##### Table of Contents



---

---

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 27, 2003.

Or

|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 0-26976

Pixar

(Exact name of registrant as specified in its charter)


|                                                                                 |  |                                               
|-------------------------------------------------------------------------------- |  | ----------------------------------------------
|California(State or other jurisdiction of Incorporation or organization)         |  | 68-0086179(I.R.S. Employer Identification No.)
|                                                                                 |  |                                               
|1200 Park Avenue, Emeryville, California(Address of principal executive offices) |  | 94608(Zip code)                               

(510) 752-3000(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 o

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes x No o

The number of shares outstanding of the registrants Common Stock as of
November 3, 2003 was 55,275,493.



---

---





---

TABLE OF CONTENTS



|                               |                                                                                               |                               |  |  |  |  |  | 
|------------------------------ | --------------------------------------------------------------------------------------------- | ----------------------------- |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION
|                               | Item 1. Financial Statements                                                                 
|                               |                                                                                               | BALANCE SHEETS               
|                               |                                                                                               | STATEMENTS OF INCOME         
|                               |                                                                                               | STATEMENTS OF CASH FLOWS     
|                               |                                                                                               | NOTES TO FINANCIAL STATEMENTS
|                               | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                               |                                                                                               | Risk Factors                 
|                               | Item 3. Quantitative and Qualitative Disclosures about Market Risk                           
|                               | Item 4. Controls and Procedures                                                              
|PART II  OTHER INFORMATION   
|                               | Item 1. Legal Proceedings                                                                    
|                               | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                               | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURE                     
|EXHIBIT INDEX                 
|EXHIBIT 31.1                  
|EXHIBIT 31.2                  
|EXHIBIT 32.1                  



---



##### Table of Contents



Pixar
FORM 10-Q
Index

|                                                                                              |                                                                                                                  |         |         |  | 
|--------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------- | ------- | ------- |  | 
|PART I. FINANCIAL INFORMATION                                                                 |                                                                                                                  |         |         | 
|Item 1. Financial Statements:                                                                 |                                                                                                                  | Page 1 
|                                                                                              | Balance Sheets as of September 27, 2003 and December 28, 2002 (unaudited)                                        |         | Page 1 
|                                                                                              | Statements of Income for the Quarter and Nine Months Ended September 27, 2003 and
September 28, 2002
(unaudited) |         | Page 2 
|                                                                                              | Statements of Cash Flows for the Nine Months Ended September 27, 2003 and September 28,
2002 (unaudited)         |         | Page 3 
|                                                                                              | Notes to Financial Statements (unaudited)                                                                        |         | Page 4 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |                                                                                                                  | Page 9 
|                                                                                              | Risk Factors                                                                                                     |         | Page 17
|Item 3. Quantitative and Qualitative Disclosures about Market Risk                            |                                                                                                                  | Page 32
|Item 4. Controls and Procedures                                                               |                                                                                                                  | Page 32
|PART II. OTHER INFORMATION                                                                    |                                                                                                                  |         |         | 
|Item 1. Legal Proceedings                                                                     |                                                                                                                  | Page 33
|Item 4. Submission of Matters to a Vote of Security Holders                                   |                                                                                                                  | Page 33
|Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                                  | Page 33
|SIGNATURE                                                                                     |                                                                                                                  | Page 34
|EXHIBIT INDEX                                                                                 |                                                                                                                  | Page 35





---



##### Table of Contents






PART I  FINANCIAL INFORMATION




Item 1.Financial Statements

PIXAR




BALANCE SHEETS

|                                  |                                                                                                                                                                          |                                            |                                      |         |         |                           |         |              |         |  |  | 
|--------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ------------------------------------ | ------- | ------- | ------------------------- | ------- | ------------ | ------- |  |  | 
|                                  |                                                                                                                                                                          |                                            |                                      |         |         | September 27,             |         | December 28,
|                                  |                                                                                                                                                                          |                                            |                                      |         |         | 2003                      |         | 2002        
|                                  |                                                                                                                                                                          |                                            |                                      |         |         |                           |         |             
|                                  |                                                                                                                                                                          |                                            |                                      |         |         | (Unaudited, in thousands,
|                                  |                                                                                                                                                                          |                                            |                                      |         |         | except share data)       
|                                  |                                                                                                                                                                          |                                            |                                      | ASSETS  |         |                           |         |              |         |  |  | 
|Cash and cash equivalents         |                                                                                                                                                                          | $                                          | 74,636                               |         |         | $                         | 44,431  |             
|Investments                       |                                                                                                                                                                          |                                            | 441,909                              |         |         |                           | 294,652 |             
|Trade receivables, net            |                                                                                                                                                                          |                                            | 2,393                                |         |         |                           | 1,178   |             
|Receivable from Disney            |                                                                                                                                                                          |                                            | 48,899                               |         |         |                           | 129,339 |             
|Other receivables                 |                                                                                                                                                                          |                                            | 3,711                                |         |         |                           | 6,394   |             
|Prepaid expenses and other assets |                                                                                                                                                                          |                                            | 26,340                               |         |         |                           | 13,826  |             
|Deferred income taxes             |                                                                                                                                                                          |                                            | 33,836                               |         |         |                           | 32,719  |             
|Property and equipment, net       |                                                                                                                                                                          |                                            | 114,952                              |         |         |                           | 117,423 |             
|Capitalized film production costs |                                                                                                                                                                          |                                            | 117,277                              |         |         |                           | 92,104  |             
|                                  |                                                                                                                                                                          |                                            |                                      |         |         |                           |         |             
|                                  |                                                                                                                                                                          | Total assets                               |                                      | $       | 863,953 |                           |         | $            | 732,066 | 
|                                  |                                                                                                                                                                          |                                            |                                      |         |         |                           |         |             
|                                  |                                                                                                                                                                          |                                            | LIABILITIES AND SHAREHOLDERS EQUITY |         |         |                           |         |              |         |  | 
|Accounts payable                  |                                                                                                                                                                          | $                                          | 1,162                                |         |         | $                         | 2,341   |             
|Accrued liabilities               |                                                                                                                                                                          |                                            | 10,205                               |         |         |                           | 9,322   |             
|Unearned revenue                  |                                                                                                                                                                          |                                            | 10,426                               |         |         |                           | 7,341   |             
|                                  |                                                                                                                                                                          |                                            |                                      |         |         |                           |         |             
|                                  |                                                                                                                                                                          | Total liabilities                          |                                      |         | 21,793  |                           |         |              | 19,004  | 
|                                  |                                                                                                                                                                          |                                            |                                      |         |         |                           |         |             
|Shareholders equity:             |                                                                                                                                                                          |                                            |                                      |         |         |                           |         |             
|                                  | Preferred stock; no par value; 5,000,000 shares authorized; no shares issued or outstanding                                                                              |                                            |                                      |        |         |                           |         |             |        
|                                  | Common stock; no par value; 100,000,000 shares authorized; 55,164,754 and 52,894,466 issued
and outstanding as of September 27, 2003 and December 28, 2002, respectively |                                            |                                      | 532,391 |         |                           |         | 442,477      |        
|                                  | Accumulated other comprehensive income                                                                                                                                   |                                            |                                      | 445     |         |                           |         | 2,156        |        
|                                  | Retained earnings                                                                                                                                                        |                                            |                                      | 309,324 |         |                           |         | 268,429      |        
|                                  |                                                                                                                                                                          |                                            |                                      |         |         |                           |         |             
|                                  |                                                                                                                                                                          | Total shareholders equity                 |                                      |         | 842,160 |                           |         |              | 713,062 | 
|                                  |                                                                                                                                                                          |                                            |                                      |         |         |                           |         |             
|                                  |                                                                                                                                                                          | Total liabilities and shareholders equity |                                      | $       | 863,953 |                           |         | $            | 732,066 | 
|                                  |                                                                                                                                                                          |                                            |                                      |         |         |                           |         |             

See accompanying notes to financial statements.

1



---



##### Table of Contents



PIXAR




STATEMENTS OF INCOME

|                                                      |                            |                          |                            |        |                                                  |        |                   |         |               |        |               |        |        |        |        |         |         |         | 
|----------------------------------------------------- | -------------------------- | ------------------------ | -------------------------- | ------ | ------------------------------------------------ | ------ | ----------------- | ------- | ------------- | ------ | ------------- | ------ | ------ | ------ | ------ | ------- | ------- | ------- | 
|                                                      |                            |                          |                            |        | Quarter Ended                                    |        | Nine Months Ended
|                                                      |                            |                          |                            |        |                                                  |        |                  
|                                                      |                            |                          |                            |        | September 27,                                    |        | September 28,     |         | September 27, |        | September 28,
|                                                      |                            |                          |                            |        | 2003                                             |        | 2002              |         | 2003          |        | 2002         
|                                                      |                            |                          |                            |        |                                                  |        |                   |         |               |        |              
|                                                      |                            |                          |                            |        | (Unaudited, in thousands, except per share data)
|Revenue:                                              |                            |                          |                            |        |                                                  |        |                   |         |               |        |               |        |        |        |        |        
|                                                      | Film                       |                          | $                          | 27,481 |                                                  |        | $                 | 100,475 |               |        | $             | 89,038 |        |        | $      | 155,711 |        
|                                                      | Software                   |                          |                            | 2,702  |                                                  |        |                   | 1,981   |               |        |               | 8,678  |        |        |        | 6,629   |        
|                                                      |                            |                          |                            |        |                                                  |        |                   |         |               |        |               |        |        |        |        |        
|                                                      |                            | Total revenue            |                            |        | 30,183                                           |        |                   |         | 102,456       |        |               |        | 97,716 |        |        |         | 162,340 |        
|                                                      |                            |                          |                            |        |                                                  |        |                   |         |               |        |               |        |        |        |        |        
|Cost of revenue:                                      |                            |                          |                            |        |                                                  |        |                   |         |               |        |               |        |        |        |        |        
|                                                      | Film                       |                          |                            | 4,287  |                                                  |        |                   | 21,304  |               |        |               | 15,017 |        |        |        | 33,231  |        
|                                                      | Software                   |                          |                            | 2      |                                                  |        |                   | 137     |               |        |               | 27     |        |        |        | 410     |        
|                                                      |                            |                          |                            |        |                                                  |        |                   |         |               |        |               |        |        |        |        |        
|                                                      |                            | Total cost of revenue    |                            |        | 4,289                                            |        |                   |         | 21,441        |        |               |        | 15,044 |        |        |         | 33,641  |        
|                                                      |                            |                          |                            |        |                                                  |        |                   |         |               |        |               |        |        |        |        |        
|                                                      |                            |                          | Gross profit               |        |                                                  | 25,894 |                   |         |               | 81,015 |               |        |        | 82,672 |        |         |         | 128,699 | 
|                                                      |                            |                          |                            |        |                                                  |        |                   |         |               |        |               |        |        |        |        |        
|Operating expenses:                                   |                            |                          |                            |        |                                                  |        |                   |         |               |        |               |        |        |        |        |        
|                                                      | Research and development   |                          |                            | 3,066  |                                                  |        |                   | 2,039   |               |        |               | 11,986 |        |        |        | 6,623   |        
|                                                      | Sales and marketing        |                          |                            | 803    |                                                  |        |                   | 404     |               |        |               | 1,769  |        |        |        | 858     |        
|                                                      | General and administrative |                          |                            | 2,935  |                                                  |        |                   | 2,347   |               |        |               | 9,944  |        |        |        | 6,354   |        
|                                                      |                            |                          |                            |        |                                                  |        |                   |         |               |        |               |        |        |        |        |        
|                                                      |                            | Total operating expenses |                            |        | 6,804                                            |        |                   |         | 4,790         |        |               |        | 23,699 |        |        |         | 13,835  |        
|                                                      |                            |                          |                            |        |                                                  |        |                   |         |               |        |               |        |        |        |        |        
|                                                      |                            |                          | Income from operations     |        |                                                  | 19,090 |                   |         |               | 76,225 |               |        |        | 58,973 |        |         |         | 114,864 | 
|Other income                                          |                            |                          | 2,717                      |        |                                                  |        | 2,577             |         |               |        | 8,622         |        |        |        | 7,678  |        
|                                                      |                            |                          |                            |        |                                                  |        |                   |         |               |        |               |        |        |        |        |        
|                                                      |                            |                          | Income before income taxes |        |                                                  | 21,807 |                   |         |               | 78,802 |               |        |        | 67,595 |        |         |         | 122,542 | 
|Income tax expense                                    |                            |                          | 8,614                      |        |                                                  |        | 31,867            |         |               |        | 26,700        |        |        |        | 49,556 |        
|                                                      |                            |                          |                            |        |                                                  |        |                   |         |               |        |               |        |        |        |        |        
|                                                      |                            |                          | Net income                 |        | $                                                | 13,193 |                   |         | $             | 46,935 |               |        | $      | 40,895 |        |         | $       | 72,986  | 
|                                                      |                            |                          |                            |        |                                                  |        |                   |         |               |        |               |        |        |        |        |         |        
|Basic net income per share                            |                            | $                        | 0.24                       |        |                                                  | $      | 0.93              |         |               | $      | 0.76          |        |        | $      | 1.46   |        
|                                                      |                            |                          |                            |        |                                                  |        |                   |         |               |        |               |        |        |        |        |         |        
|Shares used in computing basic net income per share   |                            |                          | 54,722                     |        |                                                  |        | 50,643            |         |               |        | 53,818        |        |        |        | 50,001 |        
|                                                      |                            |                          |                            |        |                                                  |        |                   |         |               |        |               |        |        |        |        |        
|Diluted net income per share                          |                            | $                        | 0.23                       |        |                                                  | $      | 0.87              |         |               | $      | 0.72          |        |        | $      | 1.39   |        
|                                                      |                            |                          |                            |        |                                                  |        |                   |         |               |        |               |        |        |        |        |         |        
|Shares used in computing diluted net income per share |                            |                          | 58,030                     |        |                                                  |        | 53,746            |         |               |        | 57,034        |        |        |        | 52,691 |        
|                                                      |                            |                          |                            |        |                                                  |        |                   |         |               |        |               |        |        |        |        |        

See accompanying notes to financial statements.

