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                       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
 
                   FOR THE FISCAL YEAR ENDED JANUARY 2, 1999
 
                         COMMISSION FILE NUMBER 0-26976
 
                                     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 IDENTIFICATION NO.)
        INCORPORATION OR ORGANIZATION)
</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 19, 1999, there were 45,625,719 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 19, 1999) was approximately
$584,134,562. 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 January 2, 1999 (the "1998 Annual Report") are incorporated by reference
in Parts II and IV of this Form 10-K to the extent stated herein.
 
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     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 "Risk Factors" on pages 14 through 28 as
well as those noted in the documents incorporated herein by reference.
Particular attention should be paid to the cautionary language in Risk Factors,
"-- We Depend on Toy Story, A Bug's Life, Toy Story 2 and Film Four," "-- Risks
Associated with Adequacy of Cash Balances," "-- Risks Associated with Scheduled
Successive Release of Films" 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 leading digital animation studio with the creative, technical
and production capabilities to create a new generation of animated feature films
and related products. Pixar's objective is to create, develop and produce
computer animated feature films with a new three-dimensional appearance,
heartwarming stories and memorable characters that appeal to audiences of all
ages. Through the creation of entertaining, enduring and successful films, Pixar
seeks to become a leading brand in animated feature films. Pixar's first and
second such films, Toy Story and A Bug's Life, were created and produced by
Pixar and were marketed and distributed by The Walt Disney Company (along with
its subsidiaries hereinafter referred to as "Disney"). Toy Story was released in
November 1995 and generated over $191 million in domestic box office revenue,
and Pixar's second animated feature film, A Bug's Life, was released in November
1998. See "-- Recent Developments."
 
     In February 1997, Pixar extended its existing relationship with Disney
(under which Toy Story was created and produced) by entering into the
Co-Production Agreement. Under the Co-Production Agreement, Pixar will produce,
on an exclusive basis, five original computer animated feature films (the
"Pictures") for distribution by Disney. Pixar and Disney will co-finance and
co-brand the films and share equally in the profits of each film and any related
merchandise and other ancillary products, after recovery of all marketing and
distribution costs and fees. The first of the films produced under the
Co-Production Agreement was A Bug's Life. See "-- Relationship with
Disney -- Co-Production Agreement."
 
RECENT DEVELOPMENTS
 
     Release of A Bug's Life. In November 1998, A Bug's Life was released and,
as of March 28, 1999, it had generated over $160 million in domestic box office
revenue and $176 in foreign box office revenue.
 
     Changes in Management. In March 1999, Pixar announced that, at the end of
March 1999, Lawrence B. Levy will be resigning from his position as Executive
Vice President, Chief Financial Officer and member of the Office of the
President. Pixar also announced that, effective in April 1999, Mr. Levy and
Edwin E. Catmull, Executive Vice President, Chief Technical Officer and member
of the Office of the President, will become members of Pixar's Board of
Directors. Effective in April 1999, Dr. Catmull will also become Secretary of
Pixar in lieu of Mr. Levy. In addition, in February 1999, Pixar announced the
promotion of five of its employees to senior executive positions. John Lasseter
was promoted to Executive Vice President of Creative, Sarah McArthur was
promoted to Executive Vice President of Production, Darwyn Peachey was
 
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promoted to Vice President of Research and Development, Greg Brandeau was
promoted to Vice President of Computer Operations and Sarah Flatley was promoted
to Vice President of Finance.
 
     John Lasseter transitions to Toy Story 2. In January 1999, after completion
of A Bug's Life, John Lasseter, Pixar's Executive Vice President of Creative
Development and Director of Toy Story and A Bug's Life, transitioned to Director
of Toy Story 2. Lee Unkrich and Ashley Brannon will be Co-Directors of Toy Story
2.
 
BUSINESS MODEL AND PRODUCTS
 
     Pixar's strategy is to become a leading brand in the development and
production of animated feature films and 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 in November 1995. On November 25, 1998, Pixar successfully
released A Bug's Life, its second computer-animated feature film for
distribution by Disney. A Bug's Life was the first of five such films developed
and distributed under the Co-Production Agreement with Disney, and Pixar intends
to continue to develop computer animated feature films for the family
entertainment market. In 1998, Pixar continued development and production on Toy
Story 2, a derivative work now subject to the same terms as the other theatrical
motion pictures developed under the Co-Production Agreement, except Toy Story 2
will not be counted toward the five Pictures to be produced under that
agreement. Toy Story 2 is not expected to be released until late 1999 at the
earliest. Also in 1998, Pixar continued story development on its fourth
theatrical film ("Film Four") and other future films. Production of Film Four
has not yet begun, however Disney and Pixar have approved the related story
treatment and budget as required under the Co-Production Agreement. Film Four is
not expected to be released until mid 2001 at the earliest. See "Risk
Factors -- Risk Associated with Scheduled Successive Releases of Films."
 
     Home Videos. Toy Story was released by Disney as a home video in October
1996 and A Bug's Life is scheduled for home video release on April 20, 1999.
Pixar believes that its future animated feature films will also 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 A Bug's Life were designed using
three-dimensional data from Pixar's digital models. Disney has the rights to
distribute merchandise and soundtracks from Toy Story, A Bug's Life and the
remaining feature films to be made pursuant to the Co-Production Agreement.
Pixar shares in the profits, if any, generated from such sales.
 
     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 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. In addition, such short films provide Pixar with
opportunities for valuable publicity and critical acclaim that further
establishes the Pixar brand. For example, in 1998, Geri's Game won an Academy
Award for Best Short Film (Animated). In addition, Geri's Game was released
theatrically nationwide as the preceding short film to A Bug's Life.
 
     RenderMan. Pixar has been selling its RenderMan software for nearly ten
years. RenderMan has helped visual effects studios create visual effects such as
certain dinosaurs in Jurassic Park, new creatures appearing in the 1998
re-release of Star Wars, the metal cyborg in Terminator 2 and the hoard of
horsemen charging over the hill in Mulan. RenderMan runs on Unix-based
workstations from Silicon Graphics, Inc ("Silicon Graphics"), Sun Microsystems,
Inc. ("Sun") and Digital Equipment Corp. ("Digital Equipment"). Examples of
RenderMan customers include movie studios such as Disney, Twentieth Century Fox
Film Corpora-
 
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tion, Lucasfilm Ltd. through its affiliate Industrial Light and Magic ("ILM"),
Columbia/Tri-Star Pictures Inc. and Warner Bros., Inc. Customers also include
government agencies and universities. The RenderMan ToolKit is sold at a list
price of $5,000 per license. Discounts are available for site or multi-use
licenses. See "-- Technology -- RenderMan" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the 1998 Annual
Report to Shareholders.
 
     Short Animation Products. Pixar has also in the past produced animated or
partially animated television commercials, including commercials 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 still produces short animation projects,
primarily derived from Pixar's films, such as the "Tree of Life" which is
currently on display at the Animal Kingdom in Disney World, and animation for
the advertising of McDonald's Happy Meals which were tied into A Bug's Life.
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.
 
PIXAR COMPUTER ANIMATION PROCESS AND DIGITAL BACK LOT
 
     Pixar Computer Animation Process
 
     The development and production of animated feature films is extremely
complex and time consuming due to the very large number of frames and intricate
detail of each frame. At 24 frames per second, a 77-minute animated feature film
such as Toy Story requires approximately 110,000 individual frames. Animation
for feature films has traditionally been created through hand-drawn cels,
requiring hundreds of people working for two to three years. Although computers
have been used to assist in some elements of cel animation during the past
several years, most frames are still hand-drawn.
 
     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 four stages:
creative development, pre-production, production and post-production. Because
this process is iterative, there is continual reworking of the film. The basic
elements of this highly complex process are outlined below.
 
<TABLE>
    <S>              <C>              <C>            <C>                 <C>            <C>
                     ----------------                -------------------                -------------
    CREATIVE
    DEVELOPMENT       Story Concept         5         Treatment/Outline        5         Screenplay
                     ----------------                -------------------                -------------
</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.
 
<TABLE>
    <S>             <C>            <C>           <C>                   <C>           <C>
                    --------------               ---------------------               ------------------
    PRE-
    PRODUCTION       Story Board         5        Story Reel Editing         5        Voice Recording
                    --------------               ---------------------               ------------------
</TABLE>
 
     Pre-Production. The pre-production stage begins when the screenplay is
turned into story boards, which are panels filled with thousands of sketches
that represent the story to be animated. The story boards are then transferred
to film or video so that they can be electronically edited into a photo play of
the film called story reels, a process that enables editing of the film before
the production phase begins. Voices are then selected, recorded and added to the
story reels. Throughout the creative development and pre-production processes,
plans are developed for the style, colors and look of the film.
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    <S>           <C>        <C>      <C>      <C>      <C>         <C>      <C>            <C>      <C>         <C>
                  ----------          --------          -----------          --------------          -----------
                                                                              Shading and
    PRODUCTION     Modeling     5      Layout     5      Animation     5        Lighting       5      Rendering     5
                  ----------          --------          -----------          --------------          -----------
 
<CAPTION>
    <S>           <C>
                  -----------
                     Film
    PRODUCTION     Recording
                  ----------          --------------
</TABLE>
 
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     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. The next step in
completing a scene requires attaching to each object and model a description of
its surface characteristics. These "shaders" describe the pattern, texture,
finish and color for every object in the scene. Next, lighting is added by
placing digital lights into the scene. In the rendering phase, the renderer
takes the modeling, layout, animation, shading and lighting data and, for each
frame in the sequence, computes a three-dimensional image of what the scene
looks like at that point in time from the point of view of the camera. The final
rendering of a single frame takes an average of one to four hours, but a small
percentage of more complex frames can take much longer, between 20 and 40 hours
each or more. 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-         Effects     5      Musical     5      Sound      5        Color        5      Delivery
    PRODUCTION     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, 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. However,
unlike a traditional movie studio's back lot, 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 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 2.
 
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 create heartwarming stories with
memorable characters that are targeted for family entertainment, utilizing the
medium of computer animation. The members of Pixar's creative and technical
teams have been nominated for and received a number of awards. In 1986, the
short animated film Luxo Jr. earned an Academy Award nomination for Best 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).
 
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     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 and A
Bug's Life. 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 story artists, animators and other artists highly
skilled in the art of animation, especially computer animation. Pixar's 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. Along with the story department
and the art department, the creative team at Pixar includes animators. 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. 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. See "Risk Factors -- We Depend on Certain Key
Employees."
 
     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 and A Bug's Life, 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; however, 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 "Risk
Factors -- We Depend on Successful Development of Appealing Creative Content For
Animated Feature Films and Related Products."
 
TECHNOLOGY
 
     Pixar has three core proprietary technologies: (1) Marionette, an animation
software system for modeling, animating and lighting, (2) Ringmaster, a
production management software system for scheduling, coordinating and tracking
of a computer animation project and (3) RenderMan, a rendering software system
for high quality photo-realistic image synthesis that Pixar uses internally and
licenses to third parties. Each of these systems is critical to the production
of 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.
 
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     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. 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, Apollo 13, the re-release of Star Wars and Mulan. 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.
 
     RenderMan was designed to be easily portable. It runs on a wide variety of
Unix workstations, including those from Silicon Graphics, Sun and Digital
Equipment. Pixar has also ported RenderMan to the Windows NT platform.
 
RELATIONSHIP WITH DISNEY
 
     A critical component of Pixar's objective to become a leading brand in the
animated feature film market is to secure strong promotion, marketing and
distribution of its films and related products. Pixar believes that Disney is
the leader in marketing and distribution of animated feature films and related
products and one of the industry's most widely recognized brand names.
Consequently, in February 1997 Pixar extended its existing relationship with
Disney by entering into the Co-Production Agreement. This arrangement allows
Pixar to focus on the story and other creative and production elements of making
animated feature films while utilizing Disney's significant promotion, marketing
and distribution capabilities.
 
