<PAGE>   1

                                  UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-Q

(Mark One)

[X]     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934

                FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997

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

             1001 West Cutting Boulevard, Richmond, California 94804
               (Address of principal executive offices) (zip code)

       Registrant's telephone number, including area code: (510) 236-4000

        Indicate by check mark whether the registrant (1) has filed all reports
        required to be filed by Section 13 or 15(d) of the Securities Exchange
        Act of 1934 during the preceding 12 months (or for such shorter period
        that the Registrant was required to file such reports), and (2) has been
        subject to such filing requirements for the past 90 days.

                                 Yes [X] No [ ]

        The number of shares outstanding of the registrant's Common Stock as of
November 6, 1997 was 42,043,696.



<PAGE>   2


PART I -- FINANCIAL INFORMATION

        ITEM 1.FINANCIAL STATEMENTS

                                      PIXAR
                                 BALANCE SHEETS
                        (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                        September 30,      December 31,
                                                                             1997              1996
                                                                       ----------------   --------------
                                                                         (Unaudited)
<S>                                                                       <C>               <C>      
                                             ASSETS
Current assets:
     Cash, cash equivalents, and short-term investments                   $ 172,373         $ 160,969
     Trade and other accounts receivable, net                                 2,854             4,328
     Capitalized film production costs, current portion                          67             1,372
     Prepaid expenses and other current assets                                  432               982
     Net assets of discontinued operations                                       37             1,469
                                                                          ---------         ---------
               Total current assets                                         175,763           169,120
Property and equipment, net                                                  20,573             4,655
Capitalized film production costs, net of current portion                    23,173             1,578
Other assets                                                                    107             1,588
                                                                          ---------         ---------
               Total assets                                               $ 219,616         $ 176,941
                                                                          =========         =========

                      LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
     Accounts payable                                                     $     305         $   1,060
     Accrued liabilities                                                      6,463             4,740
     Income taxes payable                                                     2,147                --
     Unearned revenue                                                           384               337
                                                                          ---------         ---------
               Total current liabilities                                      9,299             6,137
                                                                          ---------         ---------
Commitments and contingencies

Shareholders' equity:
   Preferred stock; no par value; 5,000,000 shares
     authorized; no shares issued and outstanding                                --                --
   Common stock; no par value; 100,000,000 shares authorized
     41,923,192 and 38,968,971 shares issued and outstanding
     in 1997 and 1996, respectively                                         208,430           187,308
Other adjustments                                                              (455)           (1,097)
Retained earnings (deficit)                                                   2,342           (15,407)
                                                                          ---------         ---------
               Total shareholders' equity                                   210,317           170,804
                                                                          ---------         ---------
                 Total liabilities and shareholders' equity               $ 219,616         $ 176,941
                                                                          =========         =========
</TABLE>



                 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.



                                      -2-

<PAGE>   3

                                      PIXAR
                            STATEMENTS OF OPERATIONS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                          Three Months Ended            Nine Months Ended
                                                            September 30,                  September 30,
                                                       -----------------------       -----------------------
                                                         1997           1996           1997           1996
                                                       --------       --------       --------       --------
<S>                                                    <C>            <C>            <C>            <C>     
Revenues:
     Software                                          $    908       $    599       $  3,386       $  2,232
     Animation services                                     896          1,022          1,165          2,606
     Film                                                 3,509         11,146         21,406         16,222
     Patent licensing                                        28            719          1,627          7,610
                                                       --------       --------       --------       --------
             Total revenues                               5,341         13,486         27,584         28,670
                                                       --------       --------       --------       --------
Cost of revenues:
     Software                                                24             20             46             81
     Animation services                                     534            856            708          2,357
     Film                                                    85            922          1,412          1,344
                                                       --------       --------       --------       --------
             Total cost of revenues                         643          1,798          2,166          3,782
                                                       --------       --------       --------       --------
        Gross margin                                      4,698         11,688         25,418         24,888
                                                       --------       --------       --------       --------

Operating expenses:
     Research and development                             1,202          1,286          3,710          3,596
     Sales and marketing                                    422            285          1,027          1,305
     General and administrative                           1,218          1,208          3,471          3,264
     Operating expense reimbursement (see Note 4)        (2,184)            --         (2,184)            --
                                                       --------       --------       --------       --------
             Total operating expenses                       658          2,779          6,024          8,165
                                                       --------       --------       --------       --------

        Income from continuing operations                 4,040          8,909         19,394         16,723

Other income, net                                         2,432          2,037          6,478          5,826
                                                       --------       --------       --------       --------
Income from continuing operations before
  income taxes                                            6,472         10,946         25,872         22,549
Income tax expense                                        2,913            722          8,159          1,302
                                                       --------       --------       --------       --------
     Net income from continuing operations                3,559         10,224         17,713         21,247
                                                       --------       --------       --------       --------
Discontinued operations:
     Income (loss) from discontinued
       operations (see Note 5)                              113           (624)            36           (578)
                                                       --------       --------       --------       --------
           Net income                                  $  3,672       $  9,600       $ 17,749       $ 20,669
                                                       ========       ========       ========       ========
Shares used in computing net income per share            48,893         46,714         48,438         46,973
                                                       ========       ========       ========       ========
Net income per share from continuing
  operations (see Note 2)                              $   0.07       $   0.22       $   0.37       $   0.45
                                                       --------       --------       --------       --------
Net income (loss) per share from discontinued
  operations (see Note 2)                              $   0.01       $  (0.01)      $   0.00       $  (0.01)
                                                       --------       --------       --------       --------
Net income per share (see Note 2)                      $   0.08       $   0.21       $   0.37       $   0.44
                                                       ========       ========       ========       ========
</TABLE>


                 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.



                                       -3-

<PAGE>   4


                                      PIXAR
                            STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                 Nine Months Ended
                                                                                   September 30,
                                                                             -------------------------
                                                                                1997           1996
                                                                             ---------       ---------
<S>                                                                          <C>             <C>      
Cash flows from operating activities:
   Net income                                                                $  17,749       $  20,669
   Adjustments to reconcile net income to net cash
        provided by continuing operating activities:
      Discontinued operations                                                      (36)            578
      Amortization of deferred compensation                                        504             972
      Non-cash revenue attributable to film overbudget                              --          (2,324)
      Depreciation and amortization                                              2,037             455
      Loss on disposition of property and equipment                                425              --
      Amortization of capitalized film production costs                          1,412           1,344
      Credits from patent license, net of expense items                         (1,519)         (1,610)
      Changes in operating assets and liabilities:
          Trade and other accounts receivable                                    1,474         (12,631)
          Prepaid expenses and other current assets                                644             (73)
          Accounts payable                                                        (755)            (53)
          Income taxes payable                                                   7,647             799
          Accrued liabilities                                                    1,619             843
          Unearned revenue                                                         108             131
                                                                             ---------       ---------
      Net cash provided by continuing operations                                31,309           9,100
      Net cash provided by (used in) discontinued operations                     1,468          (1,130)
                                                                             ---------       ---------
      Net cash provided by operating activities                                 32,777           7,970
                                                                             ---------       ---------
Cash flows from investing activities:
   Purchase of property and equipment                                          (15,483)           (645)
   Maturities of investments in short-term securities                           49,158          70,039
   Purchases of short-term securities, net of unrealized losses                (55,630)       (144,990)
   Capitalized film production costs                                           (21,578)         (1,220)
   Change in other assets                                                          (52)           (562)
                                                                             ---------       ---------
      Net cash used in investing activities                                    (43,585)        (77,378)
                                                                             ---------       ---------
Cash flows from financing activities:
   Net proceeds from issuance of common stock and warrants, net                 14,885              --
   Repayment of note payable to shareholder                                         --          (2,373)
   Proceeds from exercised stock options                                           737             160
                                                                             ---------       ---------
      Net cash provided by (used in) financing activities                       15,622          (2,213)
                                                                             ---------       ---------
Net increase (decrease) in cash and cash equivalents                             4,814         (71,621)
Cash and cash equivalents at beginning of period                                44,648          97,286
                                                                             ---------       =========
Cash and cash equivalents at end of period                                   $  49,462       $  25,665
                                                                             =========       =========