2



---



##### Table of Contents



PIXAR




STATEMENTS OF CASH FLOWS

|                                                                        |                                                                                   |                                              |                                                   |                                           |          |                           |          |               |          |         |         |  
|----------------------------------------------------------------------- | --------------------------------------------------------------------------------- | -------------------------------------------- | ------------------------------------------------- | ----------------------------------------- | -------- | ------------------------- | -------- | ------------- | -------- | ------- | ------- | -
|                                                                        |                                                                                   |                                              |                                                   |                                           |          | Nine Months Ended        
|                                                                        |                                                                                   |                                              |                                                   |                                           |          |                          
|                                                                        |                                                                                   |                                              |                                                   |                                           |          | September 27,             |          | September 28,
|                                                                        |                                                                                   |                                              |                                                   |                                           |          | 2003                      |          | 2002         
|                                                                        |                                                                                   |                                              |                                                   |                                           |          |                           |          |              
|                                                                        |                                                                                   |                                              |                                                   |                                           |          | (Unaudited, in thousands)
|Cash flows from operating activities:                                   |                                                                                   |                                              |                                                   |                                           |          |                           |          |              
|                                                                        | Net income                                                                        |                                              | $                                                 | 40,895                                    |          |                           | $        | 72,986        |         
|                                                                        | Adjustments to reconcile net income to net cash provided by operating activities: |                                              |                                                   |                                           |          |                           |          |               |         
|                                                                        |                                                                                   |                                              | Depreciation and amortization                     |                                           |          | 5,889                     |          |               |          | 6,064   |        
|                                                                        |                                                                                   |                                              | Capitalized film production costs                 |                                           |          | (39,764                   | )        |               |          | (32,456 | )      
|                                                                        |                                                                                   |                                              | Amortization of capitalized film production costs |                                           |          | 14,591                    |          |               |          | 31,753  |        
|                                                                        |                                                                                   |                                              | Tax benefit from stock option exercises           |                                           |          | 33,623                    |          |               |          | 13,817  |        
|                                                                        |                                                                                   |                                              | Deferred income tax                               |                                           |          | (1,117                    | )        |               |          | 331     |        
|                                                                        |                                                                                   |                                              | Gains on sales of investments                     |                                           |          | (1,350                    | )        |               |          | (145    | )      
|                                                                        |                                                                                   |                                              | Changes in operating assets and liabilities:      |                                           |          |                           |          |               |          |         |        
|                                                                        |                                                                                   |                                              |                                                   | Trade and other receivables, net          |          |                           | 1,468    |               |          |         | 2,416   |  
|                                                                        |                                                                                   |                                              |                                                   | Receivable from Disney                    |          |                           | 80,440   |               |          |         | (79,579 | )
|                                                                        |                                                                                   |                                              |                                                   | Prepaid expenses and other assets         |          |                           | (12,514  | )             |          |         | 610     |  
|                                                                        |                                                                                   |                                              |                                                   | Accounts payable                          |          |                           | (1,179   | )             |          |         | (4,400  | )
|                                                                        |                                                                                   |                                              |                                                   | Income taxes payable                      |          |                           |         |               |          |         | 10,400  |  
|                                                                        |                                                                                   |                                              |                                                   | Accrued liabilities                       |          |                           | 883      |               |          |         | 237     |  
|                                                                        |                                                                                   |                                              |                                                   | Unearned revenue                          |          |                           | 3,085    |               |          |         | 4,544   |  
|                                                                        |                                                                                   |                                              |                                                   |                                           |          |                           |          |              
|                                                                        |                                                                                   |                                              |                                                   | Net cash provided by operating activities |          |                           | 124,950  |               |          |         | 26,578  |  
|                                                                        |                                                                                   |                                              |                                                   |                                           |          |                           |          |              
|Cash flows from investing activities:                                   |                                                                                   |                                              |                                                   |                                           |          |                           |          |              
|                                                                        |                                                                                   | Purchases of property and equipment          |                                                   |                                           | (3,418   | )                         |          |               | (3,178   | )      
|                                                                        |                                                                                   | Proceeds from sale of property and equipment |                                                   |                                           |         |                           |          |               | 55       |        
|                                                                        |                                                                                   | Proceeds from sale of securities             |                                                   |                                           | 518,021  |                           |          |               | 89,564   |        
|                                                                        |                                                                                   | Investments in securities                    |                                                   |                                           | (665,639 | )                         |          |               | (157,862 | )      
|                                                                        |                                                                                   |                                              |                                                   |                                           |          |                           |          |              
|                                                                        |                                                                                   |                                              |                                                   | Net cash used in investing activities     |          |                           | (151,036 | )             |          |         | (71,421 | )
|                                                                        |                                                                                   |                                              |                                                   |                                           |          |                           |          |              
|Cash flows from financing activities:                                   |                                                                                   |                                              |                                                   |                                           |          |                           |          |              
|                                                                        |                                                                                   | Proceeds from exercised stock options        |                                                   |                                           | 56,291   |                           |          |               | 36,561   |        
|                                                                        |                                                                                   |                                              |                                                   |                                           |          |                           |          |              
|                                                                        |                                                                                   |                                              |                                                   | Net cash provided by financing activities |          |                           | 56,291   |               |          |         | 36,561  |  
|                                                                        |                                                                                   |                                              |                                                   |                                           |          |                           |          |              
|Net increase (decrease) in cash and cash equivalents                    |                                                                                   |                                              | 30,205                                            |                                           |          |                           | (8,282   | )            
|Cash and cash equivalents at beginning of period                        |                                                                                   |                                              | 44,431                                            |                                           |          |                           | 56,289   |              
|                                                                        |                                                                                   |                                              |                                                   |                                           |          |                           |          |              
|Cash and cash equivalents at end of period                              |                                                                                   | $                                            | 74,636                                            |                                           |          | $                         | 48,007   |              
|                                                                        |                                                                                   |                                              |                                                   |                                           |          |                           |          |               |         
|Supplemental disclosure of cash flow information:                       |                                                                                   |                                              |                                                   |                                           |          |                           |          |              
|                                                                        | Cash paid during the period for income taxes                                      |                                              | $                                                 | 7,350                                     |          |                           | $        | 25,850        |         
|                                                                        |                                                                                   |                                              |                                                   |                                           |          |                           |          |               |         
|Supplemental disclosure of non-cash investing and financing activities: |                                                                                   |                                              |                                                   |                                           |          |                           |          |              
|                                                                        | Loss on equipment disposals capitalized as film production costs                  |                                              | $                                                 |                                          |          |                           | $        | 770           |         
|                                                                        |                                                                                   |                                              |                                                   |                                           |          |                           |          |               |         
|                                                                        | Unrealized gain (loss) on investments, net of taxes                               |                                              | $                                                 | (1,711                                    | )        |                           | $        | 488           |         
|                                                                        |                                                                                   |                                              |                                                   |                                           |          |                           |          |               |         

See accompanying notes to financial statements.

3



---



##### Table of Contents



PIXAR




NOTES TO FINANCIAL STATEMENTS

(1) Basis of Presentation

The accompanying unaudited condensed financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, the accompanying unaudited condensed
financial statements reflect all adjustments (consisting only of normal
recurring adjustments) considered necessary for a fair presentation of the
financial condition, results of operations, and cash flows of Pixar (or the
Company) for the periods presented. These financial statements should be read
in conjunction with the audited financial statements as of December 28, 2002
and for each of the years in the three-year period ended December 28, 2002,
including notes thereto, which are included in Pixars Annual Report on Form
10-K filed with the Securities and Exchange Commission.

The results of operations for the quarter and nine month periods ended
September 27, 2003 are not necessarily indicative of the results to be expected
for the entire year.

Certain amounts reported in previous periods have been reclassified to
conform to the 2003 financial statement presentation.

(2) Fiscal Year

Pixar operates on a 52- or 53-week fiscal year, whereby the year ends on
the Saturday nearest December 31. Fiscal year 2003 will end on January 3, 2004
and will consist of 53 weeks.

(3) Stock Option Accounting

The Company has elected to continue using the intrinsic-value method of
accounting for stock-based compensation plans in accordance with Accounting
Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to
Employees, and related interpretations. The Company has adopted those
provisions of Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, and SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure, which require disclosure
of the pro forma effects on net income and net income per share as if
compensation cost had been recognized based upon the fair value-based method at
the date of grant of options awarded.

The following table reflects pro forma net income and net income per share
had the Company elected to adopt the fair value-based method (in thousands,
except per share data):

|                              |                                                  |                      |   |               |        |                   |   |               |        |               |   |        |        |  |   |         |        | 
|----------------------------- | ------------------------------------------------ | -------------------- | - | ------------- | ------ | ----------------- | - | ------------- | ------ | ------------- | - | ------ | ------ |  | - | ------- | ------ | 
|                              |                                                  |                      |   | Quarter Ended |        | Nine Months Ended
|                              |                                                  |                      |   |               |        |                  
|                              |                                                  |                      |   | September 27, |        | September 28,     |   | September 27, |        | September 28,
|                              |                                                  |                      |   | 2003          |        | 2002              |   | 2003          |        | 2002         
|                              |                                                  |                      |   |               |        |                   |   |               |        |              
|Net income:                   |                                                  |                      |   |               |        |                   |   |               |        |               |   |        |        |  |   |        
|                              | As reported                                      |                      | $ | 13,193        |        |                   | $ | 46,935        |        |               | $ | 40,895 |        |  | $ | 72,986  |       
|                              | Fair value-based compensation cost, net of taxes |                      |   | (3,053        | )      |                   |   | (5,375        | )      |               |   | (8,295 | )      |  |   | (10,015 | )     
|                              |                                                  |                      |   |               |        |                   |   |               |        |               |   |        |        |  |   |        
|                              |                                                  | Pro forma net income |   | $             | 10,140 |                   |   | $             | 41,560 |               |   | $      | 32,600 |  |   | $       | 62,971 | 
|                              |                                                  |                      |   |               |        |                   |   |               |        |               |   |        |        |  |   |         |       
|Basic net income per share:   |                                                  |                      |   |               |        |                   |   |               |        |               |   |        |        |  |   |        
|                              | As reported                                      |                      | $ | 0.24          |        |                   | $ | 0.93          |        |               | $ | 0.76   |        |  | $ | 1.46    |       
|                              | Pro forma                                        |                      | $ | 0.19          |        |                   | $ | 0.82          |        |               | $ | 0.61   |        |  | $ | 1.26    |       
|Diluted net income per share: |                                                  |                      |   |               |        |                   |   |               |        |               |   |        |        |  |   |        
|                              | As reported                                      |                      | $ | 0.23          |        |                   | $ | 0.87          |        |               | $ | 0.72   |        |  | $ | 1.39    |       
|                              | Pro forma                                        |                      | $ | 0.18          |        |                   | $ | 0.80          |        |               | $ | 0.59   |        |  | $ | 1.23    |       

4



---



##### Table of Contents



These pro forma amounts may not be representative of future disclosures
since the estimated fair value of stock options is amortized to expense over
the vesting period, and additional options may be granted in future years. The
pro forma amounts assume that the Company had been following the fair
value-based method since the beginning of 1996.

The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model. The weighted-average fair value
of options granted was $31.19 and $25.89 for the quarter and nine months ended
September 27, 2003, respectively, and $20.72 and $17.34 for the quarter and
nine months ended September 28, 2002, respectively. Values were estimated using
zero dividend yield for all years; expected volatility of 50% and 51% for the
quarter and nine months ended September 27, 2003, respectively, and 52% for the
corresponding prior year periods; risk-free interest rates of 3.31% and 2.95%
for the quarter and nine months ended September 27, 2003, respectively, and
3.03% and 4.21% for the corresponding prior year periods; and
weighted-average expected lives for all periods of 5.0 years.

(4) Net Income per Share

Basic net income per share is computed using the weighted-average number
of common shares outstanding during the period. Diluted net income per share is
computed using the weighted-average number of common and dilutive potential
common shares outstanding during the period, using the treasury stock method
for options. Of the outstanding options to purchase shares of common stock, for
the quarter and nine months ended September 27, 2003, options to purchase
approximately 6,000 shares and 85,000 shares, respectively, of common stock
were not included in the computation of diluted net income per share because
the options exercise price was greater than the average market price of the
common shares. Options to purchase approximately 52,000 shares and 382,000
shares, respectively, of common stock were excluded for the quarter and nine
months ended September 28, 2002.

The reconciliation of basic and diluted net income per share is as follows
(in thousands, except per share amounts):

|                             |         |   |                    |   |                    |  |           |       |            |   |        |  |           |   |        |   |            |  |        |       |  |   |      |  | 
|---------------------------- | ------- | - | ------------------ | - | ------------------ |  | --------- | ----- | ---------- | - | ------ |  | --------- | - | ------ | - | ---------- |  | ------ | ----- |  | - | ---- |  | 
|                             |         |   | Quarter Ended     
|                             |         |   |                   
|                             |         |   | September 27, 2003 |   | September 28, 2002
|                             |         |   |                    |   |                   
|                             |         |   | Net                |   |                    |  |           |       | Net Income |   | Net    |  |           |   |        |   | Net Income
|                             |         |   | Income             |   | Shares             |  | per Share |       | Income     |   | Shares |  | per Share
|                             |         |   |                    |   |                    |  |           |       |            |   |        |  |          
|Basic net income per share   |         | $ | 13,193             |   |                    |  | 54,722    |       |            | $ | 0.24   |  |           | $ | 46,935 |   |            |  | 50,643 |       |  | $ | 0.93 | 
|Effect of dilutive shares:   |         |   |                    |   |                    |  |           |       |            |   |        |  |           |   |        |   |            |  |        |       |  |   |      | 
|                             | Options |   |                    |  |                    |  |           | 3,308 |            |   |        |  |           |   |        |  |            |  |        | 3,103 |  |   |      |  | 
|                             |         |   |                    |   |                    |  |           |       |            |   |        |  |           |   |        |   |            |  |        |       |  |   |      | 
|Diluted net income per share |         | $ | 13,193             |   |                    |  | 58,030    |       |            | $ | 0.23   |  |           | $ | 46,935 |   |            |  | 53,746 |       |  | $ | 0.87 | 
|                             |         |   |                    |   |                    |  |           |       |            |   |        |  |           |   |        |   |            |  |        |       |  |   |      | 

|                             |         |   |                    |   |                    |  |           |       |            |   |        |  |           |   |        |   |            |  |        |       |  |   |      |  | 
|---------------------------- | ------- | - | ------------------ | - | ------------------ |  | --------- | ----- | ---------- | - | ------ |  | --------- | - | ------ | - | ---------- |  | ------ | ----- |  | - | ---- |  | 
|                             |         |   | Nine Months Ended 
|                             |         |   |                   
|                             |         |   | September 27, 2003 |   | September 28, 2002
|                             |         |   |                    |   |                   
|                             |         |   | Net                |   |                    |  |           |       | Net Income |   | Net    |  |           |   |        |   | Net Income
|                             |         |   | Income             |   | Shares             |  | per Share |       | Income     |   | Shares |  | per Share
|                             |         |   |                    |   |                    |  |           |       |            |   |        |  |          
|Basic net income per share   |         | $ | 40,895             |   |                    |  | 53,818    |       |            | $ | 0.76   |  |           | $ | 72,986 |   |            |  | 50,001 |       |  | $ | 1.46 | 
|Effect of dilutive shares:   |         |   |                    |   |                    |  |           |       |            |   |        |  |           |   |        |   |            |  |        |       |  |   |      | 
|                             | Options |   |                    |  |                    |  |           | 3,216 |            |   |        |  |           |   |        |  |            |  |        | 2,690 |  |   |      |  | 
|                             |         |   |                    |   |                    |  |           |       |            |   |        |  |           |   |        |   |            |  |        |       |  |   |      | 
|Diluted net income per share |         | $ | 40,895             |   |                    |  | 57,034    |       |            | $ | 0.72   |  |           | $ | 72,986 |   |            |  | 52,691 |       |  | $ | 1.39 | 
|                             |         |   |                    |   |                    |  |           |       |            |   |        |  |           |   |        |   |            |  |        |       |  |   |      | 

5



---



##### Table of Contents



(5) Comprehensive Income

Other comprehensive income consists of unrealized holding gains or losses
on the Companys investments. The following table sets forth the calculation of
comprehensive income, net of income taxes (in thousands):

|                                                               |  |               |        |                   |  |               |        |               |  |   |        |   |  |   |        | 
|-------------------------------------------------------------- |  | ------------- | ------ | ----------------- |  | ------------- | ------ | ------------- |  | - | ------ | - |  | - | ------ | 
|                                                               |  | Quarter Ended |        | Nine Months Ended
|                                                               |  |               |        |                  
|                                                               |  | September 27, |        | September 28,     |  | September 27, |        | September 28,
|                                                               |  | 2003          |        | 2002              |  | 2003          |        | 2002         
|                                                               |  |               |        |                   |  |               |        |              
|Net income                                                     |  | $             | 13,193 |                   |  | $             | 46,935 |               |  | $ | 40,895 |   |  | $ | 72,986 | 
|Unrealized holding
gains (losses) on
investments, net of
taxes |  |               | (915   | )                 |  |               | 488    |               |  |   | (1,711 | ) |  |   | 488    | 
|                                                               |  |               |        |                   |  |               |        |               |  |   |        |   |  |   |        | 
|Comprehensive income                                           |  | $             | 12,278 |                   |  | $             | 47,423 |               |  | $ | 39,184 |   |  | $ | 73,474 | 
|                                                               |  |               |        |                   |  |               |        |               |  |   |        |   |  |   |        | 

(6) Feature Film and Co-Production Agreements

Feature Film Agreement

In 1991, the Company entered into a feature film agreement with Walt
Disney Pictures, a wholly owned subsidiary of Walt Disney Pictures and
Television (together with its subsidiaries and affiliates collectively referred
to herein as Disney), to develop and produce up to three computer-animated
feature films (the Feature Film Agreement). The Company is entitled to
receive compensation based on revenue from the distribution of these films and
related products. In 1995, the Company released its first feature film under
the terms of the Feature Film Agreement, Toy Story.Based on the
individual-film-forecast-computation method, all significant Toy Storyfilm
production costs were fully amortized by the year ended December 31, 1997.

