UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549


                                   FORM 10-QSB


                   (X) QUARTERLY REPORT PURSUANT TO SECTION 13
                                OR 15 (d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
               For the quarterly period ended: September 30, 2005

          ( ) 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: 000-30771


                           INTERACTIVE MOTORSPORTS AND
                               ENTERTAINMENT CORP.
               (Exact name of registrant as specified in charter)


                                     Indiana
         (State or other jurisdiction of incorporation or organization)

                                   87-0678630
                           (I.R.S. Employer I.D. No.)

               5624 West 73rd Street, Indianapolis, Indiana 46278
                    (Address of principal executive offices)

                                 (317) 295-3500
              (Registrant's telephone number, including area code)


Indicate by checkmark  whether the Issuer:  (1) filed all reports required to be
filed by section 13 or 15 (d) of the  Exchange Act during the past 12 months (or
for such shorter  period that the registrant was required to file such reports),
and (2) has been subject to such filing  requirements  for the past 90 days. (1)
Yes [x] No [] (2) Yes [x] No []

As of November 11, 2005, there were 93,769,177 (par value $0.0001) common shares
issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE: Exhibit Index on page 30.


<PAGE>

<TABLE>
<CAPTION>
                    INDEX TO QUARTERLY REPORT ON FORM 10-QSB




                                                                                                             Page
Section                                                                                                    Number

<S>                                                                                                           <C>
NOTE ON FORWARD LOOKING INFORMATION........................................................................... .3
BASIS OF PRESENTATION....................................................................................... ...4

                                     PART I

Item 1.    Unaudited Financial Statements and Notes to Financial Statements
                Consolidated Balance Sheets at September 30, 2005 and December 31, 2004..................... ...5
                Consolidated Statements of Operations for the Three Months Ended
                  September 30, 2005 and 2004...................................................................7
                Consolidated Statements of Operations for the Nine Months Ended
                  September 30, 2005 and 2004...................................................................8
                Consolidated Statement of Shareholders' Equity
                  for the Nine Months Ended September 30, 2005..................................................9
                Consolidated Statements of Cash Flows for the Nine Months
                   Ended September 30, 2005 and 2004...........................................................10
                Notes to Consolidated Financial Statements.....................................................12
Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations...............15
Item 3.    Internal Controls and Procedures....................................................................27


                                     PART II

Item 1.    Legal Proceedings...................................................................................28
Item 2     Changes in Securities. .............................................................................28
Item 3     Defaults Upon Senior Securities.....................................................................28
Item 4.    Submission of Matters to a Vote of Security Holders.................................................28
Item 5.    Other Information...................................................................................28
Item 6.    Exhibits and Reports on Form 8-K....................................................................28


SIGNATURES.....................................................................................................29

EXHIBITS INDEX.................................................................................................30

EXHIBITS.......................................................................................................31

</TABLE>


<PAGE>

                       NOTE ON FORWARD-LOOKING INFORMATION

This Form  10-QSB and other  statements  issued or made from time to time by the
Company  or  its  representatives  contain  statements,   which  may  constitute
"forward-looking  statements"  within the meaning of the  Securities Act of 1933
and the  Securities  Exchange Act of 1934, as amended by the Private  Securities
Litigation  Reform Act of 1995,  15  U.S.C.A  Sections  77z-2 and  78u-5.  Those
statements  include  statements   regarding  the  intent,   belief,  or  current
expectations  of the Company and members of its  management  team as well as the
assumptions on which such statements are based. All statements,  trend analyses,
and other  information  contained  in this  report  relative  to markets for the
Company's  products  and/or  trends in the  Company's  operations  or  financial
results,  as well as other  statements which include words such as "anticipate,"
"could,"  "feel(s),"   "believes,"   "plan,"  "estimate,"   "expect,"  "should,"
"intend,"  "will," and other  similar  expressions,  constitute  forward-looking
statements and are subject to known and unknown risks,  uncertainties  and other
factors  that may cause actual  results to be  materially  different  from those
contemplated by the  forward-looking  statements.  Such factors  include,  among
other things:  (i) general  economic  conditions  that may impact the disposable
income and spending  habits of consumers;  (ii) the  availability of alternative
entertainment  for  consumers;  (iii)  the  ability  of the  company  to  obtain
additional  capital  and/or debt  financing;  (iv) the ability of the company to
control costs and execute its business plan.

The  reader  is  cautioned  that any  such  forward-looking  statements  are not
guarantees of future performance and involve risks and  uncertainties,  and that
actual  results  may  differ   materially   from  those   contemplated  by  such
forward-looking statements. Important factors currently known to management that
could cause actual results to differ  materially  from those in  forward-looking
statements are set forth herein.  The Company undertakes no obligation to update
or  revise  forward-looking  statements  to  reflect  changed  assumptions,  the
occurrence of unanticipated  events or changes to future operating  results over
time.


<PAGE>

                              BASIS OF PRESENTATION

Effective  August  2,  2002,  Pacific  International   Holding,   Inc.,  a  Utah
corporation  ("PIH"),  which was originally organized in 1986, changed its state
of  domicile  and name by  merging  with and into  Interactive  Motorsports  and
Entertainment   Corp.  (the  surviving  entity),  an  Indiana  corporation  (the
"Company"), pursuant to an Agreement and Plan of Reorganization.  Per the merger
agreement,  each share of PIH common stock outstanding  immediately prior to the
effective  date of the merger was cancelled  and  converted  into four shares of
Interactive  Motorsports and Entertainment  Corp. common stock.  Although it had
been in a variety of  businesses  for over 15 years,  at the time of the merger,
PIH had limited operations.

Subsequent to the merger and effective as of the same date, the Company acquired
pursuant to a Plan and  Agreement of Exchange all of the issued and  outstanding
shares of common stock and  preferred  stock of Perfect  Line,  Inc., an Indiana
corporation  ("Perfect Line"), from the Perfect Line shareholders in exchange on
a "share-for-share" basis for shares of the Company's common stock and preferred
stock. As a result of the share exchange,  the Perfect Line shareholders held as
of August 2, 2002 Company shares representing  approximately  eighty-two percent
(82%) of the Company's  capital stock.  Also effective as of August 2, 2002, the
members of the Board of  Directors  of Perfect  Line were elected to replace the
members of the  Company's  Board of  Directors  and the  executive  officers  of
Perfect Line became the executive officers of the Company.

As Perfect Line had revenues,  operations,  and business activity, for financial
reporting purposes,  Perfect Line is considered the acquirer,  and therefore the
predecessor,  and the Company is  considered  the  acquiree for  accounting  and
reporting  purposes.  Due to the fact  that the  merger  is being  treated  as a
reverse  acquisition,  the  equity of the  Company  has been  recapitalized  for
financial  reporting  purposes.  The operations of Interactive  Motorsports  and
Entertainment  Corp.  have been  included in  consolidation  from August 2, 2002
through September 30, 2005.

All  information  in this  Form  10-QSB is  presented  from the  perspective  of
Interactive  Motorsports and Entertainment Corp. and its subsidiary Perfect Line
and not from the perspective of PIH.

<PAGE>

                                     PART I

Item 1. Condensed Financial Statements

        INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES
                           Consolidated Balance Sheets

<TABLE>

<CAPTION>
                                     ASSETS


                                                                    September 30, 2005            December 31, 2004
                                                                    ------------------            -----------------
                                                                       (Unaudited)

Current Assets
<S>                                                                       <C>                      <C>
Cash                                                                      $     87,408             $      1,334,673
Accounts Receivable                                                            616,740                      428,726
Inventory                                                                      322,992                      259,931
Prepaid Expenses                                                                44,541                       35,490
                                                          ----------------------------- ---------------------------

Total Current Assets                                                         1,071,681                    2,058,820
                                                          -----------------------------  --------------------------

Property and Equipment
Total Property and Equipment, Net                                              821,141                      764,796
                                                          ----------------------------- ---------------------------

Other Assets
Deposits                                                                        33,471                       42,001
Other Intangible Assets, Net                                                     2,967                       11,599
                                                          ----------------------------- ---------------------------

Total Other Assets                                                              36,438                       53,600
                                                          ----------------------------- ---------------------------

Total Assets                                                            $    1,929,260             $      2,877,216
                                                          ============================= ===========================


The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>


        INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES
                     Consolidated Balance Sheets (Continued)


<TABLE>

<CAPTION>
                  LIABILTIES AND SHAREHOLDERS' EQUITY (DEFICIT)

                                                                    September 30, 2005            December 31, 2004
                                                                    ------------------            -----------------
                                                                           (Unaudited)

Current Liabilities
<S>                                                                      <C>                         <C>
Accounts Payable                                                         $     728,814               $      418,815
Accrued Payroll Expense                                                         23,556                       67,385
Accrued Sales Tax Payable                                                        9,972                       26,722
Gift Cert. & Customer Deposits                                                  40,676                       42,888
Deposits on Simulator Sales                                                  1,116,191                    1,573,978
Accrued Liabilities                                                            985,204                    1,158,929
Deferred revenue                                                               111,557                       81,742
Notes Payable - Related parties                                                196,000                      186,537
Notes payable                                                                  685,340                    1,061,651
                                                          ----------------------------- ---------------------------

Total Current Liabilities                                                    3,897,310                    4,618,647

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

Total Liabilities                                                            3,897,310                    4,618,647
                                                          ----------------------------- ---------------------------

Shareholders Equity (Deficit)
Common Stock                                                                     9,282                        8,772
Additional Paid in Capital                                                   5,167,575                    4,675,583
Retained Earnings                                                          (7,144,907)                  (6,425,786)
                                                          ----------------------------- ---------------------------

Total Shareholders Equity (Deficit)                                        (1,968,050)                  (1,741,431)
                                                          ----------------------------- ---------------------------

