Edgar Filing: SKYLINE MULTIMEDIA ENTERTAINMENT INC

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

FOR THE FISCAL YEAR ENDED JUNE 30, 2004
COMMISSION FILE NO. 0-23396

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

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

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

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT :

Common Stock, $.001 Par Value Per Share

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

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

Our revenues for our most recent fiscal year were $7,640,000.

The aggregate market value of the voting stock held by non-affiliates of Skyline
was $39,219 as of October 15, 2004, based on the average bid and asked price of
$.03 per share as of that date.

There were 2,095,000 shares of common stock, $.001 par value per share, issued
as of June 30, 2004. Additionally, there were 1,090,909 shares of Series A
Convertible Participating Preferred Stock, $.001 par value per share, issued and
outstanding, and 960,000 shares of class A common stock, $.001 par value, issued
as of June 30, 2004.

PART I

ITEM 1. DESCRIPTION OF BUSINESS.

GENERAL

Skyline Multimedia Entertainment, Inc. (the "Company") is a holding company
incorporated under the laws of the State of New York on November 2, 1993, which
owns all of the outstanding stock of its operating subsidiary, New York Skyline,
Inc. ("Skyline"). We operate the New York Skyride, a state-of- the-art simulator
attraction located in the Empire State Building New York City, New York.

On December 22, 1994, we commenced operations of New York Skyride. New York
Skyride is an exhilarating simulated "aerial tour" of New York City in a
futuristic "spacecopter". New York Skyride features two 40 passenger flight
simulators and related computer-controlled projection technologies to provide
visitors with a complete "New York" experience, including an extensive pre-show
area featuring interactive multimedia exhibits depicting the various tourist
sites and attractions in and around the New York Metropolitan area, and
culminating in a ten minute aerial "adventure" in and around New York City.
Passengers not only experience the sensations of an actual aerial flight, but
also experience visual images projected on screens within the simulator that
envelop the viewer with a variety of sights and sounds. New York Skyride is
intended to provide visitors with a sensation of taking a "once in a lifetime"
aerial adventure around New York City.

Our revenues have been generated primarily from ticket sales for New York
Skyride with additional revenues generated from the sale of souvenir merchandise
and profit-sharing arrangements from the sale of tickets to other attractions.
We are also seeking to enter into corporate sponsorship and advertising
arrangements with certain consumer product companies to provide additional
revenues and marketing exposure.

Our principal executive office is located at the Empire State Building, 350
Fifth Avenue, New York, New York 10118 and our telephone number is (212)
564-2224.

THE NEW YORK SKYRIDE EXPERIENCE

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

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

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

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

SIMULATOR AND VIRTUAL REALITY TECHNOLOGIES

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

A key component of the simulator technology is the "show control system", which
is a PC-based computer program that coordinates and manages the motion and
gyration of the simulator with the digital video and audio elements of the
program. For example, when the digital image shows the spacecopter banking to
the right, there must be a precise, coordinated movement of the simulator in
that direction to both convince the passengers' senses that they are flying in a
spacecopter and prevent passenger disorientation. The projection equipment is a
fully automated digitalized system that eliminates the need for a projector
operator. The digital video was developed in conjunction with Live From Earth
Entertainment, Inc., a production studio with extensive experience in digital
video concepts.

THE EMPIRE STATE BUILDING LOCATION

New York Skyride is located on the second and third floors of the Empire State
Building, in a 21,800 square foot site that wraps around the south and west
sides of the building. The location's entrance is situated adjacent to the main
lobby escalator that takes all visitors to the waiting area for the Observatory
elevators. Signs in the Empire State Building's lobby and in the Observatory
ticket purchase area inform visitors to the Empire State Building about New York
Skyride. Most importantly, visitors who purchase tickets to the Observatory are
offered the choice of purchasing a combined Observatory/New York Skyride ticket
at a reduced price, as compared with the separate purchase of tickets to both
attractions. The cost of individual tickets to New York Skyride and the
Observatory are $15.50 and $12.00 for adults, respectively, and $13.50 and $7.00
for children under the age of 12, respectively. In comparison, the cost of a
combined ticket with the Observatory is $22.00 for adults and $16.00 for
children under the age of 12. Any discount resulting from combined ticket sales
are deducted from the admission price of a New York Skyride ticket. Children's
rates, group rates and senior discounts are also offered along with other
promotional discounts.

The Empire State Building is a focal point for the tourism industry in New York
City. The Observatory, which opened in 1934 and is located on the 86th floor,
has achieved worldwide recognition and publicity, and is a primary destination
for a large percentage of New York City's tourist traffic. Estimated paid
attendance figures provided by management of the Empire State Building for the
last five years for the Observatory are summarized below.

EMPIRE STATE BUILDING OBSERVATORY ADMISSION TICKET SALES (1000'S)

FISCAL YEAR
ENDED JUNE 30, 2000 2001 2002 2003 2004
---- ---- ---- ---- ----

TOTAL ATTENDANCE 3,675 3,397 2,937 3,322 3,529

For the year ended June 30, 2004, our conversion rate of Observatory visitorship
averaged approximately 19.1%, an increase from an average of approximately 17.6%
for the year ended June 30, 2003. We believe that the increase in the conversion
rate is a direct result of an increase in international visitorship to the
Empire State Building observatory, as well as New York Skyride's participation
in several high profile discount programs.

ADVERTISING AND PROMOTIONAL PLANS

New York Skyride's advertising and promotional support programs concentrate on
tourists to New York City, families with children in the Greater New York
metropolitan area, and youth groups from surrounding areas. We are also
continuing our efforts to attract attendees to the Empire State Building
Observatory by offering combined Observatory and Skyride admission tickets. In
addition, we co-market with other New York City tourist companies, including
Circle Line and Gray Line.

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

CORPORATE SPONSORS

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

LICENSE AGREEMENTS

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

(i) $200,000 from April 1, 2002 through March 31, 2006;
(ii) $225,000 from April 1, 2006 through April 30, 2013; and
(iii) $186,000 from May 1, 2013 through June 30, 2016.

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

In December 1999, ESBCo and Skyline executed a Second Modification of License
Agreement ("SMLA"). This latest Amendment provides for a contingent license fee,
in addition to the flat annual fee noted above, in the event that the capture
rate at ESBCo's ticket window (number of Skyride tickets sold by ESBCo as a
percentage of Observatory tickets sold by ESBC) exceeds 10.5%. This provision
was added to the SMLA as an incentive for ESBCo to devote greater efforts to
promote the Skyride. Until the end of 1996, the capture rate at ESBCo's window
averaged approximately 15%. This rate was 8% in 2000, 7.9% in 2001, 8.94% in
2002 and 8.34% for the first nine months of 2003. The contingent license fee
ranges from an annual fee of $10,500 at 10.5% to $1,400,000 at 26%.

PATENTS AND TRADEMARKS

We do not hold any patents relating to New York Skyride or its related
technologies. Accordingly, our concept is not proprietary and is subject to
duplication and competition from entities with greater resources and strengths
than us. We have obtained a registered trademark for the name "New York
Skyride".

