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, 2002
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 Number)
Incorporation or Organization)

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 $7,334,000.

The aggregate market value of the voting stock held by non-affiliates of Skyline
was $28,846 as of September 30, 2002, based on the average bid and asked price
of $.02 per share as of that date.

There were 2,095,000 shares of common stock, $.001 par value, outstanding as of
September 30, 2002. Additionally, there were 1,090,909 shares of Series A
Convertible Participating Preferred Stock, $.001 par value per share, and
960,000 shares of class A common stock, $.001 par value, outstanding as of
September 30, 2002.

PART I

ITEM 1. DESCRIPTION OF BUSINESS.

GENERAL

Skyline Multimedia Entertainment, Inc. ("Skyline") is a holding company
incorporated under the laws of the State of New York on November 2, 1993, which
owns all of the outstanding stock of its operating subsidiaries, New York
Skyline, Inc. and Skyline Virtual Reality, Inc. We have been engaged in the
development and operation of state-of-the-art simulator attractions at
established tourist sites in New York City.

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

During the year ended June 30, 2001, we ceased our operations of our interactive
virtual reality entertainment center, XS New York, which was located in the
heart of Times Square in New York City. XS New York featured the latest in
virtual reality hardware and software, simulation technology and interactive
participation game experiences. Additionally, the facility included a
"cybercafe" which offered computer terminals that were linked to the Internet.
As a consequence of the cessation of operations, we have returned all equipment
related to our XS New York operations to our vendor and have terminated the
lease to our Times Square facility. As a result, we incurred certain losses as
described in Item 6 below.

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

CONTINUING EFFECTS OF THE TERRORIST ATTACKS ON THE WORLD TRADE CENTER, RELATED
MILITARY ACTION AND THE ECONOMIC SLOWDOWN

On September 11, 2001, terrorists attacked the World Trade Center in New York
City and the Pentagon in Washington, D.C. As a result of these tragic events, we
experienced significant losses in revenues during the three months ended
December 31, 2001 due to an immediate material decline in tourism and a
heightening of security measures that were taken in New York City generally, and
the Empire State Building in particular. In addition to the recent terrorist
events, tourism has suffered due to the uncertain state of events caused by the
ongoing U.S. military campaign in Afghanistan, the events in Iraq and other
areas around the world as well as the economic downturn in the United States and
abroad. Although our revenues generated from the New York Skyride increased for
the year ended June 30, 2002 as compared to June 30, 2001, this increase was the
result of an increase in local tourism, which offset the decline in
international tourism, as well as an aggressive co-marketing campaign conducted
by us and the Empire State Building during July and August of 2001, which was
prior to the World Trade Center terrorist attacks. We are still unable to
determine the impact that these events have had, and will continue to have, on
our revenues and operations. Nevertheless, we believe that the terrorist
attacks, the continued military action and the economic downturn have negatively
affected us. Further, we cannot be certain that we will be able to maintain the
revenue generated from sales to local tourists or that a future terrorist
attacks would not interrupt or cause partial or complete cessation of our
business.

In addition to the foregoing, we are concerned that certain portions of our film
containing views of the World Trade Center are inappropriate because of the
September 11, 2001 attacks. As a result, we have commenced the process of
editing our film to remove such portions of the film, as well as changing the
projection system currently used, which we anticipate will cost us approximately
$600,000. We expect this to be completed by February 2003.

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 designed and installed by certain of our
prior sponsors. These displays depict major New York City tourist attractions as
well as providing informational and entertaining film clips. The exhibits
provide the visitor with their first feeling of participation in the New York
Skyride experience.

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

Once the passengers are seated in the spacecopter, they begin a seven-and-a-half
minute simulated flight that treats them to a spectacular array of New York City
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, crashes into the East River and has a
run-in with a New York City traffic cop, among other exciting adventures. The
spacecopter also visits many of New York City's other tourist attractions. Since
New York Skyride is intended to be a family-oriented attraction, the film makes
the Empire State Building the focal point of the attraction, with a liftoff and
landing taking place from atop the Empire State Building, to appeal to the
broadest audience and not just the most adventurous thrill-seekers.

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

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

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 $13.50 and $9.00 for adults, respectively, and $10.50 and $6.00
for children under the age of 12, respectively. In comparison, the cost of a
combined ticket with the Observatory is $17.00 for adults and $10.00 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 (000'S)

YEAR 1997 1998 1999 2000 2001
---- ---- ---- ---- ----

TOTAL ATTENDANCE 3,675 3,614 3,675 3,397 3,004

For the year ended June 30, 2002, our capture rate of Observatory visitorship
averaged approximately 18.68%, up from an average of approximately 17.03% for
the year ended June 30, 2001. We believe that the increase in the capture rate
is a direct result of an increase in Empire State Building observatory and New
York Skyride co-marketing efforts.

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

The License Agreement also requires 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 and 10.25%
for the first nine months of 2002. 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, 2002, we employed one management person and 19
non-management personnel on a full-time basis, and 40 non-management personnel
on a part-time basis.

ITEM 2. DESCRIPTION OF PROPERTY.

On March 7, 2001, we entered into a lease agreement for our office space with
the Empire State Building Company, to lease approximately 1671 square feet on
the second floor of the Empire State Building for the period beginning March 1,
2001 through April 30, 2004 at an annual rate of $66,840, payable in equal
monthly installments.

In addition to the above office lease, we have a lease agreement for the
operating site of New York Skyride. 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) $479,688 from April 1, 1998 through March 31, 2002,
(ii) $545,100 from April 1, 2002 through March 31, 2006,
(iii) $610,502 from April 1, 2006 through March 31, 2009,
(iv) $654,120 from April 1, 2009 through April 30, 2013, and
(v) $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 "SKYL".

The following table sets forth the high and low sales prices for the common
stock for the fiscal periods indicated as reported by 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 2002 Fiscal 2001
----------- -----------

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

1st Quarter...................... .09 .05 .375 .125

2nd Quarter...................... .08 .03 .0938 .0312

3rd Quarter...................... .03 .03 .1562 .0156

4th Quarter...................... .03 .02 .17 .03

The per share closing sales price of the common stock as reported by the OTCBB
on September 12, 2002, (the date of the last reported sale) was $0.02. As of
October 9, 2002, we had in excess of 400 beneficial shareholders and 25
shareholders of record.

