U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

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

                      For fiscal year ended April 30, 1998

                         Commission file number 0-27382

                            SC&T INTERNATIONAL, INC.
                 (Name of Small Business Issuer in Its Charter)

         ARIZONA                                        86-0737579
(State of incorporation)                    (I.R.S. Employer Identification No.)

                                15695 N. 83rd Way
                            Scottsdale, Arizona 85260
                                 (602) 368-9490
    (Address, including zip code, and telephone number, including area code,
                         of issuer's executive offices)

    Securities registered pursuant to Section 12(b) of the Exchange Act: None

      Securities registered pursuant to Section 12(g) of the Exchange Act:

                     Common Stock, par value $0.01 per share

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 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

Check if disclosure of delinquent  filers pursuant to item 405 of Regulation S-B
is not contained in this form, and no disclosure will 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-KSB or any  amendment to
this Form 10-KSB [X].

Issuer's revenues for its most recent fiscal year:  $4,733,558

Aggregate  market value of the voting stock held by  non-affiliates  computed by
reference to the price at which the stock was sold, or the average bid and asked
prices of such stock, as of a specified date within the past 60 days: As of June
15, 1998 - $2,938,611.

Number of shares  outstanding of each of the issuer's  classes of common equity,
as of the latest practicable date: As of May 21,1998 - 24,553,684 .

Documents incorporated by reference:  Not Applicable.
                                       1
<PAGE>
                            SC&T INTERNATIONAL, INC.

                          ANNUAL REPORT ON FORM 10-KSB

                        FISCAL YEAR ENDED APRIL 30 ,1998

                                TABLE OF CONTENTS

                                                                            Page

PART I

ITEM 1.        BUSINESS                                                       3
ITEM 2.        PROPERTIES                                                    13
ITEM 3.        LEGAL PROCEEDINGS                                             14
ITEM 4.        SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS           15

PART II

ITEM 5.        MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
               STOCKHOLDER MATTERS                                           15
ITEM 6.        SELECTED FINANCIAL DATA; MANAGEMENT'S DISCUSSION AND
               ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
               OPERATIONS                                                    16
ITEM 7.        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                   17
ITEM 8.        CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
               ACCOUNTING AND FINANCIAL DISCLOSURE                           17

PART III

ITEM 9.        DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT;
               COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES
               EXCHANGE ACT OF 1934                                          18
ITEM 10.       EXECUTIVE COMPENSATION                                        19
ITEM 11.       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
               AND MANAGEMENT                                                20
ITEM 12.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                20

PART IV

ITEM 13.       EXHIBITS AND REPORTS ON FORM 8-K                              21

SIGNATURES                                                                   22
                                        2
<PAGE>
                                     PART I

ITEM 1.           BUSINESS

General

The Company develops and markets  innovative  accessory and peripheral  products
for the personal computer and video game categories. Its products are compatible
to the multimedia and internet user and focus on the retail and Corporate market
sectors.  The Company  markets its products under the Company's  PLATINUM SOUND,
PER4MER and AIR RACER registered  trademarks.  The Company `s products fall into
three  distinctive  product  categories.  It's sound  enhancement  products  are
marketed  under the  Platinum  Sound brand name,  and its racing  wheel and game
controller products, under its PER4MER and AIR RACER brand names.

The Company's sound products include sub-woofer,  equalzer-amplifier enhancement
systems,  and a broad  line  up of  amplified  speaker  systems,  headphone  and
microphones.  The PER4MER line consists of racing wheel  products,  designed for
all IBM PC's , SEGA,  Nintendo and Sony Playstation game consoles.  This Per4mer
family also includes a new universal game controller device, AIR RACER, which is
compatible to these same categories.  The line also includes a Multimedia Volume
Controller  for  IBM  PC's  and  Mackintosh  computer  systems  and a new  Voice
Recognized -  Telephonic  adaptable  PC  Keyboard,  designed  for the  Corporate
market.

The Company's first generation  multimedia keyboards have been discontinued,  in
favor of this second generation product, referred to as the VRK-500. The VRK-500
features enhanced Voice Recognition and Telephony capabilities,  but has not yet
been introduced into the market, as the Company has been focusing its efforts on
the  Platinum  Sound,  Per4mer and Air racer  products.  PLATINUM  SOUND and the
PER4MER brand names, are both registered trademarks of the Company. Registration
has been filed for its AIR RACER product.

The  Company  strategic  focus  is  targeted  at  the  multimedia,  interactive,
communications and the video gaming segments of the PC and consumer  electronics
industry.  The Company  develops unique and innovative  technologies  that offer
one-step,  integrated  solutions  for the PC, MAC and the rapidly  growing Video
Gaming arenas.

The Company has changed its fiscal year end to April 30 from June 30. Subsequent
commentary  will refer to the ten month  period  ended  April 30,  1998,  as the
period ended April 30.

The Company began  operations in June 1993 and achieved  sales of  approximately
$7,346,000  and  $4,733,000  during the year ended June 30,  1997 and the period
ended April 30,1998, respectively. Although the Company's revenues has increased
significantly since inception,  the Company has recorded losses of approximately
$6,097,000  and  $2,086,000 for the year ended June 30, 1997 and April 30, 1998,
respectively.

In Review

The period  ended  April 30, 1998 has been a very  difficult  time frame for the
Company. The accounting firm issues,  preferred shareholder,  Nasdaq de-listing,
and other related issues greatly impacted the company's revenue  performance for
this period.  For the first time since its  inception,  Company  management  was
unable to  address  all of these  issues,  and at the same time  increase  sales
revenues.  Despite the effort,  the period ended April 30, 1998  concluded  with
results  unacceptable  to the  Company.  Net  revenues  for the ten month period
totaled $ 4,733,000  as  compared to $ 7,346,000  for the fiscal year ended June
30, 1997.  The ten month period  represents  64% of last years sales.  On a more
positive note, with many past problems resolved, the Company's primary objective
and management  focus will be redirected  towards its goal of  profitability  in
fiscal 1999.  Management  believes that this can be achieved through a number of
elements,  which include;  new products,  new personnel,  new  manufacturing and
marketing alliances and a growing account based on a direct result of furthering
acceptance of the company's expanding product assortment.  Management hopes that
1999  will  allow  the  Company  to apply a 100%  focus on the  future,  and its
profitability objective.

Proxy Approval

In July of 1998 shareholders of the Company approved two motions.  The first, to
increase the number of  authorized  shares by  50,000,000  bringing the total to
75,000,000,  and the second, to authorize a reverse split.  Management's current
intent is not to reverse the stock until the company's  share price has improved
and the Company  reaches  profitability.  At this time the Company has not set a
date for a reverse  stock  split,  but  expects no split until early in calendar
year 1999.
                                        3
<PAGE>
Patent Granting

In  February,  1998 the U.S.  patent  office  granted  numerous  patents  on the
company's Multimedia - Telephony keyboard  technology.  Presently the Company is
negotiating  license  agreements  with maxi  Switch,  Silitek  and NMB.  All are
marketers of similar  technology/s  which infringe on the company's patent.  The
Company  believes  that  it has a  potential  to  generate  respectable  monthly
licensing  revenues for its technology as the demand by  corporations  to reduce
workspace   clutter  will  result  in  more  keyboards   integrating  SC  &  T's
technologies. The patent issued is in effect for a period of 22 years.

Industry Overview

The market for multimedia PC's and video game console  equipment is growing very
rapidly.  It is  characterized by rapid  technological  change and lower product
prices. Unlike the Corporate arena, the multimedia and video gaming segments are
consumer  driven.  As a result,  many PC  manufacturers  have  redesigned  their
product  mix  to   dramatically   increase  the  multimedia  and   entertainment
capabilities  of  their  products.   Currently,  most  product  lines  are  100%
multimedia and gaming compatible.

SC & T's Platinum Sound,  Per4mer and Air Racer products are primarily  targeted
at the mass merchant consumer segment. However, the current trend by many PC and
PC accessory manufacturers is in developing product offerings specifically aimed
at the mass market. The Company is currently discussing sales of its Per4mer and
Air Racer  products to such  manufacturers  on both a direct sale and OEM basis.
The OEM category is new for the Company and could increase revenues dramatically
for the coming year.

PLATINUM SOUND PRODUCTS

The Company' sound category  comprises an extensive product range  incorporating
Sub Woofers,  Equalizer-Amplifiers,  Headphones, Microphones, Volume Controllers
and Amplified Speaker Systems.  This product  assortment was designed to service
the multimedia  and video gamer.  Every PC system needs  speakers,  sub woofers,
microphones  and  headphones.  Platinum Sound products will compete head to head
with the top tier manufacturers such as Altec Lansing, Yamaha and Labtec.

The Company's  development focus is on bringing  increased value to the consumer
at lower prices. This demands unique and innovative products that as the Company
says offers;  "Twice the Product For Half The Price." The Company feels that its
mission of delivering  fully  featured  products at aggressive  retail prices is
improving.  Initial  product  offerings have been well received by retailers and
the industry media. Currently, Platinum Sound products account for approximately
10% of the Company's  annual sales revenues.  The Company expects this number to
grow more rapidly  during 1999 in  proportion  to overall  sales  revenues.  The
demand  for  greater  sound (at more  affordable  prices) by gamers and PC users
alike, have allowed SC&T entry into this high growth market category.

To ensure that we succeed,  SC & T recently  hired the former  Director of Sales
for Labtec, a major competitor,  as its new Director of Sales for North America.
Rick  Strain,  a seven year veteran of Labtec and a fifteen year veteran in this
industry is expected to spearhead the company's growth expectations for its line
of Platinum Sound products.

The Company has added  numerous  new  products  to its product  assortment.  The
Company now offers three sub woofer products, one graphic equalizer-amplifier, a
PC volume  controller,  3  microphones,  5 headphones and 8 amplified PC speaker
products.  All  products  are  compatible  to IBM-PC's,  Macintosh  PC's,  TV's,
Stereos,  CD-ROM Players,  or other electronic  devices  utilizing RCA mini-jack
connectors.

Product Assortment

7-Band Graphic  Equalizer-Amplifier with SRS. The Company offers a 100 watt peak
performance SRS(R) 3D Surround Sound equalizer/amplifier.  This product features
volume and balance controls and 7-band graphic equalization. This product offers
high-fidelity  SRS and is  compatible  with  IBM  and  Macintosh  PC's,  and all
computer sound cards. The equalizer/amplifier  installs into a 3.5" drive bay or
may be used externally, and has an autoswitch universal power supply that can be
connected  to a portable  compact disc player,  or any other  electronic  device
utilizing  RCA  mini-jacks.  It still  remains  the only  product  of this  type
available worldwide. The SRP for the SRS-OMNI is $69.95.
                                        4
<PAGE>
Product Assortment (Continued)

Sub Woofer Systems.  Platinum Sound has three products in this category. The low
end entry product is now the SWX-1000,  a very unique 16 watt book-shelf  styled
sub woofer was designed for use in the  bedroom,  kitchen,  family room and with
all PC's. This unit was created to enhance the sound of Digital Clock Radios, CD
Rom players, TV's, Stereos, Micro Stereo Systems and PC's. The retail price will
range  from $ 49.95 to $ 59.95  making it the lowest  priced  product in the sub
woofer  category.  Enclosed in a wood  cabinet,  the  SWX-1000  will ship in mid
August 1998.

The SWX-1200 launched in mid 1997 is a unique product  offering,  capable of 120
watts of peak power. Incorporating both a front and rear base/venting port, this
item has a SRP of $79.95. The Company has enhanced this product without altering
its retail price by adding the dynamic 3 D sound technology.  This new unit will
commence shipping in August 1998.

The  third  product  is the  SWX-1600,  a 160 watt peak  performance  sub-woofer
satellite speaker sound system.  This product features wood cabinet,  volume and
base controls and is available  for the home stereo and PC markets.  The SRP for
this product is $99.95.

Under Mr. Strain SC & T is  redirecting  its  marketing  efforts on its Platinum
Sound products to products that will retail for under $100.00, where over 75% of
the retail  business  is done.  The  company's  strategy  is to capture a larger
percentage of the mass consumer market.

Amplified Speaker Products

Platinum  Sound's  speaker line has  increased to 8 speaker  products.  The line
offers  products that fit each of the critical  retail price levels from $ 19.95
to $ 49.95.  The  products  range in speaker  power from 7 watts to 120 watts of
peak power.  It is this pricing  segment  that  accounts for close to 75% of all
retail  sales.  Many of the  company's  speaker  products  include  the latest 3
Dimensional sound technology.

Headsets & Microphones

Primarily  an add on sale to  consumers,  these  products  are  purchased in the
millions annually by consumers  throughout the world. The Company has a complete
line up of products that range in retail price from $ 9.99 to $ 39.95.

Multimedia Volume Controller

The  Company  markets  its own Volume  Controller,  a product  that  allows easy
"finger  control" access to a PC's volume  control.  This item may be mounted to
the monitor,  keyboard or PC tower. It eliminates the inconvenience of adjusting
volume  through  the sound card or  software  volume  control  menu.  The SRP is
$11.99.

PER4MER, ULTIMATE PER4MER and AIR RACER PRODUCTS

The  company's  line of Per4mer  racing  wheels  continues to grow.  The Company
boasts a total line up greater than all of its competitors  combined.  Presently
SC & T has  over 7  individual  racing  wheel  products.  The  Company  has also
developed a  revolutionary  new game controller  called Air Racer.  This product
will be available in 3 models for the Sony, IBM and multi-platform  video gaming
categories.

In March of 1998 the  Company  launched  its  UP-300,  a Force Feed Back  racing
wheel.  This product,  the first of its kind worldwide has met with rave reviews
from the  media.  Force feed back  allows the user to feel the jolts,  bumps and
jerks as experienced  on the screen by the software being played.  It is clearly
the next  level of  racing  technology.  The  Company  believes  that it has the
strongest and most realistic product of any other competitor.

