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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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Form 10-K



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

For the fiscal year ended December 28,
2002

Commission File Number 0-26976



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Pixar

(Exact name of registrant as specified in its
charter)


|                                                                                         |  |                                         
|---------------------------------------------------------------------------------------- |  | ----------------------------------------
|California                                                                               |  | 68-0086179                              
|(State or other jurisdiction of
    incorporation or organization)                       |  | (I.R.S. Employer
    Identification No.)
|                                                                                        
|1200 Park Avenue,
    Emeryville, California(Address of principal executive
    offices) |  | 94608(Zip Code)                         

Registrants telephone number, including
area code:

(510) 752-3000




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

None


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

Common Stock, no par value per share


(Title of Class)


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

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

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

As of June 29, 2002, the last day of the
Registrants most recently completed second fiscal quarter,
there were 50,175,152 shares of the Registrants
Common Stock outstanding, and the aggregate market value of such
shares held by non-affiliates of the Registrant (based on the
closing sale price of such shares on the Nasdaq National Market
on June 28, 2002) was approximately $497 million.
Shares of the Registrants Common Stock held by each
executive officer and director and by each entity that owns 5%
or more of the Registrants outstanding Common Stock 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.

As of March 4, 2003, there were
53,180,410 shares of the Registrants Common Stock
outstanding.



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TABLE OF CONTENTS



|                  |                                                                                                        |  |  |  |  |  |  | 
|----------------- | ------------------------------------------------------------------------------------------------------ |  |  |  |  |  |  | 
|PART I           
|                  | Item 1. Business                                                                                      
|                  | Item 2. Properties                                                                                    
|                  | Item 3. Legal Proceedings                                                                             
|                  | Item 4. Submission of Matters to a Vote of Security Holders                                           
|PART II          
|                  | Item 5. Market for Registrants Common Stock and Related Shareholder Matters                          
|                  | Item 6. Selected Financial Data                                                                       
|                  | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations         
|                  | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                                   
|                  | Item 8. Financial Statements and Supplementary Data                                                   
|                  | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure          
|PART III         
|                  | Item 10. Directors and Executive Officers of the Company                                              
|                  | Item 11. Executive Compensation                                                                       
|                  | Item 12. Security Ownership of Certain Beneficial Owners and Management andRelated Shareholder Matters
|                  | Item 13. Certain Relationships and Related Transactions                                               
|                  | Item 14. Controls and Procedures                                                                      
|PART IV          
|                  | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                              
|SIGNATURES       
|CERTIFICATIONS   
|INDEX TO EXHIBITS
|EXHIBIT 10.2     
|EXHIBIT 23.1     
|EXHIBIT 99.1     



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TABLE OF CONTENTS

|               |  |                                                                                                    |    |      |    | 
|-------------- |  | -------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|               |  |                                                                                                    |    | Page
|               |  |                                                                                                    |    |     
|PART I        
|Item 1.        |  | Business                                                                                           |    |      | 2  | 
|               |  | Risk Factors                                                                                       |    |      | 16 | 
|Item 2.        |  | Properties                                                                                         |    |      | 30 | 
|Item 3.        |  | Legal Proceedings                                                                                  |    |      | 30 | 
|Item 4.        |  | Submission of Matters to a Vote of Security
    Holders                                            |    |      | 30 | 
|               |  | Executive Officers of the Company                                                                  |    |      | 31 | 
|PART II       
|Item 5.        |  | Market for Registrants Common Stock and
    Related Shareholder Matters                           |    |      | 32 | 
|Item 6.        |  | Selected Financial Data                                                                            |    |      | 33 | 
|Item 7.        |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations          |    |      | 33 | 
|Item 7A.       |  | Quantitative and Qualitative Disclosures About
    Market Risk                                     |    |      | 41 | 
|Item 8.        |  | Financial Statements and Supplementary Data                                                        |    |      | 42 | 
|Item 9.        |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure           |    |      | 42 | 
|PART III      
|Item 10.       |  | Directors and Executive Officers of the Company                                                    |    |      | 42 | 
|Item 11.       |  | Executive Compensation                                                                             |    |      | 44 | 
|Item 12.       |  | Security Ownership of Certain Beneficial Owners
    and Management and Related Shareholder Matters |    |      | 47 | 
|Item 13.       |  | Certain Relationships and Related Transactions                                                     |    |      | 48 | 
|Item 14.       |  | Controls and Procedures                                                                            |    |      | 48 | 
|PART IV       
|Item 15.       |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                                |    |      | 49 | 
|Signatures     |  |                                                                                                    | 73 |     
|Certifications |  |                                                                                                    | 75 |     

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This Annual Report on Form 10-K contains
forward-looking statements that have been made pursuant to the
provisions of the Private Securities Litigation Reform Act of
1995, particularly statements referencing the targeted release
dates of our feature films, our anticipated revenues and
operating expenses, and our expectations regarding any future
distribution agreement we may enter into. In some cases,
forward-looking statements can be identified by the use of words
such as anticipates, expects,
intends, plans, believes,
seeks, estimates, is scheduled
for, targeted, and variations of such words
and similar expressions. Such forward-looking statements are
based on current expectations, estimates and projections about
our industry and managements beliefs and assumptions.
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 16 through 30. Particular attention
should be paid to the cautionary language in Risk Factors
 To meet our fiscal 2003 earnings projections,
we are dependent on our feature films and the accuracy of our
forecasts,  Our operating results have
fluctuated in the past, and we expect such fluctuations to
continue,  Our scheduled successive
releases of feature films will continue to place a significant
strain on our resources, and  The
Co-Production Agreement imposes several risks and restrictions
on us. Unless required by law, we undertake no obligation
to update publicly any forward-looking statements, whether as a
result of new information, future events or otherwise.




PART I






|        |         
|------- | --------
|Item 1. | Business

General

Pixar was formed in 1986 when Steve Jobs
purchased the computer division of Lucasfilm and incorporated it
as a separate company. We are a leading digital animation studio
with the creative, technical and production capabilities to
create a new generation of animated feature films and related
products. Our objective is to create, develop and produce
computer-animated feature films with heartwarming stories and
memorable characters that appeal to audiences of all ages.
Through the creation of entertaining, enduring and successful
films, we seek to maintain our position as a leading brand in
animated feature films. To date, we have created and produced
four full-length animated feature films, Toy Story, A
Bugs Life, Toy Story 2,and Monsters, Inc.,
which were marketed and distributed by The Walt Disney Company
(along with its subsidiaries hereinafter referred to as
Disney). Our films had combined worldwide box office
receipts of more than $1.7 billion and hold four positions
in the top nine grossing animated films of all time. Toy
Storywas released in 1995 and generated over
$362 million in worldwide box office revenue. Our second
animated feature film, A Bugs Life, was released in
1998 and generated over $363 million in worldwide box
office revenue. Our third film, Toy Story 2, was released
in 1999 and generated over $485 million in worldwide box
office revenue. Our fourth and latest animated feature film,
Monsters, Inc., was released in November 2001 and
generated over $524 million in worldwide box office
revenue, making it the second highest grossing animated feature
film of all time and the fourth highest grossing film released
in 2001. Our fifth animated feature film, Finding Nemo,
is scheduled for domestic theatrical release on May 30,
2003.

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

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The term of the Co-Production Agreement continues
until delivery to Disney of our fifth Picture, Cars,
which is currently targeted for a 2005 holiday release. We may,
however, enter into another distribution agreement with any
third party after the delivery of our third Picture, Finding
Nemo, which is expected to occur prior to May 30, 2003.
We have produced four tremendously successful films to date, and
we believe that this success combined with the strength of our
financial resources position us to negotiate an arrangement with
more favorable economic terms. Although we look forward to a
more favorable agreement for films released after Cars,
such an agreement may also increase our risks. See
 Relationship with Disney and Risk
Factors  We face various distribution risks with
respect to our feature films.

Our principal executive offices are located at
1200 Park Avenue, Emeryville, California 94608. Our telephone
number is (510) 752-3000, and our Internet home page is
located at www.pixar.com; however, the information in, or that
can be accessed through, our home page is not part of this
report. Our annual reports on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K, and
amendments to such reports are available, free of charge, on our
Internet home page as soon as reasonably practicable after we
electronically file such material with, or furnish it to the SEC.

Business Model and Products

Our goal is to maintain our position as a leading
brand in family entertainment through the development and
production of high quality animated films and related products,
such as video products, toys, interactive games, and other
merchandise. A critical part of our strategy to achieve our
position as a leading brand was to secure strong marketing and
distribution of our films. Consequently, we entered into the
Co-Production Agreement with Disney, which has allowed us to
leverage off Disneys marketing expertise and substantial
distribution infrastructure to market and distribute our
co-branded feature films and related products.

Animated Feature Films.Our first animated feature film,
Toy Story, was released in November 1995. In November
1998, we released A Bugs Life, our second animated
feature film with Disney. A Bugs Lifewas the first
of the Pictures to be developed and distributed under our
Co-Production Agreement with Disney. In November 1999, we
released Toy Story 2, the theatrical sequel to Toy
Storyand our third animated feature film produced for
distribution by Disney. While not counting as one of the five
original Pictures, Toy Story 2is subject to the same
terms as the five Pictures developed and produced under the
Co-Production Agreement. In November 2001, we released
Monsters, Inc., our second Picture under the
Co-Production Agreement. Finding Nemo, our third Picture
under the Co-Production Agreement, is scheduled for its domestic
theatrical release on May 30, 2003.

We intend to continue to develop original
computer-animated feature films for the family entertainment
market. We are currently in various stages of production on
three other original animated feature films: The Incredibles,
Carsand our first feature film produced outside of our
existing Disney relationship (Project 2006). The
Incrediblesand Carswill be produced and distributed
under the Co-Production Agreement and will count as the
remaining two films of the original five Pictures to be produced
under the Co-Production Agreement. Brad Bird, who previously
directed and wrote the screenplay of the critically acclaimed
animated feature The Iron Giant, is currently working on
The Incredibles, which is targeted for a 2004 holiday
release. John Lasseter, the Director of Toy Story, A
Bugs Life, and Toy Story 2, and Executive
Producer for Monsters, Inc. and Finding Nemo, is
currently directing Cars, which is targeted for a 2005
holiday release. Project 2006 was approved for production in
February 2003 and is currently targeted for a 2006 release. See
Risk Factors  Our scheduled successive releases
of feature films will continue to place a significant strain on
our resources.

Home Videos.Home
video sales, including VHS and DVD formats, continue to be among
the largest contributors to lifetime revenues of our films. With
the increasing popularity of the DVD format, more homes are
creating DVD libraries, and we believe that DVD adoption will
continue to increase. The increasing popularity of the DVD
format is one factor that contributed to the tremendous success
of the Monsters, Inc. domestic home video release,
eventually making Monsters, Inc.the best selling home
video of 2002 with sales of 20 million units in the U.S.
(11.4 million DVD units and 8.6 million VHS units).
Monsters, Inc. home video was released in the U.S. on
September 17, 2002 in both VHS and a 2-Disc Special Edition
DVD. Both

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versions included the Oscar® winning Pixar
short film, For the Birds, as well as our new animated
short, Mikes New Car, which has been nominated for
a 2002 Oscar® for Best Animated Short Film.


We expect DVD penetration to continue to have a
favorable impact on the sales of our titles on home video,
especially in many foreign territories where the DVD adoption
rate has lagged behind that of the U.S. As of the end of the
fourth quarter of 2002, we had recognized 10.4 million
units sold in the foreign market (3.7 million DVD units and
6.7 million VHS units) for Monsters, Inc.As of the
end of 2002, we have recognized Monsters, Inc.home video
net sales of 30.4 million units of DVD and VHS worldwide.
As more consumers worldwide build their DVD film libraries, we
expect to see not only a shift in the DVD/ VHS ratio toward DVD,
but also an increase in the overall sales of home videos. We
believe increasing worldwide penetration of DVDs will favorably
benefit the release of our new titles on home video as well as
potentially create incremental sales of our existing titles.

Disney initially released Toy Storyon
home video in the VHS format in October 1996. In April 1999,
A Bugs Lifewas released on home video in VHS and
DVD formats. As part of Disneys domestic home video
strategy to reinvigorate sales, Disney re-released Toy Story(in VHS format only) and A Bugs Life(in both
VHS and DVD format) as part of their Gold Collection in January
2000 and August 2000, respectively. In October 2000, Disney
released Toy Story 2in VHS and DVD formats. The Toy
Story 2DVD release occurred simultaneously with the Toy
StoryDVD release as both films were packaged into a 2-disc
pack and a 3-disk Ultimate Toy Box Collectors
Edition, which includes a third disk with behind-the-scenes
footage and additional supplemental materials. Distribution of
home video versions of the animated feature films developed and
produced under the Co-Production Agreement is governed by the
Co-Production Agreement.

We continue to explore opportunities to maximize
the home video sales of our library titles. For example, both
Toy Storyand Toy Story 2are planned to go on a
moratorium beginning May 1, 2003. This strategy is designed
to boost sales volume prior to the moratorium and support a
higher sales price upon re-entry into the market in future
periods. In the past, this strategy has been effective for other
Disney titles; however, we anticipate a shorter moratorium
period for Pixar titles.

Television.The
television market for our feature films generally follows the
theatrical and home video release. Toy Storyaired on ABC
in 1997 to kick off ABCs Wonderful World of
Disney. It also aired on The Disney Channel for several
months following its television debut on ABC. In October 2000,
A Bugs Lifebecame the first major animated title
distributed by Disney to air on Pay-Per-View. Toy Story 2began its Pay-Per-View window in March 2001. We also broke
ground in 2001 in the television market with the licensing of
Toy Story, A Bugs Lifeand Toy Story 2in
the domestic network market and in the international broadcast
and premium television markets. Monsters, Inc.was made
available to Pay-Per-View during the latter half of 2002.
Monsters, Inc.made its pay television debut on Starz!/
Encore in March 2003, the first time a Pixar title has been
licensed to a premium cable network. We expect Monsters,
Inc., Finding Nemo, The Incrediblesand Carsto be
sold to all television windows, including Pay-Per-View, pay
television and network television. Distribution of television
rights for the animated feature films developed and produced
under the Co-Production Agreement are governed by the
Co-Production Agreement.

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

Short Films.Producing short films allows us to
develop creative talent and computer animation technology. We
have produced a number of short films since our inception and
plan to continue to invest in developing new short films. For
example, in 1997 we created and produced a short film titled
Geris Game, which enabled us to further our
technology in computer-generated skin and cloth. In 2000, we
created and produced a short film titled For the Birds,
which enabled us to further our technology in computer-generated
fur and feathers. The acclaimed John Lasseter-directed Pixar
short, Knick Knack,will accompany Finding Nemoin
theaters.

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RenderMan®. We
have been selling our RenderMan® software for nearly
fifteen years. RenderMan® has helped visual effects studios
create visual effects in nearly 100 films. Of the last 35 films
nominated to receive an Academy Award® for visual effects,
32 have used RenderMan®. RenderMan® runs on three
popular platforms: IRIX, Linux and Windows. Examples of
RenderMan® customers include movie and special effects
studios such as Disney, Lucasfilm Ltd. through its affiliate
Industrial Light and Magic (ILM), Sony Pictures
Imageworks and Dreamworks SKG. RenderMan® is also used in
television broadcasting. Customers also include government
agencies and universities around the world. See 
Technology  RenderMan® and
Managements Discussion and Analysis of Financial
Condition and Results of Operations.

Computer Animation Process

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

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

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

Creative Development



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

Pre-Production



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 a story reel, a process that enables editing of
the film before the production phase begins. Voices are then
selected, recorded and added to the story reel. Animated
dioramas, which are test sequences to prove that the major
technical issues in creating the film have been addressed, are
also created in pre-production. Throughout the creative
development and pre-production processes, plans are developed
for the style, colors and look of the film.

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Production



Our production stage consists of six phases:
modeling and rigging, 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 rigs, the sets of animation controls that allow the model
to be moved or animated. In some cases, a digitized 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 by
changing the animation controls over time 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 digital image is then sent to our
PixarVision® laser recorders to be printed onto film. While
film is the primary means of distributing motion pictures to
theaters, digital electronic projectors have achieved the
brightness and high resolution necessary to project movies on
theater screens without the use of film. As our films are
produced digitally, they are uniquely suited to this method of
presentation. Toy Story 2was shown digitally in
12 theaters worldwide, making it the first completely
computer-animated feature film to be shown digitally.
Monsters, Inc. was shown digitally in 37 theaters
worldwide, and we expect that Finding Nemowill be shown
even more widely on the worlds 159 digital screens.

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

Creative Group

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

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2002, Monsters, Inc.was nominated for
four Academy Awards® including Best Animated Feature
Film, Best Song, Best Original Scoreand Best Sound
Editingand received the Academy Award® for Best
Song. Our short film For the Birdswon an Academy
Award® for Best Animated Short Filmin 2001 and our
latest short film, Mikes New Car, was nominated for
an Oscar® in 2002 for Best Animated Short Film.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.


John Lasseter is Executive Vice President,
Creative and the senior creative officer at Pixar.
Mr. Lasseter is an Academy Award®-winning director and
animator, the Director of Toy Story, A Bugs Life,and Toy Story 2and Executive Producer for
Monsters, Inc.and Finding Nemo.Other directors
working with Mr. Lasseter include Andrew Stanton, Brad Bird
and Pete Docter. Finding Nemo, scheduled for release on
May 30, 2003, is written and directed by Academy
Award®-nominee Andrew Stanton, who served as co-director
and co-screenwriter of A Bugs Lifeand was
co-screenwriter of Toy Story, Toy Story 2,and
Monsters, Inc.Brad Bird previously directed and wrote
the screenplay of the critically acclaimed animated feature,
The Iron Giant, and is currently working on The
Incredibles, which is targeted for a 2004 holiday release.
Also working with Mr. Lasseter is Pete Docter, the Director
of Monsters, Inc.and Academy Award®-nominee for his
role in creating the original story for Toy Story.
Mr. Docter is working on our projects beyond Project 2006.

Under each director is a strong creative team
consisting of highly skilled story artists, animators and other
artists trained in the art of animation, especially
computer-animation. The story department is responsible for a
projects concept, treatment, outline, script, story boards
and story reels. The art department is responsible for the
visual development of a project, including the design of
characters, sets, color, textures, shading and lighting.
Animators are responsible for bringing the characters to life.
It is also common for creative contributions to come from the
technical group. Our research and development department is
responsible for creating and further advancing our distinctive
computer animated visual effects, such as the moving fur in
Monsters, Inc.or the underwater murk in our
upcoming film, Finding Nemo.Our proprietary software
tools enable artists unfamiliar with computers to quickly become
skilled in the art of three-dimensional animation. All groups
work closely together in an iterative process. We have a
cooperative working environment and a non-hierarchical culture
whereby each member of the creative team, regardless of position
or department, considers the ideas of any other member of the
team. See Risk Factors  Our success depends on
certain key employees.

The success of each animated film developed and
produced by us depends in large part upon our ability to produce
the type of content that will appeal to a broad audience and to
develop compelling stories and characters. Traditionally, this
process has been extremely difficult. While we have enjoyed box
office success with Toy Story, A Bugs Life, Toy Story
2, and Monsters, Inc., there can be no assurance that
similar levels of success will be achieved by our subsequent
films, including Finding Nemo, The Incredibles, and
Cars. In addition, there can be no assurance that voices
and other intellectual property rights used in the animated
feature film will be available for use in any sequel or other
products related to each feature film. See Risk
Factors  In order for our feature films and related
products to be successful, we must develop appealing creative
content.

Technology

Our technology is an important component of our
films, and our research and development department is a key
strategic asset of the company. Members of this group were
responsible for many of the key, award-winning inventions that
make three-dimensional computer animation possible, including
texturing, shading, motion blur and cloth simulation. We
continue to make a significant investment in technology in order
to help maintain a competitive advantage in this fast moving
field.

We have three core proprietary technologies:
(1) MarionetteTM, an animation software system
for articulating, animating and lighting,
(2) RingmasterTM, a production management
software system for scheduling, coordinating and tracking of a
computer animation project and (3) RenderMan®,
a rendering software system for high quality photo-realistic
image synthesis that we use internally and licenses to third

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parties. Each of these systems is critical to the
production of our animated feature films and other animation
products.


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

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

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

RenderMan®.
RenderMan® is a rendering software system for high quality
photo-realistic image synthesis that we use internally and also
license to third parties. Today, RenderMan® is used by many
major film studios and special effects firms. RenderMan®
was designed to be easily portable. It is available on three
popular platforms: IRIX, Linux and Windows.

Relationship with Disney

A critical component of our objective to maintain
our position as a leading brand in the animated feature film
market is to secure strong promotion, marketing and distribution
of our films and related products. We believe that Disney is a
leader in the marketing and distribution of animated feature
films and related products and one of the industrys most
widely recognized brand names. We have enjoyed a long
relationship with Disney that dates back to 1986, when we
entered into a joint technical development effort with Disney
that resulted in the Computer Assisted Production System
(CAPS), a production system owned and used by Disney
in some of its two-dimensional cel-based animated feature films.
Disney first used CAPS for The Rescuers Down Underand
has continued to use it for its subsequent animated feature
films, such as The Lion Kingand Tarzan. In 1992,
certain employees of Pixar and Disney were jointly awarded an
Academy Award® for Scientific and Engineering
Achievementfor the development of CAPS.

In May 1991, we entered into the Feature Film
Agreement with Walt Disney Pictures, a wholly-owned subsidiary
of Disney, which provided for the development, production and
distribution of up to three feature-length motion pictures (the
Feature Film Agreement). It was pursuant to the
Feature Film Agreement that Toy Storywas developed,
produced and distributed. In 1997, we extended our existing
relationship with Disney by entering into the Co-Production
Agreement. This agreement generally provides that we will be
responsible for the development, pre-production and production
of each Picture, while Disney will be responsible for the
marketing, promotion, publicity, advertising and distribution of
each Picture. The profits from the Pictures are shared equally
between Pixar and Disney after Disney recovers a distribution
fee and pre-agreed distribution costs. The term of this
arrangement continues until the delivery of Carsto
Disney, which we expect to occur in 2005.

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We have produced four tremendously successful
films to date. We believe that the success of our track record
combined with the strength of our financial resources position
us to negotiate an arrangement with more favorable economic
terms. Although we look forward to a more favorable agreement
for films released after Cars, such an agreement may also
increase our risks. See Risk Factors  We face
various distribution risks with respect to our feature
films and Risk Factors  The Co-Production
Agreement imposes several risks and restrictions on us.



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

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

Overview.On
February 24, 1997, we entered into the Co-Production
Agreement with Disney pursuant to which we, on an exclusive
basis, agreed to produce the Pictures for distribution by
Disney. Pixar and Disney agreed to co-finance the production
costs of the Pictures, co-own the Pictures (with Disney having
exclusive distribution and exploitation rights), co-brand the
Pictures and share equally in the profits of each Picture and
any related merchandise and other ancillary products, after
recovery of all marketing and distribution costs (which are
financed by Disney), a distribution fee paid to Disney and any
other fees or costs, including any participations provided to
talent and the like. The Co-Production Agreement generally
provides that we are responsible for the production of each
Picture and that Disney is responsible for the marketing,
promotion, publicity, advertising and distribution of each
Picture. The first two original Pictures under the Co-Production
Agreement were A Bugs Lifeand Monsters, Inc.,which were released in November 1998 and November 2001,
respectively. The third original Picture governed by the
Co-Production Agreement will be Finding Nemo, which is
scheduled to be released on May 30, 2003. Toy Story
2, the theatrical sequel to Toy Story, was released
in November 1999, and is also governed by the Co-Production
Agreement, although it does not count towards the Pictures. The
Co-Production Agreement also contemplates that with respect to
theatrical sequels, made-for-home video sequels, television
productions, interactive media products and other derivative
works related to the Pictures, we will have the opportunity to
co-finance and produce such products or to earn passive
royalties on such products. We will not share in any theme park
revenues generated as a result of the Pictures.

