<PAGE>   1

================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------

                                   FORM 10-K

              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

<TABLE>
<S>                                            <C>
          FOR THE FISCAL YEAR ENDED                        COMMISSION FILE NUMBER
              DECEMBER 31, 1997                                   0-26976
</TABLE>

                                     PIXAR
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                            <C>
                  CALIFORNIA                                     68-0086179
       (STATE OR OTHER JURISDICTION OF                        (I.R.S. EMPLOYER
        INCORPORATION OR ORGANIZATION)                      IDENTIFICATION NO.)
</TABLE>

            1001 WEST CUTTING BOULEVARD, RICHMOND, CALIFORNIA 94804
              (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (510) 236-4000
                            ------------------------

        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  [X]  No  [ ]

     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.  [X]

     As of March 18, 1998, there were 43,515,276 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 18, 1998) was approximately
$403,074,076. 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.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Certain sections of Pixar's Annual Report to Shareholders for the year
ended December 31, 1997 (the "1997 Annual Report") are incorporated by reference
in Parts II and IV of this Form 10-K to the extent stated herein. Also, certain
sections of Pixar's definitive Proxy Statement for the 1998 Annual Meeting of
Shareholders to be held on June 17, 1998 are incorporated by reference in Part
III of this Form 10-K to the extent stated herein.
================================================================================
<PAGE>   2

     This Annual Report on Form 10-K and the documents incorporated herein by
reference contain forward-looking statements that have been made pursuant to the
provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are based on current expectations, estimates and
projections about Pixar's industry, management's beliefs, and assumptions made
by management. Words such as "anticipates," "expects," "intends," "plans,"
"believes," "seeks," "estimates," variations of such words and similar
expressions are intended to identify such forward-looking statements. These
statements are not guarantees of future performance and are subject to certain
risks, uncertainties and assumptions that are difficult to predict; therefore,
actual results and outcomes may differ materially from what is expressed or
forecasted in any such forward-looking statements. Such risks and uncertainties
include those set forth herein under "Certain Factors Affecting Business,
Operating Results and Financial Condition" on pages 13 through 27 as well as
those noted in the documents incorporated herein by reference. Particular
attention should be paid to the cautionary language in Certain Factors Affecting
Business, Operating Results and Financial Condition "-- Dependence on Toy Story,
A Bug's Life and Toy Story Sequel," "-- Liquidity Risks," "-- Scheduled
Successive Release of Films; Management of Growth" and "-- Risks Associated with
Co-Production Agreement." Unless required by law, Pixar undertakes no obligation
to update publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.

                                     PART I

ITEM 1. BUSINESS

GENERAL

     Pixar is a digital animation studio with the technical, creative and
production capabilities to create a new generation of animated feature films and
related products. Pixar's objective is to develop computer animated feature
films with a new three-dimensional appearance, memorable characters and
heartwarming stories that will appeal to audiences of all ages. The first such
film, Toy Story, was created and produced by Pixar and was distributed by The
Walt Disney Company (along with its subsidiaries hereinafter referred to as
"Disney"). Pixar believes that consumer marketing campaigns surrounding the
theatrical release of such films can generate broad consumer awareness of the
films, which in turn can drive box office demand as well as sales of
film-related products, such as theatrical sequels, soundtracks, toys and other
merchandise.

RECENT DEVELOPMENTS

     In February 1998, pursuant to the Co-Production Agreement, Pixar and Disney
agreed to co-finance and Pixar agreed to produce a theatrical motion picture
sequel to Toy Story (with the working title, Toy Story Sequel), in lieu of the
Toy Story made-for-home video sequel. Because Toy Story Sequel is a derivative
work of the original Toy Story, it will not be counted toward the five Pictures
to be produced under the Co-Production Agreement. However, for all other
purposes, Toy Story Sequel will be treated as a "Picture" under the
Co-Production Agreement. Accordingly, Toy Story Sequel has been added to the
definition of Pictures produced and financed under the Co-Production Agreement
and all the provisions applicable to the other five Pictures apply.
Specifically, Pixar and Disney will co-own and co-brand Toy Story Sequel (with
Disney having exclusive distribution and exploitation rights) and will share
equally in the profits of Toy Story Sequel and any related merchandise and other
ancillary products, after recovery of all marketing and distribution costs
(which will be financed by Disney), a distribution fee paid to Disney and any
other fees or costs, including any participations provided to talent and the
like. See "-- Relationship with Disney -- Co-Production Agreement."

     Since 1996, Pixar has been in the process of producing Toy Story Sequel for
the less expensive made-for-home video format. Therefore, Pixar will necessarily
spend substantially more production time and incur substantially higher
production costs to convert Toy Story Sequel into a feature-length and
feature-quality motion picture. As a result, Toy Story Sequel will not be
released until late in 1999 at the earliest. Pixar does not expect to recognize
any revenue from Toy Story Sequel until six to twelve months after the
theatrical

                                        1
<PAGE>   3

release (i.e. until the second half of 2000 at the earliest). The budget for Toy
Story Sequel will also be much greater than the original Toy Story film because,
among other things, compensation rates for personnel have escalated and, unlike
Toy Story, significant upfront and participation costs for key voice talent will
be incurred.

BUSINESS MODEL AND PRODUCTS

     Pixar's strategy is to develop and produce animated feature films and
related products, such as theatrical sequels, and to work jointly with Disney in
the development and production of certain other related products such as
soundtracks, toys and other merchandise. Pixar is currently implementing this
strategy through the Co-Production Agreement with Disney.

     Animated Feature Films. Pixar's first computer-animated feature film, Toy
Story, was released on November 22, 1995, and Pixar intends to continue to
develop computer animated feature films for the family entertainment market. In
1997, Pixar began the production phase on a second computer-animated feature
film for Disney, called A Bug's Life, which will be the first of five such films
developed and distributed under the new Co-Production Agreement with Disney.
This film is not expected to be released until the end of 1998. In 1997, Pixar
continued development and began production on Toy Story Sequel, a derivative
work now subject to the same terms as the other theatrical motion pictures
developed under the Co-Production Agreement, except Toy Story Sequel will not be
counted toward the five Pictures to be produced under that agreement. See
"Recent Developments." Toy Story Sequel is not expected to be released until the
end of 1999 at the earliest. Also in 1997, Pixar continued story development on
its fourth theatrical film (the "Fourth Film"). This film will be developed and
distributed under the Co-Production Agreement and will count as the second of
the five original films to be produced under the Co-Production Agreement.
Production of the Fourth Film has not yet begun, and Disney and Pixar have not
yet approved the story treatment and budget as required under the Co-Production
Agreement. The Fourth Film is not expected to be released until the end of 2000
at the earliest. See "Certain Factors Affecting Business, Operating Results and
Financial Condition -- Scheduled Successive Release of Films; Management of
Growth."

     Home Videos. Toy Story was released by Disney as a home video in October
1996, and Pixar believes that its future animated feature films will lend
themselves to home video distribution in both domestic and international
markets. Distribution of home video versions of the animated feature films
developed and produced under the Co-Production Agreement will also be pursuant
to the Co-Production Agreement.

     Merchandise and Soundtracks. Pixar believes that the characters and music
created in animated feature films lend themselves to opportunities for selling
merchandise and soundtracks. For example, merchandise such as children's toys
based on stories and characters in Toy Story were designed using
three-dimensional data from Pixar's digital models. Disney has the rights to
distribute merchandise and soundtracks from Toy Story and the feature films to
be made pursuant to the Co-Production Agreement, and Pixar shares in the
profits, if any, generated from such sales.

     Short Animation Products. Pixar has also in the past produced animated or
partially animated television commercials, including for products such as
Coca-Cola, Listerine and Gummi-Savers (a LifeSavers product). However, in 1996,
Pixar largely discontinued its business of producing commercials in favor of
other opportunities. Pixar does still produce short animation projects, such as
projects related to Disney theme parks. Moreover, Pixar believes 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.

     Short Films. Pixar has developed a number of short films since its
inception and continues to invest in developing new short films. In 1997, Pixar
created and produced a new short film, Geri's Game. Although the short films
have few commercial opportunities, Pixar believes it is an important investment
for the development of creative talent and Pixar's computer animation
technology. For example, Geri's Game enabled Pixar to further its technology in
computer generated skin and cloth.

     Other Products. Pixar has been selling its RenderMan software for over
eight years. RenderMan has helped visual effects studios create visual effects
such as certain dinosaurs in Jurassic Park, the metal cyborg in Terminator 2 and
the ghosts in Casper. RenderMan runs on Unix-based workstations from Silicon

                                        2
<PAGE>   4

Graphics, Sun Microsystems, Inc. ("Sun"), The Hewlett-Packard Company
("Hewlett-Packard"), International Business Machines Corporation ("IBM") and
Digital Equipment Corp. ("Digital Equipment") as well as the Windows platform.
Examples of RenderMan customers include movie studios such as Disney, Digital
Domain, Twentieth Century Fox Film Corporation, Industrial Light and Magic
("ILM"), Columbia/Tri-Star Pictures Inc. and Warner Bros. Inc. Customers also
include government agencies and universities. RenderMan is sold in several
formats, including a Toolkit at a list price of $5,000 per license. Discounts
are available for site or multi-use licenses. As a result of Pixar's reduced
emphasis on the commercialization of software in favor of products sold for
their content, Pixar continues to expect to dedicate less time and resources to
distributing and marketing RenderMan than it has in the past and expects that
sales of these products may decline. See "Technology -- RenderMan." See also
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the 1997 Annual Report to Shareholders.

     Discontinuation of Interactive Products Division. In 1995, Pixar
established a division that focused on the development of interactive CD-ROM
stories and games for PCs. Under a separate prior agreement with Disney, this
division of Pixar developed two CD-ROM titles based on Toy Story -- Toy Story
Interactive Storybook and Toy Story Activity Center. The products developed
under that agreement with Disney were financed and distributed by Disney. Pixar
determined in March 1997 to discontinue its business of producing CD-ROM and
other interactive products and successfully redirected the approximately 60
employees in this division to film and related projects within Pixar.

PIXAR COMPUTER ANIMATION PROCESS AND DIGITAL BACK LOT

     Pixar Computer Animation Process

     The production of an animated feature film 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 77-minute animated feature film such as Toy
Story requires approximately 110,000 individual frames. Animation for a feature
film 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 painting cels for more recent releases, almost every
frame is still hand-drawn.

     Pixar believes that its 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.

     Pixar makes its computer animated films and other projects in three stages:
creative development, production and post-production.
<TABLE>
    <S>                <C>          <C>     <C>          <C>     <C>          <C>     <C>          <C>     <C>          <C>
                       -----------          -----------          -----------          -----------          -----------
    CREATIVE              Story             Treatment/             Screen-               Story                Story
    DEVELOPMENT          Concept      5       Outline      5        Play        5        Board       5        Reels       5
                       -----------          -----------          -----------          -----------          -----------

<CAPTION>
    <S>                <C>
                       -----------
    CREATIVE              Voice
    DEVELOPMENT         Recording
                       -----------
</TABLE>

     Creative Development. 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. The screenplay is then 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 which enables editing of the film before the production phase begins.

