<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 September 30, 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 November 10, 1996, the Registrant had 5,629,885 shares of
Common Stock, $.001 par value, issued and outstanding.





 This report contains 73 consecutively numbered pages.  The exhibit index is on
                                   page 17.
<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 September 30, 1996
and March 31, 1996                                                                   3

Condensed Consolidated Statements of Operations for the Three
Months and Six Months Ended September 30, 1996 and 1995                              5

Condensed Consolidated Statements of Cash Flows for the Six
Months Ended September 30, 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 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS                            15


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


Signatures                                                                           16


Exhibit Index                                                                        17
</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>
                                                            SEPTEMBER 30,        MARCH 31,
                                                                1996               1996     
                                                            -------------       -----------
                                                             (unaudited)           (Note)
 <S>                                                        <C>                 <C>
                  ASSETS
                  ------

 Current assets:
    Cash and cash equivalents                               $    3,249          $    5,055
    Short-term investments                                         997               3,086
    Accounts receivable (net of allowances)                      4,751               3,241
    Unbilled receivables on uncompleted
      equipment contracts                                        1,535               1,122
    Equipment sales inventory                                    1,589               1,547
    Prepaid expenses and other current assets                      145                 122
                                                            ----------          ----------
 Total current assets                                           12,266              14,173


 Film library (net of amortization)                              4,897               3,481

 Equipment and leasehold improvements, less
  accumulated depreciation and amortization                      1,087               1,313


 Investment in owned and operated theatres (Note 2)              3,902               4,045


 Patents and other intellectual properties (net of
  amortization)                                                  1,553               1,770

 Other assets, including note receivable
  from affiliated company                                        1,684               1,975
                                                            ----------          ----------


 Total assets                                               $   25,389          $   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>
                                                               SEPTEMBER 30,       MARCH 31,
                                                                   1996              1996
                                                               -------------       ---------  
                                                                (unaudited)          (Note)
<S>                                                            <C>                 <C>
                  LIABILITIES AND STOCKHOLDERS' EQUITY

 Current liabilities:
    Accounts payable                                           $       476         $     603
    Customer advances on uncompleted
     equipment contracts                                             3,267             2,143
    Accrued expenses and other current liabilities                   2,476             3,351
                                                               -----------         ---------  
 Total current liabilities                                           6,219             6,097
                                                               -----------         ---------  
 8% convertible notes (Note 3)                                       5,760             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; 5,629,885 and 5,480,324 shares
     issued and outstanding, respectively                                6                 5
    Additional paid-in capital                                      43,228            42,446
    Accumulated deficit                                            (29,824)          (28,411)
                                                               -----------         ---------  
 Total stockholders' equity                                         13,410            14,040
                                                               -----------         ---------  
 Total liabilities and stockholders' equity                    $    25,389         $  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             SIX MONTHS ENDED
                                                SEPTEMBER 30,                 SEPTEMBER 30,
                                             1996          1995             1996          1995 
                                             ------------------             ------------------
                                                 (Unaudited)                    (Unaudited)



<S>                                        <C>           <C>              <C>          <C>
Revenues:
   Film licensing                          $  1,189      $  1,373         $  2,072     $  3,969
   Equipment sales and related services       4,286         2,543            6,647        4,761
                                           --------      --------         --------     --------
                                              5,475         3,916            8,719        8,730

Costs of revenues                             3,687         2,207            5,832        4,840
                                           --------      --------         --------     --------
Gross profit                                  1,788         1,709            2,887        3,890

Costs and expenses:
   General and administrative expenses        1,790         1,891            3,475        3,662
   Depreciation and amortization                242           244              484          488
                                           --------      --------         --------     --------
                                              2,032         2,135            3,959        4,150
                                           --------      --------         --------     --------
Operating income (loss)                        (244)         (426)          (1,072)        (260)


Other income (expense):
   Equity in operations of owned and
     operated theatres                         (126)          (74)            (186)        (113)
   Other income, including interest of
     $58, $37, $154, $58, respectively           60            69              162           98
   Interest and other expenses                 (114)          (59)            (317)         (95)
                                           --------      --------         --------     --------
                                               (180)          (64)            (341)        (110)
                                           --------      --------         --------     --------



Net income (loss)                              (424)     $   (490)         $(1,413)     $  (370)
                                           ========      ========         ========     ========


