<PAGE>
 
================================================================================

                      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, 1996

[ ]  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 3, 1997, the Registrant had 11,835,241 shares of Common
     Stock, $.001 par value, issued and outstanding.

================================================================================
<PAGE>
 
                          IWERKS ENTERTAINMENT, INC.

                                     INDEX


<TABLE>
<CAPTION>
                                                                  Page
                                                                  ----

<S>                                                               <C>
PART I - FINANCIAL INFORMATION
 
ITEM 1 - FINANCIAL STATEMENTS
-----------------------------
 
Condensed Consolidated Balance Sheets as of December 31, 1996
and June 30, 1996                                                   2
 
Condensed Consolidated Statements of Operations for the Three
and Six Months Ended December 31, 1996 and 1995                     4
 
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended December 31, 1996 and 1995                             5
 
Notes to the Condensed Consolidated Financial Statements            6
 
 
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
------------------------------------------------
     FINANCIAL CONDITION AND RESULTS OF OPERATIONS                  8
     ---------------------------------------------
 
PART II - OTHER INFORMATION
 
ITEM 1 - LEGAL PROCEEDINGS                                         11
--------------------------
 
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS       11
------------------------------------------------------------
 
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K                          11
-----------------------------------------
 
Signatures                                                         12
 
</TABLE>

                                       1
<PAGE>
 
                          IWERKS ENTERTAINMENT, INC.
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                    ASSETS
                                (in thousands)
<TABLE>
<CAPTION>
 
                                                   December 31, 1996    June 30, 1996
                                                   ------------------   -------------
                                                      (unaudited)
<S>                                                <C>                  <C>
Current assets:
 
 Cash and cash equivalents                               $ 6,666          $12,674
                                                        
 Short-term investments                                   15,662            6,782
                                                        
 Trade accounts receivable, net of allowance            
  for doubtful accounts                                    4,562            4,872
                                                        
 Costs and estimated earnings in excess of              
  billings on uncompleted contracts                        6,520            5,583
                                                        
 Inventories and other current assets                      5,388            3,166
                                                         -------          -------
                                                        
   Total current assets                                   38,798           33,077
                                                        
Investment in debt securities, excluding                
 current portion                                               -            5,826
                                                        
Properties, net:                                        
                                                        
 Portable simulation theaters at cost, net of           
  accumulated depreciation                                 8,452            9,084
                                                        
 Property and equipment at cost, net of                 
  accumulated depreciation and amortization                3,462            3,519
                                                        
 Film inventory at cost, net of amortization               3,037            3,372
                                                        
                                                        
                                                        
Goodwill, net of amortization                             16,908           17,360
                                                        
Other assets                                               1,567              688
                                                         -------          -------
                                                        
  Total assets                                           $72,224          $72,926
                                                         =======          =======
</TABLE>

                            See accompanying notes.

                                       2
<PAGE>
 
                          IWERKS ENTERTAINMENT, INC.
               CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
                     LIABILITIES AND STOCKHOLDERS' EQUITY
                     (in thousands, except share amounts)
<TABLE>
<CAPTION>
 
                                                             December 31, 1996    June 30, 1996
                                                             ------------------   --------------
                                                                (unaudited)
<S>                                                          <C>                  <C>
Current liabilities:
 Accounts payable                                                  $  3,131         $  2,634
 Accrued expenses                                                     6,589            7,667
 Notes payable to related parties, current portion                        -              875
 Notes payable, current portion                                         338              571
 Billings in excess of costs and estimated                       
  earnings on uncompleted contracts                                   2,030            1,106
 Deferred revenue                                                        80               61
 Capital leases, current portion                                        704              615
                                                                   --------         --------
                                                                 
 Total current liabilities                                           12,872           13,529
                                                                 
Notes payable, excluding current portion                                  -               81
Capital lease obligations, excluding current portion                  2,257            2,651
                                                                 
Stockholders' equity:                                            
 Preferred stock $.001 par value, 1,000,000 authorized,          
  none issued and outstanding                                             -                -
 Common stock, $.001 par value, 20,000,000 shares                
  authorized; issued and outstanding  11,770,135                 
  and 11,588,048, respectively                                           57               56
 Additional paid-in-capital                                          76,652           76,340
 Accumulated deficit                                                (19,614)         (19,731)
                                                                   --------         --------
Total stockholders' equity                                           57,095           56,665
                                                                   --------         --------
                                                                 
Total liabilities and stockholders' equity                         $ 72,224         $ 72,926
                                                                   ========         ========
 
 
</TABLE>



                            See accompanying notes.