Production.The
Co-Production Agreement provides a green lighting mechanism for
the five films to be developed and produced as Pictures. The
Incrediblesand Carsare the fourth and fifth films,
respectively, to be green lit. After the green light, we have
final control over the production of each Picture. Disney is
entitled to designate a representative at Pixar to monitor the
production and production costs of the Pictures.

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

Distribution.Disney
is solely responsible for financing the costs and expenses of
the marketing, promotion, publicity, advertising and
distribution of each Picture, subject to certain requirements,
and has final control over all related decisions. Disney is
obligated to consult with us regarding all such major marketing
and distribution decisions, and we are entitled to designate a
representative to monitor marketing and distribution of the
Pictures. As the remaining three films under the Co-Production
Agreement have been

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approved for production, Disney has committed to
initially release each Picture within certain windows and not to
release other Disney family films during certain windows.
Further, each Picture is to be distributed and marketed under
the Walt Disney Pictures brand (or the then current Disney brand
for premier Disney movies) and is to be distributed and marketed
by Disney in all markets and media and on a worldwide basis in a
manner similar to that in which Disney then currently
distributes and markets its premiere animated movies. In
addition, the costs for marketing, distribution and promotion of
the films and related products are incurred well in advance of
the release of such films and products, and consequently, we
experience a delay in the receipt of cash proceeds from such
films and products until after Disney recovers such costs.


Division of Gross Receipts.Pixar and Disney are entitled to share
equally in all gross receipts remaining after deduction of:
(1) a distribution fee to Disney, (2) mutually agreed
participations (payments to third parties such as actors,
composers and other artists contingent upon the success of the
Pictures), if any, paid by either Disney or us, and
(3) Disneys distribution costs. Gross receipts
include all revenues or other consideration received by Disney
from the exploitation of the Pictures and any related
merchandise, books, soundtracks and other tangible personal
property based upon the Pictures, as more specifically provided
in the Co-Production Agreement (collectively,
Merchandise), subject to certain exceptions relating
primarily to receipts from Disneys affiliates.
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, we receive statements and payments of our share of
gross receipts monthly within 45 days after the end of each
calendar month, subject to certain exceptions, and we have the
right to audit Disneys books and records relating to the
Pictures and Merchandise.

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

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



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

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

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

Creative Controls.Pixar and Disney have mutual creative
control of the production of The Incredibles. Pixar has
creative control of the production of Cars. The
Co-Production Agreement provides for certain dispute resolution
procedures in the event of a disagreement.

Brand/Credit.The
Co-Production Agreement sets forth Disneys and
Pixars intent that the Pixar brand be established as an
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 that is perceptually equal to the Disney logo,
animated logo and credit, subject to certain specific
requirements.

Exclusivity.We have
agreed not to release or authorize the release of any
feature-length animated theatrical motion picture we produce,
other than the Pictures and Derivative Works we produce under
the Co-Production Agreement, until twelve months from delivery
of the fifth Picture, Cars, under the Co-Production
Agreement. We have further agreed that we will not enter into
any agreement with any third party for the development,
production or distribution of any feature-length animated
theatrical motion picture until after we have delivered the
third Picture, Finding Nemo, to Disney under the
Co-Production Agreement, which is currently scheduled to occur
prior to May 30, 2003. We have also agreed that we will not
develop or produce any rides or attractions for major theme
parks not owned or operated by Disney, and to give Disney a
right to negotiate with respect to animated television
productions or animated made-for-home video productions that we
propose to produce during the term of the Co-Production
Agreement. Disney, however, is not similarly restricted by the
exclusivity provisions that bind us under the Co-Production
Agreement and, therefore, may develop, produce, or distribute
other feature-length animated and computer-animated theatrical
motion pictures itself or enter into similar agreements with
third parties. See  Competition.

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

Term and Termination.The term of the Co-Production
Agreement continues until delivery to Disney of the fifth
Picture produced and financed under the Co-Production Agreement,
unless earlier terminated. For example, Disney is entitled to
terminate the Co-Production Agreement in the event that certain
types of competitors directly or indirectly acquire or control a
50% or greater ownership interest in Pixar or we merge or
consolidate into such a competitor. Upon termination by Disney
pursuant to the example above, Disney has certain rights to
compel us to complete works in production. In the event of
termination, the Co-Production Agreement provides that its terms
and conditions continue to apply with respect to Pictures,
Merchandise and Derivative Works that we have delivered to
Disney or which Disney elects to have completed, as well as all
future Merchandise and future Derivative Works relating thereto,
but otherwise terminates.

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

Competition

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

Intense competition exists in the
family-oriented, animated and live action feature film market.
Some of the family-oriented animated and live action feature
films released theatrically in 2002 included the following:



| |   |                                                               
| | - | --------------------------------------------------------------
| |  | Ice Ageby 20th
    Century Fox/ Blue Sky Studios,             
|
| |  | The Rookieby Disney,                                          
|
| |  | Spidermanby Sony,                                             
|
| |  | Spirit: Stallion of the Cimarronby Dreamworks,                
|
| |  | Scooby-Dooby Warner
    Brothers,                             
|
| |  | Lilo and Stitchby
    Disney,                                 
|
| |  | Miyazakis Spirited Awayby Studio Ghibli,                     
|
| |  | Harry Potter and the Chamber of Secretsby Warner Brothers, and
|
| |  | The Wild Thornberrys Movieby Paramount.                       

The release of Monsters, Inc.in 2001 was
highly successful, resulting in worldwide box office revenues
exceeding $524 million. Another animated family-oriented
feature film released during 2001, Shrek, achieved
worldwide box office revenues of over $477 million. We also
experienced competition from a non-animated family-oriented
film, Harry Potter and the Sorcerers Stone, which
was released by Warner Bros. during November 2001. There appears
to be increasing widespread acceptance for those films created
by using Computer Graphics Imagery (CGI), as demonstrated by the
success of Monsters, Inc., Shrek, and Jimmy
Neutron: Boy Genius, which had combined worldwide box office
revenues of approximately $1.1 billion. Additionally, all
three Oscar® nominations in the new Best Animated
Feature Filmcategory for 2001 were awarded to these three
CGI films. In addition to box office competition, other
family-oriented films may continue to compete with Monsters,
Inc.and Finding Nemo, as well as our film library,
with respect to related television, merchandise, home video, and
other future revenue sources.

We believe competition from animated feature
films and family-oriented feature films may intensify over the
next several years, possibly affecting Finding Nemo,
which is currently targeted for release on May 30, 2003,
The Incredibles, which is currently targeted for a 2004
holiday release, and Cars, which is currently targeted
for a 2005 holiday release. Due to a potentially large number of
family-oriented films scheduled for release over the next few
years, it is possible that the market for these films, whether
animated or live action,

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will become further saturated before we release
The Incrediblesand Cars. This could result in
failure of such films to achieve the extraordinary commercial
success required for us to profit from such films.


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

Several movie studios have developed their own
internal computer animation capability specifically for the
production of animated films and live action films. For example,
DreamWorks SKG (with PDI) successfully produced Antzin
1998 and Shrekin 2001. Fox successfully produced,
through its subsidiary Blue Sky, Ice Age, which was
released in 2002. Other movie studios may internally develop,
enter into a co-production agreement with a third party, 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,
SGIs Alias/ Wavefront subsidiary licenses
Maya, which is its next generation three-dimensional
software for creating high quality animation and visual effects.
Maya incorporates many new features and could be
used to make a computer-animated feature film.

The Co-Production Agreement provides that we will
develop and produce five original computer-animated feature
films. Because Disney co-finances the films developed and
produced under the Co-Production Agreement, distributes the
films under the Walt Disney Pictures label, and
enjoys the financial benefits in the event that such films
achieve significant box office revenues, we believe that Disney
desires such films to be successful. Nonetheless, during its
long history, Disney has been a very successful producer and
distributor of its own animated feature films, and while the
Co-Production Agreement imposes restrictions prohibiting Disney
from releasing G-rated films, whether live action or animated,
within certain release windows for our films, it is possible
that other family-oriented motion pictures distributed by Disney
or its affiliates will overlap in the market and compete with
our animated feature films. Our contractual agreement with
Disney also presents other risks. See Risk
Factors  The Co-Production Agreement imposes several
risks and restrictions on us.

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

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

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

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

Proprietary Rights

Our success and ability to compete is dependent
in part upon our proprietary technology. While we rely on a
combination of patents, copyright and trade secret protection,
nondisclosure agreements and cross-licensing arrangements to
establish and protect our proprietary rights, we believe that
factors such as the technical and creative skills of our
personnel are more essential to our success and ability to
compete. We currently own twenty four patents issued in the
United States and fourteen issued in foreign countries. In
addition, we have a number of patent applications pending in the
United States and in foreign countries. There can be no
assurance that patents will issue from any of these pending
applications or that, if patents do issue, any claims allowed
will be sufficiently broad to protect our technology. In
addition, there can be no assurance that any patents that have
been issued to us, or that we may license from third parties,
will not be challenged, invalidated or circumvented, or that any
rights granted thereunder would provide proprietary protection
to us.

The source code for our proprietary software is
protected both as trade secrets and as a copyrighted work. We
generally enter into confidentiality or license agreements with
our employees, consultants and vendors, and generally control
access to and distribution of our software, documentation and
other proprietary information. Despite these precautions, it may
be possible for a third party to copy or otherwise obtain and
use our proprietary information, products or technology without
authorization, or to develop similar or superior technology
independently. Policing unauthorized use of our products is
difficult. In addition, effective copyright and trade secret
protection may be unavailable or limited in certain foreign
countries. Although we generally obtain end user license
agreements for our RenderMan® software product, we
have also relied on shrink wrap licenses that are
not signed by the end-user, which may be unenforceable under the
laws of certain jurisdictions. There can be no assurance that
the steps we take will prevent misappropriation of our
technology or that our confidentiality or license agreements
will be enforceable. In addition, litigation may be necessary in
the future to enforce our intellectual property rights, to
protect our trade secrets, to determine the validity and scope
of the proprietary rights of others, or to defend against claims
of infringement or invalidity. Any such litigation could result
in substantial costs and diversion of resources and could have a
material adverse effect on our business, operating results or
financial condition.

One of the risks of the film production business
are claims that our productions infringe on the intellectual
property rights of third parties with respect to previously
developed films, stories, characters or other entertainment. In
addition, our technology and software may be subject to patent,
copyright or other intellectual property claims of third
parties. We have received, and are likely to receive in the
future, claims of

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infringement of other parties proprietary
rights. There can be no assurance that infringement or
invalidity claims (or claims for indemnification resulting from
infringement claims) will not be asserted or prosecuted against
us or that any assertions or prosecutions will not materially
adversely affect our business, financial condition or results of
operations. Irrespective of the validity or the successful
assertion of such claims, we would incur significant costs and
diversion of resources with respect to the defense thereof which
could have a material adverse effect on our business, financial
condition or results of operations. If any claims or actions are
asserted against us, we may seek to obtain a license under a
third partys intellectual property rights. There can be no
assurance, however, that under such circumstances a license
would be available on reasonable terms or at all.


We also rely on certain technology that we
license from third parties, including software that is
integrated and used with internally developed software. There
can be no assurance that these third-party technology licenses
will continue to be available to us on commercially reasonable
terms. The loss of or inability to maintain any of these
technology licenses could result in delays in feature film
releases or product shipments until equivalent technology could
be identified, licensed and integrated. Any such delays in
feature film releases or product shipments could materially
adversely affect our business, operating results or financial
condition.

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

Employees

As of March 4, 2003, we had approximately
700 employees and contractors. Although none of our employees
are represented by a labor union, it is common for film
directors, producers, animators and actors at film production
companies to belong to a union. There can be no assurance that
our employees will not join or form a labor union or that we,
for certain purposes, will not be required to become a union
signatory. Further, we may be directly or indirectly dependent
upon union members, and work stoppages or strikes organized by
such unions could materially adversely impact our business,
financial condition or results of operations. We have not
experienced any work stoppages, and we consider relations with
our employees to be good.

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

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Risk Factors

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

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

In 2003, our revenue and operating results will
be largely dependent upon (1) the timing and amount of
worldwide revenues and distribution costs from Finding Nemo,
Monsters, Inc.and other titles in our film library,
(2) the timing, accuracy, and sufficiency of the
information we receive from Disney to determine revenues and
associated gross profits, (3) the timing and amount of
non-film related revenues and expenses, (4) the accuracy of
our assumptions and judgments used to estimate certain revenues
and associated gross profits, (5) the market price of our
Common Stock and related volatility, (6) potential delays
in the release date of our film, and (7) external economic
and political events.

Dependence on revenue from our feature
films.

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

For our business to be successful, our films must
achieve box office success. While we have been successful in the
release of our first four feature films, this level of success
is unusual in the motion picture industry and our future
releases may not achieve similar results. In 2003, we will be
dependent on the success of Finding Nemo. Unless
Finding Nemoachieves box office success and is
successful in home video, television licensing, and merchandise
sales, it may not generate significant revenue and operating
results for us to meet our projections in 2003 and beyond.

A significant portion of our anticipated revenues
for fiscal year 2003 is based on the assumption that Finding
Nemowill be a success in the worldwide theatrical, domestic
home video and worldwide merchandising markets. Therefore, if
Finding Nemodoes not generate sufficient worldwide box
office receipts, domestic home video sales, or worldwide
merchandise sales to be deemed successful, it would adversely
impact our 2003 operating results. In addition, during 2003, we
expect continued contributions from Monsters, Inc.through worldwide television licensing as well as continued
worldwide home video and merchandise sales. If Monsters, Inc.does not generate sufficient revenues from these sources,
our 2003 results could be adversely affected. To date, we have
recognized most of the revenues we expect to recognize over the
lifetime of the Toy Storyfranchise and A Bugs
Life. For Monsters, Inc., we have recognized
essentially all of the theatrical revenues and a substantial
portion of the home video revenues. Although our forecast
assumes some continued revenues from these titles, there can be
no assurance that revenues from continuing international
television licensing, worldwide home video and merchandise sales
will be sufficient to achieve our 2003 earnings projection.

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

Although we have experienced a successful track
record with the releases of our feature films, it is difficult
to predict the box office success of Finding Nemo. Even
if Finding Nemoexperiences a very successful domestic
theatrical run, it is difficult to predict the ultimate
worldwide theatrical revenues as well as related home video,
merchandising and ancillary revenue streams. While customer
acceptance is initially measured by box office success, customer
acceptance within each follow-on product category, such as home
video, merchandise or television, depends on factors unique to
each type of product, such as pricing, competitive products, and
the time of year or state of the economy in which a product is
released, among many other

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factors. In addition, we have found that the
degree of customer acceptance varies widely among foreign
countries. While box office success is often a good indicator of
general customer acceptance, the relative success of follow-on
products is not always directly correlated, and the degree of
correlation is difficult to predict.


It is also difficult to forecast the amount of
revenues from Monsters, Inc.and our other titles in our
film library. The revenues generated from continued home video
and merchandise sales can fluctuate due to various market
factors. Because the revenues from films nearing the end of life
cycle tend to be relatively small, minor fluctuations can result
in notable variances from forecast. Additionally, while we
expect the moratorium on Toy Storyand Toy
Story 2to enhance our home video sales, the impact of
this strategy is difficult to predict, particularly since these
are our first titles to go on a moratorium, and may not generate
the results we expect.

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

In addition, the amount of revenue recognized in
any given quarter or quarters from all of our films depends on
the timing, accuracy, and sufficiency of the information we
receive from Disney to determine revenues and associated gross
profits. Although we obtain from Disney the most current
information available to recognize our share of revenue and to
determine our film gross profit, Disney may make subsequent
adjustments to the information that it has provided, which could
have a material impact on us in later periods. For instance,
towards the end of the life cycle for a revenue stream, Disney
may inform us, and has in the past informed us, of additional
distribution costs to those previously forecasted. Such
adjustments have and may continue to impact our revenue share
and our film gross profit. In addition, through information we
obtain from other sources, we may make certain judgments and/or
assumptions and adjust the information we receive from Disney.
For example, in the past, we have made adjustments to our home
video revenues for estimates on return reserves that may differ
from those reported by Disney. The estimates on reserves may be
adjusted periodically based on actual rates of returns,
inventory levels in the distribution channel, as well as other
business and industry information. In addition, we utilize
margin normalization in estimating associated costs, such as
with merchandising or home video, in accordance with the
provisions of Statement of Position 00-2 
Accounting by Producers or Distributors of Films
(SOP 00-2). Due to these factors, the amount and timing of
our future revenues and associated expenses from our films are
difficult to forecast, and it is possible, in any given quarter,
that we will not recognize sufficient film revenue to generate
significant earnings. See Managements Discussion and
Analysis of Financial Condition and Results of Operations
in Item 7 of this Form 10-K.

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

Forecasting our operating expenses is
extremely difficult.

Our operating expenses will continue to be
extremely difficult to forecast. We budget the direct costs of
film productions with Disney, and we share such costs equally.
We capitalize our share of these direct costs of film production
in accordance with SOP 00-2. A substantial portion of all
of our other costs are incurred for

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the benefit of feature films
(Overhead), including research and development
expenses and general and administrative expenses. Portions of
our Overhead are included in the budgets for the Pictures under
the Co-Production Agreement, and we will share such costs
equally with Disney under the Co-Production Agreement. With
respect to the portion of our Overhead that is not reimbursed by
Disney, we either (1) capitalize such portion as film
production costs, if required under SOP 00-2, or
(2) charge it to operating expense in the period incurred.
Since a substantial portion of our Overhead is related to the
Pictures, and is therefore reimbursed by Disney, and since we
capitalize other amounts in accordance with SOP 00-2, our
reported operating expenses for the fiscal years 2000, 2001 and
2002 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.
Further, as we begin production of our films beyond the
Co-Production Agreement, we expect our operating expenses to
continue to increase to the extent that they are not shared.


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

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

Software revenue.

For 2002, software revenue represented 4% of our
total revenues, and we continue to maintain minimal emphasis on
the commercialization of software products. We are not
increasing the time and resources necessary to generate higher
RenderMan® licensing revenues; therefore, we expect
that revenue from the licensing of RenderMan® may decline.
However, our 2003 earnings are expected to include revenues
attributable to non-film related sources including software
revenue. There can be no assurance that the timing and amount of
such revenues will be sufficient to meet our 2003 earnings
projection.

Other non-film revenue and
expenses.

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

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



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

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



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

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



| |                                     
| | ------------------------------------
| | Our operating expenses
    fluctuate

Operating expenses for fiscal year 2002 increased
in comparison to fiscal year 2001, and we expect to continue to
increase our operating expenses to fund greater levels of
research and development, to ramp up our production on our
current film projects and to expand operations. We expect our
spending levels may still increase significantly due to the
following:



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

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

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does not pay for) the increases in expenses, our
operating expenses will significantly increase in 2003. In
addition, as we increase the resources allocated to our
productions beyond our feature film Cars, which will be
the last film to be co-financed with Disney under the current
Co-Production Agreement, we expect our operating expenses to
increase significantly.


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

In order to meet our obligations pursuant to the
Co-Production Agreement, we have established parallel creative
teams so that we can develop more than one film at a time. These
teams are currently working on Finding Nemo, which is
currently scheduled for release on May 30, 2003, and The
Incrediblesand Cars, as well as future projects,
including Project 2006, our first Pixar-only financed film, as
we move towards producing one feature film per year. We have
only produced four feature films to date and have limited
experience with respect to producing animated feature films in
parallel. Due to the strain on our personnel from the effort
required for the release of an upcoming film and the time
required for creative development of future films, it is
possible that we would be unable to release a new film in
successive years. In the past, we have been required, and may
continue to be required, to expand our employee base, increase
capital expenditures and procure additional resources and
facilities in order to accomplish the scheduled releases of our
animated feature films. This growth and expansion has placed,
and continues to place, a significant strain on our resources.
We cannot provide any assurances that The Incredibles,Cars, Project 2006 or any future animated film will be
released as targeted or that this strain on resources will not
have a material adverse effect on our business, financial
condition or results of operations.

In addition, John Lasseters availability
has been a key ingredient in the successful completion of our
prior films. As we move towards achieving one film a year, there
will be additional demands placed on his availability. In
addition to Mr. Lasseters role as our Creative
Executive, he is also directing his next feature film,
Cars. A lack of his availability may adversely impact the
success and timing of all our films.

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

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

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

The decisions regarding the timing of the
theatrical release and related products and which of
Disneys motion pictures and related products will receive
extensive promotional support from Disney are important factors
in determining the success of our motion pictures and related
products. Under the terms of the Co-Production Agreement, we
have some general protections with respect to the marketing and
distribution of our feature films in the form of commitments by
Disney as to release windows, the timing of release of other
Disney family films and marketing obligations. We ultimately do
not control (1) the manner in which Disney distributes our
animated feature films and related products, (2) the number
of theaters to which Disney distributes our feature films,
(3) the specific timing of release of our feature films and
related products or (4) the specific amount or quality of
marketing and promotional support of the feature films and
related products as well as the associated promotional and
marketing budgets. Because Disney co-finances the films
developed and produced under the Co-Production Agreement,
distributes the films under the Walt Disney

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Pictures label and enjoys substantial
financial benefits in the event that such films achieve
significant box office revenues, we believe that Disney desires
such films to be successful. Nonetheless, Disney could make
certain decisions as to marketing, distribution or promotion of
the animated feature films or related products or the marketing
and promotion of its own animated or other family films that
could have a material adverse effect on our business, operating
results or financial condition. In addition, the costs for
marketing, distribution and promotion of the films and related
products are incurred well in advance of the release of such
films and products, and we experience a delay in the receipt of
proceeds from such films and products until after Disney
recovers such costs. We are also dependent on Disney for
receiving accurate information on a timely basis on which we
base estimates to recognize revenue and associated gross profit
from the animated feature films and related products. If we fail
to receive accurate information from Disney, or fail to receive
it on a timely basis, it could have a material adverse effect on
our business, operating results or financial condition.


Disney has an exclusive arrangement with
us.

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

We have an obligation to co-finance
production costs.

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

Disney retains the exclusive distribution
and exploitation rights.

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

Disney can terminate the agreement under
various circumstances.

Under the terms of the Co-Production Agreement,
Disney may terminate the agreement under certain circumstances.
For example, Disney is entitled to terminate the Co-Production
Agreement in the event that

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


There are significant risks associated with
the motion picture industry.

