<PAGE>   1



                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   Form 10-Q
 (Mark One)

[X]  Quarterly report pursuant to Section 13 or 15(d) of the Securities 
     Exchange Act of 1934

For the quarterly period ended December 31, 1996 or

[ ]  Transition report pursuant to Section 13 or 15(d) of the Securities 
     Exchange Act of 1934

For the transition period from_________ to __________

Commission file number 0-15939

                          SHOWSCAN ENTERTAINMENT INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


                DELAWARE                                        95-3940004
    (State or other jurisdiction of                         (I.R.S. Employer
     incorporation or organization)                        Identification No.)

          3939 LANDMARK STREET
        CULVER CITY, CALIFORNIA                                   90232
(Address of principal executive offices)                        (Zip Code)


Registrant's telephone number, including area code: (310) 558-0150

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

                              YES  [X]        NO  [ ]

    As of  February 10, 1997, the Registrant had 5,642,058 shares of Common
Stock, $.001 par value, issued and outstanding.





             This report contains 16 consecutively numbered pages.
<PAGE>   2
                          SHOWSCAN ENTERTAINMENT INC.

                                     INDEX


<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                        <C>
PART I - FINANCIAL INFORMATION


ITEM 1. FINANCIAL STATEMENTS

Condensed Consolidated Balance Sheets as of December 31, 1996              
and March 31, 1996                                                            3

Condensed Consolidated Statements of Operations for the Three
Months and Nine Months Ended December 31, 1996 and 1995                       5
                                                                            
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended December 31, 1996 and 1995                                       6

Notes to the Condensed Consolidated Financial Statements                      8


ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS                       9


PART II - OTHER INFORMATION


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                     15


Signatures                                                                   16
</TABLE>


                                       2
<PAGE>   3
PART I. - FINANCIAL INFORMATION

ITEM 1. - FINANCIAL STATEMENTS

                         SHOWSCAN ENTERTAINMENT INC.
                    Condensed Consolidated Balance Sheets
               (Dollars in Thousands Except Share Information)

<TABLE>                                                   
<CAPTION>                                                 
                                                                          DECEMBER 31,                   MARCH 31,
                                                                             1996                          1996     
                                                                          ------------                  ----------
                                                                          (unaudited)                      (Note)
 <S>                                                                       <C>                           <C>
                           ASSETS                         
                           ------                         
 Current assets:                                          
    Cash and cash equivalents                                              $    2,697                    $    5,055
    Short-term investments                                                          -                         3,086
    Accounts receivable (net of allowances)                                     3,242                         3,241
    Unbilled receivables on uncompleted                   
       equipment contracts                                                      1,091                         1,122
    Equipment sales inventory                                                   1,063                         1,547
    Prepaid expenses and other current assets                                     210                           122
                                                                           ----------                    ----------
 Total current assets                                                           8,303                        14,173
                                                          
                                                          
 Film library (net of amortization)                                             5,413                         3,481

 Equipment and leasehold improvements, less               
  accumulated depreciation and amortization                                       985                         1,313
                                                          
                                                          
 Investment in owned and operated theatres (Note 2)                             3,745                         4,045
                                                          
                                                          
 Patents and other intellectual properties (net of        
  amortization)                                                                 1,444                         1,770
                                                          
 Other assets, including long-term receivables                                  2,211                         1,975
                                                                           ----------                    ----------
                                                          
 Total assets                                                               $  22,101                     $  26,757
                                                                            =========                     =========

</TABLE>
Note:  The balance sheet at March 31, 1996 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.

     See accompanying notes to unaudited condensed consolidated financial
                                  statements.