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

INTRODUCTION

The following discussion of 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 the 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 its strategy due to unanticipated
changes in the industries in which it operates; and (iv) various competitive
market factors that may prevent us from competing successfully in the
marketplace.

OVERVIEW

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

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

For the years ended June 30, 2002 and 2001, our New York Skyride facility was
visited by approximately 549,000 and 568,000 customers, respectively.

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

CONTINUING EFFECTS OF THE TERRORIST ATTACKS ON THE WORLD TRADE CENTER, RELATED
MILITARY ACTION AND THE ECONOMIC SLOWDOWN

RESULTS OF OPERATIONS

Year Ended June 30, 2002 compared to Year Ended June 30, 2001

REVENUES

Revenues generated during the year ended June 30, 2002 aggregated $7,334,000 as
compared to $7,956,000 for the year ended June 30, 2001. The decrease in
revenues from the prior year is primarily due the closing of the XS New York
facility in January 2001, which generated approximately $1,155,000 of revenues
for the year ended June 30, 2001. The losses that resulted from the closing of
the XS New York facility were offset by an increase in revenues generated by New
York Skyride for the year ended June 30, 2002. The increase in revenues for
the New York Skyride for the year ended June 30, 2002 as compared to the
revenues for New York Skyride generated for the year ended June 30, 2001 was
primarily resulted from more local tourism to the Empire State Building.

TOTAL OPERATING EXPENSES

Total operating expenses incurred for the year ended June 30, 2002 aggregated
$6,195,000, as compared to $7,536,000 for the year ended June 30, 2001. The
decrease for the year ended June 30, 2002 was primarily due to the close of the
Company's XS New York Facility in January 2001 as well as the reduced amount of
labor costs for the year ended June 30, 2002. Additionally, we reduced our
corporate overhead expenses.

EXTRAORDINARY GAINS

As a result of negotiations with certain creditors, we recorded an extraordinary
gain from the settlement of liabilities of approximately $72,000 for the year
ended June 30, 2001.

NET INCOME (LOSS) AND INCOME (LOSS) PER SHARE

The basic and diluted net loss and loss per share before extraordinary items was
($610,000) and ($0.27) for the year ended June 30, 2002, as compared to
($645,000) and ($.28) for the year ended June 30, 2001. This included interest
expense of $1,809,000 and $1,142,000 for the years ended June 30, 2002 and June
30, 2001, respectively. For a complete description of the Company's outstanding
debt please see "Management's Discussion and Analysis - Working Capital
Deficiency - Liquidity and Capital Resources" and Note F of the Company's
Financial Statements for the year ended June 30, 2002. The basic and diluted net
income (loss) and earnings (loss) per share available to common shareholders was
($610,000) and ($0.27) for the year ended June 30, 2002, as compared to
($573,000) and ($.25) for the year ended June 30, 2001.

For the year ended June 30, 2002, we had income from operations (before
extraordinary item, net interest, depreciation and amortization) of
approximately $1,744,000, as compared to an income from operations (before
extraordinary item, net interest, depreciation and amortization) of
approximately $1,229,000 for the year ended June 30, 2001. Income from
operations improved from the previous year primarily as a result of a reduction
in corporate overhead expenses at New York Skyride.

WORKING CAPITAL DEFICIENCY

LIQUIDITY AND CAPITAL RESOURCES

The working capital deficiency at June 30, 2002, was approximately ($10,485,000)
compared to a working capital deficiency of approximately ($10,081,000) at June
30, 2001. While the Company has generated cash from operations, such amount has
been offset by an increase in accrued interest on debt.

We have historically sustained our operations from the sale of debt and equity
securities, through institutional debt financing and through agreements or
arrangements for financing with certain key suppliers.

As of June 30, 2002, we had the following financing arrangements in place:

SENIOR CREDIT AGREEMENT

The Company entered into a Senior Credit Agreement, dated as of December 20,
1996, with Prospect Street NYC Discovery Fund, L.P. ("Prospect Street") and the
Bank of New York as trustee for the Employees Retirement Plan of the Brooklyn
Union Gas Company ("BUG") 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 (the Bank of New York as trustee
for the Employees Retirement Plan of the Brooklyn Union Gas Company
Non-Bargaining Health VEBA and Prospect Street NYC Co-Investment Fund, L.P.). 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 following is a breakdown of the Senior Notes and/or warrants issued to each
of the Lenders:

Lender Notes Warrants
------ ----- --------

Prospect Street NYC Discovery Fund, L.P. $1,500,000 146,341
The Bank of New York as trustee for
the Employees Retirement Plan of BUG $2,000,000 195,120
The Bank of New York as trustee for the
Employees Retirement Plan of the
BUG Company Non-Bargaining Health VEBA $ 500,000 48,780
Prospect Street NYC Co-Investment Fund, L.P. $ 450,000 43,902

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 "Credit
Agreement"), dated as of May 20, 1998, with the Bank of New York as trustee for
the Employees Retirement Plan of Keyspan Energy Corp. ("Keyspan") and Prospect
Street NYC Discovery Fund, L.P. ("Prospect Street") 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 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 (Prospect Street NYC Co-Investment Fund, L.P.). The $500,000
of funds from Prospect Street NYC Co-Investment Fund, L.P. were loaned on a
subordinated basis to all other debt secured under the Credit Agreement.

The following is a breakdown of the Demand Notes issued to each of the Lenders:

Lender Notes
------ -----

Prospect Street NYC Discovery Fund, L.P. $ 435,000
The Bank of New York as trustee for
the Employees Retirement Plan of Keyspan $ 1,850,000
Prospect Street NYC Co-Investment Fund, L.P. $ 500,000

In connection with the debt, the Bank of New York as trustee for the Employees
Retirement Plan of Keyspan and Prospect Street NYC Discovery Fund, L.P. received
Warrants that are exercisable for 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 holders of the Demand Notes have not demanded payment of the Demand Notes.
The Demand Notes and the obligations under the Credit Agreement and the Warrants
are also collateralized by a pledge of the stock of the Company's subsidiaries.
In connection with the Credit Agreement, Keyspan also received the right to
appoint two members to the Company's Board of Directors. Further, as a result of
the issuance of Warrants in connection with the Financing, the conversion rate
of the Series A Preferred Stock (the "Preferred Stock") held by Prospect Street
was adjusted from a conversion rate of one share of Common Stock for each share
of Preferred Stock to a conversion rate of 6.91 shares of Common Stock for each
share of Preferred Stock.

