SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                               ------------------
                                   FORM 10-KSB
                   ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended June 30, 1999 Commission File No. 0-23396

                               Skyline Multimedia
                               Entertainment, Inc.
                 (Name of Small Business Issuer in Its Charter)
<TABLE>
<CAPTION>

<S>                                                                                                       <C>
                    New York                                                                              11-3182335
         (State or Other Jurisdiction of                                                                  (I.R.S. Employer
         Incorporation or Organization)                                                                   Identification Number)
</TABLE>

                   350 Fifth Avenue, New York, New York 10118
               (Address of principal executive offices) (Zip Code)

                                 (212) 564-2224
                (Issuer's Telephone Number, Including Area Code)

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

     Units consisting of Common Stock, Class A Warrants and Class B Warrants
                     Common Stock, $.001 Par Value Per Share
                           Redeemable Class A Warrants
                           Redeemable Class B Warrants

     Check whether the Issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities  Exchange Act of 1934 during the preceding
12 months (or for such shorter  period that the  registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days: Yes X No :

     Check if there is no disclosure of delinquent  filers  pursuant to Item 405
of Regulation S-B contained herein, and no disclosure will be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment to
this Form 10-KSB. ?

     The Company's revenues for its most recent fiscal year were $9,603,000.

     The aggregate  market value of the voting stock held by  non-affiliates  of
the  Company  was  $130,565  as of October 12, 1999 based on the average bid and
asked price of $0.098 per share as of that date.

     There were 2,095,000 shares of Common Stock,  $.001 par value,  outstanding
as of October 12, 1999.  Additionally,  there were 1,090,909  shares of Series A
Convertible  Participating  Preferred  Stock,  $.001 par value  per  share,  and
960,000  shares of Class A Common  Stock,  $.001 par  value,  outstanding  as of
October 12, 1999.







<PAGE>
                                     PART I


Item 1.           DESCRIPTION OF BUSINESS.

General

     Skyline Multimedia Entertainment, Inc. (the "Company") is a holding company
incorporated  under the laws of the State of New York on November 2, 1993, which
owns  all of the  outstanding  stock  of its  operating  subsidiaries,  New York
Skyline, Inc. ("Skyline") and Skyline Virtual Reality, Inc. ("SVR"). The Company
is  engaged in the  development  and  operation  of  state-of-the-art  simulator
attractions and high-technology and family  entertainment at established tourist
sites in New York City. All references to the "Company" contained herein include
Skyline and SVR, except where specifically noted.

     On  December  22,  1994,  the  Company  commenced  operations  of its first
attraction,  New York Skyride,  which is located in the Empire State Building in
New York City. New York Skyride is an  exhilarating  simulated  "aerial tour" of
New York City in a futuristic  "spacecopter".  New York Skyride  features two 40
passenger  flight  simulators and related  computer-controlled  film  projection
technologies  to  provide  visitors  with  a  complete  "New  York"  experience,
including an extensive pre-show area featuring  interactive  multimedia exhibits
depicting the various  tourist sites and  attractions in and around the New York
Metropolitan  area,  and  culminating  in a  seven  and  a  half  minute  aerial
"adventure" in and around New York City. Passengers will not only experience the
sensations of an actual aerial flight,  but will also  experience  visual images
projected on screens within the simulator that envelop the viewer with a variety
of sights and sounds.  New York Skyride is intended to provide  visitors  with a
sensation  of taking a "once in a  lifetime"  aerial  adventure  around New York
City.  The Company  believes that New York Skyride is identified  with the focal
point of the  tourism  industry  in New York  City and one of the  world's  most
famous "must-see" attractions.

     On December 27, 1996, the Company commenced operations,  through SVR, of an
interactive virtual reality  entertainment center, XS New York, which is located
in the heart of Times Square in New York City.  XS New York  features the latest
in virtual reality hardware and software,  simulation technology and interactive
participation   game   experiences.   Additionally,   the  facility  includes  a
"cybercafe" which offers light food and refreshments and computer terminals that
are  linked to the  Internet.  XS New York was opened on a preview  basis  until
March 20, 1997, the date of its official Grand Opening.

     During  December 1996, the Company had signed a letter of intent to develop
a simulator  attraction,  similar to New York Skyride, to be located at the base
of the tower above the Centrepoint Shopping Center that adjoins the world famous
Sydney Tower (the "Tower") in Sydney,  Australia.  However,  the Company was not
successful in finalizing  lease  negotiations  with the landlord of the Tower or
arranging for adequate  financing for its "Sydney Skyride" project.  The Company
is in the  process of seeking  to  license  or sell the  Australian-themed  film
footage taken by the Company. There can be no assurance that the Company will be
able to  successfully  license  or sell  such film to these  investors  or other
entertainment companies.

     The Company's  revenues are generated  primarily  from ticket sales for New
York Skyride and game revenue at XS New York, with additional revenues generated
from the sale of food, beverages and souvenir  merchandise.  The Company is also
seeking to enter into corporate  sponsorship and advertising  arrangements  with
certain consumer product companies to provide additional  revenues and marketing
exposure.

     The  Company's  principal  executive  office is located at the Empire State
Building, 350 Fifth Avenue, New York, New York 10118 and its telephone number is
(212) 564-2224.


<PAGE>
The New York Skyride Experience

     New York Skyride is an adventure that captures and builds upon the New York
City tourist  experience.  The Company believes that New York Skyride enhances a
visit  to the  Empire  State  Building  and to New  York  City by  providing  an
exciting,  bird's-eye  view of the  landmarks and sites that cannot be seen from
any other vantage point.

     Visitors to New York  Skyride are treated as  first-class  passengers  on a
futuristic  helicopter  flight around New York City.  Upon entering,  guests are
directed to the pre-show heliport area (approximately  7,500 sq. ft.) where they
are introduced to multimedia  displays  designed and installed by certain of the
Company's  prior  sponsors.  These  displays  depict major New York City tourist
attractions as well as providing  informational and entertaining film clips. The
exhibits  provide the visitor with their first feeling of  participation  in the
New York Skyride experience.

     Following a preflight briefing about "spacecopter"  travel passengers enter
into one of two spacecopters , which are 40 passenger computer-controlled flight
simulators.  At the front of each  simulator  is a large 18' x 18'  screen  upon
which New York  Skyride's  super  35mm film is  presented.  The  simulator  also
contains an advanced 8-channel digital sound system, with 4 dual amplifiers, 400
watts per channel each (or 3,200 watts of total  sound),  to provide  passengers
with an enhanced audio/visual experience.

     Once  the  passengers  are  seated  in  the   spacecopter,   they  begin  a
seven-and-a-half minute simulated flight that treats them to a spectacular array
of New York City scenes and adventures.  For example,  the  spacecopter  crashes
into FAO  Schwarz,  the world's  largest toy store,  passes  directly  under the
Brooklyn  Bridge,  "dives" into a tunnel,  crashes into the East River and has a
run-in with a New York City traffic cop,  among other exciting  adventures.  The
spacecopter  also  visits  many of New York City's  other  tourist  attractions,
including  Fifth Avenue,  the World Trade Center  Towers,  Central  Park,  Times
Square and the Statue of  Liberty.  Since New York  Skyride is  intended to be a
family-oriented  attraction,  the film makes the Empire State Building the focal
point of the  attraction,  with a liftoff and landing taking place from atop the
Empire State Building,  to appeal to the broadest audience and not just the most
adventurous thrill-seekers.

     Once the spacecopter flight is complete, passengers exit the simulators and
proceed  to the  lobby  and a  beverage,  food  and  souvenir  concession  area.
Passengers are able to purchase souvenirs of their visit to New York Skyride.

The XS New York Experience

     XS New York is an interactive virtual reality  entertainment center located
in the heart of Times Square in New York City.  XS New York  presents the latest
in entertainment technology, featuring cutting-edge virtual reality hardware and
software. Upon entering XS New York, guests are immersed in futuristic graphics,
lighting,  audio and video  treatments.  Upon  further  inspection,  guest  find
interactive  show action  equipment and special effects areas that allow them to
experience the latest in virtual reality and similar  technologies.  Some of the
equipment offers  competition  between players while others provide  exploratory
experiences.  Several  attractions  include a  3-dimensional  action  and visual
presentation  allowing  guests  to view  their own  activity,  the  activity  of
competitors and the attractions' vital statistics on giant overhead monitors and
projection  screens.  Still other  attractions  can be programmed to function as
stand  alone  units or in  conjunction  with other  players at other  locations.
Tickets are  purchased  from a centrally  located  ticket area.  Guests are also
invited to enjoy XS New York's "Cybercafe" which serves light food and beverages
while  providing  access to the World Wide Web and Internet from  table-based PC
computer stations. Finally, guests can purchase "XS" related merchandise as well
as specialty souvenirs in XS New York's retail area.


<PAGE>
Simulator and Virtual Reality Technologies

     The Company's  motion  simulator  attractions  utilize  computer-controlled
aircraft flight simulators. Simex, Inc. (formerly Interactive Simulation, Inc.),
a  Canadian  company   experienced  in  simulation   technology,   provided  the
sophisticated  computer  hardware and software that coordinates the movements of
the  simulator  platform with the images  projected on the screen.  The range of
motion for the  simulators is along six axes (that is, the simulators can create
up and down motions, right and left motions,  angled motions to simulate turning
or banking while climbing or descending at varying degrees and a spin motion, or
some  combination of the above).  The movable  platforms on which the simulators
rest and which move in  synchronization  with the film were  developed  by Moog,
Inc.,  a large  defense  contractor  experienced  in the  adaptation  of  flight
simulator technology to the entertainment market.

     A key component of the simulator  technology is the "show control  system",
which is a PC-based computer program that coordinates and manages the motion and
gyration of the simulator with the film and audio  elements of the program.  For
example,  when the film image shows the spacecopter  banking to the right, there
must be a precise,  coordinated  movement of the simulator in that  direction to
both convince the  passengers'  senses that they are flying in a spacecopter and
prevent passenger  disorientation.  The speed of the film through the projection
system is faster than normal film,  television or video footage,  which enhances
the  passengers'  perception of motion and  movement.  The film is in super 35mm
format  projected  at 30 frames per second  rather  than  standard 24 frames per
second,  which provides a sharper,  more intense image. The projection equipment
is a fully automated  system that eliminates the need for a projector  operator.
The film was developed in  conjunction  with  Chromavision  Corp.,  a production
studio with extensive experience in fast-paced concept films.

     XS New York features a wide assortment of the latest in  entertainment  and
virtual reality  hardware and software  technologies.  The  interactive  virtual
reality technologies which are showcased at XS New York include:  Alpine Racer -
a  simulated  slalom  ski  race,  Daytona  Speedway  - a  simulated  car  racing
experience,  a laser tag arena,  and a virtual  PC-based  "battle  ground" where
players compete on-line and in person on stage.

The Empire State Building Location

     New York  Skyride is  located on the second and third  floors of the Empire
State  Building,  in a 21,800  square foot site that wraps  around the south and
west sides of the building.  The location's entrance is situated adjacent to the
main  lobby  escalator  that  takes all  visitors  to the  waiting  area for the
Observatory  elevators.  Signs in the Empire State  Building's  lobby and in the
Observatory  ticket  purchase area inform  visitors to the Empire State Building
about New York Skyride.  Most importantly,  visitors who purchase tickets to the
Observatory are offered the choice of purchasing a combined Observatory/New York
Skyride  ticket at a reduced  price,  as compared with the separate  purchase of
tickets to both attractions.  The cost of individual tickets to New York Skyride
and the Observatory are $11.50 and $6.00 for adults, respectively, and $8.50 and
$3.00 for children under the age of 12, respectively. In comparison, the cost of
a  combined  ticket  with the  Observatory  is $14.00  for  adults and $9.00 for
children under the age of 12. Any discount  resulting from combined ticket sales
are deducted from the admission price of a New York Skyride  ticket.  Children's
rates,  group  rates and  senior  discounts  are also  offered  along with other
promotional discounts.

     The Empire State Building is a focal point for the tourism  industry in New
York  City.  The  Observatory,  which  opened in 1933 and is located on both the
102nd and the 86th floors, has achieved worldwide recognition and publicity, and
is a primary  destination  for a large  percentage  of New York  City's  tourist
traffic.  Estimated paid attendance figures provided by management of the Empire
State Building for the last five years for the Observatory are summarized below.


<PAGE>
                        EMPIRE STATE BUILDING OBSERVATORY
                         ADMISSION TICKET SALES (000'S)
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<CAPTION>


         YEAR                               1994     1995     1996     1997     1998
                                            ----     ----     ----     ----     ----

<S>                                         <C>      <C>      <C>      <C>      <C>
TOTAL ATTENDANCE                            2,915    3,350    3,350    3,675    3,614
</TABLE>


     For the year ended June 30, 1999, the Company's capture rate of Observatory
visitorship averaged  approximately 15.6%, down from an average of approximately
16% for the year ended June 30, 1998,  and 19% for the year ended June 30, 1997.
The Company believes that the decrease in the capture rate is a direct result of
issues  involving  management  of the Empire  State  Building  as set forth in a
pending  lawsuit by the Company  against the Empire State  Building  Company and
others. See "Legal Proceedings." The Company is currently engaged in discussions
with management of the Empire State Building to resolve this situation. However,
there can be no assurance  that  satisfactory  resolution  of any issues will be
achieved or that the capture rate will increase to previous levels.

The Times Square Location

     The Company currently leases  approximately  13,000 square feet of space at
1457-1463  Broadway  (at  42nd  Street),  New  York,  New  York in the  Business
Improvement  District  Entertainment  Zone  located in Times  Square in New York
City.  The  Company  utilizes  this space for its  interactive  virtual  reality
entertainment center - XS New York. See "Item 2. Description of Property."

