===========================================================================

                    SECURITIES AND EXCHANGE COMMISSION
                          WASHINGTON, D.C. 20549

                                 FORM 10-Q

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

             For the quarterly period ended December 31, 1997

[   ]  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 IDENTIFICATION NO.)
       OF INCORPORATION OR ORGANIZATION)



                         4540 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)

        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 and
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     .
    -----  -----

As of February 5, 1998, the Registrant had 12,161,250 shares of Common
Stock, $.001 par value, issued and outstanding.



===========================================================================

<PAGE>


                        IWERKS ENTERTAINMENT, INC.
                 Form 10-Q for the Quarter and Six Months Ended
                             December 31, 1997

                                   INDEX

                                                                       PAGE
                                                                       ----

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS
-----------------------------

Condensed Consolidated Balance Sheets as of December 31, 1997
and June 30, 1997                                                         2

Condensed Consolidated Balance Sheets Liabilities and Stockholders'
Equity as of December 31, 1997 and June 30, 1997                          3

Condensed Consolidated Statements of Operations for the Three and 
Six Months ended December 31, 1997 and 1996                               4

Condensed Consolidated Statements of Cash Flows for the Six 
Months Ended December 31, 1997 and 1996                                   5

Notes to the Condensed Consolidated Financial Statements                  6


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
         FINANCIAL CONDITION AND RESULTS OF OPERATIONS                    9

PART II - OTHER INFORMATION                                                

ITEM 1 - LEGAL PROCEEDINGS
--------------------------                                               17

ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K                                17
------------------------------------------
Signatures                                                               18


Page 1
<PAGE>
                        IWERKS ENTERTAINMENT, INC.
                   CONDENSED CONSOLIDATED BALANCE SHEETS
                                  ASSETS
                              (IN THOUSANDS)

<TABLE>
<CAPTION
                                              December 31,        June 30,
                                                 1997               1997
                                              ------------        --------
                                               (unaudited)        (audited)
<S>                                       <C>                  <C>
Current assets:

Cash and cash equivalents                         $    3,662     $    3,608
Short-term investments                                13,718         15,459
Trade accounts receivable, net
  of allowance for doubtful
  accounts                                             3,040          5,447
Costs and estimated earnings in
  excess of billings on uncompleted 
  contracts                                             2,738          6,339
Inventories and other current
  assets                                                3,899          4,402
                                                   ---------     ----------

    Total Current Assets                              27,057         35,255

Portable simulation theaters at
  cost, net of accumulated depreciation                3,711          4,018
Property and equipment at cost,
  net of accumulated depreciation                      3,871          2,920
Film inventory at cost, net of
  amortization                                         4,972          3,439
Goodwill, net of amortization                         15,054         15,367
Investment in joint ventures
  and other assets                                     3,185          3,530
                                                   ---------      ---------

       Total assets                                $  57,850      $  64,529
                                                   =========      =========

</TABLE>


                          See accompanying notes

Page 2
<PAGE>

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

<TABLE>
<CAPTION>
                                          December 31,           June 30,
                                              1997                 1997
                                           -----------           ---------
                                           (unaudited)           (audited)

<S>                                     <C>               <C>
Current liabilities:                                                    
  Accounts payable                          $     2,164        $    3,435

  Accrued expenses                                6,419             8,793

  Notes payable, current portion                     --                81

  Billings in excess of costs and
     estimated earnings on uncompleted
     contracts                                    2,507               990

  Deferred revenue                                  176               278

  Capital leases, current portion                   693               739
                                             ----------         ---------

     Total current liabilities                   11,959            14,316
                                                                         
Capital lease obligations, excluding 
  current portion                                 1,511             1,827

Stockholders' equity:                                  

  Preferred stock, $.001 par value,
     1,000,000 authorized, none issued
     and outstanding                                 --                --

  Common stock, $.001 par value,
     50,000,000 authorized; issued and
     outstanding 12,161,250 and 12,160,102, 
     respectively                                    57                57

  Additional paid-in capital                     78,016            78,016

  Accumulated deficit                           (33,693)          (29,687)
                                             ----------         ---------

Total stockholders' equity                       44,380            48,386
                                             ----------         ---------
  Total liabilities and
     stockholders' equity                     $  57,850         $  64,529
                                             ==========         =========
</TABLE>


                          See accompanying notes.

