<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
                                   FORM 10-K

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

For the fiscal year ended  March 31, 1998
                           --------------

                                      OR

   [ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
           EXCHANGE ACT OF 1934  [NO FEE REQUIRED]
For the transition period from          to 
                               --------    -------------  

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

   The Boott Mills, 100 Foot of John Street, Lowell, Massachusetts 01852-1126
          (Address of principal executive offices including zip code)
 
                                (978) 275-6100
             (Registrant's telephone number, including area code)
                          ---------------------------
 
Securities registered pursuant to Section 12 (b) of the Act:

                                                 Name of each exchange
               Title of each class                on which registered
               -------------------                -------------------

                     None                                None

Securities registered pursuant to Section 12 (g) of the Act:
                          Common Stock, $.01 Par Value

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                                 YES  X    NO
                                    -----    ----- 

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

The approximate aggregate market value of voting stock held by non-affiliates of
the registrant as of May 26, 1998 was:  $12,360,251.

There were 7,170,601 shares of registrant's Common Stock outstanding as of May
26, 1998

                      DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive  proxy statement of the Registrant for the
Registrant's 1998 Annual Meeting of Shareholders to be held July 30, 1998 which
definitive proxy statement will be filed with the Securities and Exchange
Commission not later than 120 days after the registrant's fiscal year of March
31, 1998, are incorporated by reference into Part III of this Form 10-K.
 
<PAGE>
 
                                     Part I
Item 1.  Business

General

     Spacetec IMC Corporation ("Spacetec" or the "Company") was incorporated in
Massachusetts in April 1991.  The Company's principal executive offices are
located at The Boott Mills, 100 Foot of John Street, Lowell, Massachusetts
01852-1126.  The Company's main telephone number is (978) 275-6100.

     Spacetec IMC Corporation (NASDAQ: SIMC) is a world leader in the
development of three-dimensional (3D) interactive input controllers and related
software technology.  Spacetec input controllers are broadly supported by the
primary 3D graphical applications servicing mechanical-CAD, digital content
creation, consumer markets and an emerging desktop, typified by the Internet.
Unlike traditional one-dimensional (1D) or two dimensional (2D) input
controllers, such as keyboards, gamepads, mice, trackballs and joysticks, the
Company's products are designed to enable a user to intuitively manipulate 3D
graphical images in real time.  The Company's 3D software technology and input
controllers allow users to easily move and interact with graphical objects.
More specifically, manipulation of a graphical object is permitted by moving or
spinning, or by aligning it to other object(s).  The user can also invoke a view
point control (camera view) and move around or through objects to understand the
relationship between them.

     The Company believes and industry trends appear to verify that 3D
functionality is becoming increasingly prevalent on a broad range of platforms.
Pentium and Pentium II class devices are the norm for the desktop, as are 3D
graphic card accelerators.  3D, which was once the domain of UNIX workstations
and gaming consoles, is rapidly evolving in all market segments.  Consequently,
UNIX/NT workstations and the desktop are capable of processing and displaying
graphical data structures and content in a cost-effective manner.  Currently,
hardware offerings are more sophisticated, however, operating systems (OS) and
applications are beginning to catch up.  There is wide deployment of 3D enabled
applications in the areas of mechanical CAD, digital content creation, 3D
animation, graphic arts, simulation, visualization, and the Internet.  With both
Microsoft and Intel promoting 3D Graphical User Interfaces (GUI),
standardization of 3D rendering (OpenGL and Direct3D), and chips to accelerate
the processing, 3D will inevitably become the standard.

Company Strategy

     The Company views itself as a leading provider of 3D enabling products and
software technology to the market.  With 3D increasingly prevalent in personal
computing and other consumer electronics systems, the Company is positioned to
become an important player in the emerging 3D environment.  To achieve this, the
Company's strategies are:

Grow its premier position in the NT/UNIX market:

     Workstations -- To build on its market position by leveraging relationships
with a growing list of high-end system applications, the Company now offers an
"open" software development kit (SDK) to the development community for
integration into their applications, thus enabling the 3D input controller.
With access to the source code, the developer takes control of the
implementation and adds value wherever possible by going "native".


                                       2
<PAGE>
 
     In addition to enabling the applications with sophisticated SDK offerings,
Spacetec has initiated a new direction in input controller development,
beginning with ergonomics.  Using an input device is a physical and repetitive
event.  Major end users are cognizant of the health and well being of their
employees, and are requesting quantitative and qualitative data on the impact of
usage as it relates to "Repetitive Stress Injury".    Spacetec has responded by
engaging a leading specialist in this field, has actively measured employees at
key customer sites, and has remitted the data to a leading design house.  The
outcome of this advanced work is expected to be the Spaceball 4000, slated for
release in the latter half of fiscal year 1999.  By working with industry
specialists, key OEMs and large end-users, Spacetec has further strengthened its
position in the workstation market.

Penetrate Mass Markets:

     Consumer - The Company intends to maintain its position of supplying 3D
input controller technology to this market segment by building additional
relationships with key market players.  In fiscal year 1998, to heighten
awareness of 3D input controllers, strategic relationships were pursued and most
recently a marketing relationship with Acclaim Entertainment for a software
bundle was initiated.  In a related area, the Company has also begun shipment of
components to ASCII Entertainment for use in its anticipated release of the
"Sphere 360", a controller for the Sony PlayStation.  The Company hopes to
leverage its success with ASCII Entertainment to discover other products for the
game console market.  The Company looks to further enhance its award-winning
SpaceOrb 360 and offer a Universal Serial Bus ("USB") and Human Interface Device
("HID") in the second half of the fiscal year.  Concurrently, the company is
working closely with Microsoft in the area of DirectInput to simplify the
support of 3D devices by application developers, and to define a separate class
of 3D controllers within Windows.  The goal is to make input controllers truly
plug-and-play.

     Desktop - The corporate desktop remains the traditional domain of the mouse
(2D) today and into the foreseeable future as there has been little progress at
the OS level to standardize on a graphics modeling or rendering engine.
Nonetheless, the desktop represents the single largest business opportunity for
3D interactive computing, and is ripe for application development that brings
real 3D to the desktop.  The competing forces of OpenGL (Silicon Graphics Inc.)
and Direct3D (Microsoft) are anticipated to create a standard that targets the
development community.  Microsoft is committed to evolving the 3D-user interface
into a standard GUI in future releases of Windows.  As the PC is 3D ready, it is
anticipated that a standard will emerge.  As both Intel and Microsoft are
concentrating on this segment, the expectation of ensuing applications is high.
Until that time, the Internet and gaming are the most viable 3D environments on
the desktop.

     In anticipation of this evolution, Spacetec has committed itself to
furthering the use and deployment of 3D input controllers on the desktop. The
Company will take a similar approach to defining the product offering in desktop
as in the workstation segment, commencing with ergonomics, and on to customer
input, and industrial design.  Product functionality takes into consideration
that the desktop is mostly 2D, and that evolution to 3D cannot preclude either
form. The Company anticipates increased demand from the mass market on the
desktop as it evolves its 3D input controllers and related software.


                                       3
<PAGE>
 
Software Initiative:

     Capitalizing on Motion Control Capability -  The Company is in the process
of adding core technology and consolidating its specialized interactive 3D
motion control software and software modules into a series of comprehensive
software developers' kits.  These SDKs will be targeted at the development
community for applications across workstations, the desktop and consumer markets
with the intent of building in 3D input controller support.  The Company
believes the addition of high-performance interactive 3D motion models will
facilitate the attractiveness of its SDK's to the developer and that wide
support for 3D input controllers will follow.


Products

Hardware Products

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

Consumer Products - Spacetec entered the consumer electronics market at
Christmas 1996 with the introduction of the SpaceOrb 360, a serial 3D game
controller.  With the SpaceOrb 360, gamers experience an entirely new way to
move in 3D.  They can now "strafe, pitch, yaw or roll" with six degrees of
freedom at 1,024 levels of speed. The SpaceOrb 360 is compatible with many of
today's popular 3D games, including Forsaken, Quake, Descent, DOOM, MDK, Redneck
Rampage, Duke Nukem 3D, and all Windows 95 games.  The SpaceOrb 360 is being
redesigned and relaunched to support USB, HID and DirectInput and the Company
believes that the SpaceOrb 360 will be separately recognized as a 3D input
controller within Windows.  This will move it to a truly "plug-and-play" status,
and broader acceptance in the rapidly growing consumer sector.

Professional Products - The Spaceball 3003 "FLX" mid-range 3D controller is
primarily targeted at the emerging 3D animation and multimedia markets, and for
rapidly growing NT Mechanical-CAD market.  The new Spaceball 3003 "FLX" series
provides an improved PowerSensor ball that moves with a displacement that is
more natural and familiar to computer users of all professions.  This new 3D
motion control technology allows for easier use and improved motion control,
delivering three powerful advantages: less force for model movement, improved
ergonomics, and a reduced learning curve for new users.  The Spaceball 3003
"FLX" is sold by a number of OEM's including, Hewlett Packard, Compaq, and IBM
Corporation, together with a number of  value-added resellers and distributors.
 
Industrial Products - The Spaceball 2003 "FLX" featuring fully programmable
capability with tactile buttons, is targeted at a more rigorous environment
using UNIX-based workstations and high-end NT-based PCs.  The Spaceball 2003
"FLX" has become a standard input controller for CAD/CAM/CAE as well as digital
content creation applications.  Using these products, designers and engineers
can pan, zoom and rotate 3D models as smoothly and easily as if they were
holding them in their hands.  The Company believes that the ability to
manipulate 3D models faster with more accuracy can result in significant
increases in productivity.  With end use customers that include many of the
large Fortune 1000 manufacturing companies, such as General Motors, General
Electric, General Dynamics, Chrysler, Eastman Kodak, Daimler Benz, Honda Motors,
McDonnell Douglas, and Motorola, the Spaceball 2003 "FLX" is the largest selling
and most widely used product in this market.  The Spaceball 2003 "FLX" is sold
by a number of OEMs, including Hewlett-Packard and IBM Corporation, and a number
of value-added resellers and distributors.

                                       4
<PAGE>
 
Software Products

The Company's current software products include:

SpaceWare 7.4 - This recently released version of the driver for the Spaceball
2003 "FLX" and Spaceball 3003 "FLX" features a robust programmable user
interface that allows the user to customize settings to the particular
environment and thus increase productivity.  SpaceWare 7.4 provides for custom
selection of user defined operands including: creation of groups of functions,
modifying sensitivity of settings, programmable button selections and on-line
assistance.  The ability to map keyboard strings to buttons is a performance
enhancement that extends beyond the realm of 3D-model manipulation.

SpaceWare AniMotion - Software developers that create applications for games,
motion pictures or videos, animators, and other creative applications have a
growing need to create more sophisticated, life-like 3D animation in a timely
manner.  To put an advanced, intuitive 3D interactive motion control capability
in the hands of animators, Spacetec has created SpaceWare AniMotion, an advanced
3D interactive motion control solution for use with 3D Studio MAX, the industry
leader in animation software. By incorporating SpaceWare AniMotion with the
Spaceball 3003 "FLX", animators can dynamically move objects, cameras or lights,
to create sophisticated 3D animations faster and more effectively.

SpaceWare 8.1 - SpaceWare 8.1 driver source code is targeted for delivery to
application developers like AutoCAD for their integration, and is designed to be
the primary interface to high-end graphic technologies such as Accel View which
is embedded within Autodesk's 3D Mechanical Desktop. The SpaceWare 8.1 release
is designed and developed to interface with any graphic technology deployed by
application developers, and to provide added value to those developers.
SpaceWare 8.1, which is anticipated to be released in the third quarter of
fiscal 1999, will provide support for Spacetec's 3D input controllers in a
seamless fashion.

Enhanced Software Developer Kit ("ESDK") - The ESDK is targeted to provide base
level interactive motion and animation facilities control for application
developers to facilitate 3D input controller support similar to the level found
in SpaceWare AniMotion for any application.  The ESDK is delivered in source
code to the developer for integration within the application in contrast with
Spacetec providing a "plug-in" as with SpaceWare AniMotion and 3D Studio Max.
The ESDK, slated for release at the end of fiscal 1999, should allow developers
to easily incorporate 3D / 6DOF (six degrees of freedom) interactive viewpoint
control, and object motion control for a hierarchy of objects and attributes,
including lights and cameras.