Advertising and Promotional Plans

     The Company's  current  marketing  plans include a multifaceted  marketing,
public relations and advertising  program to heighten  awareness of the New York
Skyride,  and the XS New York facility,  among the more than 25 million  persons
who visit New York City every year.  The Company has enlisted the services of an
advertising agency to aid in its advertising and marketing campaign.

     New York Skyride's advertising and promotional support programs concentrate
on tourist to New York City,  families  with  children  in the  Greater New York
metropolitan  area, and youth groups from surrounding areas. The Company is also
continuing  its  efforts  to attract  attendees  to the  Empire  State  Building
Observatory by offering combined  Observatory and Skyride Admission tickets. The
Company also  co-markets with other New York City tourist  companies,  including
Circle Line and Gray Line.

     XS New York's  efforts  target young  adults,  Times Square  visitors,  and
corporate groups.  The Company is also focused on developing its corporate event
business for group functions, product introduction parties, meetings and holiday
parties.


<PAGE>
     In addition,  the Company  continues to promote New York Skyride and XS New
York to tourist boards, travel agents, managers of group activities and visitors
to New York City.  Special volume  discounts,  travel agent packages,  and other
special  programs are offered to target group audiences,  especially  during the
slower tourist periods in the fall and winter months.

Corporate Sponsors

     Historically,  the Company has solicited and maintained  several  corporate
sponsorships from consumer product companies.  The Company currently has no such
sponsorship   agreements.   The  Company  is  currently  seeking  new  corporate
sponsorships that will result in greater market awareness and acceptance through
the association of New York Skyride and XS New York with their  products.  There
can be no assurance that the Company will be able to successfully enter into new
sponsorship agreements.

License Agreements

     On February  26,  1993,  the  Company,  through  Skyline,  entered  into an
exclusive  license  agreement  (the "License  Agreement")  with the Empire State
Building  Company,  the operator of the Empire State  Building in New York City.
The License Agreement  provides for the joint sale of tickets to the Observatory
and New York  Skyride  so long as the  Company  makes  monthly  payments  at the
following annual rates:

i.   $150,000 from April 1, 1995 through March 31, 1998,
ii.  $175,000 from April 1, 1998 through March 31, 2002,
iii. $200,000 from April 1, 2002 through March 31, 2006,
iv.  $225,000 from April 1, 2006 through April 30, 2013, and
v.   $186,000 from May 1, 2013 through June 30, 2016.

     The License  Agreement also requires the Company to reimburse certain costs
and  expenses  relating to the joint  ticket  sales and  contains  cross-default
provisions  in the event of a default  under the Lease.  The term of the License
agreement  has been  extended  from its original  20-year term to a term lasting
through June 30, 2016,  which  coincides  with a new lease for space adjacent to
the New York Skyride  location.  For a  description  of the lease,  See "Item 2.
Description of Property."

Patents and Trademarks

     The Company  does not hold any patents  relating to New York  Skyride or XS
New York and their related technologies.  Accordingly,  the Company's concept is
not proprietary and is subject to duplication and competition from entities with
greater  resources  and  strengths  than the  Company.  The Company has obtained
registered trademarks for the name "New York Skyride" and "XS", however,  during
November  1997,  the  Company  agreed to sell the "XS"  trademarks  and  related
intellectual  property rights to an equipment  supplier.  In return, the Company
renegotiated  its  revenue  sharing  agreement  to reflect  the  trademark  sale
agreement and the equipment supplier forgave approximately  $427,000 owed by the
Company.  In addition,  the Company can continue to use the "XS"  trademarks and
related  concepts  at  its  Times  Square  location,  pursuant  to a  three-year
renewable  license  agreement.   In  December  1998,  the  Company  amended  the
revenue-sharing  agreement to increase the percentage of revenues payable to the
equipment  vendor.  The  Company  believes  that  this  amendment  will  provide
incentive to the equipment  vendor to add more games and help increase  revenues
from the XS New York facility.


<PAGE>
Competition

     New York  Skyride  and XS New York  compete  with all  other  New York City
tourist  attractions  and  cultural  events  such as  museums,  Broadway  shows,
shopping boutiques and cultural and historic landmarks.  While these attractions
are quite  different  "experiences"  from New York  Skyride's  spacecopter  trip
(which the  Company  believes  is the first  attraction  of its type in New York
City) or XS New York's virtual reality and simulator technologies, they continue
to present intense  competition for attendance and visitor  dollars.  Generally,
these other  attractions  are more  established,  and are owned and  operated by
entities that have greater financial resources and managerial expertise than the
Company.  In addition,  more intense competition of this type can be expected at
Times  Square due to the major  entertainment  complex  that is being  developed
there. The complex will include entertainment attractions from companies such as
Disney,  American Cinema, Madame Tussaud,  ESPN, Broadway City, E-Walk and other
large entertainment companies.

     In addition to competing  with  general New York City tourist  attractions,
New York Skyride and XS New York have direct  competitors in the virtual reality
and  simulator   markets.   In  September   1999,  ESPN  Zone,  a  sports  based
entertainment  attraction utilizing virtual reality and simulator  technologies,
began  operations  in  their  Times  Square  location.  Furthermore,  a New York
helicopter  tour  simulator  attraction  opened in March 1997 at the World Trade
Center  Towers.  There  can be no  assurance  that  other  virtual  reality  and
simulator  attractions will not commence  operations in the New York area in the
future.

     Insofar as motion simulation  technologies,  including show control systems
(and related projection and audio technologies), are subject to improvements and
enhancements,  it is possible that competitive attractions will be able to offer
more  technologically  advanced  "experiences"  to customers than the experience
offered  by New York  Skyride.  Also,  the  Company  believes  that a number  of
attractions  utilizing  "virtual  reality" imaging  technologies,  or large film
format technologies with enhanced  3-dimensional  projection  technologies,  are
likely to open in the New York area within the near future. These attractions do
not depend on motion  simulators  for their special  effects,  and they are also
likely to be developed and operated by companies that have significantly greater
financial, managerial and promotional experience and resources than the Company.
While these  attractions may not offer a directly  competitive  "product" to New
York Skyride (i.e., an aerial  adventure in New York City) or XS New York, their
presence  will  certainly  create  significant  competition  for the  Company to
attract  visitors to New York Skyride and XS New York.  The Company will compete
with these entities  primarily on the basis of location,  uniqueness of product,
marketing and price.

Employees

     As of September  24, 1999,  the Company  employed five  management  persons
(other than the Company's  Executive Officers) on a full-time basis. The Company
also employs approximately 155 non-management personnel.  Since August 1997, the
Company has contracted with employees for its XS New York facilites  through the
International Union of Industrial,  Service, Transport and Health Employees. The
Company  believes that it has had good relations  with the union,  and that such
union  representation  will not have a material  adverse effect on the Company's
financial condition or results of operations.

Item 2.           DESCRIPTION OF PROPERTY.

     The Company's executive offices are located at the Empire State Building at
350 Fifth Avenue,  New York,  New York.  These  offices  consist of 4,400 square
feet, and are leased at a cost of approximately  $110,000,  payable monthly, and
expiring on October 31, 1999.
<PAGE>
     In addition to these offices,  the Company has four lease agreements on its
two operating  sites.  On February 26, 1993, the Company  entered into the First
Lease  agreement  with the  operator  of the  Empire  State  Building,  to lease
approximately  17,800  square  feet on the  second  floor  of the  Empire  State
Building for a term of 20 years.  The First Lease has been  extended to a longer
term,  lasting  through  June 30,  2016,  to coincide  with the Second and Third
Leases for additional  space, as described below. The Company's annual base rent
under the First Lease is scheduled in the following manner:

i.        $391,798 from April 1, 1998 through March 31, 2002,
ii.       $445,225 from April 1, 2002 through March 31, 2006,
iii.      $498,642 from April 1, 2006 through March 31, 2009,
iv.       $534,270 from April 1, 2009 through April 30, 2013, and
v.        $441,663 from May 1, 2013 through June 30, 2016.

     The annual rent is payable  monthly and subject to  additional  amounts for
taxes and  utilities.  The Company  was not  required to pay the first 21 months
rent, which benefit is being amortized over the term of the Lease.

     The Company also leases an  additional  4,000 square feet located above the
primary  leased  premises (the "Second  Lease").  The Company uses this space to
accommodate the two large screens (18' X 18') on which the New York Skyride film
is shown.  The Second Lease  premises has an annual base rent of $76,000,  which
increases to $120,000  over the term of the lease.  The term of the Second Lease
coincides with the term of the First Lease and License Agreement, as modified.

     During  April 1996,  the Company  signed a 20 year  renewable  lease for an
additional  35,000 square feet within the Empire State Building  adjacent to the
New York Skyride facility (the "Third Lease"). The lease commenced July 1, 1997.
The Company is required to pay rent at the following annual rates:

         (i)      $600,000 from August 1, 1998 through July 31, 1999,
         (ii)     $619,000 from August 1, 1999 through July 31, 2000,
         (iii)    $741,000 from August 1, 2000 through July 31, 2004,
         (iv)     $811,000 from August 1, 2004 through July 31, 2007,
         (v)      $882,000 from August 1, 2007 through July 31, 2010,
         (vi)     $953,000 from August 1, 2010 through July 31, 2013, and
         (vii)    $1,023,000 from August 1, 2013 through July 31, 2016.

     In addition,  the Third Lease  contained a rent credit of  $1,363,000 to be
applied in equal  monthly  installments  against the base rent over the first 60
months of the lease,  as well as rent  escalation  provisions  and certain other
provisions  relating to additional  rent,  taxes,  utilities,  and  prohibitions
against assignment.

     The Company had  intended  to utilize  the  additional  space in the Empire
State Building to create a mixed use entertainment center, for which the Company
would need additional  capital.  Development plans for the additional space have
been deferred until the Company  resolves its  litigation  with the Empire State
Building  Company.  See "Legal  Proceedings." No assurance can be given that the
Company's plans to develop the additional space will be realized. The Company is
in the process of  finalizing a settlement  if its lawsuit with the Empire State
Building.  The proposed settlement,  as presently envisioned,  would provide for
the  Company  to  relinquish  back  to the  Empire  State  Building  the  unused
additional  second floor space.  No assurance  can be given that the  settlement
will be consummated in this form, if at all.

     Lastly,  during April 1996 the Company  entered  into a ten year  renewable
lease  with  the  owners  of  1457-1463   Broadway,   New  York,  New  York  for
approximately  13,000  square feet of space (the  "Fourth  Lease").  The Company
currently  occupies  the ground floor and  mezzanine  level and  commenced  full
operations of its  interactive  virtual  reality  entertainment  center in March
1997. See "The XS New York Experience".  The rent commencement date was February
1, 1997 and annual rental payments are $560,345 for each of the first five years
and  $644,000  for each of the last 5 years of the lease.  During  June 1997 the
Company amended the lease to include 5,760 square feet of additional space at an
annual rental of approximately  $29,000. Such annual rent is payable monthly and
subject to additional amounts for taxes. In April 1999, the Company renegotiated
both  of  the  leases  for  the  Times  Square  premises  so  that  each  of the
aforementioned  rents has been reduced by 25%,  respectively.  This reduction in
rent will be offset against the  reimbursement by the landlord upon termination,
if any.
<PAGE>
     The Fourth Lease contains a cancellation  clause exercisable at any time in
the event the  landlord  commences  construction  of office  buildings  and uses
incidental thereto on the site at some future date. Should the landlord exercise
the  cancellation  clause,  the  Company  would be  required to vacate the space
within six months after notice,  but would be entitled to  reimbursement  during
the first five years of the lease of a portion of its out-of-pocket construction
costs,  not to exceed $125 per square foot.  In the event the lease is canceled,
the Company will incur a charge to earnings equal to the unamortized  portion of
its investment  (adjusted for assets which are sold and reimbursed  construction
costs) at the time of such lease cancellation..  The Company has become aware of
plans by the landlord to sell the property to a developer.  However, the Company
is not  certain  of the  timing of the sale of such  property  or  whether  such
developer will construct  office  buildings and uses  incidental  thereto on the
site.  Further,  the  Company  has  not  received  notice  of  exercise  of  the
cancellation  clause.  Nonetheless,  there can be no assurance that the landlord
will not  cancel  the  lease  earlier.  Cancellation  of the  lease  will have a
material  adverse  effect on the Company's  operations  and financial  condition
taken as a whole.

     The Company  believes that its  facilities are adequate for its current and
expected future levels of operations.


Item 3. LEGAL PROCEEDINGS.

     The Company was a defendant in a lawsuit  filed by  Knightsbridge,  Ltd., a
construction  contractor hired by the Company in connection with its XS New York
project.  The action,  commenced in June 1997, in the Supreme Court of the State
of New York was finally  settled in July 1999, at which time the Company reached
a  agreement  with  respect to the  remaining  outstanding  claims made by three
subcontractors.  Pursuant to the  settlement  agreement,  the  Company  paid the
subcontractors $57,500 in July 1999 and $57,500 in August 1999.

     On December  23, 1997 the Company  filed an action in the Supreme  Court of
the State of New York, County of New York, against Empire State Building Company
("ESBCo"),  Empire  State  Building  Associates,  Helmsley-Spear,  Inc.  et.al.,
seeking,  among  other  things,  injunctive  relief to  prohibit  the ESBCo from
terminating  the Company's Lease and the License  Agreement  relating to the New
York Skyride and also seeking  significant damages from the ESBCo. The basis for
the Company's  claims are,  among other things,  the lack of  cooperation by the
ESBCo and its staff in violation of the Lease and the License Agreement, as well
as bad  faith,  fraud and  self-dealing  on the part of the  ESBCo  and  certain
members of its management staff.

