===============================================================================
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
     ACT OF 1934

                     For the fiscal year ended June 30, 2001

                                       OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
     EXCHANGE ACT OF 1934

                         Commission file number 0-22558

                           IWERKS ENTERTAINMENT, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

               Delaware                                95-4439361
     (STATE OR OTHER JURISDICTION                   (I.R.S. EMPLOYER
  OF INCORPORATION OR ORGANIZATION)                 IDENTIFICATION NO.)

                            4520 West Valerio Street
                         Burbank, California 91505-1046
              (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)

                                 (818) 841-7766
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

           SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
                                      None

           SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                     Common stock, $.001 par value per share
                         Preferred Stock Purchase Rights
                                (Title of Class)


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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this 10-K or any Amendment to this Form
10-K. [ ]

At September 18, 2001, there were outstanding, 3,540,915 shares of the Common
Stock of Registrant, and the aggregate market value of the shares held on that
date by non-affiliates of Registrant, based on the closing price ($0.54 per
share) of the Registrant's Common Stock on The Over the Counter Bulletin Board
was $1,735,967. For purposes of this computation, it has been assumed that the
shares beneficially held by directors and executive officers of Registrant were
held by affiliates; this assumption is not to be deemed to be an admission by
such persons that they are affiliates of Registrant.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of Registrant's Proxy Statement relating to its 2001 Annual Meeting of
Stockholders are incorporated by reference in Part III of this Annual Report.


<PAGE>


                           IWERKS ENTERTAINMENT, INC.

                    FISCAL YEAR 2001 FORM 10-K ANNUAL REPORT

                                TABLE OF CONTENTS

                                                                           Page
   PART I.
   Item 1.     Business...................................................... 3
   Item 2.     Properties....................................................10
   Item 3.     Legal Proceedings.............................................10
   Item 4.     Submission of Matter to a Vote of Security Holders............10

  PART II.
   Item 5.     Market for Registrant's Common Equity and Related
                 Stockholder Matters.........................................11
   Item 6.     Selected Financial Data.......................................12
   Item 7.     Management's Discussion and Analysis of Financial
                 Condition and Results of Operations.........................13
   Item 8.     Financial Statements and Supplementary Data...................26
   Item 9.     Changes and Disagreements with Accountants on
                  Accounting and Financial Disclosure........................47
  PART III.
  Item 10.     Directors and Executive Officers of Registrant................48
  Item 11.     Executive Compensation........................................48
  Item 12.     Security Ownership of Certain Beneficial Owners
                 and Management..............................................48
  Item 13.     Certain Relationships and Related Transactions................48
  Item 14.     Exhibits, Financial Statement Schedules, and
                 Reports on Form 8-K.........................................49


                                     Page 2
<PAGE>


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SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
This Report contains statements that constitute "forward-looking statements"
within the meaning of Section 21E of the Exchange Act and Section 27A of the
Securities Act. The words "expect," "estimate," "anticipate", "predict",
"believe" and similar expressions and variations thereof are intended to
identify forward-looking statements. Such statements appear in a number of
places in this filing and include statements regarding the intent, belief or
current expectations of Iwerks, its directors or officers with respect to, among
other things (a) trends affecting the financial condition or results of
operations of Iwerks and (b) the business and growth strategies of Iwerks. The
stockholders of Iwerks are cautioned not to put undue reliance on such
forward-looking statements. Such forward-looking statements are not guarantees
of future performance and involve risks and uncertainties, and actual results
may differ materially from those projected in this Report, for the reasons,
among others, discussed in the Sections - "Management's Discussion and Analysis
of Financial Condition and Results of Operations," and "Risk Factors." Iwerks
undertakes no obligation to publicly revise these forward-looking statements to
reflect events or circumstances that arise after the date hereof. Readers should
carefully review the risk factors described in other documents the Company files
from time to time with the Securities and Exchange Commission, including the
Quarterly Reports on Form 10-Q to be filed by the Company in calendar years 2001
and 2002 and any Current Reports on Form 8-K filed by the Company.
-------------------------------------------------------------------------------


                                     PART I

                               BUSINESS OF IWERKS
ITEM 1. BUSINESS.

GENERAL

        Iwerks Entertainment, Inc. and its subsidiaries ("Iwerks" or "the
Company") designs, engineers, manufactures, markets and services high-tech
entertainment attractions which employ a variety of projection, show control,
ride simulation and software technologies. The Company: (a) sells and installs
ride simulation attractions in specialty theatres, (b) sells and installs large
format theatres (generally such theatres require projection technology which
utilize film sizes ranging between five perforations per frame by 70 millimeters
(5/70) and fifteen perforations per frame by 70 millimeter (15/70), (c) sells
and installs specialty theatres which include special "3D/4D FX" effects, (d)
licenses and distributes the films in its library to ride simulation and large
format theatres and specialty "3D/4D FX" theater attractions, (e) produces
and/or distributes films in the 5/70, 8/70 and 15/70 film format for third
parties, (f) invests in joint ventures by contributing its ride simulation
technology, design and equipment and participating in the theatre profits, (g)
leases camera equipment and renting of post production facilities, and (h)
offers format conversion services to the large format industry.

        The primary markets for the Company's attractions are theme parks,
museums, movie theatres, various types of location-based entertainment centers,
destination centers and special event venues. The popularity of entertainment
attractions of the type sold by the Company has led to their increasing use as
the featured attraction in these locations. The sale of large format theatres
into existing commercial exhibitor theatre sites is a market the Company has
also targeted. In addition, high-profile retail sites and casinos are expanding
their entertainment offerings to broaden appeal, extend the visitors' stay and
stimulate repeat visits.

        The Company offers attractions that are well suited to meet this demand.
In addition to their drawing power, the attractions require relatively little
space and can be easily refreshed by changing the film or other software.

        The Company has installed more than 270 specialty format theater
attractions in 36 countries. Of these, 119 were ride simulation theatres, which
the Company supports with a library of 50 ride simulation films, the industry's
largest premium ride simulation film library.


                                     Page 3
<PAGE>


        The Company is one of the world's premier distributors of simulation
films to theatres worldwide including Premier Park's Six Flags and Paramount
Parks. The Company is proud to be the exclusive distributor of such dynamic
films as the award winning "Dino Island" and "Dino Island II: Escape From Dino
Island 3D." Both films utilize state of the art computer graphics to create
action packed adventures that bring you face to face with dinosaurs such as
T-Rex, Pteranodon and a herd of Apatosaurs. "Meteor Attack," another film
released exclusively by Iwerks, blasts you into the future as you join a
do-or-die mission to save the planet. "Stan Lee's 7th Portal" based on Lee's
team of Super Heroes for the 21st century created for the Internet, is a rescue
mission from the evil Mongor through the 7th Portal. The Company also enjoys
relationships with several independent production companies and distributes
additional films on a non-exclusive basis including among others, most of
nWave's film library, Ex-Machina's "Stealth" and "Mad Racers," Landmark's "James
Bond: 007 License To Thrill," Deepwork's "Star Warriors" and Discovery's
"Wings." Additionally, the Company continues to cultivate relationships within
the creative community to further expand its library.

        The Company is a Delaware corporation with principal executive offices
located at 4520 West Valerio Street, Burbank, California 91505, and its
telephone number is (818) 841-7766. In addition to its principal executive
offices, Iwerks has sales offices in Sarasota, Florida and Toronto, Canada. A
sales representative maintains offices in Hong Kong and Shanghai.

RECENT DEVELOPMENTS

        On August 31, 2001, the Company, SimEx, Inc., an Ontario, Canada
corporation ("SimEx"), and SimEx Acquisition Corporation, a Delaware corporation
and a wholly owned subsidiary of SimEx ("Acquisition Co."), entered into an
agreement and plan of merger pursuant to which SimEx will acquire all of the
outstanding shares of the Company's common stock for a total cash consideration
of US $2.25 million. Immediately prior to the effective time of the merger, each
issued and outstanding share of our common stock will be converted into the
right to receive a ratable portion of the US $2.25 million equal to the quotient
obtained by dividing (i) US $2.25 million by (ii) the number of shares of our
common stock immediately outstanding prior to the effective time of the merger.
Assuming the exercise or conversion of all "in-the-money" securities prior to
the effective time of the merger, the per share consideration to be offered to
our stockholders will be approximately US $0.63. The merger is subject to
stockholder approval and other customary closing conditions. If the merger is
consummated, the Company will become a wholly owned subsidiary of SimEx.
However, it is expected that the Company will retain its brand name and identity
and will continue operations under the existing Company management team.

BUSINESS STRATEGY

        The Company's goal is to capitalize on its position as a leader in the
ride simulation attraction business and become the leading full-service provider
in the ride simulation, large format and specialty venue 3D/4D FX attractions by
offering a full range of support services and film-based software.

        The Company's current strategies to achieve its objectives include the
following:

        FULL SERVICE PROVIDER OF COMPLETE ENTERTAINMENT BUSINESS SOLUTIONS. The
Company intends to expand its market penetration by offering its customers a
complete line of services and products to support the design, development and
operation of specialty format theater attractions. The Company has installed
over 270-specialty format theater attractions and currently licenses film
software to over 64 installed simulation theaters. The Company believes that its
track record of successes positions it as a leader in terms of industry
experience and operating expertise in the specialty format theater market. By
focusing its services and products on solutions designed to assist its customers
in building their businesses, the Company believes that it will continue to
expand its own business opportunities in the future.


                                     Page 4
<PAGE>


        EXTEND THE COMPANY'S PRODUCT LINE THROUGH INNOVATIVE USE OF ITS CURRENT
TECHNOLOGIES. Management believes that the Company has the opportunity to
increase its product offerings without incurring significant additional research
and development costs. An example of this is the introduction of a turnkey
specialty 3D/4D FX theatre that utilizes "4D" effects, the first of which opened
in Shenzhen, China in February 2000. The second 3D/4D FX theatre opened in May
2001, in Beijing, China. The third 3D/4D FX theatre is scheduled to open in
August 2001, in Shanghai, China. These effects include a water mist; wind and a
seat drop among other visceral effects. Management believes there are
opportunities to leverage the Company's existing technology to provide new,
innovative products designed to meet current market requirements and
opportunities, including adding 4D effects to its ride simulation systems. The
first simulation attraction with 4D effects was opened in July 2001, in Niagara
Falls, Canada.

        EXPAND INTO NEW MARKETS. The Company is exploring potential new markets
for its attractions, products and services. The Company continues its expansion
efforts in Europe, China, India and South America. In addition, the Company is
pursuing market opportunities for its large format theaters in commercial
locations, such as movie theater multiplexes, where it made its first sales in
fiscal year 1999, and its ride simulation theaters in untapped commercial
settings including casinos and retail businesses.

        IDENTIFY NEW STRATEGIC PARTNERS. Management believes that the Company
can optimize its market position and performance through the formation of
strategic alliances with companies who have complementary technologies,
manufacturing or distribution.

        BRANDED PRODUCTS. The Company has launched the Extreme Screen(TM) brand
in an effort to establish a recognizable and significant global market presence
for the Company's large format theater installations. In fiscal 2000 five
theaters opened with the Extreme Screen(TM) brand and five additional theaters
opened in fiscal 2001. Two additional Extreme Screen(TM) brand theatres are
scheduled to open in fiscal 2002.

IWERKS PRODUCTS

        FIXED-BASE RIDE SIMULATION THEATRES. The Company's line of fixed-base
ride simulators are marketed under the brand IWERKS TURBORIDE(TM). and combine
high-resolution film or video software, digital surround sound and moving seats
to fully immerse the audience in a realistic, simulated experience. The Company
is also beginning to incorporate digital projection technology into some of its
installations. Software currently available includes a variety of live action
and fantasy experiences such as taking a ride through the center of the earth,
being chased by dinosaurs, flying at supersonic speeds, racing with Indy cars,
riding a roller coaster, white-water rafting and space and underwater
adventures. The Company's ride simulation theatre product line is the broadest
in the industry, enabling the Company to offer its customers seat and
platform-based simulators in a variety of configurations and at multiple price
points. The Company's ride simulators are designed to operate in theatres which
typically seat 8 to 100 people, and feature screens up to 52 feet high, with
six-channel digital surround sound. In these rides, guests watch a
high-resolution film with a fast action point-of-view perspective while sitting
in seats that move in synchronization with the action on the screen. Films for
the Company's ride simulation theatres typically range between three and five
minutes. Ride simulation theatres can be reprogrammed to create new adventures.

        LARGE FORMAT THEATRES. The Company's large format theatres are marketed
under the name IWERKS EXTREME SCREEN(TM), and feature screens which are much
larger than standard movie screens and projection systems that deliver a
sharper, brighter image than conventional movies. The result is a high-impact,
immersive, sensory experience for the audience. These theatres can seat up to
600 people, have steeply raked seating and exhibit films typically lasting
between 15 and 40 minutes. The Company offers 15/70 (15 perforations, 70
millimeter film), 8/70 (8 perforations, 70 millimeter film) and 5/70 (5
perforations, 70 millimeter film) format systems including its exclusive
patented Academy Award winning Linear Loop projectors.


                                     Page 5
<PAGE>


        The Company's large format theatres are available in a variety of
configurations. Its flat screen theatres use screens as large as 65 feet high by
85 feet wide, more than five times the size of most movie theatre screens. The
Company's domed screen theatres use a dome-shaped screen up to 80 feet in
diameter which wraps around and above the audience filling the audience's field
of vision. The Company also offers 3D systems which use dual projectors to
create a 3D image.

        CUSTOM AND OTHER THEATRES. The Company offers a wide range of custom
film and video-based theatre systems utilizing 70 millimeter and 35 millimeter
film formats. Among its offerings is the Iwerks' 3D/4D FX Theatre, a theatre
that includes in-theatre physical effects of fog, rain, wind, speed and more.
The Company's custom projects range from the sale of individual projectors to
complete theatre systems.

        FILM DISTRIBUTION. The Company's film distribution efforts are focused
in three primary market sectors: simulation films, large format films, and
attraction films. The Company has a film library which includes, as of June 30,
2001, the distribution rights to 50 simulation films, 8 of which are available
in 3D; 7 large format films, 4 of which are available in 3D; and 6 attraction
films, all of which are available in 3D. In addition to the Iwerks' library of
large format films, owners of Iwerks' large format theatres have access to an
additional library of over 100 titles from other distributors. The Company
believes that the quality and size of its film library gives it an added
advantage over its competitors in the marketplace.

        The Company's recent simulation film releases include STAN LEE'S 7TH
PORTAL, a rescue mission involving all new Stan Lee superhero characters; METEOR
ATTACK, a 23rd century training flight; JAMES BOND: LICENSE TO THRILL, a truly
live-action experience; STAR Warriors, the ultimate starfighter experience;
WINGS, an educational aviation adventure made in association with the Discovery
Channel; JOURNEY THROUGH THE CENTER OF THE EARTH, a 3D ride to the center of the
earth; DINO ISLAND II: ESCAPE FROM DINO ISLAND, a 3D sequel to the highly
successful film DINO ISLAND; and SUPERSTITION, a haunted scream park adventure
hosted by Elvira - Mistress of the Dark. Fiscal 2002 releases are scheduled to
include "Warrior of the Dawn" and "Welcome to Toy World." The Company continues
to look at additional projects, which may increase the number of films released
in fiscal 2002. The Company intends to continue to seek opportunities for
deriving additional revenue from its library of simulation films in fiscal year
2002.

        The Company's large format library includes "Encounter in the Third
Dimension" (available in 8/70 3D), "Alien Adventure" (available in 8/70 2D and
3D), "Cirque du Soleil: Journey of Man" (available in 8/70 2D), "Wings of
Courage" (available in 8/70 2D and 3D), "Across the Sea of Time" (available in
8/70 2D and 3D), "Thrill Ride" (available in 8/70 2D), and the newest release,
"Mexico" which is available in all formats (15/70, 10/70 and 8/70). The company
is in serious discussions to acquire all large format rights for several other
projects to be released in fiscal year 2002 and future fiscal years and is
committed to building the large format distribution business.

        The Company's attraction library consists of "Ultimate Flight,"
"Pirates," "Haunts of the Olde Country," "Fascinating World of Materials,"
"Adventure Planet," "Adventures in 3D," all of which are available in 3D and can
be programmed to play in synch with 4D effects. The latest release, "Ultimate
Flight" is a revised version of the 40-minute large format film entitled
"Ultimate G's" which was successfully re-purposed for the attraction market.
Attraction films are in great demand and the Company continues to search out new
attraction films or opportunities to re-purpose existing films.