     The Company's plans to develop and commence shipments of new hardware and
software products are forward-looking statements.  The timing and completion of
such plans depends on numerous factors, including the continued technical
development of such products; the successful transition of the prototype
products to volume production; and the successful development of sufficient
market demand for such products. There can be no assurance that any new product
introduction will occur as planned, or that such introduction will prove to be
of financial benefit to the Company.  Delays and difficulties associated with
new product introductions have had material adverse effects on the 

                                       5
<PAGE>
 
Company's business, operating results and financial condition. The Company's
products represent new technology to the marketplace, and there continues to be
substantial risks that the marketplace may not accept the Company's products.
Market acceptance of the Company's products depends to a certain extent upon the
ability of the Company to demonstrate the advantages of its products over other
types of products. There can be no assurance that either existing or new
competitors will not develop products that are superior to the Company's
products or may achieve greater market acceptance or that the Company will be
able to identify, develop, manufacture, market or support new products and
services that will respond to evolving customer requirements and maintain market
acceptance. Failure by the Company to anticipate or respond adequately to
technological developments and customer requirements or any significant delays
in product development or introductions could result in a material loss of
market share or revenues. In addition, new products, when released by the
Company, may contain unexpected errors or ''bugs'' that, despite testing by the
Company, are discovered only after a product has been installed and used by
customers. Although the Company has not experienced material adverse effects
from any such errors to date, there can be no assurance that errors will not be
discovered in the future, causing delays in product introduction and shipments
or requiring design modifications that could materially adversely affect the
Company's competitive position and operating results. There can be no assurance
that announcements of competing new product offerings by others will not cause
customers to defer purchasing the Company's products or to not purchase them at
all.

                                       6
 
<PAGE>
 
Markets
 
     The Company's marketing focus is divided into two broad business sectors,
the Industrial Sector Business and the Consumer Sector Business.  The Industrial
Sector Business is comprised of the CAD/CAM/CAE and professional digital media
(multimedia) market, together with other emerging market areas supported on UNIX
and Windows NT workstation and Windows 95 PC platforms.  The Consumer Sector
Business includes both 3D games and entertainment applications.

The Industrial Sector Business:

The CAD/CAM/CAE Market.

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

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

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

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

The Professional Digital Media (Multimedia) Market.

     The Professional Digital Media market spans a broad spectrum of market
segments where end-users create 3D digital content.  This market includes game
developers, film, video and broadcast television animators, industrial
designers, architectural designers, and 3D graphic and promotional artists.

     SpaceWare AniMotion for 3D Studio MAX was the Company's initial entry into
this market.  The Enhanced SDK is expected to offer similar but more powerful
capability and is anticipated to be added to other popular 3D modeling and
rendering applications to further encourage the introduction of advanced levels
of 3D interactive motion control.


                                       7
<PAGE>
 
     Workstations supporting NT and UNIX dominate the mechanical CAD and digital
content creation markets with NT now outstripping UNIX by a greater than 2:1
ratio and expected to increase. The anticipated growth rate of over 18% over the
next few years provides for a significant market opportunity. The combination of
new seats and a large installed base together with its expanding list of OEM
partners make this a steady market for Spacetec.

The Consumer Sector Business.

PC-Based Games.

     The Company believes that the introduction of several very successful 3D
game titles such as Quake and Descent and more recently, Acclaim's Forsaken,
will increase the demand for enhanced 3D interactive motion control in the PC
game marketplace.   The Company began shipping its serial version of the
SpaceOrb 360 game controller into the retail channel in September 1996 with some
initial success.  It marked the first entry into this dynamic and highly
competitive market segment.  In fiscal 1998, the Company decided to reposition
the SpaceOrb 360 as an OEM technology and to develop some strategic bundling
opportunities to build awareness for the product/technology.  It succeeded in
doing so with both Packard Bell/ NEC and Acclaim Entertainment.  The Company
also decided to focus internally on enhancing the software support for the
future, as there would be significant changes slated for the PC game controller
market.  New controllers need to be USB based and HID compliant, and have 3D
class support within DirectInput.  At that time PC game controllers such as the
planned re-release of the SpaceOrb 360 would have true "Plug & Play" capability.

Console Games and Entertainment.

     The Company entered into an exclusive licensing strategic development,
manufacturing and marketing agreement with ASCII Entertainment in 1996 to bring
its Real-Life 3D controller technology to the Sony PlayStation.  Together with
ASCII Entertainment, the Company has been previewing the product known as the
"Sphere 360", and anticipates game support when released later this year.  This
controller is designed to address consumer demand for enhanced 3D interactive
motion control for the latest 3D games released for the console marketplace.
Mirroring the PC market, target titles for console systems include the Action,
Adventure/Role Play Games and Simulation segment, which are becoming the
majority of titles on this platform.
 
     Discussions are also continuing with other leading vendors serving the
console game market to bring the 3D-controller technology to other console
system platforms such as Nintendo and SEGA.  There can be no assurance that such
discussions will result in the Company entering into a definitive agreement with
any such companies or that any such agreement entered into will prove to be of
financial benefit to the Company.

Desktop.

     Windows 95/98 and NT proliferate the corporate and consumer desktop
markets. Microsoft is making a decided push into the 3D market with support from
chip manufacturers, including Intel.  In March, Microsoft announced that beyond
NT 5.0, both Windows and NT would have a 3D User Interface.  Practical
applications will follow, requiring devices to navigate these new horizons.


                                       8
<PAGE>
 
Sales and Marketing

     The Company's sales force is located in key markets in North America and
Europe.  As of March 31, 1998, the sales and marketing department consisted of
23 employees.  The Company has organized its sales force to focus initially on
three primary channels: OEM, Value-Added Resellers, and Corporate Accounts in
the "Fortune 1,000" category with a heavy emphasis on the automotive and
aerospace industry.  The Company plans to formalize and launch a domestic and
international distribution strategy to support the channels as they mature.

     OEM - A formal program has been designed and staffed to focus on this key
channel for Spacetec.  A team of personnel is now geographically located in
Boston, Dallas and San Francisco and is dedicated 100% to supporting the primary
OEMs [IBM, Hewlett Packard, Compaq, Digital, Dell, Intergraph, Sun, SGI, Siemens
and NEC].

     An Independent Software Vendor ("ISV") program has also been developed and
staffed to facilitate the introduction and support of the company's SDK
strategy.  Definitive ISV support is key to supporting the OEM efforts through
their channels to the end-user.

     Value Added Resellers ("VARs") - VARs are key to the success of Spacetec as
they supply the total solution to many of the target Fortune 1,000 accounts and
thousands outside this classification.  Spacetec develops this channel both
domestically in North America and in Europe where the Company has made a
determined effort to expand its scope of operations.  In fiscal year 1998,
Spacetec opened offices in both the United Kingdom and France to complement the
office opened in Germany just prior to the start of the year.  The combined
opportunity of Europe rivals that of North America.

     Corporate Accounts - In North America, a team is established to call on
corporate accounts to create demand, allowing the channels to fulfill the
demand, so demonstrating our support for our OEMs and VARs.  In fiscal year
1998, the Company opened offices in San Diego, Houston, Dayton and Detroit to
complement the Boston office, and also hired a senior manager to oversee the
effort.

     Distribution - The Company has recently renewed a two-year distribution and
market development arrangement with Sumisho Electronic Devices Corporation, a
wholly owned subsidiary of Sumitomo Corporation, for the development of all its
business in Japan.  The Japanese market showed growth and resilience during a
difficult period and represented approximately 9% of Spacetec's business in
fiscal year 1998.  The Company is also working to establish a formal
distribution structure for both North America and Europe thus allowing it to
expand the scope of its coverage into the market.  Management believes that an
active distribution policy will best serve the channel and the end-users.

     The Company serves the consumer marketplace through a tiered channel
approach.  The Company's sales through retail stores in the USA are direct to
major accounts, and indirect through wholesale distribution in the USA and
overseas.  The company also provides for fulfillment via Internet sales and
other indirect means such as coupons.

     Spacetec also offers turnkey product for private labeling or core
components to the OEM for their own manufacturing processes. The company will
also license technology and component manufacturing rights to primary
manufacturers of system hardware platforms and peripheral accessories.  These
include PC and console game systems manufacturers or third party providers.


                                       9
<PAGE>
 
Research and Development

     The Company's research and development efforts consist of enhancing the
features and performance of its core 3D motion control technologies and applying
these enhancements to existing products and the development of new products.
The Company's research and development functions are divided into hardware
development and software development groups and were reorganized in fiscal year
1998 into a single department.  The software development group is further
divided into workstation systems, consumer products, and core technology teams.

     The overall goals of the software development organization are to enhance
the value of the hardware offerings by improving functionality within the input
controller, at the driver level and within the application.  Each is a key area
that requires dedicated software efforts.

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

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

     During the years ended March 31, 1998, 1997, and 1996, the Company expended
$3,483,000, $2,916,000 and $1,684,000, respectively, on its research and
development efforts.


Patents and Proprietary Rights

     The Company relies on a combination of patents, copyrights, trade secrets,
trademark laws, confidentiality procedures and license arrangements to establish
and protect its proprietary technology.

     The Company has received eleven patents in the United States, Canada,
Australia, Japan, and certain European countries covering its core technology
relating to the PowerSensor.  The Company further has one issued United States
patent and three pending United States patent applications, as well as five
pending international patent applications, covering input sensing technology not
yet incorporated into the Company's products.

     No assurances can be given that patents issued to the Company will not be
infringed upon or designed around by others or that others will not obtain
patents that the Company would need to license or design around.  Although the
Company believes that its products and other proprietary rights do not infringe
the proprietary rights of third parties, there can be no assurance that other
third parties will not assert infringement claims against the Company or that
such claims will not be successful.  If the 


                                      10
<PAGE>
 
Company is found to be infringing third party patents, there can be no assurance
that licenses that might be required for the Company's products would be
available on reasonable terms, if at all.

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

     In addition to the protection afforded by patent registrations and
copyright laws, generally employees of the Company and consultants to the
Company have executed a proprietary information agreement designed to protect
the trade secrets of the Company, inventions created in the course of employment
with the Company and other proprietary information of the Company.
Additionally, certain senior officers and technical personnel are required to
sign non-competition agreements prohibiting such persons from competing with the
Company for a period of 1 year following their departure from the Company.

Manufacturing

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

     The Company currently uses several United States contractors and an
overseas contractor in China, for its primary manufacturing requirements.  Final
functional testing, calibration and quality control, as well as final packing
and shipping for its industrial products, are performed by the Company but will
shift to the source of manufacturing in fiscal year 1999. Generally, standard
parts and components are used in the manufacturing of the Company's products
with supplies sourced from multiple vendors.  To date, the Company has been able
to obtain adequate supplies of all components in a timely manner from existing
sources.

Competition

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

     There are currently several alternative input device technologies available
that provide various degrees of interactive 3D control capabilities.  These
devices range from the traditional 1D dial box, the keyboard, a gamepad or a 2D
mouse.  Other products like a trackball and joystick may provide some
interactive 3D-motion control with 1, 2 or at most 3 degrees of freedom at a
time.  Some specialized 3D devices are available, including head positioning
trackers but are minimally deployed.  Motion control with the 1D and 2D devices
tends to require a great deal of finger or hand dexterity and is somewhat

                                      11
<PAGE>
 
robotic in nature.  The specialized 3D devices are either difficult to use or
have a difficult software interface.  In comparison, the Company believes its
6DOF input device technology, once learned, allows life-like intuitive 3D-motion
control.

     Space Control GmbH ("Space Control") represents the principal competition
in the development and marketing of 3D input controllers with 6DOF.  Space
Control successfully markets a product known as the Space Mouse / Space Mouse
Plus.  In addition, Space Control has a relationship with Logitech for private
labeling under the Logitech logo and sells as the Magellan.  The Logitech
relationship poses a significant challenge as they are a presence at OEMs, and
within the consumer arena.  Spacetec believes that it has a number of inherent
advantages over Space Control, including full ownership of Spacetec's technology
and therefore the absence of license fees, a direct worldwide presence and
strong OEM relations with key partners, as well as a dedicated software
development organization that works to supply the best technology while
supporting key ISVs.

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

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

Dependence on Significant Customers

     The Company's total sales to Electronic Data Systems and subsidiaries
represented 21% and 17% of the Company's revenues for the years ended March 31,
1998 and 1997, respectively.  Sales to IBM Corporation totaled 13% and 8% for
the 1998 and 1997 fiscal years, respectively and sales to Hewlett Packard
totaled 6% and 15% for the 1998 and 1997 fiscal years, respectively.  The loss
of these customers could have a material adverse effect on the Company's
business, financial position and results of operations.

Employees

     As of March 31, 1998, the Company had 66 full-time employees and 1 part-
time employee, of whom 28 were engaged in research and development, 23 in sales
and marketing, 9 in administration and finance and 7 in manufacturing control.
The Company's employees are not covered by a collective bargaining agreement.
The Company has never experienced employment-related work stoppages and believes
that it has satisfactory employee relations.


                                      12
<PAGE>
 
Item 2. Properties

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

Item 3. Legal Proceedings

     As of March 31, 1998, the Company is not party to any legal proceedings and
is not aware of any material threatened litigation.

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

     None.  The Company is planning on having an annual meeting on July 30,
1998.