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



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

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

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

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

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

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

In 2002, competition continued to intensify in
the family-oriented, animated and live action feature film
market. Some of the family-oriented animated and live action
feature films released theatrically in 2002 included the
following:



| |   |                                                            
| | - | -----------------------------------------------------------
| |  | Ice Ageby 20th
    Century Fox/ Blue Sky Studios,          
|
| |  | The Rookieby Disney,                                       
|
| |  | Spidermanby Sony,                                          
|
| |  | Spirit: Stallion of the Cimarronby Dreamworks,             
|
| |  | Scooby-Dooby Warner
    Bros.,                             
|
| |  | Lilo and Stitchby
    Disney,                              
|
| |  | Miyazakis Spirited Awayby Studio Ghibli,                  
|
| |  | Harry Potter and the Chamber of Secretsby Warner Bros., and
|
| |  | The Wild Thornberrys Movieby Paramount.                    

The release of Monsters, Inc.in 2001 was
highly successful, resulting in worldwide box office revenues
exceeding $524 million. Other animated family-oriented
feature films released during 2001, such as Shrek,achieved worldwide box office revenues of over
$477 million. We also experienced competition from a
non-animated family-oriented film, Harry Potter and the
Sorcerers Stone, which was released by Warner Bros.
during November 2001. There appears to be increasing widespread
acceptance for those films created by using CGI, as demonstrated
by the success of Monsters, Inc., Shrek, and Jimmy
Neutron: Boy Genius,which contributed combined worldwide
box office revenues of approximately $1.1 billion.
Additionally, all three Oscar® nominations in the new best
animated feature film category for 2001 were awarded to CGI
films. Animated feature films currently in production that are
primarily CGI include Shrek 2, Sharkslayer,
Madagascar, Over the Hedge, Jimmy Neutron 2, Robots, Ice
Age 2and Valiant, among others. In addition to box
office competition, other family-oriented films may continue to
compete with Monsters, Inc.and Finding Nemo, as
well as our film library with respect to related television,
merchandise, home video, and other future revenue sources.

We believe competition from animated feature
films and family-oriented feature films may intensify over the
next several years, possibly affecting Finding Nemo,
which is currently targeted for release on May 30, 2003,
The Incredibles,which is currently targeted for a 2004
holiday release, and Cars, which is currently targeted
for a 2005 holiday release. Due to a potentially large number of
family-oriented films scheduled for release over the next few
years, it is possible that the market for these films, whether
animated or live action, will become further saturated before we
release The Incrediblesand Cars.This could
result in failure of such films to achieve the extraordinary
commercial success required for us to profit from such films.

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

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Due to the recent success of CGI animated films,
several movie studios have developed their own internal computer
animation capability which may be used for special effects in
animated films and live action films. For example, DreamWorks
SKG (with PDI) successfully produced Antzin 1998 and
Shrekin 2001. In addition, Fox successfully produced,
through its subsidiary Blue Sky, Ice Age, which was
released in March 2002. Other movie studios may internally
develop, license or sub-contract three-dimensional animation
capability, or enter into co-production agreements with other
studios capable of developing and producing 3-dimensional CGI
animated films. Further, we believe that continuing enhancements
in commercially available computer hardware and software
technology have lowered and will continue to lower barriers to
entry for studios or special effects companies which intend to
produce computer-animated feature films or other products. For
example, SGIs Alias/Wavefront subsidiary licenses
Maya, which is its next generation three-dimensional
software for creating high quality animation and visual effects.
Maya incorporates many new features and could be
used to make a computer-animated feature film.

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

Computer Graphics Special Effects
Firms.

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

Software Publishers.

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

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be able to introduce products for PCs that
would be competitive with RenderMan® in terms of price and
performance for professional users.


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

Our success depends on certain key
employees.

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

Our Chief Executive Officer has divided
responsibilities.

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

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

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

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

Under the Feature Film Agreement and the
Co-Production Agreement, Disney is required to distribute the
animated feature films in a manner consistent with those of
Disneys premier animated films. Currently, distribution of
our films generally include (1) worldwide theatrical
exhibition, (2) worldwide home video sales,
(3) worldwide television licensing, including Pay-Per-View,
pay television, network, basic cable and

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syndication, (4) non-theatrical exhibition,
such as airlines, schools and armed forces facilities and
(5) marketing of other rights of the picture, which may
include licensing of merchandise, such as toys, interactive
games and soundtrack recordings. Although the Co-Production
Agreement provides us with some protection, we cannot provide
any assurances that our feature films made under the
Co-Production Agreement will be distributed through all of these
outlets. See Business  Business Model and
Products.


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

We have a limited operating history.

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

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

Pursuant to the Co-Production Agreement, we
co-financed A Bugs Life, Toy Story 2and
Monsters, Inc.,and we are co-financing our next three
original animated feature films, Finding Nemo, The
Incrediblesand Cars. In the future, we may
co-finance other derivative works such as sequels and television
productions. The development and production costs of Finding
Nemo, The Incredibles, Carsand films beyond, and any
possible future expansion of our studio and headquarters in
Emeryville, California, may have an adverse impact on our cash
and investment balances. We expect to fully finance films for
release after Cars. As of December 28, 2002, we had
approximately $339.1 million in cash and investments. We believe
that these funds, along with cash provided by operating
activities, will be sufficient to meet our anticipated cash
needs for working capital and capital expenditures, including
the development and production costs of Finding Nemo, The
Incrediblesand Cars, as well as development and
pre-production costs for our first film beyond the Co-Production
Agreement. See Managements Discussion and Analysis
of Financial Condition and Results of Operations 
Liquidity and Capital Resources in Item 7 of this
Form 10-K. To date, we have chosen to use our existing cash
resources to fund construction costs and film production costs.
We may continue to use our cash resources for such expenditures,
or may choose to finance such capital expenditures through
issuance of additional equity or debt securities, by obtaining a
credit facility or by some other financing mechanism. The sale
of additional equity or convertible debt securities would result
in additional dilution to our shareholders. Moreover, we cannot
provide any assurances that we will be successful in obtaining
future financing, or even if such financing is available, that
we will obtain it on favorable terms or on terms providing us
with sufficient funds to meet our obligations and objectives.

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

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

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

Our Chief Executive Officer, Steve Jobs,
beneficially owns approximately 56% of our outstanding Common
Stock as of March 4, 2003. As a result, Mr. Jobs,
acting alone, is able to exercise sole discretion over all
matters requiring shareholder approval, including the election
of the entire board of directors and approval of significant
corporate transactions, including an acquisition of Pixar. Such
concentration of ownership may also have the effect of delaying
or preventing a change in control of Pixar, impeding a merger,
consolidation, takeover or other business combination involving
Pixar, or discouraging a potential acquirer from making a tender
offer or otherwise attempting to obtain control of Pixar.

Business interruptions could adversely affect
our operations.

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

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

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

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Work stoppages could adversely impact our
operations.

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

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

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

There are various risks associated with our
proprietary rights.

Our efforts to protect our proprietary
technologies may not succeed.

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

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

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Enforcing our proprietary rights may
require litigation.

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

Others may assert infringement claims
against us.

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

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

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

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

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

As described in Risk Factors 
Our operating results have fluctuated in the past, and we expect
such fluctuations to continue, we believe that
period-to-period comparisons of our results of operations may
not be necessarily meaningful. Accordingly, you should not rely
on our annual and quarterly results of operations as

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any indication of future performance. In
addition, it is possible that in some future period our
operating results will be below the expectations of public
market analysts and investors or the guidance we have provided.
In such event, the price of our Common Stock may be materially
adversely affected. See Managements Discussion and
Analysis of Financial Condition and Results of Operations
in Item 7 of this Form 10-K.







|        |           
|------- | ----------
|Item 2. | Properties

Our studio and headquarters are located in
Emeryville, California and consist of approximately 215,000
square feet. We believe that our properties and facilities are
suitable and adequate for current operations. In March 2000, we
purchased an existing building on 1.76 acres in Emeryville for
$7.7 million. Although we purchased the building for
potential future expansion, we are currently renting it to
commercial tenants. In November 2002, we purchased approximately
2.24 acres of land adjacent to our Emeryville studio facility
for $9.4 million, also for future expansion. Through
December 28, 2002, we incurred total capital expenditures
of $117.1 million for the purchase of the land and the
construction of our studio and headquarters facility. We used
existing cash resources to fund these facility-related costs.
See Managements Discussion and Analysis of Financial
Condition and Results of Operations  Liquidity and Capital
Resources in Item 7 of this Form 10-K.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

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






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

The following proposals were submitted to
shareholders at our Annual Meeting of Shareholders held
October 4, 2002. Each of these proposals was approved by a
majority of the shares present at the meeting.

1.     To re-elect seven
directors to serve for the ensuing year or until their
successors are duly elected and qualified.

|                   |  |            |            |                 |  |  |           | 
|------------------ |  | ---------- | ---------- | --------------- |  |  | --------- | 
|                   |  | Shares For |            | Shares Withheld
|                   |  |            |            |                
|Steve Jobs         |  |            | 45,843,050 |                 |  |  | 2,352,651 | 
|Edwin E. Catmull   |  |            | 45,864,063 |                 |  |  | 2,331,638 | 
|Skip M. Brittenham |  |            | 46,600,426 |                 |  |  | 1,595,275 | 
|Joseph A. Graziano |  |            | 46,709,666 |                 |  |  | 1,486,035 | 
|Lawrence B. Levy   |  |            | 47,250,280 |                 |  |  | 945,421   | 
|Joe Roth           |  |            | 47,359,559 |                 |  |  | 836,142   | 
|Larry W. Sonsini   |  |            | 44,753,881 |                 |  |  | 3,441,820 | 

2.     To approve an
amendment to Pixars 1995 Director Option Plan to increase
the number of shares reserved for issuance thereunder by 200,000
shares. Results of the voting included 38,503,467 shares for,
9,670,488 shares against and 21,746 shares abstained.

3.     To ratify the
appointment of KPMG LLP as our independent auditors for the
fiscal year ended December 28, 2002. Results of the voting
included 46,887,382 shares for, 1,298,497 shares against and
9,822 shares abstained.

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EXECUTIVE OFFICERS OF THE COMPANY

The executive officers of Pixar and their ages as
of March 13, 2003 are as follows:

|                 |  |     |    |          |  |                                                                    
|---------------- |  | --- | -- | -------- |  | -------------------------------------------------------------------
|Name             |  | Age |    | Position
|                 |  |     |    |         
|Steve Jobs       |  |     | 48 |          |  | Chairman and Chief Executive Officer                               
|Edwin E. Catmull |  |     | 57 |          |  | President                                                          
|Ann Mather       |  |     | 42 |          |  | Executive Vice President, Chief Financial Officer
    and Secretary
|John Lasseter    |  |     | 46 |          |  | Executive Vice President, Creative                                 
|Sarah McArthur   |  |     | 46 |          |  | Executive Vice President, Production                               
|Lois J. Scali    |  |     | 54 |          |  | Executive Vice President, General Counsel                          

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

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

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

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

Mr. Lasseteris
a two-time Academy Award®-winning director and animator. In
addition to serving as head of all of Pixar Animation
Studios films and projects as Executive Vice President,
Creative, he directed Toy Story, (the first
feature-length computer animated film), A Bugs Lifeand Toy Story 2. He most recently served as executive
producer of Monsters, Inc.,and in 2001, he was given an
honorary doctorate degree from the American Film Institute.
Mr. Lasseter is currently in development on his fourth
feature film, Cars.

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Mr. Lasseter directed the first
computer-animated feature film, Toy Story, for which he
received a Special Achievement Oscar® and was nominated for
Best Original Screenplay, the first animated film ever to
receive an Oscar® nomination for screenplay.
Mr. Lasseter has written and directed a number of short
films and television commercials while at Pixar: Luxo Jr.(1986 Academy Award® nominee), Reds Dream(1987), Tin Toy(1988 Academy Award® Winner) and
Knick Knack(1989), which was produced as a 3D
stereoscopic film. Tin Toywas the first computer
animated film to win an Oscar®, when it won the 1988
Academy Award® for Best Animated Short Film.
Mr. Lasseter also designed and animated the Stained Glass
Knight character in the 1985 Steven Spielberg production,
Young Sherlock Holmes.Mr. Lasseter joined
Lucasfilms Computer Division in 1984, and was a founding
member of Pixar when it was formed in February 1986. Prior to
this, he spent five years as an animator at The Walt Disney
Company, where he worked on such films as The Fox and the
Houndand Mickeys Christmas Carol.He earned
his B.F.A. in film from the California Institute of the Arts
where he produced two animated films, each winners of the
student Academy Award® for Animation: Lady and the Lampin 1979 and Nightmarein 1980. His very first award
came at the age of five when he won $15.00 from the Model
Grocery Market in Whittier, California for a crayon drawing of
the Headless Horseman.


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

Ms. Scalihas
served as Executive Vice President and General Counsel since
March 2003. Ms. Scali was a partner at Irell & Manella
LLP, a leading Los Angeles law firm, from January 1993 until
March 2003 where she founded and directed the firms
Intellectual Property Transactions Group and served on the
firms Executive, Partnership, Strategic Planning and
Intake Committees. Ms. Scali also directed the firms
Entertainment Group from 1996 to 2003. Ms. Scali received
her B.A. from Brooklyn College and her J.D. from the University
of California at Los Angeles. Ms. Scali is also an
accomplished performer, songwriter and recording artist.




PART II






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

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

|     |                |      |   |       |  |  |   |       | 
|---- | -------------- | ---- | - | ----- |  |  | - | ----- | 
|     |                | High |   | Low  
|     |                |      |   |      
|2001 |                |      |   |       |  |  |   |      
|     | First Quarter  |      | $ | 40.00 |  |  | $ | 28.94 | 
|     | Second Quarter |      | $ | 46.49 |  |  | $ | 29.13 | 
|     | Third Quarter  |      | $ | 44.09 |  |  | $ | 31.95 | 
|     | Fourth Quarter |      | $ | 42.72 |  |  | $ | 32.78 | 

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|     |                |      |   |       |  |  |   |       | 
|---- | -------------- | ---- | - | ----- |  |  | - | ----- | 
|     |                | High |   | Low  
|     |                |      |   |      
|2002 |                |      |   |       |  |  |   |      
|     | First Quarter  |      | $ | 36.87 |  |  | $ | 30.38 | 
|     | Second Quarter |      | $ | 44.80 |  |  | $ | 36.28 | 
|     | Third Quarter  |      | $ | 51.60 |  |  | $ | 38.64 | 
|     | Fourth Quarter |      | $ | 61.90 |  |  | $ | 42.20 | 

As of March 4, 2003, we had approximately
4,961 shareholders of record. Because many of our shares of
Common Stock are held by brokers and other institutions on
behalf of shareholders, we are unable to estimate the total
number of shareholders represented by these record holders. The
price for the Common Stock as of the close of business on
March 4, 2003 was $51.26 per share. We have never paid any
cash dividends on our Common Stock. We intend to retain any
earnings for use in our business and do not anticipate paying
any cash dividends on our Common Stock in the foreseeable future.






|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

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

|                             |  |                                       |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|---------------------------- |  | ------------------------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                             |  |                                      
|                             |  | Fiscal Year                          
|                             |  |                                      
|                             |  | 1998                                  |         | 1999 |  | 2000 |         | 2001 |  | 2002
|                             |  |                                       |         |      |  |      |         |      |  |     
|                             |  |                                      
|                             |  | (In thousands, except per share data)
|Revenue                      |  | $                                     | 14,307  |      |  | $    | 121,037 |      |  | $    | 172,267 |  |  | $ | 70,223  |  |  | $ | 201,724 | 
|Net income                   |  |                                       | 7,822   |      |  |      | 49,224  |      |  |      | 78,433  |  |  |   | 36,217  |  |  |   | 89,950  | 
|Basic net income per share   |  |                                       | 0.18    |      |  |      | 1.07    |      |  |      | 1.66    |  |  |   | 0.75    |  |  |   | 1.78    | 
|Diluted net income per share |  |                                       | 0.15    |      |  |      | 0.99    |      |  |      | 1.57    |  |  |   | 0.71    |  |  |   | 1.68    | 
|Total assets                 |  |                                       | 250,806 |      |  |      | 374,905 |      |  |      | 479,603 |  |  |   | 523,294 |  |  |   | 732,066 | 
|Total shareholders equity   |  |                                       | 235,047 |      |  |      | 344,707 |      |  |      | 435,720 |  |  |   | 505,686 |  |  |   | 713,062 | 






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

This section and other parts of this
Form 10-K contain forward-looking statements that involve
risks and uncertainties. The Companys actual results may
differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such
differences include, but are not limited to, those discussed in
the subsection entitled Risk Factors in Item 1
of this Form 10-K. The following discussion should be read
in conjunction with the consolidated financial statements and
notes thereto included in Item 8 of this Form 10-K.

Overview

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

In February 1997, we entered into the
Co-Production Agreement (which superseded the Feature Film
Agreement) with Disney pursuant to which we, on an exclusive
basis, agreed to produce five original computer-animated
feature-length theatrical motion pictures (the
Pictures) for distribution by Disney. Pixar and
Disney agreed to co-finance the production costs of the
Pictures, co-own the Pictures (with Disney having exclusive
distribution and exploitation rights), co-brand the Pictures,
and share equally in the profits of each Picture and any related
merchandise as well as other ancillary products, after recovery
of all marketing

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and distribution costs (which Disney finances), a
distribution fee paid to Disney and any other fees or costs,
including any participations provided to talent and the like.
The Co-Production Agreement generally provides that we will be
responsible for the production of each Picture, while Disney
will be responsible for the marketing, promotion, publicity,
advertising and distribution of each Picture.


Our second feature film, A Bugs
Life, was released in November 1998 and counts as the first
original Picture under the Co-Production Agreement. The
Co-Production Agreement also contemplates that with respect to
theatrical sequels, made-for-home video sequels, television
productions, interactive media products and other derivative
works related to the Pictures, we will have the opportunity to
co-finance and produce such products or to earn passive
royalties on such products. We will not share in any theme park
revenues generated as a result of the Pictures. Pursuant to the
Co-Production Agreement, in addition to co-financing the
production costs of the Pictures, Disney will reimburse us for
our share of certain general and administrative costs and
certain research and development costs that benefit the
productions. In November 1999, Toy Story 2, our
third animated feature film was released. As a theatrical
sequel, Toy Story 2is a derivative work of the
original Toy Story and therefore it does not count toward
the five original Pictures to be produced under the
Co-Production Agreement. As a derivative work, Toy
Story 2 is treated as a Picture under the Co-Production
Agreement, and all the provisions applicable to the five
original Pictures apply.

In November 2001, we released Monsters,
Inc., our fourth animated feature film, which counts as the
second original Picture under the Co-Production Agreement. We
are currently in various stages of production on three films,
Finding Nemo, The Incrediblesand Cars. These
films will be produced and distributed under the Co-Production
Agreement and will count as the third, fourth, and fifth films
of the Pictures to be produced under the Co-Production
Agreement. Finding Nemois scheduled to be released on
May 30, 2003. The Incrediblesand Carsare
currently targeted for release no earlier than 2004 and 2005,
respectively.

All payments to us from Disney for development
and production of Toy Story under the Feature Film
Agreement, and A Bugs Life, Toy Story 2, Monsters,
Inc., Finding Nemo, The Incrediblesand Carsunder
the Co-Production Agreement have been recorded as cost
reimbursements. Accordingly, no revenue has been recognized for
such reimbursements; rather, we have netted the reimbursements
against the related costs. These reimbursed costs through the
end of fiscal 2002 are set forth in Note 4 of Notes to
Financial Statements.

The statements regarding the targeted release
dates for our future films are forward-looking, and the actual
release dates may differ. Factors that could cause delays in the
release of our films include, but are not limited to:
(1) the uncertainties related to production delays;
(2) financing requirements; (3) personnel
availability; (4) external economic and political events;
and (5) the release dates of competitive films. See Risk
Factors in Item 1 of this Form 10-K.

Critical Accounting Policies



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

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



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

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Under the Co-Production Agreement, we share
equally with Disney in the profits of Monsters, Inc., Toy
Story 2and A Bugs Lifeafter Disney
recovers its marketing, distribution and other predefined costs
and fees. Our revenues for Toy Storyare governed by the
terms of the Feature Film Agreement. Although our revenues are
based on the information we receive from Disney, we may make
adjustments to that information based on our estimates and
judgments. For example, our theatrical revenues may be adjusted
for our estimated reserves on potential uncollectible amounts to
be received from theatrical exhibitors. We also make adjustments
to our home video revenues for estimates on return reserves that
may differ from those reported by Disney. The estimates on
reserves may be adjusted periodically based on actual rates of
returns, inventory levels in the distribution channel, as well
as other business and industry information. In addition, we
utilize margin normalization, such as with merchandising or home
video, in accordance with the provisions of SOP 00-2. This
may result in the utilization of budgeted or forecasted
information rather than actual costs incurred if it is deemed to
be a more accurate reflection of our participation. Similar to
return reserves, these expense estimates are reviewed and may be
adjusted periodically to ensure the most accurate depiction of
our participation is reflected. Such adjustments were made to
home video reserve and home video and merchandise expense
estimates during fiscal 2002. These one-time adjustments to A
Bugs Lifeand Toy Story 2 home video
reserves and margins and merchandising revenues had a net impact
of $0.19 to our diluted net income per share for fiscal 2002.

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

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



| |                      
| | ---------------------
| | Film Production Costs

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

Once a film is released, capitalized film
production costs will be amortized in the proportion that the
revenue during the period for each film bears to the estimated
revenue to be received from all sources under the
individual-film-forecast-computation method. The amount of film
costs that will be amortized each quarter will depend on how
much future revenue we expect to receive from each film. We make
certain estimates and judgments of our future gross revenues to
be received for each film based on information received from
Disney, and our knowledge of the industry. Estimates of
anticipated total gross revenues are reviewed periodically and
may be revised if necessary. A change to the estimate of gross
revenues for an individual film may result in an increase or
decrease to the percentage of amortization of capitalized film
costs

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##### Table of Contents



relative to a previous period. Unamortized film
production costs are compared with net realizable value each
reporting period on a film-by-film basis. If estimated remaining
gross revenues are not sufficient to recover the unamortized
film production costs, the unamortized film production costs
will be written down to fair value.


Results of Operations

Our results for the year ended December 28,
2002 were driven primarily by the worldwide home video release
and foreign box office performance of Monsters, Inc.,related merchandise sales and other ancillary royalties for
Monsters, Inc.and to a lesser extent, continuing
revenues from our library of films. By the end of fiscal year
2002, Monsters, Inc.had generated approximately
$524 million in worldwide box office receipts. We have also
recognized shipments of approximately 30.4 million home
video units, comprised of 8.6 million VHS units and
11.4 million DVD units domestically and 6.7 million
VHS units and 3.7 million DVD units internationally. We
have recognized essentially all worldwide theatrical revenues
from Monsters, Inc.and a substantial portion of the
worldwide home video revenues as of December 28, 2002.



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

Total revenue, which consists of film revenue and
software revenue, amounted to $172.3 million in 2000,
$70.2 million in 2001 and $201.7 million in 2002.

