<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549
                                   ___________

                                    FORM 10-K
                                   ___________

                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934
                   FOR THE FISCAL YEAR ENDED MARCH 31, 1997.


                         COMMISSION FILE NUMBER 0-15939



                          SHOWSCAN ENTERTAINMENT INC.
             (Exact name of registrant as specified in its charter)

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

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

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


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

Securities registered pursuant to Section 12(g) of the Act: TITLE OF EACH CLASS
                                                            -------------------
                                                              Common Stock,
                                                            $.001 par value


     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.         YES     X     NO
                                                        -----       -----

     The aggregate market value of the voting stock held by non-affiliates of
the registrant as of June 20, 1997 was approximately $13,234,405 (based on last
NASDAQ-reported sale price of $2.625 per share of Common Stock on that date).
There were 5,642,058 shares of registrant's common stock outstanding as of June
20, 1997.

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not 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-K or any
amendment to this Form 10-K.[  ]


                      DOCUMENTS INCORPORATED BY REFERENCE

         Portions of registrant's Proxy Statement for its 1997 Annual Meeting
of Stockholders, to be filed with the Securities and Exchange Commission within
120 days after the close of registrant's fiscal year, are incorporated herein
by reference in Part III of this Report.



<PAGE>   2
                               TABLE OF CONTENTS


<TABLE>

Item                                                                                                         Page
----                                                                                                         ----
<S>      <C>                                                                                                 <C>
                                     Part I

1.       Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       3

2.       Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      17

3.       Legal Proceedings  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      17

4.       Submission of Matters to a Vote of Security Holders  . . . . . . . . . . . . . . . . . . . . .      18


                                     Part II

5.       Market for Registrant's Common Equity and Related Stockholder Matters  . . . . . . . . . . . .      19

6.       Selected Financial Data  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      20

7.       Management's Discussion and Analysis of Financial
           Condition and Results of Operations  . . . . . . . . . . . . . . . . . . . . . . . . . . . .      21

8.       Financial Statements and Supplementary Data  . . . . . . . . . . . . . . . . . . . . . . . . .      27

9.       Changes in and Disagreements with Accountants
           on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . .      27


                                    Part III

10.      Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . .      28

11.      Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      28

12.      Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . .      28

13.      Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . .      28


                                     Part IV

14.      Exhibits, Consolidated Financial Statement Schedules,
           and Reports on Form 8-K  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      29
</TABLE>





                                       2.
<PAGE>   3
FORWARD-LOOKING STATEMENTS

         In addition to historical information, this Annual Report on Form 10-K
contains forward-looking statements.  The forward-looking statements contained
herein are subject to certain risks and uncertainties that could cause actual
results to differ materially from those reflected in the forward-looking
statements.  Factors that might cause such a difference include, but are not
limited to, those discussed in the section entitled "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Factors That
May Affect Future Results."  Readers are cautioned not to place undue reliance
on these forward-looking statements which reflect management's analysis only as
of the date hereof.  Showscan Entertainment Inc. undertakes no obligation to
publicly revise these forward-looking statements to reflect events or
circumstances that arise after the date hereof.  Readers should carefully
review the risk factors described in other documents the Company files from
time to time with the Securities and Exchange Commission, including the
Quarterly Reports on Form 10-Q to be filed by the Company in calendar 1997 and
1998 and any Current Reports on Form 8-K filed by the Company.


                                     PART I


ITEM 1.  BUSINESS

GENERAL

         Showscan Entertainment Inc. (the "Company") is a leading provider of
movie-based motion simulation theatre attractions to the rapidly expanding
out-of-home entertainment market.  The Company's motion simulation theatre
attractions ("Showscan Attractions") combine the exhibition of a short action
film with multi-channel sound systems and synchronized theatre seat movement to
produce an immersive entertainment experience in which the theatre patron has
the perception of actually participating in the on-screen action.  The
entertainment creates a "thrill ride" or action entertainment experience (such
as riding a run-away train or racing through outer space).  The Company's
attractions incorporate various proprietary technologies, including the award
winning and patented 70mm filming and projection process known as Showscan(R).
The Company believes that films made and exhibited in the Showscan process
create a visual effect of depth, clarity and realism that is superior to any
other film format.  The Showscan process is also used for the exhibition of
films in large screen special format movie theatres.  The Company's films have
been exhibited in such specialty theatres at world fairs, tourist destinations,
trade conventions and other locations where the operator desires the impact of
the large-screen, intense image that a Showscan film provides.

         As of June 20, 1997, the Company had 61 Showscan Attractions screens
operating around the world. The Company had 8 additional Showscan Attractions
screens in its delivery and installation backlog, and has contractual
commitments for an additional 29 Showscan Attractions screens.  The Company
includes in its backlog all sales for which it has a signed agreement or letter
of intent, in each case supported by a letter of credit, cash deposits or
damage provisions.  Until November 1993, all Showscan Attractions were owned
and operated by unaffiliated third parties.  Since then, ventures in which the
Company has a 15% to 50% ownership interest have opened motion simulation
theatres ("O&O Theatres") at Universal CityWalk, Universal City, California; in
the Trocadero Arcade at Piccadilly Circus, in London, England; at General
Cinema's 14-screen  theatre multiplex in Framingham, Massachusetts; on the
Riverwalk in San Antonio, Texas; at the Asian Trade Center in Osaka, Japan; in
Austin, Texas beginning on July 1, 1997 and at Darling Harbour, Australia in
July, 1997.

         As part of its business, the Company produces and licenses specialty
films in the Showscan process which are then exhibited in conventional theatres
equipped to show Showscan films.  The Company also markets all of the cameras,
projectors, motion bases and other equipment necessary to establish and operate
Showscan Attractions and Showscan specialty theatres.  The Company has 6
permanent specialty theatres operating as of June 20, 1997.





                                       3.
<PAGE>   4
Last year, the Company entered another expanding market when it began marketing
a 15/70 format giant screen equipment and theatre package.

         The Company was incorporated in Delaware in August 1984 under the name
Showscan Film Corporation.  In August 1990, the Company's name was changed to
Showscan Corporation, and in August 1994 the name was changed again to Showscan
Entertainment Inc.  The Company's principal executive office is located at 3939
Landmark Street, Culver City, California 90232.  The Company's telephone number
at its executive office is (310) 558-0150.  Unless the context otherwise
requires, the term "Company" as used in this Report refers to Showscan
Entertainment Inc. and its wholly owned subsidiaries, Showscan Productions,
Inc., Showscan CityWalk, Inc., Showscan Attractions, Inc., Showscan Framingham,
Inc. and Showscan Entertainment B.V.

BUSINESS STRATEGY

         The Company believes that there is a rapidly increasing worldwide
consumer demand for a variety of out-of-home entertainment options.  The
Company plans to capitalize on its position as a leader in the entertainment
motion simulation attraction business and on the growing demand for
entertainment alternatives by making its movie-based products available to
consumers worldwide at high-visibility and high-traffic locations, such as
urban entertainment complexes, tourist destinations, family entertainment
centers, amusement/theme parks, movie theatre complexes, gaming casinos, and
shopping centers.

         The Company has focused its primary business strategy on the
development of high-margin recurring revenues from the licensing and 
distribution of its motion simulation and specialty films. The Company is also 
committed to enhancing the recognition of the Showscan(R) brand name 
worldwide.  The Company's current strategies to achieve this objective are 
as follows:

         Increase Film Licensing Revenues.  The Company seeks to increase the
recurring revenues derived from licensing its films by increasing the number of
motion simulation attractions and specialty theatres.  As this installed base
grows, each film will be licensed to a greater number of exhibitors thereby
increasing revenue, while also amortizing the fixed film production costs of
Showscan owned films over a larger revenue base.  To increase this recurring
revenue, the Company is:

                  (i)      Marketing to a wide range of potential customers
                           worldwide while maintaining reasonable profit
                           margins;

                  (ii)     Distributing Showscan films to simulation attractions
                           previously installed by competitors of Showscan;

                  (iii)    Enhancing and expanding its film library by producing
                           internally or with third parties new films while also
                           obtaining distribution rights to motion simulation
                           films produced by others;

                  (iv)     Enhancing its proprietary projection and motion base
                           technology;

                  (v)      Entering into additional strategic sales arrangements
                           to supplement existing strategic agreements which
                           cover Japan, USA, Australia, Taiwan, Hong Kong and
                           selected portions of China; and

                  (vi)     Emphasizing sales having multi-location
                           possibilities. (To date, the Company has sold 18
                           Showscan Attractions to Imagine Japan, 10 Showscan
                           Attractions in Taiwan to Kings Entertainment Co.,
                           Ltd., four Showscan Attractions in China to Jenor
                           International, 24 Showscan Attractions to United
                           Artists Theatre Circuit, Inc. ("UA"), five Showscan







                                       4.
<PAGE>   5

                           Attractions to Auscinemagic/Reality Cinema in
                           Australia, two Showscan Attractions to Lotte World in
                           Korea and two Showscan Attractions to Parc du
                           Futuroscope in France.)

         INVESTMENTS IN SHOWSCAN ATTRACTION THEATRES.  The Company has
historically participated directly in the recurring revenues from ticket sales
and film distribution and licensing by having an ownership interest in certain
Showscan Attractions ranging from 25% to 50%.  Although the start-up and the
pre-opening marketing and advertising costs of O&O Theatres are sometimes high
(which costs the Company has defrayed in part through strategic alliances), the
variable costs of ticket sales are low.  In the fourth quarter of the fiscal
year ended March 31, 1997, the Company revised its O&O Theatre strategy so that
it will now generally limit its ownership interest to between 10% and 15%; 
although there may be specific locations where the Company would invest up to 
50%.  The Company intends to selectively continue its investment in Showscan 
Attractions on this basis.  The Company has entered into several alliances 
that provide the Company with the capability of participating in the ownership 
of Showscan Attractions with other investors.  See "Item 1. Business -- Motion 
Simulation Attractions -- Owned and Operated Theatres," below.

         The first O&O Theatre opened at Universal CityWalk in Universal City,
California in late November 1993; the second O&O Theatre (which contains two
separate screens) opened in late September 1994 at the Trocadero Arcade at
Piccadilly Circus, London, England; the third O&O Theatre (which contains two
separate screens) opened in late May 1995 at a General Cinema 14-screen theatre
multiplex in a suburb of Boston, Massachusetts; the fourth O&O Theatre (a joint
venture with Imagine Japan) opened in August, 1995 at the Asian Trade Center in
Osaka, Japan; and the fifth O&O Theatre opened in March, 1996 on the Riverwalk
in San Antonio, Texas.  UA has agreed to offer to the UA Venture (as defined
below) up to 24 sites at anytime prior to August 19, 1999 as locations for O&O
Theaters.  On behalf of the UA Venture, the Company has the right to accept or
reject any such potential site.  The Company also has entered into an agreement
with UA that gives the Company (on behalf of the UA Venture) the right of first
negotiation with respect to any additional Showscan Attraction to be installed
in any UA theatre complexes.  See "Item 1. Business -- Motion Simulation
Attractions -- Owned and Operated Theatres -- The United Artists Venture,"
below.  As of March 31, 1997, UA has offered eight sites of which the UA
Venture declined seven sites as they did not meet the criteria of the UA
Venture.  Effective July 1, 1997, the UA Venture accepted the offer by UA of
the Showscan Attraction site in Austin, Texas.  Additionally, the Company has
acquired (effective July 1997) a 15% investment in a Showscan Attraction in
Darling Harbour, Sydney, Australia.

         Pursue Other Business Opportunities.  In addition to increasing its
recurring film revenue, another objective of the Company is to explore and
exploit other commercial and entertainment opportunities and revenue sources.

         During the fiscal year ended March 31, 1996, the Company introduced a
new product line, a 15 perf/70 film format giant screen theatre package that
includes state-of-the-art rolling loop projectors, surround-sound systems,
synchronization, show control and theatre design.  The 15/70 film format
differs from other film formats such as 8 perf/70 and 5 perf/70 by providing a
larger frame size which in turn allows projection onto a larger screen.  This
film format system is also big enough to use in a dome application, whereas
with other formats this is not recommended.  The 15/70 format film library is
also the largest giant screen film library existing today.  On May 2, 1997, the
Company settled all litigation that it had with Imax Corporation regarding this
product line.  See "Item 3 -- Legal Proceedings," for a more detailed
explanation of this litigation.

         In addition, the Company believes that its current and future library
of motion simulation and specialty films will become increasingly more
valuable.  Accordingly, the Company plans to significantly increase the number
of films it offers by producing and/or acquiring for distribution three to five
new films annually.  During the past fiscal year, the Company released three
motion simulation films, has another film in post-production and has ten
additional simulation films under active development.  For the fiscal year
ending March 31, 1998, the Company has acquired two films that were not filmed
using the Showscan process but are being converted to the Company's format.  In
addition, the Company also is actively pursuing various financing alternatives,
including limited partnerships and other similar arrangements to finance the
production of additional Showscan motion simulation films.





                                       5.
<PAGE>   6

         The Company believes that the Showscan process can also be used to
enhance the effectiveness, appeal and commercial potential of other filmed
products, including feature-length motion pictures, specialty films, commercial
and corporate presentations, educational films, documentaries and other forms
of entertainment, such as interactive and virtual reality attractions.  In
addition, the Company is exploring potential additional entertainment
applications of the Showscan process, including the development of video games
based on its existing and future film products.

         The Company plans to enter into additional strategic alliances, joint
ventures and other similar arrangements (i) to facilitate the production of its
motion-simulation software, (ii) to expand the out-of-home entertainment venues
in which its products can be exhibited, (iii) to reduce financial risks, and
(iv) to expand the Company's access to distribution networks, urban
entertainment locations and destination centers, and technological innovations.
The Company is currently considering alliances with motion picture exhibitors,
retail shopping center developers and operators, and others for the
establishment of additional Showscan Attractions and specialty theatres in
motion picture multiplexes, shopping malls, casinos and other gaming venues,
and other high-traffic locations and destinations.  Furthermore, the Company
may consider the acquisition of motion simulation film libraries and/or other
companies in its line of business or in other businesses.

THE MOTION SIMULATION AND SPECIALTY FILM LIBRARY

         The Company derives revenues in the following ways from its film
library:  (i) a royalty fee for use of the patented Showscan filming and
projection process, (ii) a distribution fee based on the revenues derived from
all films that are not solely owned by the Company; and (iii) receipt of all or
a percentage of the licensing revenues remaining after the payment of any
distribution fees or expenses.  The amount the Company receives from co-owned
films varies, and is based on the participation agreements negotiated with the
other owners of the films.

         The Company's film library consists of a motion simulation film
library and a specialty film library.  The motion simulation film library is
one of the world's largest entertainment motion simulation film libraries and
currently contains 28 action/thrill-ride films.  The specialty film library
contains 16 Showscan specialty films available for exhibition in specialty
theatres.  The Company is the sole owner of 16 of the motion simulation films,
a joint owner of seven motion simulation films and the distributor of five
motion simulation films owned by unaffiliated companies.  Of the 16 Showscan
specialty films, seven are owned by the Company.

         The Company initiated distribution of the live-action motion
simulation film Street Luge (a new high-speed downhill ride just inches from
the asphalt) and the computer-animated/special effects Storm Rider (the rider
becomes a raindrop that falls to Earth) during the past fiscal year.  The film
library also consists of such films as Cosmic Pinball (depicting a race through
a giant, futuristic pinball park), and the highly-acclaimed Devil's Mine Ride
(a ride through an abandoned mine on a runaway rail car).  The Company has
obtained certain distribution rights through May 1, 2002 to two films (Funhouse
Express and Asteroid Adventure) which were produced by Imax Corporation.  These
two films may be distributed to Showscan's existing installed base and
contractual backlog of Showscan Attractions as of April 30, 1997 (an aggregate
of approximately 100 sites).

         The films that the Company produces are either fully financed by third
parties or co-produced and financed by the Company and third parties.  When the
Company produces films, it typically hires a production company or team of
specialists on a project-by-project basis, similar to the major movie studios.
This allows the Company to retain creative and quality control without the
burden of significant ongoing production overhead expenses.  As the film's
producer, the Company typically has control over the creative and technical
aspects of the production and is designated as the film's exclusive
distributor.

         The Company has obtained the exclusive, perpetual worldwide right to
distribute in the Showscan format certain of the Showscan motion simulation
films and specialty films that are not owned by the Company, except that in
certain circumstances the Company does not own the right to distribute such
films in the country in which the owner of the distributed film is located.  On
some films, the Company only has the right to distribute the film to its
network of simulation attractions.





                                       6.
<PAGE>   7
         The Company has or is transferring 23 of the Showscan motion
simulation films to high-definition video for exhibition in HD Simulation
Attractions.

         The Company's specialty film library consists of such films as Niagara
Wonders, a 23-minute Showscan film produced for exhibition in a permanently
erected 300-seat theatre in Niagara Falls, New York; France, a 40-minute
Showscan film that was produced by Source Perrier for the 1989 bicentennial
celebration of the French revolution and exhibited in a first-run theatre in
Paris, France; and Discovery, a 16-minute Showscan film produced by the
government of British Columbia and exhibited in a temporary specialty theatre
at the Expo '86 World's Fair in Vancouver, Canada. Two Showscan specialty
films, Nature Rediscovered and Concerto for the Earth, were in exhibition at
temporary Showscan specialty theatres at the Expo '92 World's Fair in Seville,
Spain. Both films explore biodiversity, ecological awareness and the fragile
balance of nature. Concerto for the Earth is the first Showscan film in 3-D;
however, the film can be exhibited in the standard 2-D format.

MOTION SIMULATION ATTRACTIONS

         A Showscan Attraction is a theatre (typically 18 to 84 seats) in which
the on-screen action of a short action film is synchronized with the motion of
the theatre seats to simulate various realistic or action experiences.  The
Showscan Attraction "rides" are short, approximately four-to-five-minute
entertainment experiences.  Each Showscan Attraction is equipped with a
high-quality, multi-channel sound system and a seat motion system (motion
base).  Motion bases are available in various theatre configurations to suit
the needs of the various locations, and are manufactured by Intamin, A.G.,
McFadden Systems, Inc., Shostar Ltd., and others.  The potential market for
motion simulation theatre attractions includes any location with high
pedestrian traffic, including tourist attractions, amusement parks, theme
parks, resorts, large regional shopping centers, motion-picture multiplexes,
urban entertainment centers, and hotel casinos.

         Showscan Attractions are either the standard film-based theatres in
which the Company's 70mm motion simulation films are exhibited using the
Company's patented projector, or are HD Simulation Attractions in which the
motion simulation films are projected using standard, commercially available
high-definition video projection equipment.  To date, most Showscan Attractions
have exhibited Showscan motion simulation films using 70mm film and the
Company's projectors.  However, the Company has seen increasing demand for its
HD Simulation Attractions in which the Showscan films are transferred to a
high-definition video format on laser discs and projected using high definition
video projectors.  See "Item 1. Business -- Equipment," below.  Because the
Showscan film is transferred directly from frame-to-field to high-definition
video, the Company believes that the image projected is the sharpest image
available in that format.  The HD Simulation Attractions, when combined with
any of the available motion bases, utilize less space than the standard
film-based Showscan Attractions.  Due to the lesser space requirements of HD
Simulation Attractions, such Showscan Attractions can be installed in locations
previously not feasible.

         The Company licenses its films and, in standard film-based motion
simulation theatre attractions, sells its Showscan projection equipment to
third party owners and operators of Showscan Attractions.  The Company is the
sole source of both the film projectors used to exhibit Showscan motion
simulation films and the show control system.  In addition, the Company
generally sells the motion bases, control panels, video equipment and other
equipment used in the Showscan Attractions and assists in installing the
attraction.  Licensees of the Company's motion simulation films are not
obligated to purchase the motion bases or the other equipment and services
offered by the Company.  Other than the patented Showscan film projectors and
the Company's show control system, all motion simulation equipment, including
the various motion bases, the sound system and the video projection equipment,
can be purchased by the third party owner/operator from other sources.  The
initial term of the Company's licensing agreements generally range from two to
five years (normally with fixed or minimum annual royalty payments and film
rental obligations).







                                       7.

<PAGE>   8

         Historically, Showscan Attraction installations outside North America
have represented a significant portion of the Company's revenues (constituting
62%, 61% and 69% of the Company's revenues for the fiscal years ending March
31, 1997, 1996 and 1995, respectively).

         As of March 31, 1997, Showscan Attractions have been sold or licensed
in the United Kingdom, Australia, Saudi Arabia, Spain, Hong Kong, People's
Republic of China, United States, Canada, Japan, South Korea, Taiwan,
Indonesia, Singapore, France, Belgium, Italy, South Africa, United Arab
Emirates, New Zealand and Germany.  The Showscan Attractions sold in Japan have
been purchased or distributed by Imagine Japan, Inc. ("Imagine"), which has
exclusive distribution rights to Showscan Attractions in Japan through December
31, 1999.  See "Item 1. Business -- Sales and Marketing," below.

         OWNED AND OPERATED THEATRES.  In 1993, the Company began developing
and operating Showscan Attractions in which the Company has an ownership
interest.  These O&O Theatres have, to date, been established through the
various strategic alliances described below.  For certain financial information
regarding these strategic alliances, see "Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations."

                 The United Artists Venture.  Under the terms of a Joint
Venture Agreement dated as of August 19, 1994 (the "Joint Venture Agreement"),
the Company and UA have agreed to be equal partners in a venture called
Showscan/United Artists Theatres Joint Venture (the "UA Venture").  The dates
for the capital contributions are to be agreed upon by the venture partners,
which dates will depend on the actual build- out schedule of each project.  UA
and the Company are required to equally contribute additional capital as
necessary for all projects undertaken by the UA Venture.

         The Company is managing partner of the UA Venture while UA is the
administrative partner.  The Company, as managing partner, will implement all
decisions of the UA Venture and, together with UA, develop the business plan
and long-term strategic plans for the UA Venture.  UA, as administrative
partner, will be responsible for all financial aspects of the UA Venture,
including overseeing record keeping and other financial matters.

         Pursuant to a Theater Rights Agreement dated as of August 19, 1994, as
amended (the "Theater Rights Agreement"), UA has agreed to offer to the UA
Venture for ownership and operation by the UA Venture, up to 24 theatre sites
at any time prior to August 19, 1999 for the installation of Showscan
Attractions in existing or to-be-built UA theatre complexes.  If the UA Venture
declines to acquire a particular location, then UA must install a Showscan
motion simulation attraction theatre at the first 24 sites that the UA Venture
declines to acquire.  Whenever UA or the UA Venture builds a Showscan
Attraction theatre, such entity will have the exclusive rights to exhibit
Showscan motion simulation attraction films within a pre-agreed area
surrounding such location.  Also, pursuant to a Master Management and
Development Agreement, dated as of August 19, 1994, by and among the Company,
UA and the UA Venture (the "Master Management Agreement"), UA will develop and
coordinate the construction of new and/or the conversion of existing theatres
to Showscan Attractions and will manage each theatre pursuant to pre-negotiated
terms.  The Master Management Agreement expires on August 19, 1999, unless the
Theater Rights Agreement is extended, in which case the Master Management
Agreement will be extended for the same period.  The UA Venture, in turn, has
agreed to accept prior to August 19, 1999 at least one of the theatre sites
offered to it by UA.  The Company has agreed to pre-negotiated terms for the
sale of Showscan equipment, installation, servicing and the licensing of
Showscan motion simulator films.  The Company will also make available to both
the UA Venture and UA its library of specialty films which utilize the patented
Showscan process, to the extent that either the UA Venture or UA builds or
converts existing theatres into specialty theatres for the exhibition of
specialty films.  The Theater Rights Agreement contains certain provisions that
require UA to make payments to the Company if UA is unable to meet its
obligations and that require the Company to make payments to UA if the UA
Venture is unable to meet certain of its obligations.