                                       3
<PAGE>
 
                          IWERKS ENTERTAINMENT, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (unaudited)
                     (in thousands, except share amounts)

<TABLE>
<CAPTION>
 
 
                                           For the Three Months Ended    For the Six Months Ended
                                                  December 31,                  December 31,
                                              1996           1995           1996          1995
                                           -----------    -----------    -----------   -----------
<S>                                        <C>            <C>            <C>           <C>
Revenue                                    $    10,023    $    13,207    $    19,618   $    23,303
 
Cost of sales                                    6,955          8,239         13,192        13,959
                                           -----------    -----------    -----------   -----------
 
  Gross profit                                   3,068          4,968          6,426         9,344
 
Selling, general, and administrative
 expenses                                        3,217          4,579          6,419         8,821
 
Research and development                           105             69            284           159
                                           -----------    -----------    -----------   -----------
 
  Income (loss) from operations                   (254)           320           (277)          364
 
Interest income                                    296            388            610           593
Interest expense                                    99            104            216           212
                                           -----------    -----------    -----------   -----------
 
  Net income (loss)                        $       (57)   $       604    $       117   $       745
                                           ===========    ===========    ===========   ===========
 
  Net income (loss) per common share       $      0.00    $      0.05    $      0.01   $      0.06
                                           ===========    ===========    ===========   ===========
 
Weighted average shares outstanding         11,714,916     11,804,155     12,334,924    11,750,455
                                           ===========    ===========    ===========   ===========
 
</TABLE>

                            See accompanying notes.

                                       4
<PAGE>
 
                          IWERKS ENTERTAINMENT, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (unaudited)
                                (in thousands)
<TABLE>
<CAPTION>
 
                                                            For the Six Months Ended
                                                                  December 31,
                                                           --------------------------
                                                               1996          1995
                                                           ------------   -----------
<S>                                                        <C>            <C>
OPERATING ACTIVITIES
Net income                                                   $   117       $   745
Depreciation and amortization                                  2,810         3,518
Changes in operating assets and liabilities                   (2,855)       (3,252)
                                                             -------       -------
  Net cash provided by operating activities                       72         1,011
                                                             
INVESTING ACTIVITIES                                         
Investment in joint ventures                                    (673)            -
Investment in portable simulation theaters                      (108)         (140)
Purchases of property and equipment                             (365)         (222)
Additions to film inventory                                     (698)          (67)
Purchase of short-term investments                           
 and investment in debt securities, net                       (3,056)       (3,377)
                                                             -------       -------
  Net cash provided by (used in) investing activities         (4,900)       (3,806)
                                                             
FINANCING ACTIVITIES                                         
Repayment of notes payable                                    (1,188)       (1,012)
Payments on capital leases                                      (304)          (62)
Exercise of stock options                                        312           144
Retirement of Stock                                                -          (250)
Other                                                              -            66
                                                             -------       -------
  Net cash used in financing activities                       (1,180)       (1,114)
                                                             -------       -------
                                                             
Net decrease in cash                                          (6,008)       (3,909)
                                                             
Cash and cash equivalents at beginning of period              12,674        13,814
                                                             -------       -------
                                                             
Cash and cash equivalents at end of period                   $ 6,666       $ 9,905
                                                             =======       =======
                                                             
                                                             
Supplemental disclosures of cash flow information:           
                                                             
 Cash paid during the period for interest                    $   233       $   181
                                                             =======       =======
 Cash paid during the period for income taxes                $     -       $     -
                                                             =======       =======
</TABLE>

Supplemental disclosures of non-cash activities:
 
  Accrued expenses decreased by $1.6 million and stockholders' equity increased
by corresponding amounts because of the class action litigation settlement
agreement completed during the six months ended December 31, 1995.

                            See accompanying notes.

                                       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, 1996 and the results of
its operations for the three and six months ended December 31, 1996 and 1995 and
the cash flows for the six months ended December 31, 1996 and 1995 have been
included.  Certain reclassifications have been made to the previously reported
financial information in order to conform with December 31, 1996 presentation.
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 - Cash and cash equivalents, Short-term investments and Debt securities
------------------------------------------------------------------------------

     The Company has classified "Investment in debt securities" as investments
held with maturity dates greater than one year, and "Short-term investments" as
investments held with maturity dates between 90 days and one year.  The
Company's investments (typically U.S. Treasury Securities) which mature within
90 days are classified as cash equivalents.

Note 3 - Income Taxes
---------------------

     At June 30, 1996, the Company had available federal and state tax net
operating loss carryforwards of approximately $18,093,000 and $8,240,000,
respectively expiring through 2011.  As a result of these net operating losses,
the Company's effective tax rate was negligible and consequently no income tax
provision or benefit was recorded in either the quarter or six month period
presented.

