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 September 30,
          2001

                                       or

     [ ]  Transition Report Pursuant to Section 13 or 15(d) of the Securities
          Exchange Act of 1934.


                         Commission file number 0-22558


                           IWERKS ENTERTAINMENT, INC.
             (Exact name of registrant as specified in its charter)

                Delaware                                   95-4439361
    -------------------------------                   ----------------------
    (State or other jurisdiction 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 November 7, 2001 was 3,540,903 shares.


<PAGE>


                           IWERKS ENTERTAINMENT, INC.

                                      INDEX

PART I.   FINANCIAL INFORMATION                                      Page Number

Item 1.   Financial Statements

          Condensed Consolidated Balance Sheets as of
          September 30, 2001 and June 30, 2001                             3

          Condensed Consolidated Statements of Operations for
          the Three Months ended September 30, 2001 and 2000               5

          Condensed Consolidated Statements of Cash Flows for
          the Three Months ended September 30, 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                             10

PART II.  OTHER INFORMATION

Item 6.   Exhibits and Reports on Form 8-K                                20

          Signatures                                                      21


                                     Page 2
<PAGE>


<TABLE>
<CAPTION>
                           IWERKS ENTERTAINMENT, INC.

                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS

                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

                                                                   September 30,      June 30,
                                                                        2001            2001
                                                                    (Unaudited)       (Audited)
                                                                   -------------     ----------
<S>                                                                <C>               <C>
   Current assets:

        Cash and cash equivalents                                    $    1,985      $    2,191

        Trade accounts receivable, net of allowance for
          doubtful accounts                                               3,408           3,673

        Costs and estimated earnings in excess of billings on
          uncompleted contracts                                             436             313

        Inventories                                                       1,760           1,620

        Assets held for sale - current                                      350             368

        Other current assets                                                 28              25
                                                                   -------------     -----------
            Total current assets                                          7,967           8,190

   Property and equipment at cost, net of accumulated
        depreciation and amortization                                     3,386           3,372

   Film inventory at cost, net of accumulated amortization                  433             520

   Other assets                                                           1,624           2,072

   Assets held for sale - long term                                       1,291           1,291
                                                                   -------------     -----------
           Total assets                                               $  14,701      $   15,445
                                                                   =============     ===========
</TABLE>



                             See accompanying notes.


                                     Page 3
<PAGE>


<TABLE>
<CAPTION>
                           IWERKS ENTERTAINMENT, INC.

                           CONSOLIDATED BALANCE SHEETS

                      LIABILITIES AND STOCKHOLDERS' EQUITY

                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

                                                                  September 30,       June 30,
                                                                      2001              2001
                                                                   (Unaudited)        (Audited)
                                                                  -------------     ------------
<S>                                                               <C>               <C>
   Current liabilities:

        Accounts payable                                            $      948      $    1,099

        Accrued expenses                                                 5,481           6,008

        Notes payable, current portion                                   1,580           1,661

        Billings in excess of costs and estimated
             earnings on uncompleted contracts                           2,394           1,585

        Deferred revenue                                                   210             309
                                                                    -----------     ------------
                  Total current liabilities                             10,613          10,662

   Note payable, net of current portion                                    200               -

   Note payable to shareholder                                             300             300
                                                                    -----------     ------------
                  Total liabilities                                     11,113          10,962

   Stockholders' equity:

       Preferred stock, $0.01 par value, 1,000,000 authorized,
       none issued and outstanding                                           -               -

       Common stock, $.001 par value,  50,000,000 shares
       authorized; 3,540,915 and, 3,540,915 issued and                      57              57
       outstanding

   Paid-in capital                                                      78,086          78,086

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

   Warrants                                                                250             250

   Accumulated deficit                                                 (74,464)        (73,569)
                                                                    -----------     ------------
   Total stockholders' equity                                            3,588           4,483
                                                                    -----------     ------------
   Total liabilities and stockholders' equity                       $   14,701      $   15,445
                                                                    ===========     ============
</TABLE>



                             See accompanying notes.