Total Liabilities & Equity (Deficit)                                    $    1,929,260               $    2,877,216
                                                          ============================= ===========================

The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

<PAGE>

        INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES
                      Consolidated Statements of Operations
                                  (Unaudited)

<TABLE>
<CAPTION>

                                                      For the 3 months ending             For the 3 months ending
                                                         September 30, 2005                  September 30, 2004
                                                     --------------------------          --------------------------

Revenues

<S>                                                <C>                                 <C>
   Company Store Sales                             $                   656,544         $                    885,213
   Revenue Share Sales                                                  79,957                              333,617
   Simulator Leases                                                     19,000                               95,625
   Sales of Simulator Systems                                          210,538                              294,957
                                                      -------------------------           -------------------------
          Total Revenues                                               966,039                            1,609,412
                                                      -------------------------           -------------------------

Cost of Sales
   COGS - Merchandise                                                   14,165                               54,427
   Group Sales Expenses                                                  1,208                                2,658
   COGS - Sale of Simulators                                           103,126                              122,230
                                                     -------------------------           --------------------------
          Total Cost of Sales                                          118,499                              179,315
                                                      -------------------------           -------------------------


Gross Profit                                                           847,540                            1,430,097
                                                      -------------------------           -------------------------

General & Admin Expenses

   Payroll Related Expenses                                            501,447                              609,868
   Occupancy Expenses                                                  282,939                              336,284
   Other Operating Expenses                                            306,547                              346,774
                                                      -------------------------           -------------------------
          Total Operating Expenses                                   1,090,933                            1,292,926
                                                      -------------------------           -------------------------


Operating Profit (Loss)                                              (243,393)                              137,171

          Interest Expense                                            (47,783)                            (129,316)
                                                      -------------------------           -------------------------

Net Income (Loss) before Income Tax
Expense                                                              (291,176)                                7,855


          Income Tax Expense                                                -                                     -
                                                      -------------------------           -------------------------


Net Income (Loss)                                  $                 (291,176)         $                      7,855
                                                      =========================           =========================


Net Income (Loss) per share                        $                    (0.00)         $                       0.00
                                                      =========================           =========================

Weighted Average Shares Outstanding                                 91,707,780                           87,003,140
                                                      =========================           =========================

The accompanying notes are an integral part of these consolidated financial statements.

</TABLE>

<PAGE>
        INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES
                     Consolidated Statements of Operations
                                  (Unaudited)

<TABLE>

<CAPTION>


                                                     For the 9 months ending               For the 9 months ending
                                                       September 30, 2005                    September 30, 2004
                                                    --------------------------           ---------------------------

Revenues

<S>                                              <C>                                  <C>
   Company Store Sales                           $                  1,873,172         $                    3,603,975
   Revenue Share Sales                                                423,660                                606,777
   Simulator Leases                                                    38,000                                196,875
   Sales of Simulator Systems                                       1,436,339                                294,958
                                                    --------------------------           ---------------------------
          Total Revenues
                                                                    3,771,171                              4,702,585
                                                    --------------------------           ---------------------------

Cost of Sales
   COGS - Merchandise                                                 123,097                                215,506
   Group Sales Expenses                                                 6,671                                 11,733
   COGS - Sale of Simulators                                          645,914                                122,230
   Inventory Adjustments                                             (10,257)
          Total Cost of Sales                                         765,425                                349,469
                                                    --------------------------           ---------------------------

Gross Profit                                                        3,005,746                              4,353,116
                                                    --------------------------           ---------------------------

General & Admin Expenses
   Payroll Related Expenses                                         1,534,437                              2,351,603
   Occupancy Expenses                                                 897,037                              1,508,882
   Other Operating Expenses                                         1,133,641                              1,288,027
                                                    --------------------------          ----------------------------
          Total Operating Expenses                                  3,565,115                              5,148,512
                                                    --------------------------          ----------------------------

Operating Profit (Loss)                                             (559,369)                              (795,396)

          Interest Expense                                          (159,752)                              (284,636)
                                                    --------------------------           ---------------------------

Net Income (Loss) before Income Tax
Expense                                                             (719,121)                            (1,080,032)

          Income Tax Expense                                               -                                      -
                                                    --------------------------           ---------------------------

Net Income (Loss)                                $                  (719,121)         $                  (1,080,032)
                                                    ==========================           ===========================

Net Income (Loss) per share                      $                      (.01)         $                        (.01)
                                                    ==========================           ===========================

Weighted Average Shares Outstanding                                89,242,284                             86,591,289
                                                    ==========================           ===========================

The accompanying notes are an integral part of these consolidated financial statements.

</TABLE>

<PAGE>

        INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES
            Consolidated Statement of Shareholders' Equity (Deficit)
<TABLE>
<CAPTION>

                                                                                     Additional                            Total
                                    Preferred Stock              Common Stock        Paid-In       Retained        Shareholders'
                                  --------------------       -------------------
                                Shares          Amount        Shares      Amount     Capital       Deficit       Equity (Deficit)
                                ------          ------       -------     ------      --------     --------       ----------------
Balance at
<S>        <C> <C>             <C>           <C>           <C>           <C>      <C>              <C>               <C>
  December 31, 2003            2,272,728     $    227      74,314,183    $ 7,431  $  4,029,002     $ (6,434,655)     $(2,397,995)

Common stock issued for
  2003 Bridge Loan Interest            -            -         935,726         94        78,112                -           78,206

Common stock issued
  for services                         -            -         260,000         26        17,248                -           17,274

Conversion of preferred
  stock to common stock      (2,272,728)         (227)     11,363,640      1,136          (909)               -                -

Fair value of options and
   warrants granted                    -            -               -          -       436,595                -          436,595

Common stock issued
 for payment of prior year
 year accruals                         -            -         842,361         84       115,535                -          115,619

Net income for the year
  Ended December 31,
   2004                                -            -               -          -             -            8,869            8,869
                             -----------    ----------    ------------   -------   ------------    -------------     -------------

Balance at
  December 31, 2004                    -            -       87,715,910      8772     4,675,583       (6,425,786)      (1,741,431)

Fair value of warrants
  granted (unaudited)                  -            -               -          -        94,502                -            94,502

Common stock issued
  for services (unaudited)             -            -       1,000,000        100        69,900                -            70,000

Common stock issued  - options
  exercised for debt payment (unaudited)-           -       4,100,000        410       327,590                -           328,000

Net income (loss) for the period
  Ended September 30, 2005             -            -              -           -             -         (719,121)         (719,121)
                             -----------    ------------    ------------   -----     ----------    -------------     -------------

Balance at
  September 30, 2005                   -    $          -      92,815,910  $9,282  $   5,167,575    $  (7,144,907)    $ (1,968,050)
                             ===========    ============    ============  ======     ==========    =============     =============

The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

<PAGE>


        INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES
                      Consolidated Statements of Cash Flows
                                   (Unaudited)

<TABLE>
<CAPTION>

                                                                                    For the Nine Months Ended
                                                                                            September 30
                                                                            --------------------------------------
                                                                                    2005                     2004
                                                                            --------------------     --------------

CASH FLOWS FROM OPERATING ACTIVITIES

<S>                                                                            <C>                 <C>
   Net loss                                                                    $      (719,121)    $    (1,080,032)
   Adjustments to reconcile net loss to net cash used
     by operating activities:
     Depreciation and amortization                                                     265,222             304,195
     Common stock issued for services                                                   70,000               3,462
     Common stock issued for interest                                                        -              25,000
     Warrants issued related to sales agreements                                        94,502                   -
     Amortization of notes payable discount                                             51,812             146,109
   Net changes in operating assets and liabilities:
     (Increase) decrease in trade accounts and other receivable                       (188,014)           (93,562)
     (Increase) decrease in inventory                                                  (63,061)              7,857
     (Increase) decrease in prepaid expenses and other assets                           (9,051)           (50,740)
     (Increase) decrease in intangibles                                                      -            (19,700)
     (Increase) decrease in deposits                                                     8,530             (2,036)
     Increase (decrease) in accounts payable                                           309,999            (38,917)
     Increase (decrease) in accrued payroll and payroll taxes                          (43,829)           (18,242)
     Increase (decrease) in sales tax payable                                          (16,750)           (21,930)
     Increase (decrease) in gift certificates and customer deposits                     (2,212)           (80,674)
     Increase (decrease) in accrued expenses                                          (173,725)             14,509
     Increase (decrease) in deferred revenue                                            29,815                   -
     Increase (decrease) in deposits on simulator sales                               (457,787)            376,031
                                                                            ------------------- ------------------

       Net Cash Used by Operations                                                    (843,670)          (528,670)
                                                                            ------------------ -------------------

CASH FLOWS FROM INVESTING ACTIVITIES

   Purchase of property and equipment                                               (1,123,701)          (312,055)
   Sale of property and equipment                                                      810,766             153,456
                                                                                --------------             -------

       Net Cash Used by Investing Activities                                          (312,935)          (158,599)
                                                                            ------------------     ---------------

CASH FLOWS FROM FINANCING ACTIVITIES

   Loans from and (repayments to) related parties                                            -            (50,000)
   Proceeds from issuance (payment) of notes payable                                  (90,660)             604,000
                                                                            ------------------- ------------------

       Net Cash Provided (Used) by Financing Activities                               (90,660)             554,000
                                                                            ------------------  ------------------

DECREASE IN CASH AND CASH EQUIVALENTS                                               (1,247,265)          (133,269)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                       1,334,673             249,005
                                                                            ------------------  ------------------

CASH AND CASH EQUIVALENTS, END OF PERIOD                                    $           87,408  $          115,736
                                                                            ==================  ==================

The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

<PAGE>


        INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES
                Consolidated Statements of Cash Flows (Continued)
                                   (Unaudited)

