##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-Q



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|           |  |                                                                                                 
|---------- |  | ------------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                                 
|þ          |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934 
|          
|           |  | For the quarterly period ended
    September 28, 2002                                           
|          
|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                                                         |  | 68-0086179                              
|(State or other jurisdiction of
    Incorporation or organization) |  | (I.R.S. Employer
    Identification No.)
|                                                                  
|1200 Park Avenue, Emeryville,
    California                       |  | 94608                                   
|(Address of principal executive
    offices)                       |  | (Zip code)                              

Registrants telephone number, including
area code: (510) 752-3000

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 þ          No o

The number of shares outstanding of the
registrants Common Stock as of November 4, 2002 was
51,443,576.



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TABLE OF CONTENTS



|                                |                                                                                               |  |  |  |  |  |  | 
|------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I -- FINANCIAL INFORMATION
|                                | Item 1. Financial Statements                                                                 
|                                | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                | Item 3. Quantitative and Qualitative Disclosures about Market Risk                           
|                                | Item 4. Controls and Procedures                                                              
|PART II -- OTHER INFORMATION   
|                                | Item 1. Legal Proceedings                                                                    
|                                | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURE                      
|CERTIFICATIONS                 
|EXHIBIT INDEX                  
|EXHIBIT 99.1                   



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##### Table of Contents






PART I  FINANCIAL
INFORMATION




Item 1.     Financial
Statements

PIXAR

BALANCE SHEETS

|                                         |                                                                                                                                                                                      |                                            |         |              |         |   |         |         |         | 
|---------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ------- | ------------ | ------- | - | ------- | ------- | ------- | 
|                                         |                                                                                                                                                                                      | September 28,                              |         | December 29,
|                                         |                                                                                                                                                                                      | 2002                                       |         | 2001        
|                                         |                                                                                                                                                                                      |                                            |         |             
|                                         |                                                                                                                                                                                      |                                           
|                                         |                                                                                                                                                                                      | (In thousands,                            
|                                         |                                                                                                                                                                                      | except share data)                        
|ASSETS                                  
|Cash and cash equivalents                |                                                                                                                                                                                      | $                                          | 48,007  |              |         | $ | 56,289  |        
|Short-term investments                   |                                                                                                                                                                                      |                                            | 291,241 |              |         |   | 222,310 |        
|Trade receivables, net                   |                                                                                                                                                                                      |                                            | 1,073   |              |         |   | 1,516   |        
|Receivable from Disney                   |                                                                                                                                                                                      |                                            | 93,091  |              |         |   | 13,512  |        
|Other receivables                        |                                                                                                                                                                                      |                                            | 3,659   |              |         |   | 5,632   |        
|Prepaid expenses and other assets        |                                                                                                                                                                                      |                                            | 2,558   |              |         |   | 3,528   |        
|Deferred income taxes                    |                                                                                                                                                                                      |                                            | 21,342  |              |         |   | 21,673  |        
|Property and equipment, net              |                                                                                                                                                                                      |                                            | 108,644 |              |         |   | 111,995 |        
|Capitalized film production costs        |                                                                                                                                                                                      |                                            | 88,312  |              |         |   | 86,839  |        
|                                         |                                                                                                                                                                                      |                                            |         |              |         |   |         |        
|                                         |                                                                                                                                                                                      | Total assets                               |         | $            | 657,927 |   |         | $       | 523,294 | 
|                                         |                                                                                                                                                                                      |                                            |         |              |         |   |         |        
|LIABILITIES AND SHAREHOLDERS
    EQUITY
|Accounts payable                         |                                                                                                                                                                                      | $                                          | 443     |              |         | $ | 4,843   |        
|Income taxes payable                     |                                                                                                                                                                                      |                                            | 12,208  |              |         |   | 1,808   |        
|Accrued liabilities                      |                                                                                                                                                                                      |                                            | 9,081   |              |         |   | 8,844   |        
|Unearned revenue                         |                                                                                                                                                                                      |                                            | 6,657   |              |         |   | 2,113   |        
|                                         |                                                                                                                                                                                      |                                            |         |              |         |   |         |        
|                                         |                                                                                                                                                                                      | Total liabilities                          |         |              | 28,389  |   |         |         | 17,608  | 
|                                         |                                                                                                                                                                                      |                                            |         |              |         |   |         |        
|Shareholders equity:                    |                                                                                                                                                                                      |                                            |         |              |         |   |         |        
|                                         | Preferred stock; no par value; 5,000,000 shares
    authorized and no shares issued and outstanding                                                                                  |                                            |         |             |         |   |         |        |        
|                                         | Common stock; no par value; 100,000,000 shares
    authorized; 51,192,224 and 49,445,956 issued and outstanding as
    of September 28, 2002 and December 29, 2001,
    respectively |                                            |         | 375,740      |         |   |         | 325,362 |        
|                                         | Accumulated other comprehensive income                                                                                                                                               |                                            |         | 2,333        |         |   |         | 1,845   |        
|                                         | Retained earnings                                                                                                                                                                    |                                            |         | 251,465      |         |   |         | 178,479 |        
|                                         |                                                                                                                                                                                      |                                            |         |              |         |   |         |        
|                                         |                                                                                                                                                                                      | Total shareholders equity                 |         |              | 629,538 |   |         |         | 505,686 | 
|                                         |                                                                                                                                                                                      |                                            |         |              |         |   |         |        
|                                         |                                                                                                                                                                                      | Total liabilities and shareholders equity |         | $            | 657,927 |   |         | $       | 523,294 | 
|                                         |                                                                                                                                                                                      |                                            |         |              |         |   |         |        

See accompanying notes to financial statements.

