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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



Form 10-K



ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT
OF 1934



For the fiscal year ended January 1, 2005



Commission File Number 0-26976



Pixar

(Exact name of registrant as specified in its charter)



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



Registrants
telephone number, including area code:

(510) 752-3000



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 ̈



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 ̈



As of July 3, 2004, the last day of the Registrants most recently
completed second fiscal quarter, there were 56,480,505 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 July 2, 2004) was $1,793,965,609. Shares of the Registrants Common Stock held by each executive officer and director have been excluded in that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other purposes.



As of March 1, 2005, there were 58,776,532 shares of the Registrants Common Stock outstanding.



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TABLE OF CONTENTS



|           |  |                                                                                                           |  |     
|---------- |  | --------------------------------------------------------------------------------------------------------- |  | ----
|           |  |                                                                                                           |  | Page
|PART I    
|Item 1.    |  | Business                                                                                                  |  | 3   
|           |  | Risk Factors                                                                                              |  | 18  
|Item 2.    |  | Properties                                                                                                |  | 32  
|Item 3.    |  | Legal Proceedings                                                                                         |  | 32  
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                       |  | 33  
|           |  | Executive Officers of the Company                                                                         |  | 33  
|          
|PART II   
|Item 5.    |  | Market for Companys Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities |  | 35  
|Item 6.    |  | Selected Financial Data                                                                                   |  | 35  
|Item 7.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                     |  | 35  
|Item 7A.   |  | Quantitative and Qualitative Disclosures About Market Risk                                                |  | 45  
|Item 8.    |  | Financial Statements and Supplementary Data                                                               |  | 45  
|Item 9.    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                      |  | 45  
|Item 9A.   |  | Controls and Procedures                                                                                   |  | 46  
|Item 9B.   |  | Other Information                                                                                         |  | 46  
|          
|PART III  
|Item 10.   |  | Directors and Executive Officers of the Company                                                           |  | 46  
|Item 11.   |  | Executive Compensation                                                                                    |  | 49  
|Item 12.   |  | Security Ownership of Certain Beneficial Owners and Management                                            |  | 52  
|Item 13.   |  | Certain Relationships and Related Transactions                                                            |  | 53  
|Item 14.   |  | Principal Accounting Fees and Services                                                                    |  | 54  
|          
|PART IV   
|Item 15.   |  | Exhibits and Financial Statement Schedules                                                                |  | 55  
|Signatures |  | 83                                                                                                       



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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 scheduled release dates of our feature films, our anticipated revenues and operating expenses, our expectations on DVD penetration and
the resulting effect on our home video sales and our expectations regarding any future distribution agreement into which we may enter. In some cases, forward-looking statements can be identified by the use of words such as may,
could, would, might, will, should, expect, forecast, predict, potential, continue, anticipates, expects,
intends, plans, believes, seeks, estimates, is scheduled for, scheduled, 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 various 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 18 through 32. 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 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 six full-length computer-animated feature films, which were marketed and distributed by The Walt Disney Company
(along with its subsidiaries hereinafter referred to as Disney). Pixar has won 18 Academy Awards® for its films and technical achievements, and our six films have grossed an aggregate of more than $3.2 billion at the worldwide box office as of March 6, 2005. Our next film, Cars,is scheduled for release on June 9, 2006. Cars is directed by Pixars two-time Academy Award®-winner John Lasseter, who directed Toy Story, A Bugs Life, and Toy Story 2. We are also currently in production on our first feature film produced outside of
our existing Disney relationship, which is scheduled for a summer 2007 release.



Our principal executive offices are located at 1200 Park Avenue, Emeryville, California 94608. Our telephone number is (510) 752-3000, and our website is located at www.pixar.com; however, the information in, or that
can be accessed through our website 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 the Investors
Relations section of our website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.



The statements in this Form 10-K regarding the scheduled release dates for our next 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 or marketing or distribution factors, (3)
personnel availability, (4) external socioeconomic and political events, and (5) the release dates of competitive films. See Risk Factors in Item 1 of this Form 10-K.



Distribution of Our Films



In February 1997, we extended our original relationship with Disney (under whichToy Story was created and produced)
by entering into the Co-Production Agreement. Under the Co-Production Agreement, we agreed



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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 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 mutually agreed upon fees or costs, including any third-party participations. The
first four original Pictures produced under the Co-Production Agreement wereA Bugs Life, Monsters, Inc.,Finding NemoandThe Incredibles. We are currently in production on Cars,the fifth and final Picture under
the terms of this agreement. As a sequel,Toy Story 2 did not count toward the Pictures; however, it was produced under the Co-Production Agreement and is afforded the same financial terms as the Pictures.



The term of the Co-Production Agreement continues until we deliver our fifth
and final Picture,Cars,to Disney. Since our April 2003 delivery ofFinding Nemoto Disney, we have had the right to negotiate and enter into another distribution agreement with any third party. In January 2004, we announced that we
had ended our discussions with Disney regarding extending our relationship with them by entering into a new arrangement for films released beyondCars. Since that time, we have had preliminary meetings with various major motion picture
studios regarding a potential distribution agreement for the films we release after Cars, and we continue to explore our options with respect to a future distribution agreement.



We have produced six highly successful feature films to date, and we believe that this success, combined with our strong
financial resources, position us to negotiate a new distribution arrangement with a major studio that will provide us with, among other things, (1) better economic terms than we currently have under the Co-Production Agreement and (2) full ownership
of our films. With respect to the distribution of our films after Cars, we currently are not pursuing alternatives other than entering into such an agreement with a major studio.



Although we look forward to a more favorable distribution agreement for films released afterCars, we also understand
that distributing our films through another studio may increase some of the risks we face in the motion picture industry. See  Relationship with Disney, Risk Factors  We experience intense competition with respect to
our animated feature films and software and Risk Factors  We face various distribution risks with respect to our feature films.