     Prior Agreements
 
     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, Hercules and Mulan. 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 the Feature Film Agreement with Disney
which provided for the development, production and distribution of up to three
feature-length motion pictures (the "Feature Film Agreement"). It is pursuant to
the Feature Film Agreement that Toy 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 for the
development, production and distribution of CD-ROM titles based on Toy Story
(the "CD-ROM Agreement"). It is pursuant to the CD-ROM Agreement that 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.
 
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     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.
Prospective investors in Pixar's Common Stock are encouraged to read the
Co-Production Agreement.
 
     Overview. On February 24, 1997, Pixar and Disney entered into the
Co-Production Agreement pursuant to which Pixar, on an exclusive basis, will
produce five original computer-animated feature-length theatrical motion
pictures (the "Pictures") for distribution by Disney over approximately 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. The first Picture under the Co-Production
Agreement was A Bug's Life, which was released in November 1998. 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. In order to be reimbursed for
production costs, 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 to consult with Pixar regarding all such major marketing and
distribution decisions, and Pixar is entitled to designate a representative to
monitor marketing and distribution of the Pictures. In addition, the costs for
marketing, distribution and promotion of the films and related products are
incurred well in advance of the release of such films and products, and Pixar
will experience a delay in the recognition of revenue from such films and
products until after Disney recovers such costs.
 
                                        7
<PAGE>   9
 
     Division of Gross Receipts. Pixar and Disney are entitled to share equally
in all gross receipts remaining after deduction of: (1) a distribution fee to
Disney, (2) mutually agreed participations (payments to third parties such as
actors, composers and other artists contingent upon the success of the
Pictures), if any, paid by either Disney or Pixar, and (3) 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 2, 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 (1) a theatrical motion picture, (2) a
made-for-home video production, (3) a television production, (4) location-based
entertainment which uses unique characters or other elements from any of the
Pictures or Toy Story as its primary theme, or (5) 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
with Toy Story 2, the Co-Production Agreement provides for the following:
 
          (1) with respect to theatrical motion pictures and made-for-home video
     productions, the terms and conditions of the Co-Production Agreement are to
     be extended to cover such Derivative Works, subject to certain exceptions;
 
          (2) with respect to (A) location-based entertainment using characters
     or other elements from a Picture or Toy 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 will be financed, produced
     and distributed, subject to certain specified requirements in the case of
     television productions; and
 
          (3) with respect to Interactive Products, Disney and Pixar are to
     mutually agree upon the terms and conditions under which such Interactive
     Product shall be financed, produced and distributed, subject to certain
     commitments by Disney with respect to marketing and distribution and
     provided that there will be no distribution fee payable to Disney.
 
     For live entertainment such as stage plays or ice shows, 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
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.
 
                                        8
<PAGE>   10
 
     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 2 does 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 2 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. Disney, however, is not
similarly restricted by the exclusivity provisions that bind Pixar under the
Co-Production Agreement and, therefore, may develop, produce, or distribute
other feature length animated and computer-animated theatrical motion pictures
itself or enter into similar agreements with third parties. See
"-- Competition."
 
     Proprietary Rights. 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 2, 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 motion
                                        9
<PAGE>   11
 
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), DreamWorks SKG ("DreamWorks") (which continues to
expressly target the animated film market), 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.
 
     In 1998, competition significantly intensified in the animated feature film
market from these and other movie studios. Animated feature films released in
1998 included Quest for Camelot by Warner Bros., Inc., The Rugrats Movie by
Paramount, Prince of Egypt by DreamWorks and Antz, a fully computer-animated
movie by DreamWorks with its affiliate Pacific Data Images ("PDI"). While the
release of A Bug's Life was extremely successful, achieving domestic box office
revenues over $160 million as of March 28, 1999, Antz, The Rugrats Movie and
Prince of Egypt achieved domestic box office revenues of over $91 million, $100
million and $99 million, respectively. These three films were released during or
near the 1998 holiday season and directly competed with A Bug's Life. Each of
these films was more successful than any preceding animated feature film not
released by Disney or Disney and Pixar. In addition, other non-animated family
oriented feature films released during the 1998 holiday season, such as Disney's
Mighty Joe Young, also generated competition for A Bug's Life. Pixar expects
that a variety of animated feature films which may be released in the theaters
in the next several years will directly compete with Toy Story 2 and Film Four,
which are targeted for release in late 1999, and mid 2001, respectively. Due to
a potentially large number of releases in the next several years, it is possible
that the market for animated films will become further saturated before Pixar
can release Toy Story 2 and Film Four, which could result in the failure of such
films to achieve the extraordinary commercial success required for Pixar to
profit from such films.
 
     Pixar's films will continue to 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, 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 three of these movie studios, Disney, DreamWorks and ILM have
developed their own internal computer animation capability which may be used for
special effects in animated films and live action films. For example, DreamWorks
(with PDI) successfully produced Antz. In addition, 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
licenses "Maya," its next generation three-dimensional software for creating
high quality animation and visual effects. Maya incorporates many new features
and could be used to make a computer-animated feature film.
 
                                       10
<PAGE>   12
 
     The Co-Production Agreement provides for the development and production by
Pixar of five original computer-animated feature films. Because Disney
co-finances the films developed and produced under the Co-Production Agreement,
distributes the films under the "Walt Disney Pictures" label and enjoys
financial benefits in the event that such films achieve significant box office
revenues, Pixar believes that Disney desires such films to be successful.
Nonetheless, Disney has been by far the most successful producer of animated
feature films. 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, such as was the case with the release of Mighty
Joe Young during the 1998 holiday season which then competed against A Bug's
Life. Pixar's contractual arrangement with Disney also presents other risks. See
"Risk Factors -- 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, PDI, Rhythm & Hues,
Digital Domain 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 thirteen patents issued in the United States and seven issued in
foreign countries. 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 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 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 creating
computer-generated photo-realistic images. These same patents were licensed to
Microsoft Corpora-
 
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<PAGE>   14
 
tion 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 January 2, 1999 Pixar had a total of 427 employees. 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. 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. 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 Steve Jobs, John Lasseter, Edwin E. Catmull and
Sarah McArthur. Pixar does not maintain "key person" life insurance for any of
its employees. Pixar does have an employment agreement with Mr. Lasseter who is
fundamental to its relationship with Disney. However, this employment agreement
does not necessarily assure his services. 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, or Catmull, 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.
 
                                       13
<PAGE>   15
 
                                  RISK FACTORS
 
     The following is a discussion of certain factors that currently impact or
may impact our business, operating results and/or financial condition. You
should carefully consider these factors before making an investment decision
with respect to our Common Stock.
 
WE MAY EXPERIENCE NET LOSSES IN THE FIRST AND SECOND QUARTERS OF 1999
 
     We may experience net losses in the first and second quarters of 1999
because of the factors discussed below.
 
     End of Toy Story Revenue
 
     We have already recognized the vast majority of the revenue we expect to
receive from Toy Story. While we may receive minor amounts of revenue in
subsequent periods, we do not expect to recognize any further significant
revenue from Toy Story.
 
     Timing of A Bug's Life Revenue
 
     A Bug's Life was released on November 25, 1998, but we do not expect to
recognize a significant amount of revenue from A Bug's Life until after Disney
recovers all marketing and distribution costs and fees. It is difficult to
predict when Disney will recover these costs because of the many variables
involved, some of which are unpredictable, such as the timing and amount of
revenue generated from (1) foreign box office, (2) sales of the home video of A
Bug's Life, which is scheduled for release April 20, 1999, and (3) sales of film
related merchandise. The level of success achieved by A Bug's Life in foreign
box office, home video sales, merchandise sales and the level of marketing and
distribution costs incurred by Disney will determine whether Pixar first
receives significant revenues from A Bug's Life in the second or third quarter
of 1999. We expect that even if the film is an extraordinary success in foreign
theaters and in the home video and merchandising markets, we will not recognize
significant revenue from A Bug's Life until the second quarter of 1999 at the
earliest and possibly not until the third quarter of 1999. Moreover, we may not
receive sufficient revenue from A Bug's Life in the first or second quarter of
1999 to generate earnings.
 
     Timing of Toy Story 2 Release
 
     In addition, we expect that Toy Story 2 will be released in late 1999 at
the earliest. As with A Bug's Life, we do not expect to recognize any revenue
from Toy Story 2 until six to twelve months after its release. Therefore, we are
unlikely to recognize any revenue from Toy Story 2 until the second half of 2000
at the earliest.
 
     Limited CD-ROM Revenue
 
     In March 1997, we discontinued our business of producing CD-ROM products in
favor of other opportunities arising, in part, as a result of entering into the
Co-Production Agreement. We have not received royalty income from our two
existing CD ROM products, both based on Toy Story, since the first quarter of
1998. It is unlikely that we will recognize any further royalty income from
these products or from this discontinued operation in 1999 or thereafter.
 
     Possible Decline in Sales of RenderMan Due to Our Shift in Focus
 
     As a result of our shift in focus to products sold for their content, we
have reduced emphasis on the commercialization of software products. We are not
increasing the time and resources necessary to generate higher RenderMan sales;
therefore, we continue to expect that revenue from the licensing of RenderMan
will remain flat and possibly decline.
 
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<PAGE>   16
 
     Increase in Our Operating Expenses and Effective Tax Rate
 
     Since our initial public offering in November 1995, we significantly
increased our operating expenses, and we plan to continue to increase our
operating expenses to fund greater levels of research and development and to
expand operations. Specifically, we expect our spending levels to increase
significantly due to (1) continued investment in proprietary software systems,
(2) increased compensation costs as a result of intense competition for
animators, creative personnel, technical directors and other personnel, and (3)
increased costs associated with the expansion of our facilities. A portion of
our operating expenses that are allocable to film productions is either
capitalized by us or reimbursed by Disney under the Co-Production Agreement. To
the extent that we do not capitalize (or Disney does not pay for) the increases
in expenses, our operating expenses will significantly increase in 1999.
Finally, our tax rate increased in 1998 and is likely to increase in future
years because we have utilized our remaining net operating loss carryforwards
except those which originated from the exercise of non-qualified employee stock
options. The realization of tax benefits from the exercise of non-qualified
employee stock options will reduce the amount of our tax payments and
liabilities, but will not reduce our effective tax rate.
 
     Impact on Our Operating Results
 
     As a result of the factors discussed above, revenue may decline in the
first half of 1999 as compared to prior periods. At the same time, our operating
expenses are expected to increase in 1999. Therefore, revenue and operating
results in the first half of 1999 may decline from revenue and operating results
in 1998, and operating and net losses in the first half of 1999 are possible.
Our operating results thereafter will depend upon the success of A Bug's Life,
Toy Story 2 and our subsequent films.
 
