SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K
x    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 2000


o    TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE
     ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______

                           Commission File No. 0-27302
                                               -------

                                   LABTEC INC.
             (Exact name of Registrant as specified in its charter)

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

1499 Southeast Tech Center Drive, Suite 350, Vancouver, WA       98683
----------------------------------------------------------       -----
        (Address of principal executive offices)               Zip Code

Registrant's telephone number, including area code:  (360) 896-2000
                                                     --------------

Securities registered under Section 12(b) of the Act:  None

Securities registered under 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 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 in response 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. [ ]

Issuer's revenues for its most recent fiscal year:  $90,512,495.

The aggregate market value, calculated on the basis of the average bid and asked
prices of such stock on the National Association of Securities Dealers Automated
Quotation System, of Common Stock held by non-affiliates of the Registrant as of
June 21, 2000 was approximately $38,366,182.

There were 4,013,199 shares of Common Stock outstanding as of June 21, 2000.

                       DOCUMENTS INCORPORATED BY REFERENCE

Part III of the Registrant's Proxy Statement relating to its 2000 Annual Meeting
of  Shareholders,   which  is  to  be  filed  pursuant  to  Regulation  14A,  is
incorporated by reference herein.
                                      -1-
<PAGE>



                                     PART I

Item 1.  Business.

Overview

Labtec Inc. (the  "Company") was  incorporated  in  Massachusetts  in April 1991
under the name Spacetec IMC Corporation.  On February 17, 1999, SIMC Acquisition
Corporation  ("SIMC"),  a newly formed,  wholly owned  subsidiary of the Company
incorporated in Delaware,  merged with and into Labtec Corporation ("Labtec"), a
Delaware corporation formed in 1994. Labtec,  formerly known as Labtec Inc., was
the surviving  legal entity from the merger with SIMC.  After the  completion of
the merger, the Company changed its name from Spacetec IMC Corporation to Labtec
Inc.  and  contributed  substantially  all of its  assets,  except cash and cash
equivalents,  and  all  of its  liabilities  to a  newly  formed,  wholly  owned
subsidiary, Spacetec Corporation, a Delaware corporation ("Spacetec").

The Company is a leading  developer and marketer of  high-technology  peripheral
products and accessories for computing,  communications,  and entertainment. The
Company offers an array of proprietary  products,  including  personal  computer
("PC") speakers and subwoofers;  PC Voice  Access(TM)  headsets and accessories,
and microphones;  personal audio headphone and earphone products;  and 3D motion
controllers.  On August 20,  1999,  the Company  completed  the  acquisition  of
Connector  Resources  Unlimited,  Inc. ("CRU"),  a California  corporation which
develops,  markets, and sells computer data storage products for secure computer
systems and networks.

The Company's  strategy is to offer an assortment  of  high-technology  products
based on proprietary  technology through multiple channels of distribution.  The
Company currently sells to numerous retailers (e.g., Best Buy, CompUSA,  Dixons,
Fry's Electronics,  Media Mart, Musicland, Office Depot, Sears, Staples, Target,
Vobis, and Wal-Mart),  master distributors (e.g., Avnet, Ingram Micro,  Merisel,
and Tech Data),  and  original  equipment  manufacturers  ("OEMs")  (e.g.,  ABS,
Compaq,  Dell,  Gateway,  Hewlett  Packard,  and IBM).  The Company serves these
multiple channels of distribution on a worldwide basis.

The Company  maintains a leading market position in each of its product lines of
PC speakers, PC Voice Access(TM) products,  3D motion controllers,  and computer
data storage  products,  and a second  market  position  for its personal  audio
product line.

The Company first  introduced the PC speaker in the early 1990s and continues to
provide  breadth of product,  a recognized  industry  brand name, and consistent
technological   innovations.   Management   believes  the  Company  is  strongly
positioned to grow this product  category as the demand for speaker  upgrades by
PC  consumers  continues  to grow,  and as MP3 and  other  Internet-based  music
formats  become  increasingly  popular.  Through its  personal  audio line,  the
Company has also taken  advantage  of growing  consumer  trends by offering  the
first   high-quality   headphone   marketed   specifically  for  MP3  and  other
Internet-based music applications.

The Company was the first to  commercialize  PC headsets  and  accessories,  and
microphones,  beginning in 1996.  According to PC Data,  the  Company's PC Voice
Access(TM)  products have the leading share of the United States market, as well
as a rapidly  growing market share in Europe.  Management  believes its PC Voice
Access(TM)  products will continue to rapidly  expand to support the  increasing
demand for voice-over-IP and speech recognition applications.
                                      -2-
<PAGE>

The Company's 3D Motion Control Division is a leading  developer and marketer of
controllers   and   related   software   enabling   the   user   to   manipulate
three-dimensional  graphical images in real-time.  Unlike  traditional  hardware
controllers such as keyboards,  gamepads,  mice,  trackballs and joysticks,  the
Company's  products  enable  the user to  manipulate  images as if the user were
moving actual  objects or moving  through  actual scenes in the real world.  The
Company's products are used in the engineering and design  computer-aided design
market,  the consumer  market,  and the emerging desktop market supported by the
Internet.  Management  believes  that  the  need  for the  Company's  3D  motion
controllers will continue to grow as commercial  markets quickly migrate from 2D
to 3D workstations, and as the Internet becomes more 3D enabled.

The  Company's  newest line of products is its computer  data  storage  products
offered by its  recently  acquired  subsidiary,  CRU. The  Company's  management
expects to further grow sales of the CRU product line through  increased product
development and greater distribution.

The Industry

The  Company  competes  in  the  worldwide  market  for  personal  computer  and
workstation  products  that  is  estimated  at  approximately  $200  billion  by
International Data Corporation  ("IDC").  Personal computer shipments  increased
approximately  22% to 110 million units in 1999,  from 90 million units in 1998,
according to IDC. The workstation  market increased  approximately 9% in 1999 to
2.5 million units, compared to 2.3 million units in the prior year, according to
IDC. Despite this growth, the home penetration rate for PCs in the United States
is  still  far  below  that of many  other  consumer  electronic  items  such as
televisions or VCR's.  Furthermore,  worldwide PC  penetration is  substantially
lower than in the United States.  The Company believes that the  high-technology
market  niches  that it  targets  are  growing  at or above the  overall  PC and
workstation industry rates.

Company Products

Within the category of PC peripheral  products,  the Company's product lines are
broadly grouped into five types: PC speakers,  PC Voice Access(TM) products,  3D
motion controllers, personal audio products, and computer data storage products.

PC Speakers

In fiscal  2000,  the PC speaker  category  represented  the  Company's  largest
product  category,  contributing  42.3% of its gross sales. The Company offers a
line of 12 retail speaker models,  ranging in suggested retail price from $19.99
to  $149.99,   which  utilize  proprietary   technology  such  as  Dynamic  Bass
Equalization  circuitry,  the  industry's  first Laminar Bass Flow Port, and the
unique  Clear  Desk(TM)  mounting  system.   Product   positioning  covers  both
entry-level and upgrade speaker segments, encompassing most addressable industry
volume.  The Company seeks to provide the best performing product based on sound
quality, industrial design, and product features at each retail price point.

The Company believes the following  industry trends should support the continued
growth of the PC speaker  segment:  (i)  shipments of new computer  systems with
installed multimedia capabilities, often with low-quality, inexpensive speakers;
(ii) increasing  capability and demand for MP3 and other  Internet-based  audio;
and  (iii)  introduction  of  new  software  titles  with  ever-improving  audio
capabilities.

The  Company's  line of PC speakers  is oriented  toward  three  different  user
groups:  Edutainment  for  the  users  of  basic  multimedia  software  such  as
educational  or basic music  software,  Audio  Enthusiasts  desiring crisp audio
sound for music,  and Gamers  desiring a strong bass component in their systems.
The Company  offers a variety of models  across a wide price  range  targeted at
users in each of these groups.
                                      -3-
<PAGE>

PC Voice Access(TM)

The Company offers a complete line of headsets and accessories,  and microphones
sold under the  Company's PC Voice  Access(TM)  brand name.  This product  line,
which  represented  30.5% of total gross sales in fiscal 2000,  is the Company's
fastest growing  business  segment,  with sales  increasing  73.6% compared with
fiscal 1999. This line is designed to complement several emerging  applications,
including basic PC telephony (voice mail, call forwarding,  etc.), voice-over-IP
communications  (Internet long distance),  speech  recognition and voice command
software, gaming (multi-player interaction), and Internet-based audio (including
MP3).

The PC Voice  Access(TM) line is composed of 19 retail and OEM products  ranging
from $9.99 to $129.99 that break into two product  classes:  (i)  headsets  with
boom microphones  that allow  comfortable  hands-free use of  voice-over-IP  and
speech  recognition  applications,  and  (ii)  PC  microphones  that  allow  for
effective  voice input for voice  command and speech  recognition  software  and
Internet formats. An important element of this emerging industry is the need for
the  personal  computer  to  clearly  recognize  voice  input,  in  addition  to
delivering quality sound. The Company developed and utilizes Noise Canceling and
Amplification Technology (NCAT(TM) and NCAT2(TM)) which improves performance (i)
by focusing on direct  voice input,  dramatically  reducing  ambient  background
noise,  and (ii) through a high output internal  amplification  stage,  ensuring
output compatibility with virtually all Soundblaster(R) standard soundcards.

3D Motion Controllers

The Company is a leading  provider of hardware  controllers and software for use
with 3D graphical  applications  used on  workstations,  PC's,  and  specialized
graphical  and/or  digital video design  systems.  The Company's  technology and
products  provide  simultaneous  six degrees of freedom  (6D)  through all three
possible axes of motion,  thereby  enabling a user to intuitively  manipulate 3D
images in real-time, as if the user were in the real world. The Company believes
its 3D motion control  technology is the most robust life-like 3D motion control
user interface available commercially. This product line represented 7.7% of the
Company's gross sales in fiscal 2000.

Three-dimensional graphical capability, once found only in UNIX workstations, is
now widely available and used by computer-aided design engineers,  architectural
engineers, industrial designers, film, video and broadcast television animators,
graphic  artists,  and video  game  developers.  With both  Microsoft  and Intel
promoting 3D graphical interfaces,  the Company believes the use of 3D graphical
capability will become increasingly available.

Personal Audio

Personal  audio was the  Company's  first product line  beginning in 1982.  This
innovative  group of headphones and earphones  provides quality audio technology
and  lightweight,  stylish  designs  through 22 products  ranging  from $3.99 to
$29.99. In the past year, the Company produced the first high-quality  headphone
marketed  specifically  for use with MP3 and other  Internet-based  audio.  As a
result,  this product line grew over 36.1% in fiscal 2000 and represented  11.4%
of the Company's gross sales for the year.

The Company is currently the second  leading brand in the headphone and earphone
market in the U.S.  retail sector.  Efforts are well under way to  significantly
refresh  this line of products,  including  many new  products  with  compelling
designs  and  innovative  new  packaging.   The  line  is  being   segmented  to
specifically appeal to popular customer profiles,  specifically  value-oriented,
fashion-oriented,   performance-oriented,  and  eAudio-oriented  customers.  The
eAudio family of products will further last year's  efforts to capitalize on the
emerging  market for  Internet  audio  based on MP3 and other  electronic  music
standards.
                                      -4-
<PAGE>

Computer Data Storage

In August 1999, Labtec acquired CRU, a leading supplier of computer data storage
products.  CRU's patented  products include removable storage modules sold under
the brand name  DataPort(TM),  external  drive  enclosures,  Redundant  Array of
Independent Disks (RAID) subsystems,  and associated  mounting kits, cabling and
hardware.

CRU's  DataPort(TM)  product line has an  installed-base  of more than 1,000,000
units, making it a default standard in this category.  Patents and compatibility
issues help protect this base from competitive pressures. The Company is focused
on growing sales  further  through  increased  product  development  and greater
distribution.  In addition, recent events and their corresponding media coverage
have amplified security concerns  throughout  government and industry,  creating
further  opportunities  for CRU's  products  with their  security  and  mobility
features.

Customers

The  Company's  customers  consist  of many  of the  largest  retailers,  master
distributors,  and OEM's in the United States and Europe.  Because the Company's
customer  base is so  diverse,  no customer  accounted  for more than 10% of net
sales during fiscal 2000.  Ingram Micro accounted for 8.0%, 15.7%, and 14.6 % of
net sales in fiscal 2000, 1999 and 1998, respectively. However, the loss of this
customer  or a  substantial  decrease  in sales to such  customer  could  have a
material  adverse  effect on the  Company's  sales  and  operating  results.  In
addition,  customers  may demand price  concessions  from the Company that could
adversely affect profit margins.

Research and Development

Product  development at the Company begins with  understanding  customers' needs
and requirements.  This process is typically  accomplished through a combination
of primary market  research;  solicitation  of suggestions  from retail,  master
distributor, and OEM partners;  collaboration of industry partners; and internal
brainstorming  sessions to  anticipate  future  needs.  In addition,  technology
developments  and the  competitive  environment  are key inputs to the Company's
development efforts.

Throughout the development  process,  the Company involves  internal  engineers,
outside  consultants,  and its  contract  manufacturers  to minimize the time to
market and to maximize  the  probability  of a successful  product.  The product
development process can last up to 12 months for a brand new product,  whereas a
derivative can take as little as three months.

Industrial,  mechanical,  electrical,  and  acoustical  design is managed by the
Company's in-house engineering team in Vancouver, WA. The Company's software and
firmware  engineers  with  capabilities  in both  UNIX and  Windows  NT are also
located in Vancouver,  WA. The engineering team utilizes the Company's Hong Kong
subsidiary  to search  for  components  that meet  desired  specifications.  The
Company  believes  this  interaction  between  design  engineers  and  component
manufacturers   enables  the   Company  to  develop   and  produce   innovative,
high-performance,  low-cost products.  Final specification of all components and
designs is the responsibility of the United States-based engineering team.

During the years ended March 31,  2000,  1999,  and 1998,  the Company  expended
$2.34 million, $1.72 million, and $1.51 million,  respectively,  on its research
and development efforts.