Co-Production Agreement

In February 1997, Pixar and Disney entered into a Co-Production Agreement
(the Co-Production Agreement) which governs all films made by the Company
since Toy Story.Under the Co-Production Agreement, Pixar, on an exclusive
basis, agreed to produce five original computer-animated theatrical motion
pictures (the Pictures) for distribution by Disney. Pixar and Disney co-own,
co-brand and co-finance the production costs of the Pictures, and share equally
in the profits of each Picture and any related merchandise and other ancillary
products, after recovery of all of Disneys marketing, distribution and other
predefined fees and costs. The Co-Production Agreement generally provides that
Pixar is responsible for the production of each Picture, and Disney is
responsible for the marketing, promotion, publicity, advertising and
distribution of each Picture. The first three original films produced under the
Co-Production Agreement were A Bugs Life, Monsters, Inc.,and Finding Nemo.
Films currently in production at Pixar that are governed by this agreement
include The Incrediblesand Cars. A Bugs Life, Monsters, Inc., Finding Nemo,
The Incredibles,and Carscount toward the five original Pictures, whereas Toy
Story 2,as a sequel, is a derivative work that does not count toward the
Pictures. Under the Co-Production Agreement, all provisions applicable to the
Pictures also apply to derivative works such as Toy Story 2.

All payments to Pixar from Disney for development and production of Toy
Storyunder the Feature Film Agreement, and A Bugs Life, Toy Story 2,
Monsters, Inc., Finding Nemo, The Incredibles,and Carsunder the Co-Production
Agreement have been recorded as cost reimbursements. Accordingly, no revenue
has been recognized for such reimbursements; rather, the Company has netted the
reimbursements against the related costs.

Creative Group

In addition to the films produced and in process under the Co-Production
Agreement, Pixars creative development group is working on concept development
and pre-production for several new projects that are not governed by the
Co-Production Agreement. Costs related to these projects, for example, the
first feature film produced outside the existing Disney relationship (Project
2006), are therefore neither shared nor reimbursed by Disney. Such costs are
capitalized as film costs and will be amortized under the
individual-film-forecast-computation method. In the event a film is not set for
production within three years from the time of the first

6



---



##### Table of Contents



capitalized transaction, all such costs would be expensed. Project 2006
was approved for production in February 2003 and is currently targeted for a
2006 release.

Components of Capitalized Film Production Costs

The total film production costs and related amounts capitalized are as
follows (in thousands):

|                                           |                                                        |                                                            |         |               |         |              |         |          |        | 
|------------------------------------------ | ------------------------------------------------------ | ---------------------------------------------------------- | ------- | ------------- | ------- | ------------ | ------- | -------- | ------ | 
|                                           |                                                        |                                                            |         | Total Through
|                                           |                                                        |                                                            |         |              
|                                           |                                                        |                                                            |         | September 27, |         | December 28,
|                                           |                                                        |                                                            |         | 2003          |         | 2002        
|                                           |                                                        |                                                            |         |               |         |             
|Released Films:                            |                                                        | $                                                          | 186,871 |               |         | $            | 134,533 |         
|                                           | Less: Cumulative amortization of film production costs |                                                            |         | (134,689      | )       |              |         | (120,097 | )     
|                                           |                                                        |                                                            |         |               |         |              |         |         
|                                           |                                                        | Total film production costs capitalized for released films |         |               | 52,182  |              |         |          | 14,436 | 
|Films in Production                        |                                                        |                                                            | 64,609  |               |         |              | 72,760  |         
|Films in Development or Pre-production (1) |                                                        |                                                            | 486     |               |         |              | 4,908   |         
|                                           |                                                        |                                                            |         |               |         |              |         |         
|                                           |                                                        | Total film production costs capitalized                    |         | $             | 117,277 |              |         | $        | 92,104 | 
|                                           |                                                        |                                                            |         |               |         |              |         |         



|(1) |  | In the second quarter of 2003, the Company wrote-off $1.9 million in
costs previously capitalized for future film projects, which the Company
determined would not be green-lighted for production within three years
following their initial cost capitalization.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Under the Co-Production Agreement, certain operating expenses benefiting
the productions, such as certain research and development and certain general
and administrative expenses, are paid half by Pixar and half by Disney. From
the beginning of each respective fiscal year, the Company recorded the
following amounts reimbursed by Disney as offsets to the following expense
categories (in thousands):

|                           |       |       |                   |        |               |       |   |       |  | 
|-------------------------- | ----- | ----- | ----------------- | ------ | ------------- | ----- | - | ----- |  | 
|                           |       |       | Nine Months Ended
|                           |       |       |                  
|                           |       |       | September 27,     |        | September 28,
|                           |       |       | 2003              |        | 2002         
|                           |       |       |                   |        |              
|Research and development   | $     | 6,944 |                   |        | $             | 5,301 |  
|General and administrative |       | 3,398 |                   |        |               | 2,733 |  
|                           |       |       |                   |        |               |       |   |      
|                           | Total |       | $                 | 10,342 |               |       | $ | 8,034 | 
|                           |       |       |                   |        |               |       |   |      

For released films, the Company expects to amortize, based on current
estimates, approximately $37 million to $41 million in capitalized film
production costs over the succeeding twelve-month period. In addition, the
Company has amortized more than 80% of each released films original production
costs as of September 27, 2003, with the exception of Finding Nemo,which is
projected to reach the 80% milestone in the second half of fiscal 2004.

At September 27, 2003 and December 28, 2002, receivables from Disney
aggregated $48.9 million and $129.3 million, respectively, which consists of
receivables for film revenue, advances net of Disneys actual share of
production expenditures for all films under the Co-Production Agreement and
amounts due for miscellaneous reimbursements.

(7) Segment Reporting

The chief operating decision-maker is considered to be the Companys Chief
Executive Officer (CEO). The CEO reviews financial information presented on a
summary basis accompanied by disaggregated information about film revenue for
purposes of making operating decisions and assessing financial performance. The
summary financial information reviewed by the CEO is identical to the
information presented in the accompanying statement of income, and the Company
has no foreign operations. Therefore, the Company operates in a single
operating segment.

7



---



##### Table of Contents



The Companys revenue segment information by film category follows (in
thousands):

|                   |  |               |        |    |   |  |  |                   |  |   |         |    |       |               |  |  |  |   |        |               |       |  |  |  |  |   |         |    |      
|------------------ |  | ------------- | ------ | -- | - |  |  | ----------------- |  | - | ------- | -- | ----- | ------------- |  |  |  | - | ------ | ------------- | ----- |  |  |  |  | - | ------- | -- | -----
|                   |  | Quarter Ended |        |    |   |  |  | Nine Months Ended | 
|                   |  |               |        |    |   |  |  |                   | 
|                   |  | September 27, |        |    |   |  |  | September 28,     |  |   |         |    |       | September 27, |  |  |  |   |        | September 28, |      
|                   |  | 2003          |        |    |   |  |  | 2002              |  |   |         |    |       | 2003          |  |  |  |   |        | 2002          |      
|                   |  |               |        |    |   |  |  |                   |  |   |         |    |       |               |  |  |  |   |        |               |      
|Finding Nemo       |  | $             | 15,053 |    |   |  |  |                   |  | $ |        |    |       |               |  |  |  | $ | 41,344 |               |       |  |  |  |  | $ |        |    |      
|Monsters, Inc.     |  |               | 5,239  | (1 | ) |  |  |                   |  |   | 78,414  |    |       |               |  |  |  |   | 17,394 | (1            | ) (2) |  |  |  |  |   | 116,311 |    |      
|Library titles     |  |               | 7,054  |    |   |  |  |                   |  |   | 21,726  | (3 | ) (4) |               |  |  |  |   | 29,665 |               |       |  |  |  |  |   | 37,447  | (3 | ) (4)
|Animation Services |  |               | 135    |    |   |  |  |                   |  |   | 335     |    |       |               |  |  |  |   | 635    |               |       |  |  |  |  |   | 1,953   |    |      
|                   |  |               |        |    |   |  |  |                   |  |   |         |    |       |               |  |  |  |   |        |               |       |  |  |  |  |   |         |    |      
|                   |  | $             | 27,481 |    |   |  |  |                   |  | $ | 100,475 |    |       |               |  |  |  | $ | 89,038 |               |       |  |  |  |  | $ | 155,711 |    |      
|                   |  |               |        |    |   |  |  |                   |  |   |         |    |       |               |  |  |  |   |        |               |       |  |  |  |  |   |         |    |      



|(1) |  | During the quarter ended
September 27, 2003, the Company received a settlement on
Monsters, Inc.merchandise revenue which resulted in an increase in film
revenue of $3.5 million and $0.03 to diluted net income per share.                                                                                                                                                                                                
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | During the quarter ended June 28, 2003, the Company recognized an adjustment,
which reduced revenues for Monsters, Inc.domestic home video after the Company
received updated information from Disney which reflected higher returns of
domestic home video than had been originally anticipated. This adjustment
reduced home video revenues by $4.4 million and had a net impact of
$0.04 to diluted net income per share.
|   
|(3) |  | Library titles include Toy Story, A Bugs Lifeand Toy Story 2.For the
quarter and nine months ended September 28, 2002, Toy Story 2revenues of
$11.3 million and $20.0 million, respectively, have been reclassified to
Library titles to conform to the current year presentation.                                                                                                                                       
|   
|(4) |  | During the quarter ended September 28, 2002, certain adjustments were
made to previous estimates for return reserves and expenses. These
adjustments increased home video and merchandise net revenues for Toy Story
2and A Bugs Lifeand contributed approximately $0.14 to the Companys
third quarter 2002 diluted net income per share.                                                                                 

(8) Related Party Transaction

In June
2003, the Company entered into an agreement to reimburse its CEO for
expenses incurred by him in the operation of his private plane when used for
Pixar business. For the nine months ended September 27, 2003, the Company incurred
a total of approximately $91,000 of such expenses.

(9) New Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 143, Accounting for Asset Retirement Obligations (SFAS 143). SFAS 143
addresses financial accounting and reporting for obligations associated with
the retirement of tangible long-lived assets and the associated asset
retirement costs. SFAS 143 applies to legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction,
development or normal use of the asset. As used in this Statement, a legal
obligation results from existing law, statute, ordinance, written or oral
contract, or by legal construction of a contract under the doctrine of
promissory estoppel. SFAS 143 is effective for fiscal years beginning after
June 15, 2002. The adoption of SFAS 143 has not had an impact on the Companys
financial position or results of operations.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities (SFAS 146). SFAS 146 requires
recording costs associated with exit or disposal activities at their fair
values when a liability has been incurred. Under previous guidance, certain
exit costs were accrued upon managements commitment to an exit plan, which is
generally before an actual liability has been incurred. The Company adopted
SFAS 146 effective with the beginning of fiscal 2003. The adoption of SFAS 146
has not had an impact on the Companys financial position or results of
operations.

8



---



##### Table of Contents



In January 2003, the FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No.
5, 57 and 107 and a Recision of FASB Interpretation No. 34 (FIN 45). FIN 45
clarifies the requirements for a guarantors accounting for and disclosure of
certain guarantees issued and outstanding in interim and annual financial
statements. FIN 45 also clarifies that a guarantor is required to recognize, at
inception of a guarantee, the liability for the fair value of the obligation
undertaken. The disclosure requirements are effective for financial statements
of interim and annual periods after December 31, 2002. The initial recognition
and initial measurement provisions of FIN 45 are applicable to guarantees
issued or modified after December 31, 2002. The Company adopted the provisions
of FIN 45 effective with the beginning of fiscal 2003. The adoption of FIN 45
has not had a material impact on the Companys financial statements or results
of operations.

In November 2002, the FASBs Emerging Issues Task Force reached a
consensus on Issue No. 00-21, Accounting for Revenue Arrangement with Multiple
Deliverables, which addresses circumstances involving the delivery or
performance of multiple products, services, and/or rights to use assets, and
for which performance may occur at different points in time or over different
periods of time. Issue No. 00-21 also addresses whether the different
revenue-generating activities, or deliverables, are sufficiently separable, and
there exists sufficient evidence of their fair values to separately account for
some or all of the deliverables. The issue applies to all contractual
arrangements under which a vendor will perform multiple revenue-generating
activities. Issue No. 00-21 is effective for all revenue arrangements entered
into in fiscal periods beginning after June 15, 2003, with early adoption
permitted. The Company adopted Issue No. 00-21 effective the beginning of
fiscal 2003. The adoption of Issue No. 00-21 has not had a material impact on
the Companys financial statements or results of operations.

In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure that amends SFAS No. 123,
Accounting for Stock-Based Compensation. The standard provides for (1)
alternative methods of transition for an entity that voluntarily changes to the
fair-value method of accounting for stock-based employee compensation, (2)
requires more prominent disclosure of the effects of an entitys accounting
policy decisions with respect to stock-based employee compensation on reported
income, and (3) amends APB Opinion No. 28, Interim Financial Reporting, to
require disclosure of those effects in interim financial information. SFAS No.
148 is effective for fiscal years ending after December 15, 2002 and for
financial reports containing condensed financial statements for interim periods
beginning after December 15, 2002. The Company continues to account for
employee stock options using the intrinsic value method in accordance with APB
Opinion No. 25 and has adopted the additional disclosure requirements of SFAS
No. 148.




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

This Managements Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that have been made
pursuant to the provisions of the Private Securities Litigation Reform Act of
1995, particularly statements referencing the targeted release dates of our
feature films, our revenue expectations for the fourth quarter of fiscal 2003,
our target earnings per share for the full year of fiscal 2003, our anticipated
revenues and operating expenses and our expectations regarding any future
distribution arrangement we may enter into. Such forward-looking statements are
based on current expectations, estimates and projections about our industry,
managements beliefs, and assumptions made by management. In some cases,
forward-looking statements can be identified by the use of words such as
anticipates, expects, intends, plans, believes, seeks, estimates,
is scheduled for, targeted, variations of such words and similar
expressions. These statements are not guarantees of future performance and are
subject to certain risks, uncertainties and assumptions that are difficult to
predict; therefore, actual results and outcomes may differ materially from what
is expressed or forecasted in any such forward-looking statements. Such risks
and uncertainties include those set forth herein under Risk Factors on pages
17 through 32. Particular attention should be paid to the cautionary language
in Risk Factors - To meet our fiscal 2003 earnings projections, we are
dependent on our feature films and the accuracy of our forecasts, - Our
operating results have fluctuated in the past, and we expect such fluctuations
to continue, - Our scheduled successive releases of feature films will
continue to place a significant strain on our resources, and - The
Co-Production Agreement imposes several risks and restrictions on us. Unless
required by law, Pixar undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise.

9



---



##### Table of Contents



The following discussion should be read in conjunction with the section
entitled Risk Factors on pages 17 through 32 below and Managements
Discussion and Analysis of Financial Condition and Results of Operations in
our Annual Report on Form 10-K for the year ended December 28, 2002 in addition
to our interim financial statements and notes included elsewhere in this
report.

Overview

Pixar was formed in 1986 when Steve Jobs purchased the computer division
of Lucasfilm and incorporated it as a separate company. In 1991, we entered
into a feature film agreement (the Feature Film Agreement) with Walt Disney
Pictures, a wholly owned subsidiary of the Walt Disney Company (together with
its subsidiaries and affiliates collectively referred to herein as Disney),
for the development and production of up to three animated feature films to be
marketed and distributed by Disney. Our share of revenues and expenses from Toy
Story,our first feature film, was governed by the terms of the Feature Film
Agreement.

In February 1997, we entered into the Co-Production Agreement (which
superseded the Feature Film Agreement) with Disney pursuant to which we, on an
exclusive basis, agreed to produce five original computer-animated
feature-length theatrical motion pictures (the Pictures) for distribution by
Disney. Pixar and Disney agreed to co-finance the production costs of the
Pictures, co-own the Pictures (with Disney having exclusive distribution and
exploitation rights), co-brand the Pictures, and share equally in the profits
of each Picture and any related merchandise as well as other ancillary
products, after recovery of all marketing and distribution costs (which Disney
finances), a distribution fee paid to Disney and any other fees or costs,
including any participations provided to talent and the like. The Co-Production
Agreement generally provides that we will be responsible for the production of
each Picture, while Disney will be responsible for the marketing, promotion,
publicity, advertising and distribution of each Picture.

The Co-Production Agreement also contemplates that with respect to
theatrical sequels, made-for-home video sequels, television productions,
interactive media products and other derivative works related to the Pictures,
we will have the opportunity to co-finance and produce such products or to earn
passive royalties on such products. We do not share in any theme park revenues
generated as a result of the Pictures. Pursuant to the Co-Production Agreement,
in addition to co-financing the production costs of the Pictures, Disney will
reimburse us for our share of certain general and administrative costs and
certain research and development costs that benefit the productions.