                                        3
<PAGE>   5

Voices are then selected, recorded and added to the story reels. Throughout the
creative development process, plans are developed for the style, colors and look
of the film.
<TABLE>
    <S>                <C>          <C>     <C>          <C>     <C>          <C>     <C>          <C>     <C>          <C>
                       -----------          -----------          -----------          -----------          -----------
                                                                                        Shading
    PRODUCTION          Modeling      5       Layout       5      Animation     5         and        5      Rendering     5
                                                                                       Lighting
                       -----------          -----------          -----------          -----------          -----------

<CAPTION>
    <S>                <C>
                       -----------

    PRODUCTION            Film
                        Recording
                       -----------
</TABLE>

     Production. Pixar's 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. Animation is performed
by defining "key frames," which are the frames containing the extremes of motion
that will occur in a scene. The computer then interpolates frames in between the
two most extreme positions in a particular segment of movement to create smooth
motion. The animators can then adjust the interpolation and key frames
repeatedly until they achieve the desired result. 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
can take between one and twenty hours. The final rendered data is then sent to
one of Pixar's film recorders for imaging onto film.

<TABLE>
<S>                        <C>          <C>     <C>          <C>     <C>          <C>     <C>          <C>     <C>
                           -----------          -----------          -----------          -----------          -----------
                              Sound                Print
POST-PRODUCTION              Effects      5       Musical      5        Sound       5        Color       5      Delivery
                             Design                Score               Mixing             Correction            of Print
                           -----------          -----------          -----------          -----------          -----------
</TABLE>

     Post-Production. 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. In the sound process, the sound effects and musical
score are added and the final sound is mixed. Pixar's 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. Pixar, like other animation studios, edits the film throughout the
entire creative development and production process. Thus post-production
involves only final editing.

     Digital Back Lot

     The digital models that Pixar develops to create its animated products may
be used again in future films, CD-ROM titles, television commercials and other
animation products. The Pixar technical team has developed a proprietary
database of thousands of digital models, sets, textures and surface appearances
from its short films and commercials. Much like the traditional movie studio's
back lot, this digital database allows Pixar animators to retrieve and re-use
thousands of different elements that make up the characters and scenes of a
film. Unlike a traditional movie studio's back lot however, digital animation
sequences can be easily re-used. For example, a sequence of a character walking
could be re-used with little or no rework in another portion of the film. These
models may also be used in other films or in videos, CD-ROM titles or to create
merchandise. For example, the models that were used to animate Toy Story were
"re-used" or rendered in a different resolution for use in Pixar's two Toy Story
CD-ROM titles and are being re-used in Toy Story Sequel.

                                        4
<PAGE>   6

TECHNOLOGY

     Pixar has three core proprietary technologies: (i) Marionette, an animation
software system for modeling, animating and lighting, (ii) Ringmaster, a
production management software system for scheduling, coordinating and tracking
of a computer animation project and (iii) 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 Pixar's animated feature films and other animation products.

     Marionette. Marionette is Pixar's software system for modeling, animation
and lighting for computer animation. Marionette 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,
corporate logo graphics or cinematic special effects, Marionette has been
designed and optimized for character modeling and animation. Marionette is
portable across many of the standard Unix workstations, including those from
Silicon Graphics and Sun. Pixar has also ported Marionette to IBM and
Hewlett-Packard workstations for hardware evaluation purposes.

     Ringmaster. Ringmaster 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.
Pixar's production coordination staff uses Ringmaster to plan and track projects
ranging from short animation projects to feature films.

     A key component of Ringmaster is a distributed rendering system for
managing the huge quantity of images and data that must be rendered to create
Pixar's products. Pixar does its rendering on an array of powerful Unix
processors which are dedicated to rendering 24 hours a day. These machines,
which Pixar calls 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; for video resolution the average
time to render a single frame is between 30 and 90 minutes. Since an animated
feature film contains well over 100,000 frames, each of which may be rendered
several times in the production process, Pixar typically has a large number of
frames to render at any given time. To manage this process, Ringmaster
coordinates and schedules all the processors in the RenderFarm. Ringmaster
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, Ringmaster 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 Pixar uses internally and also licenses to
third parties. Today, RenderMan is used by many major film studios and special
effects firms. Examples of projects which have used RenderMan include Terminator
2, Jurassic Park, Aladdin and Apollo 13. By licensing RenderMan to film studios,
visual effects houses, commercial production facilities and other computer
animation companies, Pixar believes that RenderMan has been established as a de
facto industry standard for high quality rendering.

     Pixar has used RenderMan for animation production since 1988, when it was
first used in the making of the short animated film Tin Toy. Since that time,
Pixar has used RenderMan for its films and short projects. Pixar also used
RenderMan to render approximately 110,000 frames for the animated feature film,
Toy Story, and to render all frames for the two Toy Story CD-ROM titles.

     RenderMan was designed to be easily portable. It runs on a wide variety of
Unix workstations, including those from Silicon Graphics, Sun, Hewlett-Packard
and Digital Equipment. Pixar has also ported RenderMan to the Windows and
Macintosh platforms.

CREATIVE DEVELOPMENT GROUP

     Pixar's creative and technical personnel have collaborated for over ten
years to produce three-dimensional computer animated films. The principal
objective of Pixar's creative group is to use the medium of computer animation
to create heartwarming stories with memorable characters that are targeted for
family entertainment. The members of Pixar's creative and technical teams have
been nominated for and received a number
                                        5
<PAGE>   7

of awards. In 1986, the short animated film Luxo Jr. earned an Academy Award
nomination for Best Short Film (Animated). In 1988, another of Pixar's short
films, Tin Toy, became the first computer animated film to win the Academy Award
for Best Short Film (Animated). In 1998, Pixar's most recent animated short
film, Geri's Game, also won an Academy Award for Best Short Film (Animated).

     The creative team at Pixar is under the direction of John Lasseter, an
Academy Award-winning director and animator and the director of Toy Story. 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. Pixar has built an entire creative team consisting of highly skilled
animators, story artists and other artists highly skilled in the art of
animation, especially computer animation. Pixar strives to hire animators who
have superior acting ability, those able to make characters and inanimate
objects come to life and appear as though they have their own thought processes.
Pixar's proprietary software tools enable artists unfamiliar with computers to
quickly become skilled in the art of three-dimensional animation. Along with
animators, the creative team at Pixar includes a story department and an art
department. The 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 and sets and the color, textures, shading and lighting. It is also
quite common for creative contributions to come from the technical group. All
groups work closely together in an iterative process. To encourage
collaboration, Pixar has strived to create 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.

     The success of each animated feature film developed by Pixar will depend in
large part upon the Pixar creative team's ability to predict the type of content
that will appeal to a broad audience and to develop stories and characters that
achieve broad market acceptance. Traditionally, this has been extremely
difficult. Disney provided creative assistance throughout the production of Toy
Story, including creative reviews and approvals, and the Co-Production Agreement
contemplates that Disney will continue to provide creative assistance to Pixar
on feature films and other products made pursuant to that agreement, but there
can be no assurance that Disney will continue to provide assistance to Pixar in
the development of creative content for its feature films or related products.
In addition, there can be no assurance that voices and other intellectual
property rights used in an animated feature film will be available for use in
any sequel or other product related to such feature film. For example, Pixar was
unable to obtain the rights to use certain voices from Toy Story in the two
CD-ROM products based on Toy Story. See "Certain Factors Affecting Business,
Operating Results and Financial Condition -- Dependence on Successful
Development of Appealing Creative Content For Animated Feature Films and Related
Products."

RELATIONSHIP WITH DISNEY

     Prior Agreements

     Pixar's relationship with Disney dates to 1986, when Pixar and Disney
entered into a joint technical development effort that resulted in the Computer
Animated 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 Under and has continued to use it
for other animated feature films, including Aladdin, The Lion King, The
Hunchback of Notre Dame and Hercules. In 1992, certain employees of Pixar and
Disney were jointly awarded an Academy Award for Scientific and Engineering
Achievement for CAPS.

     In May 1991, Pixar entered into a 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 that Feature Film
Agreement that Toy Story and the Toy Story home video were developed, produced
and distributed. In August 1995, Pixar entered into a non-exclusive CD-ROM
development and publishing agreement with Disney Interactive, Inc. ("Disney
Interactive"), 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

                                        6
<PAGE>   8

Agreement that the two Toy Story CD-ROM products were developed, produced and
distributed. Both the Feature Film Agreement and the CD-ROM Agreement were
superseded by the Co-Production Agreement, except as discussed below.

     Co-Production Agreement

     The following is a summary of the Co-Production Agreement, which was filed
as an exhibit to Pixar's Annual Report on Form 10-K for the year ended December
31, 1996 (the "1996 Form 10-K"). The foregoing 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.
Shareholders and prospective investors in Pixar's Common Stock are encouraged to
read the Co-Production Agreement.

     Overview. On February 24, 1997 Pixar and Walt Disney Pictures and
Television entered into the Co-Production Agreement pursuant to which Pixar, on
an exclusive basis, will produce five computer animated feature-length
theatrical motion pictures (the "Pictures") for distribution by Disney over
approximately the next ten years. Pixar and Disney will co-finance the
production costs of the Pictures, co-own the Pictures (with Disney having
exclusive distribution and exploitation rights), co-brand the Pictures and share
equally in the profits of each Picture and any related merchandise and other
ancillary products, after recovery of all marketing and distribution costs
(which will be financed by Disney), a distribution fee paid to Disney and any
other fees or costs, including any participations provided to talent and the
like. The Co-Production Agreement generally provides that Pixar will produce
each Picture and that Disney will control all decisions relating to marketing,
promotion, publicity, advertising and distribution of each Picture. Disney and
Pixar have agreed that the first Picture under the Co-Production Agreement is A
Bug's Life. 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,
Pixar will have the opportunity to co-finance and produce such products or to
earn passive royalties on such products. Pixar will not share in any theme park
revenues generated as a result of the Pictures.

     Production. The Co-Production Agreement provides a mechanism for Pixar's
submission and the mutual selection of treatments that will be developed and
produced as Pictures. After the selection of a treatment, Pixar generally
controls 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 are to equally
share all production costs. Production costs are defined in the Co-Production
Agreement to mean all costs and expenses incurred by Pixar directly related to
or fairly allocable to the creation, development, pre-production, production,
post-production and delivery to Disney of the Pictures. Production costs
include, among other things, all carrying costs incurred by Pixar for retention
of employees for production purposes and the overhead attendant thereto, the
costs of all treatments prepared by Pixar for submission to Disney, all costs of
computer hardware and software used to develop the Pictures, and fair
allocations of all costs and expenses of Pixar associated with or benefiting the
Picture, including research and development, general and administrative and
overhead expenses and facilities. The Co-Production Agreement provides
mechanisms for Disney and Pixar to agree upon the budgets for treatments,
development and production of each Picture. Pixar may not exceed production
budgets (which may be revised with mutual approval) without Disney's written
approval, subject to certain limited exceptions.

     Distribution. Disney has control over all decisions relating to, and is
solely responsible for financing the costs and expenses of, the marketing,
promotion, publicity, advertising and distribution of each Picture, subject to
certain requirements. Provided, in general, that Disney has agreed on the
treatment to be developed into each Picture, Disney has committed to initially
release each Picture within certain windows and not to release other Disney
family films during certain windows, and 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. Disney is

                                        7
<PAGE>   9

to consult with Pixar relating to all such major marketing and distribution
decisions, and Pixar is entitled to designate a representative to monitor
marketing and distribution of the Pictures.

     Division of Gross Receipts. Pixar and Disney are entitled to share equally
in all gross receipts remaining after deduction of: (i) a distribution fee to
Disney, (ii) mutually agreed participations (payments to third parties such as
actors, composers and other artists contingent upon the success of the
Pictures), if any, on a pro rata basis, paid by either Disney or Pixar, and
(iii) Disney's distribution costs. Gross receipts includes 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 under the prior Feature Film Agreement and
reflects Pixar's 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 distribution of the Picture and
Merchandise. Pursuant to the Co-Production Agreement, Pixar will receive
statements and payments of its share of gross receipts monthly within 45 days
after the end of each calendar month, and Pixar has the right to audit Disney's
and its affiliates' 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 derivative
works) during the term of the Co-Production Agreement or thereafter. Derivative
works include theatrical sequels such as Toy Story Sequel, made-for-home video
sequels, television productions, interactive media products 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. Pixar is 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 (i) a theatrical motion picture, (ii) a
made-for-home video production, (iii) a television production, (iv)
location-based entertainment which uses unique characters or other elements from
any of the Pictures or Toy Story as its primary theme, or (v) an interactive
product such as CD-ROMs, DVDs, video games and arcade games (collectively,
"Interactive Products").