COMPETITION

New York Skyride competes with all other New York City tourist attractions and
cultural events such as museums, Broadway shows, shopping boutiques and cultural
and historic landmarks. While these attractions are quite different
"experiences" from New York Skyride's spacecopter trip (which we believe is the
first attraction of its type in New York City), they continue to present intense
competition for attendance and visitor dollars. Generally, these other
attractions are more established, and are owned and operated by entities that
have greater financial resources and managerial expertise than us.

In addition to competing with general New York City tourist attractions, New
York Skyride has direct competitors in the simulator markets. In September 1999,
ESPN Zone, a sports based entertainment attraction utilizing virtual reality and
simulator technologies, began operations in their Times Square location. There
can be no assurance that other virtual reality and simulator attractions will
not commence operations in the New York area in the future.

Insofar as motion simulation technologies, including show control systems (and
related projection and audio technologies), are subject to improvements and
enhancements, it is possible that competitive attractions will be able to offer
more technologically advanced "experiences" to customers than the experience
offered by New York Skyride. These attractions do not depend on motion
simulators for their special effects, and they are also likely to be developed
and operated by companies that have significantly greater financial, managerial
and promotional experience and resources than us. While these attractions may
not offer a directly competitive "product" to New York Skyride (i.e., an aerial
adventure in New York City), their presence will certainly create significant
competition for us to attract visitors to New York Skyride. We will compete with
these entities primarily on the basis of location, uniqueness of product,
marketing and price.

EMPLOYEES

As of September 30, 2004, we employed one management person and 15
non-management personnel on a full-time basis, and 45 non-management personnel
on a part-time basis.

ITEM 2. DESCRIPTION OF PROPERTY.

We have a lease agreement for the operating site of New York Skyride which
includes approximately 1,200 square feet of office space. This lease, which
covers an aggregate of approximately 21,800 square feet on the second and third
floors of the Empire State Building, is for a term of 20 years. This lease
includes 4,000 square feet that is used to accommodate the two large screens
(18' X 18') on which the New York Skyride film is shown. Our annual base rent
under this lease is scheduled in the following manner:

(i) $545,100 from April 1, 2002 through March 31, 2006;
(ii) $610,502 from April 1, 2006 through March 31, 2009;
(iii) $654,120 from April 1, 2009 through April 30, 2013; and
(iv) $561,513 from May 1, 2013 through June 30, 2016.

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

We believe that our facility in the Empire State Building is adequate for our
current operations.

ITEM 3. LEGAL PROCEEDINGS

None.

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

None.

PART II

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

PRICE RANGE OF COMMON EQUITY

Our common stock is currently traded on the Over The Counter Bulletin Board (the
"OTCBB"), under the symbol "SKYLE".

The following table sets forth the high and low sales prices of our common stock
for the fiscal periods indicated as reported in the over-the-counter market. The
quotations shown represent inter-dealer prices without adjustment for retail
mark-ups, mark-downs or commissions, and may not necessarily reflect actual
transactions.

Fiscal 2004 Fiscal 2003
----------- -----------

COMMON STOCK High Low High Low
------------ ---- --- ---- ---

1st Quarter...................... .26 .02 .03 .02

2nd Quarter...................... .28 .05 .02 .005

3rd Quarter...................... .07 .05 .02 .01

4th Quarter...................... .70 .08 .01 .01

The per share closing sales price of the common stock as reported by the OTCBB
on October 14, 2004, was $0.03.

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

INTRODUCTION

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

OVERVIEW

For the years ended June 30, 2004 and 2003, our New York Skyride facility was
visited by approximately 749,000 and 585,000 customers, respectively.

The Company's Profitability is Dependent Upon Tourism, Which May be Negatively
Impacted By Many Factors, Including the Weak Economy, Declining Tourism and
Potential Terrorist Attacks.

The Company's operations and, in turn, its revenues are dependent upon tourism,
which may be negatively impacted by certain factors, including, but not limited
to, the failure of important seasonal business to materialize, softness in the
tourism industry, a weak economy, the outbreak or spread of illness (such as
SARS), and the possibility of terrorist attacks.

The Company's operations and results may be impacted as a result of future
terrorist attacks. The Company's sole facility is located in New York City at
the Empire State Building, which may be considered a prime target for terrorist
activities. If terrorists were to attack the Empire State Building or New York
City, the Company's attendance and, in turn, its revenues may be negatively
impacted. Furthermore, if the Empire State Building were to be permanently
closed as a result of a terrorist attack, then the Company would, in all
likelihood, be forced to cease operations.

RESULTS OF OPERATIONS

Year Ended June 30, 2004 compared to Year Ended June 30, 2003

Revenues

Revenues generated during the year ended June 30, 2004 aggregated $7,640,000 as
compared to $6,361,000 for the year ended June 30, 2003. The increase in
revenues for the year ended June 30, 2004 as compared to the revenues generated
for the year ended June 30, 2003 primarily resulted from an increase in
international visitorship to the Empire State Building observatory, as well as
New York Skyride's participation in several high profile discount programs.

Total Operating Expenses

Total operating expenses incurred for the year ended June 30, 2004 aggregated
$5,780,000, as compared to $5,522,000 for the year ended June 30, 2003. The
increase from the year ended June 30, 2003 was primarily due to an increase in
advertising and other promotion costs.

Net Income (Loss) And Income (Loss) Per Share

The basic and diluted net loss and loss per share was ($597,000) and ($.26) for
the year ended June 30, 2004, as compared to ($1,578,000) and ($.69) for the
year ended June 30, 2003. This included interest expense of $2,465,000 and
$2,460,000 for the years ended June 30, 2004 and June 30, 2003, respectively.
For a complete description of the Company's outstanding notes payable please see
Note B of the Company's Financial Statements for the year ended June 30, 2004.

For the year ended June 30, 2004, we had income from operations (before interest
income and expense) of approximately $1,860,000, as compared to an income from
operations (before interest income and expense) of approximately $839,000 for
the year ended June 30, 2003.

LIQUIDITY AND CAPITAL RESOURCES

Working Capital Deficiency

The working capital deficiency at June 30, 2004, was approximately
($13,217,000). Such a deficiency relates to the debt obligations of the Company
as further described below.

Financing Arrangements

As of the date hereof, we have the following financing arrangements in place:

Senior Credit Agreement

The Company entered into a Senior Credit Agreement, dated as of December 20,
1996 (the "Senior Credit Agreement"), with certain institutional lenders (the
"Lenders") pursuant to which the Company initially borrowed an aggregate of
$2,500,000 in the form of senior notes (the "Senior Notes"), which accrued
interest at 14% a year and required the payment of both principal and interest
on December 20, 2001. Subsequently, in February 1997 and March 1997, the parties
entered into a Amendments to the Senior Credit Agreement pursuant which provided
for (i) the borrowing of an aggregate of $4,450,000, and (ii) the acceptance of
funds from new additional lenders. In connection with the debt, the lenders
received warrants to purchase up to 434,143 shares of common stock at an
exercise price of $4.25 per share.

The Company is in default on the Senior Notes, which became due on December 20,
2001. As a result, effective December 20, 2001, the interest rate on the
principal and unpaid interest was increased to 21%.