<TABLE>
<CAPTION>


                                                                                  For the Nine Months Ended
                                                                                         September 30,
                                                                               2005                     2004
                                                                            ---------------      -----------------


SUPPLEMENTAL CASH FLOW DISCLOSURES:

<S>                                                                         <C>                 <C>
   Cash paid for interest                                                   $           63,744  $           87,332
   Cash paid for income taxes                                               $                -  $                -

SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:

   Common stock issued for services                                         $           70,000  $                -
   Common stock issued for accrued liabilities                              $                -  $          115,620
   Common stock issued for exercise of
         options for payment of note                                        $          328,000  $                -
   Accrued interest converted to notes payable                              $                -  $              250
   Discount on convertible notes                                            $           51,812  $          276,122
   Common stock issued for capitalized loan fees                            $                -  $           15,000
   Warrants issued related to sales agreements                              $           94,502  $                -


The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

<PAGE>

        INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES
                 Notes to the Consolidated Financial Statements
                      March 31, 2005 and December 31, 2004


NOTE 1 -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

          a.       Unaudited Interim Financial Information

          The accompanying  unaudited condensed  consolidated  balance sheets of
          Interactive  Motorsports  and  Entertainment  Corp. (the "Company") at
          September 30, 2005 and December 31, 2004,  the unaudited  consolidated
          statements of operations for the three months ended September 30, 2005
          and 2004, and the unaudited consolidated  statements of operations and
          statements of cash flows for the nine months ended  September 30, 2005
          and 2004 have been  prepared by the  Company's  management  and do not
          include  all the  information  and notes to the  financial  statements
          necessary  for a  complete  presentation  of the  financial  position,
          results of  operations,  and cash flows in conformity  with  generally
          accepted  accounting  principles.  In the opinion of  management,  all
          adjustments  necessary  for a  fair  presentation  of the  results  of
          operations  and  financial  position  have been  included and all such
          adjustments  are of a normal  recurring  nature.  Although  management
          believes  the   disclosures  are  adequate  to  make  the  information
          presented  not  misleading,  it  is  suggested  that  these  condensed
          consolidated  financial  statements  be read in  conjunction  with the
          audited  financial  statements  and the notes thereto  included in the
          Company's latest annual financial statements included in the Company's
          annual report on Form 10-KSB.  The results of operations  for the nine
          months ended September 30, 2005 are not necessarily  indicative of the
          results  that may be expected  for the full year ending  December  31,
          2005 or any future period.

          b.       Use of Estimates

          The preparation of financial  statements in conformity with accounting
          principles generally accepted in the United States of America requires
          management to make estimates and assumptions  that affect the reported
          amounts of assets and  liabilities  and the  disclosure  of contingent
          assets and liabilities at the date of the financial statements and the
          reported amounts of revenues and expenses during the reporting period.
          Actual results could differ from those estimates.

          c.       Accounting for the sale of simulators

          The Company  records the sale of  simulators  using the  percentage of
          completion method of accounting.  The percentage of completion for any
          given sales  contract is determined by the ratio of costs  incurred to
          date to the total  estimated cost for each site build.  Costs incurred
          consist  of  purchased  components,   outside  services,  and  outside
          contract labor cost.

NOTE 2 -  DEBT AND CREDIT ARRANGEMENTS

          Pursuant  to the Note  and  Option  Purchase  Agreement  and  Security
          Agreement  dated  February 2, 2004  ("Agreement"),  the Company issued
          notes  bearing an interest rate of 9.6% payable in the total amount of
          $750,000. These notes were issued between February 2, 2004 and June 6,
          2004.  Each note came with an option to purchase  common shares of the
          Company  equal to the  amount of notes  purchased  divided by the fair
          market value of the Company's stock on the date of issuance. The notes
          became due on February 2, 2005,  and $260,000 of the notes was paid in
          full at that time.  A note  holder of an  additional  $344,000  of the
          notes  elected to  receive a cash  payment  of  $16,000  and  exercise

<PAGE>
        INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES
                 Notes to the Consolidated Financial Statements
                      March 31, 2005 and December 31, 2004

          options  granted  with the note  purchase for full payment of the note
          per the terms of the Agreement.  The note holder of the final $146,000
          in notes has  agreed  to extend  the  maturity  date of their  note to
          December 31, 2005, with the expiration of the  accompanying  option to
          February 1, 2006.

          The value of the options were amortized to interest expense over their
          life which expired March 1, 2005.  Amortization  of option discount of
          $51,812 was  included in  interest  expense for the nine months  ended
          September 30, 2005.

NOTE 3 -  SIMULATOR SALE AGREEMENTS

          On December  31,  2004,  the Company  entered  into an Asset  Purchase
          Agreement  pursuant to which it sold  thirty-four (34) of its existing
          race car simulators to Race Car  Simulation  Corporation  ("RCSC"),  a
          wholly  owned  subsidiary  of  Dolphin  Direct  Equity  Partners,   LP
          ("Dolphin").  The Agreement also granted RCSC an option to purchase an
          additional ten (10) new race car simulators for an aggregate  purchase
          price of  $1,320,000.  On April 15, 2005, the Company and RCSC entered
          into a Third Asset Purchase Agreement whereby the Company received the
          proceeds  from  the  sale  of six  of  the  ten  additional  race  car
          simulators  referenced  above  for  an  aggregate  purchase  price  of
          $600,000.  The Third  Agreement  also  called for the Company to issue
          900,000 warrants as part of the transaction.

          The sale of the 6 new simulators in the Third Agreement occurred prior
          to the completion of the installation  process, and was recorded using
          the percentage of completion method. Additionally, the issuance of the
          warrants was recorded in the period ending June 30, 2005.  The portion
          of the  sale  proceeds  that  could  not  be  recorded  on the  Income
          Statement was recorded on the Balance Sheet as an increase to Deposits
          on Simulator  Sales, and will be recorded on the Income Statement when
          the installation is complete.  The Company currently has $1,116,191 in
          Deposits  on  Simulator  Sales  that will be  recorded  on the  Income
          Statement upon completion of the installations.


NOTE 4-   SUBSEQUENT EVENTS

          Pursuant  to  a  note  and  option  purchase  agreement  and  security
          agreement  dated October 1, 2005, the Company has issued notes payable
          in the amount of $122,500.  The notes bear an annual  interest rate of
          12%,  and are due  October 1, 2007.  Each note comes with an option to
          purchase  common  shares  of the  Company  in the  amount  of the note
          purchased  at an  exercise  price of $.10 per  share.  The  notes  are
          secured by certain of the Company's simulators and a worldwide royalty
          free,  non-exclusive  license to use the Company's  propriety software
          that is loaded into the simulators which secure the notes.

          Pursuant  to  a  Note  and  Option  Purchase  Agreement  and  Security
          Agreement  dated  February  2,  2004,  the note  holder  of the  final
          $146,000 has been repaid $50,000 of that amount,  with the balance due
          by December 31, 2005.

          On November 10, 2005,  the Company issued 953,267 shares of restricted
          Common  shares to Ropart  Asset  Management  Fund,  LLC as the  equity
          portion of their interest  payments for the period  December,  2004 to
          October, 2005 under the terms of the Secured Bridge Notes and warrants
          issued in March 2003.
<PAGE>
        INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES
                 Notes to the Consolidated Financial Statements
                      March 31, 2005 and December 31, 2004

          The Company is behind two to three months on lease payments to the two
          landlords of its owned and operated retail racing centers. The Company
          has agreed to late payment terms with one landlord, and is negotiating
          similar terms with the second landlord.

<PAGE>

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations

The following  discussion and analysis  provides  information that we believe is
relevant to an  assessment  and  understanding  of the  consolidated  results of
operations and financial  condition of the Company.  The terms "Company",  "we",
"our" or "us" are used in this  discussion to refer to  Interactive  Motorsports
and  Entertainment  Corp. along with Interactive  Motorsports and  Entertainment
Corp.'s wholly owned  subsidiary,  Perfect Line, Inc., on a consolidated  basis,
except  where the  context  clearly  indicates  otherwise.  The  discussion  and
information  that follows concerns the Registrant as it exists today, as of this
filing,  including the  predecessor of the Company's  operations,  Perfect Line,
LLC. This  discussion  and analysis does not relate to the operations of Pacific
International  Holding,  Inc. which had limited  operations  prior to the merger
with the Company on August 2, 2002.

Overview

Interactive  Motorsports and Entertainment  Corp. ("IMTS" or the "Company"),  an
Indiana corporation, through its wholly owned subsidiary, Perfect Line, Inc., is
a world leader in race simulation that owns and operates racing centers,  leases
or revenue  shares with third  party  operators  and sells race car  simulators.
NASCAR Silicon Motor Speedway ("NSMS") customers  experience driving in a NASCAR
race car that simulates the motion, sights and sounds of an actual NASCAR event.
Located in high profile,  high traffic  locations,  the Company's racing centers
range from 2 to 12 race car  simulators  per  location and many sites offer what
the Company believes to be the best selling NASCAR driver merchandise  available
to the market.

In July of 2003,  management revised the Company's business model,  changing the
focus from Company owned and operated mall-based racing centers to revenue share
racing  centers  (mall  merchandise  retailers,  family  entertainment  centers,
amusement parks,  casinos,  auto malls,  etc.) and mobile lease programs such as
the Nextel Experience.  In February, 2004, Nextel debuted The Nextel Experience,
a mobile fan  interactive  experience  that features six of the  Company's  race
simulators.   Nextel  has  subsequently   taken  delivery  of  three  additional
2-simulator mobile experiences that they use for promotional events that feature
the Company's  simulators.  On August 15, 2005,  the Company  announced  that it
would debut the new SMS Reactor  simulator at the  International  Association of
Amusement  Parks  and  Attractions  (IAAPA)  convention  to be held  in  Atlanta
November  16-19.  Initial  response  to the new  smaller,  more  mobile and more
affordable  simulator  that  will  feature  the same  proprietary  software  and
patented motion platform technology has been encouraging,  with a purchase order
and deposit for four new Reactor simulators and several others interested buyers
waiting to see the  prototype  at IAAPA.  The  Company has also  developed  with
Featherlite  trailers a 48 foot mobile  experience that features four of the new
SMS  Reactor  simulators,  and the  initial  response  to this  concept has been
positive, although there can be no assurances of its success.