Patents and Proprietary Rights

The Company relies on a combination of utility and design  patents,  trademarks,
copyrights, trade secrets,  confidentiality procedures, and license arrangements
to establish and protect its proprietary technology.
                                      -5-
<PAGE>

The  Company  has  obtained  18  patents in the United  States,  Japan,  Canada,
Australia,  Germany,  France,  the United  Kingdom,  and other certain  European
countries covering its core technologies relating to audio input and output, and
sensing  input of its 3D motion  controllers.  The  Company  also has 24 pending
patent  applications  in the  United  States and  elsewhere  related to its core
technologies.  In addition, the Company has four issued patents and four pending
patent applications covering other technologies.

In addition to the  protection  afforded by patent,  trademark,  copyright,  and
trade secret laws,  Company employees and consultants are generally  required to
execute  non-disclosure,  non-use, and assignment agreements designed to protect
the Company's intellectual property.  Additionally,  certain senior officers and
technical personnel are required to sign non-competition agreements.

Manufacturing

The Company contracts its production requirements with a number of manufacturers
in Hong Kong,  Taiwan,  and China. From the Company's Hong Kong office,  Company
personnel supervise daily production  activities,  initiate placement of orders,
expedite  shipments,  arrange  and track  transportation,  and  provide  quality
assurance.  The  20-person  team at the  Company's  Hong  Kong  office  plays an
important   role  in  assuring  a  steady  and  timely  supply  of  products  to
distribution centers in the United States, Europe, and Canada.

Marketing and Distribution

The  Company's  sales  and  distribution  strategy  is to offer a broad  line of
high-technology,  multimedia  peripheral  products through multiple  channels of
distribution.  The Company  currently sells through numerous  retailers,  master
distributors,  and OEM accounts. In addition,  the Company sells through each of
these three channels both domestically and worldwide.

Retailers. The Company maintains an extensive North American retail distribution
network,  selling  high-technology  multimedia  peripheral  products to computer
superstores, consumer electronic chains, mass merchandisers, software retailers,
office  superstores,  and wholesale  clubs. In fiscal 2000, the Company's retail
sales grew 19.8% and represented 64.3% of the Company's total gross revenues.

Master Distributors. The Company serves many small to mid-sized accounts through
master distributors, including Avnet, Ingram Micro, Merisel, and Tech Data.

OEM  Accounts.  Retail  and master  distributor  sales are  complemented  by the
Company's  sales in the OEM  marketplace.  Customers  include  primary  computer
manufacturers,   component   manufacturers,   Internet  product  suppliers,  and
"bundlers" - firms which package the Company's PC speakers,  PC Voice Access(TM)
products,  and 3D motion controllers with other hardware  components or complete
systems.

Although  the Company  profitably  serves such OEM  customers  as Compaq,  Dell,
Gateway,  Hewlett  Packard,  and IBM,  the Company  also  focuses its efforts on
serving the  mid/small OEM market due to its growth  potential.  The Company has
grown its base of OEM customers  from less than 15 in 1995 to over 50 today.  In
fiscal  2000,  the  Company's  sales  through  OEM  distribution  grew 23.3% and
represented 19.9% of total gross revenues.

International Sales. The Company's international distribution includes more than
40 distributors serving 24 countries.  Key retail customers include Byte (U.K.),
Dixon's (U.K.), Fnac (France),  Media Market (Germany),  Staples (U.K.),  Virgin
Megastores  (U.K.),  and Vobis (Germany).  The establishment of subsidiary sales
offices in the U.K.  and Germany  has  enhanced  the  Company's  performance  in
Europe.  International  gross  sales grew 24.0% and  represented  21.1% of total
sales in fiscal 2000.
                                      -6-
<PAGE>

Competition

The computer peripherals industry is intensely competitive and rapidly changing.
The Company's  competitors  vary by product  line.  In the PC speaker  business,
competitors include Altec Lansing  Technologies,  Inc. and Creative  Technology,
Ltd. In the headset and  microphone  markets into which the Company sells its PC
Voice Access(TM)  products,  competitors include Andrea Electronics  Corporation
and Telex  Communications,  Inc. In the 3D graphical  applications  market,  the
Company's  competitors  include  LogiCad  3d GmbH  and  LogiCad  3d  Inc.,  each
partially owned by Logitech International SA. For the personal audio market, the
Company's  primary  competitor is Sony  Corporation of America.  In the computer
data storage  market,  the Company's  competitors  include  Kingston  Technology
Company and Lian Li Industrial Co., Ltd. Within each market,  these  competitors
offer  similar  products  to the Company  and target the same  customers  as the
Company.  Further,  many of these competitors are substantially  larger and have
significantly  greater financial,  technical,  and marketing  resources than the
Company.

Employees

The Company  currently employs  approximately 140 individuals,  including 110 in
the United States and 30 who staff the Company's  U.K.,  Germany,  and Hong Kong
subsidiaries.   The  Company  is  not  subject  to  any  collective   bargaining
agreements,  has never been subject to a work  stoppage,  and believes  that its
employee relations are generally good.

Item 2.  Properties.

The Company's corporate  headquarters is located in 17,822 square feet of office
space in Vancouver,  WA. The Company also leases an 80,000 square foot warehouse
facility in  Vancouver,  WA. The leases for the  headquarters  and the warehouse
facility have terms through April 2006.  The Company also leases a 10,000 square
foot facility in Milpitas,  CA, with a term through May 2001.  In addition,  the
Company  maintains  offices in the U.K.,  Germany,  and Hong Kong. The Company's
management believes its current facilities are adequate to meet its requirements
for the near term.

Item 3.  Legal Proceedings.

The  Company  filed a  lawsuit  in the Clark  County  Superior  Court,  State of
Washington,  on or about  December  9,  2000,  against  a  competitor  which has
infringed  the  intellectual  property  rights  of the  Company  related  to the
industrial and electrical design of certain computer speakers.  The Company will
vigorously pursue protection of its intellectual property rights and believes it
will prevail in the lawsuit.

The Company is engaged in  litigation  with a former sales  representative  firm
which was terminated for good cause. The former sales  representative firm filed
the action in the Hennepin  County  District  Court,  State of Minnesota,  on or
about December 20, 1999, and the Company  subsequently removed the action to the
U.S.  District  Court for the District of  Minnesota  on January 18,  2000.  The
Company  will  vigorously  defend  itself and  believes  it will  prevail in the
lawsuit. Upon information and belief, the Company believes that the former sales
representative  firm has or will commence  another action in the Hennepin County
District Court,  State of Minnesota,  asserting  related claims which the former
sales representative firm failed to timely bring in the U.S. District Court.

Except as stated  above,  neither  the  Company  nor any of its  properties  are
subject to any pending material legal  proceedings,  and to the knowledge of the
Company, no such legal proceedings are threatened.

                                      -7-
<PAGE>

Item 4.  Submission of Matters to a Vote of Security Holders.

Special Meeting of February 17, 1999

On February 17,  1999,  the Company held a Special  Meeting of  Stockholders  to
consider and vote upon the following proposals:

     1.       The issuance of approximately 14,363,954 shares of common stock of
              the Company and such additional shares as have been required to be
              issued in connection  with the potential  valuation or sale of the
              Spacetec  industrial  business,  in each case as  pursuant  to the
              Agreement  and Plan of Merger  dated as of October  21,  1998,  as
              amended and restated on November 13, 1998, among the Company, SIMC
              and Labtec. The Merger Agreement provided for, among other things,
              the  assumption  of all  outstanding  options to  purchase  Labtec
              common  stock and the merger of Labtec  with and into  SIMC,  with
              Labtec  being  the  surviving   corporation  and  a  wholly  owned
              subsidiary of the Company.

     2.       An amendment to the Amended and Restated  Articles of Organization
              of the Company (i) to increase the number of authorized  shares of
              the Company's common stock,  $.01 par value per share (the "Common
              Stock"),  from  20,000,000  to  25,000,000  and (ii) to change the
              corporate name of the Company from "Spacetec IMC  Corporation"  to
              "Labtec Inc.," both subject to and upon completion of the merger.

     3.       An amendment to the Amended and Restated  Articles of Organization
              of the  Company to  authorize a reverse  stock  split  whereby one
              share of the Common  Stock was to be issued in  exchange  for each
              three shares of Common Stock outstanding immediately following the
              merger,  subject to completion  of the merger (the "First  Reverse
              Stock Split").

     4.       To authorize the Company to adjourn the special meeting to solicit
              additional  proxies  in the  event  that  the  number  of  proxies
              sufficient  to approve any of the  proposals had not been received
              by the date of the special meeting.

The proposals were approved based upon the following votes:

                                  For          Against           Abstain

             Proposal 1        4,062,965       102,221           18,396
             Proposal 2        4,088,831       113,220           29,846
             Proposal 3        3,921,684       244,452           17,446
             Proposal 4        4,007,998       193,553           30,346

The Company's stockholders also elected twelve directors,  four to each of Class
I, II and III, to serve terms of one, two and three years, respectively, subject
to and upon completion of the merger.

Proxies for the meeting  were  solicited  pursuant to  Regulation  14A under the
Securities  Exchange  Act of 1934,  as  amended,  there was no  solicitation  in
opposition to the management  nominees as listed in the proxy  statement and all
of such nominees were elected.

Annual Meeting of September 15, 1999

On September 15, 1999,  the Company held an Annual  Meeting of  Shareholders  to
consider and vote upon the following proposals:

                                      -8-
<PAGE>

1.   To approve the  amendment  of the  Restated  Articles of  Organization,  as
     amended  (the  "Restated  Articles  of  Organization"),  to  eliminate  the
     Company's  three classes of directors in favor of one class of directors to
     be elected annually;

2.   To elect  five (5) Class I  directors,  each to hold  office  for a term of
     three (3) years  and until  their  successors  are  chosen  and  qualified;
     provided,  however, that if Proposal I is approved,  the same five nominees
     shall each hold office for a term to expire at the 2000  Annual  Meeting of
     Stockholders  and  until  their   respective   successors  are  chosen  and
     qualified.

Proposal 1 was approved based upon the following vote:

             For                    Against                    Abstain

          4,690,711                 50,132                     18,977

The Company's shareholders also elected five (5) Class I directors, with each to
hold office for a term to expire at the 2000 Annual Meeting of Stockholders  and
until their respective successors are chosen and qualified.

Proxies for the meeting  were  solicited  pursuant to  Regulation  14A under the
Securities  Exchange  Act of 1934,  as  amended.  There was no  solicitation  in
opposition to the management  nominees as listed in the proxy  statement and all
of such nominees were elected.

Special Meeting of November 24, 1999

On November 24,  1999,  the Company held a Special  Meeting of  Shareholders  to
consider and vote upon the following proposal:

1.   To approve the amendment of the Restated Articles of Organization, in order
     to effect a one-for-two  reverse stock split ("Second Reverse Stock Split")
     of the common stock of the Company ("Common Stock").

Proposal 1 was approved based upon the following vote:

             For                   Against                    Abstain

          4,365,792                4,110                         0

Proxies for the meeting  were  solicited  pursuant to  Regulation  14A under the
Securities  Exchange  Act of 1934,  as  amended.  There was no  solicitation  in
opposition to the management  nominees as listed in the proxy  statement and all
of such nominees were elected.

                                     PART II

Item 5.  Market for Registrant's Common Equity and Related Shareholder Matters.

The Common  Stock is traded on the OTC  Bulletin  Board  under the symbol  LABT.
Effective  February 19, 1999,  the Company  implemented  the First Reverse Stock
Split,  whereby  one share of Common  Stock was issued for each three  shares of
Common  Stock  outstanding  after the merger.  Effective  December 1, 1999,  the
Company implemented the Second Reverse Stock Split,  whereby one share of Common
Stock was issued for each two shares of Common Stock outstanding.  The following
table sets forth the high and low closing bid prices for the Common Stock during
each quarter of the fiscal  years ended March 31, 1999 and 2000,  as reported by

                                      -9-
<PAGE>

NASDAQ, adjusted to reflect  both Reverse  Stock  Splits.  The prices  reported
reflect inter-dealer quotations,  may not represent actual transactions,  and do
not include retail mark-ups, mark-downs, or commissions.


                                                    High             Low


      Year ended March 31, 1999

      First Quarter                                 $18 3/4          $16 1/2

      Second Quarter                                $17 1/4          $9 3/8

      Third Quarter                                 $16 7/8          $9 3/8

      Fourth Quarter                                $13 1/8          $1 3/4


      Year ended March 31, 2000

      First Quarter                                 $10              $8 1/2

      Second Quarter                                $8               $7 1/2

      Third Quarter                                 $8               $ 1/2

      Fourth Quarter                                $8               $7

As of June 21, 2000,  there were  4,013,199  shares of Common Stock  outstanding
held by 323 holders of record.

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.

The  Company  was  incorporated  in  Massachusetts  in April 1991 under the name
Spacetec  IMC  Corporation.  On  February  17,  1999,  SIMC merged with and into
Labtec,  with Labtec as the surviving legal entity.  After the completion of the
merger,  the Company  changed its name from Spacetec IMC  Corporation  to Labtec
Inc.  and  contributed  substantially  all of its  assets,  except cash and cash
equivalents,  and  all  of its  liabilities  to a  newly  formed,  wholly  owned
subsidiary, Spacetec Corporation.

Holders of shares of Labtec common stock  outstanding  at the time of the merger
received for each share of Labtec stock:  (i) .55430739  shares of Common Stock,
and (ii) a pro rata share of all  principal  and interest  payments made under a
six-year,  10% interest  promissory  note issued by the Company in the principal
amount of $1,065,000. Prior to completion of the merger, Labtec waived the right
of its  shareholders  to receive their pro rata share of additional  shares,  if
any, of Common Stock issuable in connection  with a potential  valuation or sale
of the Company's  industrial  business,  which such shareholders had approved at
the February 17, 1999 special meeting.  In addition,  each outstanding option to
purchase a share of Labtec common stock was assumed by the Company and adjusted,
so that an option to purchase a share of Labtec common stock was converted  into
a right to purchase  .55430739  shares of Common  Stock at a similarly  adjusted
exercise price. The shares of the Common Stock were reissued in the current name
of the Company in connection  with the First Reverse Stock Split and name change
by the Company.

The Common  Stock  issued  pursuant  to the merger was not  registered  with the
Securities and Exchange  Commission under the Securities Act of 1933, as amended
(the  "Act"),   and  was  offered  solely  in  reliance  on  an  exemption  from
registration provided by Section 4(2) of the Act.

