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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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Form 10-K



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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 29,
2001

Commission File Number 0-26976

Pixar

(Exact name of registrant as specified in its
charter)


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

1200 Park Avenue, Emeryville, California
94608

(Address of principal executive offices) (Zip
Code)


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



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Securities registered pursuant to
Section 12(b) of the Act: None

Securities registered pursuant to
Section 12(g) of the Act:

Common Stock, no par value per share


(Title of Class)


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

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of
Registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K.     þ

As of March 4, 2002, there were 49,499,873
shares of the Registrants Common Stock outstanding and the
aggregate market value of such shares held by non-affiliates of
the Registrant (based upon the closing sale price of such shares
on the Nasdaq National Market on March 4, 2002) was
approximately $671,625,614. Shares of Common Stock held by each
executive officer and director have been excluded in that such
persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination
for other purposes.



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TABLE OF CONTENTS



|                  |                                                                                               |                                   |  |  |  |  |  | 
|----------------- | --------------------------------------------------------------------------------------------- | --------------------------------- |  |  |  |  |  | 
|PART I           
|                  | Item 1. Business                                                                             
|                  |                                                                                               | Risk Factors                     
|                  | Item 2. Properties                                                                           
|                  | Item 3. Legal Proceedings                                                                    
|                  | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                  |                                                                                               | EXECUTIVE OFFICERS OF THE COMPANY
|PART II          
|                  | Item 5. Market for Registrants Common Stock and Related Shareholder Matters                 
|                  | Item 6. Selected Financial Data                                                              
|                  | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                  | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                          
|                  | Item 8. Financial Statements and Supplementary Data                                          
|                  | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III         
|                  | Item 10. Directors and Executive Officers of the Company                                     
|                  | Item 11. Executive Compensation                                                              
|                  | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|                  | Item 13. Certain Relationships and Related Transactions                                      
|PART IV          
|                  | Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|SIGNATURES       
|INDEX TO EXHIBITS
|EXHIBIT 10.5     
|EXHIBIT 23.1     



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TABLE OF CONTENTS

|           |          |  |  |                                                                                        |  |  |    | 
|---------- | -------- |  |  | -------------------------------------------------------------------------------------- |  |  | -- | 
|           |          |  |  | Page                                                                                  
|           |          |  |  |                                                                                       
|PART I    
|          
|           | ITEM 1.  |  |  | BUSINESS                                                                               |  |  | 2  | 
|           |          |  |  | Risk Factors                                                                           |  |  | 15 | 
|           | ITEM 2.  |  |  | PROPERTIES                                                                             |  |  | 29 | 
|           | ITEM 3.  |  |  | LEGAL PROCEEDINGS                                                                      |  |  | 29 | 
|           | ITEM 4.  |  |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY
	HOLDERS                                   |  |  | 30 | 
|           |          |  |  | Executive Officers of the Company                                                      |  |  | 30 | 
|PART II   
|          
|           | ITEM 5.  |  |  | MARKET FOR REGISTRANTS COMMON STOCK AND
	RELATED SHAREHOLDER MATTERS                  |  |  | 32 | 
|           | ITEM 6.  |  |  | SELECTED FINANCIAL DATA                                                                |  |  | 33 | 
|           | ITEM 7.  |  |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF
	FINANCIAL CONDITION AND RESULTS OF OPERATIONS |  |  | 33 | 
|           | ITEM 7A. |  |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
	MARKET RISK                            |  |  | 39 | 
|           | ITEM 8.  |  |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                            |  |  | 40 | 
|           | ITEM 9.  |  |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
	ACCOUNTING AND FINANCIAL DISCLOSURE  |  |  | 40 | 
|PART III  
|          
|           | ITEM 10. |  |  | DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY                                        |  |  | 40 | 
|           | ITEM 11. |  |  | EXECUTIVE COMPENSATION                                                                 |  |  | 42 | 
|           | ITEM 12. |  |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
	AND MANAGEMENT                        |  |  | 45 | 
|           | ITEM 13. |  |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                         |  |  | 46 | 
|PART IV   
|          
|           | ITEM 14. |  |  | EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
	REPORTS ON FORM 8-K                       |  |  | 46 | 
|SIGNATURES |          |  |  |                                                                                       

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This Annual Report on Form 10-K 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 and our operating expenses. Such
forward-looking statements are based on current expectations,
estimates and projections about our industry, managements
beliefs, and assumptions made by management. Words such as
anticipates, expects,
intends, plans, believes,
seeks, estimates, variations of such
words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees
of future performance and are subject to certain risks,
uncertainties and assumptions that are difficult to predict;
therefore, actual results and outcomes may differ materially
from what is expressed or forecasted in any such forward-looking
statements. Such risks and uncertainties include those set forth
herein under Risk Factors on pages 15 through
29. Particular attention should be paid to the cautionary
language in Risk Factors  To meet our fiscal
2002 diluted earning per share target we are dependent on our
feature films and the accuracy of our forecasts,
 Our operating results have fluctuated in the
past and we expect such fluctuations to continue,
 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.




PART I




Item 1.     Business

General

Pixar was formed in 1986 when Steve Jobs
purchased the computer division of Lucasfilm and incorporated it
as a separate company. We are a leading digital animation studio
with the creative, technical and production capabilities to
create a new generation of animated feature films and related
products. Our objective is to create, develop and produce
computer-animated feature films with a new three-dimensional
appearance, heartwarming stories and memorable characters that
appeal to audiences of all ages. Through the creation of
entertaining, enduring and successful films, we seek to become a
leading brand in animated feature films. To date, we have
created and produced four full-length animated feature films,
Toy Story, A Bugs Life, Toy Story 2, and
Monsters, Inc.,which were marketed and distributed by
The Walt Disney Company (along with its subsidiaries hereinafter
referred to as Disney). Toy Story was
released in 1995 and generated over $191 million in
domestic box office revenue. Our second animated feature film,
A Bugs Life,was released in 1998 and generated
over $162 million in domestic box office revenue. Our third
film, Toy Story 2,was released in 1999 and
generated over $245 million in domestic box office revenue.
Our fourth and latest animated feature film, Monsters,
Inc., was released in November 2001 and to date has
generated over $252 million in domestic box office revenue,
making it the third highest domestic grossing animated feature
film of all time.

In 1997, we extended our existing relationship
with Disney (under which Toy Storywas created and
produced) by entering into the Co-Production Agreement. Under
the Co-Production Agreement, we agreed to produce, on an
exclusive basis, five original computer-animated feature films
(the Pictures) for distribution by Disney. Pixar and
Disney agreed to co-finance and co-brand the films and share
equally in the profits of each film and any related merchandise
and other ancillary products, after recovery of all marketing
and distribution costs and fees. The first two original films
produced under the Co-Production Agreement were A Bugs
Lifeand Monsters, Inc.,and we will produce three
additional original animated feature films under this agreement,
including Finding Nemo,Film Six and Film Seven. As a
sequel, Toy Story 2did not count toward the five
original films; however, it was produced under the Co-Production
Agreement and is afforded the same financial terms as the five
original films. See  Relationship with
Disney  Co-Production Agreement.

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Business Model and Products

Our goal is to become a leading brand in family
entertainment through the development and production of high
quality animated films and related products, such as video
products, toys, interactive games, and other merchandise. To
achieve this goal, we entered into the Co-Production Agreement
with Disney. This agreement allows us to focus on the production
and creative development of the films while utilizing
Disneys marketing expertise and substantial distribution
infrastructure to market and distribute our co-branded feature
films and related products.

Animated Feature Films.Our first animated feature film,
Toy Story,was released in November 1995. In November
1998, we released A Bugs Life,our second animated
feature film with Disney. A Bugs Lifewas the first
of five original films (the Pictures) to be
developed and distributed under our Co-Production Agreement with
Disney. In November 1999, we released Toy Story 2,our third animated feature film produced for distribution by
Disney. While not counting as one of the five original Pictures,
Toy Story 2is subject to the same terms as the five
Pictures developed and produced under the Co-Production
Agreement. In November 2001, we released Monsters, Inc.,our second original animated feature film under the
Co-Production Agreement.

We intend to continue to develop
computer-animated feature films for the family entertainment
market. We are currently in various stages of production on
three feature films, Finding Nemo, Film Six, and Film
Seven. These films will be produced and distributed under the
Co-Production Agreement and will count as the remaining three
films of the original five films to be produced under the
Co-Production Agreement. We expect to release Finding Nemoin summer 2003, at the earliest. Brad Bird, who previously
directed and wrote the screenplay of the critically acclaimed
animated feature The Iron Giant, is currently working on
Film Six, which is currently targeted for release in 2004. John
Lasseter, the Director of Toy Story, A Bugs Life,and Toy Story 2, and Executive Producer for
Monsters, Inc.,is currently working on Film Seven, which
is currently targeted for release in 2005. See Risk
Factors  Our scheduled successive releases of feature
films will continue to place a significant strain on our
resources.

Home Videos.Following their theatrical release,
Toy Story, A Bugs Life, and Toy Story 2were released on home video. Disney initially released
Toy Storyon home video, in the VHS format, in October
1996. In April 1999, A Bugs Lifewas released on
home video in VHS and DVD formats. In 2000, Disney implemented a
new home video strategy whereby many of the animated titles
distributed by the studio will be available on a year-round
basis. Pursuant to this strategy, the VHS format of Toy Storywas re-released domestically in January 2000 as part of
Disneys Home Video Gold Collection. Similarly,
both VHS and DVD formats of A Bugs Lifewere
re-released domestically as part of the Gold
Collection in August 2000.

In October 2000, Disney released Toy
Story 2in VHS and DVD formats. The Toy Story 2DVD release occurred simultaneously with the Toy StoryDVD release as both films were packaged into a 2-disc pack
and a 3-disk Collectors Edition, which includes a third
disk with additional behind-the-scenes footage. We plan to
release Monsters, Inc. on home video in both VHS and a
2-Disc Special Edition DVD in September 2002. Both versions will
include the Academy Award® winning Pixar short film For
the Birds,as well as an all new animated short,Mikes New Car. Distribution of home video
versions of the animated feature films developed and produced
under the Co-Production Agreement are governed by the
Co-Production Agreement.

Television.The
television market for our feature films generally follow the
theatrical and home video release. Toy Storyaired on ABC
in 1997 to kick off ABCs Wonderful World of Disney. It
also aired on The Disney Channel for several months following
its television debut on ABC. In October 2000, A Bugs
Lifebecame the first major animated title distributed by
Disney to air on Pay-Per-View. Similarly, Toy Story 2began its Pay-Per-View window in March 2001. We also broke
new ground in 2001 in the television market, with the licensing
of Toy Story, A Bugs Lifeand Toy Story 2in the domestic network market, and in the international
broadcast and premium television markets. Distribution of
television rights for the animated feature films developed and
produced under the Co-Production Agreement are governed by the
Co-Production Agreement.

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Merchandise and Interactive Games.We believe the characters, story, and
music created in our animated feature films provide significant
revenue generation opportunities through various consumer
products such as toys and interactive games. Distribution of
consumer products and licensing of merchandising and music
rights based on the animated feature films developed and
produced under the Co-Production Agreement are governed by the
Co-Production Agreement.

Short Films.In
addition to feature films, we have developed a number of short
films since our inception, and plan to continue to invest in
developing new short films. Although short films have limited
commercial opportunities, we believe it is an important
investment for the development of creative talent and computer
animation technology. For example, in 1997, we created and
produced a short film titled, Geris Game.
Geris Gameenabled us to further our technology in
computer-generated skin and cloth. This technological
advancement was applied to Toy Story 2, and will be
applied to subsequent films. In 2000, we created and produced a
short film titled, For the Birds, which enabled us to
further our technology in computer generated fur and feathers.
This technological advancement was applied to Monsters, Inc.and will be applied to subsequent films.

Furthermore, such short films provide
opportunities for valuable publicity and critical acclaim to
heighten the visibility of the Pixar brand and to enhance our
standing and reputation in the creative community, which allows
us to attract the best talent. For example, Geris Gamewon an Academy Award® for Best Animated Short
Film in 1998. In addition,Geris Gamewas
released theatrically worldwide as the preceding short film to
A Bugs Life. Similarly, Luxo Jr.,our first
ever short film produced in 1986 and an Academy
Award® nominee for Best Animated Short Film,
was the preceding short film to Toy Story 2during
its theatrical release. Finally, For the Birds,our
latest short film, which was shown preceding Monsters,
Inc. during its worldwide theatrical release, won an Academy
Award® for Best Animated Short Filmin 2001.

RenderMan®.We
have been selling our RenderMan® software for nearly
fourteen years. In March 2001, our President Ed Catmull, along
with two other Pixar employees, Loren Carpenter, Senior
Scientist and Rob Cook, Vice President of Software Engineering,
were honored by the Academy of Motion Picture Arts &
Sciences, with an Oscar® for significant advancements
to the field of motion picture rendering as exemplified in
Pixars RenderMan®. RenderMan® has helped
visual effects studios create visual effects such as creatures
appearing in Star Wars Episode 1: The Phantom
Menace, certain dinosaurs in Jurassic Park, the metal
cyborg in Terminator 2and the horde of horsemen
charging over the hill in Mulan. In addition,
RenderMan® has been used to create other critically
acclaimed box office hits such as Titanic, The Matrix,
Perfect Storm, Gladiator, Pearl Harbor, Moulin Rouge, Lord of
the Rings: The Fellowship of the Ring,and Harry
Potter & the Sorcerers Stone.

RenderMan® runs on Unix-based workstations
from Sun Microsystems, Inc. (Sun), Digital Equipment
Corp. (DEC), Silicon Graphics, Inc.
(SGI) and on personal computers
(PCs) under Linux and Windows NT. Examples of
RenderMan® customers include movie and special effects
studios such as Disney, Lucasfilm Ltd. through its affiliate
Industrial Light and Magic (ILM), Sony Pictures
Imageworks, Dreamworks SKG and Tippett Studios. RenderMan®
is also used in television broadcasting. Customers also include
government agencies and universities around the world. See
 Technology  RenderMan®
and Managements Discussion and Analysis of Financial
Condition and Results of Operations.

Animation Services.We produce short animation projects,
primarily derived from our films, such as the Tree of Lifewhich is currently on display at the Animal Kingdom in
Disney World, the vignettes of A Bugs Lifeand
Toy Story 2 for Disneys new California
Adventure theme park, and the animation for the advertising of
McDonalds Happy Meals which were tied in to the promotion
of A Bugs Life, Toy Story 2and Monsters,
Inc.Moreover, we believe that there may continue to be
other opportunities to produce short animation projects for
Disney in connection with work performed under the Co-Production
Agreement, and these animation projects help develop awareness
of the characters in our films and help Disney promote the
films. In the past, we produced animated or partially animated
television commercials, including commercials for products such
as Coca-Cola, Listerine and Gummi-Savers (a LifeSavers product).
In 1996, we largely discontinued our business of producing
commercials in favor of other opportunities.

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Computer Animation Process

The development and production of animated
feature films is extremely complex and time consuming due to the
very large number of frames and intricate detail of each frame.
At 24 frames per second, a 92-minute animated feature film
such as Monsters, Inc.requires approximately 133,000
individual frames. Animation for feature films has traditionally
been created through hand-drawn cels, requiring hundreds of
people working for two to three years. Although computers have
been used to assist in some elements of cel animation during the
past several years, most frames are still hand-drawn.

We believe that our proprietary technology, which
allows animators to manipulate hundreds of motion control points
within a single character, allows for more intricacy and
subtlety of character and personality than traditional
two-dimensional cel-based animation. This technology also
facilitates the manipulation, editing and re-use of animated
images.

We make our computer-animated feature films and
other projects in four stages: creative development,
pre-production, production and post-production. Because this
process is iterative, there is continual reworking of the film.
The basic elements of this highly complex process are outlined
below.

Creative Development

[Story
Concept     Treatment     Outline     Screen
Play]

Creative development is an iterative process in
which the story and its characters are created and developed.
The first step in creative development involves the development
of a story concept, which often takes the form of a story
summary or outline known as a treatment. After
numerous iterations and research into the story and characters,
a first draft of a screenplay is written.

Pre-Production

[Story Board     Story
Reel Editing     Voice
Recording]

The pre-production stage begins when the
screenplay is turned into story boards, which are panels filled
with thousands of sketches that represent the story to be
animated. The story boards are then transferred to film or video
so that they can be electronically edited into a photo play of
the film called story reels, a process that enables editing of
the film before the production phase begins. Voices are then
selected, recorded and added to the story reels. Throughout the
creative development and pre-production processes, plans are
developed for the style, colors and look of the film.

Production

[Modeling     Layout     Animation     Shading
and
Lighting     Rendering     Film
Recording]

Our production stage consists of six phases:
modeling, layout, animation, shading and lighting, rendering and
film recording. In the modeling phase, digitized models of each
set and character are created by defining their shapes in three
dimensions (height, width and depth) and by adding animation
control points that allow the model to be moved or animated. In
some cases, a model has hundreds of animation controls. In the
layout stage, artists place the digital models into a scene and
position the digital cameras at the angles from which the
three-dimensional shot is to be seen. The assembled shot is then
given to the animator together with the prerecorded voice.

In the animation stage, the digitized models are
animated, or brought to life, in three dimensions to
create a motion sequence. The next step in completing a scene
requires attaching, to each object and model, a description of
its surface characteristics. These shaders describe
the pattern, texture, finish and color for every object in the
scene. Next, lighting is added by placing digital lights into
the scene. In the rendering phase, the renderer takes the
modeling, layout, animation, shading and lighting data and, for
each frame in the sequence, computes a three-dimensional image
of what the scene looks like at that point in time from the
point of view of the camera. The final rendering of a single
frame takes an average of one to four hours, but a

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small percentage of more complex frames can take
much longer, between 20 and 40 hours each or more. The
final rendered digital image is then sent to our
PixarVisionTM laser recorders to be printed onto
film. While film is the primary means of distributing motion
pictures to theaters, digital electronic projectors have
recently achieved the brightness and high resolution necessary
to project movies on theater screens without the use of film. As
our films are produced digitally, they are uniquely suited to
this method of presentation. Toy Story 2was shown
digitally in twelve theaters worldwide, making it the first
completely computer-animated feature film to be shown digitally.
To date,Monsters, Inc. has been shown digitally in
thirty seven theaters worldwide.


Post-Production

Sound Effects Design     Print Musical Score     Sound Mixing     Color Correction     Delivery of Print

The post-production stage consists of two
parallel processes: the picture process and the sound process.
In the picture process, images are put on film, the film is sent
to a laboratory for color correction and final prints are made.
If the film is shown digitally, as was the case in a small
number of theaters with Toy Story 2and Monsters,
Inc.,we transfer the original rendered data for each frame
onto a digital image compression device which is then used to
project the movie electronically. In the sound process, the
sound effects and musical score are added and the final sound is
mixed. Our post-production is simpler than post-production in a
live-action film, which requires more significant editing. In
most live-action films, many hours of film are shot, and the
film is then significantly edited and re-edited in the
post-production stage to create a feature film. We, like other
animation studios, edit the film throughout the entire creative
development and production process. Thus post-production
involves only final editing.

Creative Group

Our creative and technical personnel have
collaborated since 1986 to produce three-dimensional
computer-animated films. The principal objective of our creative
group is to create heartwarming stories with memorable
characters, utilizing the medium of computer animation. The
members of our creative and technical teams have been nominated
for and received a number of awards. In 1986, the short animated
film Luxo Jr.earned an Academy Award® nomination
for Best Animated Short Film. In 1988, another of our
short films, Tin Toy,became the first computer-animated
film to win the Academy Award® for Best Animated Short
Film. In 1998, our animated short film, Geris
Game®,also won an Academy Award® for
Best Short Animated Film. In 2000, Toy Story 2won a Golden Globe Award for Best Picture, Musical or
Comedy. In 2002, Monsters, Inc.was nominated for four
Academy Awards® including Best Animated Feature Film,
Best Song, Best Original Songand Best Sound Editing
and won an Academy Award® for Best Original Song. In
addition, in 2002, our latest short film, For the Birds,won an Academy Award® for Best Animated Short
Film.

The creative team at Pixar is under the direction
of John Lasseter, an Academy Award®-winning director and
animator, the Director of Toy Story, A Bugs Life,and Toy Story 2and Executive Producer for
Monsters, Inc. In March 1996, Mr. Lasseter received
a Special Achievement Oscar® from the Academy of Motion
Picture Arts and Sciences for the development and application of
techniques that made possible the first feature-length
computer-animated film, Toy Story. In addition, during
2000, we added acclaimed animation director Brad Bird to our
creative development group. Brad Bird previously directed and
wrote the screenplay of the critically acclaimed animated
feature The Iron Giant.

We have built an entire creative team consisting
of highly skilled story artists, animators and other artists
highly skilled in the art of animation, especially
computer-animation. Our story department is responsible for a
projects concept, treatment, outline, script, story boards
and story reels. The art department is responsible for the
visual development of a project, including the design of
characters, sets, color, textures, shading and lighting. Our
tools department is responsible for creating and further
advancing Pixars distinctive computer animated visual
effects, such as the moving fur in Monsters, Inc.or the
underwater murk in our upcoming film, Finding
Nemo.It is also common for creative contributions to come
from the technical group. Along with the story department and
the art department, the creative team at Pixar includes
animators. Our proprietary software tools enable artists
unfamiliar with computers to quickly become skilled in the art
of three-dimensional animation. All groups work closely together
in an iterative process. To encourage

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collaboration, we have created a cooperative
working environment and a non-hierarchical culture whereby each
member of the creative team, regardless of position or
department, considers the ideas of any other member of the team.
See Risk Factors  Our success depends on
certain key employees.


The success of each animated film developed and
produced by us will depend in large part upon our creative
teams ability to predict the type of content that will
appeal to a broad audience and to develop 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,Film Six and
Film Seven. In addition, there can be no assurance that voices
and other intellectual property rights used in the animated
feature film will be available for use in any sequel or other
products related to such feature film. For example, we were
unable to obtain the rights to use certain voices from Toy
Storyin the two CD-ROM products based on Toy Story.See Risk Factors  In order for our feature
films and related products to be successful, we must develop
appealing creative content.

Technology

We have three core proprietary technologies:
(1) MarionetteTM, an animation software system
for articulation, animating and lighting,
(2) RingmasterTM, a production management
software system for scheduling, coordinating and tracking of a
computer animation project and (3) RenderMan®,
a rendering software system for high quality photo-realistic
image synthesis that Pixar uses internally and licenses to third
parties. Each of these systems is critical to the production of
our animated feature films and other animation products.

MarionetteTM.
MarionetteTM is our software system for articulation,
animation and lighting for computer animation.
MarionetteTM is the primary software tool of every
animator and technical director at Pixar. In contrast to many
commercially available animation systems, which are designed to
address product design, computer video games or cinematic
special effects, MarionetteTM has been designed and
optimized for character articulation and animation.
MarionetteTM is used on Linux and Unix workstations.

RingmasterTM.
RingmasterTM is a production management software
system for scheduling, coordinating and tracking a computer
animation project. Due to the enormous amount of data required
in three-dimensional animation, accurate production information
is essential for producing high quality animation. Our
production coordination staff uses RingmasterTM to
plan and track projects ranging from short animation projects to
animated feature films.

A key component of RingmasterTM is a
distributed rendering system for managing the huge quantity of
images and data that must be rendered to create our products. We
do our rendering on a large array of powerful computers, which
are dedicated to rendering 24 hours a day. These machines,
which we call the RenderFarm, are connected via a local area
network. To achieve the desired quality level, the average time
to render a single frame at film resolution is between one and
four hours. Since an animated feature film contains well over
100,000 frames, each of which may be rendered several times in
the production process, we typically have a large number of
frames to render at any given time. To manage this process,
RingmasterTM coordinates and schedules all the
processors in the RenderFarm. RingmasterTM includes a
compositing system and also maintains an array of disk drives as
a central data repository for the digital image files generated
by the rendering and compositing steps of the production
process. Finally, RingmasterTM controls the filming
phase of production and is responsible for backing up shots for
archival purposes.

RenderMan®.
RenderMan® is a rendering software system for high quality
photo-realistic image synthesis that we use internally and also
license to third parties. Today, RenderMan® is used by many
major film studios and special effects firms. Examples of
projects which have used RenderMan® include Star Wars
Episode 1: The Phantom Menace, Mulan, The Matrix, Jurassic
Park, Terminator 2, Titanic, Perfect Storm, Gladiator,
Pearl Harbor, Moulin Rouge, Lord of the Rings: The Fellowship of
the Ring,and Harry Potter & the Sorcerers
Stone.By licensing RenderMan® to film studios, special
or visual effects studios, commercial production facilities and
other computer animation companies, we believe that
RenderMan® has been established as a de facto industry
standard for high quality rendering.

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RenderMan® was designed to be easily
portable. It runs on a wide variety of Unix workstations,
including those from Sun, Digital Equipment, SGI, and on
PCs under Linux as well as Windows NT platforms.

Relationship with Disney

A critical component of our objective to become a
leading brand in the animated feature film market is to secure
strong promotion, marketing and distribution of our films and
related products. We believe that Disney is a leader in the
marketing and distribution of animated feature films and related
products and one of the industrys most widely recognized
brand names. Consequently, in 1997 we extended our existing
relationship with Disney by entering into the Co-Production
Agreement. This arrangement allows us to focus on the story and
other creative and production elements of making animated
feature films while utilizing Disneys significant
promotion, marketing and distribution capabilities.



| |                 
| | ----------------
| | Prior Agreements

Our relationship with Disney dates to 1986, when
we entered into a joint technical development effort with Disney
that resulted in the Computer Assisted Production System
(CAPS), a production system owned and used by Disney
in certain of its two-dimensional cel-based animated feature
films. Disney first used CAPS for The Rescuers Down Underand has continued to use it for all of its subsequent
animated feature films, such as The Lion Kingand
Tarzan.In 1992, certain employees of Pixar and Disney
were jointly awarded an Academy Award® for
Scientific and Engineering Achievement for CAPS.