Our second feature film, A Bugs Life,was released in November 1998 and
counts as the first Picture under the Co-Production Agreement. In November
1999, Toy Story 2,our third animated feature film was released. As a
theatrical sequel, Toy Story 2is a derivative work of the original Toy Story,
and therefore it does not count toward the Pictures to be produced under the
Co-Production Agreement. However, as a derivative work, Toy Story 2is treated
for all other purposes as a Picture under the Co-Production Agreement, and all
the provisions applicable to the Pictures apply.

In November 2001, we released Monsters, Inc.,our fourth animated feature
film, which counts as the second Picture under the Co-Production Agreement. On
May 30, 2003, we released Finding Nemo, our third Picture under the
Co-Production Agreement. We are currently in various stages of production on
the final two films under the Co-Production Agreement, The Incrediblesand
Cars.These films will count as the fourth and fifth films of the Pictures to
be produced under the Co-Production Agreement. The Incrediblesis currently
targeted for release on November 5, 2004, and Carsis currently targeted for a
holiday release in 2005.

All payments to us from Disney for development and production of Toy Story
under the Feature Film Agreement, and A Bugs Life, Toy Story 2, Monsters,
Inc., Finding Nemo, The Incredibles,and Cars,under the Co-Production
Agreement have been recorded as cost reimbursements. Accordingly, no revenue
has been recognized for such reimbursements; rather, we have netted the
reimbursements against the related costs.

The statements regarding the targeted release dates for our future films
are forward-looking, and the actual release dates may differ. Factors that
could cause delays in the release of our films include, but are not limited to:
(1) the uncertainties related to production delays, (2) financing requirements,
(3) personnel availability, (4) external socioeconomic and political events,
and (5) the release dates of competitive films. Please see Risk Factors on
pages 17 through 32 for a more detailed discussion of these factors.

10



---



##### Table of Contents



Target Earnings per Share for Fiscal 2003

During the fourth quarter, we believe revenues will be largely comprised
of Finding Nemos domestic home video sales and international box office receipts
from certain European territories and Japan. We expect Finding
Nemo home video sales will exceed those of Monsters, Inc.
over its lifetime. Consequently, our projections assume approximately
22 to 24 million units of the Finding Nemo home video will
be sold in the U.S. during the fourth quarter of fiscal 2003. Our
projections also assume that Finding
Nemowill achieve $400 million at the international box office; however, we
estimate that only $300 million of that will be recognized in fiscal 2003. In
addition, we expect to recognize the majority of all remaining marketing and
distribution costs related to its worldwide home video release as well as its
remaining international theatrical releases during the fourth quarter of fiscal
2003. Our projections also assume ongoing merchandise revenues and ancillary
royalties from Finding Nemo. We also assume that we will recognize merchandise
revenues, ongoing home video sales, international television licensing and
ancillary royalties relating to the sale of products from Monsters, Inc.,as
well as some revenues from our library titles throughout the remainder of the
year. Our assumptions for fiscal 2003 also include continued software sales,
interest income, operating expenses and an effective tax rate of approximately
40%.

Based on Finding Nemos success at the domestic box office, our
expectation of its international box office run exceeding the domestic box
office, and a successful domestic home video release, we are estimating diluted
earnings per share guidance for fiscal 2003 of approximately $1.76.

These statements regarding our targeted earnings per share and the
underlying assumptions are forward-looking, and actual results may differ
materially. These forward-looking statements should not be relied upon as
representing Pixars view as of any subsequent date, and Pixar undertakes no
obligation to update these forward-looking statements to reflect events or
circumstances after the date they were made. Factors that could cause actual
results for fiscal year 2003 to differ include, but are not limited to: (1) the
timing and amount of worldwide revenues and distribution costs from Finding
Nemo, Monsters, Inc.and other titles in our film library, (2) the timing,
accuracy, and sufficiency of the information we receive from Disney to
determine revenues and associated gross profits, (3) the timing and amount of
non-film related revenues and expenses, (4) the accuracy of assumptions and
judgments used to estimate certain revenues and associated gross profits, (5)
the market price of our Common Stock and related volatility and (6) external
socioeconomic and political events that are beyond our control. Please see
Risk Factors for a more detailed discussion of these factors.

Critical Accounting Policies

Revenue Recognition

We recognize film revenue from the distribution of our animated feature
films and related products when earned and reasonably estimable in accordance
with Statement of Position 00-2  Accounting by Producers or Distributors of
Films (SOP 00-2). The following are the conditions that must be met in order
to recognize revenue in accordance with SOP 00-2:



| |  | persuasive evidence of a sale or licensing arrangement with a customer exists;                                                                         
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | the film is complete and, in accordance with the terms of the arrangement, has been delivered or is available for immediate
and unconditional delivery;
| 
| |  | the license period of the arrangement has begun and the customer can begin its exploitation, exhibition or sale;                                       
| 
| |  | the arrangement fee is fixed or determinable; and                                                                                                      
| 
| |  | collection of the arrangement fee is reasonably assured.                                                                                               

Under the Co-Production Agreement, we share equally with Disney in the
profits of the Pictures after Disney recovers its marketing, distribution and
other predefined costs and fees. Our revenues for Toy Storyare governed by the
terms of the Feature Film Agreement. Although our revenues are based on the
information we receive from Disney, we may make adjustments to that information
based on our estimates and judgments. For example, our

11



---



##### Table of Contents



theatrical revenues may be adjusted for our estimated reserves on
potential uncollectible amounts to be received from theatrical exhibitors. We
also make adjustments to our home video revenues for estimates on return
reserves that may differ from those reported by Disney. The estimates on
reserves may be adjusted periodically based on actual rates of returns,
inventory levels in the distribution channel, as well as other business and
industry information. In addition, we utilize margin normalization, such as
with merchandising or home video, in accordance with the provisions of SOP
00-2. This may result in the utilization of budgeted or forecasted information
rather than actual costs incurred if it is deemed to be a more accurate
reflection of our participation. Similar to return reserves, these expense
estimates are reviewed and may be adjusted periodically to ensure the most
accurate depiction of our participation is reflected. Such adjustments were
made to home video reserve and home video and merchandise expense estimates
during fiscal 2002 and 2003. During fiscal 2002, one-time adjustments to A
Bugs Lifeand Toy Story 2home video reserves and margins and merchandising
revenues had a positive net impact of $0.19 to our diluted net income per
share. During the second quarter of fiscal 2003, we recognized an adjustment
which reduced our Monsters, Inc.domestic home video revenue after we received
updated information from Disney which reflected higher returns of domestic home
video than had been originally anticipated. This adjustment reduced our home
video revenues by $4.4 million and had a net impact of $0.04 to our diluted net
income per share.

The amount of revenue recognized in any given quarter or quarters from all
of our films depends on the timing, accuracy and sufficiency of the information
we receive from Disney to determine revenues and associated gross profits.
Although Disney provides us with the most current information available to
enable us to recognize our share of revenue and determine our film gross
profit, Disney may also make subsequent adjustments to the information that it
has provided, and these adjustments could have a material impact on our
operating results in later periods. As updated information becomes available
from Disney on a more timely basis, it may result in a change of estimation for
revenue recognition. For example, we received a settlement on Monsters, Inc.
merchandise revenue for the third quarter ended September 27, 2003, which
resulted in an increase of $3.5 million to our revenues and $0.03 to our
diluted net income per share. We also
received updated information from Disney in the first quarter of fiscal 2003,
which decreased previously recorded home video expenses by $3.2 million for all
of our film titles on a cumulative basis. This resulted in an increase of $0.03
to our diluted net income per share for our first quarter of fiscal 2003.
Additionally, we have the right to audit Disneys books and records related to
the Pictures according to the terms of the Co-Production Agreement, which could
result in adjustments that may be material to the financial statements in any
given quarter or quarters. Any revenue received in advance from Disney is
deferred and recorded as revenue when earned.

In accordance with the provisions of SOP 00-2, a film is classified as a
library title after three years from the films initial release. Currently, Toy
Story, A Bugs Lifeand Toy Story 2are classified as library titles. The term
library titles is used solely for the purpose of classification and for
identifying previously released films in accordance with the provisions of SOP
00-2. Revenue recognition for such titles is in accordance with our revenue
recognition policy for film revenue.

Film Production Costs

We capitalize our share of direct film production costs in accordance with
SOP 00-2. Film production costs include costs to develop and produce computer
animated motion pictures, which primarily consists of salaries, equipment and
overhead. Film production costs in excess of reimbursable amounts from Disney
are capitalized. Production overhead, a component of film costs, includes
allocable costs of individuals or departments with exclusive or significant
responsibility for the production of our films. Capitalized production overhead
does not include administrative, general and research and development expenses.
In addition to the films produced, we are also working on concept development
for several new projects.

Once a film is released, capitalized film production costs are amortized
in the proportion that the revenue during the period for each film bears to the
estimated revenue to be received from all sources under the
individual-film-forecast-computation method. The amount of film costs that will
be amortized each quarter will depend on how much future revenue we expect to
receive from each film. We make certain estimates and judgments of our future
gross revenues to be received for each film based on information received from
Disney and our knowledge of the industry. Estimates of anticipated total gross
revenues are reviewed periodically and may be revised if necessary. A change to
the estimate of gross revenues for an individual film may result in an increase
or decrease to the percentage of amortization of capitalized film costs
relative to a previous period. Unamortized film production costs

12



---



##### Table of Contents



are compared with net realizable value each reporting period on a
film-by-film basis. If estimated remaining gross revenues are not sufficient to
recover the unamortized film production costs, the unamortized film production
costs would be written down to fair value.

Results of Operations

Our results for the quarter and nine months ended September 27, 2003 were
driven primarily by Finding Nemos worldwide box office revenues, merchandise
sales and ancillary royalties. Also contributing to our results were revenues
associated with Monsters, Inc. and our library titles.

Revenue

Total revenue, which consists of film revenue and software revenue, was
$30.2 million and $97.7 million for the quarter and nine months ended September
27, 2003, respectively, compared to $102.5 million and $162.3 million in the
corresponding prior year periods.

Film revenue for the quarter ended September 27, 2003 was $27.5 million
compared with $100.5 million in the corresponding prior year period. Higher
revenue in the prior year period was primarily due to revenues associated with
the highly successful domestic home video release of Monsters, Inc. during the
third quarter of fiscal 2002. Film revenue for the quarter ended September 27,
2003 consisted of $15.1 million from Finding Nemo, primarily from worldwide box
office revenues, merchandise sales and ancillary royalties, offset by some home
video release costs. Film revenue for the quarter ended September 27, 2003
also included $5.2 million from Monsters, Inc.,which related primarily to
revenues from merchandise sales and ancillary royalties and included a
settlement on Monsters, Inc. merchandise revenue. This settlement resulted in
an increase of $3.5 million to our revenue and $0.03 to our diluted net income
per share. Also included in our film revenue for the third quarter ended
September 27, 2003 was $7.1 million from our library titles for merchandise
sales, as well as continuing worldwide home video sales, worldwide television
licensing and ancillary royalties.

Film revenue for the quarter ended September 28, 2002 consisted of $78.4
million from Monsters, Inc.and $21.7 million from our library titles. Revenues
from Monsters, Inc.were primarily attributable to its highly successful
September 2002 home video release, as well as some merchandise sales and other
ancillary royalties. Revenues for our library titles were comprised of
merchandise sales, continuing worldwide home video sales and other ancillary
royalties. During the third quarter of 2002, we made certain favorable
adjustments to previous home video reserve and home video and merchandising
expense estimates which contributed to the home video revenues associated with
Toy Story 2and A Bugs Life. These adjustments contributed approximately $0.14
to our diluted net income per share for the quarter ended September 28, 2002.

Film revenue for the nine months ended September 27, 2003 was $89.0
million compared to $155.7 million in the corresponding prior year period. Film
revenue for the first three quarters of fiscal 2003 included revenues which were
primarily comprised of worldwide theatrical revenue, merchandise and ancillary
royalties from Finding Nemoof $41.3 million. Monsters, Inc.contributed $17.4
million, consisting of merchandise sales, ancillary royalties, worldwide
television and foreign home video revenues. Our library titles contributed
$29.7 million, consisting of home video revenue, merchandise sales, and other
ancillary royalties. In addition to the third quarter fiscal 2003 settlement referred to
above, in the second quarter of fiscal 2003, we received updated information
from Disney, which reflected higher home video returns for
Monsters, Inc. than
had been originally anticipated and resulted in a reduction to our revenues of
$4.4 million and had a net impact of $0.04 to our diluted net income per share for that quarter.

Film revenue for the nine months ended September 28, 2002 was comprised of
worldwide theatrical revenue, home video sales, merchandise sales, and other
ancillary royalties from Monsters, Inc.totaling $116.3 million. Revenues from
our library titles of $37.4 million were comprised of merchandise sales,
worldwide home video sales, and other ancillary royalties.

On May 1, 2003, the home videos of two of our library titles, Toy Story
and Toy Story 2, were placed on a sales moratorium. Although this strategy is
designed to potentially increase sales over the lifetime of a title and to
support a higher sales price upon re-release, it is difficult to predict the
impact this strategy will actually have on our sales, particularly since these
are our first feature films to be placed on a sales moratorium. See Risk
Factors  To meet

13



---



##### Table of Contents



our fiscal 2003 earnings projections, we are primarily dependent on our
feature films and the accuracy of our forecasts.

Software revenue includes software license revenue from RenderMan®.
Software revenue for the quarter and nine months ended September 27, 2003 was
$2.7 million and $8.7 million, respectively, compared to $2.0 million and $6.6
million in the corresponding prior year periods. The increase in software
revenues over the prior year periods resulted from increases in RenderMan®
software licensing sales during such periods. We continue to expect ongoing
variability in revenues derived from software licenses, and we expect future
software revenues will be comparable with the average results from previous
quarters.

For both the quarter and nine months ended September 27, 2003, Disney
accounted for 89% of our total revenue compared to 97% and 95%, respectively,
for the corresponding prior year periods. The revenue from Disney consisted
primarily of film related revenue. Because of our relationship with Disney
under the Co-Production Agreement, Disney is expected to continue to represent
significantly greater than 10% of our revenue in 2003 and for the near future.

Cost of Revenue

Cost of film revenue for the quarter and nine months ended September 27,
2003 was $4.3 million and $15.0 million, respectively, compared to $21.3
million and $33.2 million in the corresponding prior year periods. Cost of film
revenue represents amortization of capitalized film production costs. See
Capitalized Film Production Costs below. For the quarter and nine months
ended September 27, 2003, cost of film revenue represented amortization of
capitalized film production costs associated with Finding Nemo, Monsters, Inc.,
Toy Story 2and A Bugs Life,and represented 15.6% and 16.9%, respectively, of
total film revenue as compared to 21.2% and 21.3% in the corresponding prior
year periods. Our cost of revenue as a percentage of film revenue may vary for
any given period due to changes in the mix of film revenue as the gross profit
varies by film, as well as for revisions to estimates on revenue to be received
under the individual-film-forecast-computation method for an individual film. A
change to an individual films estimate of revenue to be received may result in
an increase or decrease to the amortization of the capitalized film costs
relative to a previous period. For the quarter and nine months ended September
27, 2003, the decrease in our cost of revenue amortization percentage as
compared to the prior periods was due in part to revisions to our estimates of
ultimate revenue. The amortization of costs for our library titles and
Monsters, Inc.have decreased relative to their respective amortization
percentages in the prior year due to increases in their ultimate revenues.
Additionally, for the quarter and nine months ended September 27, 2003, Finding
Nemohas a lower cost amortization relative to Monsters, Inc. in the
corresponding prior year periods due to the expectation that we will receive
more revenues from Finding Nemo over its lifetime.

Cost of software revenue consists of the direct costs and manufacturing
overhead required to reproduce and package our software products, and for
periods prior to fiscal 2003, amortization of purchased technology. Cost of
software revenue as a percentage of the related revenue was less than 0.1% and
0.3%, respectively, for the quarter and nine months ended September 27, 2003 as
compared to 7% and 6% for the corresponding prior year periods.
Cost of software revenue for the quarter and nine months ended September 27,
2003 related primarily to direct costs and manufacturing overhead; however, for
the quarter and nine months ended September 28, 2002 costs of software revenue
related primarily to amortization of purchased technology of $120,000 and
$360,000, respectively. We fully amortized this purchased technology against
related license revenue by the end of fiscal 2002.

