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 June 30, 1997

                         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:  $7,346,471.

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
October 1997 - $14,083,187.

Number of shares  outstanding of each of the issuer's  classes of common equity,
as of the latest practicable date: As of November 23, 1997 - 22,953,684.

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

                          ANNUAL REPORT ON FORM 10-KSB

                         FISCAL YEAR ENDED JUNE 30, 1997

                                TABLE OF CONTENTS

                                                                            Page

PART I

ITEM 1.         BUSINESS                                                      3
ITEM 2.         PROPERTIES                                                   12
ITEM 3.         LEGAL PROCEEDINGS                                            12
ITEM 4.         SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS          14
PART II         
                
ITEM 5.         MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
                STOCKHOLDER MATTERS                                          14
ITEM 6.         SELECTED FINANCIAL DATA; MANAGEMENT'S DISCUSSION AND
                ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                OPERATIONS                                                   15
ITEM 7.         FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                  20
ITEM 8.         CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                ACCOUNTING AND FINANCIAL DISCLOSURE                          20
                
PART III        
                
ITEM 9.         DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT;
                COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES
                EXCHANGE ACT OF 1934                                         20
ITEM 10.        EXECUTIVE COMPENSATION                                       21
ITEM 11.        SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
                AND MANAGEMENT                                               22
ITEM 12.        CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS               22
                
PART IV         
                
ITEM 13.        EXHIBITS AND REPORTS ON FORM 8-K                             23
                
SIGNATURES                                                                   24
                                       2
<PAGE>
                                     PART I

ITEM 1.   BUSINESS

General

The Company  develops  and markets  accessory  and  peripheral  products for the
personal  computer and video game segments of the retail and  Corporate  markets
under the  company's  PLATINUM  SOUND and  PER4MER  registered  trademarks.  The
company  segregates its products into two distinctive  product  categories.  The
sound  products are  marketed  under the  Platinum  Sound brand name,  while the
companies racing wheel and other input device accessories are marketed under the
PER4MER brand name.  The Company's  sound  products  include  sub-woofer,  sound
enhancement  systems,  and a  broad  line  up of  headphones,  microphones,  and
amplified  speaker systems.  The PER4MER line consists of racing wheel products,
designed for all IBM PC's , SEGA,  Nintendo and Sony  Playstation game consoles.
This line also includes game controller devices,  Volume Controllers,  and a new
Voice Recognized keyboard, targeted to the Corporate market. The Company's first
generation  multimedia  keyboards have been  discontinued,  in favor of a second
generation Voice Recognized product. This product, the VRK-500 features enhanced
Voice Recognition capabilities, but has not yet been introduced into the market.
PLATINUM SOUND and the PER4MER brand names,  are both  registered  trademarks of
the Company.


The Company focuses on the multimedia, interactive, communications and the video
gaming  segments  of the PC  and  consumer  electronics  industry.  The  company
develops  technology to furnish one-step,  integrated  solutions for the PC, MAC
and Video Game user.  The Company  began  operations  in June 1993 and  achieved
sales of approximately $3,771,000 and $7,346,000 during the years ended June 30,
1996 and June 30,  1997,  respectively.  Although  the  Company's  revenues  has
increased  significantly  since  inception,  the Company has recorded  losses of
approximately  $2,688,000  and  $6,097,000 for the years ended June 30, 1996 and
June 30, 1997, respectively.

Industry Overview

The market for  multimedia  PC's and video game  console  equipment  is evolving
rapidly and is characterized by rapid technological change. Unlike certain other
segments of these  markets,  the  multimedia  and gaming  segments  are consumer
driven. As a result,  many PC manufacturers have redesigned their product mix to
dramatically  increase the multimedia and entertainment portion of their product
line. Some have reconfigured  their product lines so that 100% of their products
offer multimedia and gaming capabilities.

This  Report  also refers to other  manufacturers,  retailers  and vendors as it
applies to the current marketplace.

Platinum Sound Products

The company'  sound  category  consists of a well rounded line up of Sub Woofer,
Equalizer-Amplifiers,  Headphones, Microphones, Volume Controllers and Amplified
Speaker  systems.  This product  assortment was designed to compete head to head
with top selling products offered by Altec Lansing, Yamaha, Labtec and Sony. The
company's  development  focus was on bringing Unique and Innovative  products to
the market  under the  banner of "Twice the  Product  For Half The  Price."  The
company  feels  that its  mission  of  delivering  fully  featured  products  at
aggressive  retail prices has been  successful.  Initial product  offerings have
been well received by both retailers and the industry media. Currently, Platinum
Sound  products  account for  approximately  20% of the  company's  annual sales
revenues. The company expects this number to grow in proportion to overall sales
revenues.The  demand for greater sound (at  affordable  prices) by gamers and PC
users alike, have allowed SC&T entry into this high growth market category.

At  present,  the  company  offers  three  sub  woofer  products,   one  graphic
equalizer-amplifier, a PC volume controller, 3 microphones, 3 headphones and six
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.


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 suggested
retail price (SRP) for the SRS-OMNI is $69.95.
                                       3
<PAGE>
Sub Woofer Systems

Platinum Sound's low end entry product is the SWX-1200. This 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 will add an enhanced version of the SWX-1200, with full 3-D sound in
January 1998. It will establish  this product as the industries  only retail sub
woofer system with 3D-Sound at under  $100.00.  This product will have an SRP of
$89.95.

The  second  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.

The  SRS-2000,  rounds  out the line as an  enhanced  version  of the  SWX-1600,
offering full 3-D Surround Sound.  Higher power and larger speakers.  The system
maintains its wood cabinet and has a SRP of $ 149.95.

Many of the  company's  sub woofer  products are  available in either a black or
white exterior finish, for both the PC and Home Stereo segments.


Amplified Speaker Products

Platinum Sound's speaker line currently  consists of six speaker  products.  The
line  ranges in peak  power  ratings  of 40 watts at the low end to 140 watts of
peak power.  From your basic  replacement  computer speaker product,  the PS-610
right up to the company's  newly  introduced  high end PS-490.  This  innovative
product,  apart  from  incorporating  every  user  features  found  in the  more
expensive speaker offerings,  also includes a 3-D sound capability.  SRP for the
PS-490  is only $  69.95,  which  is  approximately  $  30-40  less  than  other
competitive products with similar features.

This  acceptance  at retail  of this line is  growing  rapidly  within  the U.S.
marketplace.  The Platinum Sound line will be a category with a heavy  marketing
focus for the company  during the next year. In 1998,  the company plans a major
launch of its  Platinum  Sound  line into the  European  market  through  its UK
subsidiary.

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.

CD-ROM Audio Cables

The  Company's  original  product was its  universal  twin head  CD-audio  cable
featuring a universal  twin head design and shielded  cable.  The universal twin
head design allows  retailers and OEMs to carry a significantly  lower amount of
inventory while maintaining the ability to provide cable that is compatible with
any  combination of sound card and CD-ROM  drives.  Over the past 2 years as the
industry reached a universal  solution for CD ROM cables,  the profit associated
to this  product has  dropped  dramatically.  As a result,  the company has been
reducing its focus on this product.  In 1998,  the company  intends to eliminate
CD-ROM audio cables from its mix, and re-apply the cash requirements in favor of
more profitable PER4MER and Platinum Sound products.
                                       4
<PAGE>
PER4MER PRODUCTS

The  PER4MER  Racing  Wheel,  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.

In  October  of 1997 the  Company  introduced  its  second  generation  product,
identified  as the  "ULTIMATE  PER4MER"  line of racing wheel  products.  A more
advanced,  ergonomically  designed product, this new line also includes a Forced
Feed Back model,  which addresses the latest technology to hit the video game/PC
marketplace. Forced Feed Back allows the end user to feel all of the real action
(bumps,  hits,  and  accidents)  as displayed on the screen of the  game/program
being run.

Unlike the  original  PER4MER  products,  the new  ULTIMATE  PER4MER line up has
greater gross margins and SRPs ranging from $69.95 -$199.95. The company expects
this line to account for  approximately  70+ % of sales  revenues  over the next
year.

Marketing

The Company  markets its products to the retail video  game,OEM,  and  corporate
segments  internationally,  through a  combination  of direct  sales  personnel,
independent  sales  representatives,  and its wholly owned US, European and U.K.
subsidiaries.