MULTI-FORMAT FILM PRODUCTION STRATEGY

        Given the Company's presence in three unique market places, Iwerks can
select film properties and exploit them across the three separate film markets.
For example, with the Company's investment in the large format film "ENCOUNTER
IN THE THIRD DIMENSION," Iwerks was able to derive three different film products
from the single investment. This strategy greatly reduces the risk of the film
investment and facilitates entry into new markets to increase revenue potential
at a greatly reduced cost. This strategy was repeated with the release of "ALIEN
ADVENTURE IN 3D" which also derived four 3D simulation films including "MAGIC
CARPET RIDE IN 3D," "KID COASTER 3D," "AQUA RIDE 3D" and "GLACIER RUN 3D" as
well as a 12 minute 3D/4D specialty film.


                                     Page 6
<PAGE>


FILM PRODUCTION

        The Company's internal executive production capability develops and
oversees production of films for the Company's film productions as well as for
third party custom film projects. In fiscal 2001 the production group developed
and produced a commercial concert film, "*NSYNC BIGGER THAN LIVE" showcasing the
chart-topping band *NSYNC. Additionally, the production group developed and
produced a custom film for Daytona USA entitled "Daytona Dream Laps." Iwerks has
several film projects in development with anticipated release dates in fiscal
2002.

OWNED AND OPERATED (O&O)

        The Company has entered into numerous Joint Venture arrangements with
Location Based Entertainment ("LBE") operators, specifically Dave & Busters and
Pier 39. Typically the arrangement consists of Iwerks contributing the hardware
and the operator contributing the site and improvements. The agreements
generally call for a film lease payment and gross profit split. In July 2001,
the Company bought out its former partners in the Pier 39 Joint Venture. In
fiscal 2002, Pier 39 will be consolidated into the operations of the Company.

CAMERAS AND OTHER PRODUCTION SERVICES

        The Company contracts with third parties to lease its 8/70 large format
cameras and related equipment, including a 3D rig, lenses and accessories,
generally from several days to several months.

        The Company has developed and manufactured two 15/70 large format
cameras and is in the process of completing one additional 15/70 camera. The
Company also provides technical and post-production services to third party
producers for a fee and maintains a 15/70 projection room as well as an 8/70
projection room at its Burbank facilities for rent to large format filmmakers
for use in the post-production process. The Company also began providing format
conversion services in fiscal 2001.

PORTABLE RIDE SIMULATION THEATRES

        In September 1999, the Company decided to sell the assets relating to
the portable ride simulation theatres ("Touring Division"). To date, the Company
has sold 5 portable ride simulation theatres and is actively seeking buyers for
the remaining portable ride simulation theaters.

MARKETING AND CUSTOMERS

        The Company distributes its theatre systems, software and services
through multiple distribution channels including a direct sales and marketing
force as well as independent sales representatives in selected areas. The sales
and marketing staff consists of seven employees. A sales representative
maintains foreign sales offices in Hong Kong and Shanghai, which provide support
to Asian marketing programs, and assist in customer service. In addition, the
Company has sales professionals located in Burbank, California and Sarasota,
Florida, as well as, Toronto, Canada.

        The Company markets its attractions, including theatre systems and film
software, mainly to theme parks, museums, movie theaters, destination centers,
casinos, location-based entertainment centers and special event venues. The
Company's theatre systems include projection and audio equipment, show control
systems and film handling equipment. The Company also provides ride simulation
systems, which include motion bases, film projection and audio equipment, show
control and other effects, as well as 4D specialty systems which include other
sensory effects. The customer supplies its own theatre space and other necessary
site improvements to operate the theatre. The Company provides installation,
training, design, marketing, maintenance and other support services.


                                     Page 7
<PAGE>


        A primary market for the Company's 2D, 3D and 4D theatres has been the
worldwide amusement and theme park industry. The Company expects that continuing
sales will come from existing parks looking for new attractions, parks under
development looking for an array of attractions and the expanding location-based
entertainment industry. Substantial new park development is occurring outside of
the United States and management believes that international operators will
continue as important customers for this product. The Company has also developed
customers in the family entertainment center, movie theatre, institutional and
casino markets as well as tourist, vacation, destination shopping and convention
locations for its ride simulation theatres. The Company sells its ride
simulation theatres at prices which are separately negotiated, depending upon
the product, the number of motion bases, the configuration of the theatre space,
optional components selected and the level of design service provided. The
Company licenses its ride simulation films for a range of prices depending on
the film, license term, location and size of theater.

        The primary markets for the Company's large format 2D and 3D theatres
have been museums, visitor destination centers, and other institutional
exhibition facilities frequented by large numbers of visitors. Commercial movie
theatre operators are also viewing large format theatres as an entertainment
option for their guests. The Company sells its large format theatres at prices
which are separately negotiated.

        The Company's sales typically are made pursuant to written contracts,
and are denominated in United States dollars. International sales are generally
backed by letters of credit. Consequently, the Company's operations historically
have not been subject to risks related to currency fluctuations. The Company's
sales contracts typically provide for progress payments that are timed to match
related expenditures by the Company. The customer generally has the right to
terminate the contract before completion by paying Iwerks its non-recoverable
costs plus a termination fee. The Company offers a warranty on sales of its
products, generally for a period of 12 months. The Company believes that its
material contract terms are consistent with industry practices.

ENABLING TECHNOLOGIES

        With limited exceptions, the underlying technologies employed by the
Company are in the public domain and generally available in the marketplace.
However, the Company possesses substantial expertise in the design, modification
and engineering of projection, film handling, and camera and audio technologies
which it believes to be an important competitive factor.

        IMAGING SYSTEMS. The Company offers a variety of technologically
advanced imaging systems.

        The Company's 8/70 is an eight perforation, 70-millimeter film system
that operates at 24 or 30 frames per second. By comparison, most motion picture
theatres use four perforation, 35-millimeter film that runs at 24 frames per
second and standard 70-millimeter film is five perforation which also runs at 24
frames per second. The larger frame size and faster speed gives the Company's
8/70 a brighter and sharper image without the flicker and stroboscopic effects
common with conventional 35 and 70-millimeter film systems. The Company's 8/70
is used in the Company's array of ride simulation systems and large format
theatres common to museums, movie theatres and other venues where screen sizes
up to 60' high and 80' wide or dome screens of 75' or less in diameter are
suitable.

        The Company owns the proprietary patented Linear-Loop Projection ("LLP")
Technology which offers the expanding large format market a genuine alternative
to existing projection techniques. The LLP gently pushes film through the
projector on a column of air unlike most projection systems that use gear
mechanisms to pull film through. The LLP is designed to produce an image that is
brighter and more stable than other projectors available. In 2000, the inventor
of the patented Linear Loop technology, L. Ron Schmidt, was recognized by the
Academy of Motion Picture Arts and Sciences as the recipient of an Academy
Scientific and Achievement Award for the Linear Loop's superior concept, design
and engineering.


                                     Page 8
<PAGE>


        The Company's 15/70 is a fifteen perforation, 70-millimeter rolling loop
projection system that handles the largest commercially available film size.
This system projects an image area more than nine times that of conventional
35-millimeter film and 300% larger than standard 70-millimeter film. The
Company's 15/70 is capable of achieving screen sizes up to 65' high and 85' wide
and dome screens up to 85' in diameter that are generally found in high capacity
theatres at world expositions and larger museums and visitor centers. Iwerks,
8/70 and 15/70 are used in the Iwerks Dome and Large Format Theatres.

        The Company offers high-resolution digital video imaging systems that
utilize a high-definition video source and produce a high quality video image.
This imaging system is ideal for small ride simulation theatre systems.

        MOTION BASES. The Company's ride simulation theatres utilize either
two-seat or eight-seat motion platforms. The two seat hydraulic base is a
compact and highly responsive three-axis system, allowing a multitude of
combinations of pitch (tilt from front to rear), vertical (move up and down) and
roll (tilt from side to side) movements, which keep passengers in constant
motion with the image. The eight seat electro-mechanical base, which has
six-axis of motion capable of producing the most realistic ride simulation
available. The six-axis systems permit pitch, roll, vertical, sway, yaw (a
turning motion), and surge (forward and back), all the motions available within
a given motion envelope. Each motion base is a self-contained system, requiring
only electronic communications and electrical power connections.

MANUFACTURING

        The Company manufactures and assembles its theatre systems at its
facilities in Burbank, California. A majority of the components for these
theatre systems are purchased from outside vendors. The Company's manufacturing
operations consist of assembly, testing, quality control and system integration
of its theatre system components, subassemblies and final assemblies, including
modifications and the programming of the show-control and motion-control
components, and installation of the completed theatre systems.

        The Company's manufacturing operations utilize a wide variety of
electrical and mechanical components, raw materials and other supplies and
services. The Company has developed multiple commercial sources for most
components and materials, but it does use single sources for a limited number of
standard and custom components. While delays in delivery of such single source
components could cause delay in shipments of certain products by Iwerks, at this
time, the Company has no reason to believe that any of the single-source vendors
present a serious risk. Consistent with industry practice, the Company generally
purchases components of its theatre systems upon receipt of an order. Certain
components used by Iwerks, including lenses, hydraulic power sources and motion
bases must be ordered up to four months in advance to assure timely delivery.
The Company maintains an inventory of these items as it deems appropriate to
service forecasted demand. Research and development costs are incurred in the
design, construction and testing of prototype systems and are charged to expense
as incurred. The research and development expenses were $565,000, $404,000 and
$186,000 for the years ended June 30, 1999, 2000 and 2001, respectively. Of the
expenses, 91%, 53% and 86% in 1999, 2000 and 2001, respectively, were for
improvements to existing products and the remainder was for development of new
products.

        In fiscal 1997, the Company acquired the technology and patents to
produce the Linear Loop Projector. The Company utilizes LLP not only in its
Large Format Theatres, but also as its projector of choice in larger ride
simulation installations. Since the acquisition of this technology, the Company
has continued to make modifications and enhancements to the LLP. The LLP is not
an upgrade or rework of existing vendored products. The technology is unique,
patented and has a distinct advantage compared to "geneva" driven models that
preceded it.

        The Company acquires certain other projectors from third party suppliers
and makes modifications to the projectors to fit the Company's use. Lenses and
lamphouses incorporated in the projection systems are supplied to the Company by
third parties.


                                     Page 9
<PAGE>


        The Company and Eaton-Vickers Incorporated, a manufacturer of hydraulic
components, jointly developed the hydraulically actuated seats which are used in
the two-seat motion base-ride simulation theatre. Under the agreement pursuant
to which the hydraulically actuated seats were developed, the Company owns all
rights in and to the seats. Eaton-Vickers continues as the sole manufacturer of
these motion bases on behalf of the Company; however, the Company has the right
under its agreement with Eaton-Vickers to secure alternate sources of
manufacturing at any time. The Company also purchases other products from
Eaton-Vickers.

        The Company also has developed an electro-mechanical 8-seat base in
conjunction with MOOG, Inc. The base actuates 6 degrees of movement and uses
standard 110 volt electrical power as its source. In the development of the
8-seat simulator, a manufacturer was secured to execute the fiberglass seat as a
finished product requiring no additional assembly or finishing by the Company.
The finished product will be shipped directly to the customer site for
installation.

PATENTS AND TRADEMARKS

        With the exception of certain features of Iwerks' motion base and motion
control system used in its motion simulation theaters and certain features of
its LLP, for which Iwerks owns United States patents, Iwerks does not have
United States or foreign patent protection on its existing technology underlying
its products. Iwerks intends to seek patent protection for any patentable
technology developed in the future. Iwerks has registered certain marks under
United States and international trademark laws. Iwerks intends to take all steps
necessary to cause these trademarks to have a perpetual existence, although
Iwerks does not believe that its business is dependent on any of these marks.

EMPLOYEES

        At August 28, 2001, the Company employed 89 persons, of whom 23 were
employed in management, finance and administration, 7 were employed in sales and
marketing, and 52 were employed in operations (including 2 employees working on
a temporary basis refurbishing the Company's portable ride simulation theatres
that are being sold) and 14 were employed at the Pier 39 Turbo Ride attraction.
None of the Company's employees are represented by a collective bargaining
agreement. The Company believes that its relations with its employees are
satisfactory.

ITEM 2. PROPERTIES.

        The Company maintains its principal facility in Burbank, California
where it leases space under three separate leases on adjacent facilities
consisting of 36,000, 23,460 and 7,596 square feet each. The leases expire
October 14, 2006, September 30, 2001 and September 30, 2002, respectively. The
Company leases the space for an aggregate lease payment of approximately $44,745
per month. In June 2000, in an effort to reduce operating costs, the Company
consolidated its operations into two of the existing buildings. The third
building (23,460 square feet) is being subleased through the end of the lease
term.

ITEM 3. LEGAL PROCEEDINGS.

        The Company is a party to various actions arising in the ordinary course
of business which, in the opinion of management, based in part on the advice of
legal counsel, will not have a material adverse effect on the Company's
financial condition or results of operations; however, there can be no assurance
that the Company will not become a party to other lawsuits in the future, and
such lawsuits could potentially have a material adverse effect on the Company's
financial condition or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

        During the last quarter of the Registrant's fiscal year ended June 30,
2001, no matter was submitted to a vote of the security holders of the
Registrant.


                                    Page 10
<PAGE>


                                    PART II

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

        The Company's Common Stock is listed for quotation on The Over The
Counter Bulletin Board. Until November 1, 2000, the Common Stock was listed on
the Nasdaq Small Capital Market. The table below sets forth, for the calendar
quarters indicated, the high and low closing sales prices per share as reported
on Over the Counter Bulletin Board or The Nasdaq Small Capital Market, as
applicable, for the Iwerks Common Stock.

<TABLE>
<CAPTION>
                                               HIGH              LOW
YEAR ENDED JUNE 30, 2000
<S>                                          <C>             <C>
First Quarter                                $ 4 19/32       $ 2 26/32
Second Quarter                                 3  1/2          2 33/64
Third Quarter                                  3  9/16         1  9/16
Fourth Quarter                                 1  7/8            13/16
YEAR ENDED JUNE 30, 2001
First Quarter                                $   15/16       $    7/16
Second Quarter                                    5/8             5/32
Third Quarter                                     9/16            5/32
Fourth Quarter                                   33/64           19/64
</TABLE>

        As of August 28, 2001, Iwerks had approximately 776 holders of record.
No dividends have been declared or paid since incorporation. Iwerks currently
intends to retain earnings for use in its business and does not anticipate
paying any cash dividends on its common stock in the foreseeable future.

        On July 28, 2000, the Company was notified by Nasdaq that the Company
did not meet the continued listing requirements of The Nasdaq National Market.
Accordingly, effective August 1, 2000 the Company was listed on the Nasdaq Small
Capital Market pursuant to an exemption and the trading symbol of the Company's
securities was changed from IWRK to IWRKC. At the time of listing on the Nasdaq
Small Capital Market, the Company was granted a temporary exception from the
continued listing requirements of the Nasdaq Small Capital Market. On November
1, 2000, the Company was notified by Nasdaq that it did not meet those continued
listing requirements and the common shares were delisted on the close of
business on November 1, 2000. The common stock currently is trading on the Over
The Counter Bulletin Board.