In January 2002, the Company was notified that the U.S. Small Business
Administration had been appointed as the Receiver for Prospect Street by the
United States District Court for the Southern District of New York. At June 30,
2002, notes and accrued interest payable to Prospect Street aggregated
approximately $3,590,000, of which approximately $2,895,000 relates to the
senior notes payable and approximately $695,000 relates to the senior secured
notes. Prospect Street is also the holder of the Company's outstanding preferred
stock.

OTHER NOTES PAYABLE

The Company has also borrowed an additional $500,000 of funds from the Prospect
Street NYC Co-Investment Fund, L.P., which is payable upon demand and bears
interest at the rate of 14%.

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, 2002, the
Company's ability to continue as a going concern is dependent upon continued
forbearance of the Company's institutional 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.

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 OR DISAGREEMENTS WITH ACCOUNTANTS

None.

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 June 30, 2001, are as follows:

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

Steven Vocino 47 Director

Michael Leeb 43 President, Chief Operating Officer,
Treasurer and Director

Jared D. Schulman 36 Director

Richard B. Stewart, Jr.(1) 59 Director

Anne Jordan(1) 52 Director

Joseph F. Bodanza(1) 55 Director

(1) Appointed as a director in August 2002.

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

STEVEN VOCINO was appointed by our Board in of Directors as Chairman of the
Board in 1998 to fill a vacancy thereon. Mr. Vocino is the Founder and President
of WTLN-TV and founded in 1989 the Teaching Learning Network, an international
television program supplier. Mr. Vocino's background includes a variety of fully
sponsored internationally televised sporting events (i.e., 1984 Summer Olympic
Games, the Traveling Sportsman, Tour of America and the Pan Am Games). Apart
from sports programming, Mr. Vocino has established an excellent sponsor and
advertising following within the children's programming market. Productions
include Classroom of the Future, College Bound, Pets and Vets and Kids Cafe. Mr.
Vocino has established an excellent reputation within the broadcast, cable and
public television industry and has won numerous awards for programming,
including Telly, Emmy, Golden Globe, Golden Apple, Peabody, International Peace
Through Sports Awards and Children's Television Workshop Awards. In 1995, Mr.
Vocino assumed the responsibilities of president of New Media Inc., a television
production company focusing on the travel industry, and was instrumental in its
turnaround.

MICHAEL LEEB has been an employee of Skyline since February 1994. Mr. Leeb
currently holds the position of Chief Operating 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.

JARED D. SCHULMAN has been a non-employee director of Skyline since 2001. Mr.
Schulman has been employed by Service Engine, Inc., a web-site tracking service,
since January 1999 and currently holds the position of chief executive officer.
In addition, from October 1995 to present, Mr. Schulman has been an executive
officer at Site Trends, LLC, a web site development company. As a founder of
Site Trends, LLC, Mr. Schulman spearheaded business development and helped build
a seed investment of $8,000 into more than $3 million in annual revenue within 5
years. Mr. Schulman has more than 12 years management and business development
experience in electronic marketing and e-commerce, including pioneering online
projects while collaborating with GTE, Compuserve, GE and Prodigy. While at M.
Fabrikant & Sons, Mr. Schulman developed and managed electronic data interchange
(EDI) commerce transactions platforms and Just-In-Time systems to connect
Wal-Mart, K-Mart and Zales, supporting more than $500 million in sales.

RICHARD B. STEWART, JR. was appointed to the Board of Directors in August
2002. Mr. Stewart has over 35 years of operations and financial experience. Mr.
Stewart is presently a Partner with Tatum CFO Partners, LLP. Prior to joining
Tatum, Mr. Stewart served as a Vice Chairman of Lehman Brothers from 1992 to
1994, President of Morrow and Company Proxy Solicitors 1998 to 2000, Senior Vice
President and Controller of Merrill Lynch 1987 to 1992 and Partner/CFO of Kidder
Peabody and Company 1980 to 1987. Since 1994, Mr. Stewart has also served as a
Director for NASA's Center for Technology Commercialization. Mr Stewart has an
MBA in Finance and a BBA in Marketing and Finance from the University of
Michigan. He is also a Certified Public Accountant. In addition, Mr. Stewart
frequently conducts entrepreneurial lectures as Babson and Wentworth Institute
of Technology.

ANNE JORDAN was appointed to the Board of Directors in August 2002. Ms.
Jordan is vice president of Financial Planning of KeySpan, a holding company
that was created in 1998 through the merger of Brooklyn Union and the Long
Island Lighting Company. Previously, she had been vice president of Financial
Planning for Brooklyn Union. Ms. Jordan joined Brooklyn Union in 1976, and has
served in a variety of management positions in Auditing, Treasury, Financial
Analysis, Corporate Finance, and Financial Planning. In 1992, she was named
Manager of the Financial Planning Area, responsible for strategic acquisitions,
merger activities, and energy related activities. She was promoted to vice
president in 1998. She graduated from Herbert H. Lehman College in 1972 with a
degree in Mathematics, and Iona College in 1976 with an MBA in Accounting. In
1986, she completed the University of Chicago's Management Development Program.
Ms. Jordan is a Certified Public Accountant and a member of the American
Institute of Certified Public Accountants, the New York State Society of
Certified Public Accountants, the Financial Executives Institute and the Society
of Utility and Regulatory Financial Analysts.

JOSEPH F. BODANZA was appointed to the Board of Directors in August 2002.
Since August 2002, has served as the Senior Vice President of Finance Operations
and Regulatory Affairs for KeySpan Energy Delivery, New England. From 2000 to
August 2002, he served as the Senior Vice President-Finance, Accounting and
Regulatory Affairs for KeySpan. In 1993, he was named Senior Vice
President-Finance, MIS & Treasurer for Keyspan. From 1988 to 1993, Mr. Bodanza
served as the Senior Vice-President-Finance, MIS & Treasurer for Boston Gas. Mr.
Bodanza initially joined Boston Gas as a accountant in 1972 and served in
various supervisory management positions until 1984 when he was named treasurer
of Boston Gas. Mr. Bodanza graduated from Nichols College in 1969, received his
master's degree in business administration in 1975 and his master's degree in
finance in 1981. He is a member of the American Gas Association and the New
England Gas Association. He is also a member of the Financial Executives
Institute and the Treasurers' Club.