Air Racer is yet another  innovative  development  of SC & T. This  product will
ship in August  1998.  This  unique new product is both a flight yoke and racing
wheel combined into one hand held game controller. No other product encompassing
these  features  exists  anywhere  in the market  today.  The  Company  has high
expectations for its Air Racer products and believes that sales through year end
will exceed 100,000 units worldwide.
                                        5
<PAGE>
PER4MER, ULTIMATE PER4MER and AIR RACER PRODUCTS
(Continued)

The PER4MER  Racing Wheel line accounts for  approximately  90% of the company's
current  revenues.  It is a full line of video arcade racing  wheels  compatible
with SEGA,  Nintendo,  Sony Playstation video game consoles and all IBM PCs. The
wheel is an arcade style input device featuring analog and digital controls. The
wheel plugs directly into the game port connection. The SRP for this line ranges
in the $49.95 - $ 59.95 level.

The  ULTIMATE  Per4mer  Racing  Wheel was  introduced  in October of 1997.  This
represented the company's  second  generation of racing wheel  products.  SC & T
identified  this line as the  "ULTIMATE  PER4MER" line of racing  wheels.  These
products have an SRP range of $ 69.95 to $ 89.95

The  ULTIMATE  Per4mer  Force  Feed Back  Racing  wheel is yet a more  advanced,
ergonomically  designed product.  This new technology  incorporates  Forced Feed
Back which addresses the latest technology to hit the PC marketplace. Force Feed
Back allows the end user to feel all of the real action (bumps, jerks, jolts) as
displayed on the screen of the game/program  being run. The UP-300 has a current
street  price of $ 179.95,  but will  likely  drop to below  the $ 150.00  level
during the 1998 Christmas  selling  season.  It comes complete with 2 free force
feed back racing titles from Sega entertainment.

AIR RACER is also part of the Per4mer family of products.  A very unique product
that we feel revolutionizes the way consumers will utilize traditional joysticks
and game  controllers  with their PC's and Video game  consoles.  Embodying  two
optical sensors, Air Racer allows a consumer to play flight, racing and numerous
other action games with a single game controller. Never before (and not to date)
available from other manufacturers,  the Company feels that its first generation
of Air racer products will have a major impact on increasing  corporate revenues
over the next 6-12 months.  Designed for both the video gaming and PC platforms,
the SRP for Air Racer is $ 79.95,  however, this product should retail for under
$ 60.00 during the upcoming 1998 Christmas selling season. The Company has filed
numerous technology patents on Air Racer .

MARKETING

The Company markets its products  primarily through the retail channel.  In 1998
the  Company  expects to expand its focus  into the OEM and  Corporate  sectors.
Strong  interest is forming for the company's  Per4mer and Air Racer products by
numerous  companies in the OEM sector. The addition of these categories over the
next 12-18 months should have a positive effect on the company's  future revenue
expectations.

In North  America,  the Company  markets its products  through a combination  of
direct sales personnel, independent sales representatives. In the UK, Europe and
the Asian Pacific Rim all sales are handled by direct  employees of the Company.
In Canada and South America sales are handled through marketing  agreements with
the Company.

The Company has wholly owned  subsidiaries  in the U.S.,  U.K and Hong Kong. The
Hong Kong office  officially opened in June of 1998. SC & T also has independent
operations in Canada and South America.

Future Efforts

With the addition of new sales and marketing  personnel coupled with the opening
of our Hong Kong office and  alliance in South  America,  SC & T feels  strongly
that it will increase  sales  revenues and reach  profitability  during the next
fiscal year. The Hong Kong office was  established to oversee all  manufacturing
for the companies products and to establish a distribution network in Hong Kong,
Taiwan, Malaysia, Japan, China, Thailand, Indonesia, Australia, and India.

Global Distribution

SC & T products are currently  sold in over 25  countries,  including the United
States, Belgium, Germany, France, Italy, Finland, Holland, Switzerland,  Turkey,
Taiwan,  the United Kingdom,  Argentina,  Brazil,  Spain, Hong Kong, Canada, and
Russia.  For the year ended June 30, 1997 and the period  ended April 30,  1998,
sales in North America accounted for approximately 50% and 62%, respectively, of
the  Company's   consolidated   revenue,  and  sales  in  Europe  accounted  for
approximately 50% and 38%, respectively, of the Company's consolidated revenue.
                                        6
<PAGE>
Customers & Company Focus

The Company has  increased  customers of the Company over the past few months as
new  products and our growing line has caught  there  attention.  Current  North
American retail  customers  include,  but are not limited to; Radio Shack,  Best
Buy, Babbages,  Software Etc., Data Vision, Computer City, Compusmart, Comp USA,
Micro Center, Fry's Electronics,  The Good Guy's, Sam's Club,  Meryvn's,  Costco
Wholesale, Compucenter and Musicland.

During early 1998, the Company  modified its retail product line to focus mainly
on products for sale to the retail market at prices under $100. This was done to
capitalize  on the mass  market.  To achieve  this  product mix, the Company has
identified new suppliers  able to supply product at lower costs,  and offer more
favorable payment terms. While the Company believes it will continue to maintain
reduced  manufacturing costs, there can be no assurance that the Company will be
successful in its efforts.

The  Company's  current  marketing  efforts  include  advertising  in trade  and
business  publications,  participation  in domestic and  international  industry
trade shows,  and production of product  literature and sales support tools. The
Company's products are marketed under the registered trade name PLATINUM SOUND ,
PER4MER,  ULTIMATE PER4MER racing wheel and AIR RACER brand names. Packaging and
operating manuals are produced in seven languages,  Spanish,  French,  Japanese,
German, Italian, Portuguese and English.

Product Development

SC&T's  second  generation  product  incorporates   enhanced  Voice  Recognition
features.  Even though  completed,  this product the  VRK-500,  has not yet been
introduced  into the  market.  Over the past year,  the  Company has applied its
primary  market focus on building the  awareness of its line of Platinum  Sound,
PER4MER, and ULTIMATE Per4mer racing wheel products.

The Company continues its new product  development  plans, and has dedicated the
majority of three  Operations  staff  members'  efforts toward the management of
research and development of advanced  applications in the expanding  multi-media
arena.  The  continuation of product  development is key to the potential of the
Company's products and market share. In addition, the Company has also dedicated
additional staff to the ongoing product design and approval  process,  which has
brought existing unique products to fruition, and continues to produce favorable
results.

We  expect  new  product  to be  released  on a regular  basis,  as has been the
practice of the Company over the last 18 months. During the years ended June 30,
1997 and the period  ended  April 30,  1998,  the  Company  spent  approximately
$859,000 and $317,000, respectively, on research and development. The Company is
projecting to spend $500,000 in research and development  expenses in connection
with development of new products during fiscal 1999.

Subsidiaries

In late 1997, the Company consolidated its European distribution operations into
one central  facility  located in the United Kingdom.  In May, 1997, the Company
formed SC&T Europe Limited,  located in Portsmouth  England.  The Belgium office
remains open at this time,  but is expected to close by August 1998. All current
marketing and distribution operations, including a United Kingdom domestic sales
force, is now being handled out of the United  Kingdom.  For the year ended June
30, 1997 and the period ended April 30, 1998, sales by SC&T Europe accounted for
approximately   $3,795,000  and  $2,343,000   respectively,   of  the  Company's
consolidated revenue. Management believes that current changes affected with the
Company's  European  staff  and  operating   infrastructure  will  correct  past
deficiencies, and position the United Kingdom Operation for growth in both sales
and customer service.

In June of 1998,  SC&T opened a Hong Kong office.  This facility was established
to oversee all  manufacturing  issues of the company's  products,  and to expand
SC&T's distribution efforts in the Asian Pacific regions.

The Company has independent  operations in Canada and in South America.  Neither
of these facilities are wholly owned subsidiaries of the Company.
                                        7
<PAGE>
Subsidiaries (Continued)

The Company's  European sales are typically  invoiced in U.S.  dollars or pounds
sterling.  The Company's  sales from the United Kingdom will be invoiced in U.S.
dollars and pounds sterling.  Expenses of the Company's international operations
are incurred in various foreign currencies,  principally pounds sterling and U.S
dollars.  Accordingly,  the  Company is subject to the risk of  fluctuations  in
currency  exchange  rates. To date, the Company has not experienced any material
net gain or loss due to foreign currency fluctuations. There can be no assurance
that the Company will not experience material adverse effects on operations from
foreign currency fluctuations in the future. See "Special Considerations - Risks
Associated With International Sales; Currency Fluctuations"  contained in Item 1
of this Report.

Competition

The PC,  multimedia,  and video  game  retail  markets  in  general  are  highly
competitive.   Many  of  the  Company's   competitors  have  greater  financial,
technical,  marketing,  and sales  resources  than SC & T. The  Company's  major
competitors in the multimedia  sound  category are Altec  Lansing,  Yamaha,  and
Labtech.  In the video gaming and PC racing wheel category our  competitors  are
Thrustmaster,  MadCatz, Inter-Act and Microsoft. Only Thrustmaster and Microsoft
will enter the Force  feed back  market,  with  planned  introductions  sometime
during the 4th quarter of 1998.

Although the Company  considers  certain of its products to be proprietary,  the
Company  manufactures  certain of its  product  lines  through  the  assembly of
component parts which are readily available in the world marketplace.  There are
few barriers that would prevent others from  designing,  assembling,  or reverse
engineering products similar to those sold by the Company.

To defend against its competition, the Company's design philosophy is to develop
products  that  can be  sold  at  lower  prices  and to  diversify  its  product
assortment over its competition. The Company's competitors in the sound category
do not market racing wheel products,  and those in the racing wheel  categories,
do not market sound  products.  The Company  feels that this  product  diversity
offers it greater protection and stronger retail  opportunities over many of its
competitors.  Unlike its  competitors  whose market  penetration is much larger,
every new retail account represents new revenue growth to the Company.

The Company competes primarily on the basis of design, quality, reliability, and
the ease of use of its products.  The Company also competes on value relative to
the features offered by its products. Competitive price reductions may, however,
have an adverse effect on the Company's revenue and profitability.  See "Special
Considerations - Competition" contained in Item 1 of this Report.

Intellectual Property Rights

The Company's  success is dependent,  in part, on its  proprietary  information,
technology  and  know-how.  The  Company  relies on a  combination  of  patents,
copyrights,   trademarks,  trade  secrets,  and  confidentiality  agreements  to
establish and protect its proprietary  rights.  Despite these efforts, it may be
possible for  competitors or users to copy aspects of the Company's  products or
to obtain information that the Company regards as a trade secret.

The  Company  applied  for a utility  patent for the  functional  aspects of its
multimedia  stereo keyboards in the United States and has filed an international
patent application designating Europe, Japan, Australia,  Canada, Brazil, China,
and South Korea.  This was granted by the U.S.  Patent office in February  1998.
The Company is currently negotiating numerous licensing agreements with keyboard
manufacturers who are infringing on the company's patents.

The  Company  believes  the market for its  fully-integrated  voice  recognition
keyboards is an emerging  market.  The Company  faces  competition  from various
manufacturers  who combine  similar  features  for audio and voice-  recognition
computer  applications.  However,  as the Company has patent rights, the Company
will seek licensing agreements from all who enter the market with like products.

The  Company  has  also  filed  patents  on its new Air  Racer  game  controller
technology.

In addition the Company has filed applications for registration of the trademark
PLATINUM  SOUND,  PER4MER and its AIR RACER brand names.  At this time, the U.S.
patent office has granted  registration  rights to the Company for the first two
brand  names.  Registered  and certain  copyrights  in the United  States and in
foreign countries have been filed.
                                        8
<PAGE>
Intellectual Property Rights (Continued)

Although  the  Company  believes  that  patent,   trade  secret,  and  copyright
protection  are  significant  to its  competitive  position,  other factors also
exist.  Knowledge,  ability,  and  experience  of the Company's  personnel,  the
Company's  success  at  new  product  development  and  enhancements,  and  name
recognition are more significant to its competitive position.

Raw Materials & Supplies

The Company receives and inspects  finished  products and component parts at its
United States,  Hong Kong and UK  facilities.  The Company tests a sample of all
delivered products for compliance with  specifications.  The Company's principal
suppliers are located in Australia, Hong Kong, Taiwan and China.

Due to  material  difficulties  in  obtaining  supplies on time and at the right
price over the past 6-8 months,  the Company  has made  numerous  changes in its
source  of  manufacturing.  These  new  alliances  are  deemed to be in the best
interests of the Company.  At present the Company maintains a suitable inventory
of its Platinum Sound and PER4MER  products.  While this decreases the risk that
the Company will be unable to supply its products, in the event of any reduction
or interruption in supply,  it increases that risk associated with  obsolescence
due to technological  change. The Company has incurred large write down costs in
the past and will do so once again this year,  as it  realigns  itself  with new
manufacturers  and adjusts to late and non  deliveries  of product.  The Company
does not foresee this being a major factor moving forward,  as its new alliances
are meeting all terms as required by the Company.

Employees

As of April 30, 1998 the  Company's  United  States  operation  had 16 full-time
employees.  The Company's  United  Kingdom  subsidiary  employed five  full-time
employees,  and its  Hong  Kong  office,  established  in  June,  1998,  had two
employees.

None of the Company's  employees are  represented by a labor union.  The Company
believes its relations with its employees are in good standing.

