UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549



FORM 10-Q


     (Mark One)

     [X]  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
          Exchange Act of 1934. For the quarterly period ended March 31, 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 of                            (I.R.S. Employer
 incorporation or organization)                          Identification Number)



            4520 West Valerio Street, Burbank, California 91505-1046
-------------------------------------------------------------------------------
               (Address of principal executive offices) (Zip Code)





                                 (818) 841-7766
-------------------------------------------------------------------------------
               (Registrant's telephone number including area code)



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 __.

The number of shares outstanding of the Registrant's Common Stock, $0.001 par
value, at April 30, 2001 was 3,540,911 shares.


<PAGE>


                           IWERKS ENTERTAINMENT, INC.

                                      INDEX
                                                                          Page
PART I.  FINANCIAL INFORMATION                                           Number

Item 1.  Financial Statements

         Condensed Consolidated Balance Sheets as of March 31, 2001
         and June 30, 2000                                                    3

         Condensed Consolidated Statements of Operations for the
         Three and Nine Months ended March 31, 2001 and 2000                  5

         Condensed Consolidated Statements of Cash Flows for the
         Nine Months ended March 31, 2001 and 2000                            6

         Notes to the Condensed Consolidated Financial Statements             7

Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations                                            9

PART II. OTHER INFORMATION

Item 6.  Exhibits and Reports on Form 8-K                                    22

         Signatures                                                          23



                                     Page 2
<PAGE>


<TABLE>
<CAPTION>
                           IWERKS ENTERTAINMENT, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                     ASSETS
                                 (IN THOUSANDS)


                                                                             MARCH 31, 2001       JUNE 30, 2000
                                                                              (Unaudited)           (Audited)
                                                                          ------------------    -----------------
<S>                                                                       <C>                   <C>
Current assets:
   Cash and Cash Equivalents (Note 2).................................      $    2,363            $    2,733

   Trade accounts receivable, net of allowance for
     doubtful accounts................................................           3,551                 3,963

   Costs and estimated earnings in excess of billings on
     uncompleted contracts............................................             614                 2,194

   Assets held for sale - current.....................................             447                   858

   Inventories and other current assets...............................           1,959                 3,147
                                                                          ---------------       --------------

Total current assets..................................................           8,934                12,895


Property and equipment at cost, net of accumulated depreciation.......           3,433                 3,693

Film inventory at cost, net of accumulated amortization...............           1,144                 2,222

Goodwill, net of accumulated amortization.............................           1,847                 1,953

Other assets..........................................................           3,343                 3,292

Assets held for sale - long term......................................           1,292                 1,755
                                                                          ---------------       --------------

Total Assets..........................................................       $  19,993             $  25,810
                                                                          ===============       ==============
</TABLE>




                             See accompanying notes.


                                     Page 3
<PAGE>


<TABLE>
<CAPTION>
                           IWERKS ENTERTAINMENT, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                      LIABILITIES AND STOCKHOLDERS' EQUITY
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

                                                                       MARCH 31, 2001      JUNE 30, 2000
                                                                        (Unaudited)          (Audited)
                                                                     ----------------     ---------------
<S>                                                                  <C>                  <C>
Current Liabilities:

Accounts payable....................................................  $    1,418           $    3,943

Accrued expenses....................................................       6,184                5,780

Notes payable, current portion......................................       1,723                1,842

Billings in excess of costs and estimated earnings on
     uncompleted contracts..........................................       2,421                3,797

Deferred revenue....................................................         101                  136

Capital lease obligations, current portion..........................           -                  459
                                                                      ---------------     ---------------

Total current liabilities...........................................      11,847               15,957

Notes payable, net of current portion...............................         387                  333
                                                                      ---------------     ---------------

Total liabilities...................................................      12,234               16,290

Stockholders' equity:

Preferred stock, $0.001 par value, 1,000,000 shares authorized,
     none issued and outstanding....................................           -                    -

Common stock, $0.001 par value, 50,000,000 shares authorized;
     3,540,911 and 3,540,911 issued and outstanding.................          57                   57

Additional paid-in capital..........................................      78,086               78,086

Treasury Stock, 91,600 shares at cost...............................        (341)                (341)

Common stock - warrants.............................................         250                  250

Accumulated deficit.................................................     (70,293)             (68,532)
                                                                      ---------------     ---------------

Total stockholders' equity..........................................       7,759                9,520
                                                                      ---------------     ---------------
Total liabilities and stockholders' equity..........................   $  19,993            $  25,810
                                                                      ===============     ===============
</TABLE>




                             See accompanying notes.



