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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



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Form 10-Q



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|               |  |                                                              |  |  | 
|-------------- |  | ------------------------------------------------------------ |  |  | 
|(Mark One)
[X] |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE     
|               |  | SECURITIES EXCHANGE ACT OF 1934                             
|              
|               |  | For the quarterly period ended March 29, 2003               
|               |  |                                                             
|               |  | or                                                          
|               |  |                                                             
|[  ]           |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE    
|               |  | SECURITIES EXCHANGE ACT OF 1934                             
|              
|               |  | For the transition period from ____________ to ____________.

Commission File Number: 0-26976

Pixar(Exact name of registrant as specified in its charter)

|                                                                         |  |                                               
|------------------------------------------------------------------------ |  | ----------------------------------------------
|California(State or other jurisdiction of
Incorporation or organization) |  | 68-0086179(I.R.S. Employer
Identification No.)

|                                                                                 |  |                
|-------------------------------------------------------------------------------- |  | ---------------
|1200 Park Avenue, Emeryville, California(Address of principal executive offices) |  | 94608(Zip code)

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

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 (the Act) during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]

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

The number of shares outstanding of the Registrants Common Stock as of
May 2, 2003 was 53,535,148.

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TABLE OF CONTENTS



|                                                                                              |  |                                                                                               |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------- |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION                                                               
|Item 1. Financial Statements:                                                                
|                                                                                              |  | Balance Sheets as of March 29, 2003 and December 28, 2002 (unaudited)                        
|                                                                                              |  | Statements of Income for the Quarters Ended March 29, 2003 and March 30, 2002 (unaudited)    
|                                                                                              |  | Statements of Cash Flows for the Quarters Ended March 29, 2003 and March 30, 2002 (unaudited)
|                                                                                              |  | Notes to Financial Statements (unaudited)                                                    
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                                                              |  | Risk Factors                                                                                 
|Item 3. Quantitative and Qualitative Disclosures about Market Risk                           
|Item 4. Controls and Procedures                                                              
|PART II. OTHER INFORMATION                                                                   
|Item 1. Legal Proceedings                                                                    
|Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURE                                                                                    
|CERTIFICATIONS                                                                               
|EXHIBIT INDEX                                                                                
|EXHIBIT 99.1                                                                                 



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Pixar
FORM 10-Q
Index

|                                                                                              |  |        
|--------------------------------------------------------------------------------------------- |  | -------
|PART I. FINANCIAL INFORMATION                                                                 |  |        
|                                                                                              |  |        
|Item 1. Financial Statements:                                                                 |  |        
|                                                                                              |  |        
|Balance
Sheets as of March 29, 2003 and December 28, 2002
(unaudited)                         |  | Page 2 
|                                                                                              |  |        
|Statements of Income for the Quarters Ended March 29, 2003 and
March 30, 2002 (unaudited)     |  | Page 3 
|                                                                                              |  |        
|Statements of Cash Flows for the Quarters Ended March 29, 2003 and
March 30, 2002 (unaudited) |  | Page 4 
|                                                                                              |  |        
|Notes to Financial Statements (unaudited)                                                     |  | Page 5 
|                                                                                              |  |        
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |  | Page 11
|                                                                                              |  |        
|Risk Factors                                                                                  |  | Page 17
|                                                                                              |  |        
|Item 3. Quantitative and Qualitative Disclosures about Market Risk                            |  | Page 29
|                                                                                              |  |        
|Item 4. Controls and Procedures                                                               |  | Page 30
|                                                                                              |  |        
|PART II. OTHER INFORMATION                                                                    |  |        
|                                                                                              |  |        
|Item 1. Legal Proceedings                                                                     |  | Page 30
|                                                                                              |  |        
|Item 6. Exhibits and Reports on Form 8-K                                                      |  | Page 30
|                                                                                              |  |        
|SIGNATURE                                                                                     |  | Page 31
|                                                                                              |  |        
|CERTIFICATIONS                                                                                |  | Page 32
|                                                                                              |  |        
|EXHIBIT INDEX                                                                                 |  |        

1



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##### Table of Contents






PART I  FINANCIAL INFORMATION




Item 1. Financial
Statements

PIXAR




BALANCE SHEETS

|                                  |                                                                                                                                                                      |                                            |                                      |         |         |                    |         |         |              |  |  | 
|--------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------------------------------ | ------- | ------- | ------------------ | ------- | ------- | ------------ |  |  | 
|                                  |                                                                                                                                                                      |                                            |                                      |         |         | March 29,          |         |         | December 28, | 
|                                  |                                                                                                                                                                      |                                            |                                      |         |         | 2003               |         |         | 2002         | 
|                                  |                                                                                                                                                                      |                                            |                                      |         |         |                    |         |         |              | 
|                                  |                                                                                                                                                                      |                                            |                                      |         |         | (In thousands,     |        
|                                  |                                                                                                                                                                      |                                            |                                      |         |         | except share data) |        
|                                  |                                                                                                                                                                      |                                            |                                      |         |         |                    |        
|                                  |                                                                                                                                                                      |                                            | ASSETS                               |         |         |                    |         |         |              |  | 
|Cash and cash equivalents         |                                                                                                                                                                      | $                                          | 73,284                               |         |         | $                  | 44,431  |        
|Investments                       |                                                                                                                                                                      |                                            | 380,596                              |         |         |                    | 294,652 |        
|Trade receivables, net            |                                                                                                                                                                      |                                            | 1,171                                |         |         |                    | 1,178   |        
|Receivable from Disney            |                                                                                                                                                                      |                                            | 27,894                               |         |         |                    | 129,339 |        
|Other receivables                 |                                                                                                                                                                      |                                            | 4,868                                |         |         |                    | 6,394   |        
|Prepaid expenses and other assets |                                                                                                                                                                      |                                            | 12,759                               |         |         |                    | 13,826  |        
|Deferred income taxes             |                                                                                                                                                                      |                                            | 33,108                               |         |         |                    | 32,719  |        
|Property and equipment, net       |                                                                                                                                                                      |                                            | 117,205                              |         |         |                    | 117,423 |        
|Capitalized film production costs |                                                                                                                                                                      |                                            | 101,909                              |         |         |                    | 92,104  |        
|                                  |                                                                                                                                                                      |                                            |                                      |         |         |                   
|                                  |                                                                                                                                                                      | Total assets                               |                                      | $       | 752,794 |                    |         | $       | 732,066      | 
|                                  |                                                                                                                                                                      |                                            |                                      |         |         |                   
|                                  |                                                                                                                                                                      |                                            | LIABILITIES AND SHAREHOLDERS EQUITY |         |         |                    |         |         |              |  | 
|Accounts payable                  |                                                                                                                                                                      | $                                          | 1,831                                |         |         | $                  | 2,341   |        
|Accrued liabilities               |                                                                                                                                                                      |                                            | 10,703                               |         |         |                    | 9,322   |        
|Unearned revenue                  |                                                                                                                                                                      |                                            | 7,179                                |         |         |                    | 7,341   |        
|                                  |                                                                                                                                                                      |                                            |                                      |         |         |                   
|                                  |                                                                                                                                                                      | Total liabilities                          |                                      |         | 19,713  |                    |         |         | 19,004       | 
|                                  |                                                                                                                                                                      |                                            |                                      |         |         |                   
|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; 53,252,077 and 52,894,466 issued
and outstanding as of March 29, 2003 and December 28, 2002, respectively |                                            |                                      | 454,889 |         |                    |         | 442,477 |             
|                                  | Accumulated other comprehensive income                                                                                                                               |                                            |                                      | 1,585   |         |                    |         | 2,156   |             
|                                  | Retained earnings                                                                                                                                                    |                                            |                                      | 276,607 |         |                    |         | 268,429 |             
|                                  |                                                                                                                                                                      |                                            |                                      |         |         |                   
|                                  |                                                                                                                                                                      | Total shareholders equity                 |                                      |         | 733,081 |                    |         |         | 713,062      | 
|                                  |                                                                                                                                                                      |                                            |                                      |         |         |                   
|                                  |                                                                                                                                                                      | Total liabilities and shareholders equity |                                      | $       | 752,794 |                    |         | $       | 732,066      | 
|                                  |                                                                                                                                                                      |                                            |                                      |         |         |                   

See accompanying notes to financial
statements.