Supplemental disclosure of cash flow information:

     Cash paid during the period for income taxes                            $     390       $     323
                                                                             =========       =========
Supplemental disclosure of non-cash investing and financing activities:

     Credits from patent license                                             $   1,627       $   1,610
                                                                             =========       =========
     Tax benefit from disqualifying dispositions                             $   5,500       $      --
                                                                             =========       =========
     Film overbudget reductions                                              $      --       $   3,324
                                                                             =========       =========
     Non-cash film production costs capitalized                              $     124       $      36
                                                                             =========       =========
     Unrealized gain (loss) on investments                                   $     118       $     (83)
                                                                             =========       =========
</TABLE>



                 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.



                                      -4-
<PAGE>   5

                                      PIXAR
                          NOTES TO FINANCIAL STATEMENTS

(1)  BASIS OF PRESENTATION

     The accompanying unaudited financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission. In the
opinion of management, the accompanying unaudited financial statements reflect
all adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation of Pixar's financial condition, results of
operations, and cash flows for the periods presented. These financial statements
should be read in conjunction with the audited financial statements as of
December 31, 1996 and 1995, and for each of the years in the three-year period
ended December 31, 1996, including notes thereto, incorporated by reference into
Pixar's Annual Report on Form 10-K for the year ended December 31, 1996.

     The results of operations for the three-month and nine-month periods ended
September 30, 1997, 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 1997 financial statement presentation.

(2)  NET INCOME PER SHARE

     Net income per share is computed using net income from continuing
operations, and net income (loss) from discontinued operations, and is based on
the weighted average number of shares of common stock outstanding and common
equivalent shares from stock options (under the treasury stock method, if
dilutive).

     The Financial Accounting Standards Board (FASB) recently issued Statement
of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share. SFAS No.
128 requires the presentation of basic earnings per share (EPS) and, for
companies with potentially dilutive securities, such as options and warrants,
diluted EPS. SFAS No. 128 is effective for annual and interim periods ending
after December 15, 1997. The Company expects basic EPS for profitable periods
will be higher than primary EPS as presented in the accompanying financial
statements and diluted EPS for profitable periods will not differ materially
from primary EPS as presented in the accompanying financial statements.
Computations for loss periods should not change significantly.

(3)  PATENT LICENSING ARRANGEMENTS

     In March 1996, Pixar delivered all rights to utilize certain technology
underlying a patent license to Silicon Graphics, Inc. (SGI), and received a
non-refundable fixed-fee payment of $6.0 million in cash and $5.0 million in the
form of credits for products to be purchased from SGI by 



                                      -6-

<PAGE>   6

Pixar over four years. Following the release of the rights to utilize the
patents to SGI, Pixar maintained no significant vendor obligations to the
licensee; therefore, as of September 30, 1996, the Company recognized as revenue
the fixed and determinable amounts of the $6.0 million cash payment received,
plus $1.6 million which represented that portion of the credits Pixar had used
through September 30, 1996. For the nine months ended September 30, 1997,
revenue of $1.6 million was recognized representing credits used by Pixar during
that period. Since March 1996, Pixar has used a total of $4.8 million worth of
credits, with $0.2 million of credits remaining which are expected to be used
during 1997.

(4)  FEATURE FILM PRODUCTION AND CO-PRODUCTION AGREEMENT

          FEATURE FILM AGREEMENT

     In 1991, Pixar entered into a 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") to
develop and produce up to three computer animated feature films (the Feature
Film Agreement). The first feature film, Toy Story, was released in November
1995. Under the Feature Film Agreement, Pixar is entitled to receive
compensation based on the revenue from the distribution of animated feature
films and related products, and recognized revenues on Toy Story of $16.2
million and $21.4 million for the nine months ended September 30, 1996 and 1997,
respectively, for a total of $40.2 million since the film's release.

     Pixar incurred film production costs that were reimbursed by Disney,
inclusive of salaries and overhead. All payments to Pixar from Disney for costs
of feature film production were recorded as cost reimbursements; accordingly, no
revenues were recorded for such reimbursements; rather, Pixar netted the
reimbursements against the related costs.

          CO-PRODUCTION AGREEMENT

     On February 24, 1997, Pixar and Disney entered into a co-production
agreement (the Co-Production Agreement) which will now govern the second and
third feature films planned under the Feature Film Agreement, three additional
films, sequels, and other derivative works. The second and third feature films,
and a made-for-home video sequel to Toy Story, were in production as of
September 30, 1997. Under the Co-Production Agreement, Pixar, on an exclusive
basis, will produce five computer animated feature-length theatrical motion
pictures (the Pictures) for distribution by Disney over approximately the next
ten years. Pixar and Disney will co-own and co-brand the Pictures and co-finance
the production costs. Pixar and Disney will share equally in the profits of each
Picture and any related merchandise and other ancillary products, after recovery
of all marketing and distribution costs (which will be financed by Disney), a
distribution fee paid to Disney and any other fees or costs, including
participations provided to talent and the like. The Co-Production Agreement
generally provides that Pixar will produce each Picture and Disney will control
all decisions relating to marketing, promotion, publicity, advertising and
distribution of each Picture. The first Picture under the Co-Production
Agreement is A Bug's Life. The Co-Production Agreement also contemplates that
with respect to interactive media products and other derivative works related to
the Pictures, Pixar will have the 



                                      -7-

<PAGE>   7

opportunity to co-finance and produce such products or to earn passive royalties
on such products.

     Included in the three and nine month periods ended September 30, 1997 was a
$2.2 million one-time adjustment reducing Pixar's operating expenses. This
reduction was due to an additional reimbursement from Disney under the
Co-Production Agreement. Under the Co-Production Agreement certain operating
expenses benefitting the productions, such as certain research and development
and certain general and administrative expenses, are paid half by Pixar and half
by Disney. Since the Co-Production Agreement begins with Pixar's next films, A
Bug's Life and The Toy Story Video Sequel, both in production during 1996, Pixar
was entitled to reimbursement for Disney's share of certain of Pixar's operating
expenses incurred in 1996 and in the first two months of 1997, prior to signing
the agreement. The determination of this one-time operating expense
reimbursement was finalized in the quarter ended September 30, 1997.