     The Company  has  received a  preliminary  injunction,  which,  among other
things,  prohibits  the ESBCo from  terminating  or canceling  the Lease and the
License  Agreement and restrains the ESBCo from  interfering  with the Company's
business or commencing any proceedings with respect to the Lease and the License
Agreement. A hearing with respect to the temporary restraining order was held on
February 6, 1998.  Subsequently,  in April 1998,  the Company  paid  $838,000 in
undisputed  rent,  pursuant  to a court  order,  which  order also  granted  the
Company's   motion  for  a   preliminary   injunction   and  provided  that  the
determination  of disputed  rent amounts be  submitted to a referee.  Since that
time,  the referral to a referee has been  rescinded and the disputed rent issue
referred to general  arbitration.  On February  26, 1999,  the Company  sought a
preliminary  injunction  to  prevent  the ESBCo from  terminating  the Lease for
undeveloped  space on the second floor of the Empire State  Building.  The Court
ruled  in  favor  of the  Company  on  the  motion  and  granted  a  Yellowstone
injunction.  If the  settlement  of the  case is not  consummated,  the  Company
intends to proceed with  discovery  with respect to its other claims for damages
against  the  ESBCo  and  its  affiliates.  The  Company  is in the  process  of
finalizing a  settlement  of its lawsuit  with the Empire  State  Building.  The
proposed settlement,  as presently envisioned,  would provide for the Company to
relinquish back to the Empire State Building the unused  additional second floor
space. No assurance can be given that the settlement will be consummated in this
form,  if at all.  In the event a  settlement  cannot be  reached,  the  Company
intends to proceed with  discovery  with respect to its other claims for damages
against  the ESBCo and its  affiliates.  The  Company  intends to  proceed  with
discovery with respect to its other claims for damages against the ESBCo and its
affiliates.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.

         Not Applicable.



<PAGE>
                                     PART II


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


                          PRICE RANGE OF COMMON EQUITY


     Prior to  February  14,  1994,  the date of the  Company's  initial  public
offering,  there was no public  market  for the  Units,  Common  Stock,  Class A
Warrants or Class B Warrants  (collectively,  the  "Securities").  From February
1994 through  December 1997,  each of these classes of securities were quoted on
the Nasdaq  SmallCap  Market  under the  symbols  "SKYLU,"  "SKYL,"  "SKYLW" and
"SKYLZ," respectively.  In December 1998, the Company's Securities were delisted
from the Nasdaq SmallCap Market. Since that time, the Company's Common Stock has
been  traded on the Over The Counter  Bulletin  Board (the  "OTCBB"),  under the
symbol "SKYL".

     The following table sets forth the high and low sales prices for the Units,
Common  Stock,  Class A  Warrants  and Class B Warrants  for the fiscal  periods
indicated  as  reported  by  Nasdaq  or  in  the  over-the-counter  market.  The
quotations  shown represent  inter-dealer  prices without  adjustment for retail
mark-ups,  mark-downs or  commissions,  and may not  necessarily  reflect actual
transactions.
<TABLE>
<CAPTION>


                                                                    Fiscal 1999                   Fiscal 1998
                                                                                                  -----------


UNITS                                                           High             Low            High             Low
-----                                                           ----             ---            ----             ---
<S>                                                              <C>            <C>             <C>           <C>
1st Quarter...............................................       5/8            1/16            4 3/4           3 3/8
2nd Quarter...............................................       5/8            1/16            3 1/4            5/8
3rd Quarter...............................................       --              --              7/8             1/2
4th Quarter...............................................       --              --             9/32            9/32




COMMON STOCK                                                    High             Low            High             Low
------------                                                    ----             ---            ----             ---
1st Quarter...............................................       1/2             1/8            3 1/4           1 7/8
2nd Quarter...............................................       1/4            1/16           2 3/32           7/32
3rd Quarter...............................................       3/8            1/16             7/8             3/8
4th Quarter...............................................       ---             ---            11/16            1/4




CLASS A WARRANTS                                                High             Low            High             Low
----------------                                                ----             ---            ----             ---
1st Quarter...............................................        0               0              7/8            7/16
2nd Quarter...............................................        0               0             13/32           1/32
3rd Quarter...............................................        0               0             1/16              0
4th Quarter...............................................        0               0               0               0




CLASS B WARRANTS                                                High             Low            High             Low
----------------                                                ----             ---            ----             ---
1st Quarter...............................................        0               0             7/16             1/4
2nd Quarter...............................................        0               0             3/16            1/32
3rd Quarter...............................................        0               0               0               0
4th Quarter...............................................        0               0               0               0

</TABLE>
<PAGE>
     The per share  closing  sales price of the Common  Stock as reported by the
OTCBB on October 12, 1999 (the date of the last reported sale) was $0.098. As of
October 12, 1999, the Company had in excess of 400 beneficial  shareholders  and
25 shareholders of record.

Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
        AND RESULTS OF OPERATIONS

Introduction

     The  following  discussion  of  the  financial  condition  and  results  of
operations  of the  Company  should be read in  conjunction  with the  Financial
Statements  and  Notes  thereto   included.   This  document   contains  certain
forward-looking  statements including,  among others,  anticipated trends in the
Company's  financial  condition  and  results of  operations  and the  Company's
business  strategy.  These  forward-looking  statements are based largely on the
Company's  current  expectations  and are  subject  to a  number  of  risks  and
uncertainties. Actual results could differ materially from these forward-looking
statements.  Important  factors to consider in evaluating  such  forward-looking
statements  include (i) changes in external  market  factors or in the Company's
internal budgeting process which might impact trends in the Company's results of
operations; (ii) unanticipated working capital or other cash requirements; (iii)
changes in the  Company's  business  strategy  or an  inability  to execute  its
strategy due to  unanticipated  changes in the  industries in which it operates;
and (iv) various  competitive market factors that may prevent the Company's from
competing successfully in the marketplace.

Overview

     The Company  was formed in November  1993.  In February  1994,  the Company
consummated  an initial  public  offering  from which it received  aggregate net
proceeds of approximately  $6,200,000,  which proceeds were used principally for
the development of New York Skyride.  Prior to the initial public offering,  the
Company's activities consisted primarily of developmental activities,  including
the preparation of plans relating to the design of New York Skyride; negotiation
of a lease  and a license  agreement  with the  operators  of the  Empire  State
Building  (the  location  for  New  York  Skyride);   working  with   engineers,
architects,  contractors,  designers,  and other parties in connection  with the
construction  and operation of New York Skyride;  developing  software and video
films in connection  with New York  Skyride;  developing  marketing  strategies;
initiating  marketing and corporate  sponsorship  activities by identifying  and
contacting  potential  strategic  alliances;  selecting a management  team;  and
obtaining financing.

     On December 22, 1994, the Company commenced  operations of New York Skyride
and began generating revenue from ticket sales to the attraction and the sale of
merchandise  at its  souvenir/concession  area. New York Skyride was opened on a
preview basis until February 21, 1995, the date of its official Grand Opening.

     For the years ended June 30, 1999 and 1998,  the Company's New York Skyride
facility   was  visited  by   approximately   582,000  and  600,000   customers,
respectively.

Results of Operations

     Year Ended June 30, 1999 compared to Year Ended June 30, 1998

Revenues

     Revenues  generated  during the year ended June 30,  1999 and June 30, 1998
aggregated  $9,603,000 and $10,834,000,  respectively.  The decrease in revenues
from the prior year is primarily  due to a decrease in revenues at the Company's
XS New York facility,  which accounted for revenues of approximately  $3,590,000
for the year ended June 30, 1999, as compared to  $4,811,000  for the year ended
June 30, 1998. In addition,  there was a decrease in sponsorship  income,  which
accounted for revenues of $101,000 for the year ended June 30, 1999, as compared
to $271,000 for the prior year  period,  due to the  expiration  of all existing
sponsorship agreements.


<PAGE>
Operating Expenses

     Operating  expenses  incurred  for the year ended June 30, 1999  aggregated
$12,419,000  as compared to  $17,901,000  for the year ended June 30, 1998.  The
decrease was due, in part, to the following:

          o At June 30,  1998,  the Company  recorded an  impairment  loss,  and
     wrote-down  approximately $3,644,000 of the carrying value of its assets at
     XS New York.  The write-down  resulted from published  reports of a sale of
     the property, which, if consummated, would trigger a cancellation clause in
     XS New York's lease;

          o The Company recorded a loss of approximately $224,000 as a result of
     the retirement of certain virtual reality  equipment at XS New York for the
     year ended June 30, 1998;

          o As a result of a default  on the lease for the  cancelled  Woodfield
     Mall project,  in Schamberg,  Illinois,  the Company  incurred  expenses of
     approximately for the year ended June 30, 1998 of $640,000;

          o As a result of costs  related to the  Sydney  Skyride  Project,  the
     Company  incurred  expenses  for the year ended June 30, 1998 of  $515,000,
     whereas the Company incurred charges of $308,000,  consisting  primarily of
     the  write-off  of  assets,  for the year  ended  June 30,  1999 due to the
     cancellation of the Sidney Skyride  Project; and

          o The Company incurred costs relating to the proposed warrant exchange
     offer, which was terminated on November 4, 1997, of approximately  $180,000
     for the year ended June 30, 1998.

Extraordinary Gain

     The Company,  as a result of negotiations with certain creditors,  recorded
an  extraordinary  gain from the  settlement  of  liabilities  of  approximately
$213,000 for the year ended June 30,  1999,  as compared  with  $659,000 for the
year ended June 30, 1998;

Net Loss and Loss Per Share

     The basic and diluted net loss and net loss per share  available  to common
shareholders  was  ($3,994,000)  and (1.76) for the year ended June 30,  1999 as
compared to ($8,235,000) and ($4.92) for the year ended June 30, 1998.

     The net loss for the year  ended  June 30,  1999  included  net  losses  of
approximately  ($2,620,000) at XS New York (excluding an  extraordinary  gain of
$213,000  from  the   settlement  of   liabilities   with  certain   creditors),
approximately  ($1,279,000) at New York Skyride,  and  approximately  ($308,000)
relating to the Sydney Skyride project.

     The net loss for the year ended June 30, 1998 included an  impairment  loss
and  write-down  of  approximately  $3,644,000  of  the  carrying  value  of the
Company's  assets at XS New York, a loss of approximately  $224,000  relating to
the retirement of certain virtual  reality  equipment at XS New York, and a loss
of  $1,155,000  as a result of costs  incurred on the  Woodfield  Mall Lease and
Sydney Skyride Projects.

     For the year  ended  June  30,  1999,  New York  Skyride  had  income  from
operations (before interest expense) of approximately  $419,000 (excluding legal
fees of  approximately  $258,000 from its legal  proceedings with the ESBCo, and
rent  of  approximately  $866,000  on  additional  space  at  the  Empire  State
Building),  as compared to income from operations  (before interest  expense) of
approximately  $270,000 (excluding legal fees of approximately $275,000 from its
legal  proceedings  with  the  ESBCo,  and  rent of  approximately  $740,000  on
additional space at the Empire State Building) for the year ended June 30, 1998.
Income from operations at New York Skyride  improved from the previous year as a
result of a reduction in overhead at New York Skyride.


<PAGE>
     XS New York incurred a loss from operations  (before  interest  expense) of
approximately  ($1,803,000)  for the year ended June 30,  1999 as  compared to a
loss from operations (before interest expense) of approximately ($1,043,000) for
the year ended June 30, 1998.  Losses from  operations at XS New York  increased
from the previous year primarily as a result of a decrease in revenues.

Working Capital Deficiency

Liquidity and Capital Resources

     The  working  capital  deficiency  at  June  30,  1999,  was  approximately
($5,593,000)   compared  to  a  working  capital   deficiency  of  approximately
($4,911,000) at June 30, 1998. The increase in the working capital deficiency is
primarily  the  result of the loss from  operations  for the year ended June 30,
1999, which included rent expense relating to the additional space in the Empire
State Building and legal fees in connection with its legal  proceedings  against
the ESBCo.

     The Company has historically sustained its operations from the sale of debt
and  equity  securities,   through  institutional  debt  financing  and  through
agreements or arrangements for financing with certain key suppliers.