The Company's  products are currently  sold in over 20 countries,  including the
United States, Belgium, Germany, France, Italy, Finland,  Holland,  Switzerland,
Turkey,  the United Kingdom,  Argentina,  Brazil,  Spain, Hong Kong, Canada, and
Russia. For the years ended June 30, 1996 and June 30, 1997, sales in the United
States accounted for approximately 49% and 48%,  respectively,  of the Company's
consolidated  revenue,  and sales in Europe accounted for  approximately 51% and
52%, respectively, of the Company's consolidated revenue.

Sales by SC&T Europe of products  other than the Company's  PER4MER and PLATINUM
SOUND  products  represented  approximately  22% of the  Company's  consolidated
revenue for each of the years ended June 30, 1996 and June 30, 1997.

In  the  United  States,  a  sales  representative  is  typically  paid  a  3-4%
commission.  In the U.K. and Europe the company utilizes direct sales personnel.
The Company has written  agreements  with its United  States  independent  sales
representatives.  Agreements with independent sales  representatives have a term
of one year, with certain cancellation provisions.  The Company expects to renew
its  agreements  as  they  expire,   providing  the  appropriate  sales  revenue
objectives are achieved by each group.

In 1998, the company intends to open up distribution  alliances-networks serving
the South  American  marketplace.  With a  consumer  market of over 300  million
people,  the company  feels that  revenues for its  products  exist in these and
Japanese  markets.  The company hopes to increase  current sales  revenues by at
least 15% through these  marketing  efforts during 1998.  However,  there are no
assurances that this increase can be realized.

Current U.S. based retail and catalogue  customers of the company  include,  but
are not limited to; Best Buy,  Babbages,  Data Vision,  PC Connections,  Egghead
Software, Fry's Electronics,  The Good Guy's, Costco Wholesale, Tiger Direct and
Micro Warehouse, Inc. The Company's OEM customer for CD ROM audio cables is Dell
Computer Corporation.

During 1997,  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  suppliers  able to supply  product  at lower  costs and make  design
modifications  that reduce  manufacturing  costs.  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.

During 1997, the Company hired a managing director for its U.K. subsidiary.  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 Multi-Media
Products,  PER4MER, and ULTIMATE PER4MER racing wheel brand names. Packaging and
operating  manuals  are  produced in six  languages,  Spanish,  French,  German,
Italian, Portuguese and English.
                                       5
<PAGE>
The Company's  European  sales are typically  invoiced in U.S.  dollars,  Pounds
sterling,  and Belgian francs.  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 the Belgian franc.  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.

During  the  years  ended  June  30,  1996  and June  30,  1997,  Dell  Computer
Corporation represented  approximately 12% of the Company's revenue. The Company
sells in  response  to  purchase  orders  issued by Dell  Computer  Corporation.
Despite the  withdrawal by the company of supplying  CD-ROM audio cables to Dell
in 1998, it is the opinion of management  that this  reduction in sales revenues
will be replaced by the growing demand for its other products.



New Product Development

The Company's  multimedia  keyboards line have been discontinued,  in favor of a
second  generation  product  targeted  at  the  corporate  market.  This  second
generation   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 on its line of Platinum  Sound and PER4MER  racing wheel
products.

During the years  ended  June 30,  1996 and June 30,  1997,  the  Company  spent
approximately $327,000 and $859,000,  respectively, on research and development.
The Company expects to incur approximately  $200,000 in research and development
expenses in connection with development of new products during fiscal 1998.

Subsidiaries

On December 31, 1994,  the Company  purchased all of the  outstanding  shares of
SC&T Europe for 210,000 shares of the Company's Common Stock. This agreement was
renegotiated in June 1996, resulting in the forfeiture of 200,000 shares and the
obligation,  subject to certain  contingencies,  to issue  25,000  shares of the
Company's  Common Stock.  SC&T Europe was incorporated in Belgium in March 1989.
SC&T Europe  markets the  Company's  products  and  distributes  other  computer
related  products  throughout  Europe.  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 Limited,  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.  For the
year ended June 30, 1996 and June 30, 1997,  sales by SC&T Europe  accounted for
approximately   $1,905,000  and  $3,795,260   respectively,   of  the  Company's
consolidated revenue.

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 the Company. The Company's major
competitors  in  the  multimedia   accessory  and  peripheral  market  are  NMB,
Maxiswitch,  Silitek,  Altec Lansing,  Yamaha,  Sony, and Labtech. The Company's
major  competitors  in the  video  game  racing  wheel  market  will  come  from
Thrustmaster, MadCatz, and Inter-Act.

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
the  product  that  can be sold at a low  price  and to  diversify  its  product
assortment over its  competition.  In effect,  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 its
product  diversity  offers it  stronger  retail  opportunities  over many of its
competitors.  Unlike its  competitors  whose market  penetration is much larger,
every new account represents new revenue and growth to the Company.

The  Company  believes  the market for its  fully-integrated  voice  recognition
keyboards is an emerging market. The Company faces direct competition as well as
indirect  competition  from  various  combinations  of non-  integrated  product
solutions  for  audio  and  voice-
                                       6
<PAGE>
recognition  computer  applications.  If  the  Company's  products  gain  market
acceptance and the voice  recognition  market  matures as expected,  the Company
knows that other companies will attempt to develop competing products.

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 has 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.

In September of 1997,  the Company was informed  that the U.S Patent  office had
awarded the company a U.S.  Patent on its Multimedia  Keyboard  technology.  The
company expects the patent to be issued by January 1998, at which point it feels
that  additional  revenues will be achieved  through  licensing  agreements from
those other manufacturers who will be in violation of its new Patent.

In addition the Company filed  applications  for  registration  of the trademark
PLATINUM SOUND and its PER4MER  logos-brand  names.  The U.S.  patent office has
granted registration rights to the company for both brand names.  Registered and
certain  copyrights  in the United  States and in  foreign  countries  have been
filed.

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 and UK  facilities.  The Company  tests a sample of all delivered
products for compliance with  specifications.  The Company's principal suppliers
are Can Technology, Fujikon, and Kaylee Computing.

Although the Company has not experienced any material  difficulties in obtaining
supplies in the past, any reduction or  interruption  in supply could  adversely
affect the Company's ability to supply certain of its products. As a result, 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 , but feels this
will not be a major factor moving forward due to its ability to focus on the key
products  in  its  product  line  assortment.   In  addition,  the  Company  has
experienced   certain   delays  in  anticipated   delivery   schedules  for  the
introduction  of  new  products.   It  is  currently  in  discussions  with  its
manufacturers  to determine  better  methods to avoid future  deliveries  of its
products.

Employees

As of November 20, 1997, the Company's  United States operation had 12 full-time
employees,  two  of  whom  were  employed  in  inspection-quality   control  and
warehousing, four in engineering,  sales, marketing and customer support, one in
research and development, and five in administration. In addition, the Company's
UK and European  subsidiaries  employed four full-time employees,  two in sales,
one in finance,  one in warehousing,  and two part time employees in warehousing
and administration.

None of the Company's  employees are  represented by a labor union.  The Company
believes its relations with its employees are in good standing.
                                       7
<PAGE>
                             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  $2,688,000 and $6,097,000 for the years ended June 30,
1996 and June 30, 1997,  respectively.  As of June 30, 1997,  the Company had an
accumulated  deficit of over  $10,000,000.  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 . The Company also incurred severe losses  associated to
its legal case  against Maxi Switch,  Silitek,  and the Lite On Group.  To date,
operating  revenues have not been sufficient to cover these costs.  Although the
Company  had  revenue of  approximately  $7,346,000  for the year ended June 30,
1997,  an increase of  approximately  $3,575,000  over revenue of  approximately
$3,771,000 for the year ended June 30, 1996, the Company reported a net loss for
the year ended June 30, 1997.  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.

The Company has always elected to write down and report obsolete inventories. It
has continued to develop new products,  at a cost to the companies  bottom line.
Over the past year the  company  suffered  two major  setbacks.  The first was a
defective racing pedal problem which was realized by the company during the late
part of December 1996 Christmas selling period.  The company  experienced severe
revenue  losses,  estimated to have  exceeded $ 1.5 million  during the December
1996 through  April 97' time frame.  The company also incurred over $ 350,000 in
re-work and replacement costs associated to this problem. The second problem was
associated to 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.

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.
                                       8
<PAGE>
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. See "Business New Product - Development" contained in Item 1 of
this Report.