Page 3
<PAGE>


                        IWERKS ENTERTAINMENT, INC.
              CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
                                (Unaudited)
                   (In Thousands, Except Per Share Amounts)


<TABLE>
<CAPTION>
                               For the Three Months       For the Six Months
                                 Ended December 31,       Ended December 31,
                               ---------------------     -------------------
                                   1997        1996       1997        1996
                                 ---------   -------     -------     -------
<S>                               <C>        <C>         <C>        <C>

Revenue                            $5,989     $10,023    $14,041    $19,618

Cost of sales                       5,168       6,955      9,957     13,192
                                  -------     -------    -------    -------

  Gross profit                        821       3,068      4,084      6,426

Selling, general, and
  administrative expenses           4,311       3,322      7,916      6,703

Merger related expenses
(note 6)                              218           -        531          -
                                  -------      ------     ------     ------

  Loss from operations             (3,708)       (254)    (4,363)      (277)

  Interest income                     272         296        491        610

  Interest expense                     64          99        134        216
                                  -------      ------      ------    -------

  Net income (loss)               $(3,500)       $(57)    $(4,006)      $117
                                  =======      ======     =======    =======

  Basic and diluted income 
  (loss) per common share 
  (note 4)                        $(0.29)       $0.00    $ (0.33)      $0.01
                                  ======       ======    =======     =======
Weighted average shares 
  outstanding - Basic              12,161      11,715     12,160      11,675
                                  =======      ======    =======     =======

Weighted average shares 
  outstanding - Diluted            12,161      11,715     12,160      12,335
                                  =======      ======    =======     =======

</TABLE>
                              See accompanying notes.

Page 4
<PAGE>


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

<TABLE>
<CAPTION>

                                          For the six months ended 
                                                  December 31,
                                           ----------------------
                                             1997            1996
                                          --------         --------
<S>                                       <C>             <C>
Operating Activities                                                                    
Net income (loss)                          $   (4,006)    $      117
Depreciation and amortization                   2,259          2,810
Changes in operating assets and
  liabilities                                   4,673         (2,855)
                                           ----------     ----------
  Net cash provided by operating
    activities                                  2,926             72
                                           ----------     ----------

Investing Activities                                                
Investment in joint ventures                     (208)          (673)
Investment in portable simulation
  theaters                                        (45)          (108)
Purchases of property and
  equipment                                    (1,399)          (365)
Additions to film inventory                    (2,518)          (698)
Investment in debt securities                   1,741         (3,056)
                                            ---------      ---------
  Net cash used in investing
    activities                                 (2,429)        (4,900)
Financing Activities                                                                    
Repayment of notes payable                        (81)        (1,188)
Payments on capital leases                       (362)          (304)
Exercise of stock options                           -            312
                                            ---------      ---------
  Net cash used in financing
    activities                                   (443)        (1,180)
                                            ---------      ---------
Net increase (decrease) in cash                    54         (6,008)
Cash and cash equivalents at
  beginning of period                           3,608         12,674
                                            ---------      ---------
Cash and cash equivalents at end
  of period                                  $  3,662      $   6,666
                                            =========      =========

Supplemental disclosures of cash 
flow information:                                                                       
  Cash paid during the period for
    interest                                 $    131      $     233
                                            =========      =========
  Cash paid during the period for
    income taxes                             $      8      $      --
                                            =========      =========

</TABLE>

                          See accompanying notes.