                                     Page 4
<PAGE>


<TABLE>
<CAPTION>
                           IWERKS ENTERTAINMENT, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

                                   (UNAUDITED)

                                                                           Three months ended
                                                                              September 30,
                                                                       ----------------------------
                                                                           2001            2000
                                                                       -----------     ------------
<S>                                                                    <C>             <C>
Revenue                                                                $    3,868      $     4,912

Cost of Sales                                                               2,836            4,087
                                                                       -----------     ------------
Gross margin                                                                1,032              825

Selling, general and administrative expenses                                1,919            2,019
                                                                       -----------     ------------
Loss from operations                                                         (887)          (1,194)

Interest income                                                                 6               16

Interest expense                                                              (14)             (44)
                                                                       -----------     ------------
Net loss                                                               $     (895)     $    (1,222)
                                                                       ===========     ============
Loss per common share - basic and diluted                              $    (0.26)     $     (0.35)
                                                                       ===========     ============
Weighted average shares outstanding - basic and diluted                 3,449,000        3,449,000
                                                                       ===========     ============
</TABLE>



                             See accompanying notes.


                                     Page 5
<PAGE>


<TABLE>
<CAPTION>
                           IWERKS ENTERTAINMENT, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                   (UNAUDITED)
                           For the three months ended
                                                                            September 30,
                                                                       ------------------------
                                                                         2001          2000
                                                                       ----------    ----------
<S>                                                                    <C>           <C>
OPERATING ACTIVITIES
Net loss                                                               $    (895)    $  (1,222)
    Depreciation and amortization                                            531           646
    Changes in operating assets and liabilities                              239           652
                                                                       ----------    ----------
       Net cash (used in) provided by operating activities                  (125)           76

INVESTING ACTIVITIES
Net proceeds from the sale of portable simulation theatres                    18           186
Acquisition of PIER 39 interest                                             (100)            -
Purchases of property and equipment                                         (118)         (110)
                                                                       ----------    ----------
        Net cash (used in) provided by  investing activities                (200)           76

FINANCING ACTIVITIES
Issuance of note payable                                                     200             -
Payments of notes payable                                                    (81)          (83)
Payments on capital leases                                                     -          (135)
                                                                       ----------    ----------
        Net cash provided by (used in) financing activities                  119          (218)
                                                                       ----------    ----------
Net decrease in cash and cash equivalents                                   (206)          (66)
Cash and cash equivalents at beginning of period                           2,191         2,733
                                                                       ----------    ----------
Cash and cash equivalents at end of period                             $   1,985     $   2,667
                                                                       ==========    ==========
Supplemental disclosures
    Interest paid during the period                                    $       8     $      12
                                                                       ==========    ==========
    Income taxes paid during the period                                $       -     $       6
                                                                       ==========    ==========
</TABLE>


                             See accompanying notes.


                                     Page 6
<PAGE>


                           IWERKS ENTERTAINMENT, INC.
                   NOTES TO 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 September 30, 2001 and the results of its operations for the three months
ended September 30, 2001 and 2000 and the cash flows for the three months ended
September 30, 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 consolidated financial statements for
the three months ended September 30, 2000 to conform to the September 30, 2001
presentation.


NOTE 2  - MERGER TRANSACTION

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


NOTE 3  - PURCHASE OF DISCOVERY THEATRE LIMITED PARTNERSHIP

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


                                     Page 7
<PAGE>


NOTE 4  - ASSETS HELD FOR SALE

        In September 1999, the Company decided to sell the assets relating to
its Touring Division. These assets are described as the portable ride simulation
theatres and are reflected at management's estimate of their net realizable
value. Management has discontinued depreciating these assets and will continue
to periodically assess the net realizable value of these assets. During fiscal
2001, the Company sold five portable simulation ride theatres for net proceeds
of approximately $954,000. No additional sales have been made in fiscal 2002.

NOTE 5  - ISSUANCE OF WARRANTS

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

NOTE 6  - DEPRECIATION AND AMORTIZATION

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

<TABLE>
<CAPTION>
                                                       Three months ended
                                                          September 30,
                                                    --------------------------
                                                       2001            2000
                                                    ----------      ----------
         <S>                                        <C>             <C>
         Depreciation on property and equipment      $320,000        $170,000
         Amortization of film inventory                87,000         293,000
         Amortization of goodwill and other           124,000         183,000
                                                    ----------      ----------
         Total depreciation and amortization         $531,000        $646,000
                                                    ==========      ==========
</TABLE>


Depreciation and amortization included in cost of sales was $87,000 and $293,000
for the three months ended September 30, 2001 and 2000, respectively.