In May 1991, we entered into the Feature Film
Agreement with Walt Disney Pictures, a wholly-owned subsidiary
of Disney, which provided for the development, production and
distribution of up to three feature-length motion pictures (the
Feature Film Agreement). It is pursuant to the
Feature Film Agreement that Toy Storywas developed,
produced and distributed. In August 1995, we entered into a
non-exclusive CD-ROM development and publishing agreement with
Disney Interactive, Inc., a wholly-owned subsidiary of Disney,
for the development, production and distribution of CD-ROM
titles based on Toy Story(the CD-ROM
Agreement). It is pursuant to the CD-ROM Agreement that
two Toy StoryCD-ROM products were developed, produced
and distributed.



| |                        
| | -----------------------
| | Co-Production Agreement

The following is a summary of the Co-Production
Agreement, which was filed as an exhibit to our Annual Report on
Form 10-K for the year ended December 31, 1996 (the
1996 Form 10-K). The following summary is not
complete, and reference is made to the Co-Production Agreement
filed as an exhibit to the 1996 Form 10-K. This summary is
qualified in all respects by such reference. Prospective
investors in our Common Stock are encouraged to read the
Co-Production Agreement.

Overview.On
February 24, 1997, we entered into the Co-Production
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 and other ancillary products, after recovery of all
marketing and distribution costs (which are financed by Disney),
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 are
responsible for the production of each Picture and that Disney
is responsible for the marketing, promotion, publicity,
advertising and distribution of each Picture. The first two
original Pictures under the Co-Production Agreement were A
Bugs Lifeand Monsters, Inc.,which were
released in November 1998 and November 2001, respectively. The
third original Picture governed by the Co-Production Agreement
will be Finding Nemo,which is scheduled for release in
summer of 2003. Toy Story 2,the theatrical sequel to
Toy Story,was released in November 1999, and is also
governed by the Co-Production Agreement, although it does not
count towards the five original Pictures. The Co-Production
Agreement also contemplates that with respect to theatrical
sequels, made-for-home video sequels, television productions,
interactive media products and other

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derivative works related to the Pictures, we will
have the opportunity to co-finance and produce such products or
to earn passive royalties on such products. We will not share in
any theme park revenues generated as a result of the Pictures.


Production.The
Co-Production Agreement provides a mechanism for our submission
and the mutual selection of treatments that will be developed
and produced as Pictures. After the selection of a treatment, we
have final control over the production of each Picture. Disney
is entitled to designate a representative at Pixar to monitor
the production and production costs of the Pictures.

Financing of Development and Production.Pixar and Disney equally share all
production costs. Production costs are defined in the
Co-Production Agreement to mean all costs and expenses we incur
directly related to or fairly allocable to the creation,
development, pre-production, production, post-production and
delivery to Disney of the Pictures. Production costs, whether
capitalized as film costs or expensed as incurred, include,
among other things, all carrying costs we incur for retention of
employees for production purposes and their associated overhead
expenses, the costs of all treatments we prepare for submission
to Disney, all costs of computer hardware and software used to
develop the Pictures, and fair allocations of all costs and
expenses we incur that are associated with or benefiting the
Picture, including research and development, general and
administrative and overhead expenses. The Co-Production
Agreement provides mechanisms for Disney and us to agree upon
the budgets for treatments, development and production of each
Picture. We may not exceed production budgets (which may be
revised with mutual approval) without Disneys written
approval, subject to certain limited exceptions.

Distribution.Disney
is solely responsible for financing the costs and expenses of
the marketing, promotion, publicity, advertising and
distribution of each Picture, subject to certain requirements,
and has final control over all related decisions. In addition,
Disney is to consult with us regarding all such major marketing
and distribution decisions, and we are entitled to designate a
representative to monitor marketing and distribution of the
Pictures. As the remaining three films under the Co-Production
Agreement have been approved for production, Disney has
committed to initially release each Picture within certain
windows and not to release other Disney family films during
certain windows. Further, each Picture is to be distributed and
marketed under the Walt Disney Pictures brand (or the then
current Disney brand for premiere Disney movies) and is to be
distributed and marketed by Disney in all markets and media and
on a worldwide basis in a manner similar to that in which Disney
then currently distributes and markets its premiere animated
movies. 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 will
experience a delay in the receipt of cash proceeds from such
films and products until after Disney recovers such costs.

Division of Gross Receipts.Pixar and Disney are entitled to share
equally in all gross receipts remaining after deduction of:
(1) a distribution fee to Disney, (2) mutually agreed
participations (payments to third parties such as actors,
composers and other artists contingent upon the success of the
Pictures), if any, paid by either Disney or us, and
(3) Disneys distribution costs. Gross receipts
include all revenues or other consideration received by Disney
from the exploitation of the Pictures and any related
merchandise, books, soundtracks and other tangible personal
property based upon the Pictures, as more specifically provided
in the Co-Production Agreement (collectively,
Merchandise), subject to certain exceptions relating
primarily to receipts from Disneys affiliates. The
distribution fee payable to Disney is substantially lower than
that under the prior Feature Film Agreement and reflects our
commitment to finance half of the production costs of the
Pictures. Distribution costs are broadly defined in the
Co-Production Agreement to include out-of-pocket costs paid (or
in certain instances, accrued for payment) to a third party (or
in certain instances, to Disneys affiliates) by Disney or
certain of its affiliates, provided that such out-of-pocket
costs are directly related or fairly allocable to the marketing
and distribution of the Picture and Merchandise. Pursuant to the
Co-Production Agreement, we will receive statements and payments
of our share of gross receipts monthly within 45 days after
the end of each calendar month, subject to certain exceptions,
and we have the right to audit Disneys books and records
relating to the Pictures and Merchandise.

Derivative Works.Subject to certain exceptions, Disney
and Pixar have mutual control of the decision to develop,
produce or otherwise exploit any derivative works (or to
transfer or license any rights to exploit any

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derivative works) during the term of the
Co-Production Agreement or thereafter. Derivative works include
theatrical sequels such as Toy Story 2,made-for-home video sequels, television productions such as
Buzz Lightyear of Star Command, interactive media
products such as Monsters, Inc.interactive games, and
other derivative works as more specifically provided in the
Co-Production Agreement (collectively, Derivative
Works). Except in certain very limited circumstances, in
the event of a disagreement over whether to proceed with a
Derivative Work, Disneys decision governs. We are to be
given the option to co-finance and produce, or to participate on
a passive financial basis with respect to, a Derivative Work
that is (1) a theatrical motion picture, (2) a
made-for-home video production, (3) a television
production, (4) location-based entertainment which uses
unique characters or other elements from any of the Pictures or
Toy Storyas its primary theme, or (5) an
interactive product such as CD-ROMs, DVDs, video games and
arcade games (collectively, Interactive Products).


If we elect to co-finance and produce a
Derivative Work, the Co-Production Agreement provides for the
following:



| |                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) with respect to theatrical motion
	pictures and made-for-home video productions, the terms and
	conditions of the Co-Production Agreement are to be extended to
	cover such Derivative Works, subject to certain exceptions;                                                                                                                                                                             
|
| | (2) with respect to (A) location-based
	entertainment using characters or other elements from a Picture
	or Toy Storyas its primary theme and (B) television
	productions, Pixar and Disney are to mutually agree upon the
	terms and the conditions under which such work will be financed,
	produced and distributed, subject to certain specified
	requirements in the case of television productions; and
|
| | (3) with respect to Interactive Products,
	Disney and Pixar are to mutually agree upon the terms and
	conditions under which such Interactive Products shall be
	financed, produced and distributed, subject to certain
	commitments by Disney with respect to marketing and distribution
	and provided that there will be no distribution fee payable to
	Disney.                                           

For live entertainment such as stage plays or ice
shows, we are entitled to participate on a passive financial
basis as specified in the Co-Production Agreement. For all other
Derivative Works except theme parks, we are entitled to
participate on a passive financial basis in such work and to
receive a reasonable royalty to be mutually agreed upon if the
work is a revenue-producing work. Disney has the sole and
exclusive right in perpetuity to use, without compensation to
us, each Picture, the characters therefrom and any story
elements thereof in theme parks, location-based entertainment
for which Picture or Toy Storycharacters or elements are
not the primary theme and cruise ships.

A Derivative Work that is a theatrical motion
picture would not count towards the five Pictures to be produced
under the Co-Production Agreement. Accordingly, Toy
Story 2does not count as one of the five Pictures to
be produced. Under the Co-Production Agreement, all provisions
applicable to the original five Pictures apply to Toy
Story 2as well.

Creative Controls.Creative controls and decisions with
respect to developing and producing Pictures are generally
subject to the mutual approval of Pixar and Disney. The
Co-Production Agreement provides for certain dispute resolution
procedures in the event of disagreement.

Brand/ Credit.The
Co-Production Agreement sets forth Disneys and
Pixars intent that the Pixar brand be established as a
co-equal brand to the Disney brand in connection with the
Pictures, Merchandise and Derivative Works. The Co-Production
Agreement provides that the Pixar logo, animated logo and credit
shall be used in a manner which is perceptually equal to the
Disney logo, animated logo and credit, subject to certain
specific requirements as set forth in the Co-Production
Agreement.

Exclusivity.We have
agreed not to release or authorize the release of any
feature-length animated theatrical motion picture we produce,
other than the Pictures and Derivative Works we produce under
the Co-Production Agreement, until twelve months from delivery
of the fifth Picture under the Co-Production Agreement. 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

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have delivered the third Picture to Disney under
the Co-Production Agreement. 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  Competition.


Proprietary Rights.Under the Co-Production Agreement, the
copyrights, trademarks and other intellectual property rights in
and to the Pictures, all new and unique characters and story
elements thereof and the audio-visual images thereof, and
ancillary rights relating thereto, shall be jointly owned by
Disney and Pixar on an undivided 50/50 basis, subject to our
ownership rights in the technology and excluding any
intellectual property rights previously owned by us or Disney.
Notwithstanding the foregoing, Disney has the exclusive
distribution and exploitation rights with respect to the
Pictures, Derivative Works and ancillary rights relating
thereto. We own the copyright and all other intellectual
property rights in and to all computer programs and other
technology we develop or discover before, during or after the
term of the Co-Production Agreement.

Term and Termination.The Co-Production Agreement continues
until delivery to Disney of the fifth Picture produced and
financed under the Co-Production Agreement, unless earlier
terminated. 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 we merge or consolidate
into such a competitor. Upon termination by Disney pursuant to
the example above, Disney has certain rights to compel us to
complete works in production. In the event of termination, the
Co-Production Agreement provides that its terms and conditions
continue to apply with respect to Pictures, Merchandise and
Derivative Works which we have delivered to Disney or which
Disney elects to have completed, as well as all future
Merchandise and future Derivative Works relating thereto, but
otherwise terminates.

Effect on Prior Agreements.All Derivative Works based on Toy
Story including Toy Story 2are to be governed
by the Co-Production Agreement and not the original Feature Film
Agreement or the CD-ROM Agreement. The original Feature Film
Agreement now applies only to the rights and obligations of
Disney and Pixar relating to the financial participation in, and
the production and distribution of, the theatrical motion
picture Toy Storyand the financial participation in
certain Merchandise related to Toy Story(unless gross
receipts in any given month exceed a certain amount, in which
case they will be subject to the Co-Production Agreement),
subject to certain exceptions, and otherwise has no further
force or effect. The original CD-ROM Agreement remains in full
force and effect with respect to the first and second CD-ROM
products developed under that agreement, but otherwise has no
force or effect.

Competition

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

Movie Studios.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.

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In 2001, competition continued to intensify in
the animated and live action feature film market.
Family-oriented animated and live action feature films released
in the domestic theatrical market in 2001 included the following:



| |   |                                                      
| | - | -----------------------------------------------------
| |  | Harry Potter and the Sorcerers Stoneby Warner Bros.,
|
| |  | Shrekby Dreamworks
	SKG,                             
|
| |  | Spy Kidsby Miramax,                                  
|
| |  | Atlantis: The Lost Empireby Disney,                  
|
| |  | Jimmy Neutron: Boy Geniusby Paramount,               
|
| |  | Recess: Schools Outby Disney,                       
|
| |  | Final Fantasy: The Spirits Withinby Columbia,        
|
| |  | Pokemon 3by
	Warner Bros., and                       
|
| |  | Osmosis Jonesby
	Warner Bros.                        

The release of Monsters, Inc.in 2001 was
highly successful, resulting in domestic box office revenues
exceeding $252 million. Other animated family-oriented
feature films released during 2001, such as Shrek,achieved domestic box office revenues of over
$268 million. We also experienced competition from a
non-animated family-oriented film, Harry Potter and the
Sorcerers Stone, which was released by Warner Bros.
during November 2001 and has earned over $315 million in
domestic box office receipts. There appears to be increasing
widespread acceptance for those films created by using Computer
Graphics Imagery (CGI), as demonstrated by the success of
Monsters, Inc., Shrek, and Jimmy Neutron: Boy Genius,which contributed combined domestic box office revenues
exceeding $600 million. Additionally, all three Oscar®
nominations in the new best animated feature film category for
2002 were awarded to CGI films. Animated feature films currently
in theaters or in production which incorporate CGI include
Ice Ageand Shrek 2, among others. In
addition to box office competition, other family-oriented films
may continue to compete with Monsters, Inc.and our film
library with respect to related merchandise, home video sales,
and other future revenue sources.

We believe competition from animated feature
films and family oriented feature films will continue to
intensify over the next several years and will directly compete
with Finding Nemo,which is targeted for release in
summer 2003, Film Six and Film Seven. 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 can release Finding Nemo,Film Six and Film
Seven. This could result in the failure of such films to achieve
the commercial success required for us to profit from such films.

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

At least three of these movie studios, Disney,
DreamWorks SKG and Lucasfilm, 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 its affiliate PDI/ DreamWorks) successfully
produced Antzin 1998 and Shrekin 2001. In
addition, Disney released Dinosaurin May 2000, a film
which combined live action backgrounds with computer-animated
dinosaurs and special effects. Other movie studios may
internally develop, license or sub-contract three-dimensional
animation capability, including Paramount and Fox, who recently
released animated films created by using CGI technology with
Jimmy Neutron: Boy Genius and Ice Age. Ice
Age, which was released on March 15, 2002, experienced
a very successful opening weekend with $47.8 million in
domestic box office revenues. Further, we believe that
continuing enhancements in

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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 five 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 the 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 Disney branded animated or G-rated live action
films, within certain release windows for 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.
Our contractual agreement with Disney also presents other risks.
See Risk Factors  The Co-Production Agreement
imposes several risks and restrictions on us.

We believe that the primary competitive factors
in the market for animated feature films include creative
content and talent, product quality, technology, access to
distribution channels and marketing resources. Due in part to
our creative and technical resources and to the Co-Production
Agreement with Disney, pursuant to which Disney co-finances the
production of the feature films, markets the feature films and
provides creative assistance and access to significant
distribution channels, we believe that we presently compete
favorably with respect to each of these factors.

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
1: The Phantom Menace,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. We believe that the
primary competitive factors in the market for three-dimensional
computer animation for animated feature films and other
animation products include creative content and talent, product
quality, technology, access to distribution channels and
marketing resources. We believe that we presently compete
favorably with respect to each of these factors.

Software Publishers.We also experience intense 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 its Alias/
Wavefront subsidiary licenses Maya, its
three-dimensional software for creating high quality animation
and visual effects), are each marketing competing rendering
software products, usually at lower prices than ours. 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 believe that the primary competitive
factors in the market for rendering software include product
quality, price/performance,

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technology, functionality, breadth of features
and customer service and support. We believe that we presently
compete favorably with respect to each of these factors.


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.

Proprietary Rights

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 own nineteen patents issued in the United
States and eight issued in foreign countries. In addition, we
have a number of patent applications pending in the United
States and in foreign countries. There can be no assurance 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, there
can be no assurance 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 proprietary protection to us.

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. To license our RenderMan® software
product, we primarily rely on shrink wrap licenses
that are not signed by the end-user and, therefore, may be
unenforceable under the laws of certain jurisdictions. There can
be no assurance that the steps we take will prevent
misappropriation of our technology or that our confidentiality
or license agreements will be enforceable. In addition,
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.

One of the risks of the film production business
are claims that our productions infringe 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, 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 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. There can be no assurance, however, that under such
circumstances a license would be available on reasonable terms
or at all.

We also rely on certain technology that we
license from third parties, including software that is
integrated and used with internally developed software. There
can be no assurance that these third party technology licenses
will continue to be available to us on commercially reasonable
terms. The loss of or inability to

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maintain any of these technology licenses could
result in delays in feature film releases or product shipments
until equivalent technology could be identified, licensed and
integrated. Any such delays in feature film releases or product
shipments could materially adversely affect our business,
operating results or financial condition.


In 1996, we entered into a license agreement with
SGI whereby we granted to SGI and its subsidiaries a
non-exclusive license to use certain of our patents covering
techniques for creating computer-generated photo-realistic
images. These same patents were licensed to Microsoft
Corporation in 1995. These patents relate to pseudo-random point
sampling techniques in computer graphics, which are incorporated
into our RenderMan® software. The license agreements
with SGI and Microsoft will expire no later than the year 2010.
SGI and Microsoft may use the licensed technology in rendering
products, which compete with our RenderMan® software, and
could adversely impact sales of RenderMan®.

Employees

As of March 4, 2002, we had a total of 648
employees. Although none of our employees are represented by a
labor union, it is common for 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. 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. We have
not experienced any work stoppages, and we consider relations
with our employees to be good.

Our success depends to a significant extent on
the performance of a number of senior management personnel and
other key employees, especially our directors, producers,
animators, other creative personnel and technical directors. In
particular, we are dependent upon the services of Steve Jobs,
John Lasseter, Ed Catmull, Sarah McArthur and Ann Mather. 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 our relationship with
Disney, however, this employment agreement does not necessarily
assure his services. See Employment Agreements. The
loss of the services of any of Messrs. Jobs, Lasseter,
Dr. Catmull, Ms. McArthur, Ms. Mather or of other
key employees, especially our directors, producers, animators,
other creative personnel and technical directors, could have a
material adverse effect on our business, operating results or
financial condition.




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

In 2002, our revenue and operating results will
be largely dependent upon (1) the timing and amount of
worldwide revenues and distribution costs from Monsters, Inc.and other titles in our film library,(2) the
timing, accuracy, and sufficiency of the information we receive
from Disney to determine revenues and associated gross profits,
(3) the timing and amount of non-film related revenues and
expenses, (4) the accuracy of assumptions and judgments
used to estimate certain revenues and associated gross profits,
(5) the market price of our common stock and related
volatility, and (6) external economic and political events
that are beyond our control.

Dependence on
revenue from our feature films.

Under the Co-Production Agreement, Pixar and
Disney share equally in the profits of A Bugs Life, Toy
Story 2,and Monsters, Inc.after Disney recovers its
distribution fee and its marketing and distribution costs.
Distribution costs include worldwide theatrical release costs,
costs related to merchandise, Disneys costs to

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market and distribute home videos in the United
States and foreign markets, and other distribution costs
including talent participation and residuals. Beginning with the
first quarter of 2000, we have an improved ability, through
information available to us from Disney and other sources, to
estimate and record our share of film revenues and gross
profits. While we anticipate this improved ability will continue
to allow us to recognize our share of film revenues and gross
profits on a more timely basis, we will remain dependent on the
timing, accuracy, and sufficiency of the information provided by
Disney.


For our business to be successful, our films must
achieve box office success. While we have been successful in the
release of our first four feature films, this level of success
is unusual in the motion picture industry and our future
releases may not achieve similar results. Moreover, although
worldwide box office results for Monsters, Inc.are very
positive, we may not achieve similar levels of success in home
video, television licensing, and ancillary products which could
impact the ultimate success of the film. Beyond 2002, we will be
dependent on the future success of Finding Nemo,Film
Six, and Film Seven (Film Six and Film Seven are together
referred to as the Current Projects). Unless
Finding Nemoand our Current Projects achieve box office
success and are successful in home video, television licensing,
and merchandise sales, they may not generate significant revenue
and operating results for us in future years.

A portion of our anticipated revenues for fiscal
year 2002 is based on the assumption that Monsters, Inc.will be a success in the foreign theatrical, worldwide home
video and merchandising markets. Although to date Monsters,
Inc. has been successful in its international release with
international box office receipts currently at
$186 million, there can be no assurance that international
theatrical revenues, along with worldwide home video and
merchandise sales will be sufficient to meet our earnings
target. To date, we have recognized most of the revenues we
expect to recognize over the lifetime of the Toy Storyfranchise and A Bugs Life.Although our
forecast assumes some continued revenues from these titles,
there can be no assurance that revenues from continuing
international television licensing, worldwide home video and
merchandise sales will be sufficient to achieve our targeted
earnings.



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

It is difficult to forecast the amount and timing
of our future revenues from Toy Story, A Bugs Life, Toy
Story 2and Monsters, Inc.for fiscal year 2002. The
amount of future revenues depends not only on customer
acceptance of a film in its worldwide theatrical release, but
also on customer acceptance of related products in each separate
release category  home video, merchandise and
television collectively, being the most significant. While
customer acceptance is initially measured by box office success,
customer acceptance within each follow-on product category, such
as home video, merchandise or television, depends on factors
unique to each type of product, such as pricing, competitive
products, and the time of year or state of the economy in which
a product is released, among many other factors. In addition, we
have found that the degree of customer acceptance varies widely
among foreign countries. While box office success is often a
good indicator of general customer acceptance, the relative
success of follow-on products is not always directly correlated,
and the degree of correlation is difficult to predict. In spite
of Monsters, Inc.s successful worldwide box office
results, it is difficult to predict the ultimate worldwide
theatrical revenues, as well as related home video,
merchandising and ancillary revenue streams.

With respect to the difficulty of forecasting the
timing of revenues, Disney distributes our films and
film-related products and therefore determines the timing of
product releases. While the timing of theatrical releases is
typically known well in advance of release, the timing of
release of follow-on products is often determined just in
advance of release, is subject to change, and is therefore less
predictable. In all product categories, timing of revenues is
particularly uncertain with respect to releases in foreign
markets as a foreign product release is often marked by a
rollout across many countries over the course of many months.
Therefore, the timing of international revenues is inherently
more difficult to predict than the timing of domestic revenues.

In addition, the amount of revenue recognized in
any given quarter or quarters from all of our films depends on
the timing, accuracy, and sufficiency of the information we
receive from Disney to determine revenues and associated gross
profits. Although we obtain from Disney the most current
information available

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to recognize our share of revenue and to
determine our film gross profit, Disney may make subsequent
adjustments to the information that it has provided which could
have a material impact on us in later periods. For instance,
towards the end of the life cycle for a revenue stream, Disney
may inform us of additional distribution costs to those
previously forecasted, as occurred in the second quarter of
fiscal year 2000. 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, we may 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 in estimating associated costs,
such as with merchandising or home video, in accordance with the
provisions of SOP 00-2. Due to these factors, the amount and
timing of our future revenues and associated expenses from
Toy Story, Toy Story 2, A Bugs Lifeand
Monsters, Inc.are difficult to forecast, and it is
possible, in any given quarter, that we will not meet our
forecasted earnings targets. See Managements
Discussion and Analysis of Financial Condition and Results of
Operations in Item 7 of this Form 10-K.


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



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

Our operating expenses will continue to be
extremely difficult to forecast. We budget the direct costs of
film productions with Disney, and we share such costs equally.
We capitalize our share of these direct costs of film production
in accordance with SOP 00-2, which we adopted in the first
quarter of fiscal year 2001. A substantial portion of all of our
other costs are incurred for the benefit of feature films
(Overhead), including research and development
expenses and general and administrative expenses. Portions of
our Overhead are included in the budgets for the Pictures, and
we will share such costs equally with Disney under the
Co-Production Agreement. With respect to the portion of our
Overhead that is not reimbursed by Disney, we either
(1) capitalize such portion as film production costs, if
required under SOP 00-2, or (2) charge it to operating
expense in the period incurred. Since a substantial portion of
our overhead is related to the Pictures, and is therefore
reimbursed by Disney, and since we capitalize other amounts in
accordance with SOP 00-2, our reported operating expenses
for the fiscal year 2001 have not reflected, and future reported
operating expenses will not reflect, our true level of spending
on the production of animated feature films, related products
and overhead.



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

Our future film budgets may increase due to
factors including, but not limited to, (1) escalation in
compensation rates of people required to work on the Current
Projects, (2) number of personnel required to work on the
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
Current Projects and subsequent films and related products may
continue to be greater than the budgets for Toy Story, A
Bugs Life, Toy Story 2and Monsters, Inc.We
will continue to finance these budgets equally with Disney under
the Co-Production Agreement. In addition, due to production
exigencies which are often difficult to predict, we believe that
it is not uncommon for film production spending to exceed film
production budgets, and the Current Projects may not be
completed within the budgeted

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amounts. In addition, when production of each
film is completed, we may incur significant carrying costs
associated with transitioning personnel on creative and
development teams from one project to another. These carrying
costs are shared with Disney and treated as film costs, which
increases overall production budgets and could have a material
adverse effect on our results of operations and financial
condition.




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

Software revenue declined in fiscal year 2001 as
compared to fiscal year 2000. This decline may be indicative of
future trends as we continue to reduce our emphasis on the
commercialization of software products. We are not increasing
the time and resources necessary to generate higher
RenderMan® licensing revenues; therefore, we expect
that revenue from the licensing of RenderMan® may continue
to decline. To meet our fiscal 2002 diluted earnings per share
target, our revenue estimates include revenues attributable to
non-film related sources including software revenue. There can
be no assurance that the timing and amount of such revenues will
be sufficient to meet our targeted earnings.