                             SPECIAL CONSIDERATIONS

Limited Operating History

The Company  commenced  operations  in July 1993 as a producer  and  marketer of
CD-ROM audio cables.  In October 1993, the Company began developing  multimedia,
accessory,  and  peripheral  computer  equipment  products,  none of which  were
introduced into the market until April 1994. In addition,  the Company  recently
entered the computer and video game markets,  with the introduction of a line of
PC and video arcade  racing  wheels.  Accordingly,  there is limited  historical
financial  information about the Company upon which to base an evaluation of the
Company's  performance.  In addition,  the Company's business will be subject to
many of the problems,  expenses, delays, and risks inherent in the establishment
of a new business enterprise, including limited capital, possible cost overruns,
uncertain market acceptance, and the absence of an operating history. Therefore,
there can be no assurance that the Company's business will be successful or that
the  Company  will be able to achieve or  maintain  profitable  operations.  See
"Business" contained in Item 1 of this Report.

History of Losses

The Company has  incurred  operating  losses since  inception,  and reported net
losses of  approximately  $6,097,000  and $2,086,000 for the year ended June 30,
1997 and the period  ended April 30, 1998,  respectively.  As of April 30, 1998,
the Company had an  accumulated  deficit of over  $12,000,000.  Losses  incurred
since  inception  are  attributable  primarily  to  start-up  costs  incurred in
developing the Company's  product line, the costs of introducing new products to
market, inventory adjustments,  costs associated with financing activities prior
to the Company's  initial public  offering and legal costs  associated  with the
preferred  shareholder  resolution  To date,  operating  revenues  have not been
sufficient  to cover these  costs.  The  Company  had  revenue of  approximately
$4,733,000 for the ten month period ended April 30, 1998.  Average monthly sales
decreased  from $612,000 in fiscal 1997 to $473,000 for fiscal 1998. The Company
reported  a net loss for the  period  ended  April  30,  1998.  There  can be no
assurance that the Company will generate  sufficient  operating revenue,  expand
sales of its products,  or control its costs  sufficiently to achieve or sustain
profitability.
                                        9
<PAGE>
History of Losses (Continued)

The Company has always elected to write down and report obsolete inventories. It
has continued to develop new products,  at a cost to the Company's  bottom line.
Over the past year the Company suffered a major setback  associated with its new
ULTIMATE  PER4MER  RACING  products.  The  product  was  planned for a June 1997
release date,  unfortunately,  due to technological changes within the industry,
coupled with  engineering  delays,  culminated  in an October 1997 release date,
some five months  behind  schedule.  This delay has resulted in revenue  losses,
estimated by the Company to be close to $ 2.5 million. Currently the Company has
approximately  $1.5 million in backorders for products.  Even though the Company
feels that the above  problems  have been  corrected,  and as such will  enhance
future  revenues and profit  figures,  the Company can make no  assurances  that
similar problems may not arise with its the new line of products.

Over the past 10 months,  management  of the  Company has been forced to spend a
considerable  amount of time on legal  matters and other issues  relating to its
Preferred  Shareholder,  Accounting Firm dilemma,  NASDAQ De-Listing procedures,
and other issues as they related to the previously  mentioned problems.  For the
first  time  since  the  company's  inception,  this  attention  to  issues,  by
management, has impacted sales revenues for the current fiscal period.

Profit Projections

Management is committed to generating a profit in fiscal year 1999,  which would
be the first profitable year since the company's  inception.  Factors that point
to this ability center on the company's  current  product line  assortment,  new
sales,  marketing and management  personnel,  growing  account base, new product
introductions,   expanded  market   opportunities  and  newer  and  more  stable
manufacturing  alliances.  With the past problems  addressed,  management  feels
confident,  coupled  with the current  state of the North  American and European
economies  that  profitability  can be achieved  during this fiscal  period.  No
guarantee can be made that this will materialize,  but with the current focus on
operating costs, against future sales,  profitability  represents the number one
objective for the Company.

See "Management's  Discussion and Analysis of Financial Condition and Results of
Operations" contained in Item 6 of this Report.

Competition

The  Company  faces  competition  from  several  major  competitors  that market
multimedia,  accessory, and peripheral computer products, and computer and video
game  products.  Many of these  products are marketed by companies that are well
established,  have  reputations  for  success  in the  development  and  sale of
products,  and have significantly  greater financial,  marketing,  distribution,
personnel,  and other resources than the Company. See "Special  Considerations -
Litigation"  contained in Item 1 of this Report. The Company expects that direct
and indirect  competition is likely to intensify in the future.  There can be no
assurance that the Company will be able to compete successfully. See "Business -
Competition" contained in Item 1 of this Report.

Technological Change and New Products

The PC,  multimedia,  computer,  and video game  markets in  general,  have been
characterized by rapid technological  change,  frequent  introduction of product
upgrades, and evolving industry standards.  The Company believes that its future
success will depend on its ability to  anticipate  such changes and to offer the
market  responsive  products on a timely basis that meet these evolving industry
standards and achieve market acceptance.

There can be no  assurance  that the Company will have  sufficient  resources to
develop or otherwise  acquire new  technology  or to introduce new products that
would satisfy an expanded range of customer needs.  Additionally,  delays in new
product   introductions  or  product   enhancements,   or  the  introduction  of
unsuccessful products, could adversely affect the Company's operating results in
the future. The Company has experienced  certain delays in anticipated  delivery
schedules on the introduction of new products in the past.

Dependence on Key Personnel; Need to Attract New Personnel

The  loss  of the  services  of  James  L.  Copland,  the  Company's  President,
Treasurer,  Chairman  of the Board and Chief  Executive  Officer,  would  have a
material  adverse  effect upon the  Company.  The  Company  has  entered  into a
five-year   employment  agreement  with  Mr.  Copland.  The  agreement  includes
non-competition and non-solicitation  provisions for a 12-month period following
termination of employment.  The Company  maintains key man life insurance on Mr.
Copland in the amount of  $1,000,000.  The Company has assigned  one-half of the
proceeds of this policy to the estate of the insured.
                                       10
<PAGE>
Dependence on Key Personnel; Need to Attract New Personnel
(Continued)

The Company's success also is dependent on its ability to identify, recruit, and
retain additional experienced management,  engineering, and marketing personnel.
There  can be no  assurance  that  the  Company  will be able to hire or  retain
necessary personnel.  The failure of the Company to attract and retain personnel
with the  requisite  expertise  or to  internally  develop  personnel  with such
expertise could  adversely  affect the prospects of the Company's  success.  See
"Directors and Executive  Officers of the  Registrant;  Compliance  with Section
16(a) of the Securities Exchange Act of 1934" contained in Item 9 of this Report
and  "Executive  Compensation - Employment  Agreements"  contained in Item 10 of
this Report .

Seasonality; Fluctuations in Quarterly Operating Results

As new  standards or  significant  new products are  introduced in the industry,
sales  may  slow  significantly  while  the  market  reacts  to  these  factors.
Therefore, the Company's revenue may vary significantly from quarter to quarter.
Additional  factors  that may affect  revenue  include  the  timing of  customer
orders,  changes in the Company's  product and customer mix, the introduction of
new products by the Company,  pricing pressures,  and economic  conditions.  The
Company also incurs  significant  development,  sales, and marketing expenses in
anticipation of future sales. If demand for the Company's  products weakens,  or
if orders are not shipped in any quarter as anticipated,  the Company's  results
of operations for that quarter could be adversely  affected.  See  "Management's
Discussion  and  Analysis of  Financial  Condition  and  Results of  Operations"
contained in Item 6 of this Report.

Need for Additional Financing; Absence of Financing

The Company completed its initial public offering in December 1995. In addition,
the Company  completed a private  placement of preferred stock in June 1996. The
Company's  continued  viability  will be dependent  upon its ability to generate
cash from operations or to obtain  additional  financing  sufficient to meet its
obligations  as they become  due.  Unless the  Company  can  generate  cash from
operations  sufficient to fund all of its operating  needs,  the Company will be
required to obtain additional  financing.  It is currently  anticipated that the
Company  will  require  additional  working  capital  to  continue  to fund  its
operations.  Management is actively  exploring both debt and equity financing as
well as holding  discussions with potential  merging partners in order to obtain
such debt or equity  financing.  There is no assurance that  management  will be
able to obtain such financing.

The  Company  has  a  favorable  factoring  agreement,  to  finance  its  U.  S.
receivables  through  Norwest  Business  Credit.  Similar  arrangements  for the
company's European receivables do not exist at this time.

Over the past  year the  Company  has  incurred  large  legal  costs  due to the
resolution efforts for its past preferred  shareholder and de-listing  problems,
coupled with other issues arising from the latter.  The Company has also written
down large  inventories in the past.  The Company based on previous  statements,
does not feel that such  expenses  or  product  write  downs are likely to occur
during the next fiscal period.

Litigation

The Company is currently  involved in various legal  proceedings.  To the extent
that these law suits requires  management time and other  resources,  results of
operations  may  be  negatively  impacted.   see  "Business  Legal  proceedings"
contained in Item 3 of this Report.

Conversion of Preferred Stock

In June,  1996, the Company issued 1,051 shares of series A Preferred Stock in a
private  placement  resulting  in proceeds to the  Company of  $10,510,000.  The
private  placement  was  made  to  a  group  of  institutional  investors  under
Regulation S as promulgated  by U.S.  Securities  and Exchange  Commission.  The
Series A Preferred Stock was convertible into common stock at a conversion ratio
based upon the average  closing bid price of the Company's  common stock for the
ten trading days prior to conversion.  Because of the steep decline in the price
of the Company's common stock, the preferred stock became  convertible into more
shares than the amount of common stock of the Company authorized by the Articles
of  Incorporation.  The Company has recently  entered into  agreements  with the
holders of 98% of the Series A Preferred  Stock  whereby all of their  shares of
Series A Preferred Stock are tendered for conversion at a fixed conversion price
of $1.00 per share (the "Fixed Conversion"). In addition to the fixed Conversion
Price, the holders of the Series A Preferred Stock will also receive warrants to
purchase  one-third of the number of shares  which they receive  pursuant to the
Fixed  Conversion  price at a price of  $1.75  per  share  subject  to  ordinary
anti-dilution provisions (the "Warrant Shares').
                                       11
<PAGE>
Conversion of Preferred Stock (Continued)

The holders of the Series A Preferred Stock waived all other  conversion  rights
which they may have  pursuant to any  agreement.  The  Company  does not have an
adequate  number  of common  shares to  convert  all the new  warrants,  all the
previously issued warrants  outstanding and employee stock options.  Further, it
should be noted that the Company  does not have  adequate  authorized  shares to
cover the conversion by holders of the 6% of series A Preferred  Stock with whom
the Company has not entered into an agreement.

On or about October, 1997, James Copland, the Chairman of the Board,  President,
Treasurer and Chief Executive Officer of the Company, turned in 1,500,000 shares
of  common  stock  held by him to allow the  Company  to issue  common  stock in
conversion  of preferred  shares.  In return  therefore,  the Board of Directors
voted to issue Mr. Copland 15 shares of $100,000 face value preferred stock. The
Board of Directors  determined  that this was a fair price for the  surrender of
the shares based on the fact that prior offers by other  shareholders would have
been sufficient at a substantially higher cost to the Company if it had accepted
these  offers  and due to the fact that the  return of the  shares  resulted  in
reducing the outstanding  convertible  preferred shares. Mr. Copland's preferred
shares  are  convertible  into  common  stock at the rate of 12 shares of common
stock for each dollar face value.

The Company  believes  that all of the foregoing  transactions  were on terms no
less favorable to the Company than could have been obtained from unrelated third
parties. The Company intends to continue to require that any future transactions
with  affiliated  parties be on such  terms and  approved  by a majority  of the
disinterested directors.

Lack of Dividends

The Company has never paid any cash  dividends  on its Common Stock and does not
anticipate that it will pay dividends in the foreseeable  future.  Instead,  the
Company  intends to apply any earnings to the expansion and  development  of its
business.

Change in Control Provisions

The Arizona General Corporation Law contains provisions that may have the effect
of making more difficult or delaying attempts by others to obtain control of the
Company, even when these attempts may be in the best interests of shareholders.

Limited Liability of Directors

The  Company's  Amended and Restated  Articles of  Incorporation  eliminate  the
personal  liability  of a  director  to the  Company  and its  shareholders  for
monetary damages for breach of fiduciary duty of care as a director,  subject to
certain exceptions,  to the fullest extent allowed by Arizona law.  Accordingly,
except in such circumstances,  the Company's directors will not be liable to the
Company  or its  shareholders  for  breach  of such  duty.  Indemnification  for
liabilities  arising  under  the  Securities  Act of 1933  may be  permitted  to
directors,  officers  and  controlling  persons of a small  business  registrant
pursuant to the provisions of the  Securities  Act of 1933,  unless the officers
and controlling  persons have been advised that in the opinion of the Securities
and  Exchange  Commission  such  indemnification  is  against  public  policy as
expressed  in the Act and is  unenforceable.  The Company  has  received no such
opinion, or advice, on indemnification under Arizona law.

Possible Volatility of Stock Price

The Company's  Common Stock and Warrants issued to the public in connection with
the Company's initial public offering ("IPO Warrants") were traded on The NASDAQ
Stock Market,  Inc.  ("NASDAQ")  SmallCap  Market since  December 14, 1995.  The
trading price of the Company's Common Stock and IPO Warrants in the future could
be subject to wide  fluctuation  in  response to factors  such as  technological
innovations, new product developments, general trends in the Company's industry,
as well as quarterly  variations  in the  Company's  results of  operations  and
market  conditions in general.  During certain  periods,  the stock markets have
experienced  extreme  price and  volume  fluctuations  which  have  particularly
affected the market  prices for many small  companies  and which often have been
unrelated to the operating  performance  of such  companies.  These broad market
fluctuations  and other  factors may  adversely  affect the market  price of the
Company's Common Stock and IPO Warrants. See "Market for the Registrant's Common
Equity and Related Stockholder Matters" contained in Item 5 of this Report.