1



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PIXAR

STATEMENTS OF INCOME

|                                                          |                             |                                       |        |                   |         |               |        |               |        |   |        |         |         |   |        |        |        | 
|--------------------------------------------------------- | --------------------------- | ------------------------------------- | ------ | ----------------- | ------- | ------------- | ------ | ------------- | ------ | - | ------ | ------- | ------- | - | ------ | ------ | ------ | 
|                                                          |                             |                                       |        |                  
|                                                          |                             | Quarter Ended                         |        | Nine Months Ended
|                                                          |                             |                                       |        |                  
|                                                          |                             | September 28,                         |        | September 29,     |         | September 28, |        | September 29,
|                                                          |                             | 2002                                  |        | 2001              |         | 2002          |        | 2001         
|                                                          |                             |                                       |        |                   |         |               |        |              
|                                                          |                             |                                      
|                                                          |                             | (In thousands, except per share data)
|Revenue:                                                  |                             |                                       |        |                   |         |               |        |               |        |   |        |         |         |   |        |       
|                                                          | Film and animation services |                                       | $      | 100,475           |         |               | $      | 9,836         |        |   | $      | 155,711 |         |   | $      | 38,643 |       
|                                                          | Software                    |                                       |        | 1,981             |         |               |        | 1,481         |        |   |        | 6,629   |         |   |        | 5,490  |       
|                                                          |                             |                                       |        |                   |         |               |        |               |        |   |        |         |         |   |        |       
|                                                          |                             | Total revenue                         |        |                   | 102,456 |               |        |               | 11,317 |   |        |         | 162,340 |   |        |        | 44,133 | 
|                                                          |                             |                                       |        |                   |         |               |        |               |        |   |        |         |         |   |        |       
|Cost of revenue:                                          |                             |                                       |        |                   |         |               |        |               |        |   |        |         |         |   |        |       
|                                                          | Film and animation services |                                       |        | 21,304            |         |               |        | 1,989         |        |   |        | 33,231  |         |   |        | 6,520  |       
|                                                          | Software                    |                                       |        | 137               |         |               |        | 131           |        |   |        | 410     |         |   |        | 422    |       
|                                                          |                             |                                       |        |                   |         |               |        |               |        |   |        |         |         |   |        |       
|                                                          |                             | Total cost of revenue                 |        |                   | 21,441  |               |        |               | 2,120  |   |        |         | 33,641  |   |        |        | 6,942  | 
|                                                          |                             |                                       |        |                   |         |               |        |               |        |   |        |         |         |   |        |       
|                                                          |                             | Gross profit                          |        |                   | 81,015  |               |        |               | 9,197  |   |        |         | 128,699 |   |        |        | 37,191 | 
|                                                          |                             |                                       |        |                   |         |               |        |               |        |   |        |         |         |   |        |       
|Operating expenses:                                       |                             |                                       |        |                   |         |               |        |               |        |   |        |         |         |   |        |       
|                                                          | Research and development    |                                       |        | 2,039             |         |               |        | 1,840         |        |   |        | 6,623   |         |   |        | 4,948  |       
|                                                          | Sales and marketing         |                                       |        | 411               |         |               |        | 541           |        |   |        | 865     |         |   |        | 1,350  |       
|                                                          | General and administrative  |                                       |        | 2,347             |         |               |        | 2,101         |        |   |        | 6,354   |         |   |        | 6,039  |       
|                                                          |                             |                                       |        |                   |         |               |        |               |        |   |        |         |         |   |        |       
|                                                          |                             | Total operating expenses              |        |                   | 4,797   |               |        |               | 4,482  |   |        |         | 13,842  |   |        |        | 12,337 | 
|                                                          |                             |                                       |        |                   |         |               |        |               |        |   |        |         |         |   |        |       
|                                                          |                             | Income from operations                |        |                   | 76,218  |               |        |               | 4,715  |   |        |         | 114,857 |   |        |        | 24,854 | 
|Other income, net                                         |                             |                                       | 2,584  |                   |         |               | 5,093  |               |        |   | 7,685  |         |         |   | 12,034 |       
|                                                          |                             |                                       |        |                   |         |               |        |               |        |   |        |         |         |   |        |       
|                                                          |                             | Income before income taxes            |        |                   | 78,802  |               |        |               | 9,808  |   |        |         | 122,542 |   |        |        | 36,888 | 
|Income tax expense                                        |                             |                                       | 31,867 |                   |         |               | 3,643  |               |        |   | 49,556 |         |         |   | 13,704 |       
|                                                          |                             |                                       |        |                   |         |               |        |               |        |   |        |         |         |   |        |       
|                                                          |                             | Net Income                            |        | $                 | 46,935  |               |        | $             | 6,165  |   |        | $       | 72,986  |   |        | $      | 23,184 | 
|                                                          |                             |                                       |        |                   |         |               |        |               |        |   |        |         |         |   |        |       
|Basic net income per share                                |                             | $                                     | 0.93   |                   |         | $             | 0.13   |               |        | $ | 1.46   |         |         | $ | 0.48   |       
|                                                          |                             |                                       |        |                   |         |               |        |               |        |   |        |         |         |   |        |       
|Shares used in computing basic net income per
    share   |                             |                                       | 50,643 |                   |         |               | 48,328 |               |        |   | 50,001 |         |         |   | 48,002 |       
|                                                          |                             |                                       |        |                   |         |               |        |               |        |   |        |         |         |   |        |       
|Diluted net income per share                              |                             | $                                     | 0.87   |                   |         | $             | 0.12   |               |        | $ | 1.39   |         |         | $ | 0.45   |       
|                                                          |                             |                                       |        |                   |         |               |        |               |        |   |        |         |         |   |        |       
|Shares used in computing diluted net income per
    share |                             |                                       | 53,746 |                   |         |               | 52,090 |               |        |   | 52,691 |         |         |   | 51,400 |       
|                                                          |                             |                                       |        |                   |         |               |        |               |        |   |        |         |         |   |        |       

See accompanying notes to financial statements.

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PIXAR

STATEMENTS OF CASH FLOWS

|                                                                            |                                                                                       |                                                   |                                   |                                           |        |         |          |          |       |        |          |  
|--------------------------------------------------------------------------- | ------------------------------------------------------------------------------------- | ------------------------------------------------- | --------------------------------- | ----------------------------------------- | ------ | ------- | -------- | -------- | ----- | ------ | -------- | -
|                                                                            |                                                                                       |                                                  
|                                                                            |                                                                                       | Nine Months Ended                                
|                                                                            |                                                                                       |                                                  
|                                                                            |                                                                                       | September 28,                                     |                                   | September 29,                            
|                                                                            |                                                                                       | 2002                                              |                                   | 2001                                     
|                                                                            |                                                                                       |                                                   |                                   |                                          
|                                                                            |                                                                                       |                                                  
|                                                                            |                                                                                       | (In thousands)                                   
|Cash flows from operating activities:                                       |                                                                                       |                                                   |                                   |                                           |        |         |          |         
|                                                                            | Net income                                                                            |                                                   | $                                 | 72,986                                    |        |         | $        | 23,184   |      
|                                                                            | Adjustments to reconcile net income to net cash
    provided by operating activities: |                                                   |                                   |                                           |        |         |          |          |      
|                                                                            |                                                                                       | Depreciation and amortization                     |                                   |                                           | 6,064  |         |          |          | 5,988 |       
|                                                                            |                                                                                       | Amortization of capitalized film production costs |                                   |                                           | 31,753 |         |          |          | 6,347 |       
|                                                                            |                                                                                       | Tax benefit from option exercises                 |                                   |                                           | 13,817 |         |          |          | 5,835 |       
|                                                                            |                                                                                       | Deferred income tax                               |                                   |                                           | 331    |         |          |          | 1,110 |       
|                                                                            |                                                                                       | Changes in operating assets and liabilities:      |                                   |                                           |        |         |          |          |       |       
|                                                                            |                                                                                       |                                                   | Trade and other receivables, net  |                                           |        | 2,416   |          |          |       | (2,251 | )       
|                                                                            |                                                                                       |                                                   | Receivable from Disney            |                                           |        | (79,579 | )        |          |       | 71,138 |         
|                                                                            |                                                                                       |                                                   | Prepaid expenses and other assets |                                           |        | 610     |          |          |       | 1,309  |         
|                                                                            |                                                                                       |                                                   | Accounts payable                  |                                           |        | (4,400  | )        |          |       | (1,262 | )       
|                                                                            |                                                                                       |                                                   | Income taxes payable              |                                           |        | 10,400  |          |          |       | (5,520 | )       
|                                                                            |                                                                                       |                                                   | Accrued liabilities               |                                           |        | 237     |          |          |       | (2,855 | )       
|                                                                            |                                                                                       |                                                   | Unearned revenue                  |                                           |        | 4,544   |          |          |       | 6,564  |         
|                                                                            |                                                                                       |                                                   |                                   |                                           |        |         |          |         
|                                                                            |                                                                                       |                                                   |                                   | Net cash provided by operating activities |        |         | 59,179   |          |       |        | 109,587  |  
|                                                                            |                                                                                       |                                                   |                                   |                                           |        |         |          |         
|Cash flows from investing activities:                                       |                                                                                       |                                                   |                                   |                                           |        |         |          |         
|                                                                            | Purchase of property and equipment                                                    |                                                   |                                   | (3,178                                    | )      |         |          | (7,179   | )    
|                                                                            | Proceeds from sale of equipment                                                       |                                                   |                                   | 55                                        |        |         |          |         |      
|                                                                            | Proceeds from sale of short-term securities                                           |                                                   |                                   | 89,564                                    |        |         |          | 156,595  |      
|                                                                            | Investments in short-term securities                                                  |                                                   |                                   | (158,007                                  | )      |         |          | (265,232 | )    
|                                                                            | Capitalized film production costs                                                     |                                                   |                                   | (32,456                                   | )      |         |          | (31,766  | )    
|                                                                            |                                                                                       |                                                   |                                   |                                           |        |         |          |         
|                                                                            |                                                                                       |                                                   |                                   | Net cash used in investing activities     |        |         | (104,022 | )        |       |        | (147,582 | )
|                                                                            |                                                                                       |                                                   |                                   |                                           |        |         |          |         
|Cash flows from financing activities:                                       |                                                                                       |                                                   |                                   |                                           |        |         |          |         
|                                                                            | Proceeds from exercised stock options                                                 |                                                   |                                   | 36,561                                    |        |         |          | 14,781   |      
|                                                                            |                                                                                       |                                                   |                                   |                                           |        |         |          |         
|                                                                            |                                                                                       |                                                   |                                   | Net cash provided by financing activities |        |         | 36,561   |          |       |        | 14,781   |  
|                                                                            |                                                                                       |                                                   |                                   |                                           |        |         |          |         
|Net decrease in cash and cash equivalents                                   |                                                                                       |                                                   | (8,282                            | )                                         |        |         | (23,214  | )       
|Cash and cash equivalents at beginning of period                            |                                                                                       |                                                   | 56,289                            |                                           |        |         | 63,241   |         
|                                                                            |                                                                                       |                                                   |                                   |                                           |        |         |          |         
|Cash and cash equivalents at end of period                                  |                                                                                       | $                                                 | 48,007                            |                                           |        | $       | 40,027   |         
|                                                                            |                                                                                       |                                                   |                                   |                                           |        |         |          |         
|Supplemental disclosure of cash flow information:                           |                                                                                       |                                                   |                                   |                                           |        |         |          |         
|                                                                            | Cash paid during the period for income taxes                                          |                                                   | $                                 | 25,850                                    |        |         | $        | 13,800   |      
|                                                                            |                                                                                       |                                                   |                                   |                                           |        |         |          |         
|Supplemental disclosure of non-cash investing and
    financing activities: |                                                                                       |                                                   |                                   |                                           |        |         |          |         
|                                                                            | Loss on equipment disposals capitalized as film
    production costs                  |                                                   | $                                 | 770                                       |        |         | $        | 21       |      
|                                                                            |                                                                                       |                                                   |                                   |                                           |        |         |          |         
|                                                                            | Unrealized gain on investments, net of taxes                                          |                                                   | $                                 | 488                                       |        |         | $        | 1,878    |      
|                                                                            |                                                                                       |                                                   |                                   |                                           |        |         |          |         