                                     Page 4
<PAGE>


<TABLE>
<CAPTION>
                           IWERKS ENTERTAINMENT, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)
                                                                     THREE MONTHS ENDED         NINE MONTHS ENDED
                                                                          MARCH 31,                 MARCH 31,
                                                                  -------------------------- -------------------------
                                                                        2001         2000          2001         2000
                                                                  ------------ ------------- ------------ ------------
<S>                                                               <C>          <C>           <C>          <C>
Revenue                                                             $  5,922     $  5,913     $  17,614    $  22,681

Cost of sales                                                          4,278        5,474        13,445       19,742
                                                                  ------------ ------------- ------------ ------------
Gross margin                                                           1,644          439         4,169        2,939

Selling, general and administrative expenses                           1,985        2,735         5,896        8,686

Impairment of Goodwill                                                    --       11,658            --       11,658
                                                                  ------------ ------------- ------------ ------------
Loss from operations                                                    (341)     (13,954)       (1,727)     (17,405)

Interest income                                                           --            4            90          153

Interest expense                                                         (14)         (67)         (124)        (219)
                                                                  ------------ ------------- ------------ ------------
Net loss                                                              $ (355)   $ (14,017)     $ (1,761)   $ (17,471)
                                                                  ============ ============= ============ ============

Net loss per common share-basic and diluted                           $(0.10)      $(4.06)       $(0.51)      $(5.07)
                                                                  ============ ============= ============ ============

Weighted average shares outstanding-basic and diluted                  3,449        3,449         3,449        3,449
                                                                  ============ ============= ============ ============
</TABLE>



                             See accompanying notes.


                                     Page 5
<PAGE>


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

                                                                                FOR THE NINE MONTHS ENDED
                                                                                        MARCH 31,
                                                                             --------------------------------
                                                                                  2001               2000
                                                                             -------------      -------------
<S>                                                                          <C>                <C>
     OPERATING ACTIVITIES
     Net loss                                                                  $  (1,761)        $ (17,471)
     Depreciation and amortization                                                 2,205             2,872
     Impairment of Goodwill                                                           --            11,658
     Changes in operating assets and liabilities                                    (694)              343
                                                                             -------------       ------------
       Net cash used in operating activities                                        (250)           (2,598)

     INVESTING ACTIVITIES
     Investments in joint ventures                                                                    (118)
     Purchases of property, plant and equipment                                     (341)             (794)
     Net proceeds from the sale of portable simulation theaters                      874                --
     Additions to film inventory                                                      --              (433)
     Investments in debt securities                                                   --             2,500
                                                                             -------------       ------------
       Net cash provided by investing activities                                    533              1,155

     FINANCING ACTIVITIES
     Proceeds from issuance of debt                                                  300                --
     Principal payments on notes payable                                            (365)             (180)
     Payments on capital leases                                                     (459)             (587)
     Proceeds from issuance of common stock warrants                                  --               250
     Deferred financing fees                                                          --              (252)
     Other                                                                          (129)               --
                                                                             -------------       ------------
       Net cash used in financing activities                                        (653)             (769)
                                                                             -------------       ------------

     Net decrease in cash and cash equivalents                                      (370)           (2,212)

     Cash and cash equivalents at beginning of period                              2,733             4,217
                                                                             -------------       ------------

     Cash and cash equivalents at end of period                                $   2,363         $   2,005
                                                                             =============       ============
     Supplemental disclosures
       Interest paid during the period                                           $    45           $   204
                                                                             =============       ============
       Income taxes paid during the period                                       $    10           $    10
                                                                             =============       ============
</TABLE>



                             See accompanying notes.