                                  (continued)





                                       3
<PAGE>   4
                          SHOWSCAN ENTERTAINMENT INC.
               Condensed Consolidated Balance Sheets (continued)
                (Dollars in Thousands Except Share Information)

<TABLE>                                                       
<CAPTION>                                                     
                                                                                   DECEMBER 31,                MARCH 31,
                                                                                       1996                      1996     
                                                                                   ------------               -----------
                                                                                    (unaudited)                   (Note)
<S>                                                                                <C>                       <C>
      LIABILITIES AND STOCKHOLDERS' EQUITY                    
      ------------------------------------                    
                                                              
 Current liabilities:                                         
    Accounts payable                                                               $       327               $        603
    Customer advances on uncompleted                          
     equipment contracts                                                                 1,714                      2,143
    Accrued expenses and other current liabilities                                       2,072                      3,351
                                                                                    ----------                -----------
 Total current liabilities                                                               4,113                      6,097
                                                                                    ----------                -----------
                                                              
 8% convertible notes (Note 3)                                                           5,690                      6,620
                                                              
 Stockholders' equity:                                        
    Series C Convertible Preferred Stock, $.001 par value;    
     100,000 shares authorized; 49,000 shares issued and      
     outstanding                                                                             -                          -
    Common stock, $.001 par value; 20,000,000 shares          
     authorized; 5,642,058 and 5,480,324 shares issued and    
     outstanding, respectively                                                               6                          5
    Additional paid-in capital                                                          43,298                     42,446
    Accumulated deficit                                                                (31,006)                   (28,411)
                                                                                    -----------                -----------
 Total stockholders' equity                                                             12,298                     14,040
                                                                                    ----------                 ----------
 Total liabilities and stockholders' equity                                         $   22,101                 $   26,757
                                                                                    ==========                 ==========
                                                                                    
</TABLE>                                                      



Note:  The balance sheet at March 31, 1996 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.



     See accompanying notes to unaudited condensed consolidated financial
                                  statements.





                                       4
<PAGE>   5
                          SHOWSCAN ENTERTAINMENT INC.
                Condensed Consolidated Statements of Operations
              (Dollars in Thousands Except Per Share Information)


<TABLE>
<CAPTION>
                                                      THREE MONTHS ENDED              NINE MONTHS ENDED
                                                         DECEMBER 31,                    DECEMBER 31,
                                                     1996           1995                1996       1995      
                                                 ---------------------------        ----------------------
                                                           (Unaudited)                    (Unaudited)
<S>                                                <C>             <C>             <C>            <C>
Revenues:
  Film licensing and production services           $      678      $   1,250       $   2,750      $   5,220
  Equipment sales and related services                  3,542          1,138          10,189          5,899 
                                                     ---------        ------       ---------      ---------
                                                        4,220          2,388          12,939         11,119

Costs of revenues                                       3,205          1,242           9,038          6,083 
                                                     ---------       --------       ---------      ---------
Gross profit                                            1,015          1,146           3,901          5,036

Costs and expenses:
  General and administrative expenses                   1,555          1,678           5,050          5,340
  Depreciation and amortization                           210            239             716            727 
                                                     ---------      ---------      ----------     ----------
                                                        1,765          1,917           5,766          6,067 
                                                      --------       --------       ---------      ---------
Operating loss                                           (750)          (771)         (1,865)        (1,031)


Other income (expense):
  Equity in net operations of owned and
    operated theatres                                    (281)           (77)           (445)          (190)
  Other income, including interest of
    $24, $115, $198, $211, respectively                    24            137             206            235
  Interest and other expenses                            (175)          (159)           (492)          (254)
                                                     ---------      --------       ----------     ----------
                                                         (432)           (99)           (731)          (209)
                                                     ---------     ----------      ----------     ----------


Net loss                                            $  (1,182)      $   (870)       $ (2,596)      $ (1,240)
                                                    ==========      =========       =========      =========


Net loss per common share (Note 4)                 $     (.21)     $    (.16)      $    (.47)     $    (.23)
                                                   ===========     ==========      ==========     ==========

</TABLE>




     See accompanying notes to unaudited condensed consolidated financial
                                  statements.