                                    Page 11
<PAGE>


ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                    Fiscal Year Ended June 30,
                                     ----------------------------------------------------------------
                                     1997 (1)(2)   1998 (1)(3)    1999 (1)   2000 (1)(4)  2001 (1)(5)
                                     -----------   -----------    --------   -----------  -----------
                                            (IN THOUSANDS EXCEPT PER SHARE INFORMATION)
<S>                                    <C>          <C>           <C>         <C>         <C>
OPERATIONS:
Total revenue                          $ 39,584     $  25,073     $ 34,869    $ 28,243    $ 22,204
Loss from operations                    (10,573)      (12,132)      (4,986)    (22,620)     (5,034)
Net loss                               $ (9,956)    $ (11,560)    $ (4,778)   $(22,507)     (5,037)
Net loss per share - basic             $  (2.94)    $   (3.33)    $  (1.36)   $  (6.53)   $  (1.46)
Net loss per share - diluted           $  (2.94)    $   (3.33)    $  (1.36)   $  (6.53)   $  (1.46)
Weighted average shares
  outstanding  -  basic                   3,387         3,489        3,520       3,449       3,449
Weighted average shares
  outstanding - diluted                   3,387         3,489        3,520       3,449       3,449

FINANCIAL POSITION (AT PERIOD END):
Cash, cash equivalents and
    short-term investments             $ 19,067      $ 10,464     $  6,717    $  2,733    $  2,191
Total assets                             64,529        50,857       50,822      25,864      15,445
Capital lease obligations and
  notes payable                           1,827         1,082        1,087       2,634       1,991
Stockholders' equity                     48,386        36,834       31,775       9,520       4,483
Total liabilities and
  stockholders' equity                 $ 64,529      $ 50,857     $ 50,822    $ 25,864    $ 15,445

PER SHARE DATA (AT END OF PERIOD):
Net book value per common share        $  13.90      $  10.43     $   9.21    $   2.76    $   1.30
Common shares outstanding                 3,474         3,527        3,448       3,449       3,449
<FN>

(1)  Net income (loss) per share - basic and diluted, weighted average shares
     outstanding - basic and diluted, net book value per common share and common
     shares outstanding have been restated to reflect the 3.5 to 1 reverse stock
     split effective January 18, 2000.

(2)  Net loss for 1997 includes the write-down of $5.6 million ($1.61 loss per
     share) for the impairment of long-lived assets for the portable ride
     simulation theaters and other fixed assets.

(3)  Net loss for 1998 includes approximately $1.6 million of severance costs
     associated with a company-wide layoff and termination of certain officers,
     and an additional $1.6 million for merger related costs associated with the
     failed merger.

(4)  Net loss for 2000 includes the write-down of approximately $13.8 million
     ($4.00 loss per share) for the impairment of goodwill and other assets.

(5)  Net loss for 2001 includes the write-down of approximately $3.2 million
     ($0.93 loss per share) for the impairment of goodwill and other assets.
</FN>
</TABLE>


                                    Page 12
<PAGE>


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

GENERAL

        The Company designs, engineers, manufactures, markets and services
high-tech entertainment attractions which employ a variety of projection, show
control, ride simulation and software technologies. The Company currently: (a)
sells and installs ride simulation attractions in specialty theatres, (b) sells
and installs large format theatres (generally such theatres require projection
technology which utilize film sizes ranging between five perforations per frame
by 70 millimeters (5/70) and fifteen perforations per frame by 70 millimeter
(15/70)), (c) sells and installs specialty theatres which include special "4D"
effects, (d) licenses and distributes the films in its library to ride
simulation, large format theatres and specialty 3D/4D attraction theaters, (e)
produces films in the 5/70, 8/70 and 15/70 film format for its film library and
for third parties, (f) invests in joint ventures by contributing its ride
simulation technology, design and equipment and participating in the theatre
profits, and (g) leases camera equipment and rents post production facilities,
and (h) offers format conversion services to the large format industry.

        The Company's operating results in fiscal 2001 have improved from fiscal
2000. This was primarily due to several large non-cash one-time adjustments made
in fiscal 2000. In the third quarter of fiscal 2000, the Company recorded a
one-time non-cash write-down to goodwill associated with the acquisition of Omni
Film International (Omni) in 1994 ($11.7 million). In the fourth quarter of
fiscal 2000, the Company recorded impairment write-downs totaling $2.2 million
(certain camera equipment-$1.58 million, portable ride simulation
theaters-$594,000). In addition, in the prior year the Company recorded a charge
of $202,000 relating to the adoption of SOP 00-2, "Accounting by Producers or
Distributors of Films. In the fourth quarter of fiscal 2001, as a result of the
proposed merger with Simex Inc., the Company recorded a non-cash write-down for
impaired assets totaling approximately $3.2 million.

REVENUES FOR THE FISCAL YEARS ENDED JUNE 30, 1999, 2000 AND 2001 ARE ANALYZED IN
THE FOLLOWING TABLE (IN THOUSANDS):

        The Company derives its revenues primarily from four sources: sales of
hardware systems, licensing of films, owned and operated (portable ride
simulation theatres and joint venture arrangements), and the production of films
for third parties, rental of facilities and camera equipment.

Revenues for the fiscal years ended June 30, 1999, 2000 and 2001 are analyzed in
the following table (in thousands):

<TABLE>
<CAPTION>
                                                    Fiscal Year Ended June 30
                                    ----------------------------------------------------------
                                       1999       %        2000        %       2001       %
                                    ----------  ------  ---------    ------  ---------  ------
<S>                                 <C>         <C>     <C>          <C>     <C>        <C>
Hardware sales & service              $ 19,305     55%   $ 16,285       58%    10,334     46%
Film licensing                           7,838     23%      5,920       21%     6,786     31%
Owned and operated                       4,471     13%      1,775        6%       778      4%
Film production and other                3,255      9%      4,263       15%     4,306     19%
                                      $ 34,869    100%   $ 28,243      100%    22,204    100%
</TABLE>

        Revenues on sales of theatre systems are recognized on the
percentage-of-completion method, measured by the ratio of percentage of labor
hours incurred to-date to estimated total labor hours for each fixed-price
contract, over the life of the contract. Accordingly, the timing of shipment and
installation schedules as dictated by the customer can result in variability of
quarterly revenues and earnings. Likewise, the cash received and used for the
contract can vary from quarter-to-quarter with the revenue and cost recognition
on the contract. The gross margin for each contract varies based upon pricing
strategies, competitive conditions and product mix.


                                    Page 13
<PAGE>


        Film Licensing revenues and related expenses are recognized at the
beginning of the license period, at which time the customer is billed the
license fee and the film is delivered to the customer.

        Revenues from O&O consist of portable ride simulation theatres, revenues
derived primarily from corporate sponsorship or ticket sales at state fairs, air
shows, and similar events as well as revenues derived from fixed site joint
venture revenues which includes Iwerks' contractual share of the sites' revenues
or profits as applicable. In September 1999, the Company stopped operations of
the Touring Division and decided to sell the assets. These assets are described
as the portable ride simulation theaters and are reflected at their estimated
net realizable value.

        Revenue from film production and other is generated primarily through
the production of films for third parties, rental of camera equipment and the
rental of postproduction facilities. The Company started a film conversion
business in the third quarter of fiscal 2001. The Company recognizes revenues
and costs associated with the production of custom films on the percentage of
completion method. The Company typically realizes a smaller margin from the sale
of custom films in comparison to its theatre system sales.

        A significant portion of the Company's sales are made to customers
located outside of the United States, primarily in Asia, South America, Europe,
the Middle East and Canada. Sales from customers outside of the United States
continue to account for a large percentage of total revenues. Sales from Asia,
Europe, Middle East and Canada account for 58% of the Company's total sales in
fiscal 2001. Revenues for the fiscal years ended June 30, 1999, 2000 and 2001
attributable to sales to these areas are summarized in the following table (in
thousands):


<TABLE>
<CAPTION>
                                   1999                      2000                      2001
                         ------------------------  -------------------------  -----------------------
                                    PERCENTAGE OF              PERCENTAGE OF            PERCENTAGE OF
                          AMOUNT    TOTAL REVENUE    AMOUNT    TOTAL REVENUE   AMOUNT   TOTAL REVENUE
                         ---------  -------------  ---------   -------------  --------  -------------
<S>                      <C>        <C>            <C>         <C>            <C>       <C>
Asia                      $ 10,434      29.9%      $  9,800        34.7%      $  6,173      27.8%
South America                  550       1.6%         1,128         4.0%           458       2.1%
(including Mexico)
Europe and Middle East       8,148      23.4%         8,429        29.8%         3,756      16.9%
Canada                         503       1.4%           386         1.4%         2,530      11.4%
                          --------     ------      --------       ------      --------     ------
Total Export Revenues     $ 19,635      56.3%      $ 19,743        69.9%      $ 12,917      58.2%
                          ========     ======      ========       ======      ========     ======
</TABLE>

        A sales representative maintains offices in Hong Kong and Shanghai to
support sales to Asia. The Company also maintains an office in Toronto, Canada
to support its North American sales. European, Middle Eastern and South American
sales are supported out of the Sarasota, Florida office. International
operations and sales may be subject to political and economic risks, including
political instability, currency fluctuations, changes in import/export
regulations, tariff and freight rates. In addition, various forms of
protectionist trade legislation have been proposed in the United States and in
certain other countries. Any resulting change in current tariff structures or
other trade and monetary policies could adversely affect Iwerks' international
operations. Political and economic factors have been identified by the Company
with respect to certain markets in which it competes. There can be no assurance
that these factors will not result in customers of the Company defaulting on
payments owed to Iwerks, or in the reduction of potential purchases of the
Company's products. For example, turmoil in the economies of the countries in
Asia has historically had a material adverse effect on the Company's revenues
and results of operations. Revenues attributable to sales in Asia declined from
$13.7 million for fiscal 1997 (representing 34.6% of the Company's revenues) to
$5.7 million in fiscal 1998 (representing 22.6% of the Company's revenues).
Fiscal 1999 sales to Asia increased to $10.4 million (representing 29.9% of the
Company revenues), and during fiscal 2000 sales remained strong at $9.8 million
(representing 34.7% of the Company's revenue). During fiscal 2001 sales to Asia
decreased to $6.2 million (representing 27.8% of Company's revenue). The Company
is not able to predict to what extent, or for what period, economic trends may
adversely affect the sales of its products. Typically, sales outside the United
States are denominated in United States dollars and are backed by bank letters
of credit, which reduce the risks related to international sales.


                                    Page 14
<PAGE>


COMPARISON OF YEAR ENDED JUNE 30, 2001 TO YEAR ENDED JUNE 30, 2000

        REVENUES

        Revenue for the fiscal year ended June 30, 2001 decreased approximately
$6.0 million or 21% from the fiscal year ended June 30, 2000 due to the factors
described below.

        Hardware sales and service decreased by $6.0 million or 37% from the
prior fiscal year. Hardware sales in the Asia region decreased from the prior
year by $3.6 million or 54%, European hardware sales decreased by $2.5 million
or 53% and South American hardware sales decreased by $762,000 or 59%. These
reductions were partially offset by an increase in North American hardware sales
of $1.1 or 43%. Due to the lead-time involved in completing our contracts,
bookings in one fiscal year are typically recognized as revenue in the following
fiscal years. The reduction in hardware revenues in fiscal 2001 is due to
reduced hardware bookings in fiscal 2000 and 2001, as a result of the slow down
in the global economy. The worldwide economic slowdown has adversely affected
the Theme Park and Leisure industries.


        Film licensing revenues for fiscal 2001 increased approximately $866,000
or 15% compared to the comparable prior year period. The increase in sales was
primarily due to numerous multiple year film license contracts signed in the
last half of fiscal 2001 with existing and new customers.

        O&O revenue for fiscal 2001 decreased by approximately $1.0 million or
56% as compared to the same period last year, primarily due to a decrease of
approximately $1.0 million in the Touring Division. The decline in sales and
related expenses in the Touring Division is due to the Company's decision to
stop operations of the division in September 1999 and actively pursue the sale
of the portable ride simulation theaters.

        Film production and other revenue for fiscal 2001 increased by
approximately $43,000 or 1% compared to the comparable prior year period. This
was due to increased print revenue, camera rentals and revenue from the new film
conversion business, partially offset by reduced film production revenues.

        No single customer accounted for more than 10% of revenues in fiscal
1999, 2000 or 2001.

        COST OF SALES

        Cost of sales includes costs of theatre systems sold, cost of servicing
out of warranty theatre systems, costs associated with film distribution, film
production and expenses associated with operating portable ride simulation
theatres. The cost of theatre systems includes the cost of components,
customization, engineering, project management, assembly, system integration,
installation and estimated warranty expenses. The costs of servicing out of
warranty theatre systems includes primarily parts and labor. The costs
associated with film distribution primarily reflect amortization of film
production costs and royalties due to third parties. The cost of sales
associated with operating portable ride simulation theatres includes costs for
personnel, depreciation, event fees, fuel, insurance and maintenance.

        Cost of sales as a percentage of sales was 74% for fiscal 2001 as
compared to 92% for fiscal 2000. The improvement is primarily attributable to
shut down of the Touring operation and improved manufacturing efficiency.
Additionally, fiscal 2000 costs were higher due to write-downs on certain films
in the final two quarters and an increase in the reserve for inventory
obsolescence in the fourth quarter.

        SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

        Selling, general and administrative expenses include, among other
things, personnel costs, trade shows and other promotional expenses, sales
commissions, travel expenses, public relation costs, outside consulting and
professional fees, depreciation of fixed assets, amortization of goodwill,
departmental administrative costs and research and development costs.


                                    Page 15
<PAGE>


        Selling, general and administrative expenses were $11.1 million and $7.6
million, for fiscal 2000 and 2001, respectively. The reduction is primarily due
to reduced employee related costs, marketing expenses, office expenses, facility
leases, travel and entertainment, professional services, and research and
development costs. The fiscal 2001 savings are the result of senior management
cost containment efforts.

        IMPAIRMENT OF LONG-LIVED ASSETS

        In the fourth quarter of fiscal 2001, as a result of the proposed merger
with Simex Inc., the Company determined that certain long-term intangible and
other assets were impaired. Accordingly, a non-cash write-down for impaired
assets totaling approximately $3.2 million was recorded.

        In the third quarter of fiscal 2000, the Company recognized a one-time
non-cash write-down of goodwill of $11.7 million associated with the acquisition
of Omni in 1994. Although the Company continues to service Omni related
products, the Company decided to discontinue the sale of these products in the
third quarter of fiscal 2000. The Company determined that the Omni product
offerings were more costly to produce and can be replaced with newer, more
reliable and more cost effective technology, which the Company owns. Thus, the
goodwill related to the Omni acquisition was determined to be impaired.

        In the fourth quarter of fiscal 2000, the Company recorded a non-cash
write-down for impaired assets totaling $2.2 million. This write-down relates to
certain camera equipment and the portable ride simulation theaters that are for
sale.

        INTEREST INCOME & EXPENSE

        Interest income for fiscal 2000 and 2001 was $144,000 and $95,000,
respectively. The decrease from 2000 to 2001 resulted primarily from a reduction
in the invested cash balances during the 2001 fiscal year.

        Interest expense for fiscal 2000 and 2001 was $253,000 and $92,000,
respectively. The decrease is the result of the reduction in capital leases.

        INCOME TAXES

        The provision for income taxes (benefit) was ($222,000) and $6,000 for
the years ended June 30, 2000 and 2001, respectively. As the Company has
significant net losses, the income tax provisions are primarily for foreign
taxes and minimum state taxes. The fiscal 2000 tax benefit is the result of a
$234,000 federal tax refund relating to a prior year.

        NET LOSS

        The Company recorded a net loss of $22,507,000 in 2000, compared to a
net loss of $5,037,000 in 2001 due to the aforementioned reasons.


                                    Page 16
<PAGE>


COMPARISON OF YEAR ENDED JUNE 30, 2000 TO YEAR ENDED JUNE 30, 1999

        REVENUES

        Revenue for the fiscal year ended June 30, 2000 decreased $6.6 million
or 19% from the fiscal year ended June 30, 1999 due to the factors described
below.

        Hardware sales and service decreased by $3.0 million or 16% from the
prior fiscal year. Hardware sales in North America decreased by $5.7 million or
68%. The reduction in North American revenues in fiscal 2000 primarily is due to
the Company concentrating it's large format sales efforts on the commercial
exhibitor market in fiscal 1999. Commercial exhibitors have been experiencing
financial difficulties. Consequently, these exhibitors have not purchased large
format product to the extent we expected. We also believe that fiscal 2000 sales
were adversely effected by changes in the Company's sales team in fiscal 1999.
Hardware sales in the Asia region increased from the prior year by $1.5 million
or 30%, South America hardware sales increased by $473,000 or 164% and European
and Middle Eastern hardware sales increased by $418,000.

        Film licensing revenues for fiscal 2000 decreased approximately $1.9
million or 25% compared to the comparable prior year period. This was primarily
due to certain theaters that signed multiple year contracts in fiscal 1999. The
Company recognized the revenue in the prior year, consequently no revenue was
recognized in the current year for these licenses. In addition, the Company
experienced a decline in new hardware installations as compared to last year.