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.

Steven Vocino receives an annual retainer of $10,000 for his services as
Chairman of the Board. In addition, Steven Vocino received options to purchase
25,000 shares of common stock in July 1998 in connection with his appointment to
the board of directors. Furthermore, in July 1998, Mr. Vocino received 600,000
shares of common stock of Skyline in consideration for services rendered to us
in connection with negotiation of favorable settlements with certain of our
creditors.

ITEM 10. EXECUTIVE COMPENSATION.

The following table summarizes all compensation paid by us with respect to the
fiscal year ended June 30, 2002 paid by us to the our President, and all other
executive officers whose total cash compensation exceeded $100,000 in the fiscal
year ended June 30, 2002 (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, 2002 165,000 75,000 --- --- --- --- ---
President 2001 150,000 25,000 --- --- --- --- ---
2000 100,000 15,000 --- --- --- --- ---

EMPLOYMENT AND OTHER AGREEMENTS

In January 2000, we entered into an employment agreement with Michael Leeb, its
vice president of operations, which expired in December 2001 and provided for
cancellation by either party upon ninety days written notice. The agreement
provided for a base salary of $100,000 per year through December 2000 with a
minimum increase of 5% thereafter. Additionally, the agreement provided for an
annual incentive bonus with a minimum of $15,000 per year. In April 2001, we
entered into a new employment agreement with Mr. Leeb, which expires in December
2002. Mr. Leeb has become the chief operating officer, president, secretary and
treasurer. The agreement provides for a base salary of $150,000 per year through
December 2001 with a minimum increase of 5% thereafter. Additionally, the
agreement provides for a guaranteed annual incentive bonus of $25,000 per year,
payable quarterly, and for the future issuance of options to purchase 1% of
Skyline's common stock on a fully diluted basis, pursuant to our employee stock
option plan.

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

The following table sets forth certain information as of June 30, 2002, with
respect to the number of shares of each class of voting stock beneficially owned
by (i) those persons known to us to be the owners of more than five percent of
any such class of our voting stock, (ii) each of our directors of and (iii) all
of our directors and executive officers as a group. Unless otherwise indicated,
each of the listed persons has sole voting and investment power with respect to
the shares beneficially owned by such shareholder.

------------------- -------------------------- ------------------------------ ------------
COMMON STOCK SERIES A PREFERRED STOCK
------------------- -------------------------- ------------------------------ ------------
Name and Address Beneficial % of % of Total % of
(1) Ownership* Total Beneficial Outstanding Actual
Outstanding Ownership Voting
(2) Power (3)
------------------- -------------- ----------- ----------------- ------------ ------------

Steven Vocino (9) 625,000 28.6% --- --- 5.4%
------------------- -------------- ----------- ----------------- ------------ ------------
Michael Leeb 0 0.0% --- --- 0.0%
------------------- -------------- ----------- ----------------- ------------ ------------
Jared D. Schulman 0 0.0% --- --- 0.0%
------------------- -------------- ----------- ----------------- ------------ ------------
Richard B. Stewart(4)0 0.0% --- --- 0.0%
------------------- -------------- ----------- ----------------- ------------ ------------
Anne Jordan(5) 0 0.0% --- --- 0.0%
------------------- -------------- ----------- ----------------- ------------ ------------
Joseph F. Bodanza(5) 0 0.0% --- --- 0.0%
------------------- -------------- ----------- ----------------- ------------ ------------
The Bank of New 86,743,900 97.6% --- --- ---
York, as Trustee (10)
for the Employees
Retirement Plan
of Key Span
Energy Corp.
------------------- -------------- ----------- ----------------- ------------ ------------
Prospect Street 95,731,124 97.9% 1,090,909 (8) 100% 38.5%
NYC Discovery (6)(7)(8)
Fund, L.P. (11)
------------------- -------------- ----------- ----------------- ------------ ------------
All directors and 625,000 28.6% --- --- 5.4%
executive
officers as a
group (6
persons)
------------------- -------------- ----------- ----------------- ------------ ------------

* 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 or warrants currently exercisable or
convertible, or exercisable or convertible within 60 days are deemed outstanding
for computing the percentage of the person holding such option or warrant 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 Record Date, and includes shares subject to currently
exercisable options and warrants for each person or group named.

(3) Does not include common stock issuable upon exercise of options and
warrants, and assumes no exercise of the right of the holder of the series A
preferred stock to acquire up to 50.1% of the total voting power of Skyline and
to elect a majority of the board of directors under certain circumstances and
limits such holder's voting power to 24.9% of the total outstanding voting
power.

(4) Does not include shares owned by Prospect Street NYC Discovery Fund, L.P.,
as to which Mr. Stewart has disclaimed beneficial ownership by virtue of the
fact that he does not have sole voting or dispositive power with respect to the
securities held by Prospect Street. Mr. Stewart has been appointed as a designee
to the Board of Directors by Prospect Street NYC Discovery Fund LLP.

(5) Does not include shares owned by Keyspan Energy Corp., as to which Mr.
Bodanza and Ms. Jordan 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 Keyspan. Mr. Bodanza and Ms. Jordan have each been
appointed to as designees to the Board of Directors by Keyspan.

(6) Includes a warrant held by Prospect Street to purchase up to 86,500,000
shares of common stock and warrants to purchase up to 146,341 shares of common
stock, all of which were received in connection with certain loans provided to
us. In addition, the beneficial ownership of Prospect Street also includes an
aggregate of 52,700 shares of common stock, and warrants to purchase up to
43,902 shares of common stock received in connection with certain loans provided
to us, which securities are held by affiliates of Prospect Street.

(7) Includes 290,000 shares of class A common stock (which shares are entitled
to five votes per share and vote together with the common stock as a single
class on all matters to be voted on by the holders of the common stock) which
Prospect Street purchased from our former president, subject to such shares
being held as collateral for a loan, and pursuant to an irrevocable proxy,
Prospect Street has the right to vote such shares.