Note 4 - Depreciation and Amortization
--------------------------------------

     Depreciation and amortization expense is computed using the straight line
method over the estimated useful lives of the assets and consists of the
following:

<TABLE>
<CAPTION>
 
 
                                                       Three Months Ended         Six Months Ended    
                                                           December 31               December 31      
                                                     -------------------------------------------------
                                                        1996         1995         1996         1995   
                                                     ----------   ----------   ----------   ----------
<S>                                                  <C>          <C>          <C>          <C>       
Depreciation  and amortization on fixed assets       $  294,000   $  432,000   $  574,000   $  959,000
Depreciation on touring equipment                       373,000      366,000      740,000      701,000
Amortization of film                                    449,000      820,000    1,033,000    1,370,000
Amortization of goodwill and other                      232,000      244,000      463,000      488,000
                                                     ----------   ----------   ----------   ----------
                                                                                                      
Total depreciation and amortization                  $1,348,000   $1,862,000   $2,810,000   $3,518,000
                                                     ==========   ==========   ==========   ========== 

</TABLE>

                                       6
<PAGE>
 
Depreciation and amortization included in cost of sales was $836,000 and
$1,203,000 for the quarter ended December 31, 1996 and 1995, respectively and
$1,800,000 and $2,100,000 for the six months ended December 31, 1996 and 1995,
respectively.

Note 5 - Net Income Per Common Share
------------------------------------

     The net income (loss) per share for the three and six month periods ended
December 31, 1996 and 1995 are based on the weighted average number of common
and common equivalent shares outstanding during the period.  Common equivalent
shares consisting of outstanding stock options and warrants have been included
in the calculation to the extent they are dilutive.  Fully diluted amounts for
the three and six months ended December 31, 1996 and 1995 do not materially
differ from the amounts presented herein.


Note 6 - Litigation
-------------------
 
     Fred Hollingsworth III, a former director of Iwerks Entertainment, Inc. and
former chief executive officer and founder of Omni Films International, Inc.,
filed suit on or about April 9, 1996 against the Company and seven of its
current or former officers and directors.  The complaint seeks unspecified
damages arising from misconduct, including alleged misstatements and omissions,
in connection with the acquisition by Iwerks of Omni Films International, Inc.
in May 1994.  In February 1997, the Company reached an agreement in principle
with respect to this action.  The settlement is subject to completion of final
documentation, which is expected to occur in the Company's third quarter of
fiscal 1997.  At such time, the Company expects to accrue the cost of
settlement, which may have a material adverse effect on the Company's results of
operations during the third quarter and the year ending June 30, 1997, but will
not materially effect the Company's liquidity and will have no impact on the
Company's results in future periods.

Note 7 - Other
--------------
 
     The Company announced on October 24, 1996, that the Board of Directors has
approved a stock repurchase program by which up to 300,000 shares of its common
stock may be acquired in the open market.  This program will terminate on
October 20, 1997 unless extended by the Board of Directors.  As of the date of
this report, the Company has not repurchased any of its common stock pursuant to
this program.
 

                                       7
<PAGE>
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
------   -----------------------------------------------------------------------
         OF OPERATIONS
         -------------

Results of Operations
---------------------

    For the six months ended December 31, 1996 Iwerks Entertainment, Inc. (the
"Company") recorded revenue of $19,618,000 compared to $23,303,000 for the same
period last year.  Net income for the six months ended December 31, 1996 was
$117,000 or $ .01 per share compared to $745,000 or $.06 per share for the same
period last year.

    For the three months ended December 31, 1996 the Company recorded revenue of
$10,023,000 compared to $13,207,000 for the same period last year.  The Company
recorded a net loss for the three months ended December 31, 1996 of $ (57,000)
or $ (.00) per share compared to net income of $604,000 or $.05 per share for
the same period last year.

