<PAGE>
 
================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                  FORM 10-KSB
   (MARK ONE)
   [x]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 (FEE REQUIRED)

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
                                       OR
   [_]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
         SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

        For the transition period from ________________ to_______________
                         Commission File Number 0-24592

                               CINEMA RIDE, INC.
                             ---------------------
             (Exact name of registrant as specified in its charter)

<TABLE> 
<CAPTION> 

<S>                                                       <C>  
            DELAWARE                                               95-4417467
----------------------------------------                  ----------------------------
 (State or other jurisdiction of                          (I.R.S. Employer
 incorporation or organization)                            Identification Number)

  12001 VENTURA PLACE, SUITE 340
     STUDIO CITY, CALIFORNIA                                         91604
----------------------------------------                ------------------------------
(Address of principal executive offices)                          (Zip Code)

Registrant's telephone number, including area code:             (818) 761-1002
                                                                --------------                                          
Securities registered pursuant to Section 12 (b) of the Act:
</TABLE> 
                                                        Name of exchange  
         Title of each class                            on which registered
         -------------------                            ------------------- 
                NONE                                           NONE


Securities registered pursuant to Section 12 (g) of the Act:

                      COMMON STOCK AND REDEEMABLE WARRANTS
                                (TITLE OF CLASS)

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

        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-KSB or any
amendment to this Form 10-KSB.  [X]

        The issuer's revenues for the year ended December 31, 1997 were
$3,875,295.

        As of March 19, 1998 there were 5,802,786 outstanding shares of common
stock, par value $0.01 per share. The aggregate market value of the voting stock
of the registrant held by non-affiliates of the registrant on March 19, 1998
based on the average bid and asked price on such date was $435,442.

        DOCUMENTS INCORPORATED BY REFERENCE:  The information required by Part
III of Form 10-KSB is incorporated herein by reference to the registrant's
definitive Proxy Statement relating to its 1996 Annual Meeting of Stockholders
which will be filed with the Commission within 120 days after the end of the
registrant's fiscal year.

        Transitional Small Business Disclosure Format:  Yes        No   X
                                                            -----     -----
<PAGE>
 
                                    PART I

FORWARD LOOKING STATEMENTS

    This Annual Report contains forward-looking statements regarding the
Company, its business, prospects and results of operations that are subject to
certain risks and uncertainties posed by many factors and events that could
cause the Company's actual business, prospects and results of operations to
differ materially from those that may be anticipated by such forward-looking
statements.  Factors that may effect such forward-looking statements include,
without limitation: the Company's ability to successfully operate its existing
facilities, the impact of competition on the Company's revenues, and
seasonality.  When used in this discussion, words such as "believes",
"anticipates", "expects", "intends" and similar expressions are intended to
identify forward-looking statements, but are not the exclusive means of
identifying forward-looking statements.  Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date of the report.  The Company undertakes no obligation to revise any
forward-looking statements in order to reflect events or circumstances that may
subsequently arise.  Readers are urged to carefully review and consider the
various disclosures made by the Company in this report and other reports filed
with the Securities and Exchange Commission that attempt to advise interested
parties of the risks and factors that may affect the Company's business.

ITEM 1.   DESCRIPTION OF BUSINESS
          -----------------------

    Cinema Ride, Inc. (the "Company") was incorporated in Delaware in April
1993.  Unless the context otherwise requires, references to the "Company" in
this report refer to Cinema Ride, Inc. and its consolidated subsidiaries.  The
Company is in the business of developing and operating rides consisting of
motion simulator attractions  which combine projected three-dimensional action
films of approximately four minutes duration with computer-controlled,
hydraulically-mobilized seating platforms that are programmed to move in concert
with the on-screen action.  Each attraction is designed to provide the viewer
with a realistic feeling of being a participant in the action on the screen.  To
date, the Company has completed construction and installation of three
facilities.  The first facility  (the "Las Vegas Facility") commenced operations
in October 1994 and is located in the Forum Shops at Caesars (the "Forum
Shops"), a high traffic tourist mall which is located between Caesars Palace
Hotel & Casino and the Mirage Hotel in Las Vegas, Nevada.  The second facility
(the " West Edmonton Mall Facility") commenced operations in August 1995 and is
located in the West Edmonton Mall, Alberta, Canada.  The third facility (the "
Times Square Facility") commenced operation in September 1996 and was located in
Times Square in New York City, New York.  The Times Square Facility was closed
during January 1998 (See "Description of Property - The Times Square Facility").
The Company's executive offices are located in Studio City, California.

    The current hours of operation for the Facilities are typically 11:00 a.m.
to 11:30 p.m.  The average ticket prices have typically been less than four
dollars due to the Company's pricing of its multiple features, and due to the
use of coupons and other discounts.

EQUIPMENT AND TECHNOLOGY

    Each of the Company's rides is comprised of two basic elements: (i) a motion
simulator which consists of an enclosed capsule and related equipment and
computer programming (the "simulator"), and (ii) the 3-D films viewed by
audiences in the simulator.

    Simulators

    The Company utilizes a simulator which it believes to be both space and cost
effective.  Each simulator includes an enclosed 15-seat capsule in which
audiences are seated during a given ride.  Inside the capsule, each seat faces a
screen at the front of the capsule, onto which the ride film is projected.
Company attractions consists of one or more capsules, the number of which will
vary depending on the size and desired seating capacity of a particular
location. The Las Vegas Facility consists of four capsules of 15 seats each and
the West Edmonton Facility consists of one capsule.

                                      -2-
<PAGE>
 
    Capsules are mounted on top of a motion base consisting of six independent
hydraulic cylinders which control the movement of the attached capsule.  The
motion bases allow an audience to experience a full six degrees of motion
(pitch, roll, heave, yaw, surge and sway).  Through the use of the motion base,
capsules have a maximum range of motion of approximately six feet and can be
programmed to move in a wider and, as a result, more realistic range of motions
than is possible with the three degrees of motion (pitch, roll and heave)
utilized in many existing motion simulator rides.  The motion bases used by the
Company are constructed by a manufacturer of military and commercial flight
simulators as well as motion simulators, such as the ones utilized by the
Company.

    Each simulator combines the motion base and capsule with two projectors and
audio systems which provides a visual and audio presentation without the
degeneration of picture and sound that is common to film formats under heavy
usage.  In addition, the use of laser disk players enables the Company to avoid
delays associated with rewinding traditional film and enables the Company to
change ride films with the push of just one bottom.  The projection equipment
used by the Company is capable of projecting both 3-D and standard ride films.

    All of the mechanical equipment comprising the simulator is coordinated by a
computer system.  A time code is added to each laser disk in order to enable the
film data to correspond with the movement of the motion bases.  As the
projectors receive the film and sound data from the laser disks, the simulator's
computer receives the time code which enables the computer to synchronize the
filmed action with the movement of the motion bases and the operation of the
wind machine.

    The equipment utilized by the Company contains relatively standard hydraulic
components which are readily available through the vendors that currently
service the simulators.  The Company believes that, should the need arise, other
vendors are available that could manufacture and maintain its equipment.
Moreover, because each simulator is completely independent of the other
simulators in a given location, the Company is able to perform routine
maintenance and make any necessary repairs to simulator equipment without
hindering the operation of the entire attraction at facilities with more than
one capsule.

    3-D Films

    Each of the Company's attractions utilizes 3-D technology in the exhibition
of ride films.  3-D technology creates the illusion of three-dimensional images.
The technology involves the filming and simultaneous projection of  images that
are slightly offset from each other which, when viewed with special polarized
glasses, create an illusion of depth and off-screen effects which are not
possible with traditional 2-D filmed entertainment.

    As of December 31, 1997, the Company had completed production of six ride
films for exhibition in its attractions.  The Company produces the ride films by
contracting with independent film production companies.  During March 1998, the
Company released a new ski and snowboard film which was produced by Warren
Miller Entertainment, and a roller coaster film which was produced by the
Company.

    The typical ride film lasts approximately four minutes.  Each capsule is
able to feature approximately nine to twelve attractions per hour.  The Company
does not anticipate that any of its attractions will operate at or near maximum
capacity.

SALES OF RIDE TICKETS

    The Company currently generates virtually all of its income from the sale of
ride tickets.  Customers purchase the ride tickets at the ticket booth.  Prior
to the showing, ticket-holders are led through an entry where their tickets are
taken and they are handed 3-D glasses and led into a Pre-Show area.  While the
previous audience is inside the capsule viewing the ride film, ticket-holders in
the Pre-Show area watch a short film on a video monitor outlining safety
instructions and other information regarding the ride.

    Once the previous showing has been completed, ticket-holders are led into
the capsule.  Each seat in the capsule has a safety belt that audience members
are required to wear for the duration of the ride film.  The 

                                      -3-
<PAGE>
 
audience and the area surrounding the capsule are monitored via video cameras by
the ride operator during each showing for the safety of audience members. Upon
completion of the ride film, audiences exit back into the lobby area where the 
3-D glasses are deposited into a return basket for cleaning.

SALE OF SYSTEMS TO THIRD PARTY OPERATORS AND JOINT VENTURE

    The Company plans to pursue customers for the sale or joint venture of its
simulator systems.  The Company also intends to lease its film library to buyers
of its simulator systems for an annual fee based on a percentage of gross
revenues generated by the sold capsules with a minimum rental fee due annually.
There can be no assurance that the Company will be successful in its efforts to
sell its capsules to third party operators, or to joint venture its simulator
systems.

COMPETITION

    The Company faces intense competition in the development and marketing of
attractions.  Such competition extends to gaining access to desirable locations
for attractions as well as to selling or leasing simulators and ride films.
Each of IMAX Corporation, Iwerks Entertainment, Inc., Showscan Corporation and
other companies develop and market simulators which compete with the simulators
and related filmed entertainment being developed and marketed by the Company.
Many of these corporations have greater financial and marketing resources than
the Company and have established reputations for success in the development and
marketing of products that are competitive with those of the Company.  In
addition, there are no significant barriers to entry which would prevent
additional competitors from competing with the Company in the development and
operation of attractions on a site-by-site basis.  During 1997, Iwerks
Entertainment and Showscan Corporation entered into a merger agreement which if
approved by the shareholders of both companies could be finalized in 1998 and
will produce what the Company believes will be the largest motion simulator ride
company.

    The Company also competes with existing motion simulators on a site-by-site
basis.  The Company is aware of several competing motion simulator attractions
either currently existing or planned to be opened in the vicinity of its
Facilities, including a motion simulator attraction developed by Caesars Palace
Hotel & Casino with IMAX Corporation which was opened during December 1997 in
the new expansion of the Forum Shops.  In addition, the Excalibur Hotel in Las
Vegas has a simulator ride facility which has been operational for many years.
The MGM Grand Hotel and Casino Theme Park , the Hilton Hotel Casino, and the
Luxor Hotel and Casino in Las Vegas offer motion simulator attractions.  Other
hotels or theme parks in Las Vegas may also acquire motion simulator
attractions.  The Company also competes for customers to some extent with theme
parks, traditional motion pictures and other forms of filmed or computer
entertainment.  Similarly the West Edmonton Facility competes with existing
motion simulators within the immediate geographical area. The Company's
attractions compete with other attractions and entertainment alternatives in a
given region on the basis of location, price and content of its ride films.

    The Company believes that the real estate experience of its management will
assist it in effectively competing in locating and acquiring favorable locations
for its attractions.  In addition, the Company believes that the compact size
and realistic motion capabilities of its simulators as well as the unique and
entertaining thematic elements and effects of its ride films will enable it to
effectively compete for customers for the sale and leasing of its simulators and
ride films.

TRADEMARKS, COPYRIGHTS AND PATENTS

    The Company does not currently hold any patents or similar intellectual
property protection for the technology or equipment used in its attractions.
Although the Company has a patent application pending under appeal  with the
United States Patent Office for the combined use of 3-D ride films in motion
simulators, there can be no assurance that a patent will be granted or, if
granted, that it will be effective in preventing competitors from developing
similar simulator systems.

    During 1996, the Company obtained a trademark for  "Cinema Ride" and a
trademark for "Ride Guy". In addition, the Company holds copyright protection
for each of the ride films owned by the Company.  While 

                                      -4-
<PAGE>
 
the Company believes that patent, copyright and other protection are desirable,
the Company believes that they are less significant to the Company's success
than factors such as the location and marketing of attractions and the
production or acquisition of entertaining ride films.

INSURANCE

    The Company maintains comprehensive general liability and excess liability
coverage of $16,000,000, business personal property coverage including leasehold
improvements of $6,550,000, business income loss coverage of $5,700,000,  and
comprehensive automobile insurance of $1,000,000.  The Company believes such
insurance will adequately insure all of its current operations.  Additional
insurance may be required in connection with the opening of additional
attractions by the Company.

    The Company also maintains $1,000,000 "key-man" life insurance on the life
of Mitch Francis, its President and Chief Executive Officer, as to which the
Company is the sole beneficiary.  The Company also maintains director's and
officers' liability insurance insuring the directors and officers of the Company
for up to $2,000,000.

GOVERNMENTAL REGULATIONS

    The Company is subject to certain governmental regulations which has
established standards for the design, construction, installation, alteration,
maintenance, operation and inspection of amusement rides such as the Company's
attractions. The Company successfully obtained all necessary permits and
approvals pursuant to such regulations.

EMPLOYEES

    As of March 19, 1998, the Company had four full-time employees at its
corporate offices (including its officers), twenty nine employees at its Las
Vegas Facility and seven employees at its West Edmonton Facility.  The addition
of new attractions will necessitate the Company's hiring of additional employees
to manage and operate the new facilities.  In addition, the Company anticipates
entering into contracts with independent sales representatives to locate
potential purchasers of simulators and licensees of ride films.  As the
Company's operations and sales efforts expand, the Company expects that it will
hire additional management personnel to oversee and coordinate the Company's
development and sales efforts.  The Company believes that its relations with its
employees are satisfactory.