                                       5
<PAGE>   6
                          SHOWSCAN ENTERTAINMENT INC.
                Condensed Consolidated Statements of Cash Flows
                             (Dollars in Thousands)


<TABLE>
<CAPTION>
                                                                                   NINE MONTHS ENDED
                                                                                     DECEMBER 31,
                                                                          1996                     1995    
                                                                      --------------------------------------
                                                                                   (Unaudited)
<S>                                                                   <C>                     <C>
Cash flows from operating activities:
  Net loss                                                            $     (2,596)           $       (1,240)
  Adjustments to reconcile net loss
  to net cash provided by (used in) operating activities:
     Depreciation and amortization                                             716                       727
     Amortization of film library                                              458                       519
     Equity in operations of owned and operated
      theatres                                                                 445                       190
     Accrued interest on debt                                                  358                       196
     Provision for doubtful accounts                                           140                         -
     Changes in operating assets and liabilities:
      Accounts receivable                                                     (141)                      550
      Equipment sales inventory                                                484                       673
      Unbilled receivables on uncompleted equipment
        contracts                                                               31                      (222) 
      Prepaid expenses and other assets                                        (88)                     (205) 
      Accounts payable, accrued expenses and other
       current liabilities                                                  (1,913)                     (175) 
      Customer advances on uncompleted equipment
       contracts                                                              (429)                     (773) 
                                                                      ------------            --------------

                 Net cash used in operating activities                $     (2,535)           $          240 
                                                                      ------------            -------------- 
                                                                                                             

Cash flows from investing activities:
    Redemptions of short term investments                                    3,086                         -
    Purchases of equipment and leasehold
      improvements                                                             (62)                     (101)
    Investment in owned and operated theatres                                 (145)                   (2,242)
    Additions to film library                                               (2,390)                     (537)
    Other assets                                                              (235)                       58
                                                                      ------------            --------------

                 Net cash provided by (used in)
                    investing activities                              $        254            $      (2,822)
                                                                      ------------            --------------

</TABLE>


                                  (Continued)





                                       6
<PAGE>   7
                          SHOWSCAN ENTERTAINMENT INC.
          Condensed Consolidated Statements of Cash Flows (Continued)
                             (Dollars in Thousands)


<TABLE>
<CAPTION>
                                                                                  NINE MONTHS ENDED
                                                                                    DECEMBER 31,
                                                                        1996                       1995         
                                                                    ------------------------------------------
                                                                                  (Unaudited)
<S>                                                               <C>                         <C>
  Balance forwarded                                                 $       (2,281)            $        (2,582)
                                                                    ---------------            --------------- 

Cash flows from financing activities:
  Payments on subordinated note payable                                          -                      (3,131)
  Proceeds from issuance of 8% convertible notes
   (net of expenses)                                                             -                       6,458
  Proceeds from exercise of stock options                                        -                          30
  Other                                                                        (77)                        (62)
                                                                   ----------------           -----------------
  Net cash provided by (used in) financing activities                          (77)                      3,295
                                                                   ----------------            ---------------

  Net increase (decrease) in cash and cash
   equivalents                                                              (2,358)                        713

Cash and cash equivalents, beginning of period                               5,055                       6,791
                                                                    --------------             ---------------

Cash and cash equivalents, end of period                             $       2,697              $        7,504
                                                                     =============              ==============


Supplemental disclosures of cash flow information:
      Interest paid                                                 $          251              $        1,567
                                                                    ==============              ==============


      Income taxes paid                                             $            -              $            -
                                                                    ==============              ==============

</TABLE>




     See accompanying notes to unaudited condensed consolidated financial
                                  statements.





                                       7
<PAGE>   8
                          SHOWSCAN ENTERTAINMENT INC.
            Notes to the Condensed Consolidated Financial Statements
                                  (Unaudited)

Note 1--Introduction:

         The accompanying unaudited condensed consolidated financial statements
of Showscan Entertainment Inc. (the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three-month period and nine-month period ended
December 31, 1996 are not necessarily indicative of the results that may be
expected either for any other quarter in the fiscal year ending March 31, 1997
or for the entire fiscal year ended March 31, 1997.  For further information,
refer to the consolidated financial statements and footnotes thereto included
in the Company's annual report on Form 10-K for the year ended March 31, 1996.