See accompanying notes to financial statements.

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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 29, 2001 and for each of the years in the
three-year period ended December 29, 2001, including notes
thereto.

The results of operations for the three and nine
months ended September 28, 2002 are not necessarily
indicative of the results expected for the current year or any
other period.

Certain amounts reported in previous periods have
been reclassified to conform to the 2002 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 2002 will end on December 28, 2002 and will
consist of 52 weeks.

(3) 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 and warrants. Of the outstanding options to
purchase shares of common stock, for the three and nine months
ended September 28, 2002, options to purchase approximately
52,000 shares and 382,000 shares, respectively, of
common stock were not included in the computation of diluted
earnings per share because the options exercise price was
greater than the average market price of the common shares.
Options to purchase approximately 345,000 shares and
545,000 shares of common stock were excluded for the
corresponding prior year periods.

Reconciliation of basic and diluted net income
per share (in thousands, except per share amounts):

|                             |                  |                    |        |                    |  |     |        |        |  |        |      |     |  |   |       |   |  |  |        |       |  |   |      |  | 
|---------------------------- | ---------------- | ------------------ | ------ | ------------------ |  | --- | ------ | ------ |  | ------ | ---- | --- |  | - | ----- | - |  |  | ------ | ----- |  | - | ---- |  | 
|                             |                  |                   
|                             |                  | Quarter Ended     
|                             |                  |                   
|                             |                  |                    |        |                   
|                             |                  | September 28, 2002 |        | September 29, 2001
|                             |                  |                    |        |                   
|                             |                  | Net                |        |                    |  | Net |        |       
|                             |                  | Income             |        | Shares             |  | EPS |        | Income |  | Shares |      | EPS
|                             |                  |                    |        |                    |  |     |        |        |  |        |      |    
|Basic net income per share   |                  | $                  | 46,935 |                    |  |     | 50,643 |        |  | $      | 0.93 |     |  | $ | 6,165 |   |  |  | 48,328 |       |  | $ | 0.13 | 
|Effect of dilutive shares:   |                  |                    |        |                    |  |     |        |        |  |        |      |     |  |   |       |   |  |  |        |       |  |   |      | 
|                             | Warrants/options |                    |        |                   |  |     |        | 3,103  |  |        |      |     |  |   |       |  |  |  |        | 3,762 |  |   |      |  | 
|                             |                  |                    |        |                    |  |     |        |        |  |        |      |     |  |   |       |   |  |  |        |       |  |   |      | 
|Diluted net income per share |                  | $                  | 46,935 |                    |  |     | 53,746 |        |  | $      | 0.87 |     |  | $ | 6,165 |   |  |  | 52,090 |       |  | $ | 0.12 | 
|                             |                  |                    |        |                    |  |     |        |        |  |        |      |     |  |   |       |   |  |  |        |       |  |   |      | 

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PIXAR


NOTES TO FINANCIAL STATEMENTS 
(Continued)

|                             |                  |                    |        |                    |  |     |        |        |  |        |      |     |  |   |        |   |  |  |        |       |  |   |      |  | 
|---------------------------- | ---------------- | ------------------ | ------ | ------------------ |  | --- | ------ | ------ |  | ------ | ---- | --- |  | - | ------ | - |  |  | ------ | ----- |  | - | ---- |  | 
|                             |                  |                   
|                             |                  | Nine Months Ended 
|                             |                  |                   
|                             |                  |                    |        |                   
|                             |                  | September 28, 2002 |        | September 29, 2001
|                             |                  |                    |        |                   
|                             |                  | Net                |        |                    |  | Net |        |       
|                             |                  | Income             |        | Shares             |  | EPS |        | Income |  | Shares |      | EPS
|                             |                  |                    |        |                    |  |     |        |        |  |        |      |    
|Basic net income per share   |                  | $                  | 72,986 |                    |  |     | 50,001 |        |  | $      | 1.46 |     |  | $ | 23,184 |   |  |  | 48,002 |       |  | $ | 0.48 | 
|Effect of dilutive shares:   |                  |                    |        |                    |  |     |        |        |  |        |      |     |  |   |        |   |  |  |        |       |  |   |      | 
|                             | Warrants/options |                    |        |                   |  |     |        | 2,690  |  |        |      |     |  |   |        |  |  |  |        | 3,398 |  |   |      |  | 
|                             |                  |                    |        |                    |  |     |        |        |  |        |      |     |  |   |        |   |  |  |        |       |  |   |      | 
|Diluted net income per share |                  | $                  | 72,986 |                    |  |     | 52,691 |        |  | $      | 1.39 |     |  | $ | 23,184 |   |  |  | 51,400 |       |  | $ | 0.45 | 
|                             |                  |                    |        |                    |  |     |        |        |  |        |      |     |  |   |        |   |  |  |        |       |  |   |      | 

(4) Comprehensive Income

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

|                                                                     |  |               |        |               |  |   |       | 
|-------------------------------------------------------------------- |  | ------------- | ------ | ------------- |  | - | ----- | 
|                                                                     |  |              
|                                                                     |  | Quarter Ended
|                                                                     |  |              
|                                                                     |  | September 28, |        | September 29,
|                                                                     |  | 2002          |        | 2001         
|                                                                     |  |               |        |              
|Net income                                                           |  | $             | 46,935 |               |  | $ | 6,165 | 
|Unrealized holding gains on short-term
    investments, net of taxes |  |               | 488    |               |  |   | 1,629 | 
|                                                                     |  |               |        |               |  |   |       | 
|Comprehensive income                                                 |  | $             | 47,423 |               |  | $ | 7,794 | 
|                                                                     |  |               |        |               |  |   |       | 

|                                                                     |  |                   |        |               |  |   |        | 
|-------------------------------------------------------------------- |  | ----------------- | ------ | ------------- |  | - | ------ | 
|                                                                     |  |                  
|                                                                     |  | Nine Months Ended
|                                                                     |  |                  
|                                                                     |  | September 28,     |        | September 29,
|                                                                     |  | 2002              |        | 2001         
|                                                                     |  |                   |        |              
|Net income                                                           |  | $                 | 72,986 |               |  | $ | 23,184 | 
|Unrealized holding gains on short-term
    investments, net of taxes |  |                   | 488    |               |  |   | 1,878  | 
|                                                                     |  |                   |        |               |  |   |        | 
|Comprehensive income                                                 |  | $                 | 73,474 |               |  | $ | 25,062 | 
|                                                                     |  |                   |        |               |  |   |        | 