Operating Expenses

Total operating expenses were $6.8 million and $23.7 million,
respectively, for the quarter and nine months ended September 27, 2003 compared
to $4.8 million and $13.8 million in the corresponding prior year periods. We
continue to expect our operating expenses to increase as a result of the growth
experienced by the studio as we ramp up to meet the demands of multiple films
in production. Our operating expenses for the nine months ended September 27,
2003 include certain unanticipated expenses which occurred during the second
quarter. For example, we expensed approximately $3.2 million of costs in that
quarter related to a one-time incentive compensation to our employees in
recognition of their contribution to the box office success of Finding Nemo,
and we wrote off $1.9 million in costs previously capitalized for future film
projects. In reviewing our projects in development, we determined it unlikely
that these projects would be green-lighted for production within three years
following their

14



---



##### Table of Contents



initial cost capitalization. Therefore, under SOP 00-2, these amounts were
expensed in the second quarter of fiscal 2003 and are included in our operating
expenses for the nine months ended September 27, 2003.

Under the Co-Production Agreement, Disney reimburses us for half of
certain general and administrative costs and certain research and development
costs that benefit the productions. The funding received from Disney is treated
as operating expense reimbursements. To the extent that personnel, facilities
and other expenditures are not capitalized by us nor allocated to and paid for
by Disney, and precede or are not subsequently followed by an increase in
revenue, our business, operating results and financial condition will be
materially adversely affected. For example, in February 2003, we approved our
first feature film outside our existing Disney relationship (Project 2006)
for production, and because it is our first feature film to be produced outside
of the existing relationship with Disney, certain costs that have been
reimbursed by Disney in our previous films will now be expensed as incurred.

Research and Development.Research and development expenses consist
primarily of salaries and support for personnel conducting research and
development for our RenderMan® software and for our proprietary Marionette and
Ringmaster animation and production management software and for creative
development for future films. Research and development expenses increased to
$3.1 million and $12.0 million, respectively, for the quarter and nine months
ended September 27, 2003 from $2.0 million and $6.6 million for the
corresponding prior year periods. The increased expenses in the third quarter
of fiscal 2003 relative to the comparable prior year period were primarily due
to an increase in employee and equipment costs, as well as an increase in
expenses related to our short film projects. The increase for the nine months
ended September 27, 2003 also included the higher employee related costs
resulting from the one-time incentive compensation and the write-off of $1.9

million in previously capitalized development costs referred to above.
Research and development expenses may continue to increase in future periods.
To date, all research and development costs not reimbursed by Disney have been
expensed as incurred.

Sales and Marketing.Sales and marketing expenses consist primarily of
salaries and related overhead, as well as public relations, advertising,
technical support and trade show costs required to support our software sales.
Sales and marketing expenses increased to $803,000 and $1.8 million,
respectively, for the quarter and nine months ended September 27, 2003 from
$404,000 and $858,000 in the corresponding prior year periods. The increase in
costs for the third quarter of fiscal 2003 as compared to the comparable prior
year period were due to increased public relations and compensation costs. The
increase for the nine months ended September 27, 2003 also relates to higher
employee related costs resulting from the one-time incentive compensation in
the second quarter of 2003. We believe that sales and marketing expenses may
continue to increase in future periods, particularly in the areas of public
relations and corporate marketing related to our films.

General and Administrative.General and administrative expenses consist
primarily of salaries of management and administrative personnel, insurance
costs, and legal and professional fees. General and administrative expenses
increased to $2.9 million and $9.9 million, respectively, for the quarter and
nine months ended September 27, 2003 from $2.3 million and $6.4 million in the
corresponding prior year periods. The increase for the third quarter of fiscal
2003 as compared to the comparable prior year period was due primarily to
increased legal and professional fees. The one-time incentive compensation
recognized in the second quarter of fiscal 2003 also contributed to the
increase for the nine months ended September 27, 2003. General and
administrative expenses may continue to increase in future periods.

Other Income, Net

Other income, net was $2.7 million and $8.6 million, respectively, for the
quarter and nine months ended September 27, 2003, compared to $2.6 million and
$7.7 million in the corresponding prior year periods. The increase in other
income over the comparable prior year periods is primarily due to net gains on
sales of investments.

Income Tax Expense

Income tax expense for the quarter and nine months ended September 27,
2003 approximates the federal and state statutory income tax rate of 39.5%
versus 40.4% in the same periods of the prior year.

Capitalized Film Production Costs

15



---



##### Table of Contents



We had $117.3 million in capitalized film production costs as of September
27, 2003, consisting of costs relating to Toy Story 2, A Bugs Life, Monsters,
Inc., Finding Nemo, The Incrediblesand Cars,all of which are being
co-financed by Disney under the Co-Production Agreement. Capitalized film
production costs also include costs related to Project 2006, our first
Pixar-only financed film. In the second quarter of fiscal 2003, we wrote off
$1.9 million in costs previously capitalized for future film projects. In
reviewing our projects in development, we determined it unlikely that these
projects would be green-lighted for production within three years following
their initial cost capitalization. Therefore, under SOP 00-2, these amounts
were expensed in the second quarter of fiscal 2003. All Toy Storycapitalized
film costs were fully amortized as of December 31, 1997.

Liquidity and Capital Resources

Cash, cash equivalents and investments increased to $516.5 million by the
end of the third quarter of fiscal 2003, an increase of $177.4 million since
December 28, 2002. The increase was primarily due to cash received from Disney
for our share of film revenue, particularly relating to Monsters, Inc.
worldwide home video revenue, along with proceeds from stock option exercises,
interest income and software revenue, offset by film production costs.

Net cash provided by operating activities for the nine months ended
September 27, 2003 of $125.0 million was primarily attributable to a decrease
of $80.4 million in our receivable from Disney as a result of cash received and
net income of $40.9 million, partially offset by capitalized film production
costs of $39.8 million. Net cash used in investing activities of $151.0 million
consisted primarily of investments in securities of $665.6 million, offset by
proceeds from the sales of investment securities of $518.0 million. Net cash
provided by financing activities consisted entirely of proceeds of $56.3
million from exercised stock options.

As of September 27, 2003, our principal source of liquidity was
approximately $516.5 million in cash, cash equivalents and investments. Our
future capital commitments primarily consist of obligations to fund production
costs of films and derivative products under the Co-Production Agreement and
beyond. We are currently co-financing The Incrediblesand Carsunder the
Co-Production Agreement. Under the Co-Production Agreement, we may co-finance
other derivative works such as theatrical sequels, direct to home video
sequels, interactive products and television productions. Additionally, we have
already approved for production Project 2006, our first film beyond the
Co-Production Agreement, and will finance production costs related to Project
2006 entirely. We also have obligations to pay portions of any revenue derived
from each feature film produced under the Co-Production Agreement to our
entertainment law firm in consideration for services rendered.

Film Production Costs.For the remainder of fiscal 2003, we expect to
spend approximately $17 million to $19 million, net of Disneys film cost
reimbursements, on direct film costs and other costs to fund our ongoing film
projects under the Co-Production Agreement and beyond, which will directly
impact working capital.

Capital Expenditures.For the remainder of fiscal 2003, we expect to spend
approximately $4 million to $6 million related to capital expenditures for our
Emeryville headquarters and studio and other projects.

We believe that our currently available funds and forecasted cash from
operations for the remainder of fiscal 2003 will be sufficient to satisfy our
currently anticipated cash needs for working capital and capital expenditures,
including the production costs of The Incrediblesand Cars, as well as the
production and development costs associated with films not covered under the
Co-Production Agreement. There can be no assurance that current and forecasted
cash from operations will be sufficient to fund operations. To date, we have
chosen to use our existing cash resources to fund both the construction on our
Emeryville facility and film production costs. We may continue to use our cash
resources for such expenditures, or may choose to finance such capital
expenditures through issuance of additional equity or debt securities, by
obtaining a credit facility or by some other financing mechanism.

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for
Asset Retirement Obligations (SFAS 143). SFAS 143 addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. SFAS 143
applies to legal obligations associated with the retirement of long-lived

16



---



##### Table of Contents



assets that result from the acquisition, construction, development or
normal use of the asset. As used in this Statement, a legal obligation results
from existing law, statute, ordinance, written or oral contract, or by legal
construction of a contract under the doctrine of promissory estoppel. SFAS 143
is effective for fiscal years beginning after June 15, 2002. The adoption of
SFAS 143 has not had a material impact on our financial position or results of
operations.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities (SFAS 146). SFAS 146 requires
recording costs associated with exit or disposal activities at their fair
values when a liability has been incurred. Under previous guidance, certain
exit costs were accrued upon managements commitment to an exit plan, which is
generally before an actual liability has been incurred. We adopted SFAS 146
effective with the beginning of fiscal 2003. The adoption of SFAS 146 has not
had an impact on our financial position or results of operations.

In January 2003, the FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No.
5, 57 and 107 and a Recission of FASB Interpretation No. 34 (FIN 45). FIN 45
clarifies the requirements for a guarantors accounting for and disclosure of
certain guarantees issued and outstanding in interim and annual financial
statements. FIN 45 also clarifies that a guarantor is required to recognize, at
inception of a guarantee, the liability for the fair value of the obligation
undertaken. The disclosure requirements are effective for financial statements
of interim and annual periods after December 31, 2002. The initial recognition
and initial measurement provisions of FIN 45 are applicable to guarantees
issued or modified after December 31, 2002. We adopted the provisions of FIN 45
effective with the beginning of fiscal 2003. The adoption of FIN 45 has not had
an impact on our financial statements or results of operations.

In November 2002, the FASBs Emerging Issues Task Force reached a
consensus on Issue No. 00-21, Accounting for Revenue Arrangement with Multiple
Deliverables, which addresses circumstances involving the delivery or
performance of multiple products, services, and/or rights to use assets, and
for which performance may occur at different points in time or over different
periods of time. Issue No. 00-21 also addresses whether the different
revenue-generating activities, or deliverables, are sufficiently separable, and
there exists sufficient evidence of their fair values to separately account for
some or all of the deliverables. The issue applies to all contractual
arrangements under which a vendor will perform multiple revenue-generating
activities. Issue No. 00-21 is effective for all revenue arrangements entered
into in fiscal periods beginning after June 15, 2003, with early adoption
permitted. We adopted Issue No. 00-21 effective the beginning of fiscal 2003.
The adoption of Issue No. 00-21 has not had a material impact on our financial
statements or results of operations.

In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure that amends SFAS No. 123,
Accounting for Stock-Based Compensation. The standard provides for (1)
alternative methods of transition for an entity that voluntarily changes to the
fair-value method of accounting for stock-based employee compensation; (2)
requires more prominent disclosure of the effects of an entitys accounting
policy decisions with respect to stock-based employee compensation on reported
income; and (3) amends Accounting Principles Board (APB) Opinion No. 28,
Interim Financial Reporting, to require disclosure of those effects in
interim financial information. SFAS No. 148 is effective for fiscal years
ending after December 15, 2002 and for financial reports containing condensed
financial statements for interim periods beginning after December 15, 2002. We
continue to account for employee stock options using the intrinsic value method
in accordance with APB Opinion No. 25 and have adopted the additional
disclosure requirements of SFAS No. 148.




Risk Factors

The following is a discussion of certain factors that currently impact or
may impact our business, operating results and/or financial condition. You
should carefully consider these factors before making an investment decision
with respect to our Common Stock.

To meet our fiscal 2003 earnings projections, we are primarily dependent on our
feature films and the accuracy of our forecasts.

17



---



##### Table of Contents



For the remainder of fiscal 2003, our revenue and operating results will
be largely dependent upon (1) the timing and amount of worldwide revenues and
distribution costs from Finding Nemo, Monsters, Inc.and other titles in our
film library, (2) the timing, accuracy, and sufficiency of the information we
receive from Disney to determine revenues and associated gross profits, (3) the
timing and amount of non-film related revenues and expenses, (4) the accuracy
of assumptions and judgments used to estimate certain revenues and associated
gross profits, (5) the market price of our Common Stock and related volatility
and (6) external socioeconomic and political events that are beyond our
control.

Dependence on revenue from our feature films.

Under the Co-Production Agreement, Pixar and Disney share equally in the
profits of our animated feature films after Disney recovers its distribution
fee and its marketing and distribution costs. Distribution costs include
worldwide theatrical release costs, costs related to merchandise, Disneys
costs to market and distribute home videos in the United States and foreign
markets, Disneys distribution fee, and other costs including talent
participation and residuals. We remain dependent on the timing, accuracy, and
sufficiency of the information provided by Disney.

For our business to be successful, our films must achieve box office
success. While we have been successful in the release of our first five feature
films, this level of success is unusual in the motion picture industry, and our
future releases may not achieve similar results. For the remainder of 2003, we
will be dependent on the continuing success of Finding Nemo. Although Finding
Nemohas had tremendous success in the domestic theatrical market and in most
foreign markets where it has been released, as well as a successful
initial domestic home video release, unless Finding Nemoachieves
continued box office success in the remaining territories and is successful in
home video, television licensing, and merchandise sales, it may not generate
sufficient revenue for us to meet our projections in 2003 and beyond.

A significant portion of our anticipated revenues for the remainder of
fiscal 2003 is based on the assumption that Finding Nemowill be a success in
the domestic home video, worldwide theatrical and worldwide merchandising
markets. Our projections assume approximately 22 to 24 million
units of the Finding Nemo home video will be sold in the U.S.
during the fourth quarter of fiscal 2003. In addition, our projections are based on the assumption that
Finding Nemowill achieve $400 million in international
box office receipts, of which $300 million we estimate will be
recognized in fiscal 2003. These projections for home video sales and international box
office receipts are significantly higher than our previous titles, and there is no
assurance that these projections can be achieved. Therefore, if Finding Nemodoes not generate
sufficient worldwide box office receipts, domestic home video sales, or
worldwide merchandise sales, it would adversely impact our 2003 operating
results and our ability to meet our targeted results. In addition, for the
remainder of 2003, we expect continued contributions from
Monsters, Inc. and our library titles. If Monsters, Inc.or our library titles do not generate sufficient
revenues, our 2003 results could be adversely affected. To
date, we have recognized most of the revenues we expect to recognize over the

lifetime of the Toy Storyfranchise and A Bugs Life. For Monsters, Inc., we
have recognized essentially all of the theatrical revenues and a substantial
portion of the home video and merchandise revenues. Although our forecast
assumes some continued revenues from these titles, there can be no assurance
that they will be sufficient to achieve our 2003 earnings projection.

Forecasting film revenue and associated gross profits from our feature films is
extremely difficult.

Although we have experienced a successful track record with the releases
of our feature films, it is difficult to predict the ultimate box office
success of Finding Nemo. Even with Finding Nemoexperiencing a very successful
theatrical run in the U.S. and other foreign territories where it has been
released, it is difficult to predict the ultimate worldwide theatrical revenues
as well as related home video, television licensing, merchandising and
ancillary revenue streams. While customer acceptance is initially measured by
box office success, customer acceptance within each follow-on product category,
such as home video, merchandise or television, depends on factors unique to
each type of product, such as pricing, competitive products, and the time of
year or state of the economy into which a product is released, among many other
factors. In addition, we have found that the degree of customer acceptance
varies widely among foreign countries. While box office success is often a good
indicator of general customer acceptance, the relative success of follow-on
products is not always directly correlated, and the degree of correlation is
difficult to predict.

It is also difficult to forecast the amount of revenues from Monsters,
Inc.and the titles in our film library. The revenues generated from continued
home video and merchandise sales can fluctuate due to various market factors.
Because the revenues from films nearing the end of life cycle tend to be
relatively small, minor fluctuations can

18



---



##### Table of Contents



result in notable variances from forecast. Both Toy Storyand Toy Story 2
home videos are currently subject to a sales moratorium, which began on May 1,
2003. Although this strategy is designed to increase potential sales over the
lifetime of a title and to support a higher sales price upon re-release, it is
difficult to predict the actual impact of this strategy, particularly since
these are our first titles to be placed on a sales moratorium, and it may not
generate the results we expect in future years.

With respect to the difficulty of forecasting the timing of revenues,
Disney distributes our films and film-related products and therefore determines
the timing of product releases. While the timing of domestic release is
typically known well in advance of release, the timing of international
releases is less predictable. A foreign product release is often marked by a
rollout across many countries over the course of many months. Therefore, the
timing of international revenues is inherently more difficult to predict than
the timing of domestic revenues.