The change in the business  model,  and  particularly  the sale of simulators as
outlined in Note 3 of the  financial  statements  above,  allowed the Company to

<PAGE>


generate three  consecutive  quarters of operating profit and positive  Earnings
Before Interest,  Taxes,  Depreciation and  Amortization  ("EBITDA"),  its first
quarterly  net profit in the fourth  quarter of 2004 and its first annual profit
in the year ending December 31, 2004. The losses reported in the quarters ending
June 30, 2005 and  September  30, 2005 are due in part to several  installations
that did not progress as quickly as expected,  or delays and failures to acquire
the necessary  financing for such  installations and therefore are not reflected
in the financial performance for the periods. However, the financial performance
for the three,  six and nine months year to date periods  ending  September  30,
2005 improved  significantly  over the same periods in 2004.  With $1,116,191 in
Deposits on Simulator Sales,  along with expected new deposits for the Company's
new SMS  Reactor  simulator,  management  feels  confident  that  the  Company's
financial  performance  will get back on track during the final  quarter of 2005
and into the first quarter of 2006, although there can be no assurance.

Since inception on May 31, 2001 and through  September 30, 2005, the Company has
accumulated aggregate losses totaling $(7,144,907),  which includes the net loss
of $(719,121)  for the nine months ending  September 30, 2005, the net profit of
$8,869  for  the  twelve  months  ended  December  31,  2004,  the  net  loss of
$(3,525,581)  for the twelve  months ended  December  31, 2003,  the net loss of
$(2,189,220)  for the twelve months ended  December 31, 2002 and the net loss of
$(719,854) for the period from inception to December 31, 2001.

The Company has funded its retained  losses  through the initial  investment  of
$650,000  in May  2001,  $400,000  of  capital  contributed  in  February  2002,
approximately  $2.6  million  received in August 2002 from the sale of Preferred
Stock,  $700,000  borrowed in March  2003,  $604,000  in net  proceeds  borrowed
between February 2004 and June 2004,  $290,000 in net proceeds borrowed in June,
2005,  $1.929 million received in the form of deposits for the placement of race
car simulators in revenue share  locations,  or for the future purchase by third
parties of race car  simulators,  and  $1,382,614  by  delaying  payments to its
vendors.  See further  discussion  under  "Liquidity and Capital  Resources" and
"Risk Factors" below.

During the nine months ended  September 30, 2005, the Company had total revenues
of  $3,771,171  compared to $4,702,585  for the nine months ended  September 30,
2004. Sales performance resulted in a net loss of approximately $719,000 for the
9 month period,  an improvement of almost $361,000 over the loss incurred during
the same period in 2004.  Performance for the three months ending  September 30,
2005  resulted  in a loss of $291,176  on revenue of  approximately  $966,000 as
compared to the profit of $7.855 on sales of  approximately  $1,609,000  for the
three month period ending September 30, 2004 A decrease in revenue, for both the
quarter and the nine month period ending September 30, 2005 was expected, and is
due  primarily to the  Company's  migration  from a business  model  focusing on
Company  owned  stores,  to one that focuses on revenue  sharing  Company  owned
simulators  with store  operators,  and  selling  Company  owned  simulators  to
investors or to store operators. As of September 30, 2004, six of the stores the
Company used to own and operate had been  converted  to Checker Flag  Lightning,
Inc.  revenue share  locations,  whereas by September  30, 2005,  all the stores
slated for conversion have either been converted to Checker Flag Lightning, Inc.
revenue share locations or have been relocated or closed under arrangements with

<PAGE>

the respective  landlords that management believes are favorable to the Company.
This has  resulted  in the  Company  recognizing  just a portion of the  revenue
generated by the location as revenue share income,  with little related expense,
rather than  recognizing  all the  revenue  generated  at a  location,  but also
recognizing  the  payroll,  rent  and  operating  expenses  associated  with the
location. The resultant reduction in revenue from store sites for the nine month
period ending September 30, 2005 was partially offset by the $1,141,381 increase
in sales of simulator systems to Race Car Simulation Corp., I-Vision Technology,
and to Ft. Gordon, GA.

On  December  31,  2004,  the  Company  sold 34 of its  simulators  to Race  Car
Simulation  Corporation.  The 34  simulators  that were  sold  were in  existing
revenue share or lease  agreements,  and  therefore the Company's  cash flow was
reduced accordingly. In the first 9 months of 2005, the Company has installed 12
simulators in new revenue share locations and has installed 4 leased simulators.
An additional 11 simulators are in process for either  revenue  share,  lease or
purchase  agreements,  and  the  Company  has an  additional  15  simulators  in
inventory that are available for  installation but have not been designated to a
new site.  Management  expects that the continued  combination of revenue share,
lease and purchase  agreements for the current  inventory of  simulators,  along
with  expected  purchase  agreements  with  deposits  for the  new  SMS  Reactor
simulator,  will return the Company to the  operating  profits it achieved  over
three consecutive quarters, although there can be no assurance.

The Company has established four primary sources of revenues:  (i) company owned
and operated racing centers;  (ii) lease/revenue share arrangements of two types
- (a) new facility  operators for new locations,  and (b) new facility operators
to assume the Company's  operations under presently  existing Company locations;
(iii) new  operators  for  mobile  lease  arrangements  such as with the  Nextel
experience;  and (iv) simulator  equipment sales. A brief description of each of
those is listed below.

Locations
<TABLE>

Company Owned (24 Simulators):
<CAPTION>
              Location                     Market              Sq. Ft.          Simulators
       --------------------         -------------------     -----------         ----------
<C>                                                         <C>               <C>
1)       Mall of America            Minneapolis, MN            5,899            12 race cars
2)       Universal CityWalk         Los Angeles, CA            5,000            12 race cars


Revenue Share (120 Simulators):

             Location                      Market              Sq. Ft.          Simulators
     ----------------------         -------------------     -----------         ----------
1)       Opry Mills                 Nashville, TN              6,007            10 race cars
2)       Gurnee Mills               Chicago, IL                6,111             6 race cars
3)       Concord Mills              Charlotte, NC              7,865            12 race cars
4)       Mall of Georgia            Atlanta, GA                5,895             8 race cars
5)       Riverchase Galleria        Birmingham, AL             6,188             8 race cars
6)       RiverTown Crossing         Grand Rapids, MI           6,100             8 race cars
7)       Jordan Creek Town Ctr      Des Moines, IA             4,000             8 race cars
8)       NASCAR SpeedPark           Sevierville, TN            1,584             6 race cars #
9)       NASCAR SpeedPark           St. Louis, MO              1,496             6 race cars #
</TABLE>

<PAGE>

<TABLE>
<CAPTION>

<C>                                                            <C>               <C>
10)      NASCAR SpeedPark           Toronto, Canada            1,500             6 race cars #
11)      NASCAR SpeedPark  (a)      Myrtle Beach, SC           1,600             6 race cars #*
12)      Gate A Sports              Cleveland, OH              2,470             5 race cars
13)      Playcenter (b)             Sao Paulo, Brazil          1,000             4 race cars*
14)      Burdick Driver's Village   Syracuse, NY               3,472             8 race cars #
15)      Big River Entertainment(b) Memphis, TN                5,000            12 race cars*
16)      Bass Pro Shop              Harrisburg, PA               500             2 race cars
17)      Bass Pro Shop (a)          Clarksville, IN              750             3 race cars
18)      University Mall            Burlington, VT              3700             5 race cars
19)      Quaker Steak & Lube        Sheffield, OH                500             2 race cars*
20)      Quaker Steak & Lube (b)    Erie, PA                     500             2 race cars*

                a. Scheduled to open Q4
                b. Scheduled to open TBD


Mobile Units (16 Simulators):

1) Nextel Mobile Experience         2004-06 NASCAR Nextel Cup series events      6 race cars #
2) Perfect Line/NTI Experience      Joint Venture Mobile Experience              2 race cars
3) Nextel Mini Experiences          Nextel regional marketing                    6 race cars #
4) DaimlerChrysler                  Frankfurt Motor Show                         2 race cars*

Sales of Simulators (27 Simulators):

         Buyer                Market                             Simulators
       --------               ------                             ----------
1)   Roltex                 Moscow, Russian Federation8 race cars *
2)   Tonne Mgmt             Wisconsin Dells, WI                4 race cars *
3)   Ft. Gordon             Ft. Gordon, GA                     2 race cars
4)   I-Vision Tech.         Abu Dhabi, UAE                     4 race cars
5)   I-Vision Tech.         Abu Dhabi, UAE                     2 race cars
6)   Fun City               Burlington, IA                     1 race car*
7)   DaimlerChysler         US Auto Shows in 2006              2 race cars*
8)   Burroughs & Chapin     TBD                                4 Reactors*

# Denotes asset sold to Race Car Simulation Corporation
* Denotes that simulators are not yet installed
</TABLE>


NSMS  racing   centers   were   originally   owned  and   developed  by  Silicon
Entertainment,  Inc.  ("SEI").  SEI opened its first site in August  1997 at the
Mall of  America  in  Bloomington,  Minnesota,  the  largest  mall in the United
States.  SEI raised large sums of initial  capital,  of which,  according to SEI
internal  documents,  approximately  $6.5  million  was  utilized  to create its
proprietary  software  technology and  approximately $25 million was utilized to
produce  approximately 170 simulators and complete the build-out of 15 stores in
high traffic malls.  SEI was unable to secure  additional long term financing to
support its capital  expansion,  and was liquidated through Chapter 7 bankruptcy
in April 2001.  Perfect Line's assets were primarily  acquired from creditors of

<PAGE>


SEI. As a result of SEI's  bankruptcy,  Perfect  Line was able to  purchase  the
assets of SEI at a price substantially below SEI's cost.