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. 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

Reliance Upon Major Customer

Sales of the Company's product to one customer represented  approximately 12% of
the  Company's  revenue  during the years ended June 30, 1996 and June 30, 1997,
respectively.  No other  customer  accounted  for more than 10% of the Company's
revenue during these periods.

Dependence on Third-Party Suppliers

The  Company  does  not have  supply  agreements  with  any of these  suppliers.
Although the Company has not experienced any material  difficulties in obtaining
supplies in the past with the exception of timely delivery of new products,  the
Company  believes  that  additional  suppliers  are  readily  identifiable,  any
reduction  or  interruption  in  supply  from its  vendors  or  suppliers  could
adversely  affect  the  Company's  ability to supply  orders for  certain of its
products.  See "Business - Raw  Materials  and Supplies"  contained in Item 1 of
this Report.

Risks Associated with International Sales; Currency Fluctuations

Expenses from foreign  operations are not denominated in U.S. dollars.  Expenses
denominated in foreign currency accounted for approximately 26% of the Company's
expenses for the year ended June 30,  1996,  computed on a pro forma basis as if
the foreign  subsidiary was owned by the Company for the entire period,  and 14%
of the  Company's  expenses  for the year ended  June 30,  1997.  The  Company's
operations  abroad  expose the  Company to risks such as  exposure  to  currency
fluctuations,  exchange rates,  tariffs and other barriers,  differing standards
requirements,  difficulties in staffing and managing  international  operations,
differing  regulatory  requirements,  potentially adverse tax consequences,  and
country-specific  product requirements.  In addition,  the Company is exposed to
gains and losses on international currency transactions.  Currently, the Company
does not engage in international currency hedging transactions.  There can be no
assurance  that these  factors will not have an adverse  impact on the Company's
future  revenue or operating  results.  See "Business - Marketing"  contained in
Item 1 of this Report.

Intellectual Property; Patents

The Company's  success is dependent,  in part, on its  proprietary  information,
technology,  know-how  and the  company's  ability to deliver its  products in a
timely  manner.  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.  See  "Business  -
Intellectual  Property Rights" and "Business - Legal  Proceedings"  contained in
Item 1 of this Report.
                                       9
<PAGE>
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.

Subsequent  to year ended June 30,  1997,  the Company  entered into a factoring
agreement to finance operations by factoring its United states receivables.

Over the past  year the  company  has  incurred  large  legal  costs  due to the
resolution efforts for its past preferred  shareholder problem. The company also
wrote  down  large  inventories  of  its  multimedia  keyboard  products  due to
introduction of competitive  keyboard products introduced by Maxi Switch and its
parent  Silitek.  These  products,  which  were  the  basis  for  the  company's
successful legal battle with Maxi Switch, caused the company to sustain millions
of dollars in lost  revenues.  The company  does not feel that such  expenses or
product write downs are likely to occur during this current 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 94% 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').  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.  The Company  intends to ask  shareholders  in the near future offer,
pursuant  to a  proxy  statement,  to  approve  amendment  of  the  articles  of
Incorporation of the Company to authorize additional common shares.
                                       10
<PAGE>
In order to allow the  Company to have  sufficient  authorized  shares of common
stock to issue shares to preferred  shareholders  that converted their preferred
shares  pursuant to the  settlement,  James  Copland  returned his shares to the
Company.  In return,  the Company has agreed to either  repurchase the shares at
the price of up to $1.00 per share if the Company is unable to obtain  authority
to issue  additional  shares  or,  in the  alternative,  to issue  shares to Mr.
Copland to replace said shares.

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.

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.  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. The Company  immediately began a search for a
new  accounting  firm,  retaining  Evers  &  Company,who  has now  acted  as the
Companys's   independent   accounting  firm  for  the  audit  of  the  financial
statements. The Company intends to appeal its delisting and ask NASDAQ to relist
the common stock of the Company. The Company is unable to predict whether NASDAQ
will act favorably on such  request.  It is expected that upon the filing of the
company's 10-KSB, that it's stock will commence trading on the Electronic Board,
which will enable ongoing trading of the company's shares.

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.
                                       11
<PAGE>
Large Number of Shares Outstanding

Because of the recent issuance of shares of common stock to convert the Series A
Preferred Stock, the company has 23,135,273 shares of common stock available for
trading,  thus  could  adversely  affect  the  prevailing  market  price  of the
Company's common stock.

Rights to Acquire Shares

Because the Company has recently  issued a large number of shares in  conversion
of  the  series  A  Preferred  Stock,  and  these  shares  are  not  subject  to
restriction,  there is a large amount of common  stock of the Company  available
for sale.  The  Company is unable to predict  the  affect  this large  amount of
common  stock  outstanding  will  have on the price of the  common  stock of the
Company.

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 01, 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 expires on January 31, 1998.

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.

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.  The Company v. Maxi Switch

         On May 13, 1997, a Pima County jury awarded SC&T $3,000,000.00  against
Maxi Switch,  Inc., Silitek Corporation,  and Lite-On Peripherals,  Inc. for the
defendants'  breach of contract and  misappropriation  of SC&T's  trade  secrets
related to SC&T's Platinum Sound Multimedia Keyboard products. On June 30, 1997,
a formal  Judgment  was  signed  by the Judge for  $3,160,885.10,  which  amount
included attorneys's fees and court costs. The defendants posted a $3,200,000.00
bond  pending post trial  motions,  and the post trial  motions were denied.  On
January 5, 1998, the Court ordered the  defendants to add a further  $500,000.00
to the bond for  additional  costs on appeal,  and also  ordered  that the 5.15%
interest being earned on the principal amount to be added to the bond. Thus, the
total  bonded  amount  is  now  $3,700,000.00,  plus  5.15%  accruing  interest.
Resolution of the appeal should take approximately one year.
                                       12
<PAGE>
b.  Home Arcade v. the Company

      In  September  of 1997,  Home Arcade  filed suit in San Jose,  California,
against the Company re a license  dispute.  The Company has denied breaching the
contract and instructed counsel to vigorously defend the case. Due to the recent
filing of the case,  counsel  has not yet been able to develop  an opinion  with
regard to the timing or likely results of this litigation.  However,  management
believes it has committed no wrongdoing.

c.  Lake Management v. the Company

     In June of 1997, Lake Management filed suit against the Company in Phoenix,
Arizona,  seeking  specific  performance  requiring  the Company to issue common
stock to Lake  pursuant to a preferred  shareholder  conversion  agreement.  The
Company has resolved a similar problem with 94% of the entities in Lake's class.
Lake has refused to  negotiate  a  reasonable  settlement  and,  therefore,  the
Company will  continue to defend this  litigation  on the basis of Lake's market
manipulation.  It is anticipated that this litigation will be concluded within a
year.

d.  Jack Of All Games v. the Company

     In June of 1997, Jack Of All Games Entertainment, Inc., sued the Company in
Cincinnati,  Ohio,  for breach of contract  regarding a purchase order for 5,000
steering  wheel  accessories.  Jack Of All Games is  seeking  $179,272.80,  plus
interest and attorneys fees.  Management  intends to vigorously defend this case
or settle it based on the  provision  of  replacement  product.  The parties had
previously  agreed  to a  product  exchange  and the  Company  expects a product
exchange to occur. This litigation should be concluded within two years.

e. Network Technical Services v. the Company

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  subsequent to
year end for $45,000 and the  corresponding  liability has been reflected in the
accompanying financial statements.

f. Activision v. the Company

In  September of 1997,  Activision  filed suit against the Company for breach of
contract seeking $43,250. This dispute arose out of a nonexclusive  distribution
agreement between  Activision and the Company.  The Company has denied breaching
the contract and  instructed  counsel to vigorously  defend the case. Due to the
recent filing of the case, the Company's  legal counsel has not yet been able to
develop  an  opinion  with  regard  to the  timing  of  likely  results  of this
litigation.

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 might have to seek a license from 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.
                                       13
<PAGE>
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
                                                                ---       ---

1995:
Fourth Quarter .......................................         6.00       7.75
1996:
First Quarter ........................................         6.50       8.75
Second Quarter .......................................         3.38       8.88
Third Quarter ........................................          .69       4.88
Fourth Quarter .......................................          .09        .97

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

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 and
are now traded on the over the  counter  market.  See Part I, Item 1 for further
discussion.  The Company has never paid any cash  dividends on its capital stock
and does not  anticipate  paying any cash dividends in the  foreseeable  future.
Instead,  the Company intends to retain any earnings to provide funds for use in
its business.
                                       14
<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.