2



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PIXAR




STATEMENTS OF INCOME

|                                                      |                            |                            |        |                       |        |   |           |        |        | 
|----------------------------------------------------- | -------------------------- | -------------------------- | ------ | --------------------- | ------ | - | --------- | ------ | ------ | 
|                                                      |                            |                            |        | Quarter Ended         |       
|                                                      |                            |                            |        |                       |       
|                                                      |                            |                            |        | March 29,             |        |   | March 30, |       
|                                                      |                            |                            |        | 2003                  |        |   | 2002      |       
|                                                      |                            |                            |        |                       |        |   |           |       
|                                                      |                            |                            |        | (In thousands, except |       
|                                                      |                            |                            |        | per share data)       |       
|Revenue:                                              |                            |                            |        |                       |        |   |           |       
|                                                      | Film                       |                            | $      | 16,375                |        |   | $         | 35,888 |       
|                                                      | Software                   |                            |        | 2,282                 |        |   |           | 1,185  |       
|                                                      |                            |                            |        |                       |        |  
|                                                      |                            | Total revenue              |        |                       | 18,657 |   |           |        | 37,073 | 
|                                                      |                            |                            |        |                       |        |  
|Cost of revenue:                                      |                            |                            |        |                       |        |   |           |       
|                                                      | Film                       |                            |        | 2,930                 |        |   |           | 8,357  |       
|                                                      | Software                   |                            |        | 20                    |        |   |           | 136    |       
|                                                      |                            |                            |        |                       |        |  
|                                                      |                            | Total cost of revenue      |        |                       | 2,950  |   |           |        | 8,493  | 
|                                                      |                            |                            |        |                       |        |  
|                                                      |                            | Gross profit               |        |                       | 15,707 |   |           |        | 28,580 | 
|                                                      |                            |                            |        |                       |        |  
|Operating expenses:                                   |                            |                            |        |                       |        |   |           |       
|                                                      | Research and development   |                            |        | 2,321                 |        |   |           | 2,355  |       
|                                                      | Sales and marketing        |                            |        | 388                   |        |   |           | 251    |       
|                                                      | General and administrative |                            |        | 2,385                 |        |   |           | 2,247  |       
|                                                      |                            |                            |        |                       |        |  
|                                                      |                            | Total operating expenses   |        |                       | 5,094  |   |           |        | 4,853  | 
|                                                      |                            |                            |        |                       |        |  
|                                                      |                            | Income from operations     |        |                       | 10,613 |   |           |        | 23,727 | 
|Other income                                          |                            |                            | 2,904  |                       |        |   | 2,482     |       
|                                                      |                            |                            |        |                       |        |  
|                                                      |                            | Income before income taxes |        |                       | 13,517 |   |           |        | 26,209 | 
|Income tax expense                                    |                            |                            | 5,339  |                       |        |   | 10,599    |       
|                                                      |                            |                            |        |                       |        |  
|                                                      |                            | Net income                 |        | $                     | 8,178  |   |           | $      | 15,610 | 
|                                                      |                            |                            |        |                       |        |  
|Basic net income per share                            |                            | $                          | 0.15   |                       |        | $ | 0.32      |       
|                                                      |                            |                            |        |                       |        |  
|Shares used in computing basic net income per share   |                            |                            | 53,046 |                       |        |   | 49,483    |       
|                                                      |                            |                            |        |                       |        |  
|Diluted net income per share                          |                            | $                          | 0.15   |                       |        | $ | 0.30      |       
|                                                      |                            |                            |        |                       |        |  
|Shares used in computing diluted net income per share |                            |                            | 56,161 |                       |        |   | 51,467    |       
|                                                      |                            |                            |        |                       |        |  

See accompanying notes to financial statements.

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PIXAR




STATEMENTS OF CASH FLOWS

|                                                                        |                                                                                             |                                                   |                                   |                                                     |         |                |         |         |           |         |         |   |  |  |  | 
|----------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | ------------------------------------------------- | --------------------------------- | --------------------------------------------------- | ------- | -------------- | ------- | ------- | --------- | ------- | ------- | - |  |  |  | 
|                                                                        |                                                                                             |                                                   |                                   |                                                     |         | Quarter Ended  |         |         |           |         |        
|                                                                        |                                                                                             |                                                   |                                   |                                                     |         |                |         |         |           |         |        
|                                                                        |                                                                                             |                                                   |                                   |                                                     |         | March 29,      |         |         | March 30, |         |         |   |  | 
|                                                                        |                                                                                             |                                                   |                                   |                                                     |         | 2003           |         |         | 2002      |         |         |   |  | 
|                                                                        |                                                                                             |                                                   |                                   |                                                     |         |                |         |         |           |         |         |   |  | 
|                                                                        |                                                                                             |                                                   |                                   |                                                     |         | (In thousands) |         |         |           |         |        
|Cash flows from operating activities:                                   |                                                                                             |                                                   |                                   |                                                     |         |                |         |         |           |         |         |  
|                                                                        | Net income                                                                                  |                                                   | $                                 | 8,178                                               |         |                | $       | 15,610  |           |         |         |   | 
|                                                                        | Adjustments to reconcile net income to net cash provided by (used in) operating activities: |                                                   |                                   |                                                     |         |                |         |         |           |         |         |   | 
|                                                                        |                                                                                             | Depreciation and amortization                     |                                   |                                                     | 1,961   |                |         |         | 2,135     |         |         |   |  | 
|                                                                        |                                                                                             | Capitalized film production costs                 |                                   |                                                     | (12,661 | )              |         |         | (12,917   | )       |         |   |  | 
|                                                                        |                                                                                             | Amortization of capitalized film production costs |                                   |                                                     | 2,856   |                |         |         | 7,362     |         |         |   |  | 
|                                                                        |                                                                                             | Tax benefit from stock option exercises           |                                   |                                                     | 4,198   |                |         |         | 645       |         |         |   |  | 
|                                                                        |                                                                                             | Deferred income taxes                             |                                   |                                                     | (389    | )              |         |         | (641      | )       |         |   |  | 
|                                                                        |                                                                                             | Gain on dispositions of property and equipment    |                                   |                                                     |        |                |         |         | (8        | )       |         |   |  | 
|                                                                        |                                                                                             | Changes in operating assets and liabilities:      |                                   |                                                     |         |                |         |         |           |         |         |   |  | 
|                                                                        |                                                                                             |                                                   | Trade and other receivables, net  |                                                     |         | 1,533          |         |         |           | 2,956   |         |   |  |  | 
|                                                                        |                                                                                             |                                                   | Receivable from Disney            |                                                     |         | 101,445        |         |         |           | (19,129 | )       |   |  |  | 
|                                                                        |                                                                                             |                                                   | Prepaid expenses and other assets |                                                     |         | 1,067          |         |         |           | 182     |         |   |  |  | 
|                                                                        |                                                                                             |                                                   | Accounts payable                  |                                                     |         | (510           | )       |         |           | (3,977  | )       |   |  |  | 
|                                                                        |                                                                                             |                                                   | Income taxes payable              |                                                     |         |               |         |         |           | 6,054   |         |   |  |  | 
|                                                                        |                                                                                             |                                                   | Accrued liabilities               |                                                     |         | 1,381          |         |         |           | 222     |         |   |  |  | 
|                                                                        |                                                                                             |                                                   | Unearned revenue                  |                                                     |         | (162           | )       |         |           | (408    | )       |   |  |  | 
|                                                                        |                                                                                             |                                                   |                                   |                                                     |         |                |         |         |           |        
|                                                                        |                                                                                             |                                                   |                                   | Net cash provided by (used in) operating activities |         |                | 108,897 |         |           |         | (1,914  | ) |  |  |  | 
|                                                                        |                                                                                             |                                                   |                                   |                                                     |         |                |         |         |           |        
|Cash flows from investing activities:                                   |                                                                                             |                                                   |                                   |                                                     |         |                |         |         |           |         |         |  
|                                                                        | Purchases of property and equipment                                                         |                                                   |                                   | (1,743                                              | )       |                |         | (150    | )         |         |         |   | 
|                                                                        | Proceeds from sale of property and equipment                                                |                                                   |                                   |                                                    |         |                |         | 55      |           |         |         |   | 
|                                                                        | Proceeds from sale of securities                                                            |                                                   |                                   | 55,787                                              |         |                |         | 28,996  |           |         |         |   | 
|                                                                        | Investments in securities                                                                   |                                                   |                                   | (142,302                                            | )       |                |         | (47,891 | )         |         |         |   | 
|                                                                        |                                                                                             |                                                   |                                   |                                                     |         |                |         |         |           |        
|                                                                        |                                                                                             |                                                   |                                   | Net cash used in investing activities               |         |                | (88,258 | )       |           |         | (18,990 | ) |  |  |  | 
|                                                                        |                                                                                             |                                                   |                                   |                                                     |         |                |         |         |           |        
|Cash flows from financing activities:                                   |                                                                                             |                                                   |                                   |                                                     |         |                |         |         |           |         |         |  
|                                                                        | Proceeds from exercised stock options                                                       |                                                   |                                   | 8,214                                               |         |                |         | 1,120   |           |         |         |   | 
|                                                                        |                                                                                             |                                                   |                                   |                                                     |         |                |         |         |           |        
|                                                                        |                                                                                             |                                                   |                                   | Net cash provided by financing activities           |         |                | 8,214   |         |           |         | 1,120   |   |  |  |  | 
|                                                                        |                                                                                             |                                                   |                                   |                                                     |         |                |         |         |           |        
|Net increase (decrease) in cash and cash equivalents                    |                                                                                             |                                                   | 28,853                            |                                                     |         |                | (19,784 | )       |           |         |         |  
|Cash and cash equivalents at beginning of period                        |                                                                                             |                                                   | 44,431                            |                                                     |         |                | 56,289  |         |           |         |         |  
|                                                                        |                                                                                             |                                                   |                                   |                                                     |         |                |         |         |           |        
|Cash and cash equivalents at end of period                              |                                                                                             | $                                                 | 73,284                            |                                                     |         | $              | 36,505  |         |           |         |         |  
|                                                                        |                                                                                             |                                                   |                                   |                                                     |         |                |         |         |           |        
|Supplemental disclosure of cash flow information:                       |                                                                                             |                                                   |                                   |                                                     |         |                |         |         |           |         |         |  
|                                                                        | Cash paid during the period for income taxes                                                |                                                   | $                                 |                                                    |         |                | $       | 3,900   |           |         |         |   | 
|                                                                        |                                                                                             |                                                   |                                   |                                                     |         |                |         |         |           |        
|Supplemental disclosure of non-cash investing and financing activities: |                                                                                             |                                                   |                                   |                                                     |         |                |         |         |           |         |         |  
|                                                                        | Loss on equipment disposals capitalized as film production costs                            |                                                   | $                                 |                                                    |         |                | $       | 549     |           |         |         |   | 
|                                                                        |                                                                                             |                                                   |                                   |                                                     |         |                |         |         |           |        
|                                                                        | Unrealized loss on investments, net of taxes                                                |                                                   | $                                 | (571                                                | )       |                | $       | (944    | )         |         |         |   | 
|                                                                        |                                                                                             |                                                   |                                   |                                                     |         |                |         |         |           |        