Note 2--Owned and Operated theatres:

         The Company retains an ownership interest, ranging from 25% to 50%, in
selected Showscan motion simulation theatre attractions ("Showscan
Attractions") through various joint venture arrangements.  The Company
currently operates and/or has an ownership interest in Showscan Attractions at
Universal CityWalk in Los Angeles (November 1993), Trocadero in London
(September 1994), Framingham, Massachusetts (May 1995), Osaka, Japan (August
1995) and San Antonio, Texas (March 1996).  The Company accounts for its
investment in owned and operated theatres under the equity method of
accounting.

Note 3--8% Convertible Notes:

         On September 1, 1995, the Company completed a private placement of
$7,000,000 in secured convertible notes through a European financial
institution, Banca del Gottardo.  The notes have a four-year maturity and an 8%
interest rate and are convertible at the option of the holder into 1,217,391
shares of the Company's $.001 par value Common Stock (the "Common Stock") at a
conversion price of $5.75 per share.  Interest payments are made semi-annually
commencing March 1, 1996.  Through December 31, 1996, $1,310,000 of notes had
been converted into 227,819 shares of Common Stock leaving an outstanding
balance of $5,690,000.

Note 4--Earnings per common share:

         Loss per common share for the three months ended December 31, 1996 and
December 31, 1995 has been determined by using 5,631,605 and 5,418,341 weighted
average shares of Common Stock, respectively.  For the nine months ended
December 31, 1996 and December 31, 1995, the weighted average shares of Common
Stock to determine loss per common share were 5,578,597 and 5,304,612,
respectively.  The impact of common stock equivalents and potentially dilutive
securities, such as the assumed conversion of Series C Convertible Preferred
Stock and the assumed conversion of the 8% Convertible Notes due September 1,
1999 has not been included, as such items are anti-dilutive for all periods
presented.





                                       8
<PAGE>   9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

Overview:

         Showscan Entertainment Inc. (the "Company") is a leading provider of
movie-based motion simulation theatre attractions ("Showscan Attractions") to
the rapidly expanding out-of-home entertainment market.  The Company's business
includes: (i) licensing and distributing the films in its library and the
proprietary technologies necessary to produce and exhibit Showscan films; (ii)
selling and installing attractions and specialty theatre equipment (including
projectors, screens, sound systems, synchronization and show control and
theatre design packages) used to exhibit films in the Showscan process as well
as 15/70 format films; (iii) selling motion bases and other equipment used in
Showscan Attractions and specialty theatres; (iv) producing films using the
Showscan process; and (v) operating Showscan Attractions in which the Company
has an ownership interest  ("O&O Theatres").  The Company is also committed to
the continued recognition of the Showscan(R) brand name worldwide.  The Company
announced in January 1996 the ShowMax(TM) product line, a complete 15/70 giant
screen theatre package.

         Currently, the principal sources of the Company's revenues are the
licensing of the Showscan film library and technologies, the sale and
installation of projectors, screens, sound systems and other equipment used to
exhibit Showscan films, and the sale of motion bases and other equipment used
in most Showscan Attractions.  The Company currently derives most of its
revenues from export sales.  The Company does not believe that inflation has
had a material impact on the Company's net revenues or on its results of
operations for the three most recent fiscal years.

Comparison of the nine months ended December 31, 1996 and 1995:

         Revenues for the nine-month period ended December 31, 1996 (the "Nine
Month Period")  of $12.9 million increased $1.8 million or 16% from the
revenues of $11.1 million for the nine-month period ended December 31, 1995.
The decrease in film licensing revenues of $2,470,000 was offset by the
increase in equipment sales and related services of $4,290,000.

         Film licensing and production service revenues decreased by 47% to
$2.8 million for the Nine Month Period.  The decrease was due primarily to (i)
the renewal of an agreement with the Company's major Japanese customer (Imagine
Japan), which renewal changed the timing of film licensing revenue recognition
such that approximately $1.1 million was recognized in the prior year nine
month period that was not recognized in the Nine Month Period, (ii) the
inclusion in the corresponding prior year nine month period of revenues from
two specific one-time license agreements, which revenues constituted all of
the revenues to be received with respect to such agreements, in the amounts of
$550,000 and $300,000 respectively, and (iii) the early renewals in fiscal year
1996 of certain film licensing agreements, which renewals changed the timing of
film licensing revenue recognition (reflected in fourth quarter fiscal 1996
rather than the Nine Month Period) of approximately $750,000.  After adjusting
for the aforementioned items, the recurring film licensing revenues were $2.8
million in the Nine Month Period and $2.5 million for the prior year nine month
period.