WE EXPECT OUR OPERATING RESULTS TO CONTINUE TO FLUCTUATE
 
     In addition to the factors set forth above, we continue to expect
significant fluctuations in our future annual and quarterly operating results
because of a variety of factors, including the following:
 
     - the timing of the domestic and international releases of our animated
       feature films,
 
     - the success of our animated feature films (which can fluctuate
       significantly from film to film),
 
     - the timing of the release of related products into their respective
       markets (such as home videos and merchandising),
 
     - the demand for such related products (which is often a function of the
       success of the related animated feature film),
 
     - film production costs,
 
     - Disney's costs to distribute and promote the feature films and related
       products,
 
     - Disney's success at marketing the films and related products,
 
     - the timing of receipt of proceeds from our 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 our revenue under the Co-Production Agreement is
directly related to the success of a feature film, our operating results are
likely to fluctuate depending on the level of success of our animated feature
films and related products. The revenues derived from the production and
distribution of an animated feature film depend primarily on the film's
acceptance by the public, which cannot be predicted and does not necessarily
bear a direct correlation to the production or distribution costs incurred. The
commercial success of a motion picture also depends upon promotion and
marketing, production costs and other factors. Further,
 
                                       15
<PAGE>   17
 
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, our operating expenses will continue to be extremely difficult to
forecast. We budget the direct costs of film productions with Disney, and we
share such costs equally. We capitalize our share of these direct costs of film
production in accordance with Statement of Financial Accounting Standards
("SFAS") No. 53, Financial Reporting by Producers and Distributors of Motion
Picture Films. A substantial portion of all of our other costs are incurred for
the benefit of feature films ("Overhead"), including research and development
expenses and general and administrative expenses. Portions of our Overhead are
included in the budgets for the Pictures, and we will share such costs equally
with Disney under the Co-Production Agreement. With respect to the portion of
our Overhead that is not reimbursed by Disney, we either (1) capitalize such
portion as film production costs, if required under SFAS No. 53, or (2) charge
it to operating expense in the period incurred. Since a substantial portion of
our Overhead is related to the Pictures and is, therefore, reimbursed by Disney,
and since we capitalize other amounts in accordance with SFAS No. 53, our
reported operating expenses for 1998 have not reflected, and future reported
operating expenses will not reflect, our true level of spending on the
production of animated feature films, related products and overhead.
 
     We may not be able to recognize the tax benefits of all of our net
operating loss carryforwards. Although we have been profitable for financial
statement purposes, we have not been profitable for federal income tax purposes
for each of fiscal 1996, 1997 and 1998 due to additional tax deductible items
and the utilization of federal net operating loss carryforwards. We were
profitable for state income tax purposes for each of 1996 and 1997, but at
levels significantly lower than those reported for financial statement purposes.
We maintain a valuation allowance which substantially offsets our deferred tax
asset, due to our dependence on the success of A Bug's Life and future films,
which continues to be uncertain.
 
     As a result of the factors discussed above, we believe that
period-to-period comparisons of our results of operations are not necessarily
meaningful, and you should not rely on our annual and quarterly results of
operations as any indication of future performance. Due to the factors discussed
above, it is likely that in some future period our operating results will be
below the expectations of public market analysts and investors. In such event,
the price of our Common Stock would likely be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the 1998 Annual Report to Shareholders.
 
WE DEPEND ON TOY STORY, A BUG'S LIFE, TOY STORY 2 AND FILM FOUR
 
     Our Dependence on Toy Story
 
     For at least the first quarter of 1999 and possibly the second quarter of
1999, our revenue and operating results will again be largely dependent upon (1)
whatever revenue remains to be received from Toy Story merchandise and (2) our
other businesses, software and animation services, from which we expect limited
revenue. We recognized the vast majority of Toy Story revenue from all sources
by the end of 1998, and we expect little revenue from Toy Story or related
products in 1999 and thereafter. We also expect no further royalty income from
our Toy Story CD-ROM products in 1999 or thereafter.
 
     Our Dependence on A Bug's Life
 
     In 1999, we expect to be significantly dependent upon the success of A
Bug's Life. Although A Bug's Life was released in November 1998 and has
experienced relative domestic box office success, we will not recognize
significant revenue from the film until Disney recovers its marketing and
distribution fees and costs. We believe that domestic box office proceeds alone
will be inadequate to recover all of these costs. Foreign box office proceeds
and sales of related products, such as A Bug's Life home videos and merchandise,
must also be substantial in order for the film to generate profits. We cannot
provide any assurances that A Bug's Life will be successful in these other key
markets. Therefore, it is possible that we will not recognize sufficient revenue
from A Bug's Life to generate earnings on a consistent basis.
 
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<PAGE>   18
 
     Risks Associated with A Bug's Life
 
     Under the Co-Production Agreement, we share with Disney the production
costs of A Bug's Life. These costs were initially capitalized as film production
costs under SFAS No. 53, and we will amortize these costs over the expected
revenue stream when we recognize revenue from the film and related products.
Although A Bug's Life has achieved substantial domestic box office success, we
believe that the amount spent by Disney for marketing and distribution has been
and will continue to be significant. Unless the amount of revenue generated by A
Bug's Life from box office proceeds, home video sales and merchandise sales is
substantial even after Disney recovers the marketing and distribution costs, our
revenues could be relatively low, and we would have to amortize the capitalized
production costs 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. It is possible that total
revenue generated in all markets by A Bug's Life may not generate significant
revenue and operating results for us, even though A Bug's Life is critically
acclaimed and has achieved domestic box office success. See "-- Risks Associated
with Co-Production Agreement -- Dependence on Disney for Distribution and
Promotion of Feature Films and Related Products," "Risks Associated with the
Motion Picture Industry," and "Business -- Relationship with Disney." See also
Note 4 of Notes to Financial Statements in the 1998 Annual Report to
Shareholders.
 
     Our Dependence on Toy Story 2 and Film Four
 
     We expect to receive the majority of proceeds from A Bug's Life by the end
of 2000. Beyond 2000, we expect to be largely dependent upon the success of Toy
Story 2 and Film Four (together referred to as the "Current Projects"). Although
development and/or production of the Current Projects is underway, we cannot
provide any assurances that they will be successfully produced and released when
scheduled. For example, while we are currently targeting Film Four for release
in mid 2001, we have not formally agreed with Disney on the timing of its
release, and we cannot provide any assurances that Disney will agree to release
Film Four in mid 2001. We cannot provide any assurances that we 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 we are 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, our business, operating results
and financial condition will be materially adversely affected.
 
     Risks Associated with Toy Story 2
 
     It is rare for animated feature films to achieve extraordinary box office
success. We believe, 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 films generated domestic box office revenues greater than A
Bug's Life and Toy Story, and both of those films were produced and distributed
solely by Disney. During at least the last five years, we believe The Rugrats
Movie is the only fully-animated feature film (other than Toy Story and A Bug's
Life) produced or developed by a studio other than Disney that has achieved more
than $100 million in domestic box office revenues. Unless Toy Story 2 achieves
extraordinary box office success and also achieves success in home video and
merchandise sales, Toy Story 2 may not generate significant revenue and
operating results for us. See "-- Risks Associated with Co-Production
Agreement -- Dependence on Disney for Distribution and Promotion of Feature
Films and Related Products," "Risks Associated with the Motion Picture
Industry," and "Business -- Relationship with Disney." See also Note 4 of Notes
to Financial Statements in the 1998 Annual Report to Shareholders.
 
     As a sequel, there are also risks unique to Toy Story 2. 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 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
                                       17
<PAGE>   19
 
and Die Hard. Accordingly, we cannot provide any assurances that Toy Story 2
will perform as well as Toy Story at the box office. It is possible that Toy
Story 2 will substantially under-perform the original feature film. In addition,
fees and participations paid to key talent on Toy Story 2 are substantially
greater than for the original film, which together with other increases in
production costs will have the effect of increasing the cost of the film when
compared to Toy Story.
 
     As a result of these factors Toy Story 2 and related products may not
generate significant revenue and operating results for us, even if Toy Story 2
is critically acclaimed and achieves substantial, but not extraordinary, box
office success.
 
     Risks Associated with Production Budgets
 
     Given the (1) escalation in compensation rates of people required to work
on the Current Projects, (2) number of people required to work on the Current
Projects, and (3) 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 A Bug's Life. We will continue to
finance these budgets equally with Disney under the Co-Production Agreement. In
addition, due to production exigencies which are often difficult to predict, we
believe that it is not uncommon for film production spending to exceed film
production budgets, and we cannot provide any assurances that any of the Current
Projects can be completed within the budgeted amounts. For example, in order to
meet the production schedule for Toy Story 2, we expect to reassign many
employees from our animation services group and from Film Four to Toy Story 2
for the completion of its production, which will result in a larger production
staff than originally anticipated and which will generate additional production
costs. In addition, when production of each film is completed, if completed, we
may incur significant carrying costs associated with transitioning personnel on
creative and development teams from one project to another which, although
shared with Disney, are treated as film costs which increase overall production
budgets and could have a material adverse effect on our results of operations
and financial condition.
 
RISKS ASSOCIATED WITH ADEQUACY OF CASH BALANCES
 
     Pursuant to the Co-Production Agreement, we co-financed A Bug's Life and
will co-finance the next four original animated feature films which we produce,
including Film Four. We are also co-financing Toy Story 2 on the same basis as
the other theatrical films. In the future, we may co-finance other derivative
works such as sequels, interactive products and television productions. In
addition, we are constructing a new headquarters and studio facility in
Emeryville, California, which is being financed by the use of our cash and may
continue to be financed by the use of our cash. Since we do not expect to
generate substantial, if any, cash from operations in the first quarter and
possibly the second quarter of 1999, the development and production costs of Toy
Story 2, Film Four and costs of the new Emeryville facility will have a material
adverse impact on our cash and short-term investment balances. As of January 2,
1999, we had approximately $149 million in cash and short-term investments. We
believe that these funds will be sufficient to meet our anticipated cash needs
for working capital and capital expenditures, including the development and
production costs of Toy Story 2 and Film Four, until we begin receiving cash
from the release of A Bug's Life (which we do not expect to occur until the
second quarter of 1999). However, even if these films generate cash, unless each
is a success such that we recover on a timely basis our share of the production
costs, as well as other operating expenses and capital expenditures, we will be
required to seek financing for our ongoing commitments under the Co-Production
Agreement and any other requirements of its operations. We may also seek
additional financing in connection with the construction of our new facility.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" in the 1998 Annual Report to
Shareholders. The sale of additional equity or convertible debt securities would
result in additional dilution to our shareholders. Moreover, we cannot provide
any assurances that we will be successful in obtaining future financing, or even
if such financing is available, that we will obtain it on favorable terms or on
terms providing us with sufficient funds to meet our obligations and objectives.
If we fail to obtain such financing, it would have a material adverse effect on
our business, operating results and financial condition.
 
                                       18
<PAGE>   20
 
RISKS ASSOCIATED WITH SCHEDULED SUCCESSIVE RELEASES OF FILMS
 
     In order to meet our obligations pursuant to the Co-Production Agreement,
we have established parallel creative teams so that we can develop more than one
film at a time. These teams are currently working on Toy Story 2, which is
currently targeted for release in late 1999, and Film Four, which is currently
targeted for release in mid 2001. We have only produced two prior feature films
to date and have limited experience with respect to producing animated feature
films in parallel. We have been required, and will continue to be required, to
expand our employee base, increase capital expenditures and procure additional
resources and facilities in order to produce animated feature films in parallel.
This growth has placed, and continues to place, a significant strain on our
resources. We cannot provide any assurances that Toy Story 2 or Film Four will
be released as targeted or that this strain on resources will not have a
material adverse effect on our business, financial condition or results of
operations. For example, to meet the production schedule of A Bug's Life, we
reassigned employees from other projects, including Toy Story 2, to A Bug's
Life. Similarly, to meet the production schedule of Toy Story 2, we expect to
reassign employees from other projects, including Film Four, to Toy Story 2. In
addition, John Lasseter, who, while directing A Bug's Life, was providing
creative oversight for Toy Story 2 in his role as Executive Vice President,
Creative, has now transitioned to the role of Director of Toy Story 2. Using the
personnel of future films to meet the immediate deadlines of films nearing
release, as we have for both A Bug's Life and Toy Story 2, may have the long
term impact of pushing out the targeted release dates of future films,
increasing film budgets, and adversely impacting our ability to generate
creative concepts for subsequent films on a timely basis.
 
     Although we cannot provide any assurances that Toy Story 2 or Film Four
will be released on schedule, the targeted release timing of mid 2001 for Film
Four is particularly uncertain. While the story treatment and production budget
for Film Four have been approved pursuant to the Co-Production Agreement, we
have not formally agreed with Disney on the timing of its release and we cannot
provide any assurances that Disney will agree to release Film Four in mid 2001
as it is currently targeted. In addition, as Director of Toy Story 2, John
Lasseter will be focused on Toy Story 2 until its completion in late 1999, and
will be less available to assist on Film Four or future films during their
development phases. This may adversely impact Pixar's ability to release Film
Four in mid 2001 and the timing of release of future films thereafter.
 