(5)  DISCONTINUED OPERATIONS

     Pixar determined in March 1997 to discontinue its business of producing
CD-ROM and other interactive products and redirect the approximately 60
employees in this division to film and related projects within Pixar. In the
three months ended September 30, 1997, a gain of $113,000, net of taxes, has
been recorded for the disposal of the CD-ROM division, primarily due to royalty
income received. In the nine month period ended September 30, 1997, Pixar
recorded a net gain from discontinued operations of its CD-ROM division of
$36,000, net of taxes. Pixar anticipates future royalty income will exceed costs
to be incurred in all future periods. In the three and nine month periods ended
September 30, 1996, losses from discontinued operations totaled $624,000 and
$578,000, respectively, net of taxes. Net assets of the discontinued operations
of $37,000 and $1.5 million at September 30, 1997 and December 31, 1996,
respectively, primarily consist of reimbursements and royalties receivable from
Disney.

(6)  EQUITY TRANSACTIONS

     In connection with the Co-Production Agreement, Pixar sold to Disney
1,000,000 shares of the Company's Common Stock which Disney has agreed to hold
for at least three years. Pixar also granted two warrants to Disney: one warrant
to purchase 750,000 shares of Common Stock at an exercise price of $20 per
share, and another warrant to purchase 750,000 shares of Common Stock at $25 per
share. Pixar granted certain registration rights for the shares issuable upon
exercise of the warrants. Gross proceeds on the transaction were $15.0 million.

(7)  RECENT ACCOUNTING PRONOUNCEMENTS

     In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". This Statement establishes standards for reporting and displaying
comprehensive income and its components in the financial statements. It does
not, however, require a specific format for the statement, but requires the
Company to display an amount representing total comprehensive income for the
period in that financial statement. The Company is in the process of determining
its preferred format. This Statement is effective for fiscal years beginning
after December 15, 1997.



                                      -8-

<PAGE>   8

     Also, in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The Statement establishes
standards for the manner in which public business enterprises report information
about operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in interim
financial reports issued to shareholders. This Statement is effective for
financial statements for periods beginning after December 15, 1997.



                                      -9-

<PAGE>   9

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

        This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contains forward-looking statements that have been made
pursuant to the provisions of the Private Securities Litigation Reform Act of
1995. Such forward-looking statements are based on current expectations,
estimates and projections about Pixar's industry, management's beliefs, and
assumptions made by management. Words such as "anticipates," "expects,"
"intends," "plans," "believes," "seeks," "estimates," variations of such words
and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and are
subject to certain risks, uncertainties and assumptions that are difficult to
predict; therefore, actual results and outcomes may differ materially from what
is expressed or forecasted in any such forward-looking statements. Such risks
and uncertainties include those set forth in the Form 10-K (as defined below)
under "Certain Factors Affecting Business, Operating Results and Financial
Condition" on pages 15 through 26, as well as those noted in the documents
incorporated therein by reference. Particular attention should be paid to the
cautionary language in the Form 10-K entitled "Certain Factors Affecting
Business, Operating Results and Financial Condition--Anticipated Decline in
Operating Results in 1997 and Net Losses in 1998," "--Dependence on Toy Story, A
Bug's Life and Toy Story Video Sequel," "--Liquidity Risks," "--Scheduled
Concurrent Release of Films; Management of Growth" and "--Risks Associated With
Co-Production Agreement." 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 Company's operating performance each quarter is subject to various
risks and uncertainties as discussed in the Company's Annual Report on Form 10-K
for the year ended December 31, 1996 (the "Form 10-K"). The following discussion
should be read in conjunction with the sections entitled "Certain Factors
Affecting Business, Operating Results and Financial Condition" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Form 10-K. In particular, the factors set forth below in "Factors Affecting
Operating Results and Financial Condition" could affect the Company's operating
results and financial condition.

NEW AGREEMENT WITH DISNEY

        On February 24, 1997, Pixar and Walt Disney Pictures, a wholly-owned
subsidiary of The Walt Disney Company (together with its subsidiaries and
affiliates collectively referred to herein as "Disney") entered into a
co-production agreement (the "Co-Production Agreement") pursuant to which Pixar,
on an exclusive basis, will produce five computer animated feature-length
theatrical motion pictures (the "Pictures"), for distribution by Disney over
approximately the next ten years. Pixar and Disney will 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 and other
ancillary products, after recovery of all marketing and distribution costs
(which will be financed by Disney), a distribution fee paid to Disney and any
other fees or costs, including participations 



                                      -10-

<PAGE>   10

provided to talent and the like. The Co-Production Agreement generally provides
that Pixar will produce each Picture and that Disney will control all decisions
relating to marketing, promotion, publicity, advertising and distribution of
each Picture. Disney and Pixar have agreed that the first Picture under the
Co-Production Agreement is the Picture with the working title "A Bug's Life".
The Co-Production Agreement also contemplates that with respect to interactive
media products and other derivative works related to the Pictures, Pixar will
have the opportunity to co-finance and produce such products or to earn passive
royalties on such products. Disney and Pixar have also agreed to produce a
made-for-home-video sequel to Toy Story (the "Toy Story Video Sequel"), and
Pixar is working on the production under the terms of the Co-Production
Agreement. Pixar will not share in any theme park revenues generated as a result
of the Pictures. Pixar does not expect to receive revenues under the
Co-Production Agreement from either A Bug's Life or the Toy Story Video Sequel
until 1999 at the earliest.

        In May 1991, Pixar entered into a feature film agreement (the "Feature
Film Agreement") with Disney, pursuant to which Toy Story and the Toy Story home
video were developed, produced and distributed. The Feature Film Agreement was
largely superseded by the Co-Production Agreement above. However, the Feature
Film Agreement remains in effect with respect to Pixar's financial participation
in Toy Story and related products.

RESULTS OF OPERATIONS

        REVENUES

        Total revenues for the three months ended September 30, 1997 were $5.3
million compared with $13.5 million for the same period of the prior year. The
decrease was primarily due to a substantial decline in Toy Story-related film
revenues. Revenues for the nine months ended September 30, 1997 and 1996 were
$27.6 million and $28.7 million, respectively. The decrease in total revenues
for the nine month period ended September 30, 1997 was primarily attributable to
a decrease in patent licensing revenue of $6.0 million, somewhat offset by
higher film revenue of $5.2 million.