                                       9
<PAGE>   10
         Revenues from film licensing are based on new license agreements as
well as renewals of existing agreements and results fluctuate from quarter to
quarter, with such fluctuations being a result of the seasonality in the way
that licensing agreements are entered into and how the license agreements are
structured.  On an annual basis, recurring film licensing revenues should
increase over time as the number of operating Showscan Attractions increases.

         Revenues from equipment sales and related services for the Nine Month
Period increased 73% to $10.2 million from $5.9 million in the corresponding
prior year period.  The increase can be attributed to an increase in the number
of Showscan Attractions shipped during the Nine Month Period as compared to the
corresponding prior year period.  The actual number of Showscan Attractions
shipped increased from nine units in the nine month period ended December 31,
1995 to sixteen units in the Nine Month Period.

         The Company recognizes equipment sales under the
percentage-of-completion method of accounting, generally measured by the
percentage that the labor hours incurred to date bears to the estimated total
labor hours of each contract.  This results in a disparity in the comparison of
equipment sales revenues over different time periods, as the Company records
revenues under this method rather than on the date that the sales agreement is
signed.  The actual signing of a Showscan Attraction sale precedes its delivery
and installation by an average of five to six months.  Accordingly, the
recognition of revenue for equipment sales during the current and future
quarters is affected by (i) the timing of such sales, (ii) the schedule of the
build out of the Showscan Attractions and (iii) the shipment, delivery and
installation of the equipment and related services.

         The Company has substantially completed its present installation
backlog at December 31, 1996, as only two projects are left in installation
backlog as compared to nine projects in installation backlog at December 31,
1995.  The Company's current contractual backlog consists of 30 screens valued
at approximately $21 million.  This contractual backlog is comprised of three
major customer contracts and will be installed over the term of those
contracts.

         Costs of revenues were 70% of revenues in the Nine Month Period as
compared to 55% in the corresponding prior year nine month period.  The
increase was principally the result of (i) two one-time agreements which were
recognized ($550,000 and $660,000 respectively) in the prior year nine month
period, each of which had significantly lower associated cost of revenues, and
(ii) a lower gross profit percentage associated with sales to a major customer
in the Nine Month Period.  Cost of revenues also increased as a percentage of
total revenues because film licensing revenues (which traditionally have a
higher gross profit margin) represented less of a percentage of total revenues
than in the corresponding prior year nine month period.  Amortization expense
of the film library decreased 12% to $458,000 for the Nine Month Period as
compared to $519,000 for the corresponding prior year nine month period.

         The Company accounts for its net ownership position in O&O Theatres
using the equity method of accounting.  The equity loss of $445,000 on the
operations of O&O Theatres for the Nine Month Period was 134% greater than the
corresponding prior year nine month period equity loss of $190,000 and is
primarily the result of the following factors: (i) expenses incurred in
connection with the acquisition and development of future O&O Theatre
locations, (ii) operating losses at the Trocadero in London due to disruptions
to theatre operations and attendance caused by the major renovation of the
building and the theatre access impediments created thereby, (iii) operating
losses, including start-up and marketing expenses at the Riverwalk in San
Antonio, Texas, (iv) operating





                                       10
<PAGE>   11
losses at the Framingham theatres and at CityWalk, and (v) offset by the
operating profit of the O&O Theatre in Osaka.  The Company earns film licensing
and management fees (from some of the O&O Theatres) which are recorded
separately in the accompanying condensed consolidated statements of operations,
thereby inherently increasing the operating expenses at the specific O&O
Theatres.  The Company has filed a formal claim with the owner of the Trocadero
building to recover damages and lost revenues resulting from the renovation of
the Trocadero building and to resolve the access issues.  There can be no
assurance as to the outcome of this claim.