(5) 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 method, all 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

5



---



##### Table of Contents



PIXAR


NOTES TO FINANCIAL STATEMENTS 
(Continued)

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 two original films produced under the Co-Production
Agreement were A Bugs Lifeand Monsters, Inc.Films currently in production at Pixar that are governed by
this agreement include Finding Nemo, The Incredibles,and
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 for several
new projects that are not governed by the Co-Production
Agreement. Costs related to these projects are therefore not
shared or reimbursed by Disney. Such costs are capitalized as
film costs and will be amortized under the film forecast method
assuming the concept development leads to a successful concept
and realization of a film project, when it is expected that the
film will be set for production. In the event a film is not set
for production within three years from the time of the first
capitalized transaction, such costs will be expensed. Certain
expenses associated with researching new concepts and ideas,
which are not expected to lead to a successful concept and
realization of a film project, are expensed as incurred.



| |                                                    
| | ---------------------------------------------------
| | Components of Capitalized Film Production
    Costs

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

|                                                 |                                                                |               |          |              |  |   |         |        | 
|------------------------------------------------ | -------------------------------------------------------------- | ------------- | -------- | ------------ |  | - | ------- | ------ | 
|                                                 |                                                                | September 28, |          | December 29,
|                                                 |                                                                | 2002          |          | 2001        
|                                                 |                                                                |               |          |             
|Released Films                                   |                                                                | $             | 134,531  |              |  | $ | 132,222 |       
|Cumulative amortization of film production costs |                                                                |               | (112,429 | )            |  |   | (80,677 | )     
|                                                 |                                                                |               |          |              |  |   |         |       
|                                                 | Total film production costs capitalized for
    released films |               |          | 22,102       |  |   |         | 51,545 | 
|Films in Production                              |                                                                |               | 62,581   |              |  |   | 33,942  |       
|Films in Development or
    Preproduction        |                                                                |               | 3,629    |              |  |   | 1,352   |       
|                                                 |                                                                |               |          |              |  |   |         |       
|                                                 | Total film production costs capitalized                        |               | $        | 88,312       |  |   | $       | 86,839 | 
|                                                 |                                                                |               |          |              |  |   |         |       

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

6



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##### Table of Contents



PIXAR


NOTES TO FINANCIAL STATEMENTS 
(Continued)

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 28,     |       | September 29,
|                           |       | 2002              |       | 2001         
|                           |       |                   |       |              
|Research and development   |       | $                 | 5,301 |               |  | $ | 3,700 |      
|General and administrative |       |                   | 2,733 |               |  |   | 2,560 |      
|                           |       |                   |       |               |  |   |       |      
|                           | Total |                   | $     | 8,034         |  |   | $     | 6,260 | 
|                           |       |                   |       |               |  |   |       |      

At September 28, 2002 and December 29,
2001, the receivable from Disney aggregated $93.1 million
and $13.5 million, respectively, which consists of a
receivable from Disney for film revenue, advances net of
Disneys actual share of expenditures for all films,
amounts due for animation services and miscellaneous
reimbursements.

For released films, the Company expects to
amortize, based on current estimates, approximately
$11 million to $13 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 28, 2002, with the exception of Monsters,
Inc.,which is projected to reach the 80% milestone by
fiscal year 2003.

(6) 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.

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

|                     |  |               |         |               |  |   |       | 
|-------------------- |  | ------------- | ------- | ------------- |  | - | ----- | 
|                     |  |              
|                     |  | Quarter Ended
|                     |  |              
|                     |  | September 28, |         | September 29,
|                     |  | 2002          |         | 2001         
|                     |  |               |         |              
|Monsters, Inc.       |  | $             | 78,414  |               |  | $ |      | 
|Toy Story 2(1)       |  |               | 11,250  |               |  |   | 7,287 | 
|Library titles(1)(2) |  |               | 10,476  |               |  |   | 2,352 | 
|Animation services   |  |               | 335     |               |  |   | 197   | 
|                     |  |               |         |               |  |   |       | 
|                     |  | $             | 100,475 |               |  | $ | 9,836 | 
|                     |  |               |         |               |  |   |       | 

|                     |  |                   |         |               |  |   |        | 
|-------------------- |  | ----------------- | ------- | ------------- |  | - | ------ | 
|                     |  |                  
|                     |  | Nine Months Ended
|                     |  |                  
|                     |  | September 28,     |         | September 29,
|                     |  | 2002              |         | 2001         
|                     |  |                   |         |              
|Monsters, Inc.       |  | $                 | 116,311 |               |  | $ |       | 
|Toy Story 2(1)       |  |                   | 19,961  |               |  |   | 17,717 | 
|Library titles(1)(2) |  |                   | 17,486  |               |  |   | 20,716 | 
|Animation services   |  |                   | 1,953   |               |  |   | 210    | 
|                     |  |                   |         |               |  |   |        | 
|                     |  | $                 | 155,711 |               |  | $ | 38,643 | 
|                     |  |                   |         |               |  |   |        | 

7



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##### Table of Contents



PIXAR


NOTES TO FINANCIAL STATEMENTS 
(Continued)



---



|    |                                                                                                                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | 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 revenue for Toy Story 2 and
    A Bugs Life and contributed approximately $0.14 to
    the Companys third quarter 2002 diluted earnings per share.
|   
|(2) | Library titles include A Bugs Life
    and Toy Story.                                                                                                                                                                                                                                                                                                    

(7) New Accounting
Pronouncements

In June 2001, the FASB issued SFAS 142,
Goodwill and Other Intangible Assets, which
supersedes APB 17, Intangible Assets (SFAS 142),
which addresses the accounting treatment for goodwill and other
intangible assets acquired individually or with a group of other
assets upon their acquisition, but not acquired in a business
combination. This statement also addresses how goodwill and
other intangible assets should be accounted for after they have
been initially recognized in the financial statements. With the
adoption of SFAS 142, goodwill is no longer subject to
amortization over its estimated useful life; rather, goodwill
will be subject to at least an annual assessment for impairment
by applying a fair-value-based test. Also, if the benefit of an
intangible asset acquired in a business combination is obtained
through contractual or other legal rights, or if the intangible
asset can be sold, transferred, licensed, rented or exchanged,
it should be separately recognized. The Company adopted SFAS 142
January 1, 2002. The adoption of SFAS 142 has not had a
material impact on our financial position or results of
operations.

On October 3, 2001, the Financial Accounting
Standards Board issued FASB Statement No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS 144), which addresses financial
accounting and reporting for the impairment or disposal of
long-lived assets. SFAS 144 supersedes FASB Statement
No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of, and also supersedes
the accounting and reporting provisions of APB Opinion
No. 30, Reporting the Results of Operations-Reporting the
Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, for the disposal of a segment of a business. The
Company adopted SFAS 144 January 1, 2002. The adoption of SFAS
144 has not had a material impact on our financial position or
results of operations.

In June 2001, the FASB issued Statement of
Financial Accounting Standards No. 143, Accounting
for Asset Retirement Obligations (SFAS 143).
This Statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs.
This Statement 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. We do not expect the
adoption of SFAS 143 to have a material impact on our financial
position or results of operations.

In June 2002, the FASB issued Statement of
Financial Accounting Standards 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. Adoption of this statement is
required for the fiscal year beginning January 1, 2003. We
do not expect the adoption of SFAS 146 to have a material
impact on our financial position or results of operations.

8



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##### Table of Contents








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|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. Such forward-looking statements are based on
current expectations, estimates and projections about our
industry, managements beliefs, and assumptions made by
management. Words such as anticipates,
expects, intends, plans,
believes, seeks, estimates,
variations of such words and similar expressions are intended to
identify such forward-looking statements. 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 to
21. Particular attention should be paid to the cautionary
language in Risk Factors  To meet our fiscal
2002 diluted earning per share target, 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, and
 Our scheduled successive releases of feature
films will continue to place a significant strain on our
resources, as well as those noted in the section entitled
Risk Factors in our Annual Report on Form 10-K
for the year ended December 29, 2001 (the
Form 10-K). 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.