Senior Secured Credit Agreement

The Company entered into a Senior Secured Credit Agreement (the " Senior Secured
Credit Agreement"), dated as of May 20, 1998, with certain of the Lenders
pursuant to which the Company initially borrowed an aggregate of $935,000 in the
form of senior secured demand notes (the "Demand Notes"). The Demand Notes
accrue interest at 14% a year and are collateralized by substantially all the
assets of the Company and its subsidiaries not otherwise pledged. Subsequently,
in May 1998 and July 2000, the parties entered into Amendments to the Senior
Secured Credit Agreement pursuant to which the Company's aggregate borrowings
were increased to $2,785,000 (the "Financing"), which included $500,000 of funds
that were accepted from a new additional lender. The additional $500,000 of
funds were loaned on a subordinated basis to all other debt secured under the
Senior Secured Credit Agreement.

In connection with the debt, the Lenders received Warrants that are exercisable
for an aggregate of 94% of the fully diluted Common Stock of the Company (after
issuance) at an exercise price of $.375 per share. The agreement provides for a
cashless exercise feature, whereby the holder has the option of reducing the
aggregate number of shares received based upon the fair market value (as
defined) of the Company's stock at date of exercise. Either exercise would
result in significant dilution to existing shareholders which could also result
in an annual limitation in the future utilization of the Company's net operating
loss carryforwards.

The Demand Notes and the obligations under the Senior Secured Credit Agreement
and the Warrants are also collateralized by a pledge of the stock of the
Company's subsidiaries. In connection with the Senior Secured Credit Agreement,
one of the lenders also received the right to appoint two members to the
Company's Board of Directors. Further, as a result of the issuance of Warrants
in connection with the Financing, the conversion rate of the Company's
outstanding Series A Preferred Stock (the "Preferred Stock") was adjusted from a
conversion rate of one share of Common Stock for each share of Preferred Stock
to a conversion rate of 6.91 shares of Common Stock for each share of Preferred
Stock.

Other Notes Payable

The Company has also borrowed an additional $500,000 of funds from one of the
Lenders, which is payable upon demand and bears interest at the rate of 14%.

Preferred Stock

As discussed above, the Company also has 1,090,909 shares of Series A
Convertible Participating Preferred Stock outstanding, which shares were
originally sold to one of the lenders in 1995. The following is a summary of the
rights, preferences, qualifications, limitations and restrictions of the
Preferred Stock:

o The holders are entitled to an aggregate of up to 24.9% of the
outstanding voting power of the Company on all matters which come
before the shareholders.
o A majority of the holders are entitled to elect two directors of the
Company. Pursuant to this right, in August 2002, the SBA, as the
Receiver for Prospect Street, elected Richard Stewart as a director of
the Company;
o Additionally, so long as 272,727 shares of Preferred Stock remain
outstanding, the holders thereof will have the ability to elect a
majority of the Board of Directors and obtain up to 50.1% of the
outstanding voting power of the Company in the event that the holders
of the Preferred Stock determine in good faith that such action is
reasonably necessary for the protection of its investment;
o As stated above, as a result of the issuance of Warrants in connection
with the financing pursuant to the Credit Agreement, the conversion
rate of the Preferred Stock held by Prospect Street was adjusted from
a conversion rate of one share of Common Stock for each share of
Preferred Stock to a conversion rate of 6.91 shares of Common Stock
for each share of Preferred Stock. Thus, the Preferred Stock may be
converted into an aggregate of 7,538,181 shares of common stock of the
Company; and
o The Preferred Stock and underlying Common Stock into which it is
convertible are subject to both demand and piggyback registration
rights.

In September 2003, an investor acquired from the Lenders all of (i) the Senior
Notes and Demand Notes (including all unpaid interest thereon), (ii) the
warrants issued in connection with the Senior Credit Agreement and the Senior
Secured Credit Agreement, (iii) the preferred and common stock held by the
Lenders, and (iv) all of the Lender's rights under the Senior Credit Agreement
and the Senior Secured Credit Agreement. In addition, following the acquisition
of the debt, the new investor notified the Company of its demand for repayment
of $3 million, to be applied against unpaid interest, which amount was paid in
September 2003.

Letter From Investor

In October 2004, the Company received a letter from the Investor setting forth
the Investor's proposed plan of operations for the Company and service of the
Debt. In the letter the Investor stated that although it has not waived its
rights to pursue all remedies available to it in connection with the Debt, it
would not require immediate satisfaction of the Debt if certain demands are
followed. The demands are as follows:

o payment of not less than 100% of the Company's monthly operating cash
flow to the Investor to be applied initially toward the interest and
then toward the principal of the Debt, which such payments commenced
on October 15, 2004 and continue semi-monthly, on the 15th and 30th
day of each month thereafter;

o unless the Investor agrees in writing the Company is not permitted to
(i) make any expenditure in an amount greater than $5,000, (ii) incur
any indebtedness, (iii) modify, change or execute any lease, or (iv)
take any action not in the ordinary course of business;

o conduct its business in accordance with a yearly budget;

o use its best efforts to preserve intact its business organization;

o confer with the Investor regarding operational matters and adverse
events; and

o provide the Investor with a weekly information report.

The Company is in continuing discussions with the Investor regarding the Debt
and the satisfaction of the conditions set forth in the letter. It should be
noted, however, that notwithstanding the satisfaction by the Company of all of
the conditions set forth in the letter from the Investor, the Investor
specifically reserved the right to demand payment in full on all obligations.
The Company is dependent on the continued forbearance of its note holder because
the Company currently does not have available funds to fully repay these loans
and the accrued interest on them. The above factors give rise to substantial
doubt as to the ability of the Company to continue as a going concern.

CAPITAL COMMITMENTS

The following is a summary of the Senior Notes, Demand Notes, Other Notes and
warrants currently outstanding:

Principal Accrued
Financing Amount of Maturity Interest as of Number of
Instrument Notes Date 6/30/04(1) Warrants

Senior Notes $ 4,450,000 12/20/01 (2) $ 4,640,483 434,143
Demand Notes $ 2,785,000 On Demand $ 1,296,801 *
Other Notes $ 500,000 On Demand $ 274,697
----------- ----------- ----------- -----------
Totals $ 7,735,000 $ 6,211,981
=========== ===========

* As described above, in connection with the Credit Agreement, the Company
issued Warrants to the lenders that are exercisable for 94% of the fully diluted
Common Stock of the Company (after issuance) at an exercise price of $.375 per
share.

(1) As described above, following the acquisition of the debt, the new investor
notified the Company of its demand for repayment of $3 million, to be applied
against unpaid interest, which amount was paid in September 2003. Such payment
shall be allocated pro rata to the outstanding balances owed under the Senior
Notes, Demand Notes and Other Notes.

In addition to the foregoing, as of June 30, 2004, summarized below are our
general and contractual obligations:

Contractual Obligations at June 30, 2004

Less than One-Three Four-Five Over 5
Contractual Obligations 1 year years Years years
----------------------- ------------- ------------ ------------ -------------

Long Term Debt $ - $ - $ - $ -

Short Term Debt $ - $ - $ - $ -

Operating Leases 545,000 1,783,000 1,276,000 3,631,000

Capital Leases -

Licensing Fee 200,000 656,000 450,000 1,227,000

Total per Period $ 745,000 $ 2,439,000 $ 1,726,000 $ 4,858,000

SUMMARY

Except for the financing facilities described above, the Company has no other
current arrangements in place with respect to financing. As stated in the report
on the Company's Financial Statements for the year ended June 30, 2004, the
Company's ability to continue as a going concern is dependent upon continued
forbearance of the Company's lenders because the Company currently does not have
available funds to repay these loans. Accordingly, the Company is in need of
either securing new financing, attaining profitable operations and/or
negotiating more favorable repayment terms on its outstanding debt.