         To date, UA has offered to the UA Venture eight sites at new or
existing UA movie theatre multiplexes.  The UA Venture has declined seven of
these sites because they did not meet the criteria of the UA Venture and





                                       8.

<PAGE>   9
therefore, UA has completed construction for its own account Showscan
Attractions at those seven sites.  On July 1, 1997, the UA Venture exercised
its rights under the Theater Rights Agreement to accept the offer by UA of the
Showscan Attraction site in Austin, Texas.  This site was completed by UA and
was already open prior to acceptance by the UA Venture.  The Austin site is the
first site under the UA Venture.

                 Moss/DiBenedetto Ventures.  The Company and affiliates of
certain of its directors entered into (i) the Showscan CityWalk Venture (the
"CityWalk Venture"), a venture formed solely to own and operate an O&O Theatre
in Universal City, California and (ii) the Showscan Attractions Venture, a
venture formed for the purpose of, directly or through other jointly-owned
entities, developing, owning and operating additional O&O Theatres throughout
the world (the "Attractions Venture", and together with the CityWalk Venture,
the "Moss/DiBenedetto Ventures").

                 The CityWalk Venture.  The first O&O Theatre opened in
November 1993 at Universal CityWalk, adjacent to Universal Studios in Universal
City, California.  This O&O Theatre is owned by the CityWalk Venture, a venture
50% owned by Showscan CityWalk, Inc. (a wholly owned subsidiary of the
Company), 25% owned by Moss Family LA Corp., a California corporation, and 25%
owned by DiBenedetto CityWalk Limited Partnership, a Delaware limited
partnership (collectively, the "Investors").  Moss Family LA Corp. and
DiBenedetto CityWalk Limited Partnership are controlled by Mr. Charles B. Moss,
Jr. and Mr. Thomas R. DiBenedetto, respectively.  Mr. Moss and Mr. DiBenedetto
are directors and stockholders of the Company.  See "Item 10. Directors and
Executive Officers of the Registrant," below.  The term of the CityWalk Venture
expires on December 31, 2050.

         Universal CityWalk is a diversified-use entertainment/shopping
facility that is controlled by Universal Studios Recreation Group
("Universal").  The facilities are leased from Universal pursuant to a profit
sharing lease (the "Lease") entered into with MCA Inc., the predecessor of
Universal, under which Universal paid approximately one-half of the total
tenant costs of the theatre (as defined), which costs included the projection
equipment and the motion bases.  The Lease expires in November 2002, subject to
options to extend the Lease for three five-year periods.  In general, the
CityWalk Venture is obligated to pay a base rent plus 50% of the cash flow (as
defined) from the operations of the theatre.  Accordingly, the CityWalk Venture
will retain 50% of the cash flow from the theatre's operations. The base rent
will be adjusted annually based on the percentage increase in the consumer
price index up to a maximum of 5% per year.  Of the 50% of cash flow retained
by CityWalk Venture, 50% will be retained by the Company and 50% will be paid
to the Investors.  Thus, the Company's share of the total cash flow from the
theatre's operations will be 25% plus the annual film rentals, royalties and
management fees that the CityWalk Venture is separately required to pay the
Company, each of which is subject to annual increases based on the consumer
price index up to a maximum of 5% per year.

                 The Attractions Venture.  The parties to the Attractions
Venture are (i) Showscan Attractions, Inc., a wholly owned California
subsidiary of the Company and the managing partner of the Attractions Venture,
(ii) Moss Family O&O Corp., a California corporation controlled by Mr. Moss
(the "Moss Partner"), and (iii) DiBenedetto O&O Limited Partnership, a Delaware
limited partnership controlled by Mr. DiBenedetto (the "DiBenedetto Partner").

         The Attractions Venture agreement states that the parties intend to
develop, own and operate O&O Theatres through the Attractions Venture or
through other corporations, joint ventures, partnerships or other entities to
be owned by the parties to the Attractions Venture.  The agreement further
provides that if any O&O Theatre is owned by any such other corporation,
venture, partnership or other entity, the partners to the Attractions Venture
shall own and operate such other entity on the same terms and conditions as the
agreement of the Attractions Venture.

         Pursuant to a Proprietary Property Acquisition and Management
Agreement, dated as of September 27, 1993, between the Company and the
Attractions Venture, the Company granted to the Attractions Venture rights to
utilize proprietary property and rights of the Company in connection with the
development and operation of additional O&O Theatres.  Under the terms of this
agreement, the Company will manage any and all Showscan  Attractions developed
and operated by the Attractions Venture.  The Attractions Venture is required
to purchase





                                       9.
<PAGE>   10

simulation equipment and license Showscan motion simulation films from the
Company on terms and conditions that are substantially the same as those
offered to unaffiliated third parties, except that the Attractions Venture
receives a discount on certain equipment prices and film rental and royalty
fees.  Moss Entertainment Corp., a corporation controlled by Moss, and
DiBenedetto Corp., an affiliate of DiBenedetto, were retained by the
Attractions Venture to provide certain services in connection with the
acquisition of properties for the additional O&O Theatres and the disposition
of those theatres.  For such services, Moss Entertainment Corp. and DiBenedetto
Corp. are to receive fees upon the sale or other disposition of certain of the
O&O Theatres developed by the Attractions Venture.  The term of the Attractions
Venture expires on December 31, 2050.

         The Attractions Venture agreement further provides that neither the
Company, the Moss Partner, nor the DiBenedetto Partner may develop, own or
operate any additional Showscan Attractions without first offering all of the
other parties to the Attractions Venture the opportunity to invest in such
additional Showscan Attractions in proportion to each party's Percentage
Interest (as defined below).  No party is, however, obligated to invest in any
such additional Showscan Attractions.  If the parties to the Attractions
Venture do not collectively contribute all funds necessary to establish and
operate any such additional Showscan Attraction, the parties may admit
additional unaffiliated investors as part owners of the additional Showscan
Attraction.

         Showscan Attractions, Inc. currently owns a 50% interest in the
Attractions Venture, and each of  the Moss Partner and the DiBenedetto Partner
owns a 25% interest in the Attractions Venture (the "Percentage Interests").
In the event that the Company and the Moss Partner and/or the DiBenedetto
Partner elect to jointly invest in any additional Showscan Attraction, the
parties will share all profits, loss and distributions of cash, if any, derived
from the operation and ultimate disposition of each additional Showscan
Attraction in proportion to the capital contributions made by the partners (and
any unaffiliated investor) into the account established for the additional
Showscan Attraction.

         The first O&O Theatre owned by the parties to the Attractions Venture
is the twin O&O Theatre that opened in late September 1994 in the Trocadero
Arcade at Piccadilly Circus, London, England.  As permitted by the Attractions
Venture agreement, the London O&O Theatre is owned by the partners of the
Attractions Venture through a corporation formed under the laws of England
rather than directly through the Attractions Venture.  Cinemania (U.K.)
Limited, the corporation formed to own the London O&O theatre, is owned by
Showscan Attractions, Inc., the Moss Partner and the DiBenedetto Partner in
proportion to their Percentage Interests.

         In connection with the UA Venture, the Attractions Venture agreement
was amended to exclude from the territories in which the Attractions Venture
can operate certain specific areas that are made available to UA under the
Theater Rights Agreement.  In exchange for such amendment, the Company agreed
to pay each of Messrs. Moss and DiBenedetto a specified amount upon the opening
of each new O&O Theatre that is owned by the UA Venture in the specific
excluded areas and to pay Messrs. Moss and DiBenedetto a percentage of certain
profits (as defined) from the Company's share of profits from each such
Showscan Attraction owned by the UA Venture.

                 The Framingham Venture.  In April 1995, Showscan Framingham,
Inc., a wholly owned Delaware subsidiary of the Company, and General Cinema of
Framingham Inc. ("GCF"), a wholly owned Massachusetts subsidiary of General
Cinema Corp. of Massachusetts ("GCC"), entered into a venture (the "Framingham
Venture") to own and operate twin Showscan Attractions at a newly opened,
14-screen movie theatre multiplex owned and operated by GCC in Framingham,
Massachusetts, a suburb of Boston.

         Showscan Framingham, Inc. and GCF agreed to be equal partners in the
Framingham Venture and to manage the venture by a four-person management
committee composed of two representatives from each party.  Day-to-day
management of the twin theatres owned by the Framingham Venture is handled by
GCF as operating partner, for which it receives a management fee.  The Company
receives film rentals and royalties from the Framingham Venture based on a
formula tied to the gross box office receipts from the twin Showscan
Attractions against a minimum.





                                      10.
<PAGE>   11
         The partners of the Framingham Venture have agreed to close the twin
Showscan motion attraction simulation theatres and liquidate the assets of the
Framingham Venture.  The partners have further agreed to sell the simulation
attraction equipment back to the Company at its current fair market value,
which approximates the underlying net book value of the equipment, and the
Company has contracted to sell the equipment to a non-affiliated third party.
The remainder of the assets will be allocated, as defined in the Venture
agreement, back to the partners.  An additional capital contribution may be
necessary by one of the partners upon settlement and liquidation of the
Venture; however, the partners believe the contribution will be under $100,000.

                 The Osaka Venture.  In June, 1995, Showscan Entertainment
B.V., a wholly owned subsidiary of the Company, organized under the laws of the
Netherlands, and Imagine Japan, Inc., a company organized under the laws of
Japan, entered into a venture (the "Osaka Venture") to own and operate a
Showscan Attractions theatre at the Asia Trade Center in Osaka, Japan.

         Showscan Entertainment B.V. and Imagine Japan, Inc. agreed to be equal
partners in the Osaka Venture.   Day-to-day operations of the theatre are
managed by Sega Enterprises, Ltd.  As theatre manager, Sega receives a
percentage of the gross box office receipts of the theatre as a combined
rent/management fee, as well as reimbursement of its operating expenses.  The
Company separately receives film rental and royalty fees from the Osaka
Venture.  The term of the Osaka Venture is for five years from June, 1995 and
can be extended for an additional five years at the option of Showscan
Entertainment B.V. at the end of the initial term.  Because of the structure of
the Osaka Venture under Japanese law, ownership and title of all property is
held by Imagine Japan.

                 The Maloney Venture.  In August, 1995, the Attractions Venture
and Maloney Development Partnership Ltd. ("Maloney"), an unaffiliated Texas
limited partnership, formed a Texas limited liability company called Showscan
Maloney, LLC to own and operate a Showscan Attraction theatre in the San
Antonio Riverwalk District, in San Antonio, Texas.

         The Attractions Venture and Maloney own equal interests in Showscan
Maloney, LLC, thus the Company's share in the cash flow from the theatre is 25%
plus the annual film rentals, royalties and management fees that Showscan
Maloney, LLC is separately required to pay to the Company.  Day-to-day
management of the theatre is handled by the Company as the sole manager of
Showscan Maloney, LLC.

         The partners of Showscan Maloney, LLC have agreed to close the theatre
and liquidate its assets.  The partners have further agreed to sell the theatre
equipment to the Company, which is in the process of negotiating to sell the
equipment to a non-affiliated third party.  The Company expects to fully
realize the carrying value of its investment in this venture at March 31, 1997
upon the completion of the liquidation and subsequent sale.

                 Universal Agreement.  Pursuant to the Lease entered into with
Universal in connection with the CityWalk Venture, Universal has the right,
exercisable at Universal's election, to participate in the Company's share of
any future O&O Theatres located in California.  If Universal makes any such
election, Universal will be entitled to receive one-half of the Company's
rights in such O&O Theatre and will assume one-half of the Company's
obligations related to such O&O Theatre.  To date, Universal has not exercised
its option to participate in any additional O&O Theatres.

SPECIALTY THEATRES

         The Company also receives revenues from the production, licensing and
exhibition of specialty films. These films are typically 15 to 40 minutes in
duration, are produced in the Showscan process and are exhibited at
expositions, theme parks, major fairs and festivals and other larger tourist
areas. Specialty theatres are either theatres permanently dedicated to the
exhibition of Showscan specialty films or temporary theatres erected for such
purposes. Often, specialty theatres exhibit Showscan specialty films that are
produced specifically for the theatre or the exhibition.  Examples of specialty
theatres and specialty films include the two films produced for and exhibited
at the Expo '92 World's Fair held in Seville, Spain.





                                      11.
<PAGE>   12

         Typically, the Company finances its specialty film production through
a third party who usually is the owner and operator of the specialty theatre
venue.  Showscan receives production fees for its services, revenues from the
sale of Showscan projector equipment (and possibly the theatre installation,
sound system and seats, etc.) and worldwide distribution rights to the specific
films.  As of June 20, 1997, nine permanent and twelve temporary specialty
theatres had been sold by the Company.  Of the nine permanent theatres, six are
currently operating and the remaining three theatres are permanently closed.

         The Company has agreed to make available, for a fee, to both the UA
Venture and UA its library of specialty films which utilize the patented
Showscan process, to the extent that either the UA Venture or UA builds or
converts existing theatres into specialty theatres for the exhibition of
specialty films.

THE SHOWSCAN PROCESS

         Standard films are currently projected at 24 frames per second (fps)
on 35mm film with each frame being shown twice.  In contrast to conventional
filming and projection systems, a Showscan motion picture is photographed on
65mm film at a rate of 60 fps and is projected using 70mm film at a rate of 60
fps and at a higher illumination level (the 65mm film is projected using 70mm
film in order to accommodate the sound track, which occupies approximately 5mm
of the film strip).  In addition, each frame in a Showscan film is shown only
once.  The Company believes that the bigger image and increased visual cues
perceived by the viewer of a Showscan film result in greater picture clarity
and an enhanced sense of depth and realism.

         Photography of 65mm film at a frame rate of 60 fps offers a number of
improvements to the quality of a motion picture image and permits the screen
size to be substantially enlarged without significant degradation of the image.
The images are significantly brighter with more saturated and vibrant colors.
Because of the frame rate of Showscan film, the motion of the cameras and the
subject can be substantially increased without noticeable distortion, greatly
heightening the impact of action scenes.  The larger 70mm format and faster
exposure time also greatly reduce blurring, thus recording images more
accurately and in finer detail.  To enhance the visual impact, and to take
maximum advantage of the realism and detail of the Showscan process, Showscan
film is usually projected onto a specially designed, curved screen.

         Showscan motion pictures can be transferred to conventional 35mm/24
fps format for use in conventional movie theatres to other large film formats
and to all standard video formats.  Showscan motion pictures can also be
directly transferred (one frame to each field) to high- definition video for
exhibition with standard high-definition video projectors.  Although a Showscan
film transferred to alternative formats, including to the high-definition laser
projection system used  by the Company, does not contain the clarity, depth and
realism of the original Showscan film projected in 70mm film at 60 fps, the
Company believes that the visual quality of Showscan film transferred to such
alternative film formats (such as the 8/70 - 30 fps and 24 fps, 5/70 - 30 fps
film formats) exceeds the quality that could be obtained in such formats using
conventional films.

SALES AND MARKETING

         The Company's sales and marketing activities are coordinated by the
Company's Vice President of Worldwide Sales and Marketing, and effected through
the Company's employees, its independent sales representatives worldwide and
its strategic sales alliances.  The Company participates in trade shows and
regularly advertises in trade periodicals.  The companies that provide Showscan
with motion bases also market motion simulation theatre attractions worldwide
that license the Company's motion simulation attraction films and equipment.

         Effective January 1997, the Company extended its agreement with
Imagine Japan, Inc. ("Imagine") through December 31, 1999, which included an
extension of Imagine's exclusive right to sell and acquire Showscan Attractions
and specialty theatres in Japan.  The price and other terms on which the
Showscan Attractions are sold to Imagine are substantially the same as the
price and terms offered by the Company to other Showscan Attraction customers.
Imagine is permitted to resell in Japan any and all of the Attractions it
purchases from the Company





                                      12.
<PAGE>   13
on terms established by Imagine.  However, notwithstanding such resales,
Imagine remains liable to the Company for all annual film licensing obligations
related to all of the Showscan Attractions sold to Imagine.  The Company has
also granted Imagine a non-transferable license to exhibit Showscan films in
the Company's motion simulation library for a rental fee that is based on the
number of Showscan Attractions operating in Japan and on the films exhibited at
the various attractions.  This exclusive agreement with Imagine expires on
December 31, 1999 although Imagine will continue to remain liable thereafter
for all annual film rental and royalty obligations.

         Historically, the majority of the Company's revenues have been derived
from export sales.  The Company sells internationally through independent sales
representatives and its own worldwide sales and marketing staff.  The Company's
international sales are subject to customary restrictions on foreign
operations, including restrictions on imports and exports, longer collection
periods for accounts receivable and risks associated with fluctuations in
foreign exchange rates.  The Company's contracts for the sale of equipment
generally provide for payment in United States dollars and for letters of
credit as the means of payment. The Company's policy is to require annual film
rental and royalty payments to be made in United States dollars.

EQUIPMENT

         The photography and exhibition of Showscan motion pictures require
specially equipped or modified cameras and projectors. In addition, certain
other products and equipment are needed to produce Showscan motion pictures and
to convert Showscan film to the conventional 35mm/24 fps format.

         Cinema Products Corporation ("Cinema Products"), a manufacturer and
supplier of professional motion picture cameras and equipment, has developed
and built 65mm high speed cameras for the Company. The camera, known as the
CP-65, is a high-speed, crystal-synchronized spinning mirror reflex studio
camera. The camera is available with a full complement of film magazines,
lenses and associated support equipment and is compatible with standard motion
picture industry equipment. The camera can be operated at various speeds from 2
fps to 72 fps and is crystal-synchronized at 24, 30 and 60 fps.  In 1993, the
Academy of Motion Picture Arts and Sciences awarded the CP-65 camera the
Scientific and Engineering Award.  The CP-65 allows the synchronous recording
of sound while filming at 60 fps and can be used in the same manner as standard
35mm/24 fps cameras. Cinema Products has manufactured and delivered to the
Company five CP-65 camera systems, all of which have been used in filming and
are available for use. Although the CP-65 camera was specially designed for
filming Showscan motion pictures, a number of existing cameras manufactured by
others can be modified to film in Showscan.

         The Company and Intamin, A.G., a Liechtenstein corporation and a
leading manufacturer of amusement park rides, jointly developed the
hydraulically-actuated seats that are used in the bench motion simulation
attractions marketed by the Company. The Company and Intamin jointly own three
United States patents on various elements of the motion simulation seats.  A
similar patent was approved under the European Patent Convention, which
resulted in the issuance of patents in those European countries in which the
Company elected to seek patent protection. See "Item 1.  Business -- Patents
and Other Intellectual Property," below.  In addition to the Intamin bench
motion bases, the Company markets the two-passenger and four-passenger pod,
including a six-axis motion base manufactured by Intamin.

         The Company, in conjunction with McFadden Systems, Inc., jointly
designed and developed a four-person, six-axis motion system (the "Quadra
Motion System") as well as an 18-seat, six-axis dynamic platform.  The Company
currently markets the Quadra Motion System, the 18-person dynamic platform as
well as six and 15-person platforms and a 12-seat self-contained capsule
manufactured by McFadden Systems, Inc.

         The Company also markets an electromagnetically-driven (as opposed to
hydraulically-driven) motion base called the "EM4."  The "EM4" has several
advantages over a hydraulically-driven motion base including lower electrical
consumption, lower noise levels, lower operating costs and a decrease in
construction costs due to elimination of hydraulic pump rooms, less air
conditioning requirements and elimination of environmental concerns as no
hydraulic fluids are used.





                                      13.
<PAGE>   14
         Films made in Showscan can be projected with certain conventional 70mm
projectors that are modified to project a motion picture at 60 fps. The
modification does not entail significant expense or effort and does not have an
adverse effect on the reliability of the projector.  In order to facilitate the
projection of Showscan motion simulation films, however, the Company has
developed an automatic electronic projector that uses low-inertia motors to
achieve the intermittent projection of frames of film rather than the
conventional use of gears and geneva-drive sprockets. Film storage is
contained within the projector which eliminates the need for complicated film
loop cabinets.  The projector permits computer-controlled automatic cuing,
synchronization and rewinding necessary for the continuous showing of a variety
of short films without requiring that the film be changed or a projectionist
used.  The Company owns a patent on certain circuitry included in this
projector.

         The HD Simulation Attractions use standard, commercially available
high definition video projectors and laser disc players.  The video projectors
and laser disc players are manufactured by a number of companies, including
NEC, Sony Corp., Hughes JVC, and Barco Inc.

RESEARCH AND DEVELOPMENT

         The Company, directly or in conjunction with other companies, has from
time to time been engaged in a limited program of research and development.
During the fiscal year ended March 31, 1997, the Company's research and
development program did not, however, require a significant expenditure of
funds.

         The Company's research and development efforts are currently directed
at creating new simulation attractions for specific world markets, 2-D, 3-D and
dome theatre systems to be used in the 15/70 giant-screen theatres.  Also, the
Company is actually developing theatre computer control system software
programs to further enhance the ease by which simulation attractions can be
operated and maintained by a minimum number of on-site personnel.

COMPETITION

         The Company faces intense competition in all of its business
activities.  Some of the Company's competitors and potential competitors are
well-established, have substantially greater financial and other resources than
the Company, and have an established reputation for success in the development
and marketing of filmed products.  There can be no assurance that the Company
will be able to compete successfully with such other companies.

         In addition to competing directly against other firms in the
marketplace of the Company's products, the Company also generally competes for
customers with other location-based entertainment alternatives.  The
entertainment business in general is undergoing significant changes in
technology and in consumer demands for more stimulating entertainment both
within the home and outside of the home.  As the demand for increasingly
sophisticated forms of technology increases, the Company competes for customers
to some extent with theme parks, traditional motion pictures and other forms of
filmed or computer-related entertainment.  As a result of technological
advances and the increased availability of alternative forms of leisure
entertainment, including expanded pay and cable television service and advanced
home audio and video systems, consumer demands and tastes may continue to
change.  Computer simulation, interactive and virtual reality products are
improving rapidly and could become competitive with the Company's products.
The Company is unable to predict what effect technological and other changes
will have on the future success of the Company's products and services.

         Motion Simulation Theatre Attractions.  Although the Company is aware
of a number of other distributors of entertainment motion simulation equipment
worldwide, including Iwerks Entertainment, Inc. ("Iwerks") and Imax Corporation
("Imax"), both of which compete directly with the Company in the motion
simulation attraction market, the Company believes that it is one of the
leading companies in the sale of motion simulation attractions.  Both Iwerks
and Imax have significantly greater financial resources than the Company and
are both substantially larger than the Company.  Because of the significant
costs involved in the development and promotion of motion simulation
attractions, companies with superior financial resources may have an advantage.





                                      14.
<PAGE>   15
However, the Company also believes that the Company's record of motion
simulation attraction operations to date, the size of its film library and the
quality and enhanced sense of depth and realism of its Showscan motion
simulation films permits the Company to effectively compete in the motion
simulation attractions market.