         The Company incurred a net loss in the Nine Month Period of $2,596,000
as compared to a $1,240,000 loss in the corresponding prior year nine month
period, primarily due to the decrease in film licensing revenues, an increase
in cost of revenues to total revenues, and the performance of the O&O Theatres.

Comparison of the three months ended December 31, 1996 and 1995:

         Revenues for the three-month period ended December 31, 1996 (the "1997
Third Quarter") increased $1,832,000 or 77% from revenues for the three-month
period ended December 31, 1995 (the "1996 Third Quarter") due to the increase
in revenues recognized from equipment sales and related services in the 1997
Third Quarter.

         Film licensing and production service revenues decreased by 46% to
$678,000 in the 1997 Third Quarter.  The decrease was due to (i) the renewal of
the agreement with Imagine Japan, which renewal changed the timing of film
licensing revenue recognition such that approximately $369,000 was recognized
in the 1996 Third Quarter that was not recognized in the 1997 Third Quarter,
and (ii) the timing and amounts of certain film royalty renewals at specific
locations.

         Revenues from equipment sales and related services for the 1997 Third
Quarter increased 211% to $3.5 million from $1.1 million in the 1996 Third
Quarter.  The increase in the number of Showscan Attraction shipments in the
1997 Third Quarter to seven units shipped as compared to the two units shipped
in the 1996 Third Quarter resulted in the increase in revenues.

         Costs of revenues were 76% of revenues in the 1997 Third Quarter as
compared to 52% in the 1996 Third Quarter.  The increase was principally the
result of the recognition of three sales to a major customer in the 1997 Third
Quarter, each of which had significantly higher associated costs of revenues.
Equipment Cost of Sales to Total Equipment Sales increased to 74% in the 1997
Third Quarter from 60% in the 1996 Third Quarter because equipment sales
recorded in the 1997 Third Quarter generally had a higher cost of revenue
associated with each unit sold (due primarily to the sales at lower margins to
the major customer) than sales of units in the 1996 Third Quarter.
Amortization of the film library for the 1997 Third Quarter and the 1996 Third
Quarter was $133,000 and $160,000, respectively.

         The loss on investment in Owned and Operated Theatres in the 1997
Third Quarter is primarily the result of the following factors: (i) operating
losses at the Framingham, San Antonio Riverwalk and Universal CityWalk
theatres, (ii) operating losses at the Trocadero theatre due to disruptions to
theatre operations and attendance caused by the major renovation of the
building and the theatre access impediments created thereby, (iii) expenses
incurred in connection with the acquisition and development of future O&O
Theatre locations, and (iv) offset by the operating profit of the O&O Theatre
at Osaka.  The Company has filed a formal claim with the owner of the





                                       11
<PAGE>   12
Trocadero building to recover damages and lost revenues resulting from the
renovation of the Trocadero building and to resolve the access issues.  There
can be no assurance as to the outcome of this claim.

         The Company's net loss increased in the 1997 Third Quarter to
$1,182,000 from $870,000 in the 1996 Third Quarter, due to (i) the decrease in
film licensing revenues, (ii) the performance of the O&O Theatres in the 1997
Third Quarter as compared to the 1996 Third Quarter, and (iii) offset by an
increase in equipment sales, and resulting equipment gross profits.

Liquidity and Capital Resources:

         At December 31, 1996, the Company's working capital decreased to
$4,190,000 from $8,076,000 at March 31, 1996.  The decrease in working capital
was primarily due to the expenditures related to the production of three new
motion simulation films and the operating loss for the Nine Month Period.