Item 6.  Selected Financial Data.

                                      -10-
<PAGE>

The  following  selected  financial  data has been  derived  from the  Company's
audited financial  statements.  The Income Statement Data relating to the fiscal
years 2000,  1999, and 1998, and the Balance Sheet Data as of March 31, 2000 and
1999  should be read in  conjunction  with the  Company's  audited  consolidated
financial  statements and notes thereto appearing elsewhere herein. The selected
financial  data set forth below for the Company as of March 31,  1998,  1997 and
1996, and for each of the two years in the period ended March 31, 1997 and 1996,
are derived from the financial statements not included elsewhere herein.


<TABLE>

                                                                Fiscal Year Ended March 31,
                                                       2000      1999      1998      1997      1996
                                                       --------------------------------------------
                                                          (in thousands, except per share data)

  STATEMENTS OF OPERATIONS:
<S>                                                    <C>       <C>       <C>       <C>       <C>

  Revenues........................................     $90,512   $64,273   $60,113   $61,943   $43,664

  Income (loss from operations....................       6,236    (2,533)    1,504     4,503      (324)

  Net income (loss)...............................         176    (4,942)   (2,277)      601    (2,578)

  Basic:

  Net income (loss) per share.....................        0.05     (1.98)    (1.29)     0.48     (2.07)

  Weighted average shares outstanding.............       3,684     2,493     1,770     1,253     1,248

  Diluted:

  Net income (loss) per share.....................        0.05     (1.98)    (1.29)     0.32     (2.07)

  Weighted average shares outstanding.............       3,715     2,493     1,770     1,861     1,248

  BALANCE SHEET DATA:

  Working capital.................................      13,078    14,935    19,544     3,407     2,997

  Total assets....................................      63,269    46,968    36,202    34,528    30,034

  Long term liabilities, less current portion.....      28,747    26,086    31,986     4,407     6,598

  Total shareholders' equity (deficit) ...........       8,111     4,701    (3,798)    6,667     6,027
</TABLE>


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

Overview

The following  discussion and analysis  should be read in  conjunction  with the
financial statements and notes thereto appearing elsewhere herein.

This Management's  Discussion and Analysis of Financial Condition and Results of
Operations,  as well  as  other  information  in this  Annual  Report,  contains
forward-looking statements that involve a number of risks and uncertainties. The
following  are among the  factors  that  could  cause  actual  results to differ
materially from the forward-looking  statements:  business conditions and growth
in the personal computer and workstation  industries;  general  economies,  both
domestic and international; lower than expected customer orders or variations in
customer order patterns;  competitive factors,  including increased competition,
new product offerings by competitors, and pricing pressures; the availability of
parts and components; changes in product mix; assertion of intellectual property
rights claimed by third parties;  resource constraints encountered in developing
new  products;   and  product  shipment   interruptions   due  to  manufacturing
difficulties.  The  forward-looking  statements  contained in the MD&A regarding
industry trends, product development,  liquidity, and future business activities
should be considered in light of these factors.

                                      -11-
<PAGE>

On August 20, 1999, Labtec completed the acquisition of CRU. As a result, Labtec
acquired  all  the  outstanding  shares  of CRU for  $13,145,956  in  cash,  and
$1,500,000 in debt.  Concurrent with the acquisition of CRU, Labtec entered into
a $43,000,000 credit facility with a bank and also sold 312,500 shares of common
stock for  $1,000,000.  The net proceeds  from the credit  facility and proceeds
from the stock sale were used to retire outstanding debt and accrued interest of
$23,400,000;  to pay issuance costs and loan fees on the new credit facility; to
pay for certain  acquisition  costs  related to the purchase of CRU; and to fund
the purchase of CRU.  CRU designs,  develops,  and markets  computer  peripheral
products principally in North America.

Results of Operations

The  following  table sets forth certain  operating  data as a percentage of net
sales for the years ended March 31, 2000, 1999 and 1998.

                                                 Fiscal Year Ended March 31,
                                                  2000      1999      1998
                                                  ----      ----      ----

    Net sales                                    100.0%    100.0%    100.0%

    Cost of sales                                 60.0      63.3      63.5

    Gross margin                                  40.0      36.7      36.5


    Selling and marketing                         19.0      23.3      20.0

    General and administrative                     6.6       8.5       6.4

    Research and development                       2.6       2.7       2.5

    Depreciation and amortization                  5.0       6.2       5.1


    Income (loss) from operations                  6.8      (4.0)      2.5

    Interest expense and other, net                4.6       5.5       5.4
                                                  ----      ----      ----

    Income (loss) before extraordinary
    loss and income taxes                          2.2      (9.5)     (2.9)


    Provision (benefit) for income taxes           0.9      (2.1)     (0.0)


    Extraordinary loss on extinguishment of debt  (1.1)     (0.4)     (0.8)
                                                  ----      ----      ----

    Net income (loss)                              0.2      (7.8)     (3.7)
                                                  ====      ====      ====

Fiscal 2000 Compared to Fiscal 1999

Net sales for fiscal 2000 increased  $26,239,085 to $90,512,495 from $64,273,410
for fiscal 1999. The increase in net sales over the periods was primarily due to
the increase in sales for the  Company's PC Voice  Access(TM)  line of products,
and the addition of sales from the 3D motion  control and data  storage  product
lines.  Also, the Company's  North American  retail and  international  business
increased  substantially.  The Company's  largest  customer  represented 8.7% of
sales for fiscal 2000, as compared to 15.7% of sales for fiscal 1999.

                                            Year Ended
                                             March 31,
                                             ---------
                                     (in thousands, except %)
                                 2000         1999         %Change
                                 ----         ----         -------
Net Sales                       $90,512      $64,273         41%

                                      -12-
<PAGE>

Cost  of  sales  increased  $13,686,477  to  $54,343,838  in  fiscal  2000  from
$40,657,361  in fiscal 1999.  The increase  over the periods was  primarily  the
result of an increase in net sales.  As a percentage  of net sales,  the cost of
sales  decreased  to 60.0% for fiscal 2000 as compared to 63.3% for fiscal 1999.
The decrease as a percentage of net sales is attributable to a change in product
mix to a larger  portion  of lower cost  products  (PC Voice  Access(TM)  and 3D
motion controllers) from a larger portion of higher cost products (speakers), as
well as to a higher proportion of lower cost retail sales versus higher cost OEM
sales.

                                            Year Ended
                                             March 31,
                                             ---------
                                     (in thousands, except %)
                                 2000         1999         %Change
                                 ----         ----         -------
Cost of Sales                   $54,344      $40,657         34%
As a % of Net Sales                60.0%        63.3%

Selling and  marketing  expenses  increased  over the periods by  $2,167,659  to
$17,161,283  from  $14,993,624.  As a  percentage  of  net  sales,  selling  and
marketing  expenses  decreased  to 19.0%  from  23.3%.  The dollar  increase  is
primarily a result of additional sales personnel, higher travel costs to support
the increased  sales volume,  increased  variable costs related to the increased
sale  volume,  and  increased  marketing  efforts in the North  American  retail
portion  of the  business  to  maintain  market  share in this very  competitive
market.

                                            Year Ended
                                             March 31,
                                             ---------
                                     (in thousands, except %)
                                 2000         1999         %Change
                                 ----         ----         -------
Selling and marketing           $17,161      $14,993         14%
As a % of Net Sales                19.0%        23.3%

General and  administrative  expenses,  which  include the  Company's  corporate
finance, legal, human resources,  and administrative  functions,  increased over
the periods by $512,019 to $5,969,246  from  $5,457,227.  As a percentage of net
sales,  general and  administrative  expenses  decreased to 6.6% from 8.5%.  The
dollar  increase is due primarily to building lease expense related to moving to
a larger  warehouse,  and to  bonuses  paid to the  Company's  executives.  As a
percentage of net sales, general and administrative expenses decreased primarily
due to increased net sales.

                                            Year Ended
                                             March 31,
                                             ---------
                                     (in thousands, except %)
                                 2000         1999         %Change
                                 ----         ----         -------
General and administrative     $5,969       $5,457            9%
As a % of Net Sales               6.6%         8.5%

Research  and  development  expenses  increased  over the periods by $626,673 to
$2,343,378  from  $1,716,705,  primarily due to the increased  investment in the
development  of  new  speaker  and  PC  Voice  Access(TM)  products  and  to the
enhancement  of  current  products.  Also,  the  dollar  increase  reflects  the
increased hiring of employees working in research and development.


                                            Year Ended
                                             March 31,
                                             ---------
                                     (in thousands, except %)
                                 2000         1999       %Change
                                 ----         ----       -------
Research and development        $2,343       $1,717        36%
As a % of Net Sales                2.6%         2.7%

                                      -13-
<PAGE>

Depreciation   increased  over  the  periods  by  $69,844  to  $1,514,152   from
$1,444,308.   The  increase  was  primarily  the  result  of  increased  capital
expenditures for computer equipment,  retail displays, and tooling and molds for
new products  being  developed.  Depreciation  decreased as a percentage  of net
sales primarily due to the increase in net sales.

                                            Year Ended
                                             March 31,
                                             ---------
                                     (in thousands, except %)
                                 2000         1999       %Change
                                 ----         ----       -------
Depreciation                    $1,514       $1,444         5%
As a % of Net Sales                1.7%         2.2%

Amortization   increased  over  the  periods  by  $386,859  to  $2,944,533  from
$2,537,674.  This entire  increase  was the result of  amortization  of goodwill
associated with the Spacetec  merger and the  acquisition of CRU.  Goodwill (the
purchase  price  paid for  Spacetec  and CRU in excess of the fair  value of net
tangible  assets) is being amortized over ten (10) years for Spacetec and twenty
(20) years for CRU, which resulted in an increase in the dollar amount. However,
amortization  decreased  as a  percentage  of  net  sales  primarily  due to the
increase in net sales.

                                            Year Ended
                                             March 31,
                                             ---------
                                     (in thousands, except %)
                                 2000        1999        %Change
                                 ----        ----        -------
Amortization                    $2,945      $2,538         16%
As a % of Net Sales                3.3%        3.9%

Interest  expense  increased  over the periods by $598,162  to  $4,114,715  from
$3,516,553,  primarily as the result of the Company's refinancing and increasing
its debt in  conjunction  with the purchase of CRU.  Net  interest  expense as a
percentage of net sales decreased due to the increase in net sales.


                                            Year Ended
                                             March 31,
                                             ---------
                                     (in thousands, except %)
                                 2000         1999       %Change
                                 ----         ----       -------
Interest expense, net            $4,115      $3,516        17%
As a % of Net Sales                 4.5%        5.5%


The  provision  for income taxes was $776,142 for fiscal 2000,  as compared to a
benefit for income taxes of  $1,370,471 in fiscal 1999.  The primary  reason for
the  provision  in fiscal  2000  compared  to a benefit  in fiscal  1999 was the
pre-tax income of $1,967,845.

In fiscal 2000 there was an extraordinary loss of $1,015,550,  after tax benefit
of $677,033,  which was due to the write off of debt  issuance  costs related to
the extinguishment of debt in August 1999.

                                      -14-
<PAGE>

Fiscal 1999 Compared to Fiscal 1998

Net sales for fiscal 1999 increased $4,159,958, or 6.9%, to $64,273,410 for 1999
from  $60,113,452  for 1998.  The  increase  in net sales  over the  period  was
primarily due to the increase in sales for the Company's European operation. The
Company's  largest  customer  represented  15.7% of sales for  fiscal  1999,  as
compared to 14.6% of sales for fiscal 1998.

Cost of sales increased $2,494,081,  or 6.5%, to $40,657,361 in fiscal 1999 from
$38,163,280  in fiscal 1998.  The increase  over the periods was  primarily  the
result of an increase in net sales.  As a percentage  of net sales,  the cost of
sales  decreased  slightly  to 63.3% for fiscal  1999 as  compared  to 63.5% for
fiscal  1998.  The decrease as a percentage  of net sales is  attributable  to a
change in  product  mix to a larger  portion of lower  cost  products  (PC Voice
Access(TM)  and personal  audio) from a larger  portion of higher cost  products
(speakers),  as well as to a higher proportion of lower cost retail sales versus
higher cost OEM sales.

Selling and marketing  expenses  increased  over the periods by  $2,984,273,  or
24.9%, to $14,993,624 from  $12,009,351.  As a percentage of net sales,  selling
and marketing  expenses  increased to 23.3% from 20.0%.  The dollar increase and
the increase as a percentage  of net sales are due  primarily to costs  incurred
relating  to the  introduction  of the  new PC  Voice  Access(TM)  products  and
increased sales efforts in the European and United States markets.

General and  administrative  expenses,  which  include the  Company's  corporate
finance, legal, human resources,  and administrative  functions,  increased over
the  periods by  $1,599,936,  or 41.5%,  to  $5,457,227  from  $3,857,291.  As a
percentage of net sales,  general and administrative  expenses increased to 8.5%
from 6.4%. The dollar increase and the increase as a percentage of net sales are
due primarily to costs related to the Spacetec merger,  compensation  expense on
Common Stock sold to management,  and severance costs incurred by the Company in
connection with the termination of three Company officers during 1999.

Research and  development  expenses  increased over the periods by $209,560,  or
13.9%, to $1,716,705 from $1,507,145,  primarily due to the increased investment
in the  development  of new speaker  and PC Voice  Access(TM)  products  and the
enhancement of current products.

Depreciation  increased  over the periods by $500,859,  or 53.1%,  to $1,444,308
from  $943,449.  The increase  was  primarily  the result of  increased  capital
expenditures for tooling,  molds,  equipment,  and retail displays during fiscal
1999 and 1998.

Amortization  increased  over the periods by $408,350,  or 19.2%,  to $2,537,674
from $2,129,324. This entire increase was the result of amortization of goodwill
associated with the Spacetec merger.

Interest expense increased over the periods by $262,758,  or 8.1%, to $3,516,553
from $3,253,795,  primarily due to the increased borrowing on the Company's line
of credit.

The benefit for income taxes was  $1,370,471  for fiscal 1999,  as compared to a
provision for income taxes of $13,555 in fiscal 1998. The primary reason for the
large benefit in fiscal 1999 was the loss of $6,041,871.