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 in conformity with U.S. generally accepted accounting principles for
interim financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the
accompanying unaudited condensed financial statements reflect all adjustments
(consisting only of normal recurring adjustments) considered necessary for a
fair presentation of the financial condition, results of operations, and cash
flows of Pixar (or the Company) for the periods presented. These financial
statements should be read in conjunction with the audited financial statements
as of December 28, 2002 and for each of the years in the three-year period
ended December 28, 2002, including notes thereto. These audited financial
statements are included in Pixars Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 28, 2003.

The results of operations for the three months ended March 29, 2003 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 2003 financial statement presentation.

(2) Fiscal Year

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

(3) Stock Option Accounting

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

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

|                              |  |                                                  |                      |   |               |       |  |           |        |        | 
|----------------------------- |  | ------------------------------------------------ | -------------------- | - | ------------- | ----- |  | --------- | ------ | ------ | 
|                              |  |                                                  |                      |   | Quarter Ended |      
|                              |  |                                                  |                      |   |               |      
|                              |  |                                                  |                      |   | March 29,     |       |  | March 30, |       
|                              |  |                                                  |                      |   | 2003          |       |  | 2002      |       
|                              |  |                                                  |                      |   |               |       |  |           |       
|Net income:                   |  |                                                  |                      |   |               |       |  |          
|                              |  | As reported                                      |                      | $ | 8,178         |       |  | $         | 15,610 |       
|                              |  | Fair value-based compensation cost, net of taxes |                      |   | (1,612        | )     |  |           | (2,660 | )     
|                              |  |                                                  |                      |   |               |      
|                              |  |                                                  | Pro forma net income |   | $             | 6,566 |  |           | $      | 12,950 | 
|                              |  |                                                  |                      |   |               |      
|Basic net income per share:   |  |                                                  |                      |   |               |       |  |          
|                              |  | As reported                                      |                      | $ | 0.15          |       |  | $         | 0.32   |       
|                              |  | Pro forma                                        |                      | $ | 0.12          |       |  | $         | 0.26   |       
|Diluted net income per share: |  |                                                  |                      |   |               |       |  |          
|                              |  | As reported                                      |                      | $ | 0.15          |       |  | $         | 0.30   |       
|                              |  | Pro forma                                        |                      | $ | 0.12          |       |  | $         | 0.26   |       

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

The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model. The weighted-average fair value
of options granted was $23.87 and $15.69 for the quarters ended March 29, 2003
and March 30, 2002, respectively. Values were estimated using zero dividend
yield for all years; expected volatility of 51% and 52% for the quarters ended
March 29, 2003 and March 30, 2002, respectively; risk-free interest rates of
2.84% and 4.38% for the quarters ended March 29, 2003 and March 30, 2002,
respectively; and weighted-average expected lives of 5.0 years.

(4) Net Income per Share

Basic net income per share is computed using the weighted-average number
of common shares outstanding during the period. Diluted net income per share is
computed using the weighted-average number of common and dilutive potential
common shares outstanding during the period, using the treasury stock method
for options. Of the outstanding options to purchase shares of common stock, for
the three months ended March 29, 2003 and March 30, 2002, options to purchase
approximately 52,000 shares and 3,653,954 shares, respectively, of common stock
were not included in the computation of diluted net income per share because
the options exercise price was greater than the average market price of the
common shares.

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

|                             |         |   |                |   |  |                |        |       |       |     |        |        |     |   |        |   |  |       |        |       |  |        |      |  | 
|---------------------------- | ------- | - | -------------- | - |  | -------------- | ------ | ----- | ----- | --- | ------ | ------ | --- | - | ------ | - |  | ----- | ------ | ----- |  | ------ | ---- |  | 
|                             |         |   | Quarter Ended  |  
|                             |         |   |                |  
|                             |         |   | March 29, 2003 |   |  | March 30, 2002 |       
|                             |         |   |                |   |  |                |       
|                             |         |   |                |   |  |                |        |       |       |     | Net    |        |     |   |        |   |  |       |        |       |  | Net    |     
|                             |         |   |                |   |  |                |        |       |       |     | Income |        |     |   |        |   |  |       |        |       |  | Income |     
|                             |         |   | Net            |   |  |                |        |       |       | per |        |        | Net |   |        |   |  |       |        | per   | 
|                             |         |   | Income         |   |  | Shares         |        |       | Share |     |        | Income |     |   | Shares |   |  | Share |       
|                             |         |   |                |   |  |                |        |       |       |     |        |        |     |   |        |   |  |       |       
|Basic net income per share   |         | $ | 8,178          |   |  |                | 53,046 |       |       | $   | 0.15   |        |     | $ | 15,610 |   |  |       | 49,483 |       |  | $      | 0.32 | 
|Effect of dilutive shares:   |         |   |                |   |  |                |        |       |       |     |        |        |     |   |        |   |  |       |        |       |  |        |      | 
|                             | Options |   |                |  |  |                |        | 3,115 |       |     |        |        |     |   |        |  |  |       |        | 1,984 |  |        |      |  | 
|                             |         |   |                |   |  |                |        |       |       |     |        |        |     |   |        |   |  |      
|Diluted net income per share |         | $ | 8,178          |   |  |                | 56,161 |       |       | $   | 0.15   |        |     | $ | 15,610 |   |  |       | 51,467 |       |  | $      | 0.30 | 
|                             |         |   |                |   |  |                |        |       |       |     |        |        |     |   |        |   |  |      