                                      13
<PAGE>
 
                                    PART II

Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters


     The Company's Common Stock commenced trading on December 6, 1995 on the
Nasdaq National Market under the symbol "SIMC".  As of May 26, 1998 there were
399 holders of record of the Company's Common Stock.

     The following table sets forth for the fiscal periods indicated, the range
of high and low closing prices for the Company's Common Stock on the Nasdaq
National Market.
 
 
                                    HIGH       LOW
 
     Year Ended March 31, 1997

     First Quarter                 $20 1/4   $14 1/4
     Second Quarter                $14 5/8   $     8
     Third Quarter                 $12 1/8   $     4
     Fourth Quarter                $ 6 3/8   $ 3 1/4
 
     Year Ended March 31, 1998
 
     First Quarter                 $ 4 9/16  $ 2
     Second Quarter                $ 4 5/8   $ 2 9/16
     Third Quarter                 $ 3 7/8   $ 2  7/8
     Fourth Quarter                $ 3 9/16  $ 3 1/16
 

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


                                      14
<PAGE>
 
Item 6. Selected Consolidated Financial Data

                      Summary Consolidated Financial Data
                     (In Thousands, Except Per Share Data)

<TABLE> 
<CAPTION> 

 
                                                                   Fiscal Year Ended March 31
                                              -------------------------------------------------------------------
                                                  1998          1997          1996         1995         1994
                                              -------------------------------------------------------------------
<S>                                             <C>           <C>           <C>           <C>          <C>   
STATEMENTS OF OPERATIONS:
Revenues..................................      $ 8,884       $ 9,075       $ 8,132       $5,536       $3,198
Income (loss) from operations.............       (3,838)       (4,948)          705          686          467
Net income (loss).........................       (3,270)       (3,722)          628          526          327
Basic:
-----
Net income (loss) per share...............      $ (0.45)      $ (0.51)      $  0.19       $ 0.42       $ 0.27
Weighted average shares outstanding.......        7,195         7,283         3,232        1,262        1,200
Diluted:
-------
Net income (loss) per share................     $ (0.45)      $ (0.51)      $  0.10       $ 0.10       $ 0.08
Weighted average shares outstanding.......        7,195         7,283         6,412        5,526        3,984
 
BALANCE SHEET DATA:
Working capital...........................      $10,480       $13,622       $17,503       $2,142       $2,357
Total assets..............................       12,999        16,602        21,108        4,507        3,342
Long term liabilities, less current                  
portion...................................           --            --           320          220           99
Total shareholders' equity................      $11,489       $15,260       $19,301       $3,339       $2,667
</TABLE>

All per share amounts reported in the table have been restated to conform with
Statement of Financial Accounting Standards, No. 128, "Earnings Per Share",
which replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share.  See Note 2 to the Consolidated
Financial Statements.


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

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

Overview

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

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

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

     The primary activity in software development has been to create specialized
3D motion control software and software tools to enable the Company's products
to be integrated into specific application software.  The Company offers an
"open" software development kit (SDK) to the development community for
integration into their applications.  Integration of the SDK enables the
Company's 3D input controllers to work with specific software.  With access to
the source code, the developer can take control of the implementation and add
value wherever possible by going "native".  Software development activities have
increased as the number of 3D applications into which the Company's software has
been integrated has increased, and upon entering the professional PC multimedia
animation market and consumer multimedia "edutainment" market with 3D
interactive software programs.

                                       16
<PAGE>
 
Results Of Operations

Comparison Of Fiscal Year Ended March 31, 1998 to the Fiscal Year Ended March
31, 1997

     Revenues.  The Company's revenues consist of sales of industrial and
consumer products, and license fees.  Revenues decreased 2.1% to $8,884,000 for
the fiscal year ended March 31, 1998 ("1998 Fiscal Year") from $9,075,000 for
the fiscal year ended March 31, 1997 ("1997 Fiscal Year").  The decrease in
revenues is attributable to a reduction in the sales of the Company's SpaceOrb
360 RealLife 3D ("SpaceOrb 360") game controller into the consumer retail
channel.

     During the 1998 Fiscal Year, management refocused the sales force on the
industrial business and increased sales in this market by 24.2% to $8,056,000
for the 1998 Fiscal Year from $6,485,000 in the 1997 Fiscal Year.  Sales to the
industrial market for the 1997 Fiscal Year were negatively impacted by the
launch of the Spaceball 3003 ("3003"), a new lower priced input device for
workstation based 3D CAD applications, which essentially replaced the higher
priced Spaceball 2003 ("2003").  The Company had anticipated that unit sales
would increase sufficiently to offset the decrease in price.  However, these
expectations were not realized as the Company was unable to encourage additional
bundling of the 3003 by its OEMs as rapidly as anticipated.

     Other revenues, which include consumer sales and licensing arrangements
decreased 68.0% in the 1998 Fiscal Year to $828,000 from $2,590,000 in the 1997
Fiscal Year.  Licensing arrangements decreased in the 1998 Fiscal Year primarily
from the Company discontinuing its 2D graphics acceleration software business.
Consumer retail sales of the SpaceOrb 360 also declined in the 1998 Fiscal Year.
While the SpaceOrb 360 has enjoyed widespread acceptance in the early-adopter,
hard core gamer market, sales to the mass market have lagged due to delays in
customer acceptance of the product and inadequate channel sales. The Company has
been unable to clearly differentiate its product from other lower priced
computer control devices.  As a result, management has shifted its sales focus
from direct retail channels to establishing Original Equipment Manufacturer
("OEM") and strategic alliance partnerships in the consumer business.

     As part of its corporate strategy, management expects to continue to
emphasize the industrial business and pursue additional strategic alliance
partnerships and OEM relationships.  However, there is no assurance that forging
additional relationships will be able to generate substantial revenue, if at
all.

     Two customers represented 21.3% and 13.4% of the Company's revenues for the
1998 Fiscal Year as compared with two customers representing 17.0% and 14.8% of
sales for the 1997 Fiscal Year.

     Revenue generated through the Company's foreign subsidiaries totaled
$631,000 and represented 7.1% of total revenues for the 1998 Fiscal Year. These
sales are denominated in the local currency of the country in which the
subsidiary is located. Although denominated in foreign currency, exchange rate
fluctuations have been not been material.

     Gross Profit.  The Company's gross profit is arrived at after the costs of
materials,  manufacturing overhead, royalties and amortization of capitalized
software are subtracted from revenues.  Gross profit increased 30.0% to
$6,029,000 for the 1998 Fiscal Year from $4,639,000 for the 1997 Fiscal Year and
represented 67.9% and 51.1% of revenues, respectively. The increase in gross
profit as a percentage of revenues reflects the proportionately higher margins
available from the industrial market, which has been the area of principal focus
by the Company during the 1998 Fiscal Year. Gross profit in both the 1998 Fiscal
Year and 1997 Fiscal Year was negatively impacted by write-downs of inventory
and capitalized software of $470,000 and $929,000, respectively, related to the
consumer market. During the 1998 Fiscal Year, the Company recognized charges of
$340,000 for the write-down of inventory and $130,000 for the write-down of
capitalized software and in the 1997 Fiscal Year, charges of $600,000 for the
write-down of inventory and $329,000 for the write-down of capitalized

                                       17
<PAGE>
 
software associated with the SpaceOrb 360 were incurred. The charges in the 1998
Fiscal Year resulted from the cessation of a retail marketing program. In the
1997 Fiscal Year, the Company had reviewed the projected revenue stream
associated with the sales of the SpaceOrb 360 product and had determined that
the recoverability of the costs of the inventory and capitalized software was
uncertain. As of March 31, 1998, the Company has attached no value to inventory
and capitalized software related to the SpaceOrb 360, and does not anticipate
further write-downs related to this product. However, in the future, there can
be no assurance that the Company will avoid write-downs related to other current
products or products in development.

     As the Company shifts its sales mix from direct to OEM channels for
industrial and consumer products, it is expected that the gross profit
percentage currently experienced by the Company, will not be sustainable.
Generally, the Company realizes a lower profit on its sales through OEMs and
therefore expects that increases in the volume of its products through OEM
channels will negatively impact its gross profit.  The Company's expectations
regarding the decline in gross profit percentage is a forward looking statement.
There can be no assurance that such decreases in profit will not be greater than
anticipated.

     Selling and Marketing Expenses.  Selling and marketing expenses, which
include principally personnel costs and sales commissions, and to a lesser
extent, tradeshow expenses and expenses related to advertising and marketing,
decreased 11.9% to $4,359,000 for the 1998 Fiscal Year from $4,945,000 for the
1997 Fiscal Year and represented 49.1% and 54.5% of revenues, respectively.
During the 1998 Fiscal Year, significant marketing expenses associated with a
direct presence in the retail channel were eliminated.  In addition, the Company
realized savings from cost containment programs implemented at the end of the
1997 Fiscal Year and eliminated broad based advertising and public relations
activities in favor of focused marketing events.  Going forward, the Company
anticipates that selling and marketing expenses will be reduced as a percentage
of revenues as it is anticipated that revenues will increase and expenses will
remain stable. The Company has recently invested in additional salespeople and
new sales offices, both domestically and internationally, which were not
established long enough in the 1998 Fiscal Year to impact revenues
significantly. The Company's expectations regarding the decline of selling and
marketing expenses as a percentage of revenues and the increase in revenues are
forward looking statements. There can be no assurance that expenses will not be
greater than anticipated or that revenues will not be less expected.

     Research and Development Expenses.    Research and development expenses,
which consist primarily of personnel and equipment costs required to conduct the
Company's software and hardware development and engineering efforts, increased
19.4% to $3,483,000 for the 1998 Fiscal Year from $2,916,000 for the 1997 Fiscal
Year and represented 39.2% and 32.1% of revenues, respectively.  The increase in
research and development expenditure in the 1998 Fiscal Year resulted from
hiring additional engineering research personnel at higher skill levels and
therefore at higher average salaries.  This investment was necessary to expand
the Company's software product development efforts, particularly in developing
software for stand-alone revenue generation unrelated to current hardware
offerings.

In the 1997 Fiscal Year, $224,000 of research and development expenses were
recorded as capitalized software related to the SpaceOrb 360.  In comparison,
the Company did not capitalize any research and development expenses in the 1998
Fiscal Year, as technological feasibility was not reached.

The Company has focused its research and development efforts on the development
of several new products, slated for release during the 1999 Fiscal Year.  The
Spaceball 4000 and the Enhanced SDK will require additional research and
development funding during the upcoming year.  Although the Company anticipates
that research and development expenses in the 1999 Fiscal Year will stabilize at
dollar levels similar to the 1998 Fiscal Year results, the continued development
of both the Spaceball 4000 and the Enhanced SDK as well as development of
additional products under consideration could 

                                       18
<PAGE>
 
cost more than expected, and there can be no assurance that these expenses will
not be greater than anticipated.

     General and Administrative Expenses.  General and administrative expenses,
which include the costs of the Company's corporate finance, human resources and
administrative functions, increased 17.3% to $2,025,000 for the 1998 Fiscal Year
from $1,726,000 for the 1997 Fiscal Year, and represented 22.8% and 19.0% of
sales, respectively.  The increase is associated with increases in accounting,
legal, and administration fees related to the establishment of three wholly-
owned subsidiaries in each of Germany, France and the United Kingdom, and to the
acquisition of Spatial Systems Limited ("SSL").  Additionally, the Company
incurred severance costs of approximately $300,000 in connection with the
termination of an executive officer, as well as a loss of $104,000 related to
the write-off of intangible assets associated with its Panacea graphics
acceleration software business.  Management anticipates that general and
administrative expenses will decrease in absolute dollars for the year ended
March 31, 1999.  However, there can be no assurance that these expenses will not
be greater than anticipated.

     Provision for Income Taxes.  As the Company has recognized losses in the
1998 Fiscal Year, it has not recorded a provision for income taxes.  The benefit
attributable to the carryback of losses to prior fiscal years was fully utilized
during the fiscal year ended March 31, 1997.  The Company has unbenefited
federal net operating loss carryforwards of approximately $4,300,000.

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

                                       19
<PAGE>
 
Comparison Of Fiscal Year Ended March 31, 1997 to the Fiscal Year Ended March
31, 1996

     Revenues. Revenues increased 11.6% to $9,075,000 in the 1997 Fiscal Year
from $8,132,000 for the fiscal year ended March 31, 1996 ("1996 Fiscal Year").
The increase in revenues is attributable to the Company's launch of the SpaceOrb
360 into the consumer market.  This was the first year that the Company sold a
consumer product.

     Two customers represented 17.0% and 14.8% of the Company's revenues for the
1997 Fiscal Year as compared with two customers representing 24.3% and 9.8% of
sales for the 1996 Fiscal Year.