         Cash and cash equivalents at December 31, 1996 decreased by $2,358,000
from March 31, 1996.  The decrease in cash was primarily due to (i) the
financing of the production of three new films in the amount of $2,390,000,
(ii) accounts payable, customer advances on uncompleted equipment contracts and
accrued expenses and other current liabilities decreased by 33%, (iii)
significant expenditures in connection with the litigation discussed below in
Factors That May Affect Future Results, and (iv) offset by a $3,086,000
redemption of short-term investments.  The changes to receivables, payables,
advances and accrued expenses are primarily attributable to variations in the
timing of Showscan Attractions sales and the specific contract terms of such
sales, which terms generally affect the timing of collections, shipments,
deliveries to customers, installations and the related payments to vendors.
The specific contract terms of each sale also dictate when invoicing occurs.
The decrease in cash and accrued expenses is also attributable to payments of
$1,620,000 in May, 1996 for the purchase of additional interests in two
existing films.

         The Company's business strategy includes a significant increase in the
installed base of Showscan Attractions, new film productions, new product
development and new product lines, enhancement of existing product lines and
possible site acquisitions for additional O&O Theatres. The Company intends to
finance the foregoing business strategy by utilizing its current working
capital resources, the proceeds to be received from its existing (and
anticipated future) product sales and film licensing agreements, together with
proceeds derived from one or more of the following financing alternatives:  the
sale of securities, the obtaining of a line of credit from a banking
institution, and/or the formation of strategic alliances, joint ventures or
off-balance sheet financing.  There can be no assurance that the Company will
be able to obtain any of the aforementioned financing alternatives.  If the
Company is unable to generate sufficient funds from operations or is unable to
raise additional capital through any of the aforementioned alternatives, the
Company will need to curtail its business strategy, specifically with regard to
new film productions and new O&O Theatres, and will be required to reduce its
general and administrative expenses.  The Company believes that, given its
various business alternatives, its working capital will be sufficient to fund
the cost of its operations for the next twelve months.  At February 1, 1997,
the Company has reserved 4,573,573 shares of Common Stock for issuance on the
exercise of stock options, warrants, preferred stock and convertible notes.





                                       12
<PAGE>   13
FACTORS THAT MAY AFFECT FUTURE RESULTS

         Portions of this report on Form 10-Q (this "Report") may contain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995.  The reader is cautioned that all
forward-looking statements are necessarily speculative and there are certain
risks and uncertainties that could cause actual events or results to differ
materially from those referred to in such forward- looking statements.  The
discussion below, together with portions of the discussion elsewhere in this
Report and in the Company's other reports on file with the Securities and
Exchange Commission, highlight some of the more important risks identified by
the management of the Company but should not be assumed to be the only things
that could affect future performance.

Period to Period Fluctuations

         The Company's operating results may fluctuate from period to period
for a number of reasons, including (i) the timing of sales of Showscan
Attractions, (ii) the timing of delivery and installation of such sales
(pursuant to percentage of completion accounting) and any delays therein caused
by permitting or construction delays at the customer's site, (iii) the size,
type and configuration of the Showscan Attractions sold, (iv) the timing of
film licensing revenues from existing Showscan Attractions and the performance
of those Showscan Attractions that pay film rental based on a percentage of box
office, and (v) the timing of sales and marketing efforts and related
expenditures.  Accordingly, the Company's revenues and earnings in any
particular period (quarterly and/or annually) may not be indicative of the
results for any future period.

         The Company's performance depends primarily upon the number of
Showscan Attractions that it can sell and install.  This dependence has been
lessening as the percentage of the Company's revenues derived from on-going
film rental has increased though there can be no assurance that this trend will
necessarily continue.  The Company's results have followed a seasonal pattern,
with revenues tending to be stronger in the second and fourth fiscal quarters,
reflecting the buying patterns of the Company's customers for new Showscan
Attractions.

International Operations

         A significant portion of the Company's revenue is from sales and film
licensing outside the United States.  The Company's results could be negatively
affected by such factors as political instability, changes in foreign currency
exchange rates, trade protection measures, policies with respect to currency
and fiscal controls, longer accounts receivable collection patterns, changes in
regional or worldwide economic or political conditions, or natural disasters.
Though the Company faces less direct exchange rate risks since nearly all of
its contracts are denominated in United States Dollars, fluctuations in
exchange rates can significantly affect the affordability of the Company's
products and services overseas.