     If Pixar elects to co-finance and produce a Derivative Work, such as it did
recently with Toy Story Sequel, the Co-Production Agreement provides for the
following:

          (i) 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;

          (ii) with respect to (A) location-based entertainment using characters
     or other elements from a Picture or Toy Story as its primary theme and (B)
     television productions, Pixar and Disney are to mutually agree upon the
     terms and the conditions under which such work shall be financed, produced
     and distributed, subject to certain specified requirements in the case of
     television productions; and

          (iii) with respect to Interactive Products, Disney and Pixar are to
     mutually agree upon the terms and conditions under which such Interactive
     Product shall be financed, produced and distributed, subject to certain
     commitments by Disney with respect to marketing and distribution and
     provided that there shall be no distribution fee payable to Disney.

     For live entertainment such as stage plays or ice shows, Pixar is entitled
to participate on a passive financial basis as specified in the Co-Production
Agreement. For all other Derivative Works except theme parks, Pixar is 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 Pixar, each Picture, the characters therefrom and any story

                                        8
<PAGE>   10

elements thereof in theme parks, location-based entertainment for which Picture
or Toy Story characters 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 Sequel will not count as one of the five Pictures to be
produced. However, for all other purposes, it has been added to the definition
of the original five Pictures produced and financed under the agreement.
Therefore, all provisions applicable to the original five Pictures apply to Toy
Story Sequel as 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. Pixar has agreed not to release or authorize the release of
any feature length animated theatrical motion picture produced by Pixar, other
than the Pictures and Derivative Works produced by Pixar under the Co-Production
Agreement, until twelve months from delivery of the fifth Picture under the Co-
Production Agreement. Pixar has further agreed that it 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 Pixar has
delivered the third Picture to Disney under the Co-Production Agreement. Pixar
has also agreed that it 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 Pixar proposes to produce during the term
of the Co-Production Agreement.

     Proprietary Rights. 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 Merchandise relating
thereto, shall be jointly owned by Disney and Pixar on an undivided 50/50 basis,
subject to Pixar's ownership rights in the technology and excluding any
intellectual property rights previously owned by Pixar or Disney.
Notwithstanding the foregoing, Disney has the exclusive distribution and
exploitation rights with respect to the Pictures, Derivative Works and
Merchandise relating thereto. Pixar shall own the copyright and all other
intellectual property rights in and to all computer programs and other
technology developed or discovered by Pixar 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. Disney is entitled to terminate the
Co-Production Agreement in the event that Disney and Pixar fail to agree on a
treatment for a Picture within one year after the initial theatrical release of
the last Picture for which a treatment has been approved or selected, subject to
certain exceptions. Disney is also 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. Upon termination by Disney pursuant to
either of the last two sentences, Disney has certain rights to compel Pixar 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 have been delivered by Pixar
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 Sequel, are 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

                                        9
<PAGE>   11

motion picture Toy Story and the financial participation in 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), 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

     Pixar experiences intense competition with respect to animated feature
films, animation products and software.

     Movie Studios. Pixar's animated feature films compete and will continue to
compete with feature films and other family oriented entertainment products
produced by major movie studios, including Disney (as somewhat limited by the
Co-Production Agreement), Warner Bros. Inc., Twentieth Century Fox Film
Corporation ("Twentieth Century Fox"), Paramount Pictures ("Paramount"),
Columbia/Tri-Star Pictures Inc., Lucasfilm Ltd. ("Lucasfilm"), Universal City
Studios, Inc. and MGM/UA, as well as numerous other independent motion picture
production companies. Competition has greatly intensified in the animated
feature film market from these and other movie studios. Animated feature films
released in 1997 included Anastasia by Twentieth Century Fox and Beavis and
Butt-head Do America by United International Pictures with Paramount, each
achieving domestic box office receipts between $55 and $65 million. Other of
these movie studios have announced their intention to enter the animated feature
film market, including DreamWorks SKG ("DreamWorks"), a studio formed in 1994
which is expressly targeting the animated film market. DreamWorks owns a
significant equity stake in Pacific Data Images ("PDI"), a computer graphics
special effects firm, and is producing a computer animated movie with PDI. This
computer animated film, which has been referred to publicly as Antz, may contain
similar subject matter to A Bug's Life. As a result, Pixar expects a variety of
new animated feature films to be released in the theaters in the next two years
generating competition for A Bug's Life and Toy Story Sequel, which are targeted
for release in late 1998 and late 1999, respectively. These films include
Paramount's Rugrats, The Movie and DreamWorks' The Prince of Egypt. Pixar is
also aware of several other animated feature films in production at various
studios. Due to the large number of expected releases in the next two years, it
is possible that the market for animated films will become saturated before
Pixar can release A Bug's Life and other feature films, which could result in
failure of such films to achieve commercial success. In addition, other
non-animated family oriented feature films are expected to be released in late
1998 and will generate additional competition for A Bug's Life. They include
Babe: Pig in the City, The Wizard of Oz , Air Bud 2: Golden Receiver and Star
Trek 9, among many others.

     Pixar's films will compete with the feature films of other movie studios
for optimal release dates, audience acceptance and exhibition outlets. In
addition, Pixar competes and will continue to compete with other movie studios
for the acquisition of literary properties, production financing, the services
of performing artists, and the services of other creative and technical
personnel, particularly in the fields of animation and technical direction. Most
of the other movie studios with which Pixar competes have significantly greater
name recognition and significantly greater financial, technical, creative,
marketing and other resources than does Pixar.

     At least two of these movie studios, Disney and Lucasfilm (through its
affiliate Industrial Light and Magic ("ILM")), have developed their own internal
computer animation capability and have created computer animation for special
effects in animated films. In addition, Pixar believes that Disney is currently
developing and producing a feature film making substantial use of computer
animation. Other movie studios may internally develop, license or sub-contract
three-dimensional animation capability. Further, Pixar believes 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, Silicon Graphics Inc.'s Alias/Wavefront subsidiary
has recently launched "Maya," its next generation three-D 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.

                                       10
<PAGE>   12

     The Co-Production Agreement provides for the development and production by
Pixar of five 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, Pixar
believes that Disney desires such films to be successful. Nonetheless, Disney
has been by far the most successful producer of animated feature films, and
family oriented motion pictures distributed by Disney or its affiliates are
likely to be in the market concurrently with and competing with Pixar's animated
feature films. Pixar's contractual arrangement with Disney also presents other
risks. See "Certain Factors Affecting Business, Operating Results and Financial
Condition Risks Associated with Co-Production Agreement."

     Pixar believes 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 Pixar's 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, Pixar believes that it presently competes
favorably with respect to each of these factors.

     Computer Graphics Special Effects Firms. Pixar also expects to compete with
computer graphics special effects firms, including ILM, Digital Domain, PDI,
Rhythm & Hues, and Blue Sky/VIFX Productions. 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 Pixar. For example, ILM has
already created and produced three-dimensional character animation which was
used for the ghosts in the live action film Casper,and ILM has a royalty-free,
paid-up license to use Pixar's 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, Pixar's RenderMan software
may not provide Pixar with a competitive advantage. Pixar also competes, or may
in the future compete, with the above firms with respect to animation products
other than feature films. Pixar believes that the primary competitive factors in
the market for three-dimensional computer animation for feature films and other
animation products include creative content and talent, product quality,
technology, access to distribution channels and marketing resources. Pixar
believes that it presently competes favorably with respect to each of these
factors.

     Software Publishers. Pixar also experiences intense competition with
respect to its RenderMan software product. In particular, Pixar competes with
makers of computer graphics imaging and animation software, principally
Microsoft (which acquired SoftImage Inc.), MentalImage (which offers the same
product offered by Microsoft), and Silicon Graphics (which acquired Wavefront
Technologies, Inc. ("Wavefront") and Alias Research, Inc. ("Alias")). Microsoft,
through SoftImage Inc., MentalImage and Silicon Graphics, through Wavefront and
Alias, are each marketing competing rendering software products, usually at
lower prices than Pixar. Microsoft and Silicon Graphics have each licensed
several of Pixar's patents that cover certain rendering techniques and may
therefore be better able to market products that compete with Pixar's RenderMan
software. Under appropriate circumstances, Pixar might elect to license its
rendering technology patents to other companies, some of which may compete with
Pixar. In addition, as PCs become more powerful, software suppliers may also be
able to introduce products for PCs that would be competitive with RenderMan in
terms of price and performance for professional users. Pixar believes 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. Pixar believes that it presently competes
favorably with respect to each of these factors.

     Pixar expects competition to persist, intensify and increase in each of its
business areas in the future. Almost all of Pixar's current and potential
competitors have longer operating histories, greater name recognition, larger
installed customer bases and significantly greater financial, technical,
marketing and other resources than Pixar. There can be no assurance that Pixar
will be able to compete successfully against current or future competitors. Such
competition could materially adversely affect Pixar's business, operating
results or financial condition.

                                       11
<PAGE>   13

PROPRIETARY RIGHTS

     Pixar's success and ability to compete is dependent in part upon its
proprietary technology. While Pixar relies on a combination of patents,
copyright and trade secret protection, nondisclosure agreements and cross-
licensing arrangements to establish and protect its proprietary rights, Pixar
believes that factors such as the technical and creative skills of its personnel
are more essential to its success and ability to compete. Pixar currently is the
owner of eight patents issued in the United States, one patent issued in the
United Kingdom, one patent issued in France, one patent issued in Germany, one
patent issued in Japan, two patents issued in Canada and one patent issued by
the European Patent Office. In addition, Pixar has 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 Pixar's technology. In addition, there can be no assurance that any
patents that have been issued to Pixar, or that Pixar may license from third
parties, will not be challenged, invalidated or circumvented, or that any rights
granted thereunder would provide proprietary protection to Pixar.

     The source code for Pixar's proprietary software is protected both as trade
secrets and as a copyrighted work. Pixar generally enters into confidentiality
or license agreements with its employees, consultants and vendors, and generally
controls access to and distribution of its software, documentation and other
proprietary information. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use Pixar's proprietary information,
products or technology without authorization, or to develop similar or superior
technology independently. Policing unauthorized use of Pixar's products is
difficult. In addition, effective copyright and trade secret protection may be
unavailable or limited in certain foreign countries. To license its RenderMan
software product, Pixar primarily relies 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 taken by Pixar
will prevent misappropriation of its technology or that its confidentiality or
license agreements will be enforceable. In addition, litigation may be necessary
in the future to enforce Pixar's intellectual property rights, to protect
Pixar's 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 Pixar's business, operating results or
financial condition.

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

     Pixar also relies on certain technology that it licenses from third
parties, including software which 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 Pixar 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 shipments until
equivalent technology could be identified, licensed and integrated. Any such
delays in feature film releases or product shipments could materially adversely
affect Pixar's business, operating results or financial condition.

     In 1996, Pixar entered into a license agreement with Silicon Graphics
whereby Pixar granted to Silicon Graphics and its subsidiaries a non-exclusive
license to use certain of Pixar's patents covering techniques for

                                       12
<PAGE>   14

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
Pixar's RenderMan. The license agreements with Silicon Graphics and Microsoft
will expire no later than the year 2010. Silicon Graphics and Microsoft may use
the licensed technology in rendering products which compete with Pixar's
RenderMan software, which could adversely impact sales of RenderMan.