Perfect Line,  LLC, a predecessor  to Perfect  Line,  Inc.,  re-opened 12 of the
racing  centers,  which  utilized 136 of the  simulators,  between July 2001 and
August 2002. The Company then warehoused 32 simulators for future deployment and
2 simulators  are used for research and  development  purposes at the  Company's
technology  center  in  Santa  Clara,  California.  The  proprietary  technology
includes two U.S. Patents,  which combine to create what management  believes to
be one of the world's  most  realistic  simulations  of the  sights,  sounds and
motions  experienced  by  driving  in an actual  NASCAR  race.  The  proprietary
motion-based  platform  that the race car  simulator  is mounted on is among the
other assets that were acquired and licensed as part of the transaction.

In August 2002,  Perfect Line became a wholly owned subsidiary of IMTS,  through
an  exchange  of shares  that  resulted  in  Perfect  Line  shareholders  owning
approximately 82% of IMTS equity.  Simultaneous  with this event,  approximately
$2.6 million in private  equity  financing  was made  available to Perfect Line.
Approximately one-half of the funding was used to retire the Company's bank note
and the balance was used for working capital.

In July of 2003,  management revised the Company's business model,  changing the
focus from Company owned and operated mall-based racing centers to revenue share
racing  centers  (mall  merchandise  retailers,  family  entertainment  centers,
amusement parks,  casinos,  auto malls,  etc.) and mobile lease programs such as
the Nextel Experience and simulator sales. Without the burden of occupancy costs
and labor  costs,  management  believes  the current  business  model has proved
successful as indicated by the Company's  string of three  straight  quarters of
operating profits and positive EBITDA through the quarter ending March 31, 2005,
the first  quarterly net profit for the quarter ended December 31, 2004, as well
as its first net profit for the year ending  December 31, 2004.  On December 31,
2004, the Company entered into an Asset Purchase  Agreement pursuant to which it
sold thirty-four (34) of its existing race car simulators to Race Car Simulation
Corporation  ("RCS"),  a  wholly  owned  subsidiary  of  Dolphin  Direct  Equity
Partners,  LP ("Dolphin")  for an aggregate  purchase  price of $1,536,600.  The
Agreement also granted RCS an option to purchase an additional ten (10) new race
car simulators for an aggregate purchase price of $1,320,000. On March 31, 2005,
the Company and RCSC entered into a Second Asset Purchase  Agreement whereby the
Company  received the proceeds from the sale of four of the ten additional  race
car simulators for an aggregate  purchase price of $720,000.  On April 15, 2005,
the Company and RCSC entered into a Third Asset Purchase  Agreement  whereby the
Company  received the  proceeds  from the sale of the  remaining  six of the ten
additional race car simulators  referenced above for an aggregate purchase price
of $600,000.  The March 31, 2005 and April 15, 2005 simulator sales transactions
completed  the  exercise of RCS's  option  stemming  from the  December 31, 2004
simulator  sale.  The losses  reported in the quarters  ending June 30, 2005 and
September  30,  2005  are due in  part to  several  installations  that  did not
progress as quickly as expected, or delays and failures to acquire the necessary
financing  for  such  installations  and  therefore  are  not  reflected  in the
financial  performance for the periods. With $1,116,191 in Deposits on Simulator

<PAGE>


Sales,  along with  expected  new  deposits  for the  Company's  new SMS Reactor
simulator,  management feels confident that the Company's financial  performance
will get back on track  during  the  final  quarter  of 2005 and into the  first
quarter of 2006, although there can be no assurance

The Company's Current Operations, Recent Developments and Plan for the Future

The  Company's  primary  focus is to leverage  the  Company's  ownership  of its
internationally  unique,  proprietary  race car  simulation  technology and be a
world leader in race car simulation. The Company believes that this can be done
profitably  through a combination of owned and operated  racing  centers,  third
party revenue share locations (family  entertainment  centers,  amusement parks,
casinos,   auto  malls,   etc.),   mobile  unit  leases  and  the  domestic  and
international  sales of the race  simulator  product,  including now its new SMS
Reactor  product that is expected to be popular in both fixed locations and in a
mobile environment, although there can be no assurances.

NASCAR racing is currently the #1 spectator sport in America. The Company has an
exclusive license agreement with NASCAR for location-based entertainment,  which
includes  the right to use the NASCAR  name within the  Silicon  Motor  Speedway
logo, on racing center signage,  within collateral sales materials,  on the NSMS
web site, and within the NSMS racing  simulator  software.  The Company has also
secured licenses with many popular racetracks in the United States, and the cars
driven by many of the race fans' favorite Nextel Cup teams and drivers,  ranging
from  established  stars such as Dale  Earnhardt,  Jr.,  Tony  Stewart  and Mark
Martin,  to rising  stars like Matt  Kenseth  and Kurt  Busch.  These  licensing
agreements and the use of NASCAR related  identities and marks provide immediate
name recognition, credibility, and authenticity to NSMS.

The  Company  has  integrated  these  license   agreements  with   sophisticated
proprietary  racing simulator  technology to create a network of  NASCAR-themed,
family-oriented,  racing  entertainment  and retail  merchandise  centers.  Many
racing centers are in some of America's premier shopping malls, giving us access
to over 160 million annual site visits from potential customers.

Simulator  races  take place on famous  NASCAR  Nextel  Cup  racetracks  such as
Daytona International Speedway,  Indianapolis Motor Speedway, Lowe's (Charlotte)
Motor  Speedway,  Atlanta Motor Speedway,  Bristol Motor Speedway,  and Richmond
International Raceway.

NSMS owned Racing Centers,  as well as many of its revenue share Racing Centers,
are operated as combined racing  entertainment and retail merchandise stores. In
addition to providing  customers  with the  opportunity to drive Nextel Cup race
cars, NSMS Racing Centers also feature a large selection of  officially-licensed
NASCAR  merchandise.  Research  indicates that NASCAR fans buy more  merchandise
than fans from  almost any other  sport and they are also the most  brand-loyal.
These  characteristics  helped boost worldwide  NASCAR-branded retail sales from
approximately  $82 million in 1990 to $2.1 billion in 2004.  The Company's  NSMS
racing centers are the largest  network of officially  licensed,  NASCAR-branded
interactive  entertainment stores in the world, and offer its customers the most
popular NASCAR  merchandise  available.  Although the Company's  owned locations

<PAGE>


provide its only direct means to generate  revenues from merchandise  sales, the
Company's  experience  has been  that  increases  in  merchandise  sales  have a
spillover  effect on the level of  simulator  revenue each site  generates.  The
Company  does  not  receive  any  payments  from the  revenue  share  sites  for
merchandise  sales.  With these  factors in place,  the  Company  believes it is
well-positioned to capitalize on this billion-dollar market.

Tony  Stewart,  2002 NASCAR  Nextel Cup Champion and current  NASCAR  Nextel Cup
points leader,  has been the spokesman and technical  advisor for NASCAR Silicon
Motor   Speedway.   He  has  been  featured  in  promotions,   advertising   and
point-of-sale  material  and also has made  appearances  at NSMS  racing  center
locations throughout the country.

The Company first tested the revenue share business model with the Burroughs and
Chapin Company of Myrtle Beach,  South  Carolina,  by installing 6 simulators at
their Smokey  Mountain  NASCAR  SpeedPark in April of 2003,  and 5 simulators at
their Myrtle Beach Pavilion  Amusement Park's Ocean Front Arcade in May of 2003.
The results of these two revenue  share racing  centers  inspired  management to
revise the  Company's  business  model  beginning in July of 2003,  changing the
focus from Company  owned and operated  racing  centers to revenue  share racing
centers located within malls,  family  entertainment  centers,  amusement parks,
casinos,  auto  malls,  etc.  Revenue  share  locations  will  provide  IMTS the
opportunity to install  simulators in existing or planned  entertainment  venues
and share  proportionately  in the sales  generated  with  owner-operators.  The
Company provides the simulators at cost (expected to be financed through a third
party  leasing  firm,  although no  agreements  have been  reached) and the host
organization  (owner-operator)  provides the space, required site build-out, and
day-to-day operations staffing.

The Company and Checker  Flag  Lightning  of  Grandville,  Michigan,  tested the
conversion  of one of the  Company's  mall  racing  centers  to a  Checker  Flag
Lightning retail  merchandise and entertainment  center beginning in November of
2003.  The lease at the racing center within  RiverTown  Crossing in Grandville,
Michigan was assigned to Checker Flag  Lightning  and the store was remodeled by
reducing  the number of  simulators  to 8 from 10, and  building  out the retail
merchandise  space to fill  nearly  half of the 6100  square  feet  with  NASCAR
merchandise. This model led to an agreement with Checker Flag Lightning in March
of 2004 to assign six of the  Company's  mall  leases with the intent to convert
each of them to the new mall model.  In  addition,  Checker Flag  Lightning  has
opened a 3,500 square foot retail merchandise and entertainment center featuring
8 of the  Company's  simulators  in the new Jordan Creek Town Center in West Des
Moines,  Iowa,  and a 4000 square foot site  featuring  6  simulators  at Gurnee
Mills, just north of Chicago, Illinois.