     If we are able to release films in late 1999 and mid 2001, we cannot
provide any assurances that we will release our next film in 2002. Due to the
strain on our personnel from the effort required for the release of Toy Story 2
and Film Four and the time required for creative development of a new film, it
is possible that we would be unable to release a successive new film in 2002. It
is too early to determine the rate at which any future films are to be released,
and we cannot provide any assurances that we will release a film in each
successive year or in any particular year.
 
     To continue to accommodate growth, we will be required to implement a
variety of new and upgraded operational and financial systems, procedures and
controls, including improvement and maintenance of our accounting system, other
internal management systems and backup systems. In addition, this growth and
these diversification activities, along with the corresponding increase in the
number of our employees and rapidly increasing costs, have resulted in increased
responsibility for our management team. We will need to continue to improve our
operational, financial and management information systems and to hire, train,
motivate and manage our employees, to integrate them into Pixar and to provide
adequate facilities and other resources for them. We cannot provide any
assurances that we 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 our 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
 
                                       19
<PAGE>   21
 
Co-Production Agreement, we have some general protections with respect to the
marketing and distribution of the feature films in the form of commitments by
Disney as to release windows, the timing of release of other Disney family films
and marketing obligations. However, we ultimately do not control (1) the manner
in which Disney distributes our animated feature films and related products, (2)
the number of theaters to which Disney distributes our feature films, (3) the
specific timing of release of the feature films and related products or (4) the
specific amount or quality of promotional support of the feature films and
related products and the associated promotional and marketing budgets. Because
Disney Co-finances the films developed and produced under the Co-Production
Agreement, distributes the films under the "Walt Disney Pictures" label and may
enjoy financial benefits in the event that such films achieve significant box
office revenues, we believe that Disney desires such films to be successful.
Nonetheless, Disney could make certain decisions as to marketing, distribution
or promotion of the animated feature films or related products or the marketing
and promotion of its own animated or other family films that could have a
material adverse effect on our business, operating results or financial
condition. In addition, the costs for marketing, distribution and promotion of
the films and related products are incurred well in advance of the release of
such films and products, and we will experience a delay in the recognition of
revenue from such films and products until after Disney recovers such costs.
 
     Exclusivity
 
     We have agreed not to release or authorize the release of any of our
feature length animated theatrical motion pictures, other than the feature films
that we produced under the Co-Production Agreement, until twelve months from our
delivery of the fifth original feature film under the Co-Production Agreement.
We currently anticipate that we will not deliver the fifth Picture until 2004 or
2005 at the earliest. We have further agreed that we will not enter into any
agreement with any third party for the development, production or distribution
of any feature length animated theatrical motion picture until after we have
delivered the third original feature film to Disney under the Co-Production
Agreement. We have also agreed that we will not develop or produce any rides or
attractions for major theme parks not owned or operated by Disney, and to give
Disney a right to negotiate with respect to animated television productions or
animated made-for-home video productions that we propose to produce during the
term of the Co-Production Agreement. Disney, however, is not similarly
restricted by the exclusivity provisions that bind us under the Co-Production
Agreement and, therefore, may develop, produce, or distribute other feature
length animated and computer animated theatrical motion pictures itself or enter
into similar agreements with third parties. For example, we believe that Disney
is developing Expedition, a science fiction adventure, with Phil Tippett
Studios. See "Business -- Competition."
 
     Financing of Production Costs
 
     Under the Co-Production Agreement, unlike the prior Feature Film Agreement
which is applicable to Toy Story, we will continue to co-finance each of the
four remaining original animated feature films and may co-finance other related
products to be developed and produced pursuant to the Co-Production Agreement.
We co-financed A Bug's Life and are currently co-financing Toy Story 2 and Film
Four under the Co-Production Agreement. Accordingly, unlike the Feature Film
Agreement, we 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 our share of their production costs, our 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 we develop under the Co-Production Agreement. Accordingly,
except in certain specified circumstances unlikely to generate revenue, we are
not able to exploit or distribute any of the feature films or characters or
elements of any of the feature films or related products developed under the
Co-Production Agreement without a license from Disney. We cannot provide any
assurances that such a license would be available to us on commercially
reasonable terms or at all.
 
                                       20
<PAGE>   22
 
     Termination
 
     Under the terms of the Co-Production Agreement, Disney may terminate the
agreement under certain circumstances. For example, Disney is entitled to
terminate the Co-Production Agreement in the event that we fail to agree with
Disney 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. We cannot provide any
assurances 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 we develop 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 we would regain the rights subject to a lien in
favor of Disney for the costs advanced to date. Further, in the event that
Disney terminated the Co-Production Agreement, we would be required to seek
alternative channels for distribution of our animated feature films and related
products. We cannot provide any assurances that we would be able to find a third
party to finance, distribute and promote our animated feature films and related
products on terms acceptable to us, if at all. See "Business -- Relationship
with Disney."
 
RISKS ASSOCIATED WITH THE 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 other factors, such as:
 
     - 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 these factors can change and cannot be predicted with certainty. In
addition, motion picture attendance is seasonal, with the greatest attendance
typically occurring during the summer and holidays. The release of a film during
a period of relatively low theater attendance is likely to affect the film's box
office receipts adversely. 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 our motion pictures
will not be commercially successful, which would have a material adverse effect
on our 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 schedules of competitive films. We are concurrently
developing and producing two motion pictures, Toy Story 2 and Film Four, which
compounds these uncertainties and jeopardizes the successful, timely and
cost-effective production and completion of each film. Under the Co-Production
Agreement, we have increased our financial involvement in the production costs
of motion pictures, which subjects us to substantial financial risks relating to
the production,
 
                                       21
<PAGE>   23
 
completion and release of the motion pictures. In addition, a significant amount
of time will elapse between our expenditure of funds and our receipt of revenues
from the animated feature films.
 
WE DEPEND ON SUCCESSFUL DEVELOPMENT OF APPEALING CREATIVE CONTENT FOR ANIMATED
FEATURE FILMS AND RELATED PRODUCTS
 
     The success of each of our animated feature films will depend in large part
upon our creative team's ability to predict the type of content that will appeal
to a broad audience and to develop stories and characters that achieve broad
market acceptance. Traditionally, this has been extremely difficult. Disney
provided creative assistance throughout the production of Toy Story and A Bug's
Life, including creative reviews and approvals. Although the Co-Production
Agreement contemplates that Disney will continue to provide creative assistance
on feature films and other products made pursuant to that agreement, we cannot
provide any assurances that Disney will continue to provide us with assistance
in the development of creative content for our feature films or related
products. We cannot provide any assurances 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, we were 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."
 
OUR MARKETS ARE HIGHLY COMPETITIVE
 
     We experience intense competition with respect to animated feature films,
animation products and software.
 
     Movie Studios. Our animated feature films compete and will continue to
compete with feature films and other family oriented entertainment products
produced by major movie studios, including Disney (as somewhat limited by the
Co-Production Agreement), DreamWorks (which continues to expressly target the
animated film market), 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.
 
     In 1998, competition significantly intensified in the animated feature film
market. Animated feature films released in 1998 included the following:
 
     - Quest for Camelot by Warner Bros., Inc.
 
     - The Rugrats Movie by Paramount,
 
     - Prince of Egypt by DreamWorks, and
 
     - Antz, a fully computer-animated movie by DreamWorks with its affiliate
       Pacific Data Images ("PDI").
 
     While the release of A Bug's Life was extremely successful, achieving
domestic box office revenues of $160 million as of March 28, 1999, Antz, The
Rugrats Movie and Prince of Egypt achieved domestic box office revenues of over
$91 million, $100 million and $99 million, respectively. These three films were
released during or near the 1998 holiday season and directly competed with A
Bug's Life. Each of these films was more successful than any preceding animated
feature film not released by Disney or the combination of Disney and Pixar. In
addition, other non-animated family oriented feature films released during the
1998 holiday season, such as Disney's Mighty Joe Young, also generated
competition for A Bug's Life. We expect that a variety of animated feature films
may be released in the theaters in the next several years that will directly
compete with Toy Story 2 and Film Four, which are targeted for release in late
1999, and mid 2001, respectively. Due to a potentially large number of releases
in the next several years, it is possible that the market for animated films
will become further saturated before we can release Toy Story 2 and Film Four,
which could result in failure of such films to achieve the extraordinary
commercial success required for us to profit from such films.
 
     Our films will continue to compete with the feature films of other movie
studios for optimal release dates, audience acceptance and exhibition outlets.
In addition, we compete and will continue to compete with other movie studios
for the acquisition of literary properties, the services of performing artists,
and the services of
                                       22
<PAGE>   24
 
other creative and technical personnel, particularly in the fields of animation
and technical direction. Most of the other movie studios with which we compete
have significantly greater name recognition and significantly greater financial,
technical, creative, marketing and other resources.
 
     At least three of these movie studios, Disney, DreamWorks and ILM have
developed their own internal computer animation capability which may be used for
special effects in animated films and live action films. For example, DreamWorks
(with PDI) successfully produced Antz. In addition, 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, we believe that continuing
enhancements in commercially available computer hardware and software technology
have lowered and will continue to lower barriers to entry for studios or special
effects companies which intend to produce computer-animated feature films or
other products. For example, Silicon Graphics Inc.'s Alias/ Wavefront subsidiary
licenses "Maya," its next generation three-dimensional software for creating
high quality animation and visual effects. Maya incorporates many new features
and could be used to make a computer-animated feature film.
 
     The Co-Production Agreement provides that we will develop and produce five
original computer-animated feature films. Because Disney co-finances the films
developed and produced under the Co-Production Agreement, distributes the films
under the "Walt Disney Pictures" label and enjoys financial benefits in the
event that such films achieve significant box office revenues, we believe that
Disney desires such films to be successful. Nonetheless, Disney has been by far
the most successful producer of animated feature films. Family oriented motion
pictures distributed by Disney or its affiliates are likely to be in the market
concurrently with and competing with our animated feature films, such as was the
case with the release of Mighty Joe Young during the 1998 holiday season which
competed against A Bug's Life. Our contractual arrangement with Disney also
presents other risks. See "-- Risks Associated with Co-Production Agreement."
 
     We believe that the primary competitive factors in the market for animated
feature films include creative content and talent, product quality, technology,
access to distribution channels and marketing resources. Due in part to our
creative and technical resources and to the Co-Production Agreement with Disney,
pursuant to which Disney co-finances the production of the feature films,
markets the feature films and provides creative assistance and access to
significant distribution channels, we believe that we presently compete
favorably with respect to each of these factors.
 
     Computer Graphics Special Effects Firms. We also expect to compete with
computer graphics special effects firms, including ILM, PDI, Rhythm & Hues,
Digital Domain 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 we compete with. 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 our RenderMan software and to obtain
at no cost all enhancements and upgrades thereto. Other computer graphics
special effects firms have licensed or may license RenderMan. Accordingly, our
RenderMan software may not provide us with a competitive advantage. We also
compete, or may in the future compete, with the above firms with respect to
animation products other than feature films. We believe that the primary
competitive factors in the market for three-dimensional computer-animation for
feature films and other animation products include creative content and talent,
product quality, technology, access to distribution channels and marketing
resources. We believe that we presently compete favorably with respect to each
of these factors.
 