Net income (loss) per common share         $   (.08)     $   (.09)        $   (.25)    $   (.07)
                                           ========      ========         ========     ========
(Note 4)
</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>
                                                                          SIX MONTHS ENDED
                                                                            SEPTEMBER 30,
                                                                    1996                 1995
                                                                 --------------------------------  
                                                                             (Unaudited)
 <S>                                                             <C>                   <C>
 Cash flows from operating activities:
    Net loss                                                     $   (1,413)           $   (370)
    Adjustments to reconcile net loss
    to net cash provided by (used in) operating
    activities:
       Depreciation and amortization                                    484                 488
       Amortization of film library                                     325                 359
       Equity in operations of owned and operated
        theatres                                                        186                 113
       Accrued interest on debt                                         241                  57
       Provision for doubtful accounts                                   60                  10
       Changes in operating assets and liabilities:
          Accounts receivable                                        (1,570)               (433)
          Equipment sales inventory                                     (42)                885
          Unbilled receivables on uncompleted equipment
           contracts                                                   (413)                168
          Prepaid expenses and other assets                             (23)               (284)
          Investment in owned and operated theatres                     (43)             (2,160)
          Accounts payable, accrued expenses and other
           current liabilities                                       (1,243)                695
          Customer advances on uncompleted equipment
           contracts                                                  1,124                  12
                                                                 ----------            --------           
            Net cash used in operating activities                    (2,327)           $   (460)
                                                                 ----------            --------           

 Cash flows from investing activities:
       Redemptions of short term investments                          2,089                   -
       Purchases of equipment and leasehold
        improvements                                                    (42)                (91)
       Additions to film library                                     (1,741)               (525)
       Other assets                                                     292                 112
                                                                 ----------            --------           

            Net cash provided by (used in)
                investing activities                             $      598            $   (504)
                                                                 ----------            --------           
</TABLE>



                                  (Continued)





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


<TABLE>
<CAPTION>
                                                                          SIX MONTHS ENDED
                                                                             SEPTEMBER 30,
                                                                        1996             1995
                                                                     ----------------------------
                                                                             (Unaudited)
 <S>                                                                 <C>               <C>
    Balance forwarded                                                $  (1,729)        $    (964)
                                                                     ----------        ----------           

 Cash flows from financing activities:
    Payments on subordinated note payable                                    -            (3,131)
    Proceeds from issuance of 8% convertible notes
     (net of expenses)                                                       -             6,463
    Proceeds from exercise of stock options                                  -                30
    Other                                                                  (77)              (62)
                                                                     ----------        ----------           
    Net cash provided by (used in) financing activities                    (77)            3,300
                                                                     ----------        ----------           

    Net increase (decrease) in cash and cash
       equivalents                                                      (1,806)            2,336

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

 Cash and cash equivalents, end of period                            $   3,249         $   9,127
                                                                     ==========        ==========           


 Supplemental disclosures of cash flow information:
    Interest paid (for 1995, interest paid is included
       in subordinated note payment above)                           $     246         $   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 six-month period ended
September 30, 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 September 30, 1996, $1,240,000 of notes had
been converted into 215,646 shares of Common Stock leaving an outstanding
balance of $5,760,000.

Note 4--Earnings per common share:

         Loss per common share for the three months ended September 30, 1996
and September 30, 1995 has been determined by using 5,577,447 and 5,250,637
weighted average shares of Common Stock, respectively.  For the six months
ended September 30, 1996 and September 30, 1995, the weighted average shares of
Common Stock to determine loss per common share were 5,551,616 and 5,247,748,
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 is
presently in the business of: (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 new 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 six months ended September 30, 1996 and 1995:

         Revenues for the six-month period ended September 30, 1996 (the "Six
Month Period")  of $8.7 million were only slightly less than the revenues for
the six-month period ended September 30, 1995.  The decrease in film licensing
revenues of $1,897,000 was offset by the increase in equipment sales and
related services of $1,886,000.