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

     Selling and Marketing Expenses. Selling and marketing expenses, increased
82.4% to $4,945,000 for the 1997 Fiscal Year from $2,711,000 for the 1996 Fiscal
Year and represented 54.5% and 33.3% of revenues, respectively.  The increase is
primarily due to costs incurred in connection with the initial marketing program
for the SpaceOrb 360, including extensive non-recurring television advertising
and promotion expenses in excess of $1,000,000.  Additional personnel and
recruiting costs associated with an expansion of the sales and marketing
infrastructure were also incurred during the year.

     Research and Development Expenses.  Research and development expenses,
increased 73.2% to $2,916,000 for the 1997 Fiscal Year from $1,684,000 for the
1996 Fiscal Year and represented 32.1% and 20.7% of revenues, respectively.  The
increase reflects significant investments in personnel and consultants necessary
to expand software product development efforts, particularly in the consumer,
multimedia and PC CAD markets, and engineering efforts designed to lower the
cost of manufacturing of the Company's hardware components.  Research and
development expenses that were recorded as capitalized software costs decreased
to $224,000 for the 1997 Fiscal Year in comparison with $425,000 for the 1996
Fiscal Year.

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

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

                                       20
<PAGE>
 
Quarterly Operating Results

     The following tables set forth certain consolidated quarterly financial
information of the  Company, for the 1997 Fiscal Year and 1998 Fiscal Year.
This information has been derived from the quarterly financial statements of the
Company which are unaudited but which, in the opinion of management, have been
prepared on the same basis as the audited financial statements and include all
adjustments, consisting only of normal recurring adjustments, that management
considers necessary for a fair presentation.  This information should be read in
conjunction with the Consolidated Financial Statements and Notes thereto
appearing elsewhere herein.

<TABLE>
<CAPTION>
                                                               Three Month Period Ended
                            ----------------------------------------------------------------------------------------------
                              June 30     Sept 30      Dec 31      Mar 31     June 30     Sept 30      Dec 31      Mar 31
                                1996        1996        1996        1997        1997        1997        1997        1998
                            ----------------------------------------------------------------------------------------------
                            
<S>                          <C>         <C>         <C>         <C>         <C>         <C>         <C>         <C>
Revenues....................    $1,852      $2,514     $ 2,685     $ 2,024      $2,083     $ 1,816      $2,488     $ 2,497
Gross profit................     1,291       1,403         930       1,015       1,421       1,329       1,342       1,937
Loss from operations........      (339)       (590)     (2,501)     (1,518)       (863)     (1,005)       (957)     (1,013)
Net loss....................       (93)       (269)     (2,092)     (1,268)       (724)       (863)       (811)       (872)
Basic and diluted loss per  
  common share..............    $(0.01)     $(0.04)    $ (0.29)    $ (0.17)     $(0.10)    $ (0.12)     $(0.11)    $ (0.12)
</TABLE>
 
     Basic and diluted loss per common share are presented to conform with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share."  See
Note 2 to the Consolidated Financial Statements.

     The Company's results of operations have varied significantly in the past
and may vary significantly in the future, on a quarterly and annual basis as a
result of a variety of factors, many of which are outside the Company's control.
These factors include, without limitation: (i) the timing and size of orders
which are received and can be shipped in any particular period; (ii) the
commercial success of the Company's products; (iii) delays in the introduction
of products or product enhancements by the Company and the Company's ability to
introduce new products and technologies on a timely basis; (iv)  the financial
stability of the Company's major customers; (v) the timing of new product
introductions or announcements by the Company or its competitors; (vi) the
seasonality of the placement of customer orders; (vii) the timing and nature of
selling and marketing expenses such as tradeshows and advertising campaigns;
(viii) the timing of development expenditures and personnel changes; (ix)
customer order deferrals in anticipation of product enhancements or new product
offerings by the Company or its competitors; (x) customer cancellation of orders
and the gain or loss of significant customers; (xi) the mix of products sold;
and (xii) the mix of OEM and direct sales to end-users.  The Company has
historically operated with little backlog because its products are generally
shipped immediately upon receipt of an order by the Company.  As a result,
revenues in any quarter are substantially dependent on orders booked and shipped
in that quarter and on sales by the Company's customers to end users.

     The Company has historically recognized a large portion of its revenues
from sales booked and shipped in the last month of a quarter such that the
magnitude of quarterly fluctuations may not become evident until late in, or at
the end of, a particular quarter.  Because a number of the Company's individual
orders are for significant amounts, the failure to ship a significant order in a
particular quarter could materially adversely affect revenues and results of
operations for such quarter.  To the extent that significant sales occur earlier
than expected, results of operations for subsequent quarters may be materially
adversely affected.  Due to these and other factors, the Company's quarterly
revenues, expenses and results of operations could vary significantly in the
future, and period-to-period comparisons should not be relied upon as
indications of future performance.  There can be no assurance that the Company
will be able to increase its revenues in 

                                       21
<PAGE>
 
future periods or be able to sustain its level of revenues or its rate of growth
on a quarterly or annual basis.

Liquidity And Capital Resources

     To date, the Company has funded its operations and capital expenditures
primarily through cash generated from operations and the proceeds from the
initial public offering of its common stock in December 1995.  As of March 31,
1998, the Company had cash and cash equivalents and available-for-sale
securities of $9,026,000 and working capital of $10,480,000 versus $10,229,000
and $13,622,000, respectively at March 31, 1997. The Company has no outstanding
line of credit or other indebtedness for borrowed money.

     The Company used $265,000 to fund operating activities in the current year
as compared with $4,408,000 used in operations in the prior year.  The use of
funds in the 1998 Fiscal Year is primarily attributable to the net loss of
$3,270,000, which was offset by a reduction in inventories, income taxes
receivable and accounts receivable and increases in accounts payable and accrued
expenses.  The change in accounts receivable from using cash of $173,000 in the
1997 Fiscal Year, to providing cash of $216,000 in the 1998 Fiscal Year is the
result of enhanced collection efforts over the course of the year. The change in
inventory to providing cash of $1,031,000 in the 1998 Fiscal Year from using
cash of $1,309,000 in the 1997 Fiscal Year resulted from the overall reduction
of on-hand quantities of inventory coupled with write-downs of SpaceOrb 360
inventory in the 1998 Fiscal Year.  Inventory levels were high in the 1997
Fiscal Year as the Company had made significant investments in inventory
related to the SpaceOrb 360 in order to have the necessary anticipated
quantities on hand for sale during the peak retail Christmas season.  In the
1998 Fiscal Year, the Company made an effort to reduce its overall inventories,
especially those related to the SpaceOrb 360.  However, as the Company was
unable to sell the on-hand quantities of this product, and as systems
configurations had changed, management determined that the inventory value was
impaired.  Therefore, a write-down of $340,000 related to the SpaceOrb 360 was
taken in the 1998 Fiscal Year.  Also during the 1998 Fiscal Year, the Company
received income tax refunds of $438,000 resulting from the carryback of the 1997
Fiscal Year net operating loss to the three previous years.  The change in
accounts payable and accrued expenses from providing cash of $231,000 in the
1998 Fiscal Year from using cash of $208,000 in the 1997 Fiscal Year is
primarily due to the timing of payments to vendors.  The overall improvement in
cash from operating activities from a use of $4,408,000 in the 1997 Fiscal Year
to a use of $265,000 in the 1998 Fiscal Year was due to considerable efforts by
management to improve the overall balance sheet.

     Net cash provided to the Company through investing activities totaled
$1,056,000 during the 1998 Fiscal Year.  The increase is attributable to net
proceeds in the amount of $1,482,000, generated from net sales of the Company's
available-for-sale securities.  The increase was offset by $339,000 for
purchases of furniture and equipment, (primarily computer equipment), and
$87,000 for purchases of intangible assets.  The Company anticipates that
capital expenditures for the 1999 Fiscal Year will mirror capital expenditures
for the 1998 Fiscal Year, but it has no commitments or specific plans for any
significant purchases.

     Financing activities used $457,000 of net cash in the current year.  The
Company spent $534,000 to repurchase 150,000 shares of its common stock.  The
cost was offset by $77,000 which was received upon the exercise of employee
stock options.

     The Company believes existing cash and investment securities together with
future anticipated funds from operations, will satisfy its projected working
capital and other cash requirements through the end of its fiscal year ending
March 31, 1999.  Substantial, additional funds will be required to continue
software and hardware development, as well as to develop the sales and marketing
infrastructure, distribution channels and market awareness of the Company's
products.  The Company believes the 

                                       22
<PAGE>
 
level of financial resources available to it is an important competitive factor
in its industry and may seek additional capital prior to the end of that period.

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


Risk Factors

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

     The Company wishes to caution readers not to place undue reliance on these
forward-looking statements which speak only as of the date on which they are
made. In addition, the Company wishes to advise readers that the factors listed
below, as well as other factors not currently identified by management, could
affect the Company's financial or other performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods or events in any
current statement.

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

     In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company is hereby filing cautionary
statements identifying important factors that could cause the Company's actual
results to differ materially from those projected in forward-looking statements
of the Company made by or on behalf of the Company.

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

                                       23
<PAGE>
 
     Developing Market.  During the fiscal year 1997, the Company began to
market its products designed for the consumer marketplace.  The Company has had
little experience in marketing its products to consumers.  The entry into the
consumer market has created considerable risks for the Company, some of which
are outside of the Company's control. See "Part 1: Business -- Products."

     Expansion into Retail Distribution Channels.  The Company commenced retail
shipments of its SpaceOrb 360 during fiscal 1997.  Retail distribution channel
sales have required significantly greater marketing and sales expenditures and
post-sale support costs than the Company's industrial sector products.
Penetration of this market has depended upon building relationships with
distributors and retailers.  An increasing number of vendors compete for access
to these distributors and retailers, which generally offer products of several
different companies, including products competitive with the Company's products.
The Company has committed substantial resources to the penetration of this
distribution channel to date.  The Company's efforts to commence sales through
retail distribution sales channels have not been as successful as anticipated,
and the inability of the Company to penetrate this sales channel effectively has
had a material adverse effect on its operating results.

     As a result of the Company's efforts in penetrating this sales channel, the
gross margins have decreased as the Company has had to price its products at low
levels to penetrate this market.  The Company has noted that its sales to retail
channels have been significantly affected by seasonality primarily due to the
increased demand for 3D game and entertainment applications and related products
during the year-end holiday buying season.  Retail distributors have been
permitted to return inventory to the Company for credit against other purchases
on negotiated terms.  In addition, the Company has granted retail distributors
price protection clauses in agreements with the Company pursuant to which the
Company has been obligated to grant credits when the Company has reduced selling
prices on products previously purchased by the distributor.  Moreover, to the
extent the Company generates significant sales to retail distribution channels
relative to its sales to OEMs, there is a greater risk of increased product
returns and warranty claims.  The Company has established reserves for product
returns and warranty claims based on its previous experiences and future
expectations.  There can be no assurance that these reserves will be adequate or
that product returns and warranty claims and price protection adjustments will
not have a material adverse effect on future operating results.

     Reliance on Third-Party Distribution Channels.  The Company expects to
increase its product sales through third-party distribution channels, including
original equipment manufacturers ("OEMs"), value added resellers ("VARs"),
system integrators and distributors.  Such OEMs and VARs are not under the
control of the Company.  Although these customers in turn sell to a wide variety
of end-users, the Company is subject not only to the risk that its customers
will discontinue selling and marketing its products, but also to the risk that
the end-users supplied by the Company's customers will alter their preferences
in a manner that has a material adverse effect on the Company's operations.
There can be no assurance that the Company will be able to retain its current
resellers or expand its distribution channels by entering into arrangements with
new resellers.
 
     Dependence on Relationships with Independent Software Vendors ("ISVs"). The
Company maintains relationships with Independent Software Vendors which
incorporate the Company's enabling software into their 3D applications. As a
result, sales of the Company's products are dependent upon the continued market
acceptance of the product/application offerings of the ISVs. The ISVs are under
no contractual obligation to incorporate the Company's enabling software into
their products/applications. The incorporation of the Company's enabling
software can involve a substantial amount of time and money. Sales of the
Company's hardware products can lag from 6 to 18 months behind the actual
incorporation of the Company's enabling software into the ISV's application. Any
delay in the product development of an ISV or a decision by the ISV to
incorporate the enabling software of a competitor of the Company into its
products/applications would have a material adverse effect on the Company's
business, financial condition and results of operations.

     Rapid Technological Change; Dependence on New Product Development.  The
electronics industry in general, and the markets for the Company's products in
particular, are characterized by rapidly changing technology, evolving industry
standards, frequent new product introductions, short product life cycles and
significant competition.  The introduction of products embodying new
technologies and the emergence of new industry standards present opportunities
for current and potential competitors of the Company to gain market share and
can quickly render the Company's products less attractive or obsolete and
unmarketable.  In order to keep pace with this rapidly changing market
environment, the Company must continually develop and incorporate into its
products new technological advances and features desired by the marketplace at
acceptable prices. 