Maintenance Criteria for NASDAQ Securities;

On October 22, 1997, the Company's shares of common stock,  which were traded on
the NASDAQ  Smallcap  market under the symbol  "SCTI," were  delisted by NASDAQ.
This  action  was taken on  account  of the  Company's  failure to file its form
10-KSB in a timely  manner.  Management  believes  the failure of the Company to
meet this filing  requirement was the direct result of the untimely  resignation
of the Company's accounting firm, Toback CPAs, P.C.
                                       12
<PAGE>
Maintenance Criteria for NASDAQ Securities (Continued)

The Company  immediately  began a search for a new  accounting  firm,  retaining
Evers & Company, who has now acted as the Company's independent  accounting firm
for the  audit of the  financial  statements.  The  Company  has  appealed  this
delisting  and is awaiting a hearing date from the SEC. The Company is unable to
predict  whether  NASDAQ or SEC will act favorably on such request.  The Company
filed its  10-KSB and the  company's  stock has been  trading on the  Electronic
Board,  enabling ongoing trading of the Company's  shares.  The company's shares
can also be seen in  Investors  Business  Daily each Monday as listed  under the
Small cap listings.

Penny Stock Rules

Because  the  Company is no longer  listed on the NASDAQ  Smallcap  market,  the
common stock of the Company  falls within the  definition of "penny stock" under
the  Securities  Exchange  Act  of  1934.   Accordingly,   brokers  engaging  in
transactions  in the  Company's  common stock are required to provide a customer
with  risk  disclosure  documents,  disclosure  of  market  quotations,  if any,
disclosure of  compensation  of the  broker/dealer  and the  salesperson  of the
transaction and monthly accounting statements showing the accounts.  These rules
may make the brokers less  willing to engage in  transactions  in the  Company's
securities,  therefore  making it more  difficult  for  purchasers to dispose of
their securities.

Large Number of Shares Outstanding  - Proxy Motion Approved

Because of the recent issuance of shares of common stock to convert the Series A
Preferred Stock, the Company has 24,553,684 shares of common stock available for
trading,  thus  could  adversely  affect  the  prevailing  market  price  of the
Company's common stock.

In July of 1998  the  shareholders  approved  a motion  to  issue an  additional
50,000,000  common shares,  and allow the Company to reverse the stock at a time
deemed necessary by the Board of Directors. It is the intent of management to do
a reverse  once the current  share  price has risen,  and in an amount that will
increase  shareholder value, not dilute the existing  shareholder base. A second
purpose  behind  the split is to raise the stock  price to an amount  that could
have the company's' shares relisted on the NASDAQ exchange.

Forward-Looking Information May Prove Inaccurate

This Report contains  various  forward-looking  statements that are based on the
Company's  beliefs  as well as  assumptions  made by and  information  currently
available  to the  Company.  When  used in this  Report,  the  words  "believe,"
"expect,"  "anticipate,"  "estimate,"  and similar  expressions  are intended to
identify  forward-looking  statements.  Such  statements  are subject to certain
risks, uncertainties, and assumptions, including those identified under "Special
Considerations." Should one or more of these risks or uncertainties materialize,
or should  underlying  assumptions  prove  incorrect,  actual  results  may vary
materially from those  anticipated,  estimated or projected.  In addition to the
other risk factors set forth above, among the key factors that may have a direct
bearing on the Company's  results are  competitive  practices in the multimedia,
interactive,  and  communications  segments of the PC and video game  industries
(generally and particularly in the Company's  principal  product  markets),  the
ability of the Company to meet existing  financial  obligations  in the event of
adverse industry or economic  conditions or to obtain additional capital to fund
future commitments and expansion, the Company's relationship with employees, and
the impact of current and future laws and governmental regulations affecting the
PC and video game industries and the Company's operations.

ITEM 2.           PROPERTIES

In October 1996, the Company purchased  approximately 1.24 acres of land located
at  the  Scottsdale  Airpark  in  Scottsdale,  Arizona.  The  Company  completed
construction  of  approximately  12,000  square  feet  of  warehouse  space  and
approximately  6,000  square feet of executive  office space in April 1997.  The
Company has subsequently sold the facility on July 1, 1997 and effective July 1,
1997 leased the facility back from the buyer. The lease expires June 30, 2007.

The Company's European  subsidiary is located in Gent,  Belgium,  and Portsmouth
,in the U.K. The office in Belgium  currently  leases  approximately  200 square
feet of office  space  primarily as a Sales  office for  approximately  $818 per
month. The lease is on a month-to-month basis.
                                       13
<PAGE>
PROPERTIES (Continued)

The office in the U.K. which is the primary Sales,  Marketing,  and Distribution
Center for SC&T's European  operations,  currently leases  approximately  11,000
square feet for approximately  $9,435 per month. The lease expires May 12, 2003,
with a three year break option.

In June the  Company  leased  office  space in Hong Kong.  A modest  facility of
approximately  475 sq. Ft. The monthly costs are  approximately  $ 1500 USD. The
office is located in Sha Tin about 20 minutes north of the city.

The Company  anticipates  that its  facilities  will be  sufficient to serve its
needs for the next 12 months.  To the  extent  additional  warehousing  space is
required, the Company intends to lease off-site, short-term storage facilities.

ITEM 3.           LEGAL PROCEEDINGS

Pending or Threatened Litigation

A. Home Arcade v. SC&T
   -------------------

In 1997, Home Arcade filed suit for breach of a license agreement,  a suit which
alleges bad faith and fraud  claims.  The  complaint  seeks damages in excess of
$900,000.00,  however the principal  amounts are far less. The requested  relief
includes trebling and punitive damages.  Management has positively evaluated the
issues of breach and  vigorously  disputes  the  principal  amounts.  Management
intends to vigorously defend the case. Further,  Management is in the process of
filing Counterclaims  alleging that SC&T, among other things,  actually incurred
significant losses as a result of Home Arcade's misrepresentations and breach of
the licensing  agreement.  The litigation is pending in Santa Clara County,  San
Jose, California. It is expected to last approximately two years.

B. SC&T v. Brian Johnson
   ---------------------

In 1998,  SC&T filed suit  against a former  sales person for recovery of moving
expenses  pursuant to the moving expense  agreement,  which expenses  became due
when Mr.  Johnson  resigned  prior to one year  from the  agreement.  SC&T  also
alleged  that Mr.  Johnson  submitted  fraudulent  reimbursement  vouchers.  Mr.
Johnson  filed a  counterclaim  alleging  he did not receive  full  compensation
during his tenure. Management has evaluated the claims and intends to vigorously
prosecute its claims against Mr. Johnson, and expects a positive judgment within
one to one and one half years.

C. Federal Insurance Company v. SC&T
   ---------------------------------

SC&T  constructed an office building in 1996 with LMB Contractors as the general
contractor. Pursuant to contract, SC&T held back funds pending completion of the
construction  project.  LMB has neared  completion  of all residual  performance
under the contract,  but has not paid certain of LMB's  subcontractors.  Federal
Insurance Company held a bond on LMB and has paid certain of LMB subcontractors.
Federal  now has an  assignment  from LMB for the  proceeds  due from SC&T,  and
Federal has also asserted claims under the doctrine of equitable  subrogation to
the effect  that  Federal is  entitled to the hold back moneys SC&T owes to LMB.
Federal  has  filed  suit and  SC&T's  Answer is not yet due at the time of this
correspondence. Management has indicated its commitment to pay all moneys due to
LMB at the times due, and  Management  is in the process of analyzing the escrow
documentation  controlling the issues,  as well as any deductions in the amounts
owed to LMB which should also be deducted from amounts owed to Federal.  Federal
has sued for  approximately  $90,000.00,  but there are certain  deductions from
that amount which will be appropriate. The amounts have not yet been determined.
Management  expects this matter to be resolved in a mutually  acceptable  manner
within the next several months.

D. Jack of All Games v. SC&T
   -------------------------

In June,  1997,  Jack of All Games  Entertainment,  Inc.,  sued the  Company  in
Hamilton  County,  Ohio, for breach of contract  regarding the purchase of 5,000
steering wheel accessories.  Jack of All Games is seeking approximately $180,000
in  damages.   Plaintiff  claims  the  steering  wheels  it  received  were  not
merchantable  for the  purpose  for which they were  intended.  The  Company has
answered the complaint and denied all material  allegations.  It is  anticipated
that the litigation of these issues will be concluded within one year.
                                       14
<PAGE>
Unasserted Claims and Assessments

The Company has a wheel product which includes "force-feedback"  technology as a
new version to its racing  wheel.  The Company was recently  contacted by Atari.
Atari expressed a desire to evaluate the Company's force-feedback  technology to
determine  whether  it  violates a patent  possessed  by Atari.  The  Company is
presumptively  protected under the circumstances  because the Company obtained a
license  for the  force-feedback  technology  from  another  Company,  Immersion
Corporation.  Immersion  Corporation  has  indemnified  the  Company  for patent
infringement  liability.  However,  should Atari successfully  enjoin Immersion,
sales of the  Company's  force-feedback  racing wheel would be impacted,  or the
Company may consider engaging in a licensing agreement with Atari.

As disclosed in Note 11 to the  financial  statements,  the Company was delisted
from the NASDAQ Stock Market in October,  1997. In the event the Company's stock
does not commence  trading on the NASDAQ stock market again,  the Company may be
exposed to claims from its Preferred Shareholders.

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

Not applicable.

PART II

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

The Company's  Common Stock and IPO Warrants were quoted on the NASDAQ  SmallCap
Market under the symbols  "SCTI" and "SCTIW,"  respectively,  from  December 14,
1995 through October 22, 1997.

The following  table sets forth the quarterly low bid and high ask prices of the
Company's Common Stock for the calendar periods indicated on the NASDAQ SmallCap
Market.

                                                                 Common Stock
                                                                 ------------

                                                                 Bid       Ask
                                                                 ---       ---
1997:
First Quarter.............................................       .22       .56
Second Quarter............................................       .19       .81
Third Quarter.............................................       .25      1.34
Fourth Quarter (as of October 22, 1997)...................       .56       .91

1998:
First Quarter.............................................       .06       .19
Second Quarter............................................       .14       .38
Third Quarter.............................................       .09       .16
 April 1998...............................................       .09       .16

On October 22, 1997, the Company's shares of common stock,  which were traded on
the NASDAQ  Smallcap  market under the symbol "SCTI",  were de-listed by NASDAQ,
and are now  traded  on the over the  counter  market.  See Part I,  Item 1, for
further  discussion.  The Company has, to date, not paid a cash dividends on its
capital stock, and does not anticipate declaring,  or paying, any cash dividends
in the foreseeable future.  Instead,  the Company intends to retain any earnings
from operation,  and other sources, to provide funds for further  capitalization
of anticipated growth of the business.

As of July 31, 1998 the Company's number of common shareholders was 1860.
                                       15
<PAGE>
ITEM 6.   SELECTED FINANCIAL DATA;  MANAGEMENT'S DISCUSSION AND ANALYSIS
          OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

                      SELECTED CONSOLIDATED FINANCIAL DATA

The following table summarizes certain selected  consolidated  financial data of
the Company and is qualified in its entirety by the more  detailed  Consolidated
Financial  Statements and Notes thereto appearing elsewhere herein. The data has
been derived from the  financial  statements  of the Company  audited by Evers &
Company, Certified Public Accountants.

                                      Period Ended April 30   Year Ended June 30
                                               1998                    1997
                                               ----                    ----
Operating Data:                                                 
Net sales                                  $4,733,558             $ 7,346,471
Net loss                                    2,085,756               6,097,193
Loss per share                                    .09                     .38
Average shares outstanding (1)             23,345,491              16,164,835
                                                                
                                               Period Ended April 30,
                                                       1998
                                                       ----
Balance Sheet Data:
Working capital                                     $2,145,388
Total assets                                         4,621,814
Shareholders' equity                                 2,810,600

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

Overview

SC&T  International,  Inc. (the  "Company") was formed in June 1993. The Company
develops  and markets  accessory  and  peripheral  products for the computer and
video  game  industries   under  its  PLATINUM  SOUND  and  PER4MER   registered
trademarks.   The  Company's  products  include  sub-woofer  and  speaker  sound
enhancement  systems, PC volume  controllers,  and a line of PC and video arcade
racing wheels for SEGA, Nintendo,  Sony Playstation and IBM-PC's.  The Company's
multimedia keyboards line has been discontinued, in favor of a second generation
product targeted at the corporate market.  This second  generation,  features an
enhanced Voice Recognition  product, has been completed but at this time has not
been introduced into the market.

Since July 1993,  the  Company's  monthly  revenue has grown from  approximately
$8,000  compared to an average of $473,000  for the ten month period ended April
30, 1998. On December 31, 1994, the Company  purchased SC&T Europe,  a marketing
and distribution Company located in Antwerp,  Belgium. The Company, in an effort
to  reduce  its  European   operating   costs,  has  consolidated  its  European
distribution  operations  into  one  central  facility,  located  in the  United
Kingdom,  in May,  1997.  The  Company  formed  SC&T  Europe,  Ltd.,  located in
Portsmouth,  England.  The Belgium office remains open at this time, solely as a
sales  office for  mainline  Europe.  All  current  marketing  and  distribution
operations,  including  a United  Kingdom  domestic  sales  force,  is now being
handled  out of  the  United  Kingdom  operations.  The  Company  established  a
subsidiary as of June 1, 1998, in Hong Kong, known as SC&T Asia Limited.