Film revenue was $163.2 million in 2000,
$63.4 million in 2001, and $193.6 million in 2002. Film
revenues for 2000 were derived primarily from the worldwide
theatrical and home video release of Toy Story 2along with its associated merchandise revenues and related
ancillary royalties, including those associated with the Buzz
Lightyear of Star Commanddirect-to-video release and
television series. Also contributing to the film revenue in 2000
were continuing home video and merchandise sales from Toy
Storyand A Bugs Life. Film revenues for 2001
consisted of revenues from our library titles (Toy Storyand A Bugs Life) of $27.1 million,
$23.5 million from Toy Story 2and
$12.1 million from Monsters, Inc.domestic
theatrical release. Revenues from our library titles resulted
primarily from television licensing, continuing home video and
merchandise sales, and ancillary royalties, including revenues
resulting from a one-time transaction associated with
interactive games. The higher revenues in 2000 as compared to
2001 were primarily due to the tremendous success of Toy
Story 2in both theatrical and home video markets.

Film revenues for 2002 consisted of
$141.5 million from Monsters, Inc.and
$50.1 million in revenues from our library titles (Toy
Story, A Bugs Lifeand Toy Story 2).
Revenues for Monsters, Inc.were derived from the
worldwide home video sales, foreign box office receipts,
merchandise sales and ancillary royalties. Revenues from our
library titles resulted primarily from international television
licensing, worldwide home video sales, merchandising sales and
ancillary royalties. Included within these amounts were revenues
of $20.1 million as a result of one-time adjustments to
film revenue from A Bugs Lifeand Toy
Story 2home video reserves and margins and
merchandising revenues, which had a net impact of $0.19 to our
diluted net income per share. The higher revenues in 2002
relative to both 2000 and 2001 were primarily due to the
tremendous success of Monsters, Inc.in both foreign
theatrical and worldwide home video markets. In May 2003, two of
our library titles, Toy Storyand A Bugs
Life, will go on a moratorium.

Software revenue includes software license
revenue, principally from RenderMan®, and royalty revenue
from licensing Physical Effects, Inc. (PEI)
technology to a third party. Software revenue was
$9.1 million in 2000, $6.9 million in 2001 and
$8.1 million in 2002. PEI, a company we acquired in 1998,
licensed certain of its technology to a third party, from which
we now receive associated royalty revenue on a quarterly basis.
In spite of the increase in software revenue for 2002, our
primary focus is on content creation for animated feature films
and related products, and as a result, we have not increased the
time and resources necessary to generate significantly higher
RenderMan® license revenues. Therefore, we continue to
expect ongoing variability in revenue derived from software
licenses from year to year. Software maintenance contracts are
recorded as unearned revenue and recognized ratably over the
life of the maintenance agreement, which ranges from 6 to
24 months in duration.

For fiscal years 2000, 2001 and 2002, Disney
accounted for 95%, 91% and 96%, respectively, of our total
revenue.

36



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

Cost of film revenue was $36.4 million in
2000, $11.8 million in 2001 and $41.0 million in 2002
and represents primarily amortization of capitalized film costs.
Cost of film revenue as a percentage of film revenue for fiscal
years 2000, 2001 and 2002 was 22%, 19% and 21%, respectively.
Our cost of film revenue as a percentage of film revenue may
vary for any given period due to changes in the mix of film
revenue as the gross profit varies by film, as well as for
revisions to estimates on revenue to be received under the
individual-film-forecast method. A change to an individual
films estimate of revenue to be received may result in an
increase or decrease to the amortization of the capitalized film
costs relative to a previous period. Toy Storyrevenue
has no related cost, as film costs were fully amortized by
December 31, 1997. For 2000, the cost of revenue percentage
was driven primarily from the amortization of capitalized film
costs for Toy Story 2, which had a higher
amortization percent than the other films at that time. The
decline in cost of film revenue as a percentage of total film
revenue from 2000 to 2001 can be attributed to a higher
proportion of revenues resulting from Toy Storyand A
Bugs Life, which had lower percentages of cost
amortization than Toy Story 2. The increase in cost
of film revenue as a percentage of total film revenue from 2001
to 2002 can be attributed to a much higher proportion of
revenues resulting from Monsters, Inc., which had a
higher percentage of cost amortization than our library titles.

Cost of software revenue consists of the direct
cost and manufacturing overhead required to reproduce and to
package our software products, as well as amortization of
purchased technology. Cost of software revenue includes no
amortization of internal software development expenses since no
such expenses have been capitalized. Cost of software revenue as
a percentage of the related revenue increased from 6% in 2000 to
8% in 2001 and then decreased to 7% in 2002. Cost of software
revenue in all three years was due primarily to the amortization
of purchased technology associated with the 1998 acquisition of
PEI. Approximately $2.7 million of the PEI purchase price
was assigned to purchased technology, which PEI licensed to a
third party. Amortization of this purchased technology was
completed in 2002.



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

Total operating expenses increased from
$14.9 million in 2000, to $16.4 million in 2001 and to
$19.5 million in 2002. We anticipate an increase in
operating expenses in future periods due to the growth
experienced by the studio as we increase resources dedicated to
production of our three current film projects remaining in the
Co-Production Agreement and to our own productions. Under the
Co-Production Agreement, Disney reimburses us for half of
certain general and administrative costs and certain research
and development costs that benefit the productions. The funding
received from Disney is treated as operating expense
reimbursements. See Note 4 of Notes to Financial
Statements. To the extent that personnel, facilities and other
expenditures are neither capitalized by us nor allocated to and
paid for by Disney, and precede or are not subsequently followed
by an increase in revenue, our business, operating results and
financial condition will be materially adversely affected. For
example, in February 2003 we approved Project 2006 for
production and because it is our first feature film to be
produced outside of the existing relationship with Disney,
certain costs that were previously reimbursed by Disney will now
be expensed as incurred.

Research and Development.Research and development expenses
consist primarily of salaries and support for personnel
conducting research and development for the RenderMan®
product, for our proprietary MarionetteTM and
RingmasterTM animation and production management
software and for creative development for future films. Research
and development expenses were $5.6 million in 2000,
$6.3 million in 2001 and $8.5 million in 2002.
Research and development expenses in 2000 incorporated a
one-time, $523,000 reimbursement from Disney under the
Co-Production Agreement for certain research and development
expenses incurred prior to 2000 for short film projects. After
allowing for the one-time reimbursement, the slight increase in
research and development expenses for 2001 was primarily
attributable to increases in employee related expenses
associated with additional staffing for research and
development, offset by a reduction in short film project and
creative development costs. Research and development in 2002
increased from 2001 as a result of increases in employee related
expenses associated with additional staffing for research and
development and an increase in short film project costs and
creative development costs. We expect research and development
expenses to increase in future periods as we increase our
investments in our

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proprietary technology. To date, all research and
development costs not reimbursed by Disney have been expensed as
incurred.


Sales and Marketing.Sales and marketing expenses consist
primarily of salaries and related overhead, as well as public
relations, advertising, technical support and trade show costs
required to support our software segment. Sales and marketing
expenses were $1.6 million in 2000, $2.0 million in
2001 and $1.3 million in 2002. The increase in expenses
during 2001 was primarily due to additional expenses associated
with the corporate marketing and creative resources departments
related to the release of our fourth film, Monsters, Inc.The decrease in expenses during 2002 can be attributed to
greater reimbursements received from Disney for marketing costs
related to Monsters, Inc.and our other upcoming feature
film projects. We believe that sales and marketing expenses will
increase in future periods, particularly in the areas of public
relations and corporate marketing.

General and Administrative.General and administrative expenses
consist primarily of salaries of management and administrative
personnel, insurance costs and professional fees. General and
administrative expenses have increased from $7.7 million in
2000 to $8.1 million in 2001 and to $9.7 million in
2002. The increase in general and administrative expenses from
2000 to 2001 was primarily due to increases in employee-related
costs and insurance, which were offset by reductions in public
company costs. The increase from 2001 to 2002 was primarily due
to increases in employee related costs and professional fees and
certain one-time settlements paid in the fourth quarter of 2002.
General and administrative expenses may increase in future
periods.



| |             
| | ------------
| | Other Income

Other income was $13.7 million in 2000,
$14.7 million in 2001 and $10.3 million in 2002. Other
income consists primarily of interest income from investments.
The increase from 2000 to 2001 is primarily due to a one-time,
non-recurring settlement of approximately $2.0 million,
unrelated to our core business in 2001. The decrease from 2001
to 2002 is due to the one-time, non-recurring settlement in
2001. Also contributing to the decrease were declining interest
rates during 2002.



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

Income tax expense of $55.6 million,
$20.0 million and $61.1 million reflects our effective
tax rates of 41.5%, 35.6% and 40.4% for 2000, 2001 and 2002,
respectively. Our income tax rate was lower in 2001 due to the
utilization of research and experimentation credits for federal
and state tax purposes, as well as the utilization of certain
other state credits and exemptions. In 2002, our income tax rate
approximated U.S. Federal and California State statutory
rates. Our effective tax rate may fluctuate in future periods.
See Note 6 of Notes to Financial Statements.



| |                        
| | -----------------------
| | Stock Option Accounting

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

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

|                              |                                                  |                      |   |              |        |              |   |        |        |  |   |         |        | 
|----------------------------- | ------------------------------------------------ | -------------------- | - | ------------ | ------ | ------------ | - | ------ | ------ |  | - | ------- | ------ | 
|                              |                                                  |                     
|                              |                                                  | Fiscal Year Ended   
|                              |                                                  |                     
|                              |                                                  | December 30,         |   | December 29, |        | December 28,
|                              |                                                  | 2000                 |   | 2001         |        | 2002        
|                              |                                                  |                      |   |              |        |             
|Net income:                   |                                                  |                      |   |              |        |              |   |        |        |  |   |        
|                              | As reported                                      |                      | $ | 78,433       |        |              | $ | 36,217 |        |  | $ | 89,950  |       
|                              | Fair value-based compensation cost, net of taxes |                      |   | (10,027      | )      |              |   | (7,998 | )      |  |   | (13,159 | )     
|                              |                                                  |                      |   |              |        |              |   |        |        |  |   |        
|                              |                                                  | Pro forma net income |   | $            | 68,406 |              |   | $      | 28,219 |  |   | $       | 76,791 | 
|                              |                                                  |                      |   |              |        |              |   |        |        |  |   |        
|Basic net income per share:   |                                                  |                      |   |              |        |              |   |        |        |  |   |        
|                              | As reported                                      |                      | $ | 1.66         |        |              | $ | 0.75   |        |  | $ | 1.78    |       
|                              | Pro forma                                        |                      | $ | 1.45         |        |              | $ | 0.58   |        |  | $ | 1.52    |       
|Diluted net income per share: |                                                  |                      |   |              |        |              |   |        |        |  |   |        
|                              | As reported                                      |                      | $ | 1.57         |        |              | $ | 0.71   |        |  | $ | 1.68    |       
|                              | Pro forma                                        |                      | $ | 1.45         |        |              | $ | 0.58   |        |  | $ | 1.49    |       

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

Liquidity and Capital Resources

Cash, cash equivalents and investments increased
from $278.6 million at December 29, 2001 to
$339.1 million at December 28, 2002. The increase was
primarily due to cash received from Disney for our share of film
revenue, as well as proceeds from stock option exercises,
software revenue, and interest income. This increase was
partially offset by film production spending, tax payments and
capital spending on our studio and headquarter facilities in
Emeryville, California. In 2000, cash provided by operating
activities was primarily attributable to net income of
$78.4 million resulting primarily from film revenue related
to Toy Story 2, cash provided by unearned revenue
totaling $14.1 million, the non-cash impact of deferred
income taxes and tax benefit from stock option exercises of
$14.7 million, and the non-cash impact of depreciation and
amortization expense and amortization of capitalized film
production costs, totaling $40.3 million. Cash provided by
operating activities for 2000 was partially offset by
receivables from Disney of $61.8 million and capitalized
film production costs of $28.4 million. In 2001, cash
provided by operating activities was attributable to net income
of $36.2 million resulting primarily from film revenue
related to our film library, Toy Story 2and
Monsters, Inc., cash collections on Disney receivables of
$60.3 million, the non-cash impact of deferred income taxes
and tax benefit from stock option exercises of
$12.3 million, and the non-cash impact of depreciation and
amortization expense and amortization of capitalized film
production costs, totaling $18.8 million. Cash provided by
operating activities for 2001 was partially offset by
capitalized film production costs of $40.8 million,
decreases in net accounts payable and accrued liabilities of
$5.2 million, income taxes payable of $6.8 million and
unearned revenue of $13.3 million. In 2002, cash used in
operating activities was attributable to net income of
$90.0 million resulting primarily from film revenue related
to our film library and Monsters, Inc., the non-cash
impact of the tax benefit from stock option exercises of
$38.6 million, the non-cash impact of depreciation and
amortization expense and amortization of capitalized film
production costs, totaling $47.1 million and an increase in
unearned revenue of $5.2 million. Cash used in operating
activities for 2002 included increases in our receivable from
Disney of $115.9 million, capitalized film production costs
of $43.9 million, decreases in accounts payable of
$2.5 million, income taxes payable of $1.6 million and
deferred income taxes of $11.2 million. In 2000, 2001 and
2002, cash used in investing activities primarily consisted of
investments in securities and purchase of property and
equipment, offset by net proceeds from sales of securities. In
2000, 2001 and 2002, cash provided by financing activities
primarily consisted of proceeds from exercised stock options.

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As of December 28, 2002, our principal
source of liquidity was approximately $339.1 million in
cash, cash equivalents and investments. Our future capital
commitments primarily consist of obligations to fund production
costs of films and derivative products under the Co-Production
Agreement and beyond. Pursuant to the Co-Production Agreement,
we will co-finance the next three original animated feature
films we have in production, Finding Nemo, The Incrediblesand Cars. In the future, we may co-finance other
derivative works such as theatrical sequels, direct to home
video sequels, interactive products and television productions.
Additionally, we have already approved for production our first
film beyond the Co-Production Agreement and will finance those
costs entirely. We also have obligations to pay portions of any
revenue derived from each feature film produced under the
Co-Production Agreement to our entertainment law firm in
consideration for services rendered.

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

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

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

At December 28, 2002, we had contractual
commitments to make payments under operating leases. Payments
due under these long-term obligations are as follows (in
thousands):

|                                   |  |       |       |                 |  |       |     |  |  |   |     | 
|---------------------------------- |  | ----- | ----- | --------------- |  | ----- | --- |  |  | - | --- | 
|                                   |  |       |       |                
|                                   |  |       |       | Payments Due by
|                                   |  |       |       | Period         
|                                   |  |       |       |                
|                                   |  |       |       | Less than       |  | 1-3  
|                                   |  | Total |       | 1 Year          |  | Years
|                                   |  |       |       |                 |  |      
|Total contractual cash obligations |  | $     | 1,618 |                 |  | $     | 846 |  |  | $ | 772 | 
|                                   |  |       |       |                 |  |       |     |  |  |   |     | 

Recent Accounting Pronouncements

In June 2001, the FASB issued
SFAS No. 143, Accounting for Asset Retirement
Obligations, which addresses financial accounting and
reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement
costs. The standard applies to legal obligations associated with
the retirement of long-lived assets that result from the
acquisition, construction, development and/or normal use of the
asset. SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in
the period in which it is incurred if a reasonable estimate of
fair value can be made. The fair value of the liability is added
to the carrying amount of the associated asset and this
additional carrying amount is depreciated over the life of the
asset. We are required to adopt the provisions of
SFAS No. 143 for the first quarter of fiscal 2003, and
we do not expect the adoption of SFAS No. 143 to have
a material impact on our financial statements.

In August 2001, the FASB issued
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which supersedes both
SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of, and the accounting and reporting provisions of APB
Opinion No. 30, Reporting the Results of
Operations  Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, for the
disposal of a

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segment of a business (as previously defined in
that Opinion). SFAS No. 144 retains the fundamental
provisions in SFAS No. 121 for recognizing and
measuring impairment losses on long-lived assets held for use
and long-lived assets to be disposed of by sale, while also
resolving significant implementation issues associated with
SFAS No. 121. SFAS No. 144 retains the basic
provisions of APB No. 30 on how to present
discontinued operations in the income statement but broadens
that presentation to include a component of an entity (rather
than a segment of a business). We adopted the provisions of
SFAS No. 144 for the first quarter of fiscal 2002, and
the adoption of SFAS No. 144 did not have a material
impact on our financial statements.


In June 2002, the FASB issued
SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS No. 146
supersedes Emerging Issues Task Force Issue No. 94-3,
Liability Recognition for Certain Employee Termination
Benefits and Other Costs To Exit an Activity (Including Certain
Costs Associated with a Restructuring) and requires that a
liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred, as
opposed to when management is committed to an exit plan.
SFAS No. 146 also establishes that the liability
should initially be measured and recorded at fair value.
SFAS No. 146 is effective for exit or disposal
activities initiated after December 31, 2002. The
provisions of SFAS No. 146 are required to be applied
prospectively after the adoption date to newly initiated exit
activities, and may affect the timing of recognizing future
restructuring costs, as well as the amounts recognized.

In November 2002, the FASB issued Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, which elaborates on existing
disclosure of most guarantees and clarifies when a company must
recognize an initial liability for the fair value of obligations
it assumes under guarantee agreements. The initial recognition
and measurement provisions apply on a prospective basis to
guarantees issued or modified after December 31, 2002. The
disclosure requirements of FIN 45 are effective for fiscal
2002. We do not expect the adoption of FIN No. 45 to
have a material impact on our financial statements.

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

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






|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risk

Investment Portfolio.We invest in a variety of investment
grade, fixed income securities, including obligations of
corporations and national governmental entities and their
agencies. This diversification of risk is consistent with our
policy to ensure safety of our principal and maintain liquidity.
We only invest in securities

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with a maturity of 24 months or less, with
only government obligations exceeding 12 months. Our
investments are primarily fixed rate obligations and carry a
certain degree of interest rate risk. A rise in interest rates
could adversely impact the fair market value of these securities.


All of our financial instruments are held for
purposes other than trading and are considered available
for sale according to SFAS No. 115. The table
below provides information regarding our investment portfolio at
December 28, 2002. The table presents principal cash flows
and related weighted-average fixed interest rates presented by
expected maturity date (dollars in thousands):

|                               |  |           |         |        |  |       |         |   |  |   |         |  
|------------------------------ |  | --------- | ------- | ------ |  | ----- | ------- | - |  | - | ------- | -
|                               |  | Less than |         | Over   |  |      
|                               |  | 1 year    |         | 1 year |  | Total
|                               |  |           |         |        |  |      
|Available-for-sale securities  |  | $         | 162,525 |        |  | $     | 132,127 |   |  | $ | 294,652 |  
|Weighted-average interest rate |  |           | 3.46    | %      |  |       | 3.06    | % |  |   | 3.28    | %

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






|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

The financial statements required pursuant to
this item are included in Part IV, Item 15 of this
Form 10-K and are presented beginning on page 50. The
supplementary financial information required by this item is
included in the notes to the financial statements under the
subsection entitled Quarterly Financial Information
(Unaudited), beginning on page 69.






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

Not applicable.




PART III






|         |                                                    
|-------- | ---------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Company

Directors

The members of our Board of Directors as of
March 4, 2003 are as follows:

|                       |  |     |    |                     |  |                                     
|---------------------- |  | --- | -- | ------------------- |  | ------------------------------------
|Name                   |  | Age |    | Position with Pixar
|                       |  |     |    |                    
|Steve Jobs             |  |     | 48 |                     |  | Chairman and Chief Executive Officer
|Edwin E. Catmull       |  |     | 57 |                     |  | President and Director              
|Skip M. Brittenham     |  |     | 61 |                     |  | Director                            
|Joseph A. Graziano     |  |     | 59 |                     |  | Director                            
|Lawrence B. Levy       |  |     | 43 |                     |  | Director                            
|Joe Roth               |  |     | 54 |                     |  | Director                            
|Larry W. Sonsini       |  |     | 62 |                     |  | Director                            
|John S. Wadsworth, Jr. |  |     | 63 |                     |  | Director                            

Mr. Jobsis a
co-founder of Pixar and has served as Chairman since March 1991,
and as Chief Executive Officer since February 1986. He has been
a director of Pixar since February 1986. In addition,
Mr. Jobs is currently Chief Executive Officer and a member
of the Board of Directors of Apple Computer, Inc.
(Apple). Mr. Jobs was also a co-founder of NeXT
Software, Inc. (NeXT), which developed and marketed
object-oriented software for client/ server business
applications and the Internet, and served as the Chairman and
Chief Executive Officer of NeXT from October 1985 until February
1997, when NeXT was

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acquired by Apple. Mr. Jobs then served as
an advisor to Apple on a limited basis and served as interim
Chief Executive Officer until assuming his current role as Chief
Executive Officer at Apple.


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

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

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

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

Mr. Roth,
founder of Revolution Studios, has served as a director of Pixar
since October 2000. Mr. Roth formed Revolution Studios in
May 2000 to independently produce and finance films in
partnership with Sony Pictures, Starz!/ Encore Group and Fox
Entertainment Group. Prior to founding Revolution Studios,
Mr. Roth served as Chairman of the Walt Disney Studios from
April 1996 to January 2000, Chairman of the Walt Disney Motion
Picture Group from August 1994 to April 1996, and Chairman of
Twentieth Century Fox from July 1989 to November 1992. In
addition, Mr. Roth ran Caravan Pictures from 1992 to 1994.
Prior to his time at Twentieth Century Fox, Mr. Roth was a
producer/director and co-founded Morgan Creek Pictures.
Mr. Roth is a graduate of Boston University.

Mr. Sonsinihas
served as a director of Pixar since April 1995 and served as
Secretary from April 1995 to October 1995. He has been an
attorney with the law firm of Wilson Sonsini Goodrich &
Rosati since 1966 and currently serves as Chairman and Chief
Executive Officer. Mr. Sonsini also serves as a director
for Brocade Communications Systems, Inc., Echelon Corporation,
Lattice Semiconductor Corporation, and LSI Logic Corporation.
Mr. Sonsini received A.B. and L.L.B. degrees from the
University of California, Berkeley.

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Mr. Wadsworthhas served as a director of Pixar since December 2002.
Mr. Wadsworth is Honorary Chairman of Morgan Stanley Asia
Limited and an Advisory Director for Morgan Stanley globally,
having spent nearly two decades overseeing Morgan Stanleys
policy and business strategies throughout Asia and Australia.
After joining Morgan Stanley in 1978, Mr. Wadsworth had
numerous responsibilities in the U.S. Investment Banking
Division, including serving on the Investment Banking Operating
Committee, Chairman of the Firm Investment Account Committee,
Chairman of Morgan Stanley Ventures and a member of the
Firms Management Committee. Mr. Wadsworth is also a
Trustee and Vice Chairman of the Asia Society, a Trustee of
Williams College, a member of the Board of Trustees of the
Guggenheim Museum of New York and a Partner of Manitou Ventures.
Mr. Wadsworth earned a B.A. from Williams College and a
M.B.A. from the University of Chicago, Graduate School of
Business.

Executive Officers

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

Section 16(a) Beneficial Ownership
Reporting Compliance

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

Based solely on our review of the copies of such
forms received by us and written representations from certain
reporting persons that no Forms 5 were required for such
persons, we believe that during fiscal 2002 all
Section 16(a) filing requirements applicable to our
executive officers, directors and 10% shareholders were complied
with.