     As of June 30, 1999, the Company had the following  financing  arrangements
in place:

               o In December  1996,  the Company  entered  into a Senior  Credit
          Agreement  with  Prospect  Street and Bank of New York, as Trustee for
          the  Employees  Retirement  Plan of the  Brooklyn  Union Gas  Company.
          Pursuant  to the  agreement  (as  amended),  the  Company  borrowed an
          aggregate of  $4,450,000.  The funds  borrowed  accrue  interest at an
          annual  rate of 14% and  require  the  payment of both  principal  and
          interest five years from the date of issuance.  In connection with the
          Senior Credit Agreement,  the lenders received warrants to purchase up
          to an aggregate of 434,146 shares of Common Stock,  which warrants are
          exercisable  until December 20, 2006 at an exercise price of $4.25 per
          share.

               o In June 1997, the Company borrowed an additional  $500,000 from
          Prospect  Street.  The loan is payable on demand and bears interest at
          the rate of 14% per annum.

               o In December  1997,  the Company  borrowed  $500,000 from a bank
          bearing  interest  at the rate of 6.25% per annum that is secured by a
          Certificate of Deposit from Prospect Street.

               o In May 1998,  the Company and its  subsidiaries  entered into a
          Senior Secured Credit  Agreement with the Bank of New York, as Trustee
          for the Employees Retirement Plan of Keyspan Energy Corp. and Prospect
          Street  pursuant  to  which  the  Company  borrowed  an  aggregate  of
          $935,000.  The funds borrowed accrue interest at an annual rate of 14%
          and are  payable  on  demand.  The Notes  are  secured  (with  certain
          exceptions) by all the assets of the Company and its subsidiaries.  In
          connection with the Credit Agreement, the lenders received warrants to
          purchase 94% of the fully diluted  Common Stock of the Company  (after
          issuance) at an exercise  price of $.375 per share.  The notes and the
          obligations  under the  Credit  Agreement  and the  warrants  are also
          collateralized by a pledge of the stock of the Company's subsidiaries.
          In addition, Keyspan also received the right to appoint two members to
          the Company's Board of Directors. Further, as a result of the issuance
          of warrants in connection  with the Financing,  the conversion rate of
          the Series A Preferred Stock held by Prospect Street was adjusted from
          a  conversion  rate of one  share of Common  Stock  for each  share of
          Preferred  Stock to a  conversion  rate of 6.91 shares of Common Stock
          for  each  share of  Preferred  Stock.  On May 29,  1998,  the  Credit
          Agreement  was amended to increase  the loan amount  funded by Keyspan
          from an aggregate of $500,000 to $1,850,000  which increased the total
          financing  from  $935,000  to  $2,785,000.  In  addition,  the  Credit
          Agreement was further amended, subsequent to June 30, 1998, to include
          under its terms the $500,000  demand loan to the Company from Prospect
          Street in June 1997.
<PAGE>
     In  addition to the  foregoing,  as of June 30,  1999,  the Company had the
following agreements or arrangements with certain key suppliers in place:

               o The Company has entered into an agreement with its major gaming
          equipment  supplier  pursuant to which the  Company has been  provided
          with certain equipment for use in its XS New York facility in exchange
          for agreeing to (i) share a percentage of the revenues  generated from
          the XS New York  facility  with  the  supplier  and  (ii)  sell the XS
          trademark  and related  intellectual  property  rights to such vendor.
          With respect to the revenue  sharing  obligation,  the  agreement  (as
          amended) provides for the Company to share 16% of the net revenue,  as
          defined,  and 50% of the excess over such amount.  The  agreement  (as
          amended)  also  provides  that the Company can  continue to use the XS
          trademark at its Times Square location pursuant to a license agreement
          entered into in connection with the sale of the trademark.

               o The lease for the XS New York location  contains a cancellation
          clause  exercisable  at any time in the  event  the  landlord  opts to
          commence construction of an office building on the site at some future
          date.  Should the  landlord  exercise  the  cancellation  clause,  the
          Company  would be required to vacate the space within six months after
          notice,  but would be entitled to reimbursement  during the first five
          years of the  lease of a  portion  of its  out-of-pocket  construction
          costs,  not to exceed $125 per square foot. In April 1999, the Company
          renegotiated  the lease for the Times Square premises so that the rent
          has been reduced by 25%. This reduction in rent will be offset against
          the  reimbursement  by the  landlord  upon  termination,  if any.  The
          Company has become aware of plans by the landlord to sell the property
          to a  developer.  The Company is not certain of the timing of the sale
          of such property or whether such  developer  will  construct an office
          building on the site.  As of June 30,  1998,  the Company  recorded an
          impairment  loss and wrote-down the carrying value of its assets at XS
          New  York  as a  result  of the  published  reports  of a sale  of the
          property.  The  Company  has not  received  notice of  exercise of the
          cancellation  clause.  However,  there  can be no  assurance  that the
          landlord will not cancel the lease earlier.  Cancellation of the lease
          will result in a charge to earnings equal to the  unamortized  portion
          of its  investment  (adjusted for assets which are sold and reimbursed
          construction  costs) at the time of such lease  cancellation,  if any,
          which could have a material adverse effect on the Company's operations
          and financial condition taken as a whole.

     Except for the financing  facilities  described  above,  the Company has no
other current arrangements in place with respect to financing.  As stated in the
report on the Company's  Financial  Statements for the year ended June 30, 1999,
the Company's ability to continue as a going concern is dependent upon continued
forbearance of the Company's lenders because the Company currently does not have
available funds to repay its currently  outstanding  demand loans.  Accordingly,
the  Company  is in need of  either  securing  new  financing  and/or  attaining
profitable operations.

     Management has been reviewing and reducing  operating expenses and focusing
on its marketing efforts on the Empire State Building and it is hopeful that its
efforts to increase  visitors to the site will be successful.  In the event that
the Company does not successfully  improve its operating  activities and results
of  operations,  the Company  will need  additional  financing.  There can be no
assurances that additional  financing will be available on acceptable  terms, if
at all, or that the Company will be able to achieve  profitable  operations.  If
additional financing arrangements are not obtained, the Company may be unable to
fully fund its operations,  pursue its business strategy,  take advantage of new
opportunities,  develop  or enhance  our  products,  or  respond to  competitive
pressures  and  financial  or marketing  hurdles.  Such  inability  would have a
materially  adverse  effect on the  Company's  business,  operating  results and
financial condition.

<PAGE>
Inflation

     The Company  believes that the impact of inflation on its operations  since
its inception has not been material.

Seasonality

     The  Company's  business is seasonal  in nature,  based in part,  on higher
volumes of tourists in the New York City Metropolitan area during the spring and
summer months and during the December holiday season.

Year 2000 Compliance

     There are issues  associated with the programming code in existing computer
systems as the year 2000  approaches.  The "year 2000  problem" is pervasive and
complex,  as virtually every computer  operation will be affected in some way by
the  rollover  of the two digit year value of 00. The issue is whether  computer
systems will properly recognize date sensitive information when the year changes
to 2000.  Systems that do not properly recognize such information could generate
erroneous  data or cause a system to fail.  The  Company has not  verified  that
companies doing business with it are year 2000  compliant.  The Company does not
anticipate that it will incur significant  operating  expenses or be required to
invest heavily in computer system  improvements  to be year 2000 compliant.  The
Company is currently updating its ticketing system for year 2000 compliance, and
expects that the system will be  compliant  by December  31,  1999.  The Company
believes  that  its  attraction,  accounting  and  other  computer  systems  are
currently  year  2000  compliant.   However,   significant   uncertainty  exists
concerning the potential costs and effects associated with year 2000 compliance.
Any year 2000 compliance  problem the Company  encounters  could have a material
adverse  effect on the Company's  business,  results of operations and financial
condition.

Item 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     The response to this item is set forth at the end of this report.

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

     On June 4, 1999, the Company,  with the approval of the Company's  Board of
Directors,  elected to replace  Richard A. Eisner & Company,  LLP ("RAE") as the
Company's  independent  auditors with the independent  auditing firm of Cornick,
Garber, & Sandler, LLP.

     RAE's  reports for each of the two years  ended June 30,  1998  included an
explanatory  paragraph  explaining  certain factors that raise substantial doubt
about the Company's ability to continue as a going concern.

     During the Company's two most recent fiscal years ended June 30, 1998,  and
through  June  1999,  there  were no  disagreements  with RAE on any  matter  of
accounting  principles or practices,  financial statement  disclosure,  auditing
scope, or procedure which disagreements,  if not resolved to the satisfaction of
RAE,  would  have  caused  it to make  reference  to the  subject  matter of the
disagreement in connection with its report.

     The  Company  requested  RAE to furnish it with a letter  addressed  to the
Securities  and  Exchange   Commission  stating  whether  RAE  agrees  with  the
statements  contained in the second and third  paragraphs  above.  A copy of the
letter  from RAE to the  Securities  and  Exchange  Commission  was  filed as an
Exhibit to the Company's Form 8-K filed on June 7, 1999.


<PAGE>
                                    PART III

Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
        COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.

     Information  concerning  the  directors  and  officers  of the  Company  is
contained  in the  Company's  definitive  Proxy  Statement  to be filed with the
Securities and Exchange  Commission pursuant to Regulation 14A no later than 120
days after the close of the fiscal year ended June 30, 1999. Such information is
hereby incorporated herein by reference.

Item 10. EXECUTIVE COMPENSATION.

     Information  concerning  the  directors  and  officers  of the  Company  is
contained  in the  Company's  definitive  Proxy  Statement  to be filed with the
Securities and Exchange  Commission pursuant to Regulation 14A no later than 120
days after the close of the fiscal year ended June 30, 1999. Such information is
hereby incorporated herein by reference.

Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     Information  concerning  the  directors  and  officers  of the  Company  is
contained  in the  Company's  definitive  Proxy  Statement  to be filed with the
Securities and Exchange  Commission pursuant to Regulation 14A no later than 120
days after the close of the fiscal year ended June 30, 1999. Such information is
hereby incorporated herein by reference.

Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     Information  concerning  the  directors  and  officers  of the  Company  is
contained  in the  Company's  definitive  Proxy  Statement  to be filed with the
Securities and Exchange  Commission pursuant to Regulation 14A no later than 120
days after the close of the fiscal year ended June 30, 1999. Such information is
hereby incorporated herein by reference.

Item 13. EXHIBITS, LIST, AND REPORTS ON FORM 8-K.

     (a) Exhibits are listed on the Index to Exhibits on page 26 of this report.
The Exhibits  required by Item 601 of Regulation S-B are listed on such Index in
response to this Item and are incorporated herein by reference.

     (b) Reports on Form 8-K:

     On June 7, 1999, the registrant filed a report on Form 8-K.





<PAGE>
                                   SIGNATURES

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

                                          SKYLINE MULTIMEDIA ENTERTAINMENT, INC.


                                                         By:   /s/Robert Brenner
                                                                  Robert Brenner
                                              Chief Executive Officer, President

                                                           /s/ Ronald H. Aghassi
                                                               Ronald H. Aghassi
                                                       Vice President of Finance

Date: October 14, 1999


     In  accordance  with the Exchange Act, 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: October 14, 1999        /s/ Steven Vocino
                              Steven Vocino, Chairman of the Board

Date: October 14, 1999        /s/ Thomas Riordan
                              Thomas Riordan, Director


Date: October 14, 1999        /s/John F. Barry, III
                              John F. Barry, III, Director

Date: October 14, 1999        /s/Robert Brenner
                              Robert Brenner, Director


<PAGE>
INDEX TO EXHIBITS


<TABLE>
<CAPTION>


Exhibit
Number            Description

<S>               <C>
3.1               Certificate of Incorporation of the Company. (1)

3.2               By-laws of the Company. (1)

3.3               Certificate of Amendment of Certificate of Incorporation relating to the issuance of the Preferred Stock. (2)

4.1               See Exhibits 3.1 and 3.2

10.1              The Company's 1994 Stock Incentive Plan (as Amended and Restated). (9)

10.2              The Company's Stock Option Plan for Non-Employee Directors (as Amended and Restated). (9)

10.3              Employment Agreement dated October 1, 1993 between the Company and Zalman Silber. (1)

10.4              Lease Agreement dated February 26, 1993 between the Company and Empire State Building Company. (1)

10.5              License Agreement dated February 26, 1993 between the Company and the Empire State Building Company. (1)

10.6              Purchase Agreement dated February 14, 1994 between the Company and Interactive Simulation, Inc. (3)

10.7              Film Production Agreement dated April 7, 1994 between the Company and Empire Productions, Inc.,
                  and Chromavision Corp. (3)

10.8              Lease Agreement dated April 14, 1994 between the Company and the Empire State Building Company relating
                  to the Company's executive offices. (3)

10.9              Lease Agreement dated February 8, 1994 between the Company and the Empire State Building Company relating
                  to additional space. (3)

10.10             Construction contract dated July 5, 1994 between the Company and Signature Construction Group Inc. (4)

10.11             Loan and security agreement dated November 16, 1994 between the Company and PhoenixCor, Inc. (5)

10.12             Employment Agreement dated August 15, 1994 between the Company and Steven Schwartz. (5)

10.13             Sponsorship Agreement dated February 21, 1995 between the Company and Dentsu USA, Inc. on behalf of
                  JVC Company of America. (6)

10.14             Stock Purchase Agreement, dated as of July 7, 1995, between the Company and Prospect Street Fund. (2)

10.15             Registration Rights Agreement dated as of July 7, 1995 between the Company and Prospect Street Fund relating
                  to the Common Stock issuable upon conversion of the Preferred Stock. (2)

10.16             Guarantee of Zalman Silber dated as of July 7, 1995 relating to the guarantee of the Company's obligations
                  under the Stock Purchase Agreement. (2)

10.17             Stockholders' Agreement dated as of July 7, 1995 between Zalman Silber and Prospect Street Fund. (2)

10.18             Amendment to Employment Agreement dated June 29, 1995 between the Company and Zalman Silber. (7)

10.19             Agreement dated March 16, 1995 by and between Skyline, PhoenixCor, Inc. and Zalman Silber relating to
                  the release of certain security deposits; and the Rider dated March 16, 1995 to the Individual Guaranty
                  of Zalman Silber. (7)

10.20             Lease amendment dated March 1996 between the Company and the Empire State Building relating to additional
                  space. (8)

10.21             Amendment dated March 1996, to the Company's original lease and license agreement with the Empire State
                  Building Company. (8)

10.22             Lease agreement dated March 1996 between the Company and One Times Square Center Partners, L.P., for space
                  located at 1457-1463 Broadway, New York, N.Y. (8)

10.23             Lease agreement dated September 5, 1996 between the Company and Woodfield Associates, for space located at
                  the Woodfield Mall in Schaumberg, Illinois. (9)

10.24             Letter of Intent relating to senior unsecured subordinated debt financing dated October 23, 1996, between
                  the Company and Prospect Street. (10)

10.25             Note Purchase Agreement dated November 6, 1996, between the Company and Prospect Street. (10)

10.26             Guarantee of Zalman Silber dated November 6, 1996 relating to the Note Purchase Agreement. (10)

10.27             Senior Credit Agreement dated December 20, 1996, between the Company and Prospect Street and
                  Bank of New York as Trustee for the Employees Retirement Plan of The Brooklyn Union Gas Company. (11)

10.28             Subsidiary Guaranty Agreement dated December 20, 1996, between the Company and Prospect Street. (11)

10.29             Indemnity, Subrogation and Contribution Agreement dated December 20, 1996, between the Company and
                  Prospect Street. (11)

10.30             Amended and restated Registration Rights Agreement dated December 20, 1996, between the Company,
                  Prospect Street, and Bank of New York as Trustee for the Employees Retirement Plan of The Brooklyn Union
                  Gas Company. (11)