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

Our 2002 diluted earnings per share target
includes our forecast of other non-film related sources such as
interest income and our effective tax rate. Interest income
fluctuates depending on economic conditions and interest rates
available to us during the year and therefore it is difficult to
forecast. For example, although our average cash, cash
equivalents and short-term investment balances increased during
2001, interest income decreased due to declining interest rates
during 2001. Income tax expense may also fluctuate. Our income
tax rate for 2001 was below statutory rates due to the
utilization of research and experimentation credits as well as
the utilization of certain other state credits and exemptions.
Our effective tax rate may increase in future periods. There can
be no assurance that the amount of other non-film revenues and
expenses such as those noted above will be sufficient to meet
targeted earnings.

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



| |                                       
| | --------------------------------------
| | Our revenues fluctuate
	significantly.

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



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

In particular, since our revenue under the
Co-Production Agreement is directly related to the success of a
feature film, our operating results are likely to fluctuate
depending on the level of success of our animated feature films
and related products. The revenues derived from the production
and distribution of an animated

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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 fiscal year 2001 increased
in comparison to fiscal year 2000, and we expect to continue to
increase our operating expenses to fund greater levels of
research and development, to ramp up our production on our three
current film projects and to expand operations. We expect our
spending levels may still increase significantly due to the
following:



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

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 2002.

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

In order to meet our obligations pursuant to the
Co-Production Agreement, we have established parallel creative
teams so that we can develop more than one film at a time. These
teams are currently working on Finding Nemo,which is
currently targeted for release in summer 2003, and our Current
Projects, as well as future projects as we move towards
producing one feature film per year. We have only produced four
prior feature films to date and have limited experience with
respect to producing animated feature films in parallel. In the
past, we have been required, and may continue to be required, to
expand our employee base, increase capital expenditures and
procure additional resources and facilities in order to
accomplish the scheduled release of our feature films. This
growth and expansion has placed, and continues to place, a
significant strain on our resources. We cannot provide any
assurances that Finding Nemowill 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 the Company moves towards achieving one film a
year, there will be additional demands placed on his
availability. In addition to Mr. Lasseters role as
the Creative Executive of the Company, he is also directing his
next feature film. A lack of his availability may adversely
impact the success and timing of all our films.

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

To continue to accommodate growth, we will be
required to implement a variety of new and upgraded operational
and financial systems, procedures and controls, including
improvement and maintenance of our

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


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 the studio are important
factors in determining the success of our motion picture and
related products. Under the terms of the Co-Production
Agreement, we have some general protections with respect to the
marketing and distribution of the 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 the
feature films and related products or (4) the specific
amount or quality of promotional support of the feature films
and related products and 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 enjoy potential 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 will 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 from the animated feature films and related products. If
we failed to receive accurate information from Disney, or failed
to receive it on a timely basis, it could have a material
adverse effect on our business, operating results or financial
condition.



| |                                              
| | ---------------------------------------------
| | Disney has an exclusive arrangement with
	us.

We have agreed not to release or authorize the
release of any of our feature length animated theatrical motion
pictures, other than the feature films that we produced 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 (which we refer to as Film
Seven) 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 the third original feature film to Disney under the
Co-Production Agreement. 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.

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See Business  Competition,
and  We experience intense competition with
respect to our animated feature films, animation products, and
software.




| |                                                       
| | ------------------------------------------------------
| | We have an obligation to co-finance
	production costs.

Under the Co-Production Agreement, unlike the
Feature Film Agreement which is applicable to Toy Story,we will continue to co-finance each of the three remaining
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.and are currently
co-financing Finding Nemo,Film Six and Film Seven under
the Co-Production Agreement. Accordingly, unlike the Feature
Film Agreement, we will incur significant production costs,
which must be offset by proceeds generated by the animated
feature films and related products. If the 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 effected.



| |                                                                    
| | -------------------------------------------------------------------
| | 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 right to all feature films, all
characters and story elements of the 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 the feature films or
characters or elements of any of the 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 the feature films and other products we develop
under the Co-Production Agreement, except for feature film(s) 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 See Business 
Relationship with Disney.

There are significant risks associated with
the motion picture industry.



| |                                                                        
| | -----------------------------------------------------------------------
| | The commercial success of a motion picture
	is extremely unpredictable.

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
commercial success of a motion picture also depends upon other
factors, such as:



| |   |                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------
| |  | distribution strategy, including 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 economic conditions and political events,                                                                    
|
| |  | weather conditions, and                                                                                              

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| |   |                                       
| | - | --------------------------------------
| |  | 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 a summer 2003 release, is our
first film to be released 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 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
animated films by Disney and other movie studios in the next
several years, it is possible that further saturation of the
animated film market, particularly those films created by 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. See
Business  Competition.



| |                                                                                    
| | -----------------------------------------------------------------------------------
| | The completion of a motion picture is
	subject to numerous risks and uncertainties.

The production, completion and distribution of
motion pictures is subject to numerous uncertainties, including
financing requirements, personnel availability and the release
schedule of competitive films. We are currently in some stage of
production on three animated feature films, Finding Nemo,Film Six and Film Seven, which compounds these uncertainties
and jeopardizes the successful, timely and cost-effective
production and completion of each film.

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 predict the type of content that will
appeal to a broad audience and to develop stories and characters
that will achieve broad market acceptance. Traditionally, it 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, Film Six and
Film Seven.

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



| |               
| | --------------
| | Movie Studios.

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 2001, competition continued to intensify in
the animated and live action feature film market.
Family-oriented animated and live action feature films released
in the domestic theatrical market in 2001 included the following:



| |   |                                                      
| | - | -----------------------------------------------------
| |  | Harry Potter and the Sorcerers Stoneby Warner Bros.,
|
| |  | Shrekby Dreamworks
	SKG,                             
|
| |  | Spy Kidsby Miramax,                                  
|
| |  | Atlantis: The Lost Empireby Disney,                  

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| |   |                                              
| | - | ---------------------------------------------
| |  | Jimmy Neutron: Boy Geniusby Paramount,       
|
| |  | Recess: Schools Outby Disney,               
|
| |  | Final Fantasy: The Spirits Withinby Columbia,
|
| |  | Pokemon 3by Warner
	Bros., and               
|
| |  | Osmosis Jonesby
	Warner Bros.                

The release of Monsters, Inc.in 2001 was
highly successful, resulting in domestic box office revenues
exceeding $252 million. Other animated family-oriented
feature films released during 2001, such as Shrek,achieved domestic box office revenues of over
$268 million. We also experienced competition from a
non-animated family-oriented film, Harry Potter and the
Sorcerers Stone, which was released by Warner Bros.
during November 2001 and earned over $315 million in
domestic box office receipts. There appears to be increasing
widespread acceptance for CGI films, as demonstrated by the
success of Monsters, Inc., Shrekand Jimmy Neutron:
Boy Genius,which contributed combined domestic box office
revenues exceeding $600 million. Additionally, all three
Oscar® nominations in the new best animated feature film
category for 2002 were awarded to CGI films. Animated feature
films currently in theaters or in production which incorporate
CGI include Ice Ageand Shrek 2, among others. In
addition to box office competition, other family-oriented films
may continue to compete with Monsters, Inc.and our film
library with respect to related merchandise, home video sales,
and other future revenue sources.

We believe competition from animated feature
films and family oriented feature films will continue to
intensify over the next several years and will directly compete
with Finding Nemo,which is targeted for release in
summer 2003 and Film Six and Film Seven. 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 can release Finding Nemo,Film Six
and Film Seven. 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.

At least three of these movie studios, Disney,
DreamWorks SKG and Lucasfilm, 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 its affiliate PDI/Dreamworks) successfully
produced Antzin 1998 and Shrekin 2001. In
addition, Disney released Dinosaurin May 2000, a film
which combined live action backgrounds with computer-animated
dinosaurs and special effects. Other movie studios may
internally develop, license or sub-contract three-dimensional
animation capability, including Paramount and Fox, who recently
released animated films created by using CGI technology with
Jimmy Neutron: Boy Genius and Ice Age. Ice Age,
which was released on March 15, 2002, experienced a very
successful opening weekend with $47.8 million in domestic
box office revenues. 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 five 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

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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. Our contractual arrangement with Disney also
presents other risks. See Risk Factors  The
Co-Production Agreement imposes several risks and restrictions
on us.


We believe that the primary competitive factors
in the market for animated feature films include creative
content and talent, product quality, technology, access to
distribution channels and marketing resources. Due in part to
our creative and technical resources and to the Co-Production
Agreement with Disney, pursuant to which Disney co-finances the
production of the feature films, markets the feature films and
provides creative assistance and access to significant
distribution channels, we believe that we presently compete
favorably with respect to each of these factors.



| |                                          
| | -----------------------------------------
| | 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 1: The Phantom Menace,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. We believe that the
primary competitive factors in the market for three-dimensional
computer animation for animated feature films and other
animation products include creative content and talent, product
quality, technology, access to distribution channels and
marketing resources. We believe that we presently compete
favorably with respect to each of these factors.



| |                     
| | --------------------
| | Software Publishers.

We also experience intense 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 its Alias/ Wavefront subsidiary
licenses Maya, its three-dimensional software for
creating high quality animation and visual effects, are each
marketing competing rendering software products, usually at
lower prices than Pixar. 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 believe that the primary
competitive factors in the market for rendering software include
product quality, price/performance, technology, functionality,
breadth of features and customer service and support. We believe
that we presently compete favorably with respect to each of
these factors.

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.

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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 continue
to 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 and produced only four animated feature films,
Toy Story, A Bugs Life, Toy Story 2,and
Monsters, Inc. Accordingly, we have only a limited
operating history in implementing our business model upon which
an evaluation of Pixar and 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.

Pursuant to the Co-Production Agreement, we
co-financed A Bugs Life, Toy Story 2and
Monsters, Inc.and will co-finance the next three
original animated feature films which we produce, including
Finding Nemo,Film Six and Film Seven. In the future, we
may co-finance other derivative works such as sequels and
television productions. In addition, in 2000, we substantially
completed construction on our new studio and headquarters
facility in Emeryville, California, which was financed by the
use of our cash. The development and production costs of
Finding Nemo,Film Six and Film Seven and any possible
future expansion of our facilities may have an adverse impact on
our cash and short-term investment balances. As of
December 29, 2001, we had approximately $278.6 million in
cash and short-term 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 development and
production costs of Finding Nemo,Film Six and Film
Seven. See Managements Discussion and Analysis of
Financial Condition and Results of Operations 
Liquidity and Capital Resources in Item 7 of this
Form 10-K. To date, we have chosen to use our existing cash
resources to fund construction costs 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. The sale
of additional equity or convertible debt securities would result
in additional dilution to our shareholders. Moreover, we cannot
provide any assurances that we will be successful in obtaining
future financing, or even if such financing is available, that
we will obtain it on favorable terms or on terms providing us
with sufficient funds to meet our obligations and objectives.

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 directors, producers,
animators, other creative personnel and technical directors. In
particular, we are dependent upon the services of Steve Jobs,
John Lasseter, Edwin E. Catmull, Ann Mather, and Sarah McArthur.
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 or of other key employees, especially our
directors, producers, animators, other 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 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

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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. See Business  Employees and
Management  Directors and Executive Officers of the
Company.


Our Chief Executive Officer has divided
responsibilities.

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

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

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 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 animators, creative personnel and technical
directors, such inability would have a material adverse effect
on our business, operating results and financial condition. See
Business  Employees and Executive
Officers of the Company.

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

Disney is required to distribute the remaining
three animated feature films to be produced pursuant to the
Co-Production Agreement. Distribution of a motion picture
generally involves domestic and foreign licensing for (1)
theatrical exhibition, (2) home video,
(3) presentation on television, including pay, network,
basic cable and syndication, (4) non-theatrical exhibition,
which includes airlines, schools and armed forces facilities and
(5) marketing of other rights of the picture, which may
include merchandising, such as CD-ROM titles, toys and
soundtrack recordings. Although the Co-Production Agreement
provides us with some protection, as all films governed by the
Co-Production Agreement are afforded the same treatment as any
Disney premiere animated film, we cannot provide assurances that
the feature films made under the Co-Production Agreement will be
distributed through all of these outlets. See
Business  Business Model and Products.

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. For example, early in 1998 we
experienced a failure of our backup systems for Toy Story 2which resulted in substantial effort to restore data and a
loss of certain data, but which did not have a material impact
on the schedule for production or release of Toy Story 2.
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. See
Business  Technology.

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

Our Chief Executive Officer, Steve Jobs,
beneficially owns approximately 61% of our outstanding Common
Stock as of March 4, 2002. 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 detailed
disaster recovery plan which 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 may 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 risen dramatically, and will likely continue to
increase for the foreseeable future. Such price changes will
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 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 may cause
significant disruption to commerce, including the entertainment
industry, throughout the world. Such disruption in the future
could have a material and adverse affect 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 animators and actors at film
production companies to belong to a union. There can be no
assurance that our employees will not join or form a labor union
or that we, for certain purposes, will not be required to become
a union signatory. We are directly or indirectly dependent upon
certain union members, and work stoppages or strikes organized
by such unions could materially adversely impact our business,
financial condition or results of operations.

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

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

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business, operating results or financial
condition could be materially adversely affected. See
Business  Technology and
Business  Competition  Movie
Studios.


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 own nineteen patents issued in the United
States and eight issued 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. See Business  Proprietary Rights.

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. To license our RenderMan® software product, we
primarily rely on shrink wrap licenses that are not
signed by the end-user and, therefore, 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. See Business 
Proprietary Rights.



| |                                                          
| | ---------------------------------------------------------
| | 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. See Business  Proprietary Rights.



| |                                                   
| | --------------------------------------------------
| | 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 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, 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 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

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rights. We cannot provide any assurances,
however, that under such circumstances a license would be
available on reasonable terms or at all. See Business
 Proprietary Rights.




| |                                                                                       
| | --------------------------------------------------------------------------------------
| | 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. See Business  Proprietary
Rights.

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 other events or factors. For example,
since January 1, 2001, our Common Stock has closed as low
as $28.94 and as high as $46.49 per share. Moreover, in recent
years, the stock market in general, and the shares of technology
companies in particular, have experienced extreme price and
volume fluctuations, some of which have been unrelated or
disproportionate to the operating performances of such
companies. 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. See Market for
Registrants Common Stock and Related Shareholder
Matters.

As described in Risk Factors 
Our operating results have fluctuated in the past and we expect
such fluctuations to continue, 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 in Item 7 of this
Form 10-K.




Item 2.     Properties

In November 2000, we moved our offices from
leased facilities in Richmond, California to our new 215,000
square foot headquarters and studio facility in Emeryville,
California. Through December 29, 2001, we incurred total
capital expenditures of $104.5 million for the purchase of
the land and the construction of our studio facility. In March
2000, we purchased an existing building on 1.76 acres in
Emeryville for $7.7 million. Although we purchased the
building for potential future expansion, we are currently
renting it to commercial tenants. We used existing cash
resources to fund these facility-related costs. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations  Liquidity and
Capital Resources in Item 7 of this Form 10-K.




Item 3.     Legal
Proceedings

We are involved in claims arising in the ordinary
course of business. While the outcome of these claims cannot be
predicted with certainty, we believe these matters will be
resolved without material adverse effect on our financial
position or cash flows.

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

None




EXECUTIVE OFFICERS OF THE COMPANY

The executive officers of Pixar and their ages as
of March 4, 2002 are as follows:

|                 |  |     |    |          |  |                                                                 
|---------------- |  | --- | -- | -------- |  | ----------------------------------------------------------------
|Name             |  | Age |    | Position
|                 |  |     |    |         
|Steve Jobs       |  |     | 47 |          |  | Chairman and Chief Executive Officer                            
|Edwin E. Catmull |  |     | 56 |          |  | President                                                       
|Ann Mather       |  |     | 41 |          |  | Executive Vice President, Chief Financial Officer
	and Secretary
|John Lasseter    |  |     | 45 |          |  | Executive Vice President, Creative Development                  
|Sarah McArthur   |  |     | 45 |          |  | Executive Vice President, Production                            

Pixars executive officers are appointed by,
and serve at the discretion of, the Board of Directors. Each
executive officer is an employee of Pixar. There is no family
relationship between any executive officer or director of Pixar.

Mr. Jobsis a
co-founder of Pixar and has served as its Chairman since March
1991 and as its Chief Executive Officer since 1986. He has been
a director of Pixar since 1986. In addition, Mr. Jobs
currently serves as Chief Executive Officer and as a member of
the Board of Directors of Apple Computer, Inc.
(Apple). Mr. Jobs was also a co-founder of NeXT
Software, Inc. (NeXT), which developed and marketed
object-oriented software for client/server business applications
and the Internet, and served as the Chairman and Chief Executive
Officer of NeXT from October 1985 until February 1997, when NeXT
was acquired by Apple. Mr. Jobs then served as an advisor
on a limited basis, then interim Chief Executive Officer to
Apple until assuming his current role as Chief Executive Officer
of Apple. Mr. Jobs has also served as a director of Gap
Inc. since September 1999.

Dr. Catmullis
a co-founder of Pixar and in January 2001 was promoted to
President. Dr. Catmull has served as Executive Vice
President and Chief Technical Officer since June 1995. From
March 1991 to February 1995, he served as President, from
November 1988 to March 1991 he served as Chairman and from
February 1986 to November 1988 he served as President. In 1979,
Dr. Catmull brought his high-technology expertise to the
film industry as Vice President of the Computer Division of
Lucasfilm, Ltd. During that time, Dr. Catmull managed four
development efforts in the areas of computer graphics, video
editing, video games and digital audio. He was also a key
developer of Renderman®, the program that creates realistic
digital effects for computer graphics and animation.
Dr. Catmull has been honored with three Scientific and
Technical Engineering Awards from the Academy of Motion Picture
Arts and Sciences for his work, including an Oscar®
for significant advancements to the field of motion
picture rendering as exemplified in Pixars
Renderman®. In 2000, he was inducted into the
National Academy of Engineering. Dr. Catmull also won the
Coons Award, which is the highest achievement in computer
graphics, for his lifetime contributions. Dr. Catmull is a
member of the Academy of Motion Picture Arts and Sciences and
the Science and Technical Awards Committee. Dr. Catmull
earned his B.S. degrees in computer science and physics and a
Ph.D. in computer science from the University of Utah.

Ms. Matherhas
served as Executive Vice President and Chief Financial Officer
since September 1999. Ms. Mather has served as Secretary of
Pixar since October 1999. Prior to joining Pixar, she was
Executive Vice President and Chief Financial Officer of Village
Roadshow Pictures. From 1992 to 1999, Ms. Mather held various
executive positions at The Walt Disney Company including Senior
Vice President of Finance and Administration of its Buena Vista
International Theatrical Division (the division that markets and
distributes all of Disneys theatrical films outside of the
U.S. and Canada). From 1991 to 1992, she was the European
Controller for Alico, a division of AIG, Inc. From 1989 to 1991,
she was Director of Finance for Polo Ralph Lauren Europe and
from 1984 to 1988, Ms. Mather was at Paramount Pictures
Corporation where she held

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various executive positions in London, Amsterdam
and New York. Ms. Mather is a graduate of Cambridge
University in England and is a chartered public accountant.


Mr. Lasseteris
a two-time Academy Award®-winning director and animator. In
addition to serving as head of all of Pixar Animation
Studios films and projects as Executive Vice President of
Creative, he directed Toy Story, (the first
feature-length computer animated film) for which he won a
special Achievement Academy Award®, A Bugs Lifeand Toy Story 2. He most recently served as executive
producer of Monsters, Inc.,and in 2001, he was given an
honorary doctorate degree from the American Film Institute. Mr.
Lasseter is currently in development on his fourth feature film.
Mr. Lasseter directed the first computer-animated feature
film, Toy Story, for which he received a Special
Achievement Oscar® and was nominated for Best Original
Screenplay, the first animated film ever to receive an
Oscar® nomination for screenplay. Mr. Lasseter has
written and directed a number of short films and television
commercials while at Pixar: Luxo Jr.(1986 Academy
Award® nominee), Reds Dream(1987), Tin Toy(1988 Academy Award® Winner) and Knickknack(1989), which was produced as a 3D stereoscopic film. Tin
Toywas the first computer animated film to win an
Oscar®, when it won the 1988 Academy Award® for Best
Animated Short Film. Mr. Lasseter also designed and
animated the Stained Glass Knight character in the 1985 Steven
Spielberg production, Young Sherlock Holmes.Mr. Lasseter joined Lucasfilms Computer Division
in 1984, and was a founding member of Pixar when it was formed
in February, 1986. Prior to this, he spent five years as an
animator at The Walt Disney Company, where he worked on such
films as The Fox and the Houndand Mickeys
Christmas Carol.He earned his B.F.A. in film from the
California Institute of the Arts where he produced two animated
films, each winners of the student Academy Award® for
Animation; Lady and the Lampin 1979 and Nightmarein 1980. His very first award came at the age of five when
he won $15.00 from the Model Grocery Market in Whittier,
California for a crayon drawing of the Headless Horseman.

Ms. McArthurhas served as Vice President,
Production since May 1997 and was promoted to Executive Vice
President, Production on February 4, 1999.
Ms. McArthur oversees all Pixar production teams and
manages all aspects of making the films. From 1989 to April
1997, Ms. McArthur worked at The Walt Disney Company, where
she was most recently Vice President of Production for Disney
Feature Animation, overseeing the production of feature
animation films in Disneys California, Florida and Paris
studios. During Ms. McArthurs eight years at Disney,
she was the Production Manager on The Rescuers Down
Under,went on to be the Associate Producer on Beauty and
the Beastand an Executive Producer on The Lion King.She was appointed Director of Production in late 1991 and
promoted to Vice President of Production in 1994. Prior to
working at Disney, Ms. McArthur worked at the Mark Taper
Forum as their Production Manager of special projects.
Ms. McArthur earned her B.A. degree in Theatre from the
University of California, Santa Barbara, and she attended
Carnegie-Mellon Universitys M.F.A. program in Theater
Arts. Ms. McArthur is a member of the Academy of Motion
Picture Arts and Sciences.

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PART II




Item 5.     Market
for Registrants Common Stock and Related Shareholder
Matters

Our Common Stock trades on The Nasdaq Stock
Markets Nasdaq National Market under the trading symbol
PIXR. The following table sets forth the high and
low sale prices per share of our Common Stock for the periods
indicated.

|     |                |      |   |       |  |  |   |       | 
|---- | -------------- | ---- | - | ----- |  |  | - | ----- | 
|     |                | High |   | Low  
|     |                |      |   |      
|2000 |                |      |   |       |  |  |   |      
|     | First Quarter  |      | $ | 39.88 |  |  | $ | 33.25 | 
|     | Second Quarter |      | $ | 40.50 |  |  | $ | 32.20 | 
|     | Third Quarter  |      | $ | 37.88 |  |  | $ | 31.31 | 
|     | Fourth Quarter |      | $ | 33.94 |  |  | $ | 25.63 | 
|2001 |                |      |   |       |  |  |   |      
|     | First Quarter  |      | $ | 40.00 |  |  | $ | 28.94 | 
|     | Second Quarter |      | $ | 46.49 |  |  | $ | 29.13 | 
|     | Third Quarter  |      | $ | 44.09 |  |  | $ | 31.95 | 
|     | Fourth Quarter |      | $ | 42.72 |  |  | $ | 32.78 | 

As of March 4, 2002, we had approximately
4,111 shareholders of record. Because many of our shares of
Common Stock are held by brokers and other institutions on
behalf of shareholders, we are unable to estimate the total
number of shareholders represented by these record holders. The
price for the Common Stock as of the close of business on
March 4, 2002 was $35.50 per share. We have never paid any
cash dividends on our Common Stock. We intend to retain any
earnings for use in our business and do not anticipate paying
any cash dividends on our Common Stock in the foreseeable future.

In connection with entering into the
Co-Production Agreement with Disney in February 1997, we granted
two warrants to Disney:



| |   |                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------
| |  | a warrant to purchase 750,000 shares of our
	Common Stock at an exercise price of $20.00 per share, and
|
| |  | a warrant to purchase 750,000 shares of our
	Common Stock at an exercise price of $25.00 per share.    

In October 2001, Disney fully exercised these two
warrants. In lieu of exercising these warrants for cash, Disney
net-exercised these warrants (i.e., Disney elected to pay the
exercise price by surrendering a number of shares of our Common
Stock equal in value to the aggregate exercise price of the
warrants). As a result, Disney received an aggregate of 640,651
shares of our Common Stock from the exercise of the warrants.
The issuance of these shares of Common Stock was exempt from
registration pursuant to Section 4(2) of the Securities Act
of 1933.

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Item 6.     Selected
Financial Data

The following selected financial data is derived
from our financial statements. This data should be read in
conjunction with the Financial Statements and Notes thereto, and
with Managements Discussion and Analysis of Financial
Condition and Results of Operations.

|                                                         |  |                                       |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|-------------------------------------------------------- |  | ------------------------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                                         |  |                                      
|                                                         |  | Fiscal Year                          
|                                                         |  |                                      
|                                                         |  | 1997                                  |         | 1998 |  | 1999 |         | 2000 |  | 2001
|                                                         |  |                                       |         |      |  |      |         |      |  |     
|                                                         |  |                                      
|                                                         |  | (In thousands, except per share data)
|Revenue                                                  |  | $                                     | 34,699  |      |  | $    | 14,307  |      |  | $    | 121,037 |  |  | $ | 172,267 |  |  | $ | 70,223  | 
|Net income from continuing operations                    |  |                                       | 21,956  |      |  |      | 7,464   |      |  |      | 49,102  |  |  |   | 78,027  |  |  |   | 36,006  | 
|Net income                                               |  |                                       | 22,190  |      |  |      | 7,822   |      |  |      | 49,224  |  |  |   | 78,433  |  |  |   | 36,217  | 
|Basic net income per share from continuing
	operations   |  |                                       | 0.53    |      |  |      | 0.17    |      |  |      | 1.06    |  |  |   | 1.65    |  |  |   | 0.75    | 
|Basic net income per share                               |  |                                       | 0.54    |      |  |      | 0.18    |      |  |      | 1.07    |  |  |   | 1.66    |  |  |   | 0.75    | 
|Diluted net income per share from continuing
	operations |  |                                       | 0.46    |      |  |      | 0.14    |      |  |      | 0.99    |  |  |   | 1.56    |  |  |   | 0.71    | 
|Diluted net income per share                             |  |                                       | 0.46    |      |  |      | 0.15    |      |  |      | 0.99    |  |  |   | 1.57    |  |  |   | 0.71    | 
|Total assets                                             |  |                                       | 231,068 |      |  |      | 250,806 |      |  |      | 374,905 |  |  |   | 479,603 |  |  |   | 523,294 | 
|Total shareholders equity                               |  |                                       | 217,300 |      |  |      | 235,047 |      |  |      | 344,707 |  |  |   | 435,720 |  |  |   | 505,686 | 






|        |                                                                                       
|------- | --------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
	of Financial Condition and Results of Operations

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 Storywas 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.