Item 11.Executive
Compensation

Summary Compensation Table

The following table shows, as to our Chief
Executive Officer and each of the four most highly compensated
executive officers whose salary plus bonus exceeded $100,000
during the last fiscal year (the

44



---



##### Table of Contents



Named Officers), information
concerning compensation paid for services to us in all
capacities during the last three fiscal years.


|                            |                                      |      |      |                     |  |            |           |              |  |              |         |           |     |  |           |   |  |   |       |         |    
|--------------------------- | ------------------------------------ | ---- | ---- | ------------------- |  | ---------- | --------- | ------------ |  | ------------ | ------- | --------- | --- |  | --------- | - |  | - | ----- | ------- | ---
|                            |                                      |      |      |                     |  |            |           | Long Term    |  |             
|                            |                                      |      |      |                     |  |            |           | Compensation |  |             
|                            |                                      |      |      |                     |  |            |           | Awards       |  |             
|                            |                                      |      |      |                     |  |            |           |             
|                            |                                      |      |      | Annual Compensation |  | Securities |           |             
|                            |                                      |      |      |                     |  | Underlying |           | All Other   
|Name and Principal Position |                                      | Year |      | Salary              |  | Bonus      |           | Options(#)   |  | Compensation
|                            |                                      |      |      |                     |  |            |           |              |  |             
|Steve Jobs                  |                                      |      | 2002 |                     |  | $          | 52        |              |  | $            |        |           |     |  |          |   |  | $ |      |        
|                            | Chairman, Chief Executive Officer    |      |      | 2001                |  |            |           | 52           |  |              |         |          |     |  |           |  |  |   |       |        |    
|                            |                                      |      | 2000 |                     |  |            | 52        |              |  |              |        |           |     |  |          |   |  |   |      |        
|Edwin E. Catmull            |                                      |      | 2002 |                     |  |            | 521,950   |              |  |              | 43,334  |           |     |  |          |   |  |   | 2,000 | (3)    
|                            | President                            |      |      | 2001                |  |            |           | 498,088      |  |              |         |          |     |  |           |  |  |   |       | 2,000   | (3)
|                            |                                      |      | 2000 |                     |  |            | 392,793   |              |  |              |        |           |     |  | 500,000   |   |  |   |      |        
|Ann Mather                  |                                      |      | 2002 |                     |  |            | 432,474   |              |  |              | 36,401  |           |     |  |          |   |  |   | 2,000 | (3)    
|                            | Executive Vice President,            |      |      | 2001                |  |            |           | 416,074      |  |              |         |          |     |  |           |  |  |   |       | 2,000   | (3)
|                            | Chief Financial Officer              |      |      | 2000                |  |            |           | 400,005      |  |              |         |          |     |  |           |  |  |   |       |        |    
|John Lasseter               |                                      |      | 2002 |                     |  |            | 2,595,542 |              |  |              |        |           |     |  |          |   |  |   | 2,000 | (3)    
|                            | Executive Vice President, Creative   |      |      | 2001                |  |            |           | 2,122,694    |  |              |         | 5,000,000 | (1) |  |           |  |  |   |       | 573,044 | (2)
|                            |                                      |      | 2000 |                     |  |            | 879,567   |              |  |              | 600,000 |           |     |  | 1,000,000 |   |  |   |      |        
|Sarah McArthur              |                                      |      | 2002 |                     |  |            | 437,308   |              |  |              | 36,401  |           |     |  |          |   |  |   | 2,000 | (3)    
|                            | Executive Vice President, Production |      |      | 2001                |  |            |           | 419,246      |  |              |         |          |     |  |           |  |  |   |       | 2,000   | (3)
|                            |                                      |      | 2000 |                     |  |            | 392,793   |              |  |              |        |           |     |  |          |   |  |   |      |        



---



|    |                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------
|(1) | This amount includes $60,000 that was paid to a
    third party.                                                                     
|   
|(2) | This amount includes $332,947 paid in lieu of
    vacation, $238,097 paid in lieu of a sabbatical and $2,000
    employer 401K match.
|   
|(3) | Commencing January 1, 2001, maximum employer
    matching contribution under the Companys 401K plan.                                

Option Grants in Last Fiscal Year

No options were granted to the Named Officers
during fiscal year 2002.

Option Exercises and Holdings

The following table sets forth, for each of the
Named Officers, certain information concerning stock options
exercised during fiscal 2002, and the number of shares subject
to both exercisable and unexercisable stock options as of
December 28, 2002. Also reported are values for
in-the-money options that represent the positive
spread between the respective exercise prices of outstanding
stock options and the fair market value of our Common Stock as
of December 28, 2002.

|                 |  |             |         |          |  |                               |           |                       |  |             |         |               |  |  |         |  |  |   |            |  |  |   |            | 
|---------------- |  | ----------- | ------- | -------- |  | ----------------------------- | --------- | --------------------- |  | ----------- | ------- | ------------- |  |  | ------- |  |  | - | ---------- |  |  | - | ---------- | 
|                 |  |             |         |          |  |                               |           |                      
|                 |  |             |         |          |  | Number of Securities          |           | Value of Unexercised 
|                 |  | Shares      |         |          |  | Underlying Unexercised        |           | In-the-money Options 
|                 |  | Acquired on |         |          |  | Options at Fiscal Year End(#) |           | at Fiscal Year End(1)
|                 |  | Exercise    |         | Value    |  |                               |           |                      
|Name             |  | (#)         |         | Realized |  | Exercisable                   |           | Unexercisable         |  | Exercisable |         | Unexercisable
|                 |  |             |         |          |  |                               |           |                       |  |             |         |              
|Steve Jobs       |  |             |        |          |  | $                             |          |                       |  |             |        |               |  |  |        |  |  | $ |           |  |  | $ |           | 
|Edwin E. Catmull |  |             | 25,000  |          |  |                               | 808,471   |                       |  |             | 100,000 |               |  |  | 375,000 |  |  |   | 2,679,000  |  |  |   | 10,046,250 | 
|Ann Mather       |  |             | 375,000 |          |  |                               | 7,197,845 |                       |  |             |        |               |  |  | 125,000 |  |  |   |           |  |  |   | 2,419,063  | 
|John Lasseter    |  |             | 210,000 |          |  |                               | 9,361,886 |                       |  |             | 380,007 |               |  |  | 799,993 |  |  |   | 13,173,763 |  |  |   | 21,431,812 | 
|Sarah McArthur   |  |             | 40,000  |          |  |                               | 1,602,576 |                       |  |             | 100,000 |               |  |  | 150,000 |  |  |   | 3,622,750  |  |  |   | 4,787,250  | 



---



|    |                                                                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Market value of underlying securities based on
    the closing price of Pixars Common Stock on
    December 27, 2002 (the last trading day of fiscal 2002) on
    the Nasdaq National Market of $53.29 minus the exercise price.

45



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##### Table of Contents



Employment Agreements

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

Director Compensation

Directors who are not employees of Pixar receive
a fee of $1,000 for each meeting attended of the Board of
Directors and a fee of $1,000 for each meeting attended of a
committee of the Board of Directors if such committee meeting is
not held in conjunction with a meeting of the Board of
Directors. All directors are reimbursed for expenses incurred in
attending such meetings.

Non-employee directors are eligible to receive
option grants pursuant to our 1995 Director Option Plan (the
Director Plan) which was adopted by the Board of
Directors in October 1995, approved by the shareholders in
November 1995 and took effect in November 1995. A total of
400,000 shares of Common Stock have been reserved for
issuance under the Director Plan. As of March 4, 2003,
there were 220,000 options outstanding under the Director Plan.
The Director Plan provides for an automatic grant of an option
to purchase 30,000 shares of Common Stock (the First
Option) to each non-employee director who first becomes a
non-employee director (other than an employee director who
ceases to be an employee but remains a director) after the
effective date of the Director Plan on the date on which such
person first becomes a non-employee director. Beginning on the
third anniversary of the date he or she became an outside
director, each non-employee director will automatically be
granted an option to purchase 10,000 shares of Common Stock
(a Subsequent Option) each year on the date of
such anniversary, provided he or she is then a non-employee
director. Each non-employee director will be eligible to receive
a Subsequent Option, regardless of whether such non-employee
director was eligible to receive a First Option. First Options
and each Subsequent Option will have a term of ten years.
One-third of the shares subject to a First Option will vest one
year after its date of grant and an additional one-third will
vest at the end of each year thereafter, provided that the
optionee continues to serve as a director on such dates. All of
the shares subject to a Subsequent Option will vest one year
after the date of the option grant, provided that the optionee
continues to serve as a director on such date. The exercise
prices of the First Option and each Subsequent Option will be
100% of the fair market value per share of Pixars Common
Stock on the date of the grant of the option. In 2002,
Mr. Sonsini was granted a Subsequent Option in
April 2002 at an exercise price of $40.07 per share; Mr.
Levy was granted a Subsequent Option in May 2002 at an exercise
price of $43.27 per share; Messrs. Brittenham and Graziano

46



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##### Table of Contents



were each granted Subsequent Options in
September 2002 at an exercise price of $48.84 per share;
and Mr. Wadsworth was granted a First Option in
December 2002 at an exercise price of $58.62 per share.


Compensation Committee Interlocks and Insider
Participation

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






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

The following table sets forth the beneficial
ownership of Common Stock of Pixar as of March 4, 2003 for
the following: (i) each person who is known by Pixar to own
beneficially more than 5% of the outstanding shares of
Pixars Common Stock; (ii) each of Pixars
directors; (iii) each of the Named Officers; and
(iv) all directors and executive officers of Pixar as a
group.

|                                                                     |                                                         |           |            |             |  |  |       |   | 
|-------------------------------------------------------------------- | ------------------------------------------------------- | --------- | ---------- | ----------- |  |  | ----- | - | 
|                                                                     |                                                         | Number of |            | Percent    
|Name of Beneficial Owner                                             |                                                         | Shares(1) |            | of Total(1)
|                                                                     |                                                         |           |            |            
|Steve Jobs                                                           |                                                         |           | 30,000,001 |             |  |  | 56.41 | %
|                                                                     | c/o Pixar
    1200 Park Avenue
    Emeryville, CA 94608 |           |            |             |  |  |       |   | 
|The TCW Group, Inc.(2)                                               |                                                         |           | 8,326,784  |             |  |  | 15.66 | %
|                                                                     | 865 South Figueroa St.
    Los Angeles, CA 90017        |           |            |             |  |  |       |   | 
|John Lasseter(3)                                                     |                                                         |           | 609,831    |             |  |  | 1.14  |  
|Edwin E. Catmull(4)                                                  |                                                         |           | 488,800    |             |  |  | *     |  
|Sarah McArthur(5)                                                    |                                                         |           | 98,500     |             |  |  | *     |  
|Ann Mather                                                           |                                                         |           |           |             |  |  | *     |  
|Lawrence B. Levy                                                     |                                                         |           | 25,010     |             |  |  | *     |  
|Joe Roth(6)                                                          |                                                         |           | 20,000     |             |  |  | *     |  
|Larry W. Sonsini(7)                                                  |                                                         |           | 54,528     |             |  |  | *     |  
|Skip M. Brittenham(8)                                                |                                                         |           | 70,000     |             |  |  | *     |  
|Joseph A. Graziano(9)                                                |                                                         |           | 40,000     |             |  |  | *     |  
|John S. Wadsworth, Jr.                                               |                                                         |           |           |             |  |  | *     |  
|All directors and executive officers as a group
    (11 persons)(10) |                                                         |           | 31,406,670 |             |  |  | 58.14 | %



---



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



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Based on 53,180,410 shares outstanding on
    March 4, 2003. The number and percentage of shares
    beneficially owned is determined under rules of the Securities
    and Exchange Commission (SEC), and the information
    is not necessarily indicative of beneficial ownership for any
    other purpose. Under such rules, beneficial ownership includes
    any shares as to which the individual has sole or shared voting
    power or investment power and also any shares which the
    individual has the right to acquire within sixty days of
    March 4, 2003 through the exercise of any stock option or
    other right. Unless otherwise indicated in the footnotes, each
    person has sole voting and investment power (or shares such
    powers with his or her spouse) with respect to the shares shown
    as beneficially owned.
|
| | (2) | As indicated in the Schedule 13G filed by
    The TCW Group, Inc. pursuant to the Exchange Act on
    February 3, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | (3) | Includes 358,341 shares subject to options
    that are exercisable within 60 days of March 4, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

47



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##### Table of Contents





| |     |                                                                                                     
| | --- | ----------------------------------------------------------------------------------------------------
| | (4) | Includes 200,000 shares subject to options
    that are exercisable within 60 days of March 4, 2003.
|
| | (5) | All 98,500 shares are subject to options
    that are exercisable within 60 days of March 4, 2003.  
|
| | (6) | All 20,000 shares are subject to options
    that are exercisable within 60 days of March 4, 2003.  
|
| | (7) | Includes 50,000 shares subject to options
    that are exercisable within 60 days of March 4, 2003. 
|
| | (8) | All 70,000 shares are subject to options
    that are exercisable within 60 days of March 4, 2003.  
|
| | (9) | All 40,000 shares are subject to options
    that are exercisable within 60 days of March 4, 2003.  



|     |                                                                                                     
|---- | ----------------------------------------------------------------------------------------------------
|(10) | Includes 836,841 shares subject to options
    that are exercisable within 60 days of March 4, 2003.

Equity Compensation Plan Information

The following table summarizes the number of
outstanding options granted to employees and directors, as well
as the number of securities remaining available for future
issuance, under the Companys compensation plans as of
December 28, 2002.

|                                                               |       |                      |            |                      |  |                                |       |       |  |  |         |         |    
|-------------------------------------------------------------- | ----- | -------------------- | ---------- | -------------------- |  | ------------------------------ | ----- | ----- |  |  | ------- | ------- | ---
|                                                               |       | Number of Securities |            |                      |  | Number of Securities Remaining
|                                                               |       | to be Issued         |            | Weighted-Average     |  | Available for Future Issuance 
|                                                               |       | Upon Exercise of     |            | Exercise Price of    |  | Under Equity Compensation     
|                                                               |       | Outstanding Options, |            | Outstanding Options, |  | Plans (Excluding Securities   
|Plan Category                                                  |       | Warrants and Rights  |            | Warrants and Rights  |  | Reflected in The First Column)
|                                                               |       |                      |            |                      |  |                               
|Equity compensation plans approved by security
    holders     |       |                      | 11,183,319 |                      |  | $                              | 28.87 |       |  |  | 476,880 | (1)    
|Equity compensation plans not approved by
    security holders |       |                      |           |                      |  |                                |      |       |  |  |        |        
|                                                               |       |                      |            |                      |  |                                |       |       |  |  |         |        
|                                                               | Total |                      |            | 11,183,319           |  |                                | $     | 28.87 |  |  |         | 476,880 | (1)
|                                                               |       |                      |            |                      |  |                                |       |       |  |  |         |        



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The Companys 1995 Stock Plan incorporates
    an evergreen formula pursuant to which on January 1 of each
    year the aggregate number of shares reserved for issuance under
    the 1995 Stock Plan will increase by a number of shares equal to
    3% of the total issued and outstanding shares as of that date.
    Pursuant to the evergreen formula, 1,586,832 shares were added
    to the shares reserved for issuance on January 1, 2003.




Item 13.Certain
Relationships and Related Transactions

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

In 2002, we began reimbursing our Chief Executive
Officer, Steve Jobs, for expenses incurred by Mr. Jobs in
the operation of his private plane when used for Pixar business.
During 2002, we recognized a total of approximately $89,000 of
such expenses.

We believe that all of the transactions set forth
above were made on terms no less favorable to us than could have
been obtained from unaffiliated third parties.




Item 14.Controls
and Procedures

a.Evaluation of
disclosure controls and procedures.Within 90 days
prior to the filing date of this Annual Report on Form 10-K
(the Evaluation Date), we evaluated, under the
supervision of our Chief Executive Officer and our Chief
Financial Officer, the effectiveness of our disclosure controls
and procedures. Based on this evaluation, our Chief Executive
Officer and our Chief Financial Officer have concluded that our

48



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##### Table of Contents



disclosure controls and procedures are effective
to ensure that information we are required to disclose in
reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms.


b.Changes in
internal controls.Subsequent to the Evaluation Date, there
were no significant changes in our internal controls or in other
factors that could significantly affect such controls, including
any corrective actions with regard to significant deficiencies
and material weaknesses.




PART IV




Item 15.     Exhibits,
Financial Statement Schedules and Reports on
Form 8-K

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

1.     Financial
Statements.

|                                                                                                                                                   |  |  |    | 
|-------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | -- | 
|Independent Auditors Report                                                                                                                       |  |  | 50 | 
|Balance Sheets as of December 29, 2001 and
    December 28, 2002                                                                                   |  |  | 51 | 
|Statements of Income for the years ended
    December 30, 2000, December 29, 2001 and
    December 28, 2002                                        |  |  | 52 | 
|Statements of Shareholders Equity and
    Comprehensive Income for the years ended December 30, 2000,
    December 29, 2001 and December 28, 2002 |  |  | 53 | 
|Statements of Cash Flows for the years ended
    December 30, 2000, December 29, 2001 and
    December 28, 2002                                    |  |  | 54 | 
|Notes to Financial Statements                                                                                                                      |  |  | 55 | 



| |                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2.     Financial
    Statement Schedule. We have filed the following financial
    statement schedule for the years ended December 30, 2000,
    December 29, 2001 and December 28, 2002 as part of
    this Form 10-K. It should be read in conjunction with our
    Financial Statements, and related notes.

|                                                                 |  |  |    | 
|---------------------------------------------------------------- |  |  | -- | 
|Independent Auditors Report on Financial
    Statement Schedule |  |  | 71 | 
|Schedule II  Valuation and
    Qualifying Accounts and Reserves |  |  | 72 | 

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

3.     Exhibits.
See Item 15(c) below.



| |                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (b) Reports on Form 8-K. We
    filed no reports on Form 8-K during the fourth quarter
    ended December 28, 2002.                                                                                                  
|
| | (c) Exhibits. We have filed, or
    incorporated into the Form 10-K by reference, the exhibits
    listed on the accompanying Index to Exhibits immediately
    following the certifications pages of this Form 10-K.
|
| | (d) Financial Statement Schedule. See
    Item 15(a) above.                                                                                                                                                          

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##### Table of Contents



INDEPENDENT AUDITORS REPORT

The Board of Directors and Shareholders, Pixar:

We have audited the accompanying balance sheets
of Pixar as of December 29, 2001 and December 28, 2002
and the related statements of income, shareholders equity
and comprehensive income, and cash flows for each of the years
in the three-year period ended December 28, 2002. These
financial statements are the responsibility of Pixars
management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred
to above present fairly, in all material respects, the financial
position of Pixar as of December 29, 2001 and
December 28, 2002, and the results of its operation and its
cash flows for each of the years in the three-year period ended
December 28, 2002, in conformity with accounting principles
generally accepted in the United States of America.



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

San Francisco, California

January 31, 2003


50



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##### Table of Contents



PIXAR

BALANCE SHEETS

|                                                                                                                                                       |                                                                                                                                                                                            |                    |                                            |              |         |         |         |         |         |         | 
|------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------ | ------------------------------------------ | ------------ | ------- | ------- | ------- | ------- | ------- | ------- | 
|                                                                                                                                                       |                                                                                                                                                                                            | December 29,       |                                            | December 28,
|                                                                                                                                                       |                                                                                                                                                                                            | 2001               |                                            | 2002        
|                                                                                                                                                       |                                                                                                                                                                                            |                    |                                            |             
|                                                                                                                                                       |                                                                                                                                                                                            |                   
|                                                                                                                                                       |                                                                                                                                                                                            | (In thousands,    
|                                                                                                                                                       |                                                                                                                                                                                            | except share data)
|ASSETS                                                                                                                                                
|Cash and cash equivalents                                                                                                                              |                                                                                                                                                                                            | $                  | 56,289                                     |              |         | $       | 44,431  |        
|Investments                                                                                                                                            |                                                                                                                                                                                            |                    | 222,310                                    |              |         |         | 294,652 |        
|Trade accounts receivable, net of allowance for
    doubtful accounts of $552 and $188 as of December 29, 2001
    and December 28, 2002, respectively |                                                                                                                                                                                            |                    | 1,516                                      |              |         |         | 1,178   |        
|Receivable from Disney                                                                                                                                 |                                                                                                                                                                                            |                    | 13,512                                     |              |         |         | 129,339 |        
|Other receivables                                                                                                                                      |                                                                                                                                                                                            |                    | 5,632                                      |              |         |         | 6,394   |        
|Prepaid expenses and other assets                                                                                                                      |                                                                                                                                                                                            |                    | 3,528                                      |              |         |         | 13,826  |        
|Deferred income taxes                                                                                                                                  |                                                                                                                                                                                            |                    | 21,673                                     |              |         |         | 32,719  |        
|Property and equipment, net                                                                                                                            |                                                                                                                                                                                            |                    | 111,995                                    |              |         |         | 117,423 |        
|Capitalized film production costs                                                                                                                      |                                                                                                                                                                                            |                    | 86,839                                     |              |         |         | 92,104  |        
|                                                                                                                                                       |                                                                                                                                                                                            |                    |                                            |              |         |         |         |        
|                                                                                                                                                       |                                                                                                                                                                                            | Total assets       |                                            | $            | 523,294 |         |         | $       | 732,066 |        
|                                                                                                                                                       |                                                                                                                                                                                            |                    |                                            |              |         |         |         |        
|                                                                                                                                                      
|LIABILITIES AND SHAREHOLDERS
    EQUITY                                                                                                              
|Accounts payable                                                                                                                                       |                                                                                                                                                                                            | $                  | 4,843                                      |              |         | $       | 2,341   |        
|Income taxes payable                                                                                                                                   |                                                                                                                                                                                            |                    | 1,808                                      |              |         |         |        |        
|Accrued liabilities                                                                                                                                    |                                                                                                                                                                                            |                    | 8,844                                      |              |         |         | 9,322   |        
|Unearned revenue                                                                                                                                       |                                                                                                                                                                                            |                    | 2,113                                      |              |         |         | 7,341   |        
|                                                                                                                                                       |                                                                                                                                                                                            |                    |                                            |              |         |         |         |        
|                                                                                                                                                       |                                                                                                                                                                                            | Total liabilities  |                                            |              | 17,608  |         |         |         | 19,004  |        
|                                                                                                                                                       |                                                                                                                                                                                            |                    |                                            |              |         |         |         |        
|Commitments and contingencies (Note 8)                                                                                                                 |                                                                                                                                                                                            |                    |                                            |              |         |         |         |        
|Shareholders equity:                                                                                                                                  |                                                                                                                                                                                            |                    |                                            |              |         |         |         |        
|                                                                                                                                                       | Preferred stock, no par value; 5,000,000 shares
    authorized, no shares issued and outstanding                                                                                           |                    |                                            |             |         |         |         |        |        
|                                                                                                                                                       | Common stock, no par value;
    100,000,000 shares authorized; 49,445,956 and
    52,894,466 shares issued and outstanding as of
    December 29, 2001 and December 28, 2002, respectively |                    |                                            | 325,362      |         |         |         | 442,477 |        
|                                                                                                                                                       | Accumulated other comprehensive income                                                                                                                                                     |                    |                                            | 1,845        |         |         |         | 2,156   |        
|                                                                                                                                                       | Retained earnings                                                                                                                                                                          |                    |                                            | 178,479      |         |         |         | 268,429 |        
|                                                                                                                                                       |                                                                                                                                                                                            |                    |                                            |              |         |         |         |        
|                                                                                                                                                       |                                                                                                                                                                                            |                    | Total shareholders equity                 |              |         | 505,686 |         |         |         | 713,062 | 
|                                                                                                                                                       |                                                                                                                                                                                            |                    |                                            |              |         |         |         |        
|                                                                                                                                                       |                                                                                                                                                                                            |                    | Total liabilities and shareholders equity |              | $       | 523,294 |         |         | $       | 732,066 | 
|                                                                                                                                                       |                                                                                                                                                                                            |                    |                                            |              |         |         |         |        

See accompanying notes to financial statements.