ITEM 2.  DESCRIPTION OF PROPERTY
         -----------------------

THE LAS VEGAS FACILITY

    In October 1993, the Company entered into a lease agreement for a site in
the Forum Shops which houses the Company's Las Vegas Facility.  The Las Vegas
Facility lease has a term of 10 years with an option to extend the term of the
lease for an additional five years at then current market rates.

    The lease for the Las Vegas Facility granted the Company the exclusive right
to operate a motion simulator attraction within the Forum Shops.  However,
pursuant to an amendment between the Company and the lessor of the Forum Shops,
the Company agreed to permit a themed simulator attraction into the mall in
exchange for a number of concessions from the landlord.

     Certain disputes have risen with respect to the obligation to the lessor of
the sign at the Las Vagas Facility, and, commencing with the lease payment for
the month of April 1997, the Company has withheld making payments.  During March
1998, the Company reached an agreement with the lessor of the sign to amend the
lease agreement to extend the term of the lease by eleven months with the first
payment becoming due on March 1, 1998.

                                      -5-
<PAGE>
 
THE WEST EDMONTON MALL FACILITY

    During July 1995, the Company entered into a five year lease agreement to
install and operate one capsule in the West Edmonton Mall, Alberta, Canada.  The
rent is based on the greater of a minimum monthly payment of CA$5,000 (in
Canadian Dollars) or twenty percent of gross sales.  The West Edmonton facility
is operated by Cinema Ride Edmonton, Inc., a wholly owned Canadian subsidiary of
the Company.  This facility commenced full operations on August 1, 1995,
employing approximately seven employees.

    The West Edmonton Mall consists of 5,200,000 square feet of rentable space,
combining recreation, entertainment and retail shops.  The mall also includes a
360 room hotel, a gambling casino, several restaurants, an ice skating ring, a
dolphin show, a water park, 20 aquariums, a miniature golf course, a roller
coaster, and a motion simulator.  The Company's facility is located within the
food court of the mall, thus capitalizing on the traffic that the food court
generates especially in the high tourist season.

THE TIMES SQUARE FACILITY

    During August 1995, the Company entered into a lease agreement with Three
Times Square Center Partners, L.P., (the "Landlord") to install three capsules
in Times Square, New York City.  The lease term is for approximately ten years
with two five year renewal options.  The Times Square Facility commenced
operations in September 1996.  The total cost of design, construction and
installation of the Times Square Facility was approximately $3.2 million
excluding signage.

    The Company entered into an agreement dated October 28, 1997 with the
Landlord to terminate the lease due to the intended demolition of the existing
building where the Facility was located.  The agreement, among other things,
required the Company to vacate the premises by February 28, 1998 and waive the
security deposit previously made to the Landlord.  In consideration, the
Landlord 1) paid the Company $500,000 upon the execution of the agreement, 2)
agreed to a rent concession for the period from April 1997 through October 1997
, 3) waived its right for all future rents following execution of the agreement
to include the months of November 1997 through February 1998, and 4) agreed to
pay the Company an additional $500,000 upon the timely delivery of possession of
the premises to the landlord on or before February 28, 1998.  The Company
informed the landlord on February 26, 1998 that the Company had vacated the
premises, and the remaining $500,000 payment was received on March 5, 1998.  The
Company is currently seeking a new location to replace this Facility.  For the
year ended December 31, 1997, the Company recorded $275,548 in impairment losses
due to the write-down of signage, equipment and other costs.

    During the quarter ended June 30, 1996, the Company entered into a lease
agreement for a sign to be installed at the Times Square Facility. The lease
term was for sixty months commencing the first month following installation of
the sign.  Certain disputes have risen with respect to the obligation to the
lessor of the sign, and, commencing with the lease payment for the month of
April 1997, the Company has withheld making payments.  During March 1998, the
Company reached an agreement with the lessor of the sign whereby both parties
agreed to terminate the lease and for the Company to purchase the sign for
$100,000 in cash.  In return, the lessor agreed to return to the Company 93,482
shares of the Company's common stock, which were previously issued to the lessor
during December 1996.

CORPORATE OFFICES

    The Company is leasing office space for its corporate headquarters in Studio
City, California.  The current lease of office space is for a period of five
years commencing in July 1995 with one option to renew for a three year period
at ninety-five percent of the then fair market rental value.  The base rent
requires monthly payments of $5,029 for the first thirty-six months, payment of
$5,334 for the following eighteen months, and payments of $5,639 thereafter.

ITEM 3.  LEGAL PROCEEDINGS
         -----------------

    The Company is not currently involved in any legal proceedings that it
believes could have, either individually or in the aggregate, a material adverse
effect on its business or financial condition.

                                      -6-
<PAGE>
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
         ---------------------------------------------------

    No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 1997.

                                    PART II


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

    The common stock of the Company began trading in September 1994 (subsequent
to the public offering) on the Nasdaq Small Cap Market under the symbol "MOVE".
The following table sets forth the high and low quotations from the National
Association of Securities Dealers Automated Quotation System "NASDAQ".  The
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.  Prior to the offering in
September 1994, no established public trading market existed.


                              Common Stock Price
<TABLE>
<CAPTION>
 
 
                                                    HIGH     LOW
                                                    ----     ----
<S>                                                <C>       <C>
 
    Third Quarter - 1994                            6 1/4       5
 
    Fourth Quarter - 1994                           6 5/8   4 3/4
 
    First Quarter - 1995                            5 5/8   1 3/4
 
    Second Quarter - 1995                         3 19/32   1 5/8
 
    Third Quarter - 1995                            2 5/8       2
 
    Fourth Quarter - 1995                         1 17/32   13/16
 
    First Quarter - 1996                           1 3/16    9/16
 
    Second Quarter - 1996                               2     3/4
 
    Third Quarter - 1996                            31/32    9/16
 
    Fourth Quarter - 1996                           23/32     1/4
 
    First Quarter - 1997                             7/16    5/16
 
    Second Quarter - 1997                            5/16    3/16
 
    Third Quarter - 1997                              1/4    7/32
 
    Fourth Quarter - 1997                             1/8    1/32
 
    First Quarter - 1998 (through March 16, 1998)    5/32    2/32
</TABLE>

    The number of record holders of the Company's common stock as of March 19,
1998 was 128.  The number of beneficial holders of the Company's common stock as
of March 19, 1998 was approximately 1,050.

    The Company has not paid a dividend with respect to its common stock nor
does the Company anticipate paying dividends in the foreseeable future.

                                      -7-
<PAGE>
 
    As of  December 31, 1997, the Company was not in compliance with the minimum
listing standards of the Nasdaq Small Cap Market.  On November 3, 1997 the
Company received a notice from The Nasdaq Stock Market, Inc. ("Nasdaq")
providing the Company with 90 days to comply with these standards before the
Company's securities will be subject to de-listing.  On February 3, 1998, the
Company filed a request for a written hearing with Nasdaq which was scheduled
for March 5, 1998.  On March 11, 1998, the Company received a notice from Nasdaq
notifying the Company that Nasdaq determined to delist the Company's securities
effective with the close of business March 11, 1998 due to the Company not being
in compliance with the minimum bid price and market value of the public float
requirements.  The Company's securities are eligible to trade on the OTC
Bulletin Board.

    In addition, the Company was informed by Nasdaq on October 1, 1997 that the
Company's warrants were de-listed from the exchange due to the Company's no
longer having any active market makers registered to trade the securities.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
        ------------------------------------------------------------

    Although the Company was formed in April 1993, operations of the Company did
not commence until October 1994 when the Las Vegas Facility was opened.  The
Company opened its other locations, the West Edmonton Mall Facility and the
Times Square Facility, in August 1995 and September 1996 respectively.  The
Company closed and vacated the Times Square Facility on February 26, 1998.

RESULTS OF OPERATIONS
---------------------

YEAR ENDED DECEMBER 31, 1997 VS. YEAR ENDED DECEMBER 31, 1996:

    Revenues increased by 17% or $565,132 from $3,310,163 in 1996 to $3,875,295
in 1997.  The increase is due to an increase in revenues at the Times Square
Facility (which opened during September 1996) by 184% or $1,028,211 from
$558,229 in 1996 to $1,586,439 in 1997 due to the facility being open for the
full year in 1997 which was partially offset by 1) a decrease in revenues at the
Las Vegas Facility by 17% or $432,289 from $2,501,512 in 1996 to $2,069,223 in
1997, which management believes was due to lower attendance at the Forum Shops
resulting from the construction of the new wing and the opening of other
casinos, and 2) a decrease in revenues at the West Edmonton Mall Facility by 12%
or approximately $30,900 from approximately $251,300 in 1996 to approximately
$220,400 in 1997.  In addition, the Company raised the price of a single ticket
at the Las Vegas and Times Square Facilities to eight dollars from seven
dollars, which partially offset the decrease in revenues due to the lower
attendance.  The average ticket price remained under four dollars due to
discounts offered through multiple purchases of tickets.  Management believes
that the trend in decreased revenues at the Las Vegas and West Edmonton
Facilities is not expected to continue in 1998.  The closure of the Times Square
Facility in 1998 is expected to reduce the Company's revenues.

    Selling, general and administrative expenses increased by 14% or $441,891
from $3,107,375 in 1996 to $3,549,266 in 1997.  This increase is mainly due to
an increase in overall expenses of approximately $637,000 relating to the new
Times Square Facility, which was opened in September 1996 and was fully
operational in 1997, which was offset by 1) a decrease in corporate expenses by
approximately $74,000 due to decreases in compensation of approximately $148,700
and decreases in other administrative expenses of $55,000 which was offset by an
increase of approximately $112,000 in fees and costs in part relating to costs
incurred in connection with the Company's registration of newly issued shares of
common stock in 1997, 2) a decrease in expenses at the Las Vegas Facility of
approximately $71,000 relating to decreases in advertising expense of
approximately $126,000 which was offset by increases in labor costs incurred in
staffing the newly installed remote ticket booth and due to increases in repairs
and maintenance, and 3) a decrease in expenses at the West Edmonton Mall
Facility of approximately $65,000 mainly due to decreases in wages, advertising,
and other administrative expenses.  The closure of the Times Square Facility in
1998 is expected to reduce the Company's expenses.

    Impairment loss of $275,548 relates to the closure of the Times Square York
Facility in 1998 as more fully described in Note 6 to the financial statements.
The amount of loss recognized in 1997 represents an impairment loss due to the
write-down of signage, equipment and moving expenses.

                                      -8-
<PAGE>
 
    Depreciation and amortization increased by 26% or $220,007 from $831,927 in
1996 to $1,051,934 in 1997 due to the new Times Square Facility which
contributed to an increase of $381,291 in 1997, which was partially offset by a
decrease of approximately $125,000 relating to the write off of certain assets
in 1996.

    Interest expense increased by $218,557 from $246,800 in 1996 to $465,357 in
1997 mostly due to the Company incurring $215,863 in interest on the loan from
lender in 1997.

YEAR ENDED DECEMBER 31, 1996 VS. YEAR ENDED DECEMBER 31, 1995:

    Revenues increased by 48% or $1,079,908 from $2,230,255 in 1995 to
$3,310,163 in 1996.  The increase is due to 1) the opening of the Times Square
Facility in September 1996 which contributed $558,229 in revenues for the
partial year it was open, and 2) an increase in revenues at the Las Vegas
Facility by 22% or $448,324 from $2,053,188 in 1995 to $2,501,512 in 1996.
Revenues from the West Edmonton Mall Facility which opened in August 1995
increased by 41% or $73,355 from $177,655 in 1995 to $251,010 in 1996.  In
addition, the Company raised the price of a single ticket to seven dollars from
five dollars.  The average ticket price remained under four dollars due to
discounts offered through multiple purchases of tickets. The Company has been
successful in marketing the sale of multiple features tickets which had a
positive contribution to revenues.

    Selling, general and administrative expenses decreased by 6% or
approximately $199,500, from $3,306,863 in 1995 to $3,107,375 in 1996.  This
decrease is due to 1) a decrease in expenses at the Las Vegas Facility of 28% or
approximately $490,000 (from approximately $1,743,715 in 1995 to approximately
$1,254,257 in 1996) relating primarily to decreases in wages, advertising, and
administrative expenses, 2) a decrease in corporate expenses of 15% or
approximately $191,500 (from $1,328,278 in 1995 to $1,136,550 in 1996) relating
primarily to decreases in professional fees, insurance reimbursements,
advertising and other administrative expenses, 3) a decrease in expenses at the
West Edmonton Mall Facility of approximately $26,000 (from $232,200 in 1995 to
$206,195 in 1996) relating  primarily to decreases in advertising, and
administrative expenses and 4) an increase in overall expenses of approximately
$508,000 relating to the opening of the Times Square Facility in September 1996.

    Depreciation and amortization increased by 124% or approximately $461,000,
from $371,007 in 1995 to $831,927 in 1996 due to 1) the opening of the West
Edmonton Mall Facility in August 1995 which contributed to an increase of
approximately $78,000 in depreciation in 1996, 2) the opening of the Times
Square Facility in September 1996 which contributed to an increase of
approximately $205,000, 3) an increase of approximately $131,000 relating to
write off of certain assets at the Las Vegas Facility, and 4) and an overall
increase in depreciation and amortization of approximately $40,000 primarily
relating to amortization of film library and pre opening costs relating to the
Las Vegas and West Edmonton Mall facilities.