                                       24
<PAGE>
 
The successful development and commercialization of new products involves many
risks, including the identification of new product opportunities, the timely
completion of the development process, the control and recoupment of development
and production costs and acceptance by customers of the Company's products.
There can be no assurance that the Company will be successful in identifying,
developing, manufacturing and marketing new products in a timely and cost
effective manner, that the Company's products will be accepted in the
marketplace, or that products or technologies developed by others will not
render the Company's products or technologies uncompetitive.
 
     Dependence on Relationships with Significant Customers.  The Company sells
substantially all of its products to and maintains strategic relationships with
original equipment manufactures ("OEMs") and value added resellers ("VARs").  As
a result, sales of the Company's products are dependent upon the continued
market acceptance of the service and product offerings of the Company's
customers.  Although the Company maintains contractual relationships with a
substantial number of its customers, such contracts do not provide for minimum
purchase requirements, nor do they contain provisions requiring the exclusive
purchase of the Company's products.
 
     Competition.  The market for computer products is intensely competitive and
rapidly changing. The Company's products currently compete against established
products and no assurance can be given that the Company's products will not be
rendered obsolete by technological advances of others.  The Company expects that
competition from existing competitors will increase and that new competitors
will enter the 3D motion control market.  Many of the existing and potential
competitors have experienced management, larger technical staffs, more
established and larger marketing and sales organizations, better developed
distribution systems and significantly greater financial resources than the
Company.  The Company anticipates that its competitors will ultimately develop
hardware products based on technology that does not infringe on the patent
rights of the Company, which may provide capabilities similar or superior to
those of the Company's products.  Increased competition could result in price
reductions and loss of market share for the Company.  There can be no assurance
that the Company will be able to compete successfully or that competition will
not have a material adverse effect on the Company's business, operating results
and financial condition.

     Patents and Proprietary Technology.  The Company's success is heavily
dependent upon its proprietary hardware and software technology.  The Company
relies on a combination of patent, trade secret, copyright and trademark law,
software license agreements, non-disclosure agreements, and technical measures
to protect its rights pertaining to its products.  Such protection may not
preclude competitors from developing products with features similar to the
Company's products.  The Company's success will depend in part on its ability to
obtain and defend United States and foreign patent protection for its products
and preserve its trade secrets.  There can be no assurance that the Company's
issued patents, or any future patents, will provide the Company with significant
protection against competitive products or otherwise be commercially valuable.
Moreover, there can be no assurance that any patents issued to or licensed by
the Company will not be infringed upon by others. In the case of infringement of
the Company's technologies, there can be no assurance that the Company would be
able to afford the expense of any litigation that may be necessary to enforce
its proprietary rights.

     In addition to seeking patent protection, in some cases the Company may
rely on contractual arrangements or trade secrets to protect its proprietary
technology.  There can be no assurance that trade secrets will be developed and
maintained, that secrecy obligations will be honored, or that others will not
independently develop similar or superior technology.  Disputes as to the
ownership of such information may arise if consultants, key employees, or other
third parties apply technological information independently developed by them or
by others to Company projects, and such disputes may not be resolved in favor of
the Company.  Due to the importance of patent and trade secret protections and
the competitive nature of its industry, the Company may also be subject to
claims that 

                                       25
<PAGE>
 
its technologies infringe on the proprietary rights of other companies. There
can be no assurance that such claims will not arise, that the Company will have
sufficient resources to pursue any resulting litigation to a final judgment, or
that the Company will prevail in such litigation.

     Dependence on Contract Manufacturers, Including Overseas Manufacturers.
The Company has and will continue to rely on outside vendors to manufacture
hardware devices among the Company's products.  Although the Company's hardware
devices are relatively simple devices to manufacture, and the Company has not
encountered any delays in obtaining adequate products from its outside
contracting organizations, there can be no assurance that delays incurred or
quality problems caused by any of the contract manufacturing organizations will
not have a material adverse effect on the Company's ability to fill customer
orders.  In 1996, the Company entered into a manufacturing contract with a
entity located in the People's Republic of China.  The Company's reliance on
outside manufacturers involves several risks, including a potential inability to
obtain an adequate supply of required products, and reduced control over the
price, timeliness of delivery, reliability and quality of finished products.
Certain of the Company's contract manufacturers have relatively limited
financial and other resources.  Any inability to obtain timely deliveries of
products and services having acceptable qualities or any other circumstance that
would require the Company to seek alternative sources of contract manufacturing
services or to manufacture its own hardware devices internally, could delay the
Company's ability to ship its products.  Any such delay could damage
relationships with customers and such delay could have a material adverse effect
on the Company.

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

     Attraction and Retention of Key Employees.  The Company is dependent on
the principal members of its management.  The loss of the services of one or
more key employees could have a material adverse effect on the Company.  The
Company believes that its future success will be affected by its ability to
attract and retain skilled technical, managerial and marketing personnel.
Although the Company has not experienced difficulty to date, there can be no
assurance that the Company will be successful in attracting or retaining the
personnel it requires to continue to grow and operate profitably.

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

                                       26
<PAGE>
 
Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

Not Applicable.

                                       27
<PAGE>
 
Item 8. Financial Statements And Supplementary Data


                         INDEX TO FINANCIAL STATEMENTS

<TABLE> 
<CAPTION>
                                                                                               Page(s)
                                                                                               -------
<S>                                                                                            <C>
Report of Independent Auditors..............................................................        29
                                                                                                  
Consolidated Balance Sheets as of March 31, 1998 and 1997...................................        30
                                                                                                  
Consolidated Statements of Operations for the years ended March 31, 1998,                         
1997, and 1996..............................................................................        31
                                                                                                  
Consolidated Statements of Shareholders' Equity for the years ended March 31, 1998, 1997,         
and 1996....................................................................................        32
                                                                                                  
Consolidated Statements of Cash Flows for the years ended March 31, 1998, 1997,                   
and 1996....................................................................................        34
                                                                                                  
Notes to Consolidated Financial Statements..................................................        35
</TABLE>

                                       28
<PAGE>
 
                         REPORT OF INDEPENDENT AUDITORS




The Board of Directors and Shareholders
Spacetec IMC Corporation


We have audited the accompanying consolidated balance sheets of Spacetec IMC
Corporation as of March 31, 1998 and 1997, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended March 31, 1998.  Our audits also included the
financial statement schedule listed in the index at Item 14(a).  These financial
statements and schedule are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Spacetec IMC Corporation at March 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
March 31, 1998 in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.



                                    Ernst & Young LLP

Boston, Massachusetts
May 7, 1998, except as to Note 15 as to which
the date is June 5, 1998

                                       29
<PAGE>
                           SPACETEC IMC CORPORATION
                          CONSOLIDATED BALANCE SHEETS

                (in thousands, except share and per share data)

<TABLE> 
<CAPTION> 
                                                                                           March 31
                                                                                  ----------------------------
                                                                                      1998            1997
                                                                                  ------------    ------------
                                    ASSETS
<S>                                                                               <C>             <C> 
Current assets:
 Cash and cash equivalents                                                         $      490      $      170
 Securities available-for-sale                                                          8,536          10,059
 Accounts receivable, less allowance for doubtful accounts of $126 and $75
    at March 31, 1998 and 1997, respectively                                            2,069           2,285
 Inventories                                                                              687           1,718
 Prepaid expenses                                                                         176             275
 Receivable from employees and officer                                                     32              19
 Income taxes receivable                                                                    -             438
                                                                                  ------------    ------------
        Total current assets                                                           11,990          14,964


Furniture and equipment,  net                                                             765             964
Intangible assets, net                                                                    216             382
Software development costs, net                                                             -             265

Other assets                                                                               28              27
                                                                                  ------------    ------------
                                                                                        1,009           1,638
                                                                                  ------------    ------------
Total assets                                                                       $   12,999       $  16,602
                                                                                  ============    ============

                     LIABILITIES AND SHAREHOLDER'S EQUITY

Current liabilities:
  Accounts payable and accrued expenses                                            $    1,498       $   1,267
  Deferred revenue                                                                         12              75
                                                                                  ------------    ------------
        Total current liabilities                                                       1,510           1,342

Shareholders' equity:
  Preferred stock, $.01 par value; 1,000,000 shares authorized                             -               -
  Common stock, voting, $.01 par value; 20,000,000 authorized shares;
    7,142,742 and 7,366,508 shares issued at March 31, 1998
    and 1997, respectively                                                                 71              74
  Additional paid-in capital                                                           16,780          17,969
  Deferred compensation                                                                   (50)            (40)
  Unrealized gain on available-for-sale securities                                          5              46
  Accumulated deficit                                                                  (5,303)         (2,033)
  Cumulative translation adjustment                                                       (14)             -
  Treasury stock, at cost; 100,000 shares at March 31, 1997                                -             (756)
                                                                                  ------------    ------------
     Total shareholders' equity                                                        11,489          15,260
                                                                                  ------------    ------------
Total liabilities and shareholders' equity                                         $   12,999      $   16,602
                                                                                  ============    ============
</TABLE>


                            See accompanying notes.

                                      30
<PAGE>

                           SPACETEC IMC CORPORATION
                     CONSOLIDATED STATEMENTS OF OPERATIONS

                     (in thousands, except per share data)


                                                    Year Ended March 31
                                           -------------------------------------
                                               1998         1997         1996
                                           -----------  -----------  -----------

Revenues                                    $   8,884    $   9,075    $   8,132
Cost of revenues                                2,855        4,436        2,229
                                           -----------  -----------  -----------
  Gross profit                                  6,029        4,639        5,903
Operating expenses:
 Selling and marketing                          4,359        4,945        2,711
 Research and development                       3,483        2,916        1,684
 General and administrative                     2,025        1,726          803
                                           -----------  -----------  -----------
       Total operating expenses                 9,867        9,587        5,198
                                           -----------  -----------  -----------
 Income (loss) from operations                 (3,838)      (4,948)         705
 Interest income                                 (568)        (632)        (278)
                                           -----------  -----------  -----------
Income (loss) before income taxes              (3,270)      (4,316)         983

Income tax provision (benefit)                      -         (594)         355
                                           -----------  -----------  -----------
Net income (loss)                           $  (3,270)   $  (3,722)   $     628
                                           ===========  ===========  ===========

Net income (loss) per share:
      Basic                                 $   (0.45)   $   (0.51)   $    0.19
                                           ===========  ===========  ===========
      Diluted                               $   (0.45)   $   (0.51)   $    0.10
                                           ===========  ===========  ===========

Weighted average shares outstanding:
      Basic                                     7,195        7,283        3,232
                                           ===========  ===========  ===========
      Diluted                                   7,195        7,283        6,412
                                           ===========  ===========  ===========




                            See accompanying notes.

                                      31
<PAGE>

                           SPACETEC IMC CORPORATION
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                       (in thousands except share data)


<TABLE>
<CAPTION>

                                                                                                          
                                                                Series A                Series B           
                                                            Preferred Stock          Preferred Stock       
                                                        -----------------------  -----------------------
                                                          Shares       Amount      Shares       Amount
                                                        -----------------------  -----------------------
<S>                                                     <C>                      <C> 
Balance at March 31, 1995                                 1,262,001       126      813,953          81   
  Issuance of common stock upon public                                                                    
      offering, net of underwriters' discount                                                             
      and issuance costs of $1,207 and                                                                    
      $709, respectively                                       -           -            -           -
  Conversion of preferred stock and Class B                                                               
      common stock upon public offering                  (1,262,001)     (126)    (813,953)        (81)  
  Net income                                                   -           -            -           -
                                                        -----------------------  -----------------------
Balance at March 31, 1996                                      -           -            -           -
  Common stock issued upon exercise                                                                       
      of options                                               -           -            -           -
  Payments to repurchase common stock                          -           -            -           -
  Additional offering costs                                    -           -            -           -
  Deferred compensation recorded upon                                                                     
      issuance of stock options                                -           -            -           -
  Amortization of deferred compensation                        -           -            -           -
  Unrealized gain on available-for-sale                                                                   
      securities                                               -           -            -           -
  Net loss                                                     -           -            -           -
                                                        -----------------------  -----------------------
Balance at March 31, 1997                                      -           -            -           -
  Common stock issued upon exercise                                                                       
      of options                                               -           -            -           -
  Common stock issued under Employee                                                                      
      Stock Purchase Plan                                      -           -            -           -
  Common stock issued to former shareholders                                                              
      of Spatial Systems, Ltd. upon acquisition                -           -            -           -
  Cancellation of common stock received upon                                                              
      acquisition of Spatial Systems, Ltd.                     -           -            -           -
  Payments to repurchase common stock                          -           -            -           -
  Deferred compensation recorded upon                                                                     
      issuance of stock options                                -           -            -           -
  Cancellation of treasury stock                               -           -            -           -
  Amortization of deferred compensation                        -           -            -           -
  Unrealized gain on available-for-sale                                                                   
      securities                                               -           -            -           -
  Net loss                                                     -           -            -           -
  Cumulative translation adjustment                            -           -            -           -
                                                        -----------------------  -----------------------
Balance at March 31, 1998                                      -     $     -            -     $     -     
                                                        =======================  =======================
  