EMPLOYEES

     As of December 31, 1997, Pixar had a total of 391 employees. Although none
of Pixar's employees is represented by a labor union, it is common for animators
and actors at film production companies to belong to a union, and there can be
no assurance that Pixar's employees will not join or form a labor union or that
Pixar, for certain purposes, will not be required to become a union signatory.
Further, Pixar may be directly or indirectly dependent upon union members, and
work stoppages or strikes organized by such unions could materially adversely
impact Pixar's business, financial condition or results of operations. For
example, many of the actors who provide the voice talents for the Pictures and
Derivative Works are members of the Screen Actors Guild, which is currently
renegotiating its basic agreement that otherwise expires on June 30, 1998. Pixar
has not experienced any work stoppages and considers its relations with its
employees to be good.

     Pixar's success depends to a significant extent on the performance of a
number of senior management personnel and other key employees, especially its
animators, creative personnel and technical directors. In particular, Pixar is
dependent upon the services of Steven P. Jobs, John Lasseter, Edwin E. Catmull,
Lawrence B. Levy and Sarah McArthur. Pixar does not maintain "key person" life
insurance for any of its employees. Pixar does have employment agreements with
Messrs. Lasseter and Catmull, who are fundamental to its relationship with
Disney. However, such employment agreements do not necessarily assure the
services of these employees. Pixar believes that it may be particularly
difficult to retain its key employees, especially its animators, creative
personnel and technical directors, during periods in which it is not developing
animated feature films. The loss of the services of any of Messrs. Jobs,
Lasseter, Catmull, or Levy, Ms. McArthur, or of other key employees, especially
its animators, creative personnel and technical directors, could have a material
adverse effect on Pixar's business, operating results or financial condition.

                      CERTAIN FACTORS AFFECTING BUSINESS,
                   OPERATING RESULTS AND FINANCIAL CONDITION

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

ANTICIPATED NET LOSSES IN 1998 AND THE FIRST HALF OF 1999

     A number of factors are expected to result in net losses in 1998 and in the
first half of 1999, as discussed more fully below.

     End of Toy Story Revenues

     Pixar has already recognized the vast majority of the revenue it expects to
receive from Toy Story. While relatively minor amounts of revenue may be
received by Pixar in subsequent periods from sources such as Toy Story
merchandise royalties, Toy Story television airings, and minor remaining
international home video sales of Toy Story, Pixar does not expect to recognize
any further significant revenue from Toy Story in the future.

     Timing of A Bug's Life and Toy Story Sequel Releases

     A Bug's Life is not expected to be released until the end of 1998 at the
earliest, and revenue attributable to A Bug's Life is not expected to be
recognized until after all marketing and distribution costs and fees have been
recovered by Disney. Recovery of all costs depends on many factors and may not
occur until six to twelve

                                       13
<PAGE>   15

months after its release at the earliest, making it likely that Pixar will not
recognize any revenue from A Bug's Life until the second half of 1999 at the
earliest. In addition, Toy Story Sequel is not expected to be released until the
end of 1999 at the earliest. As with A Bug's Life, Pixar does not expect to
recognize any revenue from Toy Story Sequel until six to twelve months after its
release at the earliest. Therefore, Pixar is unlikely to recognize any revenue
from Toy Story Sequel until the second half of 2000 at the earliest.

     Limited CD-ROM Income

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

     Possible Decline in Sales of RenderMan Due to Shift in Focus

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

     Increase in Operating Expenses and Tax Rate

     In 1996 and 1997, Pixar significantly increased its operating expenses, and
Pixar plans to continue to increase its operating expenses to fund greater
levels of research and development and to expand operations. Specifically, Pixar
expects its spending levels to increase significantly due to continued
investment in proprietary software systems, increased compensation costs as a
result of intense competition for animators, creative personnel, technical
directors and other personnel, and increased costs associated with the expansion
of its facilities. A portion of Pixar's operating expenses that are allocable to
film productions are capitalized by Pixar or reimbursed by Disney under the
Co-Production Agreement. To the extent that the increases in expenses are not
capitalized by Pixar nor paid for by Disney, Pixar's operating expenses will
significantly increase in 1998. In addition, in 1998, if the story for the
Fourth Film is not approved, Pixar could be required to write-off certain
related film costs previously capitalized. Finally, Pixar's tax rate increased
in the year ended December 31, 1997 and is likely to increase in future years
due to near complete utilization of remaining net operating loss carryforwards
in 1997.

     Impact on Operating Results

     As a result of the above factors, Pixar expects revenue to substantially
decline in 1998 as compared to the year ended December 31, 1997. At the same
time, Pixar's operating expenses are expected to increase in 1998. Therefore,
Pixar expects revenue and operating results in 1998 to decline substantially
from revenue and operating results in 1997. Pixar expects operating and net
losses in 1998 and in the first half of 1999. Operating results thereafter will
depend upon the success of Pixar's next films, starting with A Bug's Life.

POTENTIAL FLUCTUATIONS IN OPERATING RESULTS

     In addition to the factors set forth above, Pixar continues to expect to
generally experience significant fluctuations in its future annual and quarterly
operating results caused by a variety of factors. Pixar expects that its annual
and quarterly operating results, particularly its revenue, will fluctuate due to
factors such as the timing of the domestic and international releases of the
animated feature films, the success of the animated feature films (which can
fluctuate significantly from film to film), the timing of the release of related
products into their respective markets, the demand for the related products
(which is often a function of the success of the related animated feature film),
film production costs, Disney's costs to distribute and promote the feature
films and related products, Disney's success at marketing the films and related
products, the timing of receipt

                                       14
<PAGE>   16

of proceeds from the animated feature films and related products by Disney, the
timing of revenue recognition under the Co-Production Agreement and the Feature
Film Agreement, as the case may be, the introduction of new feature films or
products by Pixar's competitors, and general economic conditions. In particular,
since Pixar's revenue under the Co-Production Agreement is directly related to
the success of a feature film, Pixar's operating results are likely to fluctuate
depending on the level of success of its animated feature films and related
products. The revenues derived from the production and distribution of an
animated feature film depend primarily on the film's acceptance by the public,
which cannot be predicted and does not necessarily bear a direct correlation to
the production or distribution costs incurred. The commercial success of a
motion picture also depends upon promotion and marketing, production costs and
other factors. Further, the theatrical success of a feature film can be a
significant factor in determining the amount of revenues generated from the sale
of the related products.

     Moreover, Pixar's operating expenses will continue to be extremely
difficult to forecast. The direct costs of film production are budgeted in
agreement with Disney and shared equally. Pixar's share of these direct costs of
film production are capitalized by Pixar in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 53, Financial Reporting by Producers
and Distributors of Motion Picture Films. A substantial portion of all of
Pixar's other costs are incurred for the benefit of feature films ("Pixar's
Overhead"), including research and development expenses and general and
administrative expenses. Portions of Pixar's Overhead are included in the
budgets for the Pictures and will be shared equally with Disney under the
Co-Production Agreement. The portion of Pixar's Overhead that is not reimbursed
by Disney is either capitalized as film production costs, if required under SFAS
No. 53, or charged to operating expense in the period incurred. Because a
substantial portion of Pixar's Overhead is related to the Pictures and is,
therefore, reimbursed by Disney, and other amounts are capitalized by Pixar in
accordance with SFAS No. 53, Pixar's reported operating expenses for the year
ended December 31, 1997 have not reflected, and future reported operating
expenses will not reflect, the true level of spending on the production of
animated feature films, related products and overhead.

     Pixar may not be able to recognize the tax benefits of net operating loss
carryforwards to be generated in the future. Pixar had a valuation allowance as
of December 31, 1997 which fully offset its gross deferred tax assets due to the
fact that there is no guarantee Pixar would generate sufficient taxable income
in the future to be able to realize all of its deferred tax assets.

     As a result of all of the foregoing, Pixar believes that period-to-period
comparisons of its results of operations are not necessarily meaningful, and its
annual and quarterly results of operations should not be relied upon as any
indication of future performance. Due to all of the foregoing factors, it is
likely that in some future period Pixar's operating results will be below the
expectations of public market analysts and investors. In such event, the price
of Pixar's Common Stock would likely be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the 1997 Annual Report to Shareholders.

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

     Dependence on Toy Story

     For at least 1998 and the first half of 1999, Pixar's revenue and operating
results will again be largely dependent upon whatever remains to be received
from Toy Story merchandise royalties, any remaining Toy Story home video
revenues and revenue from television airings of Toy Story. Pixar recognized the
vast majority of Toy Story home video revenue in 1997 and expects little revenue
from Toy Story or related products in 1998 and thereafter. Pixar also expects
little or no royalty income from its Toy Story CD-ROM products in 1998 or
thereafter. Because A Bug's Life is not expected to be released until the end of
1998 at the earliest, and Toy Story Sequel is not expected to be released until
the end of 1999 at the earliest, any other revenues in 1998 and in the first
half of 1999 will be primarily dependent upon Pixar's other businesses, from
which Pixar expects limited revenue.

                                       15
<PAGE>   17

     Dependence on A Bug's Life and Toy Story Sequel

     Beyond 1998 and the first half of 1999, Pixar expects to be significantly
dependent upon the success of A Bug's Life, Toy Story Sequel, and the Fourth
Film (the "Current Projects") and related products. Although development and/or
production on each of the Current Projects is underway, there can be no
assurance that any of the Current Projects will be successfully produced and
released when scheduled or thereafter. There can be no assurance that Pixar will
not experience difficulties that could delay or prevent the successful
development or production of any of the Current Projects or subsequent animated
feature films or related products. If Pixar is unable to produce and develop on
a timely basis the Current Projects and subsequent animated feature films and
related products that meet with broad market acceptance, Pixar's business,
operating results and financial condition will be materially adversely affected.

     The development of the Fourth Film only began in late 1996. Although it is
currently targeted for release in 2000, to date there has been no final approval
under the Co-Production Agreement of the story treatment or the budget for the
Fourth Film and there can be no assurance that it will be released as targeted
in 2000. As a result, for the next two or three years, Pixar expects to be
significantly dependent upon A Bug's Life and Toy Story Sequel.

     Risks Associated with A Bug's Life

     Under the Co-Production Agreement, Pixar shares the production costs of A
Bug's Life. These costs will initially be capitalized as film production costs
under SFAS No. 53 and then be amortized over the expected revenue stream when
revenue is recognized. If A Bug's Life is not an extraordinary box office
success similar to Toy Story, the amount of revenue recognized will not be
significant, and the capitalized production costs will have to be amortized in
large amounts over a limited number of quarters, resulting in significant costs
of film revenue in those quarters and, potentially, significant quarterly
operating and net losses. Animated feature films that become extraordinary box
office successes are rare. Pixar believes, based on available information, that
there is a reasonable basis to conclude that of the more than 40 animated
feature films introduced since 1990, only two movies generated domestic box
office revenues greater than Toy Story, and both of those films were produced
and distributed solely by Disney. During at least the last five years, Pixar
believes that there has been no fully-animated feature film (other than Toy
Story) produced or developed by a studio other than Disney that has achieved
more than $65 million in domestic box office revenues. While A Bug's Life will
be co-financed, promoted and marketed by Disney, it will have a different look,
theme and musical style than Disney's other recent animated films (except for
Toy Story), and there can be no assurance that it will have the same audience
appeal as Disney's other animated films. For example, The Nightmare Before
Christmas, released in 1993, was an animated feature film with a different
appearance than traditional, hand-drawn cel animated feature films such as
Beauty and the Beast, The Lion King, Aladdin, Pocahontas, The Hunchback of Notre
Dame and Hercules and did not experience the same box office returns as those
films. As a result, A Bug's Life and related products may not generate
significant revenue and operating results for Pixar, even if A Bug's Life is
critically acclaimed and achieves substantial, but not extraordinary, box office
success. See "-- Risks Associated with Co-Production Agreement -- Dependence on
Disney for Distribution and Promotion of Feature Films and Related Products,"
"Risks of Motion Picture Industry," and "Business -- Relationship with Disney."
See also Note 4 of Notes to Financial Statements in the 1997 Annual Report to
Shareholders.