        Software revenues consist mainly of software license revenue,
principally from RenderMan. Software revenues increased 52% to $908,000 in the
three months ended September 30, 1997 from $599,000 in the prior year period and
increased 52% to $3.4 million in the nine months ended September 30, 1997 from
$2.2 million in the same period of the prior year. The increase in software
revenues resulted from a general increase in the number of RenderMan software
licenses . Due to Pixar's focus on content creation for animated feature films
and related products, Pixar expects that revenue derived from software licenses
may decline. All historical and future royalty income associated with Pixar's
discontinued CD-ROM division is now and will continue to be excluded from
software revenue and presented in results of discontinued operations. See
"Results From Discontinued Operations."

        Animation services revenues of $1.0 million and $2.6 million in the
three and nine months ended September 30, 1996, respectively, was primarily
attributable to revenue generated from the production of animated television
commercials. In July 1996, Pixar announced plans to substantially discontinue
its production of television commercials for third parties and to redirect 



                                      -11-

<PAGE>   11

the talent in its television commercial group to animated feature films and
related products. Accordingly, there has been no television commercials revenue
generated in 1997. Animation services revenues of $896,000 and $1.2 million in
the three and nine months ended September 30, 1997 primarily represent revenue
for projects related to A Bug's Life. Pixar expects that revenue in this area
will vary significantly from quarter to quarter. There are likely to be
individual quarters, such as occurred in the first quarter of 1997, or possibly
even prolonged periods of time, in which Pixar generates no animation services
revenue due to the sporadic nature of this business, and the need to utilize
animation services employees on other productions. For example, Pixar expects to
transfer substantially all of its animation services employees to assist in the
completion of A Bug's Life. There can be no assurance that Pixar will generate
any animation services revenue during this period or during similar periods.

        Film revenues for the three months ended September 30, 1997 were $3.5
million compared with $11.1 million in the prior year period. Film revenues for
the nine months ended September 30, 1997 reflect an increase of 32% to $21.4
million from $16.2 million in the prior year period. This increase resulted from
Pixar receiving the majority of its share of Toy Story home video revenue during
the first three quarters of 1997. Film revenues for the three months ended
September 30, 1997 included a one-time additional payment from Disney of $1.8
million resulting from the calculation of Pixar's film revenues under the
original Feature Film Agreement. Under the original Feature Film Agreement,
Pixar's percentage of Toy Story revenues is calculated on a sliding scale with
lower percentages earned by Pixar at the outset while Disney recovered related
production, marketing and distribution costs for the film, and higher
percentages earned once Disney has recovered these costs. Disney's costs were
recovered during the quarter ended June 30, 1997 which increased Pixar's
proportionate share of revenue in that quarter and in subsequent periods. During
the quarter ended September 30, 1997, Pixar and Disney determined that the date
on which Disney's costs were recovered occurred earlier than previously thought,
resulting in agreement on an additional payment to Pixar in the third quarter
of 1997 of $1.8 million. Since the Toy Story home video was the last major
release window for Toy Story, Pixar anticipates a continuing decline in Toy
Story-related revenue in the fourth quarter of 1997 and in 1998. In addition,
since Pixar's next feature film is not targeted for release until the end of
1998 at the earliest, Pixar expects that revenue and earnings will continue to
decrease in subsequent periods as compared to 1996 and the first three quarters
of 1997.

        Patent licensing revenues of $28,000 in the three months ended September
30, 1997 and $1.6 million in the nine months ended September 30, 1997 include
the revenue from Pixar's 1996 patent license with Silicon Graphics, Inc.
("SGI"), whereby Pixar granted to SGI and its subsidiaries a non-exclusive
license to use certain of Pixar's patents covering techniques for creating
computer-generated photorealistic images. Under the agreement, SGI agreed to pay
Pixar total compensation of $11.0 million, of which $6.0 million was paid in
cash in March 1996 and $5.0 million was to be paid in the form of purchase
credits for SGI hardware and software through the year 2000. Recognition of the
$5.0 million in credits depends upon purchases of the hardware and software to
be obtained from SGI in lieu of payment. In the nine months ended September 30,
1996, Pixar recognized the $6.0 million cash payment from SGI, and $1.6 million
representing that portion of the $5.0 million in hardware and software credits
Pixar had used through September 30, 1996. In the nine months ended September
30, 1997, revenue of $1.6 million was recognized representing credits used
during that period. Of the original $5.0 million 



                                      -12-

<PAGE>   12

in credits, Pixar has credits of approximately $240,000 remaining to be
recognized as revenue in future periods as credits are used.

        In the three and nine months ended September 30, 1997, Disney accounted
for 80% and 82%, respectively, of Pixar's total revenue. The revenues from
Disney consisted primarily of film, animation services and software revenues.
Pixar expects to continue to be dependent upon Disney for most of its revenue.
In the three and nine month periods ended September 30, 1996, Disney accounted
for 92% and 63%, respectively, of Pixar's total revenues. All patent revenues in
periods presented were generated from a one-time patent license sale to SGI. In
the nine months ended September 30, 1996, SGI accounted for 25% of total
revenues. In the comparable period in 1997, SGI revenues were not significant
and Pixar expects that significant amounts of such revenue will not be generated
on an ongoing basis.

        COST OF REVENUES

        Cost of software revenues consists of the direct costs and manufacturing
overhead required to reproduce and package software products. Cost of software
revenues as a percentage of the related revenues was 3% and 1%, respectively, in
the three and nine months ended September 30, 1997. As compared to the prior
year periods, in which cost of software revenues as a percentage of the related
revenues was 3% and 4%, respectively, the change was insignificant. Cost of
software revenues includes no amortization of capitalized software development
expenses.

        Cost of animation services revenues consists of production costs, which
include salaries and benefits and, to a lesser extent, facility expenses and
department overhead costs. Costs of animation services revenues as a percentage
of related revenues decreased to 60% in the three months ended September 30,
1997 from 84% in the same period of the prior year, and decreased to 61% for the
nine months ended September 30, 1997 from 90% in the same period of the prior
year. These decreases reflect Pixar's decision in July 1996 to substantially
discontinue the animated television commercials division, which had higher
associated costs relative to revenues, in favor of working on animated services
related to feature films, which potentially have lower associated costs relative
to revenues. Pixar's focus is now on short-term animation services projects
related to its feature films. Pixar expects that costs in this area will vary
significantly from quarter to quarter.

        Cost of film revenues represents amortization of film costs capitalized
by Pixar. See "Capitalized Film Production Costs." Cost of film revenues as a
percentage of the related revenues was 2% and 7%, respectively, in the three and
nine months ended September 30, 1997, as compared to 8% in the prior year
periods. The overall decline in cost of film revenues as a percentage of the
related revenues was due to amortization of the majority of related film costs
in prior periods.

        There were no costs of revenue associated with patent licensing
revenues, which contributed to an unusually high overall gross margin in the
three and nine months ended September 30, 1997 and in the prior year periods.