<CAPTION> 

                                                                                         Class B
                                                              Common Stock             Common Stock          
                                                        -----------------------  -----------------------
                                                          Shares       Amount      Shares       Amount
                                                        -----------------------  -----------------------

Balance at March 31, 1995                                   574,000         6      395,000         114   
  Issuance of common stock upon public                                                                    
      offering, net of underwriters' discount                                                             
      and issuance costs of $1,207 and                                                                    
      $709, respectively                                  1,725,000        17           -           -
  Conversion of preferred stock and Class B                                                               
      common stock upon public offering                   4,941,908        49     (395,000)       (114)  
  Net income                                                   -           -            -           -
                                                        -----------------------  -----------------------
Balance at March 31, 1996                                 7,240,908        72           -           -
  Common stock issued upon exercise                                                                       
      of options                                            125,600         2           -           -
  Payments to repurchase common stock                          -           -            -           -
  Additional offering costs                                    -           -            -           -
  Deferred compensation recorded upon                                                                     
      issuance of stock options                                -           -            -           -
  Amortization of deferred compensation                        -           -            -           -
  Unrealized gain on available-for-sale                                                                   
      securities                                               -           -            -           -
  Net loss                                                     -           -            -           -
                                                        -----------------------  -----------------------
Balance at March 31, 1997                                 7,366,508        74           -           -
  Common stock issued upon exercise                                                                       
      of options                                             16,700        -            -           -
  Common stock issued under Employee                                                                      
      Stock Purchase Plan                                     9,536        -            -           -
  Common stock issued to former shareholders                                                              
      of Spatial Systems, Ltd. upon acquisition           1,133,332        -            -           -
  Cancellation of common stock received upon                                                              
      acquisition of Spatial Systems, Ltd.               (1,133,334)       -            -           -
  Payments to repurchase common stock                          -           -            -           -
  Deferred compensation recorded upon                                                                     
      issuance of stock options                                -           -            -           -
  Cancellation of treasury stock                           (250,000)       (3)          -           -
  Amortization of deferred compensation                        -           -            -           -
  Unrealized gain on available-for-sale                                                                   
      securities                                               -           -            -           -
  Net loss                                                     -           -            -           -
  Cumulative translation adjustment                            -           -            -           -
                                                        -----------------------  -----------------------
Balance at March 31, 1998                                 7,142,742  $     71           -     $     -     
                                                        =======================  =======================
</TABLE> 


                            See accompanying notes.

                                      32
<PAGE>

                           SPACETEC IMC CORPORATION
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                       (in thousands except share data)
<TABLE>
<CAPTION>

                                                                                    Unrealized
                                                                                       Gain on          Retained
                                                      Additional                     Available-         Earnings      
                                                       Paid-in        Deferred        for-Sale        (Accumulated    
                                                       Capital      Compensation     Securities         Deficit)      
                                                     ------------- ---------------- --------------  ----------------- 
<S>                                                  <C>           <C>              <C>             <C>          
Balance at March 31, 1995                                 1,951             -                 -             1,061     
 Issuance of Common Stock upon public
     offering, net of underwriters' discount
     and issuance costs of $1,207 and
     $709, respectively                                  15,317             -                 -               -       
 Conversion of Preferred Stock and Class B
     Common Stock upon public offering                      272             -                 -               -       
 Net Income                                                 -               -                 -               628     
                                                       ---------       ---------         ---------       ---------    
Balance at March 31, 1996                                17,540             -                 -             1,689     
 Common stock issued upon exercise
     of options                                             384             -                 -               -       
 Payments to repurchase common stock                        -               -                 -               -       
 Additional offering costs                                   (5)            -                 -               -       
 Deferred compensation recorded upon
     issuance of stock options                               50             (50)              -               -       
 Amortization of deferred compensation                      -                10               -               -       
 Unrealized gain on available-for-sale                      -
     securities                                             -               -                  46             -       
 Net loss                                                   -               -                 -            (3,722)    
                                                       ---------       ---------         ---------       ---------    
Balance at March 31, 1997                                17,969             (40)               46          (2,033)    
 Common stock issued upon exercise
     of options                                              51             -                 -               -       
 Common stock issued under Employee
     Stock Purchase Plan                                     26             -                 -               -       
 Common stock issued to former shareholders
     of Spatial Systems, Ltd. upon acquisition              -               -                 -               -       
 Cancellation of common stock received upon
     acquisition of Spatial Systems, Ltd.                   -               -                 -               -       
 Payments to repurchase common stock                        -               -                 -               -       
 Deferred compensation recorded upon
     issuance of stock options                               21             (21)              -               -       
 Cancellation of treasury stock                          (1,287)            -                 -               -       
 Amortization of deferred compensation                      -                11               -               -       
 Unrealized gain on available-for-sale
     securities                                             -               -                 (41)            -       
 Net loss                                                   -               -                 -            (3,270)    
 Cumulative translation adjustment                          -               -                 -               -       
                                                       ---------       ---------         ---------       ---------    
Balance at March 31, 1998                              $  16,780       $    (50)         $      5        $ (5,303)    
                                                       =========       =========         =========       =========    

<CAPTION>

                                                        Cumulative        Treasury Stock           Total    
                                                        Translation   -----------------------  Shareholders'
                                                        Adjustment      Shares      Amount        Equity
                                                       -------------- ----------------------- ---------------
<S>                                                    <C>            <C>         <C>         <C>
Balance at March 31, 1995                                      -             -           -            3,339
 Issuance of Common Stock upon public
     offering, net of underwriters' discount
     and issuance costs of $1,207 and
     $709, respectively                                        -             -           -           15,334
 Conversion of Preferred Stock and Class B
     Common Stock upon public offering                         -             -           -              -
 Net Income                                                    -             -           -              628
                                                          ---------     ---------   ---------      ---------
Balance at March 31, 1996                                      -             -           -           19,301
 Common stock issued upon exercise
     of options                                                -             -           -              386
 Payments to repurchase common stock                           -        (100,000)       (756)          (756)
 Additional offering costs                                     -             -           -               (5)
 Deferred compensation recorded upon
     issuance of stock options                                 -             -           -              -
 Amortization of deferred compensation                         -             -           -               10
 Unrealized gain on available-for-sale               
     securities                                                -             -           -               46
 Net loss                                                      -             -           -           (3,722)
                                                          ---------     ---------   ---------      ---------
Balance at March 31, 1997                                      -        (100,000)       (756)        15,260
 Common stock issued upon exercise
     of options                                                -             -           -               51
 Common stock issued under Employee
     Stock Purchase Plan                                       -             -           -               26
 Common stock issued to former shareholders
     of Spatial Systems, Ltd. upon acquisition                 -             -           -              -
 Cancellation of common stock received upon
     acquisition of Spatial Systems, Ltd.                      -             -           -              -
 Payments to repurchase common stock                           -        (150,000)       (534)          (534)
 Deferred compensation recorded upon
     issuance of stock options                                 -             -           -              -
 Cancellation of treasury stock                                -         250,000       1,290            -
 Amortization of deferred compensation                         -             -           -               11
 Unrealized gain on available-for-sale
     securities                                                -             -           -              (41)
 Net loss                                                      -             -           -           (3,270)
 Cumulative translation adjustment                             (14)          -           -              (14)
                                                          ---------     ---------   ---------      ---------
Balance at March 31, 1998                                 $    (14)          -      $    -         $ 11,489
                                                          =========     =========   =========      =========
</TABLE>



                            See accompanying notes

                                      33
<PAGE>

                            Spacetec IMC Corporation
                      Consolidated Statements of Cash Flows

                                 (in thousands)
<TABLE>
<CAPTION>

                                                                                     Year Ended March 31
                                                                       ------------------------------------------------
                                                                            1998              1997           1996
                                                                       ---------------   --------------  --------------
<S>                                                                    <C>               <C>             <C>          
Operating activities
Net income (loss)                                                      $       (3,270)   $      (3,722)  $         628
Adjustments to reconcile net income (loss) to net cash provided
 by (used in) operating activities:
 Depreciation and amortization                                                    772            1,063             557
 Deferred income taxes                                                              -             (220)             50
 Loss on disposal of assets                                                       266              488               -
Changes in operating assets and liabilities:
 Accounts receivable, net                                                         216             (173)           (840)
 Inventories                                                                    1,031           (1,309)           (215)
 Prepaid expenses and other assets                                                 98               (5)           (221)
 Due from employees and officer                                                    16               53             (67)
 Income taxes receivable                                                          438             (438)              -
 Accounts payable and accrued expenses                                            231             (208)            598
 Deferred revenue                                                                 (63)              63             (39)
                                                                       ---------------   --------------  --------------
Net cash provided by (used in) operating activities                              (265)          (4,408)            451
Investing activities
Net sales (purchases) of securities available-for-sale                          1,482            5,607         (14,120)
Purchase of furniture and equipment                                              (339)            (676)           (633)
Purchase of intangible assets                                                     (87)            (171)           (129)
Software development costs                                                          -             (224)           (425)
                                                                       ---------------   --------------  --------------
Net cash provided by (used in) investing activities                             1,056            4,536         (15,307)
Financing activities
Proceeds from issuance of common stock, net of costs                                -                -          15,334
Proceeds from exercise of stock options                                            77              386               -
Stock repurchase                                                                 (534)            (756)              -
Additional offering costs                                                           -               (5)              -
Repayment of line of credit                                                         -                -             (65)
Repayment of capital lease obligation                                               -                -              (3)
                                                                       ---------------   --------------  --------------
Net cash provided by (used in) financing activities                              (457)            (375)         15,266
                                                                       ---------------   --------------  --------------

Currency translation effect on cash                                               (14)               -               -

Net increase in cash and cash equivalents                                         320             (247)            410
Cash and cash equivalents at beginning of period                                  170              417               7
                                                                       ---------------   --------------  --------------
Cash and cash equivalents at end of period                             $          490    $         170   $         417
                                                                       ===============   ==============  ==============

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

Noncash investing and financing activities:
 Adjustment of Pancea Inc. purchase price                                                                $          48
                                                                                                         ==============
 Unrealized gain on available-for-sale securities                      $            5    $          46
                                                                       ===============   ==============
</TABLE>

                             See accompanying notes.

                                       34
<PAGE>
 
                            Spacetec IMC Corporation  
                  Notes to Consolidated Financial Statements   


1.  Basis of Presentation  

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

Principles Of Consolidation

The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries.  All significant intercompany accounts and
transactions have been eliminated.

Use of Estimates  

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


2. Significant Accounting Policies  

Cash Equivalents and Securities Available-for-Sale  

The Company considers all highly liquid financial instruments with a maturity
at the date of acquisition of three months or less to be cash equivalents.    

At March 31, 1998 and 1997, securities available-for-sale consist principally
of commercial paper and debt securities maturing within one year or less.
Available-for-sale securities are carried at fair market value and unrealized
gains and losses are reported as a separate component of shareholders' equity.
  
Unrealized gains included in shareholders' equity totaled $5,000 and $46,000
at March 31, 1998 and 1997, respectively.    


                                      35
<PAGE>
 
                            Spacetec IMC Corporation  
                  Notes to Consolidated Financial Statements   

2. Significant Accounting Policies  - continued   

Concentrations of Credit Risk  

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

Concentrations of credit risk with respect to trade receivables arise as a
significant portion of the Company's customer base is comprised of high
technology manufacturers.  The Company had two customers representing
approximately 21% and 13% of 1998 sales, two customers representing
approximately 17% and 15% of 1997 sales and two customers representing
approximately 24% and 10% of 1996 sales.  Although the Company's exposure to
credit risk associated with nonpayment by high technology manufacturers is
affected by conditions or occurrences within the high technology industry, trade
receivables from the high technology manufacturers were current at March 31,
1998.  The Company's write-offs related to the collection of trade accounts
receivable amounted to $31,000, $76,000 and $27,000 in 1998, 1997 and 1996,
respectively.  

Inventories  
    
Inventory, which is comprised of component parts, subassemblies and finished
goods, is stated at the lower of cost or market.  Cost is determined using the
first in, first out (FIFO) method.  

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

Intangible Assets  
            
Intangible assets consist primarily of acquired technology, patents, licenses
and a non-compete agreement and are amortized on a straight-line basis over
three to five years.   

The realizability of intangible assets is evaluated periodically as events or
circumstances indicate a possible inability to recover the carrying amounts.  


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

2.  Significant Accounting Policies  - continued  

Revenue Recognition  

Sales are recorded as products are shipped.  A provision for estimated sales
returns is recorded in the period in which related sales are recognized.      