(5) Comprehensive Income

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

|                                                             |  |               |       |   |           |   |        |  
|------------------------------------------------------------ |  | ------------- | ----- | - | --------- | - | ------ | -
|                                                             |  | Quarter Ended |      
|                                                             |  |               |      
|                                                             |  | March 29,     |       |   | March 30, |  
|                                                             |  | 2003          |       |   | 2002      |  
|                                                             |  |               |       |   |           |  
|Net income                                                   |  | $             | 8,178 |   |           | $ | 15,610 |  
|Unrealized holding losses on investments, net of tax benefit |  |               | (571  | ) |           |   | (944   | )
|                                                             |  |               |       |   |           |  
|Comprehensive income                                         |  | $             | 7,607 |   |           | $ | 14,666 |  
|                                                             |  |               |       |   |           |  

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(6) Feature Film and Co-Production Agreements

Feature Film Agreement

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

Co-Production Agreement

In February 1997, Pixar and Disney entered into a Co-Production Agreement
(the Co-Production Agreement) that governs five original computer-animated
theatrical motion pictures (the Pictures) made by the Company since Toy Story.
Under the Co-Production Agreement, Pixar, on an exclusive basis, agreed to
produce the Pictures for distribution by Disney. Pixar and Disney co-own,
co-brand and co-finance the production costs of the Pictures, and share equally
in the profits of each Picture and any related merchandise and other ancillary
products, after recovery of all of Disneys marketing, distribution and other
predefined fees and costs. The Co-Production Agreement generally provides that
Pixar is responsible for the production of each Picture, and Disney is
responsible for the marketing, promotion, publicity, advertising and
distribution of each Picture. The first two original films produced under the
Co-Production Agreement were A Bugs Lifeand
Monsters, Inc. In April 2003, the Company delivered Finding
Nemo, the third Picture under the Co-Production Agreement, to
Disney for its scheduled theatrical release on May 30, 2003. The
Company is currently in various stages of production on the final two films
under the Co-Production Agreement, The Incredibles and
Cars. A Bugs Life, Monsters, Inc., Finding Nemo, The
Incrediblesand 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 Incrediblesand 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 Development Group

In addition to the films produced and in process under the Co-Production
Agreement, Pixars creative development group is working on concept development
and pre-production for several new projects that are not governed by the
Co-Production Agreement. Costs related to these projects, for example, the
first feature film produced outside the existing Disney relationship (Project
2006), are therefore neither shared nor reimbursed by Disney. Such costs are
capitalized as film costs and will be amortized under the
individual-film-forecast-computation method. In the event a film is not set for production
within three years from the time of the first capitalized transaction, all such
costs would be expensed. Project 2006 was approved for production in February
2003 and is currently targeted for a 2006 release.

Components of Capitalized Film
Production Costs

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

|                                                       |                                                            |                                         |          |               |         |   |              |        |        | 
|------------------------------------------------------ | ---------------------------------------------------------- | --------------------------------------- | -------- | ------------- | ------- | - | ------------ | ------ | ------ | 
|                                                       |                                                            |                                         |          | Total Through |        
|                                                       |                                                            |                                         |          |               |        
|                                                       |                                                            |                                         |          | March 29,     |         |   | December 28, |       
|                                                       |                                                            |                                         |          | 2003          |         |   | 2002         |       
|                                                       |                                                            |                                         |          |               |         |   |              |       
|Released Films                                         |                                                            | $                                       | 135,033  |               |         | $ | 134,533      |       
|Less: Cumulative amortization of film production costs |                                                            |                                         | (122,954 | )             |         |   | (120,097     | )     
|                                                       |                                                            |                                         |          |               |         |  
|                                                       | Total film production costs capitalized for released films |                                         |          | 12,079        |         |   |              | 14,436 |       
|Films in Production                                    |                                                            |                                         | 88,295   |               |         |   | 72,760       |       
|Films in Development or Pre-production                 |                                                            |                                         | 1,535    |               |         |   | 4,908        |       
|                                                       |                                                            |                                         |          |               |         |  
|                                                       |                                                            | Total film production costs capitalized |          | $             | 101,909 |   |              | $      | 92,104 | 
|                                                       |                                                            |                                         |          |               |         |  

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

|                           |       |   |               |       |  |           |       |       | 
|-------------------------- | ----- | - | ------------- | ----- |  | --------- | ----- | ----- | 
|                           |       |   | Quarter Ended |      
|                           |       |   |               |      
|                           |       |   | March 29,     |       |  | March 30, |      
|                           |       |   | 2003          |       |  | 2002      |      
|                           |       |   |               |       |  |           |      
|Research and development   |       | $ | 1,723         |       |  | $         | 1,884 |      
|General and administrative |       |   | 998           |       |  |           | 1,109 |      
|                           |       |   |               |       |  |          
|                           | Total |   | $             | 2,721 |  |           | $     | 2,993 | 
|                           |       |   |               |       |  |          

For released films, the Company expects to amortize, based on current
estimates, approximately $4 million to $6 million in capitalized film
production costs over the succeeding twelve-month period. This forecast does
not include Finding Nemo, which is scheduled to be released domestically on May
30, 2003. The Company has amortized more than 80% of each released films
original production costs as of March 29, 2003.

At March 29, 2003 and December 28, 2002, receivables from Disney
aggregated $27.9 million and $129.3 million, respectively, which consists of
receivables for film revenue, advances net of Disneys actual share of
production expenditures for all films under the Co-Production Agreement and
amounts due for miscellaneous reimbursements.

(7) Segment Reporting

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

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

|                   |  |               |        |  |           |   |        | 
|------------------ |  | ------------- | ------ |  | --------- | - | ------ | 
|                   |  | Quarter Ended |       
|                   |  |               |       
|                   |  | March 29,     |        |  | March 30, |  
|                   |  | 2003          |        |  | 2002      |  
|                   |  |               |        |  |           |  
|Monsters, Inc.     |  | $             | 8,573  |  |           | $ | 25,865 | 
|Library titles(1)  |  |               | 7,711  |  |           |   | 8,536  | 
|Animation services |  |               | 91     |  |           |   | 1,487  | 
|                   |  |               |        |  |           |  
|                   |  | $             | 16,375 |  |           | $ | 35,888 | 
|                   |  |               |        |  |           |  



---

|(1) |  | Library titles include Toy Story, A Bugs Lifeand Toy Story 2. For the
quarter ended March 30, 2002, Toy Story 2 revenue of
$6.6 million has been reclassified to
Library titles to conform to current quarter presentation.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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(8) New Accounting Pronouncements

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

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

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

In November 2002, the FASBs Emerging Issues Task Force reached a
consensus on Issue No. 00-21, Accounting for Revenue Arrangement with Multiple
Deliverables, which addresses circumstances involving the delivery or
performance of multiple products, services, and/or rights to use assets, and
for which performance may occur at different points in time or over different
periods of time. Issue No. 00-21 also addresses whether the different
revenue-generating activities, or deliverables, are sufficiently separable, and
there exists sufficient evidence of their fair values to separately account for
some or all of the deliverables. The issue applies to all contractual
arrangements under which a vendor will perform multiple revenue-generating
activities. Issue No. 00-21 is effective for all

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revenue arrangements entered into in fiscal periods beginning after June
15, 2003, with early adoption permitted. The Company will adopt this guidance
prospectively for all revenue arrangements entered into after December 29,
2002. The Company does not expect Issue No. 00-21 to have a
material impact on its
financial position or results of operations.