10.31             Senior Promissory Note dated December 20, 1996, between the Company and Prospect Street. (11)

10.32             Senior Promissory Note dated December 20, 1996 between the Company and Bank of New York as
                  Trustee for the Employees Retirement Plan of The Brooklyn Union Gas Company. (11)

10.33             Stock Purchase Warrant Agreements dated December 20, 1996, between the Company, Prospect
                  Street, and Bank of New York as Trustee for the Employees Retirement Plan of The Brooklyn Union Gas Company.(11)

10.34             Loan and Security Agreement dated December 4, 1996, between the Company and People's Bank. (11)

10.35             Loan and Security Agreement dated December 4, 1996, between the Company and Independent Resources Inc. (11)

10.36             Loan and Security Agreement dated December 4, 1996, between the Company and PhoenixCor, Inc. (11)

10.37             Guarantees of Zalman Silber dated December 4, 1996 relating to the Loan and Security Agreements with People's
                  Bank and PhoenixCor, Inc. (11)

10.38             Senior Promissory Note dated February 18, 1997 between the Company and Bank of New York, as Trustee for the
                  Employees Retirement Plan of The Brooklyn Union Gas Company. (12)

10.39             Senior Promissory Note dated March 14, 1997 between the Company and Prospect Street NYC Co-Investment
                  Fund, L.P.(12)

10.40             Senior Promissory Note dated March 21, 1997 between the Company and Bank of New York, as Trustee for
                  Brooklyn Union Gas Company Non-Bargaining Health VEBA. (12)

10.41             Stock Purchase Warrant Agreement dated February 18, 1997 between the Company and Bank of New York, as
                  Trustee for the Employee Retirement Plan of The Brooklyn Union Gas Company. (12)

10.42             Stock Purchase Warrant Agreements dated March 14, 1997 between the Company and Prospect Street NYC Co-Investment
                  Fund, L.P. (12)

10.43             Stock Purchase Warrant Agreement dated March 21, 1997 between the Company and Bank of New York, as Trustee for
                  Brooklyn Union Gas Company Non-Bargaining Health VEBA. (12)

10.44             Purchase Agreement, dated as of November 4, 1997, by and among the Company, Skyline Virtual Reality, Inc.
                  ("SVR") and Namco Cybertainment, Inc. ("Namco"). (13)

10.45             Trademark License Agreement, dated as of November 4, 1997, between SVR and Namco. (13)

10.46             Revenue-Sharing Agreement, dated as of November 4, 1997, by and among the Company, SVR and Namco. (13)

10.47             Employment Agreement dated as of December 1, 1997 between the Company and Zalman Silber. (14)

10.48             Senior Secured Credit Agreement dated as of May 20, 1998 among the Company's and its subsidiaries and
                  Prospect Street and Bank of New York, as Trustee for the Employees Retirement Plan of Keyspan Energy
                  Corp. ("Keyspan", and together with Prospect Street, the "Institutional Investors"). (15)

10.49             Form of Warrants to Purchase Common Stock to be issued to the Institutional Investors. (15)

10.50             Senior Secured Demand Promissory Notes dated as of May 20, 1998 issued to the Institutional Investors. (15)

10.51             Security Agreement dated as of May 20, 1998 among the Company and its subsidiaries and the Institutional
                  Investors. (15)

10.52             Pledge Agreement dated as of May 20, 1998 among the Company and its subsidiaries and the Institutional
                  Investors. (15)

10.53             Amended and Restated Separation Agreement and General Release dated as of May 20, 1998. (15)

10.53A            First Amendment to Senior Secured Credit Agreement dated as of May 29, 1998 among the Company and
                  its subsidiaries and the Institutional Investors. (16)

10.54             Employment Agreement dated as of May 12, 1998 between the Company and Steven Schwartz. (16)

10.55             Employment Agreement dated as of June 15, 1998 between the Company and Jay Berkman. (16)

10.56             Debt to Equity Conversion Agreement dated as of September 2, 1998. (17)

10.57             Registration Rights Agreement dated as of September 2, 1998. (17)

10.58             Form of Certificate of Amendment to Certificate of Incorporation. (17)

10.59             Employment Agreement dated as of July 14, 1999, between the Company and Robert Brenner.

21                Subsidiaries of the Company. (9)

23                Letter from Richard A. Eisner & Company, LLP to the Securities & Exchange Commission, dated June 4, 1999 (18)

27.1              Financial Data Schedule.

</TABLE>

     (1) Previously  filed as an exhibit to Registration  Statement on Form SB-2
(Commission File No. 33-73276) declared effective on February 14, 1994.

     (2) Previously filed as an exhibit to the Company's  current report on Form
8-K filed on July 21, 1995.

     (3) Previously  filed as an exhibit to the Company's  annual report on Form
10-KSB for the fiscal year ended June 30, 1994.

     (4)  Previously  filed as an exhibit to the Company's  quarterly  report on
Form 10-QSB for the quarter ended September 30, 1994.

     (5)  Previously  filed as an exhibit to the Company's  quarterly  report on
Form 10-QSB for the quarter ended December 31, 1994.

     (6)  Previously  filed as an exhibit to the Company's  quarterly  report on
Form 10-QSB for the quarter ended March 31, 1995.

     (7) Previously  filed as an exhibit to the Company's  annual report on Form
10-KSB for the fiscal year ended June 30, 1995.

     (8)  Previously  filed as an exhibit to the Company's  quarterly  report on
Form 10-QSB for the quarter ended March 31, 1996.

     (9) Previously  filed as an exhibit to the Company's  annual report on Form
10-KSB for the fiscal year ended June 30, 1996.

     (10) Previously  filed as an exhibit to the Company's  quarterly  report on
Form 10-QSB for the quarter ended September 30, 1996.

     (11) Previously  filed as an exhibit to the Company's  quarterly  report on
Form 10-QSB for the quarter ended December 31, 1996.

     (12) Previously  filed as an exhibit to the Company's  quarterly  report on
Form 10-QSB for the quarter ended March 31, 1997.

     (13) Previously  filed as an exhibit to the Company's  quarterly  report on
Form 10-QSB for the quarter ended September 30, 1997.

     (14) Previously  filed as an exhibit to the Company's  quarterly  report on
Form 10-QSB for the quarter ended December 31, 1997.

     (15) Previously  filed as an exhibit to the Company's  quarterly  report on
Form 10-QSB for the quarter ended March 31, 1998.

     (16) Previously filed as an exhibit to the Company's current report on Form
8-K filed on July 10, 1998.

     (17) Previously filed as an exhibit to the Company's current report on Form
8-K filed on September 17, 1998.

     (18) Previously filed as an exhibt to the Company's  current report on Form
8-K filed on June 6, 1999.
<PAGE>
                     SKYLINE MULTIMEDIA ENTERTAINMENT, INC.
                                AND SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS

                                  JUNE 30, 1999


<PAGE>





                          Independent Auditors' Report



To The Board of Directors and Stockholders
Skyline Multimedia Entertainment, Inc.


     We have  audited the  accompanying  consolidated  balance  sheet of SKYLINE
MULTIMEDIA  ENTERTAINMENT,  INC.  AND  SUBSIDIARIES  as at June 30, 1999 and the
related consolidated  statements of operations,  changes in stockholders' equity
(capital  deficiency)  and cash flows for the year then ended.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audit.

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

     In our opinion, the financial  statements  enumerated above present fairly,
in all  material  respects,  the  consolidated  financial  position  of  Skyline
Multimedia  Entertainment,  Inc. and  Subsidiaries  as at June 30, 1999, and the
consolidated  results of their operations and their  consolidated cash flows for
the year then ended in conformity with generally accepted accounting principles.

     The accompanying  financial statements have been prepared assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note A to the
financial  statements,  the Company has  experienced  significant  net losses in
recent years and at June 30, 1999 has substantial negative working capital and a
substantial  capital  deficiency,  it is  possible  that the Company may have to
vacate its virtual reality  game-site prior to the scheduled  termination of the
lease  and the  Company  is  dependent  upon the  continued  forbearance  of its
principal creditors in not demanding payment of outstanding indebtedness.  These
factors raise  substantial  doubt about the  Company's  ability to continue as a
going concern.  Management's plans in regard to these matters are also described
in Note A. The financial  statements do not include any  adjustments  that might
result from the outcome of this uncertainty.

                                              /s/ Cornick, Garber & Sandler, LLP
                                                  ------------------------------
                                                    CERTIFIED PUBLIC ACCOUNTANTS


New York, New York
October 1, 1999



<PAGE>
                          Independent Auditors' Report



To The Board of Directors and Stockholders
Skyline Multimedia Entertainment, Inc.


     We have audited the  accompanying  consolidated  statements of  operations,
changes in stockholders'  equity (capital  deficiency) and cash flows of Skyline
Multimedia  Entertainment,  Inc.  and  subsidiaries  for the year ended June 30,
1998.  These  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audit.

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

     In our opinion, the financial  statements  enumerated above present fairly,
in  all  material   respects,   the  consolidated   results  of  operations  and
consolidated  cash  flows  of  Skyline   Multimedia   Entertainment,   Inc.  and
subsidiaries  for the year  ended June 30,  1998 in  conformity  with  generally
accepted accounting principles.

     The accompanying  financial statements have been prepared assuming that the
Company will  continue as a going  concern.  As discussed in Note A, the Company
has experienced significant losses for each of the two years ended June 30, 1998
and as of June 30, 1998 is in a negative working capital position. These factors
raise  substantial  doubt  about the  Company's  ability to  continue as a going
concern.  Management's  plans in regard to these  matters are also  described in
Note A. The  financial  statements  do not  include any  adjustments  that might
result from the outcome of this uncertainty.

                                             /s/RICHARD A. EISNER & COMPANY, LLP
                                                RICHARD A. EISNER & COMPANY, LLP
                                                CERTIFIED PUBLIC ACCOUNTANTS


New York, New York
August 27, 1998


<PAGE>
             SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET

                               AS AT JUNE 30, 1999

                                     ASSETS
                             (To the nearest $1,000)
<TABLE>
<CAPTION>

Current assets:
<S>                                                                                <C>
   Cash ........................................................................   $    780,000
   Inventory ...................................................................        122,000
   Prepaid expenses and other current assets ...................................         39,000
                                                                                   ------------

                  Total current assets .........................................        941,000

Property, equipment and leasehold improvements - net ...........................      5,632,000
Security deposits ..............................................................        418,000
Deferred financing costs .......................................................        424,000
Other assets - net .............................................................         47,000
                                                                                   ------------

                  T O T A L ....................................................   $  7,462,000
                                                                                   ============

                                   LIABILITIES

Current liabilities:
   Capital lease obligations - current portion .................................   $    639,000
   Note payable - institutional lenders ........................................      2,785,000
   Note payable - other ........................................................        500,000
   Accounts payable ............................................................      1,973,000
   Due to contractors ..........................................................        115,000
   Accrued expenses ............................................................        135,000
   Interest payable - institutional lenders ....................................        364,000
   Deferred sponsorship income .................................................         23,000
                                                                                   ------------

                  Total current liabilities ....................................      6,534,000

Capital lease obligations - less current portion ...............................        159,000
Note payable - institutional lenders ...........................................      4,450,000
Deferred rent payable ..........................................................      2,135,000
Interest payable - institutional lenders .......................................      1,693,000
                                                                                   ------------

                                                                                     14,971,000
                                                                                   ============

Commitments and contingencies (Notes H and M)

                               CAPITAL DEFICIENCY

Preferred stock, par value $.001, 5,000,000 shares authorized,  1,090,909 shares
   of Series A convertible participating preferred stock issued and outstanding
   (liquidating value $2.75 per share) .........................................          1,000
Common stock - $.001 par value; authorized 19,000,000 shares,
   one vote per share, issued 2,095,000 shares .................................          2,000
Class A common stock - $.001 par value; authorized 1,000,000 shares,
   five votes per share, issued 960,000 shares .................................          1,000
Treasury stock, 110,000 shares of common stock and 670,000 shares
   of Class A common stock at cost .............................................       (601,000)
Additional paid-in capital .....................................................     10,848,000
Accumulated deficit ............................................................    (17,760,000)
                                                                                   ------------

                  Total capital deficiency .....................................     (7,509,000)
                                                                                   ------------
                  T O T A L ....................................................   $  7,462,000
                                                                                   ============
</TABLE>

            The notes to financial statements are made a part hereof.


<PAGE>
             SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

       STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
                             (To the nearest $1,000)
<TABLE>
<CAPTION>



                                                  Class A             Series A                  Additional
                             Common Stock       Common Stock       Preferred Stock   Treasury   Paid-in     Accumulated
                           Shares     Amount   Shares    Amount  Shares     Amount   Stock      Capital     Deficit      Total
                         ---------   ------   ------    ------  ---------  ------   -----      ----------  ---------- ------------

<S>                       <C>         <C>      <C>       <C>     <C>        <C>      <C>        <C>         <C>          <C>
Balance - June 30, 1997  1,495,000   $2,000   960,000   $1,000  1,090,909  $1,000   $(601,000) $9,989,000  $(5,531,000) $3,861,000

Issuance of warrants in
 connection with
 financings                                                                                        935,000                  935,000
Repurchase and retirement
 of officer's warrants
 and options                                                                                                  (245,000)    (245,000)
Common shares returned
 from escrow                                                                            0                                         0
Net (loss) for the year
 ended June 30, 1998                                                                                        (8,235,000)  (8,235,000)
                          ---------   ------   ------    ------  ---------  ------   -----      ----------  ----------   ---------

Balance - June 30, 1998   1,495,000   2,000    960,000   1,000   1,090,909  1,000    (601,000) 10,679,000 (13,766,000)  (3,684,000)

Common shares issued as
   payment for services     600,000                                                                169,000                  169,000

Net (loss) for the year
 ended June 30, 1999                                                                                         (3,994,000) (3,994,000)
                          ---------   ------   ------    ------  ---------  ------   -----      ----------  ----------  ---------

Balance - June 30, 1999   2,095,000   $2,000   960,000   $1,000  1,090,909  $1,000  $(601,000) $10,848,000 $(17,760,000)$(7,509,000)
                          =========   ======   =======   ======  =========  ======   ========= =========== ============= ==========


</TABLE>

            The notes to financial statements are made a part hereof.