     Risks Associated with Toy Story Sequel

     As a theatrical feature film release, Toy Story Sequel is subject to the
same risks associated with A Bug's Life specified above. In addition, because it
is a sequel, there are also risks unique to Toy Story Sequel. With a theatrical
sequel, the story concept and characters are not as novel as the original film.
In the vast majority of cases in which a film that achieved domestic box office
receipts of greater than $100 million was followed by the release of a sequel,
the sequel did not perform as well at the box office as the original. This was
the case for sequels to such films as Star Wars, Jurassic Park, Home Alone,
Jaws, Batman, Raiders of the Lost Ark, Beverly Hills Cop, Ghostbusters and Back
to the Future, among others. In many cases, sequels substantially under-perform
the original film. In far fewer cases have sequels performed as well or better
than the original
                                       16
<PAGE>   18

blockbuster feature film, and in almost all of these cases, the original feature
films and related sequels were action-adventure films, such as Lethal Weapon and
Die Hard. Accordingly, there can be no assurance that Toy Story Sequel will
perform as well as Toy Story at the box office. It is possible that Toy Story
Sequel will substantially under-perform the original feature film. In addition,
fees and participations paid to key talent on Toy Story Sequel are substantially
greater than for the original film, which will have the effect of increasing the
cost of the film.

     As a result of these factors and the same factors associated with A Bug's
Life, Toy Story Sequel and related products may not generate significant revenue
and operating results for Pixar, even if Toy Story Sequel is critically
acclaimed and achieves substantial, but not extraordinary, box office success.

     Production Budgets

     Given the escalation in compensation rates of people required to work on
the Current Projects, the number of people required to work on the Current
Projects, and the equipment needs, the budget for the Current Projects and
subsequent films and related products are and will continue to be substantially
greater than the budget for Toy Story and will be financed equally by Pixar and
Disney under the Co-Production Agreement. In addition, due to production
exigencies which are often difficult to predict, Pixar believes that it is not
uncommon for film production spending to exceed film production budgets and
there can be no assurance that any of the Current Projects can be completed
within the budgeted amounts. For example, in order to meet the production
schedule, substantially all employees from Pixar's animation services group are
expected to be assigned to A Bug's Life for the duration of its production,
which will result in a larger production staff than originally anticipated and
which will generate additional production costs.

LIQUIDITY RISKS

     Pursuant to the Co-Production Agreement, Pixar will co-finance the next
five animated feature films which it produces, including A Bug's Life and the
Fourth Film. Pixar will also co-finance Toy Story Sequel on the same basis as
the other theatrical films. In the future, Pixar may co-finance other derivative
works such as sequels, interactive products and television productions. In
addition, Pixar is planning construction of a new headquarters and studio
facility in Emeryville, California, construction of which will begin in the
first half of 1998 and which may be financed by the use of Pixar's cash. As
Pixar does not expect to generate substantial, if any, cash from operations in
1998, the production costs of A Bug's Life, the Fourth Film, Toy Story Sequel
and possibly costs of the new Emeryville facility will have a material adverse
impact on Pixar's cash and short-term investment balances. As of December 31,
1997, Pixar had approximately $176 million in cash and short-term investments.
Pixar believes that these funds will be sufficient to meet its anticipated cash
needs for working capital and capital expenditures, including the development
and production costs of A Bug's Life, the Fourth Film and Toy Story Sequel,
until Pixar begins receiving cash from the release of these films (which is not
expected to occur until the second half of 1999 at the earliest). However, even
if these films generate cash, unless each is a success such that Pixar recovers
on a timely basis its share of the production costs, as well as other operating
expenses and capital expenditures, Pixar will be required to seek financing for
its ongoing commitments under the Co-Production Agreement and any other
requirements of its operations. Pixar may also seek additional financing in
connection with the expansion of its facilities. See also "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" in the 1997 Annual Report to
Shareholders. The sale of additional equity or convertible debt securities would
result in additional dilution to Pixar's shareholders. Moreover, there can be no
assurance that Pixar will be successful in obtaining future financing, or even
if such financing is available, that it will be obtained on terms favorable to
Pixar or on terms providing Pixar with sufficient funds to meet its obligations
and objectives. The failure to obtain such financing would have a material
adverse effect on Pixar's business, operating results and financial condition.

SCHEDULED SUCCESSIVE RELEASE OF FILMS; MANAGEMENT OF GROWTH

     In order to meet its obligations pursuant to the Co-Production Agreement,
Pixar has established parallel creative teams so that it can develop more than
one film at a time. These teams are currently working on
                                       17
<PAGE>   19

A Bug's Life, Toy Story Sequel, and the Fourth Film which are currently targeted
for release in late 1998, late 1999, and late 2000, respectively. Pixar has only
produced one prior feature film to date and has no experience with respect to
producing three animated feature films in parallel. Pixar has been required, and
will continue to be required, to expand its employee base, increase capital
expenditures and procure additional resources and facilities in order to
accomplish the scheduled release of these three feature films. This period of
rapid growth and expansion has placed, and continues to place, a significant
strain on Pixar's resources. There can be no assurance that A Bug's Life, Toy
Story Sequel or the Fourth Film will be released as scheduled or that this
strain on resources will not have a material adverse effect on Pixar's business,
financial condition or results of operations. In addition, when production of
each of these films is completed, if completed, Pixar may incur significant
carrying costs associated with transitioning personnel on creative and
development teams from one project to another which, although shared with
Disney, could have a material adverse effect on Pixar's results of operations
and financial condition.

     Although there can be no assurance that any of A Bug's Life, Toy Story
Sequel, or the Fourth Film will be released on schedule, the targeted release
date of late 2000 for the Fourth Film is particularly uncertain. Pursuant to the
Co-Production Agreement, Disney and Pixar are required to agree on a number of
elements for each film, including the treatment, which summarizes the story on
which the film is based, and the budget for the film. Although the Fourth Film
has been in development at Pixar since late 1996, there has been no final
agreement between Pixar and Disney on the story or budget for the Fourth Film,
and there can be no assurance that either the story or the budget will be
approved in time to release the film by late 2000 or at all. If Disney and Pixar
do not reach final agreement on a treatment and budget for the Fourth Film
currently under development at Pixar, Pixar would be unable to develop an
alternative film in time for release in 2000, and it may be 2001 or later before
a film which follows Toy Story Sequel is ready to be released.

     If Pixar is able to release films in each of 1998, 1999 and 2000, due to
the strain on Pixar's personnel from the effort required for such successive
releases and the time required for creative development of a new film, it is
extremely unlikely that Pixar would be able or would even attempt to release a
new film in 2001. Instead, Pixar's creative and production personnel would
develop films targeted for release in 2002 and for subsequent years, although it
is too early to determine the release schedule or whether it would be possible
to release one film in each successive year after 2001. As a result,
notwithstanding the targeted successive release of films in 1998, 1999 and 2000,
it is too early to determine the rate at which any future films are to be
released, and there can be no assurance that Pixar will release a film in each
successive year or in any particular year.

     To continue to accommodate this growth, Pixar will be required to implement
a variety of new and upgraded operational and financial systems, procedures and
controls, including improvement and maintenance of its 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 Pixar's employees and rapidly increasing costs, have resulted in
increased responsibility for Pixar's management. Pixar will need to continue to
improve its operational, financial and management information systems and to
hire, train, motivate and manage its employees, to integrate them into Pixar and
to provide adequate facilities and other resources for them. There can be no
assurance that Pixar will be successful in accomplishing all of these activities
on a timely and cost-effective basis, and any failure to accomplish one or more
of these activities on a timely and cost-effective basis would have a material
adverse effect on Pixar's business, financial condition and results of
operations.

RISKS ASSOCIATED WITH CO-PRODUCTION AGREEMENT

     Dependence on Disney for Distribution and Promotion of Feature Films and
Related Products

     The decisions regarding the timing of release of motion pictures and
related products and which of Disney's motion pictures and related products will
receive extensive promotional support from the studio are important in
determining the success of the motion picture and related products. Under the
terms of the Co-Production Agreement, Pixar has 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. However, Pixar ultimately does
not control the manner in

                                       18
<PAGE>   20

which Disney distributes Pixar's animated feature films and related products,
the number of theaters to which Disney distributes Pixar's feature films, the
specific timing of release of the feature films and related products or the
specific amount or quality of promotional support of the feature films and
related products. Because Disney co-finances the films developed and produced
under the Co-Production Agreement, distributes the films under the "Walt Disney
Pictures" label and may enjoy financial benefits in the event that such films
achieve significant box office revenues, Pixar believes 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 that could have a material adverse effect on Pixar's business,
operating results or financial condition.

     Exclusivity

     Pixar has agreed not to release or authorize the release of any feature
length animated theatrical motion picture produced by Pixar, other than the
feature films produced by Pixar under the Co-Production Agreement, until twelve
months from delivery of the fifth feature film under the Co-Production
Agreement. Pixar currently anticipates that the delivery of the fifth Picture
would not occur until at least ten years from the date of the Co-Production
Agreement. Pixar has further agreed that it 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 Pixar has
delivered the third feature film to Disney under the Co-Production Agreement.
Pixar has also agreed that it 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 Pixar proposes to produce during
the term of the Co-Production Agreement.

     Financing of Production Costs

     Under the Co-Production Agreement, unlike the prior Feature Film Agreement
and the prior CD-ROM Agreement, Pixar will co-finance each of the five animated
feature films and may co-finance other related products to be developed and
produced pursuant to the Co-Production Agreement. Pixar is currently
co-financing A Bug's Life, the Fourth Film and Toy Story Sequel under the
Co-Production Agreement. Accordingly, unlike the Feature Film Agreement and the
prior CD-ROM Agreement, Pixar will incur significant production costs which must
be offset by revenue generated by the animated feature films and related
products. If the feature films and related products do not generate revenue
sufficient to more than offset Pixar's share of their production costs, Pixar's
business, operating results and financial condition will be materially adversely
effected.

     Rights to Characters and Elements Retained by Disney

     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 developed by Pixar under the Co-Production Agreement.
Accordingly, except in certain specified circumstances unlikely to generate
revenue, Pixar is 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. There can be no
assurances that such a license would be available to Pixar on commercially
reasonable terms or at all.

     Termination

     Under the terms of the Co-Production Agreement, Disney may terminate the
agreement under certain circumstances. There can be no assurance that Disney
would not terminate the Co-Production Agreement under these circumstances.
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
developed by Pixar under the Co-Production Agreement, except for a feature film
or related product then in production as to which Disney does not elect to
proceed, as to which Pixar 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, Pixar would be required to seek
alternative channels for distribution of its animated feature films and related
                                       19
<PAGE>   21

products. There can be no assurance that Pixar would be able to find a third
party to finance, distribute and promote its animated feature films and related
products on terms acceptable to Pixar, if at all. See "Business -- Relationship
with Disney."

RISKS OF MOTION PICTURE INDUSTRY

     Commercial Success of a Motion Picture is 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 the 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, weather
conditions and other tangible and intangible factors, all of which 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.
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
the market for animated films will become saturated. Therefore, there is a
substantial risk that some or all of Pixar's motion pictures will not be
commercially successful, which would have a material adverse effect on Pixar's
business, financial condition and results of operations. See
"Business -- Competition."