The Company provides customers with a warranty, principally for one to three
years from the date of sale.  Estimated warranty obligations are provided at the
time of sale of the Company's products based on historical and anticipated
warranty costs.  Warranty costs during 1998, 1997 and 1996 were immaterial.   

Research And Development Costs  

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

Technological feasibility is defined as the establishment of a working prototype
or a detail program design. Amortization of software development costs is the
greater of the amount computed using (i) the ratio of current gross revenues to
the total of current and anticipated future gross revenues of each product or
(ii) the straight-line method over the expected useful life of the product,
which generally does not exceed three years. Amortization of software
development costs in 1998, 1997 and 1996 was approximately $265,000, $654,000
and $136,000, respectively, and is included in cost of sales. In 1998 and 1997,
management determined that the recoverability of certain costs associated with
capitalized software was uncertain and recorded a charge of $130,000 and
$329,000, respectively, for the write down of the software; these amounts are
included in amortization expense for the years ended March 31, 1998 and 1997.

Income Taxes  

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


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

2.  Significant Accounting Policies  - continued  

Net Income/Loss Per Common Share  
     
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), which replaced
the calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share.  Unlike primary earnings per share, basic earnings
per share excludes any dilutive effect of options, warrants and convertible
securities.  Earnings per share amounts for all periods presented have been
restated to SFAS 128 requirements.

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

<TABLE>
<CAPTION>
                                      Years ended March 31  
                                1998          1997          1996  
                          -----------------------------------------
                            (in thousands, except per share data)  
<S>                           <C>           <C>             <C>  
Net income (loss)             $(3,270)      $(3,722)        $628  
                          =========================================
 
Weighted average shares 
 for basic earnings 
 (loss)  per share              7,195         7,283        3,232  

Effect of dilutive
 securities:  
 Employee stock options             -             -          348  
 Convertible preferred 
  stock                             -             -        2,832  
                          -----------------------------------------   
Weighted average shares 
 for diluted earnings               
 (loss) per share               7,195         7,283        6,412  
                          ========================================= 
Basic earnings         
 (loss) per share              $(0.45)       $(0.51)       $0.19   
                          =========================================
Diluted earnings       
 (loss) per share              $(0.45)       $(0.51)       $0.10  
                          =========================================
</TABLE>


Foreign Currency Translation  

The financial statements of the Company's foreign subsidiaries have been
translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards No. 52, Foreign Currency Translation.  All balance sheet
amounts have been translated using the exchange rates in effect at the balance
sheet date.  Statements of operations amounts have been translated using average
exchange rates.  The gains and losses resulting from the changes in exchange
rates from the dates of inception of Spacetec IMC GmbH, Spacetec IMC SARL, and
Spacetec IMC Limited through March 31, 1998, have been reported separately as a
component of shareholders' equity.  The operations of Spatial Systems Limited
have been translated and consolidated with the accounts of the Company from the
date of acquisition.  (See Note 13)  


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

2.  Significant Accounting Policies - continued  

Recent Accounting Pronouncements

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

In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information" ("SFAS
131").  This statement establishes standards for the way companies report
information about operating segments in annual financial statements for periods
beginning after December 15, 1997.  It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The Company will adopt SFAS 131 beginning in fiscal 1999 and does not expect
such adoption to have a material effect on its consolidated financial
statements.

Reclassifications

Certain amounts in fiscal year 1996 financial statements have been reclassified
to conform with current classifications.

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

3.  Property and Equipment

Property and equipment consist of the following:


                                             March 31               
                            -----------------------------------------
                                   1998                   1997
                            -----------------------------------------
                                         (in thousands)
Office equipment                  $  564                 $  517      
Computer equipment                   504                    325      
Tools and dies                       474                    510      
Furniture and fixtures                72                     64      
Leasehold improvements                64                     45      
Vehicles                               -                     72      
                            -----------------------------------------
                                   1,678                  1,533      
Accumulated depreciation            (913)                  (569)     
                            -----------------------------------------
                                  $  765                 $  964      
                            =========================================

Depreciation expense for the years ended March 31, 1998, 1997, and 1996 was
$477,000, $479,000, and $266,000, respectively.


4.  Intangible Assets

Intangible assets consist of the following:


                                            March 31
                            -----------------------------------------
                                   1998                  1997
                            -----------------------------------------
                                         (in thousands)
Patents                           $ 256                  $ 355      
Software licenses                   132                     53      
Acquired technology                  54                    151      
Non-compete agreements                -                    325      
Organization costs                    -                     33      
                            ----------------------------------------- 
                                    442                    917      
Accumulated depreciation           (226)                  (535)     
                            ----------------------------------------- 
                                  $ 216                  $ 382      
                            =========================================

The non-compete agreement of $325,000 arose from payments made to a certain
former employee of Panacea.  During the year, the Company ceased selling the 2D
software product acquired in the purchase of Panacea.  As a result, management
determined that the carrying value of the non-compete   

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

4.  Intangible Assets - continued

agreement was impaired and recorded a loss equal to the unamortized balance of
the non-compete in the amount of $104,000 for the year ended March 31, 1998.  
     
Amortization expense totaled $149,000, $248,000, and $155,000 for the years
ended March 31, 1998, 1997, and 1996, respectively.  


5.  Inventories  

Inventories consist of the following:  

                            March 31  
                     ----------------------
                        1998        1997  
                     ----------------------
                         (in thousands)
Materials              $   425    $ 1,133
Work-in-process             77         31
Finished goods             185        554
                     ----------------------
                       $   687    $ 1,718
                     ======================
                                        

6. Accounts Payable and Accrued Expenses  

Accounts payable and accrued expenses consist of the following:  

                                  March 31  
                           ----------------------
                               1998       1997  
                           ----------------------
                               (in thousands)
Trade payables               $   938    $ 1,055
Commission and royalties         132        130
Accrued compensation             364         27
Other                             64         55
                           ----------------------
                             $ 1,498    $ 1,267
                           ======================


                                      41
<PAGE>
 
                            Spacetec IMC Corporation  
                  Notes to Consolidated Financial Statements   

7.  Commitments  

Operating Leases  

The Company leases office equipment and certain office space under various
agreements which expire through the fiscal year 2001. The agreement pertaining
to office space is subject to rent escalation clauses. Future minimum lease
payments under these noncancelable operating lease agreements are as follows:  

     Year  
     ----
     1999                    $283,000
     2000                     282,000
     2001                      71,000
                         ------------  

                             $636,000
                         ============

Total rent expense for the years ended March 31, 1998, 1997 and 1996 amounted
to approximately $284,000, $272,000, and $136,000, respectively.  

Royalty Agreements  

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

Pursuant to the acquisition of Panacea, the Company was obligated to pay
royalties on net revenues received from the sales of certain of the Company's
products which contained purchased technology.  Royalties were paid at fifteen
dollars per five hundred seats sold on one product and at eight percent (8%) of
net revenues for another product.  As the Company no longer sells the products
that were acquired with Panacea, these royalties are no longer applicable.  

The Company incurred royalty expenses of approximately $39,000, $74,000 and
$67,000 under all agreements in fiscal years 1998, 1997 and 1996, respectively.


                                      42
<PAGE>
 
                            Spacetec IMC Corporation  
                  Notes to Consolidated Financial Statements   

8.  Segment Information and Foreign Sales  

The Company operates in one industry segment:  the manufacturing and marketing
of real time 3D IMC hardware input controllers and integration software for the
industrial CAD/CAM/CAE and consumer electronics market.  Commencing in fiscal
year 1998, the Company generated revenue through foreign subsidiaries.  Foreign
sales are denominated in the local currency of the country in which the
subsidiary is located.  Amounts are translated into US dollars upon
consolidation.  Foreign sales totaled $631,000 for the year ended March 31,
1998.   


9.  Income Taxes  

The provision for income taxes consists of the following:  

                       Years ended March 31  
                  ------------------------------
                    1998       1997       1996  
                  ------------------------------
                          (in thousands)
Currently payable:  
  Federal           $ -      $  (318)   $   265
  State               -          (56)        40
                  ------------------------------
                      -         (374)       305
Deferred:
  Federal             -         (187)        42
  State               -          (33)         8
                  ------------------------------
                      -         (220)        50
                  ------------------------------
                    $ -      $  (594)   $   355
                  ==============================


                                      43
<PAGE>
 
                            Spacetec IMC Corporation  
                  Notes to Consolidated Financial Statements   

9.  Income Taxes - continued  

A reconciliation of the federal statutory rate to the effective income tax rate
follows:     

                                               Years ended March 31      
                                                                         
                                            1998       1997       1996   
                                         -------------------------------- 
Tax at federal statutory rate            (34.0)%    (34.0)%      34.0%   
State taxes, net of federal benefit       (6.3)      (6.0)        6.3    
Research and development credits             -       (4.1)       (4.7)   
Other, net                                   -       (0.1)         .5    
Increase in valuation allowance           40.3       30.4           -    
                                         --------------------------------
                                                                         
                                             - %    (13.8)%      36.1%   
                                         ================================ 

Significant components of the Company's deferred tax liabilities and assets are
as follows:


                                                  March 31            
                                         -------------------------    
                                              1998        1997        
                                         -------------------------    
                                              (in thousands)          
Deferred tax assets:
 Net operating loss carryforward             $ 1,714     $   568      
 R&D credit carryforward                         144         367      
 Inventory obsolescence reserve                  374         290      
 Allowance for doubtful accounts                  77          59      
 Accrued vacation                                 18          19      
 Deferred revenue                                  5          30      
 Uniform capitalization                            8           5      
 Covenant not to compete                          (6)         48      
 Other                                            11          (3)     
 Valuation allowance                          (2,320)     (1,156)     
                                         -------------------------       
                                                  25         227      

                                                                      
Deferred tax liabilities:
 Software development costs                        -        (132)     
 Patents                                         (25)        (50)     
 Tax over book depreciation                        -         (45)     
                                         -------------------------
 Total deferred tax liabilities                  (25)       (227)     
                                         -------------------------      
                                             $     -     $     -         
                                         =========================       

                                       44
<PAGE>
 
                            Spacetec IMC Corporation  
                  Notes to Consolidated Financial Statements   

10.  Capital Stock  

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

On May 15,1997, the Board of Directors authorized the repurchase of up to
1,000,000 shares of the Company's Common Stock.  As of March 31, 1998, the
Company has repurchased 150,000 shares at a total cost of $534,000.


11.  Stock Option Plans  

1995 Director Stock Option Plan  

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

1993 Stock Option Plan

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

                                       45
<PAGE>
 
                            Spacetec IMC Corporation  
                   Notes to Consolidated Financial Statements  

11.  Stock Option Plans - continued  

1993 Stock Option Plan - continued

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

Option Repricing  

On April 11, 1997, the Board of Directors approved a repricing of all options
granted to current employees of the Company.  Options meeting qualification were
repriced at $3.25 per share which equaled the fair market value of the Company's
Common Stock on that date.  A total of 393,200 options were repriced.

Employee Stock Purchase Plan

In September 1995, the Company approved an Employee Stock Purchase Plan (the
"ESPP") under which employees may purchase shares of Common Stock at a discount
from fair market value.  There are 100,000 shares of Common Stock reserved for
issuance under the ESPP.  The ESPP is intended to qualify as an employee stock
purchase plan within the meaning of Section 423 of the Code.  Rights to purchase
Common Stock under the ESPP are granted at the discretion of the Compensation
Committee, which determines the frequency and duration of individual offerings
under the Plan and the dates when stock may be purchased.  Eligible employees
participate voluntarily and may withdraw from any offering at any time before
stock is purchased.  Participation terminates automatically upon termination of
employment.  The purchase price per share of Common Stock in an offering is 85%
of the lesser of its fair market value at the beginning of the offering period
or on the applicable exercise date and may be paid through payroll deductions,
periodic lump sum payments or a combination of both. The ESPP terminates on
September 29, 2005.  As of March 31, 1998, the  Company has issued 9,536 shares
at a price of $2.76 per share under the ESPP.

                                       46
<PAGE>
 
                            Spacetec IMC Corporation  
                  Notes to Consolidated Financial Statements   

11.  Stock Option Plans - continued   

FAS 123 Disclosures  

Pursuant to the requirements of FAS 123, the following are the pro forma net
loss and net loss per share for the years ended March 31, 1998 and 1997, as if
the compensation expense for the options plans had been determined based on the
fair value at the grant date for grants during fiscal years 1998 and 1997,
consistent with the provisions of FAS 123:  

<TABLE> 
<CAPTION> 
                                 1998                             1997             
                    ------------------------------   ------------------------------
                     As Reported      Pro Forma       As Reported      Pro Forma  
                    ------------------------------   ------------------------------ 
<S>                 <C>                <C>           <C>                <C>  
Net loss (in 000's)...  $(3,270)       $(4,293)          $(3,722)       $(4,335)      
                                                                                      
Net loss per share....  $ (0.45)       $ (0.60)          $ (0.51)       $ (0.60)       
</TABLE>


The fair value of options granted under the Company's stock option plans was
estimated using the Black-Scholes multiple option model with the following
assumptions:

                                          1998                1997       
                                    -----------------   ----------------- 
 
Expected term in years (from vest          
date)..............................        1.0                 1.0   
Volatility.........................       98.0%               70.0%  
Interest rate......................     5.51%-5.69%         5.92%-6.30%  

For the purposes of the calculation, the Company assumed no dividends.  