Page 5
<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 generally
accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations, although the Company believes that the
disclosures made are adequate to make information presented not misleading.
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial position
of the Company as of December 31, 1997 and the results of its operations
for the three and six months ended December 31, 1997 and 1996 and the cash
flows for the six months ended December 31, 1997 and 1996 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.

NOTE 2 - INCOME TAXES
---------------------

     At June 30, 1997, the Company had available federal and state tax net
operating loss carryforwards of approximately $18,650,000 and $7,720,000,
respectively expiring through 2012.  As a result of these net operating
losses 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.


Page 6
<PAGE>


NOTE 3 - DEPRECIATION AND AMORTIZATION
--------------------------------------

     Depreciation expense and amortization expense for 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>

                                     Three Months Ended       Six Months Ended 
                                        December 31,             December 31,
                                  -----------------------     ---------------------
                                   1997          1996          1997          1996
                                  ---------     ---------     --------     --------
<S>                            <C>           <C>          <C>          <C>
Depreciation and
  amortization on fixed
  assets                        $   230,000   $   294,000  $   448,000  $   574,000
Depreciation on touring
  equipment                         184,000       373,000      352,000      740,000
Amortization of film                367,000       449,000      985,000    1,033,000
Amortization of goodwill
  and other                         227,000       232,000      474,000      463,000
                                -----------   -----------  -----------  -----------
Total depreciation and
  amortization                  $ 1,008,000   $ 1,348,000  $ 2,259,000  $ 2,810,000
                                ===========   ===========  ===========  ===========

</TABLE>

Depreciation and amortization included in cost of sales was $561,000 and
$836,000 for the quarter ended December 31, 1997 and 1996, respectively,
and $1,356,000 and $1,800,000 for the six months ended December 31, 1997
and 1996, respectively.

NOTE 4 - NET (LOSS) INCOME PER COMMON SHARE:
--------------------------------------------

     In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, Earnings Per Share, which is effective for annual and
interim financial statements issued for periods ending after December 15,
1997. The statement requires restatement of prior years' earnings per share
("EPS").  SFAS No. 128 was issued to simplify the standards for calculating
EPS previously found in APB No. 15, Earnings Per Share. SFAS 128 replaces
the presentation of primary EPS with a presentation of basic EPS.  Basic
EPS excludes the dilutive effects of stock options and warrants. Under the
provisions of FAS 128, basic and diluted EPS were the same for the periods
reported herein.

NOTE 5 - LITIGATION
-------------------

     On or about February 5, 1998, the Company received notice of a
complaint filed in the US District Court of New York by a subsidiary of
IMAX Corporation alleging that the pending merger with Showscan
Entertainment, Inc. is in violation of the Sherman and Clayton Anti-trust
Acts. The Company believes that the suit is without merit and intends to
vigorously defend itself.

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

Page 7
<PAGE>

NOTE 6 - PROPOSED MERGER WITH SHOWSCAN ENTERTAINMENT, INC.
----------------------------------------------------------

     On August 5, 1997, Iwerks and Showscan Entertainment, Inc. (Showscan)
announced that they signed a definitive agreement to merge. This agreement
was amended December 29, 1997. 

     The amended merger agreement calls for each share of Showscan Common
Stock to be converted into 0.62 of a share of Iwerks' Common Stock. 
Outstanding Showscan Preferred Stock will be exchanged for Iwerks' Common
Stock at the 0.62 ratio on an as converted basis.  Iwerks expects to issue
approximately 4.0 million shares of Iwerks' Common Stock in the merger
(plus shares issuable upon exercise of outstanding Showscan options,
warrants and 8% Convertible Notes) resulting in an estimated transaction
value of approximately $10.0 million at February 9, 1998 (based on closing
price of Iwerks' Common Stock on the NASDAQ National Market of $2.50 per
share). The transaction will be accounted for as a pooling of interests,
after which Showscan will become a wholly owned subsidiary of the Company.
Under the pooling rules, the costs incurred in consummating the merger are
expensed as incurred, as such the Company has expensed $218,000 and
$531,000 for the three and six months ended December 31, 1997,
respectively. Further, if the merger is consummated, the Company expects to
incur an additional $5.8 million in expenses related to investment banking,
legal, accounting, printing, severance, estimated cost to sublease
Showscan's current facility, relocation costs, write-offs  associated with
equipment which the combined company will not utilize, and other expenses,
some of which will be incurred even if the merger is not consummated.