                                     Page 6
<PAGE>


                           IWERKS ENTERTAINMENT, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE 1.  INTRODUCTION

The accompanying condensed consolidated financial statements of Iwerks
Entertainment, Inc. (the "Company") have been prepared without audit pursuant to
the rules and regulations of the Securities and Exchange Commission ("SEC").
Certain information and footnote disclosures normally included in the financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures made are
adequate to make the information presented not misleading. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the consolidated financial position of the Company
as of March 31, 2001 and the results of its operations for the three and nine
months ended March 31, 2001 and 2000 and the cash flows for the nine months
ended March 31, 2001 and 2000 have been included. The results of operations for
interim periods are not necessarily indicative of the results which may be
realized for the full year. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's latest
Annual Report on Form 10-K as filed with the SEC. Certain reclassifications were
made to the financial statements for the nine months ended March 31, 2000 in
order to conform to the nine months ended March 31, 2001 presentation.

NOTE 2.  RESTRICTED CASH

Included in the March 31, 2000 cash and cash equivalents balance is $1,046,000
of cash received from one customer, which was restricted as to its use. This
restriction remained in effect until the second quarter of fiscal 2001, when the
Company reached a certain milestone related to completion of the project. At
that time, the cash became available for Company use. There is no such
restriction in the March 31, 2001 cash and cash equivalents balance of
$2,363,000.

NOTE 3.  ASSETS HELD FOR SALE

On September 30, 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 fair value less
cost to sell. Management discontinued depreciating these assets and will
continue to periodically assess the net fair value of these assets. The Company
has sold four units since June 30, 2000 with aggregate net proceeds of $874,000.

NOTE 4.  ISSUANCE OF WARRANTS

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

NOTE 5.  DEPRECIATION AND AMORTIZATION

Depreciation expense 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.


                                     Page 7
<PAGE>


<TABLE>
<CAPTION>
                                                           Three Months Ended            Nine Months Ended
                                                               March 31,                     March 31,
                                                     ------------------------------------------------------------
                                                          2001           2000            2001           2000
                                                     ------------------------------------------------------------
<S>                                                     <C>             <C>             <C>          <C>
 Depreciation on fixed assets                           $   364,000     $   337,000     $   972,000  $   986,000
 Depreciation on portable ride simulation theaters               --              --              --      161,000
 Amortization of film costs                                 491,000         626,000       1,004,000    1,181,000
 Amortization of goodwill and other                          76,000         181,000         229,000      544,000
                                                     ------------------------------------------------------------
 Total depreciation and amortization                    $   931,000      $1,144,000      $2,205,000   $2,872,000
                                                     ============================================================
</TABLE>


Depreciation and amortization included in cost of sales was $491,000 and
$626,000 for the quarters ended March 31, 2001 and 2000, respectively, and
$1,004,000 and $1,352,000 for the nine months ended March 31, 2001 and 2000,
respectively.

NOTE 6   NOTES PAYABLE

On October 19, 2000, the Company issued a five-year, 8% convertible debenture in
the amount of $300,000. Interest is paid semi-annually and the debenture is
convertible into shares of common stock at $2.00 per share.

NOTE 7.  NET LOSS PER COMMON SHARE

For the three and nine months ended March 31, 2001 and 2000, the basic and
diluted per share data is based on the weighted average number of common shares
outstanding during the period. Common equivalent shares, consisting of
outstanding stock options and warrants, are not included in the diluted loss per
share calculation since they are antidilutive.

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. 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.

NOTE 8.  INCOME TAXES

At June 30, 2000, the Company had available federal and state tax net operating
loss carryforwards of approximately $36,200,000 and $13,100,000, respectively.
The federal and state net operating loss carryforwards expire, in varying
amounts, through 2019. As a result of these net operating loss carryforwards and
current period losses, the Company's effective tax rate was negligible and
consequently no income tax provision or benefit was recorded in the periods
presented. Under Section 382 of the Internal Revenue Code, the utilization of
the net operating loss carryforwards may be limited based on changes in the
percentage of ownership of the Company.