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,Film Six, and Film Seven 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. These reimbursed costs through the
end of 2001 are set forth in Note 4 of Notes to Financial
Statements.

Our second feature film, A Bugs Life,was released in November 1998 and counts as the first
original Picture under the Co-Production Agreement. The
Co-Production Agreement also contemplates that with respect to
theatrical sequels, made-for-home video sequels, television
productions, interactive media products and other derivative
works related to the Pictures, we will have the opportunity to
co-finance and produce such products or to earn passive
royalties on such products. We will not share in any theme park
revenues generated as a result of the Pictures. Pursuant to the
Co-Production Agreement, in addition to co-financing the

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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 five original Pictures to be produced under the
Co-Production Agreement. As a derivative work, Toy
Story 2 is treated as a Picture under the Co-Production
Agreement, and all the provisions applicable to the five
original Pictures apply.


On November 2, 2001, we released
Monsters, Inc., our fourth animated feature film, which
counts as the second original Picture under the Co-Production
Agreement. We are currently in various stages of production on
three films, Finding Nemo, Film Six and Film Seven. These
films will be produced and distributed under the Co-Production
Agreement and will count as the third, fourth, and fifth films
of the Pictures to be produced under the Co-Production
Agreement. We expect to release Finding Nemo in summer
2003 at the earliest. Film Six and Film Seven are currently
targeted for release no earlier than 2004 and 2005, respectively.

Critical Accounting Policies



| |                    
| | -------------------
| | Revenue Recognition

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



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

Under the Co-Production Agreement, we share
equally with Disney in the profits of Monsters, Inc., Toy
Story 2and A Bugs Lifeafter Disney recovers
its marketing, distribution and other predefined costs and fees.
Beginning in 2000, we had an improved ability, through
information available to us from Disney and other sources, to
estimate and record our share of film revenues and gross
profits. Although our revenues are based on the information we
receive from Disney, we may make adjustments to that information
based on our estimates and judgments. For example, our
theatrical revenues may be adjusted for our estimated reserves
on potential uncollectible amounts to be received from
theatrical exhibitors. We also make adjustments to our home
video revenues for estimates on return reserves that may differ
from those reported by Disney. The estimates on reserves may be
adjusted periodically based on actual rates of returns,
inventory levels in the distribution channel, as well as other
business and industry information. In addition, we utilize
margin normalization, such as with merchandising or home video,
in accordance with the provisions of SOP 00-2. This may
result in the utilization of budgeted or forecasted information
rather than actual costs incurred if it is deemed to be a more
accurate reflection of our participation.

The amount of revenue recognized in any given
quarter or quarters from all of our films depends on the timing,
accuracy and sufficiency of the information we receive from
Disney to determine revenues and associated gross profits.
Although Disney provides us with the most current information
available to enable us to recognize our share of revenue and
determine our film gross profit, Disney may also make subsequent
adjustments to the information that it has provided, and these
adjustments could have a material impact on our operating
results in later periods. As additional information becomes
available from Disney on a more timely basis, it may result in a
change of estimation for revenue recognition. Additionally, we
have the right to audit Disneys books and records related
to the Pictures per the terms of the Co-Production Agreement,
which could result in adjustments that may be material to the
financial statements in any given quarter or quarters. Any
revenue received in advance from Disney is deferred and recorded
as revenue when earned.

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In accordance with the provisions of SOP 00-2,
library titles are defined as occurring three years from the
films initial release. Currently, Toy Story and
A Bugs Lifeare classified as library titles. The
term library titles is used solely for the purpose of
classification and for identifying previously released films in
accordance with the provisions of SOP 00-2. Revenue recognition
for such titles is in accordance with the Companys 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 within three years from the time
of the first capitalized transaction, all such costs will be
expensed.

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

Results of Operations



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

Total revenue, which consists of film and
animation services revenue and software revenue, amounted to
$121.0 million in 1999, $172.3 million in 2000 and
$70.2 million in 2001.

Film and animation services revenue was
$115.3 million in 1999, $163.2 million in 2000 and
$63.4 million in 2001. Film revenue was $114.4 million
in 1999, $162.3 million in 2000 and $62.7 million in
2001. Film revenues for 1999 resulted primarily from A
Bugs Lifetheatrical, home video and merchandise
revenues. Revenues for 2000 were also derived from A
Bugs Life, and the Toy Storyfranchise,
including royalties from Buzz Lightyear of Star Command
direct-to-video and television series. The higher revenues in
2000 relative to both 1999 and 2001, were primarily due to the
tremendous success of Toy Story 2 in both theatrical and
home video markets.

Film revenues for 2001 consisted of
$27.1 million in revenues from our library titles, A
Bugs Lifeand Toy Story, $23.5 million
from Toy Story 2, and $12.1 million from
Monsters, Inc. Revenues from our library titles resulted
primarily from worldwide television sales, home video sales,
merchandising sales and revenue resulting from a one-time
transaction associated with interactive games. Included within
these amounts were revenues of approximately $2.0 million
resulting from a change in our method of estimating certain
merchandising revenues due to improved information received from
Disney. Revenues for Toy Story 2were comprised primarily
of worldwide television and home video sales, continued
merchandise sales and other ancillary revenues, as well as
one-time revenues associated with interactive games. These
revenues were partially offset by additional expenses associated
with home video sales. Revenues for Monsters, Inc. were
derived from the domestic box office receipts, initial
merchandise sales and ancillary royalties. Additionally, in

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the fourth quarter of 2001, we recorded an
increase in revenues for our titles resulting from adjustments
made by Disney for reduced marketing expenses of
$1.3 million.


Software revenue includes software license
revenue, principally from RenderMan®, and royalty revenue
from licensing Physical Effects, Inc. (PEI)
technology to a third party. Software revenue was
$5.7 million in 1999, $9.1 million in 2000 and
$6.9 million in 2001. 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.
In spite of the increase in software revenue for the year 2000,
our primary focus is on content creation for animated feature
films and related products, and as a result, we have not
increased the time and resources necessary to generate
significantly higher RenderMan® license revenues.
Therefore, we continue to expect ongoing variability in revenue
derived from software licenses and that such revenue will remain
flat or possibly decline as seen in 2001. Software maintenance
contracts are recorded as unearned revenue and recognized
ratably over the life of the maintenance agreement, which ranges
from 12 to 24 months in duration. All historical and future
royalty income, if any, associated with our discontinued CD-ROM
division is now and will continue to be excluded from software
revenue and presented in results of discontinued operations.

For fiscal years 1999, 2000 and 2001, Disney
accounted for 95%, 95% and 91%, respectively, of our revenue
from continuing operations, attributable to film related
revenue, animation services and software revenue.



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

Cost of film and animation services revenue was
$31.0 million in 1999, $36.4 million in 2000 and
$11.8 million in 2001 and represents amortization of
capitalized film costs. Cost of film revenue as a percentage of
film revenue for fiscal year 1999, 2000 and 2001 was 27%, 22%
and 18%, respectively. Our cost of revenue as a percentage of
film revenue may vary for any given period due to changes in the
mix of film revenue as the gross profit varies by film, as well
as for revisions to estimates on revenue to be received under
the film forecast method for an individual film. A change to an
individual films estimate of revenue to be received may
result in an increase or decrease to the amortization of the
capitalized film costs relative to a previous period. Toy
Storyrevenue has no related cost, as film costs were fully
amortized by December 31, 1997. For 1999, the cost of
revenue percentage was driven primarily from the amortization of
capitalized film costs for A Bugs Life. The decline
in cost of film revenue as a percentage of total film revenue
from 1999 to 2000, can be attributed to increased revenue
related to Toy Storyin 2000 and lower amortization
percentages for Toy Story 2and A Bugs Lifein 2000 relative to 1999. The decline in cost of film
revenue as a percentage of total film revenue from 2000 to 2001
can be attributed to a higher proportion of revenues resulting
from Toy Storyand A Bugs Lifewhich had
lower percentages of cost amortization than Toy Story 2.

Cost of software revenue consists of the direct
cost and manufacturing overhead required to reproduce and to
package our software products, as well as amortization of
purchased technology. Cost of software revenue includes no
amortization of internal software development expenses since no
such expenses have been capitalized. Cost of software revenue as
a percentage of the related revenue decreased from 12% in 1999,
to 6% in 2000 and increased slightly to 8% in 2001. Cost of
software revenue in all three years was due primarily to the
amortization of purchased technology associated with the
acquisition of PEI. Approximately $2.7 million of the PEI
purchase price was assigned to purchased technology, which PEI
licensed to a third party. As a result of the ongoing
amortization of this purchased technology of $480,000, it is
likely that our software gross profit will vary from year to
year as compared to software gross profit prior to the 1998
acquisition.



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

Total operating expenses increased from
$14.8 million in 1999, to $14.9 million in 2000 and
$16.4 million in 2001. We anticipate an increase in
operating expenses in future periods due to the growth
experienced by the studio as we ramp up production on our three
current film projects. Under the Co-Production Agreement, Disney
reimburses us for half of certain general and administrative
costs and certain research and development costs that benefit
the productions. The funding received from Disney is treated as
operating expense reimbursements. See Note 4 of Notes to
Financial Statements. To the extent that personnel, facilities
and

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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.


Research and Development.Research and development expenses
consist primarily of salaries and support for personnel
conducting research and development for the RenderMan®
product, for our proprietary MarionetteTM and
RingmasterTM animation and production management
software and for creative development for future films. Research
and development expenses were $6.3 million in 1999,
$5.6 million in 2000 and $6.3 million in 2001.
Research and development expenses decreased from
$6.3 million in 1999 to $5.6 million in 2000 due
primarily to a decrease in costs associated with short film
projects resulting from a one-time $523,000 additional
reimbursement during 2000 from Disney under the Co-Production
Agreement for certain research and development expenses incurred
prior to fiscal year 2000. In addition, research and development
expenses during 2000 decreased due to diverting personnel and
other resources to the current productions and a decrease in
employee costs related to Toy Story 2.After allowing for
the one-time reimbursement, the slight increase in research and
development expenses for 2001 was primarily attributable to
increases in employee related expenses associated with
additional staffing for research and development, offset by a
reduction in short film project and creative development costs.
We expect research and development expenses to increase in
future periods. To date, all research and development costs not
reimbursed by Disney have been expensed as incurred.

Sales and Marketing.Sales and marketing expenses consist
primarily of salaries and related overhead, as well as public
relations, advertising, technical support and trade show costs
required to support our software segment. Sales and marketing
expenses for 1999 and 2000 remained relatively flat at
$1.5 million and $1.6 million, respectively, and
increased to $2.0 million in 2001. The increase in expenses
during 2001 was primarily due to additional expenses associated
with the corporate marketing and creative resources departments
related to the release of our new film, Monsters, Inc. We
believe that sales and marketing expenses will continue to
increase in future periods, particularly in the areas of public
relations and corporate marketing.

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 have increased from $7.0 million in
1999, to $7.7 million in 2000 and $8.1 million in
2001. The increase in general and administrative expenses from
1999 to 2000 was primarily due to increased general and
administrative headcount and related compensation costs
necessary to support our infrastructure and public company
related costs. The increase from 2000 to 2001 was primarily due
to increases in employee related costs and insurance, which were
offset by reductions in public company costs. General and
administrative expenses may increase in future periods.



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

Other income, net was $7.5 million in 1999,
$13.0 million in 2000 and $14.4 million in 2001. Other
income, net consists primarily of interest income from
investments. The increase from 1999 to 2000 is primarily due to
an increase in interest income resulting from higher interest
rates and an increase in our average cash, cash equivalents and
short-term investment balances during the year. The increase
from 2000 to 2001 is primarily due to a one-time, non-recurring
settlement of approximately $2 million not derived from our
ordinary course of business. Although our average cash, cash
equivalents and short-term investment balances increased during
the year, interest income decreased slightly due to declining
interest rates during 2001.

Income
Taxes

Income tax expense from continuing operations of
$32.9 million, $55.4 million and $19.9 million
reflects our effective tax rates of 40.1%, 41.5% and 35.6% for
1999, 2000, and 2001, respectively. Due to the increase in
earnings and the use of all net operating loss carryforwards by
the first quarter of 1999, income tax expense increased
significantly in 1999 and 2000. Our income tax rate is lower in
2001 due to the utilization of research and experimentation
credits for federal and state tax purposes, as well as the
utilization of certain other state

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credits and exemptions. We expect our effective
tax rate may increase in future periods. See Note 6 of Notes to
Financial Statements.


Liquidity and Capital Resources

Cash and short-term investments increased from
$202.8 million at December 30, 2000 to
$278.6 million at December 29, 2001. The increase was
primarily due to cash received from Disney for our share of film
revenue, as well as software revenue, interest income and
proceeds from stock option exercises. This increase was
partially offset by film production spending and construction
expenditures on our studio and headquarter facilities in
Emeryville, California.

In 1999, cash provided by operating activities
was attributable to net income of $49.2 million primarily
resulting from film revenue related to A Bugs Life,the non-cash impact of deferred income taxes and tax benefit
from option exercises of $19.6 million, and the non-cash
impact of depreciation and amortization expense and amortization
of capitalized film production costs, totaling
$36.5 million. In 2000, cash provided by operating
activities was primarily attributable to net income of
$78.4 million resulting primarily from film revenue related
to Toy Story 2,cash provided by unearned revenue
totaling $14.1 million, the non-cash impact of deferred
income taxes and tax benefit from option exercises of
$14.9 million, and the non-cash impact of depreciation and
amortization expense and amortization of capitalized film
production costs, totaling $40.3 million. Cash provided by
operating activities for 2000 was partially offset by
receivables from Disney of $61.8 million. In 2001, cash
provided by operating activities was attributable to net income
of $36.2 million resulting primarily from film revenue related
to our film library, Toy Story 2and Monsters, Inc.,cash collections on Disney receivables of
$60.3 million, the non-cash impact of deferred income taxes
and tax benefit from option exercises of $12.3 million, and
the non-cash impact of depreciation and amortization expense and
amortization of capitalized film production costs, totaling
$18.8 million. Cash provided by operating activities for
2001 was partially offset by decreases in net accounts payable
and accrued liabilities of $5.2 million, income taxes
payable of $6.8 million and unearned revenue of
$13.3 million. In 1999, 2000 and 2001, cash used in
investing activities primarily consisted of investments in
short-term securities, capitalized film production costs and
purchase of property and equipment, as described below, offset
by net proceeds from sales of short-term investments. In 1999,
2000 and 2001, cash provided by financing activities primarily
consisted of proceeds from exercised stock options.

As of December 29, 2001, our principal
source of liquidity was approximately $278.6 million in
cash, cash equivalents and short-term investments. Our future
capital commitments primarily consist of obligations to fund
production costs of films and derivative products under the
Co-Production Agreement and beyond. Pursuant to the
Co-Production Agreement, we will co-finance the next three
original animated feature films which we produce including
Finding Nemo,Film Six and Film Seven. In the future, we
may co-finance other derivative works such as theatrical
sequels, direct to home video sequels, interactive products and
television productions. We also have obligations to pay portions
of any revenue derived from each feature film produced under the
Co-Production Agreement to our entertainment law firm in
consideration for services rendered. Future minimum lease
payments under non-cancelable operating leases for fiscal years
2002, 2003, 2004 and 2005 will be $601,000, $383,000, $262,000
and $23,000, respectively. See Note 8 of Notes to Financial
Statements.

Film Production Costs Under Co-Production
Agreement.In fiscal 2002, we expect
to spend approximately $59.9 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.

Facility Related Capital Expenditures.In fiscal 2002, we expect to spend
approximately $4 million to $6 million related to
capital expenditures for our Emeryville headquarters and studio
and other facility related projects.

We believe that our current available funds and
forecasted cash from operations in 2002 will be sufficient to
meet our anticipated cash needs for working capital and capital
expenditures, including the production costs of Finding Nemo,Film Six and Film Seven. There can be no assurance that
current and forecasted cash from

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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 FASB issued SFAS 142,
Goodwill and Other Intangible Assets, which
supersedes APB 17, Intangible Assets
(SFAS 142), which addresses the accounting treatment for
goodwill and other intangible assets acquired individually or
with a group of other assets upon their acquisition, but not
acquired in a business combination. This statement also
addresses how goodwill and other intangible assets should be
accounted for after they have been initially recognized in the
financial statements. With the adoption of SFAS 142,
goodwill is no longer subject to amortization over its estimated
useful life; rather, goodwill will be subject to at least an
annual assessment for impairment by applying a fair-value-based
test. Also, if the benefit of an intangible asset is obtained
through contractual or other legal rights, or if the intangible
asset can be sold, transferred, licensed, rented or exchanged,
an acquired intangible asset should be separately recognized.
The terms of SFAS 142 are effective as of the beginning of
the first quarter of the fiscal year beginning after
December 15, 2001. Certain provisions of SFAS 142
shall be applied to goodwill and other acquired intangible
assets for which the acquisition date is after June 30,
2001. As identifiable intangible assets as of December 29,
2001 were $480,000, we do not expect the adoption of SFAS 142 to
have a material impact on our financial position or results of
operations.

On October 3, 2001, the Financial Accounting
Standards Board issued FASB Statement No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets
(SFAS 144), which addresses financial
accounting and reporting for the impairment or disposal of
long-lived assets. SFAS 144 supersedes FASB Statement
No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of, and also supersedes
the accounting and reporting provisions of APB Opinion
No. 30, Reporting the Results of Operations 
Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, for the disposal of a segment of a business.
SFAS 144 is effective for fiscal years beginning after
December 15, 2001 and interim periods within those fiscal
years. We do not expect the adoption of SFAS 144 to have a
material impact on our financial position or results of
operations.

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




Item 7A.     Quantitative
and Qualitative Disclosures About Market Risk

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

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All of our financial instruments are held for
purposes other than trading and are considered available
for sale per SFAS 115. The table below provides
information regarding our investment portfolio at
December 29, 2001. 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  |  | $         | 68,734 |        |  | $     | 153,576 |   |  | $ | 222,310 |  
|Weighted-average interest rate |  |           | 4.91   | %      |  |       | 3.75    | % |  |   | 4.11    | %

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




Item 8.     Financial
Statements and Supplementary Data

The financial statements required pursuant to
this item are included in Part IV, Item 14 of this
Form 10-K and are presented beginning on page F-1. The
supplementary financial information required by this item is
included in the notes to the financial statements under the
subsection entitled Quarterly Financial Information
(Unaudited), beginning on page F-19.






|        |                                                                                      
|------- | -------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
	Accountants on Accounting and Financial Disclosure

Not applicable.




PART III




Item 10.     Directors
and Executive Officers of the Company

Directors

The members of our Board of Directors as of
March 4, 2002 are as follows:

|                   |  |     |    |                     |  |                                     
|------------------ |  | --- | -- | ------------------- |  | ------------------------------------
|Name               |  | Age |    | Position with Pixar
|                   |  |     |    |                    
|Steve Jobs         |  |     | 47 |                     |  | Chairman and Chief Executive Officer
|Edwin E. Catmull   |  |     | 56 |                     |  | President and Director              
|Jill E. Barad      |  |     | 50 |                     |  | Director                            
|Skip M. Brittenham |  |     | 60 |                     |  | Director                            
|Joseph A. Graziano |  |     | 58 |                     |  | Director                            
|Lawrence B. Levy   |  |     | 42 |                     |  | Director                            
|Joe Roth           |  |     | 53 |                     |  | Director                            
|Larry W. Sonsini   |  |     | 61 |                     |  | Director                            

Mr. Jobsis a
co-founder of Pixar and has served as Chairman since March 1991,
and as Chief Executive Officer since February 1986. He has been
a director of Pixar since February 1986. In addition,
Mr. Jobs is currently Chief Executive Officer and a member
of the Board of Directors of Apple Computer, Inc.
(Apple). Mr. Jobs was also a co-founder of NeXT
Software, Inc. (NeXT), which developed and marketed
object-oriented software for client/server business applications
and the Internet, and served as the Chairman and Chief Executive
Officer of NeXT from October 1985 until February 1997, when NeXT
was acquired by Apple. Mr. Jobs then served as an advisor
to Apple on a limited basis and served as interim Chief
Executive Officer until assuming his current role as Chief
Executive Officer at Apple. Mr. Jobs has also served as a
director of Gap, Inc. since September 1999.

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Dr. Catmullis
a co-founder of Pixar and in January 2001 was promoted to
President. Dr. Catmull has served as Executive Vice
President and Chief Technical Officer since June 1995. From
March 1991 to February 1995, he served as President, from
November 1988 to March 1991 he served as Chairman and from
February 1986 to November 1988 he served as President. In 1979,
Dr. Catmull brought his high-technology expertise to the
film industry as Vice President of the Computer Division of
Lucasfilm, Ltd. During that time, Dr. Catmull managed four
development efforts in the areas of computer graphics, video
editing, video games and digital audio. He was also a key
developer of Renderman®, the program that creates realistic
digital effects for computer graphics and animation.
Dr. Catmull has been honored with three Scientific and
Technical Engineering Awards from the Academy of Motion Picture
Arts and Sciences for his work, including an Oscar®
for significant advancements to the field of motion
picture rendering as exemplified in Pixars
Renderman®. In 2000, he was inducted into the
National Academy of Engineering. Dr. Catmull also won the
Coons Award, which is the highest achievement in computer
graphics, for his lifetime contributions. Dr. Catmull is a
member of the Academy of Motion Picture Arts and Sciences and
the Science and Technical Awards Committee. Dr. Catmull
earned his B.S. degrees in computer science and physics and a
Ph.D. in computer science from the University of Utah.

Ms. Baradhas
served as a director of Pixar since July 1997. She was formerly
the Chairman and Chief Executive Officer of Mattel, Inc. from
January 1998 to February 2000. From January 1997 to December
1997, she was President and Chief Executive Officer of Mattel,
Inc., and from July 1992 until December 1996, she was President
and Chief Operating Officer. Ms. Barad also serves as a
director of Leap Wireless International, Inc.

Mr. Brittenhamhas served as a director of Pixar
since August 1995. He is a senior partner with the law firm of
Ziffren, Brittenham, Branca, Fischer, Gilbert-Lurie &
Stiffelman, an entertainment law firm, founded in 1978. Mr.
Brittenham currently serves on the board of, or is a trustee of
numerous charitable organizations, including Conservation
International, KCET, the Environmental Media Association and the
Alternative Medical AIDS Foundation. Mr. Brittenham
received a B.S. from the United States Air Force Academy and a
J.D. from the University of California at Los Angeles.

Mr. Grazianohas served as a director of Pixar
since August 1995. From June 1989 to December 1995, he was the
Executive Vice President and Chief Financial Officer of Apple
and was a member of the Board of Directors of Apple from June
1993 until October 1995. From May 1987 to June 1989,
Mr. Graziano served as Chief Financial Officer of Sun
Microsystems, Inc. and from October 1981 to May 1985 as Chief
Financial Officer of Apple. In addition, he has held accounting
positions with various technology companies in the Silicon
Valley. Mr. Graziano also serves as a director of Carrier
Access Corporation and Packeteer, Inc. Mr. Graziano
received a B.S. in accounting from Merrimack College and is a
certified public accountant.

Mr. Levyhas
served as a director of Pixar since April 1999. From June 2000
to December 2000, Mr. Levy was President and Chief
Executive Officer and a director of Shockwave.com. Mr. Levy
served as Executive Vice President and Chief Financial Officer
of Pixar from February 1995 to March 1999. Mr. Levy served
as Secretary of Pixar from October 1995 to March 1999. Prior to
joining Pixar, he was Vice Chairman and Chief Financial Officer
of Electronics for Imaging, Inc. (EFI), a provider of hardware
products for the digital color imaging market. Prior to his
tenure at EFI, he was head of the Technology Licensing and
Distribution Department at the law firm of Wilson Sonsini
Goodrich & Rosati. Mr. Levy received a B.S. in business
and accounting from Indiana University and a J.D. from Harvard
Law School.

Mr. Rothhas
served as a director of Pixar since October 2000. Mr. Roth
formed Revolution Studios, an independent movie studio, in
January 2000. From April 1996 to January 2000, Mr. Roth was
Chairman of Walt Disney Studios. From August 1994 to April 1996,
Mr. Roth was Chairman of the Walt Disney Motion Pictures
Group. From 1992 to 1994 he ran Caravan Pictures for Disney.
From July 1989 to November 1992, Mr. Roth served as
Chairman of 20th Century Fox. Prior to Fox, Mr. Roth was an
independent producer/director and co-founded Morgan Creek
Pictures. Mr. Roth received a B.S. from Boston University.