         The most widely-recognized motion simulation theatre attractions are
Star Tours in Disneyland, and Back to the Future in a Universal Studios theme
park.  The Company is not aware of any plans by The Walt Disney Company or
Universal Studios, which operate these parks, to make these motion simulation
theatre attractions available outside of their respective theme parks.  In fact,
in May 1992, MCA entered into a participating lease with the Company in
connection with the Company's first O&O Theatre located at MCA's CityWalk
complex at Universal City near Hollywood, California.  However, any decision by
The Walt Disney Company or MCA, Inc. to market their own motion simulation
theatre attractions outside their respective theme parks could have a material
adverse effect on the Company's business.

         Specialty Theatres.  With the introduction of the Company's 15/70
giant-screen equipment products in January, 1996, the Company now competes with
companies that distribute other well-established large and giant-screen and
special projection systems, including Imax, the developer of IMAX (for
flat-screen projections) and IMAX Dome (for "domed" theatre projections), and
Iwerks.  Imax is well-established in the specialty film markets and has
significantly more theatres currently exhibiting films produced in these
formats.  In addition, Imax has substantially greater financial and other
resources and an established reputation for developing and marketing products
competitive with the Company's specialty theatres.  See "Item 3 -- Legal
Proceedings."

PATENTS AND OTHER INTELLECTUAL PROPERTY

         The Company owns two United States patents on the Showscan process.
These patents cover the combined process of filming and projecting 35mm or
larger negative film having high resolution images, at a constant frame rate of
at least 50 fps, with the film being projected at a high illumination level.
Both patents expire in October 2001. The patents are important to the Company
because it believes that a frame rate of 50 fps or more is necessary to achieve
the desired degree of depth and realism, and that enforcement of these patents
could prevent others from achieving the same result. Although the Company
believes that its existing patents are valid, there can be no assurance that
the Company's patents, if challenged, will be upheld, nor can there be any
assurance that competitors will not develop a different technology that offers
comparable or better visual effects. Moreover, the Company may elect, for
financial or commercial reasons, not to enforce its rights under its patents.

         The Company has obtained additional patents for the Showscan process
in Australia, Canada and Japan.  The Company's patent on the Showscan process
has been approved under the European Patent Convention, which resulted in the
issuance of patents in those European countries in which the Company elected to
seek patent protection. To date, most of the Company's motion simulation
attraction sales have been outside the United States and no assurance can be
given that the Company's patents will adequately protect the Company's
exclusive rights to the Showscan process outside the United States or that any
additional foreign patents will be granted.

         The Company also has obtained U.S. patents on its electronic
projector, the rapid start-up feature of the CP-65 camera, a system for
projecting a 360-degree motion picture image, and a process for converting high
frame-rate film to standard frame-rate film. In addition, the Company, in
conjunction with Intamin, has obtained three U.S. patents on certain aspects of
the Showscan motion simulation attractions and has a joint interest with
another party in another motion simulation patent.  The patents expire between
the years 2004 and 2006.  The Company and Intamin have also obtained a patent
under the European Patent Convention covering certain aspects of the Showscan
motion simulation attractions, which has resulted in the issuance of patents in
those European countries in which the Company elected to seek patent
protection.  However, there can be no assurance that these patents, if
challenged, will be upheld, nor can there be any assurance that competitors
will not develop a different or more effective competing technology.





                                      15.
<PAGE>   16
         Although the Company believes that its patented and non-patented
products and processes have been independently developed and do not infringe
the patents of others, third parties could claim that the Company's products
and processes infringe the rights of others. If it were determined that the
Company's products or processes did infringe the property rights of third
parties, the Company may be required to modify its design or obtain a license.
No assurance can be given that the Company will be able to do so in a timely
manner or upon acceptable terms and conditions; and the failure to do either
could have a material adverse effect upon the Company's business. There are no
claims that the Company's products and processes infringe the rights of others.

         The mark "Showscan(R)" has been registered with the United States
Patent and Trademark Office for use with the Showscan process and Showscan
products.  The Company has also registered "Showscan's The Edge", "Cinemania"
and "Emaginator" for use as the name of motion simulation theatres.  The Company
has registered other marks in connection with certain of its products such as
the "EM4" and the "Quadra 6."  See "Item 3 - Legal Proceedings regarding the
mark 'ShowMax'."

ROYALTY ARRANGEMENTS

         The Company acquired all of the rights to the Showscan process from
Paramount Pictures Corporation ("Paramount") and its subsidiary, FGC, Douglas
Trumbull and WLS Partners ("WLS") in consideration for, among other things,
agreements to pay royalties on future revenues from the exploitation of the
Showscan process. The terms of such royalties are described below.

         WLS.  Pursuant to a royalty agreement (the "Royalty Agreement") with
WLS, the Company is required to pay WLS a royalty based, in general, on the
gross receipts (as defined) of the Company from the worldwide exploitation of
Showscan motion pictures and any other use of the Showscan process. The royalty
is 3% of such gross receipts until August 31, 1999, or until WLS has been paid
an aggregate of $3,500,000.  The Company has paid a total of $2,364,000 in
royalties under the Royalty Agreement through March 31, 1997.

         Future General Corporation/Paramount.  Pursuant to the agreement with
Paramount and FGC (the "FGC Agreement"), the Company is obligated to pay FGC a
royalty, in perpetuity, equal to 2% of the Company's gross receipts (as
defined) from the worldwide exploitation of the Showscan technology in excess
of 180% of the sum of (i) $21,100,000, (ii) actual cash contributions for debt
or equity of the Company during the period from June 27, 1985 to June 27, 1987,
(iii) the Company's actual cost, if any, of converting and equipping theatres
for exhibition of Showscan motion pictures, and (iii) any Showscan
feature-length motion picture production costs incurred by the Company. For the
purpose of determining FGC's royalty, "gross receipts" are defined as all
monies received by the Company from the exploitation of the Showscan
technology, provided that if the Company is the exhibitor of a Showscan
feature-length motion picture, gross receipts will be deemed to be one-half of
box office receipts less taxes paid.  When gross receipts reach the $65 million
level, FGC will begin to earn royalties.  The current level of gross receipts
(as defined) is $32 million at March 31, 1997, so no royalties have been earned
under the FGC Agreement as of yet.  The Company projects royalties to FGC will
begin accruing in approximately five to seven years.

         If the Company produces feature-length motion pictures in Showscan and
grants distribution rights to such a film to a third-party distributor,
Paramount will have the right of first negotiation with respect to distribution
of the first three of the Showscan motion pictures produced by the Company.
However, the Company does not currently intend to produce any feature-length
motion pictures itself.

         Douglas Trumbull.  Pursuant to its agreement with Douglas Trumbull,
the Company is required to pay royalties to Mr. Trumbull until the year 2015,
subject to the maintenance of certain levels of working capital as established
by the Board of Directors of the Company. In general, the payments equal 1% of
revenues (as defined) received by the Company from the worldwide exploitation
of the Showscan technology, except that if the Company operates a full-length
motion picture theatre, Mr. Trumbull is entitled to 1% of the box office
receipts of that theatre. The Company does not currently intend to operate any
full-length motion picture theatres.





                                      16.
<PAGE>   17

EMPLOYEES

         As of June 20, 1997, the Company had 41 employees, six of whom were
employed in management, four in sales and marketing, fourteen in engineering,
assembly and installation, and five in production, film licensing and
distribution.  The remaining full-time employees are administrative and support
staff.  Although the Company has not experienced difficulties in obtaining
qualified personnel and anticipates that it will be able to continue to recruit
qualified personnel for its operations, there can be no assurance that such
personnel will be available when required.

         The Company considers its relationship with its employees to be
satisfactory.

ITEM 2.  PROPERTIES

         The Company leases a 37,000-square-foot building in Culver City,
California, pursuant to a lease expiring on June 30, 2003.  Under the lease,
the current monthly rental is $33,568, subject to annual cost-of-living
adjustments. The maximum annual rental increase is 7%. The Company is
responsible for all costs and expenses of maintaining the building, including
the payment of all property taxes and insurance premiums. The Company's
corporate headquarters, Showscan demonstration theatre and film studio are
located at this site.

         The Company considers its facilities adequate to meet its current
needs.

ITEM 3.  LEGAL PROCEEDINGS

         In January 1996, the Company launched a new product line of 15/70
format projection systems which it called ShowMax.  The Company filed for and
registered the name "ShowMax" in the United States, Canada and several other
countries.  Soon after the launch of this product line, four lawsuits were
brought against either the Company or its supplier of 15/70 format projectors.
Three of the lawsuits involved the use of the name "ShowMax" in connection with
the product line.  Imax Corporation sued the Company on February 8, 1996 in
both the United States District Court for the Southern District of New York and
in the Federal Court of Canada alleging that the ShowMax trademark infringes
upon its "IMAX" trademark and certain other trademarks owned by it.  In the
third lawsuit involving the name "ShowMax", a small California corporation
named Showmax, Inc. sued the Company on June 12, 1996 in the United States
District Court for the Central District of California alleging that the
Company's ShowMax trademark infringes upon its alleged use of the name.  All
three of these lawsuits sought unspecified damages and asked that the Company
be enjoined from any continued use of the ShowMax trademark.  The Company
disputed each of these claims.

         Imax Corporation also brought a fourth lawsuit on February 6, 1996
against World Odyssey Inc. and N.J. Engineering  Inc. in the United States
District Court for the Northern District of California.  This suit alleged,
among other things, trade secret misappropriation and that the relationship
between World Odyssey Inc. and the Company violated certain provisions of a
1994 Settlement Agreement between Imax Corporation, World Odyssey Inc. and N.J.
Engineering Inc.  In this lawsuit, Imax Corporation sought unspecified damages
and injunctive relief.  The Company, World Odyssey Inc. and N.J. Engineering
Inc. disputed each of these claims.

         Due to the foregoing actions by Imax Corporation, as well as other
alleged acts of anticompetitive conduct, the Company and World Odyssey Inc.
filed a lawsuit against Imax Corporation on March 4, 1996 in the United States
District Court for the Central District of California alleging various
antitrust and unfair competition claims including a claim that the lawsuits
brought by Imax Corporation constitute sham litigation brought solely to
obstruct the Company's entry into the market for 15/70 format products and
services.  The Company and World Odyssey sought treble damages, costs and
injunctive relief.

         On May 2, 1997, the Company and Imax Corporation settled all claims
and actions between the companies without the admission by either party of
wrongdoing.  The parties agreed to dismiss all lawsuits pending between





                                      17.
<PAGE>   18

them.  As part of the settlement, the Company agreed, among other things, to
abandon its registrations of the name "ShowMax" in each jurisdiction where it
had been filed and to terminate its present relationship with World Odyssey Inc.
In exchange the Company received a substantial cash payment from Imax
Corporation, together with the right to distribute two Imax motion simulation
films to the Company's installed base and contracted backlog of Showscan
Attractions (approximately 100 screens) as of April 30, 1997. In turn the
Company gave Imax the right to distribute two Showscan motion simulation films
to Imax's installed base and contracted backlog (approximately 37 screens). 
The settlement does not limit the Company's ability to compete in the 15/70 
format giant screen theatre market.

         In addition, on June 3, 1997 the Company and Showmax, Inc. settled all
claims and actions between the companies without the admission by either party
of wrongdoing.  The parties also agreed to dismiss all lawsuits between them.
This settlement also does not limit the Company's ability to compete in the
15/70 format giant-screen theatre market.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS

         During the fourth quarter of the fiscal year ended March 31, 1997, no
matters were submitted to a vote of the Company's stockholders through the
solicitation of proxies or otherwise.


























                                      18.


<PAGE>   19
                                    PART II

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

The Common Stock is traded on the Nasdaq National Market under the symbol
"SHOW."

         The following table sets forth the high and low sales prices for the
Common Stock for the periods indicated as reported by Nasdaq. The prices do not
include retail mark-ups, mark-downs or fees.



<TABLE>
<CAPTION>
                                                                      Sales Prices
                                                                      ------------
                                                            High                     Low
                                                            ----                     ---
         Year Ended March 31, 1996 
         --------------------------
         <S>                                            <C>                       <C>
                 1st Quarter                            $   6  1/2                $  5
                 2nd Quarter                                8  1/8                   5  1/4
                 3rd Quarter                                7  3/4                   5  3/4
                 4th Quarter                                7  1/4                   5  3/4

         Year Ended March 31, 1997
         -------------------------
                 1st Quarter                            $   8  1/8                $  5  7/8
                 2nd Quarter                                7  7/8                   5
                 3rd Quarter                                6  3/4                   4  7/8
                 4th Quarter                                5  3/8                   2  1/4
</TABLE>


         The Company has never paid dividends on its Common Stock and does not
currently anticipate that it will do so in the foreseeable future.  The future
payment of dividends, if any, on the Common Stock, is within the discretion of
the Board of Directors and will depend on the Company's earnings, its capital
requirements and financial condition, and other relevant factors.  See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."  The payment of any dividends on the Common Stock also obligates
the Company to pay dividends on the outstanding shares of Series C Preferred
Stock.  Each share of Series C Preferred Stock is entitled, on an "as
converted" basis, to 110% of any cash dividends declared on each share of
Common Stock, subject to adjustments for stock splits, combinations or
dividends.

         As of March 31, 1997, the Company had 129 holders of record of the
Company's Common Stock.  However, based solely upon its proxy solicitation
procedures for last year's annual meeting of stockholders, the Company believes
that it has more than 1,000 beneficial owners of its Common Stock.


















                                      19.

<PAGE>   20
ITEM 6.  SELECTED FINANCIAL DATA


<TABLE>
<CAPTION>
                                                                        Fiscal Year Ended March 31,
                                               =============================================================================
                                                   1997           1996              1995               1994          1993
                                               -----------    -----------       -----------       -----------    -----------
                                                                (Dollars in thousands, except share amounts)
<S>                                            <C>            <C>               <C>               <C>            <C>        
Statement of Operations Data:
  Revenues:
    Film licensing and production services .   $     6,236    $     9,039             5,978       $     2,970    $     4,328
    Equipment sales and related
     services ..............................        11,475          8,426             9,459             2,245          6,695
                                               -----------    -----------       -----------       -----------    -----------

    Total revenues .........................        17,711         17,465            15,437             5,215         11,023

  Cost of Revenues .........................        10,854          8,399             8,584             3,967          6,941
                                               -----------    -----------       -----------       -----------    -----------
  Gross profit .............................         6,857          9,066             6,853             1,248          4,082

  Other costs and expenses:
    General and administrative .............         6,904          7,576             5,560             5,566          6,286
    Depreciation and amortization ..........           961            971             1,025             2,827          1,369
    Provision for contract modifications ...          --             --                --                 673           --
                                               -----------    -----------       -----------       -----------    -----------
                                                     7,865          8,547             6,585             9,066          7,655
                                               -----------    -----------       -----------       -----------    -----------


    Operating income (loss) ................        (1,008)           519               268            (7,818)        (3,573)
    Other income (expense):
     Equity in operations of owned and
        operated theatres ..................          (694)          (217)             (502)             --             --
      Effect of impairment loss on equity in
       operations of owned and operated
       theatres ............................        (1,771)          --                --                --             --
      Other income .........................           250            358               444               171            164
     Interest and other expense ............          (692)          (555)             (128)              (98)          (127)
   Provision for income taxes ..............            (4)            (4)               (3)             --             --
                                               -----------    -----------       -----------       -----------    -----------
   Net income (loss) .......................   $    (3,919)   $       101       $        79       $    (7,745)   $    (3,536)
                                               ===========    ===========       ===========       ===========    ===========
   Net income (loss) per common share ......   $      (.70)   $       .02       $       .01       $     (1.68)   $      (.76)
                                               ===========    ===========       ===========       ===========    ===========

Weighted average number of
 common shares .............................     5,594,245      6,317,167         5,788,230         4,679,519      4,679,519
                                               ===========    ===========       ===========       ===========    ===========

Balance Sheet Data (at end of period):
  Cash, cash equivalents and short-term
    investments ............................   $     2,562    $     8,141       $     6,791       $     2,371    $     2,405
  Accounts receivable, net .................         3,600          3,101             2,943             2,569          4,202
  Equipment sales inventory ................         1,289          1,547             2,142             1,440          1,414
  Other current assets .....................         1,072          1,244               980             1,221          1,974
  Film library (net) .......................         5,520          3,481             1,394             1,003          1,488
  Property and equipment (net) .............           868          1,313             1,728             2,140          4,128
  Owned and operated theatres ..............         2,123          4,424             2,598               644            478
  Patents and other (net) ..................         2,894          2,764             2,654             2,994          4,211
                                               -----------    -----------       -----------       -----------    -----------
  Total assets .............................   $    19,928    $    26,015       $    21,230       $    14,382    $    20,300
                                               ===========    ===========       ===========       ===========    ===========

  Current liabilities ......................   $     3,995    $     6,097       $     4,860       $     4,632    $     4,932


  Convertible notes and other ..............         5,690          6,620(2)          3,121(1)          2,998          3,004
  Series B Preferred Stock .................          --             --                --               1,678           --

  Stockholders' equity .....................        10,243         13,298            13,249             5,074         12,364
                                               -----------    -----------       -----------       -----------    -----------
  Total liabilities and stockholders' equity   $    19,928    $    26,015       $    21,230       $    14,382    $    20,300
                                               ===========    ===========       ===========       ===========    ===========
</TABLE>



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


(1)      Paid in full in April, 1995.

(2)      The Company completed a private placement of convertible notes in
         September, 1995.






                                      20.

<PAGE>   21
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

RESULTS OF OPERATIONS

         The Company is a leading provider of movie-based motion simulation
theatre attractions to the rapidly expanding out-of-home entertainment market.
The Company is presently in the business of:  (i) licensing and distributing
the films in its library and the proprietary technologies necessary to produce
and exhibit Showscan films; (ii) selling and installing motion simulation
attractions and specialty theatres including the equipment necessary for each
(including projectors, screens, sound systems, synchronization and show control
and theatre design packages); (iii) producing films using the Showscan process;
and (iv) establishing motion simulation attractions in which the Company has an
economic interest (O&O Theatres).  The Company is also committed to the
continued recognition of the Showscan(R) brand name worldwide.

         The principal sources of the Company's revenues are the licensing of
the Showscan film library and technologies, the sale and installation of
projectors, screens, sound systems and other equipment used to exhibit Showscan
films, and the sale of motion bases and other equipment used in most Showscan
Attractions.  The Company derived, for the three years ended March 31, 1997,
60-70% of its revenues from export sales. See Note 9 to the Consolidated
Financial Statements and "Item 1.  Business -- Sales and Marketing."  The
Company does not believe that inflation has had a material impact on the
Company's net revenues or on its results of operations for the three most
recent fiscal years.

         Comparison of Year Ended March 31, 1997 and Year Ended March 31, 1996.

         Revenues for the fiscal year ended March 31, 1997 (hereafter "Fiscal
1997") increased $246,000 or 1% from revenues for the fiscal year ended March
31, 1996 (hereafter "Fiscal 1996").

         Film licensing and production service revenues decreased $2.8 million
or 31% in Fiscal 1997.  The decrease was due primarily to (i) the renewal of an
agreement with the Company's major Japanese customer (Imagine Japan), which
renewal changed the timing of film licensing revenue recognition such that
approximately $1.1 million was recognized in Fiscal 1996 that would have been
recognized in Fiscal 1997; (ii) the inclusion in Fiscal 1996 of revenues from
two specific one-time license agreements, which revenues constituted all of the
revenues to be received with respect to such agreements, in the amounts of
$550,000 and $300,000, respectively; and (iii) the early renewals in Fiscal 1996
of certain film licensing agreements, which renewals changed the timing of film
licensing revenue recognition (reflected in the fourth quarter of Fiscal 1996
rather than in Fiscal 1997) of approximately $700,000.  After adjusting for the
aforementioned items, the recurring film licensing revenues were $6.2 million in
Fiscal 1997 and $6.4 million in Fiscal 1996.  Revenues from film licensing are
based on new license agreements as well as renewals of existing agreements and
results fluctuate from quarter to quarter, with such fluctuations being a result
of the seasonality in the way that licensing agreements are entered into and how
the license agreements are structured.

         Revenues from equipment sales and related services increased $3
million or 36% in Fiscal 1997.  The increase is due to an increase in the
number of Showscan Attractions shipped during Fiscal 1997 as compared to Fiscal
1996.  The actual number of Showscan Attractions shipped in Fiscal 1997
increased to 16 units plus the completion of three relocation projects compared
to ten such units in Fiscal 1996.  Equipment sales in Fiscal 1996 also included
$360,000 of one-time revenues recognized as a result of the expiration under a
customer agreement of a required installation of two theatre sites.  At June
20, 1997, the Company had 61 Showscan Attractions screens with 8 additional
Showscan Attractions screens in its delivery and installation backlog and has
contractual commitments for an additional 29 Showscan Attractions screens in
its backlog, as compared to 55 Showscan Attractions screens with 11 additional
Showscan Attractions screens in its delivery and installation backlog and 27
contractual commitments for Showscan Attractions screens in its backlog at June
20, 1996.  The Company did not sell any permanent or temporary specialty
theatres in Fiscal 1997.





                                      21.
<PAGE>   22

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

         Cost of revenues was 61% in Fiscal 1997 as compared to 48% in Fiscal
1996.  The increase was primarily the result of (i) two one-time agreements
which were recognized ($550,000 and $660,000 respectively) in Fiscal 1996, each
of which had significantly lower associated cost of revenues; and (ii) a lower
gross profit percentage associated with sales to a major customer in Fiscal
1997.  Cost of revenues also increased as a percentage of total revenues
because film licensing revenues (which traditionally have a higher gross profit
margin) represented less of a percentage of total revenues in Fiscal 1997 than
in Fiscal 1996.  Amortization expense of the film library for Fiscal 1997 was
$613,000, up 27% from the amortization expense of $481,000 in Fiscal 1996.

         General and administrative expenses decreased $672,000 or 9% in Fiscal
1997.  The decrease can be primarily attributed to an overall reduction in
payroll and consultant expense due to the reduction in Company staff in the
fourth quarter of Fiscal 1997 resulting from the decline in business activity. 

         Depreciation and amortization expense remained relatively unchanged in
Fiscal 1997 from Fiscal 1996.

         The Company accounts for its ownership position in O&O Theatres using
the equity method of accounting.  The equity loss of $694,000 on the operations
of O&O Theatres for Fiscal 1997 was primarily the result of the following
factors: (i) expenses incurred in connection with the acquisition and
development of future O&O Theatre locations; (ii) operating losses at the
Trocadero in London due to disruptions to theatre operations and attendance
caused by the major renovation of the building and the theatre access
impediments created thereby; (iii) operating losses, including start-up and
marketing expenses at the Riverwalk in San Antonio, Texas; and (iv) operating
losses at the Framingham theatres and at CityWalk.  Although the O&O Theatre in
Osaka had an operating profit, the profit was not sufficient to offset the
losses of the other O&O Theatres.  The Company earns film licensing revenues
(from all O&O Theatres) and management fees (from some of the O&O Theatres)
which are recorded separately in the accompanying consolidated statements of
operations, thereby inherently increasing the operating expenses at the
specific O&O Theatres.  A formal claim that was filed with the owner of the
Trocadero building to recover damages and lost revenues resulting from the
renovation of the Trocadero building and the related access problems has
resulted in a favorable settlement, in which the company holding that theatre
will be reimbursed for a portion of the lost revenue incurred during the 
renovation period.

         The Company recognized a non-cash charge of $1,771,000 in Fiscal 1997
to record the impact of the adoption of SFAS No 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" by
certain of its O&O Theatres joint ventures.  The loss was calculated as the
excess of the carrying value of joint venture fixed assets for each impaired
O&O Theatre over the estimated discounted cash flows or fair value of each O&O
Theatre impaired.  Under the equity method of accounting, the Company has
recognized its share of the joint venture charges.