Recent Developments



Summer Theatrical Release Schedule.    In December 2004, we announced that we would be shifting the theatrical release schedule
of our feature films from a holiday release schedule to a summer release schedule, beginning with Cars. We believe that family-oriented films enjoy better intra-week box office performance in the summer compared to the holiday season because,
among other factors, children are generally not participating in a full-time school curriculum.



Release of The Incredibles.    In November 2004, The Incredibles was theatrically released, and, as of March 6, 2005, it
had generated over $260 million in domestic box office revenue and over $368 million in foreign box office revenue. In February 2005, The Incredibles won two Academy Awards® for Best Animated Feature Film and Achievement in Sound Editing. On March 15, 2005, The Incredibles domestic
home video was released, in both DVD and VHS formats. The international home video will be released throughout the Spring of 2005.



THQ Multi-Property Publishing Agreement.    In August 2004, we announced an exclusive multi-property publishing agreement with
THQ, Inc. (THQ) in which we granted THQ the interactive rights to four future Pixar computer-animated feature films, beginning with our first film produced outside of the Co-Production Agreement. The worldwide deal extends four years
after the release of each film and includes all current and future video game console systems, PC/MAC, as well as handheld and wireless devices. Under THQs existing agreement with Pixar and Disney, which began in April 2002, THQ has the rights
to publish video games for Finding Nemo, The IncrediblesandCars.



Management and Board of Director Changes.    In May 2004, Simon T. Bax was appointed Executive Vice President and Chief Financial Officer of Pixar. In June 2004, Susan L. Decker, Chief
Financial Officer and Executive Vice President, Finance and Administration of Yahoo!, joined our board of directors.



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Business Model and Products



We are a leading brand in family entertainment as a result of our high quality animated films and related products, such as
video products, toys, interactive games and other merchandise. Because of our strong brand and the consistent success of our feature films, we believe that we are well positioned to secure a distribution agreement that will provide for strong
marketing and distribution of our films and more favorable economic terms and full ownership of our future properties.



Animated Feature Films.    Our first animated feature film,Toy Story, was released in November 1995. As the first fully
computer graphics imagery (CGI) animated feature film released theatrically, Toy Storyrevolutionized the field of animation. Since the release of Toy Story,we have produced five more highly successful films: A Bugs Life, Toy
Story 2, Monsters, Inc., Finding Nemo and The Incredibles.



We intend to continue to develop high-quality original computer-animated feature films for the family entertainment market. We are currently in various stages of development and production on a number of original animated feature films
includingCars, which is the last of five original Pictures to be produced and distributed under the Co-Production Agreement, as well as our first film beyond the Co-Production Agreement. John Lasseter, the Director ofToy Story, A
Bugs Life, andToy Story 2 and Executive Producer forMonsters, Inc.,Finding Nemo andThe Incredibles, is currently directingCars, which is scheduled for release on June 9, 2006.



The following table sets forth box office information regarding our first six
films as of March 6, 2005:



|                |  |                 |  |                                                         
|--------------- |  | --------------- |  | --------------------------------------------------------
|Film            |  | Year of Release |  | Worldwide Box Office*                                   
|The Incredibles |  | 2004            |  |    $260 million
domestic    $368 million international
|Finding Nemo    |  | 2003            |  |    $340 million
domestic    $525 million international
|Monsters, Inc.  |  | 2001            |  |    $256 million
domestic    $268 million international
|Toy Story 2     |  | 1999            |  |    $246 million
domestic    $239 million international
|A Bugs Life    |  | 1998            |  |    $163 million
domestic    $200 million international
|Toy
Story       |  | 1995            |  |    $192 million domestic    $170 million
international

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|* | Box office receipts represent the gross revenues collected by theatrical exhibitors for exhibition of our films and do not reflect the amount of revenue remitted to us.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Home Videos.    Home
video sales, including DVD and VHS formats, continue to be among the largest contributors to lifetime revenues of our films. Through January 1, 2005, we have recognized net units sales of over 183 million units worldwide from our five titles
released in this market. With the increasing popularity of the DVD format, more consumers are creating DVD libraries. We believe that the popularity of the DVD format is an important factor that contributed to the tremendous success ofFinding
Nemo andMonsters, Inc. domestic home video releases. TheFinding Nemo home video was released in the U.S. in November 2003 in both VHS and a 2-disc Collectors Edition DVD. In 2003,Finding Nemo became the best selling home
video of all time in the U.S. Over 29 million units have been sold in the U.S. since its release, (23 million DVD units and 6 million VHS units). The Monsters, Inc. home video was released in the U.S. in September 2002 in both VHS and a
2-disc Special Edition DVD and was the best selling home video of 2002. Over 20 million units have been sold in the U.S. since its release.



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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 more consumers worldwide build their DVD film libraries, we expect not only to continue to see the shift in the DVD/VHS ratio toward DVD,
but also to see 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, and also believe that home video sales will continue to be a significant component of our business. Since their release, the Finding Nemo home video has sold over 19 million units internationally (14 million DVD units and 5 million
VHS units), and the Monsters, Inc. home video has sold over 15 million units internationally (7 million DVD units and 8 million VHS units). Distribution of home video versions of the animated feature films developed and produced under the
Co-Production Agreement is governed by the terms of the Co-Production Agreement.



We also continue to explore opportunities to maximize worldwide home video sales of our library titles. For example, the domestic home video for bothToy Story andToy Story 2 were placed on a sales
moratorium on May 1, 2003. Internationally, these two titles were placed on moratorium at various dates beginning in the Spring of 2004. This strategy is designed potentially to increase sales over the lifetime of a title, to prevent a
declining sales price and to support a potentially higher sales price upon re-release. However, it is difficult to predict the impact this strategy will actually have on our sales, particularly since this is the first time home videos of any of our
feature films have been placed on a sales moratorium. In addition to re-release on existing video formats, as the marketplace evolves with the next generation of home theater technology, such as High Definition TV, we will continue to monitor the
marketplace and review home video strategies.