                                                      Year Ended June 30,
                                                  1997                   1996
                                                  ----                   ----

Operating Data:
Net sales                                       $7,346,471           $3,771,123
Net loss                                         6,097,193            2,688,145
Loss per share                                         .38                  .58
Average shares outstanding(1)                   16,164,835            4,625,086

                                                             June 30,
                                                               1997
                                                               ----

Balance Sheet Data:
Working capital                                            $ 3,375,166
Total assets                                                 6,157,616
Shareholders' equity                                         5,026,818



                     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 to  approximately  $612,000 in June, 1997. 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.
                                       15
<PAGE>
         Despite the expansion in the number of customers and the  corresponding
increase in revenue since commencing  operations,  the Company's total operating
expenses  have  exceeded  revenues,  resulting  in a net  loss of  approximately
$6,097,193 for the year ended June 30, 1997. The Company's primary costs are for
research and  development,  tooling for new  products,  inventory,  trade shows,
selling and promotion  activities,  writedown of obsolete  inventory,  and legal
expenses,  which increased  significantly for the period ended June 30, 1997 due
to the  resolution  of the  preferred  shareholder  issue.  See  "Conversion  of
Preferred Stock" contained in Item 1 of this report. The Company expects certain
of these costs to decrease  in  connection  with the  anticipated  expansion  of
sales. In addition,  operating  results may be influenced by factors such as the
demand for the Company's  products,  the timing of new product  introductions by
both the  Company  and its  competitors,  pricing  by both the  Company  and its
competitors,  inventory levels,  the Company's ability to develop and market new
products,  the  Company's  ability to  manufacture  its products at high quality
levels and at commercially  reasonable costs, the timing and levels of sales and
marketing expenditures, and general economic conditions.

Results of Operations of the Company for the Years Ended June 30, 1997 and 1996

Net Sales

Net sales for the year  ended June 30,  1997 were  approximately  $7,346,000  or
approximately  $3,575,000  greater  than net sales for the year  ended  June 30,
1996. In addition,  the Company had a backlog of orders  totaling  approximately
$422,000 at June 30, 1997 and $637,800 at November 30, 1997. The increase in net
sales for the  years  ended  June 30 1996 and 1997  resulted  from a variety  of
factors  including  growing   acceptance  of  the  Company's   products  in  the
marketplace,  sales by SC&T Europe and expansion of the Company's product lines.
Net sales for the year ended June 30, 1997 were  negatively  impacted by a delay
in the  manufacture  and release of new  products the Company is bringing to the
market.  The  products  expected for delivery in spring of 1997 were delayed and
delivery is anticipated in the second quarter of fiscal 1998.


Gross Profit

The Company's  gross profit  percentage  for the years ended ended June 30, 1996
and 1997 reflects the Company's  decision to greatly reduce the price of certain
of its first generation  products  remaining in inventory in anticipation of the
introduction of second generation products.  The gross profit percentage for the
year ended June 30, 1997 was also affected by the writedown of certain inventory
of  approximately  $1,395,000.  The  writedown for  inventory  obsolescence  was
adjusted  to reflect  concern  about  increased  inventory  and  possible  price
adjustments  to  improve  market  acceptance  of  the  Company's  products.  The
Company's gross profit percentage for the year ended June 30, 1997, prior to the
writedown, was 26%. The gross profit percentage for the year ended June 30, 1996
was affected by the writedown of certain  inventory of  approximately  $670,000.
The Company's gross profit percentage for the year ended June 30, 1996, prior to
this writedown was 31%. The Company anticipates that new products will initially
sell at higher profit margins.  However, there can be no assurance, nor does the
Company  expect  that  such  margins  will be  maintained  over  the life of the
product.

Payroll and Payroll Taxes

The  Company's  payroll and payroll tax  expense  increased  from  approximately
$732,000 in the year ended June 30, 1996 to approximately $1,302,000 in the year
ended June 30, 1997, or approximately 78%. A significant portion of the increase
was due to the additions of the Company CEO and Vice  president of Operations as
of December 1996 and a CFO as of March 1997, all of which have been  eliminated.
See Summary  Compensation  Table in Item 10.  Although the total  dollar  amount
increased,  payroll and payroll tax expense  decreased as a percentage of sales,
from 19% for the year  ended  June 30,  1996 to 18% for the year  ended June 30,
1997. The company's payroll and payroll tax expense increased from approximately
$558,000 in the year ended June 30, 1995 to  approximately  $732,000 in the year
ended June 30,  1996.  This  represented  an  increase  in sales and  operations
personnel. The Company is required to employ a base staff of qualified personnel
to maintain its operations.


Selling and Promotion

The  Company's  selling and  promotion  expenses  increased  from  approximately
$854,000 in the year ended June 30, 1996 to approximately $2,074,000 in the year
ended June 30, 1997,  or  approximately  143%.  This  represents  an increase in
selling and promotion  expenses as a percentage of sales,  from 23% for the year
ended June 30, 1996 to 28% for the year ended June 30,  1997. A portion of these
expenses  were  utilized to continue  promoting  new  products  and creating new
packaging for new products in addition to exhibiting  the Company's  products at
several  trade  shows,  in an effort to expand  their brand name  awareness  and
market penetration.  Approximately  $833,000 of the increase was associated with
the Company's  sponsorship  of a Formula  Atlantic  Racing Team in the 1997 Kool
Toyota  Racing series  versus other forms of  tradtional  industry  advertising.
Management  has  determined  to expense  the entire cost of the  sponsorship  as
incurred.   The  Company's  selling  and  promotion   expenses   increased  from
approximately $413,000 in the year ended June 
                                       16
<PAGE>
30,  1995 to  approximately  $854,000  in the year  ended  June 30,  1996.  This
increase  was due to  continuing  to  promote  new  products  and  creating  new
packaging for the Company's PLATINUM SOUND line.
                                       17
<PAGE>
Office and Administration

The Company's office and  administrative  expenses  increased from approximately
$496,000 in the year ended June 30, 1996 to approximately $1,299,000 in the year
ended June 30, 1997, or approximately 162%. As a percentage of net sales, office
and  administrative  expenses were 13% for the years ended June 30, 1996 and 18%
for the year ended June 30,  1997.  A  significant  portion of the  increase  in
office and administrative expenses is a result of legal expenses relating to the
resolution of the preferred  shareholder  issue,  and th Maxi Switch legal case.
See  "Conversion  of Preferred  Stock"  contained in Item 1 of this report.  The
Company's  office  and  administrative  expenses  increased  from  approximately
$465,000 in the year ended June 30, 1995 to  approximately  $496,000 in the year
ended June 30, 1996.

Research and Development

Expenditures for research and development increased from approximately  $327,000
in the year ended June 30, 1996 to approximately $860,000 in the year ended June
30, 1997 or approximately 163%. During the year ended June 30, 1996, development
costs were  amortized over a 12 month period  commencing  with the first sale of
the product.  However,  for the year ended June 30, 1997,  management decided to
expense the entire cost of research and  development  expenditures  as incurred.
This  amounted  to  $860,000  for the year ended June 30,  1997.  The  Company's
expenditures for research and development  increased from approximately  $90,000
in the year ended  June 30,  1995 to  approximately  $ 215,000 in the year ended
June 30, 1996. The Company's expenditures for research and development vary from
period to period depending upon the number of new products under development and
the stage of the  development  and vary as a percentage of sales  depending upon
sales achieved in that period.

Consulting Fees

Expenditures for consulting fees decreased from  approximately  $283,000 for the
year ended June 30, 1996 to  approximately  $261,000 for the year ended June 30,
1997,  or  approximately  8%. The Company's  expenditures  for  consulting  fees
increased  from  approximately  $39,000  for the year  ended  June  30,  1995 to
approximately $238,000 for the year ended June 30, 1996.  Approximately $165,000
of this  increase  represents  consulting  services  provided by a former  sales
representative.