<PAGE>
             SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                             (To the nearest $1,000)


<TABLE>
<CAPTION>

                                                                 Year Ended
                                                                   June 30,
                                                             1999           1998

Revenues:
<S>                                                     <C>             <C>
   Attraction sales .................................   $  8,359,000    $  9,532,000
   Concessions sales ................................      1,143,000       1,031,000
   Sponsorship income ...............................        101,000         271,000
                                                        ------------    ------------

                                                           9,603,000      10,834,000
                                                        ------------    ------------

Operating expenses:
   Cost of merchandise sold .........................        515,000         434,000
   Selling, general and administrative ..............      9,576,000      11,634,000
   Depreciation and amortization ....................      2,028,000       1,755,000
   Loss an impairment of long-lived assets ..........        300,000       3,854,000
   Loss on retirement of assets .....................                        224,000
                                                        ------------    ------------

                                                          12,419,000      17,901,000
                                                        ------------    ------------

(Loss) from operations before interest income and
   expense ..........................................     (2,816,000)     (7,067,000)

Interest income .....................................         44,000          32,000

Interest expense ....................................     (1,435,000)     (1,859,000)
                                                        ------------    ------------

(Loss) before extraordinary item ....................     (4,207,000)     (8,894,000)

Extraordinary gain from settlement of liabilities ...        213,000         659,000
                                                        ------------    ------------

NET (LOSS) ..........................................   $ (3,994,000)   $ (8,235,000)
                                                        ============    ============

(Loss) per share of common stock - basic and diluted:
   (Loss) before extraordinary item .................   $      (1.85)   $      (5.31)
                                                        ============    ============

   Net (loss) .......................................   $      (1.76)   $      (4.92)
                                                        ============    ============

Weighted number of average common shares outstanding       2,275,000       1,675,000
                                                        ============    ============

</TABLE>




            The notes to financial statements are made a part hereof.


<PAGE>
             SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (To the nearest $1,000)

<TABLE>
<CAPTION>
                                                                                           Year Ended
                                                                                            June 30,
INCREASE (DECREASE) IN CASH                                                            1999          1998
                                                                                  ------------    -----------

Cash flows from operating activities:
<S>                                                                                <C>            <C>
   Net (loss) ..................................................................   $(3,994,000)   $(8,235,000)
                                                                                   -----------    -----------

   Adjustments  to  reconcile  results  of  operations  to net  cash  effect  of
   operating activities:
      Loss on impairment of long-lived assets ..................................       300,000      3,854,000
      Loss on retirement of fixed assets .......................................                      224,000
      Gains on restructuring of liabilities - noncash ..........................      (213,000)      (659,000)
      Depreciation and amortization ............................................     2,237,000      1,813,000
      Deferred rent payable ....................................................       500,000        646,000
      Fair value of common stock issued as payment
         for services ..........................................................       169,000
      Net changes in assets and liabilities:
         Inventory .............................................................        12,000         34,000
         Prepaid expenses and other current assets .............................       185,000        (25,000)
         Security deposits .....................................................       554,000        (20,000)
         Accounts payable and accrued liabilities ..............................        89,000       (156,000)
         Due to contractors ....................................................                     (350,000)
         Interest payable - institutional lenders ..............................     1,013,000      1,000,000
         Deferred sponsorship income ...........................................       (26,000)       (26,000)
                                                                                   -----------    -----------

             Total adjustments .................................................     4,820,000      6,335,000
                                                                                   -----------    -----------

             Net cash provided by (used for) operating activities ..............       826,000     (1,900,000)
                                                                                   -----------    -----------

Cash flows from investing activities:
   Purchase of fixed assets ....................................................      (257,000)      (588,000)
   Redemption of certificate of deposit ........................................                      209,000
   Deferred project and leasing costs ..........................................                      101,000
   Advances to officer .........................................................                      (40,000)
                                                                                   -----------    -----------

             Net cash used for investing activities ............................      (257,000)      (318,000)
                                                                                   -----------    -----------

Cash flows from financing activities:
   Net proceeds from issuance of notes with warrants ...........................                    3,720,000
   Financing costs .............................................................                     (157,000)
   Repayment of capital lease obligations ......................................    (1,285,000)      (763,000)
   Purchase of Company's options and warrants held by officer ..................                     (205,000)
                                                                                   -----------    -----------

             Net cash provided by (used for) financing activities ..............    (1,285,000)     2,595,000
                                                                                   -----------    -----------

NET INCREASE (DECREASE) IN CASH ................................................      (716,000)       377,000

Cash - July 1 ..................................................................     1,496,000      1,119,000
                                                                                   -----------    -----------

CASH - JUNE 30 .................................................................   $   780,000    $ 1,496,000
                                                                                   ===========    ===========

</TABLE>

(Continued)


<PAGE>
             SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                       -2-
<TABLE>
<CAPTION>



                                                                      Year Ended
                                                                       June 30,
                                                               1999              1998

Supplemental disclosures of cash flow information:
 Cash paid for:
<S>                                                           <C>               <C>
   Interest ......................................            $210,000          $219,000
                                                              ========           =======
   Taxes .........................................            $  2,000          $ 44,000
                                                              ========           =======
Equipment acquired under a capital lease agreement            $ 28,000
                                                              ========
</TABLE>






























            The notes to financial statements are made a part hereof.


<PAGE>
             SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS




NOTE A - The Company

               Skyline  Multimedia  Entertainment,  Inc.  ("SME")  is a  holding
          company engaged in the  development and operation of  state-of-the-art
          entertainment   attractions   and  together   with  its   wholly-owned
          subsidiaries,  New York  Skyline,  Inc.  ("NYSI") and Skyline  Virtual
          Reality,  Inc.  ("SVR") are  referred to as the  "Company."  Its first
          site,  which is located in the Empire State Building in New York City,
          is owned and operated by NYSI which  commenced  operations of its "New
          York  Skyride"  facility on December  22,  1994.  Its revenues for the
          years ended June 30,  1999 and 1998 were  $6,013,000  and  $6,023,000,
          respectively. The second site, which is located in Times Square ("XS")
          in New York  City,  is  owned  and  operated  by SVR  which  commenced
          operations of its interactive virtual reality  entertainment center on
          December 27, 1996.  Its revenues for the years ended June 30, 1999 and
          1998 were $3,590,000 and $4,811,000, respectively.

               The Company's  business is somewhat seasonal in nature,  based in
          part on higher volumes of tourists during the spring and summer months
          and holiday seasons.

               The  accompanying  financial  statements  have been prepared on a
          going-concern  basis.  As  reflected  in  the  accompanying  financial
          statements,  the Company  has  experienced  recurring  net losses from
          operations and as of June 30, 1999 has a working capital deficiency of
          $5,593,000 and a capital  deficiency of $7,509,000.  In addition,  the
          Company  has become  aware of plans by the  landlord of its XS Site to
          sell the property to a developer. The cancellation of this lease would
          have a material  adverse effect on the  operations of the Company.  As
          further   indicated  in  Note  H,  the   Company's   borrowings   from
          institutional  lenders and investors includes borrowings which are due
          on demand.  The Company is dependent on the continued  forbearance  of
          these lenders  because the Company  currently  does not have available
          funds to repay  these  loans,  which,  if  demanded,  would  cause the
          Company  to be in  default  under  its  other  agreements  with  these
          lenders.  The above factors give rise to  substantial  doubt as to the
          ability of the Company to continue as a going concern.  In April 1999,
          the Company  negotiated a 25% rent  reduction on the XS premises which
          will be offset  against  the lease  cancellation  payment,  if any. In
          addition,   management  has  been  reviewing  and  reducing  operating
          expenses  and  focusing on its  marketing  efforts on the Empire State
          Building.  Management is hopeful that its efforts to increase visitors
          to the site will be successful.  The accompanying financial statements
          have not been adjusted to give effect to the amount or  classification
          of recorded  assets or the  classification  and amount of  liabilities
          should the Company be unable to continue as a going concern.





(Continued)


<PAGE>
             SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS
                                       -2-



NOTE B - Summary of Significant Accounting Policies
------   ------------------------------------------

             Principles of Consolidation

               The consolidated  financial statements of the Company include the
          accounts of the Company and its  wholly-owned  subsidiaries.  Material
          intercompany transactions and account balances have been eliminated in
          consolidation.

             Loss Per Share

               During  the  year  ended  June  30,  1998,  the  Company  adopted
          Statement of Financial  Accounting  Standards  No. 128,  "Earnings Per
          Share" ("SFAS No. 128").  SFAS No. 128 requires the reporting of basic
          and  diluted   earnings/loss  per  share.  Basic  loss  per  share  is
          calculated  by dividing  net loss by the  weighted  average  number of
          outstanding  common  shares  during the year.  Diluted  per share data
          includes the effects of options,  warrants and convertible securities,
          when  they  are  dilutive.   As  all  potential   common  shares  were
          antidilutive  for the years ended June 30, 1999 and 1998, they are not
          included in the  calculation  of diluted loss per share.  There was no
          effect of adoption of SFAS No. 128 on the 1998 financial statements.

             Inventory

               Inventory consists of clothing,  souvenirs and food and is stated
          at the lower of cost (first-in, first-out) or market.

             Property, Equipment and Leasehold Improvements

               Property and equipment, including assets under capital leases are
          stated at cost less accumulated depreciation unless impaired, in which
          case a charge is  recognized  for the write  down of such asset to its
          net realizable  amount.  Depreciation is provided on the straight-line
          method  over the two to  twelve  year  estimated  useful  lives of the
          assets.  Leasehold  improvements are amortized using the straight-line
          method over the shorter of the lease term or the estimated useful life
          of the asset.

             Rent Expense

               The  Company,  for  financial  accounting  purposes,   recognizes
          scheduled  rent increases and rent holidays over the term of the lease
          using the straight-line method.






(Continued)
<PAGE>
             SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS
                                       -3-



NOTE B - Summary of Significant Accounting Policies (Continued)
------   ------------------------------------------------------

             Use of Estimates

               The  preparation  of  financial  statements  in  conformity  with
          generally accepted  accounting  principles 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 reported  period.  Actual
          results could differ from those estimates.

             Stock-Based Compensation

               Stock-based  compensation  is recognized  under the provisions of
          Statement of Financial  Accounting  Standards No. 123, "Accounting for
          Stock-Based Compensation" ("SFAS No. 123"). The provisions of SFAS No.
          123 allow  companies  to either  expense the  estimated  fair value of
          employee  stock options or to continue to follow the  intrinsic  value
          method  set forth in  Accounting  Principles  Board  Opinion  No.  25,
          "Accounting  for Stock Issued to Employees"  ("APB 25"),  but disclose
          the pro forma  effects on net loss and net loss per share had the fair
          value of the  options  been  expensed.  The  Company  has  elected  to
          continue to apply APB 25 in accounting  for its employee  stock option
          incentive plans (see Note J).

             Fair Value of Financial Instruments

               The Company's  financial  instruments are comprised  primarily of
          demand  notes,  notes  payable,  capitalized  leases and senior  debt.
          Because of the  financial  condition  of the  Company,  management  is
          unable to estimate the fair values of these obligations.

             Impairment of Long-Lived Assets

               The impairment of long-lived  assets is determined  utilizing the
          provisions  of  Statement of  Financial  Accounting  Standard No. 121,
          "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
          Assets to be Disposed of ("SFAS No.  121").  The Company  periodically
          reviews  all its  long-lived  assets  whenever  events or  changes  in
          circumstances indicate that the carrying amount of such assets may not
          be recoverable.

               For the year ended June 30, 1999, the Company recorded a $300,000
          impairment loss on a cancelled project in Sidney,  Australia (see Note
          D for other impairment losses).

             Advertising

               Advertising  costs are expensed when incurred.  Advertising costs
          were $338,000 and $351,000 for the years ended June 30, 1999 and 1998,
          respectively.

             Reclassifications

               Certain  items have been  reclassified  with the  current  year's
          presentation.

(Continued)
<PAGE>
             SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS
                                       -4-



NOTE C - Concentration of Credit Risk
------   ----------------------------

               The Company  maintains  all of its cash with  highly  capitalized
          financial institutions.  Such balances often exceed the FDIC limit and
          are not insured.


NOTE D - Property, Equipment and Leasehold Improvements
------   ----------------------------------------------

               Property,  equipment and leasehold  improvements is summarized as
          follows:
<TABLE>
<CAPTION>

<S>                                                                                         <C>
                 Equipment and fixtures                                                     $  1,847,000
                 Simulation film                                                               1,065,000
                 Simulation equipment                                                          2,324,000
                 Leasehold improvements                                                        5,561,000
                                                                                           -------------

                                                                                              10,797,000

                 Less accumulated depreciation and amortization                                5,165,000
                                                                                           -------------
                                                                                            $  5,632,000
                                                                                           =============
</TABLE>

               In  accordance  with the  provisions of SFAS 121, the Company has
          recorded   impairment   losses  in  connection  with  certain  of  its
          operations and prospective  ventures.  The  circumstances  relating to
          these matters  indicated  that the  discounted  future cash flows from
          these  matters  would be less  than  the  carrying  value  of  certain
          long-lived assets. Such calculation reflects the possible cancellation
          of the lease at one of the Company's locations.  Accordingly,  in June
          1998, the Company  recognized an asset  impairment loss of $3,854,000.
          The  loss  is  the  difference  between  the  carrying  value  of  the
          long-lived  assets  and the  fair  value  of  these  assets  based  on
          discounted estimated future cash flows.