    Interest expense increased by $244,195 from $2,605 in 1995 to $246,800 in
1996 mostly due to the Company's incurring of interest on loans in 1996 and the
amortization of $20,825 in financing costs relating to the Company's issuance of
stock and warrants to lenders in connection of obtaining some of these loans as
discussed in Note 5 to the consolidated financial statements.  In addition, in
connection with the issuance of the warrants relating to the Company's financing
during December 1996, the Company incurred, based on a valuation of these
warrants which were issued to the Lender and the brokers who arranged the
financing, $47,498 as deferred financing costs which will be amortized over the
life of the loan.

    Interest income decreased by 80% or $61,000, from $76,150 in 1995 to $15,150
in 1996 mainly due to utilization of cash previously available to the Company
from the proceeds of the Company's public offering.

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

    Net cash provided by operating activities decreased by $1,327,437 from
$1,275,224 in 1996 to $52,213 in 1997.  The decrease of $1,327,437 was primarily
due to 1) a decrease in accounts payable and accrued expenses of $1,415,995, 2)
an increase in losses of $593,756, 3) a decrease in accrued interest on notes
payable of $101,094 and 4) a decrease in deferred rent of $170,905 which was
partially offset by 1) receipt of $500,000 relating to the lease termination for
the Times Square Facility, 2) an increase in depreciation and amortization of
$220,007, and 3) an increase of losses due write-off of certain assets related
to the lease termination of $275,548.

                                      -9-
<PAGE>
 
    Net cash used in investing activities decreased by $1,775,153 from
$1,874,503 in 1996 to $99,350 in 1997.  The decrease is primarily due to
payments made by the Company to complete the construction of its capsules during
the prior year, and to costs associated with the lease and build out of the
Times Square Facility in 1996.

    Net cash used in financing activities was $643,211 during the year ended
December 31, 1997, as compared to the cash provided by financing activities of
$1,850,718 for the same period during the prior year. The decrease of $2,493,929
was primarily due to 1) the Company successful funding of the loan from lender
during December  1996 amounting to approximately $1,475,000, 2) the Company
obtaining $600,000 in short term borrowing in 1996, and 3) the Company obtaining
$437,500 in short term borrowing from investors in 1996.

    The Company has relied on the proceeds of sales of Common Stock, Redeemable
Warrants, loans and equipment leasing to provide it with the cash necessary to
develop its facilities and ride films and to operate its business.

    The Company generates the majority of its revenues from the Las Vegas
Facility.  In connection with the December 1995 amendment to the Las Vegas
Facility lease, the Company waived its exclusivity right within the Forum Shops
by allowing an IMAX Simulator Theater to be installed within the center.
However, the Company obtained the right to terminate its lease if the Company's
sales for any full lease year after IMAX's opening do not equal or exceed
$2,000,000, and in return the landlord has the right to terminate the lease if
sales for any full lease year do not equal or exceed $1,500,000.  The IMAX
Simulator Theater opened during December 1997 and the Company has not
experienced any decreases in its revenues as of March 21, 1998.  However, there
can be no assurances that revenues at the Las Vegas Facility will not decrease
in the future below $1,500,000 annually and that the landlord will not terminate
the lease.

    On March 6, 1996,  Cinema Ride Edmonton, Inc. obtained a $40,328 loan
($55,000 Canadian dollars) from a Canadian bank at prime plus two percent.  The
loan has a term of four years requiring monthly payments of approximately $1,027
($1,400 Canadian dollars) and is guaranteed by the Company.  The lender has
first security interest in the equipment and improvements located at the West
Edmonton Facility.  The loan also restricts transfer of funds to the Company
other than amounts in excess of cash flow.  The loan may be prepaid at any time
without any penalties.  As of December 31, 1997, $22,144 remains unpaid on this
loan.

    As discussed in Note 5 to the consolidated financial statements, during the
quarter ended September 30, 1996, the Company obtained loans aggregating
$437,500 bearing interest at 15% per annum paid monthly with the principal
balance due at the earlier of one year or at the time the Company successfully
obtains permanent  financing.  These loans are secured by certain equipment
owned by the Company and by the net cash flow of the Las Vegas Facility.  In
connection with obtaining these loans, the Company issued 437,500 shares of the
Company's common stock to the lenders.  In connection with the issuance of the
shares to the lenders, the Company recognized $250,469 in financing costs which
is deferred and is amortized as interest expense over the life of these loans.
During the fourth quarter of 1996, some of lenders elected to convert $100,000
of the above notes to common stock at the then fair market value of $.40 per
share.  Accordingly, the Company issued 250,000 additional shares relating to
the conversion of these notes.  As of December 31, 1997, all remaining notes and
accrued interest have been paid.

    On December 31, 1996, the Company closed a financing agreement with Finova
Technology Finance, Inc. ( the "Lender") structured as a sale leaseback
transaction of certain equipment owed by the Company. Based on the substance of
this transaction, this financing agreement was accounted for as a note payable
for financial reporting purposes.  The gross loan amount was for $1,575,027 to
be paid over a four year term at $40,903 per month with a balloon payment of
$157,503.  The loan bears interest at an annual rate of 15.7%. The financing
agreement requires the Company to repurchase the equipment at the end of the
lease for $1. In connection with obtaining the financing, the Lender required
the Company to raise a minimum of $500,000 through a combination of equity,
subordinated debt, or conversion to equity of existing notes/liabilities.  As of
March 21, 1998, the Company has issued 444,285 shares of the Company's common
stock to various vendors and 250,000 shares to existing note holders in lieu of
amounts owed by the Company, enabling the Company to meet the Lender's
requirement.  The Company also issued 100,000 warrants to the Lender at an
exercise price of $2.00 per share, and an aggregate of 265,643 warrants to the
brokers who arranged the financing at an exercise price of $.41 per share
representing approximately 110% of the market value at the closing date of the
financing.

                                      -10-
<PAGE>
 
    During April 1997, the Company obtained a $50,000 loan from a related party
bearing interest at 18% per annum with both principal and interest due in six
months.  In connection with obtaining this loan, the Company issued 25,000
warrants at an exercise price of $.28 per share.  The note, along with any
accrued interest, was fully paid during 1997.

    As of December 31, 1997, the Company had a positive working capital of
$367,196.  The Company's cash and cash equivalents as of December 31, 1997 were
$705,630 as compared to $1,395,978 at December 31, 1996.  Accordingly, in order
for the Company to continue its operations as presently constituted and to
fulfill its business plan described below, the Company must obtain additional
working capital either in the form of debt, equity, or a combination thereof.
In this connection, the Company has engaged the investment banking firm of L.H.
Friend, Weinress, Frankson & Presson, Inc., to serve as the Company's exclusive
financial advisor and investment banker.  No assurance can be given, however,
that the Company will be successful in raising capital.  Additionally, the
Company has and is continuing to take steps to reduce its expenses without
materially impacting its operations.

COMPANY OUTLOOK:

IDENTIFY AND DEVELOP NEW SITES FOR ATTRACTIONS

    The Company is currently seeking additional locations for attractions.  The
Company's goal is to open approximately three more facilities over the next two
years.  In general, the Company will attempt to locate sites for its attractions
(i) which are in large metropolitan areas or which are at tourist destinations
which attract more than three million persons per year, (ii) at which the
Company can lease high-profile, high-traffic space at a reasonable cost, (iii)
which are in areas with a large number of permanent residents and which do not
have extreme seasonal attendance patterns, and (iv) which are at or near other
complementary tourist attractions.

    The Company believes that each new attraction will take approximately four
to six months from lease execution to commencement of operations.  Total cost of
developing new attractions, including construction, fixtures, equipment and
start-up costs after completion are estimated to be at least $1,250,000 per two-
capsule site.  These costs will vary depending on the leased space, the scope of
any tenant improvements required to be performed by the Company in connection
with leasing a given location and the number of capsules installed, as well as
the size and location of the planned attraction.  The Company anticipates that
three more locations will be added in the next two years.  Accordingly, the
Company expects to spend approximately at least an additional $3,750,000 on the
acquisition and installation of three more locations in the next two years. In
addition to the cost of the equipment necessary to establish a new attraction
location, the Company expects to add approximately twenty employees per each
additional two-capsule location that it owns and operates. However, the Company
currently has five capsules in its inventory which are available for
installation at future sites which should reduce the capital required to open at
least the next two facilities.

    In order to reduce the out-of-pocket costs in the development of
attractions, the Company may also explore joint venture arrangements with third
parties.  The Company and its co-venturer would then split the profits, if any,
from the attraction based on their respective contributions to the venture.

SIMULATOR SALES, JOINT VENTURES,  AND RIDE FILM LEASING

    The Company intends to pursue the sale or joint venturing of simulator
equipment to property owners and businesses that wish to operate attractions of
their own.  The sale of simulators to third parties would provide the Company
with an additional source of revenues and profits with a lower degree of risk
than is associated with owning and operating systems.  Additional revenues would
be generated from the leasing of the Company's library of ride films to
purchasers of the Company's simulators or to operators of already existing
simulators.  The Company does not intend to sell simulators or license ride
films into markets in which it expects to operate its own attractions.

    It is expected that the Company's management will continue to be responsible
for the marketing of the Company's simulators and ride films for sale and/or
leasing.  However, the Company may retain the services of outside or in-house
sales representatives to locate potential purchasers of simulators and licensees
of ride films.

                                      -11-
<PAGE>
 
SEASONALITY OF BUSINESS

    Because of the seasonal nature of tourist traffic, attendance patterns at
attractions may vary.  The degree of this seasonality varies among attractions
depending on the nature of tourist and local traffic patterns at a given
location as well as the nature of entertainment alternatives available to
audiences.  The Company expects that attendance at its facilities to be the
highest in June through September (the height of the tourist season) and lowest
during January and February. The West Edmonton Mall Facility is more effected by
seasonality as compared to the Las Vegas Facility due to the extreme weather
conditions during the Winter months in Alberta, Canada.  Similarly, the Times
Square Facility was affected by seasonality during the slower Winter months.  As
a result, the Company's results of operations at its facilities depends upon
sales generated from the peak tourist periods and any significant decrease in
sales for such periods could have a material adverse effect upon the Company's
operations.

NET OPERATING LOSS CARRY FORWARD

    As of December 31, 1997, for federal income tax purposes, the Company has
approximately $5,264,000 in net operating loss carry forwards expiring through
2012.  The net operating loss carry forwards result in deferred tax assets of
approximately $1,790,000.  Due to management not being able to conclude that it
is more likely than not that the deferred tax asset will be realized, a 100%
valuation allowance has been recorded for the full amount.  Under Section 382 of
the Internal Revenue Code, certain significant changes in ownership that the
Company had been undertaking and may currently undertake may restrict the future
utilization of the tax loss carry forwards.

EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS

    On March 3, 1997, the FASB issued Statement of Financial Accounting Standard
No. 128. Earnings per share (SFAS 128). This pronouncement provides a different
method of calculating earnings per share than is currently used in accordance
with APB 15, Earnings per Share. SFAS 128 provides for the calculation of Basic
and Diluted earnings per share. Basic earnings per share includes no dilution
and is computed by dividing income available to common shareholders by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution of securities that could
share in the earnings of the entity, similar to fully diluted earnings per
share. This pronouncement is effective for fiscal years and interim periods
after December 15, 1997; early adoption is not permitted. The Company adopted
this accounting standard and its effects on the financial position, results of
operations and earnings per share were immaterial.

    Statements of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS No. 130) issued by the FASB is effective for
financial statements with fiscal years beginning after December 15, 1997.  Early
application is permitted.  SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements.  The Company has not determined the effect on its
financial position or results of operations, if any, from the adoption of this
statements.

      Statements of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information" (SFAS No. 131) issued by the
FASB is effective for financial statements beginning after December 15, 1997.
The new standard requires that public business enterprises report certain
information about operating segments in complete sets of financial statements of
the enterprise and in condensed financial statements of interim periods issued
to shareholders.  It also requires that public business enterprises report
certain information about their products and services, the geographic areas in
which they operate and their major customers.  The Company does not expect the
adoption of SFAS No. 131 to have a material effect, if any, on its Results of
Operations.

ITEM 7.  FINANCIAL STATEMENTS
         --------------------

    For a list of financial statements filed as part of this report, see index
to financial statements at F-1.

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

   None

                                      -12-
<PAGE>
 
                                    PART III

ITEM  9.     DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
            --------------------------------------------------------------
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
------------------------------------------------- 
 
   Incorporated by reference to the Company's Proxy Statement for Annual Meeting
of Stockholders to be filed with the Securities and Exchange Commission within
120 days after the close of the fiscal year ended December 31, 1997.

ITEM 10.  EXECUTIVE COMPENSATION
          ----------------------
 
   Incorporated by reference to the Company's Proxy Statement for Annual Meeting
of Stockholders to be filed with the Securities and Exchange Commission within
120 days after the close of the fiscal year ended December 31, 1997.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
          --------------------------------------------------------------

   Incorporated by reference to the Company's Proxy Statement for Annual Meeting
of Stockholders to be filed with the Securities and Exchange Commission within
120 days after the close of the fiscal year ended December 31, 1997.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
          ----------------------------------------------

   Incorporated by reference to the Company's Proxy Statement for Annual Meeting
of Stockholders to be filed with the Securities and Exchange Commission within
120 days after the close of the fiscal year ended December 31, 1997.