NOTE 9.  LITIGATION

The proceedings to which the Company is a defendant consist of routine
litigation in the ordinary course of business. In the opinion of management,
and, based in part upon the advice of outside counsel, resolution of these
matters will not have a material adverse impact on the Company's consolidated
financial position or results of operations.

NOTE 10. LETTER OF INTENT WITH SIMEX, INC.

On March 5, 2001, the Company announced the signing of a non-binding letter of
intent for a strategic $2.2 million acquisition of the Company by SimEx Inc., a
Canadian company. The letter of intent provides that SimEx will acquire the
Company in exchange for $0.63 per share of common stock currently issued and
outstanding. The Company's Board of Directors has approved this transaction and
final completion is subject to due diligence, financing, the execution of
binding transaction documents, shareholder approval and other customary closing
conditions. The Company currently anticipates completing the transaction in the
first quarter of fiscal 2002.


                                     Page 8
<PAGE>


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

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 the Company, its directors or officers with respect to,
among other things (a) trends affecting the financial condition or results of
operations of the Company and (b) the business and growth strategies of the
Company. The stockholders of the Company 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 "Future
Operating Results". The Company undertakes no obligation to publicly revise
these forward-looking statements to reflect events or circumstances that arise
after the date hereof. Readers should review carefully the risk factors
described in other documents the Company files from time to time with the
Securities and Exchange Commission, including the Annual Report on form 10-K
filed by the Company on September 29, 2000, the Quarterly Reports on Form 10-Q
filed by the Company on February 14, 2001 and November 14, 2000, and any Current
Reports on Form 8-K filed by the Company.

RESULTS OF OPERATIONS

HARDWARE SALES AND SERVICE

Revenues on sales of theatre systems are recognized on the
percentage-of-completion method over the life of the contract. The gross margin
for each contract varies based upon pricing strategies, competitive conditions
and product mix.

FILM LICENSING AND PRINTS

Revenues and related expenses from film licensing 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.

CAMERAS AND OTHER PRODUCTION SERVICES

The Company contracts with third parties to lease its 15/70 and 8/70 large
format cameras and related equipment, (including a 3D rig, lenses and
accessories). Rental periods range from several days to several months.

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

The Company's internal executive production capability develops and oversees the
production of films for the Company's film productions as well as for third
party custom film projects.


                                     Page 9
<PAGE>


OWNED AND OPERATED

Revenues from owned and operated (O&O) consist of portable ride simulation
theatre revenues (touring) 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 the Company's
contractual share of the sites' revenues or profits as applicable. The Company
has made the determination to shut down the touring division and sell the
related assets in an effort to concentrate on its core business.

THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000

For the three months ended March 31, 2001 the Company recorded revenues of
$5,922,000 compared to $5,913,000 for the same period last year. For the three
months ended March 31, 2001, the Company recorded a net loss of $355,000 or
($0.10) per share compared to a net loss of $14,017,000 or ($4.06) per share for
the same period last year.

REVENUES

Revenue for the three months ended March 31, 2001 increased $9,000 or 0.01% from
the three months ended March 31, 2000.

The following table presents summary information regarding revenues (amounts in
thousands):

<TABLE>
<CAPTION>
                                                          Three Months Ended
                                                               March 31,
                                                       --------------------------
                                                           2001         2000
                                                       --------------------------
<S>                                                    <C>              <C>
        Hardware Sales & Service                           $  1,854     $  3,322
        Film Licensing and Prints                             3,062        1,378
        Cameras and Other Production Services                   804          931
        Owned and Operated                                      202          282
                                                       --------------------------
        Total                                              $  5,922     $  5,913
                                                       ==========================
</TABLE>


Hardware Sales and Service for the three months ended March 31, 2001 decreased
by approximately $1.5 million or 44% compared to the same period last year.
During the third quarter of fiscal 2001, hardware sales recognized in the
Asia-Pacific region decreased by approximately $593,000, hardware sales
recognized in Europe and the Middle East decreased by approximately $506,000 and
hardware sales recognized in North America decreased by approximately $159,000.
Revenue generated from Customer Service decreased by $210,000 during the third
quarter of fiscal 2001 compared to the third quarter of fiscal 2000. Generally,
hardware sales are subject to quarterly fluctuations as they are dependent on
customer installation dates.