Our operating performance each quarter is subject
to various risks and uncertainties as discussed in our
Form 10-K. The following discussion should be read in
conjunction with the sections entitled Risk Factors
and Managements Discussion and Analysis of Financial
Condition and Results of Operations in the Form 10-K.

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.

Our second feature film, A Bugs Life,was released in November 1998 and counts as the first
original Picture under the Co-Production Agreement. 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 will 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. In November 1999, Toy Story 2,our
third animated feature film was released. As a theatrical
sequel, Toy Story 2is a derivative

9



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##### Table of Contents



work of the original Toy Story, and
therefore it does not count toward the five original 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 five original Pictures apply.


In November 2001, we released Monsters, Inc.,our fourth animated feature film, which counts as the second
original Picture under the Co-Production Agreement. We are
currently in various stages of production on the final three
films under our current Disney deal, Finding Nemo, The
Incrediblesand Cars. These films will be produced
and distributed under the Co-Production Agreement and will count
as the third, fourth, and fifth films of the Pictures to be
produced under the Co-Production Agreement. Finding Nemois currently scheduled to be released on May 30, 2003.
The Incrediblesand Carsare currently targeted
for holiday releases in 2004 and 2005, respectively.

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 economic and political events;
and (5) the release dates of competitive films. Please
refer to our Form 10-K, particularly the sections on risk
factors, for a more detailed discussion of these factors.



| |                                                   
| | --------------------------------------------------
| | Target Earnings per Share for Fiscal Year
    2002

The domestic home video release for Monsters,
Inc.occurred on September 17, 2002. For the majority
of our key European and Asian territories, the home video was
also released in September 2002. Our fourth quarter film
revenues are expected to be derived primarily from Monsters,
Inc.continued worldwide home video sales, merchandising
revenues and other ancillary royalties, as well as home video,
television and merchandise revenues from our other three films.
Based on our actual results for the nine months ended
September 28, 2002 and our projections for the remainder of
the year, we are targeting earnings of $1.50 to $1.55 per
diluted share for the full year 2002. This guidance is also
based on assumptions that include continued software sales,
interest income, increased operating expenses, and an effective
tax rate of approximately 40%.

These statements regarding our targeted earnings
per share are forward-looking, and actual results may differ
materially. Factors that could cause actual results for fiscal
year 2002 to differ include but are not limited to: (1) the
timing and amount of worldwide revenue and distribution costs
from 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
economic and political events that are beyond our control. See
Risk Factors set forth below for a more detailed
discussion of factors that could cause actual results to differ.
For additional risk factors that can affect our business, please
see the section entitled Risk Factors in our
Form 10-K.

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
SOP 00-2  Accounting by Producers or
Distributors of

10



---



##### Table of Contents



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 or sale;                                                       
|
| |  | the arrangement fee is fixed and determinable; and                                                                                                             
|
| |  | collection of the arrangement fee is reasonably
    assured.                                                                                                   

Under the Co-Production Agreement, we share
equally with Disney in the profits of each Picture, including
Monsters, Inc., Toy Story 2and A Bugs
Life,after Disney recovers its marketing, distribution and
other predefined costs and fees. Beginning in 2000, we had an
improved ability, through information available to us from
Disney and other sources, to estimate and record our share of
film revenues and gross profits. 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 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 the quarter ended September 28, 2002.
These adjustments increased the net home video revenues of
Toy Story 2and A Bugs Lifeand
contributed approximately $0.14 to our diluted earnings per
share for the quarter ended September 28, 2002.

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 additional information becomes
available from Disney on a more timely basis, it may result in a
change of estimation for revenue recognition. Additionally, we
have the right to audit Disneys books and records related
to the Pictures per 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,
library titles are defined as occurring three years from the
films initial release. Currently, Toy Story and
A Bugs Lifeare 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

11



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##### Table of Contents



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, the costs of which are capitalized as film costs.
In the event a film is not set for production within three years
from the time of the first capitalized transaction, all such
costs will be expensed.


Once a film is released, capitalized film
production costs will be 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 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 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
fair value.

Results of Operations

Our results for the nine months ended
September 28, 2002 were driven primarily by the worldwide
home video release and box office performance of Monsters,
Inc.,related merchandise sales and other ancillary
royalties for Monsters, Inc.and to a lesser extent,
continuing revenues from our library of films. By the end of the
third quarter of 2002, Monsters, Inc.had generated
approximately $524 million in worldwide box office
receipts, including $256 million at the domestic box office
and $268 million at the international box office. We have
also recognized shipments of approximately 25.1 million
home video units, comprised of 6.2 million VHS units and
9.3 million DVD units domestically and 6.3 million VHS
units and 3.3 million DVD units internationally. We have
recognized essentially all remaining worldwide theatrical
revenues from Monsters, Inc.and a majority of the
worldwide home video revenues as of September 28, 2002.



| |        
| | -------
| | Revenue

Total revenue for the three and nine months ended
September 28, 2002 were $102.5 million and
$162.3 million, compared to $11.3 million and
$44.1 million, respectively, in the corresponding prior
year periods.

Film and animation services revenue for the three
months ended September 28, 2002 were $100.5 million
compared with $9.8 million in the corresponding prior year
period. Film revenue for the three months ended
September 28, 2002 consisted of $78.4 million from
Monsters, Inc.,$11.3 million from Toy
Story 2,and $10.5 million in revenues from our
library titles, A Bugs Lifeand Toy Story.Revenues from Monsters, Inc.were primarily
attributable to the home video release, as well as some
merchandise sales, and other ancillary royalties. Revenues for
Toy Story 2and our library titles were comprised of
continuing worldwide home video sales, merchandise 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 earning per share
for the three months ended September 28, 2002. Film revenue
for the three months ended September 29, 2001 included
domestic network television licensing of Toy Storyand
Toy Story 2, merchandise sales, derivative works and
ancillary royalties.

Film and animation services revenue for the nine
months ended September 28, 2002 were $155.7 million
compared to $38.6 million in the corresponding prior year
period. The increase in the current nine-month period from the
corresponding prior year period was largely due to the timing
and success of Monsters, Inc.s worldwide theatrical
performance and the September 2002 home video release, as well
as merchandise sales and other ancillary royalties. Film and
animation services revenue for the nine months ended
September 29, 2001 was primarily comprised of revenues from
domestic network television licensing of A Bugs Lifeand Toy Story 2, and merchandise sales and other
ancillary royalties related to Toy Story 2and our
library titles.

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Software revenue includes software license
revenue, principally from RenderMan®, and royalty
revenue from licensing Physical Effects, Inc. (PEI)
technology to a third party. PEI, a company we acquired in 1998,
licensed certain of its technology to a third party, from which
we now receive associated royalty revenue on a quarterly basis.
Software revenue for the three and nine months ended
September 28, 2002 was $2.0 million and
$6.6 million compared to $1.5 million and
$5.5 million, respectively, in the corresponding prior year
periods, resulting from increases in RenderMan®
software licensing during the period. Due to our focus on
content creation for animated feature films and related
products, we have not increased the time and resources necessary
to generate consistently higher RenderMan® license
revenues. Therefore, 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 the three and nine months ended
September 28, 2002, Disney accounted for 97% and 95%,
respectively, of our total revenue compared to 87% and 88%,
respectively, for the corresponding prior year periods. The
revenue from Disney consisted primarily of film related revenue
and to a lesser extent some animation services 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 2002 and for
the near future.



| |                
| | ---------------
| | Cost of Revenue

Cost of film and animation services revenue for
the three and nine months ended September 28, 2002 was
$21.3 million and $33.2 million compared to
$2.0 million and $6.5 million, respectively, in the
corresponding prior year periods. Cost of film revenue
represents amortization of capitalized film production costs.
See Capitalized Film Production Costs. For the three
and nine months ended September 28, 2002, cost of film
revenue represented amortization of capitalized film production
costs associated with Monsters, Inc.,
Toy Story 2and A Bugs Life,and
represented 21% of total film revenue for both periods. For the
three and nine months ended September 29, 2001, cost of
film revenue represented amortized costs associated with
Toy Story 2and A Bugs Life,and
represented 20% and 17%, respectively, of total film revenue.
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 film forecast
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. Toy Storyrevenue
has no related cost, as film costs were fully amortized by
December 31, 1997. The increase in cost of film revenue as
a percentage of total film revenue for the three and nine months
ended September 28, 2002 as compared to the prior year
periods, can be attributed to a majority of revenues resulting
from Monsters, Inc.,which had a higher cost amortization
percentage relative to our previous films.