Comparison of the three and six month periods ended December 31, 1996 and 1995:
------------------------------------------------------------------------------

REVENUE
-------

    The Company's revenue is derived from the manufacture and sale of specialty
theater systems (hardware), the licensing of film software to the installed base
of these systems,  the participation in joint ventures, as well as the ownership
and operation ("O & O") of both fixed and mobile specialty theater entertainment
venues.  The following table presents summary information regarding these
revenues (amounts in thousands):
<TABLE>
<CAPTION>
 
 
Periods Ended December 31,
                                 Three Months         Six Months
                               -----------------   -----------------
                                1996      1995      1996      1995
                               -------   -------   -------   -------
 
<S>                            <C>       <C>       <C>       <C>
Hardware Sales & Service       $ 7,513   $ 8,916   $12,629   $13,253
Owned and Operated               1,278     2,483     4,547     6,827
Film Licensing                   1,130     1,389     2,235     2,261
Film Production and Other          102       419       207       962
                               -------   -------   -------   -------
        Total                  $10,023   $13,207   $19,618   $23,303
                               =======   =======   =======   =======
 
</TABLE>
                                        
   Hardware Sales and Service includes the sale of hardware contracts, recorded
on a percentage of completion basis, and includes revenue generated from the
service of these attractions. The sales of hardware contracts for Turbo-Ride and
Giant Screen attractions declined eight percent from the previous year's six
month period, and 19 percent in the current quarter as compared with the
previous year's second quarter.  This decline is primarily attributable to
customer-related delays on signed Turbo-Ride contracts in China. In June of
1996, the Company announced six contracts with customers in China having a value
of approximately $9 million.  Three of these contracts have been delayed by the
customers and these contracts have a value of approximately $4 million.  We are
uncertain when, if ever, these contracts will result in income for the Company.
As a result of these delays, combined with normal market fluctuations, revenue
from hardware sales and service may be lower in the third and fourth quarters of
fiscal 1997 as compared with the same periods ending in 1996.

   O & O revenue include sponsorship, contract and admission revenue from the
Company's fleet of the 17 Reactors (portable motion simulation theaters) along
with revenue derived from joint ventures. The decrease in O & O revenue over the
same six month period last year resulted from the loss of a significant sponsor
in the first quarter of fiscal 1997.  O & O revenue has historically been
seasonal and has declined in the second and third fiscal quarters. The decrease
in O & O revenue compared with the second quarter

                                       8
<PAGE>
 
last year resulted from a full quarter's effect of this lost sponsor. The second
fiscal quarter normally experiences a seasonal decline in O & O revenue with the
limited number of events available during the period. The loss of the major
sponsor will likely have a negative impact on the results of the Reactor
operations for the third quarter of fiscal 1997. The Company is actively seeking
additional sponsors and evaluating other alternatives regarding the touring
operations.

   Film licensing revenue for the three months ended December 31, 1996 decreased
as compared to the  three months ended December 31, 1995 as a result of the
timing of certain license renewals.  The six months ended 1996 are comparable to
the six months ended 1995.

   Film production and other decreased for the three and six month periods as
compared to the prior year three and six month periods due to the Company
recognizing revenue in the prior year from an exclusive distribution agreement.
The exclusive period was for a three-year term  which ended December 1995.

COST OF SALES AND GROSS PROFIT MARGINS
--------------------------------------

   Cost of sales consist principally of the costs of theater systems sold,
expenses associated with the operation of portable and fixed-base theaters (O &
O), and  costs associated with film licensing primarily the amortization of film
production costs and royalty fees.

   The overall gross profit margin percentage for the six months ended December
31, 1996 and 1995 was 32.8% and 40.1%, respectively, and the overall gross
profit margin percentage of the three months ended December 1996 and 1995 was
30.6% and 37.6%, respectively.  The change in overall profit margin percentage
resulted primarily from two factors. First, competitive pressures have resulted
in lower margins from sales of giant-screen theaters.  Secondly, the high level
of fixed costs in the Touring business did not decline when revenues declined,
which resulted in a gross operating loss from this operation in the second
quarter of fiscal 1997 and a break-even for the six-month period ended December
31, 1996.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
--------------------------------------------

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

   SG & A costs for the six months ended December 31, 1996 and 1995 were
$6,419,000 and $8,821,000, respectively.  SG & A costs for the quarter ended
December 31, 1996 and 1995 were $3,217,000 and $4,579,000, respectively.  These
decreases, 30% for the quarter and 27% year-to-date, are due primarily to a
reduction in salaries and wages, reduction in legal and accounting expenses and
lower depreciation compared to the comparable periods of last year.  The prior
year reflected higher legal fees in association with the settlement of a class
action lawsuit against the Company.

RESEARCH AND DEVELOPMENT
------------------------

     Research and development costs for the six months ended December 31, 1996
were $284,000 compared to $159,000 for the same period last year.  R & D costs
for the three months ended December 31, 1996 were $105,000, compared to $69,000
for the same period last year.  This increase represents costs incurred to
improve the Company's products and to develop new products, namely a 3-D
projection system which was introduced at a major trade show during the second
quarter ended December 31, 1996.