Film Licensing and Prints revenues for the quarter ended March 31, 2001
increased by approximately $1.7 million or 122% compared to the same period last
year. This increase primarily is due to several large multi-year film licenses
signed in the current quarter and several film license agreements signed with
new customers.

Cameras and Other Production Services revenue for the three months ended March
31, 2001 decreased by approximately $127,000 compared to the same period last
year. The decrease primarily is due to a reduction in production revenues
($316,000) due to timing of completion of one large project in fiscal 2000
compared to a smaller project in fiscal 2001. The decrease was partially offset
by an increase ($189,000) in facility camera rentals. The increase was the
result of revenue from film conversions, which is a new line of business for the
Company.


                                    Page 10
<PAGE>


Owned and Operated revenue for the three months ended March 31, 2001 decreased
by approximately $80,000 as compared to the same period last year. This was
primarily due to reduced revenues from joint ventures as a result of a
reclassification of revenues for one joint venture ($132,000) to film licensing
revenue in fiscal 2001 rather than as owned and operated revenue.

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

Cost of sales as a percentage of sales was 72% for the three months ended March
31, 2001 as compared to 93% for the three months ended March 31, 2000. The
decrease resulted primarily from reduced film amortization costs as a result of
film write-downs made during fiscal 2000. Additionally, reduced warranty claims
resulted in lower customer service cost of sales for the quarter ended March 31,
2001.

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 relations costs, outside consulting and professional
fees, depreciation on fixed assets, amortization of goodwill, departmental
administrative costs and research and development costs.

Selling, general and administrative expenses were approximately $2.0 million and
$2.7 million, for the quarters ended March 31, 2001 and 2000, respectively. This
decrease primarily is attributable to senior management cost containment efforts
including marketing, travel and entertainment expense and office lease and
reduced depreciation and amortization, and research and development expenses.

IMPAIRMENT OF GOODWILL

In the quarter ended March 31, 2000, the Company recorded a one-time non-cash
write-down to goodwill associated with the acquisition of Omni Film
International. There was no similar write-down in the current quarter.

INTEREST INCOME & EXPENSE

Interest income for the quarters ended March 31, 2001 and 2000 was approximately
$0 and $4,000, respectively. The decrease resulted primarily from a reduction in
the invested cash balances during the three months ended March 31, 2001.

Interest expense for the quarters ended March 31, 2001 and 2000 was
approximately $14,000 and $67,000, respectively. The decrease was primarily due
to reduced notes payable and capital lease obligation balances in the current
quarter as compared to the quarter ended March 31, 2000.

NET LOSS

The Company recorded a net loss of approximately $355,000 in the quarter ended
March 31, 2001, compared to a net loss of approximately $14 million in the
quarter ended March 31, 2000 due to the reasons mentioned above.


                                    Page 11
<PAGE>


NINE MONTHS ENDED MARCH 31, 2001 COMPARED TO NINE MONTHS ENDED MARCH 31, 2000

For the nine months ended March 31, 2001 the Company recorded revenues of
approximately $17.6 million compared to approximately $22.7 million for the same
period last year. For the nine months ended March 31, 2001, the Company recorded
a net loss of approximately $1.8 million or $0.51 per share compared to a net
loss of approximately $17.5 million or $5.00 per share for the same period last
year.

REVENUES

Revenue for the nine months ended March 31, 2001 decreased by $5,067,000 or 22%
from the nine months ended March 31, 2000.