Sales for the ten month period ended April 30, 1998, were  $4,733,000,  compared
to $7,346,000 for the year ended June 30, 1997.  Average monthly sales decreased
$139,000,   or  19%.  The  primary  reasons  for  the  decrease  in  sales  were
attributable to the delays in manufacturing  and delivery in the fourth quarter,
of new products scheduled for sale during the 1997 Christmas selling season. The
Company had a gross profit percentage of 28%, before inventory write-downs. This
compares  with the gross  profit  percentage  of 26% for the year ended June 30,
1997. The Company charged operations with $834,000 in inventory obsolescence and
write-downs  during the ten month period.  The Company expects new products will
initially sell at higher profit margins. However, there can be no assurance that
such margins will be maintained over the life of the product.

The Company reduced monthly operating  expenses from $551,000,  for fiscal 1997,
to $436,000,  for the period ended April 30,  1998.  This  reduction of 21% kept
expenses in line with the decrease in sales of 19%.
                                       16
<PAGE>
Overview (Continued)

The  Company  experienced  operating  losses of  $2,086,000,  or $.09 per share,
compared to $6,097,000,  or $.38 per share, for the previous fiscal year. Losses
decreased 66% from the previous year.

Over the past ten months,  Management has spent an inordinate amount of time and
effort in  addressing  administrative  issues  and legal  matters  which are now
resolved.  Future  results  will  benefit  from a  dedicated  focus on sales and
controlling operating expenses, to maximize  profitability and return on capital
employed.

The Company's total operating  expenses  decreased from $6,610,000 to $4,355.000
for the ten month period ended April 30, 1998.  Average  monthly  expenses  were
down 21%, and were in line with the 19% decrease in sales for the period.  Major
spending  reductions  were  made in legal,  trade  show,  advertising  and sales
promotion  activities.  Resulting  operating losses of $2,086,000 were down from
$4,011,000 from fiscal year 1997.  Decreased expenses and inventory costs, along
with a favorable legal settlement of $1,825,000, were the primary reason for the
decrease in operating  losses.  Net loss per share decreased from (.38) to (.09)
for the period ended April 30, 1998.

Net sales for the year ended June 30, 1997 were  $7,346,000,  or $3,575,000 over
net  sales for the year  ended  June 30,  1996.  Sales  increases  were due to a
growing  acceptance of the Company's  products in the marketplace,  and sales by
European operations. Operating losses increased from $2,688,000, for fiscal year
June 30, 1996,  to $6,097,000  for fiscal year June 30, 1997.  Losses for fiscal
year 1997 included  write-offs of  non-recurring  expenses of $3,700,000.  These
expenses  included  $833,000  for auto racing team  expenses,  $628,000 in legal
expenses,   $1,395,000  inventory  adjustments  and  $860,000  in  research  and
development  expense for new products.  Operating loss per share  decreased from
$(.58), for the year ended June 30, 1996, to $(.38), for the year ended June 30,
1997.

Liquidity and Capital Resources

As a result of the Company's initial public offering,  and its private placement
of  Series A  Preferred  Stock  in June  1996,  the  Company's  working  capital
decreased from $3,375,000 for the year ended June 30, 1997 to $2,062,000 for the
year ended April 30, 1998.  This  decrease is due to the  Company's  net loss at
April 30, 1998.  The Company is required to pay the costs of stocking  inventory
before the Company  receives  orders and payment from its customers.  Typically,
the  Company's  customers  do  not  pay  the  Company  for  its  products  until
approximately 60 days following  delivery and billing.  As a result, the receipt
of cash from operations  typically lags substantially  behind the payment of the
costs for purchase and delivery of the Company's products.

During the year the Company settled a lawsuit with Maxiswitch,  Inc. The Company
received  $1,825,000  in April 1998.  The Company also  received  $1,500,000  as
proceeds resulting from a building sale and lease-back transaction negotiated by
previous management, in July 1997.

Subsequent  to year ended April 30, 1998,  the Company  entered into a factoring
agreement to finance operations by factoring its North American receivables.

ITEM 7.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Reference is made to the  financial  statements,  the notes  thereto and reports
thereon,  commencing  at page F-1 of this report,  which  financial  statements,
report, notes and data are incorporated herein by reference.

ITEM 8.           CHANGES IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS ON ACCOUNTING
                  AND FINANCIAL DISCLOSURE

Not applicable.
                                       17
<PAGE>
                                    PART III

ITEM 9.           DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; COMPLIANCE
                  WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934

Directors and Executive Officers

Directors  of the  Company  serve for a term of five  years  from  their date of
election to the Board of Directors.

The following table sets forth information  concerning each of the directors and
executive officers of the Company:

Name                  Age     Position
----                  ---     --------
                            
James L. Copland       48     President, Treasurer, Chairman of the Board,
                              and Chief Executive Officer
Catherine Copland      49     Secretary, Director
Harry G. Wilson        47     Director
Steve Deckrow          52     Director
Chris F. Richards*     39     Director and Vice President of Sales and Marketing
Richard W. Elwood      59     Director of Finance and Operations
                           
James L. Copland has served as President,  Treasurer,  and Chairman of the Board
since its  inception.  From February  until May 1993, Mr. Copland served as Vice
President of Sales and  Marketing  for North and South  America for Aztech Labs,
Inc., a  manufacturer  and marketer of multimedia  sound cards.  From 1990 until
1992, Mr. Copland served as Vice President, Sales of Bondwell Industrial,  Inc.,
a manufacturer and distributor of notebook computers and joy sticks.

From 1986  until  1989,  Mr.  Copland  served as  President  for North  American
Operations  of Laser  Friendly,  US,  and from 1984 until 1986 he served as Vice
President,  Sales and Marketing,  of Atari (U.S.)  Corporation.  From 1982 until
1984,  Mr.  Copland  served as General Sales and Marketing  Manager of Commodore
Computers, a Canadian Company. Mr. Copland is the husband of Catherine Copland.

Catherine  Copland has served as a director of the Company since  December 1994,
as  Assistant  Secretary  since April 1995,  and as Manager of Customer  Service
since January 1995,  and as Secretary  since January 1997.  Prior to this,  Mrs.
Copland  has  held  various  part-time  administrative  positions  with Sun Life
Insurance Company of Canada,  Munich  reinsurance  Company of Canada, and Pantek
(US) Corp. Mrs. Copland is the wife of James L. Copland.

Harry G.  Wilson has served as a director of the Company  since  December  1994.
Since  1984,  Reverend  Wilson has served as  President  and was the  founder of
Extended Hands,  Inc., a non-profit  organization  of 250 volunteers  performing
missionary  activities and supplying  medical  services to widows and orphans in
Guatemala and Haiti.

Steve Deckrow has been a director of the Company  since  September  1997.  >From
1989 until 1992,  Mr. Deckrow served as President for the publicly and privately
held LAN VAR Systems  Integration  Company.  From 1992 until 1994,  Mr.  Deckrow
served  as Vice  President  of  Sales  and  Marketing  for  Next  Link  LLC.,  a
telecommunications  Company that  provides  client/server  computing and systems
integration  services.  Mr.  Deckrow is  presently  an  independent  consultant,
assisting  companies in the launch of Internet  services designed to link buyers
with sellers in local markets through an on-line  business/residential  listings
and integrated mapping directory services.

*Chris F. Richards  served as Vice  President of Sales and  Marketing  from July
1997.  From April 1994 until June 1997, Mr. Richards served as Vice President of
Sales and Marketing and acting General Manager of Elecom Computing  Products,  a
manufacturer of computer and audio peripherals and accessories.  From 1989 until
April of 1994, Mr. Richards served as both a Regional and national Sales manager
for Panasonic  Communication and Systems  Corporation.  Mr. Richards resigned as
director and Vice President of Sales and Marketing, effective July 31, 1998.

Richard W.  Elwood has  served as  Director  of  Finance  and  Operations  since
February,  1998. From January,  1995 to August, 1997 Mr.Elwood served as General
Manager of Government Computer Sources,  Inc. Prior to this, Mr. Elwood served a
27 year career with Eaton Corporation, serving in various management capacities,
including Division Controller of Fluid Power Operations and Plant Manager in the
Engine Components Division.
                                       18
<PAGE>
Compliance with Section 16(a) of the Securities Exchange Act of 1934

Section  16(a) of the  Securities  Exchange Act of 1934  requires the  Company's
directors,  officers, and persons who own more than 10% of a registered class of
the  Company's  equity  securities  to file reports of ownership  and changes in
ownership with the Securities and Exchange Commission.  Directors,  officers and
greater than 10% shareholders are required to furnish the Company with copies of
all Section 16(a) forms they file.

The Company  believes that each person who, at any time during such fiscal year,
was a director,  officer or  beneficial  owner of more than 10% of the Company's
Common Stock  complied  with all Section 16(a) filing  requirements  during such
fiscal year.

ITEM 10.          EXECUTIVE COMPENSATION

                           Summary Compensation Table

The following  table sets forth all  compensation  earned by the Company's Chief
Executive  Officer (the ("Named  Officer") for services  rendered to the Company
during the two preceding fiscal years. No other executive officer of the Company
earned more than $90,000 in the prior fiscal years.

                                               Fiscal             Annual
Name and Principal Position                     Year           Compensation
---------------------------                     ----           ------------
                                            
James L. Copland                                1998             $126,250
President, Treasurer,                           1997             $250,000
Chairman of the Board, and                  
Chief Executive Officer (1)                 
                                            
Thomas Bednarik                             
Former Chief Executive Officer              
and Director (2)                                1997             $150,000
                                            
William A. Pendley                          
Chief Financial Officer (3)                     1997             $100,000
                                            
William Cunningham                          
Vice President of Operations (3)                1997             $100,000
                                        

(1)  The Company has entered  into a  five-year  employment  agreement  with Mr.
     Copland.  The  agreement  includes   non-competition  and  non-solicitation
     provisions for a 12-month period following  termination of employment.  The
     Company  maintains key man life  insurance on Mr.  Copland in the amount of
     $1,000,000.  The Company  has  assigned  one-half  of the  proceeds of this
     policy to the estate of the insured.
(2)  Thomas Bednarik  resigned as director and Chief Executive Officer effective
     July 18,1997
(3)  No longer employed by the Company subsequent to June 30, 1997
                                       19
<PAGE>
ITEM 11.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following  table sets forth certain  information  with respect to beneficial
ownership  of the Common  Stock as of November 20, 1997 by (i) each person known
by the  Company  to be the  beneficial  owner of more than five  percent  of the
Common  Stock,  (ii) each  director  of the  Company,  and  (iii) all  executive
officers and directors of the Company as a group.

<TABLE>
<CAPTION>
                                            Number of Shares
          Name and Address               Beneficially Owned (1)      Percent of Total (1)
          ----------------               ----------------------      --------------------
<S>                                          <C>                             <C>  
James L. and Catherine Copland (2)           18,345,258 (3)                  43.1%
                                                                   
Harry Wilson (2)                                                               *
                                                                   
Steve Deckrow (2)                                                              *
                                                                   
All directors and officers as a group                              
(four persons)(2)                            18,365,258                      43.2%
                                                                         
Less than 1% of the outstanding Common Stock                             
</TABLE>
                                                                      
(1)  The number of shares and  percentages  shown  include  the shares of Common
     Stock which each named  shareholder has the right to acquire within 60 days
     of April 30,  1998.  In  calculating  percentage  ownership,  all shares of
     Common  Stock  which the named  shareholder  has the right to acquire  upon
     exercise of stock options are deemed to be  outstanding  for the purpose of
     computing the percentage of Common Stock owned by such shareholder, but are
     not deemed to be outstanding for the purpose of computing the percentage of
     Common Stock owned by any other shareholder. Percentages may be rounded.

(2)  Each of such  persons  may be reached  through the Company at 15695 N. 83rd
     way Scottsdale, Arizona 85260.

(3)  Includes common stock owned, stock options and convertible preferred stock.

ITEM 12.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

In February 1995,  James L. Copland and Catherine  Copland were granted  250,000
options and 50,000 options, respectively, under the Company's Stock Option Plan.

The Company  believes  that all of the foregoing  transactions  were on terms no
less favorable to the Company than could have been obtained from unrelated third
parties. The Company intends to continue to require that any future transactions
with  affiliated  parties be on such  terms and  approved  by a majority  of the
disinterested directors.

The Company had entered into a related party receivable from its President,  who
is also a shareholder. the note receivable bears interest at 8.25% annually. The
repayment  terms  provide for 36  principal  payments of $500 per month,  with a
balloon payment of $33,814,  plus interest due at the end of the term. This note
was forgiven by the Board of Directors effective July 1, 1997.

James L. Copland converted 148,888 shares of common stock for $150,000 cash. The
transaction  has been  retroactively  applied to the fiscal year 1998  financial
statements, and included in this filing.
                                       20
<PAGE>
                                     PART IV

ITEM 13.          EXHIBITS AND REPORTS ON FORM 8-K

(a)      Exhibits

Exhibit
Number                                  Exhibit
------                                  -------

1.3(1)            Form of Underwriter's Warrants
1.4(1)            Form of Warrant Agreement
3.1(1)            Restated Articles of Incorporation
3.2(1)            Bylaws
4.1(2)            Form of Certificate evidencing shares of Common Stock
4.2(2)            Form of Certificate evidencing Stock Purchase Warrant
4.3(2)            Certificate of Designation of Series A Preferred Stock
4.4(2)            Form of Certificate evidencing Series A Preferred Stock
4.5(2)            Form of Certificate evidencing Series B Preferred Stock
10.1              Form of Employment Agreement between the Company and James L.
                  Copland dated July 1, 1997
21.0(2)           Subsidiaries of the Registrant
27.0*             Financial Data Schedule
----------
* Filed Herewith
(1)               Incorporated by reference to the Registrant's Registration
                  Statement on Form SB-2 (Registration No. 33-96812 LA).

(2)               Incorporated by reference to the Registrant's Registration
                  Statement on Form SB-2 filed with the U.S. Securities and
                  Exchange Commission on or about September 23, 1996.