In addition, the amount of revenue recognized in any given quarter or
quarters from all of our films depends on the timing, accuracy, and sufficiency
of the information we receive from Disney to determine revenues and associated
gross profits. Although we obtain from Disney the most current information
available to recognize our share of revenue and to determine our film gross
profit, Disney may make subsequent adjustments to the information that it has
provided, which could have a material impact on us in later periods. For
instance, towards the end of the life cycle for a revenue stream, Disney may
inform us, and has in the past informed us, of additional distribution costs to
those previously forecasted. Such adjustments have and may continue to impact
our revenue share and our film gross profit. In addition, through information
we obtain from other sources, we may make certain judgments and/or assumptions
and adjust the information we receive from Disney. For example, in the past, we
have made adjustments to our home video revenues for estimates on return
reserves that may differ from those reported by Disney. The estimates on
reserves may be adjusted periodically based on actual rates of returns,
estimated sell-throughs and the related inventory levels in the distribution
channel, as well as other business and industry information. For example,
during the third quarter of fiscal 2003, we received a settlement on Monsters,
Inc. merchandise revenue, which resulted in an increase of $3.5 million to our
revenues and $0.03 to our diluted net income per share, and during the second
quarter of fiscal 2003, we recognized an adjustment, which reduced our revenues
for Monsters, Inc.domestic home video after we received updated information
from Disney which reflected higher returns of domestic home video than had been
originally anticipated. The adjustment in the second quarter of
fiscal 2003 reduced our home video revenues by $4.4
million and had a net impact of $0.04 to our diluted net income per share.
Furthermore, we may utilize margin normalization in estimating associated
costs, such as with merchandising or home video, in accordance with the
provisions of Statement of Position 00-2  Accounting by Producers or
Distributors of Films (SOP 00-2). Due to these factors, the amount and timing
of our future revenues and associated expenses from our films are difficult to
forecast, and it is possible, in any given quarter, that we will not recognize
sufficient film revenue to generate significant earnings. See Managements
Discussion and Analysis of Financial Condition and Results of Operations.

With respect to capitalized film production costs, our policy is to
amortize these costs over the expected revenue streams as we recognize revenues
from the associated films. The amount of film costs that will be amortized each
quarter will depend on how much future revenue we expect to receive from each
film. Unamortized film production costs are compared with net realizable value
each reporting period on a film-by-film basis. If estimated remaining gross
revenues are not sufficient to recover the unamortized film production costs,
the unamortized film production costs will be written down to net realizable
value. In any given quarter, if we lower our previous forecast with respect to
total anticipated revenue from any individual feature film, we would be
required to accelerate amortization of related film costs, resulting in lower
gross margins. Such lower gross margins would adversely impact our business,
operating results, and financial condition.

Forecasting our operating expenses is extremely difficult.

Our operating expenses will continue to be extremely difficult to
forecast. We budget the direct costs of the Pictures with Disney, and we share
such costs equally. We capitalize our share of these direct costs of film
production in accordance with SOP 00-2. A substantial portion of all of our
other costs is incurred for the benefit of feature films (Overhead),
including research and development expenses and general and administrative
expenses. Portions of our Overhead are included in the budgets for the Pictures
under the Co-Production Agreement, and we will share such costs equally with
Disney under the Co-Production Agreement. With respect to the portion of our
Overhead that is not reimbursed by Disney, we either (1) capitalize such
portion as film production costs, if required

19



---



##### Table of Contents



under SOP 00-2, or (2) charge it to operating expense in the period
incurred. Since a substantial portion of our Overhead is related to the
Pictures, and is therefore reimbursed by Disney, and since we capitalize other
amounts in accordance with SOP 00-2, our reported operating expenses for the
first nine months of fiscal 2003 have not reflected, and future reported
operating expenses will not reflect, our true level of spending on the
production of animated feature films, related products and Overhead. Further,
as we begin production of our films beyond the Co-Production Agreement, we
expect our operating expenses to continue to increase to the extent that they
are not capitalized or not shared with Disney.

Film production budgets may increase, and film production spending may exceed
such budgets.

Our future film budgets may continue to increase due to factors including,
but not limited to, (1) escalation in compensation rates of people required to
work on our current projects, (2) number of personnel required to work on our
current projects, (3) equipment needs, (4) the enhancement of existing or the
development of new proprietary technology and (5) the expansion of our
facilities to accommodate the growth of the studio. The budget for The
Incrediblesand Carsand subsequent films and related products are expected to
be greater than the budgets for our previous films. Under the Co-Production
Agreement, we will continue to finance the budgets of The Incrediblesand Cars
equally with Disney. In addition, we have approved for production our first
Pixar-only financed film, Project 2006. Due to production exigencies, which
are often difficult to predict, it is not uncommon for film production spending
to exceed film production budgets, and our current projects may not be
completed within the budgeted amounts. In addition, when production of each
film is completed, we may incur significant carrying costs associated with
transitioning personnel on creative and development teams from one project to
another. These carrying costs, which are currently shared with Disney and
treated as film costs, increase overall production budgets and could have a
material adverse effect on our results of operations and financial condition.

Software revenue.

We continue to maintain minimal emphasis on and devote limited resources
to the commercialization of software products relative to our core business of
producing films. Our fiscal 2003 earnings projections include revenues
attributable to non-film related sources including software revenue; however,
there can be no assurance that the timing and amount of such revenues will be
sufficient to meet our 2003 earnings projection.

Other non-film revenue and expenses.

Our fiscal 2003 earnings are expected to include our forecast of other
non-film related sources such as interest income and our effective tax rate.
Interest income is difficult to predict and can fluctuate depending on our cash
balance as well as external factors beyond our control, such as economic
conditions and interest rates available to us during the year. For example,
although our average cash, cash equivalents and investment balances increased
during fiscal 2002, interest income decreased when compared to fiscal 2001 due
to declining interest rates during fiscal 2002. Income tax expense may also
fluctuate. Our income tax rate for fiscal 2002 approximated statutory rates,
and we expect that our income tax rate for fiscal 2003 will also approximate
statutory rates; however, our effective tax rate may fluctuate in future
periods. There can be no assurance that the amount of other non-film revenues
and expenses forecasted such as those noted above will be achieved to meet our
fiscal 2003 earnings projection.

Our operating results have fluctuated in the past, and we expect such
fluctuations to continue.

Our revenues fluctuate significantly.

We continue to expect significant fluctuations in our future quarterly and
annual revenues because of a variety of factors, including the following:



| |  |  | the timing of the domestic and international theatrical releases of our animated feature films,                                 
| | - |  | --------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the success of our animated feature films,                                                                                      
|
| |  |  | the timing of the release of related products into their respective
markets, such as home videos, television, and merchandising,

20



---



##### Table of Contents





| |  |  | the demand for such related products, which is often a function of
the success of the related animated feature film,                                                                      
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Disneys costs to distribute and promote our feature films and
related products under the Co-Production Agreement,                                                                        
|
| |  |  | Disneys success at marketing our feature films and related products
under the Co-Production Agreement,                                                                                   
|
| |  |  | the timing and accuracy of information received from Disney and other
sources on which we base estimates of revenue to be recognized from our
animated feature films and related products,
|
| |  |  | the timing and amount of non-film related revenues, such as the licensing of our software,                                                                                                
|
| |  |  | the introduction of new feature films or products by our competitors, and                                                                                                                 
|
| |  |  | external socioeconomic and political events that are beyond our control.                                                                                                                  

In particular, since our revenue under the Co-Production Agreement is
directly related to the success of our animated feature films, our operating
results are likely to fluctuate depending on the level of success of our
animated feature films and related products. The revenues derived from the
production and distribution of an animated feature film depend primarily on the
films acceptance by the public, which cannot be predicted and does not
necessarily bear a direct correlation to the production or distribution costs
incurred. The commercial success of a motion picture also depends upon
promotion and marketing, production costs and other factors. Further, the
theatrical success of a feature film can be a significant factor in determining
the amount of revenues generated from the sale of the related products.

Our operating expenses fluctuate.

Operating expenses for the first nine months of fiscal 2003 increased in
comparison to the same period in fiscal 2002, and we expect to continue to
increase our operating expenses to fund greater levels of research and
development, to ramp up to meet the demands of multiple films in production and
to expand operations. In addition, we expect our spending levels may increase
due to the following:



| |  |  | continued investment in proprietary software systems,                                                            
| | - |  | -----------------------------------------------------------------------------------------------------------------
|
| |  |  | continued and potentially increasing competition costs for creative, technical and administrative talent,        
|
| |  |  | increased costs associated with the expansion of our facilities,                                                 
|
| |  |  | increased number of personnel required to support studio growth as we
have multiple films in parallel production,
|
| |  |  | increased investment in creative development and our Pixar-only financed films, and                              
|
| |  |  | increased investment in administrative functions to support our expanding operations.                            

A portion of our operating expenses that are allocable to film productions
is either capitalized by us or reimbursed by Disney under the Co-Production
Agreement. To the extent that we do not capitalize (or Disney does not
reimburse) the increases in expenses, our operating expenses will significantly
increase in 2003. In addition, as we increase the resources allocated to our
productions beyond our feature film Cars, which is the last film to be
co-financed with Disney under the current Co-Production Agreement, we expect
our operating expenses to increase significantly.

Our scheduled successive releases of feature films will continue to place a
significant strain on our resources.

21



---



##### Table of Contents



In order to meet our obligations pursuant to the Co-Production Agreement,
we have established parallel creative teams so that we can develop more than
one film at a time. These teams are currently working primarily on The
Incrediblesand Cars, as well as future projects, including Project 2006, our
first Pixar-only financed film, as we move towards producing one feature film
per year. We have only produced and released five feature films to date and
have limited experience with respect to producing animated feature films in
parallel. Due to the strain on our personnel from the effort required for the
release of an upcoming film and the time required for creative development of
future films, it is possible that we would be unable to release a new film in
successive years. In the past, we have been required, and may continue to be
required, to expand our employee base, increase capital expenditures and
procure additional resources and facilities in order to accomplish the
scheduled releases of our animated feature films. This growth and expansion has
placed, and continues to place, a significant strain on our resources. We
cannot provide any assurances that The Incredibles, Cars, Project 2006 or any
future animated film will be released as targeted or that this strain on
resources will not have a material adverse effect on our business, financial
condition or results of operations. In addition, John Lasseters availability
has been a key ingredient in the successful completion of our prior films. As
we move towards achieving one film a year, there has been and will continue to
be additional demands placed on his availability. In addition to Mr. Lasseters
role as our Creative Executive, he is also directing his next feature film,
Cars. A lack of his availability may adversely impact the success and timing of
our future films.

We continuously implement a variety of new and upgraded operational and
financial systems, procedures and controls, including improvement and
maintenance of our accounting system, other internal management systems and
backup systems. Our growth and these diversification activities, along with the
corresponding increase in the number of our employees and our rapidly
increasing costs, have resulted in increased responsibility for our management
team. We will need to continue to improve our operational, financial and
management information systems, to hire, train, motivate and manage our
employees, to integrate them into Pixar and to provide adequate facilities and
other resources for them. We cannot provide any assurance we will be successful
in accomplishing all of these activities on a timely and cost-effective basis.
Any failure to accomplish one or more of these activities on a timely and
cost-effective basis would have a material adverse effect on our business,
financial condition and results of operations.

The Co-Production Agreement imposes several risks and restrictions on us.

We are dependent on Disney for the distribution and promotion of our feature
films and related products.

The decisions regarding the timing of the theatrical release and related
products and which of Disneys motion pictures and related products will
receive extensive promotional support from Disney are important factors in
determining the success of our motion pictures and related products. Under the
terms of the Co-Production Agreement, we have some general protections with
respect to the marketing and distribution of our feature films in the form of
commitments by Disney as to release windows, the timing of release of other
Disney family films and marketing obligations. We ultimately do not control (1)
the manner in which Disney distributes our animated feature films and related
products, (2) the number of theaters to which Disney distributes our feature
films, (3) the specific timing of release of our feature films and related
products or (4) the specific amount or quality of marketing and promotional
support of the feature films and related products as well as the associated
promotional and marketing budgets. Because Disney co-finances the films
developed and produced under the Co-Production Agreement, distributes the films
under the Walt Disney Pictures label and enjoys substantial financial
benefits in the event that such films achieve significant box office revenues,
we believe that Disney desires such films to be successful. Nonetheless, Disney
could make certain decisions as to marketing, distribution or promotion of the
animated feature films or related products or the marketing and promotion of
its own animated or other family films that could have a material adverse
effect on our business, operating results or financial condition. In addition,
the costs for marketing, distribution and promotion of the films and related
products are incurred well in advance of the release of such films and
products, and we experience a delay in the receipt of proceeds from such films
and products until after Disney recovers such costs. We are also dependent on
Disney for receiving accurate information on a timely basis on which we base
estimates to recognize revenue and associated gross profit from the animated
feature films and related products. If we fail to receive accurate information
from Disney, or fail to receive it on a timely basis, it could have a material
adverse effect on our business, operating results or financial condition.

Disney has an exclusive arrangement with us.

22



---



##### Table of Contents



We have agreed not to release or authorize the release of any of our
feature length animated theatrical motion pictures, other than our feature
films that we produce under the Co-Production Agreement, until twelve months
from our delivery of the fifth original feature film under the Co-Production
Agreement. We currently anticipate that we will not deliver the fifth Picture,
Cars, until 2005 at the earliest. However, now that we have delivered Finding
Nemo, the third original feature film under the Co-Production Agreement, to
Disney, we are free to enter into any agreement with any third party for the
development, production or distribution of any feature length animated
theatrical motion picture (other than the Pictures). We have also agreed that
we will not develop or produce any rides or attractions for major theme parks
not owned or operated by Disney, and to give Disney a right to negotiate with
respect to animated television productions or animated made-for-home video
productions that we propose to produce during the term of the Co-Production
Agreement. Disney, however, is not similarly restricted by the exclusivity
provisions that bind us under the Co-Production Agreement and, therefore, may
develop, produce, or distribute other feature length animated and computer
animated theatrical motion pictures itself or enter into similar agreements
with third parties. See Risk Factors  We experience intense competition with
respect to our animated feature films, animation products, and software below.

We have an obligation to co-finance production costs.

Under the Co-Production Agreement, we will continue to co-finance each of
the two remaining unreleased original animated feature films and may co-finance
other related products to be developed and produced pursuant to the
Co-Production Agreement. We co-financed A Bugs Life, Toy Story 2, Monsters,
Inc.and Finding Nemo. We are currently co-financing The Incrediblesand Cars
under the Co-Production Agreement. However, we also have approved for production and
have begun financing Project 2006, our first Pixar-only financed film. If our
feature films and related products do not generate proceeds sufficient to more
than offset our share of their production costs, our business, operating
results and financial condition will be materially adversely affected.

Disney retains the exclusive distribution and exploitation rights.

We share equally with Disney in the profits of each Picture and any
related merchandise after Disney recovers certain costs; however, Disney
retains the exclusive distribution and exploitation rights to all of our
feature films, all characters and story elements of our feature films and all
related products we develop under the Co-Production Agreement. Accordingly,
except in certain specified circumstances, we are not able to exploit or
distribute any of our feature films or characters or elements of any of our
feature films or related products developed under the Co-Production Agreement
without a license from Disney. We cannot provide any assurances that such a
license would be available to us on commercially reasonable terms or at all.

Disney can terminate the agreement under various circumstances.

Under the terms of the Co-Production Agreement, Disney may terminate the
agreement under certain circumstances. For example, Disney is entitled to
terminate the Co-Production Agreement in the event that certain types of
competitors directly or indirectly acquire or control a 50% or greater
ownership interest in Pixar or Pixar merges or consolidates into such a
competitor. Disney would not lose any of its rights to distribute and exploit
all feature films and all characters and elements of our feature films and
other products we develop under the Co-Production Agreement, except for feature
films or related products then in development or production as to which Disney
does not elect to proceed, as to which we would regain the rights subject to a
lien in favor of Disney for the costs advanced to date. Further, in the event
that Disney terminated the Co-Production Agreement, we would be required to
seek alternative channels for distribution of our animated feature films and
related products.

There are significant risks associated with the motion picture industry.