     Software Publishers. We also experience intense competition with respect to
our RenderMan software product. In particular, we compete with makers of
computer graphics imaging and animation software, principally Microsoft (which
acquired SoftImage Inc.), MentalImage (which offers the same product offered by
Microsoft), and Silicon Graphics (which acquired Wavefront and Alias).
Microsoft, through SoftImage Inc., MentalImage and Silicon Graphics, through
Wavefront and Alias, are each marketing competing rendering software products,
usually at prices that are lower than ours. Microsoft and Silicon Graphics have
 
                                       23
<PAGE>   25
 
each licensed several of our patents that cover certain rendering techniques and
may therefore be better able to market products that compete with our RenderMan
software. Under appropriate circumstances, we might elect to license our
rendering technology patents to other companies, some of which may compete with
us. In addition, as 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. We believe that the
primary competitive factors in the market for rendering software include product
quality, price/performance, technology, functionality, breadth of features and
customer service and support. We believe that we presently compete favorably
with respect to each of these factors.
 
     We expect competition to persist, intensify and increase in each of our
business areas in the future. Almost all of our current and potential
competitors have longer operating histories, greater name recognition, larger
installed customer bases and significantly greater financial, technical,
marketing and other resources. We cannot provide any assurances that we will be
able to compete successfully against current or future competitors. Such
competition could materially adversely affect our business, operating results or
financial condition.
 
WE HAVE A LIMITED OPERATING HISTORY
 
     Until 1996, we had generated recurring revenue primarily from the license
of our RenderMan software, amounts we received under software development
contracts and fees for animated television commercial development. However, we
continue to expect to generate a substantial majority of our future revenue from
the development and production of animated feature films and related products,
such as we did in 1996, 1997 and 1998. We have, to date, developed and produced
only two animated feature films Toy Story and A Bug's Life, and only two related
products (both CD-ROM titles, which we no longer produce). Accordingly, we have
only a limited operating history in implementing our new business model upon
which an evaluation of Pixar and our prospects can be based. Our prospects must
be considered in light of the risks, expenses and difficulties frequently
encountered by companies in the early stages of a new business enterprise,
particularly companies in highly competitive markets. To address these risks, we
must, among other things, respond to competitive developments, continue to
attract, retain and motivate qualified persons, and continue to upgrade our
technologies. We cannot provide any assurances that we will be successful in
addressing such risks.
 
WE DEPEND ON CERTAIN KEY EMPLOYEES
 
     Our success depends to a significant extent on the performance of a number
of senior management personnel and other key employees, especially our
animators, creative personnel and technical directors. In particular, we are
dependent upon the services of Steve Jobs, John Lasseter, Edwin E. Catmull and
Sarah McArthur. We do not maintain "key person" life insurance for any of our
employees. We do have an employment agreement with Mr. Lasseter, who is
fundamental to Pixar's relationship with Disney. However, such employment
agreement does not necessarily assure the services of Mr. Lasseter. Moreover,
although it is standard in the motion picture industry to rely on employment
agreements as a method of retaining the services of key employees, we have not
required our employees, other than Mr. Lasseter, to enter into employment
agreements. We believe that it may be particularly difficult to retain our key
employees, especially our animators, creative personnel and technical directors,
during periods in which we are not developing animated feature films. The loss
of the services of any of Messrs. Jobs, Lasseter, or Catmull, Ms. McArthur or of
other key employees, especially our animators, creative personnel and technical
directors, could have a material adverse effect on our business, operating
results or financial condition. Although none of our employees is represented by
a labor union, it is common for animators and actors at film production
companies to belong to a union. Further, we may be directly or indirectly
dependent upon union members, and work stoppages or strikes organized by such
unions could materially adversely impact our business, financial condition or
results of operations. There can be no assurance that our employees will not
join or form a labor union, or that we will not be directly or indirectly
impacted by industry related work stoppages or that we, for certain purposes,
will not be required to become a union signatory.
 
                                       24
<PAGE>   26
 
OUR CHIEF EXECUTIVE OFFICER HAS DIVIDED RESPONSIBILITIES
 
     Pixar's Chief Executive Officer and Chairman, Steve Jobs, is also acting as
interim Chief Executive Officer at Apple Computer, Inc. ("Apple"). Although Mr.
Jobs spends time at Pixar and is active in our management, he does not devote
his full time and resources to Pixar.
 
WE NEED TO ATTRACT AND RETAIN QUALIFIED PERSONNEL TO BE SUCCESSFUL
 
     Our success continues to depend to a significant extent on our ability to
identify, attract, hire, train and retain qualified professional, creative,
technical and managerial personnel. Competition for such personnel is intense,
and there can be no assurance that we 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 we are unable to hire, assimilate and retain
qualified personnel in the future, particularly animators, creative personnel
and technical directors, such inability would have a material adverse effect on
our business, operating results and financial condition.
 
WE FACE 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 2 pursuant to the Co-Production Agreement. Distribution of a motion
picture generally involves domestic and foreign licensing for (1) theatrical
exhibition, (2) home video, (3) presentation on television, including pay, basic
cable and syndication, (4) non-theatrical exhibition, which includes airlines,
hotels and armed forces facilities and (5) marketing of other rights of the
picture, which may include merchandising, such as CD-ROM titles, toys and
soundtrack recordings. Although the Co-Production Agreement provides us with
some protection, we cannot provide any assurances 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."
 
WE DEPEND ON PROPRIETARY TECHNOLOGY AND COMPUTER SYSTEMS FOR TIMELY AND
SUCCESSFUL DEVELOPMENT OF FEATURE FILMS AND RELATED PRODUCTS
 
     We cannot provide any assurances that we will not experience difficulties
that could delay or prevent the successful development or production of future
animated feature films or other related products. Among other things, because we
are dependent upon a large base of software and a large number of computers for
the development and production of our animated feature films and related
products, an error or defect in the software, a failure in the hardware or a
failure of the backup facilities could result in a significant delay in one or
more productions in process which, in turn, could result in potentially
significant delays in the release dates of our feature films or other products.
For example, early in 1998 we experienced a failure of our backup systems for
Toy Story 2 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 2. However, significant delays
in production and significant delays in release dates could have a material
adverse effect on our business, operating results or financial condition.
Further, because we rely mostly on internally developed software, we would not
be able to rely upon assistance from third parties in the event that the
software fails. See "Business -- Technology."
 
ONE SHAREHOLDER OWNS A LARGE PERCENTAGE OF OUR STOCK
 
     Pixar's Chief Executive Officer, Steve Jobs, beneficially owns
approximately 65.8% of the outstanding Common Stock as of March 19, 1999. As a
result, Mr. Jobs, acting alone, is able to exercise sole discretion over all
matters requiring shareholder approval, including the election of the entire
board of directors and approval of significant corporate transactions, including
an acquisition of Pixar. Such concentration of ownership may also have the
effect of delaying or preventing a change in control of Pixar, impeding a
merger,
 
                                       25
<PAGE>   27
 
consolidation, takeover or other business combination involving Pixar, or
discouraging a potential acquirer from making a tender offer or otherwise
attempting to obtain control of Pixar.
 
WE MAY INCUR SUBSTANTIAL ADDITIONAL COSTS RELATED TO FACILITIES EXPANSION
 
     As of January 2, 1999, we had incurred capital expenditures of
approximately $21.2 million to purchase and begin construction of approximately
15 acres of land in Emeryville, California to build a new headquarters and
studio facility. To construct the facility, we currently expect to incur capital
expenditures of approximately $38.0 million in 1999 and $19.0 million in 2000.
In addition, we expect to spend approximately $6.5 million total over the years
1999 and 2000 on related furniture, fixtures and equipment for the new facility.
Due to changes in construction, design and/or other specifications which may or
may not be at the discretion of management and are often difficult to predict,
we cannot provide any assurances that construction of the new studio facility
can be completed within these specified amounts. To date, we have chosen to use
our existing cash resources to fund facility-related costs. We may continue to
use our 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 we choose to seek financing for such expenditures, we cannot provide any
assurances that such financing will be available on terms reasonably acceptable
to us or at all. See "-- Risks Associated with Adequacy of Cash Balances" and
"Properties" herein and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" in the
1998 Annual Report to Shareholders.
 
WE DEPEND ON TECHNOLOGICAL ADVANCEMENT TO BE SUCCESSFUL
 
     Substantially all of our revenues have been derived, and substantially all
of our future revenues are expected to be derived, from the use and license of
our proprietary technologies. We expect that it will be required to enhance
these technologies and to develop new technologies in order to be successful in
our industry and in the licensing of our RenderMan software. We cannot provide
any assurances that we will be successful in enhancing our existing technologies
or in developing and utilizing new technologies, or that competitors will not
develop technology that is equivalent or superior to our technologies or that
makes our technologies obsolete. If we are unable to develop enhancements to our
existing technologies or new technologies as required, our business, operating
results or financial condition could be materially adversely affected. See
"Business -- Technology" and "Competition -- Movie Studios."
 
WE DEPEND ON PROPRIETARY RIGHTS
 
     No Assurance That Efforts to Protect Proprietary Technologies Will Succeed
 
     Our success and ability to compete is dependent in part upon our
proprietary technology. While we rely on a combination of patents, copyright and
trade secret protection, nondisclosure agreements and cross-licensing
arrangements to establish and protect our proprietary rights, we believe that
factors such as the technical and creative skills of our personnel are more
essential to our success and ability to compete. We currently own thirteen
patents issued in the United States and seven issued in foreign countries. In
addition, we have a number of patent applications pending in the United States
and in foreign countries. We cannot provide any assurances that patents will
issue from any of these pending applications or that, if patents do issue, any
claims allowed will be sufficiently broad to protect our technology. In
addition, we cannot provide any assurances that any patents that have been
issued to us, or that we may license from third parties, will not be challenged,
invalidated or circumvented, or that any rights granted thereunder would provide
us with any proprietary protection. Failure of the patents to provide protection
of our technology may make it easier for our competitors to offer technology
equivalent to or superior to our technology. See "Business -- Proprietary
Rights."
 
     The source code for our proprietary software is protected both as trade
secrets and as a copyrighted work. We generally enter into confidentiality or
license agreements with our employees, consultants and vendors, and generally
control access to and distribution of our software, documentation and other
proprietary information. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use our
 
                                       26
<PAGE>   28
 
proprietary information, products or technology without authorization, or to
develop similar or superior technology independently. Policing unauthorized use
of our products is difficult. In addition, effective copyright and trade secret
protection may be unavailable or limited in certain foreign countries. To
license our RenderMan software product, we primarily rely on "shrink wrap"
licenses that are not signed by the end-user and, therefore, may be
unenforceable under the laws of certain jurisdictions. We cannot provide any
assurances that the steps we take will prevent misappropriation of our
technology or that our confidentiality or license agreements will be
enforceable. See "Business -- Proprietary Rights."
 
     Risk That Litigation Will Be Required to Enforce Proprietary Rights
 
     Litigation may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets, to determine the validity and
scope of the proprietary rights of others, or to defend against claims of
infringement or invalidity. Any such litigation could result in substantial
costs and diversion of resources and could have a material adverse effect on our
business, operating results or financial condition. See "Business -- Proprietary
Rights."
 
     Risks of Infringement Claims
 
     One of the risks of the film production business is claims that our
productions infringe the intellectual property rights of third parties with
respect to previously developed films, stories, characters or other
entertainment. In addition, our technology and software may be subject to
patent, copyright or other intellectual property claims of third parties. We
have received, and are likely to receive in the future, notice of claims of
infringement of other parties' proprietary rights. There can be no assurance
that infringement or invalidity claims (or claims for indemnification resulting
from infringement claims) will not be asserted or prosecuted against us or that
any assertions or prosecutions will not materially adversely affect our
business, financial condition or results of operations. Irrespective of the
validity or the successful assertion of such claims, we would incur significant
costs and diversion of resources with respect to the defense thereof which could
have a material adverse effect on our business, financial condition or results
of operations. If any claims or actions are asserted against us, we may seek to
obtain a license under a third party's intellectual property rights. We cannot
provide any assurances, however, that under such circumstances a license would
be available on reasonable terms or at all. See "Business -- Proprietary
Rights."
 