         Film licensing revenues decreased by 48% to $2.1 million for the Six
Month Period.    The decrease was due primarily to (a) 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 $738,000 was recognized in the prior year six month period that
was not recognized in the Six Month Period, (b) the inclusion in the
corresponding prior year six 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 (c) 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 Six Month Period) of approximately $750,000.  After adjusting for the
aforementioned items, the recurring film licensing revenues amounted to $1.6
million for the prior year six month period; therefore, recurring film
licensing revenues increased 27% in the Six Month Period, when comparing the
adjusted revenues to the prior year six 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 Six Month
Period increased 40% to $6.6 million from $4.8 million in the corresponding
prior year period.  The increase can be attributed to an increase in the number
of Showscan Attractions ordered and recognized during the Six Month Period as
compared to the corresponding prior year period.  The actual number of Showscan
Attractions ordered and recognized increased from seven units in the six month
period ended September 30, 1995 to nine units in the Six 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 six to seven 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.

         Costs of revenues were 67% of revenues in the Six Month Period as
compared to 55% in the corresponding prior year six 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 six 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 Six
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 six month period.  Amortization expense of the
film library remained fairly constant as the amount for the Six Month Period
and the corresponding prior year six month period was $325,000 and $359,000,
respectively.

         The Company accounts for its net ownership position in O&O Theatres
using the equity method of accounting.  The equity loss of $186,000 on the
operations of O&O Theatres for the Six Month Period was 65% higher than the
corresponding prior year six month period equity loss of $113,000 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, including start-up and marketing expenses at
the Riverwalk in San Antonio, Texas, (iii) operating losses at the Trocadero in
London, due to heavy construction adjacent to the theatre that directly
affected all of the businesses in the area of construction, (iv) operating
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.  At the Trocadero O&O Theatre location, the Company is currently
assessing its rights in the construction matter.





                                       10
<PAGE>   11
         The Company incurred a net loss in the Six Month Period of $1,413,000
as compared to a $370,000 loss in the corresponding prior year six month
period, primarily due to the decrease in film licensing revenues and the
increase in cost of revenues in the Six Month Period as compared to the prior
year six month period.

Comparison of the three months ended September 30, 1996 and 1995:

         Revenues for the three-month period ended September 30, 1996 (the
"1997 Second Quarter") increased $1,559,000 or 40% from revenues for the
three-month period ended September 30, 1995 (the "1996 Second Quarter") due to
the increase in revenues recognized from equipment sales and related services
in the 1997 Second Quarter.

         Film licensing revenues decreased by 13% to $1,189,000 in the 1997
Second Quarter.  The decrease was due to (i) revenues of $300,000 recognized in
the 1996 Second Quarter from a specific one-time license agreement, which
revenues constitute all of the revenues to be received with respect to such
agreement, and (ii) 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 Second Quarter that was not
recognized in the 1997 Second Quarter.  After adjustment for the aforementioned
items, recurring film licensing revenues increased 69% from $704,000 in the
1996 Second Quarter to $1,189,000 in the 1997 Second Quarter, which was
primarily the result of the fact that there were additional Showscan
Attractions open in the 1997 Second Quarter.

         Revenues from equipment sales and related services for the 1997 Second
Quarter increased 69% to $4.3 million from $2.5 million in the 1996 Second
Quarter.  The increase in the number of Showscan Attraction orders and
installations in the 1997 Second Quarter and the preceding quarter as compared
to the corresponding prior year periods resulted in the increase in revenues.

         Costs of revenues were 67% of revenues in the 1997 Second Quarter as
compared to 56% in the 1996 Second Quarter.  The increase was principally the
result of the recognition of a specific one-time license agreement ($300,000)
in the 1996 Second Quarter which had a significantly lower associated cost of
revenues.  The costs related to equipment sales and related services increased
to 78% in the 1997 Second Quarter from 76% in the 1996 Second Quarter.
Equipment sales recorded in the 1997 Second Quarter generally had a higher cost
of revenue associated with each unit sold (due to the sales at lower margins to
a major customer) than sales of units in the 1996 Second Quarter.  Amortization
of the film library for the 1997 Second Quarter and the 1996 Second Quarter was
$192,000 and $159,000, respectively.

         The loss on investment in Owned and Operated Theatres in the 1997
Second Quarter is primarily the result of operating losses (i) at the
Framingham theatres, (ii) at the Trocadero theatre, due to heavy construction
adjacent to the theatre which directly affected all of the businesses in the
area of construction, and (iii) expenses incurred in connection with the
acquisition and development of future O&O Theatre locations, offset by the
operating profit of the O&O Theatre at Osaka.

         The Company's net loss decreased in the 1997 Second Quarter to
$424,000 from $490,000 in the 1996 Second Quarter, due to the increase in units
sold in the 1997 Second Quarter from the 1996 Second Quarter.