In the event that the Company is unable to sustain positive cash flow, the
Company will need additional capital. However, the Company has no assurance that
additional capital will be available on acceptable terms, if at all. In such an
event, this would have a materially adverse effect on the Company's business,
operating results and financial condition.

INFLATION

We believe that the impact of inflation on its operations since its inception
has not been material.

SEASONALITY

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles require the appropriate application of certain accounting
policies, many of which require us to make estimates and assumptions about
future events and their impact on amounts reported in the financial statements,
and related notes. Since future events and their impact cannot be determined
with certainty, the actual results will inevitably differ from our estimates.
Such differences could be material to the financial statements.

We believe application of accounting policies, and the estimates inherently
required by the policies, are reasonable. These accounting policies and
estimates are constantly reevaluated, and adjustments are made when the facts
and circumstances dictate a change. Historically, we have found the application
of accounting policies to be appropriate, and the actual results have not
differed materially form those determined using necessary estimates.

Our accounting policies are more fully described in Note B to the consolidated
financial statements, located elsewhere in this 10-KSB. We have identified
certain critical accounting policies which are described below.

Deferred valuation allowance - We have recorded a valuation allowance equal to
our net deferred tax assets, due to the uncertainty of the Company being able to
use this benefit to offset future taxable income. If we were to determine that
the Company would be able to realize the benefit of our net deferred tax assets
in excess of its recorded amount, an adjustment to the valuation allowance would
increase the income in the period such determination was made.

Long-lived assets - In evaluation the fair value and future benefits of
long-lived assets, we perform an analysis of the anticipated undiscounted future
net cash flows of the related long-lived assets, and reduce their carrying value
by the excess, if any, of the result of the calculation. We believe at this time
that the long-lived assets' carrying values and useful lives continues to be
appropriate. Future adverse changes in market conditions or poor operating
results of underlying investments could result in an inability to recover the
carrying value of the investments that may not be reflected in an investments
carrying value, thereby requiring an impairment charge in the future.

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

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

PART III

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

None.

ITEM 8A. CONTROLS AND PROCEDURES

As of June 30, 2004, an evaluation was performed under the supervision and with
the participation of the Company's management, including the Chief Executive
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on that evaluation, the Company's
management, including the Chief Executive Officer, concluded that the Company's
disclosure controls and procedures were effective as of June 30, 2004. There
have been no significant changes in the Company's internal controls or in other
factors that could significantly affect internal controls subsequent to June 30,
2004.

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

Our executive officers, directors and key employees and their ages and positions
with us as of October 15, 2004, are as follows:

Name Age Position
---- --- --------

Michael Leeb 45 President, Chief Operating Officer,
Chief Financial Officer, Treasurer
and Director

Alan D. Segars(1) 60 Director

Renwick Day(1) 62 Director

Fredrick Schulman(1) 52 Director

(1) Appointed as a director in September 2003 following the resignations of
Richard Stewart, Anne Jordan and Joseph Bodanza.

The following is a brief description of each officer and director listed above:

MICHAEL LEEB has been an employee of Skyline since February 1994. Mr. Leeb
currently holds the position of Chief Operating Officer, Chief Financial
Officer, President and Treasurer. Mr. Leeb started with us as the Director of
Operations in February of 1994. Mr. Leeb was promoted to Senior Vice President
of Operations in March of 1998. Mr. Leeb was then named Chief Operating Officer
in November 2000. Previously, Mr. Leeb was employed by W.M. Amusements from
February 1984 through December 1993. Mr. Leeb's last position held at W.M.
Amusements was Operations Manager for Splish Splash Water Park in Riverhead, New
York.

ALAN D. SEGARS was appointed to the Board of Directors in September 2003. Since
September 2002, Mr. Segars has been a Senior Portfolio Specialist for the ING
Managed Account Group's large cap equity growth portfolio. Mr. Segars joined
Furman Selz Capital Management LLC (FSCM) in 1993 as a Managing Director and
Portfolio Manager. He created the Furman Selz Capital Management Commodities
Composite, an indicator of the future trend for interest rates. His
responsibilities include portfolio management, strategy, analysis, and client
relationships. Before joining FSCM, Mr. Segars was the managing partner
responsible for institutional investments at Grigsby Brandford Capital Partners.
Prior to Grigsby Brandford, Mr. Segars was senior vice president and head of
fixed income at Irving Trust and Bank of New York, where he was also a member of
the Investment Policy Committee. He began his career as an equity analyst at
Manufacturers Hanover Trust, and later became their head of fixed income. Mr.
Segars holds a BA in Economics from The City College of New York and an MBA in
Finance and Investments from Bernard M. Baruch College, City University of New
York. He is also a Chartered Financial Analyst.

RENWICK DAY was appointed to the Board of Directors in September 2003. Mr. Day
has been the Senior Financial Consultant at Starategy, Inc., a worldwide
construction and environmental claims consulting firm, since 2002. Prior
thereto, Mr. Day was the Chief Operation/Financial officer at E.T.F.
Technologies, Inc. from 2000 to 2002. From 1999 to 2000, Mr. Day was a
management consultant with D&D Associates. From 1994 to 1998 Mr. Day was the
Finance Director and Company Secretary for High-Point Rendel, Ltd., a
privately-held company in the United Kingdom. Mr. Day has 30 years of
diversified financial and management experience, having held senior executive
positions with major international corporations. For the 11-year period between
1986 and 1997, his experience was applied to the consulting engineering
business, both nationally and internationally. Prior to entering the engineering

industry, the majority of his experience was in the transportation industry,
with major corporations such as Seatrain, Inc. and Hertz Corp. as well as other
privately held companies.

FREDRICK SCHULMAN was appointed to the Board of Directors in September 2003. Mr.
Schulman is currently President of East Coast Venture Capital, Inc., a
specialized Small Business Investment Company based in New York, NY. Mr.
Schulman is also Chairman of Gourmet Group, Inc., a dormant publicly traded
company. From September 1999 until April 2002, Mr. Schulman was President of Our
Food Products Group, Inc., d/b/a Jardine Foods, then the operating subsidiary of
Gourmet Group. During such period, Mr. Schulman also served as President of
Morgan Kent Group, Inc., a New York based venture capital firm, which had been
the majority shareholder of Gourmet Group. Prior to joining Morgan Kent, Mr.
Schulman was the Director of Investment Banking at RAS Securities Corp., a full
service, New York-based securities broker/dealer and investment banking firm.

Directors serve until the next annual meeting of stockholders or until their
successors are elected and qualified. Officers serve at the discretion of the
board of directors. The board of directors does not have any committees.
Non-employee directors are also entitled to reimbursement for reasonable
expenses incurred in attending any such meetings.

The Company currently has no standing committees.

Code of Ethics

The Company has adopted its Code of Ethics and Business Conduct for Officers,
Directors and Employees that applies to all of the officers, directors and
employees of the Company, filed as an exhibit to this Form 10-KSB.

ITEM 10. EXECUTIVE COMPENSATION.