        O&O revenue for fiscal 2000 decreased by approximately $2.7 million or
60% as compared to the same period last year, primarily due to a decrease of
approximately $2.4 million in the Touring Division and a decrease in revenue
from the fixed site joint ventures of approximately $322,000. The decline in
sales and related expenses in the Touring Division is due to the Company's
decision to curtail the division in September 1999 and actively pursue the sale
of the portable ride simulation theaters. The decrease in joint venture revenue
is the result of reduced attendance levels at our joint venture sites.

        Film production and other revenue for fiscal 2000 increased by
approximately $940,000 million or 28% compared to the comparable prior year
period. This was primarily due to three film production deals in fiscal 2000
compared to one in fiscal 1999.

        COST OF SALES

        Cost of sales primarily includes costs of theatre systems sold, expenses
associated with operating portable ride simulation theatres and costs associated
with film production and distribution. The cost of theatre systems includes the
cost of components, customization, engineering, project management, assembly,
system integration, installation and estimated warranty expenses. Also included
in cost of sales are royalties payable to a former joint venture partner, which
expired in January 2001. The costs associated with film distribution primarily
reflect amortization of film production costs and royalties paid to third
parties. The cost of sales associated with operating portable ride simulation
theatres includes costs for personnel, depreciation, event fees, fuel, insurance
and maintenance.

        Cost of sales as a percentage of sales was 92% for fiscal 2000 as
compared to 78% for fiscal 1999. One contributing factor to the increase is an
increase in hardware cost of sales due to unexpected cost overruns during the
installation phase of certain projects. In addition, the Company recorded
write-downs on certain films in the final two quarters of fiscal 2000.
Additionally, the Company experienced an increase in film production, which
typically have a higher cost of sales. Finally, in the fourth quarter of fiscal
2000, the Company increased its reserve for inventory obsolescence.


                                    Page 17
<PAGE>


        SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

        Selling, general and administrative expenses include, among other
things, personnel costs, trade shows and other promotional expenses, sales
commissions, travel expenses, public relation costs, outside consulting and
professional fees, depreciation of fixed assets, amortization of goodwill,
departmental administrative costs and research and development costs.

        Selling, general and administrative expenses were $12.6 million and
$11.1 million, for fiscal 1999 and 2000, respectively. The reduction is
primarily due to reduced marketing expenses, professional services, insurance
costs and research and development expenses, partially offset by an additional
expense to settle a claim with a former employee.

        IMPAIRMENT OF LONG-LIVED ASSETS

        In the third quarter of fiscal 2000, the Company recognized a one-time
non-cash write-down of goodwill of $11.7 million associated with the acquisition
of Omni in 1994. Although the Company continues to service Omni related
products, the Company decided to discontinue the sale of these products in the
third quarter of fiscal 2000. The Company determined that the Omni product
offerings were more costly to produce and can be replaced with newer, more
reliable and more cost effective technology, which the Company owns. Thus, the
goodwill related to the Omni acquisition was determined to be impaired.

        In the fourth quarter of fiscal 2000, the Company recorded a non-cash
write-down for impaired assets totaling $2.2 million. This write-down relates to
certain camera equipment and the portable ride simulation theaters that are for
sale.

        INTEREST INCOME & EXPENSE

        Interest income for fiscal 1999 and 2000 was approximately $366,000 and
$144,000, respectively. The decrease from 1999 to 2000 resulted primarily from a
reduction in the invested cash balances during the 2000 fiscal year.

        Interest expense for fiscal 1999 and 2000 was $156,000 and $253,000,
respectively. This increase is due to having an outstanding notes payable
balance for a full year in fiscal 2000.

        INCOME TAXES

        The provision for income taxes or (benefit) was $2,000 and ($222,000)
for the years ended June 30, 1999 and 2000, respectively. As the Company has
significant net losses, the income tax provisions are primarily for foreign
taxes and minimum state taxes. The fiscal 2000 tax benefit is the result of a
$234,000 federal tax refund relating to a prior year.

        NET LOSS

        The Company recorded a net loss of $4,778,000 in 1999, compared to a net
loss of $22,507,000 in 2000 due to the aforementioned reasons.

COMPANY'S SEASONALITY AND FLUCTUATING QUARTERLY RESULTS

        The following tables set forth unaudited data regarding operations for
each quarter of fiscal 2000 and 2001. This quarterly information has been
prepared on the same basis as the annual consolidated financial statements and,
in management's opinion, contains all adjustments necessary to fairly state the
information set forth herein. The operating results for any quarter are not
necessarily indicative of results for any future period.


                                    Page 18
<PAGE>


<TABLE>
<CAPTION>
                                             FISCAL 2000                         FISCAL 2001

                                   FIRST       SECOND        THIRD       FOURTH     FIRST      SECOND     THIRD      FOURTH
(DOLLARS IN THOUSANDS)            QUARTER      QUARTER      QUARTER      QUARTER   QUARTER     QUARTER    QUARTER    QUARTER
                                  --------    ---------    ---------    --------   --------    --------   --------   --------
<S>                               <C>         <C>          <C>          <C>        <C>         <C>        <C>        <C>
Revenue                           $ 7,609     $ 9,159      $  5,913     $ 5,562    $ 4,912     $ 6,780    $ 5,922    $ 4,590
Cost of Sales                       6,365       7,903         5,474       6,178      4,087       5,080      4,278      2,939
                                  --------    ---------    ---------    --------   --------    --------   --------   --------
Gross Margin                        1,244       1,256           439        (616)       825       1,700      1,644      1,651
Selling, General and
Administrative Expense              2,775       3,375         2,735       2,226      2,013       1,892      1,985      1,722
Impairment of Long-Lived Assets         -           -       (11,658)     (2,174)         -           -          -     (3,242)
                                  --------    ---------    ---------    --------   --------    --------   --------   --------
Interest (income) expense, net         40         (37)           63          43         28          (8)        14        (37)
                                  --------    ---------    ---------    --------   --------    --------   --------   --------
Loss before provision for taxes    (1,571)     (2,082)      (14,017)     (5,059)    (1,216)       (184)      (355)    (3,276)
Provision (benefit) for taxes           -        (199)            -         (23)         6           -          -          -
                                  --------    ---------    ---------    --------   --------    --------   --------   --------
Net loss                          $(1,571)    $(1,883)     $(14,017)    $(5,036)    (1,222)       (184)      (355)   $(3,276)
                                  ========    =========    =========    ========   ========    ========   ========   ========
</TABLE>

        The Company's operating results fluctuate from quarter to quarter as a
result of the timing of theatre system shipments, the mix of theatre system
contracts, the completion of custom film contracts and the amount of revenues
from portable simulation theatre and film licensing agreements. Hardware sales
will likely continue to experience quarterly fluctuations which cannot be
reasonably predicted, as they are substantially dependent on the customers'
varying delivery and installation requirements.

        Significant portions of the Company's operating expenses are relatively
fixed, and planned expenditures are primarily based upon revenue forecasts. The
sales cycle for the sale of a single attraction by the Company typically ranges
between six and eighteen months. The Company has little control over the timing
of customer purchases.

        The seasonal fluctuations in earnings also may cause volatility in the
stock prices of the Company. While a significant portion of the Company's
expense levels are relatively fixed, the timing of increases in expense levels
is based in large part on the Company's forecasts of future sales. If net sales
are below expectations in any given period, the adverse impact on results of
operations may be magnified by the Company's inability to adjust spending
quickly enough to compensate for the sales shortfall. The Company may also
choose to reduce prices or increase spending in response to market conditions,
which may have a material adverse effect on the Company's results of operations.

LIQUIDITY AND CAPITAL RESOURCES

        In fiscal 2001, approximately $0.1 million in cash was used in operating
activities and $0.9 million was used in financing activities, offset by $0.4
million provided by investing activities. Investing activities primarily
consisted of the purchase of property and equipment ($0.5 million) offset by
proceeds from the sale of five portable simulation theatres ($1.0 million).
Financing activities consisted primarily of payments on capital leases ($0.5
million) and payments on notes payable ($0.2 million).

        At June 30, 2001 the Company had cash and short-term investments of
approximately $2.2 million, none of which was restricted. The Company's cash and
short-term investment balances have continued to decline since June 30, 2001 and
the Company expects to experience further declining balances during the
remainder of fiscal 2002. Because of the substantial reductions in the Company's
cash balances over the last twelve months, the Company may not be able to
continue operations at its current levels. The Company is dependent upon current
cash collections to meet its operating needs and pay its current liabilities.
The Company has historically experienced significant difficulty in accurately
projecting its cash balances. The Company's cash flow is dependent on the timing
of delivery of hardware systems, collections and the signing of new contracts,
all of which are difficult to predict with accuracy. Further complicating its
ability to project cash balances is that the timing of progress payments of the
hardware projects are dependent upon achieving certain performance milestones
under its hardware sales agreements. In addition, progress payments on some of
the Company's hardware sales agreements are not sufficient to provide for the
cost of assembly and delivery of the systems, requiring the Company to fund the
cash cost of performing on the agreements.


                                    Page 19
<PAGE>


        On August 31, 2001, the Company, SimEx, and Acquisition Co., entered
into an agreement and plan of merger pursuant to which SimEx will acquire all of
the outstanding shares of the Company's common stock for a total cash
consideration of US $2.25 million. Immediately prior to the effective time of
the merger, each issued and outstanding share of our common stock will be
converted into the right to receive a ratable portion of the US $2.25 million
equal to the quotient obtained by dividing (i) US $2.25 million by (ii) the
number of shares of our common stock immediately outstanding prior to the
effective time of the merger. Assuming the exercise or conversion of all
"in-the-money" securities prior to the effective time of the merger, the per
share consideration to be offered to our stockholders will be approximately US
$0.63. The merger is subject to stockholder approval and other customary closing
conditions. If the merger is consummated, the Company will become a wholly owned
subsidiary of SimEx.

        In the event the transaction does not close, the Company will need to
aggressively seek additional debt or equity financing and other strategic
alternatives. However, recent operating losses, the Company's declining cash
balances, the Company's historical stock performance, the delisting of the
Company's common shares from The Nasdaq Stock Market, the recent decline in
revenue, a general economic downturn and a general decrease in investor interest
in the Company's industry, may make it difficult for the Company to attract
equity investments or debt financing or strategic partners on terms that are
deemed favorable to the Company. If the Company's financial condition continues
to worsen and it is unable to attract alternative equity or debt financing or
other strategic transactions, the Company could be forced to consider steps that
would protect its assets against it's creditors. The Company's independent
auditor's report contains an emphasis paragraph indicating there is substantial
doubt about the Company's ability to continue as a going concern.

        On October 19, 2000, the Company announced the signing of a strategic $4
million investment transaction with the S. Kumars Group, an Indian company. As
part of the investment transaction, on October 19, 2000, the Company issued S.
Kumars Group a $300,000 convertible subordinated debenture. On January 19, 2001,
the Company announced that other than the convertible debenture, the investment
transaction was terminated and the Company does not expect to receive any
additional funds in connection with that financing.

        The Company is in the process of selling its portable ride simulation
theatres, which when sold, will generate cash. The Company is considering a
number of other options to improve its financial condition. The Company sold
five portable ride simulation units during fiscal 2001. There can be no
assurance that any additional ride simulation theatres will be sold.

        In order to preserve cash, the Company has been required to reduce
expenditures for capital projects (including new films), research and
development, and in its corporate infrastructure, any of which may have a
material adverse affect on the Company's future operations. Further reductions
in its cash balances could require the Company to make more significant cuts in
its operations, which would have a material adverse impact on its future
operations. There can be no assurance that the Company can achieve these
reductions over a short enough period of time in order to allow it to continue
as a going concern.

RISK FACTORS

        THERE IS DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.

        We have experienced significant operating losses in the current and
prior years. Our cash and short-term investment balances continue to decline
since June 30, 2001 and we expect to experience further declining balances. We
have been unable to pay all of our trade creditors and certain other obligations
in accordance with their terms and some of our creditors have refused to provide
further products or services except on a C.O.D. basis. We intend to improve
liquidity by the continued monitoring and reduction of manufacturing, facility
and administrative costs including reduction of personnel and the sale of our
portable ride simulation units. We expect that our cash on hand and short-term
investments, together with cash generated by operations, cannot sufficiently
fund future operating losses and capital requirements. We have attempted to
raise additional capital through debt or equity


                                    Page 20
<PAGE>


financing and to date have had nominal success. If we are unable to obtain
financing on terms acceptable to us, or at all, or if we are unable to
consummate the merger with SimEx on a timely basis, we will not be able to
accomplish any or all of our initiatives and could be forced to consider steps
that would protect our assets against our creditors.

        WE HAVE A HISTORY OF LOSSES AND WE CANNOT ASSURE YOU THAT WE WILL BE
ABLE TO ACHIEVE PROFITABLE OPERATIONS IN FISCAL 2002.

        We have not been profitable in six of the last seven years and have an
aggregate net loss for the last seven years of $64.2 million. During fiscal
2001, we incurred a net loss of $5.0 million. Because substantial portions of
our expenses are fixed and our gross margin is relatively low, achieving
profitability depends upon our ability to generate and sustain substantially
higher revenues. Although we have implemented plans to increase revenues and
operating margin, we can not assure you that we will be able to do so and
consequently we may experience additional losses in fiscal 2002.

        OUR COMMON SHARES HAVE BEEN DELISTED FROM THE NASDAQ STOCK MARKET.

        On November 1, 2000, we were notified by the NASDAQ Stock Market that we
did not meet continued listing requirements of the NASDAQ Small Capital Market
and our common shares were delisted on the close of business on November 1,
2000. Our common stock currently is trading on the Over the Counter Bulletin
Board. It may be more difficult to raise additional debt or equity financing
while trading on the Over The Counter Bulletin Board. If we are unable to raise
additional financing, we will not be able to accomplish our business objectives
and may consider steps to protect our assets against creditors.


        WE DEPEND ON SINGLE OR LIMITED SUPPLIERS FOR CERTAIN OF OUR COMPONENTS
AND IF THESE SUPPLIERS ARE UNABLE TO PROVIDE THESE COMPONENTS, WE MAY EXPERIENCE
DELAYS IN PRODUCT SHIPMENT AND ADDITIONAL COSTS.

        We currently use only one or a limited number of suppliers for certain
of the components that we use in our theater systems. If our suppliers are
unable to deliver these components to us we may be unable to locate an alternate
source of these components, which would result in a material adverse effect on
our revenues, results of operations, liquidity and financial position. Our
reliance on a limited number of vendors involves many risks including:

     o    Shortages of certain key components;

     o    Delays in product shipment;

     o    Product performance shortfalls;

     o    Additional costs associated with the purchase of the components from
          alternative suppliers; and

     o    Reduced control over delivery schedules, manufacturing capabilities,
          quality and costs;

        If any of our suppliers suffers business disruptions, financial
difficulties, or if there is any significant change in condition of our
relationship with the supplier, our costs of goods sold may increase or we may
be unable to obtain these key components for our products. In either event, our
revenues, results of operations, liquidity and financial condition would be
adversely affected. While we believe that we can obtain most of the components
necessary for our products from other manufacturers, any unanticipated change in
the source of our supplies, or unanticipated supply limitations, could adversely
affect our ability to meet our product orders.


                                    Page 21
<PAGE>


        IT IS POSSIBLE THAT OUR CURRENT FILM SOFTWARE MAY NOT SUSTAIN ITS
POPULARITY AND OUR NEW FILM SOFTWARE MAY NOT BECOME POPULAR.

        A substantial portion of our revenue is dependent upon the production
and distribution of entertainment film software for exhibition on our theatre
systems. Each production is an individual artistic work. We try to develop and
produce film software that will achieve high market acceptance. However, market
acceptance depends upon many factors beyond our control, including:

o    audience reaction;

o    competing programming;

o    other forms of entertainment; and

o    perceived quality of programming.

        We cannot assure you that our film software will obtain market
acceptance. If our film software becomes less popular, we will most likely
derive less revenue from the license of our film library and from new hardware
sales.

        OUR COMPETITIVE POSITION IS DEPENDENT ON CONTINUING TO INVEST IN NEW
FILM PRODUCTIONS. IF WE ARE UNABLE TO DO SO, IT COULD HAVE A NEGATIVE IMPACT ON
OUR REVENUES.