Competition

         The Company faces intense competition in all of its product lines.  In
the motion simulation business, the Company's main competitor is Iwerks
Entertainment, Inc. though there are an increasing number of smaller
competitors.  Iwerks has substantially greater financial resources than the
Company and as such may be able to both price its existing products and
services lower than the Company as





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<PAGE>   14
well as produce new products.  Imax Corporation is a growing competitor of the
Company in this segment and has dedicated substantial resources to entering
this market.

         In the large screen, special format motion picture business, the
Company's main competitor is Imax though Iwerks is also very significant.  The
15/70 film format appears to be emerging as the most popular large format due
primarily to the large number of films available in that format.  Imax is by
far the dominant company in this market.  The Company is only a recent entrant
into this market and has not yet made any sales.  The Company will have to
continue to invest funds in order to broaden its position in the 15/70 market
and thus short term results will be adversely affected until sales can be made.

         Imax has initiated three lawsuits against the Company and others with
respect to the Company's entry into the 15/70 market.  Two of these lawsuits
primarily allege that the Company's "ShowMax" trademark infringes upon various
trademarks of Imax.  The third lawsuit primarily alleges that the relationship
between the Company and World Odyssey, Inc. (the 15/70 projector manufacturer
that the Company serves as direct sales agent for) is improper under the terms
of a 1994 settlement agreement between Imax and World Odyssey.  Partially in
response to these lawsuits, the Company has initiated a separate lawsuit
against Imax that alleges that Imax is engaging in various antitrust and
anticompetition practices.  A fifth lawsuit has been initiated against the
Company by a company that primarily alleges that the "ShowMax" trademark
infringes upon their corporate name.  To date, these lawsuits have consumed
significant Company funds as well as significant amounts of management time.
The presence of this litigation has had a significant dampening effect on
customers' willingness to consider the ShowMax product line.  Any determination
that the Company could not use the trademark "ShowMax" would have a materially
adverse effect on sales of the Company's 15/70 product line until such time as
the Company could develop another brand name.  Any such determination would not
have a material adverse effect on the Company as a whole since, given the
effect that the presence of this litigation has already had upon the present
sales and future prospects for this product line, the Company does not expect
that the ShowMax product line will have a material impact upon the Company's
revenues for the next two years.  Any determination that the Company's
relationship with World Odyssey is improper and that such relationship cannot
be changed so that it complied would have a material adverse effect on sales of
the Company's "ShowMax" product line until such time as the Company could find
another equipment supplier.

Dependence on Major Customers

         The Company's motion simulation business has two significant
concentrations.  The first concentration involves ongoing film licenses and is
located in Japan where a single customer presently operates or is otherwise
responsible for fifteen attractions.  The second concentration relates to the
Company's sales backlog where United Artists Theatre Circuit, Inc. and King's
Entertainment Co., Ltd. individually and collectively represent a substantial
portion of the outstanding equipment orders to be delivered in the next few
years.  Of course, as each of these customers builds more theatres they will
then become a concentration in the area of ongoing film rental.  In the future,
the Company plans to increase the number of customers with which it has
multi-system agreements.  The Company's short and long term performance could
be adversely impacted if disruptions were to occur in any of these areas of
concentration such as order cancellations, license terminations or payment
problems.





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<PAGE>   15
PART II - OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 

a)  Exhibits

         None

(b)  Reports on Form 8-K

         None.





                                       15
<PAGE>   16
                                   SIGNATURES


     Pursuant to the requirements of Sections 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, in the City of
Culver City, State of California on the 13th day of February, 1997.


                                       Showscan Entertainment Inc.
                                               (Registrant)



                                       By \s\ DENNIS POPE
                                          -------------------------------------
                                          Dennis Pope
                                          Executive Vice President
                                          - Chief Financial Officer
                                              (Authorized Officer and Principal
                                              Financial Officer)



                                       By \s\ GREGORY W. BETZ
                                          -------------------------------------
                                          Gregory W. Betz
                                          Vice President - Director of Finance
                                            (Authorized Officer and Principal
                                            Accounting Officer)





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