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PIXAR

STATEMENTS OF INCOME

|                                                          |                            |                                       |        |              |         |              |        |        |        |   |        |         |         | 
|--------------------------------------------------------- | -------------------------- | ------------------------------------- | ------ | ------------ | ------- | ------------ | ------ | ------ | ------ | - | ------ | ------- | ------- | 
|                                                          |                            |                                      
|                                                          |                            | Years Ended                          
|                                                          |                            |                                      
|                                                          |                            | December 30,                          |        | December 29, |         | December 28,
|                                                          |                            | 2000                                  |        | 2001         |         | 2002        
|                                                          |                            |                                       |        |              |         |             
|                                                          |                            |                                      
|                                                          |                            | (In thousands, except per share data)
|Revenue:                                                  |                            |                                       |        |              |         |              |        |        |        |   |        |        
|                                                          | Film                       |                                       | $      | 163,154      |         |              | $      | 63,365 |        |   | $      | 193,591 |        
|                                                          | Software                   |                                       |        | 9,113        |         |              |        | 6,858  |        |   |        | 8,133   |        
|                                                          |                            |                                       |        |              |         |              |        |        |        |   |        |        
|                                                          |                            | Total revenue                         |        |              | 172,267 |              |        |        | 70,223 |   |        |         | 201,724 | 
|                                                          |                            |                                       |        |              |         |              |        |        |        |   |        |        
|Cost of revenue:                                          |                            |                                       |        |              |         |              |        |        |        |   |        |        
|                                                          | Film                       |                                       |        | 36,433       |         |              |        | 11,769 |        |   |        | 41,003  |        
|                                                          | Software                   |                                       |        | 571          |         |              |        | 549    |        |   |        | 531     |        
|                                                          |                            |                                       |        |              |         |              |        |        |        |   |        |        
|                                                          |                            | Total cost of revenue                 |        |              | 37,004  |              |        |        | 12,318 |   |        |         | 41,534  | 
|                                                          |                            |                                       |        |              |         |              |        |        |        |   |        |        
|                                                          |                            | Gross profit                          |        |              | 135,263 |              |        |        | 57,905 |   |        |         | 160,190 | 
|                                                          |                            |                                       |        |              |         |              |        |        |        |   |        |        
|Operating expenses:                                       |                            |                                       |        |              |         |              |        |        |        |   |        |        
|                                                          | Research and development   |                                       |        | 5,562        |         |              |        | 6,339  |        |   |        | 8,497   |        
|                                                          | Sales and marketing        |                                       |        | 1,615        |         |              |        | 1,991  |        |   |        | 1,334   |        
|                                                          | General and administrative |                                       |        | 7,686        |         |              |        | 8,059  |        |   |        | 9,677   |        
|                                                          |                            |                                       |        |              |         |              |        |        |        |   |        |        
|                                                          |                            | Total operating expenses              |        |              | 14,863  |              |        |        | 16,389 |   |        |         | 19,508  | 
|                                                          |                            |                                       |        |              |         |              |        |        |        |   |        |        
|                                                          |                            | Income from operations                |        |              | 120,400 |              |        |        | 41,516 |   |        |         | 140,682 | 
|Other income                                              |                            |                                       | 13,663 |              |         |              | 14,706 |        |        |   | 10,342 |        
|                                                          |                            |                                       |        |              |         |              |        |        |        |   |        |        
|                                                          |                            | Income before income taxes            |        |              | 134,063 |              |        |        | 56,222 |   |        |         | 151,024 | 
|Income tax expense                                        |                            |                                       | 55,630 |              |         |              | 20,005 |        |        |   | 61,074 |        
|                                                          |                            |                                       |        |              |         |              |        |        |        |   |        |        
|                                                          |                            | Net income                            |        | $            | 78,433  |              |        | $      | 36,217 |   |        | $       | 89,950  | 
|                                                          |                            |                                       |        |              |         |              |        |        |        |   |        |        
|Basic net income per share                                |                            | $                                     | 1.66   |              |         | $            | 0.75   |        |        | $ | 1.78   |        
|                                                          |                            |                                       |        |              |         |              |        |        |        |   |        |        
|Shares used in computing basic net income per
    share   |                            |                                       | 47,280 |              |         |              | 48,276 |        |        |   | 50,473 |        
|                                                          |                            |                                       |        |              |         |              |        |        |        |   |        |        
|Diluted net income per share                              |                            | $                                     | 1.57   |              |         | $            | 0.71   |        |        | $ | 1.68   |        
|                                                          |                            |                                       |        |              |         |              |        |        |        |   |        |        
|Shares used in computing diluted net income per
    share |                            |                                       | 49,851 |              |         |              | 51,030 |        |        |   | 53,400 |        
|                                                          |                            |                                       |        |              |         |              |        |        |        |   |        |        

See accompanying notes to financial statements.

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PIXAR

STATEMENTS OF SHAREHOLDERS EQUITY AND
COMPREHENSIVE INCOME

|                                                              |  |                |        |               |  |             |         |               |  |               |       |        |  |   |         |  |  |   |         |  |  |   |        | 
|------------------------------------------------------------- |  | -------------- | ------ | ------------- |  | ----------- | ------- | ------------- |  | ------------- | ----- | ------ |  | - | ------- |  |  | - | ------- |  |  | - | ------ | 
|                                                              |  |                |        |               |  | Accumulated |         |               |  |               |       |       
|                                                              |  |                |        | Other         |  |             |         |               |  |              
|                                                              |  | ?Common Stock  |        | Comprehensive |  |             |         | Total         |  |              
|                                                              |  |                |        | Income        |  | Retained    |         | Shareholders |  | Comprehensive
|                                                              |  | Shares         |        | Amount        |  | (Loss)      |         | Earnings      |  | Equity        |       | Income
|                                                              |  |                |        |               |  |             |         |               |  |               |       |       
|                                                              |  |               
|                                                              |  | (In thousands)
|Balances, January 1, 2000                                     |  |                | 46,959 |               |  | $           | 281,274 |               |  | $             | (396  | )      |  | $ | 63,829  |  |  | $ | 344,707 |  |  |   |        | 
|Exercise of stock options, including tax benefit              |  |                | 674    |               |  |             | 11,935  |               |  |               |      |        |  |   |        |  |  |   | 11,935  |  |  |   |        | 
|Other comprehensive income (net of tax expense of
    $440)   |  |                |       |               |  |             |        |               |  |               | 645   |        |  |   |        |  |  |   | 645     |  |  | $ | 645    | 
|Net income                                                    |  |                |       |               |  |             |        |               |  |               |      |        |  |   | 78,433  |  |  |   | 78,433  |  |  |   | 78,433 | 
|                                                              |  |                |        |               |  |             |         |               |  |               |       |        |  |   |         |  |  |   |         |  |  |   |        | 
|Balances, December 30, 2000                                   |  |                | 47,633 |               |  |             | 293,209 |               |  |               | 249   |        |  |   | 142,262 |  |  |   | 435,720 |  |  | $ | 79,078 | 
|                                                              |  |                |        |               |  |             |         |               |  |               |       |        |  |   |         |  |  |   |         |  |  |   |        | 
|Exercise of stock options, including tax benefit              |  |                | 1,172  |               |  |             | 32,153  |               |  |               |      |        |  |   |        |  |  |   | 32,153  |  |  |   |        | 
|Conversion of Disney warrants                                 |  |                | 641    |               |  |             |        |               |  |               |      |        |  |   |        |  |  |   |        |  |  |   |        | 
|Other comprehensive income (net of tax expense of
    $1,173) |  |                |       |               |  |             |        |               |  |               | 1,596 |        |  |   |        |  |  |   | 1,596   |  |  | $ | 1,596  | 
|Net income                                                    |  |                |       |               |  |             |        |               |  |               |      |        |  |   | 36,217  |  |  |   | 36,217  |  |  |   | 36,217 | 
|                                                              |  |                |        |               |  |             |         |               |  |               |       |        |  |   |         |  |  |   |         |  |  |   |        | 
|Balances, December 29, 2001                                   |  |                | 49,446 |               |  |             | 325,362 |               |  |               | 1,845 |        |  |   | 178,479 |  |  |   | 505,686 |  |  | $ | 37,813 | 
|                                                              |  |                |        |               |  |             |         |               |  |               |       |        |  |   |         |  |  |   |         |  |  |   |        | 
|Exercise of stock options, including tax benefit              |  |                | 3,448  |               |  |             | 117,115 |               |  |               |      |        |  |   |        |  |  |   | 117,115 |  |  |   |        | 
|Other comprehensive income (net of tax expense of
    $212)   |  |                |       |               |  |             |        |               |  |               | 311   |        |  |   |        |  |  |   | 311     |  |  | $ | 311    | 
|Net income                                                    |  |                |       |               |  |             |        |               |  |               |      |        |  |   | 89,950  |  |  |   | 89,950  |  |  |   | 89,950 | 
|                                                              |  |                |        |               |  |             |         |               |  |               |       |        |  |   |         |  |  |   |         |  |  |   |        | 
|Balances, December 28, 2002                                   |  |                | 52,894 |               |  | $           | 442,477 |               |  | $             | 2,156 |        |  | $ | 268,429 |  |  | $ | 713,062 |  |  | $ | 90,261 | 
|                                                              |  |                |        |               |  |             |         |               |  |               |       |        |  |   |         |  |  |   |         |  |  |   |        | 

See accompanying notes to financial statements.

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PIXAR

STATEMENTS OF CASH FLOWS

|                                                                            |                                                                                                 |                                                           |                                                         |              |         |              |        |          |         |         |         |          |          |         |  
|--------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------- | --------------------------------------------------------- | ------------------------------------------------------- | ------------ | ------- | ------------ | ------ | -------- | ------- | ------- | ------- | -------- | -------- | ------- | -
|                                                                            |                                                                                                 |                                                          
|                                                                            |                                                                                                 | Years Ended                                              
|                                                                            |                                                                                                 |                                                          
|                                                                            |                                                                                                 | December 30,                                              |                                                         | December 29, |         | December 28,
|                                                                            |                                                                                                 | 2000                                                      |                                                         | 2001         |         | 2002        
|                                                                            |                                                                                                 |                                                           |                                                         |              |         |             
|                                                                            |                                                                                                 |                                                          
|                                                                            |                                                                                                 | (In thousands)                                           
|Cash flows from operating activities:                                       |                                                                                                 |                                                           |                                                         |              |         |              |        |          |         |         |         |         
|                                                                            | Net income                                                                                      |                                                           | $                                                       | 78,433       |         |              | $      | 36,217   |         |         | $       | 89,950   |         
|                                                                            | Adjustments to reconcile net income to net cash
    provided by (used in) operating activities: |                                                           |                                                         |              |         |              |        |          |         |         |         |          |         
|                                                                            |                                                                                                 | Amortization of purchased technology                      |                                                         |              | 480     |              |        |          | 480     |         |         |          | 480      |        
|                                                                            |                                                                                                 | Depreciation and amortization                             |                                                         |              | 4,312   |              |        |          | 7,639   |         |         |          | 7,661    |        
|                                                                            |                                                                                                 | Capitalized film production costs                         |                                                         |              | (28,443 | )            |        |          | (40,777 | )       |         |          | (43,915  | )      
|                                                                            |                                                                                                 | Amortization of capitalized film production costs         |                                                         |              | 35,940  |              |        |          | 11,198  |         |         |          | 39,420   |        
|                                                                            |                                                                                                 | Provision for bad debts                                   |                                                         |              |        |              |        |          | 394     |         |         |          | 9        |        
|                                                                            |                                                                                                 | (Gain) loss on dispositions of property and
    equipment |                                                         |              | 16      |              |        |          | 19      |         |         |          | (8       | )      
|                                                                            |                                                                                                 | Tax benefit from stock option exercises                   |                                                         |              | 6,282   |              |        |          | 9,063   |         |         |          | 38,601   |        
|                                                                            |                                                                                                 | Deferred income taxes                                     |                                                         |              | 8,442   |              |        |          | 3,245   |         |         |          | (11,258  | )      
|                                                                            | Changes in operating assets and liabilities:                                                    |                                                           |                                                         |              |         |              |        |          |         |         |         |          |         
|                                                                            |                                                                                                 | Trade accounts receivable                                 |                                                         |              | (422    | )            |        |          | (774    | )       |         |          | 329      |        
|                                                                            |                                                                                                 | Receivable from Disney                                    |                                                         |              | (61,793 | )            |        |          | 60,338  |         |         |          | (115,827 | )      
|                                                                            |                                                                                                 | Other receivables                                         |                                                         |              | 848     |              |        |          | (2,511  | )       |         |          | (762     | )      
|                                                                            |                                                                                                 | Prepaid expenses and other assets                         |                                                         |              | (1,495  | )            |        |          | 895     |         |         |          | (10,778  | )      
|                                                                            |                                                                                                 | Accounts payable                                          |                                                         |              | 1,164   |              |        |          | 3,221   |         |         |          | (2,502   | )      
|                                                                            |                                                                                                 | Accrued liabilities                                       |                                                         |              | 754     |              |        |          | (8,385  | )       |         |          | 478      |        
|                                                                            |                                                                                                 | Income taxes payable                                      |                                                         |              | (2,404  | )            |        |          | (6,845  | )       |         |          | (1,596   | )      
|                                                                            |                                                                                                 | Unearned revenue                                          |                                                         |              | 14,083  |              |        |          | (13,269 | )       |         |          | 5,228    |        
|                                                                            |                                                                                                 |                                                           |                                                         |              |         |              |        |          |         |         |         |         
|                                                                            |                                                                                                 |                                                           | Net cash provided by (used in) operating
    activities |              |         | 56,197       |        |          |         | 60,148  |         |          |          | (4,490  | )
|                                                                            |                                                                                                 |                                                           |                                                         |              |         |              |        |          |         |         |         |         
|Cash flows from investing activities:                                       |                                                                                                 |                                                           |                                                         |              |         |              |        |          |         |         |         |         
|                                                                            | Purchases of property and equipment                                                             |                                                           |                                                         | (55,352      | )       |              |        | (8,990   | )       |         |         | (13,906  | )       
|                                                                            | Proceeds from sale of property and equipment                                                    |                                                           |                                                         | 399          |         |              |        |         |         |         |         | 55       |         
|                                                                            | Proceeds from sale of securities                                                                |                                                           |                                                         | 321,241      |         |              |        | 211,892  |         |         |         | 158,270  |         
|                                                                            | Investments in securities                                                                       |                                                           |                                                         | (296,067     | )       |              |        | (293,092 | )       |         |         | (230,301 | )       
|                                                                            |                                                                                                 |                                                           |                                                         |              |         |              |        |          |         |         |         |         
|                                                                            |                                                                                                 |                                                           | Net cash used in investing activities                   |              |         | (29,779      | )      |          |         | (90,190 | )       |          |          | (85,882 | )
|                                                                            |                                                                                                 |                                                           |                                                         |              |         |              |        |          |         |         |         |         
|Cash flows from financing activities:                                       |                                                                                                 |                                                           |                                                         |              |         |              |        |          |         |         |         |         
|                                                                            | Proceeds from exercised stock options                                                           |                                                           |                                                         | 5,653        |         |              |        | 23,090   |         |         |         | 78,514   |         
|                                                                            |                                                                                                 |                                                           |                                                         |              |         |              |        |          |         |         |         |         
|                                                                            |                                                                                                 |                                                           | Net cash provided by financing activities               |              |         | 5,653        |        |          |         | 23,090  |         |          |          | 78,514  |  
|                                                                            |                                                                                                 |                                                           |                                                         |              |         |              |        |          |         |         |         |         
|Net increase (decrease) in cash and cash
    equivalents                    |                                                                                                 |                                                           | 32,071                                                  |              |         |              | (6,952 | )        |         |         | (11,858 | )       
|Cash and cash equivalents at beginning of period                            |                                                                                                 |                                                           | 31,170                                                  |              |         |              | 63,241 |          |         |         | 56,289  |         
|                                                                            |                                                                                                 |                                                           |                                                         |              |         |              |        |          |         |         |         |         
|Cash and cash equivalents at end of period                                  |                                                                                                 | $                                                         | 63,241                                                  |              |         | $            | 56,289 |          |         | $       | 44,431  |         
|                                                                            |                                                                                                 |                                                           |                                                         |              |         |              |        |          |         |         |         |         
|Supplemental disclosure of cash flow information:                           |                                                                                                 |                                                           |                                                         |              |         |              |        |          |         |         |         |         
|Cash paid during the period for income taxes                                |                                                                                                 | $                                                         | 43,486                                                  |              |         | $            | 15,539 |          |         | $       | 46,750  |         
|                                                                            |                                                                                                 |                                                           |                                                         |              |         |              |        |          |         |         |         |         
|Supplemental disclosure of non-cash investing and
    financing activities: |                                                                                                 |                                                           |                                                         |              |         |              |        |          |         |         |         |         
|Loss on equipment disposals capitalized as film
    production costs        |                                                                                                 | $                                                         | 396                                                     |              |         | $            | 228    |          |         | $       | 770     |         
|                                                                            |                                                                                                 |                                                           |                                                         |              |         |              |        |          |         |         |         |         
|Unrealized gain on investments                                              |                                                                                                 | $                                                         | 645                                                     |              |         | $            | 1,596  |          |         | $       | 311     |         
|                                                                            |                                                                                                 |                                                           |                                                         |              |         |              |        |          |         |         |         |         

See accompanying notes to financial statements.

54



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PIXAR

NOTES TO FINANCIAL STATEMENTS

(1) Summary of Critical and Significant
Accounting Policies



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

Pixar was incorporated in the state of California
on December 9, 1985 and 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. The Companys objective is to create, develop and
produce computer-animated feature films with heartwarming
stories and memorable characters that appeal to audiences of all
ages. Through the creation of entertaining, enduring and
successful films, the Company seeks to maintain its position as
a leading brand in animated feature films.

Critical Accounting Policies



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

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



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

Under the Co-Production Agreement, the Company
shares equally with Disney in the profits of Monsters, Inc.,
Toy Story 2and A Bugs Lifeafter Disney
recovers its marketing, distribution and other predefined costs
and fees. Revenues for Toy Storyare governed by the
terms of the Feature Film Agreement. Although revenues are based
on the information received from Disney, the Company may make
adjustments to that information based on estimates and
judgments. For example, theatrical revenues may be adjusted for
estimated reserves on potential uncollectible amounts to be
received from theatrical exhibitors. The Company also makes
adjustments to home video revenues for estimates on return
reserves that may differ from those reported by Disney. The
estimates on reserves may be adjusted periodically based on
actual rates of returns, inventory levels in the distribution
channel, as well as other business and industry information. In
addition, the Company utilizes margin normalization, such as
with merchandising or home video, in accordance with the
provisions of SOP 00-2. This may result in the utilization
of budgeted or forecasted information rather than actual costs
incurred if it is deemed to be a more accurate reflection of our
participation. Similar to return reserves, these expense
estimates are reviewed and may be adjusted periodically to
ensure the most accurate depiction of participation is reflected.

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

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PIXAR


NOTES TO FINANCIAL
STATEMENTS  (Continued)

which could result in adjustments that may be
material to the financial statements in any given quarter or
quarters. Any revenue received in advance from Disney is
deferred and recorded as revenue when earned.

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



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

Revenue for software licenses are recognized in
compliance with SOP 97-2 Software Revenue
Recognition as amended by SOP 98-9 Modification
of SOP 97-2, With Respect to Certain Transactions.
Under SOP 97-2, as amended, the Company recognizes revenues
when all of the following conditions are met:



| |   |                                            
| | - | -------------------------------------------
| |  | persuasive evidence of an agreement exists;
|
| |  | delivery of the product has occurred;      
|
| |  | the fee is fixed or determinable; and      
|
| |  | collection of these fees is probable.      

SOP 97-2, as amended, generally requires
revenue earned on software arrangements involving multiple
elements to be allocated to each element based on the relative
fair values of the elements. Revenue recognized from
multiple-element arrangements is allocated to undelivered
elements of the arrangement, such as support services, based on
the relative fair values of the elements. The Companys
determination of fair value of each element in multi-element
arrangements is based on vendor-specific objective evidence
(VSOE). The Company limits its assessment of VSOE for each
element to either the price charged when the same element is
sold separately or the price established by management, having
the relevant authority to do so, for an element not yet sold
separately.

Software maintenance is recorded as deferred
revenue and is recognized ratably over the term of the
agreement, which is generally twelve months.



| |                      
| | ---------------------
| | Film Production Costs

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

Once a film is released, capitalized film
production costs are amortized in the proportion that the
revenue during the period for each film bears to the estimated
revenue to be received from all sources under the
individual-film-forecast-computation method as defined in
SOP 00-2. The amount of film costs that are amortized each
quarter depends on how much future revenue is expected to
received from each film. The Company makes certain estimates and
judgments of our future gross revenues to be received for each
film

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PIXAR


NOTES TO FINANCIAL
STATEMENTS  (Continued)

based on information received from Disney,
historical results and managements knowledge of the
industry. Estimates of anticipated total gross revenues are
reviewed periodically and may be revised if necessary. A change
to the estimate of gross revenues for an individual film may
result in an increase or decrease to the percentage of
amortization of capitalized film costs relative to a previous
period. Unamortized film production costs are compared with net
realizable value each reporting period on a film-by-film basis.
If estimated remaining gross revenues are not sufficient to
recover the unamortized film production costs, the unamortized
film production costs will be written down to net realizable
value.

Significant Accounting Policies



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

The Company considers all highly liquid
instruments with an original maturity of 90 days or less to
be cash equivalents. Cash equivalents as of December 28,
2002 consisted primarily of U.S. Treasury Bills.



| |            
| | -----------
| | Investments

Investments are accounted for under Statement of
Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity
Securities and are classified as
available-for-sale. Such investments are recorded at
fair value, and unrealized gains and losses, if material, are
reported as a component of comprehensive income
(loss) until realized. If declines in the value of
investments accounted for under SFAS No. 115 are determined
to be other than temporary, a loss is recorded in earnings
currently. Interest income is recorded using an effective
interest rate with the associated premium or discount amortized
to interest income. The cost of securities sold is based upon
the specific identification method.



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

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



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

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



| |                                      
| | -------------------------------------
| | Research and Development
    Expenses

Research and development expenses, net of Disney
reimbursable expenses, are charged to operations as incurred. In
accordance with SFAS No. 86, Accounting for the Costs
of Computer Software to be Sold, Leased, or Otherwise
Marketed, development costs related to software products
are expensed as incurred until the technological feasibility of
the product has been established. After technological
feasibility is established, additional costs would be
capitalized. To date, the Company has not capitalized any
software development costs after technological feasibility has
been established on its software products. The Company

57



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PIXAR


NOTES TO FINANCIAL
STATEMENTS  (Continued)

believes the process for developing software is
essentially completed concurrently with the establishment of
technological feasibility and costs incurred thereafter have not
been material.