In fiscal 1999 there was an extraordinary loss of $270,754, after tax benefit of
$77,841,  which was due to the write off of debt  issuance  costs related to the
extinguishment of debt on February 17, 1999.

Liquidity and Capital Resources

As of March 31, 2000,  the Company had  $1,372,840 in cash and cash  equivalents
and working capital of $13,077,545.  The working capital balance  decreased from
March 31, 1999, primarily due to the increase in borrowing on the line of credit
and increase in accounts  payable which was partially  offset by the increase in
accounts receivable and inventory.
                                      -15-
<PAGE>

Net cash  provided by  operating  activities  was  $3,373,744  for fiscal  2000,
compared to cash provided by operating activities of $3,635,068 for fiscal 1999.
The slight  decrease in net cash  provided by operating  activities  in 2000 was
largely due to the increase in income from  operations  over the prior year loss
from   operations,   offset  by  decreases  in  accounts   payable  and  accrued
liabilities.

Net cash used for investing  activities was $14,395,974 for fiscal 2000 compared
to net cash provided by investing activities of $2,155,625 in 1999. The increase
was primarily due to the purchase of CRU in August 1999.

Financing   activities  provided  net  cash  of  $11,644,501  for  fiscal  2000,
principally  from the refinancing of the Company's  long-term debt and revolving
line of credit in conjunction  with the purchase of CRU, as well as the issuance
of additional common stock.

The Company  refinanced  its long-term  debt and  short-term  revolving  line of
credit  in  August  1999.  Outstanding  at March  31,  2000 was  $25,600,000  on
long-term  loans,  $4,500,000 in subordinated  debt,  $10,760,948 on the line of
credit, $240,938 on a six-year promissory note that was issued to the holders of
Labtec common stock  outstanding  just prior to the time of the Spacetec merger,
and a $1,500,000  seven and one-half  year  promissory  note issued to the prior
shareholders  of CRU.  At March 31,  2000,  the  long-term  loans were  accruing
interest at the LIBOR rate plus 3.25 - 3.50%, the subordinated  note at 12%, the
line of credit at the prime rate plus 1.75%, and the promissory notes at 10% and
6%,  respectively.  In December 1999, the Company  entered into an interest rate
swap  agreement  with its primary  lender in order to fix the interest rate on a
portion of its long-term  debt. At March 31, 2000, the amount of debt subject to
the fixed rate was $12,800,000, for which the rate was 9.69%.

In December 1999, the Company completed a one-for-two reverse stock split of its
common  stock.  Subsequent  to the reverse  stock  split,  one of the  Company's
subordinated  debt holders converted  $1,500,000  principal amount of its Senior
Subordinated Note due October 1, 2005 for 262,237 shares of common stock.  Also,
the  Company's  majority   shareholder   converted  $824,062  of  the  Unsecured
Subordinated  Promissory  Note due  February  17,  2005,  and $27,926 of accrued
interest for 148,949 shares of common stock.

Capital expenditures were $1,323,220 for fiscal 2000, compared to $1,437,498 for
fiscal 1999.  These  capital  expenditures  were  primarily  for the purchase of
computer equipment, tooling and molds, and retail displays.

The  Company  believes  that its  existing  cash and  revolving  line of credit,
together  with future funds from  operations,  will satisfy its need for working
capital and other cash requirements for at least the next twelve-month period.

Inflation and Seasonality

Inflation has not had any significant adverse effects on the Company's business,
and the  Company  does not  believe it will have any  significant  effect on its
future business. The Company's business is seasonal, with slightly greater sales
in its second and third  fiscal  quarters,  preceding  and during the  Christmas
season.  The second and third fiscal quarters together accounted for 54% and 53%
of the Company's net annual sales in fiscal 2000 and 1999, respectively.

Year 2000 Issues

The Year  2000  issue is the  result  of  date-sensitive  devices,  systems  and
computer programs that were deployed using two digits rather than four to define
the applicable year. Any such  technologies may recognize a year containing "00"
as the year  1900  rather  than the year  2000.  This  could  result in a system
failure or  miscalculation  causing  disruption of operations  including,  among
other things, a temporary inability to process transactions or engage in similar
normal business activities.
                                      -16-
<PAGE>

The Company did not experience  any  significant  malfunctions  or errors in its
information or business  systems when the date changed from 1999 to 2000.  Based
on its  operations  since  January  1,  2000,  the  Company  does not expect any
significant  problems  related to the Year 2000 issue.  However,  it is possible
that the full  impact of the date  change  has not been  fully  recognized.  For
example,  it is  possible  that Year 2000 or similar  issues,  such as leap year
related problems,  may occur with financial closings.  The Company believes that
any such problems will be minor and easily corrected.  In addition,  the Company
could still be negatively  impacted if the Year 2000 or similar issues adversely
affect its  customers or suppliers.  Currently,  the Company is not aware of any
significant Year 2000 or similar problems that have arisen with its customers or
suppliers.

Disclosure Regarding Private Securities Litigation Reform Act of 1995

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

The  Company  wishes to caution  readers  not to place  undue  reliance on these
forward-looking  statements  which  speak  only as of the date on which they are
made. Various factors could affect the Company's financial or other performance,
and could  cause the  Company's  actual  results  for  future  periods to differ
materially  from any  opinions or  statements  expressed  with respect to future
periods or events in any current  statement.  These facts  include,  but are not
limited  to:  business  conditions  and  growth  in the  personal  computer  and
workstation  industries and general economies,  both domestic and international;
dependence  on a limited  number of retail  customers;  dependence  on a limited
number of source suppliers; lower than expected customer orders or variations in
customer  order  patterns due to changes in demand for  customers'  products and
customers'   inventory  levels;   competitive   factors,   including   increased
competition, new product offerings by competitors and pricing pressures; changes
in product mix; dependence on proprietary technology;  assertion of intellectual
property  rights  by third  parties;  technological  difficulties  and  resource
constraints   encountered   in  developing   new  products;   product   shipment
interruptions  and other factors  discussed  herein and in the  Company's  other
filings with the Securities and Exchange Commission.

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


Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.

None.


                                      -17-
<PAGE>

Item 8.  Financial Statements and Supplementary Data.

CONSOLIDATED FINANCIAL STATEMENTS
AND REPORTS OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS

LABTEC INC.

MARCH 31, 2000 AND 1999






























                                      -18-
<PAGE>



                                 C O N T E N T S


                                                                         Page


REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS                     20-21


CONSOLIDATED FINANCIAL STATEMENTS

   BALANCE SHEETS                                                          22

   STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)                23

   STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)               24-26

   STATEMENTS OF CASH FLOWS                                             27-28

   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                           29-44















                                      -19-
<PAGE>




               Report of Independent Certified Public Accountants


Board of Directors and Stockholders
Labtec Inc.


We have audited the accompanying  consolidated balance sheets of Labtec Inc. and
its subsidiaries as of March 31, 2000 and the related consolidated statements of
operations and comprehensive income (loss),  changes in shareholders' equity and
cash  flows  for  the  year  then  ended.  These  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards  generally accepted
in the United States. 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 audit  provides 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 Labtec
Inc. and its subsidiaries as of March 31, 2000, and the consolidated  results of
their  operations and their  consolidated  cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States.


/s/ GRANT THORNTON LLP


Portland, Oregon
May 15, 2000




                                     - 20 -
<PAGE>




                    Report of Independent Public Accountants


To the Shareholders and Board of Directors of Labtec Inc.


In our opinion,  the  accompanying  consolidated  balance  sheet and the related
consolidated  statements of  operations  and  comprehensive  income  (loss),  of
changes to shareholders'  equity (deficit) and of cash flows present fairly,  in
all  material   respects,   the  financial  position  of  Labtec  Inc.  and  its
subsidiaries (the Company) at March 31, 1999 and the results of their operations
and their  cash flows for each of the two years in the  period  ended  March 31,
1999, in conformity with accounting  principles generally accepted in the United
States.  These  financial  statements  are the  responsibility  of the Company's
management;  our  responsibility  is to express  an  opinion on these  financial
statements  based on our audits.  We conducted our audits of these statements in
accordance  with auditing  standards  generally  accepted in the United  States,
which 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,  assessing the  accounting  principles
used and  significant  estimates made by management,  and evaluating the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for the opinion express above.

/s/   PricewaterhouseCoopers LLP


May 21, 1999



                                     - 21 -
<PAGE>
<TABLE>
<CAPTION>
                                   Labtec Inc.

                           CONSOLIDATED BALANCE SHEETS
                    (In thousands, except per share amounts)
                                    March 31,


                                                                                 2000       1999
                                                                             ----------- -----------
                                          ASSETS
<S>                                                                          <C>         <C>
Current assets
   Cash                                                                      $    1,373  $      768
   Accounts receivable, net                                                      22,120      17,890
   Interest and other receivables                                                    16         211
   Income taxes receivable                                                            -         595
   Inventories                                                                   13,955      10,662
   Prepaid expenses                                                                 171         160
   Current deferred income taxes                                                  1,854         830
                                                                             ----------- -----------

      Total current assets                                                       39,489      31,116

Property and equipment - net                                                      2,332       2,330
Noncurrent deferred income taxes                                                  1,953       1,893
Debt issuance costs                                                               2,277       1,984
Other noncurrent assets                                                             180         253
Goodwill, net                                                                    17,038       9,392
                                                                             ----------- -----------

                                                                             $   63,269  $   46,968
                                                                             =========== ===========

                           LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities
   Lines of credit                                                           $   10,761  $    4,000
   Current portion of long-term debt                                              2,900           -
   Accounts payable                                                               9,411       8,492
   Income taxes payable                                                             185           -
   Accrued payroll and benefits                                                   1,359       1,589
   Accrued interest                                                                 256         223
   Other accrued expenses                                                         1,539       1,877
                                                                             ----------- -----------

      Total current liabilities                                                  26,411      16,181

Long-term debt                                                                   28,747      26,086
                                                                             ----------- -----------

                                                                                 55,158      42,267
                                                                             ----------- ----------

Commitments and contingencies                                                         -           -

Shareholders' equity:
   Preferred stock, par value $.01, 1,000 shares authorized and no shares
      outstanding at March 31, 2000 or 1999                                           -           -
   Common stock, par value $.01, 25,000 shares authorized, 4,013
      and 6,904 shares issued and outstanding at March 31, 2000 and 1999             40          69
   Additional paid-in capital                                                    23,806      20,551
   Common stock subscription receivable                                               -         (26)
   Accumulated deficit                                                          (15,688)    (15,864)
   Accumulated other comprehensive income (loss):
      Cumulative foreign currency translation adjustment                            (47)        (29)
                                                                             ----------- -----------

                                                                                  8,111       4,701
                                                                             ----------- -----------

                                                                             $   63,269  $   46,968
                                                                             =========== ===========
</TABLE>

The accompanying notes are an integral part of these statements.
                                     - 22 -
<PAGE>
<TABLE>
<CAPTION>
                                   Labtec Inc.

      CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
                    (In thousands, except per share amounts)
                              Years ended March 31,


                                                                         2000        1999        1998
                                                                     ----------- ----------- -----------
<S>                                                                  <C>         <C>         <C>
Net sales                                                            $   90,512  $   64,273  $   60,113
Cost of sales                                                            54,344      40,657      38,163
                                                                     ----------- ----------- -----------

Gross profit                                                             36,168      23,616      21,950
                                                                     ----------- ----------- -----------

Operating expenses:
   Selling and marketing                                                 17,161      14,993      12,009
   General and administrative                                             5,969       5,457       3,857
   Research and development                                               2,343       1,717       1,507
   Depreciation                                                           1,514       1,444         943
   Amortization of goodwill                                               2,945       2,176       1,768
   Amortization of noncompete agreement                                       -         362         362
                                                                     ----------- ----------- -----------
                                                                         29,932      26,149      20,446
                                                                     ----------- ----------- -----------

Income (loss) from operations                                             6,236      (2,533)      1,504

Interest expense, net                                                     4,115       3,516       3,254
Other nonoperating (income) expense                                         153          (8)          2
                                                                     ----------- ----------- -----------

Income (loss) before extraordinary loss and income taxes                  1,968      (6,041)     (1,752)

Provision (benefit) for income taxes                                        776      (1,370)         14
                                                                     ----------- ----------- -----------

Income (loss) before extraordinary loss                                   1,192      (4,671)     (1,766)

Extraordinary loss on extinguishments of debt, less applicable
   income tax benefit of $677, $78, and $263, respectively               (1,016)       (271)       (511)
                                                                     ----------- ----------- -----------

Net income (loss)                                                    $      176  $   (4,942) $   (2,277)
                                                                     =========== =========== ===========

Net income (loss) per share before extraordinary loss
   Basic                                                             $       .3  $    (1.87) $    (1.00)
                                                                     =========== =========== ===========
   Diluted                                                           $       .3  $    (1.87) $    (1.00)
                                                                     =========== =========== ===========

Net income (loss) per share
   Basic                                                             $       .0  $    (1.98) $    (1.29)
                                                                     =========== =========== ===========
   Diluted                                                           $       .0  $    (1.98) $    (1.29)
                                                                     =========== =========== ===========

Comprehensive income (loss)

Net income (loss)                                                    $      176  $   (4,942) $   (2,277)

Foreign currency translation adjustment                                     (18)        (29)          -
                                                                     ----------- ----------- -----------

Comprehensive income (loss)                                          $      158  $   (4,971) $   (2,277)
                                                                     =========== =========== ===========

</TABLE>

The accompanying notes are an integral part of these statements.
                                     - 23 -
<PAGE>
<TABLE>
<CAPTION>
                                   Labtec Inc.

       CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Deficit)
                                 (In thousands)
                    Years ended March 31, 2000, 1999 and 1998



                                                                                      Common            Accumulated
                               Preferred stock    Common stock   Additional     stock                      other
                              ----------------  ---------------   paid-in    subscription  Accumulated  comprehensive
                              Shares   Amount   Shares   Amount   capital     receivable     deficit       income        Total
                              ------  --------  ------  -------  ----------  ------------  -----------  -------------  --------
<S>                           <C>     <C>       <C>     <C>      <C>         <C>           <C>          <C>            <C>
Balance at March 31, 1997         34  $ 2,500       79  $     1  $  7,924    $      (171)  $   (3,588)  $          -   $ 6,666

 Payments on common stock
  subscription                     -        -        -        -         -             36            -              -        36

 Preferred stock dividend          -        -        -        -         -              -         (435)             -      (435)

 Preferred stock converted to
  common stock                   (34)  (2,500)      34        1     2,499              -            -              -         -

 Compensation expense on
  stock options granted            -        -        -        -        73              -            -              -        73

 Exercise of warrants
  (including cancellation
  of "put" rights)                 -        -        5        -     1,902              -            -              -     1,902

 Exercise of stock options         -        -       19        -     1,873              -            -              -     1,873

 8.5853 to 1 stock split           -        -    1,039       10       (10)             -            -              -         -

 Repurchase and retirement of
  common stock                     -        -   (1,017)     (10)  (14,261)             -       (3,557)             -   (17,828)

 Issuance of common stock          -        -    1,050       10     5,900              -            -              -     5,910

 Issuance of shares to
  subordinated debt holder         -        -       50        1       281              -            -              -       282

 20 to 1 stock split               -        -   23,906      239      (239)             -            -              -         -

 Net loss                          -        -        -        -         -              -       (2,277)             -    (2,277)
                              ------  --------  ------  -------  ---------  -------------  -----------  -------------  --------

Balance at March 31, 1998          -        -   25,165  $   252  $  5,942   $       (135)  $   (9,857)  $          -    (3,798)
                              ======  ========  ======  =======  =========  =============  ===========  =============  ========
</TABLE>


                                     - 24 -
<PAGE>
<TABLE>
<CAPTION>
                              Labtec Inc.

 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Deficit) - CONTINUED
                                 (In thousands)
                    Years ended March 31, 2000, 1999 and 1998



                                                               Common                       Accumulated
                                  Common stock   Additional     stock                          other
                                 --------------    paid-in   subscription     Accumulated  comprehensive
                                 Shares  Amount    capital    receivable        deficit        income          Total
                                 ------- ------  ----------  ---------------  -----------  -------------  --------------
<S>                              <C>     <C>     <C>         <C>              <C>          <C>            <C>
Balance at March 31, 1998        25,165  $  252  $  5,942    $       (135)    $   (9,857)  $          -   $      (3,798)

 Repurchase and retirement of
  common stock                   (1,217)    (12)     (183)            135               -             -             (60)

 Translation adjustment               -       -         -               -               -           (29)            (29)

 Issuance of common stock
  to management                   1,032      10     1,062             (26)              -             -           1,046

 Reduction to common stock
  outstanding related to
  merger                        (11,133)   (111)      111               -               -             -               -

 Issuance of shares for Spacetec
  IMC Corporation acquisition     6,847      68    12,735               -               -             -          12,803

 Common stock issued for the
  Spacetec employee stock
  purchase plan                      18       -         4               -               -             -               4

 Dividend declared to former
  Labtec owners                       -       -         -               -          (1,065)            -          (1,065)

 Stock options granted to
  Spacetec employees                  -       -       742               -               -             -             742

 1 to 3 reverse stock split     (13,808)   (138)      138               -               -             -               -

 Net loss                             -       -         -               -          (4,942)            -          (4,942)
                                 ------- ------  ----------  ---------------  -----------  -------------  --------------

Balance at March 31, 1999         6,904  $   69  $ 20,551    $         (26)   $   (15,864) $        (29)  $       4,701
                                ======== ======  ==========  ===============  ===========  =============  ==============

</TABLE>

                                     - 25 -
<PAGE>
<TABLE>
<CAPTION>
                                   Labtec Inc.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Deficit) - CONTINUED
                                 (In thousands)
                    Years ended March 31, 2000, 1999 and 1998



                                                                    Common                  Accumulated
                                  Common stock      Additional      stock                      other
                                -----------------     paid-in    subscription  Accumulated  comprehensive
                                 Shares   Amount      capital     receivable     deficit       income         Total
                                -------  --------  ------------- ------------  -----------  -------------  ------------
<S>                             <C>      <C>       <C>           <C>           <C>          <C>            <C>
Balance at March 31, 1999        6,904   $    69   $     20,551   $     (26)   $  (15,864)  $        (29)  $     4,701

 Repurchase and retirement
  of common stock                  (27)        -           (171)          -            -              -          (171)

 Translation adjustment              -         -              -           -             -            (18)          (18)

 Issuance of common stock          313         3            997           -             -              -         1,000

 Payment on stock subscription       -         -              -          26             -              -            26

 Stock options exercised            11         -             45           -             -              -            45

 Debt for equity swap              411         4          2,348           -             -              -         2,352

 1 to 2 reverse stock split     (3,599)      (36)            36           -             -              -             -

 Net income                          -         -              -           -           176              -           176
                                -------  --------  ------------- ------------  -----------  -------------  ------------

Balance at March 31, 2000        4,013   $    40   $     23,806   $     -      $  (15,688)  $       (47)   $     8,111
                                =======  ========  ============= ============  ===========  =============  ============
</TABLE>




The accompanying notes are an integral part of these statements.

                                     - 26 -
<PAGE>
<TABLE>
<CAPTION>
                                   Labtec Inc.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                              Years ended March 31,


                                                                            2000         1999         1998
                                                                        -----------  -----------  -----------
<S>                                                                     <C>          <C>          <C>
Cash flows from operating activities
   Net income (loss)                                                    $      176   $   (4,942)  $   (2,277)
   Adjustments to reconcile net income (loss) to net cash provided
      by (used in) operating activities
         Depreciation                                                        1,514        1,444          943
         Amortization of goodwill                                            2,945        2,176        1,768
         Amortization of noncompete agreement                                    -          362          362
         Amortization of debt issuance costs                                   433          383          475
         Change in deferred income taxes                                       302         (794)        (350)
         Loss on disposal of assets                                              -            -            1
         Compensation expense on common stock sold to
           management                                                            -          781            -
         Compensation expense on stock options                                  10            -           73
         Write-off of debt issuance costs                                    1,693          348          296
         Write-off of unamortized discount on refinanced
           subordinated debt                                                     -            -          307
   Changes in current assets and liabilities, net of effects of
      acquisition:
         Accounts receivable                                                (1,885)      (3,084)      (3,143)
         Inventories                                                        (1,074)       2,724        3,433
         Interest and other receivables                                        195           47            5
         Income taxes receivable                                               595         (595)           -
         Prepaid expenses                                                       (2)          32            -
         Accounts payable                                                     (535)       3,225         (273)
         Income taxes payable                                                 (150)        (285)          27
         Accrued interest                                                       33           21           76
         Accrued payroll and other expenses                                   (876)       1,792         (533)
                                                                        -----------  -----------  -----------

                  Net cash provided by operating activities                  3,374        3,635        1,190
                                                                        -----------  -----------  -----------

   Cash flows from investing activities
      Costs associated with purchase of CRU                                (13,146)           -            -
      Costs associated with purchase of Spacetec                                 -       (1,633)           -
      Capital expenditures                                                  (1,323)      (1,437)      (1,473)
      Other assets                                                              73           20          (64)
      Proceeds from sale of securities purchased from Spacetec                   -        5,206            -
                                                                        -----------  -----------  -----------

                  Net cash provided by (used in) investing activities      (14,396)       2,156       (1,537)
                                                                        -----------  -----------  -----------

                                     - 27 -

<PAGE>
                                   Labtec Inc.

               CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued

                                 (In thousands)
                              Years ended March 31,


                                                                            2000         1999         1998
                                                                        -----------  -----------  -----------

   Cash flows from financing activities
      Net increase in short-term credit facility                        $    6,761   $    1,500   $    2,500
      Net decrease in short-term borrowing facility                              -            -      (15,673)
      Proceeds from issuance of long-term debt                              27,000            -       33,000
      Repayments of long-term debt                                         (20,587)      (7,590)      (5,750)
      Debt issuance costs                                                   (2,419)        (100)      (2,820)
      Proceeds from exercise of stock options and warrants                      35            -        2,323
      Repurchase and cancellation of common stock                             (171)         (61)     (17,828)
      Proceeds from issuance of common stock                                 1,000            4        5,911
      Preferred stock dividend                                                   -            -         (435)
      Payments on common stock subscription                                     26          265           36
                                                                        -----------  -----------  -----------

                  Net cash provided by (used in) financing activities       11,645       (5,982)       1,264
                                                                        -----------  -----------  -----------

   Effect of foreign currency on cash                                          (18)         (29)           -
                                                                        -----------  -----------  -----------

   Net increase (decrease) in cash                                             605         (220)         917

   Cash at beginning of year                                                   768          988           71
                                                                        -----------  -----------  -----------

   Cash at end of year                                                  $    1,373   $      768   $      988
                                                                        ===========  ===========  ===========



   Cash paid during the year for                                        $    3,649   $    3,160   $    2,758
      Interest

      Income taxes                                                      $      -     $      200   $       76


</TABLE>






The accompanying notes are an integral part of these statements.

                                     - 28 -


<PAGE>

  Labtec Inc.

  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (Dollar amounts in thousands, except per share amounts)




NOTE A - SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

  Labtec Inc.  (Labtec) was formed October 7, 1997. On February 17, 1999, Labtec
  Inc. acquired Spacetec IMC Corporation  (Spacetec) (see Note B). On August 20,
  1999, Labtec Inc. acquired Connector Resources Unlimited, Inc. (CRU) (see Note
  B). The Company  designs,  manufactures  and distributes  multimedia  computer
  peripheral,  three-dimensional  motion control and data storage products.  Its
  worldwide   customers  include  original  computer  equipment   manufacturers,
  distributors and retailers. The Company's products are manufactured by various
  factory   suppliers  located  in  Asia  and  are  imported  to  the  Company's
  headquarters in Vancouver,  Washington and to warehouses in California,  Great
  Britain, the Netherlands and Canada for distribution.

  The principal accounting policies followed by Labtec Inc. and its subsidiaries
  in  maintaining  their  financial  records and  preparing  these  consolidated
  financial statements are as follows:

  1. Principles of Consolidation
     ---------------------------

  The accompanying  financial statements include the accounts of the Company, as
  well as all of the accounts of its wholly owned subsidiaries.  All significant
  intercompany transactions and balances have been eliminated.

  2. Revenue Recognition
     -------------------

  Revenues are  recognized  upon shipment of the Company's  products,  net of an
  estimated allowance for sales returns.  Gross sales revenues from one customer
  were $10.1  million  and $8.8  million  for the years ended March 31, 1999 and
  1998, respectively.  Each of these revenue amounts accounted for more than 10%
  of  consolidated  sales for the  respective  period.  There were no individual
  customers that accounted for more than 10% of consolidated  sales for the year
  ended March 31, 2000.

  3. Fair value of financial instruments
     -----------------------------------

  The recorded amounts of cash, accounts receivable,  accounts payable, lines of
  credit and current  portion of  long-term  debt,  and accrued  liabilities  as
  presented in the financial  statements  approximate  fair value because of the
  short-term  maturity of these  instruments.  The recorded  amount of long-term
  debt approximates fair value because actual interest rates approximate current
  competitive rates.

  4. Accounts  receivable
     --------------------

  Accounts  receivable are net of allowances for doubtful accounts and for sales
  returns.  The allowance  for doubtful  accounts was $706 and $938 at March 31,
  2000 and 1999, respectively. The allowance for returns of merchandise was $584
  and $505 at March 31, 2000 and 1999, respectively. At March 31, 2000 and 1999,
  13%, and 18%, respectively, of receivables were from one customer.



                                      -29-
<PAGE>

  Labtec Inc.

  NOTES TO  CONSOLIDATED  FINANCIAL  STATEMENTS - CONTINUED
             (Dollar amounts in thousands, except per share amounts)


NOTE A - SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

  5. Concentration of credit risk
     ----------------------------

  The Company is subject to credit risk primarily from its accounts  receivable.
  The Company mitigates its credit risk on receivables by control  procedures to
  monitor the credit  worthiness  of its  customers  and  utilization  of credit
  limits. The Company's  customers are concentrated in the technology  industry.
  Therefore, the Company's operations and collection of its accounts receivables
  are directly associated with the results of the technology industry.

  6. Inventories
     -----------

  Inventories  are  stated  at the  lower of landed  cost  (first-in,  first-out
  method) or market. Landed cost includes the cost of merchandise, freight, duty
  and handling fees.

  7. Property and equipment
     ----------------------

  Property and  equipment  are stated at cost.  Depreciation  is provided on the
  straight-line  method for financial  reporting  purposes and on an accelerated
  method for tax purposes  over  estimated  useful  lives  ranging from three to
  seven years. Depreciation expense for the years ended March 31, 2000, 1999 and
  1998 was $1,514, $1,444 and $943,  respectively.  Repair and maintenance costs
  are expensed as incurred.

  8. Debt issuance costs
     -------------------

  Debt issuance costs,  including bank fees of $2,419 and other transaction fees
  relating  to the  Company's  debt,  are  included in debt  issuance  costs and
  represent  all  costs  and fees  incurred  to obtain  bank  financing  for the
  refinancing  of debt in August 1999 (see Notes B and F). These costs are being
  amortized  over the term of the related debt.  Debt of $19.25 million was paid
  off in August 1999. Therefore,  debt issuance costs of $1,693 were written off
  and included in extraordinary  loss on extinguishments of debt in fiscal 2000.
  Debt of $5 million was paid off on February 17, 1999. Therefore, debt issuance
  costs  of  $349  were  written  off  and  included  in  extraordinary  loss on
  extinguishments of debt in fiscal 1999. Debt issuance costs of $296 related to
  financing arrangements prior to the Recapitalization (see Note I) were written
  off and included in extraordinary  loss on  extinguishments of debt in October
  1997. Amortization expense for fiscal years 2000, 1999 and 1998 was $433, $383
  and $286, respectively, and is included in interest expense.

  9. Goodwill and other intangible assets
     ------------------------------------

  Goodwill represents the excess of acquisition costs over the fair market value
  of the  net  assets  of  acquired  businesses  and  is  being  amortized  on a
  straight-line  basis over  estimated  useful lives ranging from five to twenty
  years. Periodically,  the Company reviews the recoverability of its intangible
  assets  based on  estimated  undiscounted  future  cash flows  from  operating
  activities  compared with the carrying value of the intangible  assets. If the
  aggregate  future cash flows are less than the  carrying  value,  a write-down
  would be required,  measured by the difference  between the fair value and the
  carrying  value of the  intangible  assets.  The Company has not  recorded any
  provision related to impairment of intangible assets.