The following table summarizes all compensation paid by us with respect to the
fiscal year ended June 30, 2004 paid by us to our President, and all other
executive officers whose total cash compensation exceeded $100,000 in the fiscal
year ended June 30, 2004 (collectively, the "Named Executive Officers").

SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
------------------- ----------------------
Other Restricted Securities LTIP Pay All Other
Name and Principal Year Salary Bonus Annual Stock Underlying outs ($) Compensation
Position ($) ($) Compens Award(s) Options/ ($)
-ation ($) SAR's (#)

Michael Leeb, 2004 175,000 6,000 --- --- --- --- ---
President 2003 165,000 87,500 --- --- --- --- ---
2002 165,000 75,000 --- --- --- --- ---

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

The following table sets forth the number of shares of our common
stock beneficially owned by (i) each member of our board of directors; (ii)
certain of our executive officers (including all of our named executive
officers); (iii) all of our directors and executive officers as a group; and
(iv) all those known by us to be beneficial owners of more than five percent of
the outstanding shares of our common stock as of October 15, 2004. Unless
otherwise indicated, the shareholders listed in the table have sole voting and
investment power with respect to the shares indicated.

--------------------------------------------------- -------------------------- ----------------------
Common Stock Percentage of
Name of Beneficial Owner(1) Beneficially Owned Common Stock(2)*
--------------------------------------------------- -------------------------- ----------------------

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

Michael Leeb 0 0%
--------------------------------------------------- -------------------------- ----------------------
Alan Segars(3) 0 0%
--------------------------------------------------- -------------------------- ----------------------
Renwick Day(3) 0 0%
--------------------------------------------------- -------------------------- ----------------------
Fredrick Schulman(4) 4,522,912 68.3%
--------------------------------------------------- -------------------------- ----------------------
Skyride Associates LLC(5) 176,179,898 98.8%
--------------------------------------------------- -------------------------- ----------------------
All Directors and Executive Officers as a Group 4,522,912 68.3%
--------------------------------------------------- -------------------------- ----------------------

* The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial ownership includes any shares as to which
the stockholder has sole or shared voting power or investment power and also any
shares that the stockholder has the right to acquire within 60 days. Shares of
common stock subject to options, warrants or convertible preferred shares
currently exercisable or convertible, or exercisable or convertible within 60
days are deemed outstanding for computing the percentage of the person holding
such option, warrant or convertible preferred shares but are not deemed
outstanding for computing the percentage of any other person.

(1) Unless otherwise noted, the address of each of these persons is c/o Skyline
Multimedia Entertainment, Inc., 350 Fifth Avenue, New York, New York 10118.

(2) Based on an aggregate of 2,095,000 shares of common stock issued and
outstanding as of the October 15, 2004, and includes shares subject to currently
exercisable options and warrants for each person or group named.

(3) Does not include shares owned by Skyride Associates LLC, as to which Messrs.
Segars and Day each have disclaimed beneficial ownership by virtue of the fact
that they do not have sole voting or dispositive power with respect to the
securities held by Skyride Associates LLCKeyspan. Messrs. Segars and Day have
each been appointed to as designees to the Board of Directors by Skyride
Associates LLC.

(4) Includes 4,522,912 shares of Common Stock issuable upon conversion of
654,546 shares of Series A Convertible Participating Preferred Stock acquired by
Mr. Schulman on September 24, 2003. Each share of Series A Convertible
Participating Preferred Stock is convertible at any time into 6.91 shares of
Common Stock of the Issuer. The holders of an aggregate of 1,090,909 outstanding
shares of the Issuer's Series A Convertible Participating Preferred Stock are
entitled to 24.9% of the outstanding voting power of the Issuer on all matters
which come before the shareholders. Accordingly, Mr. Schulman's ownership of 60%
of the outstanding Series A Convertible Participating Preferred Stock entitles
him to up to 14.94% of the outstanding voting power of the Company. Mr. Schulman
disclaims beneficial ownership of the Issuer's securities owned by Skyride
Associates, LLC. In addition, the Company's Certificate of Amendment to its
Certificate of Incorporation relating to the Series A Preferred grants the
majority holder of the Series A Preferred the right to elect by written consent
of the Series A Preferred up to two members of the Company's Board of Directors.
Such Certificate of Amendment states that the Company's Board shall be limited
to six members unless the Series A Preferred otherwise agrees. By acquiring a
majority of the outstanding Series A Preferred, Mr. Schulman acquired the right
to elect two members of the Company's Board.

(5) This figure represents:

(i) warrants to purchase such number of shares of Common Stock as would
equal 94.334% of the total outstanding shares of Common Stock on a
fully-diluted basis (after taking into account the full exercise of
such warrants);
(ii) warrants to purchase up to 434,143 shares of common stock;
(iii) an aggregate of 52,700 shares of common stock;
(iv) 290,000 shares of common stock which are issuable in exchange for
290,000 shares of class A common stock; and
(v) 436,363 shares of series A preferred stock held by Skyride Associates
LLC which, in the aggregate, are convertible into approximately
3,015,268 shares of common stock and which vote together with the
common stock as a single class on all matters to be voted on by the
holders of the common stock. The holders of an aggregate of 1,090,909
outstanding shares of the Issuer's Series A Convertible Participating
Preferred Stock are entitled to 24.9% of the outstanding voting power
of the Issuer on all matters which come before the shareholders.
Accordingly, Skyride Associates LLC's ownership of 40% of the
outstanding Series A Convertible Participating Preferred Stock
entitles them to up to 9.96% of the outstanding voting power of the
Company.

In addition, the Senior Secured Credit Agreement, dated May 20, 1998, which the
Company and its subsidiaries entered into with The Bank of New York as Trustee
for the Employment Retirement Plan of Keyspan Energy Corp. ("Keyspan") and
Propect Street NYC Discovery Fund, L.P. ("Prospect Street Discovery") provides
that, "upon notice to the Company, Keyspan shall have the right to designate two
members to the Company's Board of Directors, provided, however, that such
designees shall be subject to the approval of the Company, which approval shall
not be unreasonably withheld." Through its acquisitions on September 15, 2003,
Skyride Associates LLC acquired Keyspan's rights to designate two members of the
Company's Board. Upon the resignations from the Board of Anne Jordan and Joseph
Bodanza, who were the Board designees of Keyspan, the Board, excluding Mr.
Schulman, elected Alan D. Segars and Renwick Day as replacement members of the
Board.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

In connection with the design, development and maintenance of the Company's web
site, the Company approximately $97,000 from July 1, 2002 through January 23,
2003 to Site Trends, LLC. Mr. Jared D. Schulman, a former director of the
Company through January 23, 2003, was also a director of Site-Trends.

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

(a) Index to Exhibits:

1 Certificate of Incorporation of Skyline. (1)

3.2 By-laws of Skyline. (1)

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

4.1 See Exhibits 3.1 and 3.2

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

10.49 Form of Warrants to Purchase common stock to be issued to the
Institutional Investors. (15)

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

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

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

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

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

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

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

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

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

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

10.59 Consulting Agreement dated as of July 14, 1999, between Skyline and Robert
Brenner. (19)

10.60 Employment Agreement dated as of January 13, 2000, between Skyline and
Michael Leeb. (19)

10.61 Amendment to Lease Agreement between Skyline and One Times Square Center
Partners, L.P., for space located at 1457-1463 Broadway, New York, N.Y.,
dated June 1, 2000. (19)

10.62 Third Amendment to Revenue Sharing Agreement, dated as of August 2, 2000,
by and among Skyline, Skyline Virtual Reality Inc., d/b/a/ XS New York,
and Namco Cybertainment, Inc. (19)

10.63 Employment Agreement effective as of January 1, 2001, between Skyline and
Michael Leeb.(20)

21 Subsidiaries of Skyline. (9)

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

31.1 Certification by Michael Leeb, Principal Executive Officer and Chief
Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.