Net Loss

As a result of the factors  described  above, the Company's loss from operations
increased  from  approximately  $2,277,000  in the year ended  June 30,  1996 to
approximately $6,158,000 in the year ended June 30, 1997. The Company's net loss
increased  from  approximately  $2,688,000  in the year ended  June 30,  1996 to
approximately $6,097,000 in the year ended June 30, 1997. The loss of $6,097,000
includes an aggregate of approximately $3,700,000 which consists principally of:
(I)  $833,000  of  non-recurring  Racing  expenses  which  the  Company  has  no
significant   Racing  commitments  for  fiscal  year  1998,  (ii)  approximately
$1,395,000  of  non-recurring  inventory  adjustments  to reflect  concern about
increased inventory and possible price adjustments to improve market adjustments
to improve  market  acceptance of the Company's  products,  (iii)  approximately
$628,000 of  non-recurring  legal  expenses and (iv)  approximately  $860,000 of
non-recurring  R&D expenses  relating to the  Company's  decision to expense the
entire cost of research and development expenditures as incurred.

Net Loss Per Share

Net loss per share  decreased  from $0.58 for the year  ended  June 30,  1996 to
$0.38 for the year ended June 30,  1997.  The  decrease  in the net loss for the
year ended June 30, 1997 was affected by the  increase in the  weighted  average
common shares  outstanding from  approximately 4.9 million to 16.1 million.  The
increase in  weighted  average  common  shares was due to  additional  shares of
common shares issued in connection  with the Company's  private  placements  and
conversion of Series A Preferred Stock.

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  $10,684,000  for the year ended June 30, 1996 to $3,375,000 for
the year ended June 30, 1997.  This decrease is due to the Company's net loss at
June 30,  1997.  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.

In December  1995, the Company used  approximately  $1,875,000 of the $4,500,000
gross proceeds of its initial public  offering to repay the inventory  financing
and the 8%  Subordinated  Debentures.  In June 1996 the Company  received  gross
proceeds of $10,510,000 for an
                                       18
<PAGE>
issuance of 1,051 shares of Series A Preferred Stock. The preferred shareholders
earn 8% accretion per annum up to the date of conversion.

Subsequent to  year-ended  June 30, 1997,  the Company  entered into a factoring
agreement to finance operations by factoring its North American receivables. 
                                       19
<PAGE>
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.

                                    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

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

Name                     Age        Position
----                     ---        --------

James L. Copland          47        President, Treasurer, Chairman of the Board,
                                    and Chief Executive Officer
Catherine Copland         48        Secretary, Director
Harry G. Wilson           46        Director
Steve Deckrow             51        Director
Chris F. Richards (1)     38        Vice President of Sales and Director



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.

(1)Chris F. Richards has served as Vice  president of Sales and Marketing  since
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.
                                       20
<PAGE>
(1) Mr. Richards became a board member effective September 1997


At the time of the Company's  initial public offering,  Mr. Copland and Mr. Rudi
Devers,  former  President of SC&T  Europe,  agreed that if the Company does not
record a cumulative net profit,  adjusted for costs incurred in connection  with
the Company's initial public offering,  in the fiscal years ending June 30, 1996
and June 30, 1997,  they will forfeit a total of 500,000 shares of Common Stock,
which  shares  will be  returned  to the  Company's  treasury.  Upon Mr.  Devers
separation  from the Company and SC&T  Europe,  Mr.  Devers  agreed to the early
forfeiture  of his shares  and,  as a result,  200,000  shares  held by him were
returned to the Company's treasury.

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                             1997                   $250,000(3)
President, Treasurer,                        1996                   $104,000
Chairman of the Board, and
Chief Executive Officer

Thomas Bednarik
Former Chief Executive Officer,
and Director (1)                             1997                   $150,000

William A. Pendley
Chief Financial Officer(2)                   1997                   $100,000

William Cunningham
Vice President of Operations(2)              1997                   $100,000

(1)  Thomas Bednarik  resigned as director and Chief Executive Officer effective
     July 18, 1997.
(2)  No longer employed by the Company subsequent to June 30, 1997.
(3)  This amount includes base salary of $150,000,  vacation  accrual of $60,000
     for 4 years, and loan forgiveness of $40,000.
                                       21
<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.

                                        Number of Shares
      Name and Address                Beneficially Owned(1)  Percent of Total(1)
      ----------------                ---------------------  -------------------

James L. and Catherine Copland(2)           1,993,702(4)             8.68%

Harry Wilson(2)                                 ---                    *

Steve Deckrow(2)                                ---                    *

Cameron Capital Ltd.(3)                     1,400,000                6.10%

All directors and officers as a group
(four persons)(2)                           2,013,702                8.77%


*Less than 1% of the outstanding Common Stock

(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 November 20, 1997. 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)      May be reached  c/o Mr.  Alan  Dunkle,  10  Cavendish  Road,  Hamilton,
         Bermuda HM 19.

(4)      Includes common stock owned and stock options.

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 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.

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.
                                       22
<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
10.3              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

(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 October 9, 1997,  the  Registrant  filed with the  Securities  and
           Exchange  Commission a Report on Form 8-K dated  September  17, 1997,
           which  reported the  resignation  of the Company's  certified  public
           accountants,  Toback CPAs,  P.C. and the resignation of the Company's
           Chief Executive Officer, Thomas Bednarik.
                                       23
<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:    December 31, 1997              /s/ James J. 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              December 31, 1997
--------------------              Officer, and Director
James L. Copland

/s/ Catherine Copland             Assistant Secretary and Director                   December 31, 1997
---------------------
Catherine Copland

/s/ Harry G. Wilson               Director                                           December 31, 1997
-------------------
Harry G. Wilson

/s/ Steve Decrow                  Director                                           December 31, 1997
----------------
Steve Decrow

/s/Christopher Richards           Director                                           December 31, 1997
-----------------------
Christopher Richards
</TABLE>
                                       24
<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
              June 30, 1997                                                F - 2

Consolidated Statements of Operations for the Years
              Ended June 30, 1997 and June 30, 1996                        F - 4

Consolidated Statements of Shareholders' Equity for the
              Years Ended June 30, 1997 and June 30, 1996                  F - 5

Consolidated Statements of Cash Flows for the Years
              Ended June 30, 1997 and June 30, 1996                        F - 6

Notes to Consolidated Financial Statements                                 F - 7
                                       25
<PAGE>
                          Independent Auditors' 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 June  30,  1997  and the  related
consolidated  statements of operations,  shareholders' equity and cash flows for
the  year  then  ended.   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 $2,394,685  and total  revenues of $3,795,260 for the year then ended.
Those  statements were audited by other auditors whose report has 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.

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

In our  opinion,  based  upon our audit 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 June 30, 1997 and the consolidated  results of their
operations  and their  cash  flows for the year then  ended 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

December 31, 1997
Phoenix, Arizona
                                      F-1
<PAGE>
                         [TOBACK CPA's P.C. LETTERHEAD]

The Board of Directors and Shareholders 
SC&T International, Inc.
Scottsdale, Arizona

                          INDEPENDENT AUDITOR'S REPORT
                          ----------------------------

         We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of SC & T International, Inc. and Subsidiary
for  the  year  ended  June  30,  1996.  These  financial   statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audit.

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

         In our opinion, the consolidated financial statements referred to above
present  fairly,  in all material  respects,  the results of operations and cash
flows of SC & T  International,  Inc. and Subsidiary for the year ended June 30,
1996 in conformity with generally accepted accounting principles.


TOBACK CPAs, P.C.                                 /s/ TOBACK CPAs, P.C.
Phoenix, Arizona
August 25, 1996
                                      F-1a
<PAGE>

                            SC&T INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET
                                  June 30, 1997

                                     ASSETS


Current Assets:
             Cash, including cash equivalents                  $   1,058,638

             Receivables                                             843,109

             Inventory                                             2,465,523

             Other current assets                                    114,178
                                                               --------------

                          Total current assets                     4,481,448

Property and equipment                                             1,637,172

Other assets                                                          38,996
                                                               --------------

                                                               $   6,157,616
                                                               ==============

        The accompanying notes are an integral part of these consolidated
                              financial statements.
                                       F-2
<PAGE>
                            SC&T INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET
                                  June 30, 1997

                      LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:

    Capital lease obligation, current portion                    $        6,530

    Accounts payable                                                    896,459

    Accrued expenses                                                    203,293
                                                                 ---------------

                 Total current liabilities                            1,106,282

Capital lease obligation, net of current portion                         24,516
                                                                 ---------------


Shareholders' equity:

    Series A preferred stock, $0.01 par, authorized 5,000,000                 7
         shares, issued and outstanding 718

    Common stock, $0.01 par; authorized 25,000,000 shares;              231,353
          23,135,273 issued 