The following table presents summary information regarding revenues (amounts in
thousands):

<TABLE>
<CAPTION>
                                                          Nine Months Ended
                                                              March 31,
                                                       -------------------------
                                                           2001        2000
                                                       -------------------------
        <S>                                            <C>             <C>
        Hardware Sales & Service                           $  8,911     $13,670
        Film Licensing and Prints                             5,120       4,014
        Cameras and Other Production Services                 3,020       2,882
        Owned and Operated                                      563       2,115
                                                       -------------------------
        Total                                               $17,614     $22,681
                                                       =========================
</TABLE>


Hardware Sales and Service for the nine months ended March 31, 2001 decreased by
approximately $4.8 million or 35% compared to the same period last year. During
the nine months ended March 31, 2001, hardware sales recognized in the
Asia-Pacific region decreased by approximately $2.7 million, hardware sales
recognized in South America decreased by $1.0 million, hardware sales recognized
in Europe and the Middle East decreased by approximately $1.2 million and
hardware sales recognized in the North American region increased by
approximately $712,000. In addition, revenue generated from Customer Service
decreased by $471,000 in the nine months ended March 31, 2001 compared to the
nine months ended March 31, 2000.

Film Licensing and Prints revenues for the nine months ended March 31, 2001
increased by approximately $1.1 million or 28% compared to the same period last
year. The increase primarily is due to several large multi-year film licenses
signed in the nine months ended March 31, 2001 and several film license
agreements signed with new customers.

Cameras and Other Production Services revenue for the nine months ended March
31, 2001 increased by approximately $138,000 due to higher Facility and Camera
rental revenue. The increase was the result of revenue from film conversions,
which is a new line of business.

Owned and Operated revenue for the nine months ended March 31, 2001 decreased by
approximately $1.6 million as compared to the same period last year, primarily
due to declining sales in the touring division. Revenues generated from the
touring division were approximately $124,000 during the nine months ended March
31, 2001 compared to $1.2 million during the nine months ended March 31, 2000
due to the Company's decision to shut down the touring division during fiscal
2000. Revenues from joint venture venues decreased by approximately $473,000 as
a result of a reclassification of revenues for one joint venture to film
licensing revenue in fiscal 2001 rather than as owned and operated revenue.

COST OF SALES

Cost of sales as a percentage of sales was 76% for the nine months ended March
31, 2001 as compared to 87% for the nine months ended March 31, 2000. The
decrease resulted primarily from shutting down the touring division operations.
For the nine months ended March 31, 2001 the touring division had a negative
gross margin.


                                    Page 12
<PAGE>


SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses decreased to approximately $5.9
million for the nine months ended March 31, 2001 compared to approximately $8.7
million for the nine months ended March 31, 2000, respectively. This decrease
was related to senior management cost containment efforts including marketing,
travel and entertainment expense and office expense and reduced depreciation and
amortization, commission and research and development expense.

IMPAIRMENT OF GOODWILL

In the nine months ended March 31, 2000, the Company recorded a one-time
non-cash write-down to goodwill associated with the acquisition of Omni Film
International. There was no similar write-down in the current fiscal year.

INTEREST INCOME & EXPENSE

Interest income for the nine months ended March 31, 2001 and 2000 was
approximately $90,000 and $153,000, respectively. The decrease resulted
primarily from a reduction in the invested cash balances during the nine months
ended March 31, 2001.

Interest expense for the nine months ended March 31, 2001 and 2000 was
approximately $124,000 and $219,000, respectively. The decrease was primarily
due to reduced notes payable and capital lease obligation balances in the nine
months ended March 31, 2001 as compared to the nine months ended March 31, 2000.

NET LOSS

The Company recorded a net loss of approximately $1.8 million in the nine months
ended March 31, 2001, compared to a net loss of approximately $17.5 million in
the nine months ended March 31, 2000 due to the reasons mentioned above.

FUTURE OPERATING RESULTS

The market for the Company's products is intensely competitive and is undergoing
significant changes, primarily due to technological developments as well as
changing consumer tastes. Numerous companies are developing and are expected to
develop new entertainment products or concepts for the out-of-home entertainment
industry.