32.1 Certification by Michael Leeb, Chief Executive Officer and Chief Financial
Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
--------------------------------------------------------------------------------
(1) Previously filed as an exhibit to Registration Statement on Form SB-2
(Commission File No. 33-73276) declared effective on February 14, 1994.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(18) Previously filed as an exhibit to Skyline's current report on Form 8-K,
filed on June 6, 1999.

(19) Previously filed as an exhibit to Skyline's annual report on Form 10-KSB
for the fiscal year ended June 30, 2000.

(20) Previously filed as an exhibit to Skyline's annual report on Form 10-KSB
for the fiscal year ended June 30, 2001.

(b) Reports on Form 8-K:

None.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Audit Fees. The aggregate fees billed by our auditors, for professional services
rendered for the audit of the Company's annual financial statements for the
years ended June 30, 2004 and June 30, 2003, and for the reviews of the
financial statements included in the Company's Quarterly Reports on Form 10-QSB
during those fiscal years were $30,700, and $51,575, respectively. The amount
for the year ended June 30, 2004 does not include an unbilled amount for the
year end audit which are estimated at $7,500.

Tax Fees. The Company incurred fees to auditors of $6,059 and $5,151 for tax
compliance matters during the fiscal years ended June 30, 2004 and 2003,
respectively.

SIGNATURES

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

SKYLINE MULTIMEDIA ENTERTAINMENT, INC.

By: /s/ MICHAEL LEEB
------------------------------------------
MICHAEL LEEB, CHIEF EXECUTIVE OFFICER
AND PRESIDENT

Dated: October 15, 2004

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

DATE: October 15, 2004 /s/ MICHAEL LEEB
------------------------------------
MICHAEL LEEB, DIRECTOR

DATE: October 15, 2004 /s/ ALAN D. SEGARS
------------------------------------
ALAN D. SEGARS, DIRECTOR

DATE: October 15, 2004 /s/ RENWICK DAY
------------------------------------
RENWICK DAY, DIRECTOR

DATE: October 15, 2004 /s/ FREDRICK SCHULMAN
------------------------------------
FREDRICK SCHULMAN, DIRECTOR

SKYLINE MULTIMEDIA ENTERTAINMENT, INC.
AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2004

SKYLINE MULTIMEDIA ENTERTAINMENT, INC.
AND SUBSIDIARIES

FINANCIAL STATEMENTS

Contents

Page

Independent Auditors' Report F-3

Balance Sheet F-4

Statements of Operations F-5

Statement of Changes in Capital Deficiency F-6

Statement of Cash Flows F-7

Notes to Financial Statements F-8

Report of Independent Registered Public Accounting Firm

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

We have audited the accompanying consolidated balance sheet of SKYLINE
MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES as at June 30, 2004 and the
related consolidated statements of operations, changes in capital deficiency and
cash flows for each of the two years in the period ended June 30, 2004. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Skyline
Multimedia Entertainment, Inc. and Subsidiaries as at June 30, 2004, and the
consolidated results of their operations and their consolidated cash flows for
each of the two years in the period ended June 30, 2004, in conformity with
generally accepted accounting principles in the United States.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A to the
financial statements, the Company has experienced significant losses in recent
years and at June 30, 2004 has substantial negative working capital and a
substantial capital deficiency. Also, since a substantial portion of the working
capital deficiency is comprised of notes payable and accrued interest that are
due currently, the Company is dependent upon the continued forbearance of its
principal creditor in not demanding payment of the outstanding indebtedness.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.

_______________________________
CERTIFIED PUBLIC ACCOUNTANTS

New York, New York
August 19, 2004

F-2

SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

AS AT JUNE 30, 2004

ASSETS
(To the nearest $1,000)

Current assets:
Cash and money market funds $ 519,000
Prepaid expenses and other current assets 499,000

Total current assets 1,018,000

Property, equipment and leasehold improvements - net 3,642,000
Security deposits 151,000
Web site development costs 34,000

T O T A L $ 4,845,000
LIABILITIES

Current liabilities:
Notes payable $ 7,735,000
Accounts payable 150,000
Accrued expenses 138,000
Interest payable 6,212,000

Total current liabilities 14,235,000

Deferred rent payable 1,272,000

Total liabilities 15,507,000

Commitments and contingencies

CAPITAL DEFICIENCY

Preferred stock, par value $.001, 5,000,000 shares authorized,
1,090,909 shares of Series A convertible participating preferred
stock issued and outstanding (liquidating value $2.75 per share) 1,000
Common stock - $.001 par value; authorized 19,000,000 shares,
issued 2,095,000 shares 2,000
Class A common stock - $.001 par value; authorized 1,000,000 shares,
issued 960,000 shares 1,000
Treasury stock, 110,000 shares of common stock and 670,000 shares of
Class A common stock at cost (601,000)
Additional paid-in capital 10,848,000
Accumulated deficit (20,913,000)

Total capital deficiency (10,662,000)
TOTAL $ 4,845,000

The notes to financial statements are made a part hereof.

F-3

SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

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

Year Ended
June 30,
2004 2003

Revenues:
Attraction sales $ 7,003,000 $ 5,311,000
Concessions sales 637,000 1,050,000

7,640,000 6,361,000

Operating expenses:
Cost of merchandise sold 257,000 361,000
Selling, general and administrative 4,837,000 4,561,000
Depreciation and amortization 686,000 600,000

5,780,000 5,522,000

Income from operations before interest income and
expense 1,860,000 839,000

Interest income 8,000 43,000

Interest expense (2,465,000) (2,460,000)

NET (LOSS) $ (597,000) $(1,578,000)

Net loss per share of common stock - basic and diluted $ (.26) $ (.69)

Weighted number of average common shares outstanding 2,275,000 2,275,000

The notes to financial statements are made a part hereof.

F-4

SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL DEFICIENCY
(To the nearest $1,000)

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

Balance - July 1, 2002 2,095,000 $2,000 960,000 $1,000 1,090,909 $1,000 $(601,000) $10,848,000 $(18,738,000) $ (8,487,000)

Net (loss) for the year
ended June 30, 2003 (1,578,000) (1,578,000)
--------- ------- ------- ------ --------- ------ ---------- ----------- ------------- -------------
Balance - June 30, 2003 2,095,000 2,000 960,000 1,000 1,090,909 1,000 (601,000) 10,848,000 (20,316,000) (10,065,000)

Net (loss) for the year
ended June 30, 2004 (597,000) (597,000)
--------- ------- ------- ------ --------- ------ ---------- ----------- ------------- -------------
BALANCE - JUNE 30, 2004 2,095,000 $2,000 960,000 $1,000 1,090,909 $1,000 $(601,000) $10,848,000 $(20,913,000) $(10,662,000)
========= ======= ======= ====== ========= ====== ========== =========== ============= =============

The notes to financial statements are made a part hereof.