                                      -13-

<PAGE>   13

        OPERATING EXPENSES

        Included in the three and nine month periods ended September 30, 1997
was a $2.2 million one-time adjustment reducing Pixar's operating expenses. This
reduction was due to an additional reimbursement from Disney under the
Co-Production Agreement which was signed in February 1997. Under this agreement
certain operating expenses benefitting the productions, such as certain research
and development and certain general and administrative expenses, are paid half
by Pixar and half by Disney. Since the Co-Production Agreement begins with
Pixar's next films, A Bug's Life and The Toy Story Video Sequel, both in
production during 1996, Pixar was entitled to reimbursement for Disney's share
of certain of Pixar's operating expenses incurred in 1996 and in the first two
months of 1997, prior to signing the agreement. The determination of this
one-time operating expense reimbursement was finalized in the quarter ended
September 30, 1997.

        Without this adjustment, operating expenses would have been $2.8 million
and $8.2 million for the three and nine months ended September 30, 1997,
respectively. While Pixar has continued to increase its spending levels, total
operating expenses for the three and nine months ended September 30, 1997,
excluding the $2.2 million operating expense reimbursement, were approximately
the same as in the comparable prior year periods. This is also a result of the
recent Co-Production Agreement pursuant to which certain of Pixar's operating
expenses that benefit the productions are now partially funded by Disney.

        Pixar intends to continue to increase its spending levels in a number of
areas. First, as a result of intense competition for animators, Pixar continues
to have to pay higher salaries to attract new creative personnel and technical
directors. Pixar expects compensation for such new and existing personnel to
continue to increase. In the three and nine months ended September 30, 1997,
Pixar expanded its administrative staff and facilities and expanded other
operations. Pixar expects continued growth in operating expenses in these areas.
To the extent that such expenses are not capitalized by Pixar, nor paid by
Disney under the Co-Production Agreement, and precede or are not subsequently
followed by an increase in revenues, Pixar's business, operating results and
financial condition will be materially adversely affected.

        Research and development expenses consist primarily of salaries and
support for personnel conducting research and development for the RenderMan
product and for Pixar's proprietary Marionette and Ringmaster software. Research
and development expenses totaled $1.2 million and $1.3 million, respectively, in
the three months ended September 30, 1997 and 1996, and increased 3% to $3.7
million in the nine months ended September 30, 1997 from $3.6 million in the
prior year period. In each period, increased personnel costs were offset by
recovery of certain research and development costs reimbursed by Disney under
the Co-Production Agreement. To date, all software development costs have been
expensed as incurred.

        Sales and marketing expenses consist primarily of salaries and related
overhead, as well as advertising, technical support, public relations and trade
show costs required to support the software segment. Sales and marketing
expenses increased 48% to $422,000 in the three months ended September 30, 1997
from $285,000 in the prior year period due to increased hiring and spending in
the areas of corporate marketing and public relations. Sales and marketing
expenses decreased 21% to $1.0 million in the nine months ended September 30,
1997 from $1.3 million 



                                      -14-

<PAGE>   14

in the prior year period due to discontinued marketing efforts for television
commercials. Pixar expects that marketing expenses will continue to increase
significantly in future periods, particularly in the areas of corporate
marketing and public relations.

        General and administrative expenses consist primarily of salaries of
management and administrative personnel, insurance costs and professional fees.
For the three months ended September 30, 1997, general and administrative
expenses of $1.2 million were relatively flat as compared to the prior year
period, and increased 6% to $3.5 million in the nine months ended September 30,
1997 from $3.3 million in the prior year period. The increase in the nine months
ended September 30, 1997 was primarily due to increased staffing and increased
professional fees. Growth in these costs was somewhat offset by the recovery of
certain general and administrative costs reimbursed by Disney under the
Co-Production Agreement. Pixar continues to expect general and administrative
expenses to increase in absolute dollars in future periods as Pixar incurs
additional costs to expand its administrative staff and facilities.

        OTHER INCOME, NET

        In both 1996 and 1997, other income consisted primarily of interest
income on investments. Other income, net was $2.4 million and $6.5 million in
the three and nine months ended September 30, 1997, respectively. Other income,
net in the three and nine months ended September 30, 1996 was $2.0 million and
$5.8 million, respectively.

        INCOME TAXES

        Income tax expense for the three and nine months ended September 30,
1997 reflects Pixar's federal and state income tax liability after utilization
of available federal net operating loss carryforwards and federal and state tax
credits. Income taxes increased in the three and nine months ended September 30,
1997 due to expected full utilization of the Company's net operating loss
carryforwards in 1997.

        RESULTS OF DISCONTINUED OPERATIONS

        After the Co-Production Agreement was executed in February 1997, Pixar
evaluated the merits of staying in the business of producing CD-ROM products and
compared those opportunities with opportunities in film and other potential
projects under the Co-Production Agreement. Management determined that, despite
the fact that Pixar's first CD-ROM titles were successful on relative terms, the
resources devoted to its interactive products division would be better allocated
to other projects arising from the Co-Production Agreement which Pixar believes
will have greater potential than the CD-ROM titles, such as theatrical films,
home video sequels and short animation projects. Moreover, the CD-ROM and
interactive product market is not growing as fast as expected, the production
costs of such products are increasing and one project under negotiation with a
third party was canceled. For these reasons, Pixar determined in March 1997 to
discontinue its business of producing CD-ROM and other interactive products and
redirect the approximately 60 employees in this division to film and related
projects within Pixar. Because the CD-ROM business previously represented an
ongoing potential source of revenue, 



                                      -15-

<PAGE>   15

this decision is expected to continue to have a material adverse impact on
Pixar's revenues and results of operations in the future.

        In the three months ended September 30, 1997, a gain of $113,000, net of
taxes, has been recorded for the disposal of the CD-ROM division, primarily due
to royalty income received. In the nine month period ended September 30, 1997,
Pixar recorded a net gain from discontinued operations of its CD-ROM division of
$36,000, net of taxes. Pixar anticipates future royalty income will exceed costs
to be incurred in all future periods. In the three and nine month periods ended
September 30, 1996, losses from discontinued operations totaled $624,000 and
$578,000, respectively, net of taxes.

FACTORS AFFECTING OPERATING RESULTS AND FINANCIAL CONDITION

        The following is a discussion of certain factors which currently impact
or may impact Pixar's business, operating results and/or financial condition.
Anyone making an investment decision with respect to Pixar's capital stock or
other securities is cautioned to carefully consider these factors.

    ANTICIPATED DECLINE IN OPERATING RESULTS IN 1997 AND NET LOSSES IN 1998

        A number of factors are expected to lead to a substantial decline in
Pixar's operating results in the remainder of 1997 and net losses in 1998, as
discussed more fully below.

        END OF TOY STORY REVENUES

        As of September 30, 1997, Pixar has recognized the vast majority of the
revenue it expects to receive from the domestic and international theatrical
releases of Toy Story and substantially all of the home video revenue from Toy
Story. While relatively minor amounts of revenue may be received by Pixar in
subsequent periods from sources such as international home video sales of Toy
Story, Toy Story merchandise royalties, and television airings of Toy Story,
Pixar does not expect to recognize significant revenue from Toy Story in the
fourth quarter of 1997 or in 1998.