The completion and commercial success of a motion picture is extremely
unpredictable, and the motion picture industry involves a substantial degree of
risk. Each motion picture is an individual artistic work, and its commercial
success is primarily determined by audience reaction, which is unpredictable.
The completion and commercial success of a motion picture also depends upon
other factors, such as:



| |  |  | talent and crew availability,
| | - |  | -----------------------------

23



---



##### Table of Contents





| |  |  | financing requirements,                                                                                            
| | - |  | -------------------------------------------------------------------------------------------------------------------
|
| |  |  | distribution strategy, including the time of the year and the number of screens on which it is shown,              
|
| |  |  | the number, quality and acceptance of other competing films released
into the marketplace at or near the same time,
|
| |  |  | critical reviews,                                                                                                  
|
| |  |  | the availability of alternative forms of entertainment and leisure time activities,                                
|
| |  |  | general socioeconomic conditions and political events,                                                             
|
| |  |  | weather conditions, and                                                                                            
|
| |  |  | other tangible and intangible factors.                                                                             

All of these factors can change and cannot be predicted with certainty. In
addition, motion picture attendance is seasonal, with the greatest attendance
typically occurring during the summer and holidays. The release of a film
during a period of relatively low theater attendance is likely to affect the
films box office receipts adversely. Under the terms of the Co-Production
Agreement, Pixar is guaranteed theatrical release either during the summer or
holiday period. Finding Nemo,which was released on May 30, 2003, is our first
film to be released domestically during the summer months, as all of our
previous film releases occurred during holiday periods. Although Finding Nemo
has been very successful in the domestic theatrical market, as well as the
foreign markets where it has already been released, it is difficult to predict
the films performance in the remaining foreign territories, or its success in
other ancillary revenue streams such as merchandising due to the different
timing of its release relative to our other films. Further, due to the expected
release of a large number of family films by Disney and other movie studios in
the next several years, it is possible that further saturation of the family
film market, particularly those films created by computer graphics imagery
(CGI), may adversely impact the commercial success of our films, and
therefore have a material adverse effect on our business, financial condition
and results of operations.

In order for our feature films and related products to be successful, we must
develop appealing creative content.

The success of each animated film developed and produced by us will depend
in large part upon our creative teams ability to produce content that will
appeal to a broad audience and to develop compelling stories and characters
that will achieve broad market acceptance. Traditionally, this process has been
extremely difficult. While we have enjoyed worldwide box office success with
Toy Story, A Bugs Life, Toy Story 2, Monsters, Inc.,and Finding Nemoin the
domestic market and the international markets where it has been released, there
can be no assurance that similar levels of success will be achieved by our
subsequent films, including The Incredibles, Carsand Project 2006.

We experience intense competition with respect to our animated feature films,
animation products, and software.

We experience intense competition with respect to our animated feature
films, animation products, and software. Our animated feature films compete and
will continue to compete with family-oriented, animated and live action feature
films and other family-oriented entertainment products produced by major movie
studios, including Disney (as somewhat limited by the Co-Production Agreement),
DreamWorks SKG, Warner Bros., Sony Pictures Entertainment (Sony), Fox
Entertainment Group Inc. (Fox), Paramount Pictures (Paramount), Lucasfilm
Ltd. (Lucasfilm), Universal Studios, Inc. and MGM/UA, as well as numerous
other independent motion picture production companies.

In 2003, competition is expected to continue to intensify in the
family-oriented, animated and live action feature film market and may affect
the ultimate box office success of Finding Nemo, which was released
domestically on

24



---



##### Table of Contents



May 30, 2003. Some of the family-oriented animated and live action feature
films that have been released during summer 2003 that competed with Finding
Nemoinclude the following:



| |  |  | X2: X-Men Unitedby Fox,                                         
| | - |  | ----------------------------------------------------------------
|
| |  |  | The Lizzie McGuire Movieby Disney,                              
|
| |  |  | Daddy Day Careby Columbia,                                      
|
| |  |  | The Matrix Reloadedby Warner Bros.,                             
|
| |  |  | Bruce Almightyby Universal,                                     
|
| |  |  | Rugrats Go Wildby Paramount,                                    
|
| |  |  | The Hulkby Universal,                                           
|
| |  |  | Sinbad: Legend of the Seven Seasby Dreamworks,                  
|
| |  |  | Terminator 3: Rise of the Machinesby Warner Bros.,              
|
| |  |  | Pirates of the Caribbean: The Curse of the Black Pearlby Disney,
|
| |  |  | Spy Kids 3D: Game Overby Miramax, and                           
|
| |  |  | Freaky Fridayby Disney.                                         

We believe competition from animated feature films and family-oriented
feature films may intensify over the next several years, possibly affecting The
Incredibles,which is currently targeted for release on November 5, 2004, and
Cars, which is currently targeted for a 2005 holiday release. Due to a
potentially large number of family-oriented films scheduled for release over
the next few years, it is possible that the market for these films, whether
animated or live action, will become further saturated before we release The
Incrediblesand Cars.This could result in the failure of such films to achieve
the commercial success required for us to profit from such films.

Our films will continue to compete with the feature films of other movie
studios for optimal release dates, audience acceptance, and exhibition outlets.
In addition, we compete and will continue to compete with other movie studios
for the services of performing artists, and the services of other creative and
technical personnel, particularly in the fields of animation and technical
direction. Some of the other movie studios with which we compete have
significantly greater financial, marketing and other resources than we do.

Finding Nemowas released on home video in the domestic marketplace on
November 4, 2003. It will compete with many of the same films from its
theatrical release as well as other direct-to-video features and library titles
re-released on home video. Examples of home video releases we expect will
compete with Finding Nemoinclude the following:



| |  |  | Daddy Day Careby Fox,              
| | - |  | -----------------------------------
|
| |  |  | The Matrix Reloadedby Warner Bros.,
|
| |  |  | Charlies Angelsby Columbia,       
|
| |  |  | The Hulkby Universal,              
|
| |  |  | Legally Blond 2by MGM,             

25



---



##### Table of Contents





| |  |  | Terminator 3: Rise of the Machinesby Warner Bros.,                  
| | - |  | --------------------------------------------------------------------
|
| |  |  | The Santa Clause 2by Disney,                                        
|
| |  |  | Bruce Almightyby Universal,                                         
|
| |  |  | X2: X-Men Unitedby Fox,                                             
|
| |  |  | Pirates of the Caribbean: The Curse of the Black Pearlby Disney, and
|
| |  |  | Freaky Fridayby Disney.                                             

There appears to be increasing widespread acceptance for films created by
CGI. Animated feature films currently in production that are primarily CGI
include Shrek 2, Shark Tale, Madagascar, Over the Hedge, Jimmy Neutron 2,
Robots, Ice Age 2and Valiant,among others. Disney is also considering
developing and producing feature-length CGI-animated films based on classic
fairy tales, such as Rapunzeland Snow Queen. In addition to box office and
home video competition, other family-oriented films may continue to compete
with Monsters, Inc.and Finding Nemo,as well as our film library with respect
to related television, merchandise, and other future revenue sources.

Furthermore, due to the recent success of CGI-animated films, several
movie studios have developed their own internal computer animation capability,
which may be used for special effects in animated films and live action films.
For example, DreamWorks SKG (with PDI) successfully produced Antzin 1998 and
Shrekin 2001. In addition, Fox successfully produced, through its subsidiary
Blue Sky, Ice Age,which was released in March 2002. Other movie studios may
internally develop, license or sub-contract three-dimensional animation
capability, or enter into co-production agreements with other studios capable
of developing and producing three-dimensional CGI-animated films. Further, we
believe that continuing enhancements to commercially available computer
hardware and software technology have lowered and will continue to lower
barriers to entry for studios or special effects companies which intend to
produce computer-animated feature films or other products. For example, SGIs
Alias/Wavefront subsidiary licenses Maya, which is its next generation
three-dimensional software for creating high quality animation and visual
effects. Maya incorporates many new features and could be used to make a
computer-animated feature film.

The Co-Production Agreement provides that we will develop and produce
original computer-animated feature films. Because Disney co-finances the films
developed and produced under the Co-Production Agreement, distributes the films
under the Walt Disney Pictures label and enjoys financial benefits in the
event that such films achieve significant box office revenues, we believe that
Disney desires such films to be successful. Nonetheless, during its long
history, Disney has been a very successful producer and distributor of its own
animated feature films. While the Co-Production Agreement imposes restrictions
prohibiting Disney from releasing G-rated films, whether live action or
animated, within certain release windows from our films, it is likely that
other family-oriented motion pictures distributed by Disney or its affiliates
will overlap in the market and compete with our animated feature films. For
example, Pirates of the Caribbean: The Curse of the Black Pearl,which was
released July 9, 2003, Spy Kids 3D: Game Over, which was released on July 25,
2003 and Freaky Friday, which was released on August 6, 2003, competed directly
with Finding Nemofor domestic theatrical market share this past summer. We
also expect the fourth quarter 2003 home video releases of Pirates of the
Caribbean: The Curse of the Black Pearland Freaky Fridayto compete with
Finding Nemoin the domestic home video market. Our contractual arrangement
with Disney also presents other risks. See Risk Factors  The Co-Production
Agreement imposes several risks and restrictions on us.

Computer Graphics Special Effects Firms.

We also expect to compete with computer graphics special effects firms,
including ILM, Rhythm & Hues/VIFX, Tippett Studios, Digital Domain, and Sony
Pictures Imageworks. These computer graphics special effects firms may be
capable of creating their own three-dimensional computer animated feature films
or may produce three-dimensional computer-animated feature films for movie
studios that compete with us. For example, ILM has already

26



---



##### Table of Contents



created and produced three-dimensional character animation which was used
for several central characters in the live action film Star Wars Episode II:
Attack of the Clones, and ILM has a royalty-free, paid-up license to use our
RenderMan® software and to obtain at no cost all enhancements and upgrades
thereto. Other computer graphics special effects firms have licensed or may
license RenderMan®. Accordingly, our RenderMan® software may not provide us
with a competitive advantage. We also compete, or may in the future compete,
with the above firms with respect to animation products other than feature
films.

Software Publishers.

We also experience competition with respect to our RenderMan® software
product. In particular, we compete with makers of computer graphics imaging and
animation software, principally SGI (which acquired Wavefront Technologies,
Inc. (Wavefront) and Alias Research, Inc. (Alias)), Mental Images GmbH and
Avid Technologies (which distributes the Mental Images product). Mental Images,
Avid and SGI, which through its Alias/Wavefront subsidiary, licenses Maya, a
three-dimensional software for creating high quality animation and visual
effects, are each marketing competing rendering software products, usually at
lower prices than we are willing to offer for RenderMan®. SGI has licensed
several of our patents that cover certain rendering techniques and may
therefore be better able to market products that compete with our RenderMan®
software. Under appropriate circumstances, we might elect to license our
rendering technology patents to other companies, some of which may compete with
us. In addition, as PCs become more powerful, software suppliers may also be
able to introduce products for PCs that would be competitive with RenderMan®
in terms of price and performance for professional users.

We expect competition to persist, intensify and increase in each of our
business areas in the future. Some of our current and potential competitors
have longer operating histories, larger installed customer bases and
significantly greater financial, technical, marketing and other resources than
we do. There can be no assurance that we will be able to compete successfully
against current or future competitors. Such competition could materially
adversely affect our business, operating results or financial condition.

Our success depends on certain key employees.

Our success depends to a significant extent on the performance of a number
of senior management personnel and other key employees, especially our film
directors, producers, animators, creative personnel and technical directors. In
particular, we are dependent upon the services of Steve Jobs, John Lasseter,
Edwin E. Catmull, Ann Mather, Sarah McArthur and Lois Scali. We do not maintain
key person life insurance for any of our employees. We do have an employment
agreement with Mr. Lasseter, who is fundamental to Pixars relationship with
Disney; however, such employment agreement does not necessarily assure the
services of Mr. Lasseter. Moreover, although it is standard in the motion
picture industry to rely on employment agreements as a method of retaining the
services of key employees, we have not required our employees, other than Mr.
Lasseter, to enter into employment agreements. The loss of the services of any
of Messrs. Jobs, Lasseter, Dr. Catmull, Ms. Mather, Ms. McArthur, Ms. Scali or
of other key employees, especially our film directors, producers, animators,
creative personnel and technical directors, could have a material adverse
effect on our business, operating results or financial condition. Although none
of our employees is represented by a labor union, it is common for film
directors, producers, animators and actors at film production companies to
belong to a union. Further, we may be directly or indirectly dependent upon
union members, and work stoppages or strikes organized by such unions could
materially adversely impact our business, financial condition or results of
operations. There can be no assurance that our employees will not join or form
a labor union, or that we will not be directly or indirectly impacted by
industry related work stoppages or that we, for certain purposes, will not be
required to become a union signatory.

Our Chief Executive Officer has divided responsibilities.

Pixars Chief Executive Officer and Chairman, Steve Jobs, is also Chief
Executive Officer at Apple Computer, Inc. Although Mr. Jobs spends time at
Pixar and is active in our management, he does not devote his full time and
resources to Pixar.

To be successful, we need to attract and retain qualified personnel.

27



---



##### Table of Contents



Our success continues to depend to a significant extent on our ability to
identify, attract, hire, train and retain qualified professional, creative,
technical and managerial personnel. Competition for the caliber of talent
required to make our films, particularly our film directors, producers,
animators, creative personnel and technical directors, will continue to
intensify as more studios build their in-house CGI-animation or special effects
capabilities. There can be no assurance that we will be successful in
identifying, attracting, hiring, training and retaining such personnel in the
future. If we were unable to hire, assimilate and retain qualified personnel in
the future, particularly film directors, producers, animators, creative
personnel and technical directors, such inability would have a material adverse
effect on our business, operating results and financial condition.

We face various distribution risks with respect to our feature films.

Under the Feature Film Agreement and the Co-Production Agreement, Disney
is required to distribute the animated feature films in a manner consistent
with those of Disneys premier animated films. Currently, distribution of our
films generally includes (1) worldwide theatrical exhibition, (2) worldwide
home video sales, (3) worldwide television licensing, including Pay-Per-View,
pay television, network, basic cable and syndication, (4) non-theatrical
exhibition, such as airlines, schools and armed forces facilities and (5)
marketing of other rights of the picture, which may include licensing of
merchandise, such as toys, interactive games and soundtrack recordings.
Although the Co-Production Agreement provides us with some protection, we
cannot provide any assurances that our feature films made under the
Co-Production Agreement will be distributed through all of these outlets.

Although we have enjoyed a tremendously successful track record with our
first five feature films, we cannot provide any assurances that our future
films will enjoy the same level of success. Currently, Disney shares our
financial risks associated with the production of the films under the
Co-Production Agreement. As our co-production partner, Disney is currently
sharing the risk of our films by financing 50% of the production costs. In
addition, under the Co-Production Agreement, Disney is responsible for
financing 100% of the costs related to the marketing and distribution of the
films. In the event that a film does not generate sufficient revenues to offset
such costs, Pixar is not responsible for any losses Disney incurs. We cannot
provide any assurances that future distribution agreements will provide us with
the same level of risk minimization. In addition, as additional entrants emerge
in the animation marketplace, there may be increased competition for
distribution partners.

We have a limited operating history.

Until 1996, we had generated recurring revenue primarily from the license
of our RenderMan® software, amounts we received under software development
contracts and fees for animated television commercial development. We expect to
generate a substantial majority of our future revenue from the development and
production of animated feature films and related products, as we have since
1996. We have, to date, developed, produced and released only five animated
feature films, Toy Story, A Bugs Life, Toy Story 2, Monsters, Inc., and
Finding Nemo.Accordingly, we have a limited operating history in implementing
our business model upon which an evaluation of our prospects can be based. Our
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in the early stages of a business
enterprise, particularly companies in highly competitive markets. To address
these risks, we must, among other things, respond to changes in the competitive
environment, continue to attract, retain and motivate qualified persons, and
continue to upgrade our technologies. We cannot provide any assurances that we
will be successful in addressing such risks.

Our current and future commitments may have an adverse impact on our cash
balances.

We are currently co-financing our remaining two unreleased original
animated feature films, The Incrediblesand Carspursuant to the Co-Production
Agreement. We are also solely financing Project 2006. In the future, we may
co-finance other derivative works such as sequels and television productions.
The future development and production costs of The Incredibles, Cars, Project
2006 and films beyond, and any possible future expansion of our studio and
headquarters in Emeryville, California, may have an adverse impact on our cash
and investment balances. We expect to fully finance the production costs of
films for release after Cars. As of September 27, 2003, we had approximately
$516.5 million in cash, cash equivalents and investments. We believe that these
funds, along with cash provided by operating activities, will be sufficient to
meet our anticipated cash needs for working capital and capital expenditures,
and the development and production costs of The Incrediblesand Cars,as well
as development and production costs for Project 2006. See Managements
Discussion and Analysis of Financial Condition and

28



---



##### Table of Contents



Results of Operations  Liquidity and Capital Resources. To date, we have
chosen to use our existing cash resources to fund film production costs and
construction costs. We may continue to use our cash resources for such
expenditures, or may choose to finance such capital expenditures through
issuance of additional equity or debt securities, by obtaining a credit
facility or by some other financing mechanism. The sale of additional equity or
convertible debt securities would result in additional dilution to our
shareholders. Moreover, we cannot provide any assurances that we will be
successful in obtaining future financing, or even if such financing is
available, that we will obtain it on favorable terms or on terms providing us
with sufficient funds to meet our obligations and objectives.