Cost of software revenue consists of the direct
costs and manufacturing overhead required to reproduce and
package our software products, as well as amortization of
purchased technology. Cost of software revenue as a percentage
of the related revenue was 7% and 6% for the three and nine
months ended September 28, 2002, as compared to 9% and 8%
for the corresponding prior year periods. Cost of software
revenue for the three and nine months ended September 28,
2002 and September 29, 2001 relates primarily to
amortization of purchased technology associated with the
acquisition of PEI of $120,000 and $360,000, respectively, in
both years. We are amortizing this purchased technology against
related license revenue over a period not to exceed four years,
which will be fully amortized by the end of fiscal year 2002.



| |                   
| | ------------------
| | Operating Expenses

Total operating expenses were $4.8 million
and $13.8 million for the three and nine months ended
September 28, 2002, respectively, compared to
$4.5 million and $12.3 million in the corresponding
prior year periods. We anticipate an increase in operating
expenses in future periods due to the growth experienced by the
studio as we ramp up production on our three current film
projects. 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

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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.


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
MarionetteTM and RingmasterTM animation
and production management software and for creative development
for future films. Research and development expenses increased to
$2 million and $6.6 million, respectively, for the
three and nine months ended September 28, 2002 from
$1.8 million and $4.9 million in the corresponding
prior year periods. The increase in research and development
expenses for the three and nine months ended September 28,
2002 was due to increases in employee related expenses
associated with additional staffing and an increase in short
film project costs, which was offset by reduced creative
development costs. We expect research and development expenses
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 decreased to $411,000 and $865,000, respectively, for
the three and nine months ended September 28, 2002, from
$541,000 and $1.3 million in the corresponding prior year
periods, due to a reduction in marketing costs associated with
the release of Monsters, Inc.in the prior year period.
We believe that sales and marketing expenses may 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 professional fees. General and
administrative expenses increased to $2.3 million for the
three months ended September 28, 2002 from
$2.1 million in the corresponding prior year, and increased
to $6.4 million for the nine months ended
September 28, 2002 from $6.0 million in the
corresponding prior year period. The increase for the three
months ended September 28, 2002 was primarily due to an
increase in employee related costs. The slight overall increase
for the nine months ended September 28, 2002 is a result of
employee related costs, insurance and professional fees, which
were partially offset by reductions in public company costs and
legal fees. General and administrative expenses may increase in
future periods.



| |                  
| | -----------------
| | Other Income, Net

Other income, net was $2.6 million and
$7.6 million, respectively, for the three and nine months
ended September 28, 2002, compared to $5.1 million and
$12.0 million in the corresponding prior year periods. The
decrease in other income over the comparable prior year periods
is primarily due to a one-time, non-recurring settlement of
approximately $2 million which was recognized in the third
quarter of 2001 and was unrelated to our core business. After
factoring in this one-time, non-recurring settlement, the
remaining decrease in other income for 2002 relative to 2001 is
due to declining interest rates in 2002.



| |             
| | ------------
| | Income Taxes

Income tax expense for the three and nine months
ended September 28, 2002 reflects our federal and state
income tax expense of 40.4% versus 37.1% in the same periods of
the prior year. Our income tax rate was lower in 2001 due to the
utilization of research and experimentation credits for federal
and state tax purposes, as well as the utilization of certain
other state credits and exemptions.

Facility Related Capital
Expenditures

During the last quarter of fiscal year 2002, we
expect to spend approximately $10 million to
$11 million related to capital expenditures for our
Emeryville headquarters and future expansion.

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Capitalized Film Production Costs

We had $88.3 million in capitalized film
production costs as of September 28, 2002, consisting
primarily of costs relating to Toy Story 2, A Bugs
Life, Monsters, Inc., Finding Nemo, The Incredibles,and
Cars,all of which are being co-financed by Disney under
the Co-Production Agreement. All Toy Story capitalized
film costs were fully amortized as of December 31, 1997.

Stock Option Accounting

The Financial Accounting Standards Board
(FASB) is currently reviewing the accounting standards for
stock-based compensation and is considering if changes to the
existing rules should be made. Under the current provisions of
SFAS 123, we have elected to continue using the
intrinsic-value method of accounting for stock-based awards
granted to employees in accordance with Accounting Principles
Board Opinion No. 25 Accounting for Stock Issued to
Employees (APB 25). Accordingly, we have not recognized
compensation expense for our stock-based awards to employees in
our Statements of Income.

The following table reflects pro forma net income
and earnings per share had we elected to adopt the fair value
approach of Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based
Compensation (in thousands, except per share data):

|                            |                                      |                                               |   |                   |       |               |   |               |       |  |   |        |        |  |   |        |       | 
|--------------------------- | ------------------------------------ | --------------------------------------------- | - | ----------------- | ----- | ------------- | - | ------------- | ----- |  | - | ------ | ------ |  | - | ------ | ----- | 
|                            |                                      |                                               |   |                  
|                            |                                      | Quarter Ended                                 |   | Nine Months Ended
|                            |                                      |                                               |   |                  
|                            |                                      | September 28,                                 |   | September 29,     |       | September 28, |   | September 29,
|                            |                                      | 2002                                          |   | 2001              |       | 2002          |   | 2001         
|                            |                                      |                                               |   |                   |       |               |   |              
|Net income:                 |                                      |                                               |   |                   |       |               |   |               |       |  |   |        |        |  |   |       
|                            | As reported                          |                                               | $ | 46,935            |       |               | $ | 6,165         |       |  | $ | 72,986 |        |  | $ | 23,184 |      
|                            | Pro forma after stock option expense |                                               |   | 41,560            |       |               |   | 4,395         |       |  |   | 62,971 |        |  |   | 17,796 |      
|                            |                                      |                                               |   |                   |       |               |   |               |       |  |   |        |        |  |   |       
|                            |                                      | Decrease attributable to stock option expense |   | $                 | 5,375 |               |   | $             | 1,770 |  |   | $      | 10,015 |  |   | $      | 5,388 | 
|                            |                                      |                                               |   |                   |       |               |   |               |       |  |   |        |        |  |   |       
|Diluted earnings per share: |                                      |                                               |   |                   |       |               |   |               |       |  |   |        |        |  |   |       
|                            | As reported                          |                                               | $ | 0.87              |       |               | $ | 0.12          |       |  | $ | 1.39   |        |  | $ | 0.45   |      
|                            | Pro forma after stock option expense |                                               |   | 0.77              |       |               |   | 0.08          |       |  |   | 1.20   |        |  |   | 0.35   |      
|                            |                                      |                                               |   |                   |       |               |   |               |       |  |   |        |        |  |   |       
|                            |                                      | Decrease attributable to stock option expense |   | $                 | 0.10  |               |   | $             | 0.04  |  |   | $      | 0.19   |  |   | $      | 0.10  | 
|                            |                                      |                                               |   |                   |       |               |   |               |       |  |   |        |        |  |   |       

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 we had been following the fair value
approach since the beginning of 1996.

Liquidity and Capital Resources

Cash, cash equivalents and short-term investments
increased by $60.6 million to $339.2 million at
September 28, 2002 from $278.6 million at
December 29, 2001 due primarily to cash received from
Disney for our share of film revenue, as well as proceeds from
stock option exercises, software revenue and interest income,
which was offset by film production spending on our three films
and income tax payments.