(8) Includes 1,090,909 shares of series A preferred stock held by Prospect
Street which, in the aggregate, are convertible into approximately 7,538,181
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; except
that the holder of the series A preferred stock has the right, voting as a
separate class, to elect two directors to our board of directors. Mr. Stewart is
the designee of Prospect Street. Pursuant to the terms of the series A preferred
stock, Prospect Street will be able to vote up to 24.9% of the total shares
eligible to vote at the Meeting. Additionally, pursuant to the certificate of
incorporation of Skyline, so long as 272,727 shares of series A preferred stock
remain outstanding, and upon notice to us, Prospect Street, as the holder of the
series A preferred stock, has the right to obtain up to 50.1% of the total
voting power of Skyline and to elect a majority of the board of directors in the
event the holders of the series A preferred stock determine in good faith that
such action is reasonably necessary for the protection of their investment.
Since Prospect Street is a Small Business Investment Company subject to the
regulatory oversight of the SBA, the exercise of this control provision cannot
be made arbitrarily and is subject to SBA review. See footnote (11) below.

(9) Reflects (i) 600,000 shares of common stock, which shares became
unrestricted on July 2, 1998, and (ii) options to purchase 25,000 shares of
common stock held by such individual which are currently exercisable.

(10) Includes a warrant held by Keyspan to purchase up to 86,500,000 shares of
common stock and a warrant to purchase 243,900 shares of common stock, which
were received in connection with certain loans provided to us. Beneficial
ownership of such securities are attributed to Keyspan and its affiliates.

(11) Prospect Street is a Small Business Investment Company subject to
regulatory oversight by the SBA. In January 2002, the Company was notified that
the U.S. Small Business Administration has been appointed as Receiver for
Prospect Street by the United States District Court for the Southern District of
New York.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

In connection with the design, development and maintenance of the Company's web
site, the Company paid approximately $192,000 during the year ended June 30,
2002 to Site Trends, LLC, of which Mr. Jared D. Schulman, a director of the
Company, is a member and executive officer.

SENIOR CREDIT AGREEMENT

The following is a breakdown of the Senior Notes and/or warrants issued to each
of the Lenders:

Lender Notes Warrants
------ ----- --------

SENIOR SECURED CREDIT AGREEMENT

The following is a breakdown of the Demand Notes issued to each of the Lenders:

Lender Notes
------ -----

Prospect Street NYC Discovery Fund, L.P. $ 435,000
The Bank of New York as trustee for
the Employees Retirement Plan of Keyspan $ 1,850,000
Prospect Street NYC Co-Investment Fund, L.P. $ 500,000

OTHER NOTES PAYABLE

The Company has also borrowed an additional $500,000 of funds from the Prospect
Street NYC Co-Investment Fund, L.P., which is payable upon demand and bears
interest at the rate of 14%.

We believe that all transactions between us and our officers, directors and
employees described above are on terms no less favorable to us than could have
been obtained from unaffiliated parties under similar circumstances.

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

(a) Exhibits are listed on the Index to Exhibits on page 28 of this report. The
Exhibits required by Item 601 of Regulation S-B are listed on such Index in
response to this Item and are incorporated herein by reference.

(b) Reports on Form 8-K:

None.

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 OPERATING OFFICER,
PRESIDENT, SECRETARY AND TREASURER

Dated: October 10, 2002

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 10, 2002 /S/ STEVEN VOCINO
------------------------------------
STEVEN VOCINO, CHAIRMAN OF THE BOARD

DATE: OCTOBER 10, 2002 /S/ MICHAEL LEEB
------------------------------------
MICHAEL LEEB, DIRECTOR

DATE: OCTOBER __, 2002
------------------------------------
ANNE JORDAN, DIRECTOR

DATE: OCTOBER __, 2002
------------------------------------
JOSEPH F. BODANZA, DIRECTOR

DATE: OCTOBER 10, 2002 /S/ RICHARD B. STEWART, JR.
------------------------------------
RICHARD B. STEWART, JR., DIRECTOR

DATE: OCTOBER 10, 2002 /S/ JARED D. SCHULMAN
------------------------------------
JARED D. SCHULMAN, DIRECTOR

SKYLINE MULTIMEDIA ENTERTAINMENT, INC.
AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2002

INDEPENDENT AUDITORS' REPORT

TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
SKYLINE MULTIMEDIA ENTERTAINMENT, INC.

We have audited the accompanying consolidated balance sheet of
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES as at June 30, 2002 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, 2002.
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 auditing standards
generally accepted in the 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, 2002, and
the consolidated results of their operations and their consolidated cash flows
for each of the two years in the period ended June 30, 2002, in conformity with
accounting principles generally accepted 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
before extraordinary items in recent years and at June 30, 2002 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 that are due currently, the Company is dependent upon the continued
forbearance of its principal creditors in not demanding payment of the
outstanding indebtedness. These factors raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note A. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.

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

NEW YORK, NEW YORK
SEPTEMBER 18, 2002

F-1

SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

AS AT JUNE 30, 2002

ASSETS
------
(TO THE NEAREST $1,000)

CURRENT ASSETS:
Cash $ 3,722,000
Inventory 115,000
Prepaid expenses and other current assets 93,000
-------------

TOTAL CURRENT ASSETS 3,930,000

PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS - NET 3,120,000
SECURITY DEPOSITS 151,000
WEB SITE DEVELOPMENT COSTS - NET 81,000
-------------

T O T A L $ 7,282,000
=============
LIABILITIES
-----------

CURRENT LIABILITIES:
Capital lease obligations - current portion $ 6,000
Notes payable - institutional lenders 7,735,000
Accounts payable 457,000
Accrued expenses 310,000
Interest payable - institutional lenders 5,907,000
-------------

TOTAL CURRENT LIABILITIES 14,415,000

CAPITAL LEASE OBLIGATIONS - LESS CURRENT PORTION 7,000
DEFERRED RENT PAYABLE 1,347,000
-------------

TOTAL LIABILITIES 15,769,000
-------------

COMMITMENTS AND CONTINGENCIES (Notes I and J)

CAPITAL DEFICIENCY
------------------

PREFERRED STOCK, par value $.001, 5,000,000 shares authorized,
1,090,909 shares of Series A convertible participating preferred
stock issued and outstanding (liquidating value $2.75 per share) 1,000
COMMON STOCK - $.001 par value; authorized 19,000,000 shares,
one vote per share, issued 2,095,000 shares 2,000
CLASS A COMMON STOCK - $.001 par value; authorized 1,000,000 shares,
five votes per share, issued 960,000 shares 1,000
TREASURY STOCK, 110,000 shares of common stock and 670,000 shares
of Class A common stock at cost (601,000)
ADDITIONAL PAID-IN CAPITAL 10,848,000
ACCUMULATED DEFICIT (18,738,000)
-------------

TOTAL CAPITAL DEFICIENCY (8,487,000)
-------------

T O T A L $ 7,282,000
=============

The notes to financial statements are made a part hereof.