     No Assurance That Third Party Technology Licenses Will Continue to be
Available
 
     We also rely on certain technology that we license from third parties,
including software that we integrate and use with our internally developed
software. We cannot provide any assurances that these third party technology
licenses will continue to be available to us on commercially reasonable terms.
The loss of or inability to maintain any of these technology licenses could
result in delays in feature film releases or product shipments until equivalent
technology could be identified, licensed and integrated. Any such delays in
feature film releases or product shipments could materially adversely affect our
business, operating results and financial condition. See
"Business -- Proprietary Rights."
 
POSSIBLE VOLATILITY OF SHARE PRICE AND RISK OF LITIGATION
 
     The market price of our Common Stock is highly volatile and is subject to
wide fluctuations in response to a wide variety of factors including the
publication of box office results for our feature films and those of our
competitors, fluctuations in our quarterly or annual results of operations,
changes in financial estimates by securities analysts, announcements made by us
or our competitors, budget increases, delays in or cancellation of feature film
or other product release dates, or other events or factors. For example, since
December 31, 1997, our Common Stock has closed as low as $21 and as high as $64
per share. Moreover, in recent years, the stock market in general, and the
shares of technology companies in particular, have experienced extreme price and
volume fluctuations, some of which have been unrelated or disproportionate to
the operating performances of such companies. These broad market and industry
fluctuations may adversely affect the market price of our Common Stock. In the
past, following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted against
such a company. If brought against Pixar,
                                       27
<PAGE>   29
 
such litigation could result in substantial costs and a diversion of
management's attention and resources, which could have a material adverse effect
on our business, operating results or financial condition. See "Market for
Registrant's Common Stock and Related Shareholder Matters."
 
WE FACE YEAR 2000 RISKS
 
     The Year 2000 problem is the result of computer programs using two digits
rather than four to define the applicable year. Computer programs that have
time-sensitive software may recognize a date using "00" as the Year 1900 rather
than the Year 2000. This could result in a major system failure or
miscalculations. We are currently reviewing our products, our internal computer
systems and the systems of third parties on which we rely for handling the Year
2000. We are also seeking confirmation from third parties that their systems are
Year 2000 compliant or plans are being developed to address the Year 2000
problem. Based on information available to date, we believe that we will be able
to complete our Year 2000 compliance review and make any necessary modifications
to our internal systems prior to the end of 1999. We further believe that such
review and modification will not require us to incur any material charge to
operating expenses, although we cannot provide any assurance that such expenses
will not be material.
 
     Our most significant Year 2000 risk results from our relationship with
Disney, a public company. We rely on Disney for the distribution and marketing
of our films and Toy Story 2 is expected to be released in late 1999. The
disruption of Disney's distribution activities as a result of Year 2000 problems
could result in lost revenues for Toy Story 2 and related merchandise. In
addition, if the accounting and financial systems of Disney are adversely
affected by Year 2000 issues and Disney is unable to issue revenue reports to
us, our recognition of our share of the revenue generated pursuant to the
Co-Production Agreement could be delayed. There can be no assurance that
third-party systems will be Year 2000 compliant or that the failure of such
systems to be Year 2000 compliant would not have a material adverse effect on
our financial position or results of operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- The Year 2000"
in the 1998 Annual Report to Shareholders.
 
ITEM 2. PROPERTIES
 
     Pixar leases approximately 120,000 square feet of office space in Richmond,
California. The related leases expire on various dates ranging from July 1999 to
January 2002.
 
     As of January 2, 1999, Pixar had incurred total capital expenditures of
approximately $21.2 million to purchase and begin construction on approximately
15 acres of land in Emeryville, California for a new headquarters and studio
facility. Pixar expects to incur capital expenditures of approximately $38.0
million in 1999 and $19.0 million in 2000. 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 "Risk Factors -- We May Incur Substantial Additional Costs Related to
Facilities Expansion" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" in the
1998 Annual Report to Shareholders.
 
ITEM 3. LEGAL PROCEEDINGS
 
     Pixar is not party to any material legal proceedings.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     No matters were submitted to a vote of security holders during the fourth
quarter of 1998.
 
                                       28
<PAGE>   30
 
                          EXECUTIVE OFFICERS OF PIXAR
 
     The executive officers of Pixar and their ages as of March 31, 1999 are as
follows:
 
<TABLE>
<CAPTION>
       NAME            AGE                      POSITION WITH PIXAR
       ----            ---                      -------------------
<S>                    <C>    <C>
Steve Jobs             44     Chairman, Chief Executive Officer and Office of the
                              President
Edwin E. Catmull       54     Executive Vice President, Chief Technical Officer and
                              Office of the President
Lawrence B. Levy(1)    40     Executive Vice President, Chief Financial Officer,
                              Office of the President and Secretary
John Lasseter          42     Executive Vice President, Creative Development
Sarah McArthur         42     Executive Vice President, Production
</TABLE>
 
---------------
(1) Effective March 31, 1999, Mr. Levy will resign as Executive Vice President,
    Chief Financial Officer, and Office of the President and effective in April
    1999, Mr. Levy will join Pixar's Board of Directors.
 
     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 also serves as a director
of IDG Books Worldwide, Inc. 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 was promoted to Executive Vice President, Creative Development
in February 1999. Mr. Lasseter was Director of Toy Story and A Bug's Life and
currently is Director of Toy Story 2. In addition, he serves 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 Disney. For his work in directing Toy
Story, Mr. Lasseter received an Academy Award in 1996 for Special Achievement,
and
 
                                       29
<PAGE>   31
 
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 and
was promoted to Executive Vice President, Production in February 1999. Ms.
McArthur oversees all Pixar production teams and manages all aspects of making
the films. From 1989 to April 1997, Ms. McArthur worked at Disney, where she was
most recently Vice President of Production for Disney Feature 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.
 
                                       30
<PAGE>   32
 
                                    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>
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.............................................  $38       $20 1/4
  Second Quarter............................................  $65 5/8   $33 3/4
  Third Quarter.............................................  $66       $27 1/2
  Fourth Quarter............................................  $53 3/4   $31
1999
  First Quarter (through March 19, 1999)....................  $45 1/4   $35
</TABLE>
 
     As of March 19, 1999, Pixar had approximately 2,672 shareholders of record.
The price for the Common Stock as of the close of business on March 19, 1999 was
$41.75 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 January 2, 1999, the Company had used the net proceeds from the
offering as follows: $24,167,034 for construction of plant, building and
facilities, $12,650,029 for the purchase and installation of machinery and
equipment, $2,374,000 for the repayment of indebtedness, $79,784,138 for the
development of films and other animated products, $16,196,615 for working
capital and $4,489,470 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.
 
                                       31
<PAGE>   33
 
ITEM 6. SELECTED FINANCIAL DATA
 
     The information required by this item is incorporated by reference to the
section entitled "Selected Financial Data" in the 1998 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 1998 Annual Report to Shareholders.
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
     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 1998 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 1998
Annual Report to Shareholders.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE
 
     Not applicable.
 
                                       32
<PAGE>   34
 
                                    PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
 
DIRECTORS
 
     The members of Pixar's Board of Directors as of March 31, 1999 are as
follows:
 
<TABLE>
<CAPTION>
       NAME           AGE                  POSITION WITH PIXAR
       ----           ---                  -------------------
<S>                   <C>    <C>
Steve Jobs            44     Chairman, Chief Executive Officer and Office of
                             the President
Larry W. Sonsini      58     Director
Skip M. Brittenham    57     Director
Joseph A. Graziano    55     Director
Jill E. Barad         47     Director
</TABLE>
 
     Mr. Jobs is a co-founder of Pixar and has served as its Chairman since
March 1991, as its Chief Executive Officer since February 1986 and in the Office
of the President since February 1995. He has been a director of Pixar since
February 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.
 
     Mr. Sonsini has served as a director of Pixar since April 1995 and served
as Secretary from April 1995 to October 1995. He has been an attorney with the
law firm of Wilson Sonsini Goodrich & Rosati since 1966 and currently serves as
the Chairman of the firm's Executive Committee. Mr. Sonsini also serves as a
director of Lattice Semiconductor Corporation and Novell, Inc. Mr. Sonsini
received A.B. and L.L.B. degrees from the University of California, Berkeley.
 
     Mr. Brittenham has served as a director of Pixar since August 1995. He has
been an attorney with the law firm of Ziffren, Brittenham, Branca & Fischer, an
entertainment law firm, since 1978. Mr. Brittenham currently serves on the board
of, or is a trustee of, numerous charitable organizations, including
Conservation International, the American Oceans Campaign, the Environmental
Media Association and the Alternative Medical AIDS Foundation. Mr. Brittenham
received a B.S. from the United States Air Force Academy and a J.D. from the
University of California at Los Angeles.
 
     Mr. Graziano has served as a director of Pixar since August 1995. From June
1989 to December 1995, he was the Executive Vice President and Chief Financial
Officer of Apple and was a member of the Board of Directors of Apple from June
1993 until October 1995. From May 1987 to June 1989, Mr. Graziano served as
Chief Financial Officer of Sun Microsystems, Inc. and from October 1981 to May
1985 as Chief Financial Officer of Apple. In addition, he has held accounting
positions with various technology companies in the Silicon Valley. Mr. Graziano
also serves as a director of IntelliCorp, Inc., Carrier Access Corporation and
CIDCO Incorporated. Mr. Graziano received a B.S. in accounting from Merrimack
College and is a certified public accountant.
 
     Ms. Barad has served as a director of Pixar since July 1997. She has been
Chairman and Chief Executive Officer of Mattel, Inc. since October 1997. From
January 1997 to October 1997, she was President and Chief Executive Officer of
Mattel, Inc., and from July 1992 until December 1996, she was President and
Chief Operating Officer. Ms. Barad serves as a director of Mattel, Inc. and
Microsoft Corporation.
 
     In addition, Lawrence B. Levy and Edwin E. Catmull will become members of
Pixar's Board of Directors effective in April 1999. See the section entitled
"Executive Officers of Pixar" at the end of Part I of this Form 10-K.
 
                                       33
<PAGE>   35
 
EXECUTIVE OFFICERS
 
     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 Pixar" at the end of Part I of this Form 10-K.
 
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
 
     Section 16(a) of the Exchange Act ("Section 16(a)") requires Pixar's
executive officers, directors and persons who own more than ten percent of
Pixar's Common Stock, to file initial reports of ownership on Form 3 and changes
in ownership on Form 4 or Form 5 with the SEC and the National Association of
Securities Dealers, Inc. Such executive officers, directors and ten-percent
shareholders are also required by SEC rules to furnish Pixar with copies of all
such forms that they file.
 
     Based solely on its review of the copies of such forms received by Pixar
and written representations from certain reporting persons that no Forms 5 were
required for such persons, Pixar believes that during fiscal 1998 all Section
16(a) filing requirements applicable to its executive officers, directors and
ten-percent shareholders were complied with.
 
ITEM 11. EXECUTIVE COMPENSATION
 
SUMMARY COMPENSATION TABLE
 
     The following table shows, as to the Chief Executive Officer and each of
the four most highly compensated executive officers whose salary plus bonus
exceeded $100,000 during the last fiscal year (the "Named Officers"),
information concerning compensation paid for services to Pixar in all capacities
during the last three fiscal years.
 