     Completion of the Merger is subject to approval by the stockholders of
the Company and Showscan, as well as other customary closing conditions. If
shareholder approval is not obtained or other closing conditions are not
satisfied or if the parties mutually agree to terminate or modify the terms
of the merger agreement, the transaction may not be consummated pursuant to
the existing terms of the merger agreement, or at all. The stockholders
meetings are expected to occur in March, 1998.

NOTE 7 - NEW ACCOUNTING PRONOUNCEMENTS
--------------------------------------

     In June 1997, the FASB issued Statement No. 130, Reporting
Comprehensive Income.  The Statement establishes standards for the
reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. The Statement applies to all
enterprises that provide a full set of general purpose financial
statements. The Statement becomes effective for all financial statements
for fiscal years beginning after December 15, 1997, with earlier
application permitted. Further, in June 1997, the FASB issued Statement No.
131, Disclosures about Segments of an Enterprise and Related Information.
The Statement changes the way public companies report segment information
in annual financial statements and also requires those companies to report
selected segment information in interim financial reports to shareholders.
The Statement becomes effective for all financial statements for fiscal
years beginning after December 15, 1997, with earlier adoption permitted.
The Company has reviewed those Statements and does not believe that they
will have a material impact on its financial statements and related
disclosures.

Page 8
<PAGE>

Note 8 - Subsequent Events
--------------------------

     In January 1998, the Company reduced its workforce by approximately
13% after which the Company has approximately 131 employees.  In an
unrelated event, on February 20, 1998, Charles Goldwater was
appointed Chief Executive Officer, President and Chairman of the Board,
succeeding Roy A. Wright.  The Company anticipates accruing approximately
$1.7 million in third quarter of fiscal 1998 for severance and related
expense with respect to the foregoing. 

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

GENERAL
-------

     The Company is engaged in the business of designing, engineering,
manufacturing, marketing and servicing specialty theatre systems which
employ a variety of projection, show control, ride simulation and software
technologies. The Company is currently in the business of: (a) selling and
installing ride simulation attractions in specialty theatres, (b) selling
and installing giant screen 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) licensing and distributing the
films in its library to ride simulation theatres previously sold by the
Company, (d) producing films in the 5/70, 8/70 and 15/70 film format for
its film library as well as producing films in these formats for third
parties, (e) investing in joint ventures by contributing its ride
simulation technology, design and equipment and participating in the
theatre profits, and (f) operating a fleet of 16 mobile ride simulation
attractions.

     The following sections contain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve risks and uncertainties such that actual
results may vary materially. Certain factors that may affect the Company's
results and financial condition over the next few quarters are discussed
under the caption "future operating results" below. Other factors that may
affect such results and financial condition are set forth in the Company's
Annual Report on Form 10-K as filed with the Securities and Exchange
Commission.

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

     The Company derives its revenues primarily from three sources:  sales
of hardware systems, owned and operated (primarily portable simulation
theatres), and licensing of films. To a lesser extent, revenues are also
earned from service to existing theatre owners and production of films for
third parties. The following table presents summary information regarding
revenues (amounts in thousands):


<TABLE>
<CAPTION>

                                              Periods Ended December 31,
                                       Three Months               Six Months
                                    -----------------           ----------------
                                    1997           1996        1997           1996
                                   ------         ------      ------         ------
<S>                          <C>            <C>         <C>            <C>
Hardware Sales & Service          $ 3,620       $  7,366    $  7,092       $ 12,358
Owned and Operated                    860          1,278       4,040          4,547
Film Licensing                      1,415          1,277       2,759          2,506
Film Production and Other              94            102         150            207
                                  -------       --------    --------      ---------