                                       9
<PAGE>
 
INTEREST INCOME AND EXPENSE
---------------------------

     Interest income for the six months ended December 31, 1996 and 1995 was
$610,000 and $593,000, respectively. Interest income for the three months ended
December 31, 1996 and 1995 was $296,000 and $388,000, respectively.  Interest
income is derived from the Company's investments, primarily in U.S. Treasury
Notes.  Interest income for the six month period was comparable to the prior
year six months period.  The decrease in the three month period was a result of
the Company recording a gain on the sale of certain investments in the same
quarter of the prior year.
 
     Interest expense for the six months ended December 31, 1996 and 1995 was
$216,000 and $212,000, respectively.  Interest expense for the three months
ended December 31, 1996 and 1995 was $99,000 and $104,000, respectively.
Interest expense is primarily financing costs on portable simulation theaters.

OTHER
-----

     In February 1997, the Company reached an agreement in principle with
respect to the Fred Hollingsworth litigation (see Note 6).  The settlement is
subject to completion of final documentation, which is expected to occur in the
Company's third quarter of fiscal 1997.  At such time, the Company expects to
accrue the cost of settlement, which may have a material  adverse effect on the
Company's results of operations during the third quarter and the year ending
June 30, 1997.

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

     The Company's operating activities for the six months ended December 31,
1996 generated a positive cash flow of $72,000.  Investing activities for the
six months ended December 31, 1996 consisted primarily of investing in joint
ventures and additions to film inventory along with the purchase of short-term
investments. The Company's portfolio of investments reflects more securities
which have maturity dates greater than 90 days.  Consequently, the Company's
cash and cash equivalents have decreased and short-term investments have
increased.

     The Company maintains a bank line of credit in the amount of $5 million.
At December 31, 1996, there were no amounts outstanding on the line of credit.
Together with existing cash balances and short-term investments in debt
securities, 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 operations is less than anticipated, the Company may be required to
obtain additional sources of cash.
 
     The Company does not anticipate the need to retire its debt security
investments before maturity to meet cash requirements, however, should
unanticipated events require early retirement of these investments, the Company
could incur a loss on their sale.  At December 31, 1996, the investment in debt
securities are classified as available-for-sale and are stated at fair market
value.

OUTLOOK AND RISK FACTORS
------------------------

     With the exception of the historical information, the matters discussed
above include forward-looking statements that involve risks and uncertainties.
Among the important factors that could cause actual results to differ from those
indicated in the forward-looking statements are costs of sales and the ability
of the Company to maintain pricing at a level to maintain gross profit margins,
the level of selling, general and administrative costs, the performance by the
Company under its existing purchase contracts and the ability to obtain new
contracts, the success of the Company's owned and operating strategy, the
ability of the Company to identify and successfully negotiate arrangements with
joint venture and other strategic partners, the success of the Company's film
software, the effects of competition, general economic conditions and acts of
God and other events outside the control of the Company.

                                      10
<PAGE>
 
PART II - OTHER INFORMATION

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

     Iwerks has been named as a defendant in an action filed on or about April
9, 1996, entitled Hollingsworth v. Iwerks Entertainment, Inc., et al.,.  Fred
Hollingsworth III, a former director of Iwerks Entertainment, Inc. and former
chief executive officer and founder of Omni Films International, Inc., filed
suit against the Company and seven of its current or former officers and
directors.  The complaint seeks unspecified damages arising from alleged
misconduct, including alleged misstatements and omissions, in connection with
the acquisition by Iwerks of Omni Films International, Inc. in May 1994. In
February 1997, the Company reached an agreement in principle with respect to
this action.  The settlement is subject to completion of final documentation,
which is expected to occur in the Company's third quarter of fiscal 1997.  At
such time, the Company expects to accrue the cost of settlement, which may have
a material adverse effect on the Company's results of operations during the
third quarter and the year ending June 30, 1997, but will not materially effect
the Company's liquidity and will have no impact on the Company's results in
future periods.

     The Company is also a party to various other 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 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
------------------------------------------------------------

     On November 15, 1996 the Company held its annual shareholders meeting.
Donald W. Iwerks and Gary J. Matus were elected to the board of directors for a
term of three years.  The continuing directors are Paula T. Douglass, Roy A.
Wright, Dag Tellefsen and Terry E. VanGorder.  Donald W. Iwerks received
8,843,946 votes for election with 90,621 votes withheld.  Gary J. Matus received
8,833,669 votes for election with 100,898 votes withheld.


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

(a)   Exhibits:

          11.1 Earnings per share
          15.1 Letter 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, 1996:

          A Form 8-K was filed on October 24, 1996 - Item 5.

                                      11
<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 11th day of February, 1997.



                              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)

                                      12