(b)      Reports on Form 8-K;

               On March 12,  1998,  the  registrant  filed  with the  Securities
               Exchange  Commission  to change its  fiscal  year from June 30 to
               March 31.

               On June 17,  1998,  the  registrant  filed  with  the  Securities
               Exchange  Commission  to change its fiscal  year from March 31 to
               April 30.
                                       21
<PAGE>
                                   SIGNATURES

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

                            SC&T INTERNATIONAL, INC.



Date:  August 10, 1998                  /s/ James L. Copland
                                        --------------------
                                        James L. Copland, Chairman of the Board,
                                        President, Treasurer, Chief Executive
                                        Officer, and Director

In accordance  with the  Securities  Exchange Act of 1934,  this report has been
signed below by the  following  persons on behalf of the  registrant  and in the
capacities and on the date indicated.

<TABLE>
<CAPTION>
Signature                                Title                                        Date
---------                                -----                                        ----
<S>                                <C>                                          <C> 
/s/ James L. Copland               President, Treasurer, Chief Executive        August 10, 1998
----------------------------
James L. Copland



/s/ Catherine Copland              Assistant Secretary and Director             August 10, 1998
----------------------------
Catherine Copland



/s/ Harry G. Wilson                Director                                     August 10,  1998
----------------------------
Harry G. Wilson



/s/ Steve Decrow                   Director                                     August 10, 1998
----------------------------
Steve Decrow



/s/ Chris F. Richards              Director                                     August 10, 1998
----------------------------
Chris F. Richards
</TABLE>
                                       22
<PAGE>
                            SC&T INTERNATIONAL, INC.
                            ------------------------

                                 AND SUBSIDIARY
                                 --------------

                                                                          Page
                                                                          ----
Part I Financial Information

Item 1 Financial Information

Independent Auditor's Report                                              F - 1

Consolidated Balance Sheet as of
         April 30, 1998                                                   F - 2

Consolidated Statements of Operations for the Years
         Ended April 30, 1998 and June 30, 1997                           F - 3

Consolidated Statements of Shareholders' Equity for the
         Years Ended April 30, 1998 and June 30, 1997                     F - 4

Consolidated Statements of Cash Flows for the Years
         Ended April 30, 1998 and June 30, 1997                           F - 5

Notes to Consolidated Financial Statements                                F - 6
                                       23
<PAGE>
                          Independent Auditor's Report
                          ----------------------------


The Board of Directors
SC&T International, Inc.

We  have  audited  the   accompanying   consolidated   balance   sheet  of  SC&T
International,  Inc.  and  subsidiaries  as of April  30,  1998 and the  related
consolidated  statements of operations,  shareholders' equity and cash flows for
the ten month  period  ended  April 30,  1998 and the year ended June 30,  1997.
These consolidated  financial statements are the responsibility of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audit. We did not audit the financial statements of both
SC&T Europe, NV, (Belgium) and SC&T Europe, LTD., (United Kingdom), wholly-owned
subsidiaries,  which  statements  reflect total assets of  $1,448,000  and total
revenues of $2,343,000 for the year then ended. Those statements were audited by
other  auditors  whose  reports  have been  furnished to us, and in our opinion,
insofar as it relates  to the  amounts  included  for SC&T  Europe,  NV and SC&T
Europe, LTD., is based solely on the report of the other auditors.  The auditors
of SC&T Europe,  LTD.,  issued an adverse opinion on the subsidiary's  financial
statements,  due to  uncertainties  about the  Company's  ability to provide the
necessary financial support to the subsidiary.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards. Those standards require that we plan and perform the audits 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 and the report of other auditors provide a reasonable
basis for our opinion.

In our  opinion,  based upon our audits  and the report of other  auditors,  the
consolidated  financial  statements  referred to above  present  fairly,  in all
material respects,  the consolidated  financial position of SC&T  International,
Inc. and subsidiaries as of April 30, 1998 and the consolidated results of their
operations  and their cash flows for the ten months ended April 30, 1998 and the
year  ended June 30,  1997 in  conformity  with  generally  accepted  accounting
principles.

The accompanying  financial  statements have been prepared  assuming the Company
will  continue  as a going  concern.  As  discussed  in Note 2 to the  financial
statements,   the  Company  has  suffered  losses  from  operations  that  raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these  matters are also  described  in Note 2. The  financial
statements do not include any adjustments  that might result from the outcome of
this uncertainty.


EVERS & COMPANY, LTD

August 6, 1998
Phoenix, Arizona

                                       F-1
<PAGE>
                            SC&T INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET
                                 April 30, 1998

<TABLE>
<CAPTION>
                                        ASSETS

<S>                                                                        <C>         
Current Assets:
         Cash and cash equivalents                                         $    861,560
         Receivables                                                            741,709
         Inventory                                                            2,047,639
         Other current assets                                                   136,037
                                                                           ------------
                  Total current assets                                        3,786,945

Property and equipment                                                          670,080
Other assets                                                                    164,789
                                                                           ------------

                                                                           $  4,621,814
                                                                           ============

                         LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:

         Accounts payable                                                  $  1,324,511
         Accrued expenses                                                       190,463
         Advances from factor                                                   116,252
         Current portion of capital lease obligation                             10,331
                                                                           ------------

                  Total current liabilities                                   1,641,557
                                                                           ------------

Capital lease obligation, net of current portion                                 23,793
Deferred gain on sale/leaseback of building                                     145,864

Shareholder's equity:
   Preferred stock, 5,000,000 shares authorized
      Series A, $.01 par, 173 shares issued and outstanding                           2
      Series B, $.100,000 stated value, 15 shares issued and outstanding      1,500,000
   Common stock, $.01 par value, 75,000,000 shares authorized
      23,153,684 shares issued and outstanding                                  231,538

   Additional paid-in capital                                                13,280,027
   Currency translation                                                         (54,713)
   Accumulated deficit                                                      (12,146,254)
                                                                           ------------

                                                                              2,810,600
                                                                           ------------

                                                                           $  4,621,814
                                                                           ============
</TABLE>
   The accompanying notes are an integral part of these consolidated financial
                                   statements.
                                       F-2
<PAGE>
                            SC&T INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
 For the Ten Month Period Ended April 30, 1998 and the Year Ended June 30, 1997

<TABLE>
<CAPTION>
                                                          1998            1997
                                                          ----            ----
<S>                                                   <C>             <C>         
Net Sales                                             $  4,733,558    $  7,346,471

Cost of goods sold
             Cost of goods sold                          3,424,081       5,497,851
             Inventory adjustment to carrying value        834,900       1,395,975
                                                      ------------    ------------
                                                         4,258,981       6,893,826
                                                      ------------    ------------

Gross profit                                               474,577         452,645
                                                      ------------    ------------

Selling, general and administrative expenses
             salaries and benefits                       1,140,345       1,302,239
             Selling and promotion                       1,072,065       2,074,097
             Office and administrative                     900,206       1,298,976
             Research and development                      317,593         859,971
             Consulting fees                               120,005         260,685
             Other                                         805,163         814,362
                                                      ------------    ------------
                                                         4,355,377       6,610,330
                                                      ------------    ------------

Loss from operations                                    (3,880,800)     (6,157,685)
                                                      ------------    ------------
Other income (expense):
             Interest income                                17,125         273,623
             Interest expense                              (47,081)       (213,131)
             Gain from legal settlement                  1,825,000            --
                                                      ------------    ------------
                                                         1,795,044          60,492
                                                      ------------    ------------

Net loss                                              $ (2,085,756)   $ (6,097,193)
                                                      ============    ============

Net loss per common share                             $      (0.09)   $      (0.38)
                                                      ============    ============

Weighted average common shares outstanding            $ 23,345,491    $ 16,164,835
                                                      ============    ============
</TABLE>
   The accompanying notes are an integral part of these consolidated financial
                                   statements.
                                       F-3
<PAGE>
                            SC&T INTERNATIONAL, INC.
                                AND SUBSIDIARIES
                  Consolidated Statement of Shareholders Equity
 For the Ten Month Period Ended April 30, 1998 and the Year Ended June 30, 1997

<TABLE>
<CAPTION>
                                           Common Stock           Preferred Stock        Additional      
                                           ------------           ---------------          Paid-in        
                                       Shares        Amount     Shares         Amount      Capital        
                                       ------        ------     ------         ------      -------        
<S>                                   <C>            <C>        <C>               <C>    <C>              
Balance at June 30, 1996              5,085,415      50,854     1,051             11     15,097,557       

Issuance of stock for liabilities        18,332         183      --             --           27,315       

Conversion of preferred stock        18,031,526     180,316      (333)            (4)      (165,250)      

Currency translation                       --          --        --             --             --         

Net Loss                                   --          --        --             --             --         

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

Balance at June 30, 1997             23,135,273     231,353       718              7     14,959,622       

Conversion of preferred stock         5,450,000      54,500      (545)            (5)       (54,495)      

Conversion of president's common
   stock to Series B Preferred       (1,648,444)    (16,484)       15      1,500,000     (1,633,516)      

Cancellation of treasury stock       (3,783,145)    (37,831)     --             --            8,416       

Currency translation                       --          --        --             --             --         

Net Loss                                   --          --        --             --             --         

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

Balance at April  30, 1998           23,153,684     231,538       188      1,500,002     13,280,027       
                                     ================================================================

                                         Treasury Stock                                    
                                         --------------            Currency     Accumulated
                                      Shares          Amount      Translation     Deficit  
                                      ------          ------      -----------     -------  
Balance at June 30, 1996             (200,000)       (29,415)       (23,271)    (3,963,305)
                                                                                           
Issuance of stock for liabilities        --             --             --             --   
                                                                                           
Conversion of preferred stock            --             --             --             --   
                                                                                           
Currency translation                     --             --          (50,980)          --   
                                                                                           
Net Loss                                 --             --             --       (6,097,193)
                                                                                           
                                     ------------------------------------------------------
                                                                                           
Balance at June 30, 1997             (200,000)       (29,415)       (74,251)   (10,060,498)
                                                                                           
Conversion of preferred stock            --             --             --             --   
                                                                                           
Conversion of president's common                                                           
   stock to Series B Preferred           --             --             --             --   
                                                                                           
Cancellation of treasury stock        200,000         29,415           --             --   
                                                                                           
Currency translation                     --             --           19,538           --   
                                                                                           
Net Loss                                 --             --             --       (2,085,756)
                                                                                           
                                     ------------------------------------------------------
                                                                                           
Balance at April  30, 1998               --             --          (54,713)   (12,146,254)
                                     ======================================================
</TABLE>
   The accompanying notes are an integral part of these consolidated financial
                                   statements.
                                       F-4
<PAGE>
SC & T INTERNATIONAL, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Ten Month Period Ended April 30, 1998 and the Year Ended June 30, 1997

<TABLE>
<CAPTION>
                                                                                     1998           1997
                                                                                     ----           ----
<S>                                                                              <C>            <C>         
Cash flows from operating activities:
Net loss                                                                          $(2,085,756)   $(6,097,193)

    Adjustments to reconcile net loss to net cash used in operating activities:
    Depreciation and amortization                                                     141,055        142,149
    Amortization of deferred gain on sale leaseback                                   (13,252)             0
    Loss on disposition of property and equipment                                           0        138,944
    Decrease (increase) in accounts receivable                                        101,400       (102,655)
    Decrease (increase) in inventory                                                  417,884     (1,033,442)
    Decrease (increase) in other assets                                              (147,652)       168,553
    Increase (decrease) in accounts payable                                           428,052       (169,854)
    Decrease in accrued expenses                                                      (12,830)       (50,205)
                                                                                  -----------    -----------

                   Net cash used in operating activities                           (1,171,099)    (7,003,703)
                                                                                  -----------    -----------
Cash flows from investing activities:
    Proceeds from sale leaseback of building                                        1,408,577              0
    Purchase of property and equipment                                               (412,121)    (1,656,749)
                                                                                  -----------    -----------
                   Net cash provided by (used in) investing activities                996,456     (1,656,749)
                                                                                  -----------    -----------
Cash flows from financing activities:
         Repayment of debt                                                                  0        (85,350)
         Cash payment for stock acquired from president                              (150,000)             0
         Currency translation                                                          19,538        (50,980)
         Payment of capital lease obligations                                          (8,225)          (785)
    Proceeds from issuance of stock                                                         0         15,062
    Advances from (repayments to) factor                                              116,252       (121,368)
                                                                                  -----------    -----------

                   Net cash provided by financing activities                          (22,435)      (243,421)
                                                                                  -----------    -----------

Net increase (decrease) in cash                                                      (197,078)    (8,903,873)
Cash, beginning of period                                                           1,058,638      9,962,511
                                                                                  -----------    -----------

Cash, end of period                                                               $   861,560    $ 1,058,638
                                                                                  ===========    ===========
Supplement disclosure of cash flow information
----------------------------------------------
Cash paid for interest                                                            $    47,081    $   213,131
                                                                                  ===========    ===========
</TABLE>
Supplementary schedule of non cash investing and financing
----------------------------------------------------------
During 1998,  the Company  converted  preferred  and treasury  stock into common
stock.  The Company  also  converted  the  president's  common stock to Series B
preferred.
During  1997,  the  Company  issued  18,332  shares of common  stock in  partial
satisfaction of a liability for $27,498.
The Company leased equipment with a cost of $11,303 in 1998 and $18,131 in 1997.