    Additional paid-in capital                                       14,959,622

    Treasury stock - at cost, 200,000 shares                            (29,415)

    Currency translation                                                (74,251)

    Accumulated deficit                                             (10,060,498)
                                                                 ---------------

    Total shareholders' equity                                        5,026,818
                                                                 ---------------

                                                                 $    6,157,616
                                                                 ===============

        The accompanying notes are an integral part of these consolidated
                              financial statements.
                                       F-3
<PAGE>
                            SC&T INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                   For the Years Ended June 30, 1997 and 1996

                                                        1997            1996
                                                        ----            ----

Net Sales                                            $7,346,471      $3,771,123

Cost of goods sold:
        Cost of goods sold                            5,497,851       2,619,048
        Inventory adjustment to carrying value        1,395,975         669,579
                                                   -------------    ------------

                                                      6,893,826       3,288,627
                                                   -------------    ------------

Gross profit                                            452,645         482,496

Selling, general and administrative expenses:
        Payroll and payroll taxes                     1,302,239         731,832
        Selling and promotion                         2,074,097         854,046
        Office and administrative                     1,298,976         495,889
        Research and development                        859,971         327,011
        Consulting fees                                 260,685         282,706
        Other                                           814,362          67,957
                                                   -------------    ------------

                                                      6,610,330       2,759,441
                                                   -------------    ------------

Loss from operations                                 (6,157,685)     (2,276,945)

Other income (expense):
        Interest income                                 273,623          36,484
        Interest expense                               (213,131)       (147,539)
                                                   -------------    ------------

Loss before income tax & financing costs             (6,097,193)     (2,388,000)

Interest associated with short-term                       --            (56,011)
bridge financing

Write-off of loan acquisition costs resulting from        --           (244,134)
repayment of debt

Income tax expense                                        --              --
                                                   -------------    ------------

Net loss                                            $(6,097,193)    $(2,688,145)
                                                   =============    ============

Net loss per common share                           $     (0.38)     $    (0.58)
                                                   =============    ============

Weighted average common shares outstanding           16,164,835       4,625,086
                                                   =============    ============

        The accompanying notes are an integral part of these consolidated
                              financial statements.
                                       F-4
<PAGE>
                            SC&T INTERNATIONAL, INC.
                                AND SUBSIDIARIES
                  Consolidated Statement of Shareholders Equity
                   For the Years Ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
                                      Common Stock      Preferred Stock   Additional   Treasury Stock       
                                   -------------------  ----------------   Paid-in    ----------------     Currency     Accumulated
                                    Shares      Amount  Shares    Amount   Capital    Shares    Amount    Translation     Deficit
                                    ------      ------  ------    ------  ----------  ------    ------    -----------   -----------
<S>                              <C>         <C>          <C>    <C>     <C>          <C>       <C>        <C>         <C>          
Balance at July 1, 1995           4,059,178  $ 40,592      10       --   $ 1,682,589      --         --          --    ($ 1,275,160)
                                                                                                                       
Stock Issuance                                                                                                         
  Issuance of additional stock    1,003,322    10,033     (10)      --     3,759,870      --         --          --            --
                                                                                                                       
  Issuance of preferred stock          --        --     1,051         11   9,620,955      --         --          --            --
                                                                                                                       
  Exercise of options                22,915       229    --         --        34,143      --         --          --            --
                                                                                                                       
Forfeiture of common stock             --        --      --         --          --    (200,000)   (29,415)       --            --
                                                                                                                       
Currency translation                   --        --      --         --          --        --         --       (23,271)         --
                                                                                                                       
Net Loss                               --        --      --         --          --        --         --          --      (2,688,145)
                                 ----------  --------  ------    ------- -----------  --------  ---------  ----------  ------------
Balance at June 30, 1996          5,085,415  $ 50,854   1,051    $    11 $15,097,557  (200,000) ($ 29,415) ($  23,271) ($ 3,963,305)
                                                                                                                       
Stock Issuance                                                                                                         
  Issuance of additional stock       18,332       183    --         --        27,315      --         --          --            --
                                                                                                                       
  Conversion of preferred stock  18,031,516   180,316    (333)        (4)   (165,250)     --         --          --            --
                                                                                                                       
Currency translation                   --        --      --         --          --        --         --       (50,980)         --
Net Loss                               --        --      --         --          --        --         --          --      (6,097,193)
                                 ----------  --------  ------    ------- -----------  --------  ---------  ----------  ------------
Balance at June 30, 1997         23,135,273  $231,353     718    $     7 $14,959,622  (200,000) ($ 29,415) ($  74,251) ($10,060,498)
                                 ==========  ========  ======    ======= ===========  ========  =========  ==========  ============
</TABLE>
        The accompanying notes are an integral part of these consolidated
                              financial statements.
                                       F-5
<PAGE>
SC & T INTERNATIONAL, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
                                                                               1997                    1996
                                                                               ----                    ----
<S>                                                                  <C>                     <C>        
Cash flows from operating activities:
Net loss                                                                  $ (6,097,193)           $ (2,688,145)
Adjustments to reconcile net loss to net cash used in operating
       activities:
       Loss on disposition of property & equipment                             138,944                       0
       Depreciation and amortization                                           142,149                 192,269
       Loan amortization                                                             0                 244,134
       (Increase) decrease in accounts receivable                             (102,655)                270,483
       Increase in inventories                                              (1,033,442)               (128,209)
       Increase in other current assets                                        (39,235)                (55,264)
       (Increase) decrease in other assets                                     207,788                (192,983)
       Increase (decrease) in accounts payable                                (169,854)                352,423
       Increase (decrease) in accrued expenses                                 (50,205)                 39,088
                                                                     ------------------      ------------------
                    Net cash used in operating activities                   (7,003,703)             (1,966,204)
                                                                     ------------------      ------------------

Cash flows from investing activities:
       Purchase of property and equipment                                   (1,656,749)               (105,347)
       Loans to related parties                                                      0                 (16,673)
                                                                     ------------------      ------------------
                    Net cash used in investing  activies                    (1,656,749)               (122,020)
                                                                     ------------------      ------------------

Cash flows from financing activities:
       Currency translation                                                    (50,980)                (23,271)
       Net repayments under line of credit agreement                           (78,528)               (129,788)
       Principal payments on debentures                                              0                (875,000)
       Principal payments on long-term debt                                     (6,822)                (19,172)
       Net repayments on related party loans                                         0              (1,000,000)
       Payment of capital lease obligations                                       (785)                      0
       Proceeds from stock issuance                                             15,062              13,337,491
       Proceeds from sale of debentures                                              0                 782,651
       Advances from (repayments to) factor                                   (121,368)               (311,883)
                                                                     ------------------      ------------------
                    Net cash provided by financing activities                 (243,421)             11,761,028
                                                                     ------------------      ------------------
Net increase (decrease) in cash                                             (8,903,873)              9,672,804
Cash, beginning of period                                                    9,962,511                 289,707
                                                                     ------------------      ------------------
Cash, end of period                                                        $ 1,058,638             $ 9,962,511
                                                                     ==================      ==================



Supplement disclosure of cash flow information
----------------------------------------------
Cash paid for interest                                                     $   213,131             $   203,550
                                                                     ==================      ==================
Supplementary schedule of non cash investing and financing
----------------------------------------------------------
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 $ 31,831
</TABLE>
        The accompanying notes are an integral part of these consolidated
                              financial statements.
                                       F-6
<PAGE>
                  S C & T INTERNATIONAL, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                             June 30, 1997 and 1996


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

     The following is a summary of the significant  accounting policies followed
         by  SC&T  International,  Inc.  The  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, Belgium and the United Kingdom.

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

         Certain prior period amounts have been  reclassified  to conform to the
              current period presentation.

     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 30 years.
                                      F-7
<PAGE>
                  S C & T INTERNATIONAL, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                             June 30, 1997 and 1996



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

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

         Salesare  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  until
              feasibility  of  the  product  is   established.   Costs  incurred
              subsequent to feasibility  are stated at cost and being  amortized
              over  the  twelve  month  period  immediately  subsequent  to  the
              product's introduction, using the straight line method.