NOTE 7  - NOTES PAYABLE

        Notes payable consists of the following:

<TABLE>
<CAPTION>
                                                 Sept. 30,        June 30,
                                                   2001            2001
                                                 ---------       ---------
             <S>                                 <C>             <C>
             Customer Note                         $1,354          $1,354
             Equipment Note                           226             307
             SimEx Note                               200              -
                                                   ------          ------
                                                   $1,780          $1,661
             Less non-current portion                 200              -
                                                   ------          ------
             Current portion of notes payable      $1,580          $1,661
                                                   ======          ======
</TABLE>


                                     Page 8
<PAGE>


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

        On June 22, 2000, the Company renegotiated its capital lease and in
connection therewith established a $485,000 note payable ("Equipment Note") to
purchase certain equipment. The Equipment Note has an 18-month term beginning
January 1, 2001 and accrues interest at the rate of 12.5% per annum.

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


NOTE 8  - NET LOSS PER COMMON SHARE

        Basic and diluted loss per share is calculated using the weighted
average number of common shares outstanding during the period. Common equivalent
shares, consisting of outstanding stock options and warrants are not included in
the computation of diluted loss per common share, as the effect would be
antidulitive.

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

NOTE 9  - INCOME TAXES

        At June 30, 2001, the Company had available federal and state tax net
operating loss carryforwards of approximately $45,000,000 and $13,000,000,
respectively. The federal and state net operating loss carryforwards expire, in
varying amounts, through 2020. 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 10  - 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.


                                     Page 9
<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 24, 2001, as amended on October 26, 2001, and previous
Quarterly Reports on Form 10-Q and 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 two 15/70 large format cameras and is
in the process of completing one additional 15/70 camera. The Company also
provides technical and post-production services to third party producers for a
fee and maintains a 15/70 and 8/70 projection room at its Burbank facilities for
rent to large format filmmakers for use in the post-production process. During
2001, the Company began generating revenues by providing film format conversion
services.

The Company's internal executive production staff develops and oversees the
production of films for the Company's film productions as well as for third
party custom film projects. The Company recognizes revenues and costs associated
with the production of films on the percentage of completion method.


                                    Page 10
<PAGE>


OWNED AND OPERATED

Revenues from owned and operated (O&O) consist primarily of ticket sales of the
simulation theatre site at PIER 39 in San Francisco. To a lesser extent, the
Company generates revenue from portable ride simulation theatres (touring), as
well as revenues derived from fixed site joint ventures, which includes the
Company's contractual share of the sites' revenues or profits as applicable. In
September 1999, the Company determined to shut down the touring division and
sell the related assets in an effort to concentrate on its core business.

THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2000

For the three months ended September 30, 2001 the Company recorded revenues of
$3,868,000 compared to $4,912,000 for the same period last year. For the three
months ended September 30, 2001, the Company recorded a net loss of $895,000 or
($0.26) per share compared to a net loss of $1,222,000 or ($0.35) per share for
the same period last year.

REVENUES

Revenue for the three months ended September 30, 2001 decreased $1,044,000 or
21% from the three months ended September 30, 2000.

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

<TABLE>
<CAPTION>
                                               Three months ended
                                                  September 30,
                                               -------------------
                                                 2001      2000
                                               --------  ---------
       <S>                                     <C>       <C>
       Hardware Sales & Service                $  1,896  $  2,262
       Film Licensing                             1,078       864
       Cameras and Other Production Services        595     1,607
       Owned and Operated                           299       179
                                               --------  ---------
       Total                                   $  3,868  $  4,912
                                               ========  =========
</TABLE>


Hardware Sales and Service for the three months ended September 30, 2001
decreased by approximately $366,000 or 16% compared to the same period last
year. During the first quarter of fiscal 2002, hardware sales recognized in the
Asia-Pacific region and Europe and the Middle East region decreased by
approximately $36,000 and $812,000, respectively, from the year ago period.
Hardware sales recognized in North America and South America increased by
approximately $346,000 and $191,000, respectively, from the year ago period.
Revenue generated from Customer Service decreased by approximately $55,000
during the first quarter of fiscal 2002 compared to the first quarter of fiscal
2001. The decrease in hardware sales and service primarily is attributed to the
continued economic downturn. Generally, hardware sales are subject to quarterly
fluctuations as they are dependent on customer installation dates.