F-5

SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

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

Year Ended
June 30,
2004 2003
INCREASE (DECREASE) IN CASH AND MONEY
MARKET FUNDS

Cash flows from operating activities:
Net (loss) $ (597,000) $(1,578,000)

Adjustments to reconcile results of operations
to net cash effect of operating activities:
Depreciation and amortization 686,000 600,000
Deferred rent payable (38,000) (37,000)
Net changes in assets and liabilities:
Inventory 127,000 (12,000)
Prepaid expenses and other current assets (71,000) (335,000)
Accounts payable and accrued expenses (204,000) (275,000)
Interest payable (2,154,000) 2,459,000

Total adjustments (1,654,000) 2,400,000

Net cash provided by (used for) operating activities (2,251,000) 822,000

Cash flows from investing activities:
Purchase of fixed assets (274,000) (1,464,000)
Web site development costs (23,000)

Net cash used for investing activities (274,000) (1,487,000)

Cash flows used for financing activities:
Repayment of capital lease obligations (7,000) (6,000)

NET DECREASE IN CASH AND MONEY
MARKET FUNDS (2,532,000) (671,000)

Cash and money market funds - July 1 3,051,000 3,722,000

CASH AND MONEY MARKET FUNDS - JUNE 30 $ 519,000 $ 3,051,000

Supplemental disclosures of cash flow information:
Cash paid for interest $ 4,619,000 $ 100,000

The notes to financial statements are made a part hereof.

F-6

SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - The Company

Skyline Multimedia Entertainment, Inc. is a holding company formed to
develop and operate state-of-the-art entertainment attractions and
together with its wholly-owned subsidiaries are referred to as the
"Company." Currently, there is only one active subsidiary, that
operates its "New York Skyride" facility, a simulated "aerial tour" of
New York City located in the Empire State Building in New York City.

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

The accompanying financial statements have been prepared on a
going-concern basis. As reflected in the accompanying financial
statements, the Company has experienced recurring losses from
operations and as of June 30, 2004, has a working capital deficiency
of $13,217,000 and a capital deficiency of $10,662,000. As further
indicated in Note E, the Company's borrowings are either past due or
due on demand. The Company has been notified by the noteholder of its
intent to seek full and complete satisfaction of the loans and accrued
interest on them. While the noteholder is currently not requiring
immediate satisfaction of the debt, it has preserved the right to
demand payment in full at any time. The Company is dependent on the
continued forbearance of its lender because the Company currently does
not have available funds to fully repay these loans and the accrued
interest on them. The above factors give rise to substantial doubt as
to the ability of the Company to continue as a going concern. The
accompanying financial statements have not been adjusted to give
effect to the amount or classification of recorded assets or the
classification and amount of liabilities should the Company be unable
to continue as a going concern.

NOTE B - Summary of Significant Accounting Policies

Principles of Consolidation

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

Loss Per Share

Basic loss per share is calculated by dividing net loss by the
weighted average number of outstanding common shares during the year.
Diluted per share data includes the effects of options, warrants and
convertible securities, when they are dilutive. Because all potential
common shares were either antidilutive or nondilutive for the years
ended June 30, 2004 and 2003, they are not included in the calculation
of diluted per share amounts.

(Continued)

F-7

SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE B - Summary of Significant Accounting Policies (Continued)

Property, Equipment and Leasehold Improvements

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

Web Site Development Costs

In accordance with Emerging Issues Task Force Issue 00-2 "Accounting
for Web Site Development Costs," the Company capitalizes certain costs
related to the creation of its web site. Web site development costs
are amortized on a straight-line basis over the three year estimated
useful life of the web site. Accumulated amortization at June 30, 2004
was approximately $87,000 (see Note J).

Rent Expense

For financial accounting purposes, the Company recognizes scheduled
rent in-creases and rent holidays over the term of the lease using the
straight-line method.

Use of Estimates

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

Stock-Based Compensation

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

(Continued)

F-8

SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE B - Summary of Significant Accounting Policies (Continued)

Fair Value of Financial Instruments

The Company's financial instruments are comprised primarily of demand
notes and senior debt payable. In September 2003, the Company's
outstanding loans payable and accrued interest together with related
stock purchase warrants and other equity interests were sold by their
holders to an unrelated party for $6,000,000.

Impairment of Long-Lived Assets

Effective July 1, 2002, the Company adopted Financial Accounting
Standards Board Statement No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144"). While this statement
supersedes SFAS No. 121 it retains the fundamental provisions of SFAS
No. 121 for recognition and measurement of the impairment of
long-lived assets to be held and used and measurement of long-lived
assets to be disposed of by sale. However, SFAS No. 144 applies the
fair value method for testing of impairment, which differs from SFAS
No. 121. The adoption of SFAS No. 144 did not have any impact on the
results of operations or financial position in 2003.

Advertising

Advertising costs are expensed when incurred. Advertising costs were
$666,000 and $304,000 for the years ended June 30, 2004 and 2003,
respectively.

NOTE C - Concentration of Credit Risk

The Company maintains all of its cash and money market funds with a
highly capitalized financial institution, which is insured by the
FDIC for $100,000.

NOTE D - Property, Equipment and Leasehold Improvements

Property, equipment and leasehold improvements is summarized as
follows:

Estimated
Useful Life
(Years)

Equipment and fixtures $1,002,000 5-7
Simulation film 2,310,000 10
Simulation equipment 2,510,000 12
Leasehold improvements 2,848,000 10-16

Total 8,670,000

Less accumulated depreciation and amortization 5,028,000

Net $3,642,000

(Continued)

F-9

SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE E - Notes Payable

Notes payable at June 30, 2004 are summarized as follows:

Senior notes (1) $4,450,000

Senior secured demand notes (2) 2,785,000

Other notes (3) 500,000

Total $7,735,000

(1) In December 1996, the Company entered into a Senior Credit
Agreement with certain institutional lenders ("the lenders").
Under the terms of the agreement (as amended), interest on the
notes accrued at 14% a year to December 20, 2001, at which time
both the principal and unpaid interest became due. The Company
defaulted on the repayment. As a result, effective December 20,
2001, the interest rate on the principal and unpaid interest
increased to 21%. In connection with the debt, the lenders
received Warrants to purchase up to 434,143 shares of common
stock at an exercise price of $4.25 per share.

(2) In May 1998, the Company entered into a Senior Secured Credit
Agreement with certain of the lenders. Under the terms of the
agreement (as amended), the notes are payable on demand and
accrue interest at 14% a year. In the event that the Company
defaults on the repayment when demanded, the rate increases to
21%.

In connection with the debt, two of the lenders received Warrants
that are exercisable for an aggregate of 94% of the fully diluted
common stock of the Company (after issuance) at an exercise price
of $.375 per share. The agreement provides for a cashless
exercise feature, whereby the holders have the option of reducing
the aggregate number of shares received based upon the fair
market value (as defined) of the Company's stock at date of
exercise. Either exercise would result in significant dilution to
existing shareholders which could also result in an annual
limitation of the future utilization of the Company's net
operating loss carryforwards.