     Completion of a Motion Picture Subject to Uncertainties and Financial Risks

     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. Pixar is
concurrently developing three motion pictures, A Bug's Life, the Fourth Film and
Toy Story Sequel, which compounds these uncertainties and jeopardizes the
successful, timely and cost-effective production and completion of each film.
Under the Co-Production Agreement, Pixar has increased its financial involvement
in the production costs of motion pictures, subjecting Pixar to substantial
financial risks relating to the production, completion and release of the motion
pictures. In addition, a significant amount of time will elapse between the
expenditure of funds by Pixar and the receipt of revenues from the animated
feature films.

COMPETITION

     Pixar experiences intense competition with respect to animated feature
films, animation products and software.

     Competition From Movie Studios

     Pixar's animated feature films compete and will continue to compete with
feature films and other family oriented entertainment products produced by major
movie studios, including Disney (as somewhat limited by the Co-Production
Agreement), Warner Bros. Inc., Twentieth Century Fox, Paramount,
Columbia/Tri-Star Pictures Inc., Lucasfilm, Universal City Studios, Inc. and
MGM/UA, as well as numerous other independent motion picture production
companies. Competition has greatly intensified in the animated feature film
market from these and other movie studios. Animated feature films released in
1997 included Anastasia by Twentieth Century Fox and Beavis and Butt-head Do
America by United International Pictures with Paramount, each achieving domestic
box office receipts between $55 and $65 million. Other of these movie studios
have announced their intention to enter the animated feature film market,
including DreamWorks, a studio formed in 1994 which is expressly targeting the
animated film market. DreamWorks owns a significant equity stake in PDI, a
computer graphics special effects firm, and is producing a computer animated
movie with PDI. This computer animated film, which has been referred to publicly
as Antz, may contain similar subject matter to A Bug's Life. As a result, Pixar
expects a variety of new animated feature films to be released in the theaters
in the next two years generating competition for A Bug's Life and Toy Story
Sequel, which are targeted for release in late 1998 and late 1999, respectively.
These films include Paramount's Rugrats, The Movie and

                                       20
<PAGE>   22

DreamWorks' The Prince of Egypt. Pixar is also aware of several other animated
feature films in production at various studios. Due to the large number of
expected releases in the next two years, it is possible that the market for
animated films will become saturated before Pixar can release A Bug's Life and
other feature films, which could result in failure of such films to achieve
commercial success. In addition, other non-animated family oriented feature
films are expected to be released in late 1998 and will generate additional
competition for A Bug's Life. They include Babe: Pig in the City, The Wizard of
Oz , Air Bud 2: Golden Receiver and Star Trek 9, among many others.

     Pixar's films will compete with the feature films of other movie studios
for optimal release dates, audience acceptance and exhibition outlets. In
addition, Pixar competes and will continue to compete with other movie studios
for the acquisition of literary properties, production financing, the services
of performing artists, and the services of other creative and technical
personnel, particularly in the fields of animation and technical direction. Most
of the other movie studios with which Pixar competes have significantly greater
name recognition and significantly greater financial, technical, creative,
marketing and other resources than does Pixar.

     At least two of these movie studios, Disney and Lucasfilm (through its
affiliate ILM), have developed their own internal computer animation capability
and have created computer animation for special effects in animated films. In
addition, Pixar believes that Disney is currently developing and producing a
feature film making substantial use of computer animation. Other movie studios
may internally develop, license or sub-contract three-dimensional animation
capability. Further, Pixar believes 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, Silicon Graphics Inc.'s Alias/Wavefront subsidiary has recently
launched "Maya," its next generation three-D 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 for the development and production by
Pixar of five 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, Pixar
believes that Disney desires such films to be successful. Nonetheless, Disney
has been by far the most successful producer of animated feature films, and
family oriented motion pictures distributed by Disney or its affiliates are
likely to be in the market concurrently with and competing with Pixar's animated
feature films. Pixar's contractual arrangement with Disney also presents other
risks. See "-- Risks Associated With Co-Production Agreement" and
"Business -- Competition."

     Competition From Computer Graphics Special Effects Firms

     Pixar also expects to compete with computer graphics special effects firms,
including ILM, Digital Domain, PDI, Rhythm & Hues and Blue Sky/VIFX Productions.
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 Pixar. For example, ILM has already created and produced three-dimensional
character animation which was used for the ghosts in the live action film
Casper, and ILM has a royalty-free, paid-up license to use Pixar's 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.
Pixar also competes, or may in the future compete, with the above firms with
respect to animation products other than feature films. Accordingly, Pixar's
RenderMan software may not provide Pixar with a competitive advantage. See
"Business -- Competition."

     Competition From Software Publishers

     Pixar also experiences intense competition with respect to its RenderMan
software product. In particular, Pixar competes with makers of computer graphics
imaging and animation software, principally Microsoft (which acquired SoftImage,
Inc.), MentalImage (which offers the same product offered by Microsoft), and

                                       21
<PAGE>   23

Silicon Graphics (which acquired Alias/Wavefront). Microsoft, through SoftImage,
Inc., MentalImage and Silicon Graphics, through Alias/Wavefront, are each
marketing competing rendering software products, usually at lower prices than
Pixar. Microsoft and Silicon Graphics have each licensed several of Pixar's
patents that cover certain rendering techniques and may therefore be better able
to market products that compete with Pixar's RenderMan software. Under
appropriate circumstances, Pixar might elect to license its rendering technology
patents to other companies, some of which may compete with Pixar. In addition,
as PCs become more powerful, software suppliers may also be able to introduce
products for PCs that would be competitive with RenderMan in terms of price and
performance for professional users. See "Business -- Competition."

     Competition Could Adversely Impact Pixar

     Pixar expects competition to persist, intensify and increase in each of its
business areas in the future. Almost all of Pixar's current and potential
competitors have longer operating histories, greater name recognition, larger
installed customer bases and significantly greater financial, technical,
marketing and other resources than Pixar. There can be no assurance that Pixar
will be able to compete successfully against current or future competitors. Such
competition could materially adversely affect Pixar's business, operating
results or financial condition. See "Business -- Competition."

LIMITED OPERATING HISTORY

     Until 1996, Pixar had generated recurring revenue primarily from the
license of its RenderMan software, amounts received under software development
contracts and fees for animated television commercial development. However,
Pixar intends to generate a substantial majority of its future revenue from the
development and production of animated feature films and related products, such
as it did in 1996 and 1997. Pixar has, to date, developed and produced only one
animated feature film, Toy Story, and only two related products (both CD-ROM
titles, which Pixar no longer intends to produce). Accordingly, Pixar has only a
limited operating history in implementing its new business model upon which an
evaluation of Pixar and its prospects can be based. Pixar's prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in the early stages of a new business enterprise,
particularly companies in highly competitive markets. To address these risks,
Pixar, among other things, must respond to competitive developments, continue to
attract, retain and motivate qualified persons, and continue to upgrade its
technologies. There can be no assurance that Pixar will be successful in
addressing such risks.

DEPENDENCE ON KEY PERSONNEL

     Pixar's success depends to a significant extent on the performance of a
number of senior management personnel and other key employees, especially its
animators, creative personnel and technical directors. In particular, Pixar is
dependent upon the services of Steven P. Jobs, John Lasseter, Edwin E. Catmull,
Lawrence B. Levy and Sarah McArthur. Pixar does not maintain "key person" life
insurance for any of its employees. Pixar does have employment agreements with
Messrs. Lasseter and Catmull, who are fundamental to Pixar's relationship with
Disney. However, such employment agreements do not necessarily assure the
services of these employees. Pixar believes that it may be particularly
difficult to retain its key employees, especially its animators, creative
personnel and technical directors, during periods in which it is not developing
animated feature films. The loss of the services of any of Messrs. Jobs,
Lasseter, Catmull or Levy, Ms. McArthur or of other key employees, especially
its animators, creative personnel and technical directors, could have a material
adverse effect on Pixar's business, operating results or financial condition.
Although none of Pixar's employees are represented by a labor union, it is
common for animators and actors at film production companies to belong to a
union. Further, Pixar may be directly or indirectly dependent upon union
members, and work stoppages or strikes organized by such unions could materially
adversely impact Pixar's business, financial condition or results of operations.
For example, many of the actors who provide their voice talents for the Pictures
and Derivative Works are members of the Screen Actors Guild, which is currently
renegotiating its basic agreement that otherwise expires on June 30, 1998. There
can be no assurance that Pixar's employees will not join or form a labor union,
or that Pixar will not be directly or indirectly impacted

                                       22
<PAGE>   24

by industry related work stoppages or that Pixar, for certain purposes, will not
be required to become a union signatory. See "Business -- Employees" and
"Executive Officers of the Company."

DIVIDED RESPONSIBILITIES OF CHIEF EXECUTIVE OFFICER

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

NEED TO ATTRACT AND RETAIN QUALIFIED PERSONNEL TO BE SUCCESSFUL

     Pixar's success continues to depend to a significant extent on its ability
to identify, attract, hire, train and retain qualified professional, creative,
technical and managerial personnel. Competition for such personnel is intense,
and there can be no assurance that Pixar will be successful in identifying,
attracting, hiring, training and retaining such personnel in the future. The
competition for quality animators, creative personnel and technical directors is
especially intense because the entertainment market has significantly expanded
over the past several years. If Pixar is 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
Pixar's business, operating results and financial condition. See
"Business -- Employees" and "Executive Officers of the Company."

DEPENDENCE ON SUCCESSFUL DEVELOPMENT OF APPEALING CREATIVE CONTENT FOR ANIMATED
FEATURE FILMS AND RELATED PRODUCTS

     The success of each animated feature film created and produced by Pixar
will depend in large part upon the Pixar creative team's ability to predict the
type of content that will appeal to a broad audience and to develop stories and
characters that achieve broad market acceptance. Traditionally, this has been
extremely difficult. Disney provided creative assistance throughout the
production of Toy Story, including creative reviews and approvals, and the
Co-Production Agreement contemplates that Disney will continue to provide
creative assistance to Pixar on feature films and other products made pursuant
to that agreement, but there can be no assurance that Disney will continue to
provide assistance to Pixar in the development of creative content for its
feature films or related products. There also can be no assurance that voices
and other intellectual property rights used in an animated feature film will be
available for use in any derivative product related to such feature film. For
example, Pixar was unable to obtain the rights to use certain voices from Toy
Story in the two CD-ROM products based on Toy Story. See "Business -- Creative
Development Group."

DISTRIBUTION RISKS

     Disney is required to distribute the five animated feature films to be
produced pursuant to the Co-Production Agreement and has agreed to distribute
Toy Story Sequel pursuant to the Co-Production Agreement. Distribution of a
motion picture generally involves domestic and foreign licensing for (i)
theatrical exhibition, (ii) home video, (iii) presentation on television,
including pay, basic cable and syndication, (iv) non-theatrical exhibition,
which includes airlines, hotels and armed forces facilities and (v) 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 Pixar with some protection, there can be no assurance that the feature
films made under the Co-Production Agreement will be distributed through all of
these outlets. For example, Disney has traditionally not made its animated
feature films available on pay television other than the Disney Channel or on
network television other than ABC, an affiliate of Disney. See
"Business -- Business Model and Products."