Film Licensing revenues for the quarter ended September 30, 2001 increased by
approximately $214,000 or 25% compared to the same period last year. This
increase primarily is due to a significant film license agreement signed with a
new customer, increased Large Format business and the timing of several new film
licensing agreements with existing customers.

Cameras and Other Production Services revenues for the three months ended
September 30, 2001 decreased by approximately $1.0 million or 63% compared to
the same period last year. The decrease is due to a lack of film production
projects in the first quarter of fiscal 2002. The decrease was partially offset
by an increase ($207,000) in facility and camera rentals. The increase was the
result of increased 15/70 camera rentals and revenue from film conversions,
which is a new line of business for the Company.


                                    Page 11
<PAGE>


Owned and Operated revenues for the three months ended September 30, 2001
increased by approximately $120,000 as compared to the same period last year.
The increase is primarily due to an increase in PIER 39 related revenues
resulting from the Company's acquisition of the remaining interest of the
partnership which previously operated the attraction at PIER 39 during the first
quarter of fiscal 2002.

COST OF SALES

Cost of sales primarily includes costs of theatre systems sold, costs associated
with film production, licensing fees and costs associated with the operation of
the PIER 39 theatre. 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 third party
commissions and estimated warranty expenses. The costs associated with film
license fees primarily reflect amortization of film production costs over the
lives of certain films, royalties paid to third parties and the cost of film
prints.

Cost of sales as a percentage of sales were 73% for the three months ended
September 30, 2001 as compared to 83% for the three months ended September 30,
2000. The decrease resulted from reduced film amortization costs as a result of
film write-downs made during fiscal 2001. Also, the lack of low margin film
production activity helped reduce the cost of sales in the current quarter.
Additionally, improved manufacturing efficiencies resulted in lower hardware
cost of sales. Finally, reduced warranty claims resulted in lower customer
service cost of sales for the quarter ended September 30, 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 $1.9 million and
$2.0 million, for the quarters ended September 30, 2001 and 2000, respectively.
This decrease primarily is attributable to cost containment efforts relating to
expenditures for outside consulting, marketing, travel and entertainment expense
and office lease expense.

INTEREST INCOME & EXPENSE

Interest income for the quarters ended September 30, 2001 and 2000 was
approximately $6,000 and $16,000, respectively. The decrease resulted primarily
from a reduction in the invested cash balances during the three months ended
September 30, 2001.

Interest expense for the quarters ended September 30, 2001 and 2000 was
approximately $14,000 and $44,000, 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 September 30, 2000.

NET LOSS

The Company recorded a net loss of approximately $895,000 in the quarter ended
September 30, 2001, compared to a net loss of approximately $1.2 million in the
quarter ended September 30, 2000 due to the reasons mentioned above.

LIQUIDITY AND CAPITAL RESOURCES

        In the three months ended September 30, 2001, approximately $125,000 in
cash was used in operating activities and $200,000 was used in investing
activities, offset by $119,000 provided by financing activities. Investing
activities primarily consisted of the purchase of property and equipment
($118,000) and the purchase of a partnership interest ($100,000). Financing
activities consisted of the issuance of a new note ($200,000), partially offset
by payments on notes payable ($81,000).


                                    Page 12
<PAGE>


        At September 30, 2001, the Company had cash and short-term investments
of approximately $2.0 million. The Company's cash and short-term investment
balances have continued to decline since June 30, 2001 and the Company expects
to experience further declining balances during the remainder of fiscal 2002.
Because of the reductions in the Company's cash balances, the Company may not be
able to continue operations at its current levels. The Company is dependent upon
current cash collections to meet its operating needs and pay its current
liabilities. The Company has historically experienced significant difficulty in
accurately projecting its cash balances. The Company's cash flow is dependent on
the timing of delivery of hardware systems, collections and the signing of new
contracts, all of which are difficult to predict with accuracy. Further
complicating its ability to project cash balances is that the timing of progress
payments of the hardware projects are dependent upon achieving certain
performance milestones under its hardware sales agreements. In addition,
progress payments on some of the Company's hardware sales agreements are not
sufficient to provide for the cost of assembly and delivery of the systems,
requiring the Company to fund the cash cost of performing on the agreements.