        TIMING OF A BUG'S LIFE AND TOY STORY VIDEO SEQUEL RELEASES

        A Bug's Life is not expected to be released until the end of 1998 at the
earliest, and revenue from A Bug's Life is not expected to be recognized until
after all marketing and distribution costs and fees have been recovered by
Disney. Recovery of all costs depends on many factors and may not occur until
six to twelve months after its release at the earliest, making it unlikely that
Pixar will recognize any revenue from A Bug's Life until the second half of 1999
at the earliest. While the Toy Story Video Sequel is currently targeted for
completion in the second half of 1998, the more likely release date is in the
first quarter of 1999 or even later depending on a few factors. First, Pixar may
be unable, for technical or other reasons, to complete the production of the Toy
Story Video Sequel by the end of 1998. Second, even if completed, Disney and
Pixar may choose to delay release of the Toy Story Video Sequel until the first
quarter of 1999 or thereafter. Depending on the timing of receipt of revenues by
Disney, Pixar may not recognize revenue from the Toy Story Video 



                                      -16-

<PAGE>   16

Sequel until three to six months after its release at the earliest, meaning that
if the Toy Story Video Sequel were released in the first quarter of 1999 or
thereafter, Pixar would not recognize any revenue from the Toy Story Video
Sequel until the second half of 1999 at the earliest.

        REDUCED CD-ROM INCOME

        Although its first two CD-ROM products were successful on relative
terms, Pixar determined in March 1997 to discontinue its business of producing
CD-ROM and other interactive products in favor of other opportunities arising,
in part, as a result of entering into the Co-Production Agreement. Pixar has not
and will not recognize any CD-ROM income from this discontinued operation in
1997 or 1998, other than royalty income attributable to the two Toy Story CD-ROM
products. Pixar has reassigned all of the approximately 60 employees previously
employed in the CD-ROM division to feature film productions and other
departments within Pixar.

        POSSIBLE DECLINE IN LICENSING OF RENDERMAN DUE TO SHIFT IN FOCUS

        As a result of Pixar's reduced emphasis on the commercialization of
software in favor of products sold for their content, Pixar continues to expect
to dedicate less time and fewer resources to distributing and marketing
RenderMan than it has in the past and further expects that licensing of
RenderMan may decline.

        INCREASE IN OPERATING EXPENSES AND TAX RATE

        In 1996 and the first nine months of 1997, Pixar significantly increased
its operating expenses, and Pixar plans to continue to increase its operating
expenses to fund greater levels of research and development and to expand
operations. Specifically, Pixar expects its spending levels to increase
significantly due to continued investment in proprietary software systems,
increased compensation costs as a result of intense competition for animators,
creative personnel, technical directors and other personnel, and increased costs
associated with the expansion of its facilities. To the extent that such
expenses are not capitalized by Pixar nor paid for by Disney, Pixar's operating
expenses would significantly increase in the remainder of 1997 and in 1998.
Finally, Pixar's tax rate has increased in the nine months ended September 30,
1997 and may continue to increase in the remainder of 1997 and future years as
the result of full utilization of remaining net operating losses in 1997.

        IMPACT ON OPERATING RESULTS

        As a result of the above factors, Pixar expects revenue to continue to
decline in the fourth quarter of 1997 as compared to the third quarter of 1997,
and to not recognize substantial revenue in 1998. At the same time, Pixar's
operating expenses may increase in the fourth quarter of 1997 and in 1998, even
after giving effect to the reimbursement of certain operating expenses from
Disney under the Co-Production Agreement. Therefore, Pixar expects revenue and
operating results in the fourth quarter of 1997 to decline substantially from
the first three quarters of 1997 and from the fourth quarter of 1996. It is
possible that Pixar could even incur operating and net 



                                      -17-

<PAGE>   17
losses in the last quarter of 1997. Pixar also expects to incur operating and
net losses throughout 1998.

        POTENTIAL FLUCTUATIONS IN OPERATING RESULTS

        In addition to the factors set forth above, Pixar continues to expect to
generally experience significant fluctuations in its future annual and quarterly
operating results caused by a variety of factors. Pixar expects that its annual
and quarterly operating results, particularly its revenue, will fluctuate due to
factors such as the timing of the domestic and international releases of the
animated feature films, the success of the animated feature films (which can
fluctuate significantly from film to film), the timing of the release of related
products into their respective markets, the demand for the related products
(which is often a function of the success of the related animated feature film),
film production costs, Disney's costs to distribute and promote the feature
films and related products, Disney's success at marketing the films and related
products, the timing of receipt of proceeds from the animated feature films and
related products by Disney, the timing of revenue recognition under the
Co-Production Agreement and the Feature Film Agreement, as the case may be, the
introduction of new feature films or products by Pixar's competitors, and
general economic conditions. In particular, since Pixar's revenue under the
Co-Production Agreement is directly related to the success of a feature film,
Pixar's operating results are likely to fluctuate depending on the level of
success of its 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.

        Moreover, Pixar's operating expenses will continue to be extremely
difficult to forecast. The direct costs of film production are budgeted in
agreement with Disney and shared equally. Pixar's share of these direct costs of
film production are capitalized by Pixar in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 53, "Financial Reporting by
Producers and Distributors of Motion Picture Films." A substantial portion of
all of Pixar's other costs are incurred for the benefit of feature films
("Pixar's Overhead"), including research and development expenses and general
and administrative expenses. Portions of Pixar's Overhead are included in the
budgets for the Pictures and will be shared equally with Disney under the
Co-Production Agreement. The portion of Pixar's Overhead that is not reimbursed
by Disney is either capitalized as film production costs, if required under SFAS
No. 53, or charged to operating expense in the period incurred. Because a
substantial portion of Pixar's Overhead is related to the Pictures and is,
therefore, reimbursed by Disney, and other amounts are capitalized by Pixar in
accordance with SFAS No. 53, Pixar's reported operating expenses for the first
nine months of 1997 have not reflected, and future reported operating expenses
will not reflect the true level of spending on the production of animated
feature films, related products and overhead.

        Pixar may not be able to recognize the tax benefits of net operating
losses to be generated in the future. Pixar had a valuation allowance as of
December 31, 1996 which fully offset its 



                                      -18-

<PAGE>   18

gross deferred tax assets due to Pixar's historical losses and the fact that
there is no guarantee Pixar would generate sufficient taxable income in the
future to be able to realize all of its deferred tax assets.

        As a result of all of the foregoing, Pixar believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful, and its annual and quarterly results of operations should not be
relied upon as any indication of future performance. Due to all of the foregoing
factors, it is likely that in some future period Pixar's operating results will
be below the expectations of public market analysts and investors. In such
event, the price of Pixar's Common Stock would likely be materially adversely
affected.