The Company recently established a new revenue stream through mobile leases that
management believes will be beneficial to the Company in the future. At the 2004
Daytona 500,  Nextel  debuted The Nextel  Experience,  a mobile fan  interactive
experience  that  features  six of the  Company's  race  simulators.  The Nextel
Experience  has had and will have a  prominent  location  at each of the  NASCAR
Nextel Cup events for at least  through the 2006  season.  In 2004,  Nextel also
leased a  Mini-Experience  housed  in a 53 foot  trailer.  The  Mini  Experience

<PAGE>


features two of the Company's racing simulators in a self contained package that
Nextel uses at various promotional activities. The Mini Experience has been such
a success that Nextel  ordered and is now leasing two  additional  trailers that
they will use for promotional  events around the country,  each featuring two of
the Company's simulators.

The Company has made technological improvements to the simulation,  resulting in
an enhanced racing experience. In addition, two popular racetracks,  Bristol and
Indianapolis,  were  introduced to the  simulation  experience  late in 2002 and
early in 2003. Other software  improvements were implemented,  including on-line
programs  such  as  MySpeedway.  MySpeedway  is  a  feature  on  IMTS's  website
(www.smsonline.com)  that allows  customers to find their recent lap times,  and
analyze their results to improve their  performance by comparing  their times to
those of other racers throughout the country.  Car parameters were introduced in
August 2003 allowing racers to set up their cars to their personal  preferences.
Adjustable parameters include traction control, anti-lock brakes, spoiler angle,
steering ratio, front anti-roll bar, engine,  transmission gearing, and rear end
ratio.

Technological  improvements  are continually  under  development.  These include
upgrading and enhancing the game graphics,  upgrading the  underlying  operating
system in order to accommodate  future  developments,  and  significant  revenue
enhancing game features that target the Company's core customers. Other projects
include completion of the new SMS Reactor  simulator,  a smaller and more mobile
and more  affordable  version  of our  current  simulator  that will  allow more
customer  throughput  at a  lower  price  point,  a 3D  version  of  our  racing
experience  and a concept  called Wheel to Real where we recreate  actual NASCAR
races in graphic form using data from the race cars for replay  experiences  and
interactive features.

The Company has  designed a new  product  for 2006 called the SMS  Reactor.  The
simulator is a downsized version of the current simulator, and has been designed
to be more  portable,  mobile and  affordable.  The Company has an initial order
from Burroughs and Chapin,  and intends to complete the development and have the
initial units completed in time for the  International  Association of Amusement
Parks and  Attractions  (IAAPA)  convention  in at  Atlanta in  November,  2005.
Management is  optimistic  about the prospects for the SMS Reactor in both fixed
locations  and in mobile  environments,  although  it is too early to assure the
success of the new product.

Overview of Financial Position and Results of Operations

During the nine months ended  September 30, 2005, the Company had total revenues
of  $3,771,171  compared to $4,702,585  for the nine months ended  September 30,
2004, a 19.8% decrease.  Revenue from company store sales decreased by 48.02% as
the  company  executed  its revised  business  plan  focusing  on revenue  share
locations  versus  company  owned  locations.  Offsetting  the  decline in total
company  store sales in the first nine months  ending  September  30, 2005 was a
$1,141,381  positive  swing in sales of simulators as compared to the first nine
months  ending  September 30, 2004.  During the nine months ended  September 30,
2005,  the  Company  recorded  all or a portion of four sales  transactions  for
fourteen  simulators,  and added a five  simulator  revenue  share  location  in

<PAGE>




Mentor, OH, a five simulator revenue share location in Burlington, VT, and a two
simulator  revenue  share  location in  Sheffield,  OH.  During the period,  the
Company  also  leased a two  simulators  housed in a  trailer,  and  leased  two
additional  simulators that appeared as part of Daimler Chrysler's Dodge exhibit
at the Frankfort Auto Show.

For the nine months ending  September 30, 2005, sales declined 19.8% as compared
to the nine months ending September 30, 2004.  Operating expenses declined at an
even faster rate,  resulting in a 33.4%,  or $360,911  decrease in the operating
loss for the nine  months  ending  September  30,  2005 as  compared to the same
period in 2004.  Payroll  expenses  declined  34.75% or $817,166,  and occupancy
expense  declined  40.6%,  or $611,845,  when comparing the first nine months of
2005 to the first  nine  months of 2004.  As a result  of the note  payoffs  the
Company made early in the first quarter,  2005,  interest expense decreased from
$284,636 for the nine months ending  September 30, 2004 to $159,752 for the same
period in 2005.  The net loss for the first three quarters of 2005 of ($719,121)
was 33.4% lower than the  ($1,080,032)  loss for the same nine month  period one
year ago.

The Company's year over year financial  results declined during the three months
ending September 30, 2005. Although revenues decreased by $643,373 for the three
months  ending  September  30,  2005 as  compared  to the  three  months  ending
September 30, 2004, cost of goods sold for the comparable  periods  decreased by
only $60,816, and operating expenses decreased by only $201,993 during the three
month  period.  The decline in revenue for the quarter was the result of several
factors.  First, company store sales declined by 26% because the Company started
the quarter ending September 30, 2004 operating six stores,  and converted three
stores to Checker Flag Lightning  revenue share sites by the end of the quarter.
This compares to operating only two stores in the quarter  ending  September 30,
2005.  Secondly,  revenue  share sales  declined by 76% due the  non-payment  of
revenue share payments by Checker Flag Lightning  ("CFL").  The Company has been
trying for over a year to work toward a long term agreement with the landlord of
three of the ("CFL")  revenue  share sites,  and CFL itself.  CFL is the revenue
share  partner who took over a number of the Company  owned stores in 2004.  CFL
has been  reluctant to pay its revenue share payment to the Company until such a
long term agreement is in place with this  particular  mall owner.  As such, the
Company has taken the conservative  position that until an agreement is reached,
it will record  revenue  share income from CFL at the time a payment is received
by the Company. The Company last received a payment from CFL in August, 2005 for
July's revenue share payment.  Thirdly,  the company sold most of the simulators
it had under lease at September 30, 2004 to Race Car Simulation Corp. at the end
of 2004. As such,  revenue from leases declined by 80.13% from year-ago  levels.
Finally,  the company's sales of simulators  declined by 28.62% as last year saw
the sale of the four  simulators in  Abu-Dhabi,  while this year we recorded the
partial sale of 6 simulators  being  installed in Myrtle Beach,  South  Carolina
(see Note 3 of the Notes to the Consolidated Financial statements).

Partially offsetting the decrease in gross profit of $582,557 was the decline in
year over year operating expenses by 15.62% or $201,993, resulting in a $380,564
operating  profit  reduction for the quarter ending  September 30, 2005 over the
quarter ending September 30, 2004. The decline in operating expenses is a direct

<PAGE>


result of the  implementation  of the company's  revised  business model, and is
largely due to the closure, relocation, or conversion to a revenue share site of
seven former  company  store  locations.  Payroll  expenses  declined  17.8% and
occupancy  expenses  declined 15.9% when comparing the third quarter 2005 to the
third quarter 2004.  Interest  expense for the three months ending September 30,
2005 was $47,784 as compared to $129,316 for the comparable quarter in 2004. The
net loss for the quarter  ending  September 30, 2005 of ($291,176)  was $299,031
more than the $7,855 profit for the same quarter one year ago.

Since inception on May 31, 2001 and through  September 30, 2005, the Company has
accumulated aggregate losses totaling ($7,144,907).

The  Company's  cash flow from  operations  deteriorated  during  the nine month
period ending  September 30, 2005 as compared to the comparable  period in 2004.
Cash  generated from  operations  for the nine months ending  September 30, 2005
declined by $315,000 to ($843,670) as compared to the ($528,670) during the same
nine  month  period in 2004.  During  the first  nine  months of 2005,  the cash
requirements from the increases in accounts receivable  ($188,014) and inventory
($63,061) and the decrease in accrued expenses  ($173,725) were partially offset
by the  increase  in  accounts  payable  ($309,999).  Additionally,  deposits on
simulator  sales  decreased by $457,787 due to the full or partial  recording of
four simulator  sales  transactions  in the first nine months of the year.  Cash
flow  from  all  sources   (operations,   investing   activities  and  financing
activities)  was  insufficient to fund the company during the nine months ending
September 30, 2005, and resulted in a $1,247,265 reduction in the Company's cash
position. This compares with $133,269 in cash used by all sources for the period
ending September 30, 2004.

The Company has funded its retained  losses  through the initial  investment  of
$650,000  in May  2001,  $400,000  of  capital  contributed  in  February  2002,
approximately  $2.6  million  received in August 2002 from the sale of Preferred
Stock,  $700,000  borrowed in March  2003,  $604,000  in net  proceeds  borrowed
between February 2004 and June 2004,  $290,000 in net proceeds borrowed in June,
2005,  $1.929 million received in the form of deposits for the placement of race
car simulators in revenue share  locations,  or for the future purchase by third
parties of race car  simulators,  and  $1,382,614  by  delaying  payments to its
vendors.


Review of Consolidated Financial Position

Cash and Cash Equivalents:  The Company had $87,408 in cash and cash equivalents
as of  September  30, 2005  compared  with  $1,334,673  at December  31, 2004, a
decrease of $1,247,265.  This decrease in the company's  position of cash during
the first nine months of 2005 was due to the net loss of $719,121  sustained  to
date, and the reduction of customer  deposits for simulator sales as the revenue
from four installations was partially or fully recognized.  Also contributing to
the decline in the cash  position  was the  increase in accounts  receivable  as
detailed below, and the increase in fixed assets and inventory. At September 30,
2005,  the  Company  had taken  delivery  of 21 new  simulators,  and has either
installed or earmarked  to install 18 of these  simulators,  leaving 3 available
for future opportunities.  The Company has also taken delivery of 18 refurbished

<PAGE>


simulators from closed or downsized sites, and has either installed or allocated
6 of these units to new sites,  leaving 12 simulators for future  opportunities.
The Company also has 13 simulators at Elan in various stages of refurbishment.