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

        In the event the merger does not close, the Company will need to
aggressively seek additional debt or equity financing and other strategic
alternatives. However, recent operating losses, the Company's declining cash
balances, the Company's historical stock performance, the delisting of the
Company's common shares from The Nasdaq Stock Market, the recent decline in
revenue, a general economic downturn and a general decrease in investor interest
in the Company's industry, may make it difficult for the Company to attract
equity investments or debt financing or strategic partners on terms that are
deemed favorable to the Company. If the Company's financial condition continues
to worsen and it is unable to attract alternative equity or debt financing or
other strategic transactions, the Company could be forced to consider steps that
would protect its assets against it's creditors. The Company's independent
auditor's report, for fiscal year ended June 2001, 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
theatres, which when sold, will generate cash. The Company is considering a
number of other options to improve its financial condition. The Company sold
five portable ride simulation units during fiscal 2001. There can be no
assurance that any additional ride simulation theatres will be sold.

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

RISK FACTORS

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

        We have experienced significant operating losses in the current and
prior years. Our cash and short-term investment balances continue to decline
since June 30, 2001 and we expect to experience


                                    Page 13
<PAGE>


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

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

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

        TERRORISM AND THE UNCERTAINTY OF WAR MAY HAVE A MATERIAL ADVERSE EFFECT
ON OUR OPERATING RESULTS.

        Terrorist attacks, such as the attacks that occurred in New York and
Washington, D.C. on September 11, 2001, the response by the United States on
October 7, 2001 and other acts of violence or war may affect the market in which
our common stock will trade, the markets in which we operate, our operations and
profitability and your investment. Further terrorist attacks against the United
States or United States businesses may occur. The potential near-term and
long-term effect these attacks may have for our customers, the market for our
common stock, the markets for our sales and services and the U.S. economy are
uncertain. The consequences of any terrorist attacks, or any armed conflicts
which may result, are unpredictable, and we may not be able to foresee events
that could have an adverse effect on our markets, our business or your
investment.

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

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

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

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

     o    shortages of certain key components;

     o    delays in product shipment;


                                    Page 14
<PAGE>


     o    product performance shortfalls;

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

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

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

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

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

o    audience reaction;

o    competing programming;

o    other forms of entertainment; and

o    perceived quality of programming.

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

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

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

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

        We face significant competition in each of the markets in which we
operate. Our principal direct competition for customers comes from manufacturers
of competing movie-based attractions and manufacturers of traditional amusement
park attractions. In addition, there is also competition from systems
integrators and some amusement and theme parks developing and constructing their
own


                                    Page 15
<PAGE>


attractions. We have significantly fewer financial, technical, manufacturing,
marketing and other resources than certain of our competitors do. Our
competitors may leverage their greater resources to:

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

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

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

o    operate at lower margins for longer periods;

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

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

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

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

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

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

o    difficulty in forecasting customer demand accurately;

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

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

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

o    competitors' responses to our introduction of new products;

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

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

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


                                    Page 16
<PAGE>


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

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

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

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

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

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

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

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

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

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

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

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

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

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

o    the size and timing of customer orders;

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


                                    Page 17
<PAGE>


o    the timing and level of our operating expenses.

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

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

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

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

        Although we maintain general liability insurance and product liability
insurance, our insurance may not cover all potential types of product liability
claims to which manufacturers are exposed or may 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 18
<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 19
<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 SEPTEMBER 30, 2001

           A Current Report on Form 8-K, Item 5, was filed on September 10,
           2001, regarding the merger agreement with SimEx, Inc. and SimEx
           Acquisition Corporation.


                                     Page 20
<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 November, 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: NOVEMBER 14, 2001


                                    Page 21