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

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

This Managements Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that have been made
pursuant to the provisions of the Private Securities Litigation Reform Act of
1995, particularly statements referencing the targeted release dates of our
feature films, our target earnings per share for the second quarter
of fiscal 2003, our anticipated revenues and operating expenses and our
expectations regarding any future distribution arrangement we may enter into.
Such forward-looking statements are based on current expectations, estimates
and projections about our industry, managements beliefs, and assumptions made
by management. In some cases, forward-looking statements can be identified by
the use of words such as anticipates, expects, intends, plans,
believes, seeks, estimates, is scheduled for, targeted, variations of
such words and similar expressions. These statements are not guarantees of
future performance and are subject to certain risks, uncertainties and
assumptions that are difficult to predict; therefore, actual results and
outcomes may differ materially from what is expressed or forecasted in any such
forward-looking statements. Such risks and uncertainties include those set
forth herein under Risk Factors on pages 17 through 29. Particular attention
should be paid to the cautionary language in Risk Factors  To meet our fiscal
2003 earnings projections, we are dependent on our feature films and the
accuracy of our forecasts,  Our operating results have fluctuated in the
past, and we expect such fluctuations to continue,  Our scheduled successive
releases of feature films will continue to place a significant strain on our
resources, and  The Co-Production Agreement imposes several risks and
restrictions on us. Unless required by law, Pixar undertakes no obligation to
update publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.

The following discussion should be read in conjunction with the section
entitled Risk Factors on pages 17 through 29 below and Managements
Discussion and Analysis of Financial Condition and Results of Operations in
our Annual Report on Form 10-K for the year ended December 28, 2002 in addition
to our interim financial statements and notes included elsewhere in this
report.

Overview

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

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

Our second feature film, A Bugs Life,was released in November 1998 and
counts as the first 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 do not share in any theme park revenues
generated as a result of the Pictures. Pursuant to the Co-Production Agreement,
in addition to co-financing the production costs of the Pictures, Disney will
reimburse us for our share of certain general and administrative costs and
certain research and development costs that benefit the productions. In
November 1999, Toy Story 2,our third animated feature film was released. As a
theatrical sequel, Toy Story 2is a derivative work of the original Toy Story,
and therefore it does not count toward the Pictures to be produced under the
Co-Production Agreement. However, as a derivative work, Toy Story 2is treated
for all other purposes as a Picture under the Co-Production Agreement, and all
the provisions applicable to the Pictures apply.

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

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

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

Target Earnings per Share for
the Second Quarter of Fiscal 2003

Our fifth animated film, Finding Nemo, will be released on May 30, 2003.
Due to the significant initial outlay of theatrical marketing and distribution
costs, as well as the timing of Finding Nemos domestic box office release only
one month prior to the end of our second quarter of fiscal 2003, we do not
expect to see significant revenues, if any, in the second quarter of fiscal
2003. We expect film revenue for the second quarter of fiscal 2003 to be
derived primarily from continuing home video, television and merchandise sales
from Monsters, Inc.and our library titles. Accordingly, we are targeting
diluted earnings per share of approximately $0.12 for the second quarter of
fiscal 2003.

These statements regarding our targeted earnings per share are
forward-looking, and actual results may differ materially. Factors that could
cause actual results for the second quarter of fiscal 2003 to differ include,
but are not limited to: (1) the timing and amount of worldwide revenues and
distribution costs from Finding Nemo, Monsters, Inc.and other titles in our
film library, (2) the timing, accuracy, and sufficiency of the information we
receive from Disney to determine revenues and associated gross profits, (3) the
timing and amount of non-film related revenues and expenses, (4) the accuracy
of our assumptions and judgments used to estimate certain revenues and
associated gross profits, (5) the market price of our Common Stock and related
volatility, (6) unanticipated delays in the release date of Finding Nemoand
(7) external socioeconomic and political events.

Critical Accounting Policies

Revenue Recognition

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



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

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

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periodically to ensure the most accurate depiction of our participation is
reflected. Such adjustments were made to home video reserve and home video and
merchandise expense estimates during fiscal 2002. These one-time adjustments to
A Bugs Lifeand Toy Story 2home video reserves and margins and merchandising
revenues had a net impact of $0.19 to our diluted net income per share for
fiscal 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. For example, we received additional information from Disney
in the first quarter of fiscal 2003 which decreased previously recorded home
video expenses for all of our film titles on a cumulative basis. This resulted
in an increase of $0.03 to our diluted net income per share for our first
quarter of fiscal 2003. Additionally, we have the right to audit Disneys books
and records related to the Pictures according to the terms of the Co-Production
Agreement, which could result in adjustments that may be material to the
financial statements in any given quarter or quarters. Any revenue received in
advance from Disney is deferred and recorded as revenue when earned.

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

Film Production Costs

We capitalize our share of direct film production costs in accordance with
SOP 00-2. Film production costs include costs to develop and produce computer
animated motion pictures, which primarily consists of salaries, equipment and
overhead. Film production costs in excess of reimbursable amounts from Disney
are capitalized. Production overhead, a component of film costs, includes
allocable costs of individuals or departments with exclusive or significant
responsibility for the production of our films. Capitalized production overhead
does not include administrative, general and research and development expenses.
In addition to the films produced, we are also working on concept development
for several new projects, the costs of which are capitalized as film costs. In
the event a film is not set for production, or green lit, within three years
from the time of the first capitalized transaction, all such costs would be
expensed.

Once a film is released, capitalized film production costs are amortized
in the proportion that the revenue during the period for each film bears to the
estimated revenue to be received from all sources under the
individual-film-forecast-computation method. The amount of film costs that will
be amortized each quarter will depend on how much future revenue we expect to
receive from each film. We make certain estimates and judgments of our future
gross revenues to be received for each film based on information received from
Disney and our knowledge of the industry. Estimates of anticipated total gross
revenues are reviewed periodically and may be revised if necessary. A change to
the estimate of gross revenues for an individual film may result in an increase
or decrease to the percentage of amortization of capitalized film costs
relative to a previous period. Unamortized film production costs are compared
with net realizable value each reporting period on a film-by-film basis. If
estimated remaining gross revenues are not sufficient to recover the
unamortized film production costs, the unamortized film production costs would
be written down to fair value.

Results of Operations

Our results for the three months ended March 29, 2003 were driven
primarily by Monsters, Inc.domestic pay television licensing as well as
continued worldwide home video and merchandising from Monsters, Inc.and our
library titles.

Revenue

Total revenue, which consists of film revenue and software revenue, was
$18.7 million for the three months ended March 29, 2003 compared to $37.1
million in the corresponding prior year period. The year-over-year decrease was
largely due to the timing and success of Monsters, Inc.sforeign theatrical
performance in the first quarter of fiscal 2002.

Film revenue for the three months ended March 29, 2003 was $16.4 million
compared with $35.9 million in the corresponding prior year period. Film
revenue for the three months ended March 29, 2003 consisted of $8.6 million
from Monsters, Inc.,which

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related primarily to revenues from domestic pay television licensing, and
to a lesser extent, revenues from pay-per-view and merchandise sales. Also
included in our film revenue for the first quarter ended March 29, 2003 was
$7.7 million from our library titles, Toy Story, A Bugs Lifeand Toy Story2,
which consisted of continued worldwide home video sales, merchandise sales,
international television licensing and ancillary royalties. During the first
quarter of fiscal 2003, we received additional information from Disney that
decreased home video expenses for all of our film titles on a cumulative basis
and contributed approximately $3.2 million to our net revenues and $0.03 to our
fully diluted net income per share.