ITEM 13.   EXHIBITS AND REPORTS ON FORM 8-K
           --------------------------------

(a)  EXHIBITS

   The following exhibits are submitted herewith:

   NUMBER                    DESCRIPTION
   ------                    -----------

    3.1   Certificate of Incorporation of the Company, as amended*
    3.2   Bylaws of the Company*
    3.3   Certificate of Incorporation of Cinema Ride Edmonton, Inc.***
    3.4   Bylaws of Cinema Ride Edmonton, Inc.***
    4.1   Specimen Stock Certificate of the Company*
    4.2   Form of Redeemable Warrant Agreement (with form of certificate
          attached)*
    4.3   Form of Underwriter's Warrant Agreement (with form of certificate
          attached)*
    4.4   Lender's Warrant Certificate ****
    4.5   Warrant Holder Rights agreement dates as of December 31, 1996 between
          the Company and the Lender.****
    10.1  Form of Employment Agreement of Mitch Francis dated September 14,
          1994.*
    10.2  Form of Employment Agreement of Gary Packman dated September 14,
          1994.*
    10.3  Form of Indemnification Agreement*
    10.4  Cinema Ride, Inc. Stock Option Plan*
    10.5  Equipment Lease, dated June 1, 1994, between the Company and Rust
          Leasing International*
    10.6  Placement Agent Agreement, dated May 10, 1993, between the Company and
          the Underwriter*
    10.7  Placement Agent Agreement, dated September 3, 1993, between the
          Company and the Underwriter*
    10.8  Equipment lease, dated April 6, 1995, between the Company and Sign
          Systems.**
    10.10 Agreement, dated December 15, 1993, between the Company and Computer
          3-D, Inc.*
    10.11 Agreement, dated December 28, 1993, among the Company and Boyington
          Film Productions, Inc. and Peter Shillingford*

                                      -13-
<PAGE>
 
    10.12 Agreement, dated January 12, 1994, between the Company and Topix
          Computer Graphics and Animation*
    10.13 Agreement, dated December 21, 1993, between the Company and Multi-
          Dimensional Media Services, Inc.*
    10.14 Contract, dated January 3, 1994, between the Company and McFadden
          Systems, Inc.*
    10.15 Letter Agreement, dated April 30, 1993, between the Company and Jack
          Hollander & Associates, Inc.*
    10.16 Standard Office Lease -- Gross, dated as of March 29, 1993, between
          the Company and Ventura Place Associates*
    10.17 Lease, dated July 2, 1993, between Forum Developers Limited
          Partnership and the Company*
    10.18 Third Lease Amendment, dated July 27, 1994, between Forum Developers
          Limited Partnership and the Company*
    10.19 Equipment Purchase and Ride Film Rental Agreement, dated August 8,
          1994, between the Company and Nickelodeon Theater Co., Inc.*
    10.22 Form of Financial Advisory and Consulting Agreement between the
          Company and the Underwriter*
    10.23 Form of Indemnification Agreement between the Company and the
          Underwriter*
    10.24 Cancellation Agreement relating to certain shares of Common Stock*
    10.25 Contract, dated December 10, 1994, between the Company and McFadden
          Systems, Inc.*
    10.26 Form of Promissory Note and Security Agreement (stock pledge)
          of Mr. Mitch Francis dated July 5, 1995.***
    10.27 Form of Promissory Note and Security Agreement (stock pledge)
          of Mr. Gary Packman dated July 5, 1995.***
    10.28 Standard Office Lease -- Gross, dated March 21, 1995, between the
          Company and WFC Ventures L.P.***

    10.29 First Lease Amendment, dated April 15, 1995, between the
          Company and WFC Ventures L.P.***
    10.30 Lease, dated July 17, 1995 between the Company and West Edmonton
          Mall Property Inc.***
    10.31 Lease, dated August 8, 1995 between the Company and Three Times
          Square Center Partners, L.P.***
    10.32 Fourth Lease Amendment, dated December 30, 1995, between Forum
          Developers Limited Partnership and the Company (filed as part of the 
          Registrant's 10-KSB for the year ended December 31, 1995).
    10.33 Form of employment agreement with Toufic Roger Bassil dated April 29,
          1997.*****
    10.34 Master Equipment Lease Agreement dated as of December 12, 1996,
          between the Lender and the Company.****
    10.35 Form of employment agreement with Mitch Francis dated September 1,
          1997.******
    10.36 Stipulation and consent judgement between the Company and Three Times
          Square Center Partners, L.P., dated October 28, 1997.******
    27    Financial Data Schedule                                    
____________________

*      Incorporated by reference to Exhibits of Registrant's Registration
       Statement on Form SB-2, Registration No. 33-80672.
**     Incorporated by reference to Exhibits previously filed as part of the
       Registrant's quarterly report on Form 10-QSB for the quarter ended March
       31, 1995.
***    Incorporated by reference to Exhibits previously filed as part of the
       Registrant's quarterly report on Form 10-QSB for the quarter ended June
       30, 1995.
****   Incorporated by reference to Exhibits previously filed as part of the
       Registrant's Form 8-K filed on January, 28, 1997.
*****  Incorporated by reference to Exhibits previously filed as part of the
       Registrant's quarterly report on Form 10-QSB for the quarter ended March
       31, 1997.
****** Incorporated by reference to Exhibits previously filed as part of the
       Registrant's quarterly report on Form 10-QSB for the quarter ended
       September 30, 1997.

                                      -14-
<PAGE>
 
(b) REPORTS ON FORM 8-K

    The Company filed a Form 8-K on January 28, 1997, reporting under item 5.

                                      -15-
<PAGE>
 
                                             CINEMA RIDE, INC.
                                             AND SUBSIDIARIES
                                             

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

                                               CONSOLIDATED FINANCIAL STATEMENTS
                                          Years Ended December 31, 1997 and 1996
<PAGE>
 
                                            CINEMA RIDE, INC. AND SUBSIDIARIES
                                                              
                                                                                
                                                                      CONTENTS
                           
                                                                                
--------------------------------------------------------------------------------


    REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS                  F-2


    CONSOLIDATED FINANCIAL STATEMENTS
 
       Balance sheets                                                   F-3
 
       Statements of operations                                         F-5 
                                                                           
       Statements of stockholders' equity                               F-6
                                                                           
       Statements of cash flows                                         F-7 
 

    SUMMARY OF ACCOUNTING POLICIES                                      F-9 


    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                          F-15

                                                                             F-1
<PAGE>
 
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


Board of Directors
Cinema Ride, Inc. and Subsidiaries
Studio City, California


We have audited the accompanying consolidated balance sheets of Cinema Ride,
Inc. and Subsidiaries as of December 31, 1997 and 1996 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1997 and 1996.  These consolidated financial
statements are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these consolidated 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 these 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cinema Ride, Inc.
and Subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and cash flows for the years ended December 31, 1997 and 1996, in
conformity with generally accepted accounting principles.


                                                            BDO SEIDMAN, LLP


Los Angeles, California
February 23, 1998, except for
Note 6 which is as of March 5, 1998

                                                                             F-2
<PAGE>

<TABLE> 
<CAPTION> 

                                                                    CINEMA RIDE, INC. AND SUBSIDIARIES

                                                                                        BALANCE SHEETS  
 
December 31,                                                           1997                      1996
-------------------------------------------------------------------------------------------------------
 
ASSETS
<S>                                                             <C>                     <C>      
CURRENT ASSETS
  Cash and cash equivalents                                        $   705,630              $ 1,395,978
  Inventories                                                           21,614                   45,515
  Prepaid expenses                                                      69,601                   93,330
  Receivable from Times Square landlord (Note 6)                       500,000                        -
  Other receivables                                                        852                    5,311
  Assets to be disposed - short-term (Note 6)                        1,490,915                        -
-------------------------------------------------------------------------------------------------------
Total current assets                                                 2,788,612                1,540,134
-------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT (Notes 5 and 6)
  Office equipment and furniture                                       106,938                  103,050
  Equipment under capital lease                                        139,474                  589,474
  Lease improvements                                                   943,873                2,222,967
  Theater and film equipment                                         2,953,259                3,078,593
  Theater and film equipment available for use                         564,432                  564,432
-------------------------------------------------------------------------------------------------------
                                                                     4,707,976                6,558,516
  Accumulated depreciation                                          (1,226,811)                (846,873)
-------------------------------------------------------------------------------------------------------
                                                                     3,481,165                5,711,643
-------------------------------------------------------------------------------------------------------
 
FILM LIBRARY
  Film projects under development                                      316,387                  271,872
  Film library, net of accumulated amortization of
     $460,710  and $297,582                                            299,651                  454,783
                                                                       616,038                  726,655
-------------------------------------------------------------------------------------------------------
 
ASSETS TO BE DISPOSED - LONG-TERM (Note 6)                             161,629                        -
RECEIVABLES FROM OFFICERS (Note 1)                                      47,962                   97,865
CONSULTING AGREEMENT (Note 1)                                           49,420                        -
DEFERRED LEASE COSTS AND OTHER ASSETS                                  283,713                  783,217
-------------------------------------------------------------------------------------------------------
Total assets                                                       $ 7,428,539              $ 8,859,514
=======================================================================================================
</TABLE>

See accompanying summary of accounting policies and notes to consolidated
financial statements.

                                                                             F-3
<PAGE>

<TABLE> 
<CAPTION> 

                                                                           CINEMA RIDE, AND SUBSIDIARIES


                                                                                          BALANCE SHEETS
--------------------------------------------------------------------------------------------------------

December 31,                                                              1997                      1996
--------------------------------------------------------------------------------------------------------

LIABILITIES AND STOCKHOLDERS' EQUITY
<S>                                                             <C>                      <C>    
CURRENT LIABILITIES
  Accounts payable and accrued expenses                         $      539,006           $     1,342,855
  Accrued interest                                                           -                    50,547
  Current portion of capital lease obligations (Note 4)                 58,641                    53,102
  Notes payable to investors (Note 5)                                        -                   337,500
  Current portion of note payable to lender (Note 5)                   322,286                   275,979
  Notes payable to vendors (Note 5)                                          -                    52,612
  Note payable to bank (Note 5)                                         10,568                     9,310
  Deferred Lease Termination (Note 6)                                1,490,915                         -
-------------------------------------------------------------------------------------------------------- 
Total current liabilities                                            2,421,416                 2,121,905
--------------------------------------------------------------------------------------------------------
OBLIGATIONS UNDER CAPITAL LEASE (Note 4)                               300,819                   336,548
NOTE PAYABLE TO BANK (Note 5)                                           11,576                    23,370
NOTE PAYABLE TO LENDER (Note 5)                                        894,098                 1,116,384
DEFERRED RENT (Note 9)                                                 137,617                   154,261
--------------------------------------------------------------------------------------------------------
Total liabilities                                                    3,765,526                 3,752,468
COMMITMENTS (Notes 4 and 9)
--------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (Notes 7 and 8)
  Preferred stock, $.01 par value, 500,000 shares
     authorized, none issued                                                 -                         -
  Common stock, $.01 par value, 20,000,000 shares
     authorized, 5,802,785 and 5,731,785 shares
     shares issued and outstanding                                      58,028                    57,318
  Additional paid-in capital                                         9,173,191                 9,134,389
  Treasury stock, at cost, 51,786 shares at December 31,
    1997                                                               (29,000)                        -
  Accumulated deficit                                               (5,539,206)               (4,084,661)
-------------------------------------------------------------------------------------------------------- 
Total stockholders' equity                                           3,663,013                 5,107,046
--------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity                      $    7,428,539           $     8,859,514
========================================================================================================
</TABLE>

See accompanying summary of accounting policies and notes to consolidated
financial statements.

                                                                             F-4
<PAGE>

<TABLE> 
<CAPTION> 
                                                                       CINEMA RIDE, INC. AND SUBSIDIARIES

                                                                    CONSOLIDATED STATEMENTS OF OPERATIONS
---------------------------------------------------------------------------------------------------------
 
Years ended December 31,                                              1997                        1996
---------------------------------------------------------------------------------------------------------
<S>                                                             <C>                        <C>  
REVENUES                                                        $    3,875,295             $    3,310,163
---------------------------------------------------------------------------------------------------------
 
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                         3,549,266                  3,107,375
 
IMPAIRMENT LOSS (NOTE 6)                                               275,548                          -
 
DEPRECIATION AND AMORTIZATION                                        1,051,934                    831,927
---------------------------------------------------------------------------------------------------------
 
Total expenses                                                       4,876,748                  3,939,302
---------------------------------------------------------------------------------------------------------
 
OPERATING LOSS                                                      (1,001,453)                  (629,139)
 
OTHER INCOME (EXPENSE)
  Interest income                                                       12,265                     15,150
  Interest expense                                                    (465,357)                  (246,800)
---------------------------------------------------------------------------------------------------------
 
NET LOSS                                                        $   (1,454,545)            $     (860,789)
=========================================================================================================
 
NET LOSS PER COMMON SHARE                                       $         (.25)            $         (.18)
=========================================================================================================
 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                           5,787,749                  4,765,444
=========================================================================================================
</TABLE>

See accompanying summary of accounting policies and notes to consolidated
financial statements.