        We believe that our extensive library of films is a competitive
advantage and that we must continue to add to our library if we are to be
successful. Film production is expensive. We generally spend $100,000 -
$2,000,000 to produce a film. We try to reduce the financial impact of a new
film by entering into licensing, participation or other financing arrangements
with third parties prior to release. However, we typically do not recoup our
costs until 2-3 years following a film's release. Even if we are able to reduce
the costs of production, we cannot assure you that the films we produce and
acquire will be popular. In addition, because our cash balances have continued
to decline, we have had to decrease the level of our investment in film software
and this may have an adverse impact on our revenues in future periods.

        OUR PRINCIPAL COMPETITORS DEVOTE GREATER FINANCIAL, PERSONNEL AND
MARKETING RESOURCES TO THE DEVELOPMENT AND EXPANSION OF COMPETITIVE PRODUCTS.

        We face significant competition in each of the markets in which we
operate. Our principal direct competition for customers comes from manufacturers
of competing movie-based attractions and manufacturers of traditional amusement
park attractions. In addition, there is also competition from systems
integrators and some amusement and theme parks developing and constructing their
own attractions. We have significantly fewer financial, technical,
manufacturing, marketing and other resources than certain of our competitors do.
Our competitors may leverage their greater resources to:

o    develop, manufacture and market products that are less expensive or
     technologically superior to our products;

o    reach a wider array of potential customers through increased marketing and
     sales activities;

o    attend more trade shows and spend more on advertising and marketing;

o    operate at lower margins for longer periods;

o    respond more quickly to new or changing technologies, customer requirements
     and standards; or

o    reduce prices in order to preserve or gain market share.


                                    Page 22
<PAGE>


        In addition, the out-of-home entertainment industry in general is
undergoing significant changes, primarily due to technological developments as
well as changing consumer tastes. Many companies are developing and are expected
to develop new entertainment products or concepts in response to these
developments that may be directly competitive with our products.

        We believe these competitive pressures are likely to continue. We cannot
guarantee that our resources will be sufficient to address this competition or
that we will manage costs and adopt strategies capable of effectively utilizing
our resources. If we are unable to respond to competitive pressures
successfully, our prices and profit margins may fall and our market share may
decrease.

        OUR FUTURE SUCCESS WILL DEPEND IN PART UPON OUR ABILITY TO ANTICIPATE
CHANGES IN TECHNOLOGY AND DEVELOP NEW AND ENHANCED PRODUCTS ON A TIMELY AND
COST-EFFECTIVE BASIS.

        We operate in a technology-driven segment of the entertainment industry.
Consequently, it is important for us to develop new and enhanced products in
response to technological changes. Risks inherent in the development and
introduction of new products include:

o    difficulty in forecasting customer demand accurately;

o    our inability to expand capacity fast enough to meet customer demand;

o    the possibility that new products may make current products obsolete;

o    delays or interruptions in the manufacture and installation of new
     products;

o    competitors' responses to our introduction of new products;

o    the desire by customers to evaluate new products for longer periods of time
     before making a purchase decision; and

o    the possibility the market may reject certain new technology and products.

        If we are unable, for technological or other reasons, to develop
products in a timely manner or the products or product enhancements that we
develop do not achieve market acceptance, our business could be harmed.

        A SIGNIFICANT PORTION OF OUR SALES AND CUSTOMERS ARE LOCATED OUTSIDE THE
UNITED STATES. CURRENCY FLUCTUATIONS AND THE INCREASED COSTS ASSOCIATED WITH
INTERNATIONAL SALES, COULD MAKE OUR PRODUCTS UNAFFORDABLE IN FOREIGN MARKETS,
WHICH COULD REDUCE OUR PROFITABILITY.

        Sales to customers outside the United States accounted for approximately
56%, 70% and 58% of our revenues in fiscal 1999, 2000 and 2001, respectively. We
believe that international sales will continue to represent a significant
portion of our total sales. Our foreign sales subject us to a number of risks
including:

o    currency fluctuations could make our products unaffordable to foreign
     purchasers or more expensive compared to those of foreign manufacturers;

o    greater difficulty of administering business overseas may increase the
     costs of foreign sales and support;

o    foreign governments may impose tariffs, quotas and taxes on our products;

o    longer payment cycles typically associated with international sales and
     potential difficulties in collecting accounts receivable may reduce the
     profitability of foreign sales;


                                    Page 23
<PAGE>


o    political and economic instability may reduce demand for our products or
     our ability to market our products;

o    restrictions on the export or import of technology may reduce or eliminate
     our ability to sell in certain markets; and

o    although we have met certain international manufacturing standards, our
     lack of ISO 9000 certification, a widely accepted method of establishing
     and certifying the technical characteristics and quality of our products,
     may hinder our foreign sales.

        These risks may increase our costs of doing business internationally and
reduce our sales or profitability.

        WE ARE DEPENDENT ON THE STRENGTH OF THE NATIONAL AND INTERNATIONAL
ECONOMIES. RECESSIONARY OR DEFLATIONARY CONDITIONS IN ANY OF OUR PRINCIPAL
MARKETS COULD REDUCE OUR SALES AND PROFITABILITY.

        Our revenues and profitability are dependent on the strength of the
national and international economies. In a recessionary or deflationary
environment, sales of our products may be adversely affected.

        Theme parks and other out-of-home entertainment venues may also
experience a downturn in sales which could reduce the funds available for
capital improvements and film licensing, resulting in price and other
concessions and discounts by us in order to maintain sales activity.

        OUR QUARTERLY REVENUES AND OPERATING RESULTS ARE DIFFICULT TO FORECAST.
IF REVENUES AND OPERATING RESULTS FLUCTUATE UNEXPECTEDLY FROM QUARTER TO
QUARTER, OUR STOCK PRICES MAY FLUCTUATE.

        Our quarterly revenues and operating results are difficult to forecast.
As a result, we believe that the period-to-period comparisons for operating
results are not necessarily reliable indicators of our future performance. A
variety of factors may affect our operating results, including factors which are
outside our control. These factors include the following:

o    the size and timing of customer orders;

o    the timing, introduction or enhancement of products by us or our
     competitors;

o    the timing and level of our operating expenses.

        Any unanticipated change in operating results may cause our stock prices
to fluctuate since such changes reflect new information for investors and
analysts. New information causes investors and analysts to revalue our stock and
this in the aggregate could cause our stock price to fluctuate.

        OUR CUSTOMERS HAVE THE RIGHT TO TERMINATE THEIR CONTRACTS WITH US IN
CERTAIN CIRCUMSTANCES WHICH CAN HAVE AN ADVERSE EFFECT ON OUR CASH FLOW.

        Our hardware sales contracts typically provide that the customer may
terminate our contract prior to delivery. However, a customer canceling its
contract is obligated to pay to us a cancellation fee equal to the costs
committed plus 20%. Customers typically pay a deposit upon execution of a
contract. If a customer cancels a contract and the amount of the deposit exceeds
the cancellation fee, we are contractually obligated to refund the excess to the
customer. In the event of a large refund, we could experience a negative impact
on cash flow.

        IF WE ARE SUED ON A PRODUCT LIABILITY CLAIM, OUR INSURANCE POLICIES MAY
NOT BE SUFFICIENT.

        Although we maintain general liability insurance and product liability
insurance, our insurance may not cover all potential types of product liability
claims to which manufacturers are exposed or may


                                    Page 24
<PAGE>


not be adequate to indemnify us for all liability that may be imposed. Any
imposition of liability that is not covered by insurance or is in excess of our
insurance coverage could harm our business.

        IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS ADEQUATELY,
THE ADVANTAGES OF OUR RESEARCH, MANUFACTURING AND DISTRIBUTION SYSTEMS MAY BE
REDUCED AS COMPETITORS ADOPT SOME OR ALL OF THESE TECHNIQUES.

        Since our business depends in part on intellectual property rights, our
ability to compete effectively depends in part on our ability to develop and
maintain proprietary aspects of our technology in creative works. We currently
hold several patents on the design elements of our products and also rely on a
combination of trademark, trade secret, copyright and other intellectual
property laws to protect our proprietary rights. Such rights, however, may not
preclude competitors from developing products that are essentially equivalent or
superior to ours. In addition, many aspects of our product are not subject to
intellectual property protection and therefore may be reproduced by our
competitors.

        INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS AGAINST US COULD BE TIME
CONSUMING AND EXPENSIVE TO DEFEND AND MAY HARM OUR BUSINESS.

        In recent years there has been significant litigation in the United
States involving patents and other intellectual property rights. While we
currently are not engaged in any material intellectual property litigation or
proceedings, we may become involved in the future. An adverse outcome of
litigation could force us to do one or more of the following:

o    stop selling, incorporating or using our products for services that use the
     challenged intellectual property;

o    subject us to significant liabilities to third parties;

o    obtain from the owners of the infringed intellectual property right a
     license to sell or use the relevant technology, which license may not be
     available on reasonable terms or at all; or

o    redesign those products and services that use such technology, which
     redesign may be either economically or technologically infeasible.

        Whether or not an intellectual property litigation claim is valid, the
cost of responding to it, in terms of legal fees and expenses and the diversion
of management resources, could harm our business.

        THE ABILITY OF OUR BOARD OF DIRECTORS TO ISSUE PREFERRED STOCK AND OUR
STOCKHOLDER RIGHTS PLAN MAY MAKE TAKEOVER ATTEMPTS DIFFICULT OR IMPOSSIBLE.

        Our Board of Directors has the authority, without any action of the
shareholders, to issue up to one million shares of Preferred Stock and to fix
the rights and preferences of those shares. In addition, we have in place a
Stockholder Rights Plan. The ability of our Board to issue Preferred Stock and
the existence of the Stockholder Rights Plan may have the effect of delaying,
deferring or preventing a change of control, may discourage bids for our common
stock at a premium over its market price and may adversely affect the market
price, and the voting and rights of the holders of our Common Stock.


                                    Page 25
<PAGE>


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.


                         REPORT OF INDEPENDENT AUDITORS

        The Board of Directors
        Iwerks Entertainment, Inc.

        We have audited the accompanying consolidated balance sheets of Iwerks
Entertainment, Inc. as of June 30, 2001 and 2000, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended June 30, 2001. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.

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

        In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Iwerks Entertainment, Inc. at June 30, 2001 and 2000 and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended June 30, 2001, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

        The accompanying consolidated financial statements have been prepared
assuming that Iwerks Entertainment, Inc. will continue as a going concern. As
more fully described in Note 1, the Company has a large accumulated deficit and
working capital deficiency at June 30, 2001 and has been unable to meet all of
its obligations. These conditions 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 1. The consolidated financial statements do
not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.





        Los Angeles, California                     Ernst & Young LLP
        August 31, 2001



                                    Page 26
<PAGE>


<TABLE>
<CAPTION>
                           IWERKS ENTERTAINMENT, INC.

                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS

                                 (IN THOUSANDS)
                                                                           June 30,
                                                                  ---------------------------
                                                                     2000            2001
                                                                  -----------     -----------
<S>                                                               <C>             <C>
Current assets:
     Cash and cash equivalents                                    $    2,733      $   2,191

     Trade accounts receivable, net of allowance for
         doubtful accounts                                             3,963          3,673

     Costs and estimated earnings in excess of billings on
         uncompleted contracts                                         2,194            313

     Inventories                                                       2,650          1,620

     Assets held for sale - current                                      858            368

     Other current assets                                                497             25
                                                                  -----------     -----------
         Total current assets                                         12,895          8,190

Property and equipment at cost, net of accumulated
     depreciation and amortization                                     3,693          3,372

Film inventory at cost, net of accumulated amortization                2,222            520

Goodwill, net of accumulated amortization                              1,953              -

Other assets                                                           3,346          2,072

Assets held for sale - long term                                       1,755          1,291
                                                                  -----------     -----------
        Total assets                                              $   25,864      $  15,445
                                                                  ===========     ===========
</TABLE>


                             See accompanying notes.


                                    Page 27
<PAGE>


<TABLE>
<CAPTION>
                           IWERKS ENTERTAINMENT, INC.

                           CONSOLIDATED BALANCE SHEETS

                      LIABILITIES AND STOCKHOLDERS' EQUITY

                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

                                                                           June 30,
                                                                     2000            2001
                                                                  -----------   ------------
<S>                                                               <C>           <C>
Current liabilities:
     Accounts payable                                             $    3,943    $    1,099

     Accrued expenses                                                  5,834         6,008

     Notes payable, current portion                                    1,842         1,661

     Billings in excess of costs and estimated
          earnings on uncompleted contracts                            3,797         1,585

     Deferred revenue                                                    136           309

     Capital lease, current portion                                      459             -
                                                                  -------------  -----------
               Total current liabilities                              16,011        10,662

Notes payable, net of current portion                                     333            -

Note payable to shareholder                                                 -          300
                                                                  -------------  -----------
               Total liabilities                                      16,344        10,962

Stockholders' equity:
    Preferred stock, $0.01 par value, 1,000,000 authorized,
    none issued and outstanding                                            -             -
    Common stock, $.001 par value,  50,000,000 shares
    authorized; 3,540,915 (2000) and, 3,540,915 (2001)
    issued and outstanding                                                57            57

Paid-in capital                                                       78,086        78,086

Treasury stock, 91,600 shares at cost                                   (341)         (341)

Warrants                                                                 250           250

Accumulated deficit                                                  (68,532)      (73,569)
                                                                  -------------  -----------
Total stockholders' equity                                             9,520         4,483
                                                                  -------------  -----------
Total liabilities and stockholders' equity                        $   25,864     $  15,445
                                                                  =============  ===========
</TABLE>


                             See accompanying notes.


                                    Page 28
<PAGE>


<TABLE>
<CAPTION>
                           IWERKS ENTERTAINMENT, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

                                                                   Years ended June 30,
                                                       ---------------------------------------------
                                                           1999            2000            2001
                                                       --------------  --------------  -------------
<S>                                                    <C>             <C>             <C>
Revenue                                                  $   34,869      $   28,243     $   22,204

Cost of Sales                                                27,210          25,920        16,384
                                                       --------------  --------------  -------------
Gross margin                                                  7,659           2,323         5,820

Selling, general and administrative expenses                 12,645          11,111         7,612

Impairment of long-lived assets                                   -          13,832         3,242
                                                       --------------  --------------  -------------
Loss from operations                                         (4,986)        (22,620)       (5,034)

Interest income                                                 366             144            95

Interest expense                                               (156)           (253)          (92)
                                                       --------------  --------------  -------------
Loss before provision (benefit) for income taxes             (4,776)        (22,729)       (5,031)

Provision (benefit) for income taxes                              2            (222)            6
                                                       --------------  --------------  -------------
Net loss                                                 $   (4,778)     $  (22,507)    $  (5,037)
                                                       ==============  ==============  =============
Loss per common share - basic and diluted                $    (1.37)     $    (6.53)    $   (1.46)
                                                       ==============  ==============  =============
Weighted average shares outstanding - basic and
diluted                                                   3,520,000       3,449,000      3,449,000
                                                       ==============  ==============  =============
</TABLE>


                             See accompanying notes.



                                    Page 29
<PAGE>


<TABLE>
<CAPTION>
                           IWERKS ENTERTAINMENT, INC.

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                                 (IN THOUSANDS)

                                                 COMMON STOCK                PAID-IN     TREASURY  ACCUMULATED
                                               SHARES    AMOUNT   WARRANTS   CAPITAL      STOCK      DEFICIT       TOTAL
                                               -------   ------   --------   --------    --------  ------------  ---------
<S>                                            <C>       <C>      <C>        <C>         <C>       <C>           <C>
Balance at June 30, 1998                        3,527    $   57    $         $ 78,024    $           $ (41,247)   $ 36,834

Common stock options and warrants exercised        13         -         -          60          -             -          60

Purchase of treasury stock                        (92)        -         -           -       (341)            -        (341)

Net loss                                            -         -         -           -          -        (4,778)     (4,778)
                                               -------   ------    -------   ---------   ---------   ----------   ---------
Balance at June 30,  1999                       3,448        57         -      78,084       (341)      (46,025)     31,775

Common stock options and warrants exercised         1         -         -           2          -             -           2

Proceeds from issuance of warrants                  -         -       250           -          -             -         250

Net loss                                            -         -         -           -          -       (22,507)    (22,507)
                                               -------   ------    -------   ---------   ---------   ----------   ---------
BALANCE AT JUNE 30, 2000                        3,449        57       250      78,086       (341)      (68,532)      9,520

NET LOSS                                            -         -         -           -          -        (5,037)     (5,037)
                                               -------   ------    -------   ---------   ---------   ----------   ---------
BALANCE AT JUNE 30, 2001                        3,449    $   57    $  250    $ 78,086    $  (341)    $ (73,569)   $  4,483
                                               =======   ======    =======   =========   =========   ==========   =========
</TABLE>


                             See accompanying notes.