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

         Advertising costs, which include the costs of sponsoring racing events,
              are  expensed as incurred.  Advertising  costs for the years ended
              June 30, 1997 and 1996 were  approximately  $883,000  and $262,000
              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  carryforwards.  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.
                                      F-8
<PAGE>
                  S C & T INTERNATIONAL, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                             June 30, 1997 and 1996



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

     The Company has reported  net losses of  approximately  $6,000,000  for the
         year  ended  June  30,  1997  and had an  accumulated  deficit  of over
         $10,000,000 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. Subsequent to year end, the Company entered into a factoring
         agreement  to  finance  operations  by  factoring  its  North  American
         Receivables.

     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  June 30,  1997,  the Company  maintained  cash  accounts  in  financial
         institutions  that exceeded  federally  insured limits by approximately
         $673,000.  Additionally,  a $525,000  certificate of deposit was use to
         collateralize a line of credit. (Note 7)

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

     Receivables consist of the following at June 30, 1997:

         Trade accounts receivable                               $   1,166,282
         Related party note                                             38,215
         Other                                                          35,217
         Allowance for returns and allowances                      (   228,870)
         Allowance for doubtful accounts                           (   167,735)
                                                                 -------------
                                                                 $     843,109
                                                                 =============

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

     Inventory consists of the following at June 30, 1997:

         Finished goods                                          $   3,397,305
         Advances on purchases of inventory                            179,563
         Allowance for obsolescence                                 (1,111,345)
                                                                 -------------
                                                                 $   2,465,523
                                                                 =============
                                      F-9
<PAGE>
                  S C & T INTERNATIONAL, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                             June 30, 1997 and 1996



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
         has experienced  delays in the anticipated  delivery  schedules for its
         new  products.   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.  Management  is  currently  in
         discussions with its manufacturers to determine better methods to avoid
         future delays in the delivery of its products.

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

     Property and equipment consist of the following at June 30, 1997.


         Office furniture and equipment                             $   427,808
         Land                                                           362,760
         Building                                                       893,279
         Tools & dies                                                   109,850
         Warehouse equipment                                             13,167
                                                                    -----------
                                                                      1,806,864
         Less accumulated depreciation                                 (169,692)
                                                                    -----------
                                                                    $ 1,637,172
                                                                    ===========

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

     The Company  leases office  equipment  under various  capital and operating
         leases which  require  monthly  payments  which range from $72 to $909,
         that expire from October,  1997 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.
                                      F-10
<PAGE>
                  S C & T INTERNATIONAL, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                             June 30, 1997 and 1996



8.   Lease Commitments, continued
     ----------------------------

     The Company  leased its office  location in Belgium  through April 30, 1996
         from a former  director,  who was a  shareholder  and  owned 50% of the
         building  where  the  office  was  located.   The  monthly  rental  was
         approximately  $3,700.  The Company  exercised its cancellation  rights
         described in the lease and relocated to a temporary facility, effective
         May 1, 1996. As of September 1, 1996, the Belgian  office  relocated to
         Gent,  Belgium.  The new operating  lease provides for a monthly rental
         rate of approximately $800 per month, with a 60 day cancellation clause
         effective  after December 31, 1996. The Company began to lease its U.K.
         facility in May, 1997 for $9,435 per month through May,  2003,  with an
         option to break the lease after a three-year period.

     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.  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,   including   the   sales-leaseback
     transaction, are as follows:

       Year ending June 30,                                 Capital   Operating
       --------------------                                 -------   ---------

            1998                                            $11,196   $  287,794
            1999                                             10,905      277,383
            2000                                             10,905      265,880
            2001                                              9,088      171,670
            2002                                                -        171,670
            Thereafter                                          -        923,739
                                                             ------   ----------

                                                             42,094   $2,098,136
                                                                      ==========

       Less amounts representing  interest at 18%            11,048
                                                             ------

       Present value of capital lease obligations            31,046

       Current portion                                        6,530
                                                             ------

       Capital lease obligations, net of current portion    $24,516
                                                             ======

     Rent expense  for the years ended June 30, 1997 and 1996, was approximately
         $128,000 and $119,000, respectively.
                                      F-11
<PAGE>
                  S C & T INTERNATIONAL, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                             June 30, 1997 and 1996



9.   Preferred Stock:
     ---------------

     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 year ended June 30,  1997,  333 shares of  preferred  stock were
         converted into  18,031,516  shares of common stock.  Subsequent to year
         end, the Company  reached an agreement  regarding the  conversion  with
         shareholders of 680 shares of preferred stock. (See note 21)

10.  Common Stock:
     ------------

     During the quarter ended December 31, 1995, the Company  completed a public
         offering  of  common  stock.  The  Company  received  net  proceeds  of
         approximately $3,615,000 and issued a total of 900,000 shares of common
         stock.

     The Company also 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  October,  1995, the Company  increased its authorized  share capital to
         25,000,000  shares of common stock and authorized  5,000,000  shares of
         preferred stock.
                                      F-12
<PAGE>
                  S C & T INTERNATIONAL, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                             June 30, 1997 and 1996



10.  Common Stock, continued
     -----------------------

     During the quarter  ended  September  30,  1995,  the  Company  completed a
         private  placement for short-term  bridge  financing of 8% subordinated
         debentures, due at the earlier of September 30, 1996 or upon completion
         of the  offering.  The Company  issued 87,500 shares of common stock at
         $1.00 per share to obtain the short-term bridge financing.

     In  September, 1995, the President was issued 15,822 shares of common stock
         at a value  of  $1.00  per  share  for past  services  provided  to the
         Company.

     During the year ended June 30,  1997,  333 shares of  preferred  stock were
         converted  into  18,031,516  shares of common  stock.  The Company also
         issued  18,332  shares  of  common  stock  for  $27,315  and  reduced a
         liability for a corresponding  amount in conjunction  with a consulting
         agreement from the prior year.

     Subsequent to year end,  the Company  reached an  agreement  regarding  the
         conversion  with  shareholders of 680 shares of preferred  stock.  (See
         note 21)


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,  management  believes
         that  due to  the  resignation  of the  Company's  auditors  and  their
         notification to the SEC dated 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.
                                      F-13
<PAGE>
                  S C & T INTERNATIONAL, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                             June 30, 1997 and 1996



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

     The  components of the net deferred tax  assets at June 30, 1997,  assuming
         a 40% effective tax rate, are as follows:

         Deferred tax assets
              Allowance for doubtful accounts and sales returns      $  160,000
              Allowance  for inventory obsolescence                     450,000
              Net operating loss carryforward                         3,150,000
              Other                                                      20,000
         Less valuation allowance                                    (3,780,000)
                                                                     ----------
                                                                     $        -
                                                                     ==========

     At  June 30, 1997,  the Company has net  operating  loss  carryforwards  of
         approximately $8,000,000,  which are available to offset future taxable
         income  for  federal  and  state  income  tax   purposes.   These  loss
         carryforwards  will  begin to  expire  from  2010 to 2012  for  federal
         purposes and from 2000 to 2002 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  June 30,  1997,  the Company  had  recorded a  valuation  allowance  of
         $3,780,000  for  deferred  tax  assets  because  the  benefit  of those
         temporary differences may not be realized. This represents and increase
         of $2,530,000 over the prior year.

13.  Related Party Transactions:
     ---------------------------

     The Company has a receivable from its President and principal  shareholder,
         which bears  interest at 8.25% and provides for  principal  payments of
         $500 per month,  with a balloon payment of $33,814 plus interest due at
         the end of the term. Principal payments during fiscal 1997 were $3,000.
         The balance due at June 30, 1997 was $38,215.  Subsequent  to year end,
         the Board of Directors forgave all amounts due from the President.

     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 are to receive a cash payment
         for accumulated accrued vacation and forgiveness of all amounts owed by
         them to the Company.  The vacation and indebtedness were  approximately
         $60,000 and $40,000, respectively, at June 30, 1997. The agreement also
         contains termination provisions and a one-year non-competition clause.
                                      F-14
<PAGE>
                  S C & T INTERNATIONAL, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                             June 30, 1997 and 1996



13.  Related Party Transactions, continued
     -------------------------------------

     In  June,  1996,  the Company  entered  into a  separation  and  settlement
         agreement with the former General  Director of the Belgian  subsidiary,
         whereby the former General Director  resigned as an officer,  director,
         and  employee of the  Company.  Under the terms of the  agreement,  the
         former  General  Director  received  $29,415.  In addition,  the former
         General  Director  forfeited  200,000  shares  of  common  stock of the
         Company owned by him on the date of the agreement.