During the nine months ended  September 30, 2005, the Company used $1,123,701 of
cash to purchase property and equipment relating to the construction in progress
on the nine sites  where  simulators  were  installed,  the two new sites where
installations  will  be  occurring  and the  Myrtle  Beach  site.  Additionally,
$810,766  of assets  were either  sold in four  separate  transactions,  or were
transferred from work in process to fixed assets.

Additionally,  the  company  had a net use of cash of $90,660 to reduce its debt
during the first nine months  ending  September 30, 2005 as compared to December
31, 2004.  The debt  reduction in the first nine months of 2005 was offset by an
increase in the amount owed to an existing  noteholder in the second  quarter of
2005.  Also,  another  noteholder  completed  the  exercise  of his  option  for
4,100,000  shares of company  stock for full payment of the balance of his note.
See further  discussion  under the  "Liquidity  and Capital  Resources"  section
below.

Trade Accounts Receivable: At the nine months ending September 30, 2005, Checker
Flag Lightning was behind on payments in the amount of $567,319. The Company has
agreed to reduce the minimum  revenue share payments from several of the Checker
Flag stores,  and Checker Flag has made payments  covering June and July. At the
time of this  filing,  basic terms have been agreed to for a long term  solution
with Checker Flag and with the owner of the malls where most of the Checker Flag
Lightning  stores are located.  The details of such an agreement  continue to be
negotiated,  and  management  believes a final  agreement will be reached in the
near future to the benefit of all parties, although there can be no assurance.

Inventory:  At September 30, 2005,  inventory increased by $63,061 from December
31, 2004 levels due primarily to the delivery of new and refurbished  simulators
from Elan  Motorsports  for  deployment  to new sites.  Simulators  in inventory
increased by $86,142 from  December 31, 2004 levels to $321,826 at September 30,
2005.  The value of simulator  inventory at September  30, 2005 was down $25,534
from the June 30, 2005 level, and down $103,368 from the March 31, 2005 level of
$425,194.  Merchandise inventory at September 30, 2005 of $11,166 also decreased
as compared to the levels at prior quarter ends in 2005. The decreased levels of
inventory  are due  primarily  to the  inability  of the  Company to restock its
stores due to its cash flow  performance.  The company has reached an  agreement
with a third  party to accept new  merchandise  inventory  on  consignment.  The
Company's cost will be the third party's cost, plus shipping expenses. With this
arrangement,  the Company expects to have its stores adequately  stocked to take
advantage of the Christmas buying season.

Notes Payable:  Pursuant to the Note and Option Purchase  Agreement and Security
Agreement dated February 2, 2004 ("Agreement"), the Company issued notes bearing
an interest  rate of 9.6% payable in the total  amount of $750,000.  These notes
were issued  between  February 2, 2004 and June 6, 2004.  Each note came with an
option to purchase  common  shares of the  Company  equal to the amount of notes
purchased divided by the fair market value of the Company's stock on the date of
issuance.  The notes  became due on February 2, 2005,  and $260,000 of the notes

<PAGE>



was paid in full at that time. The note holder of an additional  $344,000 of the
notes has received  $16,000 in cash and has exercised  options  granted with the
note purchase for full payment of the notes per the terms of the Agreement.  The
conversion of the options to common stock occurred in the third quarter of 2005.
The note holder of the final $146,000 in notes has agreed to extend the maturity
date of their note to December 31, 2005, with the expiration of the accompanying
option to February 1, 2006.

The value of the options  was  amortized  to interest  expense  over  their life
which  expired  March 1, 2005.  Amortization  of option  discount of $51,812 was
included in interest expense for the nine months ended September 30, 2005.

In March 2003, the company issued notes totaling $700,000, $500,000 of which was
sold to Ropart Asset Management. During the three months ending March 31, 2005,
the Company reduced its indebtedness to Ropart Asset Management by $200,000, and
the maturity of the note was extended to September 30, 2005. In June, 2005, the
Company borrowed an additional $300,000 from Ropart Asset Management under the
same terms as the original 2003 Bridge Loan agreement. The maturity date of the
note was also extended to December 31, 2005.

Deposits on Simulator  Sales:  The Company records the sale of simulators  using
the percentage of completion method of accounting.  The percentage of completion
for any given sales  contract is  determined  by the ratio of costs  incurred to
date to the total estimated cost for each site build.  Costs incurred consist of
purchased components,  outside services, and outside contract labor cost. During
the nine month period ending  September 30, 2005, the Company  recorded all or a
portion  of  four  simulator  sales  transactions  based  on the  percentage  of
completion  method of  accounting.  This  activity  resulted in the reduction of
deposits on simulator sales of $457,787 to $1,116,191 as compared to the balance
at December 31, 2004.

Other  Liabilities:  Accounts payable,  accrued payroll and payroll taxes, sales
taxes payable,  unearned revenue,  and other accrued expenses fluctuate with the
volume of  business,  timing of  payments,  and the day of the week on which the
period ends.


Review of Consolidated Results of Operations

During the nine months ended  September 30, 2005, the Company had total revenues
of  $3,771,171  compared to $4,702,585  for the nine months ended  September 30,
2004, a 19.8% decrease.  Revenue from company store sales decreased by 48.02% as
the  company  executed  its revised  business  plan  focusing  on revenue  share
locations  versus  company  owned  locations.  Offsetting  the  decline in total
company  store sales in the first nine months  ending  September  30, 2005 was a
$1,141,381  positive  swing in sales of simulators as compared to the first nine
months  ending  September 30, 2004.  During the nine months ended  September 30,
2005,  the  Company  recorded  all or a portion of four sales  transactions  for
fourteen  simulators,  and added a five  simulator  revenue  share  location  in
Mentor, OH, a five simulator revenue share location in Burlington, VT, and a two
simulator  revenue  share  location in  Sheffield,  OH.  During the period,  the
Company  also  leased  two  simulators  housed  in a  trailer,  and  leased  two

<PAGE>


additional  simulators that appeared as part of Daimler Chrysler's Dodge exhibit
at the Frankfort Motor Show.

For the nine months ending  September 30, 2005, sales declined 19.8% as compared
to the nine months ending September 30, 2004.  Operating expenses declined at an
even faster rate,  resulting in a 33.4%,  or $360,911  decrease in the operating
loss for the nine  months  ending  September  30,  2005 as  compared to the same
period in 2004.  Payroll  expenses  declined  34.75% or $817,166,  and occupancy
expense  declined  40.6%,  or $611,845,  when comparing the first nine months of
2005 to the first  nine  months of 2004.  As a result  of the note  payoffs  the
Company made early in the first quarter,  2005,  interest expense decreased from
$284,636 for the nine months ending  September 30, 2004 to $159,752 for the same
period in 2005.  The net loss for the first three quarters of 2005 of ($719,121)
was 33.4% lower than the  ($1,080,032)  loss for the same nine month  period one
year ago.

The Company's year over year financial  results declined during the three months
ending September 30, 2005. Although revenues decreased by $643,373 for the three
months  ending  September  30,  2005 as  compared  to the  three  months  ending
September 30, 2004, cost of goods sold for the comparable  periods  decreased by
only $60,816, and operating expenses decreased by only $201,993 during the three
month  period.  The decline in revenue for the quarter was the result of several
factors.  First, company store sales declined by 26% because the Company started
the quarter ending September 30, 2004 operating six stores,  and converted three
stores to Checker Flag Lightning  revenue share sites by the end of the quarter.
This compares to operating only two stores in the quarter  ending  September 30,
2005.  Secondly,  revenue share sales declined by 76% due to the sale of revenue
share  simulators that produced  revenue for the Company in the third quarter of
2004, but were sold to Race Car  Simulation  Corp. on December 31, 2005, and due
to the non-payment of revenue share payments by Checker Flag Lightning  ("CFL").
The Company has been  negotiating  a long term  agreement  with the  landlord of
three of the ("CFL")  revenue  share sites,  and CFL itself.  CFL is the revenue
share  partner who took over a number of the Company  owned stores in 2004.  CFL
has been  reluctant to pay its revenue share payment to the Company until such a
long term agreement is in place with this  particular  mall owner.  As such, the
Company has taken the conservative  position that until an agreement is reached,
it will record  revenue  share income from CFL at the time a payment is received
by the Company. The Company last received a payment from CFL in August, 2005 for
July's revenue share payment.  Thirdly, the company sold the eight simulators it
had under lease at September 30, 2004 to Race Car Simulation Corp. at the end of
2004.  As such,  revenue from leases  declined by 80.13% from  year-ago  levels.
Finally,  the company's sales of simulators  declined by 28.62% as last year saw
the sale of the four  simulators in  Abu-Dhabi,  while this year we recorded the
partial sale of 6 simulators  being  installed in Myrtle Beach,  South  Carolina
(see Note 3 of the Notes to the Consolidated Financial Statements).

Partially offsetting the decrease in gross profit of $582,557 was the decline in
year over year operating expenses by 15.62% or $201,993, resulting in a $380,564
operating  profit  reduction for the quarter ending  September 30, 2005 over the
quarter ending September 30, 2004. The decline in operating expenses is a direct
result of the  implementation  of the company's  revised  business model, and is
largely due to the closure, relocation, or conversion to a revenue share site of
seven former  company  store  locations.  Payroll  expenses  declined  17.8% and

<PAGE>



occupancy  expenses  declined 15.9% when comparing the third quarter 2005 to the
third quarter 2004.  Interest  expense for the three months ending September 30,
2005 was $47,784 as compared to $129,316 for the comparable quarter in 2004. The
net loss for the quarter  ending  September 30, 2005 of ($291,176)  was $299,031
more than the $7,855 profit for the same quarter one year ago.