                                    Page 30
<PAGE>


<TABLE>
<CAPTION>
                           IWERKS ENTERTAINMENT, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

                                                                        Year ended June 30,
                                                              ----------------------------------------
OPERATING ACTIVITIES                                             1999          2000           2001
                                                              ----------   ------------   ------------
<S>                                                           <C>          <C>            <C>
Net loss                                                      $  (4,778)    $  (22,507)    $  (5,037)
Adjustments to reconcile net loss
  to net cash provided by  (used in) operating activities:
    Depreciation and amortization                                 4,696          5,767         3,259
    Impairment of long-lived assets                                   -         13,832         3,242
    Changes in operating assets and liabilities:
        Trade accounts receivable, net                           (2,098)         1,656          (329)
        Costs and estimated earnings in excess of
           billings on uncompleted contracts                         79           (699)        1,881
        Inventories                                              (1,744)         2,748         1,030
        Other current assets                                        261            (52)          558
        Accounts payable and accrued expenses                       554            364        (2,670)
        Billings in excess of costs and estimated
            earnings on uncompleted contracts                     4,037         (3,211)       (2,212)
        Deferred revenue                                           (298)           126           173
                                                              ----------   ------------   ------------
       Net cash provided by (used in) operating activities          709         (1,976)         (105)

INVESTING ACTIVITIES
Net proceeds from the sale of portable simulation theatres            -              -           954
Investment in limited partnership and joint ventures               (991)           (92)            -
Investment in portable simulation theatres                          (34)           (99)            -
Purchases of property and equipment                              (2,168)          (811)         (511)
Additions to film inventory                                      (1,565)          (649)            -
Investment in debt securities                                       422          2,500             -
                                                              ----------   ------------   ------------
        Net cash (used in) provided by investing activities      (4,336)           849           443

FINANCING ACTIVITIES
Issuance of note payable                                          1,534            363           300
Payments of notes payable                                             -           (207)         (514)
Issuance of warrants                                                  -            250             -
Payments on capital leases                                         (804)          (623)         (459)
Exercise of stock options                                            60              2             -
Repurchase of common stock                                         (341)             -             -
Other                                                              (147)          (142)         (207)
                                                              ----------   ------------   ------------
        Net cash provided by (used in) financing activities         302           (357)         (880)
                                                              ----------   ------------   ------------
Net decrease in cash and cash equivalents                        (3,325)        (1,484)         (542)
Cash and cash equivalents at beginning of year                    7,542          4,217         2,733
                                                              ----------   ------------   ------------
Cash and cash equivalents at end of year                      $   4,217    $     2,733     $   2,191
                                                              ==========   ============   ============
</TABLE>



                             See accompanying notes.


                                    Page 31
<PAGE>


<TABLE>
<CAPTION>
SUPPLEMENTAL INFORMATION TO CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                      Year ended June 30,
                                               ----------------------------------
                                                 1999        2000         2001
                                               --------    --------   -----------
     <S>                                       <C>          <C>        <C>
     Cash paid (received) during the year for:
        Interest                               $   163      $   253    $      67

        Income taxes                           $    11      $  (222)   $       6
</TABLE>


                             See accompanying notes.



                                    Page 32
<PAGE>


                           IWERKS ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.      GOING CONCERN MATTERS

        The accompanying financial statements have been prepared assuming the
Company will continue as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
Company has experienced significant operating losses. In addition, the Company
has been unable to pay all of its trade creditors and certain other obligations
in accordance with their terms and some of the Company's creditors have refused
to provide further product or services except on a C.O.D. basis. Management
intends to improve liquidity in various ways such as (a) the completion of
equity or debt financing or other strategic transactions; (b) the continued
monitoring and reduction of manufacturing, facility and administrative costs
including reduction of personnel; and (c) the sale of its portable ride
simulation units. However, there is no assurance that the Company will succeed
in accomplishing any or all of these initiatives. The fiscal 2001 consolidated
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.

2.      BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        Consolidation and Basis of Presentation - Iwerks is a Delaware
corporation. Iwerks designs, manufactures, installs and services high
resolution, proprietary motion picture theatre attractions. Iwerks' attractions
are built around a variety of theatre systems, including fixed and portable
simulators, large format theatres, 3D theatres, 4D specialty theatres and the
licensing of the related software.

        Iwerks operates in one business segment, the manufacture, distribution
and operation of entertainment hardware and software.

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

        Certain reclassifications were made to the financial statements for the
year ended June 30, 1999 and 2000 in order to conform to the fiscal 2001
presentation.

        Revenue and Cost Recognition - Revenue from fixed-price-contracts is
recognized on the percentage-of-completion method, measured by the ratio of
percentage of labor hours incurred to date to estimated total labor hours for
each contract. Management considers expended labor hours to be the best
available measure of progress on such contracts. A contract is considered
substantially complete upon delivery and acceptance of the product by the
customer. These contracts average six to eighteen months in duration.

        Contract costs include direct materials, direct labor cost and indirect
costs related to contract performance, such as indirect labor, supplies and
tools. Costs and estimated earnings in excess of billings on uncompleted
contracts represents costs incurred and gross profit recognized in excess of
amounts billed. Billings in excess of costs and estimated earnings on
uncompleted contracts represents billings in excess of costs incurred and gross
profit recognized. Billings to customers are in accordance with the terms of the
contract and generally follow a payment schedule.

        Iwerks performs a quarterly review of uncompleted contracts. Changes in
estimates are reflected in the period of the change. Provisions for estimated
losses on uncompleted contracts are made in the period in which such losses are
determined.


                                    Page 33
<PAGE>


        Iwerks provides a warranty for contracts generally for a period of
twelve months. Such warranty costs are included in cost of sales. The warranty
accrual as of June 30, 2000 and 2001 was $963,000 and $839,000 respectively, and
is included in accrued expenses in the accompanying consolidated balance sheets.

        Iwerks also earns revenues for the production of films for outside
parties. Iwerks recognizes such producer fee revenue as the services are
rendered.

        Iwerks generally licenses films at agreed-upon minimum amounts. Revenues
from film licenses are recognized when the license period begins and the
programming is available pursuant to the terms of the license agreement.
        Cash and Cash Equivalents--The Company considers all highly liquid debt
instruments with an original maturity of three months or less and money market
securities to be cash equivalents.

        Trade Accounts Receivable primarily consists of amounts due on contracts
and film licenses. Allowance for doubtful accounts was $933,000 at June 30, 2000
and $1,257,000 at June 30, 2001.

        Inventories consist primarily of simulation system equipment components
and are stated at the lower of cost or market on an average cost basis.

        Change in Accounting Principle-In June 2000, Statement of Position 00-2
"Accounting by Producers or Distributors of Films" (SOP 00-2), was issued. SOP
00-2 establishes new financial accounting and reporting standards for producers
and distributors of films, including changes in measuring impairment of film
costs. The Company adopted the provisions of SOP 00-2 as of July 1, 1999.

        SOP 00-2 requires the use of a fair value approach when measuring
impairment of film costs. The Company utilizes discounted cash flows to
determine fair value, which differs from the net realizable value approach
utilized by the Company pursuant to the previous accounting model and under
which cash flows were not discounted. In connection with the adoption of SOP
00-2, the Company recorded a non-cash charge of approximately $202,000 in fiscal
2000 to reduce the carrying value of its film inventory. Such charge is included
in cost of sales in the accompanying consolidated statement of operations.

        Film Inventory consists of production costs and is stated at the lower
of cost or fair value. The individual film forecast method is used to amortize
film inventory. Costs of a film are amortized in the proportion that gross
revenues in the period bear to management's estimate of the total current and
future gross revenues to be received. Estimated liabilities for participation
and royalties are accrued and expensed in the same manner as film inventory is
amortized.

        Revenue estimates on a film-by-film basis are reviewed periodically by
management and are revised, if warranted, based upon management's appraisal of
current market conditions. Unamortized individual film costs are written down to
estimated fair value based on this estimate, where applicable. When estimates of
total revenue indicate that a film will ultimately realize a loss, the entire
loss is recognized in the current period.

        Film inventory is comprised of the following (in thousands):

<TABLE>
<CAPTION>
                                           June 30,
                                       2000         2001
                                    ----------   ----------
<S>                                 <C>          <C>
Films released                      $  22,865    $ 22,790
Less accumulated amortization         (20,643)     (22,270)
                                    ----------   ----------
                                    $   2,222    $     520
                                    ==========   ==========
</TABLE>


                                    Page 34
<PAGE>


        While the Company has ceased production of new films, it is actively
engaged as an exclusive distributor of films produced by third parties. In such
instances, the Company is entitled to recoupment of its distribution expenses as
well as a distribution fee.

        Management estimates that 100% of the costs of its unamortized films
will be amortized during fiscal 2002.

        Depreciation and Amortization of Property and Equipment is computed
using the straight-line method over the estimated useful lives of the assets,
which range from three to ten years. Leasehold improvements are amortized over
five years or the remaining term of the lease, whichever is shorter.

        Goodwill (excess purchase price and liabilities assumed over the fair
market value of assets acquired) relates to the acquisition of Pioneer Marketing
Corporation and a related company (collectively referred to as "Pioneer") and
prior acquisitions and is being amortized over 16 to 25 years. Goodwill is
reviewed periodically to determine if the facts and circumstances suggest that
it may be impaired. If this review indicates that goodwill will not be
recoverable, as determined based upon discounted cash flows of the acquired
business over the remaining amortization period, then the carrying value of the
related goodwill will be reduced by the estimated shortfalls of cash flows (see
Note 4). Accumulated amortization was $16,209,000 at June 30, 2000 and $0 at
June 30, 2001.

        Other Assets - Patents are stated at cost, and are being amortized using
the straight-line method over 10 to 25 years. Iwerks acquired a patent in fiscal
1997 in connection with the Pioneer acquisition in the amount of $1,094,000, and
a covenant not to compete in the amount of $50,000. Accumulated amortization was
$487,000 at June 30, 2000 and $0 at June 30, 2001 (see Note 4). The Company has
entered into joint venture arrangements whereby the Company contributes ride
simulation theatre equipment and the joint venture partner contributes site
improvements. The Company retains title to the assets it contributes to certain
joint ventures, and therefore its investment in joint ventures is carried at
historical cost and depreciated over 5 years. The Company receives film
licensing fees and cash flow income is split between the joint venture partners
under the equity method of accounting.

        Long-Lived Assets used in operations or held for sale are reviewed
periodically to determine that the carrying values are not impaired and if
indicators of impairment are present or if long-lived assets are expected to be
disposed of at a loss, impairment losses are recorded (see Note 4).

        Accrued Expenses - The Company provides for commission and applicable
royalties on revenue recognized in connection with certain agreements. The
commission accrual as of June 30, 2000 and 2001 was $595,000 and $109,000
respectively, and the royalty accrual as of June 30, 2000 and 2001 was
$2,646,000 and $2,904,000 respectively. These amounts are included in accrued
expenses in the accompanying consolidated balance sheets.

        Deferred Revenue primarily represents advance payments received for
theatre service contracts and is recognized as revenue over the life of the
respective agreements.

        Research and Development Costs are incurred in the design, construction
and testing of prototype systems and are charged to expense as incurred.
Research and development expenses amounted to $565,000, $404,000 and $186,000
for the years ended June 30, 1999, 2000 and 2001, respectively and are included
in selling, general and administrative expenses in the accompanying consolidated
statements of operations.

        Income Taxes - The Company has applied Statement of Financial Accounting
Standards No. 109, (Accounting for Income Taxes), which utilizes the liability
method. Deferred income taxes under the liability method arise primarily from
the difference between the timing of recognition of certain revenue and expense
items for financial reporting and income tax purposes.


                                    Page 35
<PAGE>


        Advertising costs are expensed as incurred. Advertising expense amounted
to approximately $251,000, $199,000, and $7,000 in the years ended June 30,
1999, 2000 and 2001, respectively, and is included in selling, general and
administrative expenses in the accompanying consolidated statements of
operations.

        Shipping and handling costs are included in cost of sales in the
accompanying consolidated statements of operations.

        Concentration of Credit Risk - The Company conducts credit evaluations
of customers and believes the credit risk from its customers to be minimal. The
Company generally requires significant foreign sales be supported by irrevocable
letters of credit established with the Company as beneficiary.

        Qualified 401k Plan - The Company has a Defined Contribution 401k Plan
("Plan") for all of its eligible employees. Under the Plan, each employee who
has attained the age of eighteen and who has completed three months of service
with the Company is eligible to become a participant. Each participant is
permitted to make tax deferred voluntary contributions of an amount not to
exceed the lesser of 15% of his or her respective compensation and the
applicable statutory limitation. Effective July 1997, the Company began making
matching contributions not to exceed 3% of participants salaries to the Plan,
and has consequently recorded an expense of approximately $96,000, $73,000 and
$74,000 in fiscal 1999, 2000 and 2001, respectively.

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

3.      RESTRICTED CASH

        Included in the June 30, 2000 cash and cash equivalents balance is
$1,176,000 of cash received from two customers, which was restricted as to its
use. This restriction remained in effect until the Company reached certain
milestones related to the completion of each project. The milestones were
reached during fiscal 2001 and the cash became available for Company use.

4.      IMPAIRMENT OF LONG-LIVED ASSETS

        The following non-cash charges were included in impairment of long-lived
assets for the years ended June 30, 2000 and 2001 (in thousands):

<TABLE>
<CAPTION>
                                                       2000           2001
                                                   -----------    -----------
         <S>                                       <C>            <C>
         Goodwill                                  $      -       $  1,812
         Other Assets                                     -          1,430
         Omni Film International goodwill            11,657              -
         Camera equipment                             1,581              -
         Portable ride simulation theatres              594              -
                                                   -----------    -----------
                                                    $13,832        $ 3,242
                                                   ===========    ===========
</TABLE>

        In connection with the proposed merger with Simex Inc. (see Note 19),
the Company determined that certain long-term intangible assets were impaired.
Accordingly, an impairment loss of approximately $3.2 million was recorded in
the year ended June 30, 2001.

        In the third quarter of fiscal 2000, the Company recorded a one-time
non-cash write-down to goodwill of approximately $11,657,000. The goodwill was
associated with the acquisition of Omni Film International (Omni) in 1994.
Although the Company continues to service Omni related products, the Company
decided to discontinue the sale of these products during the third quarter of
fiscal 2000. In connection with the decision, the Company determined that the
Omni product offerings were more costly to produce and can be replaced with
newer, more reliable and more cost effective technology, which the


                                    Page 36
<PAGE>


Company owns. Thus, the entire amount of goodwill related to the Omni
acquisition was determined to be impaired.

        The Company completed manufacturing of camera equipment for rental use
during the current year and is manufacturing additional camera equipment. The
Company first rented the camera equipment in July 2000. Based on actual rental
revenues received, and considering costs to complete the remaining camera
equipment, the Company determined that an impairment analysis was required at
June 30, 2000. Upon comparing the carrying value and future costs to complete
the camera equipment to the estimated discounted net cash inflows from rentals
of such camera equipment, the Company recorded a non-cash charge of
approximately $1,581,000 in the fourth quarter of fiscal 2000.

        As described in Note 5, in September 1999 the Company decided to sell
the portable ride simulation theaters of the Touring Division. A non-cash charge
of approximately $594,000 was recorded in the fourth quarter of fiscal 2000 to
write the portable motion theatres down to their net realizable value.

5.      ASSETS HELD FOR SALE

        In September 1999 the Company decided to sell the assets relating to the
Touring Division. These assets are described as the portable ride simulation
theatres and are reflected at management's estimate of their net realizable
value. Management has discontinued depreciating these assets and will continue
to periodically assess the net realizable value of these assets. During fiscal
2001, the Company sold five portable simulation ride theatres for net proceeds
of approximately $954,000.

        Touring Division revenues and expenses were $1,192,000 and $2,184,000,
respectively in the year ended June 30, 2000 and $204,500 and $63,300,
respectively, in the year ended June 30, 2001.