(Continued)

F-10

SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE E - Notes Payable (Continued)

The Notes and Warrants under the Senior Secured Credit Agreement
are collateralized by substantially all of the Company's assets
as well as the pledge of stock of the Company's subsidiaries. In
connection with the Credit Agreement, one of the lenders received
the right to appoint two members to the Company's Board of
Directors. Further, as a result of the issuance of Warrants in
connection with the financing, the conversion rate of the Series
A Preferred Stock (see Note G) held by one of the lenders was
adjusted from a conversion rate of one share of common stock for
each share of preferred stock to a conversion rate of 6.91 shares
of common stock for each share of preferred stock.

(3) The Company borrowed an additional $500,000 of funds from one of
the lenders, which is payable upon demand and bears interest at
the rate of 14%.

In September 2003, an investor acquired from the lenders all of
the outstanding debt and unpaid interest, the Warrants, their
preferred and common stock and all of their rights under the
Senior Credit and Senior Secured Credit Agreements. The new
noteholder notified the Company of its demand for repayment of $3
million, to be applied against unpaid interest, which amount was
paid in September 2003. Additionally, the new noteholder demanded
that beginning in October 2003 the Company make monthly payments
of not less than 85% of monthly operating cash flows and
submitted a schedule of required minimum monthly payments.
Subsequent to June 30, 2004, the noteholder notified the Company,
that, beginning in October 2004, the Company make payments not
less than 100% of the monthly cash flow. Through June 30, 2004,
the Company has paid $1,618,000. The schedule provides for
payments of $2,639,000 for the year ending June 30, 2005,
$2,639,000 for the year ending June 30, 2006 and $815,000 for the
three months ending September 30, 2006. All payments are first to
be applied against the accrued interest outstanding on September
14, 2003, which aggregated approximately $8,933,000. Remaining
payments are then to be applied against the outstanding principal
balance of the loans and lastly against interest accrued
subsequent to September 14, 2003. In addition, unless agreed to
by the new noteholder, the Company is restricted from (a)
incurring any new debt, (b) modifying, changing or executing any
new lease agreements, (c) making expenditures in an amount
greater than $5,000 and (d) taking any action not in the ordinary
course of business.

(Continued)

F-11

SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE F - Income Taxes

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

June 30,
2003 2003

Deferred tax assets:
Deferred rent payable $ 573,000 $ 590,000
Net operating loss carryforwards 319,000 9,475,000

892,000 10,065,000

Less valuation allowance 496,000 (9,765,000)

Total deferred tax assets 396,000 300,000

Less deferred tax liabilities for
depreciation differences (396,000) (300,000)

Net deferred tax asset $ -- $ --

The Company has provided valuation allowances equal to its net
deferred tax assets at June 30, 2004 and June 30, 2003 due to
uncertainty of the Company being able to use this benefit to offset
future taxable income. The Company will periodically evaluate the
likelihood of realizing such asset and will adjust such amount
accordingly.

At June 30, 2004, the Company has available net operating loss
carryforwards to reduce future federal taxable income of approximately
$710,000 for tax reporting purposes which expires in 2024. As a result
of the September 2003 transaction described in Note E, the Company has
not recorded the $9,450,000 deferred tax benefit and equal valuation
allowance applicable to the $21,000,000 of net operating loss
carryforwards incurred prior to the transaction since the ability to
utilize such losses could be substantially eliminated.

NOTE G - Stockholders' Equity

In July 1995, the Company sold to one of the lenders (see Note E)
1,090,909 shares of Series A convertible participating preferred
stock, par value $.001 per share, for $3,000,000. The preferred stock
is convertible into common stock of the Company at any time at a
conversion rate of 6.91 shares of common stock for each share of
preferred stock. The preferred shares are subject to both demand and
piggyback registration rights. The preferred stock has a liquidation
preference equal to $2.75 per share, but does not pay any dividends
unless declared by the Board of Directors. The preferred stockholders
are entitled to an aggregate of up to 24.9% of the outstanding voting
power of the Company which can increase to 50.1% of the voting power
if in the holder's sole discretion it becomes reasonably necessary for
the protection of its investment.

(Continued)

F-12

SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE G - Stockholders' Equity (Continued)

At June 30, 2004, the Company has outstanding warrants, expiring
December 20, 2006, for the purchase of 434,146 shares of common stock
at a price of $4.25.

The Company has a stock option plan ("Plan A") which, as amended,
provides for the issuance of incentive stock options or nonqualified
options to key employees and officers to be determined by the
compensation committee of the Board of Directors. The aggregate number
of shares which may be issued under Plan A is 2,500,000. Incentive
stock options under Plan A may not be granted at less than the fair
market value of the underlying shares at date of grant (110% of fair
market value for a 10% or greater stockholder). Incentive options
granted under Plan A can be exercisable for a period not to exceed ten
years. At June 30, 2004, no options are outstanding under Plan A.

The Company has a stock option plan for nonemployee directors ("Plan
B"). The aggregate number of shares which may be issued under Plan B,
as amended, is 500,000. At June 30, 2004, no options are outstanding
under Plan B.

The Board of Directors approved a stock buy-back program where the
Company is authorized to purchase up to 300,000 shares of common
stock. As of June 30, 2004, the Company has purchased 110,000 shares
which is reflected as treasury stock.

At June 30, 2004, in addition to shares under warrants, pursuant to
the Senior Secured Credit Agreement (Note E), the Company has reserved
shares of common stock for issuance upon exercise of warrants, options
and conversions of preferred stock as follows:

Preferred stock 7,538,181
Senior Credit Agreements 434,143

Total 7,972,324

NOTE H - Commitments

The Company leases space for its Skyride attraction in the Empire
State Building pursuant to an operating lease expiring in June 2016.

(Continued)

F-13

SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE H - Commitments (Continued)

Minimum annual rental payments required for these leases are as
follows:

Year Ending June 30:
2005 $ 545,000
2006 561,000
2007 611,000
2008 611,000
2009 621,000
Thereafter 4,286,000

$7,235,000

The leases include escalation clauses for increases in real estate
taxes, operating costs and certain cost of living adjustments.

Rent expense for the years ended June 30, 2004 and 2003 was
approximately $883,000 and $748,000, respectively (see Note B).

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

Year Ending June 30:
2005 $ 200,000
2006 206,000
2007 225,000
2008 225,000
2009 225,000
Thereafter 1,452,000

$2,533,000

In addition to the minimum annual fee, the agreement provides for a
contingent license fee in the event that the capture rate at ESBC's
ticket window (number of Skyride tickets sold by ESBC as a percentage
of ESBC Observatory tickets sold) exceeds 10.5%. The contingent
license fee ranges from an annual fee of $10,500 at a capture rate of
10.5% to $1,400,000 at a capture rate of 26%. The capture rates were
below 10.5% in each of the years ended June 30, 2004 and June 30,
2003.

(Continued)

F-14

SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE I - 401(K) Plan

In July 2002, the Company adopted a 401(k) defined contribution profit
sharing plan, which provides for a discretionary profit sharing
contribution and a matching contribution equal to a percentage (as
determined each year) of the employee's elective salary deferral. The
Company's contribution aggregated approximately $45,000 and $46,000
for the years ended June 30, 2004 and 2003, respectively.

NOTE J - Related Party Transaction

In connection with the design, development and maintenance of the web
site, the Company paid approximately $97,000 from July 1, 2002 through
January 23, 2003 to a Limited Liability Company, a member and
executive officer of which was also a director of the Company through
January 23, 2003.

F-15