Film revenue for the three months ended March 30, 2002 consisted of $25.9
million from Monsters, Inc.,$6.6 million from Toy Story 2, and $1.9 million from A Bugs Lifeand Toy Story.Revenues from
Monsters, Inc.were primarily attributable to foreign theatrical revenues and
related merchandise sales, as well as remaining domestic box office receipts.
Revenues for Toy Story 2were comprised of higher than expected merchandise
sales, of which a significant portion was attributable to a one-time,
unanticipated adjustment from Disney. Revenues from A Bugs Lifeand Toy Story resulted
primarily from worldwide home video sales, merchandising sales and other
ancillary royalties.

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

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
months ended March 29, 2003 was $2.3 million compared to $1.2 million in the
corresponding prior year period, resulting from increases in RenderMan®
software licensing sales 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 months ended March 29, 2003, Disney accounted for 89% of our
total revenue compared to 94% for the corresponding prior year period. The
revenue from Disney consisted primarily of film related revenue. Because of our
relationship with Disney under the Co-Production Agreement, Disney is expected
to continue to represent significantly greater than 10% of our revenue in 2003
and for the near future.

Cost of Revenue

Cost of film revenue for the three months ended March 29, 2003 was $2.9
million compared to $8.4 million in the corresponding prior year period. Cost
of film revenue represents amortization of capitalized film production costs.
See Capitalized Film Production Costs below. For the three months ended March
29, 2003, cost of film revenue represented amortization of capitalized film
production costs associated with Monsters, Inc., Toy Story 2and A Bugs Life,
and represented 18% of total film revenue as compared to 21% for the
corresponding prior year period. This decrease can be attributed to a greater
portion of our revenues derived in the current quarter, as compared
to the corresponding prior year period, from our library titles,
which have a lower cost amortization percentage.

Cost of software revenue consists of the direct costs and manufacturing
overhead required to reproduce and package our software products, and for
periods prior to fiscal 2003, amortization of purchased technology. Cost of
software revenue as a percentage of the related revenue was 1% for the three
months ended March 29, 2003 as compared to 11% for the corresponding prior year
period. Cost of software revenue for the three months ended March 29, 2003
related primarily to direct costs and manufacturing overhead; however, for the
three months ended March 30, 2002 costs of software revenue related primarily
to amortization of purchased technology associated with the acquisition of PEI
of $120,000. We had fully amortized this purchased technology against related
license revenue by the end of fiscal 2002.

Operating Expenses

Total operating expenses were $5.1 million for the three months ended
March 29, 2003 compared to $4.9 million in the corresponding prior year period.
The increase in operating expenses over the prior year period reflects the
growth experienced by the studio as we ramp up to meet the demands of multiple
films in production. Under the Co-Production Agreement, Disney reimburses

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

Research and Development.Research and development expenses consist
primarily of salaries and support for personnel conducting research and
development for our RenderMan® software and for our proprietary Marionette and
Ringmaster animation and production management software and for creative
development for future films. Research and development expenses of $2.3 million
for the three months ended March 29, 2003 remained relatively flat as compared
to expenses of $2.4 million for the corresponding prior year period. 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 increased to $388,000 for the three months ended
March 29, 2003, from $251,000 in the corresponding prior year period. The
increase was due to higher promotional costs as well as higher employee related
costs. 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
$2.4 million for the three months ended March 29, 2003 from $2.2 million in the
corresponding prior year period. The increase for the three months ended March
29, 2003 was due primarily to increased insurance costs, which was partially
offset by a decrease in professional services fees. General and administrative
expenses may increase in future periods.

Other Income, Net

Other income, net was $2.9 million for the three months ended March 29,
2003, compared to $2.5 million in the corresponding prior year period. The
increase in other income over the comparable prior year period is primarily due
to an increase in interest income.

Income Tax Expense

Income tax expense for the three months ended March 29, 2003 approximates
the federal and state statutory income tax rate of 39.5% versus 40.4% in the
same period of the prior year.

Capitalized Film Production Costs

We had $101.9 million in capitalized film production costs as of March 29,
2003, 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. Capitalized film
production costs also include costs related to Project 2006, our first
Pixar-only financed film. All Toy Storycapitalized film costs were fully
amortized as of December 31, 1997.

Liquidity and Capital Resources

Cash, cash equivalents and investments increased to $453.9 million by the
end of the first quarter of fiscal 2003, an increase of $114.8 million since
December 28, 2002. The increase was primarily due to cash received from Disney
for our share of film revenue, particularly relating to Monsters, Inc.worldwide
home video, along with proceeds from stock option exercises, interest
income and software revenue, offset by film production costs.

Net cash provided by operating activities for the three months ended March
29, 2003 of $108.9 million was primarily attributable to a decrease of $101.4
million in our receivable from Disney as a result of cash received and net
income of $8.2 million, partially offset by capitalized film production costs
of $12.7 million. Net cash used in investing activities of $88.3 million
consisted primarily

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of investments in securities of $142.3 million, offset by proceeds from
the sales of investment securities of $55.8 million. Net cash provided by
financing activities consisted entirely of proceeds of $8.2 million from
exercised stock options.

As of March 29, 2003, our principal source of liquidity was approximately
$453.9 million in cash, cash equivalents and investments. Our future capital
commitments primarily consist of obligations to fund production costs of films
and derivative products under the Co-Production Agreement and beyond. We are
currently co-financing The Incrediblesand Cars, as well as remaining
post-production costs for Finding Nemo, under the Co-Production Agreement. In
the future, we may co-finance other derivative works such as theatrical
sequels, direct to home video sequels, interactive products and television
productions. Additionally, we have already approved for production Project
2006, our first film beyond the Co-Production Agreement and will finance
production costs related to Project 2006 entirely. We also have obligations to
pay portions of any revenue derived from each feature film produced under the
Co-Production Agreement to our entertainment law firm in consideration for
services rendered.

Film Production Costs.In fiscal 2003, we expect to spend approximately
$60 million to $65 million, net of Disneys film cost reimbursements, on direct
film costs and other costs to fund our ongoing film projects under the
Co-Production Agreement and beyond, which will directly impact working capital.

Capital Expenditures.In fiscal 2003, we expect to spend approximately $7
million to $9 million related to capital expenditures for our Emeryville
headquarters and studio and other projects.

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

Recent Accounting Pronouncements

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

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

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

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In November 2002, the FASBs Emerging Issues Task Force reached a
consensus on Issue No. 00-21, Accounting for Revenue Arrangement with Multiple
Deliverables, which addresses circumstances involving the delivery or
performance of multiple products, services, and/or rights to use assets, and
for which performance may occur at different points in time or over different
periods of time. Issue No. 00-21 also addresses whether the different
revenue-generating activities, or deliverables, are sufficiently separable, and
there exists sufficient evidence of their fair values to separately account for
some or all of the deliverables. The issue applies to all contractual
arrangements under which a vendor will perform multiple revenue-generating
activities. Issue No. 00-21 is effective for all revenue arrangements entered
into in fiscal periods beginning after June 15, 2003, with early adoption
permitted. We will adopt this guidance prospectively for all revenue
arrangements entered into after December 29, 2002. We do not expect Issue No.
00-21 to have a material impact on our financial position or results of
operations.

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




Risk Factors

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

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

For the remainder of fiscal 2003, our revenue and operating results will
be largely dependent upon (1) the timing and amount of worldwide revenues and
distribution costs from Finding Nemo, Monsters, Inc.and other titles in our
film library, (2) the timing, accuracy, and sufficiency of the information we
receive from Disney to determine revenues and associated gross profits, (3) the
timing and amount of non-film related revenues and expenses, (4) the accuracy
of our assumptions and judgments used to estimate certain revenues and
associated gross profits, (5) the market price of our Common Stock and related
volatility, (6) unanticipated delays in the release date of Finding Nemoand
(7) external socioeconomic and political events. In addition, we are unable to
predict whether the emerging Severe Acute Respiratory Syndrome, or SARS, will
have an adverse impact on our box office receipts for Finding Nemo.

Dependence on revenue from our feature films.

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

For our business to be successful, our films must achieve extraordinary
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. For the
remainder of 2003, we will be dependent on the success of Finding Nemo. Unless
Finding Nemoachieves box office success and is successful in home video,
television licensing, and merchandise sales, it may not generate significant
revenue and operating results for us to meet our projections in 2003 and
beyond.