NOTE E - Capital Lease Obligations

               In  November  1996,  the Company  entered  into an  agreement  to
          finance the acquisition of certain equipment for its XS New York site.
          The Company received approximately  $1,024,000,  with $495,000 held by
          the  lender  as  security.   In  March  1999,   the  Company  and  its
          institutional  lender  agreed  to offset  the  security  plus  accrued
          interest  against the outstanding  balance of $530,000.  An additional
          payment of approximately $18,000 was required to pay the loan in full.

               On  December  31,  1996,  the  Company  refinanced  its  existing
          equipment at its New York Skyride location from aggregate  proceeds of
          $1,500,000. The obligation bears interest at 11 1/2% a year compounded
          monthly and is payable in 48 monthly  installments  secured by a first
          security  interest  in all of the  equipment  at the New York  Skyride
          location. Additionally, up to $250,000 of the obligation is personally
          guaranteed by the Company's former president.


(Continued)
<PAGE>
             SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS
                                       -5-



NOTE E - Capital Lease Obligations (Continued)
------   -------------------------------------

               In March  1997,  the Company  entered  into a loan  agreement  to
          finance  the  acquisition  of  additional  equipment  for XS New York.
          Pursuant  to this  transaction,  in April  1997 the  Company  received
          $559,000  with an  additional  $54,000 held by the lender as security.
          The  amounts  financed  bear  interest  at 11  1/2% a year  compounded
          monthly and were  initially  to be repaid in 48 monthly  installments.
          However,  in  November  1997 the term was  modified  to provide for an
          accelerated  payback  over 36 months  from the date of  issuance.  The
          lender  obtained a first  security  interest  in the  equipment  and a
          personal guarantee by the Company's former president of up to $125,000
          of the loan.

               The future minimum lease payments under capital lease obligations
          as of June 30, 1999 are as follows:

<TABLE>
<CAPTION>
                 Year Ending June 30:
<S>                  <C>                                                                        <C>
                     2000                                                                       $714,000
                     2001                                                                        151,000
                     2002                                                                         18,000
                     2003                                                                          7,000
                     2004                                                                          7,000
                                                                                             -----------

                     Total minimum lease payments                                                897,000

                     Less amount representing interest at
                         9.2% to 11.5% a year                                                     99,000
                                                                                              ----------

                     Present value of minimum lease payments                                     798,000
                     Lease current portion                                                       639,000
                                                                                              ----------
                     Long-term portion                                                          $159,000
                                                                                              ==========
</TABLE>

NOTE F - Notes Payable

                    In December 1996,  the Company  entered into a Senior Credit
               Agreement  with the Bank of New York as trustee for the Employees
               Retirement Plan of Keyspan Energy Corp.  ("Keyspan") and Prospect
               Street NYC Discovery Fund,  L.P.  ("Prospect  Street")  (together
               with Keyspan, the "Institutional  Investors").  The agreement (as
               amended)  provided for the borrowing of $4,450,000 in the form of
               senior notes which accrue  interest at 14% a year and require the
               payment of both  principal  and interest on December 20, 2001. In
               connection  with  the  subordinated  debt,  the  lender  received
               warrants to purchase up to 434,146  shares of common  stock at an
               exercise  price of $4.25 per share  which the  Company  valued at
               approximately $712,000 using the Black-Scholes pricing model. The
               warrants expire on December 20, 2006.


(Continued)
<PAGE>
             SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS
                                       -6-



NOTE F - Notes Payable (Continued)
------   -------------------------

                    In June 1997,  the Company  received an additional  $500,000
               loan  from  Prospect  Street  payable  upon  demand  and  bearing
               interest at 14% a year.

                    In December 1997, the Company  received a $500,000 loan from
               a bank  bearing  interest  at 6.25% a year that is  secured  by a
               certificate of deposit from Prospect Street.

                    On May 20, 1998,  the Company and its  subsidiaries  entered
               into a Senior Secured Credit  Agreement (the "Credit  Agreement")
               with the Institutional  Investors relating to the financing of an
               aggregate  of  $2,285,000  (the  "Financing"),  in  exchange  for
               receipt  by  the   Institutional   Investors  of  senior  secured
               promissory  notes (the  "Notes")  and the issuance of warrants to
               purchase shares of Common Stock of the Company (the  "Warrants").
               The Notes, which are payable on demand,  accrue interest at 14% a
               year and are secured (with certain  exceptions) by all the assets
               of the  Company  and  its  subsidiaries  not  otherwise  pledged.
               Additionally,  the Credit  Agreement was amended to include under
               its terms the $500,000  demand loan to the Company from  Prospect
               Street  in  June  1997.  The  Institutional  Investors  have  not
               demanded  payment  of the  Notes.  The Notes and the  obligations
               under  the   Credit   Agreement   and  the   Warrants   are  also
               collateralized  by  a  pledge  of  the  stock  of  the  Company's
               subsidiaries.  In connection with the Credit  Agreement,  Keyspan
               also  received the right to appoint two members to the  Company's
               Board of  Directors.  Further,  as a result  of the  issuance  of
               Warrants in connection with the Financing, the conversion rate of
               the Series A  Preferred  Stock (the  "Preferred  Stock")  held by
               Prospect  Street was adjusted from a conversion rate of one share
               of Common Stock for each share of Preferred Stock to a conversion
               rate of 6.91 shares of Common  Stock for each share of  Preferred
               Stock.

                    The Warrants are  exercisable  for 94% of the fully  diluted
               Common Stock of the Company (after issuance) at an exercise price
               of $.375 per share. Accordingly, the exercise of such Warrants by
               the Institutional  Investors would result in a significant change
               in the  ownership  of the  Company.  The  Company  approved  this
               transaction after consideration of its alternatives and financial
               situation.  The Warrants are  exercisable for  approximately  173
               million shares of Common Stock at an aggregate  exercise price of
               approximately  $64.9  million  or, at the  option  of the  holder
               pursuant to a cashless exercise feature,  based on the difference
               in shares  between 173  million  shares and that number of shares
               having a market value equal to $64.9 million  (e.g.,  at a market
               price per share of $.40,  an aggregate of 10.8 million  shares of
               Common Stock would be issued).  Either  exercise  would result in
               significant  dilution to existing  shareholders  which could also
               result in an annual  limitation in the future  utilization of the
               Company's net operating loss carryforwards.



(Continued)
<PAGE>
             SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS
                                       -7-



NOTE G - Income Taxes

                    The principal components of deferred tax assets, liabilities
               and the valuation allowance are as follows:
<TABLE>
<CAPTION>

                                                                                       June 30,
                                                                              1999                1998
                 Deferred tax assets:
<S>                                                                    <C>                   <C>
                    Capitalization of start-up costs                    $       81,000       $    229,000
                    Impairment loss                                          1,734,000          1,542,000
                    Net operating loss carryforwards                         6,869,000          4,033,000
                                                                          ------------        -----------

                                                                             8,684,000          5,804,000

                    Less valuation allowance                                (7,824,000)        (5,185,000)
                                                                           -----------        -----------

                                                                               860,000            619,000

                 Deferred tax liabilities:
                    Depreciation differences                                   860,000            619,000
                                                                         -------------       ------------

                 Net deferred tax asset                                 $       --           $    --
                                                                        ==============      =============
</TABLE>

                    The Company has provided valuation  allowances of $7,824,000
               at June 30, 1999 and $5,185,000 at June 30, 1998 equal to its net
               deferred tax assets due to  uncertainty of the Company being able
               to use this benefit to offset future taxable income.  The Company
               will periodically evaluate the likelihood of realizing such asset
               and will adjust such amount accordingly.

                    At June 30, 1999,  the Company has  available  net operating
               loss  carryforwards  to reduce future  federal  taxable income of
               approximately $15,300,000 for tax reporting purposes which expire
               from  2010  through  2019.  Pursuant  to  the  provisions  of the
               Internal  Revenue Code,  future  utilization of these past losses
               may be subject to certain annual  limitations based on changes in
               the ownership of the Company's stock that may occur.










(Continued)
<PAGE>
             SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS
                                       -8-



NOTE H - Commitments

                    The  Company  leases  office  premises  and  space  for  its
               entertainment  attractions in the Empire State Building  pursuant
               to operating  leases  expiring  substantially  in June 2016.  The
               lease for the office space  expires on October 31, 1999.  Certain
               of the leases  contain  renewal  options for up to 10 years.  The
               leases provide for free rent or rent credits for various periods;
               rental  expense is recognized on a  straight-line  basis over the
               life of the leases. The Company was served a notice of default by
               the landlord (see Note M).

                    In April 1996, the Company entered into a ten-year renewable
               lease  for  space  to  house  its  interactive   virtual  reality
               entertainment  center.  The  lease  terms  also  provide  for two
               five-year  renewal  options.  In addition,  the lease  contains a
               cancellation  clause in the  event  that the  landlord  commences
               construction  of office  buildings  on the site  during the lease
               term. Should the landlord exercise the cancellation  clause,  the
               Company  would be required to vacate the space  within six months
               after  written  notice,  but would be entitled  to  reimbursement
               during years 1-5 of a portion of its  out-of-pocket  construction
               costs,  not to exceed $125 per square  foot.  In April 1999,  the
               Company  renegotiated the lease whereby the rent has been reduced
               25%.  This   reduction  in  rent  will  be  offset   against  the
               reimbursement  by the  landlord,  if any.  The Company has become
               aware of plans to sell the property to a  developer.  The Company
               is not sure of the  timing  of the  sale;  however,  the  Company
               believes  that XS can continue to operate  through June 30, 2000.
               Accordingly,  the  Company has  adjusted  the life of the related
               assets so that they will be fully  depreciated  at June 30, 2000.
               Rental   expense  will  be   recognized   by  the  Company  on  a
               straight-line basis over the term of the lease.

                    Minimum  annual rental  payments  required for all operating
               leases are as follows:
<TABLE>
<CAPTION>

                 Year Ending June 30:
<S>                 <C>                                                 <C>
                    2000                                                $  1,578,000
                    2001                                                   1,671,000
                    2002                                                   1,748,000
                    2003                                                   1,797,000
                    2004                                                   1,797,000
                 Thereafter                                               19,198,000
                                                                          ----------

                                                                         $27,789,000
                                                                          ==========
</TABLE>

                    The  terms of the  leases  include  escalation  clauses  for
               increases  in real  estate  taxes  and  certain  cost  of  living
               adjustments.

                    Rent  expense for the years ended June 30, 1999 and 1998 was
               approximately  $2,225,000 and $2,150,000,  respectively (see Note
               B).

(Continued)
<PAGE>
             SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS
                                       -9-



NOTE H - Commitments (Continued)

                    The Company has a licensing  agreement with the Empire State
               Building  Observatory  (the  "Observatory")  expiring on June 30,
               2016 to have tickets to its New York Skyride facility sold by the
               licensor's  employees at the counter where licensor's  tickets to
               the  observatory  are  sold.  Under  the  terms of the  licensing
               agreement, the following future payments are required:
<TABLE>
<CAPTION>

                 Year Ending June 30,
<S>                 <C>                                                  <C>
                    2000                                                 $   175,000
                    2001                                                     175,000
                    2002                                                     181,000
                    2003                                                     200,000
                    2004                                                     200,000
                 Thereafter                                                2,534,000
                                                                           ---------
                                                                          $3,465,000
                                                                           =========
</TABLE>


NOTE I - Employment and Other Agreements

                    In April 1998, the Company and its former president  entered
               into a separation  agreement.  Pursuant to its terms,  the former
               president  agreed to relinquish all positions in the Company held
               by him and  deliver to the Company  for  cancellation  all of his
               options  and   warrants  in  the  Company  in  exchange  for  the
               forgiveness of amounts previously advanced. The Company agreed to
               make payments of approximately $206,000 and forgave approximately
               $318,000  in loan  receivables.  The Company  charged  additional
               paid-in  capital  for  $245,000 for the  repurchase  of stock and
               outstanding  options and warrants  with the balance being charged
               to operations.  The Company,  in turn, received 670,000 shares of
               Class A common stock,  then held in escrow, as well as the return
               and  cancellation  of Class B  warrants  for  280,000  shares and
               options to purchase 1,400,000 shares of common stock. The Company
               exchanged  general  releases and the former president has granted
               to one of its  institutional  investors an irrevocable proxy with
               respect  to the  vote of such  Class A  common  stock  until  the
               remaining  290,000  shares  of Class A common  stock,  which  are
               currently pledged as collateral in connection with a loan, can be
               transferred upon release of such pledge.








(Continued)
<PAGE>
             SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS
                                      -10-



NOTE I - Employment and Other Agreements (Continued)

                    In November 1998, the Company entered into an agreement with
               its new President and Chief Executive  Officer.  The agreement is
               for twenty-four months at $18,000 per month. The agreement can be
               terminated  by either party upon ninety days written  notice.  If
               the Company  terminates the agreement,  a termination fee will be
               paid equal to six months  severance plus one additional month for
               each month the employee has been employed after May 1999, up to a
               maximum of twelve  months.  If a change of control of the Company
               occurs during  employment or within twelve months of  termination
               or  resignation,  the  Company  will be required to pay 3% of the
               transaction  proceeds  or  $250,000,   whichever  is  greater.  A
               semiannual  bonus is payable equal to 10% of the first $1,000,000
               of EBITDA  (earnings  before  interest,  taxes,  depreciation and
               amortization)  and 5% of EBITDA in excess of $1,000,000.  A bonus
               of $50,000 is payable on October 15, 1999 if the Company does not
               file a bankruptcy proceeding.


NOTE J - Stockholders' Equity

                    In  connection   with  the  Company's   public  offering  of
               securities in 1994, the underwriter required that an aggregate of
               670,000  shares of the  Company's  Class A common stock be placed
               into escrow.  Some or all of such escrow  shares were eligible to
               be released up to the year ended June 30, 1998 if the Company had
               met  certain  minimum  earnings  thresholds,  as  defined,  or if
               certain  minimum per share market prices of its common stock were
               attained.  Since neither the earnings requirement nor the minimum
               per share market price  requirement  were met, the escrow  shares
               reverted to the Company on June 30, 1998.