F-2

SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(TO THE NEAREST $1,000)

YEAR ENDED
JUNE 30,
------------------------------
2002 2001
------------ ------------

REVENUES:
Attraction sales $ 6,303,000 $ 6,930,000
Concessions sales 1,031,000 959,000
Other income 67,000
------------ ------------

7,334,000 7,956,000
------------ ------------

OPERATING EXPENSES:
Cost of merchandise sold 405,000 416,000
Selling, general and administrative 5,185,000 6,311,000
Depreciation and amortization 605,000 809,000
------------ ------------

6,195,000 7,536,000
------------ ------------

INCOME BEFORE INTEREST INCOME AND
EXPENSE AND EXTRAORDINARY ITEM 1,139,000 420,000

INTEREST INCOME 60,000 77,000

INTEREST EXPENSE (1,809,000) (1,142,000)
------------ ------------

(LOSS) BEFORE EXTRAORDINARY ITEM (610,000) (645,000)

EXTRAORDINARY GAINS FROM SETTLEMENTS OF LIABILITIES 72,000
------------ ------------

NET LOSS $ (610,000) $ (573,000)
============ ============

INCOME (LOSS) PER SHARE OF COMMON STOCK - BASIC AND DILUTED:
(Loss) before extraordinary item $ (.27) $ (.28)
============ ============

Net loss $ (.27) $ (.25)
============ ============

WEIGHTED NUMBER OF AVERAGE COMMON SHARES OUTSTANDING 2,275,000 2,275,000
============ ============

The notes to financial statements are made a part hereof.

F-3

SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

STATEMENTS OF CHANGES IN CAPITAL DEFICIENCY
(TO THE NEAREST $1,000)

CLASS A SERIES A
---------------- -------------------
COMMON STOCK COMMON STOCK PREFERRED STOCK ADDITIONAL
-------------------- ---------------- ------------------- TREASURY PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT STOCK CAPITAL DEFICIT TOTAL
----------- ------- --------- ------- ----------- ------- ---------- ----------- ------------- ------------

BALANCE - JULY 1, 2000 2,095,000 $2,000 960,000 $1,000 1,090,909 $1,000 $(601,000) $10,848,000 $(17,555,000) $(7,304,000)

NET (LOSS) FOR THE YEAR
ENDED JUNE 30, 2001 (573,000) (573,000)
----------- ------- --------- ------- ----------- ------- ---------- ----------- ------------- ------------

BALANCE - JUNE 30, 2001 2,095,000 2,000 960,000 1,000 1,090,909 1,000 (601,000) 10,848,000 (18,128,000) (7,877,000)

NET (LOSS) FOR THE YEAR
ENDED JUNE 30, 2002 (610,000) (610,000)
----------- ------- --------- ------- ----------- ------- ---------- ----------- ------------- ------------

BALANCE - JUNE 30, 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)
=========== ======= ========= ======= =========== ======= ========== =========== ============= ============

The notes to financial statements are made a part hereof.

F-4

SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(TO THE NEAREST $1,000)

YEAR ENDED
JUNE 30,
-------------------------
INCREASE (DECREASE) IN CASH 2002 2001
------------ ------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (610,000) $ (573,000)
------------ ------------

Adjustments to reconcile results of operations
to net cash effect of operating activities:
Noncash gains on restructuring of liabilities (72,000)
Depreciation and amortization 605,000 809,000
Deferred rent payable 27,000 159,000
Net changes in assets and liabilities:
Inventory (15,000) 46,000
Prepaid expenses and other current assets 68,000 72,000
Security deposits 23,000
Accounts payable and accrued liabilities 163,000 (406,000)
Interest payable - institutional lenders 1,708,000 1,091,000
------------ ------------

TOTAL ADJUSTMENTS 2,556,000 1,722,000
------------ ------------

NET CASH PROVIDED BY OPERATING ACTIVITIES 1,946,000 1,149,000
------------ ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (322,000) (105,000)
Web site development costs (97,000)
------------ ------------

NET CASH USED FOR INVESTING ACTIVITIES (419,000) (105,000)
------------ ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of capital lease obligations (17,000) (141,000)
------------ ------------

NET INCREASE IN CASH 1,510,000 903,000

CASH - JULY 1 2,212,000 1,309,000
------------ ------------

CASH - JUNE 30 $ 3,722,000 $ 2,212,000
============ ============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 2,000 $ 51,000
============ ============

The notes to financial statements are made a part hereof.

F-5

SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

NOTE A - THE COMPANY
-------- -----------

Skyline Multimedia Entertainment, Inc. ("SME") is a holding company
formed to develop and operate state-of-the-art entertainment
attractions and together with its wholly-owned subsidiaries, New
York Skyline, Inc. ("NYSI") and Skyline Virtual Reality, Inc.
("SVR") are referred to as the "Company." Its first site, which is
located in the Empire State Building in New York City, is owned and
operated by NYSI which operates its "New York Skyride" facility, a
simulated "aerial tour" of New York City.

The second site, which was located in Times Square in New York
City, was owned by SVR which had operated an interactive virtual
reality entertainment center from December 1996 to January 2001. In
December 2000, SVR was notified by its land-lord of the exercise of
a cancellation clause, as provided in the lease. As a result, in
January 2001, SVR ceased its operations, returned leased game
equipment to the vendor and sold at auction certain other fully
depreciated property and equipment for approximately $65,000. For
the period July 1, 2000 to January 7, 2001, SVR's revenues were
approximately $1,155,000 and its direct operating expenses were
approximately $979,000.