         The Company incurred a net loss of $3,919,000 in Fiscal 1997 as
compared to net income of $101,000 recorded in Fiscal 1996, primarily due to
the decrease in film licensing and production service revenues, an increase in
cost of revenues to total revenues, and the performance of the O&O Theatres,
including the effect of the impairment loss on equity in the operations of
certain O&O Theatres joint ventures.





                                      22.
<PAGE>   23

         Comparison of Year Ended March 31, 1996 and Year Ended March 31, 1995.

         Revenues for the fiscal year ended March 31, 1996 (hereafter "Fiscal
1996") increased $2 million or 13% from revenues for the fiscal year ended
March 31, 1995 (hereafter "Fiscal 1995").

         Film rentals and royalties increased $3.1 million or 51% in Fiscal
1996.  The increase was due primarily to the increase in the installed base of
operating Showscan Attractions, renewals on certain licensing contracts (which
affected the timing of revenue recognition) which accounted for $700,000 of the
increase, the renewal of the Imagine Japan agreement which increased film
revenues by approximately $1 million, and approximately $900,000 of revenues
from two specific customer agreements, which revenues constitute all of the
revenues to be received with respect to such agreements.  On an annual basis,
recurring film rentals and royalties should increase over time as the number of
operating Showscan Attractions increases.

         Revenues from equipment sales and related services decreased $1
million or 11% in Fiscal 1996.  Unit sales actually increased in Fiscal 1996,
but revenues from these sales decreased as a result of the lower than average
sales prices.  At June 20, 1996, the Company has 55 Showscan Attractions
screens with 11 additional Showscan Attractions screens in its delivery and
installation backlog and has contractual commitments for an additional 27
Showscan Attractions screens in its backlog, as compared to 47 Showscan
Attractions with 11 additional Showscan Attractions in its delivery and
installation backlog and 22 contractual commitments for Showscan Attractions in
its backlog at June 20, 1995.  The Company has sold nine permanent and twelve
temporary specialty theatres through June 20, 1996 and had sold eight permanent
and twelve temporary specialty theatres through June 20, 1995.  Fiscal 1996
equipment sales includes $360,000 of revenues recognized as a result of the
expiration under a customer agreement of a required installation period for two
theatre sites.

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

         Cost of revenues was 48% in Fiscal 1996 as compared to 56% in Fiscal
1995.  Royalties and film costs as a percentage of film rentals and royalties
dropped to 29% in Fiscal 1996 from 36% in Fiscal 1995 while equipment cost of
sales as a percentage of equipment sales and related services remained constant
at 68% for each of the past two fiscal years.  The primary reason for the
increase in film rental gross profit is due to the Company's purchase in Fiscal
1996 of the interests held by certain third-party producers in two films
distributed by the Company, so that the Company now owns 100% of "Cosmic
Pinball" and 57% of "Devil's Mine Ride."  These purchases resulted in a
reduction in payments to third-party producers (included in cost of revenues).
The increase in film rental gross profit is also attributed to more Company-
owned films being licensed by the venues in Fiscal 1996 than in the prior
years. Amortization expense of the film library for Fiscal 1996 and Fiscal 1995
was $481,000 and $502,000 respectively.

         General and administrative expenses increased $2 million or 36% in
Fiscal 1996.  The increase was primarily the result of the Company's hiring of
additional personnel in Fiscal 1996 to meet the anticipated levels of Showscan
Attractions sales.  Company management also made a decision to enhance the
quality of existing product lines and to develop new product lines, both of
which involved the continuing employment and hiring of key personnel in the
Company's engineering and technology departments.  The Company believes that
there is a cost savings by performing such projects in-house, rather than
contracting projects out to outside vendors.  In addition, the Company
increased its bad debt provision by $440,000 in Fiscal 1996, due to three
Showscan Attraction accounts that became delinquent and eventually were written
off as uncollectible.  The closures of two





                                      23.
<PAGE>   24
(which are higher than the Company's historical experience) of these Showscan
Attractions were unforeseen by the Company at the beginning of Fiscal 1996.

         Depreciation and amortization remained relatively unchanged during
Fiscal 1996 from Fiscal 1995.

         The Company develops, through various financing arrangements, Showscan
Attractions in which the Company has an ownership interest and accounts for its
net ownership position using the equity method of accounting.  The Company's
loss of $217,000 on the operations of owned and operated theatres in Fiscal
1996 decreased $285,000 or 57% from the $502,000 loss posted in Fiscal 1995.
This loss is primarily the result of the following factors: (i) expenses
incurred in connection with the acquisition and development of future owned and
operated theatre locations, (ii) operating losses, including initial start-up
and marketing expenses at the Framingham theatres (opened in late May 1995) of
which the Company has a 50% interest and The Edge theatre in San Antonio, Texas
(opened in March 1996), of which the Company has a 25% interest, and (iii) the
combined operating profits of the owned and operated Showscan Attractions at
CityWalk, the Trocadero in London, and Osaka.  The results of operations showed
an improvement for the CityWalk and London theatre locations in Fiscal 1996
from Fiscal 1995.  The Company earns film rentals, royalties and management
fees (from some of the owned and operated theatres), which are recorded
separately in the accompanying condensed consolidated statements of operations,
thereby inherently increasing the operating expenses at these specific
theatres.

         Interest and other expense increased $427,000 or 334% in Fiscal 1996.
The Company completed a $7 million ($6.4 million net of expenses) private
placement of convertible notes through a European financial institution on
September 1, 1995.  The notes bear interest at 8% per annum with a semi-annual
interest payment schedule commencing March 1, 1996.  Interest expense recorded
in Fiscal 1996 related to these notes was $319,024.

         Operating income increased 94% in Fiscal 1996 to an operating profit
of $519,000 from an operating profit of $268,000 in Fiscal 1995.  The increase
in operating profit is primarily attributed to the increase in film rentals and
royalties for the Company offset by the increase in general and administrative
expenses.  The Company's net income increased 28% to $101,000 or $0.02 per
share in Fiscal 1996 as compared to a $79,000 net profit and $0.01 per share in
Fiscal 1995.


LIQUIDITY AND CAPITAL RESOURCES

         At March 31, 1997, the Company's working capital decreased to
$4,528,000 from $7,936,000 at March 31, 1996.  Cash, cash equivalents and
short-term investments decreased to $2,562,000 from $8,141,000 at March 31,
1996.  The decrease in working capital is primarily due to the expenditures
related to the production of three new motion simulation films and the
operating loss for Fiscal 1997.

         Cash and cash equivalents at March 31, 1997 decreased by $2,493,000
from March 31, 1996.  The decrease in cash was primarily due to (i) the
financing of the production of three new films in the amount of $2,420,000,
(ii) the decrease of 34% in accounts payable, customer advances on uncompleted
equipment contracts and accrued expenses and other current liabilities, (iii)
significant expenditures in connection with the litigation with Imax
Corporation discussed under "Item 3 - Legal Proceedings" which has been settled
by the parties, and (iv) offset by a $3,086,000 redemption of short-term
investments.  The changes to receivables, payables, advances and accrued
expenses are primarily attributable to variations in the timing of Showscan
Attraction sales and the specific contract terms of such sales, which terms
generally affect the timing of collections, shipments, deliveries to customers,
installations and the related payments to vendors.  The specific contract terms
of each sale also dictate when invoicing occurs.  The decrease in cash and
accrued expenses is also attributable to the payment of $1,620,000 in May, 1996
for the purchase of additional interests in two films currently in the Showscan
film library.





                                      24.
<PAGE>   25
         Net cash flow used in operations was $2,687,000 in Fiscal 1997 as a
result of changes in several categories.  Accounts payable and accrued expenses
and other current liabilities decreased by 25%, while accounts receivable (net
of the $425,000 allowance) increased by 44% at March 31, 1997.

         Net cash provided by the Company's investing activities was $194,000 in
Fiscal 1997.  This was the result of $3,086,000 of redemptions in short-term
investments, offset by $2,652,000 of additions to the Company's film library,
$164,000 of investments in O&O theatres and $76,000 in purchases of equipment.

         The Company's business strategy includes a significant increase in the
installed base of Showscan Attractions, new film productions, or the securing
of distribution rights to motion simulation films produced by other companies,
new product development and new product lines, enhancement of existing product
lines, possible investments in O&O Theatres and the reduction of overhead by
30% (which was implemented during the fourth quarter of Fiscal 1997).  The
Company intends to finance the foregoing business strategy by utilizing its
current working capital resources, the proceeds to be received from its
existing  backlog and anticipated future product sales and film licensing
agreements, together with proceeds derived from one or more of the following
financing alternatives:  the sale of securities, the obtaining of a line of
credit from a banking institution, and/or the formation of strategic alliances,
joint ventures or off-balance sheet financing.  There can be no assurance that
the Company will be able to obtain any of the aforementioned financing
alternatives.  If the Company is unable to generate sufficient funds from
operations or is unable to raise additional capital through any of the
aforementioned alternatives, the Company will need to curtail its business
strategy, specifically with regard to new film productions and investments in
O&O Theatres.  The Company believes that, given its various business
alternatives, its working capital will be sufficient to fund the cost of its
operations for the next twelve months.  At March 31, 1997, the Company has
reserved 4,573,572 shares of Common Stock for issuance on the exercise of stock
options, warrants, preferred stock and convertible notes.

FACTORS THAT MAY AFFECT FUTURE RESULTS

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


Period to Period Fluctuations

         The Company's operating results may fluctuate from period to period
for a number of reasons, including (a) the timing of sales of the Company's
motion simulation attractions, (b) the timing of delivery and installation of
such sales (pursuant to percentage of completion accounting) and any delays
therein caused by permitting or construction delays at the customer's site, (c)
the size, type and configuration of the attractions sold, (d) the timing of
film rental payments from existing attractions and the performance of those
attractions that pay film rental based on a percentage of box office, and (e)
the timing of sales and marketing efforts and related expenditures.
Accordingly, the Company's revenues and earnings in any particular period may
not be indicative of the results for any future period.  The seasonal
fluctuations also cause gyrations in the Company's stock price.

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









                                      25.

<PAGE>   26


Business Strategy

         Management of the Company has adopted a business strategy that
includes substantial investments in its sales and marketing organizations, the
creation of new research and development programs and increased funding of
existing programs.  This strategy carries with it a number of risks, including
a level of operating expenses that may not be adequately covered by increased
sales or additional financing may not be available on favorable terms. This
strategy will have to be curtailed if adequate funds are not available.

New Product Development

         The Company operates in a technology driven segment of the
entertainment business.  As such, the Company must continually improve its
products to increase their entertainment value while also facing pressure to
continually reduce the price of its products to respond to competitive
pressures.  Since the Company's main competitors, Iwerks Entertainment, Inc.
and Imax Corporation, have significantly more capital than the Company, the
Company has had to rely more on its suppliers and other third-parties to
improve the Company's existing products and to develop new ones.  The inability
of the Company to develop new products and to respond to technological
developments of its competitors could have a materially-adverse effect on the
Company's business, operations and financial condition.

International Operations

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

Intellectual Property

         The Company has several United States patents on various processes and
elements related to  film projection and motion simulation.  The most important
of these patents expire in October 2001.  Though the Company's patents have
never been challenged and the Company believes that they are valid, third
parties could still challenge the patents and a court could determine that one
or more of them are invalid.  Declarations of invalidity, particularly of the
Company's key patents, could adversely affect the marketability of the
Company's products and services.  In addition, the Company always faces the
risk that new technologies could be discovered that are superior to the
Company's patents.

Competition

         The Company faces intense competition in all of its product lines.  In
the motion simulation business, the Company's main competitor is Iwerks though
there are an increasing number of smaller competitors.  Iwerks has
substantially greater financial resources than the Company and as such may be
able to both price its existing products and services lower than the Company as
well as produce new products.  Imax is a growing competitor of the Company in
this segment and has dedicated substantial resources to entering this market.

         In the large screen, special format motion picture business, the
Company's main competitor is Imax though Iwerks is also very significant.  The
15/70 format appears to be emerging as the most popular large format due
primarily to the large number of films available in that format.  Imax is by
far the dominant company in this market.  The Company is only a recent entrant
into this market and has not yet made any sales.  The Company will have to





                                      26.


<PAGE>   27

continue to invest funds in order to broaden its position in the 15/70 market
and thus short term results could be adversely affected until sales can be
made.

Business Disruption

         The Company's corporate headquarters, including its research and
development operations, are located in Los Angeles, California, a region known
for seismic activity.  Operating results could be materially affected by a
significant earthquake or other natural disaster.

Dependence on Major Customers

         The Company's motion simulation business has two significant
concentrations.  The first concentration involves ongoing film licenses and is
located in Japan where Imagine Japan presently operates or is otherwise
responsible for fifteen simulation attractions.  The second concentration
relates to the Company's sales backlog where UA and King's Entertainment Co.,
Ltd. individually and collectively represent a substantial portion of the
outstanding equipment orders to be delivered in the next few years.  In Fiscal
1997, the Company earned revenues from Imagine Japan and UA in the amount of
$8,522,000.  The Company's short and long term performance could be adversely
impacted if disruptions were to occur in any of these areas of concentration
such as order cancellations, license terminations or payment problems.

Ability to Produce Additional Films

         One of the primary factors considered by potential purchasers of motion
simulation attractions is the quality and extent of the films available to be
shown at the attraction.  The Company believes that a large portion of its
competitive advantage resides in its popular and extensive library of ride
films.  To maintain this competitive edge, the Company must produce or acquire
the distribution rights to several new films each year.  Film production is
expensive and requires the investment of Company funds (to the extent that
investors cannot be located) with no assurance that the films produced will be
popular.  Iwerks and Imax have each indicated that they are devoting substantial
portions of their assets to the production of new motion simulation films.  Both
the short and long term financial performance of the Company will be adversely
affected if the perceived quality and popularity of the Company's film library
declines either alone or in comparison to the films of the Company's
competitors.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The Financial Statements are listed under Item 14 in this report.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

         Not applicable.












                                      27.


<PAGE>   28
                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The Company intends to file with the Securities and Exchange Commission
a definitive proxy statement (the "Proxy Statement") pursuant to Regulation 14A
pertaining to the Annual Meeting of Stockholders, which will involve the
election of directors, within 120 days of the end of the fiscal year covered by
this Report on Form 10-K.  Information regarding directors and executive
officers of the Company will appear under the caption "Election of Directors" in
the Proxy Statement and is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

         Information regarding executive compensation will appear under the
caption "Compensation of Directors and Executive Officers" in the Proxy
Statement and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Information regarding security ownership of certain beneficial owners
and management will appear under the caption "Security Ownership of Directors,
Nominees and Principal Security Holders" in the Proxy Statement and is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Information regarding certain relationships and related transactions
will appear under the caption "Certain Relationships and Related Transactions"
in the Proxy Statement and is incorporated herein by reference.






                                      28.

<PAGE>   29
                                    PART IV

ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
         FORM 8-K

a.(1)(2) FINANCIAL STATEMENTS AND SCHEDULES.

         See the Index to Consolidated Financial Statements and Financial
Statement Schedule on Page F-1 hereafter, which is incorporated herein by
reference.

a.(3)  EXHIBITS


<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                                      DESCRIPTION
    ------                                      -----------
     <S>        <C>
      3.1       Restated Certificate of Incorporation.(j)

      3.2       Certificate of Amendment to Restated Certificate of Incorporation, dated
                August 3, 1990.(j)

      3.3       Second Certificate of Amendment of Restated Certificate of Incorporation
                of Showscan Corporation, dated August 18, 1994.(j)

      3.6       Certificate of Designations with respect to Series C Convertible
                Preferred Stock of Showscan Corporation, as filed with the Secretary of
                State of Delaware on August 22, 1994.(h)

      3.7       Certificate of Designations with respect to Series D Participating
                Preferred Stock of Showscan Entertainment Inc., as filed with the
                Secretary of State of Delaware on November 9, 1994.(j)

      3.8       Bylaws of the Company, as amended.

      4.1       Specimen certificate of the Common Stock, $.001 par value, of the
                Company.(a)

      4.4       Stock Purchase Warrant, dated March 9, 1989, issued by the Company to
                Columbia Pictures Industries, Inc.(a)

      4.7       Warrant Agreement, dated as of September 27, 1993, among Showscan
                Corporation and Charles B. Moss, Jr. and DiBenedetto Showscan Limited
                Partnership.(b)

      4.8       Form of Warrant Agreement entered into with William D. Eberle.(g)

      4.9       Registration Rights Agreement, dated as of September 27, 1993, among
                Showscan Corporation, Charles B. Moss, Jr., Thomas R. DiBenedetto and
                DiBenedetto Showscan Limited Partnership.(b)

     4.10       Specimen Certificate of Series C Convertible Preferred Stock, $.001 par
                value, of the Company.(j)

     4.11       Warrant Agreement, dated as of August 19, 1994, by and between Showscan
                Corporation and United Artists Theatre Circuit, Inc.(h)
</TABLE>





                                      29.
<PAGE>   30
<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                                      DESCRIPTION
    ------                                      -----------
     <S>        <C>
     4.12       Registration Rights Agreement, dated as of August 19, 1994, by and
                between Showscan Corporation and United Artists Theatre Circuit, Inc.(h)

     4.13       Rights Agreement, dated as of November 11, 1994, by and between Showscan
                Entertainment Inc. and Continental Stock Transfer & Trust Company.(i)

     4.14       Registration Rights Agreement, dated as of September 22, 1994, by and
                among Showscan Entertainment Inc., Charles B. Moss, Jr. and DiBenedetto
                Showscan Limited Partnership.(j)

     4.15       Note Purchase, Paying and Conversion Agency Agreement, dated as of August
                14, 1995, by and between Showscan Entertainment Inc. and Banca del
                Gottardo.(k)

     4.16       Global Note, dated September 1, 1995, made by Showscan Entertainment Inc.
                in favor of Banca del Gottardo.(k)

     4.17       Agency Agreement, dated as of August 14, 1995, by and between Showscan
                Entertainment Inc. and Banca del Gottardo.(k)

     4.18       Pledge/Security Agreement, dated as of September 1, 1995, by and between
                Showscan Entertainment Inc. and Banca del Gottardo.(k)

     4.19       Amendment to Pledge/Security Agreement, dated as of September 1, 1995, by
                and between Showscan Entertainment Inc. and Banca del Gottardo.(k)

     4.20       Warrant Agreement, dated as of September 1, 1995, by and between Showscan
                Entertainment Inc. and Jack M. Ferraro.(l)

     4.21       Registration Rights Agreement, dated as of September 1, 1995, by and
                between Showscan Entertainment Inc. and Jack M. Ferraro.(l)

     4.22       Warrant Agreement, dated as of September 1, 1995, by and between Showscan
                Entertainment Inc. and Jack Erlanger.(l)

     4.23       Registration Rights Agreement, dated as of September 1, 1995, by and
                between Showscan Entertainment Inc. and Jack Erlanger.(l)

     4.24       Warrant Agreement, dated as of October 3, 1995, by and between Showscan
                Entertainment Inc. and Intralink Film Graphic Design.(l)

      9.1       Voting Agreement, dated as of August 19, 1994, by and among Showscan
                Corporation, United Artists Theatre Circuit, Inc., Charles B. Moss, Jr.,
                and Thomas R. DiBenedetto.(h)

     10.1       Lease dated June 15, 1989 between the Company and Landmark Investments
                Ltd. ("Lease").(d)

     10.2       Amendment No. 1 to Lease, dated February 20, 1991.(a)

     10.3       Amendment No. 2 to Lease, dated January 21, 1992.(e)
</TABLE>





                                      30.
<PAGE>   31
<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                                      DESCRIPTION
    ------                                      -----------
     <S>        <C>
     10.4       Amendment No. 3 to Lease, dated February 18, 1993.(f)

     10.5       Amended and Restated Showscan Corporation 1987 Stock Option Plan.(c)

     10.6       Showscan Entertainment Inc. 1992 Stock Option Plan, as amended.(j)

     10.7       Modification, Consent and Assignment Agreement dated April 26, 1985
                between the Company, Douglas Trumbull and Brock/Trumbull Entertainment
                Corporation.(c)

     10.8       Agreement, dated June 27, 1985, between the Company and Future General
                Corporation.(c)

     10.9       Agreement, dated February 23, 1987, between the Company and Cinema
                Products Corporation (the "Camera Agreement").(c)

     10.10      Amendment to Camera Agreement, dated July 20, 1988.(a)

     10.11      Amendment to Camera Agreement, dated February 1, 1989.(a)

     10.12      Showscan 1985 Agreement, dated April 16, 1985, and Agreement, dated
                August 31, 1983, between Showscan Investors and Brock-Trumbull
                Entertainment Corporation.(c)

     10.13      Amendment to Royalty Agreement, dated July 6, 1990, between the Company
                and WLS Partners.(a)

     10.14      Amendment to payment terms of the Royalty Agreement, dated November 13,
                1990, between the Company and WLS Partners.(a)

     10.15      Universal CityWalk Lease, dated November 24, 1992, by and among the
                Company and MCA Development Company.(f)

     10.16      Purchase Agreement dated as of September 27, 1993, among Showscan
                Corporation, Charles B. Moss, Jr., Thomas R. DiBenedetto and DiBenedetto
                Showscan Limited Partnership.(b)

     10.17      Joint Venture Agreement, dated as of September 27, 1993, among Showscan
                Attractions, Inc., Moss Family O&O Corp., and DiBenedetto O&O Limited
                Partnership, with respect to the organization of Showscan Attractions
                Venture.(b)

     10.18      Joint Venture Agreement, dated as of September 27, 1993, among Showscan
                CityWalk, Inc., Moss Family LA Corp., and DiBenedetto CityWalk Limited
                Partnership, with respect to the organization of Showscan CityWalk
                Venture.(b)
     10.19      Proprietary Property Acquisition and Management Agreement, dated as of
                September 27, 1993, between Showscan Corporation and Showscan Attractions
                Venture.(b)

     10.20      Development and Disposition Services Agreement, dated as of September 27,
                1993, among Showscan Attractions Venture, DiBenedetto Showscan, Inc. and
                Moss Entertainment Corp.(b)
</TABLE>





                                      31.
<PAGE>   32
<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                                      DESCRIPTION
    ------                                      -----------
     <S>        <C>
     10.22      Employment Agreement, dated May 3, 1994, between the Company 
                and Dennis Pope, as amended.(j)

     10.23      Purchase Agreement, dated as of August 19, 1994, by and 
                between Showscan Corporation and United Artists Theatre 
                Circuit, Inc.(h)

     10.24      Joint Venture Agreement, dated as of August 19, 1994, by and 
                between Showscan Corporation and United Artists Theatre 
                Circuit, Inc.(h)

     10.25      Theater Rights Agreement, dated as of August 19, 1994, among 
                Showscan Corporation, United Artists Theatre Circuit, Inc. and 
                Showscan/United Artists Theatres Joint Venture.(h)

     10.26      First Amendment to Theater Rights Agreement, dated as of 
                March 30, 1995, by and among Showscan Entertainment Inc., 
                United Artists Theatre Circuit, Inc. and Showscan/United 
                Artists Theatres Joint Venture.(j)

     10.27      Master Management and Development Agreement, dated as of 
                August 19, 1994, among Showscan Corporation, United Artists 
                Theatre Circuit, Inc. and Showscan/United Artists Theatres 
                Joint Venture.(h)

     10.28      Amendment No. 1 to the Showscan Attractions Joint Venture 
                Agreement, dated as of September 22, 1994, by and among 
                DiBenedetto O&O Limited Partnership, Showscan Attractions, 
                Inc., and Moss Family O&O Corp.(j)

     10.29      Standstill Agreement, dated as of August 22, 1994, by and 
                among Showscan Corporation, United Artists Theatre Circuit, 
                Inc., Charles B. Moss, Jr., Thomas DiBenedetto and DiBenedetto 
                Showscan Limited Partnership.(h)

     10.30      Stock Exchange Agreement, dated as of September 22, 1994, by 
                and among Showscan Entertainment Inc., Charles B. Moss, Jr., 
                Thomas R. DiBenedetto, and DiBenedetto Showscan Limited 
                Partnership.(j)

     10.31      Royalty Agreement, dated as of September 22, 1994, by and 
                among Showscan Entertainment Inc., Moss Family O&O Corp. and 
                DiBenedetto O&O Limited Partnership.(j)

     10.32      Memorandum of Agreement, dated as of April 24, 1995, by and 
                between Showscan Framingham, Inc. and General Cinema of 
                Framingham Inc.(j)

     10.33      Operating Agreement, dated as of August 25, 1995, by and 
                between Showscan Attractions Venture and Maloney Development 
                Partnership Ltd.(l)

     10.34      Second Amendment to Theater Rights Agreement, dated as of 
                December 31, 1995, by and among Showscan Entertainment Inc., 
                United Artists Theatre Circuit, Inc. and Showscan/United 
                Artists Theatres Joint Venture.(l)

     10.35      Agreement, dated August 7, 1996, between the Company and 
                Dennis Pope.(m)

     10.36      Agreement, dated August 7, 1996, between the Company and 
                W. Tucker Lemon.(m)

     21.1       List of Subsidiaries of the Company.(l)

     23.1       Consent of Ernst & Young LLP.

     27.1       Financial Data Schedule.
</TABLE>





                                      32.
<PAGE>   33

________________

         (a)      Previously filed as an exhibit to the Company's Registration
                  Statement on Form S-1, Registration No. 33-40531, as amended,
                  and incorporated herein by reference.