6.      ISSUANCE OF WARRANTS

        On September 8, 1999 the Company appointed two new outside members to
its Board of Directors. The two new members purchased warrants to purchase an
aggregate 442,857 shares of Iwerks common stock. The warrants were issued in
four tranches of equal amounts ranging in a per share price of $5.01 to $10.50.
Certain restrictions apply to the exercise of these warrants, which have a life
of five years. These two board members resigned on January 18, 2000. The
warrants remain outstanding with the same terms described above.

7.      DEPRECIATION AND AMORTIZATION

        Depreciation and amortization expense of property and equipment,
goodwill and other is computed using the straight-line method over the estimated
useful lives of the assets. Film costs are amortized using the individual film
forecast method.

<TABLE>
<CAPTION>
                                                           2000          2001
                                                       ----------     ----------
         <S>                                           <C>            <C>
         Depreciation on property and equipment           $1,654       $   832
         Depreciation on portable ride simulation            160             -
         theaters
         Amortization of film inventory                    3,288         1,627
         Amortization of goodwill and other                  665           800
                                                       ----------     ----------

         Total depreciation and amortization              $5,767        $3,259
                                                       ==========     ==========
</TABLE>

Depreciation and amortization included in cost of sales was $3,461 and $1,627
for 2000 and 2001, respectively.


                                    Page 37
<PAGE>


8.      BILLINGS IN EXCESS OF COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED
        CONTRACTS

        Billings in excess of costs and estimated earnings on uncompleted
contracts at June 30, 2000 and 2001 consist of the following (in thousands):

<TABLE>
<CAPTION>
                                              2000         2001
                                           ----------   -----------
<S>                                        <C>          <C>
Costs incurred on uncompleted contracts    $  28,016    $  15,249

Estimated earnings                            16,625        6,564
                                           ----------   -----------

                                              44,641       21,813

Less billings to date                        (46,244)     (23,085)
                                           ----------   -----------

                                           $  (1,603)   $  (1,272)
                                           ==========   ===========
</TABLE>

        Such costs are included in the accompanying balance sheets at June 30,
2000 and 2001 under the following captions (in thousands):

<TABLE>
<CAPTION>
                                                2000        2001
                                             ---------   ----------
<S>                                          <C>         <C>
Costs and estimated earnings in excess of
   billings on uncompleted contracts         $  2,194    $    313
Billings in excess of costs and estimated
   earnings on uncompleted contracts           (3,797)     (1,585)
                                             ---------   -----------
                                             $ (1,603)   $ (1,272)
</TABLE>

9.      NET LOSS PER COMMON SHARE

        Basic and diluted loss per share is calculated using the weighted
average number of common shares outstanding during the period. Options and
warrants to purchase 8,029, 2,882 and 4,755 shares of common stock were not
included in the computation of diluted loss per common share for the years ended
June 30, 1999, 2000 and 2001, respectively, as the effect would be antidulitive.

        During fiscal 2001 there were no shares of common stock issued as a
result of exercises of stock options.

        On January 13, 2000, the Company's stockholders approved an amendment to
the Company's certificate of incorporation to effect a one for three and
one-half reverse stock split with no change in par values, effective for
stockholders of record on November 12, 1999. The reverse stock split was
effective January 18, 2000. All references to per share amounts and shares
outstanding included herein have been retroactively restated to reflect the
stock split.


                                    Page 38
<PAGE>


10.     PROPERTY AND EQUIPMENT

        Property and equipment is stated at cost and is comprised of the
following at June 30, 2000, and 2001 (in thousands):

<TABLE>
<CAPTION>
                                                2000         2001
                                              ---------    ---------
<S>                                           <C>          <C>
Office equipment, furniture and fixtures      $  3,023     $  3,013
Operating equipment                              1,476        1,476
Film production equipment                        4,146        4,599
Demonstration theatres                           3,690        3,690
Leasehold improvements                           1,375        1,442
                                              ---------    ---------
   Total                                        13,710       14,220
Less accumulated depreciation                   (10,017)     (10,848)
                                              ---------    ---------
                                              $  3,693     $  3,372
                                              =========    =========
</TABLE>

        Depreciation expense was $1,946,000, $1,814,000 and $1,326,000 for the
years ended June 30, 1999, 2000 and 2001, respectively, including amounts
related to assets under capital leases.

11.     INCOME TAXES

        Significant components of income tax expense (benefit) are as follows
(in thousands):

<TABLE>
<CAPTION>
                                                    Year ended June 30,
                                              1999          2000          2001
                                           ----------    ----------     --------
<S>                                        <C>           <C>            <C>
Current
   Federal                                   $    -        $  (239)     $    -
   State                                          2             10           -
   Foreign                                        -              7           6
                                           ----------    ----------     --------
                                                  2           (222)      $   6
Deferred:
   Federal                                        -              -           -
   State                                          -              -           -
                                           ----------    ----------     --------
                                             $    2        $  (222)      $   6
                                           ==========    ==========     ========
</TABLE>


The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense is:

<TABLE>
<CAPTION>
                                                           Year ended June 30,
                                                1999             2000               2001
                                            -------------    --------------    -------------
<S>                                         <C>              <C>               <C>
Provision (benefit) for income taxes
at statutory federal rate of 35%             $   (1,672)      $    (7,877)     $   (1,763)
State and local taxes                                  2                10               -
Foreign taxes                                          -                 7               6
Nondeductible items and
    nontaxable items                                 242             4,277             784
Benefit of net operating loss
    not currently recognized                       1,430             3,361             979
                                            -------------    --------------    -------------
                                              $        2       $      (222)    $         6
                                            =============    ==============    =============
</TABLE>


                                    Page 39
<PAGE>


The deferred tax asset at June 30 consists of (in thousands):

<TABLE>
<CAPTION>
                                                1999             2000               2001
                                            -------------    --------------    ------------
<S>                                         <C>                <C>             <C>
Net operating loss                          $    12,480        $  14,480       $    18,000
Reserves                                           (661)            (131)             (464)
Asset impairment reserve                         (1,507)          (2,378)           (2,858)
Deferred revenues                                    27              (73)              (36)
Amortization and depreciation                       767              956             1,093
Other                                                14              (14)               (5)
                                            -------------    --------------    ------------
                                                 11,120           12,840            15,730
Valuation allowance                             (11,120)         (12,840)          (15,730)
                                            -------------    --------------    ------------
                                            $         -        $       -       $         -
                                            =============    ==============    ============
</TABLE>

At June 30, 2001, Iwerks had available federal and state tax net operating loss
carryforwards of approximately $45,000,000 and $13,000,000 respectively,
expiring through 2020. As a result of the merger discussed in Note 19, certain
net operating loss carryforwards may be subject to limitation under Internal
Revenue Code Section 382.

12.     STOCK OPTIONS AND WARRANTS

        The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of Iwerks' employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.

        The Company has four stock incentive plans adopted in 1987, 1993, 1994
and the 1999 non-employee directors' stock option plan (collectively the
"Plans"). In aggregate, 1,000,000 shares of Iwerks Common Stock are reserved for
issuance under the Plans. The Company has granted other options to purchase
29,880 shares of Iwerks Common Stock to certain officers outside of these plans.
Options generally vest over a four-year period and expire in ten years.

        Terminated employees have 90 days to exercise options, however certain
officers, having separation agreements, have as long as 12 months to exercise
options. At June 30, 2001, there were 11,784 vested options outstanding relating
to one terminated officer, which expire July 2001.

        Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for fiscal year 1999, 2000 and 2001, respectively: risk-free
interest rates of 4.84%, 6.50% and 5.29%, weighted-average expected life of the
option of 5.00 years, 4.93 years and 4.95 years; zero dividend yields; and a
volatility factor of the expected market price of Iwerks' Common Stock of 86%,
100%, and 125%.

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


                                    Page 40
<PAGE>


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

<TABLE>
<CAPTION>
                                            1999              2000            2001
                                        ------------       ----------     ------------
<S>                                     <C>                <C>            <C>
Pro forma net loss                      $  (5,489)         $ (22,938)     $  (5,312)
Pro forma net loss per share            $    (1.59)        $   (6.65)     $   (1.54)
</TABLE>


        A summary of the Company's stock option activities and related
information for the years ended June 30 are as follows:

<TABLE>
<CAPTION>
                                           Number of Shares          Weighted Average
                                            (IN THOUSANDS)            EXERCISE PRICE
                                           ----------------          -----------------
<S>                                        <C>                       <C>
Options outstanding July 1, 1998                   668                    $15.29
Options granted                                    128                      4.83
Options exercised                                  (12)                     1.50
Options terminated                                (258)                    17.63
Options exercisable at June 30, 1999               309                     14.32

Options outstanding July 1, 1999                   526                    $11.89
Options granted                                    189                      2.26
Options exercised                                   (1)                     1.19
Options terminated                                (153)                     9.53
Options exercisable at June 30, 2000               418                     11.04

Options outstanding July 1, 2000                   561                   $  9.32
Options granted                                    105                       .31
Options exercised                                    -                         -
Options terminated                                 262                     12.57
Options exercisable at June 30, 2001               234                      7.33
</TABLE>


The weighted-average fair value of options granted was $2.14 in fiscal year
1999, $5.08 in fiscal year 2000, and $0.32 in fiscal year 2001.


                                    Page 41
<PAGE>


The following table summarizes information about stock options outstanding at
June 30, 2001:

<TABLE>
<CAPTION>
               OPTIONS OUTSTANDING                                           OPTIONS
                 WEIGHTED AVERAGE                                          EXERCISABLE
------------------------------------------------                  -----------------------------
                                      WEIGHTED
                                      AVERAGE
                                     REMAINING       WEIGHTED                        WEIGHTED
  RANGE OF       OUTSTANDING AT     CONTRACTUAL       AVERAGE      EXERCISABLE AT     AVERAGE
  EXERCISE       JUNE 30, 2001          LIFE         EXERCISE       JUNE 30, 2001    EXERCISE
    PRICES       (IN THOUSANDS)       IN YEARS         PRINCE      (IN THOUSANDS)      PRICE
-------------    --------------     ------------     ---------     --------------   -----------
<S>              <C>                <C>              <C>           <C>              <C>
 $0.23-0.31            105              9.4           $  0.31              -         $  0.31
 $0.97-1.26              7              6.4           $  1.06              2         $  1.26
 $1.63-1.69            125              8.6           $  1.63            108         $  1.63
 $2.59-3.72             33              7.5           $  3.28             14         $  3.28
 $4.38-6.34             62              6.3           $  4.96             40         $  5.17
$11.38-17.06            23              4.5            $13.37             22          $13.52
$17.50-25.81            40              4.5            $19.01             40          $19.01
$26.47-31.50             8              3.2            $28.20              8          $28.20
                       ---                                               ---
                       404                                               234
                       ===                                               ===
</TABLE>


        As of June 30, 1999, 2000 and 2001 the Company had 164,318, 126,041 and
274,543 shares available for future grants under the Plans. As of June 30, 2001
Iwerks has reserved 678,377 shares of unissued Iwerks Common Stock for issuance
upon exercise of options granted under the Plans and outside the Plans.

At June 30, 2001 the Company had 2,286 warrants exercisable at $25.55 per share
expiring April 2003.

13.     NOTES PAYABLE

        Notes payable consists of the following:

<TABLE>
<CAPTION>
                                               June 30,
                                           2000        2001
                                         --------    ---------
<S>                                       <C>          <C>
Customer Note                             $1,354       $1,354
Settlement Note                              336            -
Equipment Note                               485          307
                                         --------    ----------
                                          $2,175       $1,661
Less non-current portion                     333            -
                                         --------    ----------
Current portion of notes payable          $1,842       $1,661
                                         ========    ==========
</TABLE>


        In the fourth quarter of fiscal 1999, one customer contract relating to
a research and development specialty project was terminated. In connection with
the termination, the Company agreed to refund payments previously received from
the customer and established a note payable ("Customer Note") for approximately
$1.5 million. The Customer Note accrues interest at a rate of 7.752 % per annum.
The Company is currently in default regarding the Customer Note and therefore
the entire balance is classified as a current liability in the accompanying
consolidated balance sheets.

        On June 6, 2000, a settlement agreement for severance pay was reached
with a former executive of the Company. The agreement established a note payable
("Settlement Note") for approximately $363,000 that was secured by certain
assets of the Company. The Settlement Note did not accrue interest and was paid
in full as of June 30, 2001.


                                    Page 42
<PAGE>


        On June 22, 2000, the Company established a $485,000 note payable
("Equipment Note") to purchase certain equipment. The Equipment Note has an
18-month term beginning January 1, 2001 and accrues interest at the rate of
12.5% per annum. Approximately $307,000 in principal payments under the
Equipment Note is due in fiscal year 2002.

14.     NOTE PAYABLE TO SHAREHOLDER

        In October 2000, the Company received $300,000 from a shareholder of the
Company and issued to such shareholder an 8% convertible subordinated note due
October 19, 2005 ("Shareholder Note"). The Shareholder Note is secured by
certain assets of the Company. Interest is payable semi-annually and, at the
sole discretion of the note holder, may be paid in cash or in the form of common
stock of the Company. Should the note holder elect to be paid interest in the
form of common stock, the number of shares of common stock to be issued will be
determined by dividing the dollar value of the interest due by the market value
of the common stock (as defined).

        The note holder has the right, at its option, to convert the principal
amount of the Shareholder Note into shares of common stock of the Company at any
time prior to the close of business on October 19, 2005. The number of shares to
be issued will be determined by dividing the amount of principal to be converted
by $2.00. At June 30 2001, the Company has reserved 150,000 shares in connection
with the potential conversion of the Shareholder Note.

15.     COMMITMENTS AND CONTINGENCIES

        The Company leases facilities and office equipment under operating
leases that expire through 2005. Leases that expire are expected to be renewed
or replaced. Rental expense for the years ended June 30, 1999, 2000 and 2001 was
approximately $506,000, $538,000, and $437,000, respectively. The fiscal 2001
rental expense was offset by approximately $153,000 of rent received from
subleasing one of one of the leased properties.

        Future minimum lease payments under operating leases at June 30, 2001
are as follows (in thousands):

                                                    Operating
                                                        leases
                                                    ----------
         2002                                       $    464

         2003                                            354

         2004                                            300

         2005                                            293

         2006                                            289

         Thereafter                                       72
                                                    ----------
         Total minimum lease                        $  1,772
                                                    ==========

        There are no material legal proceedings to which the Company is a party
other than ordinary routine litigation in the course of business. In the opinion
of management, based in part on the advice of counsel, resolution of these
matters will not have a material adverse impact on the Company's consolidated
financial position or results of operations.

        The Company has, from time to time, provided standby letters of credit
to customers as performance bonds. The customers may draw on the letters of
credit should Iwerks fail to perform under the terms of the contracts. There
were two standby letters of credit outstanding as of June 30, 2000 (see Note 3)
and no standby letters of credit outstanding as of June 30, 2001.


                                    Page 43
<PAGE>


16.     SIGNIFICANT CUSTOMERS AND GEOGRAPHIC INFORMATION

        The Company operates in one business segment - the manufacture,
distribution and operation of entertainment hardware and software.

        Geographic segment information is as follows (in thousands):

<TABLE>
<CAPTION>
                                   1999         2000          2001
                                ----------   ----------   -----------
<S>                             <C>          <C>          <C>
United States                   $  15,234    $   8,500    $    9,287
Asia                               10,434        9,800         6,173
South America                         550        1,128           458
Europe and Middle East              8,148        8,429         3,756
Canada                                503          386         2,530
                                ----------   ----------   -----------
Total Revenue                   $  34,869    $  28,243     $  22,204
                                ==========   ==========   ===========
</TABLE>

        Nearly all of the Company's identifiable assets are located in the
United States. In fiscal 1999, 2000 and 2001 the Company had no customers who
accounted for more than 10% of consolidated revenues.

17.     STOCKHOLDER RIGHTS PLAN

        The Company has adopted a Stockholder Rights Plan (the "Agreement").
Pursuant to the Agreement each outstanding share of Iwerks' Common Stock has
received one right entitling the holder to purchase 1/100th of a share of Series
A Preferred Stock of Iwerks for each share of Iwerks Common Stock then held by
such holder. Each right becomes exercisable upon certain triggering events
related to an unsolicited takeover attempt of Iwerks.

18.     ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS

        In June 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill and intangible assets deemed to
have indefinite lives will no longer be amortized, but will be subject to annual
impairment tests in accordance with the Statements. Other intangible assets will
continue to be amortized over their useful lives.