                                                                             F-5
<PAGE>
 
<TABLE>
<CAPTION>



                                                                                            CINEMA RIDE, INC. AND SUBSIDIARIES

                                                                                    CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                                                                             YEARS ENDED DECEMBER 31, 1997 AND 1996
------------------------------------------------------------------------------------------------------------------------------------
                                    Common Stock           
                                   (Notes 5 and 6)             Additional                         Accumu-            Total
                              -------------------------         Paid-in        Treasury            lated           Stockholders'
                                Shares         Amount           Capital         Stock             Deficit             Equity
------------------------------------------------------------------------------------------------------------------------------------
<S>                           <C>             <C>              <C>             <C>             <C>              <C> 
BALANCE, January 1, 1996         4,570,000     $ 45,700          $ 8,363,638     $    -         $ (3,223,872)        $  5,185,466

 
Issuance of common stock to
 officer                            30,000          300               15,600          -                    -               15,900
 
Issuance of common stock
 to lenders                        437,500        4,375              246,094          -                    -              250,469
 
Conversion of note payable to
 common stocks                     250,000        2,500               97,500          -                    -              100,000
 
Issuance of common stock for
 services rendered                 444,285        4,443              343,234          -                    -              347,677
 
Issuance of warrants to lenders
 and brokers                             -            -               68,323          -                    -               68,323
 
Net loss                                 -            -                    -          -             (860,789)            (860,789)
------------------------------------------------------------------------------------------------------------------------------------
 
BALANCE, December 31, 1996       5,731,785       57,318            9,134,389          -           (4,084,661)           5,107,046
 
Issuance of common stock to
 officer                            50,000          500               18,500          -                    -               19,000
 
Issuance of common stock
 Employee                            5,000           50                1,850          -                    -                1,900
 
Repurchase of stock                      -            -                    -    (29,000)                   -              (29,000)
 
Issuance of common stock for
 services rendered                  16,000          160                  800          -                    -                  960
 
Issuance of warrants to lenders          -            -                3,000          -                    -                3,000

 
Issue of warrants to directors           -            -               14,652          -                    -               14,652

 
Net loss                                 -            -                    -          -           (1,454,545)          (1,454,545)
------------------------------------------------------------------------------------------------------------------------------------
 
BALANCE, December 31, 1997       5,802,785     $ 58,028          $ 9,173,191  $ (29,000)        $ (5,539,206)        $  3,663,013
====================================================================================================================================
</TABLE>

See accompanying summary of accounting policies and notes to consolidated
financial statements.

                                                                             F-6
<PAGE>

<TABLE> 
<CAPTION> 
                                                                     CINEMA RIDE, INC. AND SUBSIDIARIES
                                 
                                                                   CONSOLIDATED STATEMENTS OF CASH FLOWS
----------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH
 
Years ended December 31,                                                 1997                      1996
----------------------------------------------------------------------------------------------------------
<S>                                                                <C>                      <C>  
CASH FLOWS FROM OPERATING ACTIVITIES
  Net loss from operations                                         $   (1,454,545)          $     (860,789)
  Adjustments to reconcile net loss to cash provided by
    operating activities:
     Depreciation and amortization                                      1,051,934                  831,927
     Stock issued for services rendered                                    39,512                   29,400
     Amortization of deferred financing costs                             192,027                  125,187
     Write-off of organization costs                                            -                    9,863
     Loss on sale of assets                                                     -                    7,846
     Receipt from lease termination                                       500,000                        -
     Impairment loss                                                      275,548                        -
     Increase (decrease) in cash due to changes in
       operating assets and liabilities:
       Inventories                                                         23,901                      291
       Prepaid expenses and other assets                                   36,405                   48,037
       Other receivables                                                      (58)                   7,980
       Accounts payable and accrued expenses                             (545,320)                 870,674
       Deferred rent                                                      (16,644)                 154,261
       Accrued interest                                                   (50,547)                  50,547
----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities                                  52,213                1,275,224
----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
  Acquisition of:
     Film production costs                                                (52,515)                 (49,716)
     Capital expenditures                                                 (46,835)              (1,440,244)
     Equipment under capital lease                                              -                  (75,215)
  Proceeds from insurance for equipment                                         -                   33,671
  Deferred lease costs and other assets                                         -                 (342,999)
----------------------------------------------------------------------------------------------------------
Net cash used in investing activities                                     (99,350)              (1,874,503)
----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from notes payable                                             150,000                2,471,295
  Payments made on notes payable                                         (739,021)                (608,752)
  Principal payments under capital lease obligation                       (30,190)                 (21,825)
  Payments made from officers                                               5,000                   10,000
  Repurchase of stock                                                     (29,000)                       -
----------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities                      (643,211)               1,850,718
----------------------------------------------------------------------------------------------------------
</TABLE>

                                                                             F-7
<PAGE>
 
<TABLE>
<CAPTION>


                                                                        CINEMA RIDE, INC. AND SUBSIDIARIES

                                                                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
----------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH

Years Ended December 31,                                                   1997                   1996
----------------------------------------------------------------------------------------------------------
<S>                                                                        <C>                    <C>         
NET (DECREASE) INCREASE IN CASH EQUIVALENTS                              (690,348)               1,251,439
 
CASH AND CASH EQUIVALENTS, beginning of year                            1,395,978                  144,539
----------------------------------------------------------------------------------------------------------
 
CASH AND CASH EQUIVALENTS, end of year                                 $  705,630              $ 1,395,978
==========================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
  Cash paid for interest                                               $  253,087              $    53,290
==========================================================================================================
  Non cash financing and investing activities:
     Common stock issued to vendors in exchange for
       services rendered                                               $      960              $    13,500
     Issuance of stock to lenders                                               -                  250,469
     Issuance of common stock and warrants to employees
       and directors                                                       35,552                   15,900
     Increase in capital lease obligation and accounts
       payable for equipment                                                    -                  300,000
     Issuance of common stock for film expenditures                             -                   24,548
     Issuance of common stock for financing costs                               -                   56,250
     Issuance of common stock for capital obligation                            -                   74,785
     Issuance of common stock for leasehold improvements                        -                  158,256
     Issuance of common stock for equipment                                     -                   20,338
     Issuance of warrants to lender                                         3,000                    4,652
     Issuance of warrants to brokers                                            -                   42,846
     Conversion of notes payable to common stock                                -                  100,000
     Conversion of accounts payable to notes payable                       12,394                   52,612
</TABLE> 

      On October 28, 1997, the Company entered into an agreement with the
      landlord of the Times Square Facility to terminate the lease. As a result
      of the termination agreement, the Company recorded a receivable from the
      landlord of $500,000, wrote-off a deposit of $30,767 and accounts payable
      of $246,134 and recorded a non-cash deferred lease termination liability
      of $715,367. The Company also transferred leasehold improvements of
      $1,652,544 from property and equipment to assets to be disposed (Note 6).
 
      During 1997, the Company converted $52,021 of receivables from officers
      into a five year consulting agreement (Note 1).
--------------------------------------------------------------------------------

See accompanying summary of accounting policies and notes to consolidated
financial statements.

                                                                             F-8
<PAGE>
 
<TABLE> 
<CAPTION> 
                                              CINEMA RIDE, INC. AND SUBSIDIARIES 
                                                                                 
                                                  SUMMARY OF ACCOUNTING POLICIES 
    
------------------------------------------------------------------------------------------------
<S>                         <C>   
BUSINESS ACTIVITY           Cinema Ride, Inc. (the "Parent") and Subsidiaries (the "Company")
                            was incorporated in Delaware in April 1993.  The Company is in the
                            business of developing and operating rides consisting of motion
                            simulator attractions ("attractions" or "rides") and filmed
                            entertainment ("ride films") that combines projected
                            three-dimensional ("3-D") action films of approximately four minutes
                            duration with computer-controlled, hydraulically-mobilized capsules
                            that are programmed to move in concert with the on-screen action.
                            The Company opened its first attraction in Las Vegas in October,
                            1994.  The Company's executive offices are located in Studio City,
                            California.
 
                            During 1995, the Company established a wholly owned subsidiary,
                            Cinema Ride Edmonton, Inc., a Canadian corporation that operates one
                            motion simulator ride Facility located at the West Edmonton Mall in
                            Alberta, Canada.  During the years ended December 31, 1997 and 1996,
                            revenues, losses and identifiable assets for Cinema Ride Edmonton,
                            Inc. were less than 5% of the consolidated amounts, therefore
                            segment information is not disclosed.
 
                            During 1995, the Company also established a wholly owned subsidiary,
                            Cinema Ride Times Square, Inc., that operates one motion simulator
                            ride Facility consisting of three capsules, located at New York
                            Times Square which commenced operation in September 1996.  On
                            October 28, 1997, the Company entered into an agreement with its
                            landlord to terminate the lease and discontinue operations at New
                            York Times Square (Note 6).
 
                            All significant intercompany transactions and balances have been
                            eliminated in consolidation.

CONCENTRATION OF            The Company maintains cash balances at various financial
 CREDIT RISK                institutions.  Deposits not to exceed $100,000 for each institution
                            are insured by the Federal Deposit Insurance Corporation.  At
                            December 31, 1997 and 1996, the Company had uninsured cash and cash
                            equivalents in the amount of $399,379 and $1,101,770.
</TABLE>

                                                                             F-9
<PAGE>
 
<TABLE> 
<CAPTION> 
                                              CINEMA RIDE, INC. AND SUBSIDIARIES                
                                                                                                
                                                  SUMMARY OF ACCOUNTING POLICIES                
                                                                                                
------------------------------------------------------------------------------------------------ 
<S>                         <C>
PROPERTY AND                Property and equipment are stated at cost.  Depreciation is provided
 EQUIPMENT                  at the time property and equipment is placed in service using the
                            straight-line method over the estimated useful lives of the assets
                            which range from five to ten years.

FILM PRODUCTION             Film production costs are stated at the lower of amortized cost or
COSTS                       market.  Upon completion, film production costs are amortized on an
                            individual production basis in the proportion that current gross
                            revenues bear to management's  estimate of total gross revenues with
                            such estimates being reviewed at least quarterly.

DEFERRED LEASE COSTS        Deferred lease costs represent amounts paid in connection with the
                            successful negotiation of the Company's leases.  Costs are amortized
                            on a straight-line basis over the term of the lease.

PRE-OPENING COSTS           The Company capitalizes pre-opening costs (primarily rent, salaries
                            and insurance) incurred in connection with potential new locations.
                            These costs are amortized over the twelve months following
                            commencement of operations, or charged to expense when the project
                            is abandoned.  At December 31, 1997 and 1996, unamortized
                            pre-opening costs of $0 and $258,701 are included in other assets.

INCOME TAXES                The Company provides for income taxes in accordance with Statement
                            of Financial Accounting Standards 109 ("SFAS 109"), Accounting for
                            Income Taxes.  Deferred income taxes are provided on the difference
                            in earnings determined for tax and financial reporting purposes and
                            result primarily from differences in methods used to amortize
                            production costs.

FAIR VALUE OF               The Financial Accounting Standards Board issued SFAS No. 107,
FINANCIAL                   Disclosures about Fair Value of Financial Statements, which is
INSTRUMENTS                 effective December 31, 1995.  This statement requires the disclosure
                            of estimated fair values for all financial instruments for which it
                            is practicable to estimate fair value.
</TABLE>

                                                                            F-10
<PAGE>
 
<TABLE> 
<CAPTION> 
                                              CINEMA RIDE, INC. AND SUBSIDIARIES                
                                                                                                
                                                  SUMMARY OF ACCOUNTING POLICIES                
                                                                                                
------------------------------------------------------------------------------------------------ 
<S>                         <C>
FAIR VALUE OF               The carrying amounts of financial instruments including cash and
FINANCIAL                   cash equivalents, receivable from Times Square landlord, other
INSTRUMENTS                 receivables and accounts payable approximate fair value because of
(CONTINUED)                 their short maturity.
  
                            The carrying amount of long-term debt approximates fair value
                            because the interest rates on these instruments approximate the rate
                            the Company could borrow at December 31, 1997.

                            The fair value of receivables from officers cannot be determined due
                            to their related party nature.

FOREIGN CURRENCY            Foreign currency denominated assets and liabilities of subsidiaries
TRANSLATION                 with local functional currencies are translated to United States
                            dollars at year-end exchange rates.  The effects of translation are
                            recorded in the cumulative translation component of shareholders'
                            equity.  Such translations in 1997 and 1996 were minimal.

STOCK-BASED                 Statements of Financial Accounting Standards No. 123, "Accounting
COMPENSATION                for Stock-Based Compensation" (SFAS No. 123) establishes a fair
                            value method of accounting for stock-based compensation plans and
                            for transactions in which an entity acquires goods or services from
                            nonemployees in exchange for equity instruments.  The Company
                            adopted this accounting standard on January 1, 1996.  SFAS 123 also
                            encourages, but does not require companies to record compensation
                            cost for stock-based employee compensation.  The Company has chosen
                            to continue to account for stock-based compensation utilizing the
                            intrinsic value method prescribed in Accounting Principles Board
                            Opinion No. 25, "Accounting for Stock Issued to Employees."
                            Accordingly, compensation cost for stock options is measured as the
                            excess, if any, of the fair market price of the Company's stock at
                            the date of grant over the amount an employee must pay to acquire
                            the stock.
</TABLE>

                                                                            F-11
<PAGE>
 
<TABLE> 
<CAPTION> 
                                              CINEMA RIDE, INC. AND SUBSIDIARIES                
                                                                                                
                                                  SUMMARY OF ACCOUNTING POLICIES                
                                                                                                
------------------------------------------------------------------------------------------------ 
<S>                         <C>
LOSS PER SHARE              On March 3, 1997, the FASB issued Statement of Financial Accounting
                            Standard No. 128.  Earnings per share (SFAS 128).  This
                            pronouncement provides a different method of calculating earnings
                            per share than is currently used in accordance with APB 15, Earnings
                            per Share.  SFAS 128 provides for the calculation of Basic and
                            Diluted earnings per share.  Basic earnings per share includes no
                            dilution and is computed by dividing income available to common
                            shareholders by the weighted average number of common shares
                            outstanding for the period.  Diluted earnings per share reflects the
                            potential dilution of securities that could share in the earnings of
                            the entity, similar to fully diluted earnings per share.  This
                            pronouncement is effective for fiscal years and interim periods
                            after December 15, 1997; early adoption is not permitted. The
                            Company has adopted this pronouncement during the fiscal year ended
                            December 31, 1997 and it had no effect on loss per share.