         (b)      Previously filed as an exhibit to the Schedule 13D filed with
                  the Securities and Exchange Commission by Charles B. Moss,
                  Jr., Thomas R. DiBenedetto and DiBenedetto Showscan Limited
                  Partnership, dated September 27, 1993, and incorporated herein
                  by reference.

         (c)      Previously filed as an exhibit to the Company's Registration
                  Statement on Form S-1, Registration No. 33-13582, as amended,
                  and incorporated herein by reference.

         (d)      Previously filed as an exhibit to the Company's Annual Report
                  on Form 10-K for fiscal year ended March 31, 1990, and
                  incorporated herein by reference.

         (e)      Previously filed as an exhibit to the Company's Annual Report
                  on Form 10-K for the fiscal year ended March 31, 1992, and
                  incorporated herein by reference.

         (f)      Previously filed as an exhibit to the Company's Annual Report
                  on Form 10-K for fiscal year ended March 31, 1993, and
                  incorporated herein by reference.

         (g)      Previously filed as an exhibit to the Company's Registration
                  Statement on Form S-1, Registration No. 33-78236, as amended,
                  and incorporated herein by reference.

         (h)      Previously filed as an exhibit to the Company's Current Report
                  on Form 8-K dated August 19, 1994, as amended by the Form 8-
                  K/A dated November 7, 1994, and incorporated herein by
                  reference.

         (i)      Previously filed as an exhibit to the Company's Current Report
                  on Form 8-K dated November 11, 1994, and incorporated herein
                  by reference.

         (j)      Previously filed as an exhibit to the Company's Annual Report
                  on Form 10-K, as amended by the Form 10-K/A dated September
                  25, 1995, for the fiscal year ended March 31, 1995, and
                  incorporated herein by reference.

         (k)      Previously filed as an exhibit to the Company's Current Report
                  on Form 8-K dated September 1, 1995, and incorporated herein
                  by reference.

         (l)      Previously filed as an exhibit to the Company's Annual Report
                  on Form 10-K for the fiscal year ended March 31, 1996, and
                  incorporated herein by reference.

         (m)      Previously filed as an exhibit to the Company's Quarterly
                  Report on Form 10-Q for the fiscal quarter ended June 30,
                  1996, and incorporated herein by reference.









                                      33.


<PAGE>   34

B.       THE FOLLOWING REPORTS ON FORM 8-K WERE FILED DURING THE FOURTH QUARTER
         OF THE FISCAL YEAR ENDED MARCH 31, 1997.

         Current Report dated February 12, 1997, Item 5 and Item 7.

         No financial statements were filed with the foregoing Report.



















                                      34.





<PAGE>   35


                         INDEX TO FINANCIAL STATEMENTS
                          SHOWSCAN ENTERTAINMENT INC.




<TABLE>
<S>                                                                                                                     <C>
Report of Independent Auditors  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   F-2

Consolidated Balance Sheets at March 31, 1997 and 1996  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   F-3

Consolidated Statements of Operations for the years ended March 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . .   F-5

Consolidated Statements of Stockholders' Equity for the years ended March 31, 1997, 1996, and 1995  . . . . . . . . .   F-6

Consolidated Statements of Cash Flows for the years ended March 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . .   F-7

Notes to Consolidated Financial Statements  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   F-9

Consolidated Financial Statement Schedule:

         Schedule II.     Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  F-30
Supplementary Audited Financial Statements:

         Financial Statements for Showscan CityWalk Venture for the years ended December 31, 1996
         and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  F-31

         Financial Statements for Cinemania (U.K.) Limited for the years ended December 31, 1996
         and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  F-40

         Financial Statements for Showscan/General Cinema Ventures for the year ended October 31,
         1996 and for the period from April 24, 1995 (date of formation) to October 31, 1995  . . . . . . . . . . . .  F-49
</TABLE>

         All other schedules have been omitted either as inapplicable or not
required under the instructions contained in Regulation S-X or because the
information is included in the Consolidated Financial Statements or the Notes
thereto listed above.



















                                      F-1
<PAGE>   36

                         Report of Independent Auditors

Board of Directors and Stockholders
Showscan Entertainment Inc.

We have audited the accompanying consolidated balance sheets of Showscan
Entertainment Inc. as of March 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended March 31, 1997. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.

We conducted our audits 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 audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Showscan
Entertainment Inc. at March 31, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended March 31, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.



                                                  Ernst & Young LLP




Los Angeles, California
June 27, 1997



                                      F-2
<PAGE>   37

                           Showscan Entertainment Inc.

                           Consolidated Balance Sheets

                  (Dollars in Thousands, Except Share Amounts)


<TABLE>
<CAPTION>
                                                                       MARCH 31
                                                                   1997        1996
                                                                ---------- ----------
<S>                                                             <C>        <C>       
ASSETS
Current assets:
  Cash and cash equivalents                                     $    2,562 $    5,055
  Short-term investments (Note 1)                                        -      3,086
  Accounts receivable, net of allowances of $425 (1997)
    and $215 (1996)                                                  2,716      1,885
  Unbilled receivables on uncompleted equipment
    contracts (Note 1)                                                   -      1,122
  Due from affiliated entities (Note 7)                                884      1,216
  Equipment sales inventory                                          1,289      1,547
  Prepaid expenses and other current assets (Note 1)                 1,072        122
                                                                ---------- ----------
Total current assets                                                 8,523     14,033


Film library, net (Note 1)                                           5,520      3,481

Equipment and leasehold improvements, less
  depreciation and amortization (Note 2)                               868      1,313

Investment in and advances to O&O theatres 
  (Notes 1 and 6)                                                    2,123      4,424

Patents and other intellectual properties, net of
  amortization (Note 1)                                              1,336      1,770

Other assets                                                         1,558        994
                                                                ---------- ----------
Total assets                                                    $   19,928 $   26,015
                                                                ========== ==========
</TABLE>


See accompanying notes.



                                      F-3
<PAGE>   38

<TABLE>
<CAPTION>
                                                                       MARCH 31
                                                                   1997        1996
                                                               ----------  ----------
<S>                                                            <C>         <C>       
LIABILITIES AND STOCKHOLDERS' EQUITY 
Current liabilities:
  Accounts payable                                             $      654  $      603
  Customer advances on uncompleted film and equipment
    contracts (Note 1)                                              1,033       2,143
  Accrued expenses and other current liabilities (Note 1)           2,308       3,351
                                                               ----------  ----------
Total current liabilities                                           3,995       6,097

8% convertible notes (Note 3)                                       5,690       6,620
                                                               ----------  ----------
Total liabilities                                                   9,685      12,717
                                                               ----------  ----------

Commitments and contingencies (Note 10)

Stockholders' equity (Note 5):
  Series A Convertible Preferred Stock, $.001 par value; 
    150,000 shares authorized, no shares issued and
    outstanding in 1997 and 1996 (Note 4)                               -           -
  Series C Convertible Preferred Stock, $.001 par value;
    100,000 shares authorized; 49,000 shares issued and
    outstanding in 1997 and 1996, $100 per share
    liquidation preference (Note 4)                                     -           -
  Common stock, $.001 par value; 20,000,000 shares
    authorized; shares issued and outstanding of
    5,642,058 in 1997 and 5,480,324 in 1996                             6           5
  Additional paid-in capital                                       42,567      41,704
  Accumulated deficit                                             (32,330)    (28,411)
                                                               ----------  ----------
Total stockholders' equity                                         10,243      13,298
                                                               ----------  ----------
Total liabilities and stockholders' equity                     $   19,928  $   26,015
                                                               ==========  ==========
</TABLE>


See accompanying notes.



                                      F-4
<PAGE>   39

                           Showscan Entertainment Inc.

                      Consolidated Statements of Operations

                  (Dollars in Thousands, Except Share Amounts)


<TABLE>
<CAPTION>
                                                            YEAR ENDED MARCH 31
                                                       1997        1996        1995
                                                    ----------  ---------- ----------
<S>                                                 <C>         <C>        <C>       
Revenues (Note 9):
  Film licensing and production services            $    6,236  $    9,039 $    5,978
  Equipment sales and related services                  11,475       8,426      9,459
                                                    ----------  ---------- ----------
                                                        17,711      17,465     15,437

Costs of revenues                                       10,854       8,399      8,584
                                                    ----------  ---------- ----------
Gross profit                                             6,857       9,066      6,853

Other costs and expenses:
  General and administrative expenses                    6,904       7,576      5,560
  Depreciation and amortization                            961         971      1,025
                                                    ----------  ---------- ----------
                                                         7,865       8,547      6,585
                                                    ----------  ---------- ----------
Operating income (loss)                                 (1,008)        519        268

Other income (expense):
  Equity in net operations of O&O theatres                (694)       (217)      (502)
    (Note 6)
  Effect of impairment loss on equity in net
    operations of O&O theatres (Note 6)                 (1,771)          -          -
  Other income, including interest of $241
    (1997), $250 (1996) and $237 (1995)                    250         358        444
  Other expense, including interest of $672
    (1997), $410 (1996) and $128 (1995)                   (692)       (555)      (128)
                                                    ----------  ---------- ----------
                                                        (2,907)       (414)      (186)
                                                    ----------  ---------- ----------
Income (loss) before taxes                              (3,915)        105         82
Provision for income taxes                                   4           4          3
                                                    ----------  ---------- ----------
Net income (loss)                                   $   (3,919) $      101 $       79
                                                    ==========  ========== ==========

Net income (loss) per common share (Note 1)         $    (0.70) $     0.02 $     0.01
                                                    ==========  ========== ==========
</TABLE>

See accompanying notes.



                                      F-5
<PAGE>   40

                           Showscan Entertainment Inc.
                 Consolidated Statements of Stockholders' Equity
                      (In thousands, except share amounts)


<TABLE>
<CAPTION>
                                            Series A Convertible  Series C Convertible
                                               Preferred Stock      Preferred Stock         Common Stock       
                                            -----------------------------------------------------------------
                                              Number              Number of               Number               
                                             of Shares   Amount     Shares     Amount   of Shares      Amount    
                                            ----------   ------   ---------    ------   ---------    --------
<S>                                         <C>          <C>      <C>          <C>      <C>          <C>
Balance at March 31, 1994                    150,000      $  -            -    $   -    4,679,519    $   5 
  Proceeds from common stock offering              -         -            -        -      560,340        - 
  Accretion on Series B Preferred Stock            -         -            -        -            -        - 
  Proceeds from issuance of Series C
    Convertible Preferred Stock and
    warrants to purchase common stock              -         -       25,000        -            -        - 
  Conversion of Series B Preferred
    Stock to Series C Convertible                  -         -       24,000        -            -        - 
    Preferred Stock
  Exercise of stock options                        -         -            -        -        3,000        - 
  Stock issuance costs                             -         -            -        -            -        - 
  Net income                                       -         -            -        -            -        - 
                                            --------     -----    ---------    -----    ---------    ----- 
Balance at March 31, 1995                    150,000         -       49,000        -    5,242,859        5 
  Conversion of Series A Convertible
    Preferred Stock to common stock         (150,000)        -            -        -      165,380        - 
  Exercise of stock options                                                                 6,000          
  Conversion of convertible notes
    payable to common stock                        -         -            -        -       66,085        - 
  Other                                            -         -            -        -            -        - 
  Net income                                       -         -            -        -            -        - 
                                            --------     -----    ---------    -----    ---------    ----- 
Balance at March 31, 1996                          -         -       49,000        -    5,480,324        5 
  Exercise of stock options                        -         -            -        -            -        - 
  Conversion of convertible notes to
    common stock and other                         -         -            -        -      161,734        1 
  Net income                                       -         -            -        -            -        - 
                                            --------     -----    ---------    -----    ---------    ----- 
Balance at March 31, 1997                          -      $  -       49,000    $   -    5,642,058    $   6 
                                            ========     =====    =========    =====    =========    ===== 
</TABLE>

<TABLE>
<CAPTION>
                                            Additional
                                              Paid-In   Accumulated
                                              Capital     Deficit      Total
                                            ----------  -----------  ----------
<S>                                         <C>         <C>          <C>    
Balance at March 31, 1994                   $  33,660    $ (28,591)  $ 5,074
  Proceeds from common stock offering           4,342            -     4,342
  Accretion on Series B Preferred Stock          (122)           -      (122)
  Proceeds from issuance of Series C
    Convertible Preferred Stock and
    warrants to purchase common stock           2,500            -     2,500
  Conversion of Series B Preferred
    Stock to Series C Convertible               1,800            -     1,800
    Preferred Stock
  Exercise of stock options                        12            -        12
  Stock issuance costs                           (436)           -      (436)
  Net income                                        -           79        79
                                            ---------   ----------   -------
Balance at March 31, 1995                      41,756      (28,512)   13,249
  Conversion of Series A Convertible
    Preferred Stock to common stock                 -            -         -
  Exercise of stock options                        30                     30
  Conversion of convertible notes
    payable to common stock                       345            -       345
  Other                                          (427)           -      (427)
  Net income                                        -          101       101
                                            ---------   ----------   -------
Balance at March 31, 1996                      41,704      (28,411)   13,298
  Exercise of stock options                         -            -         -
  Conversion of convertible notes to
    common stock and other                        863            -       864
  Net income                                        -       (3,919)   (3,919)
                                            ---------   ----------   -------
Balance at March 31, 1997                   $  42,567   $  (32,330)  $10,243
                                            =========   ==========   =======
</TABLE>


See accompanying notes.



                                      F-6
<PAGE>   41

                           Showscan Entertainment Inc.

                      Consolidated Statements of Cash Flows

                             (Dollars in Thousands)


<TABLE>
<CAPTION>
                                                            YEAR ENDED MARCH 31
                                                        1997         1996       1995
                                                      ---------   ---------  ---------
<S>                                                   <C>         <C>        <C>      
OPERATING ACTIVITIES
Net income (loss)                                     $  (3,919)  $     101  $      79
Adjustments to reconcile net income (loss) to
  net cash provided by (used in) operating
  activities:
    Depreciation and amortization                           961         971      1,025
    Amortization of film library                            613         481        502
    Amortization of debt issue costs                        198          85          -
    Provision for doubtful accounts receivable              270         440        (30)
    Equity in net operations of O&O theatres,
      including impairment loss                           2,465         217        502
    Accrued interest on subordinated note                     -           -        123
    Changes in operating assets and liabilities:
      Accounts receivable                                (1,101)       (279)       353
      Due from affiliated entities                          332        (319)      (697)
      Equipment sales inventory                             258         595       (702)
      Unbilled receivables on uncompleted
        equipment contracts                               1,122        (252)       248
      Prepaid expenses and other assets                  (1,784)        (12)        (7)
      Accounts payable, accrued expenses and               (992)      2,023       (570)
        other
      Customer advances on uncompleted
        equipment contracts                              (1,110)       (786)       798
                                                      ---------   ---------  ---------
Net cash (used in) provided by operating                 (2,687)      3,265      1,624
activities

INVESTING ACTIVITIES
Purchases of short-term investments                           -      (3,086)         -
Redemptions of short-term investments                     3,086           -      1,243
Additions to film library                                (2,652)     (2,568)      (891)
Investment in and advances to O&O theatres                 (164)     (2,486)    (2,456)
Purchases of equipment and leasehold
  improvements and other, net                               (76)       (151)      (275)
                                                      ---------   ---------  ---------
Net cash provided by (used in) investing                    194      (8,291)    (2,379)
  activities
</TABLE>



                                      F-7
<PAGE>   42

                           Showscan Entertainment Inc.

                Consolidated Statements of Cash Flows (continued)

                             (Dollars in Thousands)


<TABLE>
<CAPTION>
                                                             YEAR ENDED MARCH 31
                                                        1997         1996       1995
                                                      ---------   ---------  ---------
<S>                                                   <C>         <C>        <C>      
FINANCING ACTIVITIES
Proceeds from borrowings, net of debt issue costs     $       -   $   6,381  $       -
Repayment of subordinated note payable                        -      (3,121)         -
Net proceeds from issuance of common stock                    -           -      4,079
Net proceeds from issuance of preferred stock and
  common stock warrants                                       -           -      2,327
Proceeds from exercise of stock options                       -          30         12
                                                      ---------   ---------  ---------
Net cash provided by financing activities                     -       3,290      6,418
                                                      ---------   ---------  ---------
Net (decrease) increase in cash and cash                 (2,493)     (1,736)     5,663
  equivalents

Cash and cash equivalents at beginning of year            5,055       6,791      1,128
                                                      ---------   ---------  ---------
Cash and cash equivalents at end of year              $   2,562   $   5,055  $   6,791
                                                      =========   =========  =========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
  Interest paid                                       $     479   $   1,818  $       4
                                                      =========   =========  =========
  Income taxes paid                                   $       4   $       4  $       2
                                                      =========   =========  =========
</TABLE>


See accompanying notes.



                                      F-8
<PAGE>   43

                           Showscan Entertainment Inc.

                   Notes to Consolidated Financial Statements

                                 March 31, 1997


1. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS OF THE COMPANY

Showscan Entertainment Inc. (the Company) is a leader in the production and
distribution of exciting movie-based entertainment attractions shown in
large-screen, special-format theatres worldwide. The Company's business is in
the rapidly expanding out-of-home entertainment marketplace. The Company's
motion simulation and specialty theatres are open or under construction around
the world, located in theme parks, motion picture mutiplexes, expos, world
fairs, resorts, shopping centers, casinos, museums and other tourist
destinations. The Company also owns and operates motion simulation theatres in
partnership with leading entertainment companies around the world.

The Company's simulation attractions combine the exhibition of a short action
film with multi-channel sound systems and synchronized theatre seat movement to
produce an immersive entertainment experience in which the theatre patron has
the perception of actually participating in the on-screen action. The
entertainment creates a "thrill ride" or action entertainment experience (such
as riding a runaway train or racing through outer space). The Company's
attractions incorporate various proprietary technologies, including the award
winning and patented 70mm filming and projection process known as Showscan(R).
The Company believes that films made and exhibited in the Showscan process
create a visual effect of depth, clarity and realism that is superior to any
other film format. The Showscan process is also used for the exhibition of films
in large screen special format movie theatres. The Company's films have been
exhibited in such specialty theatres at world fairs, tourist destinations, trade
conventions and other locations where the operator desires the impact of the
large-screen, intense image that a Showscan film provides.

The Company is presently in the business of: (i) licensing and distributing the
films in its library and the proprietary technologies necessary to produce and
exhibit the Company's films; (ii) selling and installing motion simulation
attractions and specialty theatres (including projectors, screens, sound
systems, synchronization and show control, and theatre design packages); (iii)
selling motion bases and other equipment used in motion simulation attractions;
(iv) producing films using the Showscan process; and (v) operating motion
simulation attractions in which the Company has an economic interest (O&O
Theatres). The Company is also committed to the continued recognition of the
Showscan(R) brand name worldwide.



                                      F-9
<PAGE>   44

                           Showscan Entertainment Inc.

             Notes to Consolidated Financial Statements (continued)


1. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

BUSINESS OF THE COMPANY (CONTINUED)

The Company's primary business strategy is to develop high margin recurring
revenues from the licensing and distribution of movie-based software to
third-party owner/operators of its attractions and from ticket sales at, and the
licensing of its movie-based software to, its O&O Theatres. The Company seeks to
increase the demand for its film library by significantly increasing the
installed base of both its motion simulation attractions and specialty theatres.

CONSOLIDATION

The financial statements consolidate the accounts of the Company and its
wholly-owned subsidiaries. All significant intercompany amounts and transactions
have been eliminated in consolidation.

The Company accounts for its investment in O&O Theatres (see Note 6) using the
equity method of accounting.

RECLASSIFICATIONS

The consolidated financial statements for the years ended March 31, 1996 and
1995 contain certain reclassifications to conform to the presentation for the
year ended March 31, 1997.

FILM LIBRARY

The Company's film library primarily consists of short "thrill-ride" or action
films that are exhibited in motion simulation attraction theatres worldwide.
Films are stated at the lower of unamortized cost or estimated realizable
values. The cost of a film includes the direct costs to produce or purchase the
film and the costs of production overhead, if any. The components of the
unamortized film library consist of the following:



                                      F-10
<PAGE>   45
                           Showscan Entertainment Inc.

             Notes to Consolidated Financial Statements (continued)

1. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

<TABLE>
<CAPTION>
                                                                 MARCH 31
                                                             1997       1996
                                                          ---------  ---------
<S>                                                       <C>        <C>      
Films in production                                       $   2,399  $     476
Completed films in release                                   10,239      9,510
                                                          ---------  ---------
                                                             12,638      9,986
Less accumulated amortization                                 7,118      6,505
                                                          ---------  ---------
                                                          $   5,520  $   3,481
                                                          =========  =========
</TABLE>

Films are being amortized over their estimated future revenue stream (five to
seven years) as revised quarterly, if applicable; however, many of the Company's
films are expected to generate revenues for periods up to ten years or longer.
The Company estimates that approximately 60% of unamortized film costs at March
31, 1997 will be amortized over the next four fiscal years.

PATENTS AND OTHER INTELLECTUAL PROPERTIES

Patents (expiring in fiscal year 2002) and other intellectual properties
represent the excess of the total purchase cost over the values assigned to
tangible assets at the date of acquisition of the Showscan process.