Television.    Our films are distributed to television markets throughout the world. All of our films have been distributed to the domestic broadcast and basic cable television markets. Since October of 2000, our
films have appeared on Pay-Per-View with A Bugs Life being the first major animated title to be distributed by Disney for this market. We entered the pay television market in March 2003 by licensing the pay television rights for
Monsters, Inc. to Starz!/Encore. This was the first time that a Pixar title was licensed to a premium cable network. Finding Nemo, The Incredibles, and Cars are now included as part of an output deal between Disney and
Starz!/Encore. Internationally, our films have appeared in the pay TV market as well as the broadcast networks. Disney generally distributes our films internationally to the broadcast networks through a package consisting of multiple films. Going
forward, we expect all of our titles to be available through the various television markets: Pay-Per-View, pay television, broadcast and basic cable television, and international television. Distribution of television rights for the animated feature
films developed and produced under the Co-Production Agreement is 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. For example, Pixar and Disney have granted THQ interactive rights to create interactive video and computer games forFinding Nemo,
The Incredibles, andCars,which are Pictures under the Co-Production Agreement. In August 2004, we announced an exclusive multi-property publishing agreement with THQ in which we granted THQ the interactive rights to four future Pixar
computer-animated feature films, beginning with our first film produced outside of 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 award-winning short films since our inception and plan to continue to invest in developing new short films. For example, in 1997 we created and produced the Academy Award®-winning short film,Geris Game, which enabled us to further our technology
in computer-generated skin and cloth. In 2000, we created and produced the Academy Award®-winning short film,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, produced in
1989, accompaniedFinding Nemo in theaters. In 2003, we created and produced the Academy Award®-nominated,Boundinwhich accompanied The Incredibles in theaters. We also create new short films for inclusion as a bonus feature in our DVD releases in addition to
including on the DVD the short films that accompanied the theatrical release of our feature films. Mikes New Carwas a special bonus feature on the Monsters, Inc.DVD, and the release of The IncrediblesDVD on March 15,
2005 includes a new and previously unreleased short film, Jack-Jack Attack.



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RenderMan®.    We have been selling our RenderMan® software for nearly seventeen years. RenderMan® has helped visual effects studios create visual effects in over 100 films. Of the
last 44 films nominated to receive an Academy Award® for visual effects, 41 have used RenderMan®. RenderMan® runs on these popular platforms: Linux, Macintosh OSX, 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 Animation SKG, Inc. 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 required to condense emotional information into actions that are believable on the screen. At 24 frames per
second, a 115-minute animated feature film such asThe Incredibles requires approximately 165,000 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 in the past, 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 the elements used to create the animated images.



We produce 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



LOGO



Creative development is a
collaborative 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



LOGO



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 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, visual plans are developed for the style, colors and look of the film.



Production



LOGO



Our production stage consists of
six phases: modeling and rigging, layout, animation, shading and lighting, rendering and film recording. In the modeling phase, digital models of each set and character are created by



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defining their shapes in three dimensions (height, width and depth) and by adding the rigging, the sets of animation controls that allow the model to be
moved or animated. In some cases, a digital 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 digital 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 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 data for the models, layout, animation, shaders and lights, and for each frame in the sequence, computes a two-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 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 exhibition.Toy Story 2 was shown digitally in 12 theaters worldwide, making it the first completely computer-animated feature film to be shown digitally.Monsters,
Inc. andFinding Nemo were shown digitally in 37 and 103 theaters worldwide, respectively. The Incredibles is Pixars widest international digital cinema release to date, and the industrys first to take advantage of the
new generation of higher resolution, 2K digital cinema projectors. Audiences in eighteen territories around the world saw The Incredibles projected digitally, in seventeen localized versions. Worldwide, the digital release hit 112
theaters (35 domestic, 77 international).



Post-Production



LOGO



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, 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.



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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. An exemplary list of
those awards is included in the table below:



|                |  |                                                                                                                           |  |                                                                                                          |  |     
|--------------- |  | ------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------- |  | ----
|Film            |  | Category                                                                                                                  |  | Award/Nomination                                                                                         |  | Year
|The Incredibles |  | Best Animated Feature Film Best Original
Screenplay Best Sound Editing Best Sound Mixing Best Picture, Musical or Comedy  |  | Academy Award® Academy Award® Nominee Academy Award® Academy Award® Nominee Golden Globe Nominee         |  | 2004
|Finding Nemo    |  | Best Animated Feature Film Best Original
Screenplay Best Musical Score Best Sound Editing Best Picture, Musical or Comedy |  | Academy Award® Academy Award® Nominee Academy Award®
Nominee Academy Award® Nominee Golden Globe Nominee |  | 2003
|Boundin        |  | Best Animated Short Film                                                                                                  |  | Academy Award® Nominee                                                                                   |  | 2003
|Mikes New Car  |  | Best Animated Short Film                                                                                                  |  | Academy Award® Nominee                                                                                   |  | 2002
|Monsters, Inc.  |  | Best Song Best Animated Feature Film
Best Original Score Best Sound Editing                                               |  | Academy Award® Academy Award® Nominee Academy Award®
Nominee Academy Award® Nominee                      |  | 2001
|For the Birds   |  | Best Animated Short Film                                                                                                  |  | Academy Award®                                                                                           |  | 2001
|Toy Story 2     |  | Best Original Song Best Picture, Musical or
Comedy Best Original Song                                                     |  | Academy Award® Golden Globe Award Golden Globe Nominee                                                   |  | 2000
|Geris Game     |  | Best Animated Short Film                                                                                                  |  | Academy Award®                                                                                           |  | 1998
|A Bugs Life    |  | Best Musical Score Best Original
Score                                                                                    |  | Academy Award® Nominee Golden Globe Nominee                                                              |  | 1998
|Tin Toy         |  | Best Animated Short Film                                                                                                  |  | Academy Award®                                                                                           |  | 1988
|Luxo, Jr.       |  | Best Animated Short Film                                                                                                  |  | Academy Award®                                                                                           |  | 1986