<TABLE>
<CAPTION>
                                                                                     LONG TERM
                                                                                    COMPENSATION
                                                                                       AWARDS
                                                                                    ------------
                                                       ANNUAL COMPENSATION           SECURITIES
                                                 -------------------------------     UNDERLYING
         NAME AND PRINCIPAL POSITION             YEAR    SALARY($)     BONUS($)      OPTIONS(#)
         ---------------------------             ----    ---------    ----------    ------------
<S>                                              <C>     <C>          <C>           <C>
Steve Jobs                                       1998    $     50     $       --           --
  Chairman, Chief Executive Officer              1997          --             --           --
  and Office of the President                    1996          --             --           --
Edwin E. Catmull                                 1998     295,846             --           --
  Executive Vice President, Chief                1997     208,539             --           --
  Technical Officer and Office of the
     President                                   1996     198,512             --           --
Lawrence B. Levy                                 1998     295,846             --           --
  Executive Vice President, Chief Financial      1997     208,539             --           --
  Officer and Office of the President            1996     197,789             --           --
John Lasseter                                    1998     769,315        250,000           --
  Executive Vice President,                      1997     625,903      1,250,000      125,000
  Creative Development                           1996     256,203             --           --
Sarah McArthur(1)                                1998     300,000             --      200,000
  Executive Vice President, Production           1997     196,148             --      200,000
                                                 1996         N/A            N/A          N/A
</TABLE>
 
---------------
(1) Ms. McArthur joined Pixar in 1997.
 
                                       34
<PAGE>   36
 
OPTION GRANTS IN LAST FISCAL YEAR
 
     The following table shows, as to each of the Named Officers, information
concerning stock options granted during the fiscal year ended January 2, 1999.
 
                          OPTION GRANTS IN FISCAL 1998
 
<TABLE>
<CAPTION>
                             INDIVIDUAL GRANTS                                          POTENTIAL REALIZABLE VALUE
                   --------------------------------------                                 AT ASSUMED ANNUAL RATES
                                            % OF TOTAL                                  OF STOCK PRICE APPRECIATION
                   NUMBER OF SECURITIES   OPTIONS GRANTED                                   FOR OPTION TERM(4)
                        UNDERLYING        TO EMPLOYEES IN     EXERCISE     EXPIRATION   ---------------------------
      NAME          OPTIONS GRANTED(1)    FISCAL YEAR(2)    PRICE ($/SH)    DATE(3)          5%            10%
      ----         --------------------   ---------------   ------------   ----------   ------------   ------------
<S>                <C>                    <C>               <C>            <C>          <C>            <C>
Steve Jobs                    --                 --%           $   --            --      $       --     $       --
Edwin E. Catmull              --                 --                --            --              --             --
Lawrence B. Levy              --                 --                --            --              --             --
John Lasseter                 --                 --                --            --              --             --
Sarah McArthur           200,000(5)             6.2             21.38        1/9/08       2,688,525      6,813,249
</TABLE>
 
---------------
(1) All options in this table were granted under the 1995 Stock Plan and have
    exercise prices equal to the fair market value on the date of grant.
 
(2) Pixar granted options for 3,205,922 shares of Common Stock to employees in
    fiscal 1998.
 
(3) Options may terminate before their expiration upon the termination of
    optionee's status as an employee or consultant, the optionee's death or an
    acquisition of Pixar.
 
(4) The 5% and 10% assumed rates of appreciation are provided in accordance with
    rules of the SEC and do not represent Pixar's estimate or projection of the
    future Common Stock price. This table does not take into account any
    appreciation in the price of the Common Stock from the date of grant to
    date.
 
(5) These options are nonstatutory stock options which vest over a four-year
    period at the rate of one-fourth at the end of each year from the vesting
    start date.
 
OPTION EXERCISES AND HOLDINGS
 
     The following table sets forth, for each of the Named Officers, certain
information concerning stock options exercised during fiscal 1998, and the
number of shares subject to both exercisable and unexercisable stock options as
of January 2, 1999. Also reported are values for "in-the-money" options that
represent the positive spread between the respective exercise prices of
outstanding stock options and the fair market value of Pixar's Common Stock as
of January 2, 1999.
 
   AGGREGATED OPTION EXERCISES IN FISCAL 1998 AND FISCAL 1998 YEAR END OPTION
                                     VALUES
 
<TABLE>
<CAPTION>
                                                  NUMBER OF SECURITIES          VALUE OF UNEXERCISED
                                                 UNDERLYING UNEXERCISED         IN-THE-MONEY OPTIONS
                     SHARES                    OPTIONS AT FISCAL YEAR END     AT FISCAL YEAR END($)(1)
                   ACQUIRED ON      VALUE      ---------------------------   ---------------------------
      NAME         EXERCISE(#)   REALIZED($)   EXERCISABLE   UNEXERCISABLE   EXERCISABLE   UNEXERCISABLE
      ----         -----------   -----------   -----------   -------------   -----------   -------------
<S>                <C>           <C>           <C>           <C>             <C>           <C>
Steve Jobs                --     $        --          --             --      $        --    $       --
Edwin E. Catmull     340,000       9,508,250      66,667         83,333        2,320,012     2,899,988
Lawrence B. Levy     946,210      33,036,202     136,124         66,666        4,737,115     2,319,977
John Lasseter        405,000      15,272,813     498,959        151,041       16,565,982     4,313,393
Sarah McArthur        15,000         572,500      64,167        320,833        1,427,716     5,413,534
</TABLE>
 
---------------
(1) Market value of underlying securities based on the closing price of Pixar's
    Common Stock on December 31, 1998 (the last trading day of fiscal 1998) on
    the Nasdaq National Market of $35.00 minus the exercise price.
 
                                       35
<PAGE>   37
 
EMPLOYMENT AGREEMENTS
 
     In February 1997, Pixar entered into a new employment agreement with John
Lasseter that extends until February 23, 2004. Pursuant to the agreement, Mr.
Lasseter received a signing bonus of $1,250,000 and was granted additional stock
options to purchase 125,000 shares of Pixar's Common Stock which vest over four
years. The agreement provides for a current annual salary of $816,480 with 8%
annual increases. The agreement also provides for the payment of a bonus (the
"Motion Picture Bonus") based upon domestic theatrical box office gross receipts
from feature-length animated motion pictures ("Feature Films") directed by Mr.
Lasseter. Under the agreement, Mr. Lasseter will direct three Feature Films and
has the option to direct certain sequels to Feature Films he directed if Pixar
elects to produce such sequels within twelve years after the initial release of
the applicable picture. A Bug's Life counted as the first of the three feature
films Mr. Lasseter has agreed to produce. During the term of the agreement, Mr.
Lasseter is prohibited from accepting other employment and from becoming
financially interested or associated with any entity engaged in a related or
competitive business. Pixar can terminate the agreement at any time for any
reason. However, if Pixar terminates Mr. Lasseter's employment without cause,
Pixar must pay Mr. Lasseter (i) an amount equal to 75% of the balance of the
salary Mr. Lasseter would have earned through the remainder of the term of the
agreement and (ii) any portion of the Motion Picture Bonus as and if due. In
addition, the vesting of Mr. Lasseter's stock options would accelerate so that
they would be exercisable in full and Mr. Lasseter could accept employment with
any third party.
 
DIRECTOR COMPENSATION
 
     Directors who are not employees of Pixar receive a fee of $1,000 for each
meeting attended of the Board of Directors and a fee of $1,000 for each meeting
attended of a committee of the Board of Directors if such committee meeting is
not held in conjunction with a meeting of the Board of Directors. All directors
are reimbursed for expenses incurred in attending such meetings.
 
     Non-employee directors are eligible to receive option grants pursuant to
Pixar's 1995 Director Option Plan (the "Director Plan") which was adopted by the
Board of Directors in October 1995, approved by the shareholders in November
1995 and took effect in November 1995. A total of 200,000 shares of Common Stock
has been reserved for issuance under the Director Plan. As of March 19, 1999,
there were 60,000 options outstanding under the Director Plan. The Director Plan
provides for an automatic grant of an option to purchase 30,000 shares of Common
Stock (the "First Option") to each non-employee director who first becomes a
non-employee director (other than an employee director who ceases to be an
employee but remains a director) after the effective date of the Director Plan
on the date on which such person first becomes a non-employee director.
Beginning on the third anniversary of the date he or she became an outside
director, each nonemployee director will automatically be granted an option to
purchase 10,000 shares of Common Stock (a "Subsequent Option") each year on the
date of such anniversary, provided he or she is then a non-employee director.
Each nonemployee director will be eligible to receive a Subsequent Option,
regardless of whether such non-employee director was eligible to receive a First
Option. First Options and each Subsequent Option will have a term of ten years.
One-third of the shares subject to a First Option will vest one year after its
date of grant and an additional one-third will vest at the end of each year
thereafter, provided that the optionee continues to serve as a director on such
dates. All of the shares subject to a Subsequent Option will vest one year after
the date of the option grant, provided that the optionee continues to serve as a
director on such date. The exercise prices of the First Option and each
Subsequent Option will be 100% of the fair market value per share of Pixar's
Common Stock on the date of the grant of the option. Ms. Barad was granted a
First Option in July 1997 at an exercise price of $15.125 per share. Mr. Sonsini
was granted a Subsequent Option in April 1998 at an exercise price of $43.50 per
share. Messrs. Brittenham and Graziano were each granted a Subsequent Option in
August 1998 at an exercise price of $30.75 per share. Ms. Barad will be eligible
for a Subsequent Option under the Director Plan on the third anniversary of the
date she became a director and Messrs. Sonsini, Brittenham and Graziano are
eligible for Subsequent Options each year on the anniversary of the dates they
became directors.
 
                                       36
<PAGE>   38
 
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
     Pixar's Compensation Committee is currently composed of Ms. Barad and Mr.
Graziano. No interlocking relationship exists between any member of Pixar's
Board of Directors or Compensation Committee and any member of the Board of
Directors or compensation committee of any other company, nor has any such
interlocking relationship existed in the past. No member of the Compensation
Committee is or was formerly an officer or an employee of Pixar.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The following table sets forth the beneficial ownership of Common Stock of
Pixar as of March 19, 1999 for the following: (i) each person who is known by
Pixar to own beneficially more than 5% of the outstanding shares of Pixar's
Common Stock; (ii) each of Pixar's directors; (iii) each of the Named Officers;
and (iv) all directors and executive officers of Pixar as a group.
 
<TABLE>
<CAPTION>
                                                       NUMBER OF       PERCENT
              NAME OF BENEFICIAL OWNER                 SHARES(1)     OF TOTAL(1)
              ------------------------                 ----------    -----------
<S>                                                    <C>           <C>
Steve Jobs                                             30,000,001       65.8%
c/o Pixar
1001 West Cutting Boulevard
Richmond, CA 94804
Transamerica Corporation(2)                             3,432,900        7.5
600 Montgomery Street
San Francisco, CA 94111
Disney Enterprises, Inc.(3)                             2,500,100        5.3
500 South Buena Vista Street
Burbank, CA 91521
John Lasseter(4)                                        1,084,708        2.3
Edwin E. Catmull(5)                                       612,800        1.3
Lawrence B. Levy(6)                                       733,800        1.6
Sarah McArthur(7)                                          85,000          *
Larry W. Sonsini(8)                                        14,528          *
Skip M. Brittenham(9)                                      30,000          *
Joseph A. Graziano(10)                                     30,000          *
Jill E. Barad(11)                                          10,800          *
All directors and executive officers as a group (9
  persons)(12)                                         32,601,637       70.0
</TABLE>
 
---------------
  *  Represents less than 1% of the total.
 
 (1) Based on shares outstanding on March 19, 1999. The number and percentage of
     shares beneficially owned is determined under rules of the Securities and
     Exchange Commission ("SEC"), and the information is not necessarily
     indicative of beneficial ownership for any other purpose. Under such rules,
     beneficial ownership includes any shares as to which the individual has
     sole or shared voting power or investment power and also any shares which
     the individual has the right to acquire within sixty days of March 19, 1999
     through the exercise of any stock option or other right. Unless otherwise
     indicated in the footnotes, each person has sole voting and investment
     power (or shares such powers with his or her spouse) with respect to the
     shares shown as beneficially owned.
 
 (2) As indicated in the Schedule 13G/A filed by Transamerica Corporation
     pursuant to the Exchange Act on February 16, 1999. Includes 3,091,900
     shares owned by direct and indirect subsidiaries of Transamerica
     Corporation.
 