 Total                            $ 5,989       $ 10,023    $ 14,041       $ 19,618
                                  =======       =========   ========       =========

</TABLE>


Page 9
<PAGE>

     Revenues on sales of theatre systems are recognized on the percentage-of-
completion method over the life of the contract.  Accordingly, the timing
of shipment schedules as dictated by the customer can result in variability
of quarterly revenues and earnings.  The gross margin for each contract
varies based upon pricing strategies, competitive conditions and product
mix.

     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 Iwerks' contractual share of the sites' revenues or profits as
applicable. Admission revenues from the portable ride simulation theatres
are subject to variability due to the seasonal nature of these events and
are higher during the summer months.  Sponsorship and contract revenues for
the portable theatres are recognized ratably over the term of the contract.

     The Company typically licenses its film software under one year film
license agreements.  Revenues and related expenses are recognized at the
beginning of the license period at which time the customer is billed the
license fee and film is delivered to the customer.

COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 1997 TO THREE MONTHS
ENDED DECEMBER 31, 1996

REVENUES

     Hardware sales and service revenue decreased by approximately $3.7
million as compared to the same period last year. Sales recognized from
Asian customers decreased by approximately $3.8 million as compared to the
prior year. The Company has experienced a decline in the signing of new
sales contracts in Asia, which adversely impacted simulation hardware
revenue in the second quarter of fiscal 1998 and will have a negative
impact on sales in future periods. Management believes this decline is
primarily due to the Asian economic crisis. Typically, sales are
denominated in U.S. dollars and are backed by letters of credit, which
reduce the risks attendant to international sales.

     Owned and operated revenue decreased by approximately $418,000 as
compared to the same period last year, primarily due to a reduction in
sponsorship revenue relating to the portable simulation theatres. The
Company expects the lower touring sponsorship sales trends to continue to
adversely affect results for the remainder of fiscal 1998 and may continue
into future periods. The Company continues to actively seek alternatives to
increase the utilization of the 16 touring ride simulators.

     Film licensing revenue increased by 10.8% as a result of the increasing 
base of installed theatres that license the Company's film software.

COST OF SALES AND GROSS PROFIT MARGIN

     The total gross profit margin percentages for the three months ended
December 31, 1997 and 1996 were 13.7% and 30.6%, respectively. The decrease
in gross profit margin in the 1997 quarter compared to the same quarter in 
1996 is primarily related 

Page 10
<PAGE>

to the portable simulation theatre business. This business segment has 
significant fixed cost of sales regardless of revenue fluctuations. 
Therefore, as sales decreased, due to a decline of sponsorship revenue,
and costs of sales remained relatively constant, the gross margin was 
negatively impacted. The gross profit margin on the other revenue 
sources were generally consistent with the prior year's 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 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 increased for the three
months ended December 31, 1997 by approximately $989,000 over the same
period in the prior year. This increase was primarily due to increased
research and development efforts, additional bad debt expense, higher
insurance costs and additional marketing expenses.

INTEREST INCOME AND EXPENSE

     Interest income for the three months ended December 31,1997 and 1996
was $272,000 and $296,000, respectively, and is derived from the Company's
investments, primarily in U.S. Treasury Notes. The decrease in interest
income resulted primarily from the decrease in the invested balances in the
comparable periods.

COMPARISON OF SIX MONTHS ENDED DECEMBER 31, 1997 TO SIX MONTHS ENDED
DECEMBER 31, 1996

REVENUES

     Hardware sales and service revenue decreased by approximately $5.3
million as compared to the same period last year. Sales recognized from
Asian customers decreased by approximately $5.4 million as compared to the
same period in the prior year. The Company has experienced a decline in the 
signing of new sales contracts in Asia, which adversely impacted simulation 
hardware revenue in the six months ended December 31, 1997 and will have a 
negative impact on sales in future periods. Management believes this decline 
is primarily due to the Asian economic crisis. Typically, sales are
denominated in U.S. dollars and are backed by letters of credit, which
reduce the risks attendant to international sales.