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 ofToy Story, A Bugs Life,Toy Story 2 andCars and Executive Producer forMonsters, Inc., Finding Nemo
andThe Incredibles. In March 1996, Mr. Lasseter received a Special Achievement Oscar® from the Academy of Motion Picture Arts and Sciences for the development and application of techniques that made possible the first feature-length computer-animated film,Toy
Story. In February 2004, Mr. Lasseter was awarded the Art Directors Guilds coveted honorary Contribution to Cinematic Imagery Award. The Contribution to Cinematic Imagery Award is voted from time to time to an individual whose body of work
in the film business has richly enhanced the visual aspects of the movie-going experience. Award-winning directors working with Mr. Lasseter include, among others, Andrew Stanton, Brad Bird and Pete Docter. Finding Nemo, released domestically
on May 30, 2003, was written and directed by Academy Award®-winning Andrew Stanton, who served as co-director and co-screenwriter ofA Bugs Life and as co-screenwriter ofToy Story, Toy Story 2, andMonsters, Inc. Academy Award®-winning Brad Bird previously directed and wrote the
screenplay of the critically acclaimed animated feature,The Iron Giant, and directed and wrote the multiple award-winning The Incredibles, which was released domestically on November 5, 2004. Pete



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Docter, the Director ofMonsters, Inc.,is an Academy Award®-nominee for his role in creating the original story forToy Story. Mr. Docter and Mr. Stanton are currently
working on projects outside of the term of the Co-Production Agreement.



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, storyboards 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 inMonsters, Inc., the underwater murk inFinding Nemo and the human skin inThe Incredibles. Our proprietary software tools enable artists unfamiliar with
computers to become quickly 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 that encourages each member of the
creative team, regardless of position or department, to consider the ideas of all other members 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 develop and produce compelling stories and characters that will appeal to a broad audience. Traditionally, this process has been extremely difficult. While we have enjoyed box office success with all of our feature
animated films to date, there can be no assurance that similar levels of success will be achieved by our subsequent films, including Cars and projects beyond the Co-Production Agreement. 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. Members of this group were responsible for many of the award-winning inventions that make three-dimensional computer animation
possible, including texturing, shading, motion blur, and cloth and human skin simulation. We continue to make a significant investment in technology in order to help maintain a competitive advantage in this dynamic fast-moving field.



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



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



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



A key component of Ringmaster is a distributed rendering system for managing the huge quantity of images
and data that must be rendered to create 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



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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, Ringmaster coordinates and
schedules all the processors in the RenderFarm. Ringmaster includes a compositing system and also maintains an array of disk drives as a central data repository for the digital image files generated by the rendering and compositing steps of the production process. Finally,
Ringmaster controls the filming phase of
production and is responsible for backing up shots for archival purposes.



RenderMan®.    RenderMan® is a rendering software system for high quality photo-realistic image synthesis that 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
these popular platforms: Linux, Macintosh OSX, and Windows. For more information, see Business Model and Products RenderMan®.



Relationship with Disney



Our relationship with Disney 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 forThe Rescuers Down Under and has continued to use it for its subsequent animated feature films, such asThe Lion King andTarzan. In
1992, certain employees of Pixar and Disney were jointly awarded an Academy Award® for Scientific and Engineering Achievement for the development of CAPS.



In May 1991, we entered into a feature film agreement with Disney, which provided for the development, production and distribution of up to three
feature-length motion pictures (the Feature Film Agreement). Toy Story was developed, produced and distributed under the Feature Film Agreement. 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 ofCars to Disney.



We have produced six highly
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 a distribution arrangement that will provide us with more favorable economic terms and allow
us to retain full ownership of our future films. Although we look forward to a more favorable agreement for films released afterCars, we also understand that such an agreement may increase some of the risks we face in the motion picture
industry. 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. Before making an investment decision with respect to our Common Stock, we encourage you 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 third-party participations. 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



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of each Picture. The first four original Pictures under the Co-Production Agreement wereA Bugs Life, Monsters, Inc., Finding Nemo andThe
Incredibles, which were released in November 1998, November 2001, May 2003 and November 2004, respectively.Toy Story 2, the theatrical sequel toToy Story, was released in November 1999, and is also governed by the Co-Production
Agreement, although it does not count towards the Pictures because it was a sequel. 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.Cars was the fifth film to be green lit. Once the film has been green lit, we have final control over the production of
the 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 the production costs of the Pictures. 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 films under the Co-Production Agreement have been approved for production, Disney has committed initially to 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 Pictures 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 for the first three years after the films release then quarterly thereafter, subject to certain exceptions, and we have the right to audit
Disneys books and records relating to the Pictures and Merchandise.



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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 asToy Story 2, made-for-home video sequels, television productions such asBuzz Lightyear of Star Command, interactive media products such asMonsters, Inc.,Finding NemoandThe
Incrediblesinteractive 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 orToy Story as its primary theme, or (5) an
interactive product such as a CD-ROM, DVD, video game or arcade game (collectively, Interactive Products). Although Disney has given us the option to co-finance and co-produce theatrical sequels to A Bugs Life, Toy Story
2, Monsters, Inc. and Finding Nemo, we have declined. Therefore, should Disney release these sequels, we will participate on a passive financial basis.



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 orToy Story as its primary theme and (B) television productions, Pixar and Disney are to agree mutually 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 agree mutually upon the terms and conditions under which such Interactive Products shall be financed, produced and distributed, subject to certain commitments by Disney with
respect to marketing and distribution and provided that there will be no distribution fee payable to Disney.



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



A
Derivative Work that is a theatrical motion picture does not count towards the five Pictures under the Co-Production Agreement. Accordingly,Toy Story 2 did 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 toToy Story 2 as well.