We depend on our proprietary technology and computer systems for the timely and
successful development of our feature films and related products.

We cannot provide any assurances that we will not experience difficulties
that could delay or prevent the successful development or production of future
animated feature films or other related products. Among other things, because
we are dependent upon a large base of software and a large number of computers
for the development and production of our animated feature films and related
products, an error or defect in the software, a failure in the hardware or a
failure of the backup facilities could result in a significant delay in one or
more productions in process which, in turn, could result in potentially
significant delays in the release dates of our feature films or other products.
In the past we have experienced minor delays as a result of such matters.
Significant delays in production and significant delays in release dates could
have a material adverse effect on our business, operating results or financial
condition. Further, because we rely mostly on internally developed software, we
would not be able to rely upon assistance from third parties in the event that
the software fails.

A single shareholder owns a large percentage of our outstanding stock.

Our Chief Executive Officer, Steve Jobs, beneficially owns approximately
54.4% of our outstanding Common Stock as of September 27, 2003. As a result,
Mr. Jobs, acting alone, is able to exercise sole discretion over all matters
requiring shareholder approval, including the election of the entire board of
directors and approval of significant corporate transactions, including an
acquisition of Pixar. Such concentration of ownership may also have the effect
of delaying or preventing a change in control of Pixar, impeding a merger,
consolidation, takeover or other business combination involving Pixar, or
discouraging a potential acquirer from making a tender offer or otherwise
attempting to obtain control of Pixar.

Business interruptions could adversely affect our operations.

Our operations are vulnerable to interruption by fire, earthquake, power
loss, telecommunications failure and other events beyond our control. Although
we have a disaster recovery plan that we regularly update, there can be no
assurance that it will be effective in the event of a disaster. Our facilities
in the State of California have in the past and may in the future be subject to
electrical blackouts as a consequence of a shortage of available electrical
power. In the event these blackouts continue or increase in severity, they
could disrupt the operations of our affected facilities. In the event of a
short-term power outage, we have installed UPS (uninterrupted power supply)
equipment to protect our RenderFarm and other sensitive equipment, along with
two 1.5 Megawatt backup generators. In connection with the shortage of
available power, prices for electricity have in the past risen dramatically and
may increase in the future. An increase in prices would increase our operating
costs, which could in turn adversely affect our profitability. We do not carry
earthquake insurance for earthquake related losses and although we carry
business interruption insurance for other potential losses, there can be no assurance that such insurance
will be sufficient to compensate us for losses that may occur and any losses or
damages incurred by us could have a material adverse effect on our business.

29



---



##### Table of Contents



Terrorist activities and resulting military and other actions could adversely
affect our business.

The continued threat of terrorism within the United States and abroad, the
escalation of military action and heightened security measures in response to
such threats, as well as the recent military action against the government of
Iraq or any other country, may cause significant disruption to commerce,
including the entertainment industry, throughout the world. For example, the
terrorist attacks in New York and Washington, D.C. on September 11, 2001
disrupted commerce throughout the United States and Europe. Such disruption in
the future could have a material and adverse effect on our business and results
of operations.

Work stoppages could adversely impact our operations.

Although none of our employees are represented by a labor union, it is
common for film directors, producers, animators and actors at film production
companies to belong to a union. There can be no assurance that our employees
will not join or form a labor union or that we, for certain purposes, will not
be required to become a union signatory. We are directly or indirectly
dependent upon certain union members, and work stoppages or strikes organized
by such unions could materially adversely impact our business, financial
condition or results of operations.

To be successful, we will need to continuously enhance our existing proprietary
technology and develop new technology.

Substantially all of our revenues have been derived, and substantially all
of our future revenues are expected to be derived from the use and license of
our proprietary technologies. We expect that we will be required to enhance
these technologies and to develop new technologies in order to be successful in
our industry and in the licensing of our RenderMan® software. We cannot provide
any assurances that we will be successful in enhancing our existing
technologies or in developing and utilizing new technologies, or that
competitors will not develop technology that is equivalent or superior to our
technologies or that makes our technologies obsolete. If we are unable to
develop enhancements to our existing technologies or new technologies as
required, or if the costs associated with developing those technologies
continue to increase, our business, operating results or financial condition
could be materially adversely affected.

There are various risks associated with our proprietary rights.

Our efforts to protect our proprietary technologies may not succeed.

Our success and ability to compete is dependent in part upon our
proprietary technology. While we rely on a combination of patents, copyright
and trade secret protection, nondisclosure agreements and cross-licensing
arrangements to establish and protect our proprietary rights, we believe that
factors such as the technical and creative skills of our personnel are more
essential to our success and ability to compete. We currently have twenty- four
patents in force in the United States and eleven patents in force in foreign
countries. In addition, we have a number of patent applications pending in the
United States and in foreign countries. We cannot provide any assurances that
patents will issue from any of these pending applications or that, if patents
do issue, any claims allowed will be sufficiently broad to protect our
technology. In addition, we cannot provide any assurances that any patents that
have been issued to us, or that we may license from third parties, will not be
challenged, invalidated or circumvented, or that any rights granted thereunder
would provide us with any proprietary protection. Failure of the patents to
provide protection of our technology may make it easier for our competitors to
offer technology equivalent to or superior to our technology.

The source code for our proprietary software is protected both as a trade
secret and as a copyrighted work. We generally enter into confidentiality or
license agreements with our employees, consultants and vendors, and generally
control access to and distribution of our software, documentation and other
proprietary information. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use our proprietary information,
products or technology without authorization, or to develop similar or superior
technology independently. Policing unauthorized use of our products is
difficult and expensive. In addition, effective copyright and trade secret
protection may be unavailable or limited in certain foreign countries. Although
we generally obtain end user license agreements for our RenderMan®software
product, we have also relied on shrink wrap licenses

30



---



##### Table of Contents



that are not signed by the end-user, which may be unenforceable under the
laws of certain jurisdictions. We cannot provide any assurances that the steps
we take will prevent misappropriation of our technology or that our
confidentiality or license agreements will be enforceable.

Enforcing our proprietary rights may require litigation.

Litigation may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets, to determine the validity and
scope of the proprietary rights of others, or to defend against claims of
infringement or invalidity. Any such litigation could result in substantial
costs and diversion of resources and could have a material adverse effect on
our business, operating results or financial condition.

Others may assert infringement claims against us.

One of the risks of the film production business is the possibility of
claims that our productions infringe on the intellectual property rights of
third parties with respect to previously developed films, stories, characters
or other entertainment. In addition, our technology and software may be subject
to patent, copyright or other intellectual property claims of third parties. We
have received, and are likely to receive in the future, claims of infringement
of other parties proprietary rights. There can be no assurance that
infringement or invalidity claims (or claims for indemnification resulting from
infringement claims) will not be asserted or prosecuted against us, or that any
assertions or prosecutions will not materially adversely affect our business,
financial condition or results of operations. Irrespective of the validity or
the successful assertion of such claims, we would incur significant costs and
diversion of resources with respect to the defense thereof, which could have a
material adverse effect on our business, financial condition or results of
operations. If any claims or actions are asserted against us, we may seek to
obtain a license under a third partys intellectual property rights. We cannot
provide any assurances, however, that under such circumstances a license would
be available on reasonable terms or at all.

Third-party technology licenses may not continue to be available to us in the
future.

We also rely on certain technology that we license from third parties,
including software that we integrate and use with our internally developed
software. We cannot provide any assurances that these third-party technology
licenses will continue to be available to us on commercially reasonable terms.
The loss of, or inability to maintain any of these technology licenses could
result in delays in feature film releases or product releases until equivalent
technology could be identified, licensed and integrated. Any such delays in
feature film releases or product releases could materially adversely affect our
business, operating results and financial condition.

The market price of our Common Stock has been volatile in the past, and we
expect such volatility to continue.

The market price of our Common Stock is highly volatile and is subject to
wide fluctuations in response to a wide variety of factors, including the
publication of box office results for our feature films and those of our
competitors, fluctuations in our quarterly or annual results of operations,
changes in financial estimates by securities analysts, announcements made by
us, Disney, or our competitors, budget increases, delays in or cancellation of
feature film or other product release dates, speculation about the negotiation
of terms or conditions of our next distribution arrangement, or socioeconomic,
political or other factors. For example, for the nine months ended September
27, 2003, our Common Stock closed as low as $50.19 and as high as $74.20 per
share, and during 2002, our Common Stock closed as low as $30.67 and as high as
$61.42 per share. Moreover, in recent years, the stock market has experienced
extreme price and volume fluctuations, some of which have been unrelated or
disproportionate to the operating performances of the companies affected. These
broad market and industry fluctuations may adversely affect the market price of
our Common Stock. In the past, following periods of volatility in the market
price of a companys securities, securities class action litigation has often
been instituted against such a company. If brought against Pixar, such
litigation could result in substantial costs and a diversion of managements
attention and resources, which could have a material adverse effect on our
business, operating results or financial condition.

As described in Risk Factors  Our operating results have fluctuated in
the past, and we expect such fluctuations to continue above, we believe that
period-to-period comparisons of our results of operations may not

31



---



##### Table of Contents



be necessarily meaningful. Accordingly, you should not rely on our annual
and quarterly results of operations as any indication of future performance. In
addition, it is possible that in some future period our operating results will
be below the expectations of public market analysts and investors or the
guidance we have provided. In such event, the price of our Common Stock may be
materially adversely affected. See Managements Discussion and Analysis of
Financial Condition and Results of Operations.




Item 3. Quantitative and Qualitative Disclosures about Market Risk

Investment Portfolio.We invest in a variety of investment grade,
interest-bearing securities, including fixed rate obligations of corporations
and national governmental entities and agencies. This diversification of risk
is consistent with our policy to ensure safety of our principal and maintain
liquidity. We only invest in securities with maturities of 24 months or less,
with only government obligations exceeding 12 months. Our investments are
primarily fixed rate obligations and carry a certain degree of interest rate
risk. A rise in interest rates could adversely impact the fair market value of
these securities.

All of our financial instruments are held for purposes other than trading
and are considered available for sale per SFAS 115, Accounting for Certain
Investments in Debt and Equity Securities. The table below provides
information regarding our investment portfolio at September 27, 2003. The table
presents principal cash flows and related weighted-average fixed interest rates
presented by expected maturity date (dollars in thousands):

|                               |  |           |         |        |  |       |         |   |  |   |         |  
|------------------------------ |  | --------- | ------- | ------ |  | ----- | ------- | - |  | - | ------- | -
|                               |  | Less than |         | Over   |  |       |         |  
|                               |  | 1 Year    |         | 1 Year |  | Total
|                               |  |           |         |        |  |      
|Available-for-sale securities  |  | $         | 130,764 |        |  | $     | 311,145 |   |  | $ | 441,909 |  
|Weighted-average interest rate |  |           | 2.63    | %      |  |       | 2.30    | % |  |   | 2.40    | %

Impact of Foreign Currency Rate Changes.Disney and its affiliates
distribute our products in foreign markets; therefore, we are not directly
exposed to foreign currency rate fluctuations. We recognize revenues from
foreign territories based on an average foreign currency exchange rate used by
Disney for revenue reporting. This rate may differ from the actual exchange
rate at the time cash is remitted to Disney and subsequently to us. Therefore,
there may be some indirect foreign currency exchange rate exposure as managed
by Disney.




Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures.Our management
evaluated, with the participation of our Chief Executive Officer and our Chief
Financial Officer, the effectiveness of our disclosure controls and procedures
as of the end of the period covered by this Quarterly Report on Form 10-Q.
Based on this evaluation, our Chief Executive Officer and our Chief Financial
Officer have concluded that our disclosure controls and procedures are
effective to ensure that information we are required to disclose in reports
that we file or submit under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms.

Changes in internal control over financial reporting.There was no change
in our internal control over financial reporting that occurred during the
period covered by this Quarterly Report on Form 10-Q that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.

32



---



##### Table of Contents






PART II  OTHER INFORMATION




Item 1. Legal Proceedings

Pixar is regularly subject to certain legal proceedings and claims that
arise in the ordinary course of business. Many of these have not yet been fully
adjudicated. In the opinion of management, Pixar does not have a potential
liability related to any current legal proceedings and claims that would have a
material adverse effect on its financial condition, liquidity or results of
operations. However, the results of legal proceedings cannot be predicted with
certainty. Should Pixar fail to prevail in any of these legal matters or should
several of these legal matters be resolved against Pixar in the same reporting
period, the operating results of a particular reporting period could be
materially adversely affected.




Item 4.Submission of Matters to a Vote of Security Holders

The following proposals were submitted to shareholders at our Annual
Meeting of Shareholders held September 5, 2003. Each of these proposals was
approved by a majority of the shares present at the meeting.



| |                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------
| | 1. To re-elect eight directors to serve for the ensuing year or until
their successors are duly elected and qualified.

|                       |  |            |            |                 |  |  |           | 
|---------------------- |  | ---------- | ---------- | --------------- |  |  | --------- | 
|                       |  | Shares For |            | Shares Withheld
|                       |  |            |            |                
|Steve Jobs             |  |            | 45,440,847 |                 |  |  | 4,404,584 | 
|Edwin E. Catmull       |  |            | 45,666,165 |                 |  |  | 4,179,266 | 
|Skip M. Brittenham     |  |            | 45,471,184 |                 |  |  | 4,374,247 | 
|Joseph A. Graziano     |  |            | 47,909,370 |                 |  |  | 1,936,061 | 
|Lawrence B. Levy       |  |            | 45,386,537 |                 |  |  | 4,458,894 | 
|Joe Roth               |  |            | 45,732,524 |                 |  |  | 4,112,907 | 
|Larry W. Sonsini       |  |            | 45,691,680 |                 |  |  | 4,153,751 | 
|John S. Wadsworth, Jr. |  |            | 47,910,020 |                 |  |  | 1,935,411 | 



| |                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2. To ratify the appointment of KPMG LLP as our independent auditors for
the fiscal year ending January 3, 2004. Results of the voting included
49,398,640 shares for, 438,001 shares against and 8,790 shares abstained.




Item 6. Exhibits and Reports on Form 8-K



| |             
| | ------------
| | (a) Exhibits

|             |  |                                                                                                                                                                                
|------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit 31.1 |  | Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a) or
15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.           
|             |  |                                                                                                                                                                                
|Exhibit 31.2 |  | Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a) or
15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.           
|             |  |                                                                                                                                                                                
|Exhibit 32.1 |  | Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.



| |                        
| | -----------------------
| | (b) Reports on Form 8-K



| |                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The following current report on Form 8-K was filed by Pixar during Pixars
third fiscal quarter: (1) Current Report on Form 8-K dated August 7, 2003,
furnishing Pixars press release regarding its financial results for the
second quarter ended June 28, 2003.
|
| | Items 2, 3 and 5 are not applicable and have been omitted.                                                                                                                                                                                                        

33



---



##### Table of Contents






SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

| |  |       |  |                                                     
| |  | ----- |  | ----------------------------------------------------
| |  | PIXAR |  |                                                     
| |  |       |  |                                                     
| |  | By:   |  | /s/ ANN MATHER                                      
| |  |       |  |                                                     
| |  |       |  | Ann Mather                                          
| |  |       |  | Executive Vice President and Chief Financial Officer
| |  |       |  | (Principal Financial and Accounting Officer and     
| |  |       |  | Duly Authorized Officer)                            

Date: November 12, 2003

34



---



##### Table of Contents






EXHIBIT INDEX

|        |  |                                                                                                                                                                                
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                
|Number  |  | Description                                                                                                                                                                    
|        |  |                                                                                                                                                                                
|31.1    |  | Certification of Chief Executive Officer Pursuant to Exchange Act
Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.           
|        |  |                                                                                                                                                                                
|31.2    |  | Certification of Chief Financial Officer Pursuant to Exchange Act
Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.           
|        |  |                                                                                                                                                                                
|32.1    |  | Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.

35