Liquidity and Capital Resources

The primary source of funds available to the Company are receipts from customers
for  simulator  and  merchandise  sales in its two  owned  and  operated  racing
centers,   percentage  of  gross  revenues  from  simulator  races  and  minimum
guarantees from revenue share and lease sites, the sale of simulators,  proceeds
from equity offerings including the $2,610,050 received in August 2002, proceeds
from debt offerings  including the $700,000 in Secured Bridge Notes and warrants
issued in March 2003, the $604,000 in net proceeds from Notes and options issued
between February and June, 2004, the additional loan of $300,000 from one of the
existing Bridge Loan note holders,  loans from shareholders,  credit extended by
vendors, and possible future financings.

As of the filing of this Form 10-QSB,  the net proceeds of  $1,874,708  from the
three sales  transactions  for the sale of 44 simulators to Race Car  Simulation
Corp.  have  been  depleted.  The  Company  believes  that  it has  generated  a
significant  interest in its  simulators,  and that some  combination of revenue
share agreements,  lease agreements and simulator sales agreements with both the
original  simulator and the new SMS Reactor simulator will be sufficient to fund
the daily  operations  of the  business,  although  there can be no  assurances.
Additionally,  the Company  continues to seek  manufacturing  financing to fully
implement the desired level of growth  management  believes its revised business
model is capable  of  generating.  The  Company's  ability to raise the  desired
financing will depend on many factors,  but the Company  intends to leverage the
market value of its assets as collateral. Management believes the culmination of
the recent  negotiations with Checker Flag Lightning into an agreement  allowing
for cash flow to again be generated  from the Checker Flag sites,  combined with
some combination of original  simulator and new SMS Reactor  simulator sales and
the increased  revenues that come from additional  third party revenue share and
lease agreements will allow the Company to maintain and increase positive EBITDA
and regain profitability, although there can be no assurances.

Management  is  optimistic  that  the new SMS  Reactor  will  be  attractive  to
customers   seeking  a  lower  priced   simulator  with  greater   mobility  and
portability.  The SMS Reactor is scheduled to debut at the 2005 IAAPA convention
in  mid-November,  2005,  in time for  2006  installations.  Management  is also
encouraged by the initial interest in, and for the potential  profitability  of,
the  mobile  application  of the  new  SMS  Reactor,  although  there  can be no
assurances.

On December 31, 2004,  March 31, 2005 and April 15,  2005,  the Company  entered
into three Asset Purchase  Agreements  pursuant to which it sold forty-four (44)
of its  race  car  simulators  that  were  located  in  existing  revenue  share
locations,  or have been  installed  in new  revenue  share  sites.  While  this
transaction  generated  an  aggregate  purchase  price  of  $2,856,600,  it also
depleted  monthly  revenue  share  payments  to  the  Company  generated  by the
simulators  that were sold.  Management  intends to contract  with revenue share
partners and install  simulators within its inventory to replenish the cash flow

<PAGE>


lost from 34 of the 44 simulators  that were sold in a timely  manner,  although
there can be no  assurances.  To this end,  the  Company  has  installed  a five
simulator  site in Burlington,  VT, a five  simulator site in Mentor,  OH, a two
simulator site in Sheffield,  OH, and has delivered a two simulator trailer to a
lessee.  The Company has also configured two simulators for lease that were part
of the Dodge exhibit at the Frankfort Motor Show, and are expected to be part of
the Dodge exhibit at future auto shows  throughout  Europe.  Eleven  additional
simulators in three new locations  are scheduled for  installations  pursuant to
either revenue share, lease or purchase agreements.

During the nine months ended September 30, 2005, the operating activities of the
Company used net cash of $843,670  compared to net cash used of $528,670 for the
comparable  period in 2004. The cash requirements from the increases in accounts
receivable  and  inventory  were  partially  offset by the  increase in accounts
payable.  Additionally,  deposits  on  simulator  sales  decreased  due  to  the
recording of four simulator sales  transactions  in the period ending  September
30, 2005.

During the nine months ended  September  30, 2005,  the Company used $312,935 of
cash in investing  activities  compared  with $158,599 of cash used in investing
activities  during the comparable  period in 2004. The purchases in property and
equipment  relates  primarily to the  construction in progress on the nine sites
where new  simulators  were  installed in the first nine months of 2005, the two
new sites where installations are currently occurring and the Myrtle Beach site.
Additionally, $810,766 of assets were either sold in four separate transactions,
or were transferred from work in process to fixed assets.

During the nine months ended September 30, 2005, the Company used $90,660 of net
cash in financing  activities,  compared with the $554,000 the Company generated
in the  comparable  period in 2004.  As detailed  above,  the  Company  repaid a
portion of its  debt obligations during  the nine  month period ending September
30,  2005,  but also  borrowed an  additional  $300,000  during the same period.
Additionally,  the Company negotiated a settlement with one of its landlords for
the payment of rent in arrears over a 12 month period. The settlement amount was
transferred from accrued expenses to notes payable.

The Company's  current debt financing  includes the extension of $350,000,  plus
the addition of $300,000 of the Secured  Bridge Notes and Warrants  initiated in
March of 2003 until  December  31,  2005,  and an extension of a Note and Option
Agreement of $146,000 until December 31, 2005.

As of September  30, 2005,  the Company had cash and cash  equivalents  totaling
$87,408  compared to $1,334,673  at December 31, 2004.  Current  assets  totaled
$1,071,681  at September  30, 2005  compared to $2,058,820 on December 31, 2004.
Current  liabilities  totaled  $3,897,310  on September  30, 2005  compared with
$4,618,647  on December 31, 2004. As such,  these  amounts  represent an overall
decrease in working capital of $265,802 for the nine months ending September 30,
2005.

<PAGE>


ITEM 3. Internal Controls and Procedures

The Principal  Executive  Officer  ("PEO") and the Principal  Financial  Officer
("PFO")  of  the  Company   (currently  one   individual)   have  evaluated  the
effectiveness  of its  disclosure  controls and  procedures  (as defined in Rule
13a-14 of the  Exchange  Act) within 90 days prior to the filing of this report.
Based on that  evaluation,  the PEO and PFO have  concluded  that the  Company's
disclosure  controls and procedures are adequate and effective.  There have been
no significant  changes in the Company's internal  controls,  or in factors that
could  significantly  affect  internal  controls,  subsequent to the most recent
evaluation of such controls.


<PAGE>


                                     PART II

Item 1.  Legal Proceedings

From  time to time,  the  Company  may be party to  various  legal  actions  and
complaints arising in the ordinary course of business.  As of September 30, 2005
and as of the filing of this Interim  Report on Form 10-QSB,  the Company is not
aware of any material legal actions directed against the Company.

Item 2.  Unregistered Sales of Securities and Use of Proceeds

On April 15, 2005, the Company sold Warrants for cash  consideration of $39.269.
The Warrants enable the holder to purchase 900,000 shares of IMTS stock for $.10
per share. Proceeds from the sale were used for working capital.

Item 3. Defaults Upon Senior Securities

None, not applicable.

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

None, not applicable.

Item 5.  Other Information

None, not applicable.

Item 6.   Exhibits and Reports on Form 8-K

A. Exhibits.

         10.1     Form of Note and Option Purchase Agreement and Security
                  Agreement **
         10.2     Form of Procurement Contract **
         10.3     Form of Master Revenue Sharing Agreement**
         10.4     Asset Purchase Agreement with Race Car Simulation Corporation,
                  a portfolio company of Dolphin Direct Equity Partners, LP ***
         11.1     Computation of Earnings (Loss) Per Share
         31.1     Certification of William R. Donaldson as Chief Executive
                  Officer and Chief Financial Officer pursuant to
                  Rule 13a-14 of the Security Exchange Act of 1934.
         32.1     Certification of William R. Donaldson as Chief Executive
                  Officer pursuant to 18 U.S.C. Section 1350.
         32.2     Certification of William R. Donaldson as Chief Financial
                  Officer and Treasurer pursuant to 18 U.S.C. Section 1350.
<PAGE>



         * Incorporated by reference from Form 10-QSB filed on November 14, 2002
         ** Incorporated by reference from Form 10-QSB filed on May 17, 2004
         *** Incorporated by reference from Form 8-K filed on January 6, 2005



B. Reports on Form 8-K.

                  None, not applicable.



<PAGE>



                                   SIGNATURES

Pursuant  to the  requirements  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.

                               INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP.

Date: November 16, 2005        By:    /s/ William R. Donaldson
                               -----------------------------------------------
                               William R. Donaldson
                               Chairman of the Board and Chief Executive Officer


Pursuant to the requirements of the Securities Exchange of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.


Date: November 16, 2005        By:   /s/ William R. Donaldson
                               ----------------------------------------------
                               William R. Donaldson
                               Chairman of the Board and Chief Executive Officer
                               (Principal Executive Officer)

Date: November 16, 2005        By:   /s/ William R. Donaldson
                               -----------------------------------------------
                               William R. Donaldson
                               Chairman of the Board and Chief Executive Officer
                               (Principal Financial Officer)



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                                  EXHIBIT INDEX

Exhibits:

         11.1     Computation of Earnings (Loss) Per Share
         31.1     Certification of William R. Donaldson as Chief Executive
                  Officer and Chief Financial Officer pursuant to
                  Rule 13a-14 of the Security Exchange Act of 1934.
         32.1     Certification of William R. Donaldson as Chief Executive
                  Officer pursuant to 18 U.S.C. Section 1350.
         32.2     Certification of William R. Donaldson as Chief Financial
                  Officer and Treasurer pursuant to 18 U.S.C.
                  Section 1350.