Creative Controls.    Pixar has full creative control of the production ofCars. 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



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Agreement. We further agreed that we would 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 delivered the third Picture,Finding Nemo, to Disney under the Co-Production Agreement, which occurred in April 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, are 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. Disney has the exclusive distribution and exploitation rights with respect to the Pictures, Derivative Works and ancillary rights relating
thereto. Under the Feature Film Agreement, Disney owns all of the proprietary rights associated with the firstToy Story film. Notwithstanding the foregoing, 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 the delivery to Disney ofCars, 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 Pixar merges or consolidates into 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.



Effect on Prior Agreements.    All Derivative Works based onToy Story includingToy Story 2 are 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 pictureToy Story and
the financial participation in certain Merchandise related toToy 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. Additionally, under the Feature Film Agreement, Disney owns all of the proprietary rights associated with the firstToy Story film.



Competition



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



Animated Feature Films.    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 Animation SKG, Inc. (DreamWorks), Warner Bros. Entertainment (Warner Bros.), Sony Pictures Entertainment (Sony), Fox Entertainment Group Inc. (Fox), Paramount Pictures
(Paramount), Lucasfilm Ltd. (Lucasfilm), Universal Studios, Inc. (Universal), MGM/UA, and Studio Ghibli as well as numerous other independent motion picture production companies.



In 2004, 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 that were released domestically



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during the 2004 holiday period that competed withThe Incredibles, which was released domestically on November 5, 2004, included the following:



| |  |  | Shark Taleby DreamWorks,
| | - |  | ------------------------



| |  |  | The Polar Expressby Warner Bros.,
| | - |  | ---------------------------------



| |  |  | The SpongeBob Squarepants Movieby Paramount,
| | - |  | --------------------------------------------



| |  |  | National Treasureby Disney,
| | - |  | ---------------------------



| |  |  | Christmas with the Kranksby Sony,
| | - |  | ---------------------------------



| |  |  | Lemony Snickets A Series of Unfortunate Eventsby Paramount, and
| | - |  | ----------------------------------------------------------------



| |  |  | Fat Albertby Fox.
| | - |  | -----------------



The Incredibleswas released on home video in the domestic marketplace on March 15, 2005 and will compete with many of the same films from its
theatrical release as well as other direct-to-video features and library titles re-released on home video.



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.



There appears to be increasing widespread acceptance for CGI animated films. In 2005, a significant increase is expected in the number of CGI animated
films to be released, a trend that we expect to carry through 2006 and beyond. Animated feature films currently in production for major studios that are primarily CGI includeA Day With Wilbur Robinson, American Dog, Chicken Little, Flushed Away,
Ice Age 2,Madagascar, Open Season, Over the Hedge, Rapunzel Unbraided, Shrek 3, Surfs Up, The Barnyard, The Wild,andValiant, among others. Some studios have also announced publicly that they intend to release multiple CGI
films per year. In addition to box office and home video competition, other family-oriented films may continue to compete with The Incredibles, Finding Nemo, and our film library with respect to related television, merchandise, and
other future revenue sources.



The Co-Production Agreement
provides that we will develop and produce five original computer-animated feature films. Because Disney co-finances the films developed and produced under the Co-Production Agreement, distributes the films under the Walt Disney Pictures
label and enjoys financial benefits in the event that such films achieve significant box office revenues, we believe that Disney desires such films to be successful. Nonetheless, during its long history, Disney has been a very successful producer
and distributor of its own animated feature films. While the Co-Production Agreement imposes restrictions prohibiting Disney and its affiliates from releasing animated films or live action family films 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, Pirates of the Caribbean: The Curse of the Black Pearl,
Spy Kids 3D:Game Over, and Freaky Friday, competed directly with Finding Nemofor domestic theatrical market share during summer 2003. The home video releases of Piratesof the Caribbean: The Curse of the Black
Pearland Freaky Fridayhave also competed with Finding Nemoin the worldwide home video market. Disneys National Treasureand Miramaxs Finding Neverlandwere released on November 19, 2004 and competed
with the worldwide theatrical release of The Incredibles,and the home video release of these films may also compete with The Incredibles in the worldwide home video market. After the release of Cars, Disney can begin to release
its movies during our release windows. This could have an adverse impact on the commercial success required for us to profit from future films. Our contractual arrangement with Disney also presents other risks. See Risk Factors  The
Co-Production Agreement imposes several risks and restrictions on us.



We believe that the primary competitive factors in the market for animated feature films include creative content and talent, product quality, technology, access to distribution channels and marketing resources. Due
in



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part to our creative and technical resources and to the Co-Production Agreement with Disney, pursuant to which Disney co-finances the production of the
feature films, markets the feature films and provides creative assistance and access to significant distribution channels, we believe that we presently compete favorably with respect to each of these factors.



Computer Graphics Special Effects Firms.    We
also expect to compete with computer graphics special effects firms, including ILM, Rhythm & Hues/VIFX, Tippett Studios, WETA Digital, 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 filmStar 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 Alias, Discreet (a division of Autodesk), Mental Images GmbH and Avid Technologies. Mental Images, Avid and Alias are each marketing
competing rendering software products, usually at lower prices than the price at which we offer RenderMan®. Under appropriate circumstances, we have in the past elected and might in the future 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. In addition, advances in Graphics Processing Unit technology
may impinge on the market for software rendering solutions. Faster and lower cost graphic cards provide capability for users to produce pictures of higher complexity.



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 have twenty-nine patents in force in the United States and eighteen patents in force 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.



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, patent and trade
secret protection may be unavailable or limited in certain foreign countries. We generally rely on electronically delivered software licenses that include an electronic acceptance by the purchaser, which may be unenforceable under the
laws of certain jurisdictions. There can be no assurance that the steps we take will



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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 protect our patents, 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 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 in 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
January 1, 2005, we had approximately 775 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. See
Risk Factors  Work stoppages could adversely impact our operations.