Amortization is provided on the basis of the ratio of annual revenues to
projected revenues over the lives of the patents, as revised quarterly, if
applicable, from the Showscan process with minimum annual amortization of
approximately $434,000 (equal to 1/15 of the original balance of $6,504,000).
Accumulated amortization of the patents and other intellectual properties was
$5,169,000 and $4,734,000 at March 31, 1997 and 1996, respectively.

EQUIPMENT SALES ACCOUNTING

Equipment sales inventory, consisting primarily of film exhibition and motion
simulation system equipment packages and related components, is valued at the
lower of average cost or market.

Equipment sales contracts are accounted for using the percentage-of-completion
method of accounting, generally measured by the percentage of labor hours
incurred to date to the estimated total labor hours for each contract. When
revenues and cost estimates for a contract indicate an ultimate loss, that loss
is recognized immediately.



                                      F-11
<PAGE>   46
                           Showscan Entertainment Inc.

             Notes to Consolidated Financial Statements (continued)


1. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and leasehold improvements are stated at cost.

Depreciation of equipment is computed using the straight-line method over the
estimated useful lives of the respective assets, generally 7 to 12 years.
Amortization of leasehold improvements is computed using the straight-line
method over the lease term. Depreciation and amortization of equipment and
leasehold improvements was $527,000, $537,000 and $590,000 for the years 1997,
1996 and 1995, respectively.

FILM LICENSING REVENUES

Revenues from film license agreements are recognized when the license period
begins and the film is available pursuant to the terms of the license agreement
and accepted by the customer.

INCOME TAXES

The Company accounts for taxes using Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" (SFAS No. 109). Under SFAS No. 109, the
liability method is used in accounting for income taxes. Under this method,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.

CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less or investments in money market funds
to be cash equivalents.

Short-term investments are stated at amortized cost and consisted of amounts
invested in debt securities (U.S. Treasury Bills) which were held to maturity.
Such securities had maturities ranging from three to nine months from the time
of acquisition.



                                      F-12
<PAGE>   47
                           Showscan Entertainment Inc.

             Notes to Consolidated Financial Statements (continued)


1. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

CONCENTRATION OF CREDIT RISK

Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of accounts receivable. The Company performs
ongoing credit evaluations of its customers and maintains allowances for
potential credit losses. The Company generally requires customers to furnish
irrevocable letters of credit on equipment sales and to pay film licensing
revenues at the beginning of the license period in order to minimize the
Company's credit risk.

PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets include $600,000 at March 31, 1997 of
costs advanced for the joint defense of certain litigation against the Company
and a supplier. Such litigation was settled subsequent to year end, and the
Company realized the amounts capitalized.

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Included in accrued expenses and other current liabilities are the following:

<TABLE>
<CAPTION>
                                                        1997          1996
                                                   ------------- -------------
<S>                                                <C>           <C>          
Accrued participations and royalties               $     972,000 $     988,000
Purchase of motion simulation films                            -     1,620,000
Accrued cost of film and equipment sales                 679,000       175,000
Other items                                              657,000       568,000
                                                   ------------- -------------
                                                   $   2,308,000 $   3,351,000
                                                   ============= =============
</TABLE>



                                      F-13
<PAGE>   48
                           Showscan Entertainment Inc.

             Notes to Consolidated Financial Statements (continued)


1. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

STOCK-BASED COMPENSATION

In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). SFAS 123 established a fair value-based method of
accounting for compensation cost related to stock options and other forms of
stock-based compensation plans. However, SFAS 123 allows an entity to continue
to measure compensation costs using the principles of APB 25 if certain pro
forma disclosures are made. The Company has elected to account for its stock
compensation arrangements under the provisions of APB 25, "Accounting for Stock
Issued to Employees." The Company adopted the provisions for pro forma
disclosures requirements of SFAS 123 in fiscal year 1997 (see Note 5).

USE OF ESTIMATES AND ASSUMPTIONS

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.

NET INCOME (LOSS) PER COMMON SHARE

Per share information has been determined on the basis of 5,594,245, 6,317,167,
and 5,788,230 weighted average shares outstanding for the years ended March 31,
1997, 1996 and 1995, respectively.

For the year ended March 31, 1997, the effect of common stock equivalents is not
included in the per share computation as such items are anti-dilutive. The
weighted average shares for the years ended March 31, 1996 and 1995 give effect
to the assumed conversion of the Company's Convertible Preferred Stock (the
effect of all other common stock equivalents was anti-dilutive and thus not
reflected in the per share computation).

In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128).
SFAS No. 128 establishes standards for computing and presenting earnings per
share (EPS) and supersedes APB Opinion No. 15, "Earnings Per Share" (APB No.
15). SFAS No. 128 replaces the presentation of primary EPS with a presentation
of basic EPS. Basic EPS excludes the dilutive effects, if any, of common stock
equivalents, and is computed by dividing income available to common stockholders
by the weighted average number of common shares outstanding during


                                      F-14
<PAGE>   49

                           Showscan Entertainment Inc.

             Notes to Consolidated Financial Statements (continued)


1. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

NET INCOME (LOSS) PER COMMON SHARE (CONTINUED)

the period. SFAS No. 128 also requires dual presentation of basic EPS and
diluted EPS on the face of the income statement for all periods presented.
Diluted EPS is computed similarly to fully diluted EPS pursuant to APB No. 15,
with certain modifications. SFAS No. 128 is effective for financial statements
issued for periods ending after December 15, 1997, including interim periods.
Early adoption is not permitted and SFAS No. 128 requires restatement of all
prior period EPS data presented after SFAS No. 128's effective date.

The Company will adopt SFAS No. 128 effective with its March 31, 1998 fiscal
year end. Pro forma earnings (loss) per share data calculated in accordance with
SFAS No. 128 for the year ended March 31, 1997 and 1996 has not been presented
as it would have been the same as the historical amounts reported.

2. EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and leasehold improvements at March 31, 1997 and 1996 were as follows:

<TABLE>
<CAPTION>
                                                        1997          1996
                                                   ------------- -------------
<S>                                                <C>           <C>          
Showscan equipment                                 $   4,580,000 $   4,559,000
Leasehold improvements                                   926,000       927,000
Office furniture and equipment                           652,000       769,000
                                                   ------------- -------------
                                                       6,158,000     6,255,000
Less accumulated depreciation and amortization         5,290,000     4,942,000
                                                   ------------- -------------
                                                   $     868,000 $   1,313,000
                                                   ============= =============
</TABLE>

3. 8% CONVERTIBLE NOTES

In September 1995, the Company completed a private placement of $7,000,000 in
Convertible Notes which mature on September 1, 1999 and bear interest at 8% per
annum payable semi-annually. The notes are secured by substantially all of the
assets of the Company, although the security excludes the Company's film library
and the capital stock of its subsidiaries, which includes its O&O Theatres. In
connection with the placement, $619,000 of debt issue costs were incurred and
are being amortized over the life of the notes. The notes are convertible into



                                      F-15
<PAGE>   50
                           Showscan Entertainment Inc.

             Notes to Consolidated Financial Statements (continued)


3. 8% CONVERTIBLE NOTES (CONTINUED)

common stock at the option of the holder at a conversion price (subject to
certain anti-dilution adjustments) of $5.75 per share (the closing price on the
Nasdaq National Market on the transaction closing date). Through March 31, 1997,
$1,310,000 of notes were converted into 227,819 shares of common stock, leaving
an outstanding balance of $5,690,000.

The fair value of convertible notes was determined using valuation techniques
that considered cash flows discounted at current market rates and management's
best estimate for instruments without quoted market prices. At March 31, 1997
and 1996, the carrying value of convertible notes exceeded the fair value by
approximately $1,300,000 and $0, respectively.

4. PREFERRED STOCK

The Company is authorized to issue preferred stock in one or more series and to
fix the rights, preferences, privileges, qualifications, limitations,
restrictions and the number of shares constituting any such series.

The Company is authorized to issue a total of 10,000,000 shares of preferred
stock of which 49,000 shares are issued as of March 31, 1997. Accordingly,
9,951,000 shares of preferred stock are available for issuance.

SERIES A CONVERTIBLE PREFERRED STOCK (SERIES A)

On September 30, 1995, the Company converted all 150,000 previously outstanding
shares of its Series A into 165,380 shares of common stock.

SERIES C CONVERTIBLE PREFERRED STOCK (SERIES C)

The Company has 49,000 shares of Series C outstanding. The Series C is
convertible into common stock at $5.04 per share (subject to certain
anti-dilution adjustments), has a liquidation preference of $100 per share, and
provides voting rights as if such shares had been fully converted into common
stock. Each share of Series C entitles the holder to receive dividends in an
amount equal to 110% of the dividends per share declared on each share of common
stock. The Company may elect to pay dividends on the Series C either in cash or
in additional shares of Series C based on its liquidation preference of $100 per
share.



                                      F-16
<PAGE>   51
                           Showscan Entertainment Inc.

             Notes to Consolidated Financial Statements (continued)


4. PREFERRED STOCK (CONTINUED)

SERIES C CONVERTIBLE PREFERRED STOCK (SERIES C) (CONTINUED)

The Series C is senior to the common stock of the Company; additionally, a
majority of the holders of Series C must consent to (a) the issuance of any
equity securities ranking senior to, or on parity with, the Series C, and (b)
the repurchase or retirement of any equity securities of the Company other than
the Series C.

SERIES D PARTICIPATING PREFERRED STOCK (SERIES D)

The issuance of 10,000 shares of Series D was authorized in November 1994 in
connection with the adoption of the Company's stockholder rights plan.

In connection therewith, the Company issued a dividend of one preferred share
purchase right (a Right) for each outstanding share of common stock and for each
share of common stock issuable upon conversion of outstanding Series C to the
stockholders of record on November 11, 1994. Each Right entitles the registered
holder to purchase from the Company one one-thousandth of a share of Series D at
a purchase price of $40 per one one-thousandth of a share of Series D, subject
to adjustment (the Purchase Price).

The Rights may be exercised (a) 20 days after a person or group of persons has
become the beneficial owner of 20% or more of the common stock then outstanding
(an Acquiring Person), or (b) 20 business days after the date of commencement of
a tender or exchange offer the consummation of which would result in a person or
group of persons becoming an Acquiring Person. The Rights, which do not have any
voting rights, expire on November 11, 2004 and may be redeemed by the Company at
a price of $.01 per Right, subject to adjustment, at any time prior to their
expiration and prior to such time as any person or group of persons becomes an
Acquiring Person.

In the event that a person or group of persons becomes an Acquiring Person, each
Right will entitle its holder to purchase, at the Right's then Purchase Price, a
number of shares of common stock of the Company having a market value of twice
the Purchase Price. If certain mergers or sales of assets by the Company occur,
each Right shall entitle the holder to purchase, at the then Purchase Price, a
number of shares of common stock of the surviving corporation or purchaser
having a market value of twice the Purchase Price.



                                      F-17
<PAGE>   52
                           Showscan Entertainment Inc.

             Notes to Consolidated Financial Statements (continued)


5. STOCK OPTIONS AND WARRANTS

OPTIONS

The Company currently has two stock option plans in effect, the 1987 Option Plan
and the 1992 Option Plan (collectively, the Plans). The Plans provide for the
issuance of nonqualified and qualified stock options under the Internal Revenue
Code of 1986, as amended. An aggregate of 300,000 shares of common stock were
initially reserved for grant under the 1992 Option Plan to officers, directors
and employees as well as independent contractors and consultants who performed
services for the Company. In 1995, the 1992 Option Plan was amended to permit
the grant of up to 800,000 shares of common stock and such number of shares have
been reserved for grant at March 31, 1997. All remaining shares reserved for
grant under the 1987 Option Plan were cancelled upon adoption of the 1992 Option
Plan. Persons who are not employees of the Company are eligible to receive only
nonqualified stock options. The options may be granted for a term of up to ten
years. If an incentive stock option is granted to an individual owning more than
10% of the total combined voting power of all classes of the Company's stock,
the exercise price of the option may not be less than 110% of the fair market
value of the underlying shares on the date of the grant and the term of the
option may not exceed five years.

The Plans provide that the aggregate fair market value (determined at the time
the option is granted) of the common stock with respect to which incentive stock
options are exercisable for the first time by an optionee during any calendar
year shall not exceed $100,000.

The Company has elected to follow APB 25 (see Note 1) in accounting for its
employee stock options because, as discussed below, the alternative fair value
accounting provided for under SFAS 123 requires use of option valuation models
that were not developed for use in valuing employee stock options. Under APB 25,
because 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
expense is recognized.

Pro forma information regarding net income and earnings per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of SFAS 123. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions for each of
the years ended March 31, 1997 and 1996: risk-free interest rates ranging from
5% to 6%, volatility factors of the expected market price of the Company's
common stock of .361, and a weighted average expected life of the options
ranging from 7 to 10 years.



                                      F-18
<PAGE>   53
                           Showscan Entertainment Inc.

             Notes to Consolidated Financial Statements (continued)


5. STOCK OPTIONS AND WARRANTS (CONTINUED)

OPTIONS (CONTINUED)

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. Given this method of
amortization, the initial impact of applying SFAS 123 on pro forma net income
and pro forma earnings per share is not representative of the potential impact
on pro forma amounts in future years, when the effect of amortization from
multiple awards would be reflected. The Company's pro forma information follows:

<TABLE>
<CAPTION>
                                                        1997          1996
                                                   -------------   ----------- 
<S>                                                <C>             <C>         
Pro forma net loss                                 $  (4,475,000)  $  (402,000)
Pro forma loss per share                           $       (0.80)  $     (0.08)
</TABLE>



                                      F-19
<PAGE>   54

5. STOCK OPTIONS AND WARRANTS (CONTINUED)

OPTIONS (CONTINUED)

The following is a summary of Company stock options granted, exercised and
terminated through March 31:

<TABLE>
<CAPTION>
                                  1997                  1996                 1995
                            --------------------------------------------------------------
                                     WEIGHTED               WEIGHTED              WEIGHTED
                                      AVERAGE                AVERAGE               AVERAGE
                                     EXERCISE               EXERCISE              EXERCISE
                            OPTIONS     PRICE    OPTIONS       PRICE   OPTIONS       PRICE
                            -------  ---------   -------    --------   -------   ---------
<S>                         <C>       <C>        <C>        <C>        <C>        <C>     
Outstanding at beginning    605,750   $   7.51   619,500    $   7.58   333,000    $   6.68
  of year
Granted                     200,000   $   4.75    32,250    $   6.53   304,750    $   8.47
Exercised                         -   $   -       (6,000)   $   5.00    (3,000)   $   4.00
Canceled                    (31,500)  $   8.81   (40,000)   $   6.06   (15,250)   $   4.44
                            -------   --------   -------    --------   -------    --------
Outstanding at end of year  774,250   $   6.75   605,750    $   7.51   619,500    $   7.58
                            =======   ========   =======    ========   =======    ========

Exercisable at end of year  364,688   $   7.30   235,625    $   7.24   156,500    $   6.70
                            =======   ========   =======    ========   =======    ========

Weighted average fair
  value of options   
  granted during year                 $   2.41              $   3.32              $   4.30                                     
                                      ========              ========              ========                                     
</TABLE>

Exercise prices for options outstanding at March 31, 1997 ranged from $3.625 to
$9.06. The weighted average remaining contractual life of those options is 8
years. Options vest over a period of 4 or 5 years from respective grant dates.

WARRANTS

During 1991, warrants to purchase an aggregate of 200,000 shares of common stock
were issued by the Company. Warrants for 150,000 shares expired on July 11, 1996
and the remaining warrants for 50,000 shares are exercisable at a price of $6.50
and expire on March 9, 1999, subject to certain anti-dilution adjustments.


                                      F-20
<PAGE>   55
                           Showscan Entertainment Inc.

             Notes to Consolidated Financial Statements (continued)


5. STOCK OPTIONS AND WARRANTS (CONTINUED)

WARRANTS (CONTINUED)

In October 1993, the Company issued a warrant to purchase an aggregate of 50,000
shares of common stock at an exercise price of $4.47 per share to the Chairman
of its Board of Directors. The warrant was issued as compensation for services
the Chairman provided to the Company. At March 31, 1997, the warrant has been
adjusted (due to anti-dilution adjustments) to permit the purchase of up to
55,127 shares of common stock at an exercise price of $4.05 per common share.
The warrant is exercisable at any time on or before October 26, 1998.

In September 1993, the Company issued to certain of its directors (and their
affiliates) warrants which initially allowed the purchase of up to 850,000
shares of common stock at the then exercise price of $4.00 per share. The
warrants have been adjusted (due to anti-dilution adjustments) to permit the
purchase of up to 937,155 shares of common stock at an exercise price of $3.63
per share and are currently exercisable and expire on September 27, 1998.

In August 1994, the Company issued to United Artists Theatre Circuit (UA)
warrants to purchase an aggregate of 552,000 shares of common stock, at exercise
prices ranging from $6.50 to $8.50, subject to certain anti-dilution
adjustments. The warrants become exercisable at dates from August 22, 1995
(300,000) and annually thereafter at 75,000 per year with the remaining 27,000
exercisable on August 22, 1999, and have expiration dates of either August 22,
1999 or August 22, 2000.

In September 1995, the Company issued warrants to purchase an aggregate of
150,000 shares of common stock at an exercise price of $5.75 per share, subject
to certain anti-dilution adjustments, to financial advisors who assisted in the
private placement of the Convertible Notes. The warrants became exercisable on
September 1, 1996 and expire on September 1, 2000.

In October 1995, the Company issued warrants to purchase an aggregate of 30,000
shares of common stock at an exercise price of $6.44, subject to certain
anti-dilution adjustments, to an outside marketing, film production and
consulting company. The warrants become exercisable on August 2, 1996 (15,000)
and August 2, 1997 (15,000) and expire on August 1, 1998.


                                      F-21
<PAGE>   56
                           Showscan Entertainment Inc.

             Notes to Consolidated Financial Statements (continued)


5. STOCK OPTIONS AND WARRANTS (CONTINUED)

WARRANTS (CONTINUED)

Shares of the Company's common stock reserved for issuance upon exercise of
stock options, warrants, preferred stocks and convertible notes are as follows:

<TABLE>
<CAPTION>
                                  MARCH 31, 1997
                                     RANGE OF                 MARCH 31
                                  EXERCISE PRICES        1997           1996
                                 ----------------      ---------      ---------
<S>                              <C>                   <C>            <C>      
 1987 and 1992 Option Plans      $3.625 - $9.0625        837,500*       837,500*
 Warrants                          $3.63 - $8.50       1,774,283      1,924,283
 Series C                             $5.04**            972,222        972,222
 Convertible Notes                    $5.75**            989,567      1,151,304
                                                       ---------      ---------
                                                       4,573,572      4,885,309
                                                       =========      =========
</TABLE>

*   At March 31, 1997 and 1996, shares reserved for options which are still
    available for grant are 66,250 and 231,750, respectively.

**  Subject to certain anti-dilution provisions.

6. OWNED AND OPERATED THEATRES

The Company has an ownership interest, ranging from 15% to 50%, in selected
Showscan motion simulation theatre attractions. The Company operates and/or has
an ownership interest in theatre attractions at Universal CityWalk in Universal
City, California (November 1993), at the Trocadero Arcade/Piccadilly Circus in
London, England (September 1994), Framingham, Massachusetts (May 1995), Osaka,
Japan (August 1995), on the Riverwalk in San Antonio, Texas (March 1996), in
Austin, Texas (through the UA Venture in July 1997) and in Darling Harbour in
Sydney, Australia (July 1997). Generally, in each of these arrangements, the
Company receives reimbursement for direct expenses (as defined), a percentage of
each theatre's cash flow (equal to its ownership percentage), and receives
separately annual film licensing revenues, and management fees (if applicable).

Affiliated Ventures

The Company and affiliates of certain of its directors have entered into three
ventures through March 31, 1997 with respect to owned and operated theatres:


                                      F-22
<PAGE>   57
                           Showscan Entertainment Inc.

             Notes to Consolidated Financial Statements (continued)


6. OWNED AND OPERATED THEATRES (CONTINUED)

a)    Universal CityWalk - The Universal CityWalk Venture (CityWalk Venture) is
      a joint venture which is 50% owned by a wholly-owned subsidiary of the
      Company, and 50% owned by affiliates of certain of the directors. The
      CityWalk Venture also entered into a ten-year profit sharing lease with
      the owner of Universal CityWalk pursuant to which the owner contributed
      one-half of the costs incurred for the construction of the theatre. In
      general, the CityWalk Venture is obligated to pay a base rent plus 50% of
      the cash flow, as defined, from the operations of the theatre.

b)    Trocadero Arcade/Piccadilly Circus - The Trocadero Arcade/Piccadilly
      Circus theatres are owned by Cinemania (UK) Limited, a British
      corporation, which is 50% owned by a wholly-owned subsidiary of the
      Company, and 50% owned by affiliates of certain of the directors
      (investors). In connection with the issuance of preferred stock to the
      investors, the Company was required to make an initial contribution to
      this venture which exceeded its ownership interest. The investment account
      for this venture and additional paid-in-capital for all periods presented
      has been restated by $742,000 to properly reflect such costs of the 
      preferred stock issuance. The adjustment had no impact on the reported 
      results of operations for any period.

c)    Riverwalk/San Antonio - The Riverwalk/San Antonio theatre is owned by a
      limited liability company which is 50% owned by an unaffiliated third
      party and 50% owned by Showscan Attractions Venture, which is a joint
      venture 50% owned by a wholly-owned subsidiary of the Company and 50%
      owned by affiliates of certain of the directors. Thus, the Company
      effectively has a 25% ownership interest in this theatre. The parties to
      this venture have agreed to close the theater and liquidate its assets.
      The parties have further agreed to sell the theater equipment to the
      Company, which is negotiating to sell the equipment to a non-affiliated
      third party. The Company expects to fully realize the carrying value of
      its investment in this venture at March 31, 1997 upon the completion of
      the liquidation and subsequent sale.

The accompanying statement of operations for the year ended March 31, 1997
includes a non-cash charge of $1,771,000 to record the impact of the adoption of
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" by certain of the joint ventures. Under
the equity method of accounting, the Company has recognized its share of
joint venture charges; accordingly, the carrying value of investments in and
advances to O&O theatres in the accompanying consolidated balance sheets was
reduced by this charge.


                                      F-23
<PAGE>   58
                           Showscan Entertainment Inc.

             Notes to Consolidated Financial Statements (continued)


6. OWNED AND OPERATED THEATRES (CONTINUED)

The Company has through other financing and/or joint venture arrangements
entered into the following additional theatre ventures:

UA Venture

In August 1994, the Company and United Artists Theatre Circuit Inc. (UA) agreed
to be partners in a venture called Showscan/United Artists Theatres Joint
Venture (UA Venture).

Pursuant to a Theatre Rights Agreement, as amended (TRA), UA has agreed to offer
to the UA Venture for ownership and operation by the UA Venture, up to 24
theatre sites prior to August 19, 1999 for the installation of motion simulation
attraction threatres in or adjacent to existing or to-be-built UA theatre
multiplexes. If the UA Venture declines to acquire a particular site, then UA
must install a motion simulation attraction theatre at such site. As of March
31, 1997, UA has offered eight sites of which the UA Venture declined seven of
these sites as these sites did not meet the criteria of the UA Venture and on
July 1, 1997, the UA Venture exercised its rights under the TRA and accepted the
offer by UA for the theatre site in Austin, Texas. The TRA contains certain
provisions that require UA to make payments to the Company if UA is unable to
meet its obligations under that agreement. The TRA provided that two motion
simulation attraction theatres be installed and in operation in Malaysia no
later than December 31, 1995. UA was unable to meet this commitment (see Note
7).