                                      -30-
<PAGE>



NOTE A - SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES - Continued

  10. Discount of subordinated debt
      -----------------------------

  In  connection  with the  Recapitalization,  the  Company  issued 93 shares of
  common stock to a  subordinated  lender and recorded the $282 of fair value of
  these  shares as a  discount  on the face  amount of the debt.  This  non-cash
  transaction  is excluded from the  accompanying  statement of cash flows.  The
  discount is being  amortized  using the effective  interest  method over eight
  years, which is the life of the subordinated note.  Amortization during fiscal
  years 2000, 1999 and 1998 aggregated $35, $35 and $18 respectively.

  11. Stock subscription
      ------------------

  During  fiscal year 1999,  the Company  sold shares of common stock to certain
  members of management  for a note  aggregating  $26. This note  receivable was
  recorded as a reduction of  shareholders'  equity and was fully repaid  during
  fiscal 2000.

  In fiscal  year  1995 the  Company  issued  28  shares of common  stock to the
  Company's  president  in  exchange  for a note  aggregating  $177.  This  note
  receivable was recorded as a reduction to shareholders'  equity. During fiscal
  year 1999, the unpaid balance of $135 was forgiven.

  12. Research and development costs
      ------------------------------

  Research and development costs are expensed as incurred.

  13. Advertising expenses
      --------------------

  The  Company  expenses  advertising  costs when  incurred.  Total  advertising
  expenses for the years ended March 31, 2000, 1999 and 1998 were $674, $782 and
  $819, respectively.

  14. Income taxes
      ------------
  The  Company  accounts  for  income  taxes in  accordance  with  Statement  of
  Financial  Accounting  Standards  No. 109 (SFAS  109),  Accounting  for Income
  Taxes.   SFAS  109  requires  the  recognition  of  deferred  tax  assets  and
  liabilities  for  the  expected  tax  effects  from  differences  between  the
  financial  reporting  and tax bases of assets and  liabilities.  In estimating
  future tax effects,  SFAS 109 generally  considers all expected  future events
  other than enactments of changes in tax law or statutorily imposed rates.

  15. Foreign currency  translation
      -----------------------------

  The  financial   statements  and   transactions   of  the  Company's   foreign
  subsidiaries are maintained in their  functional  currency and translated into
  U.S.  dollars  for  purposes of  consolidation.  Translation  adjustments  are
  accumulated as a separate  component of shareholders'  equity. The translation
  adjustment for 1998 was not significant.



                                      -31-
<PAGE>



NOTE A - SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES - Continued

  16. Earnings per share
      ------------------

  Basic  earnings per share (EPS) is computed by dividing  net income  (loss) by
  the  weighted-average  common shares  outstanding for the period.  Diluted EPS
  reflects the potential  dilution that could occur if contracts to issue common
  stock were  exercised  or  converted to common  stock.  All amounts  below and
  earnings per share amounts in the statement of operations are calculated after
  retroactively  considering  the stock splits that occurred  during fiscal 2000
  and 1999, and the conversion of Labtec shares as discussed in Note B.

  The following table sets forth the reconciliation of the denominator  utilized
  in the computation of basic and diluted income (loss) per share (in thousands,
  except per share amounts).

                                                        Fiscal 2000
                                              -----------------------------
                                                                     Per
                                                Income   Average    share
                                                (loss)    shares    amount
                                              --------- --------- ---------
      Income before extraordinary item        $  1,192     3,684  $    .32
      Extraordinary loss, net of tax            (1,016)    3,684      (.27)
                                              ---------           ---------

      Income per common share                      176     3,684       .05

      Effect of dilutive securities
         Stock options                              -         31        -
                                              --------- --------- ---------

      Income per share-assuming dilution      $    176     3,715  $    .05
                                              ========= ========= =========

                                                        Fiscal 1999
                                              -----------------------------
                                                                     Per
                                                Income   Average    share
                                                (loss)    shares    amount
                                              --------- --------- ---------

      Loss before extraordinary item          $ (4,671)    2,493  $  (1.87)
      Extraordinary loss, net of tax              (271)    2,493      (.11)
                                              ---------           ---------

      Loss per common share                     (4,942)    2,493     (1.98)

      Effect of dilutive securities
         Stock options                              -         -         -
                                              --------- --------- ---------
      Loss per share-assuming dilution        $ (4,942)    2,493  $  (1.98)
                                              ========= ========= =========


                                      -32-
<PAGE>

NOTE A - SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES - Continued

                                                        Fiscal 1998
                                              -----------------------------
                                                                     Per
                                                Income   Average    share
                                                (loss)    shares    amount
                                              --------- --------- ---------

   Loss before extraordinary item             $ (1,766)    1,770  $  (1.00)
   Extraordinary loss, net of tax                 (511)    1,770      (.29)
                                              --------- --------- ---------

   Loss per common share                        (2,277)    1,770     (1.29)

   Effect of dilutive securities
      Stock options                                 -         -         -
                                              --------- --------- ---------

   Loss per share-assuming dilution           $ (2,277)    1,770  $  (1.29)
                                              ========= ========= =========

  17. Comprehensive income
      --------------------

  The Company adopted SFAS No. 130, Reporting  Comprehensive  Income as of April
  1, 1998.  Comprehensive  income is  defined by SFAS No. 130 as the  changes in
  equity of a business enterprise during a period that results from transactions
  and other economic events and circumstances from  non-shareholder  sources. It
  includes all changes in equity  during a period  except those  resulting  from
  investments  by  shareholders.  Consequently,  the  Company has  reported  its
  Foreign Currency Translation Adjustment, as required by SFAS No. 130, as other
  comprehensive  income in the  appropriate  consolidated  financial  statements
  presented herein.

  18. Segment reporting
      -----------------

   The Company  has  adopted  SFAS No.  131,  Disclosures  about  Segments of an
   Enterprise  and  Related  Information  in fiscal  year 1999.  This  statement
   establishes  standards for reporting  information about operating segments in
   annual financial statements and requires selected information about operating
   segments in interim  financial  reports issued to  shareholders.  The Company
   does not have separate  operating  segments which meet the  requirements  for
   SFAS No. 131 disclosure.  The Company does sell its products internationally.
   Sales to Europe and Asia were as follows:

                                            Year ended March 31
                                  2000             1999             1998
                             ---------------  ---------------  ----------------
      Europe                 $       18,071   $       13,397   $        9,561
      Asia                   $        1,322   $          770   $        1,168

  19. Related parties
      ---------------

  The former controlling shareholders of the Company provided certain management
  services for which they charged a monthly fee of  approximately  $15 for April
  1, 1997  through  September 1, 1997 (prior to the  Recapitalization  (see Note
  I)).

  The majority shareholders charge an annual management services fee of $500, of
  which  $500,  $500 and $250 was charged  during  fiscal  2000,  1999 and 1998,
  respectively,  and $375 and $750 remained  payable at March 31, 2000 and 1999,
  respectively.


                                      -33-
<PAGE>

NOTE A - SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES - Continued


  20. Use of estimates
      ----------------

  The preparation of financial  statements in conformity with generally accepted
  accounting  principals  requires  management to make estimates and assumptions
  that affect the reported  amounts of assets and liabilities and disclosures of
  contingent assets and liabilities at the date of the financial statements, and
  the reported  amounts of revenues and expenses  during the  reporting  period.
  Actual results could differ from those  estimates.  Significant  estimates and
  judgments  made by the Company  include  items such as the  collectibility  of
  accounts receivable; the level of sales returns;  realizability of inventories
  and relizability of intangible assets and deferred income tax assets.

  21. Recent accounting pronouncements
      --------------------------------

  In June 1998 the  Financial  Accounting  Standards  Board issued  Statement on
  Financial Accounting  Standards No. 133 (SFAS 133),  Accounting for Derivative
  Instruments and Hedging Activities.  The Statement is effective beginning with
  the Company's  fiscal year ended March 31, 2002,  and will require the Company
  to record all derivative  instruments at fair value on its balance sheet.  The
  Company has not elected to adopt the statement  early, and does not expect the
  standard  to have a material  effect on the  Company's  financial  position or
  results of operations upon adoption.

NOTE B - ACQUISITIONS

  Purchase of Spacetec IMC Corporation
  ------------------------------------

  Effective  February 17, 1999,  Labtec merged with Spacetec IMC Corporation,  a
  publicly traded company. Spacetec is involved in the development,  manufacture
  and distribution of three-dimensional (3D) input controller devices for the PC
  and workstation  marketplace used in both CAD/CAM industrial  applications and
  in consumer  electronic  games.  The merger  called for issuance of 0.55430739
  (pre-stock  split) of  Spacetec  common  shares for each Labtec  common  share
  outstanding.  As a result of the merger,  Labtec shareholders  acquired 67% of
  Spacetec and therefore, Labtec has accounted for the transaction as a purchase
  of Spacetec in a "reverse acquisition."

  The  acquisition  of Spacetec for 3,424 common  shares valued at $12.8 million
  has been accounted for under the purchase method of accounting.  The financial
  statements  reflect the  allocation  of the purchase  price and  assumption of
  Spacetec's  liabilities and include its operating results from the date of the
  acquisition.


                                      -34-
<PAGE>

NOTE B - ACQUISITIONS - Continued

  The  following  sets  forth the  reconciliation  of fair  value of the  assets
  acquired and the liabilities assumed.

      Purchase price                                                $    12,804
      Fair value of tangible assets acquired                             (8,528)
      Liabilities assumed                                                 2,539
      Fair value of options granted to Spacetec employees                   742
      Direct costs of acquisition                                         2,243
                                                                    ------------

  Excess of purchase price over fair value of tangible assets       $     9,800
                                                                    ============

  The excess of purchase  price over fair value of tangible  assets  acquired is
  being amortized over an estimated useful life of ten years.

  In  conjunction  with the  closing of the merger,  Spacetec  issued a six year
  promissory  note in the principal  amount of $1,065  payable to the holders of
  Labtec  common stock  outstanding  just prior to the time of the merger.  This
  transaction  was  accounted  for as a  dividend  distribution.  This  note  is
  unsecured and accrues interest at the rate of 10% per year.

  In conjunction with the acquisition, the Company accrued costs associated with
  closing of certain  acquired  facilities  and severance  payments to terminate
  employees of the acquired  company.  The following table presents the activity
  in the related accrued liabilities:

                                     Facility
                                     closure      Employee
                                      costs       severance     Total
                                    ----------   ----------   ----------
      Balance at March 31, 1999     $     426    $     873    $   1,299
         Payments in fiscal 2000          118          750          868
                                    ----------   ----------   ----------

      Balance at March 31, 2000     $     308    $     123    $     431
                                    ==========   ==========   ==========

  These  items  are  included  in  accrued   payroll  costs  and  other  accrued
  liabilities in the accompanying balance sheet.

  Purchase of Connector Resources Unlimited, Inc. (CRU)
  -----------------------------------------------------

  On  August  20,  1999,  the  Company  completed  the  acquisition  of all  the
  outstanding  shares of CRU for $13,146 in cash and $1,500 in debt.  Concurrent
  with the  acquisition of CRU,  Labtec  entered into a $43,000 credit  facility
  with a lender and also sold 313  shares of common  stock for  $1,000.  The net
  proceeds  from the credit  facility and proceeds from the stock sale were used
  to retire outstanding debt and accrued interest totaling $23,400;  to pay debt
  issuance  costs and loan fees on the new credit  facility;  to pay for certain
  acquisition  costs related to the purchase of CRU; and to fund the purchase of
  CRU.  CRU  designs,   develops,   and  markets  computer  peripheral  products
  principally in North America.  The acquisition was accounted for as a purchase
  and  therefore  the  operations  of CRU have been  included  with those of the
  Company since August 20, 1999.


                                      -35-
<PAGE>

NOTE B - ACQUISITIONS - Continued

  The  following  sets  forth the  reconciliation  of fair  value of the  assets
  acquired and the liabilities assumed.

      Purchase price                                                $    14,646
      Fair value of tangible assets acquired                             (5,338)
      Liabilities assumed                                                 2,098
      Direct costs of acquisition                                           755
                                                                    ------------

      Excess of purchase price over fair value of tangible assets   $    12,161
                                                                    ============

  The excess of the purchase price over fair value of tangible assets acquired
   is being amortized over an estimated useful life of twenty years.

  In conjunction with the acquisition, the Company accrued costs associated with
  closing of certain  acquired  facilities  and severance  payments to terminate
  employees of the acquired  company.  The following table presents the activity
  in the related accrued liabilities:

                                     Facility
                                     closure      Employee
                                      costs       severance     Total
                                    ----------   ----------   ----------
      Balance at March 31, 1999     $      -     $      -     $       -
         Additions                        335          420          755
         Payments in fiscal 2000          158          154          312
                                    ----------   ----------   ----------

      Balance at March 31, 2000     $     177    $     266    $     443
                                    ==========   ==========   ==========

  These  items  are  included  in  accrued   payroll  costs  and  other  accrued
  liabilities in the accompanying balance sheet.

  The  following  unaudited  pro forma  information  presents the results of the
  Company's  operations  assuming  both the  Spacetec  and the CRU  acquisitions
  occurred at the beginning of each period presented:

                                            Year ended March 31
                                    ------------------------------------
                                       2000         1999         1998
                                    ------------------------------------
                                                 (Unaudited)
      Net sales                     $  96,422    $  70,411    $  66,704
      Net income (loss)                   243      (11,424)      (8,351)
      Net income (loss) per share:
         Basic and diluted               $.06       $(2.29)      $(2.36)

  The pro forma  financial  information  is not  necessarily  indicative  of the
  operating  results that would have  occurred had both the Spacetec and the CRU
  acquisitions  been  consummated as of the beginning of each period,  nor is it
  necessarily indicative of future operating results.


                                      -36-
<PAGE>

NOTE C - GOODWILL

  Cost in excess of the fair value of tangible  assets of CRU acquired in fiscal
  2000 (Note B) consisted  of goodwill  associated  primarily  with the existing
  technology  acquired and was recorded at $11,406.  Direct costs of acquisition
  totaled $755. These costs have also been capitalized as part of cost in excess
  of fair value of tangible assets  acquired.  Amortization  expense  recognized
  related to this goodwill was $355 for the year ended March 31, 2000.