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, Simon Bax, Sarah McArthur and Lois Scali. We do not currently have key person life insurance for any of our employees. We do have an
employment agreement with Mr. Lasseter; however, this employment agreement does not necessarily assure his services. See Employment Agreements in Item 11 of this Form 10-K. The loss of the services of any of Messrs. Jobs, Lasseter, Bax,
Dr. Catmull, Ms. McArthur, Ms. Scali 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.



Our operating results are primarily dependent on the success of our
feature films and forecasting is extremely difficult.



In
2005, our revenue and operating results will be largely dependent upon (1) the timing and amount of worldwide revenues and distribution costs for The Incredibles, Finding Nemo,and to a lesser extent, the titles in our film library, (2) the
timing, accuracy, and sufficiency of 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) the terms of our next distribution agreement and (7) domestic and international socioeconomic and political events that
are beyond our control.



Dependence on revenue from our
feature films.



Under the current Co-Production
Agreement, which governs our relationship with Disney regarding the Pictures, 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 international markets, Disneys distribution fee, and other
distribution costs including talent participation and residuals. We remain dependent on the timing, accuracy, and sufficiency of 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 all six of our feature films, this level of success is highly unusual in the motion picture industry, and our future releases may not achieve similar results. For fiscal 2005, we will be dependent primarily on the worldwide home video and
merchandising success of The Incredibles, the domestic free television licensing of our library titles, and the continuing worldwide home video, international television licensing and merchandise sales of all of our films, excluding our
titles on home video moratorium. If our films do not generate sufficient revenues from these sources, our 2005 results would be adversely affected.



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 their worldwide box office success prior to their release. While the popularity of the film is initially measured by box office success, the films success 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 into which a product is released, among many other factors. We have
experienced a very successful worldwide box office release for The Incredibles, but it is difficult to predict its ultimate revenues from home video, television licensing, merchandise licensing, and ancillary streams. Moreover, The
Incrediblesis our first film to be released with a PG rating, as all of our previous films have been released with a G rating. It is difficult to predict what impact a PG rating may have on the performance of the film within each follow-on
product category. Additionally, we have not released a film into the home video market in the Spring since A Bugs Life; therefore, it is difficult to forecast how the March 15threlease date into this market will impact demand and the sales of the product. 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 The Incredibles, Finding Nemo, and the 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 their life cycle tend to be relatively small, minor fluctuations can result in notable
variances from our forecast. Both Toy Storyand Toy Story 2



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domestic home videos are currently subject to a domestic sales moratorium, which began on May 1, 2003. Internationally, these two titles were placed on
moratorium at various dates beginning in the Spring of 2004. This strategy is designed to increase potential sales over the lifetime of a title, to prevent a declining sales price and to support a potentially higher sales price upon re-release.
However, it is difficult to predict the actual impact of this strategy, particularly since these are our first titles to be placed on a sales moratorium, and it may not generate the results we expect in future years.



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. Although we are moving towards a strategy to release our films theatrically worldwide within a narrower timeframe relative to our earlier films,
the specific dates of the international releases for these films will depend on territory-specific factors, such as the local competitive environment and school holidays. Therefore, the timing of international revenues could span over several
months, and the forecasting of such revenues is inherently more difficult.



In addition, the amount of revenue recognized in any given quarter or quarters from all of our films depends on the timing, accuracy, and amount of 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 revisions to the information that it has provided,
which could have a significant 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 revisions have impacted and may continue to impact our revenue share and our film gross profit. In addition, through information we obtain from other sources, we may make certain judgments and/or assumptions and adjust the
information we receive from Disney. For example, we also make adjustments to our home video revenues for estimates on return reserves that may differ from those reported by Disney. In determining our home video reserves, we review information which
includes Disneys current return reserves, the historical return reserves for our previous titles, actual rates of returns, inventory levels in the distribution channel and other business and industry trend information that is available. Disney
has provided and may continue to provide us with reserve information that may differ substantially from our historical experience with our previous titles. Unless Disney provides a sufficient rationale as to why the market and sales performance are
substantially different for a particular title, we have and may continue to record reserves more consistent with our historical experience. The estimate for return reserves, whether based on historical information or more current information from
Disney, is inherently subjective and may differ significantly from actual results. Our original estimates on reserves may be revised in future periods as new and additional information becomes available.



We have utilized margin normalization, such as with merchandise or home
video expenses, in accordance with the provisions of SOP 00-2. This may result in the utilization of budgeted or forecasted information to calculate an ultimate lifetime expense margin, 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.



Any revisions to our estimated reserves, margin normalization or updated
information from Disney, as noted above, as well as findings from audit rights offered in accordance with the terms of the Co-Production Agreement, could have a material effect on our financial statements in any given quarter or quarters. For
further details, refer to 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 depends 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



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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 the Pictures with Disney, and we share such costs equally. We capitalize our share of direct costs of film production in accordance with SOP 00-2.
A substantial portion of all of our other costs is incurred for the benefit of feature films (Overhead), including research and development expenses and general and administrative expenses. Portions of our Overhead are included in the
budgets for the Pictures under the Co-Production Agreement, and we 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. During fiscal years 2002, 2003, and 2004, a substantial portion of our Overhead was related to the Pictures produced pursuant
to the Co-Production Agreement, and was therefore reimbursed by Disney. Since we capitalize other amounts in accordance with SOP 00-2, our reported operating expenses for fiscal years 2002, 2003 and 2004 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 continue 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 capitalized or shared with Disney.



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. The budgets for Carsand subsequent films and related products are expected to be greater than the budgets for our previous films.
Under the Co-Production Agreement, we will continue to finance any post-production costs for The Incredibles, as well as the budget forCars, equally with Disney. 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.



Our fiscal 2005 earnings are expected to include revenues attributable to non-film related sources including software revenue; however, there can be no assurance as to the timing and amount of such revenues.



Other items affecting forecasting.