                            For the year ended December 31, 1997, common equivalents
                            representing 913,500 outstanding stock options and 3,176,567
                            outstanding warrants are not included since their effect would be
                            anti-dilutive.  For the year ended December 31, 1996, common stock
                            equivalents representing 910,000 outstanding stock options and
                            2,800,000 outstanding warrants are not included since their effect
                            would be anti-dilutive.

STATEMENT OF CASH           For purposes of the statement of cash flows, the Company considers
FLOWS                       all highly liquid debt instruments with an original maturity of
                            three months or less to be cash equivalents.
</TABLE>

                                                                            F-12
<PAGE>
 
<TABLE> 
<CAPTION> 
                                              CINEMA RIDE, INC. AND SUBSIDIARIES                
                                                                                                
                                                  SUMMARY OF ACCOUNTING POLICIES                
                                                                                                
------------------------------------------------------------------------------------------------ 
<S>                         <C>
SEASONALITY OF              Because of the seasonal nature of tourist traffic, attendance
BUSINESS                    patterns at attractions may vary.  The nature and degree of this
                            seasonality varies among attractions depending on the nature of
                            tourist and local traffic patterns at a given location, as well as,
                            the nature of entertainment alternatives available to audiences.
                            The Company expects that attendance at its facilities will be the
                            highest in June through September (the height of the tourist season)
                            and lowest during January and February.  The West Edmonton Mall
                            Facility is more affected by seasonality as compared to the Las
                            Vegas Facility due to the extreme weather conditions during the
                            winter months in Alberta, Canada.  As a result, the Company's
                            results of operations at its facilities will depend upon sales
                            generated from the peak tourist periods and any significant decrease
                            in sales for such periods could have a material adverse effect upon
                            the Company's operations.

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

IMPAIRMENT OF               Statement of Financial Accounting Standards No. 121, "Accounting for
LONG-LIVED ASSETS           the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
                            Disposed of" (SFAS No. 121) establishes new guidelines regarding
                            when impairment losses on long-lived assets, which include plant and
                            equipment, and certain identifiable intangible assets, should be
                            recognized and how impairment losses should be measured.  The
                            Company adopted this accounting standard on January 1, 1996 and its
                            effects on the financial position and results of operations were
                            immaterial.
</TABLE>

                                                                            F-13
<PAGE>
 
<TABLE> 
<CAPTION> 
                                              CINEMA RIDE, INC. AND SUBSIDIARIES                
                                                                                                
                                                  SUMMARY OF ACCOUNTING POLICIES                
                                                                                                
------------------------------------------------------------------------------------------------ 
<S>                         <C>
NEW ACCOUNTING              Statements of Financial Accounting Standards No. 130, "Reporting
PRONOUNCEMENTS              Comprehensive Income" (SFAS No. 130) issued by the FASB is effective
                            for financial statements with fiscal years beginning after December
                            15, 1997.  Early application is permitted.  SFAS No. 130 establishes
                            standards for reporting and display of comprehensive income and its
                            components in a full set of general purpose financial statements.
                            The Company has not determined the effect on its financial position
                            or results of operations, if any, from the adoption of this
                            statement.

                            Statements of Financial Accounting Standards No. 131, "Disclosure
                            about Segments of an enterprise and Related Information" (SFAS No.
                            131) issued by the FASB is effective for financial statements
                            beginning after December 15, 1997.  The new standard requires that
                            public business enterprises report certain information about
                            operating segments in complete sets of financial statements of the
                            enterprise and in condensed financial statements of interim periods
                            issued to shareholders.  It also requires that public business
                            enterprises report certain information about their products and
                            services, the geographic areas in which they operate and their major
                            customers.  The Company does not expect the adoption of SFAS No. 131
                            to have a material effect, if any, on its Results of Operations.
</TABLE>

                                                                            F-14
<PAGE>
 
<TABLE> 
<CAPTION> 

                                          CINEMA RIDE, INC. AND SUBSIDIARIES
                                                                                                
                                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                                                
------------------------------------------------------------------------------------------------ 
 
<S>    <C>                      <C>
1.     RECEIVABLES FROM         During the year ended December 31, 1995, the Company made loans
       OFFICERS AND             to two of its officers in the amount of $50,000.  The loans
       CONSULTING AGREEMENT     beared interest at a rate of 8% per year and were due on the
                                earlier of June 30, 1998 or six months after the officer ceases
                                to be an employee of the Company.  Principal payments of $5,000
                                per loan were due on June 30, 1996 and June 30, 1997, with the
                                balance due on June 30, 1998.  Each note was secured by the
                                higher of 40,000 shares or the number of shares equivalent to the
                                unpaid value of the note.

                                On February 1, 1997, the Company's Chief Operating Officer
                                resigned and agreed to be available to the Company on a
                                consulting basis for the period between February 1, 1996 and
                                September 30, 1997.  Additionally, he agreed to be available to
                                the Company on a limited consulting basis for the five years
                                following September 30, 1997 in consideration for the release
                                from one fifth each year of his balance on his loan to the
                                Company and the waiver of accrued and future interest on the
                                unpaid balance.
 
                                The Company is amortizing the balance of the consulting agreement
                                over the period of the consulting contract.  As such, $51,021 was
                                transferred from receivables from officers to other receivables.
                                The balance of the remaining loan from officer at December 31,
                                1997 is $47,962, which includes $7,962 of accrued interest

2.     MANAGEMENT PLANS         During the years ended December 31, 1997 and 1996, the Company
                                incurred losses of $1,454,595 and $860,789.  The Company has and
                                is continuing to take steps to reduce its expenses without
                                impacting its operations.  Management believes that the existing
                                funds, combined with the Company's ability to generate cash from
                                its operations and through lease or debt financing of the
                                Company's existing equipment, or through equity financing, will
                                be adequate to finance current levels of activity.  Additional
                                funds will be required to finance the opening of additional
                                locations.  There can be no assurance that the Company will be
                                successful in obtaining the necessary funds to finance the
                                opening of any additional locations.
</TABLE>

                                                                            F-15
<PAGE>


<TABLE> 
<CAPTION> 
 
                                                              CINEMA RIDE, INC. AND SUBSIDIARIES                
                                                                                                  
                                                                  SUMMARY OF ACCOUNTING POLICIES                
                                                                                                                       
------------------------------------------------------------------------------------------------ 
<S>    <C>                      <C> 
  3.   INCOME TAXES             The income tax effect of temporary differences between financial
                                and tax reporting gives rise to the deferred income tax assets as
                                follows:
</TABLE>

<TABLE>
<CAPTION>
                                           March 31,                        1997                    1996
                                ----------------------------------------------------------------------------
 
                                <S>                                       <C>                   <C> 
                                Loss on lease termination                 $    110,219          $          -
                                Net operating loss carryforward              1,947,554             1,511,325
                                ----------------------------------------------------------------------------
 
                                                                             2,057,773             1,511,325
 
                                Less valuation allowance                    (2,057,773)           (1,511,325)
                                ----------------------------------------------------------------------------
                                Net deferred tax asset                    $          -          $          -
                                ============================================================================
</TABLE>

<TABLE> 

<S>                             <C> 
                                The Company has provided a 100% valuation allowance as they believe that is more likely than not
                                that they will not realize the deferred tax assets. As of December 31, 1997, for federal income tax
                                purposes, the Company has approximately $5,263,658 in net operating loss carryforwards expiring
                                through 2012. As of December 31, 1997, for State tax purposes, the Company has approximately
                                $2,631,829 in net operating loss carryforwards expiring through 2012.
 
</TABLE> 
4.     OBLIGATION UNDER         Minimum future lease payments under
       CAPITAL LEASE            capital lease obligations are as follows:
       
<TABLE> 
<CAPTION> 
                                                                                               Amount
                                 December 31,
                                 --------------------------------------------------------------------------- 
                                    <S>                                                          <C> 
                                    1998                                                        $ 113,064
                                    1999                                                          113,064
                                    2000                                                          113,064
                                    2001                                                          108,545
                                    Thereafter                                                     61,268
                                ---------------------------------------------------------------------------- 
                                                                                                  509,005
 
                                Amount representing interest                                     (149,545)
                                ---------------------------------------------------------------------------- 
 
                                Present value of minimum lease payments                         $ 359,460
                                ---------------------------------------------------------------------------- 
</TABLE>

                                                                            F-16
<PAGE>
 
<TABLE> 
<CAPTION> 

                                              CINEMA RIDE, INC. AND SUBSIDIARIES                
                                                                                                
                                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------------------------ 

<S>    <C>                      <C>
5.     NOTES PAYABLE            NOTE PAYABLE TO BANK
 
                                On March 6, 1996, Cinema Ride Edmonton, Inc. obtained a $40,328
                                loan ($55,000 Canadian dollars) from a Canadian bank at prime
                                plus two percent (total interest is 6.5% at December 31, 1997).
                                The loan has a term of four years requiring monthly payments of
                                approximately $1,027 ($1,400 Canadian dollars) and is guaranteed
                                by the Parent.  The lender has first security interest in the
                                equipment and improvements located at the West Edmonton Facility.
                                The loan also restricts transfer of funds to the Parent other
                                than amounts in excess of cash flow.  The loan may be prepaid at
                                any time without any penalties.  As of December 31, 1997 and
                                1996, $22,144 and $32,680 remained unpaid on this loan.

                                LOAN PAYABLE TO UNAFFILIATED PARTY
 
                                On June 17, 1996, the Company obtained a loan for $600,000 from
                                an unaffiliated party.  The loan was due in sixty days bearing
                                interest at 2% per month compounded monthly.  In connection with
                                obtaining the loan, the Company agreed to pay the lender a 2
                                point fee ($12,000), and issue 50,000 warrants to purchase the
                                Company's common stock at the then fair market value.  The
                                Company repaid this loan during the quarter ended September 30,
                                1996.  As of December 31, 1996, all accrued interest relating to
                                this note has been paid.  In connection with the Company's
                                issuance of warrants to this lender, the Company recognized,
                                based on a valuation of these warrants, $20,825 as an additional
                                interest expense during 1996.

                                NOTES PAYABLE TO INVESTORS
 
                                During the quarter ended September 30, 1996, the Company obtained
                                loans aggregating $437,500 bearing interest at 15% paid monthly
                                with the principal balance due at the earlier of one year or at
                                the time the Company successfully obtains permanent financing.
                                These loans are secured by certain equipment owned by the Company
                                and by the net cash flow of the Las Vegas Facility.  In
                                connection with obtaining these loans, the Company issued 437,500
</TABLE>

                                                                            F-17
<PAGE>
 
<TABLE> 
<CAPTION> 

                                              CINEMA RIDE, INC. AND SUBSIDIARIES                

                                            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

------------------------------------------------------------------------------------------------ 
<S>    <C>                      <C>
5.     NOTES PAYABLE            NOTES PAYABLE TO INVESTORS (CONTINUED)
       (CONTINUED)
                                shares of the Company's common stock to the lenders at the then
                                fair value of $.58 per share.  In connection with the issuance of
                                the shares to the lenders the Company recognized $250,469 in
                                financing costs which is deferred and is amortized as interest
                                expense over the life of these loans.  During the fourth quarter
                                of 1996, some of the lenders elected to convert $100,000 of the
                                above notes to common stock at the then fair market value of $.40
                                per share.  Accordingly, the Company issued 250,000 additional
                                shares relating to the conversion of these notes.  During January
                                1997, the Company repaid the remaining $337,500 balance of the
                                notes.  As such, the Company wrote off, in January 1997, the
                                remaining unamortized portion of the deferred financing costs
                                relating to these notes as interest expense.

                                NOTE PAYABLE TO LENDER
 
                                On December 31, 1996, the Company closed a financing agreement
                                (the "Financing Agreement") with Finova Technology Finance, Inc.
                                (The "Lender") structured as a sale leaseback transaction of
                                certain equipment owned by the Company.  Based on the substance
                                of this transaction, the Financing Agreement was accounted for as
                                a note payable for financial reporting purposes.  The gross loan
                                amount was for $1,575,027 to be paid over a four year term at
                                $40,903 per month with a balloon payment of $157,503.  The loan
                                bears  interest at an annual rate of 15.7%.  The financing
                                agreement requires the Company to repurchase the equipment at the
                                end of the lease for $1. In connection with obtaining the
                                financing, the Lender required the Company to raise a minimum of
                                $500,000 through a combination of equity, subordinated debt, or
                                conversion to equity of existing notes/liabilities.  The balance
                                of the loan at December 31, 1997 was $1,216,384 and the Lender
                                held back $82,664 representing the first and last payments of the
                                financing agreement.  The Company issued 444,285 shares of the
                                Company's
</TABLE>

                                                                            F-18
<PAGE>
 
<TABLE> 
<CAPTION> 

                                              CINEMA RIDE, INC. AND SUBSIDIARIES                
                                                                                                
                                            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
                                                                                                
------------------------------------------------------------------------------------------------ 
<S>    <C>                      <C>
5.     NOTES PAYABLE            NOTE PAYABLE TO LENDER (CONTINUED)
       (CONTINUED)
                                common stock to various vendors and 250,000 shares to existing
                                note holders in lieu of amounts owed by the Company, enabling the
                                Company to meet the lender's requirement.  The Company also
                                issued 100,000 warrants to the lender at an exercise price of
                                $2.00 per share, and an aggregate of 265,643 warrants to the
                                brokers at an exercise price of $.41 per share representing
                                approximately 110% of the market value at the closing date of the
                                financing.  In connection with the issuance of the warrants to
                                the lender and brokers, the Company recognized, based on a
                                valuation of these warrants, $47,498 as deferred financing costs
                                which will be amortized over the life of the loan.