The TRA has been amended by the Company and UA to eliminate certain installation
requirements in Malaysia and to add those requirements to the overall UA
obligations. In connection with the amendment, UA relinquished its exclusivity
rights to Malaysia and eliminated its rights of first refusal in the Asia
Territory (as defined).


                                      F-24
<PAGE>   59
                           Showscan Entertainment Inc.

             Notes to Consolidated Financial Statements (continued)


6. OWNED AND OPERATED THEATRES (CONTINUED)

Other O&O Theatres

The Framingham theatre is 50% owned by a wholly-owned subsidiary of the Company
and 50% owned by a subsidiary of General Cinema Corporation. The parties to this
venture have agreed to liquidate the assets of the venture. The parties have
further agreed to sell certain equipment back to the Company, which has
contracted to sell the equipment to a non-affiliated third party. An additional
capital contribution may be necessary by one of the parties upon the ultimate
settlement and liquidation of the venture; however, the partners believe the
contribution to be under $100,000.

The Osaka theatre is 50% owned by a wholly-owned subsidiary of the Company and
50% by Imagine Japan, Inc. Sega Enterprises, Ltd. operates the Osaka theatre in
exchange for a certain percentage of the gross receipts.

The Company has acquired (effective July 1997) a 15% investment interest in a
theatre located in Darling Harbour which is owned by Reality Cinema Pty. Ltd.,
an Australian corporation, by acquiring a 15% ownership in Reality Cinema Pty.
Ltd.

During 1997, 1996 and 1995, the Company sold equipment to several of these
ventures and eliminated the gross profit on such sales to the extent of its
ownership percentage ($38,705 in 1997, $382,000 in 1996, and $194,000 in 1995).
The amount of profit eliminated is being recognized into income over the
depreciation period of the related equipment.

7. RECEIVABLES FROM AFFILIATED ENTITIES

At March 31, 1997, the Company is due $722,000 from UA in connection with the
TRA as discussed in Note 6. The payment terms provide for (a) interest on the
unpaid principal balance to be charged at 7.5% and (b) principal and interest to
be paid in full on or before December 31, 1996 (Maturity Date); provided,
however, that if the UA Venture has not accepted one of the theatre sites it has
been offered by UA prior to the Maturity Date, the Maturity Date will be
extended 30 days after the date that the UA Venture does accept, but in no event
shall the Maturity Date be extended later than August 19, 1999. Effective July
1, 1997, the UA Venture accepted an offered theatre site at Austin, Texas (see
Note 6), which will reduce the amount owed by UA by $390,000 (the Company's
investment in this theatre). At March 31, 1997, the $390,000 is included in
other assets in the accompanying consolidated balance sheet and will be
reclassified to Investment in Owned and Operated Theatres effective July 1,
1997.


                                      F-25
<PAGE>   60
                           Showscan Entertainment Inc.

             Notes to Consolidated Financial Statements (continued)


7. RECEIVABLES FROM AFFILIATED ENTITIES (CONTINUED)

During the fiscal years ended 1997, 1996 and 1995, the Company charged
approximately $909,000, $897,000 and $789,000, respectively, to the O&O Theatre
joint ventures. Such amounts have either been recognized as film rentals and
royalties ($666,000 in 1997, $565,000 in 1996 and $314,000 in 1995), or offset
against general and administrative expenses ($243,000 in 1997, $332,000 in 1996
and $475,000 in 1995) in the accompanying consolidated statements of operations.
Such amounts represent film rentals and royalties, management and administrative
services provided by the Company to the theatre joint ventures. The joint
ventures owed the Company approximately $238,000 and $318,000 at March 31, 1997
and 1996, respectively, (included in due from affiliated entities) for such
charges and for costs paid on behalf of the ventures.

8. INCOME TAXES

At March 31, 1997, the Company has net operating loss carryforwards for federal
and state income tax purposes of approximately $25,794,000 and $7,927,000,
respectively. The federal loss carryforwards expire through the year ending
2012. The state loss carryforwards expire through the year ending 2002. These
loss carryforwards can be used to offset future taxable income, if any. The
provision for income taxes for all years presented represents minimum state tax
liabilities.


                                      F-26
<PAGE>   61
                           Showscan Entertainment Inc.

             Notes to Consolidated Financial Statements (continued)


8. INCOME TAXES (CONTINUED)

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts utilized for income tax purposes. Significant
components of the Company's deferred tax liabilities and assets as of March 31,
1997 and 1996 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                       1997        1996
                                                     ---------   ---------
<S>                                                  <C>         <C>      
Deferred tax liabilities:
  Unbilled receivables on uncompleted
    equipment contracts                              $       -   $   1,770
                                                     ---------   ---------
Total deferred tax liabilities                               -       1,770

Deferred tax assets:
  Customer advances on uncompleted equipment
    contracts                                                -       1,505
  Excess of book over tax depreciation                     402         395
  Patent amortization                                      251         339
  Amortization of film library                             236         127
  Other                                                    486         300
  Net operating loss carryforward                        9,765      10,181
                                                     ---------   ---------
Total deferred tax assets                               11,140      12,847
Valuation allowance for deferred tax asset             (11,140)    (11,077)
                                                     ---------   ---------
Total deferred taxes                                 $       -   $       -
                                                     =========   =========
</TABLE>

9. GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS

Export revenues by geographic area for each of the three years ended March 31
consisted of:

<TABLE>
<CAPTION>
                                       1997            1996           1995
                                  -------------- --------------  --------------
<S>                               <C>            <C>             <C>           
Africa                            $      215,000 $      281,000  $      851,000
Australasia                            1,976,000      2,574,000       1,031,000
Europe                                 1,206,000      1,992,000       3,531,000
Far East                               6,048,000      5,628,000       4,982,000
Middle East                            1,340,000         48,000          41,000
Other                                    159,000        125,000         184,000
                                  -------------- --------------  --------------
Total export revenues             $   10,944,000 $   10,648,000  $   10,620,000
                                  ============== ==============  ==============
</TABLE>


                                      F-27
<PAGE>   62
                           Showscan Entertainment Inc.

             Notes to Consolidated Financial Statements (continued)


9. GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS (CONTINUED)

During the fiscal years ended 1997, 1996 and 1995, the Company earned export
revenues from an unaffiliated customer of $3,117,000, $3,407,000 and $3,080,000,
respectively. During the fiscal years ended 1997, 1996 and 1995, the Company
recognized domestic revenues from UA of approximately $5,405,000, $3,126,000 
and $109,000, respectively.

10. COMMITMENTS AND CONTINGENCIES

The Company is obligated under various operating leases for its corporate
office, storage premises and equipment. Future net minimum rental payments under
these leases at March 31, 1997 are as follows:

<TABLE>
<S>                                                              <C>          
1998                                                             $     426,000
1999                                                                   426,000
2000                                                                   421,000
2001                                                                   421,000
2002                                                                   416,000
Thereafter                                                             504,000
                                                                 -------------
                                                                 $   2,614,000
                                                                 =============
</TABLE>

The corporate office lease provides for rent adjustments based on increases in
the Consumer Price Index. The Company has provided a letter of credit to its
landlord in the amount of $295,000 which permits the landlord to draw against
the letter of credit upon default by the Company (as defined) under the terms of
the lease. The letter of credit is secured by a cash deposit in the amount of
$295,000; such amount is included in other assets in the accompanying
consolidated balance sheet.

Total rental expense charged to operations for the years ended March 31, 1997,
1996 and 1995 was $400,000, $389,000 and $456,000, respectively.

Under the terms of a film production agreement, the Company has guaranteed, for
four years beginning in 1996, a minimum amount per year ($287,500) of proceeds
to the outside investors in the film project. If revenues, as defined, from the
distribution of the film are less than the required minimum amount, the Company
will contribute the difference to the outside investors. Based upon management's
estimate of future revenues to be derived from the film, the Company does not
expect to pay any amounts under this guarantee.


                                      F-28
<PAGE>   63
                           Showscan Entertainment Inc.

             Notes to Consolidated Financial Statements (continued)


10. COMMITMENTS AND CONTINGENCIES (CONTINUED)

The Company is obligated under various royalty agreements to pay royalties
(ranging from 1% to 3%) to various parties, generally based on the gross
receipts (as defined) from either the exploitation of the Showscan process (in
excess of certain amounts), the exploitation of Showscan feature-length motion
pictures, or other receipts.


                                      F-29
<PAGE>   64

                           Showscan Entertainment Inc.

                 Schedule II - Valuation and Qualifying Accounts


<TABLE>
<CAPTION>
          COL. A                          COL. B           COL. C            COL. D           COL. E           COL. F
        -----------                    ------------     ------------     ------------      ----------------  ------------
                                                                           Charged
                                        Balance at       Charged to        to Other                             Balance 
        DESCRIPTION                      Beginning        Costs and        Accounts -        Deductions -       at End 
                                          of Year         Expenses         Describe            Describe         of Year
                                       ------------     ------------     ------------      ----------------  ------------
<S>                                    <C>              <C>              <C>               <C>               <C>         
Year ended 1997:
Allowance for doubtful accounts        $    215,000     $    270,000     $          -      $     60,000 (a)  $    425,000
                                       ============     ============     ============      ================  ============

Product warrant liability              $    182,000     $     67,000     $          -      $     69,000 (b)  $    180,000
                                       ============     ============     ============      ================  ============

Year ended 1996:
Allowance for doubtful accounts        $    254,000     $    440,000     $          -      $    479,000 (a)  $    215,000
                                       ============     ============     ============      ================  ============

Product warrant liability              $    187,000     $     77,000     $          -      $     82,000 (b)  $    182,000
                                       ============     ============     ============      ================  ============

Year ended 1995:
Allowance for doubtful accounts        $    283,000     $    (30,000)    $          -      $     (1,000)(a)  $    254,000
                                       ============     =============    ============      ================  ============

Product warrant liability              $    213,000     $    124,000     $          -      $    150,000 (b)  $    187,000
                                       ============     ============     ============      ================  ============
</TABLE>

(a) Represents write-off of uncollectible accounts receivable.
(b) Represents actual warranty expenditures.


                                      F-30
<PAGE>   65
  

                            Financial Statements

                            Showscan CityWalk Venture

                  Years ended December 31, 1996, 1995 and 1994
                       with Report of Independent Auditors







                                      F-31

<PAGE>   66

                         Report of Independent Auditors

The Partners
Showscan CityWalk Venture

We have audited the accompanying balance sheets of Showscan CityWalk Venture as
of December 31, 1996 and 1995, and the related statements of operations,
partners' capital, and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Venture's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits 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 audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Showscan CityWalk Venture at
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.

As discussed in Note 4 to the financial statements, the Venture adopted the
provisions of Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," in 1996.



                                                  Ernst & Young LLP



Los Angeles, California
June 27, 1997






                                      F-32
<PAGE>   67

                            Showscan CityWalk Venture

                                 Balance Sheets


<TABLE>
<CAPTION>
                                                                   DECEMBER 31
                                                               1996          1995
                                                          ------------- -------------
<S>                                                       <C>           <C>          
ASSETS
Current assets:
  Cash                                                    $     104,923 $      74,163
  Due from Showscan CityWalk, Inc. (Note 3)                           -        20,000
  Due from Showscan Entertainment Inc. (Note 3)                       -        26,424
  Prepaid expenses and other assets                              49,957         7,993
                                                          ------------- -------------
Total current assets                                            154,880       128,580

Property and equipment:
  Leasehold improvements                                        557,431       557,431
  Operating equipment                                           879,064       868,682
                                                          ------------- -------------
                                                              1,436,495     1,426,113
  Less accumulated depreciation and amortization             (1,236,610)     (312,360)
                                                          ------------- -------------
                                                                199,885     1,113,753
Other assets                                                     19,241        16,211
                                                          ------------- -------------
Total assets                                              $     374,006 $   1,258,544
                                                          ============= =============

LIABILITIES AND PARTNERS' CAPITAL 
Current liabilities:
  Accounts payable and accrued liabilities                $      69,926 $      74,708
  Due to Showscan Entertainment Inc. (Note 3)                    23,558        21,248
                                                          ------------- -------------
Total current liabilities                                        93,484        95,956

Commitments and contingencies (Note 2)

Partners' capital                                               280,522     1,162,588
                                                          ------------- -------------
Total liabilities and partners' capital                   $     374,006 $   1,258,544
                                                          ============= =============
</TABLE>

See accompanying notes.






                                      F-33
<PAGE>   68

                            Showscan CityWalk Venture

                            Statements of Operations


<TABLE>
<CAPTION>
                                                      YEAR ENDED DECEMBER 31
                                                 1996          1995          1994
                                            ------------- ------------- -------------
<S>                                         <C>           <C>           <C>          
Revenues                                    $     996,380 $   1,000,198 $   1,206,961

Cost of revenues, primarily film rental,
  royalty and management fees (Note 3)            264,749       293,708       250,383
                                            ------------- ------------- -------------
Gross profit                                      731,631       706,490       956,578

Other costs and expenses:
  Rent                                            183,182       197,923       180,000
  Payroll and related items                       216,178       180,402       191,151
  Marketing and advertising                        13,494        27,235       294,065
  Other general and administrative                273,693       238,139       263,496
  Impairment loss on long-lived assets
    (Note 4)                                      770,000             -             -
  Depreciation and amortization                   157,150       151,014       148,939
                                            ------------- ------------- -------------
                                                1,613,697       794,713     1,077,651
                                            ------------- ------------- -------------
Net loss                                    $    (882,066)$     (88,223)$    (121,073)
                                            ============= ============= ============= 
</TABLE>

See accompanying notes.






                                      F-34
<PAGE>   69

                            Showscan CityWalk Venture

                         Statements of Partners' Capital


<TABLE>
<S>                                                                     <C>          
Partners' capital at December 31, 1993                                  $   1,325,460
  Capital contributions                                                        20,000
  Net loss                                                                   (121,073)
                                                                        -------------
Partners' capital at December 31, 1994                                      1,224,387
  Capital contributions                                                        26,424
  Net loss                                                                    (88,223)
                                                                        -------------
Partners' capital at December 31, 1995                                      1,162,588
  Net loss                                                                   (882,066)
                                                                        -------------
Partners' capital at December 31, 1996                                  $     280,522
                                                                        =============
</TABLE>

See accompanying notes.






                                      F-35
<PAGE>   70

                            Showscan CityWalk Venture

                            Statements of Cash Flows


<TABLE>
<CAPTION>
                                                      YEAR ENDED DECEMBER 31
                                                 1996          1995          1994
                                              -----------   -----------   ----------- 
<S>                                           <C>           <C>           <C>         
OPERATING ACTIVITIES
Net loss                                      $  (882,066)  $   (88,223)  $  (121,073)
Adjustments to reconcile net loss to net
  cash provided by operating activities:
    Impairment loss on long-lived assets          770,000             -             -
    Loss on disposal of assets                      3,102             -             -
    Depreciation and amortization                 157,150       151,014       148,939
    Changes in operating assets and
      liabilities:
      Prepaid expenses and other assets           (44,994)       52,580        12,387
      Accounts payable and accrued expenses        (4,782)      (57,618)       95,287
      Due to Showscan Entertainment Inc.            2,310         2,223      (171,368)
                                              -----------   -----------   ----------- 
Net cash provided by operating activities             720        59,976        35,828

INVESTING ACTIVITIES
Purchases of property and equipment               (16,384)      (63,169)       (2,664)
                                              -----------   -----------   ----------- 
Net cash used in investing activities             (16,384)      (63,169)       (2,664)

FINANCING ACTIVITIES
Capital contributions by partners                       -        26,424        20,000
Due from Showscan Entertainment Inc.               26,424       (26,424)            -
Due from Showscan CityWalk, Inc.                   20,000             -       (20,000)
                                              -----------   -----------   ----------- 
Net cash provided by financing activities          46,424             -             -
                                              -----------   -----------   ----------- 
Increase (decrease) in cash                        30,760        (3,193)      (38,492)
Cash at beginning of year                          74,163        77,356       115,848
                                              -----------   -----------   ----------- 
Cash at end of year                           $   104,923   $    74,163   $    77,356
                                              ===========   ===========   ===========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
  Cash paid for:
    Interest                                  $     1,441   $     1,790   $     6,849
    Income taxes                              $         -   $         -   $         -
</TABLE>

See accompanying notes.






                                      F-36
<PAGE>   71

                            Showscan CityWalk Venture

                          Notes to Financial Statements

                           December 31, 1996 and 1995


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND BUSINESS

Showscan CityWalk Venture (the Venture) is a venture engaged in the business of
operating a Showscan motion simulation attraction theatre. The theatre opened in
late November 1993 at Universal CityWalk adjacent to Universal Studios,
Universal City, California. The Venture is 50% owned by Showscan CityWalk, Inc.,
a wholly-owned subsidiary of Showscan Entertainment Inc. (Showscan). Moss Family
LA Corp. and DiBenedetto CityWalk Limited Partnership (collectively the
Investors) each own 25% of the Venture. The principals of the Investors are
greater than 10% stockholders and members of the Board of Directors of Showscan.

Cumulative net income or loss of the Venture is allocated to the partners in
accordance with their respective ownership percentage interests.

REVENUE RECOGNITION

The Venture recognizes revenue from ticket sales at the time the tickets are
purchased.

PROPERTY AND EQUIPMENT

Property and equipment are carried at cost.

Depreciation on operating equipment is recorded on a straight-line basis over
the estimated useful lives of the assets, generally 3 to 10 years. Operating
equipment consists of projection and motion-based equipment used in the
operation of the theatre. Leasehold improvements are amortized on a
straight-line basis over their estimated useful lives or the term of the lease,
whichever is shorter.

INCOME TAXES

No provision has been made for income taxes in the accompanying financial
statements; such taxes, if any, are the responsibility of the individual
partners.





                                      F-37
<PAGE>   72

                            Showscan CityWalk Venture

                    Notes to Financial Statements (continued)


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

USE OF ESTIMATES AND ASSUMPTIONS

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.

2. COMMITMENTS AND CONTINGENCIES

In connection with the establishment of the Universal CityWalk theatre, the
Venture entered into a ten-year profit sharing lease pursuant to which MCA
Development Company, a division of MCA, Inc. (now known as Universal Studios
Recreation, a division of Universal Studios), contributed one-half of the costs
incurred for the construction of the theatre. The lease expires in November
2002, subject to options to extend it for three five-year periods. The Venture
is obligated to pay base rent equal to $180,000 (subject to annual Consumer
Price Index increases) per year plus 50% of the cash flow, as defined
(Percentage Rent), from the operations of the theatre. Percentage rent paid was
$13,358 in 1995 and none in 1996 and 1994.

Future minimum payments, by year and in the aggregate, under the lease at
December 31, 1996 are as follows:

<TABLE>
<S>                                                              <C>          
1997                                                             $     185,274
1998                                                                   185,274
1999                                                                   185,274
2000                                                                   185,274
2001                                                                   185,274
Thereafter                                                             370,548
                                                                 -------------
Total minimum lease payments                                     $   1,296,918
                                                                 =============
</TABLE>

3. RELATED PARTY TRANSACTIONS

For the years ended December 31, 1996, 1995 and 1994, cost of revenues shown in
the accompanying statements of operations include $185,700, $184,500 and
$180,250, respectively, of amounts paid or owed to Showscan for film rental,
royalty and management fees. At December 31, 1996 and 1995, the Venture owed
Showscan $23,558 and $21,248, respectively, related to such fees.






                                      F-38
<PAGE>   73

                            Showscan CityWalk Venture

                    Notes to Financial Statements (continued)


3. RELATED PARTY TRANSACTIONS (CONTINUED)

Amounts due from Showscan CityWalk, Inc. and Showscan related to capital
contributions due the Venture. Such contributions were made subsequent to
December 31, 1995.

4. IMPAIRMENT OF LONG-TERM ASSETS

During 1996, the Venture adopted Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" (SFAS No. 121). The continued operating losses were
indicators of potential impairment. The estimated undiscounted cash flows
anticipated from operating the Venture indicated that a write-down to fair
market value was required under SFAS No. 121. Accordingly, the Venture recorded
a non-cash charge of $770,000 for the impairment of its long-lived assets. The
impairment loss was calculated based on the excess of the carrying amount of the
assets over the discounted cash flow expected to be received from the operation
of the Venture.






                                      F-39
<PAGE>   74



                         CINEMANIA (UK) LIMITED
                         AUDITED FINANCIAL STATEMENTS

                         Year ended 31 December 1996







                                      F-40
<PAGE>   75
                         REPORT OF INDEPENDENT AUDITORS

BOARD OF DIRECTORS AND STOCKHOLDERS
CINEMANIA (UK) LIMITED

We have audited the accompanying balance sheets of Cinemania (UK) Limited as of
December 31, 1996 and 1995, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with United States 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 audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cinemania (UK) Limited at
December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with United States generally accepted accounting principles.  

As discussed in Note 6 to the financial statements, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," in 1996.