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                       F-5
<PAGE>
                  S C & T INTERNATIONAL, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        April 30, 1998 and June 30, 1997

1.   Summary of Significant Accounting Policies:
     -------------------------------------------

     The following is a summary of the significant  accounting policies followed
         by SC&T  International,  Inc.  These  policies  conform with  generally
         accepted  accounting  principles,  which  require  management  to  make
         estimates and assumptions that affect the reported amount of assets and
         liabilities and disclosure of contingent  assets and liabilities at the
         date of the financial  statements and the reported  amounts of revenues
         and expenses during the reporting  period.  Actual results could differ
         from those estimates.

     a.  Consolidation
         -------------

         The  consolidated  financial  statements  include the  accounts of SC&T
              International,   Inc.  and  its  wholly-owned  subsidiaries,  SC&T
              America,  Inc., SC&T Racing Enterprises,  LTD., SC&T Europe, NV, a
              Belgium  corporation  and SC&T Europe,  LTD.,  an English  company
              (collectively,   the  "Company").   All  significant  intercompany
              transactions and balances have been eliminated in consolidation.

     b.  Operations
         ----------

         The  Company  sells,   markets  and  distributes   consumer  electronic
              products and personal computer accessory products, from facilities
              located in Arizona and the United Kingdom.  The Company closed its
              offices in Belgium during 1998 and  consolidated  those operations
              in the United Kingdom.

     c.  Reclassifications
         -----------------

         Certain prior period amounts have been  reclassified  to conform to the
              current period presentation.  During 1998, the Company changed its
              fiscal year from June 30 to April 30.

     d.  Cash Equivalents
         ----------------

         Cash equivalents  include  money market  accounts and other  short-term
              investments with an original maturity of three months or less.

     e.  Inventories
         -----------

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

     f.  Property and Equipment
         ----------------------

         Property and equipment are recorded at cost.  Depreciation is provided,
              on the  straight-line  method,  over the estimated useful lives of
              the assets, which range from 3 to 10 years.
                                       F-6
<PAGE>
                  S C & T INTERNATIONAL, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        April 30, 1998 and June 30, 1997


1.   Summary of Significant Accounting Policies, continued
     -----------------------------------------------------

     g.  Revenue Recognition
         -------------------

         Sales are recorded  when the  product is  shipped.  The  Company  sells
              product through internal sales  personnel,  as well as independent
              sales  representatives.   An  allowance  is  recorded  to  reflect
              estimated returns of products from customers.

     h.  Research and Development
         ------------------------

         Research  and  development  costs  for new  products  are  expensed  as
              incurred.

     i.  Advertising
         -----------

         Advertising costs, which include the costs of sponsoring racing events,
              are  expensed as incurred.  Advertising  costs for the years ended
              April 30, 1998 and June 30, 1997 were  approximately  $686,000 and
              $883,000 respectively.

     j.  Income Taxes
         ------------

         Income taxes are accounted  for under the asset and  liability  method.
              Deferred tax assets and  liabilities are recognized for the future
              tax consequences attributable to differences between the financial
              statement  carrying  amount of existing assets and liabilities and
              their  respective  tax  bases,  including  operating  loss and tax
              credit  carry-forwards.  Deferred tax assets and  liabilities  are
              measured  using  enacted  tax rates  expected  to apply to taxable
              income  in the  years in which  those  temporary  differences  are
              expected to be  recovered  or settled.  The effect in deferred tax
              assets and  liabilities  of a change in tax rates is recognized in
              income in the period that includes the enactment  date.  Valuation
              allowances are  established  when necessary to reduce deferred tax
              assets to the amount expected to be realized.

     k.  Foreign Currency Translation
         ----------------------------

         Assets and  liabilities  in  foreign  currencies  are  translated  into
              dollars at the rates in effect at the balance sheet date. Revenues
              and expenses are translated at average rates for the year. The net
              exchange   difference   resulting  from  these   transactions   is
              separately stated in the equity section of the balance sheet.

     l.  Loss Per Common Share
         ---------------------

         Loss per common share is based on the weighted average number of common
              shares outstanding during the respective years. Warrants,  options
              and convertible  preferred stock were  anti-dilutive  at April 30,
              1998 and June 30,  1997.  The  conversion  of  preferred  stock to
              common,  including the surrender of the president's shares and the
              re-issuance of treasury stock resulted in weighted  average shares
              of approximately 210,000 during 1998.
                                       F-7
<PAGE>
                  S C & T INTERNATIONAL, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        April 30, 1998 and June 30, 1997

2.   Contingency
     -----------

     The Company has reported  net losses of  approximately  $2,100,000  for the
         year  ended  April  30,  1998  and  had  an   accumulated   deficit  of
         approximately  $12,300,000 at that time.  Management  attributes  these
         losses primarily to start-up costs incurred in developing the Company's
         product  line,  the  costs  of  introducing  new  products  to  market,
         allowances   for   inventory   obsolescence   related  to  the  limited
         marketability  of older  generation  products and costs associated with
         financing activities prior to the Company's initial public offering. To
         date, operating revenues have not been sufficient to cover these costs.

     Unless the Company can generate cash from operations sufficient to fund all
         of its  operating  needs,  the  Company  will  be  required  to  obtain
         additional  financing  to continue  operations.  Management  intends to
         actively  explore  both debt and equity  financing,  as well as holding
         discussions  with  potential  merging  partners in order to obtain such
         financing.

     The  Company  has not  yet  developed  and  implemented  a plan  to  ensure
         compliance of its systems in the Year 2000.

     These financial  statements do not contain any  adjustments to the carrying
         value of assets and liabilities, related to recoverability,  should the
         Company be unable to continue as a going concern.

3.   Cash Concentrations and Restrictions
     ------------------------------------

     At  April 30, 1998, the Company  maintained cash accounts with a securities
         broker  that  exceeded   federally   insured  limits  by  approximately
         $600,000.

4.   Receivables
     -----------

     Receivables consist of the following at April 30, 1998:

<TABLE>
<S>                                                                      <C>       
         Trade accounts receivable (see factoring agreement - Note 8)    $1,267,875
         Other                                                                8,922
         Allowance for returns and doubtful accounts                       (535,088)
                                                                         ----------
                                                                         $  741,709
                                                                         ==========
</TABLE>

5.   Inventory
     ---------

     Inventory consists of the following at April 30, 1998:

<TABLE>
<S>                                                                      <C>       
         Finished goods                                                  $2,584,411
         Advances on purchases of inventory                                 133,048
         Allowance for obsolescence                                        (669,820)
                                                                         ----------
                                                                         $2,047,639
                                                                         ==========
</TABLE>
                                       F-8
<PAGE>
                  S C & T INTERNATIONAL, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        April 30, 1998 and June 30, 1997

5.   Inventory, continued
     --------------------

     Advances on  purchases  of  inventory  are for  inventory  currently  being
         manufactured or anticipated to be manufactured in the near future.  The
         Company   relies  on  a  limited   number  of  suppliers  and  contract
         manufacturers for the production of its products.  As such, the Company
         experienced  delays  in the  anticipated  delivery  schedules  for  its
         products during both 1998 and 1997. Subsequent to year end, the company
         shifted the manufacturing of its products to a new manufacturer in Hong
         Kong.  The  company  also  reached a verbal  settlement  with its prior
         manufacturer.  The settlement  required the Company to pay $300,000 for
         release of certain inventory and supplies.

     The allowance for  obsolescence  and the  inventory  adjustment to carrying
         value  consist  of  reductions  in the  market  value of the  Company's
         existing  product line in  anticipation of a new generation of products
         to be released.

6.   Property and Equipment
     ----------------------

     Property and equipment consist of the following at April 30, 1998.


         Office furniture and equipment                   $ 487,416
         Tools & dies                                       475,530
         Warehouse equipment                                 11,303
                                                          ---------
                                                            974,249
         Less accumulated depreciation                     (304,169)
                                                          ---------
                                                          $ 670,080
                                                          =========
7.   Bank Line of Credit
     -------------------

     On  October  1,  1996,  the  Company  obtained  a  $500,000  line of credit
         agreement  with a bank  which was to be used for  financing  letters of
         credit  with an  issuance  date no later than  September  30,  1997 and
         maturity not to extend more than 180 days beyond the  expiration  date.
         The line was  collateralized  by a $525,000  certificate of deposit and
         accrued  interest at the bank's  reference  rate.  The  agreement  also
         contained  various  liquidity  and net  worth  ratios,  with  which the
         Company was not in  compliance at June 30, 1997. On September 23, 1997,
         the Company  and the bank agreed to  terminate  the  agreement  and the
         restrictions on the cash were released.

8.   Factoring Agreements
     --------------------

     In  November, 1997, the Company entered into a factoring agreement with the
         Commercial Financial Group (CFG) to factor its accounts receivable. The
         terms  of  the  agreement  provided  for  advances  of  up  to  50%  of
         receivables  factored  and a 2% discount  factor  payable to the factor
         upon  submission  of  invoices.  Additional  fees were charged when the
         invoices  remained  unpaid  after  30 days  and the  Company  was  also
         required to  repurchase  any  invoices  outstanding  over 90 days.  The
         agreement was secured by substantially all assets of the Company.
                                       F-9
<PAGE>
                  S C & T INTERNATIONAL, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        April 30, 1998 and June 30, 1997

8.   Factoring Agreements, continued
     -------------------------------

     In  May,  1998,  the Company  changed  factors  which  resulted in an early
         termination  penalty of $12,000 to CFG. The new  factoring  arrangement
         provides for a fee equal to 1.5% of all invoices factored plus interest
         equal to the  bank's  base  rate  plus 2% on all  outstanding  balances
         advanced.  The factor has assumed  credit risk  related to  receivables
         factored,  however the Company is responsible for all customer disputes
         and  counterclaims.  The  agreement is secured by accounts  receivable,
         inventory,  certain  other  assets  of the  Company  and  the  personal
         guarantees of certain officers.

9.   Lease Commitments
     -----------------

     The Company  leases office  equipment  under various  capital and operating
         leases which  require  monthly  payments  which range from $89 to $909,
         that expire from November,  1998 through April,  2001. The Company also
         leases its  corporate  apartment  under an operating  lease.  Under the
         lease,  the  monthly  rent is  approximately  $750,  and the Company is
         responsible for certain expenses.

     The Company  leases its U.K.  facility  for $9,435 per month  through  May,
         2003, with an option to break the lease in May, 2000.

     On  July 1, 1997,  the  Company  completed  a  sales-leaseback  transaction
         involving the land and building on which the Company's headquarters are
         located. The sales price of the property was $1,500,000, which resulted
         in a gain  of  approximately  $159,000,  that  is  being  deferred  and
         amortized over the lease term.  The leaseback is for a ten-year  period
         and grants the  Company  the right of first  refusal  to  purchase  the
         building.  The terms of the lease also  require  the Company to pay all
         operating expenses associated with the building.

     Future minimum lease obligations are as follows:

<TABLE>
<CAPTION>
         Year ending April 30,                                 Capital      Operating
         ---------------------                                 -------      ---------
<S>                                                           <C>          <C>        
              1999                                            $  15,333    $   278,951
              2000                                               15,333        277,201
              2001                                               12,504        170,110
              2002                                                 -           171,670
              2003                                                 -           171,670
              Thereafter                                           -           780,680
                                                              ---------    -----------
                                                                 43,170    $ 1,850,282
                                                                           ===========
         Less amounts representing  interest at 18%               9,046
                                                              ---------
         Present value of capital lease obligations              34,124

         Current portion                                         10,331
                                                              ---------

         Capital lease obligations, net of current portion    $  23,793
                                                              =========
</TABLE>
                                      F-10
<PAGE>
                  S C & T INTERNATIONAL, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        April 30, 1998 and June 30, 1997

9.   Lease Commitments, continued
     ----------------------------

     Rent  expense for the years ended  April 30,  1998 and June 30,  1997,  was
         approximately $216,126 and $128,000, respectively.

10.  Equity
     ------

     In  June 1996, the Company issued 1,051 shares of Series A preferred stock,
         $.01 par value per share,  for $10,000 per share with an accretion rate
         of 8% per year up to the date of conversion.  The Company  received net
         proceeds of approximately  $9,621,000 for the 1,051 shares.  The shares
         were able to be converted  to common stock at a conversion  price which
         was the  lesser of $7.75 per share or 85% of the  average  closing  bid
         price of the Company's  common stock for the ten trading days preceding
         the  conversion  date.  One-third  of the Series A preferred  stock was
         convertible on or after August 20, 1996, September 19, 1996 and October
         19,  1996.  All  conversions  are  subject  to the  Company's  right of
         redemption, under a formula specified in the preferred stock agreement.

     The  Series A  preferred  stock will bear no  dividends  and have no voting
         rights except as otherwise required by Arizona statute.

     Upon dissolution of the  Company,  the holders of Series A preferred  stock
         are entitled to distributions in the sum of the original Series A issue
         price for each  outstanding  share,  plus 8% of the  original  Series A
         issue  price per year since  purchase.  At any time  commencing  twelve
         months and one day after the last closing date,  the Company shall have
         the right to redeem any or all of the Series A preferred  stock subject
         to certain conditions set forth in the Certificate of Designation.

     During the years ended April 30, 1998 and June 30, 1997, 545 and 333 shares
         of preferred stock were converted into 5,450,000 and 18,031,516  shares
         of common stock, respectively.