     Owned and operated revenue decreased by approximately $507,000 as
compared to the same period last year, primarily due to a reduction in
sponsorship revenue relating to the portable simulation theatres.

     Film licensing revenue increased by 10.1% as a result of the increasing 
base of installed theatres that license the Company's film software.

Page 11
<PAGE>

COST OF SALES AND GROSS PROFIT MARGIN

     The total gross profit margin percentages for the six months ended
December 31, 1997 and 1996 were 29.1% and 32.8%, respectively. The decrease
in gross profit margin was primarily related to the portable simulation
theatre business.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

     Selling, general and administrative expenses increased for the six
months ended December 31, 1997 by approximately $1.2 million over the same
period in the prior year. This increase was primarily due to increased
research and development efforts, additional bad debt expense, higher
insurance costs and additional marketing expenses.

MERGER RELATED EXPENSES

     On August 5, 1997, the Company and Showscan Entertainment, Inc.
announced an agreement to merge. The merger agreement was subsequently
amended on December 29, 1997 (see note 6 of Notes to Condensed Consolidated
Financial Statements). The transaction will be accounted for as a pooling
of interest, consequently all transaction related costs are to be expensed
in the period incurred. During the quarter and six months ended December
31, 1997, the Company incurred $218,000 and $531,000 of transaction
expenses. The Company expects to incur additional transaction expenses in
the next quarter (regardless of whether the merger is consummated).

IMPACT OF YEAR 2000

     Some of the Company's older computer programs were written using two
digits rather than four to define the applicable year. As a result, those
computer programs have time-sensitive software that recognize a date using
"00" as the year 1900 rather than the year 2000. This could cause a system
failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities.

     The Company has completed an assessment of its existing software
systems and after reviewing various factors, one of which being the year
2000 issue, has decided to replace its key manufacturing and financial
software systems. The new systems will function properly with respect to
dates in the year 2000 and thereafter. The total project cost is estimated
at approximately $400,000 which includes $300,000 for the purchase and
implementation of new software and hardware that will be capitalized and
approximately $100,000 that will be expensed as incurred. To date, the
Company has incurred approximately $25,000.

     The project is estimated to be completed not later than June 30, 1999,
which is prior to any anticipated impact on its operating systems. The
Company believes that with conversions to new software, the Year 2000 Issue
will not pose significant operational problems for its computer systems.

Page 12
<PAGE>

     The costs of the project and the date on which the Company believes it
will complete the conversion are based on management's best estimates,
which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.

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 severe 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 has experienced a significant decline in revenues in
recent periods. Historically, a substantial portion of the Company's
revenues from new hardware sales in the ride simulation market have
originated in international markets, particularly in Asia. The Company
began to experience a significant decline in new hardware contracts during
the fourth quarter of fiscal 1997, which trend has continued through the
first six months of fiscal 1998.  This trend has been exacerbated by the
recent economic crisis experienced in this region. While the Company is
placing greater focus on other markets, particularly the United States,
Latin America and Europe, the trend of declining sales in Asia is expected
to have a continuing negative impact on the Company's revenues through the
remainder of fiscal 1998 and may have a continuing negative impact in
future periods.

     The Company and its principal competitor in the large screen market,
Imax Corporation, are aggressively competing, particularly in the United
States market, for new theater 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 film library.  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
over time.