                                       11
<PAGE>   12
Liquidity and Capital Resources:

         At September 30, 1996, the Company's working capital decreased to
$6,047,000 from $8,076,000 at March 31, 1996.  The decrease in working capital
was primarily due to the expenditures related to the production of two new
motion simulation films and the operating loss for the Six Month Period.

         Cash and cash equivalents at September 30, 1996 decreased by
$1,806,000 from March 31, 1996.  The decrease in cash was primarily due to (i)
the financing of the production of two new films in the amount of $1,741,000,
and (ii) account receivables and unbilled receivables on uncompleted equipment
contracts increased by a combined 44%, while accounts payable, customer
advances on uncompleted equipment contracts and accrued expenses and other
current liabilities increased by only 2%, offset by (iii) a $2,089,000
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 increase in accounts receivable is primarily due to the issuance of certain
large invoices just prior to September 30, 1996.

         The Company believes that its working capital will be sufficient to
fund the costs of operations for the next twelve months.  The Company's
business strategy includes 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 plans to pursue further
financing alternatives by one or more of the following means:  the selling of
securities, obtaining a line of credit from a banking institution, and/or
forming strategic alliances or joint ventures.  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 the timing of new film productions and
the number of new O&O Theatres.  At October 31, 1996, the Company has reserved
4,585,746 shares of Common Stock for issuance on the exercise of stock options,
warrants, preferred stock and convertible notes. Furthermore, the Company's
current backlog is approximately $25 million, comprising 38 screens of which 9
screens are scheduled to be open by the end of fiscal year 1997.

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.





                                       12
<PAGE>   13
Period to Period Fluctuations

         The Company's operating results may fluctuate from period to period
for a number of reasons, including (a) the timing of sales of Showscan
Attractions, (b) 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, (c) the size, type
and configuration of the Showscan Attractions sold, (d) 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 (e) 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 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 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 could be adversely affected until sales can be
made.





                                       13
<PAGE>   14
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.





                                       14
<PAGE>   15
PART II - OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

         The Company held its annual meeting of stockholders on August 26,
1996.  The matters voted upon at the meeting were (a) the election of a board
of directors to serve until the next annual meeting of stockholders, and (b)
the ratification of the appointment of Ernst & Young LLP as the independent
auditors for the Company.

         The voting on each proposal was as set forth in the tables below.

         1.      Election of directors:
<TABLE>
<CAPTION>
                                                                    Withhold
                                                      For           Authority
                                                   ---------        --------- 
                 <S>                               <C>              <C>
                 William D. Eberle                 6,515,625        7,050
                 William C. Soady                  6,515,825        6,850
                 Charles B. Moss, Jr.              6,515,825        6,850
                 Thomas R. DiBenedetto             6,515,825        6,850
                 Kurt C. Hall                      6,515,625        7,050
</TABLE>

         2.      Ratification of the appointment of Ernst & Young LLP as the
                 independent auditors of the Company for the fiscal year ending
                 March 31, 1997.

<TABLE>
                       <S>                 <C>              <C>
                          For              Against          Abstentions
                       ---------           -------          ------------
                       6,517,324            3,001              2,350
</TABLE>

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a)  Exhibits

         The exhibits listed below are filed as part of this Report.

<TABLE>
<CAPTION>
     Exhibit Number                              Description
     --------------                              -----------
         <S>                    <C>
         10.35                  Agreement, dated August 7, 1996, between the
                                Company and William C. Soady.

         10.36                  Agreement, dated August 7, 1996, between the
                                Company and Dennis Pope.

         10.37                  Agreement, dated August 7, 1996, between the
                                Company and W. Tucker Lemon.

         27                     Financial Data Schedule.
</TABLE>

(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 November, 1996.


                                       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)





                                       16
<PAGE>   17
                                 EXHIBIT INDEX



<TABLE>
<CAPTION>
Exhibit No.      Description                                Page Number
-----------      -----------                                -----------
    <S>          <C>
    10.35        Agreement, dated August 7, 1996,
                 between the Company and William C. Soady.

    10.36        Agreement, dated August 7, 1996,
                 between the Company and Dennis Pope.

    10.37        Agreement, dated August 7, 1996,
                 between the Company and W. Tucker Lemon.

    27           Financial Data Schedule.
</TABLE>





                                       17