Our fiscal 2005 earnings are expected to include nonrevenue income and
expenses such as interest income, tax expense, and stock-based compensation expense. These items can be difficult to predict and there is no assurance that we will meet our forecasts. For example, interest income is difficult to predict and can
fluctuate depending on our cash, cash equivalents and investment balances as well as external factors beyond our control, such as economic conditions and interest rates available to us during the year. Further, our income tax rate for fiscal 2004
was lower than expected due to the utilization of certain tax benefits related to foreign income exclusions for the years 2000 through 2004.



Changes in accounting regulations may also have a significant effect on our results of operations. For example, in December 2004, the Financial Accounting
Standards Board (FASB) enacted Statement of Financial Accounting Standards 123  Revised 2004 (SFAS 123R), Share-Based Payment which replaces



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Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25
(APB 25), Accounting for Stock Issued to Employees. SFAS 123R requires the measurement of all share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of
such compensation expense in our statements of income. We are required to adopt SFAS 123R in the third quarter of fiscal 2005. The pro forma disclosures, previously permitted under SFAS 123 and adopted by Pixar, no longer will be an alternative to
financial statement recognition. Although we have not yet determined whether the adoption of SFAS 123R will result in amounts that are similar to the current pro forma disclosures under SFAS 123, we expect the adoption to increase our cost of
revenues and operating expenses, and the adoption of SFAS 123R could make our net income less predictable in any given reporting period, could change the way we compensate our employees, or may cause other changes in the way we conduct our business.



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 quarterly and annual 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 competitive environment,
| | - |  | ----------------------------



| |  |  | the final terms of our next distribution arrangement, and
| | - |  | ---------------------------------------------------------



| |  |  | external socioeconomic and political events that are beyond our control.
| | - |  | ------------------------------------------------------------------------



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.



We expect to continue to increase our operating expenses to fund greater levels of research and development, to ramp up to
meet the demands of multiple films in production and to expand operations. In addition, we expect our spending levels may increase significantly due to the following:



| |  |  | continued investment in proprietary software systems,
| | - |  | -----------------------------------------------------



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| |  |  | continued and potentially increasing 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 have multiple films in parallel production,
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | increased investment in creative development and our Pixar-only financed films,
| | - |  | -------------------------------------------------------------------------------



| |  |  | increased proportion of operating expenses previously shared with Disney, 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 does not reimburse) the increases in expenses, our operating expenses will increase in fiscal 2005. In addition, as we increase the resources allocated to
our productions beyond our feature film Cars, which is 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.



We have only recently
established parallel creative teams so that we can develop more than one film at a time. These teams are presently working on a number of original animated feature films including the last Picture under the Co-Production Agreement, Cars and
our first film outside of the Co-Production Agreement. We have only produced and released six 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 any future animated film will be released as scheduled 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 has been and will continue to
be additional demands placed on his availability. In addition to Mr. Lasseters role as our Executive Vice President  Creative, he is also directing Cars,our next feature film. A lack of his availability may adversely impact the
success and timing of our future films.



We continuously
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. Our growth and these
diversification activities, along with the corresponding increase in the number of our employees and our 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, the marketing and distribution strategy, and the extent of promotional
support are important factors in determining the success of



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our motion pictures and related products. Under the terms of the Co-Production Agreement, Disney is required to market and distribute the Pictures in the
same manner as their premier animated films, and Disney is required to consult with us with respect to all major marketing and distribution decisions. While Disney is prohibited from distributing potential competing films within certain release
collars, 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 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 significant adverse effect on our business, operating results or financial condition.



Disney has an exclusive arrangement with us.



We have agreed not to release or authorize the release of any of our feature length animated theatrical motion pictures, other than the Pictures, until twelve months from our delivery of the fifth Picture under the
Co-Production Agreement. However, since we have delivered FindingNemo, we have been free to enter into any agreement with any third party for the development, production or distribution of any feature length animated theatrical motion
picture (other than the Pictures). In January 2004, we announced that we had ended our discussions with Disney regarding a new arrangement with them for films released beyond Cars. Since that time, we have had preliminary meetings with
various major motion picture studios regarding a potential distribution agreement for the films we release after Cars, and we continue to explore our options with respect to a future distribution agreement.



We 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. However, if Disney produces any derivative works without Pixar, we are entitled to receive passive royalties pursuant to the terms of the Co-Production Agreement.
See Business  Competition, and Risk Factors  We experience intense competition with respect to our animated feature films and software.



We have an obligation to co-finance production costs.



We co-financed the first four films under the Co-Production Agreement, as
well as Toy Story 2, and we will continue to co-finance Carsand may co-finance other related products to be developed and produced pursuant to the Co-Production Agreement. For example, we have, in the past, elected to actively
participate in various interactive games with Disney where we fund half of the development costs of the games. We also have approved for production and have begun financing other Pixar-only financed films. 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.



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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 of each Picture, all characters and story elements of each Picture 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 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.



We are subject to risks inherent to our industry.



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:



| |  |  | talent and crew 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,
| | - |  | -----------------------------------------------------------------------------------



| |  |  | piracy and unauthorized recording, transmission and distribution of motion pictures,
| | - |  | ------------------------------------------------------------------------------------



| |  |  | general socioeconomic 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. In addition, 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 CGI animated films, 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.



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Motion picture piracy, which may intensify, could decrease the revenue we receive from the
exploitation of our films.



Piracy and the
unauthorized recording, transmission and distribution of our content are increasing challenges. Motion picture piracy is already prevalent outside of the United States, Canada and Western Europe and in countries where we may have difficulty
enforcing our intellectual property rights. Technological advances, such as the digital distribution of motion pictures, could increase the prevalence of piracy, including in the United States, because such advances simplify the creation,
transmission and sharing of high quality unauthorized copies of motion pictures in theatrical release, on videotapes and DVDs, from pay-per-view through set top boxes and other devices and through unlicensed broadcasts on free TV and the Internet.
The proliferation of unauthorized copies of our products could have an adverse effect on our business, financial condition and results of operations and decrease the revenue we receive from our legitimate products.