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 before
extraordinary items from operations and as of June 30, 2002, has a
working capital deficiency of $10,485,000 and a capital deficiency
of $8,487,000. As further indicated in Note F, the Company's
borrowings from institutional lenders and investors is either past
due or due on demand. The Company is dependent on the continued
forbearance of these lenders 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.
Management plans to negotiate with the lenders for more favorable
repayment terms, including the forbearance of a portion of the
accrued interest charges. In addition, the Company has been
reviewing and reducing operating expenses and focusing on its
marketing efforts on the Empire State Building attraction, which
includes an upgrade to its "New York Skyride" film. 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 SME
and its wholly-owned subsidiaries. Material intercompany
transactions and account balances have been eliminated in
consolidation.

(Continued)

F-6

SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
-------- ------------------------------------------------------

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, 2002 and 2001, they are
not included in the calculation of diluted per share amounts.

INVENTORY
---------

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

PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
----------------------------------------------

Property and equipment 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, 2002 was approximately $16,000
(see Note L).

RENT EXPENSE
------------

For financial accounting purposes, the Company recognizes scheduled
rent increases 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.

(Continued)

F-7

SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
-------- ------------------------------------------------------

STOCK-BASED COMPENSATION
------------------------

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

FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------

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

IMPAIRMENT OF LONG-LIVED ASSETS
-------------------------------

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

In October of 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards 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. SFAS No.
144 is effective for the Company on July 1, 2002. The Company is
evaluating the impact of the adoption of this standard on the
carrying amounts of its property, equipment and improvements.

ADVERTISING
-----------

Advertising costs are expensed when incurred. Advertising costs
were $209,000 and $200,000 for the years ended June 30, 2002 and
2001, respectively.

(Continued)

F-8

SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

NOTE C - CONCENTRATION OF CREDIT RISK
-------- ----------------------------

The Company maintains all of its cash with two highly capitalized
financial institutions, which are insured by the FDIC for $100,000
per financial institution.

NOTE D - PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
-------- ----------------------------------------------

Property, equipment and leasehold improvements is summarized as
follows:

ESTIMATED
USEFUL LIFE
(YEARS)
-------

Equipment and fixtures $ 898,000 5-7
Simulation film 1,275,000 10
Simulation equipment 2,150,000 12
Leasehold improvements 2,609,000 10-16
-----------

6,932,000

Less accumulated depreciation and amortization 3,812,000
-----------

$ 3,120,000
===========

NOTE E - CAPITAL LEASE OBLIGATIONS
-------- -------------------------

The future minimum lease payments under capital lease obligations
as of June 30, 2002 are as follows:

Year Ending June 30:
2003 $ 7,000
2004 7,000
----------

Total minimum lease payments 14,000

Less amount representing interest at
11.1% a year 1,000
----------

Present value of minimum lease payments 13,000
Less current portion 6,000
----------

Long-term portion $ 7,000
==========

(Continued)

F-9

SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

NOTE F - NOTES PAYABLE - INSTITUTIONAL LENDERS
-------- -------------------------------------

SENIOR CREDIT AGREEMENT
-----------------------

The Company entered into a Senior Credit Agreement, dated as of
December 20, 1996, with Prospect Street NYC Discovery Fund, L.P.
("Prospect Street") and the Bank of New York as trustee for the
Employees Retirement Plan of the Brooklyn Union Gas Company ("BUG")
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 an Amendment
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 (the Bank of New York as trustee
for the Employees Retirement Plan of the Brooklyn Union Gas Company
Non-Bargaining Health VEBA and Prospect Street NYC Co-Investment
Fund, L.P.). 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 following is a breakdown of the Senior Notes and/or warrants
issued to each of the Lenders:

Lender Notes Warrants
------ ----- --------

Prospect Street NYC Discovery Fund, L.P. $1,500,000 146,341
The Bank of New York as trustee for the
Employees Retirement Plan of BUG $2,000,000 195,120
The Bank of New York as trustee for the
Employees Retirement Plan of the
BUG Company Non-Bargaining
Health VEBA $ 500,000 48,780
Prospect Street NYC Co-Investment
Fund, L.P. $ 450,000 43,902

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%.

(Continued)

F-10

SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

NOTE F - NOTES PAYABLE - INSTITUTIONAL LENDERS (CONTINUED)
-------- -------------------------------------------------

SENIOR SECURED CREDIT AGREEMENT
-------------------------------

The Company entered into a Senior Secured Credit Agreement (the
"Credit Agreement"), dated as of May 20, 1998, with the Bank of
New York as trustee for the Employees Retirement Plan of Keyspan
Energy Corp. ("Keyspan") and Prospect Street NYC Discovery Fund,
L.P. ("Prospect Street") 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 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 (Prospect Street NYC Co-Investment
Fund, L.P.) The $500,000 of funds from Prospect Street NYC
Co-Investment Fund, L.P. were loaned on a subordinated basis to all
other debt secured under the Credit Agreement.

The following is a breakdown of the Demand Notes issued to each of
the Lenders:

Lender Notes
-------------------------------------------------- -----------

Prospect Street NYC Discovery Fund, L.P. $ 435,000
The Bank of New York as trustee for the
Employees Retirement Plan of Keyspan $ 1,850,000
Prospect street NYC Co-Investment Fund, L.P. $ 500,000

In connection with the debt, the Bank of New York as trustee for
the Employees Retirement Plan of Keyspan and Prospect Street NYC
Discovery Fund, L.P. received Warrants that are exercisable for 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 of the future utilization of the Company's net operating
loss carryforwards.

The holders of the Demand Notes have not demanded payment of the
Demand Notes. The Demand Notes and the obligations under the Credit
Agreement and the Warrants are also collateralized by a pledge of
the stock of the Company's subsidiaries. In connection with the
Credit Agreement, Keyspan also received the right to appoint two
members to the Company's Board of Directors. Further, as a result
of the issuance of Warrants in connection with the Financing, the
conversion rate of the Series A Preferred Stock (the "Preferred
Stock") held by Prospect Street was adjusted from a conversion rate
of one share of Common Stock for each share of Preferred Stock to a
conversion rate of 6.91 shares of Common Stock for each share of
Preferred Stock.

(Continued)

F-11

SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

NOTE F - NOTES PAYABLE - INSTITUTIONAL LENDERS (CONTINUED)
-------- -------------------------------------------------

SENIOR SECURED CREDIT AGREEMENT (CONTINUED)
-------------------------------------------

In January 2002, the Company was notified that the U.S. Small
Business Administration had been appointed as the Receiver for
Prospect Street by the United States District Court for the
Southern District of New York. At June 30, 2002, notes and accrued
interest payable to Prospect Street aggregated approximately
$3,590,000, of which approximately $2,895,000 relates to the senior
notes payable and approximately $695,000 relates to the senior
secured notes. Prospect Street is also the holder of the Company's
outstanding preferred stock.