                                NOTES PAYABLE TO VENDORS
 
                                As a part of the requirements to obtain the Financing Agreement
                                above during 1996, the Company converted a total of $64,965 of
                                accounts to vendors into unsecured subordinated notes payable
                                bearing interest at 8%.  Principal payments on the notes were to
                                be made at 20% increments on April 30, 1997 and July 31, 1997
                                with the remaining 60% due on September 30, 1997.  As of December
                                31, 1997, these loans were paid in full.

                                NOTE PAYABLE TO RELATED PARTY
 
                                During April 1997, the Company obtained a $50,000 loan from a
                                related party bearing interest payable monthly at 18% per annum
                                with principal due in six months.  The Company paid this loan in
                                full as of December 31, 1997.  In connection with obtaining this
                                loan, the Company issued 25,000 warrants at an exercise price of
                                $.28 per share.  The warrants were valued at $3,000 and were
                                charged to interest expense during 1997.
</TABLE>

                                                                            F-19
<PAGE>
 
<TABLE> 
<CAPTION> 

                                              CINEMA RIDE, INC. AND SUBSIDIARIES                  
                                                                                                  
                                            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                                                  
------------------------------------------------------------------------------------------------  
<C>    <S>                      <C>
  5.   NOTES PAYABLE            Minimum future payments under notes payable are as follows:
       (CONTINUED)
</TABLE>

<TABLE>
<CAPTION>
                                December 31,                                          Amount
                                --------------------------------------------------------------
                                <S>                                              <C>
                                    1998                                          $    332,854
                                    1999                                               390,737
                                    2000                                               514,937
                                ---------------------------------------------------------------
                                                                                  $  1,238,528
                                ==============================================================
</TABLE>

<TABLE>
<S>    <C>                      <C>
6.     TIMES SQUARE LEASE       The Company entered into an agreement dated October 28, 1997 with
       TERMINATION              the landlord of the Times Square Facility to terminate the lease
                                due to the intended demolition of the existing building where the
                                facility is located.  The agreement, among other things, requires
                                the Company to vacate the premises by February 28, 1998 and waive
                                the security deposit previously made to the landlord.  In
                                consideration, the landlord 1) paid the Company $500,000 upon the
                                execution of the agreement, 2) agreed to a rent concession for
                                the period from April 1997 through October 1997, 3) waived its
                                right for all future rents following execution of the agreement
                                to include the months of November 1997 through February 1998, and
                                4) paid the Company an additional $500,000 upon the timely
                                delivery of possession of the premises to the landlord on or
                                before February 28, 1998.  The Company informed the Landlord on
                                February 26, 1998 that the Company had vacated the premises and
                                the remaining $500,000 payment was received on March 5, 1998.

                                As a result of the termination agreement, the Company recorded a
                                loss of $275,548 related to the impairment of signage, equipment
                                and moving costs.  The Company received $500,000 upon the
                                execution of the agreement and recorded a receivable of $500,000
                                for the remaining amount due.  A deferred liability of $1,490,915
                                was recorded in connection with the agreement and $1,652,544 of
                                net leasehold improvements and equipment are included as assets
                                to be disposed of.
</TABLE>

                                                                            F-20
<PAGE>
 
<TABLE> 
<CAPTION> 
                                              CINEMA RIDE, INC. AND SUBSIDIARIES                 
                                                                                                 
                                            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                                                 
------------------------------------------------------------------------------------------------  
<S>    <C>                      <C>
7.     CAPITAL STOCK            Holders of the common stock purchased in previous private
       TRANSACTIONS             placements in 1993 and 1994 received certain demand and piggyback
                                registration rights as a result of the initial public offering of
                                the common stock (see below).  The Company has also granted
                                certain "piggyback" registration rights for a period of five
                                years after the closing date of a public offering of the
                                Company's common stock, in the event of any subsequent public
                                offering of the Company's securities, with respect to the common
                                stock purchased in the private placement.

                                In September 1994, the Company completed an initial public stock
                                offering of 1,200,000 shares of common stock, with a par value of
                                $.01 per share, at a price of $5 per share  and 2,000,000
                                warrants, at a price of $.25 per warrant.  Each warrant entitles
                                the holder thereof, upon exercise, to purchase one share of
                                common stock at a price of $6.00 per share, subject to
                                adjustments, exercisable for a period of forty eight months,
                                commencing twelve months from the date of the offering.  The
                                warrants are subject to redemption by the Company, at any time,
                                commencing eighteen months following the date of issuance,
                                subject to earlier redemption at a price of $.25 per warrant if
                                the average closing bid price for the common stock equals or
                                exceeds $7.00 per share for any 20 trading days ending on the
                                fifth day prior to the date of the notice of redemption.  In
                                November 1994, the underwriter in the Company's initial public
                                offering exercised it option to purchase 180,000 shares of Common
                                Stock and 300,000 Redeemable Warrants at the initial public
                                offering prices of such securities in order to meet
                                over-allotments in connection with the initial public offerings.

                                In conjunction with the public stock offering, the Company sold
                                separate warrants to the underwriter to purchase shares of common
                                stock and redeemable warrants of the Company in an amount equal
                                to 10% of the total shares of common stock and redeemable
                                warrants underwritten excluding any over-allotment options
                                granted to the underwriter.  The warrants were sold at a price of
                                $.0001 per share and are exercisable at 120% of the initial
                                offering price per share of the Company's common stock and $.30
                                per redeemable warrant for a four year period commencing twelve
                                months after the closing date of the public offering.  The
                                holders of the warrants sold to the underwriter will have certain
                                registration rights.
</TABLE>

                                                                            F-21
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                              CINEMA RIDE, INC. AND SUBSIDIARIES                 
                                                                                                 
                                                                  SUMMARY OF ACCOUNTING POLICIES                 
                                                                                                 
------------------------------------------------------------------------------------------------  
<S>                         <C>
  7.   CAPITAL STOCK            During January 1997, and in accordance with the warrant
       TRANSACTIONS             agreements, the Company, repriced the exercise price of the
       (CONTINUED)              warrants issued in connection with its Initial Public Offering.
                                The Company also issued additional warrants as required by the
                                warrant agreements as follows:
</TABLE>

<TABLE>
<CAPTION>
                                                                      Original      Adjusted       Original       Additional   
                                                                      Exercise      Exercise       Warrants        Warrants 
                                                                       Price         Price          Issued          Issued   
                                ----------------------------------------------------------------------------------------------
                                <S>                                   <C>           <C>            <C>            <C>
                                Private Placement Warrants            $ 5.00        $ 4.16         500,000          101,519
                                                                                                                     
                                Public Warrants                       $ 6.00        $ 4.97       2,000,000          415,656
                                                                                                                    
                                Underwriters Warrants                 $ 5.00        $ 4.16         300,000           60,911 
                                ----------------------------------------------------------------------------------------------
</TABLE>

<TABLE>

<S>                             <C> 
                                During the year ended December 31, 1997, the Private Placement 
                                Warrants outstanding of 601,519 were canceled.

                                During the year ended December 31, 1996, the Company issued its
                                Chief Financial Officer 30,000 shares of the Company's common
                                stock at the then fair market value of $.53 per share.  The
                                Company recorded the then fair market value of the shares as
                                additional compensation to the officer.

                                During the years ended December 31, 1997 and 1996, the Company
                                issued 16,000 and 444,285 shares of common stock at the then fair
                                market values to vendors in exchange for services in the amount
                                of $960 and $347,677, respectively.

                                On June 14, 1996, the Company's stockholders approved an
                                amendment to the Company's Certificate of Incorporation to
                                increase the number of authorized shares of common stock from
                                10,000,000 to 20,000,000.

                                During January 1997, the Company issued 55,000 shares of the
                                Company's common stock to employees, including 50,000 shares to
                                its Chief Financial Officer at the fair market value of $.38 per
                                share.  The Company recorded the then fair market value of the
                                shares as additional compensation to the employees.

                                During April 1997, the Company repurchased 51,786 shares of the
                                Company's common stock previously issued to one of its vendors
                                for $29,000.
</TABLE>

                                                                            F-22
<PAGE>
 
<TABLE> 
<CAPTION> 
                                              CINEMA RIDE, INC. AND SUBSIDIARIES                 
                                                                                                 
                                            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                                                 
------------------------------------------------------------------------------------------------  
<S>    <C>                      <C>
8.     STOCK OPTION PLANS       EMPLOYEE STOCK OPTION PLAN
       AND WARRANTS
       ISSUED TO EMPLOYEES      The Company adopted a Stock Option Plan (the "Plan") for
                                officers, employees, directors and consultants of the Company or
                                its subsidiaries, if any, subject to ratification by the
                                Company's stockholders.  The Plan authorizes the granting of
                                incentive stock options and non-qualified stock options to
                                purchase an aggregate of not more than 900,000 shares of the
                                Company's common stock.  The Plan provides that options granted
                                will generally be exercisable at any time during a ten year
                                period (five years for a stockholder owning in excess of 10% of
                                the Company's common stock).  The exercise price for
                                non-qualified stock options shall not be less than the par value
                                of the Company's common stock.  The exercise price for incentive
                                stock options shall not be less than 100% of the fair market of
                                the Company's common stock on the date of grant (110% of the fair
                                market value of the Company's common stock on the date of grant
                                for a stockholder owning in excess of 10% of the Company's common
                                stock).

                                1995 DIRECTORS' STOCK OPTION PLAN
 
                                The Company adopted a Directors Stock Option Plan (the
                                "Directors' Plan") for non-employee directors of the Company.
                                The Directors Plan authorizes the granting of non-qualified stock
                                options to purchase an aggregate of not more than 100,000 shares
                                of the Company's common stock.  The Directors' Plan provides that
                                options granted will be exercisable during a ten year period and
                                will vest on a cumulative basis as to one third of the total
                                number of shares covered thereby at any time after one year from
                                the date the option is granted and an additional one-third of
                                such total number of shares at any time after the end of each
                                consecutive one year period thereafter until the option has
                                become exercisable as to all of such total number of shares.  The
                                exercise price for non-qualified stock options shall be the fair
                                value of the Company's common stock at the date of the grant.
</TABLE>

                                                                            F-23
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                             CINEMA RIDE, INC. AND SUBSIDIARIES                 
                                                                                                     
                                                                 SUMMARY OF ACCOUNTING POLICIES                 
                                                                                                  
------------------------------------------------------------------------------------------------  
<S>    <C>                       <C>
  8.   STOCK OPTION PLANS        OPTION AND WARRANT ACTIVITY
       AND WARRANTS
       ISSUED TO EMPLOYEES       On December 31, 1996, the Company's Board of Directors agreed on
       (CONTINUED)               repricing the exercise price of options already issued under both
                                 the Company's Stock Option Plan and Directors' Plan to the then
                                 current market value.
 
                                 Option activity during the years ended December 31, 1997 and 1996
                                 is as follows:
</TABLE>

<TABLE>
<CAPTION>
                                                                                        Stock              Weighted
                                                                                       Options           Average Price
                                 --------------------------------------------------------------------------------------
 
                                 <S>                                                       <C>                 <C>
                                 Balance outstanding, January 1, 1996            $     478,500                $ 1.57
                                 Options canceled                                         (500)                 1.66
                                 Options granted                                        40,000                  0.88    
                                 Options granted                                        50,000                  0.53    
                                 Options granted                                       241,500                  1.03    
                                 Options granted                                       100,500                  0.94    
                                 Options canceled                                     (910,000)                 1.17    
                                 Options re-issued                                     910,000                  0.38    
                                 --------------------------------------------------------------------------------------
                                 Balance outstanding, December 31, 1996                910,000                  0.38    
                                 Options canceled                                     (226,500                  0.38    
                                 Options granted                                       230,000                  0.24    
                                 ======================================================================================
                                 Balance outstanding, December 31, 1997                913,500                $ 0.34
                                 ======================================================================================
                                 Option exercisable:
                                   December 31, 1997                                   331,333                $ 0.38
                                   December 31, 1996                                   292,667                $ 0.38
                                 ======================================================================================
</TABLE>

                     Information relating to stock options at December 31, 1997
                     summarized by exercise price are as follows:

<TABLE> 
<CAPTION> 
                                                                        Outstanding                               Exercisable
                                                       ---------------------------------------------    ----------------------------
                                                                          Weighted Average                
                                Exercise Price                     ---------------------------------                Weighted Average
                                   Per Share           Shares       Life (Year)       Exercise Price     Shares       Exercise Price
                                ----------------------------------------------------------------------------------------------------
                                <S>                    <C>          <C>               <C>                <C>          <C> 
                                    $ 0.38            683,000           8.8               $ 0.38          331,500        $ 0.38

                                      0.24            220,000          10.0                 0.24                -             -     

                                      0.22             10,000          10.0                 0.22                -             -     
                                ----------------------------------------------------------------------------------------------------
                                    $ 0.22 - $0.38    913,500           9.2               $ 0.34          331,500        $  0.38
                                ----------------------------------------------------------------------------------------------------
</TABLE>

                                                                            F-24
<PAGE>


                      CINEMA RIDE, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------
<TABLE> 

<S>                           <C>    
8.    STOCK OPTION PlANS      Warrants to employees activity during the years ended 
      AND WARRANTS            December 31, 1997 and 1996 is as follows:                                            
      ISSUED TO EMPLOYEES                                                                                       
      (CONTINUED)                                                                                               
                                                                                  
                                                                                               Warrants            Weighted
                                                                                                  to               Average
                                                                                               Employees            Price
                                --------------------------------------------------------------------------------------------
                                Balance outstanding, December 31, 1996                                  -          $      -
                                Warrants granted                                                  400,000               0.24
                                --------------------------------------------------------------------------------------------
 
                                Balance outstanding, December 31, 1997                            400,000              $0.24
                                --------------------------------------------------------------------------------------------

                                There are no warrants issued to employees exercisable at 
                                December 31, 1997.