                                       23
<PAGE>   25

DEPENDENCE ON PROPRIETARY TECHNOLOGY AND COMPUTER SYSTEMS FOR TIMELY AND
SUCCESSFUL DEVELOPMENT OF FEATURE FILMS AND RELATED PRODUCTS

     There can be no assurance that Pixar 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
Pixar is dependent upon a large base of software and a large number of computers
for the development and production of its 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 Pixar's feature films or other
products. For example, early in 1998 Pixar experienced a failure of its backup
systems for Toy Story Sequel which resulted in substantial effort to restore
data and a loss of certain data, but which is not expected to have a material
impact on the schedule for production or release of Toy Story Sequel. However,
significant delays in production and significant delays in release dates could
have a material adverse effect on Pixar's business, operating results or
financial condition. Further, because Pixar relies mostly on internally
developed software, Pixar would not be able to rely upon assistance from third
parties in the event that the software fails. See "Business -- Technology."

CONCENTRATION OF STOCK OWNERSHIP

     Pixar's Chief Executive Officer, Steven P. Jobs, beneficially owns
approximately 68.9% of the outstanding Common Stock as of March 18, 1998. 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.

RISK OF SUBSTANTIAL ADDITIONAL COSTS RELATED TO FACILITIES EXPANSION

     In May 1997, Pixar exercised its option (which option Pixar purchased in
1996) and paid $5.8 million to purchase approximately 15 acres of land in
Emeryville, California to build a new headquarters and studio facility. To
construct the facility, Pixar currently expects to incur total capital
expenditures of more than $17 million in 1998 and more than $31 million in 1999.
To date, Pixar has chosen to use its existing cash resources to fund
facility-related costs. Pixar may continue to use its cash resources for such
expenditures, or may choose to finance such capital expenditures through the
issuance of additional equity or debt securities, by obtaining a credit facility
or by some other financing mechanism. If Pixar chooses to seek financing for
such expenditures, there can be no assurance that such financing will be
available on terms reasonably acceptable to Pixar or at all. See "Liquidity
Risks" and "Properties" herein and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" in the 1997 Annual Report to Shareholders.

NEED FOR TECHNOLOGICAL ADVANCEMENT TO BE SUCCESSFUL

     Substantially all of Pixar's revenues have been derived, and substantially
all of Pixar's future revenues are expected to be derived, from the use and
license of Pixar's proprietary technologies. Pixar expects that it will be
required to enhance these technologies and to develop new technologies in order
to be successful in its industry and in the licensing of its RenderMan software.
There can be no assurance that Pixar will be successful in enhancing its
existing technologies or in developing and utilizing new technologies, or that
competitors will not develop technology that is equivalent or superior to
Pixar's technologies or that makes Pixar's technologies obsolete. If Pixar is
unable to develop enhancements to its existing technologies or new technologies
as required, Pixar's business, operating results or financial condition could be
materially adversely affected. See "Business -- Technology" and
"Competition -- Movie Studios."

                                       24
<PAGE>   26

DEPENDENCE ON PROPRIETARY RIGHTS

     No Assurance That Patents Will Issue From Applications or Sufficiently
Protect Pixar's Technology

     Pixar's success and ability to compete is dependent in part upon its
proprietary technology. While Pixar relies on a combination of patents,
copyright and trade secret protection, nondisclosure agreements and cross-
licensing arrangements to establish and protect its proprietary rights, Pixar
believes that factors such as the technical and creative skills of its personnel
are more essential to its success and ability to compete. Pixar currently is the
owner of eight patents issued in the United States, one patent issued in the
United Kingdom, one patent issued in France, one patent issued in Germany, one
patent issued in Japan, two patents issued in Canada and one patent issued by
the European Patent Office. In addition, Pixar has 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 Pixar's technology. In addition, there can be no assurance that any
patents that have been issued to Pixar, or that Pixar may license from third
parties, will not be challenged, invalidated or circumvented, or that any rights
granted thereunder would provide proprietary protection to Pixar. Failure of the
patents to provide protection of Pixar's technology may make it easier for
Pixar's competitors to offer technology equivalent to or superior to Pixar's
technology. See "Business -- Proprietary Rights."

     No Assurance That Efforts to Protect Proprietary Technologies Will Succeed

     The source code for Pixar's proprietary software is protected both as trade
secrets and as a copyrighted work. Pixar generally enters into confidentiality
or license agreements with its employees, consultants and vendors, and generally
controls access to and distribution of its software, documentation and other
proprietary information. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use Pixar's proprietary information,
products or technology without authorization, or to develop similar or superior
technology independently. Policing unauthorized use of Pixar's products is
difficult. In addition, effective copyright and trade secret protection may be
unavailable or limited in certain foreign countries. To license its RenderMan
software product, Pixar primarily relies 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 taken by Pixar
will prevent misappropriation of its technology or that its confidentiality or
license agreements will be enforceable. See "Business -- Proprietary Rights."

     Risk That Litigation Will Be Required to Enforce Proprietary Rights

     Litigation may be necessary in the future to enforce Pixar's intellectual
property rights, to protect Pixar's 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
Pixar's business, operating results or financial condition. See
"Business -- Proprietary Rights."

     Risks of Infringement Claims

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

                                       25
<PAGE>   27

intellectual property rights. There can be no assurance, however, that under
such circumstances a license would be available on reasonable terms or at all.
See "Business -- Proprietary Rights."

     No Assurance That Third Party Technology Licenses Will Continue to be
Available

     Pixar also relies on certain technology that it licenses 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 Pixar 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 shipments until
equivalent technology could be identified, licensed and integrated. Any such
delays in feature film releases or product shipments could materially adversely
affect Pixar's business, operating results and financial condition. See
"Business -- Proprietary Rights."

LITIGATION AND THREATENED LITIGATION

     On January 21, 1998, an e-mail message was sent to all Pixar employees
containing salary data of certain employees as of early 1997. The e-mail was
falsely alleged to have been sent from Pixar's Chief Executive Officer, Steven
Jobs. Pixar has filed a lawsuit against an unnamed defendant seeking damages and
an injunction. In addition, a former employee of Pixar who was named by press
reports as a suspect in this matter has threatened Pixar with legal action
relating to being named as a suspect. Pixar does not believe these matters will
have any material adverse effect on its business, operations or financial
condition. However, due to the inherent uncertainties of litigation, there can
be no assurance that such litigation will not distract management's time and
attention and other resources from the business and will not have a material
adverse effect on Pixar's business, operating results or financial condition.

POSSIBLE VOLATILITY OF SHARE PRICE AND RISK OF LITIGATION

     Pixar believes that factors such as the publication of box office results
for Pixar's or its competitors' feature films, fluctuations in quarterly or
annual results of operations, changes in financial estimates by securities
analysts, announcements by Pixar or by its competitors, budget increases, delays
in or cancellation of feature film or other product release dates, or other
events or factors may cause the market price of Pixar's Common Stock to
fluctuate. 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 Pixar's 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. Such litigation could result in substantial costs and a
diversion of management's attention and resources, which could have a material
adverse effect on Pixar's business, operating results or financial condition.

ITEM 2. PROPERTIES

     Pixar leases approximately 118,000 square feet of office space in Richmond,
California. The related leases expire on various dates ranging from July 1999 to
May 2001.

     In May 1997, Pixar exercised its option (which option Pixar purchased in
1996) and paid $5.8 million to purchase approximately 15 acres of land in
Emeryville, California to build a new headquarters and studio facility. To
construct the facility, Pixar will incur substantial capital expenditures in
1998 and 1999. To date, Pixar has chosen to use its existing cash resources to
fund facility-related costs. Pixar may continue to use its cash resources for
such expenditures, or may choose to finance such capital expenditures through
the issuance of additional equity or debt securities, by obtaining a credit
facility or by some other financing mechanism. See "Business -- Certain Factors
Affecting Business, Operating Results and Financial Condition -- Risk of
Substantial Additional Costs Related to Facilities Expansion." See also
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" in the 1997 Annual Report to
Shareholders.

                                       26
<PAGE>   28

ITEM 3. LEGAL PROCEEDINGS

     Not applicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     Not applicable.

                                       27
<PAGE>   29

                       EXECUTIVE OFFICERS OF THE COMPANY

     The executive officers of Pixar and their ages as of March 18, 1998 are as
follows:

<TABLE>
<CAPTION>
       NAME          AGE                            POSITION
-------------------  ---    ---------------------------------------------------------
<S>                  <C>    <C>
Steven P. Jobs        43    Chairman, Chief Executive Officer and Office of the
                            President
Edwin E. Catmull      52    Executive Vice President, Chief Technical Officer and
                            Office of the President
Lawrence B. Levy      38    Executive Vice President, Chief Financial Officer, Office
                            of the President and Secretary
John Lasseter         41    Vice President, Creative Development
Sarah McArthur        41    Vice President, Production
</TABLE>

     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. Jobs is a co-founder of Pixar and has served as its Chairman since
March 1991, as its Chief Executive Officer since 1986 and in the Office of the
President since 1995. He has been a director of Pixar since 1986. In addition,
Mr. Jobs currently serves as interim 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 to Apple on a limited basis until assuming his current role
as interim Chief Executive Officer at Apple.

     Dr. Catmull is a co-founder of Pixar and has served as Executive Vice
President and Chief Technical Officer since June 1995 and in the Office of the
President since February 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. Prior to joining Pixar,
he was Vice President of the Computer Division of Lucasfilm. Dr. Catmull
received the Scientific and Engineering Award from The Academy of Motion Picture
Arts and Sciences in 1992 and also received the SIGGRAPH Coons Award for
lifetime contributions in 1993. Dr. Catmull is a member of the Scientific and
Technical Awards Committee of The Academy of Motion Picture Arts and Sciences.
Dr. Catmull received B.S. degrees in computer science and physics and a Ph.D. in
computer science from the University of Utah.

     Mr. Levy has served as Executive Vice President, Chief Financial Officer
and in the Office of the President since February 1995. Mr. Levy has served as
Secretary of Pixar since October 1995. Prior to joining Pixar, he was Vice
Chairman and Chief Financial Officer of Electronics for Imaging, Inc., a
provider of hardware and software products for the digital color imaging market,
where he held various executive positions from April 1991 until January 1995.
From December 1987 to April 1991, he was head of the Technology Licensing and
Distribution Department at the law firm of Wilson Sonsini Goodrich & Rosati,
where he became a partner in February 1990. Mr. Levy received a B.S. in business
and accounting from Indiana University and a J.D. from Harvard Law School. Mr.
Levy is also a certified public accountant.

     Mr. Lasseter has served as Vice President, Creative Development since
August 1991 and is currently Director of A Bug's Life in addition to serving as
creative head of Pixar's other films and projects. Mr. Lasseter joined Pixar in
February 1986 as Animator/Director. From 1984 to 1986, he was an animator at
Lucasfilm and from 1979 to 1984 he worked as an animator at The Walt Disney
Company. For his work in directing Toy Story, Mr. Lasseter received an Academy
Award in 1996 for Special Achievement, and for his work in directing Tin Toy,
Mr. Lasseter received an Academy Award in 1988 for Best Short Film (Animated).
Mr. Lasseter received a B.F.A. degree in film from the California Institute of
the Arts.

     Ms. McArthur has served as Vice President, Production since May 1997,
overseeing all Pixar production teams and managing 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

                                       28
<PAGE>   30

Animation, overseeing the production of feature animation films in Disney's
Burbank, 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 Beast and 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.

                                       29
<PAGE>   31

                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
        SHAREHOLDER MATTERS

     Pixar's Common Stock has traded on The Nasdaq Stock Market under the
trading symbol "PIXR" since Pixar's initial public offering on November 29,
1995. The following table sets forth the high and low sale prices per share of
Pixar's Common Stock for the periods indicated.