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

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

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



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

The Companys fiscal year consists of the 52
or 53 week period ended with the Saturday nearest to
December 31. The 2002 fiscal year ended December 28,
2002 and consisted of 52 weeks. The 2000 and 2001 fiscal
years ended December 30, 2000 and December 29, 2001,
respectively, and each consisted of 52 weeks.



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

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



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

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



| |                     
| | --------------------
| | Net Income per Share

Basic net income per share is computed using the
weighted-average number of common shares outstanding during the
period. Diluted net income per share is computed using the
weighted-average number of common and dilutive potential common
shares outstanding during the period including using the
treasury stock method for options and warrants (see
Note 10).



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

The Company reports segment information based on
the management approach. The management approach
designates the internal reporting used by management for making
decisions and assessing performance as the source of our
reportable segments. The Company operates in a single operating
segment. Information about the Companys films and major
customer is also disclosed.

58



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PIXAR


NOTES TO FINANCIAL
STATEMENTS  (Continued)



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

Comprehensive income (loss) consists of two
components, net income and other comprehensive income. Other
comprehensive income (loss) refers to revenue, expenses,
gains and losses that under generally accepted accounting
principles are recorded as an element of shareholders
equity but are excluded from net income. Our other comprehensive
income (loss) is comprised of unrealized gains and losses
on marketable securities categorized as available-for-sale.



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

Certain amounts reported in previous years have
been reclassified to conform to the 2002 financial statement
presentation.



| |                         
| | ------------------------
| | Stock-Based Compensation

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

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

|                              |                                                  |                      |   |              |        |              |   |        |        |  |   |         |        | 
|----------------------------- | ------------------------------------------------ | -------------------- | - | ------------ | ------ | ------------ | - | ------ | ------ |  | - | ------- | ------ | 
|                              |                                                  |                     
|                              |                                                  | Fiscal Year Ended   
|                              |                                                  |                     
|                              |                                                  | December 30,         |   | December 29, |        | December 28,
|                              |                                                  | 2000                 |   | 2001         |        | 2002        
|                              |                                                  |                      |   |              |        |             
|Net income:                   |                                                  |                      |   |              |        |              |   |        |        |  |   |        
|                              | As reported                                      |                      | $ | 78,433       |        |              | $ | 36,217 |        |  | $ | 89,950  |       
|                              | Fair value-based compensation cost, net of taxes |                      |   | (10,027      | )      |              |   | (7,998 | )      |  |   | (13,159 | )     
|                              |                                                  |                      |   |              |        |              |   |        |        |  |   |        
|                              |                                                  | Pro forma net income |   | $            | 68,406 |              |   | $      | 28,219 |  |   | $       | 76,791 | 
|                              |                                                  |                      |   |              |        |              |   |        |        |  |   |        
|Basic net income per share:   |                                                  |                      |   |              |        |              |   |        |        |  |   |        
|                              | As reported                                      |                      | $ | 1.66         |        |              | $ | 0.75   |        |  | $ | 1.78    |       
|                              | Pro forma                                        |                      | $ | 1.45         |        |              | $ | 0.58   |        |  | $ | 1.52    |       
|Diluted net income per share: |                                                  |                      |   |              |        |              |   |        |        |  |   |        
|                              | As reported                                      |                      | $ | 1.57         |        |              | $ | 0.71   |        |  | $ | 1.68    |       
|                              | Pro forma                                        |                      | $ | 1.45         |        |              | $ | 0.58   |        |  | $ | 1.49    |       

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

The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option-pricing
model. The weighted-average fair value of options granted was
$12.66, $13.95, and $18.64 for fiscal years 2000, 2001, and
2002, respectively. Values were estimated using zero dividend
yield for all years; expected volatility of 50% for 2000, 45%
for 2001 and 52% for 2002; risk-free interest rates of 5.36%,
4.34%, and 3.59% for 2000, 2001, and 2002, respectively; and
weighted-average expected lives of 4.0 years for 2000 and
2001 and 5.0 years for 2002.

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PIXAR


NOTES TO FINANCIAL
STATEMENTS  (Continued)



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

In June 2001, the FASB issued
SFAS No. 143, Accounting for Asset Retirement
Obligations, which addresses financial accounting and
reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement
costs. The standard applies to legal obligations associated with
the retirement of long-lived assets that result from the
acquisition, construction, development and/or normal use of the
asset. SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in
the period in which it is incurred if a reasonable estimate of
fair value can be made. The fair value of the liability is added
to the carrying amount of the associated asset and this
additional carrying amount is depreciated over the life of the
asset. The Company is required to adopt the provisions of
SFAS No. 143 for its first quarter of fiscal 2003, and
it does not expect the adoption of SFAS No. 143 to have a
material impact on the financial statements.

In August 2001, the FASB issued
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which supersedes both
SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of, and the accounting and reporting provisions of APB
Opinion No. 30, Reporting the Results of
Operations  Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, for the
disposal of a segment of a business (as previously defined in
that Opinion). SFAS No. 144 retains the fundamental
provisions in SFAS No. 121 for recognizing and
measuring impairment losses on long-lived assets held for use
and long-lived assets to be disposed of by sale, while also
resolving significant implementation issues associated with SFAS
No. 121. SFAS No. 144 retains the basic
provisions of APB No. 30 on how to present discontinued
operations in the income statement but broadens that
presentation to include a component of an entity (rather than a
segment of a business). The Company adopted the provisions of
SFAS No. 144 for its first quarter of fiscal 2002, and
the adoption of SFAS No. 144 did not have a material
impact on the financial statements.

In June 2002, the FASB issued
SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS No. 146
supersedes Emerging Issues Task Force Issue No. 94-3,
Liability Recognition for Certain Employee Termination
Benefits and Other Costs To Exit an Activity (Including Certain
Costs Associated with a Restructuring) and requires that a
liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred, as
opposed to when management is committed to an exit plan.
SFAS No. 146 also establishes that the liability
should initially be measured and recorded at fair value.
SFAS No. 146 is effective for exit or disposal
activities initiated after December 31, 2002. The
provisions of SFAS No. 146 are required to be applied
prospectively after the adoption date to newly initiated exit
activities, and may affect the timing of recognizing future
restructuring costs, as well as the amounts recognized.

In November 2002, the FASB issued Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, which elaborates on existing
disclosure of most guarantees and clarifies when a company must
recognize an initial liability for the fair value of obligations
it assumes under guarantee agreements. The initial recognition
and measurement provisions apply on a prospective basis to
guarantees issued or modified after December 31, 2002. The
disclosure requirements of FIN 45 are effective for fiscal
2002. The Company does not expect the adoption of
FIN No. 45 to have a material impact on the financial
statements.

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

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PIXAR


NOTES TO FINANCIAL
STATEMENTS  (Continued)

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

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

(2) Investments

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

|                           |  |      |         |                  |  |            |       |  |  |   |         | 
|-------------------------- |  | ---- | ------- | ---------------- |  | ---------- | ----- |  |  | - | ------- | 
|                           |  |      |         | Gross Unrealized |  | Estimated 
|                           |  | Cost |         | Gains            |  | Fair Value
|                           |  |      |         |                  |  |           
|December 29, 2001:         |  |      |         |                  |  |            |       |  |  |   |         | 
|U. S. Treasury Notes       |  | $    | 80,253  |                  |  | $          | 1,188 |  |  | $ | 81,441  | 
|Federal agency obligations |  |      | 139,039 |                  |  |            | 1,830 |  |  |   | 140,869 | 
|                           |  |      |         |                  |  |            |       |  |  |   |         | 
|                           |  | $    | 219,292 |                  |  | $          | 3,018 |  |  | $ | 222,310 | 
|                           |  |      |         |                  |  |            |       |  |  |   |         | 
|December 28, 2002:         |  |      |         |                  |  |            |       |  |  |   |         | 
|U. S. Treasury Notes       |  | $    | 154,560 |                  |  | $          | 2,066 |  |  | $ | 156,626 | 
|Federal agency obligations |  |      | 136,553 |                  |  |            | 1,473 |  |  |   | 138,026 | 
|                           |  |      |         |                  |  |            |       |  |  |   |         | 
|                           |  | $    | 291,113 |                  |  | $          | 3,539 |  |  | $ | 294,652 | 
|                           |  |      |         |                  |  |            |       |  |  |   |         | 

The contractual maturities of available-for-sale
securities as of December 28, 2002 are as follows (in thousands):

|                                     |  |      |         |            |  |   |         | 
|------------------------------------ |  | ---- | ------- | ---------- |  | - | ------- | 
|                                     |  |      |         | Estimated 
|                                     |  | Cost |         | Fair Value
|                                     |  |      |         |           
|Due within one year                  |  | $    | 160,948 |            |  | $ | 162,525 | 
|Due after one year through two years |  |      | 130,165 |            |  |   | 132,127 | 
|                                     |  |      |         |            |  |   |         | 
|                                     |  | $    | 291,113 |            |  | $ | 294,652 | 
|                                     |  |      |         |            |  |   |         | 

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PIXAR


NOTES TO FINANCIAL
STATEMENTS  (Continued)

(3) Balance Sheet Components

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

|                                               |                                   |              |         |              |  |   |         |         | 
|---------------------------------------------- | --------------------------------- | ------------ | ------- | ------------ |  | - | ------- | ------- | 
|                                               |                                   | December 29, |         | December 28,
|                                               |                                   | 2001         |         | 2002        
|                                               |                                   |              |         |             
|Property and equipment:                        |                                   |              |         |              |  |   |         |        
|                                               | Building and land                 |              | $       | 104,423      |  |   | $       | 117,131 | 
|                                               | Furniture, fixtures and equipment |              |         | 23,427       |  |   |         | 21,822  | 
|                                               | Construction in process           |              |         | 2,875        |  |   |         | 1,908   | 
|                                               |                                   |              |         |              |  |   |         |        
|                                               |                                   |              | 130,725 |              |  |   | 140,861 |        
|Less accumulated depreciation and amortization |                                   |              | 18,730  |              |  |   | 23,438  |        
|                                               |                                   |              |         |              |  |   |         |        
|                                               |                                   | $            | 111,995 |              |  | $ | 117,423 |        
|                                               |                                   |              |         |              |  |   |         |        
|Accrued liabilities:                           |                                   |              |         |              |  |   |         |        
|                                               | Employee-related expenses         |              | $       | 5,055        |  |   | $       | 6,073   | 
|                                               | Professional services             |              |         | 2,186        |  |   |         | 1,451   | 
|                                               | Other                             |              |         | 1,603        |  |   |         | 1,798   | 
|                                               |                                   |              |         |              |  |   |         |        
|                                               |                                   | $            | 8,844   |              |  | $ | 9,322   |        
|                                               |                                   |              |         |              |  |   |         |        

(4) Feature Film and Co-Production
Agreements



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

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



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

In February 1997, Pixar and Disney entered into a
new Co-Production Agreement (the Co-Production
Agreement) that now governs all films made by the Company
since Toy Story. Under the Co-Production Agreement,
Pixar, on an exclusive basis, agreed to produce five original
computer-animated theatrical motion pictures (the
Pictures) for distribution by Disney. Pixar and
Disney co-own, co-brand and co-finance the production costs of
the Pictures, and share equally in the profits of each Picture
and any related merchandise and other ancillary products, after
recovery of all of Disneys marketing, distribution and
other predefined fees and costs. The Co-Production Agreement
generally provides that Pixar is responsible for the production
of each Picture and Disney is responsible for the marketing,
promotion, publicity, advertising and distribution of each
Picture. The first two original films produced under the
Co-Production Agreement were A Bugs Lifeand
Monsters, Inc.Films presently in production at Pixar
governed by this agreement include Finding Nemo, The
Incrediblesand Cars. A Bugs Life, Monsters,
Inc., Finding Nemo, The Incrediblesand Carscount toward the five original Pictures, whereas Toy
Story 2, as a sequel, is a derivative work that will not
count toward the Pictures. Under the Co-Production Agreement,
all provisions applicable to the Pictures also apply to
derivative works such as Toy Story 2.

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PIXAR


NOTES TO FINANCIAL
STATEMENTS  (Continued)

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



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

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

Components of Capitalized Film Production
Costs

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

|                                                            |                                                                     |          |         |         |  |      |        |               |  |   |        |        |  |   |          |         | 
|----------------------------------------------------------- | ------------------------------------------------------------------- | -------- | ------- | ------- |  | ---- | ------ | ------------- |  | - | ------ | ------ |  | - | -------- | ------- | 
|                                                            |                                                                     | 2000 and |         |         |  |      |        | Total Through
|                                                            |                                                                     | prior    |         | 2001    |  | 2002 |        | 2002         
|                                                            |                                                                     |          |         |         |  |      |        |              
|Released Films:                                             |                                                                     |          |         |         |  |      |        |               |  |   |        |        |  |   |          |        
|Pixar production costs                                      |                                                                     | $        | 115,465 |         |  | $    | 15,348 |               |  | $ | 2,310  |        |  | $ | 133,123  |        
|Disney production funding and reimbursement
    (unaudited) |                                                                     |          | 138,536 |         |  |      | 15,348 |               |  |   | 2,310  |        |  |   | 156,194  |        
|                                                            |                                                                     |          |         |         |  |      |        |               |  |   |        |        |  |   |          |        
|                                                            | Total film production costs (unaudited)                             |          | $       | 254,001 |  |      | $      | 30,696        |  |   | $      | 4,620  |  |   |          | 289,317 | 
|                                                            |                                                                     |          |         |         |  |      |        |               |  |   |        |        |  |   |          |        
|Disney reimbursements of production costs
    (unaudited)   |                                                                     |          |         |         |  |      |        |               |  |   |        |        |  |   | (156,194 | )      
|Amortization of deferred compensation                       |                                                                     |          |         |         |  |      |        |               |  |   |        |        |  |   | 360      |        
|Participation fees                                          |                                                                     |          |         |         |  |      |        |               |  |   |        |        |  |   | 1,050    |        
|Amortization of film production costs                       |                                                                     |          |         |         |  |      |        |               |  |   |        |        |  |   | (120,097 | )      
|                                                            |                                                                     |          |         |         |  |      |        |               |  |   |        |        |  |   |          |        
|                                                            | Total film production costs capitalized for
    released films      |          |         |         |  |      |        |               |  |   |        |        |  |   |          | 14,436  | 
|                                                            |                                                                     |          |         |         |  |      |        |               |  |   |        |        |  |   |          |        
|Films in Production:                                        |                                                                     |          |         |         |  |      |        |               |  |   |        |        |  |   |          |        
|Pixar production costs                                      |                                                                     | $        | 9,346   |         |  | $    | 24,596 |               |  | $ | 38,818 |        |  |   | 72,760   |        
|Disney production funding and reimbursement
    (unaudited) |                                                                     |          | 9,346   |         |  |      | 24,596 |               |  |   | 36,193 |        |  |   | 70,135   |        
|                                                            |                                                                     |          |         |         |  |      |        |               |  |   |        |        |  |   |          |        
|                                                            | Total film production costs (unaudited)                             |          | $       | 18,692  |  |      | $      | 49,192        |  |   | $      | 75,011 |  |   |          | 142,895 | 
|                                                            |                                                                     |          |         |         |  |      |        |               |  |   |        |        |  |   |          |        
|Disney reimbursements of production costs
    (unaudited)   |                                                                     |          |         |         |  |      |        |               |  |   |        |        |  |   | (70,135  | )      
|                                                            |                                                                     |          |         |         |  |      |        |               |  |   |        |        |  |   |          |        
|                                                            | Total film production costs capitalized for films
    in production |          |         |         |  |      |        |               |  |   |        |        |  |   |          | 72,760  | 
|Films in Development or
    Pre-production:                 |                                                                     |          |         |         |  |      |        |               |  |   |        |        |  |   |          |        
|Pixar production costs                                      |                                                                     | $        | 291     |         |  | $    | 1,061  |               |  | $ | 3,556  |        |  |   | 4,908    |        
|                                                            |                                                                     |          |         |         |  |      |        |               |  |   |        |        |  |   |          |        
|                                                            | Total film development and pre-production costs
    capitalized     |          | $       | 291     |  |      | $      | 1,061         |  |   | $      | 3,556  |  |   |          | 4,908   | 
|                                                            |                                                                     |          |         |         |  |      |        |               |  |   |        |        |  |   |          |        
|                                                            |                                                                     |          |         |         |  |      |        |               |  |   |        |        |  | $ | 92,104   |        
|                                                            |                                                                     |          |         |         |  |      |        |               |  |   |        |        |  |   |          |        

63



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PIXAR


NOTES TO FINANCIAL
STATEMENTS  (Continued)

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

|                           |       |                   |        |                   |  |                   |       |       |  |   |       |        | 
|-------------------------- | ----- | ----------------- | ------ | ----------------- |  | ----------------- | ----- | ----- |  | - | ----- | ------ | 
|                           |       |                   |        |                  
|                           |       |                   |        | Years Ended      
|                           |       | February 1997 to  |        |                  
|                           |       | December 30, 2000 |        | December 29, 2001 |  | December 28, 2002
|                           |       |                   |        |                   |  |                  
|Research and development   |       | $                 | 13,506 |                   |  | $                 | 4,933 |       |  | $ | 6,846 |       
|General and administrative |       |                   | 8,987  |                   |  |                   | 3,350 |       |  |   | 3,640 |       
|                           |       |                   |        |                   |  |                   |       |       |  |   |       |       
|                           | Total |                   | $      | 22,493            |  |                   | $     | 8,283 |  |   | $     | 10,486 | 
|                           |       |                   |        |                   |  |                   |       |       |  |   |       |       

For released films, the Company expects to
amortize, based on current estimates, approximately
$6 million to $8 million in capitalized film
production costs during fiscal year 2003. This forecast does not
include Finding Nemo,which will be released domestically
on May 30, 2003. In addition, the Company has amortized
more than 80% of each released films original production
costs as of December 28, 2002, with the exception of
Monsters, Inc., which is projected to reach the 80%
milestone in the first half of fiscal year 2003.

At December 29, 2001 and December 28,
2002, Receivables from Disney aggregated $13.5 million and
$129.3 million, respectively, which consists of receivables
for film revenue, advances net of Disneys actual share of
expenditures for all films, amounts due for miscellaneous
reimbursements.

(5) Related Party Transactions

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

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PIXAR


NOTES TO FINANCIAL
STATEMENTS  (Continued)

(6) Income Taxes

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

|                                                                        |           |              |                      |              |        |              |       |   |       |        |        |   |         |         |  
|----------------------------------------------------------------------- | --------- | ------------ | -------------------- | ------------ | ------ | ------------ | ----- | - | ----- | ------ | ------ | - | ------- | ------- | -
|                                                                        |           |             
|                                                                        |           | Years Ended 
|                                                                        |           |             
|                                                                        |           | December 30, |                      | December 29, |        | December 28,
|                                                                        |           | 2000         |                      | 2001         |        | 2002        
|                                                                        |           |              |                      |              |        |             
|Income taxes:                                                           |           |              |                      |              |        |              |       |   |       |        |        |  
|                                                                        | Current:  |              |                      |              |        |              |       |   |       |        |        |   |        
|                                                                        |           | Federal      |                      | $            | 32,335 |              |       | $ | 8,089 |        |        | $ | 29,697  |        
|                                                                        |           | State        |                      |              | 8,489  |              |       |   | (460  | )      |        |   | 3,997   |        
|                                                                        |           | Foreign      |                      |              | 82     |              |       |   | 68    |        |        |   | 37      |        
|                                                                        |           |              |                      |              |        |              |       |   |       |        |        |  
|                                                                        |           |              | Total current taxes  |              |        | 40,906       |       |   |       | 7,697  |        |   |         | 33,731  |  
|                                                                        |           |              |                      |              |        |              |       |   |       |        |        |  
|                                                                        | Deferred: |              |                      |              |        |              |       |   |       |        |        |   |        
|                                                                        |           | Federal      |                      |              | 6,364  |              |       |   | 2,867 |        |        |   | (10,389 | )      
|                                                                        |           | State        |                      |              | 2,078  |              |       |   | 378   |        |        |   | (869    | )      
|                                                                        |           |              |                      |              |        |              |       |   |       |        |        |  
|                                                                        |           |              | Total deferred taxes |              |        | 8,442        |       |   |       | 3,245  |        |   |         | (11,258 | )
|                                                                        |           |              |                      |              |        |              |       |   |       |        |        |  
|Charge in lieu of taxes attributable to employer
    stock option plans |           |              | 6,282                |              |        |              | 9,063 |   |       |        | 38,601 |  
|                                                                        |           |              |                      |              |        |              |       |   |       |        |        |  
|                                                                        |           |              | Total tax provision  |              | $      | 55,630       |       |   | $     | 20,005 |        |   | $       | 61,074  |  
|                                                                        |           |              |                      |              |        |              |       |   |       |        |        |  

Income tax expense attributable to income from
operations was $55.6 million, $20.0 million, and
$61.1 million for fiscal years 2000, 2001, and 2002,
respectively, and differed from the amounts computed by applying
the U.S. federal income tax rate of 35% to pretax income from
operations as a result of the following (in thousands):

|                                             |                                               |              |        |              |   |              |        |       |   |   |        |       |  
|-------------------------------------------- | --------------------------------------------- | ------------ | ------ | ------------ | - | ------------ | ------ | ----- | - | - | ------ | ----- | -
|                                             |                                               |             
|                                             |                                               | Years Ended 
|                                             |                                               |             
|                                             |                                               | December 30, |        | December 29, |   | December 28,
|                                             |                                               | 2000         |        | 2001         |   | 2002        
|                                             |                                               |              |        |              |   |             
|Expected income tax expense                  |                                               | $            | 46,922 |              |   | $            | 19,677 |       |   | $ | 52,858 |      
|Increases (decreases) in tax resulting from: |                                               |              |        |              |   |              |        |       |   |   |        |      
|                                             | State income taxes, net of federal tax effect |              |        | 7,754        |   |              |        | 1,165 |   |   |        | 6,626 |  
|                                             | Non deductible expenses                       |              |        | 311          |   |              |        | 1,084 |   |   |        | 351   |  
|                                             | Research and expenditure credits              |              |        |             |   |              |        | (498  | ) |   |        | (128  | )
|                                             | Other tax credits                             |              |        | (82          | ) |              |        | (698  | ) |   |        | (182  | )
|                                             | Other, net                                    |              |        | 725          |   |              |        | (725  | ) |   |        | 1,549 |  
|                                             |                                               |              |        |              |   |              |        |       |   |   |        |      
|Actual tax expense                           |                                               | $            | 55,630 |              |   | $            | 20,005 |       |   | $ | 61,074 |      
|                                             |                                               |              |        |              |   |              |        |       |   |   |        |      

65



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PIXAR


NOTES TO FINANCIAL
STATEMENTS  (Continued)

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

|                         |                              |                                |   |              |        |  |   |        |        | 
|------------------------ | ---------------------------- | ------------------------------ | - | ------------ | ------ |  | - | ------ | ------ | 
|                         |                              | December 29,                   |   | December 28,
|                         |                              | 2001                           |   | 2002        
|                         |                              |                                |   |             
|Deferred tax assets:     |                              |                                |   |              |        |  |   |       
|                         | Deferred compensation        |                                | $ | 505          |        |  | $ | 428    |       
|                         | Capitalized film costs       |                                |   | 26,324       |        |  |   | 35,155 |       
|                         | Tax credit carry forwards    |                                |   | 201          |        |  |   |       |       
|                         | Reserves and accruals        |                                |   | 490          |        |  |   | 2,244  |       
|                         |                              |                                |   |              |        |  |   |       
|                         |                              | Total deferred tax assets      |   |              | 27,520 |  |   |        | 37,827 | 
|Deferred tax liabilities |                              |                                |   |              |        |  |   |       
|                         | Deferred revenue             |                                |   | 4,402        |        |  |   | 2,126  |       
|                         | Deferred gain on investments |                                |   | 1,173        |        |  |   | 1,385  |       
|                         | Property and equipment       |                                |   | 272          |        |  |   | 1,597  |       
|                         |                              |                                |   |              |        |  |   |       
|                         |                              | Total deferred tax liabilities |   |              | 5,847  |  |   |        | 5,108  | 
|                         |                              |                                |   |              |        |  |   |       
|                         |                              | Net deferred tax assets        |   | $            | 21,673 |  |   | $      | 32,719 | 
|                         |                              |                                |   |              |        |  |   |       

In assessing the realizability of deferred tax
assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is
dependent upon the generation of taxable income during the
periods in which temporary differences become deductible. At
December 28, 2002, based on historical taxable income and
projections of future taxable income, the Company believes it is
more likely than not that the Company will realize the benefits
of its deferred tax assets, and therefore no valuation allowance
against those assets has been provided.