A significant portion of our anticipated revenues for the remainder of
fiscal 2003 is based on the assumption that Finding Nemowill be a success in
the worldwide theatrical, domestic home video and worldwide merchandising
markets. Therefore, if Finding Nemodoes not generate sufficient worldwide box
office receipts, domestic home video sales, or worldwide merchandise sales to
be deemed successful, it would adversely impact our 2003 operating results. In
addition, for the remainder of 2003, we expect continued contributions from
Monsters, Inc.through worldwide television licensing as well as continued
worldwide home video and merchandise sales. If Monsters, Inc.does not generate
sufficient revenues from these sources, our 2003 results could be adversely

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affected. To date, we have recognized most of the revenues we expect to
recognize over the lifetime of the Toy Storyfranchise and A Bugs Life. For
Monsters, Inc., we have recognized essentially all of the theatrical revenues
and a substantial portion of the home video revenues. 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 and merchandise sales will be sufficient to achieve our 2003
earnings projection.

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

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

It is also difficult to forecast the amount of revenues from Monsters,
Inc.and the titles in our film library. The revenues generated from continued
home video and merchandise sales can fluctuate due to various market factors.
Because the revenues from films nearing the end of life cycle tend to be
relatively small, minor fluctuations can result in notable variances from
forecast. Both Toy Storyand Toy Story 2home videos are currently subject to a
sales moratorium, which began on May 1, 2003. Although this strategy is designed
to increase sales over the lifetime of a title and to support a
higher sales price upon re-release, it is difficult to
predict the actual impact of this strategy, particularly since these are our
first titles to be placed on a sales moratorium, and it may not generate the results
we expect.

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

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

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

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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. 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
under the Co-Production Agreement, and we will share such costs equally with
Disney under the Co-Production Agreement. With respect to the portion of our
Overhead that is not reimbursed by Disney, we either (1) capitalize such
portion as film production costs, if required under SOP 00-2, or (2) charge it
to operating expense in the period incurred. Since a substantial portion of our
Overhead is related to the Pictures, and is therefore reimbursed by Disney, and
since we capitalize other amounts in accordance with SOP 00-2, our reported
operating expenses for the first quarter of fiscal 2003 has not reflected, and future
reported operating expenses will not reflect, our true level of spending on the
production of animated feature films, related products and Overhead. Further,
as we begin production of our films beyond the Co-Production Agreement, we
expect our operating expenses to continue to increase to the extent that they
are not capitalized or not shared with Disney.

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

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

Software revenue.

We continue to maintain minimal emphasis on the commercialization of
software products. We are not increasing the time and resources necessary to
generate higher RenderMan®licensing revenues; therefore, it is possible that
future revenues from the licensing of RenderMan® may decline. Our 2003 earnings
projections include revenues attributable to non-film related sources including
software revenue; however, there can be no assurance that the timing and amount
of such revenues will be sufficient to meet our 2003 earnings projection.

Other non-film revenue and expenses.

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

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

Our revenues fluctuate
significantly

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



| |  | the timing of the domestic and international theatrical releases of our animated feature films,                                                                                           
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | the success of our animated feature films,                                                                                                                                                
| 
| |  | the timing of the release of related products into their respective markets, such as home videos, television, and
merchandising,                                                          
| 
| |  | the demand for such related products, which is often a function of the success of the related animated feature film,                                                                      
| 
| |  | Disneys costs to distribute and promote our feature films and related products under the Co-Production Agreement,                                                                        
| 
| |  | Disneys success at marketing our feature films and related products under the Co-Production Agreement,                                                                                   
| 
| |  | the timing and accuracy of information received from Disney and other sources on which we base estimates of revenue
to be recognized from our animated feature films and related products,
| 
| |  | the timing and amount of non-film related revenues, such as the licensing of our software,                                                                                                
| 
| |  | the introduction of new feature films or products by our competitors, and                                                                                                                 
| 
| |  | general political and socioeconomic conditions.                                                                                                                                           

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

Our operating expenses
fluctuate

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



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

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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 2003. In addition, as we increase the resources allocated to our productions
beyond our feature film Cars, which will be the last film to be co-financed
with Disney under the current Co-Production Agreement, we expect our operating
expenses to increase significantly.

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

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

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, to hire,
train, motivate and manage our employees, to integrate them into Pixar and to
provide adequate facilities and other resources for them. We cannot provide any
assurance we will be successful in accomplishing all of these activities on a
timely and cost-effective basis. Any failure to accomplish one or more of these
activities on a timely and cost-effective basis would have a material adverse
effect on our business, financial condition and results of operations.

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

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

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

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Disney has an exclusive
arrangement with us.

We have agreed not to release or authorize the release of any of our
feature length animated theatrical motion pictures, other than our feature
films that we produce under the Co-Production Agreement, until twelve months
from our delivery of the fifth original feature film under the Co-Production
Agreement. We currently anticipate that we will not deliver the fifth Picture,
Cars, until 2005 at the earliest. We have further agreed that we will not enter
into any agreement with any third party for the development, production or
distribution of any feature length animated theatrical motion picture until
after we have delivered Finding Nemo, the third original feature film under the
Co-Production Agreement, to Disney. Finding Nemowas delivered in April 2003
for its scheduled release on May 30, 2003. We have also agreed that we will not
develop or produce any rides or attractions for major theme parks not owned or
operated by Disney, and to give Disney a right to negotiate with respect to
animated television productions or animated made-for-home video productions
that we propose to produce during the term of the Co-Production Agreement.
Disney, however, is not similarly restricted by the exclusivity provisions that
bind us under the Co-Production Agreement and, therefore, may develop, produce,
or distribute other feature length animated and computer animated theatrical
motion pictures itself or enter into similar agreements with third parties. See
Risk Factors  We experience intense competition with respect to our animated
feature films, animation products, and software below.

We have an obligation to
co-finance production costs.

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

Disney retains the exclusive
distribution and exploitation rights.

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

Disney can terminate the
agreement under various circumstances.

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

There are significant risks associated with the motion picture industry.

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



| |  | personnel availability,
|- |  | -----------------------
| 
| |  | financing requirements,

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

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

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

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

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

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

In 2003, competition is expected to continue to intensify in the
family-oriented, animated and live action feature film market and may affect
the box office success of Finding Nemo, scheduled for domestic theatrical
release on May 30, 2003. Some of the family-oriented animated and live action
feature films scheduled for theatrical release during summer 2003 that may
compete with Finding Nemoinclude the following:



| |  | X2: X-Men United by Fox,           
| | - | -----------------------------------
|
| |  | The Lizzie McGuire Movieby Disney, 
|
| |  | Daddy Day Careby Columbia,         
|
| |  | The Matrix Reloadedby Warner Bros.,

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| |  | Bruce Almightyby Universal,                                    
| | - | ---------------------------------------------------------------
|
| |  | Rugrats Go Wildby Paramount,                                   
|
| |  | The Hulkby Universal,                                          
|
| |  | Charlies Angels: Full Throttleby Columbia,                    
|
| |  | Sinbad: Legend of the Seven Seasby Dreamworks,                 
|
| |  | Terminator 3: Rise of the Machinesby Warner Bros., and         
|
| |  | Pirates of the Caribbean: The Curse of the Black Pearlby Disney

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

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

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

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

The Co-Production Agreement provides that we will develop and produce
original computer-animated feature films. Because Disney co-finances the films
developed and produced under the Co-Production Agreement, distributes the films
under the Walt Disney Pictures label and enjoys financial benefits in the
event that such films achieve significant box office revenues, we believe that
Disney desires such films to be successful. Nonetheless, during its long
history, Disney has been a very successful producer and distributor of its own
animated feature films. While the Co-Production Agreement imposes restrictions
prohibiting Disney from releasing G-rated films, whether live action or
animated, within certain release windows from our films, it is likely that
other family-oriented motion pictures distributed by Disney or its affiliates
will overlap in the market and compete with our animated feature films. For
example, Mighty Joe Young,released during the 1998 holiday season, competed
with A Bugs Lifein the domestic theatrical market, and Pirates of the
Caribbean: The Curse of the Black Pearl,currently scheduled for release in
July 2003, may compete with Finding Nemo. Our contractual arrangement with
Disney also presents other risks. See Risk Factors  The Co-Production
Agreement imposes several risks and restrictions on us.