Ernst & Young
London
England
June 27, 1997




                                      F-41
<PAGE>   76
Cinemania (UK) Limited
Balance Sheet

<TABLE>
<CAPTION>
                                                                              December 31         December 31
                                                                   Notes             1996                1995
<S>                                                              <C>         <C>              <C>
Assets

Current assets:
   Cash                                                                      $    280,785     $       821,401
   Prepaid expenses and other current assets                                      238,341             187,315
                                                                             ------------     ---------------
Total current assets                                                              519,126           1,008,716

Property and equipment, net                                      2 and 6          282,340           2,925,474
                                                                             ------------     ---------------
Total assets                                                                 $    801,466     $     3,934,190
                                                                             ------------     ---------------

Liabilities and stockholders' equity

Current liabilities:
   Accounts payable                                                          $     92,932     $        58,431
   Accrued expenses and other current liabilities                                 102,635             202,048
   Amounts payable to related party                                    5           47,761              22,483
   Current maturities of notes payable to
    stockholders                                                       3          712,048             633,695
                                                                             ------------     ---------------
Total current liabilities                                                         955,376             916,657

Notes payable to stockholders                                          3        1,155,201           1,478,619
                                                                             ------------     ---------------
Total liabilities                                                               2,110,577           2,395,276
                                                                             ------------     ---------------

Stockholders' equity:
   Common stock, Pound Sterling 1 ($1.48) par value;
   1,000 shares authorised; 100 shares
   issued and outstanding                                                             148                 148
   Additional paid-in capital                                                   1,891,000           1,891,000
   Accumulated deficit                                                         (3,428,366)           (423,040)
   Currency translation adjustments                                               228,107              70,806
                                                                             ------------     ---------------
Total stockholders' equity                                                     (1,309,111)          1,538,914
                                                                             ------------     ---------------
Total liabilities and stockholders' equity                                   $    801,466     $     3,934,190
                                                                             ============     ===============
</TABLE>


See accompanying notes





                                      F-42
<PAGE>   77
Cinemania (UK) Limited
Statement of Operations

<TABLE>
<CAPTION>
                                                            Year ended     Year ended     Year ended
                                                           December 31    December 31    December 31
                                                   Note           1996           1995           1994
<S>                                                <C>     <C>            <C>            <C>
Revenues                                                   $ 1,728,567    $ 2,140,118    $   507,242

Cost of revenues, primarily film rental,
royalty and management fees                           5        306,294        415,035        157,544
                                                           -----------    -----------    -----------
Gross profit                                                 1,422,273      1,725,083        349,698

Costs and expenses:
   Rent                                                        568,388        344,551         78,348
   Payroll and related items                                   418,326        402,359         63,652
   Marketing and advertising                                    30,915         87,188         54,044
   Pre-opening                                                       -              -        397,151
   Other general and administrative                            234,777        310,338        205,801
   Depreciation                                                304,611        265,959         69,528
   Impairment loss on long-lived assets               6      2,750,000              -              -
                                                           -----------    -----------    -----------
                                                             4,307,017      1,410,395        868,524
                                                           -----------    -----------    -----------
Operating (loss)/profit                                     (2,884,744)       314,688       (518,826)

Other income(expense):
   Interest income                                              21,973         24,193          3,199
   Interest expense                                           (142,555)      (171,818)       (74,476)
                                                           -----------    -----------    ----------- 
                                                              (120,582)      (147,625)       (71,277)
                                                           -----------    -----------    ----------- 
Net (loss)/profit                                          $(3,005,326)   $   167,063    $  (590,103)
                                                           ===========    ===========    =========== 
Net (loss)/profit per common share                         $   (30,053)   $     1,671     $   (5,901)
                                                           ===========    ===========     ========== 
</TABLE>

See accompanying notes






                                      F-43
<PAGE>   78
Cinemania (UK) Limited
Statement of stockholders' equity


<TABLE>
<CAPTION>
                                                            
                                                            
                                                            

                                         
                                          Common stock              Additional                        Currency
                                   Number of                          paid in        Accumulated     translation
                                    shares          Amount            capital         deficit        adjustments          Total
                                                            $                 $                $               $                  $
<S>                            <C>                <C>               <C>              <C>             <C>               <C>
Balance at
 December 31, 1993                        -                  -                 -                 -               -                -
Proceeds from issuance
 of common stock                        100                148                 -                 -               -              148
Capital contributions                     -                  -         1,891,000                                 -        1,891,000
Net loss                                                                                  (590,103)                        (590,103)
Foreign exchange gain
 on translation                           -                  -                 -                 -          81,321           81,321
                               ------------       ------------      ------------      ------------    ------------     ------------
Balance at
 December 31, 1994                      100                148         1,891,000          (590,103)         81,321        1,382,366
Net profit                                -                  -                 -           167,063               -          167,063
Foreign exchange loss on
 translation                              -                  -                 -                 -         (10,515)         (10,515)
                                -----------        -----------       -----------       -----------     -----------      ----------- 
Balance at
 December 31, 1995                      100                148         1,891,000          (423,040)         70,806        1,538,914
Net loss                                  -                  -                 -        (3,005,326)              -       (3,005,326)
Foreign exchange gain
 on translation                           -                  -                 -                 -         157,301          157,301
                                -----------        -----------       -----------       -----------     -----------      -----------
Balance at
 December 31, 1996                      100                148         1,891,000        (3,428,366)        228,107       (1,309,111)
                                ===========        ===========       ===========       ===========     ===========      =========== 
</TABLE>


See accompanying notes





                                      F-44
<PAGE>   79
Cinemania (UK) Limited
Statement of cash flows


<TABLE>
<CAPTION>
                                                               Year ended        Year ended       Year ended
                                                              December 31       December 31      December 31
                                                                     1996              1995             1994
<S>                                                            <C>               <C>             <C>
OPERATING ACTIVITIES

Net (loss)/profit                                              $(3,005,326)      $  167,063      $ (590,103)
                                                                                                            
Adjustments to reconcile net (loss)/profit
 to net cash provided by/used in)
  operating activities:
   Depreciation                                                    304,611          265,959          69,528
   Impairment loss                                               2,750,000                -               -
   Changes in operating assets and liabilities:
   Prepaid expenses and other current assets                       (31,878)         (50,056)       (138,311)
   Accounts payable                                                 28,529         (121,319)        179,750
   Accrued expenses and other liabilities                         (120,067)         (62,596)        202,116
   Amounts payable to related party                                 22,979           22,483               -
   Interest payable to stockholders                                116,589           82,597          47,435
                                                               -----------       ----------      ----------

Net cash provided by operating activities                           65,437          304,131        (229,585)

INVESTING ACTIVITY

Purchases of property and equipment                               (112,448)         (55,051)     (3,211,450)
                                                               -----------       ----------      ---------- 
Net cash used in investing activity                               (112,448)         (55,051)     (3,211,450)

FINANCING ACTIVITIES

Proceeds from issuance of common stock                                   -                -             148
Capital contributions                                                    -                -       1,891,000
Repayments to stockholders                                        (443,146)               -               -
Borrowings from stockholders                                             -           96,946       1,947,558
                                                               -----------       ----------      ----------
Net cash (used in) provided by financing activities               (443,146)          96,946       3,838,733

Effect of exchange rate changes on cash                            (50,459)          (3,644)         81,321
                                                               -----------       ----------      ----------
Net (decrease)/increase in cash                                   (540,616)         342,382         479,019
Cash at beginning of year                                          821,401          479,019               -
                                                               -----------       ----------      ----------
Cash at end of year                                            $   280,785       $  821,401      $  479,019
                                                               ===========       ==========      ==========


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
  Interest paid                                                $   283,575       $      730      $      254
  Taxes paid                                                   $         -       $        -      $        -
</TABLE>

See accompanying notes





                                      F-45
<PAGE>   80
         Cinemania (UK) Limited
         Notes to Financial Statements

1.       ORGANISATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         ORGANISATION AND BUSINESS

         Cinemania (UK) Limited (the Company), owns a Showscan motion
         simulation twin theatre attraction based at Piccadilly Circus, London,
         England.  The Company was incorporated in December 1993.  The Showscan
         attraction opened on September 26 1994.

         REVENUE RECOGNITION

         The company recognises revenues from ticket sales at the time the
         tickets are purchased.

         PROPERTY AND EQUIPMENT

         Property and equipment are stated at cost.  Depreciation of equipment
         is computed using the straight line method over the estimated useful
         lives of the assets, ranging from 3 to 10 years.  Leasehold property
         is depreciated on a straight line basis over the initial term of the
         lease.

         FOREIGN CURRENCY TRANSLATION

         The financial position and results of operations of the Company are
         measured using local currency as the functional currency.  Assets and
         liabilities of the Company are translated into US dollars at the
         exchange rate in effect at the year end (1996 -$1.7113:  Pound Sterling
         1, 1995- $1.5526: Pound Sterling 1).  Income statement accounts are
         translated at the average rate of exchange prevailing during the year.
         Translation adjustments arising from differences in exchange rates from
         period to period are included in stockholders' equity.

         PREPAID EXPENSES AND OTHER CURRENT ASSETS

         These costs relate mainly to the prepaid running costs of the Company
         such as rent, rates, service charges and insurance.

         INCOME TAXES

         The company accounts for income taxes using Statement of Financial
         Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No.
         109).  Under SFAS No. 109, the liability method is used.  Under this
         method, deferred tax assets and liabilities are measured using the
         enacted tax rates and laws for the year in which the taxes are
         expected to be paid.

         NET PROFIT (LOSS) PER COMMON SHARE

         The net profit (loss) per common share has been determined on the
         basis of the 100 weighted average shares outstanding for each of the
         three years in the period ended December 31, 1996.

         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 amounts reported in the financial
         statements and accompanying notes.  Actual results could differ from
         these estimates.





                                      F-46
<PAGE>   81
         Cinemania (UK) Limited
         Notes to Financial Statements

2.       PROPERTY AND EQUIPMENT

<TABLE>
<CAPTION>
                                                        1996                1995
         <S>                                     <C>                  <C>       
         Leasehold property                      $    44,150          $   40,056
         Operating equipment                       3,588,721           3,205,971
         Office furniture and fixtures                39,567             $14,934
                                                 -----------          ----------
                                                   3,672,438           3,260,961
         Less accumulated depreciation             3,390,098             335,487
                                                 -----------          ----------
                                                 $   282,340          $2,925,474
                                                 ===========          ==========
</TABLE>

3.       NOTES PAYABLE TO STOCKHOLDERS

         The loans, which are due to mature on May 1, 2000, are repayable in 10
         semi-annual instalments commencing November 1, 1995, only to the
         extent that the company has cumulative net profits available to make
         such payments.  If no payments are made due to lack of profits
         available, interest will accrue until such time as cumulative profits
         exist whereby payments will be made.  Interest is payable at LIBOR
         plus 3% (8.563% and 8.875% at December 31, 1996 and 1995
         respectively).

         The aggregate maturities of long-term debt (including interest of
         $238,940 at December 31, 1996) are as follows:

<TABLE>
<CAPTION>
                                                                            1996
         <S>                                                       <C>
         1997                                                      $     712,048
         1998                                                            462,080
         1999                                                            462,080
         2000                                                            231,041
                                                                   -------------
                                                                   $   1,867,249
                                                                   =============
</TABLE>

         Included within the $712,048 debt due to mature in 1997 is $249,975
         which was due to be paid on November 1, 1996.  However, due to the
         lack of available profits, no payment was made.

4.       LEASES

         The Company leases its theatre location under an operating lease,
         having a non-cancellable term expiring in 2008, with a renewal option
         for 10 years.

         Future minimum payments under leases with terms of one year or more are
         approximately as follows:

<TABLE>
<CAPTION>
                                                                      Operating 
                                                                         leases 
         <S>                                                         <C>        
         1997                                                        $   240,000
         1998                                                            247,500
         1999                                                            247,500
         2000                                                            247,500
         2001 and thereafter                                           1,980,000
                                                                     -----------
         Total minimum lease payments                                $ 2,962,500
                                                                     ===========
</TABLE>



                                      F-47
<PAGE>   82
         Cinemania (UK) Limited
         Notes to Financial Statements

5.       RELATED PARTY TRANSACTIONS

         Showscan Entertainment Inc. (Showscan) holds a 50% equity interest in
         the Company.  Cost of revenues shown in the accompanying statement of
         operations includes $156,637, $228,400 and $151,000 in 1996, 1995 and
         1994 respectively, of amounts paid to and $47,761, $22,483 and $nil in
         1996, 1995 and 1994   respectively of amounts owed to Showscan for
         film rental and royalty fees.

         Entities controlled by Mr Charles Moss and Mr Thomas DiBenedetto each
         hold a 25% equity interest in the Company.  Mr Moss and Mr DiBenedetto
         each have a greater than 10% stockholding in Showscan and are
         directors of Showscan.

6.       IMPAIRMENT OF LONG-TERM ASSETS

         During 1996, the company adopted SFAS No. 121, "Accounting for the
         Impairment of Long-Lived Assets and for Long-Lived Assets to be
         Disposed of". The recent decline in attendance and the operating loss
         generated during 1996 was a potential  indicator of impairment.  The
         estimated undiscounted cash flows anticipated from operating the
         Company indicated that a write-down to fair market value was required
         under SFAS No. 121.  Accordingly, the company recorded a non-cash
         charge of $2,750,000 for the impairment of its long-lived assets.  The
         impairment loss was calculated based on the excess of the carrying
         amount of the assets over the discounted cash flow expected to be
         received from the operation of the theatre.





                                      F-48
<PAGE>   83


                          AUDITED FINANCIAL STATEMENTS--LIQUIDATION BASIS

                          SHOWSCAN/GENERAL CINEMA VENTURES

                          Year ended October 31, 1996 and period
                          from April 24, 1995 (date of
                          formation) to October 31, 1995








                                      F-49
<PAGE>   84

                         Report of Independent Auditors


The Partners
Showscan/General Cinema Ventures

We have audited the accompanying statements of net assets in liquidation of
Showscan/General Cinema Ventures (the Venture) as of October 31, 1996 and 1995,
and the related statements of operations--liquidation basis, statements of
changes in net assets in liquidation, and cash flows-liquidation basis for the
year ended October 31, 1996 and for the period April 24, 1995 (date of
formation) to October 31, 1995. These financial statements are the
responsibility of the Venture's management. Our responsibility is to express an
opinion on these statements based on our audits.

We conducted our audits 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 audits provide a reasonable basis for our opinion.

As described in Note 1, the partners have agreed to sell the assets and dissolve
the partnership. Accordingly, as of October 31, 1996, the Venture has changed
its basis of accounting from a going-concern basis to a liquidation basis.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the net assets of Showscan/General Cinema Ventures at
October 31, 1996 and 1995, and the results of its operations and its cash flows
for the year ended October 31, 1996 and for the period April 24, 1995 (date of
formation) to October 31, 1995 in conformity with generally accepted accounting
principles.



                                                  Ernst & Young LLP



Boston, Massachusetts
June 6, 1997




                                      F-50
<PAGE>   85

                        Showscan/General Cinema Ventures

                     Statements of Net Assets in Liquidation



<TABLE>
<CAPTION>
                                                                     OCTOBER 31
ASSETS                                                          1996              1995
                                                            ------------      ------------
<S>                                                         <C>               <C>         
Current assets:
  Current portion of foregone rent                          $    123,256      $    110,086
  Other assets                                                     3,783                --
                                                            ------------      ------------
Total current assets                                             127,039           110,086

Property and equipment:
  Leasehold improvements                                       1,011,864         1,011,864
  Operating equipment                                          1,723,422         1,723,422
                                                            ------------      ------------
                                                               2,735,286         2,735,286
  Less accumulated depreciation and amortization                (568,111)         (189,378)
                                                            ------------      ------------
                                                               2,167,175         2,545,908

Foregone rent, less current portion, net of accumulated
  amortization of $146,254 in 1996 and $42,726 in 1995           394,490           511,188
                                                            ------------      ------------

Total assets                                                $  2,688,704      $  3,167,182
                                                            ============      ============

LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
  Due to Showscan                                           $     72,468      $         --
  Due to (from) General Cinema Theatre                           100,299           (34,858)
  Accounts payable and accrued expenses                           25,108            49,640
                                                            ------------      ------------
Total current liabilities                                        197,875            14,782

Net assets in liquidation                                      2,490,829         3,152,400
                                                            ------------      ------------

Total liabilities and net assets in liquidation             $  2,688,704      $  3,167,182
                                                            ============      ============
</TABLE>

See accompanying notes.





                                      F-51
<PAGE>   86

                        Showscan/General Cinema Ventures

                   Statements of Operations--Liquidation Basis


<TABLE>
<CAPTION>
                                                                                      PERIOD FROM
                                                                                    APRIL 24, 1995
                                                                                       (DATE OF
                                                                  YEAR ENDED         FORMATION) TO
                                                                  OCTOBER 31          OCTOBER 31
                                                                     1996                1995
                                                               -----------------    ---------------
<S>                                                            <C>                  <C>      
Revenues                                                           $ 274,366           $ 159,651

Cost of revenues, primarily film rental and management
  fees to related parties                                            230,195              86,664
                                                                   ---------           --------- 
Gross profit                                                          44,171              72,987

Other costs and expenses:
  Rent                                                               165,000              71,500
  Payroll and related items                                           70,586              30,892
  Marketing and advertising                                           27,263              18,865
  Other general and administrative                                   125,632              38,012
  Depreciation and amortization                                      378,733             189,378
                                                                   ---------           --------- 
                                                                     767,214             348,647
                                                                   ---------           --------- 
                                                                    (723,043)           (275,660)

Interest income                                                       61,472              28,774

Net loss                                                           $(661,571)          $(246,886)
                                                                   =========           ========= 
</TABLE>

See accompanying notes.




                                      F-52
<PAGE>   87

                        Showscan/General Cinema Ventures

               Statements of Changes in Net Assets in Liquidation


<TABLE>
<S>                                                                 <C>        
Beginning net assets effective April 24, 1995                       $ 3,399,286
  Cash contributions                                                     97,643
  Cash distributions                                                    (97,643)
  Allocation of net loss                                               (246,886)
                                                                    -----------
Net assets at October 31, 1995                                        3,152,400
  Allocation of net loss                                               (661,571)
                                                                    -----------
Net assets at October 31, 1996                                      $ 2,490,829
                                                                    ===========
</TABLE>

See accompanying notes.






                                      F-53
<PAGE>   88

                        Showscan/General Cinema Ventures

                   Statements of Cash Flows--Liquidation Basis


<TABLE>
<CAPTION>
                                                                             PERIOD FROM
                                                                           APRIL 24, 1995
                                                                              (DATE OF
                                                           YEAR ENDED       FORMATION) TO
                                                            OCTOBER 31       OCTOBER 31
                                                               1996             1995
                                                          -------------     -------------
<S>                                                       <C>               <C>           
OPERATING ACTIVITIES
Net loss                                                  $    (661,571)    $    (246,886)
Adjustments to reconcile net loss to net cash used
  in operating activities:
    Depreciation and amortization                               378,733           189,378
    Foregone rent, net                                          103,528            42,726
    Changes in operating assets and liabilities:
      Other assets                                               (3,783)               --
      Due to Showscan                                            72,468                --
      Due to/(from) General Cinema                              135,157           (34,858)
      Accounts payable and accrued expenses                     (24,532)           49,640
                                                          -------------     -------------
Net cash used in operating activities                                 0                 0

FINANCING ACTIVITIES
Capital contributions                                                --            97,643
 Capital distributions                                               --           (97,643)
                                                          -------------     -------------
Net cash used in financing activities                                --                 0

                                                          -------------     -------------
Net increase in cash and cash equivalents                             0                 0
Cash at beginning of year                                             0                 0
                                                          =============     =============

Cash at end of year                                       $         -0-     $         -0-
                                                          =============     =============


NONCASH ACTIVITY 
Noncash capital contributions:
    Equipment                                             $          --     $   1,723,422
    Leasehold improvements                                $          --     $   1,011,864
    Foregone rent                                         $          --     $     664,000
</TABLE>


See accompanying notes.





                                      F-54
<PAGE>   89

                        Showscan/General Cinema Ventures

                Notes to Financial Statements--Liquidation Basis

                                October 31, 1996


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND BUSINESS

Showscan/General Cinema Ventures (the Venture) is a partnership engaged in the
business of operating twin Showscan motion attraction simulation theaters. The
theaters opened in late May 1995 at the Framingham General Cinema 14-screen
multiplex in Framingham, Massachusetts. The Venture is 50% owned by Showscan
Framingham, Inc. (Showscan), a wholly-owned subsidiary of Showscan Entertainment
Inc., and 50% owned by General Cinema of Framingham Inc. (General Cinema), a
wholly-owned subsidiary of General Cinema Corp. of Massachusetts. Net income or
loss of the Venture is allocated 50% to Showscan and 50% to General Cinema.
Showscan and General Cinema hold equal voting interests in the Venture
regardless of capital accounts.

The partners of the Venture have agreed to close the twin Showscan motion
attraction simulation theaters and liquidate the assets of the Venture. The
partners have further agreed to sell the simulation attraction equipment back to
Showscan at its current fair market value, which approximates the underlying net
book value of the equipment. The remainder of the assets will be allocated, as
defined in the Venture Agreement, back to the partners. An additional capital
contribution may be necessary by one of the partners upon settlement and
liquidation of the Venture; however, the partners believe the contribution will
be under $100,000.

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 amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.

REVENUE RECOGNITION

The Venture recognizes revenue from ticket sales at the time the tickets are
purchased.






                                      F-55
<PAGE>   90

                        Showscan/General Cinema Ventures

          Notes to Financial Statements--Liquidation Basis (continued)


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

PROPERTY AND EQUIPMENT

Property and equipment were contributed to the Venture as part of the initial
capital contributions of the partners and are carried at values representing
cost, as specified in the Venture Agreement. Other assets purchased specifically
for the Venture are carried at the cost to the contributor.

Depreciation on operating equipment was recorded on a straight-line basis over
the estimated useful lives of the assets of five or ten years. Leasehold
improvements were being amortized on a straight-line basis over the shorter of
their estimated useful lives or the five-year term of the leases.

INCOME TAXES

No provision has been made for income taxes in the accompanying financial
statements; such taxes, if any, are the responsibility of the individual
partners.

RECLASSIFICATION

Certain 1995 amounts have been reclassified to conform to 1996 presentation.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts reported in the balance sheet for foregone rent, accounts
payable, due to Showscan and General Cinema Theatre approximate their fair
values.

2.  RELATED-PARTY TRANSACTIONS

Cost of revenues shown in the accompanying statement of operations includes
$130,199 and $43,332 at October 31, 1996 and 1995, respectively, of amounts paid
or due to Showscan Entertainment Inc. for film rental and $99,996 and $43,332 at
October 31, 1996 and 1995, respectively, of amounts paid or due to General
Cinema for management fees.

In accordance with the Venture agreement, General Cinema was credited with a
capital contribution to the Venture in the amount of $664,000, representing the
present value of





                                      F-56
<PAGE>   91

                        Showscan/General Cinema Ventures

          Notes to Financial Statements--Liquidation Basis (continued)


2.  RELATED-PARTY TRANSACTIONS (CONTINUED)

five years of rent which would be payable by the Venture to General Cinema but
for which payment was waived. Such amount has been classified as an asset on the
Venture's balance sheet as foregone rent. The initial undiscounted value of the
foregone rent was $881,250. The discounting effect of the rent resulted in the
Venture recognizing interest income of $61,472 and $28,774 for the period ended
October 31, 1996 an 1995, respectively. Rent expense is being recognized on a
straight-line basis over the 60-month lease period concluding May of 1999.
Related rent expense for the year ended October 31, 1996 and 1995 amounted to
$165,000 and $71,500, respectively.

General Cinema also made in-kind capital contributions in the form of leasehold
improvements and equipment, which are being carried at cost of approximately
$1.1 million as specified in the venture agreement.

As part of its initial capital contribution, Showscan made a noncash
contribution of certain operating equipment valued at $1,602,000. As specified
in the Venture Agreement, such value represents 90% of the price Showscan
generally charges unaffiliated parties for the purchase of such equipment.

In addition, Showscan made a cash capital contribution of approximately $98,000,
which was then paid out as a distribution to General Cinema in order to equalize
the capital accounts as called for in the Venture Agreement.





                                      F-57
<PAGE>   92
                                   SIGNATURES

         Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

Date:  July 14, 1997

                                      SHOWSCAN ENTERTAINMENT INC.



                                      By /s/ DENNIS POPE
                                         -------------------------------------
                                         Dennis Pope
                                         President and Chief Executive Officer




         Pursuant to the requirements of the Securities Exchange Act of 1933,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
         Signature                                     Title                                       Date
         ---------                                     -----                                       ----
<S>                                           <C>                                              <C>
/s/ WILLIAM D. EBERLE                         Chairman of the Board                            July 14, 1997
-------------------------------------                                                               
         William D. Eberle


/s/ DENNIS POPE                               Director; President; Chief Executive             July 14, 1997
-------------------------------------         Officer (Principal Executive Officer)                 
         Dennis Pope



/s/ CHARLES B. MOSS, JR.                      Director                                         July 14, 1997
-------------------------------------                                                               
         Charles B. Moss, Jr.                                                                  



/s/ THOMAS R. DIBENEDETTO                     Director                                         July 14, 1997
-------------------------------------                                                               
         Thomas R. DiBenedetto



/s/ KURT C. HALL                              Director                                         July 14, 1997
-------------------------------------                                                               
         Kurt C. Hall                                                                          



/s/ WILLIAM C. SOADY                          Director                                         July 14, 1997
-------------------------------------                                                               
         William C. Soady


                                              
/s/ GREGORY W. BETZ                           Vice President and Director of Finance           July 14, 1997
-------------------------------------         (Principal Accounting Officer)                        
         Gregory W. Betz
</TABLE>