DEPENDENCE ON TOY STORY, A BUG'S LIFE AND TOY STORY VIDEO SEQUEL

     DEPENDENCE ON TOY STORY

        For at least 1997, Pixar's revenue and operating results have been and
will continue to be almost entirely dependent upon the success of the Toy Story
home video and merchandising of Toy Story products. Pixar recognized the
substantial majority of Toy Story home video revenue in the first three quarters
of 1997 and expects little revenue from Toy Story or related products
thereafter. In its discontinued CD-ROM operations, Pixar also expects limited
royalty income from its Toy Story CD-ROM products in the last quarter of 1997
and little or no income from such products in 1998. Because A Bug's Life is not
expected to be released until the end of 1998 at the earliest, and the Toy Story
Video Sequel is not likely to be released before the first quarter of 1999, all
other revenues in the last quarter of 1997 and for all of 1998 will be primarily
dependent upon Pixar's other businesses, from which Pixar expects limited
revenue.

     DEPENDENCE ON A BUG'S LIFE AND TOY STORY VIDEO SEQUEL

        Beyond 1998, Pixar expects to be significantly dependent upon the
success of A Bug's Life and the Toy Story Video Sequel (the "Current Projects")
and related products. Although production on each of the Current Projects is
underway, there can be no assurance that either of the Current Projects will be
successfully produced and released when scheduled or thereafter. In addition,
given the escalation in compensation rates of people required to work on the
Current Projects, the number of people required to work on the Current Projects,
and the equipment needs, the budget for the Current Projects and subsequent
films and related products will be substantially greater than the budget for Toy
Story and will be financed equally by Pixar and Disney under the Co-Production
Agreement. There can be no assurance that Pixar will not experience difficulties
that could delay or prevent the successful development or production of either
of the Current Projects or subsequent animated feature films or related
products, or that production can be completed within the budgeted amounts. For
example, substantially all employees from Pixar's animation services group are
expected to be assigned to A Bug's Life for the duration of its production,
which will generate additional production costs. If Pixar is unable to produce
and develop on a timely basis the Current Projects and subsequent animated
feature films and related products that meet with broad market acceptance,
Pixar's business, operating results and financial condition will be materially
adversely affected.



                                      -19-

<PAGE>   19

        It is possible that Pixar and Disney could decide to make the Toy Story
Video Sequel a production for theatrical release instead of a made-for-home
video. In such event, Pixar would not expect to recognize any revenue until six
to twelve months after the theatrical release. In addition, the production would
take longer to complete, at significantly greater cost, and Disney might incur
significantly greater costs to market and distribute the film, the impact of
which would be to adversely impact the timing and possibly the amount of Pixar's
related film revenues.

        RISKS ASSOCIATED WITH A BUG'S LIFE

        Under the Co-Production Agreement, Pixar shares the production costs of
A Bug's Life. These costs will initially be capitalized as film production costs
under SFAS No. 53 and then be amortized over A Bug's Life's expected revenue
stream when revenue is recognized. If A Bug's Life is not an extraordinary box
office success similar to Toy Story, the amount of revenue recognized will not
be significant, and the capitalized production costs will have to be amortized
in large amounts over a limited number of quarters, resulting in significant
costs of film revenue in those quarters and, potentially, significant quarterly
operating and net losses. Animated feature films that become extraordinary box
office successes are rare. Pixar believes, based on available information, that
there is a reasonable basis to conclude that of the more than 40 animated
feature films introduced since 1990, only two movies generated domestic box
office revenues greater than Toy Story, and both of those films were produced
and distributed solely by Disney. During at least the last five years, Pixar
believes that there has been no fully-animated feature film (other than Toy
Story) produced or developed by a studio other than Disney that has achieved
more than $25 million in domestic box office revenues. While A Bug's Life will
be co-financed, promoted and marketed by Disney, it will have a different look,
theme and musical style than Disney's other recent animated films (except for
Toy Story), and there can be no assurance that it will have the same audience
appeal as Disney's other animated films. For example, The Nightmare Before
Christmas, released in 1993, was an animated feature film with a different
appearance than traditional, hand drawn cel animated feature films such as
Beauty and the Beast, The Lion King, Aladdin, Pocahontas, The Hunchback of Notre
Dame and Hercules and did not experience the same box office returns as those
films. As a result, A Bug's Life and related products may not generate
significant revenue and operating results for Pixar, even if A Bug's Life is
critically acclaimed and achieves substantial, but not extraordinary, box office
success.

        RISKS ASSOCIATED WITH TOY STORY VIDEO SEQUEL

        There are several additional risks unique to the Toy Story Video Sequel.
First, Pixar has no experience developing sequels, either theatrical or
made-for-home video. Moreover, the made-for-home video market has only recently
begun to develop. As is typical in the case of an undeveloped market, demand and
market acceptance are uncertain. Competition in this market is expected to
increase dramatically. Disney has distributed and plans to distribute additional
made-for-home video sequels, and other studios have done the same. Pixar is at a
disadvantage in the made-for-home video sequel market as compared to other
animation studios in that Pixar cannot produce low cost animation, which
typically characterizes sequels to animated feature films. Finally, the Toy
Story Video Sequel will need to be an extraordinary success on relative 



                                      -20-


<PAGE>   20
terms in order to generate profits for Pixar. If the Toy Story Video Sequel is
not an extraordinary success on relative terms, Pixar will incur substantial
costs of film revenue in those quarters in which revenue is recognized, which
will have a material adverse effect on its results of operations. There can be
no assurance that the Toy Story Video Sequel will be an extraordinary success on
relative terms, particularly given the recent emergence and uncertainty of the
made-for-home video market.

        LIQUIDITY RISKS

        Pursuant to the Co-Production Agreement, Pixar will co-finance the next
five animated feature films which it produces, including A Bug's Life and the
second theatrical film being developed under the Co-Production Agreement (the
"Second Theatrical Film"), and will also co-finance the Toy Story Video Sequel.
In the future, Pixar may co-finance other derivative works such as theatrical
sequels, interactive products and television productions. In addition, Pixar is
planning construction of a new headquarters and studio facility in Emeryville,
California, construction of which is targeted to begin in the first half of 1998
and which may be financed by the use of Pixar's cash. As Pixar does not expect
to generate substantial, if any, cash from operations in the last quarter of
1997 and in 1998, the production costs of A Bug's Life, the Second Theatrical
Film, the Toy Story Video Sequel and possibly costs of the new Emeryville
facility are expected to have a material adverse impact on Pixar's cash and
short-term investment balances. As of September 30, 1997, Pixar had
approximately $172.4 million in cash and short-term investments. Pixar believes
that these funds will be sufficient to meet its anticipated cash needs for
working capital and capital expenditures, including the production costs of A
Bug's Life, the Second Theatrical Film and the Toy Story Video Sequel, until
Pixar begins receiving cash from the release of these films (which is generally
not expected to occur until the second half of 1999 at the earliest). However,
even if these films generate cash, unless each is a success such that Pixar
recovers on a timely basis its share of the production costs, as well as other
operating expenses and capital expenditures, Pixar will be required to seek
financing for its ongoing commitments under the Co-Production Agreement and any
other requirements of its operations. Pixar may also seek additional financing
in connection with the expansion of its facilities (see Liquidity and Capital
Resources), or in the event that the Toy Story Video Sequel becomes a theatrical
production. The sale of additional equity or convertible debt securities would
result in additional dilution to Pixar's shareholders. Moreover, there can be no
assurance that Pixar will be successful in obtaining future financing, or even
if such financing is available, that it will be obtained on terms favorable to
Pixar or on terms providing Pixar with sufficient funds to meet its obligations
and objectives. The failure to obtain such financing would have a material
adverse effect on Pixar's business, operating results and financial condition.