     During 1998, the Company  reached  agreements  with preferred  shareholders
         owning  680  shares of  preferred  stock.  The stock was  tendered  for
         conversion at a fixed conversion price of $1.00 per share. In addition,
         the holders of the stock are to receive warrants to purchase  one-third
         of the  number of shares  which  they  receive  at a price of $1.75 per
         share subject to anti-dilution provisions.  The Company did not have an
         adequate  number of authorized  shares to cover the warrants,  employee
         stock options and the  remaining  preferred  shareholders.  In order to
         allow the Company to have sufficient shares for these transactions, the
         President  of the  Company  returned  1,648,444  of his  shares  to the
         Company.  Subsequent  to year  end,  the  shareholders  of the  Company
         approved the issuance of 15 shares of $100,000  stated value  preferred
         stock to the president in exchange for 1,500,000 shares of common stock
         returned. The preferred shares are convertible into common stock at the
         rate of 12 shares for every $1 of face value of the Series B  Preferred
         Stock.  In addition,  the president  received  $150,000 in cash for the
         additional   148,444  shares   returned.   The   transaction  has  been
         retroactively applied to the 1998 financial statements.
                                      F-11
<PAGE>
                  S C & T INTERNATIONAL, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        April 30, 1998 and June 30, 1997

10.  Equity, continued
     -----------------

     In  conjunction  with its  public  offering  in 1995,  the  Company  issued
         450,000  redeemable  common  stock  purchase  warrants.   Each  warrant
         represented  the right to purchase  one-half share of common stock at a
         price  of  $7.00  per  share,   subject  to  adjustment  under  certain
         circumstances.  The warrants  expire three years from  December,  1995.
         Each warrant is immediately exercisable. The warrants are redeemable by
         the Company for $.05 per warrant upon 30 days notice  mailed  within 20
         days after the  closing  bid price of the common  stock has  equaled or
         exceeded $8.00 per share for a period of 20  consecutive  trading days.
         The Company received cash of approximately $45,000.

     In  January,  1996,  the Company  issued an  additional  67,500  redeemable
         common  stock  purchase   warrants.   The  Company   received  cash  of
         approximately $6,750.

     In  July, 1998,  the  shareholders  authorized an increase in the Company's
         authorized  common  shares from  25,000,000  to  75,000,000.  They also
         approved a reverse  stock  split of the  common  stock in a ratio to be
         determined by the board.

11.  Delisting from NASDAQ Small Cap Market
     --------------------------------------

     During the  year  ended  June 30,  1997,  the  NASDAQ  Stock  Market,  Inc.
         conducted  reviews of the  Company's  public  filings and  responses to
         previous comment letters and determined that sufficient public interest
         concerns  existed to warrant  delisting of the Company's stock from the
         NASDAQ stock market.  Part of NASDAQ's concerns related to the issuance
         of convertible  preferred  stock which granted those  stockholders  the
         ability to convert  their shares to common  stock in an amount  greater
         than the Company's  authorized capital.  The Company responded to those
         inquiries and was granted an extension  until October 20, 1997 to reach
         agreements with the preferred shareholders to eliminate the overhang in
         the market.

     The Company  reached  agreements  with  approximately  94% of the preferred
         shareholders prior to October 20, 1997. However, due to the resignation
         of the  Company's  auditors  and  their  notification  with  the SEC on
         September  17,  1997,  the  Company  failed  to file its 10-K  with the
         Securities and Exchange  Commission in a timely manner.  On October 21,
         1997,  NASDAQ notified the Company that it had determined to delist the
         Company's  securities  from the NASDAQ Small Cap Market  effective with
         the  close  of  business  on  October  21,  1997  due to the  Company's
         inability to comply with its filing requirements.

12.  Income Taxes
     ------------

     The components of the net deferred tax assets at April 30, 1998, assuming a
         40% effective tax rate, are as follows:

              Allowance for doubtful accounts and sales returns     $   210,000
              Allowance  for inventory obsolescence                     270,000
              Net operating loss carry-forward                        4,720,000
              Less valuation allowance                               (5,200,000)
                                                                    -----------
                                                                    $         -
                                                                    ===========
                                      F-12
<PAGE>
                  S C & T INTERNATIONAL, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        April 30, 1998 and June 30, 1997

12.  Income Taxes
     ------------

     At  April 30, 1998,  the Company has net operating loss  carry-forwards  of
         approximately $11,500,000, which are available to offset future taxable
         income  for  federal  and  state  income  tax   purposes.   These  loss
         carry-forwards  will  begin to  expire  from  2010 to 2013 for  federal
         purposes and from 2000 to 2003 for state purposes.

     Due to various changes in ownership,  the Company's initial public offering
         and the private  offering of Series A Preferred  Stock during the years
         ended  June 30,  1995,  1996 and 1997,  the  availability  of these net
         operating  losses will be restricted as provided under Internal Revenue
         Code Section 382 and related regulations.

     At  April 30,  1998,  the Company had  recorded a  valuation  allowance  of
         $5,200,000  for  deferred  tax  assets  because  the  benefit  of those
         temporary differences may not be realized.  This represents an increase
         of $1,420,000 over the prior year.

13.  Legal settlement
     ----------------

     In  May of 1995,  the  Company  filed  suit  against  Maxi  Switch  and its
         corporate  affiliates for  misappropriation of trade secrets and breach
         of  contract  in  connection  with the  Company's  multimedia  keyboard
         technology. In May of 1997, a jury awarded the Company $3,000,000, plus
         $125,000 in attorneys' fees. The defendants had filed counterclaims for
         defamation,  but the jury denied those counterclaims in their entirety.
         In October of 1997,  the  defendants  filed a timely  Notice of Appeal.
         However,  in April 1998,  Maxi Switch and the Company  agreed to settle
         the  claim  for  $1,825,000.  The gain has  been  recorded  in the 1998
         financial statements.

14.  Related Party Transactions:
     ---------------------------

     During 1998, the Board of Directors forgave a receivable from the Company's
         President of approximately $38,000.

     On  July 1, 1997,  the  Company  entered  into a new  five-year  employment
         agreement with its Chief Executive Officer.  The agreement provides for
         a  base  salary,  certain  benefits  plus  an  incentive  bonus  to  be
         determined at the sole discretion of the Board of Directors. As part of
         the  agreement,  the officer and his wife  received  cash  payments for
         accumulated  accrued  vacation and  forgiveness  of all amounts owed by
         them to the Company.  The vacation and indebtedness were  approximately
         $60,000  and  $38,000,   respectively.   The  agreement  also  contains
         termination provisions and a one-year non-competition clause.

15.  Significant Customer and Suppliers
     ----------------------------------

     The Company had a significant  customer which  accounted for  approximately
         12% of the Company's total revenues for the years ended April 30, 1998.
         The  Company  had a  different  customer  during  1997 whose  purchases
         totaled 12% of sales as well. The accounts  receivable balance from the
         significant customer totaled  approximately  $50,000 at April 30, 1998.
         Additionally,   a  significant  portion  of  the  Company's  sales  are
         generated from its wheels and a limited number of other products.
                                      F-13
<PAGE>
                  S C & T INTERNATIONAL, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        April 30, 1998 and June 30, 1997

16.  Disclosures About Fair Value of Financial Instruments
     -----------------------------------------------------

     Fair value estimates are made at a specific  point in time and are based on
         relevant  market   information  and  information  about  the  financial
         instrument;  they are  subjective in nature and involve  uncertainties,
         matters  of  judgment  and,   therefore,   cannot  be  determined  with
         precision.  These estimates do not reflect any premium or discount that
         could result from  offering for sale at one time the  Company's  entire
         holdings  of a  particular  instrument.  Changes in  assumptions  could
         significantly affect the estimates.

     Since the fair value is estimated  as of April 30,  1998,  the amounts that
         will  actually  be realized or paid at  settlement  of the  instruments
         could be significantly different.

     The carrying amount of cash and cash  equivalents is assumed to be the fair
         value  because  of  the  liquidity  of  these   instruments.   Accounts
         receivable,  accounts  payable and accrued  expenses  approximate  fair
         value because of the short maturity of these instruments. Inventory has
         been reduced to estimated  market value.  Advances from the factor bear
         interest at current market rates.

17.  Options and Warrants
     --------------------

     The Company  has a  qualified  incentive  stock  option  plan  for  its key
         employees,   consultants  and  independent   contractors.   The  grants
         generally vest over three years and expire in 2005 or upon  termination
         of  employment,  if not utilized.  Due to limited  availability  of the
         Company's  authorized  stock, the options may not able to be exercised.
         Activity for 1997 and 1998 follows:

                                                       Options           Price
                                                       -------           -----
         Options outstanding at July 1, 1996           576,585        $1.00-5.70
         Granted                                       625,000             $1.00
         Canceled or expired                          (226,585)       $1.00-5.70
                                                     ---------
         Options outstanding at June 30, 1997          975,000             $1.00
         Granted                                       270,000             $1.00
         Canceled or expired                          ( 65,000)            $1.00
                                                     ---------
         Options outstanding at April 30, 1998       1,180,000             $1.00
                                                     =========

     The Company  continues  to  account  for stock  options in  accordance  APB
         Opinion #25,  whereby the option costs to employees are not  recognized
         in the statement of  operations.  The results of  operations  would not
         have been significantly  different,  had the Company elected to reflect
         the option cost in its statement of  operations  during the years ended
         April 30, 1998 and June 30, 1997.
                                      F-14
<PAGE>
                  S C & T INTERNATIONAL, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        April 30, 1998 and June 30, 1997

17.  Options and Warrants, continued
     -------------------------------

     In  connection  with the Company's  private  placement in June,  1996,  the
         Company issued warrants to purchase 108,490 shares of common stock. The
         warrants are  exercisable  immediately at $7.75 per share and expire on
         June 17, 2001. The Company issued 517,500  warrants to its  underwriter
         in connection  with its initial public  offering  454,000 IPO warrants.
         The  underwriter's  warrants are exercisable for a period of four years
         commencing  one year from  December  15,  1995 at a per share  exercise
         price  equal to $6.25  per  share of  common  stock  and  $.125 per IPO
         warrant.

18.  Litigation and Unasserted Claims
     --------------------------------

     In  August  of  1995,  Network  Technical  Services  sued the  Company  for
         approximately  $150,000 in a breach of  contract  action  alleging  the
         failure of SC&T to pay for certain  cables  delivered by Network.  This
         litigation  was settled  during 1998 for $45,000 and the  corresponding
         liability has been reflected in the accompanying financial statements.

     In  September of 1997, Activision filed suit against the Company for breach
         of contract  seeking $43,250 related to the  cancellation of a shipment
         of goods. Management denies responsibility due to the unavailability of
         the second  shipment.  Both parties have agreed to explore the use of a
         new bundling agreement to resolve the current litigation.

     In  September  of 1997,  Home  Arcade  filed suit  against  the Company for
         breach  of a  license  agreement,  which  alleges  bad  faith and fraud
         claims.   Home  Arcade  demanded   $300,000  for  breach  of  contract,
         requesting  that the amount be trebled to  $900,000  for  trebling  and
         punitive  damages.  Management  has  evaluated the issues of breach and
         disputes the principal amounts. The Company is in the process of filing
         counterclaims  alleging  that  SC&T  incurred  significant  losses as a
         result of Home  Arcade's  misrepresentations  and  breach of  licensing
         agreement.

     In  June of 1997,  Jack of All Games  Entertainment,  Inc. sued the Company
         for  breach  of  contract   regarding   a  purchase   order  for  wheel
         accessories.  Jack Of All Games is seeking  approximately  $180,000  in
         damages.  Management  acknowledged  difficulties  with the  wheels  and
         attempted to negotiate an amicable  resolution  with Jack of All Games.
         Two weeks prior to the court date in June, JOAG dismissed its complaint
         and refiled a new  complaint.  Management  believes that it has certain
         legal  defenses,  but legal counsel is unable to determine  whether any
         other of JOAG's claims have merit and to what extent JOAG may have been
         damaged.  It is,  therefore,  not possible to determine  the  Company's
         potential  exposure at present,  and no provision for the liability has
         been made in the accompanying financial statements.

     In  conjunction  with the  construction of its office building in 1996, the
         Company held back certain funds from the contractor  pending completion
         of  the  contract.   The   contractor   did  not  pay  certain  of  its
         subcontractors  and consequently  the contractor's  bonding company was
         required to pay the  subcontractors.  The bonding company has now filed
         suit  against  SC&T for  recovery  of  amounts  due to the  contractor.
         Although  management has not yet filed its answer to the claim,  it has
         indicated  commitment  to pay all  amounts  when due.  The  company has
         provided for this liability in the April 30, 1998 financial statements.
                                      F-15
<PAGE>
                  S C & T INTERNATIONAL, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        April 30, 1998 and June 30, 1997

18.  Litigation and Unasserted Claims, continued
     -------------------------------------------

     SC&T filed suit against a former employee for recovery of moving  expenses,
         which expenses became due when the employee  resigned prior to one year
         from the agreement.  The employee filed a counterclaim alleging that he
         did not receive full  compensation  during his tenure.  Management  has
         evaluated the claims and expects a positive  judgment within one to one
         and one half years.

     As  disclosed  in note 11 to the  financial  statements,  the  Company  was
         delisted  from the NASDAQ stock market in October,  1997.  In the event
         the  Company's  stock does not  commence  trading  on the NASDAQ  stock
         market  again,  the Company may be exposed to claims from its preferred
         shareholders.

19.  Foreign Operations
     ------------------

     The Company  operated  sales  facilities in the United  Kingdom and Belgium
         during 1998 and 1997. These offices  distribute  substantially the same
         product  line as the U.S.  operations.  During the year ended April 30,
         1998,  sales  and  net  loss  generated  from  foreign  operation  were
         approximately,  $2,340,000 and $1,200,000,  respectively.  For the year
         ended  June 30,  1997,  sales and net  income  generated  from  foreign
         operations were  approximately  $3,795,000 and $231,000,  respectively.
         The Company  closed its  offices in Belgium  during  1998.  Significant
         assets used in these operations, at April 30, 1998, are as follows:

         Cash                                          $64,000
         Receivables                                   338,000
         Inventory                                     883,000
         Other                                         161,000

     The Company's foreign operations do not have any significant  investment in
         property and equipment.

20.  Commitments
     -----------

     The Company has  entered  into a  consulting  and  royalty  agreement  with
         various  companies,  which require payments based upon either the sales
         or purchases the vendor's products.
                                      F-16