Mr. Sonsinihas
served as a director of Pixar since April 1995 and served as
Secretary from April 1995 to October 1995. He has been an
attorney with the law firm of Wilson Sonsini Goodrich &
Rosati since 1966 and currently serves as Chairman and Chief
Executive Officer. Mr. Sonsini also serves as a director
for Brocade,

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Inc., Commerce One, Echelon Corporation, Lattice
Semiconductor Corporation, LSI Logic Corporation, Novell, Inc.
and Tibco Software. Mr. Sonsini received A.B. and L.L.B. degrees
from the University of California, Berkeley.


Executive Officers

The information required by this item concerning
our executive officers is incorporated by reference to the
information set forth in the section entitled Executive
Officers of the Company at the end of Part I of the
Companys Form 10-K.

Section 16(a) Beneficial Ownership
Reporting Compliance

Section 16(a) of the Exchange Act
(Section 16(a)) requires our executive
officers, directors and persons who own more than ten percent of
our Common Stock, to file initial reports of ownership on
Form 3 and changes in ownership on Form 4 or
Form 5 with the SEC and the National Association of
Securities Dealers, Inc. Such executive officers, directors and
ten-percent shareholders are also required by SEC rules to
furnish Pixar with copies of all such forms that they file.

Based solely on our review of the copies of such
forms received by us and written representations from certain
reporting persons that no Forms 5 were required for such
persons, we believe that during fiscal 2001 all
Section 16(a) filing requirements applicable to our
executive officers, directors and 10% shareholders were complied
with.




Item 11.     Executive
Compensation

Summary Compensation Table

The following table shows, as to our Chief
Executive Officer and each of the four most highly compensated
executive officers whose salary plus bonus exceeded $100,000
during the last fiscal year (the Named Officers),
information concerning compensation paid for services to us in
all capacities during the last three fiscal years.

|                            |                                   |      |      |                     |  |            |           |              |     |              |           |         |  |  |   |           |  |  |         |     | 
|--------------------------- | --------------------------------- | ---- | ---- | ------------------- |  | ---------- | --------- | ------------ | --- | ------------ | --------- | ------- |  |  | - | --------- |  |  | ------- | --- | 
|                            |                                   |      |      |                     |  |            |           | Long Term    |     |             
|                            |                                   |      |      |                     |  |            |           | Compensation |     |             
|                            |                                   |      |      |                     |  |            |           | Awards       |     |             
|                            |                                   |      |      |                     |  |            |           |             
|                            |                                   |      |      | Annual Compensation |  | Securities |           |             
|                            |                                   |      |      |                     |  | Underlying |           | All Other   
|Name and Principal Position |                                   | Year |      | Salary($)           |  | Bonus($)   |           | Options(#)   |     | Compensation
|                            |                                   |      |      |                     |  |            |           |              |     |             
|Steve Jobs                  |                                   |      | 2001 |                     |  | $          | 52        |              |     | $            |          |         |  |  |  |           |  |  |        |    
|                            | Chairman, Chief Executive Officer |      |      | 2000                |  |            |           | 52           |     |              |           |        |  |  |   |          |  |  |         |    | 
|                            |                                   |      | 1999 |                     |  |            | 52        |              |     |              |          |         |  |  |  |           |  |  |        |    
|Edwin E. Catmull            |                                   |      | 2001 |                     |  |            | 498,088   |              |     |              |          |         |  |  |  |           |  |  |        |    
|                            | President                         |      |      | 2000                |  |            |           | 392,793      |     |              |           |        |  |  |   | 500,000   |  |  |         |    | 
|                            |                                   |      | 1999 |                     |  |            | 322,596   |              |     |              | 54,167    |         |  |  |  |           |  |  |        |    
|Ann Mather                  |                                   |      | 2001 |                     |  |            | 416,074   |              |     |              |          |         |  |  |  |           |  |  |        |    
|                            | Executive Vice President,         |      |      | 2000                |  |            |           | 400,005      |     |              |           |        |  |  |   |          |  |  |         |    | 
|                            | Chief Financial Officer           |      |      | 1999                |  |            |           | 124,617      | (1) |              |           | 203,600 |  |  |   | 500,000   |  |  |         |    | 
|John Lasseter               |                                   |      | 2001 |                     |  |            | 2,122,694 |              |     |              | 5,000,000 | (2)     |  |  |  |           |  |  | 571,044 | (3)
|                            | Executive Vice President,         |      |      | 2000                |  |            |           | 879,567      |     |              |           | 600,000 |  |  |   | 1,000,000 |  |  |         |    | 
|                            | Creative Development              |      |      | 1999                |  |            |           | 806,726      |     |              |           | 900,000 |  |  |   |          |  |  |         |    | 
|Sarah McArthur              |                                   |      | 2001 |                     |  |            | 419,246   |              |     |              |          |         |  |  |  |           |  |  |        |    
|                            | Executive Vice President,         |      |      | 2000                |  |            |           | 392,793      |     |              |           |        |  |  |   |          |  |  |         |    | 
|                            | Production                        |      |      | 1999                |  |            |           | 322,596      |     |              |           | 54,167  |  |  |   |          |  |  |         |    | 



---



|    |                                                                                                   
|--- | --------------------------------------------------------------------------------------------------
|(1) | Ms. Mather joined Pixar in September 1999.                                                        
|   
|(2) | This amount includes $60,000 that was paid to Mr.
	Lasseters designees.                          
|   
|(3) | This amount includes $332,947 paid in lieu of
	vacation and $238,097 paid in lieu of a sabbatical.

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Option Grants in Last Fiscal Year

No options were granted to the Named Officers
during fiscal year 2001.

Option Exercises and Holdings

The following table sets forth, for each of the
Named Officers, certain information concerning stock options
exercised during fiscal 2001, and the number of shares subject
to both exercisable and unexercisable stock options as of
December 29, 2001. Also reported are values for
in-the-money options that represent the positive
spread between the respective exercise prices of outstanding
stock options and the fair market value of our Common Stock as
of December 29, 2001.

|                 |  |             |        |             |  |                            |         |                          |  |             |         |               |  |  |         |  |  |   |            |  |  |   |           | 
|---------------- |  | ----------- | ------ | ----------- |  | -------------------------- | ------- | ------------------------ |  | ----------- | ------- | ------------- |  |  | ------- |  |  | - | ---------- |  |  | - | --------- | 
|                 |  |             |        |             |  |                            |         |                         
|                 |  |             |        |             |  | Number of Securities       |         | Value of Unexercised    
|                 |  |             |        |             |  | Underlying Unexercised     |         | In-the-Money Options    
|                 |  | Shares      |        |             |  | Options at Fiscal Year End |         | at Fiscal Year End($)(1)
|                 |  | Acquired on |        | Value       |  |                            |         |                         
|Name             |  | Exercise(#) |        | Realized($) |  | Exercisable                |         | Unexercisable            |  | Exercisable |         | Unexercisable
|                 |  |             |        |             |  |                            |         |                          |  |             |         |              
|Steve Jobs       |  |             |       |             |  |                            |        |                          |  |             |        |               |  |  |        |  |  |   |           |  |  |   |          | 
|Edwin E. Catmull |  |             |       |             |  |                            |        |                          |  |             |        |               |  |  | 500,000 |  |  |   |           |  |  | $ | 5,100,000 | 
|Ann Mather       |  |             |       |             |  |                            |        |                          |  |             | 250,000 |               |  |  | 250,000 |  |  | $ | 690,625    |  |  |   | 690,625   | 
|John Lasseter    |  |             |       |             |  |                            |        |                          |  |             | 490,003 |               |  |  | 899,997 |  |  |   | 13,514,406 |  |  |   | 9,179,969 | 
|Sarah McArthur   |  |             | 35,000 |             |  | $                          | 694,938 |                          |  |             | 90,000  |               |  |  | 200,000 |  |  |   | 2,155,500  |  |  |   | 3,065,000 | 



---



|    |                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Market value of underlying securities based on
	the closing price of Pixars Common Stock on
	December 28, 2001 (the last trading day of fiscal 2001) on
	the Nasdaq National Market of $36.70 minus the exercise price.

Employment Agreements

In March 2001, we entered into an employment
agreement with John Lasseter (the Employment
Agreement), which has a term of 10 years. The
Employment Agreement supercedes our prior employment agreement
with Mr. Lasseter, which was entered into in February 1997.
Pursuant to the Employment Agreement, Mr. Lasseter received a
signing bonus of $5,000,000, of which $60,000 was paid to
Mr. Lasseters designees. The Employment Agreement
also provides for a current annual salary of $2,500,000 with 5%
annual increases. In connection with the Employment Agreement,
Mr. Lasseter was previously granted an option to purchase
1,000,000 shares of our common stock at the fair market value on
the date of such grant. The option vests on an equal monthly
basis over the ten-year term of the agreement, except for
options that vest on the last month will vest on the penultimate
month of this ten-year period. Under the Employment Agreement,
Mr. Lasseter will direct three Feature Films (a Feature Film is
defined as a feature-length animated motion picture) and he has
the option to direct certain sequels to Feature Films he has
directed if we elect to produce such sequels within
12 years of the initial release of the applicable Feature
Film. In addition, at our request, Mr. Lasseter will
provide writing services and supervisory services to create
stories, treatments and screenplays for Feature Films, and
Mr. Lasseter will also provide executive producing services
on Feature Films, made-for-home videos and short-subject motion
pictures that Mr. Lasseter does not direct. During the term of
the Employment Agreement, Mr. Lasseter is prohibited from
accepting other employment and from becoming financially
interested or associated with any entity engaged in a related or
competitive business. We can terminate the Employment Agreement
at any time for any reason. If we terminate
Mr. Lasseters employment without cause, we must
(1) pay an amount equal to 75% of the balance of the salary
Mr. Lasseter would have earned through the remainder of the
term of the Employment Agreement and (2) accelerate the
unvested portion of Mr. Lasseters option so that the
option would be exercisable in full. In addition,
Mr. Lasseter would be able to accept employment with any
third party.

Director Compensation

Directors who are not employees of Pixar receive
a fee of $1,000 for each meeting attended of the Board of
Directors and a fee of $1,000 for each meeting attended of a
committee of the Board of Directors if such

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committee meeting is not held in conjunction with
a meeting of the Board of Directors. All directors are
reimbursed for expenses incurred in attending such meetings.


Non-employee directors are eligible to receive
option grants pursuant to our 1995 Director Option Plan (the
Director Plan) which was adopted by the Board of
Directors in October 1995, approved by the shareholders in
November 1995 and took effect in November 1995. A total of
200,000 shares of Common Stock has been reserved for issuance
under the Director Plan. As of March 4, 2002, there were
200,000 options outstanding under the Director Plan. The
Director Plan provides for an automatic grant of an option to
purchase 30,000 shares of Common Stock (the First
Option) to each non-employee director who first becomes a
non-employee director (other than an employee director who
ceases to be an employee but remains a director) after the
effective date of the Director Plan on the date on which such
person first becomes a non-employee director. Beginning on the
third anniversary of the date he or she became an outside
director, each non-employee director will automatically be
granted an option to purchase 10,000 shares of Common Stock (a
Subsequent Option) each year on the date of such
anniversary, provided he or she is then a non-employee director.
Each non-employee director will be eligible to receive a
Subsequent Option, regardless of whether such non-employee
director was eligible to receive a First Option. First Options
and each Subsequent Option will have a term of ten years.
One-third of the shares subject to a First Option will vest one
year after its date of grant and an additional one-third will
vest at the end of each year thereafter, provided that the
optionee continues to serve as a director on such dates. All of
the shares subject to a Subsequent Option will vest one year
after the date of the option grant, provided that the optionee
continues to serve as a director on such date. The exercise
prices of the First Option and each Subsequent Option will be
100% of the fair market value per share of Pixars Common
Stock on the date of the grant of the option. Ms. Barad was
granted a Subsequent Option in July 2001 at an exercise price of
$40.87 per share. Mr. Sonsini was granted a Subsequent
Option in April 2001 at an exercise price of $31.86 per share.
Messrs. Brittenham and Graziano were each granted Subsequent
Options in August 2001 at an exercise price of $40.20 per share.
Mr. Roth and Mr. Levy, non-employee directors of
Pixar, will be eligible for Subsequent Options under the
Director Plan on the third anniversary of the dates they became
directors. Messrs. Sonsini, Brittenham and Graziano and
Ms. Barad, also non-employee directors, are eligible for
Subsequent Options each year on the anniversary of the dates
they became directors.

Compensation Committee Interlocks and Insider
Participation

Pixars Compensation Committee was formed in
1995 and is currently composed of Ms. Barad and
Mr. Graziano. No interlocking relationships exist between
any member of Pixars Board of Directors or Compensation
Committee and any member of the board of directors or
compensation committee of any other company, nor has any such
interlocking relationship existed in the past. No member of the
Compensation Committee is or was formerly an officer or an
employee of Pixar.

44



---



##### Table of Contents








|         |                                                                
|-------- | ---------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
	Owners and Management

The following table sets forth the beneficial
ownership of Common Stock of Pixar as of March 4, 2002 for
the following: (i) each person who is known by Pixar to own
beneficially more than 5% of the outstanding shares of
Pixars Common Stock; (ii) each of Pixars
directors; (iii) each of the Named Officers; and
(iv) all directors and executive officers of Pixar as a
group.

|                                                                  |                                                   |           |            |             |  |  |      |   | 
|----------------------------------------------------------------- | ------------------------------------------------- | --------- | ---------- | ----------- |  |  | ---- | - | 
|                                                                  |                                                   | Number of |            | Percent    
|Name of Beneficial Owner                                          |                                                   | Shares(1) |            | of Total(1)
|                                                                  |                                                   |           |            |            
|Steve Jobs                                                        |                                                   |           | 30,000,001 |             |  |  | 60.6 | %
|                                                                  | c/o Pixar
	1200 Park Avenue
	Emeryville, CA 94608 |           |            |             |  |  |      |   | 
|The TCW Group, Inc.(2)                                            |                                                   |           | 8,216,351  |             |  |  | 16.6 | %
|                                                                  | 865 South Figueroa St.
	Los Angeles, CA 90017     |           |            |             |  |  |      |   | 
|John Lasseter(3)                                                  |                                                   |           | 749,828    |             |  |  | 1.5  |  
|Edwin E. Catmull(4)                                               |                                                   |           | 422,800    |             |  |  | *    |  
|Sarah McArthur(5)                                                 |                                                   |           | 90,000     |             |  |  | *    |  
|Ann Mather(6)                                                     |                                                   |           | 250,000    |             |  |  | *    |  
|Lawrence B. Levy                                                  |                                                   |           | 25,010     |             |  |  | *    |  
|Joe Roth(7)                                                       |                                                   |           | 10,000     |             |  |  | *    |  
|Larry W. Sonsini(8)                                               |                                                   |           | 44,528     |             |  |  | *    |  
|Skip M. Brittenham(9)                                             |                                                   |           | 60,000     |             |  |  | *    |  
|Joseph A. Graziano(10)                                            |                                                   |           | 30,000     |             |  |  | *    |  
|Jill E. Barad (11)                                                |                                                   |           | 41,000     |             |  |  | *    |  
|All directors and executive officers as a group
	(11 persons)(12) |                                                   |           | 31,723,167 |             |  |  | 64.1 | %



---



|  |                                      
|- | -------------------------------------
|* | Represents less than 1% of the total.



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Based on 49,499,873 shares outstanding on
	March 4, 2002. The number and percentage of shares
	beneficially owned is determined under rules of the Securities
	and Exchange Commission (SEC), and the information
	is not necessarily indicative of beneficial ownership for any
	other purpose. Under such rules, beneficial ownership includes
	any shares as to which the individual has sole or shared voting
	power or investment power and also any shares which the
	individual has the right to acquire within sixty days of
	March 4, 2002 through the exercise of any stock option or
	other right. Unless otherwise indicated in the footnotes, each
	person has sole voting and investment power (or shares such
	powers with his or her spouse) with respect to the shares shown
	as beneficially owned.
|   
|(2) | As indicated in the Schedule 13G filed by
	The TCW Group, Inc. pursuant to the Exchange Act on
	February 13, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(3) | Includes 498,338 shares subject to options that
	are exercisable within 60 days of March 4, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|(4) | Includes 125,000 shares subject to options that
	are exercisable within 60 days of March 4, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|(5) | All 90,000 shares are subject to options that are
	exercisable within 60 days of March 4, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(6) | All 250,000 shares are subject to options that
	are exercisable within 60 days of March 4, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(7) | All 10,000 shares are subject to options that are
	exercisable within 60 days of March 4, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(8) | Includes 40,000 shares subject to options that
	are exercisable within 60 days of March 4, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(9) | All 60,000 shares are subject to options that are
	exercisable within 60 days of March 4, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        



|     |                                                                                                    
|---- | ---------------------------------------------------------------------------------------------------
|(10) | All 30,000 shares are subject to options that are
	exercisable within 60 days of March 4, 2002.    
|    
|(11) | Includes 40,000 shares subject to options that
	are exercisable within 60 days of March 4, 2002.   
|    
|(12) | Includes 1,143,338 shares subject to options that
	are exercisable within 60 days of March 4, 2002.

45



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##### Table of Contents






Item 13.     Certain
Relationships and Related Transactions

We have engaged the law firm of Ziffren,
Brittenham, Branca, Fischer, Gilbert-Lurie & Stiffelman
(ZBBFG&S) to handle certain legal matters. Skip
M. Brittenham, a director of Pixar, is a senior partner of the
firm. We have also engaged the law firm of Wilson Sonsini
Goodrich & Rosati (WSGR) to handle certain legal
matters. Larry W. Sonsini, a director of Pixar, is Chairman and
Chief Executive Officer of the firm. We also have obligations to
pay portions of any revenue derived from each feature film
produced under the Co-Production Agreement to ZBBFG&S in
consideration for services rendered. Payments by us to each of
ZBBFG&S and WSGR did not exceed five percent of either law
firms respective gross revenues in the last fiscal year of
either such firm.

We believe that all of the transactions set forth
above were made on terms no less favorable to us than could have
been obtained from unaffiliated third parties. All future
transactions, including loans, between us and our officers,
directors and principal shareholders and their affiliates will
be approved by a majority of the Board of Directors, including a
majority of the independent and disinterested directors of the
Board of Directors, and will be on terms no less favorable to us
than could be obtained from unaffiliated third parties.




PART IV




Item 14.     Exhibits,
Financial Statement Schedules and Reports on
Form 8-K

(a) We have filed the following documents as
part of this Form 10-K:

1. Financial Statements.

|                                                                                                                                           |  |  |     | 
|------------------------------------------------------------------------------------------------------------------------------------------ |  |  | --- | 
|Independent Auditors Report                                                                                                               |  |  | F-1 | 
|Balance Sheets as of December 30, 2000 and
	December 29, 2001                                                                              |  |  | F-2 | 
|Statements of Income for the years ended
	January 1, 2000, December 30, 2000 and
	December 29, 2001                                        |  |  | F-3 | 
|Statements of Shareholders Equity and
	Comprehensive Income for the years ended January 1, 2000,
	December 30, 2000 and December 29, 2001 |  |  | F-4 | 
|Statements of Cash Flows for the years ended
	January 1, 2000, December 30, 2000 and
	December 29, 2001                                    |  |  | F-5 | 
|Notes to Financial Statements                                                                                                              |  |  | F-6 | 

2. Financial Statement Schedule.We
have filed the following financial statement schedule for the
years ended January 1, 2000, December 30, 2000 and
December 29, 2001 as part of this Form 10-K. It should
be read in conjunction with our Financial Statements, and
related notes.

|                                                              |  |  |     | 
|------------------------------------------------------------- |  |  | --- | 
|Independent Auditors Report on Financial
	Statement Schedule |  |  | S-1 | 
|Schedule II  Valuation and
	Qualifying Accounts and Reserves |  |  | S-2 | 

We have omitted schedules not listed above since
they are either not required, not applicable, or the information
is otherwise included.

3. Exhibits.See Item 14(c)
below.

(b) Reports on Form 8-K.We
filed no reports on Form 8-K during the fourth quarter
ended December 29, 2001.

(c) Exhibits.We have filed, or
incorporated into the Form 10-K by reference, the exhibits
listed on the accompanying Index to Exhibits immediately
following the signature page of this Form 10-K.

(d) Financial Statement Schedule.See
Item 14(a) above.

46



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##### Table of Contents



INDEPENDENT AUDITORS REPORT

The Board of Directors and Shareholders, Pixar:

We have audited the accompanying balance sheets
of Pixar as of December 30, 2000 and December 29, 2001
and the related statements of income, shareholders equity
and comprehensive income, and cash flows for each of the years
in the three-year period ended December 29, 2001. These
financial statements are the responsibility of Pixars
management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the financial statements referred
to above present fairly, in all material respects, the financial
position of Pixar as of December 30, 2000 and
December 29, 2001, and the results of its operation and its
cash flows for each of the years in the three-year period ended
December 29, 2001, in conformity with accounting principles
generally accepted in the United States of America.



| |             
| | ------------
| | /s/ KPMG LLP

San Francisco, California

February 1, 2002


F-1



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##### Table of Contents



PIXAR

BALANCE SHEETS

|                                                                                                                                   |                                                                                                                                                                                   |                                            |         |              |         |   |         |         |         | 
|---------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | ------------ | ------- | - | ------- | ------- | ------- | 
|                                                                                                                                   |                                                                                                                                                                                   | December 30,                               |         | December 29,
|                                                                                                                                   |                                                                                                                                                                                   | 2000                                       |         | 2001        
|                                                                                                                                   |                                                                                                                                                                                   |                                            |         |             
|                                                                                                                                   |                                                                                                                                                                                   |                                           
|                                                                                                                                   |                                                                                                                                                                                   | (In thousands,                            
|                                                                                                                                   |                                                                                                                                                                                   | except share data)                        
|ASSETS                                                                                                                            
|Cash and cash equivalents                                                                                                          |                                                                                                                                                                                   | $                                          | 63,241  |              |         | $ | 56,289  |        
|Short-term investments                                                                                                             |                                                                                                                                                                                   |                                            | 139,514 |              |         |   | 222,310 |        
|Trade accounts receivable, net of allowance for
	returns and doubtful accounts of $170 and $552 as of 2000 and
	2001, respectively |                                                                                                                                                                                   |                                            | 1,136   |              |         |   | 1,516   |        
|Due from Disney                                                                                                                    |                                                                                                                                                                                   |                                            | 73,850  |              |         |   | 13,512  |        
|Other receivables                                                                                                                  |                                                                                                                                                                                   |                                            | 3,121   |              |         |   | 5,632   |        
|Prepaid expenses and other assets                                                                                                  |                                                                                                                                                                                   |                                            | 4,903   |              |         |   | 3,528   |        
|Deferred income taxes                                                                                                              |                                                                                                                                                                                   |                                            | 25,915  |              |         |   | 21,673  |        
|Property and equipment, net                                                                                                        |                                                                                                                                                                                   |                                            | 110,891 |              |         |   | 111,995 |        
|Capitalized film production costs                                                                                                  |                                                                                                                                                                                   |                                            | 57,032  |              |         |   | 86,839  |        
|                                                                                                                                   |                                                                                                                                                                                   |                                            |         |              |         |   |         |        
|                                                                                                                                   |                                                                                                                                                                                   | Total assets                               |         | $            | 479,603 |   |         | $       | 523,294 | 
|                                                                                                                                   |                                                                                                                                                                                   |                                            |         |              |         |   |         |        
|LIABILITIES AND SHAREHOLDERS
	EQUITY                                                                                             
|Accounts payable                                                                                                                   |                                                                                                                                                                                   | $                                          | 1,622   |              |         | $ | 4,843   |        
|Income taxes payable                                                                                                               |                                                                                                                                                                                   |                                            | 9,650   |              |         |   | 1,808   |        
|Accrued liabilities                                                                                                                |                                                                                                                                                                                   |                                            | 17,229  |              |         |   | 8,844   |        
|Unearned revenue                                                                                                                   |                                                                                                                                                                                   |                                            | 15,382  |              |         |   | 2,113   |        
|                                                                                                                                   |                                                                                                                                                                                   |                                            |         |              |         |   |         |        
|                                                                                                                                   |                                                                                                                                                                                   | Total liabilities                          |         |              | 43,883  |   |         |         | 17,608  | 
|                                                                                                                                   |                                                                                                                                                                                   |                                            |         |              |         |   |         |        
|Shareholders equity:                                                                                                              |                                                                                                                                                                                   |                                            |         |              |         |   |         |        
|                                                                                                                                   | Preferred stock, no par value; 5,000,000 shares
	authorized and no shares issued and outstanding                                                                                  |                                            |         |             |         |   |         |        |        
|                                                                                                                                   | Common stock, no par value; 100,000,000 shares
	authorized; 47,633,372 and 49,445,956 shares issued and
	outstanding as of December 30, 2000 and December 29,
	2001, respectively |                                            |         | 293,209      |         |   |         | 325,362 |        
|                                                                                                                                   | Accumulated other comprehensive income                                                                                                                                            |                                            |         | 249          |         |   |         | 1,845   |        
|                                                                                                                                   | Retained earnings                                                                                                                                                                 |                                            |         | 142,262      |         |   |         | 178,479 |        
|                                                                                                                                   |                                                                                                                                                                                   |                                            |         |              |         |   |         |        
|                                                                                                                                   |                                                                                                                                                                                   | Total shareholders equity                 |         |              | 435,720 |   |         |         | 505,686 | 
|                                                                                                                                   |                                                                                                                                                                                   |                                            |         |              |         |   |         |        
|                                                                                                                                   |                                                                                                                                                                                   | Total liabilities and shareholders equity |         | $            | 479,603 |   |         | $       | 523,294 | 
|                                                                                                                                   |                                                                                                                                                                                   |                                            |         |              |         |   |         |        

See accompanying notes to financial statements.