OTHER NOTES PAYABLE
-------------------

The Company has also borrowed an additional $500,000 of funds from
the Prospect Street NYC Co-Investment Fund, L.P., which is payable
upon demand and bears interest at the rate of 14%.

NOTE G - INCOME TAXES
-------- ------------

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

JUNE 30,
-------------------------
2002 2001
------------ ------------
Deferred tax assets:
Deferred rent payable $ 606,000 $ 594,000
Net operating loss carryforwards 8,503,000 8,245,000
------------ ------------

9,109,000 8,839,000

Less valuation allowance (9,062,000) (8,789,000)
------------ ------------

Total deferred tax assets 47,000 50,000

Depreciation differences (47,000) (50,000)
------------ ------------

Net deferred tax asset $ -- $ --
============ ============

The Company has provided valuation allowances equal to its net
deferred tax assets at June 30, 2002 and June 30, 2001 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.

(Continued)

F-12

SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

NOTE G - INCOME TAXES (CONTINUED)
-------- ------------------------

At June 30, 2002, the Company has available net operating loss
carryforwards to reduce future federal taxable income of
approximately $18,900,000 for tax reporting purposes which expire
from 2010 through 2022. Pursuant to the provisions of the Internal
Revenue Code, future utilization of these past losses may be
subject to certain annual limitations based on changes in the
ownership of the Company's stock that may occur.

NOTE H - STOCKHOLDERS' EQUITY
-------- --------------------

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

At June 30, 2002, 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, 2002,
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.

(Continued)

F-13

SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS
-9-

NOTE H - STOCKHOLDERS' EQUITY (CONTINUED)

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

OPTION
NUMBER OF PRICE
SHARES PER SHARE
------ ---------

OUTSTANDING - JULY 1, 2000 95,000 $ .25 - $4.00
Cancelled during the year ended June 30, 2001 (35,000) $ .25 - $3.75
-------

OUTSTANDING - JUNE 30, 2001 60,000 $ .25 - $4.00

Cancelled during the year ended June 30, 2002 (5,000) $4.00
-------

Outstanding June 30, 2002 55,000 $ .25 - $1.50
=======

The 55,000 Plan B options are currently exercisable. Options to
purchase 5,000 shares of common stock at $1.50 per share expire in
November 2002 and options to purchase 50,000 shares of common stock
at $.25 per share expire in July 2003.

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, 2002, the Company has purchased 110,000
shares which is reflected as treasury stock.

At June 30, 2002, in addition to shares under warrants, pursuant to
the 1998 Credit Agreement (Note F) the Company has reserved shares
of common stock for issuance upon exercise of warrants, options and
conversions of preferred stock as follows:

Plan "B" options 55,000
Preferred stock 7,538,181
Sub-debt financing 434,143
----------

TOTAL 8,027,324
==========

Pro forma information regarding net loss and loss per share as
required by SFAS No.123 has been determined as if the Company had
accounted for its employee stock options under the fair value
method of that statement. However, on a pro forma basis there would
be no material difference to the historical amounts of net loss or
loss per share as reported in the basic financial statements for
the years ended June 30, 2002 and June 30, 2001. No options or
warrants were issued during 2002 and 2001.

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

(Continued)

F-14

SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

NOTE I - COMMITMENTS
-------- -----------

The Company leases space for its Skyride attraction in the Empire
State Building pursuant to an operating lease expiring in June
2016. Additionally, the Company occupies office space under a
lease, which expires on April 30, 2004.

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

Year Ending June 30:
2003 $ 612,000
2004 601,000
2005 545,000
2006 561,000
2007 611,000
Thereafter 5,517,000
----------

$8,447,000
==========

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

Rent expense for the years ended June 30, 2002 and 2001 was
approximately $747,000 and $902,000, 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:
2003 $ 200,000
2004 200,000
2005 200,000
2006 206,000
2007 225,000
Thereafter 1,902,000
-----------

$ 2,933,000
===========

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,
2002 and June 30, 2001.

In June 2002, the Company entered into a $400,000 contract
relating primarily to the editing of certain portions of the "New
York Skyride" simulation film as well as for digitizing the film,
of which approximately $224,000 has been incurred as of June 30,
2002.

(Continued)

F-15

SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

NOTE J - EMPLOYMENT AGREEMENT
-------- --------------------

In April 2001, the Company entered into an employment agreement
with an officer which expires in December 2002 but which may be
cancelled by either party upon ninety days written notice. The
agreement provides for a base salary of $150,000 a year through
December 2001 with a minimum increase of 5% thereafter.
Additionally, the agreement provides for a minimum annual incentive
bonus of $25,000, and for the future issuance of options to
purchase 1% of the Company's common stock on a fully diluted basis,
pursuant to the Company's employee stock option plan (Note H). As
at June 30, 2002, no options have been granted.

NOTE K - EXTRAORDINARY GAINS FROM RESTRUCTURINGS OF LIABILITIES
-------- ------------------------------------------------------

During the year ended June 30, 2001, the Company settled
outstanding liabilities to vendors resulting in an extraordinary
gain of $72,000.

NOTE L - RELATED PARTY TRANSACTION
-------- -------------------------

In connection with the design, development and maintenance of the
web site, the Company paid approximately $192,000 in 2002 to a
Limited Liability Company, a member and executive officer of which
is also a director of the Company.

NOTE M - FOURTH QUARTER ADJUSTMENT
-------- -------------------------

In the fourth quarter of 2002, the Company reversed a previously
recorded liability for accrued Board of Directors' fees to a former
Director aggregating $60,000 which are not expected to be paid.

F-16

INDEX TO EXHIBITS

Exhibit
Number Description
------ -----------

3.1 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 1457-1463
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.

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

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.

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.

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)

99.1 Certification of the Chief Executive Officer of Skyline
Multimedia Entertainment, Inc. Pursuant to 18 U.S.C. Section
1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.

99.2 Certification of the Chief Financial Officer of Skyline
Multimedia Entertainment, Inc., 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.