     Revenues from the Company's owned and operated attractions (primarily
portable simulation theaters) have been declining since the first quarter
of fiscal 1997 when the Company lost its principal sponsorship contract
with AT&T. While the Company has been aggressively pursuing other
sponsorship opportunities since that time, it has not been successful in
fully replacing this revenue source. Because this segment of the Company's
business has a significant level of fixed costs regardless of fluctuations
in revenues, the Company's gross margins will continue to be adversely
impacted unless it is able to secure alternate sources of revenue or
disposes of all or a portion of this business segment or otherwise
eliminates a portion of the fixed costs associated with its operation.

Page 13
<PAGE>


     Iwerks has entered into a merger agreement with Showscan
Entertainment, Inc. with the expectation that the transaction will result
in beneficial synergies for the combined business. Achieving these
anticipated business benefits will depend in part on whether the operations
of Showscan can be integrated with the operations of Iwerks in an
efficient, effective and timely manner. There can be no assurance that this
will occur. The combination of the companies will require, among other
things, integration of the companies' management staffs, coordination of
the companies' sales and marketing efforts, integration and coordination of
the companies' film production and distribution efforts, acceptance by the
companies' respective theater networks of film software originally produced
in the other company's format, and the identification and elimination of
redundant and/or unnecessary overhead. Further, the integration of
operations of the companies following the Merger will require the
dedication of management resources, which may temporarily distract
management's attention from the day-to-day business of the combined
business. The inability of management to integrate successfully the
operations of the companies could have an adverse effect on the business
and results of the combined business. In addition, even if the operations
of the companies are ultimately successfully integrated, it is anticipated
that the integration will be accomplished over time and, in the interim,
the combination may have an adverse effect on the business, results of
operations and financial condition of the combined business.  

     Iwerks currently is evaluating the operations of the business of
Showscan for purposes of developing a plan for the integration of the
business to be acquired with Iwerks' existing operations. Although this
plan is not complete, it is anticipated that a significant restructuring of
the combined operations will be required as a result of the Merger. As a
consequence of this restructuring and the consummation of the Merger,
Iwerks anticipates that the combined companies will incur one-time
restructuring and related charges of $6.9 million of which $1.2 million has
been recorded in the fourth fiscal quarter of 1997 and the first six months
of fiscal 1998. Further, assuming the Merger is consummated in the third
quarter of fiscal 1998 and that the transaction costs associated with the
Merger are paid in that quarter, the combined company expects to have a
significant decline in its cash and short-term investment balances from 
those existing at December 31, 1997 which, on a combined basis was $19.6 
million.

     The Merger will be accounted for on a pooling of interests basis.
Under the pooling rules, the historical financial results of Iwerks will be
restated to reflect the combination, following certain adjustments.
Following the consummation of the Merger, the historical results of Iwerks
will be restated to reflect the historical profits and losses of Showscan.
Showscan generated profits in each of fiscal years ended 1995 and 1996 and
incurred losses in the fiscal year ended March 31, 1997 and in the first
nine months of fiscal 1998.

     The combined effect of the restructuring and other charges discussed
above and the pooling accounting treatment in the Merger will have an
adverse effect on the results of operations of Iwerks in each of the first,
second and third fiscal quarters of 1998.

     Iwerks 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 theater system
deliveries, contract signing, sponsorships, the mix of theater systems
shipped, the completion of custom film contracts, the existence of world
expos, amount of revenues from portable simulation 

Page 14
<PAGE>

theater and 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 and the timing of
sales and marketing efforts and related expenditures. In particular,
fluctuations in theater system sales and deliveries from quarter to quarter
can materially affect quarterly and periodic operating results, and theater
system contract signing can materially affect quarterly or periodic cash
flow. Accordingly, Iwerks' 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 Iwerks. While a significant portion of Iwerks' expense
levels are relatively fixed, the timing of increases in expense levels is
based in large part on Iwerks' 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 Iwerks' inability to adjust spending quickly
enough to compensate for the sales shortfall. Iwerks may also choose to
reduce prices or increase spending in response to market conditions, which
may have a material adverse effect on Iwerks' results of operations.