F-2



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##### Table of Contents



PIXAR

STATEMENTS OF INCOME

|                                                                                                                               |                             |                                                |        |              |         |              |        |         |         |   |        |        |        | 
|------------------------------------------------------------------------------------------------------------------------------ | --------------------------- | ---------------------------------------------- | ------ | ------------ | ------- | ------------ | ------ | ------- | ------- | - | ------ | ------ | ------ | 
|                                                                                                                               |                             |                                               
|                                                                                                                               |                             | Years Ended                                   
|                                                                                                                               |                             |                                               
|                                                                                                                               |                             | January 1,                                     |        | December 30, |         | December 29,
|                                                                                                                               |                             | 2000                                           |        | 2000         |         | 2001        
|                                                                                                                               |                             |                                                |        |              |         |             
|                                                                                                                               |                             |                                               
|                                                                                                                               |                             | (In thousands, except per share data)         
|Revenue:                                                                                                                       |                             |                                                |        |              |         |              |        |         |         |   |        |       
|                                                                                                                               | Film and animation services |                                                | $      | 115,291      |         |              | $      | 163,154 |         |   | $      | 63,365 |       
|                                                                                                                               | Software                    |                                                |        | 5,746        |         |              |        | 9,113   |         |   |        | 6,858  |       
|                                                                                                                               |                             |                                                |        |              |         |              |        |         |         |   |        |       
|                                                                                                                               |                             | Total revenue                                  |        |              | 121,037 |              |        |         | 172,267 |   |        |        | 70,223 | 
|                                                                                                                               |                             |                                                |        |              |         |              |        |         |         |   |        |       
|Cost of revenue:                                                                                                               |                             |                                                |        |              |         |              |        |         |         |   |        |       
|                                                                                                                               | Film and animation services |                                                |        | 31,016       |         |              |        | 36,433  |         |   |        | 11,769 |       
|                                                                                                                               | Software                    |                                                |        | 689          |         |              |        | 571     |         |   |        | 549    |       
|                                                                                                                               |                             |                                                |        |              |         |              |        |         |         |   |        |       
|                                                                                                                               |                             | Total cost of revenue                          |        |              | 31,705  |              |        |         | 37,004  |   |        |        | 12,318 | 
|                                                                                                                               |                             |                                                |        |              |         |              |        |         |         |   |        |       
|                                                                                                                               |                             | Gross profit                                   |        |              | 89,332  |              |        |         | 135,263 |   |        |        | 57,905 | 
|                                                                                                                               |                             |                                                |        |              |         |              |        |         |         |   |        |       
|Operating expenses:                                                                                                            |                             |                                                |        |              |         |              |        |         |         |   |        |       
|                                                                                                                               | Research and development    |                                                |        | 6,281        |         |              |        | 5,562   |         |   |        | 6,341  |       
|                                                                                                                               | Sales and marketing         |                                                |        | 1,501        |         |              |        | 1,615   |         |   |        | 1,991  |       
|                                                                                                                               | General and administrative  |                                                |        | 7,016        |         |              |        | 7,686   |         |   |        | 8,057  |       
|                                                                                                                               |                             |                                                |        |              |         |              |        |         |         |   |        |       
|                                                                                                                               |                             | Total operating expenses                       |        |              | 14,798  |              |        |         | 14,863  |   |        |        | 16,389 | 
|                                                                                                                               |                             |                                                |        |              |         |              |        |         |         |   |        |       
|                                                                                                                               |                             | Income from continuing operations              |        |              | 74,534  |              |        |         | 120,400 |   |        |        | 41,516 | 
|Other income, net                                                                                                              |                             |                                                | 7,469  |              |         |              | 12,978 |         |         |   | 14,355 |       
|                                                                                                                               |                             |                                                |        |              |         |              |        |         |         |   |        |       
|                                                                                                                               |                             | Income from continuing operations before taxes |        |              | 82,003  |              |        |         | 133,378 |   |        |        | 55,871 | 
|Income tax expense                                                                                                             |                             |                                                | 32,901 |              |         |              | 55,351 |         |         |   | 19,865 |       
|                                                                                                                               |                             |                                                |        |              |         |              |        |         |         |   |        |       
|                                                                                                                               |                             | Net income from continuing operations          |        |              | 49,102  |              |        |         | 78,027  |   |        |        | 36,006 | 
|Income from discontinued operations (includes
	income tax expense of $62, $279 and $140 in 1999, 2000 and 2001,
	respectively) |                             |                                                | 122    |              |         |              | 406    |         |         |   | 211    |       
|                                                                                                                               |                             |                                                |        |              |         |              |        |         |         |   |        |       
|                                                                                                                               |                             | Net income                                     |        | $            | 49,224  |              |        | $       | 78,433  |   |        | $      | 36,217 | 
|                                                                                                                               |                             |                                                |        |              |         |              |        |         |         |   |        |       
|Basic net income per share from continuing
	operations                                                                         |                             | $                                              | 1.06   |              |         | $            | 1.65   |         |         | $ | 0.75   |       
|Basic net income per share from discontinued
	operations                                                                       |                             |                                                | 0.01   |              |         |              | 0.01   |         |         |   | 0.00   |       
|                                                                                                                               |                             |                                                |        |              |         |              |        |         |         |   |        |       
|Basic net income per share                                                                                                     |                             | $                                              | 1.07   |              |         | $            | 1.66   |         |         | $ | 0.75   |       
|                                                                                                                               |                             |                                                |        |              |         |              |        |         |         |   |        |       
|Shares used in computing basic net income per
	share                                                                           |                             |                                                | 46,148 |              |         |              | 47,280 |         |         |   | 48,276 |       
|                                                                                                                               |                             |                                                |        |              |         |              |        |         |         |   |        |       
|Diluted net income per share from continuing
	operations                                                                       |                             | $                                              | 0.99   |              |         | $            | 1.56   |         |         | $ | 0.71   |       
|Diluted net income per share from discontinued
	operations                                                                     |                             |                                                | 0.00   |              |         |              | 0.01   |         |         |   | 0.00   |       
|                                                                                                                               |                             |                                                |        |              |         |              |        |         |         |   |        |       
|Diluted net income per share                                                                                                   |                             | $                                              | 0.99   |              |         | $            | 1.57   |         |         | $ | 0.71   |       
|                                                                                                                               |                             |                                                |        |              |         |              |        |         |         |   |        |       
|Shares used in computing diluted net income per
	share                                                                         |                             |                                                | 49,810 |              |         |              | 49,851 |         |         |   | 51,030 |       
|                                                                                                                               |                             |                                                |        |              |         |              |        |         |         |   |        |       

See accompanying notes to financial statements.

F-3



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##### Table of Contents



PIXAR

STATEMENTS OF SHAREHOLDERS EQUITY AND
COMPREHENSIVE INCOME

|                                                           |  |                |        |               |  |             |         |              |  |               |       |               |  |        |      |   |  |   |         |  |  |   |         |   |  |   |        |  
|---------------------------------------------------------- |  | -------------- | ------ | ------------- |  | ----------- | ------- | ------------ |  | ------------- | ----- | ------------- |  | ------ | ---- | - |  | - | ------- |  |  | - | ------- | - |  | - | ------ | -
|                                                           |  |                |        |               |  | Accumulated |         |              |  |               |       |               |  |       
|                                                           |  |                |        | Other         |  |             |         |              |  |               |       |              
|                                                           |  | Common Stock   |        | Comprehensive |  |             |         |              |  | Total         |       |              
|                                                           |  |                |        | Income        |  | Deferred    |         | Retained     |  | Shareholders |       | Comprehensive
|                                                           |  | Shares         |        | Amount        |  | (Loss)      |         | Compensation |  | Earnings      |       | Equity        |  | Income
|                                                           |  |                |        |               |  |             |         |              |  |               |       |               |  |       
|                                                           |  |               
|                                                           |  | (In thousands)
|Balances, January 2, 1999                                  |  |                | 45,336 |               |  | $           | 220,397 |              |  | $             | 149   |               |  | $      | (104 | ) |  | $ | 14,605  |  |  | $ | 235,047 |   |  |   |        |  
|Exercise of stock options, including tax benefit           |  |                | 1,623  |               |  |             | 60,877  |              |  |               |      |               |  |        |     |   |  |   |        |  |  |   | 60,877  |   |  |   |        |  
|Amortization of deferred compensation                      |  |                |       |               |  |             |        |              |  |               |      |               |  |        | 104  |   |  |   |        |  |  |   | 104     |   |  |   |        |  
|Other comprehensive income (net of tax benefit of
	$364)   |  |                |       |               |  |             |        |              |  |               | (545  | )             |  |        |     |   |  |   |        |  |  |   | (545    | ) |  |   | (545   | )
|Net income                                                 |  |                |       |               |  |             |        |              |  |               |      |               |  |        |     |   |  |   | 49,224  |  |  |   | 49,224  |   |  |   | 49,224 |  
|                                                           |  |                |        |               |  |             |         |              |  |               |       |               |  |        |      |   |  |   |         |  |  |   |         |   |  |   |        |  
|Balances, January 1, 2000                                  |  |                | 46,959 |               |  |             | 281,274 |              |  |               | (396  | )             |  |        |     |   |  |   | 63,829  |  |  |   | 344,707 |   |  | $ | 48,679 |  
|                                                           |  |                |        |               |  |             |         |              |  |               |       |               |  |        |      |   |  |   |         |  |  |   |         |   |  |   |        |  
|Exercise of stock options, including tax benefit           |  |                | 674    |               |  |             | 11,935  |              |  |               |      |               |  |        |     |   |  |   |        |  |  |   | 11,935  |   |  |   |        |  
|Other comprehensive income (net of tax expense of
	$440)   |  |                |       |               |  |             |        |              |  |               | 645   |               |  |        |     |   |  |   |        |  |  |   | 645     |   |  |   | 645    |  
|Net income                                                 |  |                |       |               |  |             |        |              |  |               |      |               |  |        |     |   |  |   | 78,433  |  |  |   | 78,433  |   |  |   | 78,433 |  
|                                                           |  |                |        |               |  |             |         |              |  |               |       |               |  |        |      |   |  |   |         |  |  |   |         |   |  |   |        |  
|Balances, December 30, 2000                                |  |                | 47,633 |               |  |             | 293,209 |              |  |               | 249   |               |  |        |     |   |  |   | 142,262 |  |  |   | 435,720 |   |  | $ | 79,078 |  
|                                                           |  |                |        |               |  |             |         |              |  |               |       |               |  |        |      |   |  |   |         |  |  |   |         |   |  |   |        |  
|Exercise of stock options, including tax benefit           |  |                | 1,172  |               |  |             | 32,153  |              |  |               |      |               |  |        |     |   |  |   |        |  |  |   | 32,153  |   |  |   |        |  
|Conversion of Disney warrants                              |  |                | 641    |               |  |             |        |              |  |               |      |               |  |        |     |   |  |   |        |  |  |   |        |   |  |   |        |  
|Other comprehensive income (net of tax expense of
	$1,173) |  |                |       |               |  |             |        |              |  |               | 1,596 |               |  |        |     |   |  |   |        |  |  |   | 1,596   |   |  |   | 1,596  |  
|Net income                                                 |  |                |       |               |  |             |        |              |  |               |      |               |  |        |     |   |  |   | 36,217  |  |  |   | 36,217  |   |  |   | 36,217 |  
|                                                           |  |                |        |               |  |             |         |              |  |               |       |               |  |        |      |   |  |   |         |  |  |   |         |   |  |   |        |  
|Balances, December 29, 2001                                |  |                | 49,446 |               |  | $           | 325,362 |              |  | $             | 1,845 |               |  | $      |     |   |  | $ | 178,479 |  |  | $ | 505,686 |   |  | $ | 37,813 |  
|                                                           |  |                |        |               |  |             |         |              |  |               |       |               |  |        |      |   |  |   |         |  |  |   |         |   |  |   |        |  

See accompanying notes to financial statements.

F-4



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##### Table of Contents



PIXAR

STATEMENTS OF CASH FLOWS

|                                                                         |                                                                                    |                                                               |                                              |              |         |              |        |          |         |         |        |          |         |          |  
|------------------------------------------------------------------------ | ---------------------------------------------------------------------------------- | ------------------------------------------------------------- | -------------------------------------------- | ------------ | ------- | ------------ | ------ | -------- | ------- | ------- | ------ | -------- | ------- | -------- | -
|                                                                         |                                                                                    |                                                              
|                                                                         |                                                                                    | Years Ended                                                  
|                                                                         |                                                                                    |                                                              
|                                                                         |                                                                                    | January 1,                                                    |                                              | December 30, |         | December 29,
|                                                                         |                                                                                    | 2000                                                          |                                              | 2000         |         | 2001        
|                                                                         |                                                                                    |                                                               |                                              |              |         |             
|                                                                         |                                                                                    |                                                              
|                                                                         |                                                                                    | (In thousands)                                               
|Cash flows from operating activities:                                    |                                                                                    |                                                               |                                              |              |         |              |        |          |         |         |        |         
|                                                                         | Net income                                                                         |                                                               | $                                            | 49,224       |         |              | $      | 78,433   |         |         | $      | 36,217   |        
|                                                                         | Adjustments to reconcile net income to net cash
	provided by operating activities: |                                                               |                                              |              |         |              |        |          |         |         |        |          |        
|                                                                         |                                                                                    | Discontinued operations                                       |                                              |              | (122    | )            |        |          | (406    | )       |        |          | (211    | )       
|                                                                         |                                                                                    | Amortization of deferred compensation, net of
	capitalization |                                              |              | 104     |              |        |          |        |         |        |          |        |         
|                                                                         |                                                                                    | Amortization of purchased technology                          |                                              |              | 630     |              |        |          | 480     |         |        |          | 480     |         
|                                                                         |                                                                                    | Depreciation and amortization                                 |                                              |              | 6,046   |              |        |          | 4,312   |         |        |          | 7,639   |         
|                                                                         |                                                                                    | Amortization of capitalized film production costs             |                                              |              | 30,503  |              |        |          | 35,940  |         |        |          | 11,198  |         
|                                                                         |                                                                                    | Provision for bad debts                                       |                                              |              |        |              |        |          |        |         |        |          | 394     |         
|                                                                         |                                                                                    | Loss on disposition of property and equipment                 |                                              |              | 706     |              |        |          | 16      |         |        |          | 19      |         
|                                                                         |                                                                                    | Tax benefit from option exercises                             |                                              |              | 53,150  |              |        |          | 6,282   |         |        |          | 9,063   |         
|                                                                         |                                                                                    | Deferred income taxes                                         |                                              |              | (33,545 | )            |        |          | 8,442   |         |        |          | 3,245   |         
|                                                                         | Changes in operating assets and liabilities:                                       |                                                               |                                              |              |         |              |        |          |         |         |        |          |        
|                                                                         |                                                                                    | Trade accounts receivable                                     |                                              |              | (119    | )            |        |          | (422    | )       |        |          | (774    | )       
|                                                                         |                                                                                    | Due from Disney                                               |                                              |              | (11,606 | )            |        |          | (61,793 | )       |        |          | 60,338  |         
|                                                                         |                                                                                    | Other receivables                                             |                                              |              | (1,130  | )            |        |          | 848     |         |        |          | (2,511  | )       
|                                                                         |                                                                                    | Prepaid expenses and other assets                             |                                              |              | 366     |              |        |          | (1,495  | )       |        |          | 895     |         
|                                                                         |                                                                                    | Accounts payable                                              |                                              |              | (2,157  | )            |        |          | 1,164   |         |        |          | 3,221   |         
|                                                                         |                                                                                    | Accrued liabilities                                           |                                              |              | 4,716   |              |        |          | 754     |         |        |          | (8,385  | )       
|                                                                         |                                                                                    | Income taxes payable                                          |                                              |              | 12,133  |              |        |          | (2,404  | )       |        |          | (6,845  | )       
|                                                                         |                                                                                    | Unearned revenue                                              |                                              |              | 111     |              |        |          | 14,083  |         |        |          | (13,269 | )       
|                                                                         |                                                                                    |                                                               |                                              |              |         |              |        |          |         |         |        |         
|                                                                         |                                                                                    |                                                               | Net cash provided by continuing operations   |              |         | 109,010      |        |          |         | 84,234  |        |          |         | 100,714  |  
|                                                                         |                                                                                    |                                                               | Net cash provided by discontinued operations |              |         | 122          |        |          |         | 406     |        |          |         | 211      |  
|                                                                         |                                                                                    |                                                               |                                              |              |         |              |        |          |         |         |        |         
|                                                                         |                                                                                    |                                                               | Net cash provided by operating activities    |              |         | 109,132      |        |          |         | 84,640  |        |          |         | 100,925  |  
|                                                                         |                                                                                    |                                                               |                                              |              |         |              |        |          |         |         |        |         
|Cash flows from investing activities:                                    |                                                                                    |                                                               |                                              |              |         |              |        |          |         |         |        |         
|                                                                         | Purchase of property and equipment                                                 |                                                               |                                              | (38,060      | )       |              |        | (55,352  | )       |         |        | (8,990   | )      
|                                                                         | Proceeds from sale of property and equipment                                       |                                                               |                                              | 2,172        |         |              |        | 399      |         |         |        |         |        
|                                                                         | Proceeds from sale of short-term securities                                        |                                                               |                                              | 140,701      |         |              |        | 321,241  |         |         |        | 211,892  |        
|                                                                         | Investments in short-term securities                                               |                                                               |                                              | (185,898     | )       |              |        | (296,067 | )       |         |        | (293,092 | )      
|                                                                         | Capitalized film production costs                                                  |                                                               |                                              | (34,161      | )       |              |        | (28,443  | )       |         |        | (40,777  | )      
|                                                                         |                                                                                    |                                                               |                                              |              |         |              |        |          |         |         |        |         
|                                                                         |                                                                                    |                                                               | Net cash used in investing activities        |              |         | (115,246     | )      |          |         | (58,222 | )      |          |         | (130,967 | )
|                                                                         |                                                                                    |                                                               |                                              |              |         |              |        |          |         |         |        |         
|Cash flows from financing activities:                                    |                                                                                    |                                                               |                                              |              |         |              |        |          |         |         |        |         
|                                                                         | Proceeds from exercised stock options                                              |                                                               |                                              | 7,727        |         |              |        | 5,653    |         |         |        | 23,090   |        
|                                                                         |                                                                                    |                                                               |                                              |              |         |              |        |          |         |         |        |         
|                                                                         |                                                                                    |                                                               | Net cash provided by financing activities    |              |         | 7,727        |        |          |         | 5,653   |        |          |         | 23,090   |  
|                                                                         |                                                                                    |                                                               |                                              |              |         |              |        |          |         |         |        |         
|Net increase (decrease) in cash and cash
	equivalents                    |                                                                                    |                                                               | 1,613                                        |              |         |              | 32,071 |          |         |         | (6,952 | )       
|Cash and cash equivalents at beginning of period                         |                                                                                    |                                                               | 29,557                                       |              |         |              | 31,170 |          |         |         | 63,241 |         
|                                                                         |                                                                                    |                                                               |                                              |              |         |              |        |          |         |         |        |         
|Cash and cash equivalents at end of period                               |                                                                                    | $                                                             | 31,170                                       |              |         | $            | 63,241 |          |         | $       | 56,289 |         
|                                                                         |                                                                                    |                                                               |                                              |              |         |              |        |          |         |         |        |         
|Supplemental disclosure of cash flow information:                        |                                                                                    |                                                               |                                              |              |         |              |        |          |         |         |        |         
|Cash paid during the period for income taxes                             |                                                                                    | $                                                             | 1,900                                        |              |         | $            | 43,486 |          |         | $       | 15,539 |         
|                                                                         |                                                                                    |                                                               |                                              |              |         |              |        |          |         |         |        |         
|Supplemental disclosure of non-cash investing and
	financing activities: |                                                                                    |                                                               |                                              |              |         |              |        |          |         |         |        |         
|Non-cash film production costs capitalized                               |                                                                                    | $                                                             |                                             |              |         | $            | 396    |          |         | $       | 228    |         
|                                                                         |                                                                                    |                                                               |                                              |              |         |              |        |          |         |         |        |         
|Unrealized gain (loss) on investments, net
	of tax expense               |                                                                                    | $                                                             | (545                                         | )            |         | $            | 645    |          |         | $       | 1,596  |         
|                                                                         |                                                                                    |                                                               |                                              |              |         |              |        |          |         |         |        |         

See accompanying notes to financial statements.

F-5



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##### Table of Contents



PIXAR

NOTES TO FINANCIAL STATEMENTS

(1) Summary of Critical and Significant
Accounting Policies



| |            
| | -----------
| | The Company

Pixar was incorporated in the state of California
on December 9, 1985. Pixar is a leading digital animation
studio with the creative, technical and production capabilities
to create a new generation of animated feature films and related
products.

Critical Accounting Policies



| |                    
| | -------------------
| | Revenue Recognition

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



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

Under the Co-Production Agreement, we share
equally with Disney in the profits of Monsters, Inc., Toy
Story 2and A Bugs Lifeafter Disney
recovers its marketing, distribution and other predefined costs
and fees. Beginning in 2000, we had an improved ability, through
information available to us from Disney and other sources, to
estimate and record our share of film revenues and gross
profits. Although our revenues are based on the information we
receive from Disney, we may make adjustments to that information
based on our estimates and judgments. For example, our
theatrical revenues may be adjusted for our estimated reserves
on potential uncollectible amounts to be received from
theatrical exhibitors. We also make adjustments to our home
video revenues for estimates on return reserves that may differ
from those reported by Disney. The estimates on reserves may be
adjusted periodically based on actual rates of returns,
inventory levels in the distribution channel, as well as other
business and industry information. In addition, we utilize
margin normalization, such as with merchandising or home video,
in accordance with the provisions of SOP 00-2. This may
result in the utilization of budgeted or forecasted information
rather than actual costs incurred if it is deemed to be a more
accurate reflection of our participation.

The amount of revenue recognized in any given
quarter or quarters from all of our films depends on the timing,
accuracy and sufficiency of the information we receive from
Disney to determine revenues and associated gross profits.
Although Disney provides us with the most current information
available to enable us to recognize our share of revenue and
determine our film gross profit, Disney may also make subsequent
adjustments to the information that it has provided, and these
adjustments could have a material impact on our operating
results in later periods. As additional information becomes
available from Disney on a more timely basis, it may result in a
change of estimation for revenue recognition. Additionally, we
have the right to audit Disneys books and records related
to the Pictures per the terms of the Co-Production Agreement,
which could result in adjustments that may be material to the
financial statements in any given quarter or quarters. Any
revenue received in advance from Disney is deferred and recorded
as revenue when earned.

In accordance with the provisions of
SOP 00-2, library titles are defined as occurring three
years from the films initial release. Currently, Toy
Story and A Bugs Lifeare classified as library
titles. The term library

F-6



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##### Table of Contents



PIXAR


NOTES TO FINANCIAL
STATEMENTS  (Continued)

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 the
Companys revenue recognition policy for film revenue.



| |                 
| | ----------------
| | Software Revenue

Revenue for software licenses are recognized in
compliance with the American Institute of Certified Public
Accountants Statement of Position (SOP) 97-2 Software
Revenue Recognition and SOP 98-9 Modification
of SOP 97-2, with respect to certain transactions.
SOP 97-2 requires that revenue recognized from software
arrangements be allocated to each element of the arrangement
based on the relative fair values of the elements. Software
maintenance is recorded as deferred revenue and is recognized
ratably over the term of the agreement, which is generally
twelve months.



| |                   
| | ------------------
| | Animation Services

Animation services revenue is recognized on the
percentage-of-completion method of accounting.



| |                      
| | ---------------------
| | 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 within three years from the time
of the first capitalized transaction, all such costs will be
expensed.

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

Significant Accounting Policies



| |                          
| | -------------------------
| | Cash and Cash Equivalents

The Company considers all highly liquid
instruments with an original maturity of 90 days or less to
be cash equivalents. Cash equivalents as of December 29,
2001 consisted primarily of U.S. Treasury Bills and federal
agency obligations.



| |                       
| | ----------------------
| | Short-Term Investments

Investments are accounted under SFAS 115,
Statement of Financial Accounting Standards in Debt and
Equity Instruments (SFAS 115) and are classified as
available-for-sale. Such investments are recorded at

F-7



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##### Table of Contents



PIXAR


NOTES TO FINANCIAL
STATEMENTS  (Continued)

fair value, and unrealized gains and losses, if
material, are reported as a component of comprehensive income
(loss) until realized. Interest income is recorded using an
effective interest rate with the associated premium or discount
amortized to interest income. The cost of securities sold is
based upon the specific identification method.



| |                       
| | ----------------------
| | Property and Equipment

Property and equipment are stated at cost.
Depreciation of property and equipment is calculated using the
straight-line method over estimated useful lives ranging from
two to thirty years. Leasehold improvements are amortized over
the lesser of the related lease term or the life of the
improvement. Management evaluates these assets for impairment
whenever changes in circumstances indicate that the carrying
amount of the asset may not be recoverable. Impaired assets and
assets to be disposed of are reported at the lower of carrying
values or fair values, less costs of disposal.



| |                                 
| | --------------------------------
| | Impairment of Long-lived
	Assets

The Company reviews for impairment of long-lived
assets whenever events or changes in circumstances indicate that
the carrying value of an asset may not be recoverable. An
impairment loss would be recognized when estimated undiscounted
future cash flows expected to result from the use of the asset
and its eventual disposition is less than its carrying amount.
If an asset is considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. The
Company has not identified any such impairment losses.



| |                                
| | -------------------------------
| | Research and Development
	Costs

Research and development costs, net of
reimbursable expenses, are charged to operations as incurred. In
accordance with Statement of Financial Accounting Standards
(SFAS) No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise
Marketed, development costs related to software products
are expensed as incurred until the technological feasibility of
the product has been established. After technological
feasibility is established, additional costs would be
capitalized. To date, the Company has not capitalized any
software development costs after technological feasibility has
been established on its software products since it believes the
process for developing software is essentially completed
concurrently with the establishment of technological feasibility
and costs incurred thereafter have not been material.



| |                                                        
| | -------------------------------------------------------
| | Financial Instruments and Concentration of
	Credit Risk

The carrying value of financial instruments,
including marketable securities and accounts receivable,
approximate fair value. Financial instruments that potentially
subject the Company to concentrations of credit risk consist
primarily of cash equivalents, short-term investments and trade
accounts receivable. The Company invests its excess cash in a
variety of investment grade, interest-bearing securities with
major banks. This diversification of risk is consistent with its
policy to ensure safety of principal and maintain liquidity.