  Cost in excess of the fair value of tangible  assets of  Spacetec  acquired in
  fiscal 1999 (Note B)  consisted  of  goodwill  associated  primarily  with the
  existing  technology  acquired  and was  recorded at $7,558.  Direct  costs of
  acquisition totaled $2,243.  These costs have also been capitalized as part of
  cost in  excess of fair  value of  tangible  assets  acquired.  In the  fourth
  quarter of the year ended  March 31,  2000,  the Company  determined  that the
  estimated life for goodwill  associated  with Spacetec  should be revised from
  three to ten years.  This change was accounted for prospectively as of January
  1, 2000 and reduced  goodwill  amortization  in the  quarter by  approximately
  $597.  Amortization expense recognized related to this goodwill was $2,590 and
  $408 in fiscal 2000 and 1999, respectively.

  Costs  in  excess  of the fair  value of the net  tangible  assets  of  Labtec
  acquired in fiscal  1995  consisted  primarily  of  goodwill  associated  with
  product  trade names  originally  recorded  at $8,838 and a $3,350  noncompete
  agreement  with the  former  owner.  Goodwill  was being  amortized  using the
  straight-line method over 5 years, which represents the estimated lives of the
  underlying  product trade names. The noncompete  agreement was being amortized
  using the double-declining balance method over the agreement's life of 5 years
  to reflect management's belief that the noncompete provision has more value in
  the earliest years of the noncompete period.  Amortization  expense recognized
  related to this  goodwill  was $1,768 for years ended March 31, 1999 and 1998.
  Amortization  expense recognized  related to the noncompete  agreement was $0,
  $362 and $362 for the years ended March 31, 2000, 1999 and 1998, respectively.


NOTE D - INVENTORIES

  Inventories   represent  merchandise  produced  for  the  Company  by  foreign
  factories  subcontracted by the Company.  Of the total  inventories,  $450 and
  $2,170 was in transit at March 31, 2000 and 1999, respectively.


NOTE E - PROPERTY AND EQUIPMENT

  Property and equipment consist of:

                                                                March 31,
                                                            2000         1999
                                                         ----------   ----------

      Leasehold improvements                             $     256    $     239
      Tooling and molds                                      2,588        2,329
      Furniture and equipment                                2,473        1,879
      Retail displays                                        2,145        1,527
                                                         ----------   ----------
                                                             7,462        5,974

      Less accumulated depreciation and amortization        (5,130)      (3,644)
                                                         ----------   ----------

                                                         $   2,332    $   2,330
                                                         ==========   ==========


                                      -37-
<PAGE>

NOTE F - LONG-TERM DEBT

  In conjunction with the purchase of CRU in August 1999, the Company repaid its
  $7,500 revolving line of credit and $19,250 long-term loan with funds obtained
  from a $27,000  long-term  loan and a $16,000  revolving  line of credit  with
  other  lenders.  Also a $1,500 seven and  one-half  year  promissory  note was
  issued to the prior  shareholders  of CRU.  Fees  related to the  extinguished
  credit line are included in the extraordinary loss on extinguishments of debt.
  At March 31, 2000 the long-term  loans and a portion of the revolving  line of
  credit were  accruing  interest  at LIBOR plus  3.25-3.50%  and the  remaining
  portion of the  revolving  line of credit was  accruing  interest at the prime
  rate plus 1.75%.  In December 1999, the Company  entered into an interest rate
  swap  agreement with its primary lender in order to fix the interest rate on a
  portion of its long-term debt. At March 31, 2000 the amount of debt subject to
  the fixed  rate was  $12,800  for which the rate was  9.69%.  The bank line of
  credit is collateralized  by substantially  all of the Company's assets.  Loan
  fees  paid to the  banks  and  transaction  fees  relating  to the term  loan,
  revolving  line of  credit,  and  promissory  note were  $2,419  and have been
  recorded  in debt  issuance  costs.  The  current  line of credit  expires  in
  September 2005 and the long-term debt expires June 30, 2005.

   Long-term debt consists of:
<TABLE>

                                                                              March 31,
                                                                         2000           1999
                                                                      ----------    ----------
<S>                                                                   <C>           <C>

      Bank note payable with varying quarterly payments,
        interest at the bank's LIBOR rate plus 3.25-3.50%,
        (9.69% at March 31, 2000),  with the final payment due
         June 30, 2005, collateralized by the Company's assets        $  25,600     $     -
      Bank note payable with varying quarterly payments,
         interest at the bank's Eurodollar rate plus 3%, (8% at
         March 31, 1999), with the final payment due
         September 30, 2004, collateralized by the Company's assets          -         19,250
      Bank subordinated note payable (net of $194 and
         $229 discount at March 31, 2000 and 1999
         respectively) at 12% with principal due October 1, 2005          4,306         5,771
      Note payable to former Labtec shareholders; interest at
         10%, with principal due February 17, 2005 (Note B)                 241         1,065
      Note payable to former CRU shareholders; interest at 6%,
         with principal due February 28, 2005 (Note B)                    1,500            -
                                                                      ----------    ----------
                                                                         31,647        26,086

      Less amounts payable in one year                                    2,900            -
                                                                      ----------    ----------

      Total long-term debt                                            $  28,747        26,086
                                                                      ==========    ==========
</TABLE>

  The bank line of credit agreement and long-term debt agreements are subject to
  certain  restrictive  covenants.  The  Company  was in  compliance  with these
  covenants for all periods presented in the accompanying financial statements.

  Interest  payments  for the years  ended  March 31,  2000,  1999 and 1998 were
  $3,649, $3,160 and $2,758, respectively.


                                      -38-
<PAGE>

NOTE F - LONG-TERM DEBT - Continued

  Principal repayments of the long-term debt are required as follows:

      Fiscal year
         2001                                                         $   2,900
         2002                                                             3,000
         2003                                                             3,300
         2004                                                             3,700
         2005                                                             4,341
         Thereafter                                                      14,600
         Less debt discount                                                (194)
                                                                      ----------

                                                                      $  31,647
                                                                      ==========


NOTE G - EMPLOYEE BENEFITS

  The Company has a defined contribution profit sharing plan for its employees
   who meet certain  requirements  of age and length of service.  Employees  may
   voluntarily contribute up to a maximum of 20% of their annual compensation to
   the plan.  During fiscal year 2000,  the Company  matched 50% of the employee
   contributions up to a maximum of 6%. There was no Company match during fiscal
   1999 and  during a portion  of fiscal  1998 the  Company  matched  50% of the
   employee  contributions  up to a maximum of 5%. For the years ended March 31,
   2000, 1999 and 1998,  matching  contributions for eligible employees amounted
   to $29, $0 and $56, respectively.

  Discretionary bonuses of $991, $141 and $175 were awarded to employees for the
  years ended March 31, 2000, 1999 and 1998, respectively.


NOTE H - INCOME TAXES

   The income tax provision (benefit) consists of the following:

                                             Fiscal year ended March 31,
                                           2000          1999          1998
                                        ----------    ----------    ----------

      Current tax expense (benefit)     $     474     $    (576)    $     364
      Deferred tax expense (benefit)          302          (794)         (350)
                                        ----------    ----------    ----------

                                        $     776     $  (1,370)    $      14
                                        ==========    ==========    ==========


                                      -39-
<PAGE>

NOTE H - INCOME TAXES - Continued

   Deferred tax assets are comprised of the following:

                                                                March 31,
                                                            2000         1999
                                                         ----------   ----------
      Nondeductible accruals and allowances              $   1,214    $     652
      Capitalized inventory costs                               69          177
      Property and equipment depreciation                      707          536
      Intangibles                                            1,203        1,357
      Research and experimentation credits                     522          523
      Net operating loss carryforward                        2,691        2,986
                                                         ----------   ----------

      Gross deferred tax asset                               6,406        6,231

      Valuation allowance                                   (2,599)      (3,508)
                                                         ----------   ----------


      Net deferred tax assets                            $   3,807    $   2,723
                                                         ==========   ==========

  The net  decrease  of $909 in the  valuation  allowance  for fiscal  year 2000
  relates to a portion of the net operating loss  carryforwards and research and
  experimentation  credits  resulting from the acquisition of Spacetec in fiscal
  year  1999.   The  Company's  net  operating  loss   carryforwards   aggregate
  approximately  $7.7  million at March 31,  2000 and expire in  2012-2014.  The
  utilization  of the Spacetec net operating loss  carryforwards  are limited to
  approximately  $600 per year for income tax purposes as well as being  limited
  to the taxable  earnings of  Spacetec.  The credit  carryforwards  also have a
  yearly  limitation  amount as well as being  limited  to taxable  earnings  of
  Spacetec  and  expire in 2012 and  2013.  As of March 31,  2000,  a  valuation
  allowance has been provided for a portion of these deferred tax assets because
  management cannot conclude that it is presently more likely than not that such
  deferred income tax assets will be utilized.

  The income tax  provision is  reconciled  to the tax computed at the statutory
  federal rate as follows:

<TABLE>
                                                            Fiscal year ended March 31,
                                                         2000          1999          1998
                                                      ----------    ----------    ----------
<S>                                                    <C>          <C>           <C>

      Tax expense (benefit) at federal statutory rate     34.00%      (34.00)%       (34.00)%
      Foreign taxes                                       (7.65)         .09            .39
      Foreign sales corporation benefit                  (39.01)          -              -
      Permanent differences                               17.71        11.41           35.38
      Other                                               34.39         (.18)          (1.00)
                                                      ----------    ----------    ----------

                                                          39.44%      (22.68)%          .77 %
                                                      ==========    ==========    ===========
</TABLE>

  Permanent   differences   primarily   include   nondeductible   goodwill   and
  nondeductible meals and entertainment expense. Other differences include state
  income taxes net of the Federal benefit.

                                      -40-
<PAGE>

NOTE I - SHAREHOLDERS' EQUITY

  On October 7, 1997 the  Company  undertook  the  Recapitalization  whereby the
  Company:  (i)  refinanced its existing debt by obtaining a $13 million line of
  credit, a $27 million term note and a $6 million  subordinated  term note, and
  by  issuing  550  shares of  common  stock for  aggregate  proceeds  of $6,192
  representing  approximately  87.4% of the stock ownership of the Company;  and
  (ii) repurchased 509 shares of its previously  existing  outstanding stock for
  aggregate  cash  consideration  of  $17,828,   including  direct  expenses  of
  approximately  $690.  The  repurchase  of existing  stock  resulted in the old
  shareholder group maintaining an approximate 12.6% interest in the Company.

  All  holders  of  common  stock  are  entitled  to one vote per  share and are
  entitled to  dividends,  provided that  equivalent  dividends are declared and
  paid on all outstanding  shares of common stock. The Company has granted stock
  options  and  warrants  to  purchase  shares  of Class A  common  stock of the
  Company.

  In fiscal year 1996, the Company  authorized and issued 34 shares of preferred
  stock.  At March 31, 1996 and 1997,  34 shares  were  issued and  outstanding.
  During fiscal year 1998 all shares of preferred stock were converted to shares
  of common stock.  The shares were  converted in  accordance  with the original
  terms of the preferred stock, resulting in no beneficial conversion interests.

  Certain  employees of Spacetec  were  eligible to  participate  in an Employee
  Stock  Purchase  Plan.  This plan  terminated  upon Spacetec being acquired by
  Labtec and 9 shares were issued at such time.

  On  September  30, 1998 the Company sold 96 shares of common stock (post stock
  splits) to certain  members of management for $3.05 per share.  Of this,  $265
  was received in cash and the remaining $26 in proceeds was recorded as a stock
  subscription  receivable.  The difference between the fair market value of the
  Company's common stock and the proceeds  received was recorded as compensation
  expense aggregating $781 during the year ended March 31, 1999. During the year
  ended March 31, 1998, the Company  effected a 8.5853 to 1 stock split followed
  by a second  split at 20 to 1. On February 17, 1999,  directly  following  the
  acquisition of Spacetec,  the Company  effected a 1 for 3 reverse stock split.
  On December 1, 1999, the Company  effected a 1 for 2 reverse stock split.  All
  share and per share amounts in the  consolidated  statement of operations  and
  comprehensive income (loss) and the notes to consolidated financial statements
  have been retroactively adjusted for these splits.

  The Company  provided an employee stock option plan (the Plan) which commenced
  on January 27, 1995.  Options under the Plan were granted at the discretion of
  the Board of Directors.  The exercise price of these options generally was the
  fair market value of shares at the date of grant as determined by the Board of
  Directors.  Such options were  exercisable  generally  over ten years from the
  time the  options  were  granted,  and  vested  over a period of three  years.
  Compensation  cost  recognized  on the  Company's  stock  option  grants which
  provided an  exercise  price below the fair value on the date of the grant was
  $73 for the year ended March 31, 1998.

  The Plan allowed the granting of options to purchase up to an aggregate of 496
  shares  (before  considering  stock  splits) of the  Company's  Class A common
  stock.  Options  granted  under the Plan were  nonqualified  stock  options as
  defined by the Internal  Revenue Code. All options were exercised and the Plan
  was terminated  pursuant to the completion of the  Recapitalization in October
  of 1997.

  In  connection  with  the  Recapitalization,  the  Company  established  a new
  employee stock option plan, which commenced on October 7, 1997 (the New Plan).
  The  Company  reserved  443  shares of common  stock for  issuance  to certain
  employees  under the New Plan.  The exercise price of these options range from
  $3.0481

                                      -41-
<PAGE>

NOTE I - SHAREHOLDERS' EQUITY - Continued

  (estimated fair value based upon the price paid for new shares) to $9.1444 per
  share. Such options may be exercised generally over 10 years from the time the
  options are granted, and vest over a period of four years.

  The Company has elected to follow APB No. 25,  Accounting  for Stock Issued to
  Employees  ("APB  25"),  and related  interpretations  in  accounting  for its
  employee  stock  options.  Under APB 25,  because  the  exercise  price of the
  Company's  employee  stock options  equals the market price of the  underlying
  stock on the date of the grant, no compensation  expense has been  recognized.
  Pro forma  information  regarding net income per share is required by SFAS No.
  123,  Accounting for Stock Based  Compensation,  and has been determined as if
  the Company had accounted for its employee  stock options under the fair value
  method of that statement. The 1998 options were valued using the minimum value
  pricing model as prescribed by SFAS 123 for nonpublic  companies.  The options
  issued  subsequent  to fiscal  1998 have been valued  using the  Black-Scholes
  pricing model as prescribed by SFAS 123.