     In  December,  1995,  the  Company  used  approximately  $1,875,000  of the
         proceeds  from its  initial  public  offering  to repay two  short-term
         bridge  financing   arrangements  with  shareholders  and  all  accrued
         interest associated with the debt.

14.  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
         June 30,  1997 and  1996.  The  accounts  receivable  balance  for that
         customer totaled approximately $81,000 at June 30, 1997.  Additionally,
         a  significant  portion of the Company's  sales are generated  from its
         wheels and a limited number of other products.

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

     Fairvalue  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 June 30,  1997,  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.  As described
         in Note 5,  inventory has been reduced by  approximately  $1,100,000 to
         estimated market value.
                                      F-15
<PAGE>
                  S C & T INTERNATIONAL, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                             June 30, 1997 and 1996



16.  Options and Warrants
     --------------------

     The Company  has a  qualified  incentive  stock  option  plan  for  its key
         employees, consultants and independent contractors.

     In  connection  with the  Company's  private  placement  of 1,051 shares of
         Series A preferred stock in June,  1996, the Company issued warrants to
         purchase an aggregate of 108,490  shares of common stock.  The warrants
         are exercisable  immediately at $7.75 per share. The warrants expire on
         June 17, 2001.

     The Company issued 517,500  warrants in connection  with its initial public
         offering. In connection with the Company's initial public offering, the
         Company sold warrants to the IPO  underwriter at a purchase price $.001
         per warrant, to purchase from the Company 90,000 shares of common stock
         and 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.

     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
         (See note 21). Activity for 1996 and 1997 follows:

         Options oustanding at July 1, 1995           723,500    $1.00-1.75
         Granted                                       60,000    $1.50-5.70
         Canceled                                    (184,000)   $1.00-1.75
         Exercised                                     22,915         $1.50
         Options oustanding at June 30, 1996          576,585    $1.00-5.70
                                                     ---------
         Granted                                      625,000         $1.00
         Canceled or expired                         (226,585)   $1.00-5.70
                                                     ---------
         Options oustanding at June 30, 1997          975,000         $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 year ended
         June 30, 1997.

     In  connection  with the  Company's  private  placement  of 1,501 shares of
         Series A preferred  stock in June 1996, the Company issued  warrants to
         purchase an aggregate of 108,490  shares of common stock.  The warrants
         are exercisable  immediately at $7.75 per share. The warrants expire on
         June 17, 2001. The Company issued 517,500  warrants in connection  with
         its initial public offering.  In connection with the Company's  initial
         public offering,  the Company sold warrants to the IPO underwriter at a
         purchase price $0.001 per warrant,  to purchase from the Company 90,000
         shares of common  stock and 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.

17.  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  subsequent  to year end 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.  This dispute arose out of a nonexclusive
         distribution  agreement between Activation and the Company. The Company
         has denied breaching the contract and instructed  counsel to vigorously
         defend the case.  Due to the recent  filing of the case,  the Company's
         legal  counsel has not yet been able to develop an opinion  with regard
         to the timing of likely results of this litigation.
                                      F-16
<PAGE>
                  S C & T INTERNATIONAL, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                             June 30, 1997 and 1996



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

     In  September  of 1997,  Home  Arcade  filed suit  against  the Company for
         breach of a royalty  agreement  and bad faith breach of contract.  Home
         Arcade  demanded  $300,000 for breach of contract,  requesting that the
         amount be trebled to $900,000 based on the alleged bad faith aspects of
         the breach.  Management  aggressively maintains that all royalties were
         timely paid and management  intends to vigorously  defend this suit. It
         is expected that this litigation will be concluded within two years.

     In  June of 1997, Lake Management  filed suit against the Company,  seeking
         specific  performance  requiring  the Company to issue  common stock to
         Lake  pursuant to a preferred  shareholder  conversion  agreement.  The
         Company  has  resolved a similar  problem  with 94% of the  entities in
         Lake's class.  Management believes that Lake has refused to negotiate a
         reasonable  settlement  and,  therefore,  the Company will  continue to
         defend  this  litigation  on the basis of Lake's  market  manipulation.
         Management anticipates that the litigation will be concluded within one
         year.

     In  June of 1997,  Jack of All Games  Entertainment,  Inc. sued the Company
         for breach of contract  regarding a purchase  order for 5,000  steering
         wheel accessories. Jack Of All Games is seeking approximately $179,000,
         plus  interest and  attorneys  fees.  Management  intends to vigorously
         defend  this  case or  settle  based on the  provision  of  replacement
         product.  The parties had previously  agreed to a product  exchange and
         the Company expects a product exchange to occur.  This litigation is in
         the discovery phase and, therefore, no provision for any potential loss
         has been provided in the accompanying financial statements.  Management
         expects that this litigation should be concluded within two years.

     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,  sale of the Company's  force-feedback racing wheel would be
         impacted, or the Company would have to seek a license form 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.
                                      F-17
<PAGE>
                  S C & T INTERNATIONAL, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                             June 30, 1997 and 1996



18.  Gain Contingency
     ----------------

     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.
         Management  intends to  vigorously  pursue  collection of this judgment
         through appeal, which may take one to two years.

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

     The Company  operates  sales  facilities in the United Kingdom and Belgium.
         These  offices  distribute  substantially  the same product line as the
         U.S.  operations.  During the year ended June 30,  1997,  sales and net
         income generated from foreign operations were approximately  $3,795,000
         and   $231,000,   respectively.   Significant   assets  used  in  these
         operations, at June 30, 1997, are as follows:

         Cash                                                     $ 289,000
         Receivables                                                507,000
         Inventory                                                1,514,000
         Other                                                       85,000

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

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

     On  October 1, 1996,  the Company  entered into an agreement  with Phillips
         Motorsports, Inc. to sponsor a race car for the 1997 racing season. The
         Company agreed to provide  $605,000 with an initial payment of $150,000
         and payments of $368,000 from  December,  1996 through  June,  1997 and
         $87,000 in July and August, 1997. This agreement has concluded.

     The Company has entered into a consulting and royalty agreement with Kaylee
         Computing  Pty.,  the  supplier  of the  computer  chips  for its wheel
         products.  The  agreement  provides for payments of a 5% royalty on the
         base manufactured cost of the wheel products.

     The Company  has  entered  into  a  licensing   agreement   with  Immersion
         Corporation  for the  force  feedback  technology  used  in the  second
         generation of its wheel products.
                                      F-18
<PAGE>
                  S C & T INTERNATIONAL, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                             June 30, 1997 and 1996



21.  Subsequent Events
     -----------------

     In  July,  1997,  the Company  entered into a  sales-leaseback  transaction
         involving the land and building on which the Company's headquarters are
         located. The leaseback is for a ten-year period. The terms of the lease
         require the Company to pay all operating  expenses  associated with the
         leaseback.  The terms of the lease also  provide for  increases  in the
         monthly rent based upon a stated schedule of increases.

     Subsequent to year end,  the  Company  reached  agreements  with  preferred
         shareholders  owning 680 shares of preferred  stock.  The stock will be
         tendered for conversion at a fixed conversion price of $1.00 per share.
         In  addition,  the holders of the stock will also  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 does not have an adequate number of authorized  shares to cover
         the  warrants,  employee  stock  options  and the  remaining  preferred
         shareholders.  The  company  intends  to ask  shareholders  to  approve
         amendment to the  Articles of  Incorporation  to  authorize  additional
         common shares.  In order to allow the Company to have sufficient shares
         for these transactions, the President of the Company returned a portion
         of his shares to the Company.  In return, the Company intends to either
         repurchase  the  shares at $.50 per share if the  Company  is unable to
         obtain authority to issue additional shares or, in the alternative,  to
         issue replacement  shares to the President.  The Company expects to pay
         interest on the shares at 9% per year. This agreement have not yet been
         formalized.

     In October,  1997,  the Company's  stock was delisted from the NASDAQ Small
         Cap Market (See note 11).

     In  November,  1997,  the  Company  entered  into an  agreement  to  factor
         accounts  receivable  acceptable  to the factor at a 2%  discount  rate
         through May 17, 1998.  In accordance  with the terms of the  agreement,
         the factor will advance 50% of all invoices  purchased from the Company
         with  the  balance  due upon  settlement  of all  obligations  with the
         customer.  The Company has also agreed to  repurchase  all invoices not
         paid within 90 days.  The  agreement  is secured by  substantially  all
         assets of the Company and the personal  guarantee of the  President and
         Secretary of the Company.
                                      F-19