<TABLE>
<CAPTION>
                                                             HIGH        LOW
                                                           --------    -------
<S>                                                        <C>         <C>
1996
  First Quarter..........................................    $29         $18 1/2
  Second Quarter.........................................    $25 1/2     $16 3/4
  Third Quarter..........................................    $19 1/4     $12 1/4
  Fourth Quarter.........................................    $20 1/2     $12 3/4
1997
  First Quarter..........................................    $22 3/4     $12 5/8
  Second Quarter.........................................    $18 1/2     $14 1/8
  Third Quarter..........................................    $24 3/4     $14 1/2
  Fourth Quarter.........................................    $27 1/4     $19 1/2
1998
  First Quarter (through March 18, 1998).................    $38         $20 1/4
</TABLE>

     As of March 18, 1998, Pixar had approximately 2,487 shareholders of record.
The price for the Common Stock as of the close of business on March 18, 1998 was
$33.13 per share. Pixar has never paid any cash dividends on its Common Stock.
Pixar intends to retain any earnings for use in its business and does not
anticipate paying any cash dividends on its Common Stock in the foreseeable
future.

USE OF PROCEEDS

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

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

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

     As of December 31, 1997, the Company had used the net proceeds from the
offering as follows: $11,227,043 for construction of plant, building and
facilities, $9,017,312 for the purchase and installation of machinery and
equipment, $2,374,000 for the repayment of indebtedness, $42,512,172 for the
development of future films and other animated products, $6,229,973 for working
capital and $68,300,786 remaining in temporary investments. Of these amounts,
$2,374,000 represented direct or indirect payments to directors, officers,
general partners of the Company or their associates; to persons owning ten (10)
percent or more of any class of equity securities of the Company; or to
affiliates of the Company. The use of the proceeds from the offering does not
represent a material change in the use of proceeds described in the prospectus.

                                       30
<PAGE>   32

ITEM 6. SELECTED FINANCIAL DATA

     The information required by this item is incorporated by reference to the
section entitled "Selected Financial Data" in the 1997 Annual Report to
Shareholders.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

     The information required by this item is incorporated by reference to the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in the 1997 Annual Report to Shareholders.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The information required by this item is incorporated by reference to the
section entitled "Financial Statements and Selected Financial Data" in the 1997
Annual Report to Shareholders.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

     Not applicable.

                                       31
<PAGE>   33

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

     The information required by this item concerning Pixar's directors is
incorporated by reference to the information set forth in the section entitled
"Election of Directors" in Pixar's Proxy Statement for the 1998 Annual Meeting
of Shareholders to be filed with the Commission within 120 days after the end of
the Pixar's fiscal year ended December 31, 1997, except that the information
required by this item concerning the executive officers of Pixar 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 this Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

     The information required by this item regarding executive compensation is
incorporated by reference to the information set forth in the sections entitled
"Election of Directors -- Director Compensation" and "Executive Officer
Compensation" in Pixar's Proxy Statement for the 1998 Annual Meeting of
Shareholders to be filed with the Commission within 120 days after the end of
the Pixar's fiscal year ended December 31, 1997.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this item regarding security ownership of
certain beneficial owners and management is incorporated by reference to the
information set forth in the section entitled "Security Ownership of Certain
Beneficial Owners and Management" in Pixar's Proxy Statement for the 1998 Annual
Meeting of Shareholders to be filed with the Commission within 120 days after
the end of Pixar's fiscal year ended December 31, 1997.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by this item regarding certain relationships and
related transactions is incorporated by reference to the information set forth
in the section entitled "Certain Transactions" in Pixar's Proxy Statement for
the 1998 Annual Meeting of Shareholders to be filed with the Commission within
120 days after the end of Pixar's fiscal year ended December 31, 1997.

                                       32
<PAGE>   34

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this Form 10-K:

     1. Financial Statements. The following financial statements of Pixar and
        the Independent Auditors' Report therein are incorporated by reference
        to the portions of Pixar's 1997 Annual Report to Shareholders filed as
        Exhibit 13.1 to this Form 10-K:

<TABLE>
       <S>                                                           <C>
       Independent Auditors' Report................................
       Balance Sheets as of December 31, 1996 and 1997.............
       Statements of Operations for the years ended December 31,
         1995, 1996 and 1997.......................................
       Statements of Shareholders' Equity (Deficit) for the years
         ended December 31, 1995, 1996 and 1997....................
       Statements of Cash Flows for the years ended December 31,
         1995, 1996 and 1997.......................................
       Notes to Financial Statements...............................
</TABLE>

     2. Financial Statement Schedule. The following financial statement schedule
        of Pixar for the years ended December 31, 1995, 1996 and 1997 is filed
        as part of this Form 10-K and should be read in conjunction with the
        Financial Statements, and related notes thereto, of Pixar.

<TABLE>
       <S>                                                           <C>
       Independent Auditors' Report on Financial Statement
         Schedule..................................................  S-1
       Schedule II -- Valuation and Qualifying Accounts and
         Reserves..................................................  S-2
       Schedules not listed above have been omitted since they are
       either not required, not applicable, or the information is
       otherwise included.
</TABLE>

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

(b) Reports on Form 8-K. No Reports on Form 8-K were filed during the fourth
    quarter ended December 31, 1997.

(c) Exhibits. The exhibits listed on the accompanying index to exhibits
    immediately following the financial statement schedule are filed as part of,
    or incorporated by reference into, this Form 10-K.

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

                                       33
<PAGE>   35

                                   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 31st day of
March 1998.

                                      PIXAR

                                      By:        /s/ LAWRENCE B. LEVY
                                         ---------------------------------------
                                      Lawrence B. Levy
                                      Executive Vice President and Chief
                                      Financial Officer

                               POWER OF ATTORNEY

     KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Steven P. Jobs, Lawrence B. Levy 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:

<TABLE>
<CAPTION>
                       SIGNATURE                                     TITLE                    DATE
                       ---------                                     -----                    ----
<S>                                                       <C>                            <C>

                   /s/ STEVEN P. JOBS                      Chairman of the Board and     March 31, 1998
--------------------------------------------------------    Chief Executive Officer
                     Steven P. Jobs                          (Principal Executive
                                                                   Officer)

                  /s/ LAWRENCE B. LEVY                     Executive Vice President      March 31, 1998
--------------------------------------------------------  and Chief Financial Officer
                    Lawrence B. Levy                       (Principal Financial and
                                                              Accounting Officer)

                   /s/ JILL E. BARAD                               Director              March 31, 1998
--------------------------------------------------------
                     Jill E. Barad

                 /s/ SKIP M. BRITTENHAM                            Director              March 31, 1998
--------------------------------------------------------
                   Skip M. Brittenham

                 /s/ JOSEPH A. GRAZIANO                            Director              March 31, 1998
--------------------------------------------------------
                   Joseph A. Graziano

                  /s/ LARRY W. SONSINI                             Director              March 31, 1998
--------------------------------------------------------
                    Larry W. Sonsini
</TABLE>

                                       34
<PAGE>   36

                    INDEPENDENT AUDITORS' REPORT ON SCHEDULE

The Board of Directors and Shareholders
Pixar:

     Under date of January 30, 1998, we reported on the balance sheets of Pixar
as of December 31, 1996 and 1997, and the related statements of operations,
shareholders' equity (deficit), and cash flows for each of the years in the
three-year period ended December 31, 1997, which are incorporated by reference
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.

                                          KPMG PEAT MARWICK LLP

San Francisco, California
January 30, 1998

                                       S-1
<PAGE>   37

                                     PIXAR

         SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                 BALANCE AT                  DEDUCTIONS:
                                                 BEGINNING                  WRITE OFFS OF    BALANCE AT
                CLASSIFICATION                    OF YEAR      ADDITIONS      ACCOUNTS       END OF YEAR
                --------------                   ----------    ---------    -------------    -----------
<S>                                              <C>           <C>          <C>              <C>
Allowance for returns and doubtful accounts
  Year ended December 31, 1995                      $227         $ 61           $ (32)          $256
                                                    ====         ====           =====           ====
  Year ended December 31, 1996.................     $256         $  3           $  --           $259
                                                    ====         ====           =====           ====
  Year ended December 31, 1997.................     $259         $100           $(102)          $257
                                                    ====         ====           =====           ====
</TABLE>

                                       S-2
<PAGE>   38

                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                               EXHIBITS
    -------                              --------
    <S>        <C>
     3.1       Amended and Restated Articles of Incorporation(1)...........
     3.4       Amended and Restated Bylaws, as amended(5)..................
     4.1       See Exhibit 3.1.............................................
     4.2       See Exhibit 3.2.............................................
     4.5       Specimen Common Stock Certificate(1)........................
     4.6       Common Stock and Warrant Purchase Agreement between the
               Registrant and Disney Enterprises, Inc. dated as of February
               23, 1997(4).................................................
     4.7       Form of Common Stock Purchase Warrant to be issued to Disney
               Enterprises, Inc.(4)........................................
     4.8       Form of Registration Rights Agreement by and between the
               Registrant and Disney Enterprises, Inc.(4)..................
    10.1*      1995 Stock Plan, as amended, and forms of agreements
               thereto(5)..................................................
    10.2*      1995 Director Option Plan(1)................................
    10.3*      Form of Indemnification Agreement entered into between the
               Registrant and each of the executive officers and
               directors(1)................................................
    10.4       Agreement between the Registrant and Walt Disney Pictures
               dated May 3, 1991, as amended(1)(6).........................
    10.5       Net Office Lease between the Registrant and Point Richmond
               R&D Associates dated February 15, 1990, as amended(1).......
    10.6       Patent License Agreement between the Registrant and
               Microsoft Corporation dated June 21, 1995(1)(6).............
    10.7*      Employment Agreement between the Registrant and Edwin E.
               Catmull dated August 1, 1991(1).............................
    10.8*      Employment Agreement between the Registrant and John
               Lasseter dated February 24, 1997(4)(6)......................
    10.11      Patent License Agreement between the Registrant and Silicon
               Graphics, Inc. dated March 12, 1996(2)......................
    10.12      Net Office Lease between the Registrant and Point Richmond
               R&D Associates dated November 7, 1995(2)....................
    10.13      Co-Production Agreement between the Registrant and Walt
               Disney Pictures and Television dated February 24, 1997(4)(6)
    10.14      Net Office Lease between the Registrant and Point Richmond
               R&D Associates dated April 1, 1996(3).......................
    10.15      Net Office Lease between the Registrant and Point Richmond
               R&D Associates dated September 12, 1996(3)..................
    10.16      Agreement of Purchase and Sale between the Registrant and
               Del Monte Corporation dated as of September 6, 1996, as
               amended(5)..................................................
    10.17      Amendment to the September 12, 1996 Net Office Lease between
               the Registrant and Point Richmond R&D Associates dated as of
               May 8, 1997.................................................
    13.1       Portions of the Annual Report to Shareholders for the fiscal
               year ended December 31, 1997, expressly incorporated by
               reference herein............................................
    23.1       Consent of Independent Auditors.............................
</TABLE>
<PAGE>   39

<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                               EXHIBITS
    -------                              --------
    <S>        <C>
    27.1       Financial Data Schedule.....................................
    27.2       Restated 1996 Financial Data Schedule.......................
</TABLE>

---------------
(1) Incorporated by reference to the Registrant's Registration Statement on Form
    S-1 (File No. 33-97918) declared effective on November 28, 1995.

(2) Incorporated by reference to the Registrant's Annual Report on Form 10-K for
    the year ended December 31, 1995.

(3) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
    for the quarter ended September 30, 1996.

(4) Incorporated by reference to the Registrant's Annual Report on Form 10-K for
    the year ended December 31, 1996.

(5) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
    for the quarter ended June 30, 1997.

(6) Documents for which confidential treatment has been granted for certain
    portions of these exhibits.

 *  Indicates management compensatory plan, contract or arrangement.