  The following weighted-average  assumptions have been used for grants of stock
  options.

                                           2000          1999          1998
                                        ----------    ----------    ----------
      Risk-free interest rate              5.45%         5.20%         5.61%
      Expected dividend yield              -             -             -
      Expected lives                       5 years       5 years       5 years
      Expected volatility                   103%           71%         -

  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.   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 the Company's opinion the existing available models do
  not  necessarily  provide a reliable  single  measure of the fair value of the
  Company's employee stock options.

   Using the Black-Scholes  option valuation model, the  weighted-average  grant
   date value of options granted during fiscal 2000 and 1999 was $7.98 and $8.06
   per option, respectively.

   The pro forma effect of applying FAS 123 would have an immaterial  effect for
   fiscal 1998 and 1997 based on the above assumptions.  The Company's pro forma
   information for fiscal 2000 and 1999 is as follows:

                                          Year ended            Year ended
                                         March 31, 2000        March 31, 1999
                                      --------------------  --------------------
                                      Reported   Pro forma  Reported   Pro forma
                                      --------   ---------  --------   ---------
    Net income (loss) (in thousands)  $   176    $   (166)  $(4,942)   $ (4,988)
    Net income loss per share
       Basic and diluted              $  0.05    $   (.04)  $ (1.98)      (2.00)


                                      -42-
<PAGE>

NOTE I - SHAREHOLDERS' EQUITY - Continued

The following table summarizes the stock option  transactions under the Plan and
New Plan described above.

                                          Shares        Average
                                           under        exercise
                                          option         price
                                        ----------    ----------
   Balance, March 31, 1997                  1,730     $ 1,082.44

      Options exercised                    (1,730)      1,082.44

      Options granted                     358,591           5.08
      Options cancelled                   (34,182)          5.08
                                        ----------

   Balance, March 31, 1998                324,409           5.08

      Options granted                     153,925          14.78
      Options cancelled                  (233,510)          5.08
                                        ----------

   Balance, March 31, 1999                244,824          12.24

      Options granted                     216,325           9.50
      Options exercised                    (6,925)          5.08
      Options cancelled                   (82,892)          5.08
                                        ----------

   Balance, March 31, 2000                371,332     $     9.24
                                        ==========    ==========


  A summary of  options  outstanding  and  exercisable  at March 31,  2000 is as
  follows:
<TABLE>

                                                     Options Outstanding                       Options Exercisable
                                        -----------------------------------------------   ------------------------------
                                                          Weighted-        Weighted-                        Weighted-
                                                           Average          Average                          Average
                                           Number         Remaining        Exercise          Number          Exercise
                                        outstanding          Life            Price        Exercisable         Price
                                        -------------    -------------   --------------   -------------    -------------
<S>                                     <C>              <C>             <C>              <C>              <C>
      $0.00 - $5.00                           78,777          3.42       $     3.05            28,447      $     3.05
      $5.01 - $9.00                           71,029          8.10       $     7.68             3,292      $     6.33
      $9.01 - $10.00                         109,812          8.08       $     9.69            30,583      $     9.48
      $10.01 - $20.00                        111,714          7.89       $    14.15            61,839      $    16.89
</TABLE>


NOTE J - COMMITMENTS AND CONTINGENCIES

  1. Commitments
     -----------

  The  Company  is  contractually   obligated  under  various   operating  lease
  agreements  for warehouse and office space until April of 2006. The total rent
  expense  related to warehouse and office space under leases  amounted to $982,
  $621 and $352 for the  fiscal  years  ended  March  31,  2000,  1999 and 1998,
  respectively.


                                      -43-
<PAGE>

NOTE J - COMMITMENTS AND CONTINGENCIES - Continued

  Future minimum lease payments under these leases are as follows:

      Fiscal year
         2001                                                   $       989
         2002                                                           968
         2003                                                           903
         2004                                                           860
         2005                                                           838
         Thereafter                                                     911
                                                                -------------
                                                                -------------

         Total minimum lease payments                           $     5,469
                                                                =============


  2. Contingencies
     -------------

  Pursuant  to  the  Recapitalization  agreement,  the  shareholder  group  that
  received  redemption  proceeds are  contingently  entitled to receive from the
  Company  up  to  $1,500  upon  a  "Change  in  Control"  (as  defined  in  the
  Stockholders  Agreement),  or up to $3,000 in the event of an "Initial  Public
  Offering" (as defined in the Stockholders Agreement).

  The Company becomes involved in litigation,  disputes,  employment matters and
  other  proceedings  in the normal  course of its  business.  In the opinion of
  management,   and  after  consultation  with  legal  counsel,   the  Company's
  liability,  if any, under any pending matters would not materially  affect its
  financial condition or results of operations.



                                      -44-
<PAGE>

Item  9.  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
          ----------------------------------------------------------------------
          Financial Disclosure.
          ---------------------

As  reported  in the Form 8-K filed by the Company on  February  15,  2000,  the
Company  changed its  independent  public  accountants  to Grant  Thornton  LLP,
effective February 8, 2000.

                                    PART III
                                    --------

Item 10.  Directors and Executive Officers of the Registrant.
          --------------------------------------------------

The information required by this item is incorporated by reference herein in the
"Election of  Directors"  section of the Company's  Proxy  Statement to be filed
pursuant to Regulation 14A.

Item 11.  Executive Compensation.
          ----------------------

The information required by this item is incorporated by reference herein in the
"Executive  Compensation"  section of the Company's  Proxy Statement to be filed
pursuant to Regulation 14A.

Item 12.  Security Ownership of Certain Beneficial Owners and Management.
          --------------------------------------------------------------

The information required by this item is incorporated by reference herein in the
"Security  Ownership of Management"  section of the Company's Proxy Statement to
be filed pursuant to Regulation 14A.

Item 13.  Certain Relationships and Related Transactions.
          ----------------------------------------------

The information required by this item is incorporated by reference herein in the
"Certain  Transactions"  section of the  Company's  Proxy  Statement to be filed
pursuant to Regulation 14A.

                                     PART IV
                                     -------

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K.
          ---------------------------------------------------------------

(A)      1.       Financial Statements

The financial statements are listed beginning on page 18 of this report.

         2.       Financial Statement Schedules

The following schedule is filed as part of this report:

         Schedule II - Valuation and Qualifying Accounts

No  other   schedules  are  included   because  the  required   information   is
inapplicable,  not required,  or is presented in the financial statements or the
notes thereto.

         3.       Exhibits

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

(B)      Reports on Form 8-K:

On May 4,  1999,  the  Company  filed a report  on Form  8-K/A  relating  to the
amendment of Item 7, Financial  Statements,  Pro Forma Financial Information and
Exhibits, to provide financial statements and pro forma financial information.


                                      -45-
<PAGE>

On September 2, 1999, the Company filed a report on Form 8-K relating to Item 2,
Acquisition  of Assets,  in connection  with the  Company's  purchase of all the
outstanding stock of Connector Resources Unlimited, Inc.

On November 1, 1999,  the Company filed a report on Form 8-K relating to Item 5,
Other Events, in connection with the listing of the Company's  securities on the
Nasdaq National Market.

On November 2, 1999,  the Company  filed a report on Form 8-K/A  relating to the
amendment of Item 7, Financial  Statements,  Pro Forma Financial Information and
Exhibits,  to provide the financial statements of Connector Resources Unlimited,
Inc.

On December 1, 1999,  the Company filed a report on Form 8-K relating to Item 5,
Other Events, in connection with the listing of the Company's  securities on the
Nasdaq National Market.

On February 15, 2000, the Company filed a report on Form 8-K relating to Item 4,
Changes in Registrant's  Certifying Accountant,  in connection with the retainer
of Grant Thornton LLP as the Company's independent public accountants.
<TABLE>

(C)      Exhibits:
<S>                  <C>                                                   <C>

    Number           Description of Exhibit                                Method of Filing

    1                Letter Agreement between the Issuer and Sun           Incorporated by reference to Exhibit 1 to
                     Multimedia Partners, L.P.                             the Form SC 13D/A filed by Labtec Inc. on
                                                                           February 10, 2000

    2.1              Stock Purchase Agreement, dated as of August 4,       Incorporated by reference to Exhibit 2.1
                     1999, among the Purchaser, the Company and each       to the Form 8-K filed by Labtec Inc. on
                     of the stockholders of Connector Resources            September 2, 1999 ("Labtec September 2,
                     Unlimited, Inc.                                       1999 Form 8-K")

    2.2              Promissory Note, dated as of August 20, 1999,         Incorporated by reference to Exhibit 2.2
                     issued by the Company and payable to Carl W.          to the Labtec September 2, 1999 Form 8-K
                     Gromada, as collection agent for each of the
                     stockholders of Connector Resources Unlimited,
                     Inc.
                                                                           Incorporated by reference to Exhibit 3.1
    3.1              Restated Articles of Organization                     to the Labtec Inc. Annual Report on Form
                                                                           10-K for the fiscal year ended March 31,
                                                                           1999 ("Labtec 1999 Form 10-K")

                                                                           Incorporated by reference to Exhibit 3.2
    3.2              Articles of Amendment                                 to the Labtec 1999 Form 10-K

    3.3              Amended and Restated By-Laws of the Company           Incorporated by reference to Exhibit 3.3
                                                                           to the Labtec 1999 Form 10-K

    3.4              Articles of Amendment                                 Incorporated by reference to Exhibit 3.3
                                                                           to the Form 10-Q filed by Labtec Inc. on
                                                                           November 15, 1999 ("Labtec November 15,
                                                                           1999 Form 10-Q")

    4.1              Specimen certificate for shares of common stock       Incorporated by reference to Exhibit 4.1
                     of the Company                                        to the Labtec 1999 Form 10-K


</TABLE>


                                      -46-
<PAGE>

                                                        SIGNATURES

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

Date:        June 29, 2000

      LABTEC INC.


      By:                                         s/ Robert G Wick
                                                  --------------------
                                                  Robert G. Wick
                                                  President and CEO

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
Registrant and in the capacities and on the dates indicated.

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

    /s/ Robert G. Wick         President, CEO, and Director        June 29, 2000
  -------------------------    (principal executive officer)
        Robert G. Wick


    /s/ Marc J. Leder          Co-Chairman, Senior Vice President, June 29, 2000
  -------------------------    Finance, Chief Financial Officer,
        Marc J. Leder          Director and Treasurer (principal
                               financial officer and principal
                               accounting officer)


    /s/ Rodger R. Krouse       Co-Chairman, Vice President,        June 29, 2000
  -------------------------    Director
        Rodger R. Krouse


    /s/  Clarence Terry        Vice President, Director            June 29, 2000
  -------------------------
         Clarence Terry


    /s/  Bradley A. Krouse     Director                            June 29, 2000
  -------------------------
         Bradley A. Krouse


    /s/  George R. Rea         Director                            June 29, 2000
  -------------------------
         George R. Rea


    /s/ Patrick J. Sullivan    Director                            June 29, 2000
  -------------------------
        Patrick J. Sullivan



    /s/ Joseph Pretlow         Director                            June 29, 2000
  -------------------------
        Joseph Pretlow

                                      -47-
<PAGE>

                      REPORT OF INDEPENDENT ACCOUNTANTS ON
                          FINANCIAL STATEMENT SCHEDULE


To the Board of Directors of Labtec Inc.

Our audit of the  consolidated  financial  statements  referred to in our report
dated May 15,  2000 in this Form 10-K also  includes  an audit of the  Financial
Statement  Schedule  listed in Item  14(a)(2) of this Form 10-K. In our opinion,
this Financial Statement Schedule presents fairly, in all material respects, the
information  set  forth  therein  when  read in  conjunction  with  the  related
consolidated financial statements.


/s/      Grant Thornton LLP

Portland, Oregon
May 15, 2000



<PAGE>



                      REPORT OF INDEPENDENT ACCOUNTANTS ON
                          FINANCIAL STATEMENT SCHEDULE


To the Board of Directors of Labtec Inc.

Our audits of the fiscal 1999 consolidated  financial  statements referred to in
our report  dated May 21,  1999 in this Form 10-K also  includes an audit of the
fiscal 1999 Financial  Statement  Schedule  listed in Item 14(a)(2) of this Form
10-K. In our opinion,  this Financial Statement Schedule presents fairly, in all
material  respects,  the  information set forth therein when read in conjunction
with the related fiscal 1999 consolidated financial statements.


/s/      PricewaterhouseCoopers LLP

Portland, Oregon
May 21, 1999


<PAGE>

                                                                Schedule II

                                        Labtec, Inc.
                              Valuation and Qualifying Accounts


                                            ------------------------------------
                                               1998          1999         2000
                                               ----          ----         ----

Bad Debt Reserve
----------------
Beginning Balance                            120,000        89,736       937,990
Additions - charged to expense                62,910       762,163       146,948
Spacetec Reserve - purchase accounting                     252,845
CRU Reserve - purchase accounting                                         12,059
Writeoffs                                     93,174       166,754       391,083
Ending Balance                                89,736       937,990       705,914

Inventory Reserve
-----------------
Beginning Balance                             200,000           -        399,851
Additions - charged to expense                             500,000       186,064
CRU Reserve - purchase accounting                                        102,403
Writeoffs                                     200,000      100,149
Ending Balance                                     -       399,851       688,318

Returns & Allowances Reserve
----------------------------
Beginning Balance                             599,162      578,067       505,153
Additions - charged to expense              2,509,109    2,077,055     2,461,579
CRU Reserve - purchase accounting                                         42,706
Deletions                                   2,530,204    2,149,969     2,425,594
Ending Balance                                578,067      505,153       583,844

Advertising Allowance Reserve
-----------------------------
Beginning Balance                             241,821      233,392       297,987
Additions - charged to expense              2,284,720    3,459,843     4,461,996
Deletions                                   2,293,149    3,395,248     4,185,100
Ending Balance                                233,392      297,987       574,883


Allowance for Deferred Tax Asset
--------------------------------
Beginning Balance                                  -            -             -
Additions - charged to expense                           3,508,392     2,599,000
Deletions                                                3,508,392     2,599,000
Ending Balance                                     -            -             -