     Additionally, the Company plans to continue to evaluate and, when
appropriate, make acquisitions of complimentary technologies, products or
businesses. The Company will continue to evaluate the changing value of its
assets, and when necessary, make adjustments thereto. 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
-------------------------------

     The Company's operating activities for the six months ended December
31, 1997 generated positive cash flow of $2.9 million. This was mainly due
to the net loss of $4.0 million offset by non-cash charges of $2.3 million
for depreciation and amortization along with changes in operating assets
and liabilities of $4.7 million. Investing activities for the six months
ended December 31, 1997 consisted primarily of investments in film
inventory and purchases of property and equipment partially offset by
investments in debt securities. Cash used in financing activities consisted
primarily of payments for notes payable and capital leases.

     At December 31, 1997, the Company had cash and short-term investments
of approximately $17.4 million. In addition, the Company maintains a bank
line of credit in the amount of $5 million. At December 31, 1997 and 1996,
there were no amounts outstanding on the line of credit. At December 31,
1997 the Company was not in compliance with respect to certain financial
covenants relating to the bank line of credit. The Company and the bank
have decided to renegotiate the line of credit pending the merger with
Showscan. The Company anticipates that its investment activities, financing
activities, along with the proposed merger related costs will use cash and
expects that its cash balance will decline in Fiscal 1998. If the proposed
merger with Showscan is consummated, it is anticipated that the transaction
fees associated with the merger after December 31, 1997, which 

Page 15
<PAGE>

affect cash, would be approximately $4.5 million which would be offset by 
any cash received from Showscan as a result of the merger. However, with the
existing cash balances and short-term investments in debt securities on
hand at December 31, 1997, the Company believes that it has adequate
liquidity to meet its cash requirements for at least the next twelve
months, after which time it may be required to raise additional cash
through the sale of equity or debt securities. In addition, to the extent
the Company experiences growth in the future, or its cash flow from
operations is less than anticipated, the Company may be required to obtain
additional sources of cash.

Page 16
<PAGE>


PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
--------------------------

     On or about February 5, 1998, the Company received notice of a
complaint filed in the U.S. District Court of New York by a subsidiary of
IMAX Corporation alleging that the pending merger with Showscan
Entertainment, Inc. is in violation of the Sherman and Clayton Anti-trust
Acts.  The Company believes that the suit is without merit and intends to
vigorously defend itself.

     The Company is a party to various actions arising in the ordinary
course of business which, in the opinion of management, will not have a
material adverse impact on the Company's financial condition; 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 and results of
operations.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
-----------------------------------------

(a)  Exhibits:

     10.1      Separation Agreement dated October 31, 1997 between the      
               Company and Roy A. Wright.
     10.2      Separation Agreement dated October 31, 1997 between the      
               Company and Bruce Hinckley.
     10.3      Separation Agreement dated October 31, 1997 between the      
               Company and William J.
               Battison, III.
     10.4      Separation Agreement dated October 31, 1997 between the      
               Company and Catherine Giffen.
     10.5      Separation Agreement dated October 31, 1997 between the      
               Company and Jon Corfino.
     10.6      Separation Agreement dated October 31, 1997 between the      
               Company and Curt Thornton.
     11.1      Earnings per share
     15.1      Auditors consent regarding unaudited Interim Financial
               Information
     27.1      Schedule of financial data
     99.1      Independent Accountants' Review Report

(b)  Reports on Form 8-K filed during the quarter ended December 31, 1997:

     A report on Form 8-K was filed December 30, 1997 relating to a press
release announcing the amendment to the proposed Showscan merger.

Page 17
<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 23 day of February, 1998.



                        IWERKS ENTERTAINMENT, INC.
                               (Registrant)





By:   /S/BRUCE C. HINCKLEY
      ----------------------
Executive Vice President/Chief Financial Officer (Principal Finance
Officer)




By:  /S/JEFFREY M. DAHL
     ------------------
Vice President / Controller (Principal Accounting Officer)