Net cash provided by operating activities for the
nine months ended September 28, 2002 was primarily
attributable to net income of $73.0 million, the non-cash
impact of depreciation and amortization expense and amortization
of capitalized film production costs totaling
$37.8 million, an increase in unearned revenue totaling
$4.5 million, an increase in receivables from Disney of
$79.6 million, and an increase in income taxes payable of
$10.4 million, offset by a decrease in accounts payable of
$4.4 million. Net cash used in investing activities
primarily consisted of investments in short-term securities of
$158.0 million, which were offset by funding of film
production costs of $32.5 million, by sales of short-term
investments of $89.6 million and

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equipment purchases of $3.1 million. Net
cash provided by financing activities consisted of proceeds of
$36.6 million from exercised stock options.


As of September 28, 2002, our principal
source of liquidity was $339.2 million in cash, cash
equivalents and short-term 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. Pursuant to the Co-Production Agreement,
we will co-finance the next three original animated feature
films that we produce, which will be Finding Nemo, The
Incrediblesand Cars.In the future, we may
co-finance other derivative works such as theatrical sequels,
direct to home video sequels, interactive products and
television productions. 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. We believe that these funds
will be sufficient to meet our operating requirements through
the next twelve months.

Impact of Recent Accounting
Pronouncements

In June 2001, the FASB issued SFAS 142,
Goodwill and Other Intangible Assets, which
supersedes APB 17, Intangible Assets
(SFAS 142), which addresses the accounting treatment for
goodwill and other intangible assets acquired individually or
with a group of other assets upon their acquisition, but not
acquired in a business combination. This statement also
addresses how goodwill and other intangible assets should be
accounted for after they have been initially recognized in the
financial statements. With the adoption of SFAS 142,
goodwill is no longer subject to amortization over its estimated
useful life; rather, goodwill will be subject to at least an
annual assessment for impairment by applying a fair-value-based
test. Also, if the benefit of an intangible asset acquired in a
business combination is obtained through contractual or other
legal rights, or if the intangible asset can be sold,
transferred, licensed, rented or exchanged, it should be
separately recognized. The Company adopted SFAS 142
January 1, 2002. The adoption of SFAS 142 has not had
a material impact on our financial position or results of
operations.

On October 3, 2001, the Financial Accounting
Standards Board issued FASB Statement No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS 144), which addresses
financial accounting and reporting for the impairment or
disposal of long-lived assets. SFAS 144 supersedes FASB
Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
and also supersedes the accounting and reporting provisions of
APB Opinion No. 30, Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for the disposal of a segment of a
business. The Company adopted SFAS 144 January 1, 2002. The
adoption of SFAS 144 has not had a material impact on our
financial position or results of operations.

In June 2001, the FASB issued Statement of
Financial Accounting Standards No. 143, Accounting
for Asset Retirement Obligations
(SFAS 143). This Statement addresses financial
accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated
asset retirement costs. This Statement 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. We do not
expect the adoption of SFAS 143 to have a material impact
on our financial position or results of operations.

In June 2002, the FASB issued Statement of
Financial Accounting Standards 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. Adoption of this statement is
required for the fiscal year beginning January 1, 2003. We
do not expect the adoption of SFAS 146 to have a material
impact on our financial position or results of operations.

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Risk Factors

The following is a discussion of certain
factors that currently impact or may impact our business,
operating results and/or financial condition. In addition,
please refer to the section entitled Risk Factors in
our Form 10-K, for additional factors that may impact our
business, operating results and/or financial condition in the
future. You should carefully consider these factors before
making an investment decision with respect to our common
stock.



| |                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------
| | To meet our fiscal 2002 diluted earnings
    per share target, we are dependent on our feature films and the
    accuracy of our forecasts.

In 2002, our revenue and operating results will
be largely dependent upon (1) the timing and amount of
worldwide revenues and distribution costs from 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 economic 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 A Bugs Life, Toy
Story 2,and Monsters, Inc.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, and other distribution costs including talent
participation and residuals. Beginning with the first quarter of
2000, we have an improved ability, through information available
to us from Disney and other sources, to estimate and record our
share of film revenues and gross profits. While we anticipate
this improved ability will continue to allow us to recognize our
share of film revenues and gross profits on a more timely basis,
we will 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 four feature films, this level of success
is unusual in the motion picture industry, and our future
releases may not achieve similar results. Beyond 2002, we will
be dependent on the future success of Finding Nemo, The
Incredibles,and Cars. Unless Finding Nemo, The
Incredibles,and Carsachieve box office success and
are successful in home video, television licensing, and
merchandise sales, they may not generate significant revenue and
operating results for us in future years.

The majority of our anticipated revenues for the
remainder of fiscal year 2002 is based on the assumption that
Monsters, Inc.will be a continued success in the
worldwide home video and merchandising markets through the
holiday season. Although to date Monsters, Inc.has been
very successful in its home video release, there can be no
assurance that worldwide home video and merchandise sales will
be sufficient to meet our earnings target. 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.Although our forecast assumes some continued revenues
from these titles, there can be no assurance that revenues from
continuing international television licensing, worldwide home
video, merchandise sales and ancillary royalties will be
sufficient to achieve our targeted earnings.



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

It is difficult to forecast the amount and timing
of our future revenues from Toy Story, A Bugs Life, Toy
Story 2and Monsters, Inc.for the remainder of
fiscal year 2002. The amount of future revenues depends not only
on customer acceptance of a film in its worldwide theatrical
release, but also on customer acceptance of related products in
each separate release category  home video,
merchandise and television collectively, being the most
significant. 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

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of the economy in 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. In spite of Monsters,
Inc.s successful worldwide box office and home video
results, it is difficult to predict the ultimate revenues from
worldwide home video, worldwide television, merchandising and
ancillary revenue streams.


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 theatrical releases is
typically known well in advance of release, the timing of
release of follow-on products is often determined just in
advance of release, is subject to change, and is therefore less
predictable. In all product categories, timing of revenues is
particularly uncertain with respect to releases in foreign
markets as 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 of additional distribution costs to those
previously forecasted. Such adjustments have impacted 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, we may make
adjustments to our home video revenues for estimates on return
reserves and expenses 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. Such adjustments were made during the period ending
September 28, 2002. Although these adjustments increased
net revenues for home video of Toy Story 2and A
Bugs Life, there can be no assurance that future
adjustments will be favorable to our results. In addition, we
utilize margin normalization in estimating associated costs,
such as with merchandising or home video, in accordance with the
provisions of SOP 00-2. Due to these factors, the amount and
timing of our future revenues and associated expenses from
Toy Story, Toy Story 2, A Bugs Lifeand
Monsters, Inc.are difficult to forecast, and it is
possible, in any given quarter, that we will not meet our
forecasted earnings targets.

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 our forecast
changes with respect to total anticipated revenue from any
individual feature film and becomes lower than was previously
forecasted, 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.

In accordance with the terms of the Co-Production
Agreement, we are not obligated to pay certain advertising costs
related to our films unless they have been fully recouped by
related revenues. Accordingly, we do not record advertising
expenses incurred in advance of domestic theatrical receipts.
For the remaining revenue streams, however, we may be required
to record advertising expenses in advance of the related
revenue. For example, during the second quarter of 2002, we
recorded marketing and advertising expenses associated with the
third quarter home video release of Monsters, Inc.The
timing and amount of such expenses are difficult to forecast,
and it is possible, in any given quarter, that we will not meet
our forecasted earnings targets, or that there will not be
enough revenues to offset such up front costs.

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| |                                                               
| | --------------------------------------------------------------
| | Forecasting our operating expenses is
    extremely difficult.

Our operating expenses will continue to be
extremely difficult to forecast. We budget the direct costs of
film productions 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, which we adopted in the first
quarter of fiscal year 2001. A substantial portion of all of our
other costs are 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, 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 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 three and nine months ended September 28, 2002 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.