There is competition for financial, creative and technological resources in the
industry and there can be no assurance that existing products will continue to
compete effectively or that products under development will ever be competitive.

The Company and its principal competitor in the giant screen market, Imax
Corporation ("Imax"), are aggressively competing, particularly in the United
States market, for new 15 perforation, 70 millimeter format (15/70) theatre
installations. The Company primarily competes in this market based upon the
price and terms of its projection technology. Imax, the dominant competitor in
the market, competes primarily on the basis of its brand identity and its larger
base of installed theatres. These factors, and Imax's access to greater
financial and other resources, are expected to continue to place the Company at
a competitive disadvantage in this market and could have a negative impact on
the Company's gross margins in this market. However, the Company believes there
is potential and is pursuing the 8 perforation, 70 millimeter (8/70) format
theatre market in addition to its 15/70 sales efforts. Imax does not offer an
8/70 product.


                                    Page 13
<PAGE>


In addition to competition in the giant screen market, the Company faces
competition in the simulation industry from a number of other competitors. The
Company competes in this market based upon the breadth of its product offerings
and the size and quality of its film library. Few of its competitors in this
market have sufficient financial resources to effectively compete with the
Company based on these criteria. The Company's competitive position in this
market segment could be materially affected if any of its existing competitors
or a new entrant were to assemble the financial, technical and creative
resources required to effectively compete with the Company's range of product
offerings and film library.

The Company recognizes these competitive issues and is in the process of
creating new products, such as a 3D/4D FXTM specialty attraction system which
includes multiple sensory effects and the development of a new generation of
smaller ride simulation configurations that can accommodate the potential
opportunity in the mass retail environment and movie theatres. The Company
already has made three sales of its new 3D/4D FXTM theatre system. All three of
the sales were in China, the first of which opened in February 2000. The other
two theater systems are scheduled to open in the fourth quarter of fiscal 2001.

The Company has experienced quarterly fluctuations in operating results and
anticipates that these fluctuations will continue in future periods. Operating
results and cash flow can fluctuate substantially from quarter to quarter and
periodically as a result of the timing of theatre system deliveries, contract
signing, the mix of theatre systems shipped, the completion of custom film
contracts, the existence of world expos, the amount of revenues from film
licensing agreements, the timing of sales of ride simulation attractions, the
timing of delivery and installation of such sales (pursuant to percentage of
completion accounting) and any delays therein caused by permitting or
construction delays at the customer's site, the size, type and configuration of
the attractions sold, the timing of film rental payments from existing
attractions and the performance of those attractions that pay film rental based
on a percentage of box office receipts and the timing of sales and marketing
efforts and related expenditures. In particular, fluctuations in theatre system
sales and deliveries from quarter to quarter can materially affect quarterly and
periodic operating results, and theatre system contract signing can materially
affect quarterly or periodic cash flow. Accordingly, the Company's revenues and
earnings in any particular period may not be indicative of the results for any
future period.

The seasonal fluctuations in earnings also may cause volatility in the stock
price 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. 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.
If net sales are below expectations in any given period, the adverse impact on
results of operations may be magnified by Iwerks inability to adjust spending
quickly enough to compensate for the sales shortfall.

Additionally, the Company plans to continue to evaluate and, when appropriate,
make acquisitions of complementary technologies, products or businesses. The
Company will continue to evaluate the changing value of its assets, and when
necessary, make adjustments to these assets. While the Company cannot predict
what effect these various factors may have on its financial results, the
aggregate effect of these and other factors could result in significant
volatility in the Company's future performance and stock price.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities for the nine months ended March 31, 2001
was approximately $250,000. This was primarily attributable to the net loss of
approximately $1.8 million and negative changes in operating assets and
liabilities of approximately $694,000 offset by non-cash charges of
approximately $2.2 million for depreciation and amortization. Investing
activities for the nine months ended March 31, 2001 consisted of purchases of
property and equipment that was offset by the proceeds from the sale of four
portable simulation units. Cash used in financing activities consisted primarily
of principal payments on notes payable and capital leases that were partially
offset by proceeds from the issuance of debt.