(7) Shareholders Equity



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

The Company has stock option plans for employees,
consultants and non-employee directors that provide incentive
and nonstatutory stock options. The option exercise price for
incentive stock options is not less than the fair market value
at the grant date. Nonstatutory options are granted at prices
and terms determined by the Board of Directors, or a committee
of the Board of Directors. Employee and consultant options
generally vest 25% per year over four years. Initial grants to
non-employee directors vest one-third annually for three years;
subsequent grants vest after one year. All options have a term
not greater than 10 years from the date of grant. As of
December 28, 2002, the Company had 476,880 shares reserved
and available for issuance under the plans.

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PIXAR


NOTES TO FINANCIAL
STATEMENTS  (Continued)

A summary of activity under the option plans
during 2000, 2001 and 2002 are as follows:

|                                     |           |        |            |                  |   |   |       |       | 
|------------------------------------ | --------- | ------ | ---------- | ---------------- | - | - | ----- | ----- | 
|                                     |           |        |            | Weighted-Average
|                                     |           | Shares |            | Exercise Price  
|                                     |           |        |            |                 
|Outstanding at January 1, 2000       |           |        | 8,755,919  |                  |   | $ | 21.00 |      
|                                     | Granted   |        |            | 5,424,584        |   |   |       | 28.16 | 
|                                     | Exercised |        |            | (674,279         | ) |   |       | 8.39  | 
|                                     | Forfeited |        |            | (394,371         | ) |   |       | 26.18 | 
|                                     |           |        |            |                  |   |   |       |      
|Outstanding at December 30,
    2000 |           |        | 13,111,853 |                  |   |   | 24.46 |      
|                                     | Granted   |        |            | 992,500          |   |   |       | 34.55 | 
|                                     | Exercised |        |            | (1,171,933       | ) |   |       | 19.70 | 
|                                     | Forfeited |        |            | (421,908         | ) |   |       | 31.33 | 
|                                     |           |        |            |                  |   |   |       |      
|Outstanding at December 29,
    2001 |           |        | 12,510,512 |                  |   |   | 25.47 |      
|                                     | Granted   |        |            | 2,351,975        |   |   |       | 38.26 | 
|                                     | Exercised |        |            | (3,448,510       | ) |   |       | 22.77 | 
|                                     | Forfeited |        |            | (230,658         | ) |   |       | 31.43 | 
|                                     |           |        |            |                  |   |   |       |      
|Outstanding at December 28,
    2002 |           |        | 11,183,319 |                  |   |   | 28.87 |      
|                                     |           |        |            |                  |   |   |       |      

For various price ranges, weighted-average
characteristics of outstanding stock options at
December 28, 2002 were as follows:

|                         |  |                     |            |                                |  |                  |      |        |  |                  |       |  |  |  |           |  |  |   |       | 
|------------------------ |  | ------------------- | ---------- | ------------------------------ |  | ---------------- | ---- | ------ |  | ---------------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                         |  |                     |            |                               
|                         |  | Options Outstanding |            | Options Vested and Exercisable
|                         |  |                     |            |                               
|                         |  |                     |            | Remaining                      |  | Weighted-Average |      |        |  | Weighted-Average
|Range of Exercise Prices |  | Shares              |            | Life (Years)                   |  | Exercise Price   |      | Shares |  | Exercise Price  
|                         |  |                     |            |                                |  |                  |      |        |  |                 
|$ 0.20 to $21.38.        |  |                     | 2,152,765  |                                |  |                  | 4.11 |        |  | $                | 14.51 |  |  |  | 1,982,182 |  |  | $ | 13.93 | 
|$23.13 to $26.50.        |  |                     | 3,527,339  |                                |  |                  | 7.93 |        |  |                  | 26.49 |  |  |  | 749,325   |  |  |   | 26.44 | 
|$27.50 to $33.44.        |  |                     | 2,216,270  |                                |  |                  | 7.93 |        |  |                  | 31.49 |  |  |  | 257,095   |  |  |   | 31.39 | 
|$33.50 to $40.07.        |  |                     | 1,911,245  |                                |  |                  | 7.59 |        |  |                  | 35.70 |  |  |  | 387,199   |  |  |   | 36.02 | 
|$40.13 to $59.50.        |  |                     | 1,365,700  |                                |  |                  | 9.13 |        |  |                  | 43.58 |  |  |  | 207,625   |  |  |   | 44.25 | 
|$61.50 to $61.50.        |  |                     | 10,000     |                                |  |                  | 5.52 |        |  |                  | 61.50 |  |  |  | 10,000    |  |  |   | 61.50 | 
|                         |  |                     |            |                                |  |                  |      |        |  |                  |       |  |  |  |           |  |  |   |       | 
|                         |  |                     | 11,183,319 |                                |  |                  | 7.28 |        |  |                  | 28.87 |  |  |  | 3,593,426 |  |  |   | 22.05 | 
|                         |  |                     |            |                                |  |                  |      |        |  |                  |       |  |  |  |           |  |  |   |       | 

At December 28, 2002, there were 3,593,426
shares exercisable at a weighted-average exercise price of
$22.05 per share. At December 30, 2000 and
December 29, 2001 there were 3,942,747 and 4,775,182 shares
exercisable, respectively, at a weighted-average exercise price
of $15.16 and $19.23, respectively.



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

In 1992, the Company adopted a 401(k) Profit
Sharing Plan (the 401(k) Plan) that is intended to qualify under
Section 401(k) of the Internal Revenue Code of 1986, as
amended. The 401(k) Plan covers substantially all employees.
Participants may elect to contribute a percentage of their
compensation to this plan, up to the statutory maximum amount.
For the plan year commencing December 30, 2001 and ending on
December 28, 2002, the employer match was 50% of deferrals
up to 5% of eligible plan compensation, with a maximum
contribution of $2,000 per participant. Employer match
contributions vest immediately. The Company contributed $842,000
and $943,000 to the 401(k) Plan for fiscal years 2001 and 2002,
respectively. No contributions were made in fiscal 2000.

67



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PIXAR


NOTES TO FINANCIAL
STATEMENTS  (Continued)

(8) Commitments and
Contingencies



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

Future minimum lease payments under
non-cancelable operating leases (with initial or remaining lease
terms in excess of one year) as of December 28, 2002 were
as follows (in thousands):

|            |       |                              |   |     |       | 
|----------- | ----- | ---------------------------- | - | --- | ----- | 
|Fiscal Year |       |                              |   |    
|            | 2003. |                              | $ | 846 |      
|            | 2004. |                              |   | 616 |      
|            | 2005. |                              |   | 156 |      
|            |       |                              |   |    
|            |       | Total minimum lease payments |   | $   | 1,618 | 
|            |       |                              |   |    

Rental expense from operating leases amounted to
approximately $3,301,000, $935,000 and $814,000 for fiscal years
2000, 2001 and 2002, respectively.



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

The Company has obligations to pay portions of
any revenue derived from each feature film produced under the
Co-Production Agreement to our entertainment law firm in
consideration for services rendered. The compensation is subject
to a cap of $500,000 for each theatrical motion picture and a
cap of $200,000 for each sequel or remake, with a total
aggregate cap of $3,000,000. The Company paid participation fees
of $200,000 in fiscal year 2000 under this obligation. No
payments were made in fiscal years 2001 or 2002.



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

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

(9) Significant Customer and Segment
Reporting



| |                     
| | --------------------
| | Significant Customer

In fiscal years 2000, 2001 and 2002, Disney
represented 95%, 91% and 96% of total revenue, respectively, and
95%, 92% and 95% of total accounts receivable, respectively.



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

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

68



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PIXAR


NOTES TO FINANCIAL
STATEMENTS  (Continued)

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

|                   |  |             |         |      |  |      |        |  |  |   |         | 
|------------------ |  | ----------- | ------- | ---- |  | ---- | ------ |  |  | - | ------- | 
|                   |  |            
|                   |  | Fiscal Year
|                   |  |            
|                   |  | 2000        |         | 2001 |  | 2002
|                   |  |             |         |      |  |     
|Monsters, Inc.     |  | $           |        |      |  | $    | 12,144 |  |  | $ | 141,452 | 
|Toy Story 2        |  |             | 143,596 |      |  |      | 23,432 |  |  |   |        | 
|Library titles(1)  |  |             | 18,676  |      |  |      | 27,081 |  |  |   | 50,072  | 
|Animation services |  |             | 882     |      |  |      | 708    |  |  |   | 2,067   | 
|                   |  |             |         |      |  |      |        |  |  |   |         | 
|                   |  | $           | 163,154 |      |  | $    | 63,365 |  |  | $ | 193,591 | 
|                   |  |             |         |      |  |      |        |  |  |   |         | 



---



|    |                                                                                                                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Library titles in 2002 include A Bugs
    Life, Toy Story and Toy Story 2. Fiscal year
    2002 includes adjustments that increased the net home video
    reserves and margins and merchandise revenues of Toy
    Story 2 and A Bugs Life and contributed
    approximately $0.19 to our diluted earnings per share.

(10) Net Income per Share
Calculation

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

|                           |                              |             |        |        |  |       |        |        |  |        |      |        |  |        |        |        |  |       |        |        |  |   |      |      |  |   |        |        |  |  |        |        |  |   |      |      | 
|-------------------------- | ---------------------------- | ----------- | ------ | ------ |  | ----- | ------ | ------ |  | ------ | ---- | ------ |  | ------ | ------ | ------ |  | ----- | ------ | ------ |  | - | ---- | ---- |  | - | ------ | ------ |  |  | ------ | ------ |  | - | ---- | ---- | 
|                           |                              |            
|                           |                              | Fiscal Year
|                           |                              |            
|                           |                              |             |        |        |  |      
|                           |                              | 2000        |        | 2001   |  | 2002 
|                           |                              |             |        |        |  |      
|                           |                              |             |        | Net    |  |       |        | Net    |  |        |      | Net   
|                           |                              |             |        | Income |  |       |        | Income |  |        |      | Income
|                           |                              | Net         |        |        |  | per   |        | Net    |  |        |      | per    |  | Net    |        |        |  | per  
|                           |                              | Income      |        | Shares |  | Share |        | Income |  | Shares |      | Share  |  | Income |        | Shares |  | Share
|                           |                              |             |        |        |  |       |        |        |  |        |      |        |  |        |        |        |  |      
|Basic net income per share |                              | $           | 78,433 |        |  |       | 47,280 |        |  | $      | 1.66 |        |  | $      | 36,217 |        |  |       | 48,276 |        |  | $ | 0.75 |      |  | $ | 89,950 |        |  |  | 50,473 |        |  | $ | 1.78 |     
|Effect of dilutive shares: |                              |             |        |        |  |       |        |        |  |        |      |        |  |        |        |        |  |       |        |        |  |   |      |      |  |   |        |        |  |  |        |        |  |   |      |     
|                           | Warrants and options         |             |        |       |  |       |        | 2,571  |  |        |      |        |  |        |        |       |  |       |        | 2,754  |  |   |      |      |  |   |        |       |  |  |        | 2,927  |  |   |      |      | 
|                           |                              |             |        |        |  |       |        |        |  |        |      |        |  |        |        |        |  |       |        |        |  |   |      |      |  |   |        |        |  |  |        |        |  |   |      |     
|                           | Diluted net income per share |             | $      | 78,433 |  |       |        | 49,851 |  |        | $    | 1.57   |  |        | $      | 36,217 |  |       |        | 51,030 |  |   | $    | 0.71 |  |   | $      | 89,950 |  |  |        | 53,400 |  |   | $    | 1.68 | 
|                           |                              |             |        |        |  |       |        |        |  |        |      |        |  |        |        |        |  |       |        |        |  |   |      |      |  |   |        |        |  |  |        |        |  |   |      |     

Options to purchase 934,618, 647,101 and 222,495
shares of common stock in 2000, 2001 and 2002, respectively,
were not included in the computation of diluted net income per
share because the options exercise price was greater than
the average market price of the common shares.

Quarterly Financial Information
(Unaudited)

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

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

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PIXAR


NOTES TO FINANCIAL
STATEMENTS  (Continued)

|                             |  |               |        |         |  |              |        |             |  |   |         |  |  |   |        | 
|---------------------------- |  | ------------- | ------ | ------- |  | ------------ | ------ | ----------- |  | - | ------- |  |  | - | ------ | 
|                             |  |              
|                             |  | Quarter Ended
|                             |  |              
|                             |  | March 30      |        | June 29 |  | September 28 |        | December 28
|                             |  |               |        |         |  |              |        |            
|2002                         |  |               |        |         |  |              |        |             |  |   |         |  |  |   |        | 
|Revenue                      |  | $             | 37,073 |         |  | $            | 22,811 |             |  | $ | 102,456 |  |  | $ | 39,384 | 
|Gross profit                 |  |               | 28,580 |         |  |              | 19,105 |             |  |   | 81,015  |  |  |   | 31,490 | 
|Net income                   |  |               | 15,610 |         |  |              | 10,442 |             |  |   | 46,935  |  |  |   | 16,963 | 
|Basic net income per share   |  |               | 0.32   |         |  |              | 0.21   |             |  |   | 0.93    |  |  |   | 0.33   | 
|Diluted net income per share |  |               | 0.30   |         |  |              | 0.20   |             |  |   | 0.87    |  |  |   | 0.31   | 

Period-to-period comparisons of our results of
operations may not be necessarily meaningful, as our annual and
quarterly revenues may fluctuate due to the timing of our
theatrical releases and related products, such as home video,
television, and merchandising. For example, revenues for the
third quarter of 2002 were significantly higher than the third
quarter of 2001 due to the September 2002 release of worldwide
home videos and DVDs for Monsters, Inc.

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INDEPENDENT AUDITORS REPORT ON
SCHEDULE

The Board of Directors and Shareholders

Pixar:


Under date of January 31, 2003, we reported
on the balance sheets of Pixar as of December 29, 2001 and
December 28, 2002, and the related statements of income,
shareholders equity and comprehensive income, and cash
flows for each of the years in the three-year period ended
December 28, 2002, which are included in the 2002 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 31, 2003


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PIXAR

SCHEDULE II  VALUATION AND
QUALIFYING ACCOUNTS AND RESERVES

|                                            |                              |                |   |           |  |              |   |             |  |  |   |      |   |  |   |     | 
|------------------------------------------- | ---------------------------- | -------------- | - | --------- |  | ------------ | - | ----------- |  |  | - | ---- | - |  | - | --- | 
|                                            |                              | Balance at     |   |           |  | Deductions:  |   |            
|                                            |                              | Beginning      |   |           |  | Write off of |   | Balance at 
|Classification                              |                              | of Year        |   | Additions |  | Accounts     |   | End of Year
|                                            |                              |                |   |           |  |              |   |            
|                                            |                              |               
|                                            |                              | (In thousands)
|Allowance for returns and doubtful accounts |                              |                |   |           |  |              |   |             |  |  |   |      |   |  |   |    
|                                            | Year ended December 30, 2000 |                | $ | 224       |  |              | $ |            |  |  | $ | (54  | ) |  | $ | 170 | 
|                                            |                              |                |   |           |  |              |   |             |  |  |   |      |   |  |   |    
|                                            | Year ended December 29, 2001 |                | $ | 170       |  |              | $ | 394         |  |  | $ | (12  | ) |  | $ | 552 | 
|                                            |                              |                |   |           |  |              |   |             |  |  |   |      |   |  |   |    
|                                            | Year ended December 28, 2002 |                | $ | 552       |  |              | $ | 9           |  |  | $ | (373 | ) |  | $ | 188 | 
|                                            |                              |                |   |           |  |              |   |             |  |  |   |      |   |  |   |    

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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
28th day of March, 2003.



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



| |     |               
| | --- | --------------
| | By: | /s/ ANN MATHER

| |                                                        
| | -------------------------------------------------------
| | ______________________________________ 
     Ann Mather
| | Executive Vice President,                              
| | Chief Financial Officer and
    Secretary              

POWER OF ATTORNEY

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

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

|                                         |  |                                                                                                               |  |                |  | 
|---------------------------------------- |  | ------------------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|                                         |  |                                                                                                               |  |               
|Signature                                |  | Title                                                                                                         |  | Date          
|                                         |  |                                                                                                               |  |               
|                                        
|/s/ STEVE JOBSSteve Jobs                 |  | Chairman of the Board and
    Chief Executive Officer
    (Principal Executive Officer)                       |  | March 28, 2003
|                                        
|/s/ ANN MATHERAnn Mather                 |  | Executive Vice President and
    Chief Financial Officer
    (Principal Financial and
    Accounting Officer) |  | March 28, 2003
|                                        
|/s/ EDWIN E. CATMULLEdwin E. Catmull     |  | President and Director                                                                                        |  | March 28, 2003
|                                        
|/s/ SKIP M. BRITTENHAMSkip M. Brittenham |  | Director                                                                                                      |  | March 28, 2003
|                                        
|/s/ JOSEPH A. GRAZIANOJoseph A. Graziano |  | Director                                                                                                      |  | March 28, 2003
|                                        
|/s/ LAWRENCE B. LEVYLawrence B. Levy     |  | Director                                                                                                      |  | March 28, 2003

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|                                                 |  |          |  |                |  | 
|------------------------------------------------ |  | -------- |  | -------------- |  | 
|                                                 |  |          |  |               
|Signature                                        |  | Title    |  | Date          
|                                                 |  |          |  |               
|                                                
|/s/ JOE ROTHJoe Roth                             |  | Director |  | March 28, 2003
|                                                
|/s/ LARRY W. SONSINILarry W. Sonsini             |  | Director |  | March 28, 2003
|                                                
|/s/ JOHN S. WADSWORTH, JR.John S. Wadsworth, Jr. |  | Director |  | March 28, 2003

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CERTIFICATIONS

I, Steve Jobs, certify that:

1.     I have reviewed
this annual report on Form 10-K of Pixar;

2.     Based on my
knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;

3.     Based on my
knowledge, the financial statements, and other financial
information included in this annual report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;

4.     The
registrants other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and have:



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5.     The
registrants other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrants
auditors and the audit committee of registrants board of
directors (or persons performing the equivalent functions):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6.     The
registrants other certifying officer and I have indicated
in this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.



| |                                                         
| | --------------------------------------------------------
| | /s/ STEVE JOBS                                          
| | _______________________________________ 
     Steve Jobs
| | Chairman and Chief Executive Officer                    

Date: March 28, 2003

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##### Table of Contents



I, Ann Mather, certify that:

1.     I have reviewed
this annual report on Form 10-K of Pixar;

2.     Based on my
knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;

3.     Based on my
knowledge, the financial statements, and other financial
information included in this annual report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;

4.     The
registrants other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and have:



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5.     The
registrants other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrants
auditors and the audit committee of registrants board of
directors (or persons performing the equivalent functions):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6.     The
registrants other certifying officer and I have indicated
in this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.



| |                                                         
| | --------------------------------------------------------
| | /s/ ANN MATHER                                          
| | _______________________________________ 
     Ann Mather
| | Executive Vice President and                            
| | Chief Financial Officer                                 

Date: March 28, 2003

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INDEX TO EXHIBITS

|        |    |          |  |                                                                                                                                                                                                                                                                                                                              
|------- | -- | -------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |         
|Number  |    | Exhibits
|        |    |         
|        | 3  | .1       |  | Amended and Restated Articles of Incorporation
    (which is incorporated herein by reference to Exhibit 3.3
    to the Registrants Form S-1 Registration Statement,
    Commission File No. 33-97918)                                                                                                                      
|        | 3  | .2       |  | Amended and Restated Bylaws (which is
    incorporated herein by reference to Exhibit 3.2 to the
    Registrants Annual Report on Form 10-K for the year
    ended December 30, 2000, Commission File No. 0-26976)                                                                                                          
|        | 4  | .1       |  | See Exhibit 3.1                                                                                                                                                                                                                                                                                                              
|        | 4  | .2       |  | See Exhibit 3.2                                                                                                                                                                                                                                                                                                              
|        | 4  | .3       |  | Specimen Common Stock Certificate (which is
    incorporated herein by reference to Exhibit 4.5 to the
    Registrants Form S-1 Registration Statement,
    Commission File No. 33-97918)                                                                                                                                   
|        | 10 | .1*      |  | 1995 Stock Plan, as amended (which is
    incorporated herein by reference to Exhibit 4.3 to the
    Registrants Form S-8 Registration Statement,
    Commission File No. 333-71706)                                                                                                                                        
|        | 10 | .2*      |  | 1995 Director Option Plan                                                                                                                                                                                                                                                                                                    
|        | 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, Commission File 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,
    Commission File No. 33-97918)(1)                                                                     
|        | 10 | .5*      |  | Employment Agreement between the Registrant and
    John Lasseter dated March 21, 2001 (which is incorporated
    herein by reference to Exhibit 10.5 to the
    Registrants Annual Report on Form 10-K for the year
    ended December 29, 2001, Commission File
    No. 0-26976)(1)                                       
|        | 10 | .6       |  | Co-Production Agreement between the Registrant
    and Walt Disney Pictures and Television dated February 24,
    1997 (which is incorporated herein by reference to
    Exhibit 10.16 to the Registrants Annual Report on
    Form 10-K for the year ended December 31, 1996,
    Commission File No. 0-26976)(1)          
|        | 10 | .7       |  | Agreement of Purchase and Sale between the
    Registrant and Del Monte Corporation dated as of
    September 6, 1996, as amended (which is incorporated herein
    by reference to Exhibit 10.19 to the Registrants
    Quarterly Report on Form 10-Q for the quarter ended
    June 30, 1997, Commission File No. 0-26976)
|        | 23 | .1       |  | Consent of Independent Auditors                                                                                                                                                                                                                                                                                              
|        | 99 | .1       |  | Certification of Chief Executive Officer and
    Chief Financial Officer pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002                                                                                                                                    



---



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



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