Excluding the software business, revenue is
concentrated in one large customer, Disney, as outlined in Note
9. The Company maintains reserves for potential credit losses
and such losses have been within managements expectations.



| |            
| | -----------
| | Fiscal Year

Effective for the fiscal year 1998, the Company
adopted a 52 or 53-week fiscal year, changing the year end date
from December 31 to the Saturday nearest December 31.
The 2001 fiscal year ended December 29, 2001 and consisted
of 52 weeks. The 1999 and 2000 fiscal years ended
January 1, 2000 and December 30, 2000, respectively,
and each consisted of 52 weeks.

F-8



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##### Table of Contents



PIXAR


NOTES TO FINANCIAL
STATEMENTS  (Continued)



| |                     
| | --------------------
| | Accounting Estimates

The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.



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

The Company accounts for income taxes pursuant to
Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes.Under the asset and
liability method of Statement 109, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to
be recovered or settled. Under Statement 109, the effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date.



| |                     
| | --------------------
| | 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 including using the
treasury stock method for options and warrants.



| |                  
| | -----------------
| | Segment Reporting

The Company operates in a single operating
segment.



| |                            
| | ---------------------------
| | Comprehensive Income (Loss)

Comprehensive income is comprised of our net
income and unrealized gains and losses on available-for-sale
securities.



| |                  
| | -----------------
| | Reclassifications

Certain amounts reported in previous years have
been reclassified to conform to the 2001 financial statement
presentation.



| |                   
| | ------------------
| | Stock Option Plans

The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with
Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB
25) and Financial Accounting Standards Board
Interpretation No. 44 Accounting for Certain
Transactions Involving Stock Compensation (an interpretation of
APB Opinion No. 25) (FIN 44) and related
interpretations. The Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards
No. 123 Accounting for Stock-Based Compensation
(SFAS 123).

Additionally, pursuant to SFAS No. 123,
stock options issued to non-employees are accounted for at the
fair value of the equity instruments issued.

F-9



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##### Table of Contents



PIXAR


NOTES TO FINANCIAL
STATEMENTS  (Continued)



| |                                  
| | ---------------------------------
| | Recent Accounting
	Pronouncements

In June 2001, the FASB issued SFAS 142,
Goodwill and Other Intangible Assets, which
supersedes APB 17, Intangible Assets
(SFAS 142), which addresses the accounting treatment for
goodwill and other intangible assets acquired individually or
with a group of other assets upon their acquisition, but not
acquired in a business combination. This statement also
addresses how goodwill and other intangible assets should be
accounted for after they have been initially recognized in the
financial statements. With the adoption of SFAS 142,
goodwill is no longer subject to amortization over its estimated
useful life; rather, goodwill will be subject to at least an
annual assessment for impairment by applying a fair-value-based
test. Also, if the benefit of an intangible asset is obtained
through contractual or other legal rights, or if the intangible
asset can be sold, transferred, licensed, rented or exchanged,
an acquired intangible asset should be separately recognized.
The terms of SFAS 142 are effective as of the beginning of
the first quarter of the fiscal year beginning after
December 15, 2001. Certain provisions of SFAS 142 shall be
applied to goodwill and other acquired intangible assets for
which the acquisition date is after June 30, 2001. As
identifiable intangible assets as of December 29, 2001 were
$480,000, we do not expect the adoption of SFAS 142 to have
a material impact on our financial position or results of
operations.

On October 3, 2001, the Financial Accounting
Standards Board issued FASB Statement No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS 144), which addresses financial
accounting and reporting for the impairment or disposal of
long-lived assets. SFAS 144 supersedes FASB Statement
No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of, and also supersedes
the accounting and reporting provisions of APB Opinion
No. 30, Reporting the Results of Operations-Reporting the
Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, for the disposal of a segment of a business. SFAS
144 is effective for fiscal years beginning after
December 15, 2001 and interim periods within those fiscal
years. We do not expect the adoption of SFAS 144 to have a
material impact on our financial position or results of
operations.

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

F-10



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PIXAR


NOTES TO FINANCIAL
STATEMENTS  (Continued)

(2) Short-Term Investments

All investments were considered
available-for-sale securities and consisted of the following (in
thousands):

|                           |  |      |         |                  |  |            |       |   |  |   |         | 
|-------------------------- |  | ---- | ------- | ---------------- |  | ---------- | ----- | - |  | - | ------- | 
|                           |  |      |         | Gross Unrealized |  | Estimated 
|                           |  | Cost |         | Gains (Losses)   |  | Fair Value
|                           |  |      |         |                  |  |           
|December 30, 2000:         |  |      |         |                  |  |            |       |   |  |   |         | 
|U.S. Treasury Bills        |  | $    | 2,463   |                  |  |            |      |   |  | $ | 2,463   | 
|U.S. Treasury Notes        |  |      | 58,242  |                  |  | $          | 114   |   |  |   | 58,356  | 
|Commercial paper           |  |      | 2,091   |                  |  |            | (4    | ) |  |   | 2,087   | 
|Federal agency obligations |  |      | 76,293  |                  |  |            | 315   |   |  |   | 76,608  | 
|                           |  |      |         |                  |  |            |       |   |  |   |         | 
|                           |  | $    | 139,089 |                  |  | $          | 425   |   |  | $ | 139,514 | 
|                           |  |      |         |                  |  |            |       |   |  |   |         | 
|December 29, 2001:         |  |      |         |                  |  |            |       |   |  |   |         | 
|U.S. Treasury Notes        |  | $    | 80,253  |                  |  | $          | 1,188 |   |  | $ | 81,441  | 
|Federal agency obligations |  |      | 139,039 |                  |  |            | 1,830 |   |  |   | 140,869 | 
|                           |  |      |         |                  |  |            |       |   |  |   |         | 
|                           |  | $    | 219,292 |                  |  | $          | 3,018 |   |  | $ | 222,310 | 
|                           |  |      |         |                  |  |            |       |   |  |   |         | 

The contractual maturities of available-for-sale
debt securities as of December 29, 2001, regardless of
their balance sheet classification, are as follows (in
thousands):

|                                     |  |      |         |            |  |   |         | 
|------------------------------------ |  | ---- | ------- | ---------- |  | - | ------- | 
|                                     |  |      |         | Estimated 
|                                     |  | Cost |         | Fair Value
|                                     |  |      |         |           
|Due within one year                  |  | $    | 82,942  |            |  | $ | 83,754  | 
|Due after one year through two years |  |      | 136,353 |            |  |   | 138,556 | 
|                                     |  |      |         |            |  |   |         | 
|                                     |  | $    | 219,295 |            |  | $ | 222,310 | 
|                                     |  |      |         |            |  |   |         | 

(3) Balance Sheet Components

Selected balance sheet components are as follows
(in thousands):

|                                               |                                    |              |         |              |  |   |         |         | 
|---------------------------------------------- | ---------------------------------- | ------------ | ------- | ------------ |  | - | ------- | ------- | 
|                                               |                                    | December 30, |         | December 29,
|                                               |                                    | 2000         |         | 2001        
|                                               |                                    |              |         |             
|Property and equipment:                        |                                    |              |         |              |  |   |         |        
|                                               | Building and land                  |              | $       | 101,431      |  |   | $       | 104,423 | 
|                                               | Furniture, fixtures and equipment  |              |         | 22,222       |  |   |         | 23,427  | 
|                                               | Construction in process            |              |         | 372          |  |   |         | 2,875   | 
|                                               |                                    |              |         |              |  |   |         |        
|                                               |                                    |              | 124,025 |              |  |   | 130,725 |        
|Less accumulated depreciation and amortization |                                    |              | 13,134  |              |  |   | 18,730  |        
|                                               |                                    |              |         |              |  |   |         |        
|                                               |                                    | $            | 110,891 |              |  | $ | 111,995 |        
|                                               |                                    |              |         |              |  |   |         |        
|Accrued liabilities:                           |                                    |              |         |              |  |   |         |        
|                                               | Facilities construction in process |              | $       | 8,262        |  |   | $       | 138     | 
|                                               | Employee-related expenses          |              |         | 4,648        |  |   |         | 5,055   | 
|                                               | Professional services              |              |         | 2,316        |  |   |         | 2,186   | 
|                                               | Other                              |              |         | 2,003        |  |   |         | 1,465   | 
|                                               |                                    |              |         |              |  |   |         |        
|                                               |                                    | $            | 17,229  |              |  | $ | 8,844   |        
|                                               |                                    |              |         |              |  |   |         |        

F-11



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##### Table of Contents



PIXAR


NOTES TO FINANCIAL
STATEMENTS  (Continued)

(4) Feature Film and Co-Production
Agreements



| |                       
| | ----------------------
| | Feature Film Agreement

In 1991, the Company entered into a feature film
agreement with Walt Disney Pictures, a wholly owned subsidiary
of Walt Disney Pictures and Television (together with its
subsidiaries and affiliates collectively referred to herein as
Disney), to develop and produce up to three
computer-animated feature films (the Feature Film
Agreement). The Company is entitled to receive
compensation based on revenue from the distribution of these
films and related products. In 1995, the Company released its
first feature film under the terms of the Feature Film
Agreement, Toy Story.Based on the individual film
forecast method, all 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
new Co-Production Agreement (the Co-Production
Agreement) which now governs all films made by the Company
since Toy Story. Under the Co-Production Agreement,
Pixar, on an exclusive basis, agreed to produce five original
computer-animated theatrical motion pictures (the
Pictures) for distribution by Disney. Pixar and
Disney co-own, co-brand and co-finance the production costs of
the Pictures, and share equally in the profits of each Picture
and any related merchandise and other ancillary products, after
recovery of all of Disneys marketing, distribution and
other predefined fees and costs. The Co-Production Agreement
generally provides that Pixar is responsible for the production
of each Picture and Disney is responsible for the marketing,
promotion, publicity, advertising and distribution of each
Picture. The first two original films produced under the
Co-Production Agreement were A Bugs Lifeand
Monsters, Inc.Films in development or production at
Pixar governed by this agreement, include Finding Nemo,Film Six and Film Seven. A Bugs Life, Monsters,
Inc., Finding Nemo, Film Six and Film Seven count
toward the five original Pictures, whereas Toy
Story 2, as a sequel, is a derivative work that will
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,Film Six, and Film Seven under
the Co-Production Agreement have been recorded as cost
reimbursements. Accordingly, no revenue has been recognized for
such reimbursements; rather, the Company has netted the
reimbursements against the related costs.



| |               
| | --------------
| | Creative Group

In addition to the films produced and in process
under the Co-Production Agreement, Pixars creative
development group is working on concept development for several
new projects that do not come under the Co-Production Agreement.
Costs related to these projects are therefore not shared or
reimbursed by Disney. Such costs are capitalized as film costs
and will be amortized under the film forecast method assuming
the concept development leads to a successful concept and
realization of a film project, when it is expected that the film
will be set for production. In the event a film is not set for
production within three years from the time of the first
capitalized transaction, such costs will be expensed. Certain
expenses associated with researching new concepts and ideas
which are not expected to lead to a successful concept and
realization of a film project, are expensed as incurred.

F-12



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PIXAR


NOTES TO FINANCIAL
STATEMENTS  (Continued)

Components of Capitalized Film Production
Costs

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

|                                                         |                                                                  |          |         |         |  |      |        |               |  |   |        |        |  |   |          |         | 
|-------------------------------------------------------- | ---------------------------------------------------------------- | -------- | ------- | ------- |  | ---- | ------ | ------------- |  | - | ------ | ------ |  | - | -------- | ------- | 
|                                                         |                                                                  | 1999 and |         |         |  |      |        | Total Through
|                                                         |                                                                  | Prior    |         | 2000    |  | 2001 |        | 2001         
|                                                         |                                                                  |          |         |         |  |      |        |              
|Released Films:                                          |                                                                  |          |         |         |  |      |        |               |  |   |        |        |  |   |          |        
|Pixar production costs                                   |                                                                  | $        | 93,946  |         |  | $    | 19,193 |               |  | $ | 15,348 |        |  | $ | 128,487  |        
|Disney production funding and reimbursement
	(unaudited) |                                                                  |          | 121,668 |         |  |      | 19,193 |               |  |   | 15,348 |        |  |   | 156,209  |        
|                                                         |                                                                  |          |         |         |  |      |        |               |  |   |        |        |  |   |          |        
|                                                         | Total film production costs (unaudited)                          |          | $       | 215,614 |  |      | $      | 38,386        |  |   | $      | 30,696 |  |   |          | 284,696 | 
|                                                         |                                                                  |          |         |         |  |      |        |               |  |   |        |        |  |   |          |        
|Disney reimbursements of production costs
	(unaudited)   |                                                                  |          |         |         |  |      |        |               |  |   |        |        |  |   | (153,884 | )      
|Amortization of deferred compensation                    |                                                                  |          |         |         |  |      |        |               |  |   |        |        |  |   | 360      |        
|Participation fees                                       |                                                                  |          |         |         |  |      |        |               |  |   |        |        |  |   | 1,050    |        
|Amortization of film production costs                    |                                                                  |          |         |         |  |      |        |               |  |   |        |        |  |   | (80,677  | )      
|                                                         |                                                                  |          |         |         |  |      |        |               |  |   |        |        |  |   |          |        
|                                                         | Total film production costs capitalized for
	released films      |          |         |         |  |      |        |               |  |   |        |        |  |   |          | 51,545  | 
|                                                         |                                                                  |          |         |         |  |      |        |               |  |   |        |        |  |   |          |        
|Films in Production:                                     |                                                                  |          |         |         |  |      |        |               |  |   |        |        |  |   |          |        
|Pixar production costs                                   |                                                                  | $        | 586     |         |  | $    | 8,760  |               |  | $ | 24,596 |        |  |   | 33,942   |        
|Disney production funding and reimbursement
	(unaudited) |                                                                  |          | 586     |         |  |      | 8,760  |               |  |   | 24,596 |        |  |   | 33,942   |        
|                                                         |                                                                  |          |         |         |  |      |        |               |  |   |        |        |  |   |          |        
|                                                         | Total film production costs (unaudited)                          |          | $       | 1,172   |  |      | $      | 17,520        |  |   | $      | 49,192 |  |   |          | 67,884  | 
|                                                         |                                                                  |          |         |         |  |      |        |               |  |   |        |        |  |   |          |        
|Disney reimbursements of production costs
	(unaudited)   |                                                                  |          |         |         |  |      |        |               |  |   |        |        |  |   | (33,942  | )      
|                                                         |                                                                  |          |         |         |  |      |        |               |  |   |        |        |  |   |          |        
|                                                         | Total film production costs capitalized for films
	in production |          |         |         |  |      |        |               |  |   |        |        |  |   |          | 33,942  | 
|Films in Development or
	Preproduction:                  |                                                                  |          |         |         |  |      |        |               |  |   |        |        |  |   |          |        
|Pixar development costs                                  |                                                                  | $        |        |         |  | $    | 291    |               |  | $ | 1,061  |        |  |   | 1,352    |        
|                                                         |                                                                  |          |         |         |  |      |        |               |  |   |        |        |  |   |          |        
|                                                         | Total film development and preproduction costs
	capitalized      |          | $       |        |  |      | $      | 291           |  |   | $      | 1,061  |  |   |          | 1,352   | 
|                                                         |                                                                  |          |         |         |  |      |        |               |  |   |        |        |  |   |          |        
|                                                         |                                                                  |          |         |         |  |      |        |               |  |   |        |        |  | $ | 86,839   |        
|                                                         |                                                                  |          |         |         |  |      |        |               |  |   |        |        |  |   |          |        

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

|                           |       |                 |       |                   |  |                   |       |       |  |   |       |       | 
|-------------------------- | ----- | --------------- | ----- | ----------------- |  | ----------------- | ----- | ----- |  | - | ----- | ----- | 
|                           |       |                 |       |                  
|                           |       |                 |       | Years Ended      
|                           |       | February 24 to  |       |                  
|                           |       | January 2, 1999 |       | December 30, 2000 |  | December 29, 2001
|                           |       |                 |       |                   |  |                  
|Research and development   |       | $               | 8,900 |                   |  | $                 | 4,606 |       |  | $ | 4,933 |      
|General and administrative |       |                 | 6,069 |                   |  |                   | 2,918 |       |  |   | 3,350 |      
|                           |       |                 |       |                   |  |                   |       |       |  |   |       |      
|                           | Total |                 | $     | 14,969            |  |                   | $     | 7,524 |  |   | $     | 8,283 | 
|                           |       |                 |       |                   |  |                   |       |       |  |   |       |      

For released films, the Company expects to
amortize, based on current estimates, approximately
$30 million to $32 million in capitalized film
production costs over the succeeding twelve-month period. This
forecast includes Monsters, Inc., which was released
domestically on November 2, 2001. In addition, the

F-13



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PIXAR


NOTES TO FINANCIAL
STATEMENTS  (Continued)

Company has amortized more than 80% of each
released films original production costs as of
December 29, 2001, with the exception of Monsters, Inc.,which is projected to reach the 80% milestone by fiscal year
2004.

At December 30, 2000 and December 29,
2001, due from Disney aggregated $73.9 million and
$13.5 million, respectively, which consists of a receivable
from Disney for film revenue, advances net of Disneys
actual share of expenditures for all films, amounts due for
animation services and miscellaneous reimbursements.

(5) Related Party Transactions

In conjunction with the signing of the
Co-Production Agreement, Pixar issued to Disney two warrants,
each exercisable for five years: one warrant to purchase 750,000
shares of Common Stock at an exercise price of $20.00 per share
and another warrant to purchase 750,000 shares of Common Stock
at an exercise price of $25.00 per share. On October 25,
2001, pursuant to the terms of the Common Stock Purchase Warrant
Agreement, Disney fully exercised both warrants. In lieu of
exercising the warrants for cash, Disney surrendered the
warrants in exchange for 640,651 shares of Common Stock.

(6) Income Taxes

The components of income taxes from continuing
operations are as follows (in thousands):

|              |                                                                      |             |                      |              |         |              |   |       |        |        |  |       |       |        | 
|------------- | -------------------------------------------------------------------- | ----------- | -------------------- | ------------ | ------- | ------------ | - | ----- | ------ | ------ |  | ----- | ----- | ------ | 
|              |                                                                      |            
|              |                                                                      | Years Ended
|              |                                                                      |            
|              |                                                                      | January 1,  |                      | December 30, |         | December 29,
|              |                                                                      | 2000        |                      | 2000         |         | 2001        
|              |                                                                      |             |                      |              |         |             
|Income taxes: |                                                                      |             |                      |              |         |              |   |       |        |        |  |      
|              | Current:                                                             |             |                      |              |         |              |   |       |        |        |  |       |      
|              |                                                                      | Federal     |                      | $            | 9,523   |              |   | $     | 32,117 |        |  | $     | 7,975 |       
|              |                                                                      | State       |                      |              | 3,740   |              |   |       | 8,428  |        |  |       | (486  | )     
|              |                                                                      | Foreign     |                      |              | 33      |              |   |       | 82     |        |  |       | 68    |       
|              |                                                                      |             |                      |              |         |              |   |       |        |        |  |      
|              |                                                                      |             | Total current taxes  |              |         | 13,296       |   |       |        | 40,627 |  |       |       | 7,557  | 
|              |                                                                      |             |                      |              |         |              |   |       |        |        |  |      
|              | Deferred:                                                            |             |                      |              |         |              |   |       |        |        |  |       |      
|              |                                                                      | Federal     |                      |              | (26,527 | )            |   |       | 6,364  |        |  |       | 2,867 |       
|              |                                                                      | State       |                      |              | (7,018  | )            |   |       | 2,078  |        |  |       | 378   |       
|              |                                                                      |             |                      |              |         |              |   |       |        |        |  |      
|              |                                                                      |             | Total deferred taxes |              |         | (33,545      | ) |       |        | 8,442  |  |       |       | 3,245  | 
|              |                                                                      |             |                      |              |         |              |   |       |        |        |  |      
|              | Charge in lieu of taxes attributable to employer
	stock option plans |             |                      | 53,150       |         |              |   | 6,282 |        |        |  | 9,063 |      
|              |                                                                      |             |                      |              |         |              |   |       |        |        |  |      
|              |                                                                      |             | Total tax provision  |              | $       | 32,901       |   |       | $      | 55,351 |  |       | $     | 19,865 | 
|              |                                                                      |             |                      |              |         |              |   |       |        |        |  |      

F-14



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PIXAR


NOTES TO FINANCIAL
STATEMENTS  (Continued)

The following is a reconciliation of the expected
statutory corporate federal income tax expense (computed by
multiplying income from continuing operations before income
taxes by the statutory federal income tax rate of 35%) to the
actual tax expense (in thousands):

|                                             |                                               |                 |        |                   |   |                   |        |       |   |   |        |       |  
|-------------------------------------------- | --------------------------------------------- | --------------- | ------ | ----------------- | - | ----------------- | ------ | ----- | - | - | ------ | ----- | -
|                                             |                                               |                
|                                             |                                               | Years Ended    
|                                             |                                               |                
|                                             |                                               | January 1, 2000 |        | December 30, 2000 |   | December 29, 2001
|                                             |                                               |                 |        |                   |   |                  
|Expected income tax expense                  |                                               | $               | 28,701 |                   |   | $                 | 46,682 |       |   | $ | 19,555 |      
|Increases (decreases) in tax resulting from: |                                               |                 |        |                   |   |                   |        |       |   |   |        |      
|                                             | State income taxes, net of federal tax effect |                 |        | 4,757             |   |                   |        | 7,715 |   |   |        | 1,147 |  
|                                             | Non deductible expenses                       |                 |        | 858               |   |                   |        | 311   |   |   |        | 1,084 |  
|                                             | Research and expenditure credits              |                 |        |                  |   |                   |        |      |   |   |        | (498  | )
|                                             | Other tax credits                             |                 |        |                  |   |                   |        | (82   | ) |   |        | (698  | )
|                                             | Change in valuation allowance                 |                 |        | (1,085            | ) |                   |        |      |   |   |        |      |  
|                                             | Other, net                                    |                 |        | (330              | ) |                   |        | 725   |   |   |        | (725  | )
|                                             |                                               |                 |        |                   |   |                   |        |       |   |   |        |      
|Actual tax expense                           |                                               | $               | 32,901 |                   |   | $                 | 55,351 |       |   | $ | 19,865 |      
|                                             |                                               |                 |        |                   |   |                   |        |       |   |   |        |      

The tax effects of temporary differences that
give rise to significant portions of the deferred tax assets are
presented below (in thousands):

|                         |                              |                         |                                |                   |        |        |   |        |        |        | 
|------------------------ | ---------------------------- | ----------------------- | ------------------------------ | ----------------- | ------ | ------ | - | ------ | ------ | ------ | 
|                         |                              | December 30, 2000       |                                | December 29, 2001
|                         |                              |                         |                                |                  
|Deferred tax assets:     |                              |                         |                                |                   |        |        |   |       
|                         | Deferred compensation        |                         | $                              | 559               |        |        | $ | 505    |       
|                         | Capitalized film costs       |                         |                                | 27,627            |        |        |   | 26,324 |       
|                         | Tax credit carry forwards    |                         |                                |                  |        |        |   | 201    |       
|                         | Property and equipment       |                         |                                | 1,957             |        |        |   |       |       
|                         | Reserves and accruals        |                         |                                | 3,051             |        |        |   | 490    |       
|                         |                              |                         |                                |                   |        |        |   |       
|                         |                              |                         | Total deferred tax assets      |                   |        | 33,194 |   |        |        | 27,520 | 
|Deferred tax liabilities |                              |                         |                                |                   |        |        |   |       
|                         | Unearned revenue             |                         |                                | 7,103             |        |        |   | 4,402  |       
|                         | Deferred gain on investments |                         |                                | 176               |        |        |   | 1,173  |       
|                         | Property and equipment       |                         |                                |                  |        |        |   | 272    |       
|                         |                              |                         |                                |                   |        |        |   |       
|                         |                              |                         | Total deferred tax liabilities |                   |        | 7,279  |   |        |        | 5,847  | 
|                         |                              |                         |                                |                   |        |        |   |       
|                         |                              | Net deferred tax assets |                                | $                 | 25,915 |        |   | $      | 21,673 |       
|                         |                              |                         |                                |                   |        |        |   |       

In assessing the realizability of deferred tax
assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is
dependent upon the generation of taxable income during the
periods in which temporary differences become deductible. At
December 29, 2001, based on historical taxable income and
projections of future taxable income, the Company believes it is
more likely than not that the Company will realize the benefits
of its deferred tax assets, and therefore no valuation allowance
against those assets has been provided.

F-15



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##### Table of Contents



PIXAR


NOTES TO FINANCIAL
STATEMENTS  (Continued)

(7)     Shareholders
Equity



| |                   
| | ------------------
| | Stock Option Plans

The Company has stock option plans for employees,
consultants and non-employee directors which provide incentive
and nonstatutory stock options. The option exercise price for
incentive stock options is not less than the fair market value
at the grant date. Nonstatutory options are granted at prices
and terms determined by the Board of Directors, or a committee
of the Board of Directors. Employee and consultant options
generally vest 25% per year over four years. Initial grants to
non-employee directors, vest one-third annually for three years;
subsequent grants vest after one year. All options have a term
not greater than 10 years from the date of grant. As of
December 29, 2001, the Company had 914,818 shares
reserved and available for issuance under the plans.