                                    Page 14
<PAGE>


At March 31, 2001, the Company had cash and cash equivalents of approximately
$2.4 million. The Company's cash and short-term investment balances have
declined since June 30, 2000 and the Company expects to experience further
declining balances during the remainder of fiscal 2001. Because of the
reductions in the Company's cash balances over the last twenty-one 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 experienced significant
difficulty in accurately projecting its cash balances historically. 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.

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 to 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.

On March 5, 2001, the Company announced the signing of a non-binding letter of
intent for a strategic $2.2 million acquisition of the Company by SimEx Inc., a
Canadian company ("SimEx"). The letter of intent provides that SimEx will
acquire the Company in exchange for $0.63 per share of common stock currently
issued and outstanding. The Company's Board of Directors has approved this
transaction and final completion is subject to due diligence, financing,
execution of binding transaction documents, shareholder approval and other
customary closing conditions. The Company currently anticipates completing the
transaction in the first quarter of fiscal 2002. 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, 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 to be 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 its creditors. The
Company's independent auditors' report contains an emphasis paragraph indicating
there is substantial doubt about the Company's ability to continue as a going
concern.

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


                                    Page 15
<PAGE>


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, 2000 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 financings and to date have had
nominal success. If we are unable to obtain financing on terms acceptable to us,
or at all, or if the transaction with SimEx does not close 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 THERE CAN BE NO ASSURANCE THAT WE WILL BE ABLE
TO ACHIEVE PROFITABLE OPERATIONS IN FISCAL 2001.

         We have not been profitable in five of the last six years and have an
aggregate net loss for the last six years of $59.2 million. During the nine
months ended March 31, 2001, we incurred a net loss of $1.8 million and for the
fiscal year ended June 30, 2000, we incurred a net loss of $22.5 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 cannot assure you that we will be
able to do so and consequently we expect to experience additional losses in
fiscal 2001.

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 the 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


                                    Page 16
<PAGE>


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

         If any of our suppliers suffer 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.

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    competitive 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 popular films is a competitive
advantage and that we must continue to add to this library if we are to be
successful. Film production is expensive. We typically spend $100,000 to
$2,000,000 to produce a film. Although 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 we typically do not recoup our
costs until 2 to 3 years later. 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 substantially 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 in the case of amusement and theme
parks, 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 and these limited resources may harm our business in
many ways. Our competitors may leverage their greater resources to:

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


                                    Page 17
<PAGE>


     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.

         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 cannibalize current products;

     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 revenues may decline and our
financial condition would be adversely affected.

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 46%, 56%, 70% and 56% of our revenues in fiscal 1998, 1999, 2000,
and the nine months ended March 31, 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:


                                    Page 18
<PAGE>


     o    although we denominate our international sales in U.S. dollars,
          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;

     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 PRICE 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 that 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 price
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.


                                    Page 19
<PAGE>


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 or incurred 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 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.


                                    Page 20
<PAGE>


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 21
<PAGE>


PART II - OTHER INFORMATION



ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

          a.   EXHIBITS:

               None.

          b.   REPORTS ON FORM 8-K FILED DURING THE QUARTER ENDED MARCH 31, 2001

               A Form 8-K was filed on March 7, 2001, Item 5, regarding a press
               release dated March 5, 2001.


                                    Page 22
<PAGE>


                                   SIGNATURES

Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has caused this report to be signed on its behalf by
the undersigned thereunto duly authorized, in the city of Burbank, State of
California on the 14th day of May, 2001.



                           IWERKS ENTERTAINMENT, INC.
                                  (Registrant)


                             By: /S/ JEFFREY M. DAHL
                                --------------------
                              Senior Vice President
                             Chief Financial Officer
                           (Principal Finance Officer)


                              By: /S/ DEBRA L. WISE
                                 -------------------
                           Vice President / Controller
                         (Principal Accounting Officer)


DATE: MAY 14, 2001


                                    Page 23