        The Company will apply the new rules on accounting for goodwill and
other intangible assets beginning July 1, 2002. During its fiscal year ended
June 30, 2003, the Company will perform the first of the required impairment
tests of goodwill and indefinite lived intangible assets, but does not believe
that the effect of adopting these standards will have a material impact on the
earnings and financial position of the Company.

19.     SUBSEQUENT EVENTS

        On August 31, 2001, the Company, SimEx, and Acquisition Co., entered
into an agreement and plan of merger pursuant to which SimEx will acquire all of
the outstanding shares of the Company's common stock for a total cash
consideration of US $2.25 million. Immediately prior to the effective time of
the merger, each issued and outstanding share of our common stock will be
converted into the right to receive a ratable portion of the US $2.25 million
equal to the quotient obtained by dividing (i) US $2.25 million by (ii) the
number of shares of our common stock immediately outstanding prior to the
effective time of the merger. Assuming the exercise or conversion of all
"in-the-money" securities prior to the effective time of the merger, the per
share consideration to be offered to our stockholders will be approximately US
$0.63. The merger is subject to stockholder approval and other customary closing
conditions. If the merger is consummated, the Company will become a wholly owned
subsidiary of SimEx.


                                    Page 44
<PAGE>


        On August 21, 2001, SimEx Inc., an Ontario, Canada corporation,
purchased a promissory note from the Company in the aggregate principal amount
of $200,000. The note does not bear interest and is payable in full on the
fourth anniversary of the date of issuance. The Company many prepay the note at
any time without penalty. The note is secured by one portable ride simulation
unit. SimEx has the right to convert, in whole or in part, at any time the
entire unpaid and unconverted balance of the note, into shares of common stock
of the Company at a conversion price of sixty-three ($0.63) per Share.

        On July 20, 2001, the Company exercised certain buyout rights and
acquired the 50% ownership interest held by Sea Lion Entertainment, Inc. and
Pier Theatre Limited Partnership in Discovery Theatre Limited Partnership, a
California limited partnership for an aggregate purchase price of $100,000. As a
result of the acquisition, the Company, through its subsidiaries, Iwerks
Discovery Theatre San Francisco and Cinetropolis, Inc. owns 100% if Discovery
Theatre Limited Partnership. Prior to this acquisition, Discovery Theatre
Limited Partnership was operated as a joint venture, with the Company, through
its subsidiaries, owning a 50% interest and Sea Lion Entertainment, Inc. and
Pier Theatre Limited Partnership owning a 50% interest. Discovery Theatre
Limited Partnership operates a Turbo Ride theatre attraction on San Francisco's
PIER 39. The Company intends to dissolve Discovery Theatre Limited Partnership
and transfer its assets to Cinetropolis, Inc.


                                    Page 45
<PAGE>


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

        None.


                                    Page 46
<PAGE>


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.


        Information regarding directors and executive officers of the Company
will appear in the Proxy Statement for the 2001 Annual Meeting of Stockholders,
and is incorporated herein by this reference.

ITEM 11. EXECUTIVE COMPENSATION.

        Information regarding executive compensation will appear in the Proxy
Statement for the 2001 Annual Meeting of Stockholders, and is incorporated
herein by this reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

        Information regarding security ownership of certain beneficial owners
and management of the Company will appear in the Proxy Statement for the 2001
Annual Meeting of Stockholders, and is incorporated herein by this reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

        Information regarding certain relationships and related transactions
will appear in the Proxy Statement for the 2001 Annual Meeting of Stockholders,
and is incorporated herein by this reference.


                                    Page 47
<PAGE>


                                     PART IV

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


(a)            Financial Statements:                             PAGE NUMBER
                                                                 -----------
               Report of Independent Auditors                        26

               Consolidated Balance Sheets
               June 30, 2000 and 2001                                27

               Consolidated Statements of Operations
               Years Ended June 30, 1999, 2000 and 2001              29

               Consolidated Statements of Stockholders' Equity
               Years Ended June 30, 1999, 2000 and 2001              30

               Consolidated Statements of Cash Flows
               Years Ended June 30, 1999, 2000 and 2001              31

               Notes to Consolidated Financial Statements            33


Financial Statement Schedules:

Schedule II - Valuation and Qualifying Accounts for the years ended June 30,
1999, 2000 and 2001.

All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.

(b)     Exhibits:  See Exhibit List attached to this Annual Report on Form 10-K.

(c)     Reports on Form 8-K: none


                                    Page 48
<PAGE>


                                   SIGNATURES

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

IWERKS ENTERTAINMENT, INC.
   (Registrant)

   By:  /S/ JEFFREY M. DAHL                    By:    /S/ DEBRA L. WISE
        ---------------------------                   -----------------------
        Jeffrey M. Dahl                               Debra L. Wise
        Senior Vice President &                       Vice President &
        Chief Financial Officer                       Chief Accounting Officer

        Date: September 19, 2001                      Date: September 19, 2001


                                POWER OF ATTORNEY

        KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Don Iwerks and Jeffrey Dahl, or any one of them,
his attorney-in-fact and agent, with full power of substitution, for him in any
and all capacities, to sign any amendments to this Annual Report, and to file
the same, with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming all
that said attorneys-in-fact, or their substitutes, may do or cause to be done by
virtue hereof.


        Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>

           SIGNATURE                              TITLE                          DATE
-------------------------------        ----------------------------       ------------------
<S>                                    <C>                                <C>
      /S/ JEFFREY M. DAHL                 Senior Vice President
-------------------------------          Chief Financial Officer          September 19, 2001
        Jeffrey M. Dahl                (Principal Finance Officer)


     /S/ DONALD W. IWERKS                       Director                  September 19, 2001
--------------------------------         (Chairman of the Board)
        Donald W. Iwerks

                                                Director                  September 19, 2001
       /S/ GARY J. MATUS                (Chief Executive Officer)
--------------------------------
         Gary J. Matus

         /S/ BRUCE BEDA                         Director                  September 19, 2001
--------------------------------
           Bruce Beda

       /S/ PETER HANELT                         Director                  September 19, 2001
--------------------------------
          Peter Hanelt

</TABLE>


                                    Page 49
<PAGE>


                                                                    SCHEDULE II

                           IWERKS ENTERTAINMENT, INC.
                        VALUATION AND QUALIFYING ACCOUNTS
                       FOR THE YEARS ENDED JUNE 30, 1999, 2000 AND 2001

<TABLE>
<CAPTION>
                                      BALANCE AT
                                     BEGINNING OF                                    BALANCE AT
      CLASSIFICATION                      YEAR          ADDITIONS      WRITE-OFFS    END OF YEAR
      --------------                 --------------    ------------   ------------   -----------
<S>                                  <C>               <C>            <C>            <C>
FOR THE YEAR ENDED JUNE 30, 1999      $  1,893,232      $  997,783     $ 1,068,340   $ 1,822,675
Allowance for doubtful accounts

FOR THE YEAR ENDED JUNE 30, 2000      $  1,822,675      $  300,000     $ 1,189,528   $   933,147
Allowance for doubtful accounts

FOR THE YEAR ENDED JUNE 30, 2001      $    933,147      $  630,924     $   307,098   $ 1,256,974
Allowance for doubtful accounts
</TABLE>


                                    Page 50
<PAGE>


                                  EXHIBIT INDEX


3.1     Amended and Restated Certificate of Incorporation. Incorporated by
        reference from Iwerks' Registration Statement on Form S-1, SEC File No.
        68022 declared effective on October 19, 1993.

3.2     Certificate of Amendment of Certificate of Incorporation dated August 1,
        1997. Incorporated by reference from Registrant's annual Report on Form
        10-K for the year ended June 30, 1997.

3.3     Bylaws of Iwerks. Incorporated by reference from Registrant's annual
        Report on Form 10-K for the year ended June 30, 1995.

4.1     Specimen Certificate evidencing Common Stock of Iwerks. Incorporated by
        reference from Iwerks' Registration Statement on Form S-1, SEC Rule No.
        68022 declared effective on October 19, 1993.

4.2     Warrant Agreement, dated April 30, 1993, by and between Iwerks and
        Richard King International. Incorporated by reference from Iwerks'
        Registration Statement on Form S-1, SEC Rule No. 68022 declared
        effective on October 19, 1993.

4.3     Warrant to purchase 339,063 shares of common stock of the Registrant,
        dated September 8, 1999, by the Registrant to the Guber Family Trust
        dated October 20, 1978. Incorporated by reference from Registrant's
        Report on Form 8-K filed on September 23, 1999.

4.4     Warrant to purchase 339,063 shares of common stock of the Registrant,
        dated September 8, 1999, by the Registrant to the Guber Family Trust
        dated October 20, 1978. Incorporated by reference from Registrant's
        Report on Form 8-K filed on September 23, 1999.

4.5     Warrant to purchase 339,062 shares of common stock of the Registrant,
        dated September 8, 1999, by the Registrant to the Guber Family Trust
        dated October 20, 1978. Incorporated by reference from Registrant's
        Report on Form 8-K filed on September 23, 1999.

4.6     Warrant to purchase 339,062 shares of common stock of the Registrant,
        dated September 8, 1999, by the Registrant to the Guber Family Trust
        dated October 20, 1978. Incorporated by reference from Registrant's
        Report on Form 8-K filed on September 23, 1999.

4.7     Warrant to purchase 48,438 shares of common stock of the Registrant,
        dated September 8, 1999, by the Registrant to the Paul and Judy
        Schaeffer Living Trust dated February 28, 1992. Incorporated by
        reference from Registrant's Current Report on Form 8-K filed on
        September 23, 1999.

4.8     Warrant to purchase 48,438 shares of common stock of the Registrant,
        dated September 8, 1999, by the Registrant to the Paul and Judy
        Schaeffer Living Trust dated February 28, 1992. Incorporated by
        reference from Registrant's Current Report on Form 8-K filed on
        September 23, 1999.

4.9     Warrant to purchase 48,437 shares of common stock of the Registrant,
        dated September 8, 1999, by the Registrant to the Paul and Judy
        Schaeffer Living Trust dated February 28, 1992. Incorporated by
        reference from Registrant's Current Report on Form 8-K filed on
        September 23, 1999.

4.10    Warrant to purchase 48,437 shares of common stock of the Registrant,
        dated September 8, 1999, by the Registrant to the Paul and Judy
        Schaeffer Living Trust dated February 28, 1992. Incorporated by
        reference from Registrant's Current Report on Form 8-K filed on
        September 23, 1999.

10.1    Form of Indemnification Agreement and schedule of indemnified parties.
        Incorporated by reference from Iwerks' Registration Statement on Form
        S-1, SEC Rule No. 68022 declared effective on October 19, 1993.


                                    Page 51
<PAGE>


10.2    Purchase Agreement dated January 23, 1991, by and between Iwerks and
        Ride and Show Engineering, Inc. Incorporated by reference from Iwerks'
        Registration Statement on Form S-1, SEC Rule No. 68022 declared
        effective on October 19, 1993.

10.3    Amended and Restated 1987 Stock Option, Purchase and Appreciation Rights
        Plan of Iwerks. Incorporated by reference from Iwerks' Registration
        Statement on Form S-1, SEC Rule No. 68022 declared effective on October
        19, 1993.

10.4    1993 Stock Incentive Plan of Iwerks. Incorporated by reference from
        Iwerks' Registration Statement on Form S-1, SEC Rule No. 68022 declared
        effective on October 19, 1993.

10.5    Lease for 4540 W. Valerio Street, Burbank, California 91505, dated May
        15, 1990, by and between Iwerks as lessee and Sheldon Plutsky as lessor.
        Incorporated by reference from Iwerks' Registration Statement on Form
        S-1, SEC Rule No. 68022 declared effective on October 19, 1993.

10.6    Lease for 4520Valerio Street, Burbank, California 91505, dated September
        1, 1992, and the Amendment thereto, dated September 22, 1992, by and
        between Iwerks as lessee and James E. McGraw as lessor. Incorporated by
        reference from Iwerks' Registration Statement on Form S-1, SEC Rule No.
        68022 declared effective on October 19, 1993.

10.7    Lease for 4535 W. Valerio Street, Burbank, California 91505, dated
        September 11, 1991, by and between Iwerks as lessee and R.C. Associates
        as lessor. Incorporated by reference from Iwerks' Registration Statement
        on Form S-1, SEC Rule No. 68022 declared effective on October 19, 1993.

10.8    Intentionally left blank.

10.9    Rights Agreement dated as of May 18, 1995, between Iwerks Entertainment,
        Inc. and U.S. Stock Transfer Corporation. Incorporated by reference from
        Registrant's Current Report on Form 8-K filed on May 24, 1995.

10.10   1994 Stock Incentive Plan of Iwerks Entertainment, Inc. Incorporated by
        reference from Registrant's annual Report on Form 10-K for the year
        ended June 30, 1995

10.11   Lease Agreement - Matrix Funding Corporation. Incorporated by reference
        from 10.11 Registrant's annual Report on Form 10-K for the year ended
        June 30, 1996.

10.12   Separation Agreement dated October 31, 1997 between the Company and Roy
        A. Wright. Incorporated by reference from Registrant's Quarterly Report
        on Form 10-Q for the quarter and six months ended December 31, 1997.

10.13   Separation Agreement dated October 31, 1997 between the Company and
        Bruce Hinckley. Incorporated by reference from Registrant's Quarterly
        Report on Form 10-Q for the quarter and six months ended December 31,
        1997.

10.14   Rights Agreement Amendment dated as of July 15, 1997, between Iwerks
        Entertainment, Inc. and U.S. Stock Transfer Corporation. Incorporated by
        reference from Registrant's Current Report on Form 8-K filed on August
        7, 1997.

10.15   Separation Agreement dated October 31, 1997 between the Company and
        William J. Battison III. Incorporated by reference from Registrant's
        Quarterly Report on Form 10-Q for the quarter and six months ended
        December 31, 1997.

10.16   Employment Agreement dated February 21, 1998 between the Company and
        Charles Goldwater. Incorporated by reference from Registrant's
        Registration Statement on Form S-4 filed on March 4, 1998.

10.17   Employment Agreement dated March 2, 1998 between the Company and Dan
        Griesmer. Incorporated by reference from Registrant's Quarterly Report
        on Form 10-Q for the quarter and nine months ended March 31, 1998.


                                    Page 52
<PAGE>


10.18   Employment Agreement dated August 3, 1998 between the Company and Jack
        Shishido. Incorporated by reference from Registrant's Quarterly Report
        on Form 10-Q for the quarter and three months ended September 30, 1998.

10.19   1998 Non-Employee Directors Stock Option Plan. Incorporated by reference
        from Registrant's Proxy Statement on Form 14-A filed on October 28,
        1998.

10.20   Rights Agreement Amendment dated as of July 16, 1999, between Iwerks
        Entertainment, Inc. and U.S. Stock Transfer Corporation. Incorporated by
        reference from Registrant's Current Report on Form 8-K filed on July 23,
        1999.

10.21   First Amendment to Schedule as of June 22, 2000, by and between Matrix
        funding corporation and Iwerks Entertainment, Inc. Incorporated by
        reference from Registrant's Annual Report on Form 10-K for the year
        ended June 30, 2000.

10.22   Consulting Agreement as of February 15, 2000, between Iwerks
        Entertainment, Inc. and Gary J. Matus. Incorporated by reference from
        Registrant's Annual Report on Form 10-K for the year ended June 30,
        2000.

10.23   A Consulting Agreement as of February 15, 2000, between Iwerks
        Entertainment, Inc. and Donald W. Iwerks. Incorporated by reference from
        Registrant's Annual Report on Form 10-K for the year ended June 30,
        2000.

10.24   Agreement as of March 22, 2000, between Iwerks Entertainment, Inc. and
        Jeffrey M. Dahl. Incorporated by reference from Registrant's Annual
        Report on Form 10-K for the year ended June 30, 2000.

10.25   Rights Agreement Amendment dated as of September 12, 2000, between
        Iwerks Entertainment, Inc. and U.S. Stock Transfer Corporation.
        Incorporated by reference from Registrant's Current Report on Form 8-K
        filed on December 12, 2000.

10.26   Rights Agreement Amendment dated as of October 24, 2000, between Iwerks
        Entertainment, Inc. and U.S. Stock Transfer Corporation. Incorporated by
        reference from Registrant's Current Report on Form 8-K filed on December
        12, 2000.

21.1    Subsidiary List.

23.1    Consent of Independent Auditors - Ernst & Young LLP


                                    Page 53