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

Our future film budgets may increase due to
factors including, but not limited to, (1) escalation in
compensation rates of people required to work on our current
film projects including Finding Nemo, The Incredibles,and Cars, (2) number of personnel required to
work on our current film projects, (3) unanticipated
production delays, (4) equipment needs, (5) the
enhancement of existing or the development of new proprietary
technology and (6) the expansion of our facilities to
accommodate the growth of the studio. Therefore, the budget for
Finding Nemo, The Incredibles, Carsand related products
may continue to be greater than the budgets for Toy Story, A
Bugs Life, Toy Story 2and Monsters, Inc.We will continue to finance these budgets equally with
Disney under the Co-Production Agreement. In addition, due to
production exigencies which are often difficult to predict, we
believe that it is not uncommon for film production spending to
exceed film production budgets, and Finding Nemo, The
Incrediblesand Carsmay 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 are shared
with Disney and treated as film costs, which increases overall
production budgets and could have a material adverse effect on
our results of operations and financial condition.



| |                  
| | -----------------
| | Software revenue.

Software revenue declined in fiscal year 2001 but
increased for the nine months ended September 28, 2002, as
compared to prior years. We expect ongoing variability in
revenues derived from software licenses as we continue to reduce
our emphasis on the commercialization of software products. Due
to our focus on content creation for animated feature films and
related products, we have not increased the time and resources
necessary to generate consistently higher RenderMan®
licensing revenues; therefore, we expect that revenue from the
licensing of RenderMan® may continue to fluctuate in
future periods. To meet our fiscal 2002 diluted earnings per
share target, our revenue estimates include revenues
attributable to non-film related sources including software
revenue. There can be no assurance that the timing and amount of
such revenues will be sufficient to meet our targeted earnings.



| |                                     
| | ------------------------------------
| | Other non-film revenue and expenses.

Our 2002 diluted earnings per share target
includes our forecast of other non-film related sources such as
interest income and our effective tax rate. Interest income
fluctuates depending on economic conditions and interest rates
available to us during the year, and therefore, it is difficult
to forecast. For example, although our average cash, cash
equivalents and short-term investment balances increased during
2001 and through September 28, 2002, interest income
decreased due to declining interest rates occurring in the
latter half of 2001 and into 2002. Income tax expense may also
fluctuate. Our income tax rate for 2002 approximates statutory
levels, however the effective tax rate for 2001 was below
statutory rates due to the utilization of

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research and experimentation credits as well as
the utilization of certain other state credits and exemptions.
There can be no assurance that the amount of other non-film
revenues and expenses such as those noted above will be
sufficient to meet targeted earnings.




| |                                                                                                        
| | -------------------------------------------------------------------------------------------------------
| | 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 annual and quarterly 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, which
    can fluctuate significantly from film to film,                                                                                                             
|
| |  | the timing of the release of related products
    into their respective markets, such as home videos, television,
    and merchandising,                                                                        
|
| |  | 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 the
    feature films and related products and the timing of those costs,                                                                                              
|
| |  | Disneys success at marketing the films and
    related products,                                                                                                                                               
|
| |  | 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 by Disney,
|
| |  | the introduction of new feature films or products
    by our competitors,                                                                                                                                       
|
| |  | general political and economic conditions, and                                                                                                                                                                  
|
| |  | timing and amount of non-film related revenues
    such as licensing of our software.                                                                                                                           

In particular, since our revenue under the
Co-Production Agreement is directly related to the success of a
feature film, 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 and profitability 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 nine months ended
September 28, 2002, increased in comparison to the same
period in fiscal year 2001, and we expect to continue to
increase our operating expenses to fund greater levels of
research and development, to ramp up our production on our three
current film projects and to expand operations. We expect our
spending levels may still increase significantly due to the
following:



| |   |                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------
| |  | continued investment in proprietary software
    systems,                                                          
|
| |  | potential increased competition costs for
    creative, technical and administrative talent,                       
|
| |  | increased costs associated with the expansion of
    our facilities,                                               
|
| |  | number of personnel required to support studio
    growth to accommodate multiple films in parallel production, and
|
| |  | increased investment in creative development.                                                                      

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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 pay for)
the increases in expenses, our operating expenses will
significantly increase in the remainder of 2002.



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

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 on Finding Nemo,which is
currently targeted for release on May 30, 2003, The
Incredibles,which is currently targeted for release in
holiday 2004, and Cars,which is currently targeted for
release in holiday 2005, as well as future projects as we move
towards producing one feature film per year. We have only
produced four prior feature films to date and have limited
experience with respect to producing animated feature films in
parallel. 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 release of our feature films.
This growth and expansion has placed, and continues to place, a
significant strain on our resources. We cannot provide any
assurances that Finding Nemo, The Incredibles, and
Carswill 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
will 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 all our films.

If we are able to release Finding Nemoin
2003, we cannot provide any assurances that we will release
The Incrediblesin 2004 and Carsin 2005. Due to
the strain on our personnel from the effort required for the
release of Finding Nemoand the time required for
creative development of a new film, it is possible that we would
be unable to release The Incrediblesand Carsin
2004 and 2005, respectively. It is too early to determine the
rate at which any future films are to be released, and we cannot
provide any assurances that we will release a film in each
successive year or in any particular year.

To continue to accommodate growth, we will be
required to 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. In addition,
this growth and these diversification activities, along with the
corresponding increase in the number of our employees and
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 and 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.




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 a maturity 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.

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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 28, 2002. 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  |  | $         | 152,976 |        |  | $     | 138,265 |   |  | $ | 291,241 |  
|Weighted-average interest rate |  |           | 3.93    | %      |  |       | 2.93    | % |  |   | 3.45    | %

Impact of Foreign Currency Rate Changes.While our products are distributed in
foreign markets by Disney and its affiliates, we are not
directly exposed to foreign currency rate fluctuations. However,
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

a.     Evaluation of
disclosure controls and procedures.Within 90 days prior to the
filing date of this Quarterly Report on Form 10-Q (the
Evaluation Date), we evaluated, under the
supervision of our Chief Executive Officer and our Chief
Financial Officer, the effectiveness of our disclosure controls
and procedures. 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.

b.     Changes in
internal controls.Subsequent to the
Evaluation Date, there were no significant changes in our
internal controls or in other factors that could significantly
affect such controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.




PART II  OTHER
INFORMATION




Item 1.     Legal
Proceedings

Pixar is a party to various legal proceedings
arising from the normal course of business activities. In
managements opinion, resolution of these matters is not
expected to have a material adverse impact on Pixars
results of operations, cash flows, or its financial position.
However, depending on the amount and timing, an unfavorable
resolution of a matter could materially affect Pixars
future results of operations, cash flows or financial position
in a particular period.




Item 6.     Exhibits
and Reports on Form 8-K

(a) Exhibits

|             |  |                                                                                                                                                                                            
|------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit 99.1 |  | 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

No reports on Form 8-K were filed by Pixar
during the quarter ended September 28, 2002.

Items 2, 3, 4 and 5 are not applicable and
have been omitted.

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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, 2002

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CERTIFICATIONS

I, Steve Jobs, certify that:

1. I have reviewed this quarterly report on
Form 10-Q of Pixar;

2. Based on my knowledge, this quarterly
report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period
covered by this quarterly report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;

4. The registrants other certifying
officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:



| |                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this quarterly report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this
    quarterly report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this quarterly report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officer and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons
performing the equivalent functions):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6. The registrants other certifying
officer and I have indicated in this quarterly report whether
there were significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.

Date: November 12, 2002



| |                                     
| | ------------------------------------
| | /s/ STEVE JOBS                      
| |                                     
| | Steve Jobs                          
| | Chairman and Chief Executive Officer

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I, Ann Mather, certify that:

1. I have reviewed this quarterly report on
Form 10-Q of Pixar;

2. Based on my knowledge, this quarterly
report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period
covered by this quarterly report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;

4. The registrants other certifying
officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:



| |                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this quarterly report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this
    quarterly report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this quarterly report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officer and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons
performing the equivalent functions):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6. The registrants other certifying
officer and I have indicated in this quarterly report whether
there were significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.

Date: November 12, 2002



| |                             
| | ----------------------------
| | /s/ ANN MATHER              
| |                             
| | Ann Mather                  
| | Executive Vice President and
| | Chief Financial Officer     

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EXHIBIT INDEX

|        |      |             |  |                                                                                                                                                                                           
|------- | ---- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |            
|Number  |      | Description
|        |      |            
|        | 99.1 |             |  | Certification 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.

26