                    On July 7, 1995,  the Company  consummated a stock  purchase
               agreement  with  Prospect  Street,  pursuant to which the Company
               sold  1,090,909  shares  of  Series A  convertible  participating
               preferred stock,  par value $.001 per share, for $3,000,000.  Net
               proceeds from such offering, aggregated approximately $2,833,000.
               The preferred  stock issued is  convertible  into common stock of
               the  Company at any time at a  conversion  rate of 6.91 shares of
               common stock for each share of  preferred  stock.  The  preferred
               shares are  subject to both  demand  and  piggyback  registration
               rights. The preferred stock has a liquidation preference equal to
               $2.75 per share,  but does not pay any dividends  unless declared
               by  the  Board  of  Directors.  The  preferred  stockholders  are
               entitled to an aggregate of up to 24.9% of the outstanding voting
               power of the  Company  which can  increase to 50.1% of the voting
               power if in their sole discretion it becomes reasonably necessary
               for the protection of its investment.





(Continued)
<PAGE>
             SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS
                                      -11-



NOTE J - Stockholders' Equity (Continued)

                    At June 30, 1999, the Company has  outstanding  warrants for
               the purchase of its common stock as follows:
<TABLE>
<CAPTION>

                     Warrants Issued in
                      Connection With/                 Number of         Exercise
                          Held By                          Shares          Price       Expiration Date

                 <S>                                        <C>             <C>        <C>
                 Sub-debt financing                         243,904         (a)        December 20, 2006
                 Sub-debt financing                          48,780         (a)        December 31, 2006
                 Sub-debt financing                          48,780         (a)        February 18, 2007
                 Sub-debt financing                          43,902         (a)        March 14, 2007
                 Sub-debt financing                          48,780         (a)        March 21, 2007
                 Equipment financing                         50,000         (b)        December 31, 2007
</TABLE>

                         (a) The  warrants  are  exercisable  into one  share of
                    common stock at an exercise price of $4.25.

                         (b) The warrant is exercisable into one share of common
                    stock at an exercise price of $6.00.

                    The above warrants may be redeemed by the Company at a price
               of $.05 per warrant  assuming  certain  minimum per share  market
               prices of its common stock, as defined, are met.

                    The  Company has a stock  option  plan ("Plan A") which,  as
               amended,  provides for the issuance of incentive stock options or
               nonqualified   options  to  key  employees  and  officers  to  be
               determined  by  the  compensation   committee  of  the  Board  of
               Directors.  The  aggregate  number of shares  which may be issued
               under Plan A is 2,500,000.  Incentive  stock options under Plan A
               may not be  granted  at less  than the fair  market  value of the
               underlying shares at date of grant (110% of fair market value for
               a 10% or greater  stockholder).  Incentive  stock options granted
               under  Plan A can be  exercisable  for a period not to exceed ten
               years.











(Continued)
<PAGE>
             SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS
                                      -12-



NOTE J - Stockholders' Equity (Continued)

                    A summary of stock option  activity  related to Plan A is as
               follows:
<TABLE>
<CAPTION>

                                                                                              Exercise
                                                                           Number of           Price
                                                                             Shares           Per Share

<S>                                 <C>                                    <C>               <C>     <C>
                 Outstanding - July 1, 1997                                1,671,500         $3.50 - $5.00
                 Granted                                                     827,500         $0.31 - $1.88
                 Cancelled                                                (1,567,500)        $1.88 - $5.00
                                                                          ----------

                 Outstanding - June 30, 1998                                 931,500         $0.31 - $4.00
                 Cancelled                                                  (907,500)        $0.31 - $4.00
                                                                         -----------

                 Outstanding - June 30, 1999                               24,000 (a)        $2.75 - $4.00
                                                                         ============
</TABLE>

                         (a)  All  of  the   Plan  A   options   are   currently
                    exercisable.

                    The following table presents  information relating to Plan A
               stock options outstanding at June 30,1999:
<TABLE>
<CAPTION>

                                                   Weighted
                                    Weighted       Average
                                     Average       Remaining
                                    Exercise       Life in
                   Shares             Price        Years

<S>                <C>                <C>          <C>
                   7,500              $4.00        1.05
                  16,500              $2.75        2.20
                  ------

                  24,000              $3.14        1.84
                  ======
</TABLE>

                    The  Company  has  a  stock  option  plan  for   nonemployee
               directors ("Plan B"). The aggregate number of shares which may be
               issued under Plan B, as amended, is 500,000.








(Continued)
<PAGE>
             SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS
                                      -13-



NOTE J - Stockholders' Equity (Continued)

                    A summary of stock option  activity  related to Plan B is as
               follows:

<TABLE>
<CAPTION>

                                                                                              Option
                                                                               Number of       Price
                                                                                 Shares      Per Share

<S>                                 <C>                                         <C>          <C>
                 Outstanding - July 1, 1997                                     240,000      $3.50 - $5.00
                 Granted                                                         25,000           $1.50
                 Cancelled                                                      (75,000)     $1.50 - $5.00
                                                                              ---------

                 Outstanding - June 30, 1998                                    190,000      $1.50 - $4.00
                 Granted                                                         75,000           $.25
                 Cancelled                                                     (170,000)     $1.50 - $4.00
                                                                               --------

                 Outstanding - June 30, 1999                                     95,000      $  .25 - $4.00
                                                                             ==========
</TABLE>

                    The following table presents  information relating to Plan B
               stock options outstanding at June 30, 1999
<TABLE>
<CAPTION>

                                 Options Outstanding                     Options Exercisable
                                                    Weighted
                                 Weighted           Average                          Weighted
                                  Average           Remaining                        Average
                                 Exercise           Life in                          Exercise
                    Shares          Price           Years              Shares        Price

<S>                 <C>          <C>                 <C>               <C>           <C>
                    75,000       $  .25              4.01
                     5,000       $ 1.50              3.41               5,000         $1.50
                    15,000       $ 3.83              1.61              15,000         $3.83
                    ------                                             ------

                    95,000       $  .88              3.60              20,000         $3.25
                    ======                                             ======
</TABLE>

                    The Board of  Directors  approved a stock  buy-back  program
               where the Company is authorized to purchase up to 300,000  shares
               of common stock.  As of June 30, 1999,  the Company has purchased
               110,000 shares which is shown as treasury stock.







(Continued)
<PAGE>
             SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS
                                      -14-



NOTE J - Stockholders' Equity (Continued)

                    At June 30, 1998, the Company has reserved  shares of common
               stock  for  issuance  upon  exercise  of  warrants,  options  and
               conversions of preferred stock as follows:
<TABLE>
<CAPTION>

<S>                                                                               <C>
                 Plan "A" options                                                 24,000
                 Plan "B" options                                                 95,000
                 Preferred stock                                               7,538,181
                 Sub-debt financing                                              434,146
                 Equipment financing                                              50,000
                                                                             -----------

                                                                               8,141,327
</TABLE>

                    The  Company  has  elected to follow  Accounting  Principles
               Board  Opinion  25 ("APB  25")  and  related  interpretations  in
               accounting for its employee  stock  options.  Under APB 25, where
               the exercise price of the Company's employee stock options equals
               the market price of the underlying stock on the date of grant, no
               compensation is recognized.

                    Pro forma information  regarding net loss and loss per share
               as required by SFAS No.123 has been  determined as if the Company
               had accounted for its employee stock options under the fair value
               method of that statement.  The effect of applying SFAS No. 123 on
               the  1999  and  1998  pro  forma  net  loss  is  not  necessarily
               representative  of the effects on reported  operations for future
               years due to, among other things:  (1) the vesting  period of the
               stock options and (2) the fair value of additional  stock options
               in future years.  Had  compensation  cost for the Company's stock
               option  plans  been  determined  based upon the fair value at the
               grant  date  for  awards  under  the  plans  consistent  with the
               methodology prescribed under SFAS No. 123, the Company's net loss
               in 1999 and 1998 would have been  approximately  $(4,003,000) and
               $(8,332,000)   or  $(1.76)  per  share  and  $(4.97)  per  share,
               respectively. The weighted  average fair value of the options and
               warrants  granted  during  fiscal 1999 and 1998 are  estimated as
               $.11 and  $.16,  respectively,  on the date of  grant  using  the
               Black-Scholes    option-pricing    model   with   the   following
               assumptions:  expected dividend yield of 0% in both of the years,
               expected  volatility  of 40% in  both  of  the  years,  risk-free
               interest  rate of 5.48% in 1999 and  between  5.53% and 6.00% for
               1998  and an  estimated  life of 5 years in 1999 and from 1 to 10
               years in 1998.









(Continued)
<PAGE>
             SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS
                                      -15-



NOTE J - Stockholders' Equity (Continued)

                    The  exercise  price  for  warrants  and  options  issued in
               connection  with services  rendered by  nonemployees or financing
               arrangements  is determined by  negotiations  between the Company
               and the third party.  Generally,  warrants and options are issued
               to employees  with an exercise  price of not less that the quoted
               market price of the stock on the date of grant.


NOTE K - Related Party Transactions

                    In July 1998,  the Company  issued  600,000 shares of common
               stock to a director of the  Company in  connection  with  certain
               consulting services which were valued at approximately $169,000.

                    During  the  fiscal  year  1998,  the  Company  employed  an
               individual  related to the  former  president  of the  Company to
               manage  the  souvenir/concession  area  of  the  attraction.  The
               agreement  provided for annual  compensation of $80,000.  In June
               1998, the Company and this  individual  terminated the employment
               contract.  The  termination  agreement  provided  for a severance
               payment of $18,000.

                    The Company  had an  agreement  with a marketing  consulting
               firm  whose  principal  was the former  Chairman  of the Board of
               Directors of the Company to act as the  Company's  sales agent in
               soliciting   and   negotiating    sponsorships   and   commercial
               endorsements.  Sponsorship commissions and consulting fees earned
               by said firm for the year ended June 30, 1998 were $48,000.

                    The Company  incurred legal fees to a law firm, one of whose
               partners  was a  director  of  the  Company.  Such  fees  related
               primarily to general corporate services.  Legal fees for the year
               ended June 30, 1998 were $283,000.


NOTE L - Revenue Sharing Agreements

                    The Company has been provided with certain equipment for use
               in its XS New York  facility in exchange for a percentage  of the
               revenues generated  therefrom.  In November 1997, a new agreement
               was entered into with its major  equipment  supplier  whereby the
               Company's revenue-sharing  obligation was reduced from 40% to 14%
               in exchange for the Company  selling the XS trademark and related
               intellectual  property  rights to such  vendor.  The  Company can
               continue to use the XS  trademark  at its Times  Square  location
               pursuant to a license  agreement  entered into in connection with
               the sale of the  trademark.  In  addition,  the vendor  agreed to
               waive all amounts due under the prior  revenue-sharing  agreement
               through October 12, 1997 which aggregated approximately $427,000.
               In December  1998, the  revenue-sharing  agreement was amended to
               increase  the  percentage  of revenues  payable to the  equipment
               vendor  to 16% of the net  revenue,  as  defined,  and 50% of the
               excess over such amount. The Company believes that this amendment
               will  incentivize the equipment vendor to add more games and help
               increase revenues from the XS New York facility.

(Continued)
<PAGE>
             SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS
                                      -16-



NOTE M - Contingencies

                    In October  1997,  the Empire  State  Building  Company (the
               "ESBCo") sent notices of default to the Company alleging that the
               Company  failed to pay rent  pursuant  to  certain  leases at the
               Empire State  Building (the "ESB") (the  "Notices").  The Company
               believed it had valid claims and offsets against a portion of the
               rents  claimed  by ESBCo.  Thus,  the  Company  responded  to the
               Notices and informed the ESBCo that the ESBCo, as well as others:
               (1) had  breached the leases and the license  agreement;  and (2)
               had failed to provide the Company with certain  credits,  offsets
               and adjustments  that were due and owing to the Company under the
               leases and license Agreement.

                    In December  1997,  the Company  commenced an action against
               the ESBCo, Empire State Building Associates, Helmsley-Spear, Inc.
               and others,  seeking injunctive relief to prohibit the ESBCo from
               terminating  the  Company's  leases  and  the  license  agreement
               relating  to the New  York  Skyride  location  and  also  seeking
               damages  from the  ESBCo.  The  Company  asserts  that the  ESBCo
               violated the terms of the leases and the license  agreement.  The
               Company has  received an  injunction,  which among other  things,
               prohibits the ESBCo from  terminating or canceling the leases and
               the license agreement and restraining ESBCo from interfering with
               the Company's business or commencing any proceedings with respect
               to the leases and the license  agreement.  The court  ordered the
               Company to pay $838,000 in undisputed  rent. The Company  intends
               to defend  its  position  vigorously  with  respect  to its other
               claims for damages against the ESBCo.


NOTE N - Extraordinary Gains From Restructuring of Liabilities

                    During the year ended June 30,  1999,  the  Company  settled
               $1,148,000 of liabilities to vendors for $935,000  resulting in a
               gain of $213,000.

                    In  November  1997,  the  Company  agreed  to  sell  its  XS
               trademarks  and related  property  rights to its major  equipment
               supplier at its XS site.  The  Company,  pursuant to a three-year
               renewable  license  agreement,  can  continue  to  use  the  "XS"
               trademarks and related concepts at its Times Square location.  In
               connection   therewith,   the  supplier  agreed  to  reduce   its
               revenue-sharing  percentage  and forgave  approximately  $427,000
               owed by the  Company.  The Company  recognized a gain of $385,000
               from the  settlement of the liability net of the assets sold. The
               total gain from restructuring of these liabilities in fiscal 1998
               was $659,000.