                                Information relating to warrants issued to employees at 
                                December 31, 1997 summarized by exercise price are as follows:

                                                                                          Outstanding
                                                                  ----------------------------------------------------------
                                                                                                Weighted Average
                                   Exercise Price                                -------------------------------------------
                                     Per Share                    Shares         Life (Year)            Exercise Price
                                --------------------------------------------------------------------------------------------
                                      $ 0.25                     300,000             5.0                      $ 0.25
                                        0.19                     100,000             7.0                        0.19
                                --------------------------------------------------------------------------------------------
 
                                   $0.19 - 40.25                 400,000             5.5                      $ 0.24
                                --------------------------------------------------------------------------------------------
                                All stock options issued to employees have an exercise price not
                                less than the fair market value of the Company's common stock on
                                the date of grant, and in accordance with accounting for such
                                options utilizing the intrinsic value method there is no related
                                compensation expense recorded in the Company's financial
                                statements.  Had compensation cost for stock-based compensation
</TABLE>

                                                                            F-25
<PAGE>


 
                      CINEMA RIDE, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
<TABLE> 

<S>                             <C>
  8.   STOCK OPTION PLANS       been determined based on the fair value at the grant dates
       AND WARRANTS             consistent with the method of SFAS 123, the Company's net income
       ISSUED TO EMPLOYEES      and earnings per share for the years ended December 31, 1997 and
       (CONTINUED)              1996 would have been reduced to the pro forma amounts presented
                                below:
 
                                December 31,                                  1997            1996
                                --------------------------------------------------------------------
                                Net loss
                                  As reported                           $  (1,454,545)      (860,789)
                                  Pro forma                             $  (1,509,448)      (924,564)
 
                                Loss per share                          
                                  As reported                           $        (.25)         (0.18)
                                  Pro forma                             $        (.2)          (0.19)
                                --------------------------------------------------------------------
                                The fair value of option and warrants grants is estimated on the
                                date of grants utilizing the Black-Scholes option-pricing with
                                the following weighted average assumptions for 1997 and 1996,
                                expected life of 7.1 years and 8.9 years:  expected volatility of
                                40% and 42%, risk-free interest rates of 8.5% and 6.15%, and a 0%
                                dividend yield.  The weighted average fair value at date of grant
                                for options granted during 1997 and 1996 approximated $0.13 and
                                $0.23 per option.

9.     COMMITMENTS              The Company leases office space for its corporate headquarters in
                                Studio City, California.  Additionally, the Company leases retail
                                space for its attractions in Las Vegas, Nevada, Edmonton, Canada
                                and New York, New York (Note 6).

                                The amendment of the Las Vegas Facility lease in December 1995
                                allows the Company to install a booth/kiosk on the main level of
                                the Forum Shops, and also gives the Company a rent reduction not
                                to exceed in total $150,000.  The rent reduction was deducted
                                from the monthly rent payment at a rate of $18,000 per month
                                starting February 1, 1996 until the Company had recorded $150,000
                                as deferred rent and rent is being recorded on a straight-line
                                basis through the expiration of lease which is July 2004.
                                Deferred rent at
</TABLE>

                                                                            F-26
<PAGE>

 
                      CINEMA RIDE, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
<TABLE> 


<S>                             <C>
9.     COMMITMENTS              December 31, 1997 was $137,617 which also includes deferred rent
       (CONTINUED)              on the corporate office lease.  In addition, the lease amendment
                                requires the Landlord to install at the Landlord's cost, within
                                six months, new signage that is acceptable to the Company and to
                                take possession of the original sign.  The Company will still be
                                responsible for paying off the remaining obligation at that time.

                                Subsequent to year end, the Company reached an agreement with the
                                Lessor of the New York Times Square sign whereby both parties
                                agreed to terminate the lease and for the Company to purchase the
                                sign for $100,000 in cash.  In return, the Lessor agreed to
                                return 93,482 shares of the Company's common stock, which were
                                previously issued to the Lessor during December 1996, to the
                                Company.

                                Minimum future rental payments for each of the next five years
                                and thereafter is as follows:
</TABLE>

<TABLE>
<CAPTION>
                                Year ending                                           Annual
                                December 31,                                           Rent
                                -------------------------------------------------------------------
                                <S>                                               <C>  
                                  1998                                            $    491,090
                                  1999                                                 492,920
                                  2000                                                 440,643
                                  2001                                                 380,988
                                  Thereafter                                           984,219
                                ------------------------------------------------------------------
                                                                                  $  2,789,860
                                ==================================================================
</TABLE>

<TABLE>
<CAPTION>
<S>                             <C> 
                                Rent expense for the years ended December 31, 1997 and 1996 was
                                $807,555 and $632,726.
                                    
                                During the quarter ended September 30, 1997, the Company entered
                                into a three year employment agreement with its Chief Executive
                                Officer.  The agreement provides for a base annual salary of
                                $195,000, annual increases of 8%, annual bonuses based on 6% of
                                the Company's annual earnings before interest, taxes,
                                depreciation and amortization in excess of $500,000, and issuance
                                of 300,000 options exercisable at $0.25 per share vesting equally
</TABLE>

                                                                            F-27
<PAGE>
 
<TABLE> 
<CAPTION> 

                                              CINEMA RIDE, INC. AND SUBSIDIARIES                 
                                                                                                 
                                            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                                                 
------------------------------------------------------------------------------------------------  
<C>    <S>                      <C>
  9.   COMMITMENTS              over the next three years.  The agreement also approves the
       (CONTINUED)              granting of additional performance options based on various
                                occurrences such as the opening of new locations, obtaining
                                additional funds, and attaining and maintaining certain market
                                price for the Company's common stock.

                                During April 1997, the Company entered into a three year
                                employment agreement with its Chief Financial Officer.  The
                                agreement provides for a base salary of $120,000, annual
                                increases of 8%, and issuance of 100,000 options  exercisable at
                                the then current market price vesting equally over the next two
                                years.

 10.   SUBSEQUENT               In January 1998, the Company made a loan of $35,000 to its Chief
       EVENTS                   Executive Officer.  The loan bears interest at a rate of 8.5% per
                                year and principal and interest are due at the earlier of (1)
                                June 30, 2001 or (2) six months after the officer ceases to be an
                                employee.  This loan is secured by shares equivalent to the
                                unpaid value of the note.
 
                                Subsequent to year ended December 31, 1997, the Company issued
                                its Chief Financial Officer 51,787 shares of the Company's common
                                stock at the then fair market value of $0.09 per share.  The
                                Company recorded the then fair market value of the shares as
                                additional compensation to the officer.
</TABLE>

                                                                            F-28
<PAGE>
 
                                   SIGNATURES

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



                             CINEMA RIDE, INC.



                             BY:   /s/ MITCH FRANCIS
                                ----------------------------------
                                 MITCH FRANCIS, PRESIDENT


       In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.


<TABLE>
<CAPTION>

SIGNATURE                                                      DATE
---------                                                      ----
<S>                                                       <C> 
 
/s/ MITCH FRANCIS                                         March 19, 1998
----------------------
Mitch Francis
Chairman of the Board, President, Chief Executive
Officer and Director (principal executive officer)
 
/s/ TOUFIC R. BASSIL                                      March 19, 1998
----------------------
Toufic R. Bassil
Chief Financial Officer, Secretary and Treasurer
(principal financial officer, principal accounting
officer).

/s/ BENJAMIN  FRANKEL                                     March 19, 1998
----------------------  
Benjamin Frankel
Director

/s/ NORMAN FEIRSTEIN                                      March 19, 1998
-----------------------
Norman Feirstein
Director
</TABLE> 

                                      -16-
<PAGE>
 
<TABLE> 
<CAPTION> 

                                 EXHIBIT INDEX


  EXHIBIT                                                                    SEQUENTIAL  
  NUMBER        DESCRIPTION                                                  PAGE NUMBER           
  ------        -----------                                                  -----------       
<S>             <C>                                                          <C>               
    3.1         Certificate of Incorporation of the Company, as amended*                       
    3.2         Bylaws of the Company*                                                         
    3.3         Certificate of Incorporation of Cinema Ride Edmonton, Inc.***                  
    3.4         Bylaws of Cinema Ride Edmonton, Inc.***                                        
    4.1         Specimen Stock Certificate of the Company*                                     
    4.2         Form of Redeemable Warrant Agreement (with form of certificate attached)*      
    4.3         Form of Underwriter's Warrant Agreement (with form of certificate attached)*   
    4.4         Lender's Warrant Certificate ****                                              
    4.5         Warrant Holder Rights agreement dates as of December 31, 1996 between          
                the Company and the Lender.****                                                
    10.1        Form of Employment Agreement of Mitch Francis dated September 14, 1994.*       
    10.2        Form of Employment Agreement of Gary Packman dated September 14, 1994.*        
    10.3        Form of Indemnification Agreement*                                             
    10.4        Cinema Ride, Inc. Stock Option Plan*                                           
    10.5        Equipment Lease, dated June 1, 1994, between the Company and Rust Leasing      
                International*                                                                 
    10.6        Placement Agent Agreement, dated May 10, 1993, between the Company and the     
                Underwriter*                                                                   
    10.7        Placement Agent Agreement, dated September 3, 1993, between the Company        
                and the Underwriter*                                                           
    10.8        Equipment lease, dated April 6, 1995, between the Company and Sign Systems.**  
                                                                                               
    10.10       Agreement, dated December 15, 1993, between the Company and Computer 3-D,      
                Inc.*                                                                          
    10.11       Agreement, dated December 28, 1993, among the Company and Boyington Film       
                Productions, Inc. and Peter Shillingford*                                      
    10.12       Agreement, dated January 12, 1994, between the Company and Topix Computer      
                Graphics and Animation*                                                        
    10.13       Agreement, dated December 21, 1993, between the Company and Multi-             
                Dimensional Media Services, Inc.*                                              
    10.14       Contract, dated January 3, 1994, between the Company and McFadden Systems,     
                Inc.*                                                                          
    10.15       Letter Agreement, dated April 30, 1993, between the Company and Jack           
                Hollander & Associates, Inc.*                                                  
    10.16       Standard Office Lease -- Gross, dated as of March 29, 1993, between the Company
                and Ventura Place Associates*                                                  
    10.17       Lease, dated July 2, 1993, between Forum Developers Limited Partnership and    
                the Company*                                                                   
    10.18       Third Lease Amendment, dated July 27, 1994, between Forum Developers           
                Limited Partnership and the Company*                                           
    10.19       Equipment Purchase and Ride Film Rental Agreement, dated August 8, 1994,       
                between the Company and Nickelodeon Theater Co., Inc.*                         
    10.22       Form of Financial Advisory and Consulting Agreement between the Company        
                and the Underwriter*                                                           
    10.23       Form of Indemnification Agreement between the Company and the Underwriter*     
    10.24       Cancellation Agreement relating to certain shares of Common Stock*             
    10.25       Contract, dated December 10, 1994, between the Company and McFadden            
                Systems, Inc.*                                                                 
    10.26       Form of Promissory Note and Security Agreement (stock pledge)                  
                of Mr. Mitch Francis dated July 5, 1995.***                                    
    10.27       Form of Promissory Note and Security Agreement (stock pledge)                  
                of Mr. Gary Packman dated July 5, 1995.***                                     
</TABLE> 

                                      -17-
<PAGE>
 
<TABLE> 

<S>             <C>            
    10.28       Standard Office Lease -- Gross, dated March 21, 1995, between the
                Company and AC Ventures L.P.***                                  
    10.29       First Lease Amendment, dated April 15, 1995, between the         
                Company and AC Ventures L.P.***                                  
    10.30       Lease, dated July 17, 1995 between the Company and West Edmonton 
                Mall Property Inc.***                                            
    10.31       Lease, dated August 8, 1995 between the Company and Three Times  
                Square Center Partners, L.P.***                                  
    10.32       Fourth Lease Amendment, dated December 30, 1995, between Forum Developers 
                Limited Partnership and the Company (filed as part of Registrant's 10-KSB for 
                the year ended December 31, 1995).
    10.33       Form of employment agreement with Toufic Roger Bassil dated April 29, 1997.*****
    10.34       Master Equipment Lease Agreement dated as of December 12, 1996, between
                the Lender and the Company.****
    10.35       Form of employment agreement with Mitch Francis dated September 1, 1997.******
    10.36       Stipulation and consent judgement between the Company and Three Times
                Square Center Partners, L.P., dated October 28, 1997.******
    27          Financial Data Schedule                                         
</TABLE> 
____________________
*      Incorporated by reference to Exhibits of Registrant's Registration
       Statement on Form SB-2, Registration No. 33-80672.
**     Incorporated by reference to Exhibits previously filed as part of the
       Registrant's quarterly report on Form 10-QSB for the quarter ended March
       31, 1995.
***    Incorporated by reference to Exhibits previously filed as part of the
       Registrant's quarterly report on Form 10-QSB for the quarter ended June
       30, 1995.
****   Incorporated by reference to Exhibits previously filed as part of the
       Registrant's Form 8-K filed on January, 28, 1997. 
*****  Incorporated by reference to Exhibits previously filed as part of the
       Registrant's quarterly report on Form 10-QSB for the quarter ended March
       31, 1997.
****** Incorporated by reference to Exhibits previously filed as part of the
       Registrant's quarterly report on Form 10-QSB for the quarter ended
       September 30, 1997.

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