The effects on 1998 and 1997 pro forma net income or loss per share of
expensing the estimated fair value of stock options are not necessarily
representative of the effects on reporting the results of operations for future
years as the periods presented include only two and three years of option grants
under the Company's plans.  

                                       47
<PAGE>
 
                            Spacetec IMC Corporation  
                  Notes to Consolidated Financial Statements   

11.  Stock Option Plans - continued  

The following table presents the combined activity of the 1993 Plan and the
Director Plan for the years ended March 31, 1998, 1997 and 1996:  


<TABLE>

                                                   1998                        1997                        1996          
                                         -------------------------   -------------------------   -------------------------
                                                                                                                         
                                                          Weighted                    Weighted                    Weighted
                                                           Average                     Average                     Average
                                                          Exercise                    Exercise                    Exercise
                                            Shares         Price        Shares         Price        Shares         Price  
                                         -------------------------   -------------------------   -------------------------
<S>                                      <C>          <C>            <C>          <C>            <C>          <C>        
Outstanding beginning of period...          886,370        $4.87        873,050        $4.05        183,000        $0.61 
Granted...........................          969,200         3.35        280,650         7.08        708,550         4.97 
Canceled..........................         (608,860)        5.88       (141,730)        5.83        (18,500)        6.10 
Exercised.........................          (16,700)        3.02       (125,600)        3.07              -            - 
                                         -------------------------   -------------------------   -------------------------
Outstanding at end of year........        1,230,010        $3.19        886,370        $4.87        873,050        $4.05 
                                         =========================   =========================   =========================
                                                                                                                         
Options exercisable at year end ..          440,787        $2.92        227,904        $3.56        162,000        $2.58 
                                         =========================   =========================   =========================
                                                                                                                         
Available for grant at end of year          452,690                     813,050                     951,950              
                                         ============                ============                ============             
 
Weighted average fair value per
share of options granted during 
the year                                                   $1.60                       $3.44                       $2.61
                                                     =============                ============                ============
</TABLE>


The following table presents weighted average price and life information for
significant option groups outstanding at March 31, 1998:  

<TABLE>
<CAPTION>
                                    Options Outstanding            Options Exercisable     
                             ---------------------------------  ------------------------- 
                                         Weighted                                              
                                         Average      Weighted                     Weighted    
                                         Remaining    Average                      Average     
   Range of                  Number      Contractual  Exercise       Number        Exercise    
 Exercise Prices            Outstanding   Life (yrs)   Price       Exercisable      Price      
--------------------------------------------------------------  --------------------------     
<S>                      <C>             <C>          <C>       <C>                <C>             
$0.05 - $1.00                   134,200         5.72     $0.53          99,800       $0.52     
$1.01 - $3.00                   170,100         6.37     $2.64         100,500       $2.63     
$3.01 - $4.00                   736,310         8.43     $3.25         183,420       $3.26     
$4.01 - $5.00                   154,000         9.10     $4.51          32,400       $4.75     
$5.01 - $13.00                   35,400         8.12     $8.98          24,667       $8.90     
                         ---------------                        ---------------                
                              1,230,010                                440,787                 
                         ===============                        ===============                 
</TABLE>

                                       48
<PAGE>
 
                            Spacetec IMC Corporation  
                  Notes to Consolidated Financial Statements   

12.  Severance Payments

In the fiscal quarter ended March 31, 1998, the Company incurred charges of
approximately $370,000 as a result of changes in its senior management.  This
amount consisted principally of salary and benefit payments, outplacement
expenses and compensation expense related to the remeasurement of stock options.
Included in severance charges was a loss of $30,000 on the sale of a Company
vehicle to a former employee.  At March 31, 1998, the Company's severance
liability was $313,000.  This amount represents severance payments that will
continue to be paid through October 1999.


13.  Acquisition

On April 19, 1997, the Company initiated a tender offer to purchase all of the
outstanding shares of Spatial Systems Ltd. ("SSL") from SSL's stockholders in
exchange for 1,133,332 shares of Common Stock of the Company.  The tender offer
ended on July 18, 1997.  In connection with the tender offer, the Company paid
approximately $75,000 to SSL for the cancellation of a license agreement that
was entered into in May 1991.  Additionally, 1,133,334 shares of Common Stock of
the Company owned by SSL prior to the offer, were canceled.  The tender offer,
together with the cancellation of the shares of the Company's Common Stock owned
by SSL, did not affect the number of shares of Common Stock outstanding of the
Company.


14.  Related Party Transactions  

During the fiscal years 1997 and 1996, the Company sold its products to SSL, a
former shareholder of the Company whose Chairman was also a Director of the
Company.  Sales to SSL for the years ended March 31, 1998, 1997 and 1996,
amounted to approximately $0, $278,000, and $140,000, respectively.  Accounts
receivable at March 31, 1998, 1997 and 1996 from SSL were approximately $0,
$149,000, and $79,000, respectively.  The Company did not sell products to SSL
during the year ended March 31, 1998.  On July 18, 1997, the Company acquired
SSL.  (See Note 13)  


15.  Subsequent Events  

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

                                       49
<PAGE>
 
                            Spacetec IMC Corporation  
                  Notes to Consolidated Financial Statements   

15.  Subsequent Events - continued  

If the option is exercised, the Company's favorable pricing terms would extend
through June 2003.  

In conjunction with this agreement, the former CEO contributed 291,667 shares of
stock of Spacetec IMC Corporation to the LLC as his initial investment in the
LLC. The Company has agreed to repurchase these shares from the LLC at a price
of $2.40 per share, which represents a discount of approximately 20% from the
fair market value of the shares on June 3, 1998, the date on which the parties 
agreed to the terms of the joint venture.


                                       50
<PAGE>
 
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures

     None.

                                    PART III


Item 10.   Directors and Executive Officers of the Registrant

     The response to this item is incorporated herein by reference from the
discussion responsive thereto under the captions "Occupations of Directors and
Officers", and "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Company's Proxy Statement relating to its Annual Meeting of Stockholders
scheduled for July 30, 1998 (the "Proxy Statement").

Item 11.  Executive Compensation

     The response to this item is incorporated herein by reference from the
discussion responsive thereto under the caption "Compensation and Other
Information Concerning Directors and Officers" in the Proxy Statement.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

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

Item 13.  Certain Relationships and Related Transactions

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

                                       51
<PAGE>
 
                                    PART IV

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

(A)  1. Financial Statements

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

     2. Financial Statement Schedules

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

     3. Exhibits

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

(B)  Reports on Form 8-K

     No reports on Form 8-K were filed during the fourth quarter of fiscal 1998.

 
 
(C)  EXHIBITS
 
Number      Footnote               Description
---------------------------------------------- 

 3.1             1      Restated Articles of Organization.

 3.3             2      Restated By-Laws of Registrant.
 
 4.1             3      Specimen certificate for shares of Common  
                        Stock of the Registrant.
 
10.1             3      Amended and Restated Stock Option Plan.*
                                       
10.2             7      Amended and Restated 1995 Director Stock Option Plan.*
                                       
10.3             3      1995 Employee Stock Purchase Plan.*
 
10.4             5      Sublease Agreement between the Registrant and
                        TRC Environmental Corporation dated December 26, 1995.
 
10.5             5      Recognition, Non-Disturbance and Attornment Agreement
                        between the Registrant and Historic Boott Mill Limited
                        Partnership dated December 26, 1995.


                                      52
<PAGE>
 
10.6             3      Royalty Agreement dated May 29, 1991 between the
                        Registrant and John A. Hilton.*

10.7             3      Form of indemnification agreement between the Registrant
                        and each of its directors.

10.8             3, 6   Resale Agreement dated as of May 1, 1991 between the
                        Registrant and Electronic Data Systems Corporation (as
                        successor to McDonnell Douglas Corporation), as amended
                        by Amendment No. 1 dated December 23, 1993 and
                        Amendment No. 2 dated October 6, 1994.

10.9             3, 6   Distribution and Marketing Agreement dated April 28,
                        1994 between the Registrant and Sumisho Electronic
                        Devices Corporation.

10.10            3      Adoption Agreement for Aetna Life Insurance and Annuity
                        Company Standardized 401(k) Profit Sharing Plan and
                        Trust (Spacetec IMC Corporation 401 (k) Plan) dated June
                        7, 1995.*

10.11            3      Form of Confidentiality and Inventions Agreement between
                        the Registrant and its employees.

10.12            3      Form of Non-Disclosure Agreement between the Registrant 
                        and its consultants.

10.13            5, 6   Basic Order Agreement between the Registrant and Digital
                        Equipment Corporation dated March 19, 1996.

10.14                   Takeover agreement between the Registrant and Spatial 
                        Systems Limited dated February 26, 1997. Filed herewith.

10.15                   Severance agreement between the Registrant and Dennis T.
                        Gain dated March 18, 1998. Filed herewith.

10.16                   Employment agreement between the Registrant and C. 
                        Raymond Boelig dated April 1, 1998. Filed herewith.

21.1                    Subsidiary of the Registrant. Filed herewith.

23.1                    Consent of Ernst & Young LLP. Filed herewith.

27.1                    Financial Data Schedule. Filed herewith.


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

                                      53
<PAGE>
 
(1)  Filed as Exhibit 3.2 to the Spacetec IMC Corporation Registration Statement
on Form S-1 (Commission File No. 33-98064) and incorporated herein by reference.

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

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

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

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

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

(7)  Filed as an exhibit with the same number to the Spacetec IMC Corporation
Annual Report on Form 10-K for the fiscal year ended March 31, 1997 and
incorporated herein by reference.


                                      54
<PAGE>
 
                                   SIGNATURES


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


Dated:      June 9, 1998                   Spacetec IMC Corporation
                                           By: /s/ C. Raymond Boelig
                                              -----------------------------
                                                   C. Raymond Boelig,
                                                    President

                                  Insert 49A

                        Power of Attorney and Signatures

We, the undersigned officers and directors of the Registrant, hereby severally
constitute and appoint C. Raymond Boelig and Neil M. Rossen, and each of them
singly, our true and lawful attorneys with full power to them, and each of them
singly to sign for us and in our names in the capacities indicated below, the
Annual Report on Form 10-K filed herewith and any and all amendments to said
Annual Report on Form 10-K, and generally to do all such things in our names and
on our behalf in our capacities as officers and directors to enable the Company
to comply with the provisions of the Securities and Exchange Act of 1934, as
amended, and all requirements of the Securities and Exchange Commission, hereby
ratifying and confirming our signatures as they may be signed by our said
attorneys, or any of them, to said Annual Report on Form 10-K and any and all
amendments thereto.

Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
 
     Signature                            Title                        Date
     ---------                            -----                        ---- 
<S>                         <C>                                    <C>
 
/s/ C. Raymond Boelig       President, Chief Operating Officer     June 9, 1998
--------------------------- and Director (Principal Executive
C. Raymond Boelig           Officer)
                             
/s/ Neil M. Rossen          Chief Financial Officer,               June 9, 1998
--------------------------- Vice President of Finance
Neil M. Rossen              (Principal Financial and Accounting
                            Officer) 
 
/s/ Dennis T. Gain          Director                               June 9, 1998
---------------------------
Dennis T. Gain
 
                            Director                               June 9, 1998
---------------------------
Morton E. Goulder
 
/s/ J. Grant Jagelman       Director                               June 9, 1998
---------------------------
J. Grant Jagelman
 
/s/ Jerry H. Loyd           Director                               June 9, 1998
---------------------------
Jerry H. Loyd
 
                            Director                               June 9, 1998
---------------------------
George R. Rea
 
/s/ Patrick J. Sullivan     Director                               June 9, 1998
---------------------------
Patrick J. Sullivan
</TABLE> 
<PAGE>
 
                            SPACETEC IMC CORPORATION
                                  SCHEDULE II
                       VALUATION AND QUALIFYING ACCOUNTS
                   Years ended March 31, 1998, 1997, and 1996
                                 (in thousands)
 
<TABLE> 
<CAPTION> 

                        Balance at      Charge to                   Balance at
                       Beginning of     Costs and                     End of 
                          Period         Expenses     Write-offs      Period
                    ------------------------------------------------------------
<S>                    <C>              <C>           <C>           <C> 
1998
Allowance for
doubtful accounts          $75             $82           $31           $126
 
 
1997
Allowance for
doubtful accounts          $80             $71           $76           $ 75
 
1996
Allowance for
doubtful accounts          $10             $97           $27           $ 80
 
</TABLE>