A summary of activity under the option plans
during 1999, 2000, and 2001 are as follows:

|                                  |           |        |            |                  |   |   |       |       | 
|--------------------------------- | --------- | ------ | ---------- | ---------------- | - | - | ----- | ----- | 
|                                  |           |        |            | Weighted-Average
|                                  |           | Shares |            | Exercise Price  
|                                  |           |        |            |                 
|Outstanding at December 31,
	1998 |           |        | 8,457,019  |                  |   | $ | 14.38 |      
|                                  | Granted   |        |            | 2,130,077        |   |   |       | 34.98 | 
|                                  | Exercised |        |            | (1,623,323       | ) |   |       | 4.76  | 
|                                  | Forfeited |        |            | (207,854         | ) |   |       | 21.50 | 
|                                  |           |        |            |                  |   |   |       |      
|Outstanding at January 1, 2000    |           |        | 8,755,919  |                  |   |   | 21.00 |      
|                                  | Granted   |        |            | 5,424,584        |   |   |       | 28.16 | 
|                                  | Exercised |        |            | (674,279         | ) |   |       | 8.39  | 
|                                  | Forfeited |        |            | (394,371         | ) |   |       | 26.18 | 
|                                  |           |        |            |                  |   |   |       |      
|Outstanding at December 30,
	2000 |           |        | 13,111,853 |                  |   |   | 24.46 |      
|                                  | Granted   |        |            | 992,500          |   |   |       | 34.55 | 
|                                  | Exercised |        |            | (1,171,933       | ) |   |       | 19.70 | 
|                                  | Forfeited |        |            | (421,908         | ) |   |       | 31.33 | 
|                                  |           |        |            |                  |   |   |       |      
|Outstanding at December 29,
	2001 |           |        | 12,510,512 |                  |   |   | 25.47 |      
|                                  |           |        |            |                  |   |   |       |      

For various price ranges, weighted-average
characteristics of outstanding stock options at
December 29, 2001 were as follows:

|                 |  |                     |            |                |  |                  |      |        |  |                  |       |  |  |  |           |  |  |   |       | 
|---------------- |  | ------------------- | ---------- | -------------- |  | ---------------- | ---- | ------ |  | ---------------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                 |  |                     |            |               
|                 |  | Options Outstanding |            | Options Vested
|                 |  |                     |            |               
|                 |  |                     |            | Remaining      |  | Weighted-Average |      |        |  | Weighted-Average
|Exercise Prices  |  | Shares              |            | Life (Years)   |  | Exercise Price   |      | Shares |  | Exercise Price  
|                 |  |                     |            |                |  |                  |      |        |  |                 
|$0.20 to $1.25   |  |                     | 899,444    |                |  |                  | 3.38 |        |  | $                | 0.28  |  |  |  | 899,444   |  |  | $ | 0.28  | 
|$9.60 to $14.50  |  |                     | 1,191,461  |                |  |                  | 4.65 |        |  |                  | 12.29 |  |  |  | 1,191,461 |  |  |   | 12.29 | 
|$14.75 to $21.38 |  |                     | 1,663,395  |                |  |                  | 5.89 |        |  |                  | 20.50 |  |  |  | 911,754   |  |  |   | 19.86 | 
|$23.13 to $32.13 |  |                     | 4,989,654  |                |  |                  | 8.76 |        |  |                  | 27.29 |  |  |  | 628,701   |  |  |   | 27.45 | 
|$32.88 to $37.83 |  |                     | 3,044,913  |                |  |                  | 8.01 |        |  |                  | 33.98 |  |  |  | 852,235   |  |  |   | 34.11 | 
|$38.51 to $52.88 |  |                     | 699,645    |                |  |                  | 7.99 |        |  |                  | 40.98 |  |  |  | 275,087   |  |  |   | 41.85 | 
|$58.00 to $61.50 |  |                     | 22,000     |                |  |                  | 3.42 |        |  |                  | 60.31 |  |  |  | 16,500    |  |  |   | 60.31 | 
|                 |  |                     |            |                |  |                  |      |        |  |                  |       |  |  |  |           |  |  |   |       | 
|                 |  |                     | 12,510,512 |                |  |                  | 7.37 |        |  |                  | 25.47 |  |  |  | 4,775,182 |  |  |   | 19.23 | 
|                 |  |                     |            |                |  |                  |      |        |  |                  |       |  |  |  |           |  |  |   |       | 

F-16



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##### Table of Contents



PIXAR


NOTES TO FINANCIAL
STATEMENTS  (Continued)

At December 29, 2001, there were 4,775,182
shares exercisable at a weighted average exercise price of
$19.23. At January 1, 2000 and December 30, 2000 there
were 3,091,152 and 3,942,747 shares exercisable, respectively,
at a weighted average exercise price of $9.11 and $15.16,
respectively.

The Company uses the intrinsic value-based method
to account for all of employee stock-based compensation plans.
Had compensation cost for our stock option plans been determined
consistent with SFAS No. 123, net income and net income per
share would have been reduced to the pro forma amounts indicated
below (in thousands, except per share data):

|                                       |  |             |        |      |  |      |        |  |  |   |        | 
|-------------------------------------- |  | ----------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                                       |  |            
|                                       |  | Fiscal Year
|                                       |  |            
|                                       |  | 1999        |        | 2000 |  | 2001
|                                       |  |             |        |      |  |     
|Pro forma net income                   |  | $           | 42,848 |      |  | $    | 68,406 |  |  | $ | 28,219 | 
|Pro forma basic net income per share   |  | $           | 0.93   |      |  | $    | 1.45   |  |  | $ | 0.58   | 
|Pro forma diluted net income per share |  | $           | 0.86   |      |  | $    | 1.37   |  |  | $ | 0.55   | 

Certain prior year proforma disclosures have been
adjusted to reflect compensation expense amounts relating to
productions that would have been capitalized and subsequently
amortized.

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
$15.62, $12.66, and $13.95 for fiscal years 1999, 2000, and
2001, respectively. Values were estimated using zero dividend
yield for all years; expected volatility of 50% for 1999 and
2000 and 45% for 2001; risk-free interest rates of 5.78%, 5.36%,
and 4.34% for 1999, 2000, and 2001, respectively; and
weighted-average expected lives of 3.92 years for 1999 and
4.00 years for 2000 and 2001 for both plans.



| |                       
| | ----------------------
| | Employee Benefit Plans

In 1992, the Company adopted a 401(k) Profit
Sharing Plan (the 401(k) Plan) that is intended to qualify under
Section 401(k) of the Internal Revenue Code of 1986, as
amended. The 401(k) Plan covers substantially all employees.
Participants may elect to contribute a percentage of their
compensation to this plan, up to the statutory maximum amount.
For the plan year commencing January 1, 2001 and ending on
December 29, 2001, the employer match was 50% of deferrals
up to 5% of eligible plan compensation, with a maximum
contribution of $2,000 per Participant. Employer match
contributions vest immediately. The Company contributed $842,000
to the Plan for fiscal year 2001.

(8)     Commitments
and Contingencies



| |                  
| | -----------------
| | Lease Commitments

Future minimum lease payments under
non-cancelable operating leases (with initial or remaining lease
terms in excess of one year) as of December 29, 2001 were
as follows (in thousands):

|            |                              |   |     |       | 
|----------- | ---------------------------- | - | --- | ----- | 
|Fiscal Year |                              |  
|            |                              |  
|2002        |                              | $ | 601 |      
|2003        |                              |   | 383 |      
|2004        |                              |   | 262 |      
|2005        |                              |   | 23  |      
|            |                              |   |     |      
|            | Total minimum lease payments |   | $   | 1,269 | 
|            |                              |   |     |      

Rental expense from operating leases amounted to
approximately $2,957,000, $3,301,000 and $935,000 for the years
ended January 1, 2000, December 30, 2000, and
December 29, 2001, respectively.

F-17



---



##### Table of Contents



PIXAR


NOTES TO FINANCIAL
STATEMENTS  (Continued)



| |                         
| | ------------------------
| | Participation Commitment

The Company has 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. The compensation is subject
to a cap of $500,000 for each theatrical motion picture and a
cap of $200,000 for each sequel or remake, with a total
aggregate cap of $3,000,000. The Company paid participation fees
of $250,000 in 1999 and $200,000 in 2000 under this obligation.
No payments were made in 2001.



| |              
| | -------------
| | Legal Matters

The Company is involved in claims arising in the
ordinary course of business. While the outcome of these claims
cannot be predicted with certainty, management believes these
matters will be resolved without material adverse effect on the
Companys financial position, results of operations or cash
flows.

(9) Significant Customers and Segment
Reporting



| |                      
| | ---------------------
| | Significant Customers

The following table summarizes the annual
percentage contribution to revenue by customers when revenue
from such customers exceeded 10% of total revenue in 1999, 2000
or 2001, and the amounts due from these customers as a
percentage of total accounts receivable at the corresponding
year end:

|       |  |                |    |                  |  |      |    |      |  |      |    |      |  |  |    |   |  |  |    |   |  |  |    |  
|------ |  | -------------- | -- | ---------------- |  | ---- | -- | ---- |  | ---- | -- | ---- |  |  | -- | - |  |  | -- | - |  |  | -- | -
|       |  |                |    |                  |  |      |    |     
|       |  |                |    | Percentage of   
|       |  | Percentage of  |    | Total Accounts  
|       |  | Total Revenues |    | Receivable as of
|       |  |                |    |                 
|       |  | 1999           |    | 2000             |  | 2001 |    | 1999 |  | 2000 |    | 2001
|       |  |                |    |                  |  |      |    |      |  |      |    |     
|Disney |  |                | 95 | %                |  |      | 95 | %    |  |      | 91 | %    |  |  | 72 | % |  |  | 95 | % |  |  | 92 | %



| |                  
| | -----------------
| | 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
operations 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):

|                   |  |             |         |      |  |      |         |  |  |   |        | 
|------------------ |  | ----------- | ------- | ---- |  | ---- | ------- |  |  | - | ------ | 
|                   |  |            
|                   |  | Fiscal Year
|                   |  |            
|                   |  | 1999        |         | 2000 |  | 2001
|                   |  |             |         |      |  |     
|Monsters, Inc.     |  | $           |        |      |  | $    |        |  |  | $ | 12,144 | 
|Toy Story 2.       |  |             |        |      |  |      | 143,596 |  |  |   | 23,432 | 
|A Bugs Life(1)    |  |             | 110,344 |      |  |      |        |  |  |   |       | 
|Library titles(1)  |  |             | 4,074   |      |  |      | 18,676  |  |  |   | 27,081 | 
|Animation services |  |             | 873     |      |  |      | 882     |  |  |   | 708    | 
|                   |  |             |         |      |  |      |         |  |  |   |        | 
|                   |  | $           | 115,291 |      |  | $    | 163,154 |  |  | $ | 63,365 | 
|                   |  |             |         |      |  |      |         |  |  |   |        | 



---



|    |                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------
|(1) | Library titles include A Bugs Life
	and Toy Story. A Bugs Life revenue has been
	classified as Library titles in 2000 and 2001.

F-18



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##### Table of Contents



PIXAR


NOTES TO FINANCIAL
STATEMENTS  (Continued)

(10) Earnings per Share
Calculation

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

|                           |                              |             |        |        |  |      |        |        |  |        |      |      |  |        |        |        |  |     |        |        |  |   |      |      |  |   |        |        |  |  |        |        |  |   |      |      | 
|-------------------------- | ---------------------------- | ----------- | ------ | ------ |  | ---- | ------ | ------ |  | ------ | ---- | ---- |  | ------ | ------ | ------ |  | --- | ------ | ------ |  | - | ---- | ---- |  | - | ------ | ------ |  |  | ------ | ------ |  | - | ---- | ---- | 
|                           |                              |            
|                           |                              | Fiscal Year
|                           |                              |            
|                           |                              |             |        |        |  |     
|                           |                              | 1999        |        | 2000   |  | 2001
|                           |                              |             |        |        |  |     
|                           |                              | Net         |        |        |  | Net  |        |        |  | Net    |      |     
|                           |                              | Income      |        | Shares |  | EPS  |        | Income |  | Shares |      | EPS  |  | Income |        | Shares |  | EPS
|                           |                              |             |        |        |  |      |        |        |  |        |      |      |  |        |        |        |  |    
|Basic net income per share |                              | $           | 49,224 |        |  |      | 46,148 |        |  | $      | 1.07 |      |  | $      | 78,433 |        |  |     | 47,280 |        |  | $ | 1.66 |      |  | $ | 36,217 |        |  |  | 48,276 |        |  | $ | 0.75 |     
|Effect of dilutive shares: |                              |             |        |        |  |      |        |        |  |        |      |      |  |        |        |        |  |     |        |        |  |   |      |      |  |   |        |        |  |  |        |        |  |   |      |     
|                           | Warrants/options             |             |        |       |  |      |        | 3,662  |  |        |      |      |  |        |        |       |  |     |        | 2,571  |  |   |      |      |  |   |        |       |  |  |        | 2,754  |  |   |      |      | 
|                           |                              |             |        |        |  |      |        |        |  |        |      |      |  |        |        |        |  |     |        |        |  |   |      |      |  |   |        |        |  |  |        |        |  |   |      |     
|                           | Diluted net income per share |             | $      | 49,224 |  |      |        | 49,810 |  |        | $    | 0.99 |  |        | $      | 78,433 |  |     |        | 49,851 |  |   | $    | 1.57 |  |   | $      | 36,217 |  |  |        | 51,030 |  |   | $    | 0.71 | 
|                           |                              |             |        |        |  |      |        |        |  |        |      |      |  |        |        |        |  |     |        |        |  |   |      |      |  |   |        |        |  |  |        |        |  |   |      |     

Options to purchase 242,122, 934,618, and 647,101
shares of common stock in 1999, 2000 and 2001, respectively,
were not included in the computation of diluted earnings per
share because the options exercise price was greater than
the average market price of the common shares.

(11) Discontinued Operations

In March 1997, the Company discontinued its
business of producing CD-ROM and other interactive products.
Since the measurement date and disposal date were virtually
simultaneous, no income or loss was measured for the intervening
period. The Company recorded revenues of $184,000, $685,000 and
$351,000 in 1999, 2000 and 2001, respectively, and recorded
income from discontinued operations of $122,000, $406,000 and
$211,000 in 1999, 2000, and 2001, respectively, net of income
taxes, due to royalty income received for the Toy StoryCD-ROM products.

Quarterly Financial Information
(Unaudited)

The unaudited financial statements have been
prepared on substantially the same basis as the audited
financial statements and, in the opinion of management, include
all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results of
operations for such periods (in thousands, except per share
data).

|                             |  |               |        |        |  |              |        |             |  |   |        |  |  |   |        | 
|---------------------------- |  | ------------- | ------ | ------ |  | ------------ | ------ | ----------- |  | - | ------ |  |  | - | ------ | 
|                             |  |              
|                             |  | Quarter Ended
|                             |  |              
|                             |  | April 1       |        | July 1 |  | September 30 |        | December 30
|                             |  |               |        |        |  |              |        |            
|2000                         |  |               |        |        |  |              |        |             |  |   |        |  |  |   |        | 
|Revenue                      |  | $             | 60,978 |        |  | $            | 18,333 |             |  | $ | 17,296 |  |  | $ | 75,659 | 
|Gross profit                 |  |               | 45,803 |        |  |              | 14,628 |             |  |   | 15,106 |  |  |   | 59,726 | 
|Net income                   |  |               | 26,388 |        |  |              | 8,020  |             |  |   | 8,821  |  |  |   | 35,204 | 
|Basic net income per share   |  |               | 0.56   |        |  |              | 0.17   |             |  |   | 0.19   |  |  |   | 0.74   | 
|Diluted net income per share |  |               | 0.53   |        |  |              | 0.16   |             |  |   | 0.18   |  |  |   | 0.71   | 

|                             |  |               |        |         |  |              |        |             |  |   |        |  |  |   |        | 
|---------------------------- |  | ------------- | ------ | ------- |  | ------------ | ------ | ----------- |  | - | ------ |  |  | - | ------ | 
|                             |  |              
|                             |  | Quarter Ended
|                             |  |              
|                             |  | March 31      |        | June 30 |  | September 29 |        | December 29
|                             |  |               |        |         |  |              |        |            
|2001                         |  |               |        |         |  |              |        |             |  |   |        |  |  |   |        | 
|Revenue                      |  | $             | 16,151 |         |  | $            | 16,665 |             |  | $ | 11,317 |  |  | $ | 26,090 | 
|Gross profit                 |  |               | 13,814 |         |  |              | 14,180 |             |  |   | 9,197  |  |  |   | 20,714 | 
|Net income                   |  |               | 8,267  |         |  |              | 8,753  |             |  |   | 6,165  |  |  |   | 13,033 | 
|Basic net income per share   |  |               | 0.17   |         |  |              | 0.18   |             |  |   | 0.13   |  |  |   | 0.27   | 
|Diluted net income per share |  |               | 0.16   |         |  |              | 0.17   |             |  |   | 0.12   |  |  |   | 0.25   | 

F-19



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##### Table of Contents



PIXAR


NOTES TO FINANCIAL
STATEMENTS  (Continued)

Period-to-period comparisons of our results of
operations may not be necessarily meaningful, as our annual and
quarterly revenues may fluctuate, due to the timing of our
theatrical releases and related products, such as home video,
television, and merchandising. For example, revenues for the
first quarter of 2000 were higher than the first quarter of 2001
due to worldwide theatrical revenues and related merchandise
from Toy Story 2,which was released in November 1999.
Revenues for the fourth quarter of 2000 were higher than the
fourth quarter of 2001 due to the release and success of Toy
Story 2 in the worldwide home video markets.

F-20



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##### Table of Contents



INDEPENDENT AUDITORS REPORT ON
SCHEDULE

The Board of Directors and Shareholders

Pixar:


Under date of February 1, 2002, we reported
on the balance sheets of Pixar as of December 30, 2000 and
December 29, 2001, and the related statements of income,
shareholders equity and comprehensive income, and cash
flows for each of the years in the three-year period ended
December 29, 2001, which are included in the annual report
on Form 10-K. In connection with our audits of the
aforementioned financial statements, we also audited the related
financial statement schedule included herein. This financial
statement schedule is the responsibility of Pixars
management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.

In our opinion, such financial statement
schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.



| |             
| | ------------
| | /s/ KPMG LLP

San Francisco, California

February 1, 2002


S-1



---



##### Table of Contents



PIXAR

SCHEDULE II  VALUATION AND
QUALIFYING ACCOUNTS AND RESERVES

|                                            |                              |                |   |           |  |              |   |             |  |  |   |     |   |  |   |     | 
|------------------------------------------- | ---------------------------- | -------------- | - | --------- |  | ------------ | - | ----------- |  |  | - | --- | - |  | - | --- | 
|                                            |                              | Balance at     |   |           |  | Deductions:  |   |            
|                                            |                              | Beginning      |   |           |  | Write off of |   | Balance at 
|Classification                              |                              | of Year        |   | Additions |  | Accounts     |   | End of Year
|                                            |                              |                |   |           |  |              |   |            
|                                            |                              |               
|                                            |                              | (In thousands)
|Allowance for returns and doubtful accounts |                              |                |   |           |  |              |   |             |  |  |   |     |   |  |   |    
|                                            | Year ended January 1, 2000   |                | $ | 229       |  |              | $ |            |  |  | $ | (5  | ) |  | $ | 224 | 
|                                            |                              |                |   |           |  |              |   |             |  |  |   |     |   |  |   |    
|                                            | Year ended December 30, 2000 |                | $ | 224       |  |              | $ |            |  |  | $ | (54 | ) |  | $ | 170 | 
|                                            |                              |                |   |           |  |              |   |             |  |  |   |     |   |  |   |    
|                                            | Year ended December 29, 2001 |                | $ | 170       |  |              | $ | 394         |  |  | $ | (12 | ) |  | $ | 552 | 
|                                            |                              |                |   |           |  |              |   |             |  |  |   |     |   |  |   |    

S-2



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this Form 10-K to be signed on its behalf
by the undersigned, thereunto duly authorized, on this 29th day
of March, 2002.



| |      
| | -----
| | PIXAR



| |     |                                                                        
| | --- | -----------------------------------------------------------------------
| | By: | /s/ ANN MATHER 
	 _______________________________________ 
	 Ann Mather

| |                                       
| | --------------------------------------
| | Executive Vice President,             
| | Chief Financial Officer and
	Secretary

POWER OF ATTORNEY

KNOW ALL THESE PERSONS BY THESE PRESENTS, that
each person whose signature appears below constitutes and
appoints Steve Jobs, Ann Mather and Edwin E. Catmull and each of
them, jointly and severally, his or her attorneys-in-fact, each
with full power of substitution, for him or her in any and all
capacities, to sign any and all amendments to this
Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that
each said attorneys-in-fact or his substitute or substitutes,
may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities
Exchange Act of 1934, this Form 10-K has been signed below
by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:

|                                         |  |                                                                                                    |  |               
|---------------------------------------- |  | -------------------------------------------------------------------------------------------------- |  | --------------
|Signature                                |  | Title                                                                                              |  | Date          
|                                         |  |                                                                                                    |  |               
|                                        
|/s/ STEVE JOBSSteve Jobs                 |  | Chairman of the Board and Chief Executive Officer
	(Principal Executive Officer)                   |  | March 29, 2002
|                                        
|/s/ ANN MATHERAnn Mather                 |  | Executive Vice President and Chief Financial
	Officer (Principal Financial and Accounting Officer) |  | March 29, 2002
|                                        
|/s/ EDWIN E. CATMULLEdwin E. Catmull     |  | President and Director                                                                             |  | March 29, 2002
|                                        
|/s/ JILL E. BARADJill E. Barad           |  | Director                                                                                           |  | March 29, 2002
|                                        
|/s/ SKIP M. BRITTENHAMSkip M. Brittenham |  | Director                                                                                           |  | March 29, 2002
|                                        
|/s/ JOSEPH A. GRAZIANOJoseph A. Graziano |  | Director                                                                                           |  | March 29, 2002



---



##### Table of Contents



|                                     |  |          |  |               
|------------------------------------ |  | -------- |  | --------------
|Signature                            |  | Title    |  | Date          
|                                     |  |          |  |               
|/s/ LAWRENCE B. LEVYLawrence B. Levy |  | Director |  | March 29, 2002
|                                    
|/s/ JOE ROTHJoe Roth                 |  | Director |  | March 29, 2002
|                                    
|/s/ LARRY W. SONSINILarry W. Sonsini |  | Director |  | March 29, 2002



---



##### Table of Contents






INDEX TO EXHIBITS

|        |       |          |  |                                                                                                                                                                                                                                                                                                               
|------- | ----- | -------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |         
|Number  |       | Exhibits
|        |       |         
|        | 3.1   |          |  | Amended and Restated Articles of Incorporation
	(which is incorporated herein by reference to Exhibit 3.3
	to the Registrants Form S-1 Registration Statement
	No. 33-97918)                                                                                                                                 
|        | 3.2   |          |  | Amended and Restated Bylaws (which is
	incorporated herein by reference to Exhibit 3.2 to the
	Registrants Annual Report on Form 10-K for the year
	ended December 30, 2000, Commission File No. 0-26976)                                                                                                    
|        | 4.1   |          |  | See Exhibit 3.1                                                                                                                                                                                                                                                                                               
|        | 4.2   |          |  | See Exhibit 3.2                                                                                                                                                                                                                                                                                               
|        | 4.3   |          |  | Specimen Common Stock Certificate (which is
	incorporated herein by reference to Exhibit 4.5 to the
	Registrants Form S-1 Registration Statement
	No. 33-97918)                                                                                                                                              
|        | 10.1* |          |  | 1995 Stock Plan, as amended (which is
	incorporated herein by reference to Exhibit 4.3 to the
	Registrants Form S-8 Registration Statement File
	No. 333-71706)                                                                                                                                              
|        | 10.2* |          |  | 1995 Director Option Plan (which is incorporated
	herein by reference to Exhibit 10.2 to the
	Registrants Form S-1 Registration Statement
	No. 33-97918)                                                                                                                                                     
|        | 10.3* |          |  | Form of Indemnification Agreement entered into
	between the Registrant and each of the executive officers and
	directors (which is incorporated herein by reference to
	Exhibit 10.3 to the Registrants Form S-1
	Registration Statement No. 33-97918)                                                       
|        | 10.4  |          |  | Agreement between the Registrant and Walt Disney
	Pictures dated May 3, 1991, as amended (which is
	incorporated herein by reference to Exhibit 10.4 to the
	Registrants Form S-1 Registration Statement
	No. 33-97918)(1)                                                                                   
|        | 10.5* |          |  | Employment Agreement between the Registrant and
	John Lasseter dated March 21, 2001(2)                                                                                                                                                                                                                        
|        | 10.6  |          |  | Co-Production Agreement between the Registrant
	and Walt Disney Pictures and Television dated February 24,
	1997 (which is incorporated herein by reference to
	Exhibit 10.16 to the Registrants Annual Report on
	Form 10-K for the year ended December 31, 1996,
	Commission File No. 0-26976)(1)          
|        | 10.7  |          |  | Agreement of Purchase and Sale between the
	Registrant and Del Monte Corporation dated as of
	September 6, 1996, as amended (which is incorporated herein
	by reference to Exhibit 10.19 to the Registrants
	Quarterly Report on Form 10-Q for the quarter ended
	June 30, 1997, Commission File No. 0-26976)
|        | 23.1  |          |  | Consent of Independent Auditors                                                                                                                                                                                                                                                                               



---



|    |                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------
|(1) | Portions of this exhibit have been omitted
	pursuant to a request for confidential treatment granted by the
	Commission.
|   
|(2) | Portions of this exhibit have been omitted
	pursuant to a request for confidential treatment filed with the
	Commission.



|  |                                                                  
|- | -----------------------------------------------------------------
|* | Indicates management compensatory plan, contract
	or arrangement.