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Computer Graphics Special
Effects Firms.

We also expect to compete with computer graphics special effects firms,
including ILM, Rhythm & Hues/VIFX, Tippett Studios, Digital Domain, and Sony
Pictures Imageworks. These computer graphics special effects firms may be
capable of creating their own three-dimensional computer animated feature films
or may produce three-dimensional computer-animated feature films for movie
studios that compete with us. For example, ILM has already created and produced
three-dimensional character animation which was used for several central
characters in the live action film Star Wars Episode II: Attack of the Clones,
and ILM has a royalty-free, paid-up license to use our RenderMan® software and
to obtain at no cost all enhancements and upgrades thereto. Other computer
graphics special effects firms have licensed or may license RenderMan®.
Accordingly, our RenderMan® software may not provide us with a competitive
advantage. We also compete, or may in the future compete, with the above firms
with respect to animation products other than feature films.

Software Publishers.

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

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

Our success depends on certain key employees.

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

Our Chief Executive Officer has divided responsibilities.

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

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

Our success continues to depend to a significant extent on our ability to
identify, attract, hire, train and retain qualified professional, creative,
technical and managerial personnel. Although recent economic events have
reduced competition in our industry for certain personnel, it may still be
challenging to identify the caliber of talent required to make our films,
particularly our film directors, producers, animators, creative personnel and
technical directors. There can be no assurance that we will be successful in
identifying, attracting, hiring, training and retaining such personnel in the
future. If we were unable to hire, assimilate and retain qualified personnel in
the future, particularly film directors, producers, animators, creative
personnel and technical directors, such inability would have a material adverse
effect on our business, operating results and financial condition.

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

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

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

We have a limited operating history.

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

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

We are currently co-financing our remaining three unreleased original
animated feature films, Finding Nemo, The Incrediblesand Carspursuant to the
Co-Production Agreement. We are also solely financing Project 2006. In the
future, we may co-finance other derivative works such as sequels and television
productions. The future development and production costs of The Incredibles,
Carsand films beyond, and any possible future expansion of our studio and
headquarters in Emeryville, California, may have an adverse impact on our cash
and investment balances. We expect to fully finance films for release after
Cars. As of March 29, 2003, we had approximately $453.9 million in cash, cash
equivalents and investments. We believe that these funds, along with cash
provided by operating activities, will be sufficient to meet our anticipated
cash needs for working capital and capital expenditures, including the
remaining post-production costs of Finding Nemoand the development and
production costs of The Incrediblesand Cars,as well as development and
production costs for our first film beyond the Co-Production Agreement. See
Managements Discussion and Analysis of Financial Condition and Results of
Operations  Liquidity and Capital Resources. To date, we have chosen to use
our existing cash resources to fund film production costs and construction
costs. We may continue to use our cash resources for such expenditures, or may
choose to finance such capital expenditures through issuance of additional
equity or debt securities, by obtaining a credit facility or by some other
financing mechanism. The sale of additional equity or convertible debt
securities would result in additional dilution to our shareholders. Moreover,
we cannot provide any assurances that we will be successful in obtaining future

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financing, or even if such financing is available, that we will obtain it on
favorable terms or on terms providing us with sufficient funds to meet our
obligations and objectives.

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

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

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

Our Chief Executive Officer, Steve Jobs, beneficially owns approximately
56% of our outstanding Common Stock as of March 29, 2003. As a result, Mr.
Jobs, acting alone, is able to exercise sole discretion over all matters
requiring shareholder approval, including the election of the entire board of
directors and approval of significant corporate transactions, including an
acquisition of Pixar. Such concentration of ownership may also have the effect
of delaying or preventing a change in control of Pixar, impeding a merger,
consolidation, takeover or other business combination involving Pixar, or
discouraging a potential acquirer from making a tender offer or otherwise
attempting to obtain control of Pixar.

Business interruptions could adversely affect our operations.

Our operations are vulnerable to interruption by fire, earthquake, power
loss, telecommunications failure and other events beyond our control. Although
we have a disaster recovery plan that we regularly update, there can be no
assurance that it will be effective in the event of a disaster. Our facilities
in the State of California have in the past and may in the future be subject to
electrical blackouts as a consequence of a shortage of available electrical
power. In the event these blackouts continue or increase in severity, they
could disrupt the operations of our affected facilities. In the event of a
short-term power outage, we have installed UPS (uninterrupted power supply)
equipment to protect our RenderFarm and other sensitive equipment, along with
two 1.5 Megawatt backup generators. In connection with the shortage of
available power, prices for electricity have in the past risen dramatically and
may increase in the future. An increase in prices would increase our operating
costs, which could in turn adversely affect our profitability. Although we
carry business interruption insurance, there can be no assurance that such
insurance will be sufficient to compensate us for losses that may occur and any
losses or damages incurred by us could have a material adverse effect on our
business.

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

The terrorist attacks in New York and Washington, D.C. on September 11,
2001 disrupted commerce throughout the United States and Europe. In response to
such attacks, the United States is actively using military force to pursue
those behind these attacks and is initiating broader actions against global
terrorism. The continued threat of terrorism within the United States, the
escalation of military action and heightened security measures in response to
such further threats, as well as military action against the government of Iraq
or any other country, may cause significant disruption to commerce, including
the entertainment industry, throughout the world. Such disruption in the future
could have a material and adverse effect on our business and results of
operations.

Work stoppages could adversely impact our operations.

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

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

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

There are various risks associated with our proprietary rights.

Our efforts to protect our
proprietary technologies may not succeed.

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

The source code for our proprietary software is protected both as trade
secrets and as a copyrighted work. We generally enter into confidentiality or
license agreements with our employees, consultants and vendors, and generally
control access to and distribution of our software, documentation and other
proprietary information. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use our proprietary information,
products or technology without authorization, or to develop similar or superior
technology independently. Policing unauthorized use of our products is
difficult. In addition, effective copyright and trade secret protection may be
unavailable or limited in certain foreign countries. Although we generally
obtain end user license agreements for our RenderMan®software product, we have
also relied on shrink wrap licenses that are not signed by the end-user,
which may be unenforceable under the laws of certain jurisdictions. We cannot
provide any assurances that the steps we take will prevent misappropriation of
our technology or that our confidentiality or license agreements will be
enforceable.

Enforcing our proprietary rights may require litigation.

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

Others may assert infringement claims against us.

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

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

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

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

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

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




Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

All of our financial instruments are held for purposes other than trading
and are considered available for sale per SFAS 115, Accounting for Certain
Investments in Debt and Equity Securities. The table below provides
information regarding our investment portfolio at March 29, 2003. The table
presents principal cash flows and related weighted-average fixed interest rates
presented by expected maturity date (dollars in thousands):

|                               |  |           |         |   |        |   |         |       |  |   |         |  
|------------------------------ |  | --------- | ------- | - | ------ | - | ------- | ----- |  | - | ------- | -
|                               |  | Less than |         |   | Over   |   |         |       |  |  
|                               |  | 1 Year    |         |   | 1 Year |   |         | Total | 
|                               |  |           |         |   |        |   |         |       | 
|Available-for-sale securities  |  | $         | 177,439 |   |        | $ | 203,157 |       |  | $ | 380,596 |  
|Weighted-average interest rate |  |           | 3.46    | % |        |   | 2.92    | %     |  |   | 3.17    | %

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

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




Item 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 March
29, 2003.

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 MATHERAnn MatherExecutive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Officer)

Date: May 13, 2003

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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: May 13, 2003

| |                                                             
| | ------------------------------------------------------------
| | /s/ STEVE JOBSSteve JobsChairman and Chief Executive Officer

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CERTIFICATIONS

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: May 13, 2003

| |                                                                             
| | ----------------------------------------------------------------------------
| | /s/ ANN MATHERAnn MatherExecutive 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.