 (3) As indicated in the Schedule 13D filed by Disney Enterprises, Inc. pursuant
     to the Exchange Act on April 18, 1997. Includes 1,500,000 shares issuable
     upon exercise of warrants.
 
 (4) Includes 532,708 shares subject to options that are exercisable within 60
     days of March 19, 1999.
 
 (5) Includes 66,667 shares subject to options that are exercisable within 60
     days of March 19, 1999.
                                       37
<PAGE>   39
 
 (6) Includes 202,790 shares subject to options that are exercisable within 60
     days of March 19, 1999.
 
 (7) Includes 85,000 shares subject to options that are exercisable within 60
     days of March 19, 1999.
 
 (8) Includes 10,000 shares subject to options that are exercisable within 60
     days of March 19, 1999.
 
 (9) Includes 30,000 shares subject to options that are exercisable within 60
     days of March 19, 1999.
 
(10) Includes 30,000 shares subject to options that are exercisable within 60
     days of March 19, 1999.
 
(11) Includes 10,000 shares subject to options that are exercisable within 60
     days of March 19, 1999.
 
(12) Includes 967,165 shares subject to options that are exercisable within 60
     days of March 19, 1999.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     Pixar has engaged the law firm of Ziffren, Brittenham, Branca & Fischer
("ZBB&F") to handle certain matters. Skip M. Brittenham, a director of Pixar, is
a senior partner of the firm. Pixar has also engaged the law firm of Wilson
Sonsini Goodrich & Rosati ("WSGR") to handle certain legal matters. Larry W.
Sonsini, a director of Pixar, is a member of the firm. Payments by Pixar to each
of ZBB&F and WSGR did not exceed five percent of either law firm's respective
gross revenues in the last fiscal year of either such firm.
 
     Pixar believes that all of the transactions set forth above were made on
terms no less favorable to Pixar than could have been obtained from unaffiliated
third parties. All future transactions, including loans, between Pixar and its
officers, directors and principal shareholders and their affiliates will be
approved by a majority of the Board of Directors, including a majority of the
independent and disinterested directors of the Board of Directors, and will be
on terms no less favorable to Pixar than could be obtained from unaffiliated
third parties.
 
                                       38
<PAGE>   40
 
                                    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:
 
<TABLE>
    <S>  <C>                                                           <C>
    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 1998
         Annual Report to Shareholders filed as Exhibit 13.1 to this
         Form 10-K:
         Independent Auditors' Report................................
         Balance Sheets as of December 31, 1997 and January 2,
         1999........................................................
         Statements of Operations for the years ended December 31,
         1996, December 31, 1997 and January 2, 1999.................
         Statements of Shareholders' Equity for the years December
         31, 1996, December 31, 1997 and January 2, 1999.............
         Statements of Cash Flows for the years December 31, 1996,
         December 31, 1997 and January 2, 1999.......................
         Notes to Financial Statements...............................
    2.   Financial Statement Schedule. The following financial
         statement schedule of Pixar for the years ended December 31,
         1996, December 31, 1997 and January 2, 1999 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.
         Independent Auditors' Report on Financial Statement
         Schedule....................................................  S-1
         Schedule II -- Valuation and Qualifying Accounts............  S-2
         Schedules not listed above have been omitted since they are
         either not required, not applicable, or the information is
         otherwise included.
    3.   Exhibits: See Item 14(c) below.
</TABLE>
 
(b) Reports on Form 8-K. No Reports on Form 8-K were filed during the fourth
    quarter ended January 2, 1999.
 
(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.
 
                                       39
<PAGE>   41
 
                                   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, 1999.
 
                                          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 Steve 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/ STEVE JOBS                      Chairman of the Board and Chief  March 31, 1999
-----------------------------------------------------         Executive Officer
                     Steve Jobs                         (Principal Executive Officer)
 
                /s/ LAWRENCE B. LEVY                    Executive Vice President and    March 31, 1999
-----------------------------------------------------      Chief Financial Officer
                  Lawrence B. Levy                        (Principal Financial and
                                                             Accounting Officer)
 
                  /s/ JILL E. BARAD                               Director              March 31, 1999
-----------------------------------------------------
                    Jill E. Barad
 
               /s/ SKIP M. BRITTENHAM                             Director              March 31, 1999
-----------------------------------------------------
                 Skip M. Brittenham
 
               /s/ JOSEPH A. GRAZIANO                             Director              March 31, 1999
-----------------------------------------------------
                 Joseph A. Graziano
 
                /s/ LARRY W. SONSINI                              Director              March 31, 1999
-----------------------------------------------------
                  Larry W. Sonsini
</TABLE>
 
                                       40
<PAGE>   42
 
          INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
 
The Board of Directors and Shareholders
Pixar:
 
     Under date of January 29, 1999, we reported on the balance sheets of Pixar
as of December 31, 1997 and January 2, 1999, and the related statements of
operations, shareholders' equity, and cash flows for each of the years in the
three-year period ended January 2, 1999, which are incorporated by reference in
the 1998 annual report on Form 10-K. In connection with our audits of the
aforementioned financial statements, we also audited the related financial
statement schedule included herein. This financial statement schedule is the
responsibility of Pixar's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.
 
     In our opinion, such financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
 
                                          /s/ KPMG LLP
 
San Francisco, California
January 29, 1999
 
                                       S-1
<PAGE>   43
 
                                     PIXAR
 
                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                 BALANCE AT                 DEDUCTIONS:
                                                 BEGINNING                  WRITE OFFS     BALANCE AT
                CLASSIFICATION                    OF YEAR      ADDITIONS    OF ACCOUNTS    END OF YEAR
                --------------                   ----------    ---------    -----------    -----------
<S>                                              <C>           <C>          <C>            <C>
Allowance for returns and doubtful accounts
  Year ended December 31, 1996.................     $256         $  3          $  --          $259
                                                    ====         ====          =====          ====
  Year ended December 31, 1997.................     $259         $100          $(102)         $257
                                                    ====         ====          =====          ====
  Year ended January 2, 1999...................     $257         $ --          $ (28)         $229
                                                    ====         ====          =====          ====
</TABLE>
 
                                       S-2
<PAGE>   44
 
                               INDEX TO EXHIBITS
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                              EXHIBITS
-------                             --------
<S>       <C>                                                           <C>
 3.1      Amended and Restated Articles of Incorporation (which is
          incorporated herein by reference to Exhibit 3.3 to the
          Registrant's Form S-1 Registration Statement No.
          33-97918)...................................................
 3.4      Amended and Restated Bylaws, as amended (which is
          incorporated herein by reference to Exhibit 3.4 to the
          Registrant's Quarterly Report on Form 10-Q for the quarter
          ended June 30, 1997.........................................
 4.1      See Exhibit 3.1.............................................
 4.2      See Exhibit 3.4.............................................
 4.5      Specimen Common Stock Certificate (which is incorporated
          herein by reference to Exhibit 4.5 to the Registrant's Form
          S-1 Registration Statement No. 33-97918)....................
 4.6      Common Stock and Warrant Purchase Agreement between the
          Registrant and Disney Enterprises, Inc. dated as of February
          23, 1997 (which is incorporated herein by reference to
          Exhibit 4.6 to the Registrant's Annual Report on Form 10-K
          for the year ended December 31, 1996).......................
 4.7      Form of Common Stock Purchase Warrant to be issued to Disney
          Enterprises, Inc. (which is incorporated herein by reference
          to Exhibit 4.7 to the Registrant's Annual Report on Form
          10-K for the year ended December 31, 1996)..................
 4.8      Form of Registration Rights Agreement by and between the
          Registrant and Disney Enterprises, Inc. (which is
          incorporated herein by reference to Exhibit 4.8 to the
          Registrant's Annual Report on Form 10-K for the year ended
          December 31, 1996)..........................................
10.1*     1995 Stock Plan, as amended (which is incorporated herein by
          reference to Exhibit 10.1 to the Registrant's Quarterly
          Report on Form 10-Q for the quarter ended June 27, 1998)....
10.2*     1995 Director Option Plan (which is incorporated herein by
          reference to Exhibit 10.2 to the Registrant's Form S-1
          Registration Statement No. 33-97918)........................
10.3*     Form of Indemnification Agreement entered into between the
          Registrant and each of the executive officers and directors
          (which is incorporated herein by reference to Exhibit 10.3
          to the Registrant's Form S-1 Registration Statement No.
          33-97918)...................................................
10.4      Agreement between the Registrant and Walt Disney Pictures
          dated May 3, 1991, as amended (which is incorporated herein
          by reference to Exhibit 10.4 to the Registrant's Form S-1
          Registration Statement No. 33-97918)(1).....................
10.5      Net Office Lease between the Registrant and Point Richmond
          R&D Associates dated February 15, 1990, as amended (which is
          incorporated herein by reference to Exhibit 10.5 to the
          Registrant's Form S-1 Registration Statement No.
          33-97918)...................................................
10.6      Patent License Agreement between the Registrant and
          Microsoft Corporation dated June 21, 1995 (which is
          incorporated herein by reference to Exhibit 10.7 to the
          Registrant's Form S-1 Registration Statement No.
          33-97918.(1)................................................
10.7*     Employment Agreement between the Registrant and John
          Lasseter dated February 24, 1997 (which is incorporated
          herein by reference to Exhibit 10.10 to the Registrant's
          Annual Report on Form 10-K for the year ended December 31,
          1996).(1)...................................................
10.8      Patent License Agreement between the Registrant and Silicon
          Graphics, Inc. dated March 12, 1996 (which is incorporated
          herein by reference to Exhibit 10.14 to the Registrant's
          Annual Report on Form 10-K for the year ended December 31,
          1995).......................................................
10.9      Net Office Lease between the Registrant and Point Richmond
          R&D Associates dated November 7, 1995 (which is incorporated
          herein by reference to Exhibit 10.15 to the Registrant's
          Annual Report on Form 10-K for the year ended December 31,
          1995).......................................................
</TABLE>
<PAGE>   45
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                              EXHIBITS
-------                             --------
<S>       <C>                                                           <C>
10.10     Co-Production Agreement between the Registrant and Walt
          Disney Pictures and Television dated February 24, 1997
          (which is incorporated herein by reference to Exhibit 10.16
          to the Registrant's Annual Report on Form 10-K for the year
          ended December 31, 1996).(1)................................
10.11     Net Office Lease between the Registrant and Point Richmond
          R&D Associates dated April 1, 1996 (which is incorporated
          herein by reference to Exhibit 10.16 to the Registrant's
          Quarterly Report on Form 10-Q for the quarter ended
          September 30, 1996).........................................
10.12     Net Office Lease between the Registrant and Point Richmond
          R&D Associates dated September 12, 1996 (which is
          incorporated herein by reference to Exhibit 10.17 to the
          Registrant's Quarterly Report on Form 10-Q for the quarter
          ended September 30, 1996)...................................
10.13     Agreement of Purchase and Sale between the Registrant and
          Del Monte Corporation dated as of September 6, 1996, as
          amended (which is incorporated herein by reference to
          Exhibit 10.19 to the Registrant's Quarterly Report on Form
          10-Q for the quarter ended June 30, 1997)...................
10.14     Amendment to the September 12, 1996 Net Office Lease between
          the Registrant and Point Richmond R&D Associates dated as of
          May 8, 1997 (which is incorporated herein by reference to
          Exhibit 10.17 to the Registrant's Annual Report on Form 10-K
          for the year ended December 31, 1997).......................
10.15     Net Office Lease between the Registrant and Point Richmond
          R&D Associates dated January 11, 1999.......................
13.1      Portions of the Annual Report to Shareholders for the fiscal
          year ended January 2, 1999, expressly incorporated by
          reference herein............................................
23.1      Consent of Independent Auditors.............................
27.1      Financial Data Schedule.....................................
</TABLE>
 
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(1) Documents for which confidential treatment has been granted for certain
    portions of these exhibits.
 
 *  Indicates management compensatory plan, contract or arrangement.