                                      -21-


<PAGE>   21

        DIVIDED RESPONSIBILITIES OF CHIEF EXECUTIVE OFFICER

        Pixar's Chief Executive Officer and Chairman, Steven P. Jobs, is also
acting as interim Chief Executive Officer at Apple Computer, Inc. ("Apple")
until such time as a new Chief Executive Officer is identified and named at
Apple. Although Mr. Jobs spends time at Pixar and is active in Pixar's
management, he does not devote his full time and resources to Pixar. For day to
day operations, since 1995, Pixar has established an Office of the President
which is comprised of Mr. Jobs as Chief Executive Officer, Edwin E. Catmull as
Executive Vice President and Chief Technical Officer and Lawrence B. Levy,
Executive Vice President and Chief Financial Officer.

        RISKS OF INFRINGEMENT CLAIMS

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

CAPITALIZED FILM PRODUCTION COSTS

        Although Disney funded the entire production of Toy Story, Pixar
contractually guaranteed certain of the film budget overages and was liable to
Disney for these amounts under the Feature Film Agreement. Because these are
"production costs" under Statement of Financial Accounting Standards (SFAS) No.
53, "Financial Reporting by Producers and Distributors of Motion Picture Films,"
the costs were capitalized and amortized against film revenue. In the three and
nine months ended September 30, 1997, $85,000 and $1.4 million of these costs,
respectively, were amortized against film revenues. As of September 30, 1997,
Pixar had approximately $23.2 million of capitalized film production costs,
consisting primarily of costs related to A Bug's Life and the Toy Story Video
Sequel, both of which are being co-financed by Pixar under the Co-Production
Agreement.



                                      -22-

<PAGE>   22

LIQUIDITY AND CAPITAL RESOURCES

        Cash and short-term investments increased $11.4 million to $172.4
million at September 30, 1997 from $161.0 million at December 31, 1996. Working
capital increased $3.5 million to $166.5 million at September 30, 1997 from
$163.0 million at December 31, 1996.

        Net cash provided by operations in the nine months ended September 30,
1997 was primarily attributable to cash received from film revenues and other
operations. Net cash used in investing activities was due primarily to the
purchase of property and computer equipment of $15.5 million and funding of film
production costs of $21.6 million. Under the Co-Production Agreement signed in
February 1997, film production costs are paid half by Pixar and half by Disney.
The agreement begins with Pixar's next film, A Bug's Life. Since A Bug's Life
was in production in 1996, Disney was entitled to reimbursement for half of
Disney's production costs incurred prior to signing the Co-Production Agreement.
The amount owing to Disney was determined and paid in full to Disney in the
three months ended September 30, 1997 and represents a portion of total film
production spending of $21.6 million during 1997. In addition, Pixar was
entitled to a reimbursement of certain of Pixar's operating expenses benefiting
the productions prior to signing the Co-Production Agreement. This reimbursement
amount is included in cash generated from operating activities. Net cash
provided by financing activities was due primarily to $14.9 million of net
proceeds from issuance of common stock and warrants to Disney.

        In May 1997, Pixar exercised its option (which option Pixar purchased in
1996) and paid $5.8 million to purchase approximately 15 acres of land in
Emeryville, California to build a new headquarters and studio facility. To
construct the facility, Pixar currently expects to incur total capital
expenditures of more than $10 million in 1997, $8 million of which has been
incurred in the first nine months of 1997 (which includes the land purchase),
and more than $12 million in 1998. To date, Pixar has chosen to use its existing
cash resources to fund facility-related costs. Pixar may continue to use its
cash resources for such expenditures, or finance such capital expenditures
through the issuance of additional equity or debt securities, by obtaining a
credit facility or by some other financing mechanism.

        As of September 30, 1997, Pixar's principal source of liquidity was
approximately $172.4 million in cash and short-term investments. Pixar believes
that these funds will be sufficient to meet the Company's operating requirements
through the next twelve months. Thereafter, if cash generated by operations is
insufficient to satisfy Pixar's liquidity requirements, Pixar may sell
additional equity or debt securities or obtain credit facilities. The sale of
additional equity or convertible debt securities will result in additional
dilution to Pixar's shareholders. There can be no assurance that financing will
be available to Pixar in an amount and on terms acceptable to Pixar.



                                      -23-

<PAGE>   23

                          PART II -- OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

(d) The effective date of the Company's first registration statement, filed on
Form S-1 under the Securities Act of 1933 (No. 33-97918), was November 28, 1995
(the "Registration Statement"). The class of securities registered was Common
Stock. The offering commenced on November 29, 1995 and all securities were sold
in the offering. The managing underwriters for the offering were Robertson,
Stephens & Company, L.P., Hambrecht & Quist LLC and Cowen & Company.

A total of 6,900,000 shares were registered pursuant to the Registration
Statement, all of which the Company sold for its own account, for an aggregate
offering price of $151,800,000.

The Company incurred expenses of approximately $12,138,714, of which $10,246,500
represented underwriting discounts and commissions and $1,892,214 represented
other expenses. All such expenses were direct or indirect payments to others.
The net offering proceeds to the Company after total expenses was $139,661,286.

As of September 30, 1997, the Company had used the net proceeds from the
offering as follows: $10,090,973 for construction of plant, building and
facilities, $7,874,678 for the purchase and installation of machinery and
equipment, $2,374,000 for the repayment of indebtedness, $35,550,708 for the
development of future films and other animated products, $3,072,443 for working
capital and $80,698,484 remaining in temporary investments. Of these amounts,
$2,374,000 represented direct or indirect payments to directors, officers,
general partners of the Company or their associates; to persons owning ten (10)
percent or more of any class of equity securities of the Company; or to
affiliates of the Company. The use of the proceeds from the offering does not
represent a material change in the use of proceeds described in the prospectus.


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

           (A) EXHIBITS

               11.1   Statement of Computations of Net Income Per Share.
               27.1   Financial Data Schedule.

           (B) REPORTS ON FORM 8-K

               No reports on Form 8-K were filed by Pixar during the quarter
               ended September 30, 1997.

ITEMS 1, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.



                                      -24-

<PAGE>   24

                                    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

Date: NOVEMBER 13, 1997                    By /s/ LAWRENCE B. LEVY
      ----------------------------           -----------------------------------
                                             Lawrence B. Levy,
                                             Executive Vice President and Chief
                                             Financial Officer
                                             (Principal Financial and 
                                               Accounting Officer
                                               and Duly Authorized Officer)



                                      -25-

<PAGE>   25

                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
 NUMBER           DESCRIPTION
-------           -----------
<S>             <C>                                           

  11.1      Statement of Computations of Net Income Per Share.

  27.1      Financial Data Schedule.
</TABLE>