Motion picture trade associations such as the Motion Picture Association of
America monitor the progress and efforts made by various countries to limit or prevent piracy. Some of these trade associations have initiated voluntary embargoes on motion picture exports to certain countries in the past to exert pressure on the
governments of those countries to become more aggressive in preventing motion picture piracy. In addition, the U.S. government has publicly considered implementing trade sanctions against specific countries that, in its opinion, do not make
appropriate efforts to prevent copyright infringements of U.S. produced motion pictures. There can be no assurance, however, that voluntary industry embargoes or U.S. government trade sanctions will be enacted or, if enacted, effective. If enacted,
such actions could impact the amount of revenue that we realize from the international exploitation of motion pictures depending upon the countries subject to such action and the duration and effectiveness of such action. If embargoes or sanctions
are not enacted or if other measures are not taken, we may lose an indeterminate amount of additional revenue as a result of motion picture piracy.



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



The success of each animated feature film developed and produced by us
depends in large part upon our ability to develop and produce compelling stories and characters that will appeal to a broad audience. Traditionally, this process has been extremely difficult. While we have enjoyed worldwide box office success with
all of our feature films, there can be no assurance that similar levels of success will be achieved by our subsequent films, including Cars and projects beyond the Co-Production Agreement.



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



Animated Feature Films.



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, Warner Bros., Sony, Fox,
Paramount, Lucasfilm, Universal, MGM/UA, and Studio Ghibli as well as numerous other independent motion picture production companies.



In 2004, competition continued to intensify in the family-oriented, animated and live action feature film market. As described in Business 
Competition above, a number of family-oriented animated and live action feature films were released during the 2004 holiday period and competed withThe Incredibles, which was released domestically on November 5, 2004. In addition,
there appears to be increasing widespread acceptance for CGI-animated films. In 2004, there was a significant increase in the number of CGI-animated films released, a trend that is likely to carry through 2005 and beyond. Primarily CGI-animated
feature films currently in production for major studios include A Day With Wilbur Robinson, American Dog, Chicken Little, Flushed Away, Ice Age 2, Madagascar, Open Season, Over the Hedge, Rapunzel Unbraided, Shrek 3, Surfs Up, The Barnyard,
The Wild, and Valiant, among others. Some studios have also announced publicly that they intend to release multiple CGI films per year. In addition to box office and home video competition, other family-oriented films may continue to
compete with Finding Nemo and The Incrediblesas well as our film library with respect to related television, merchandise, and other future revenue sources.



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Furthermore, 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 has successfully produced and released Antzin 1998, Shrekin 2001, and Shrek 2and Shark Talein 2004. In addition, Fox successfully produced, through its subsidiary Blue Sky, Ice Age, which was released in March 2002 and Robots, which was released in March 2005; and Warner Bros. released The Polar
Express in November 2004. 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 three-dimensional
CGI-animated films. Further, we believe that continuing enhancements to 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.



Therefore, we believe competition from animated feature films and family-oriented feature films will likely continue to intensify over the next several years. 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.



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.



The Co-Production Agreement provides that we will develop and produce five original computer-animated feature films. Because Disney co-finances the films
developed and produced under the Co-Production Agreement, distributes the films under the Walt Disney Pictures label and enjoys financial benefits in the event that such films achieve significant box office revenues, we believe that
Disney desires such films to be successful. Nonetheless, during its long history, Disney has been a very successful producer and distributor of its own animated feature films. While the Co-Production Agreement imposes restrictions prohibiting Disney
and its affiliates from releasing animated films or live action family films 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, Pirates of the Caribbean: The Curse of the Black Pearl, Spy Kids 3D:Game Over, and Freaky Friday, competed directly with Finding Nemofor domestic
theatrical market share during summer 2003. The home video releases of Piratesof the Caribbean: The Curse of the Black Pearland Freaky Fridayhave also competed with Finding Nemoin the worldwide home video market. The
theatrical releases of Disneys National Treasureand Miramaxs Finding Neverlandon November 19, 2004 competed with the worldwide theatrical release of The Incredibles, and the home video release of these films may
also compete with The Incrediblesin the worldwide home video market. After Cars, Disney may begin to release its movies during our release windows. This could have an adverse impact on the commercial success required for us to profit
from future films. 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, WETA Digital, 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 theClones, 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.



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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 Alias, Discreet (a division of Autodesk), Mental Images GmbH and Avid Technologies. Mental Images and Avid are each marketing competing rendering software products, usually at lower prices than the price at which
we offer RenderMan®. Under appropriate
circumstances, we have in the past elected and might in the future 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. In addition, there have been advances in graphics processing unit technology that may impinge on the market for software rendering solutions. Faster
and lower cost graphic cards provide capability for users to produce pictures of higher complexity than previously available.



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 have a material adverse effect on 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, Simon Bax, Sarah McArthur and Lois Scali. We do not currently have
key person life insurance for any of our employees. We do have an employment agreement with Mr. Lasseter, 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, Bax, Dr. Catmull, Ms. McArthur, Ms. Scali 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. 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. Competition for the caliber of talent required to make our films, particularly our film directors, producers, animators, creative personnel and technical directors, will continue to intensify as more studios build
their in-house CGI-animation or special effects capabilities. 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.



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



Under the Co-Production Agreement, Disney is required to distribute the
Pictures in a manner consistent with that of Disneys premier animated films. Currently, distribution of our films generally includes (1) worldwide theatrical exhibition, (2) worldwide home video sales, (3) worldwide television licensing,
including Pay-Per-View, pay television, network, basic cable and syndication and some video-on-demand (VOD), (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 all six of our feature films, we cannot provide any assurances that our future films
will enjoy the same level of success. Currently, Disney shares the financial risks associated with the production of our films under the Co-Production Agreement 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. However, because we anticipate financing 100% of the production costs of our films under any future distribution agreement, we expect to bear all of the financial risks associated with a future films production costs. In
addition, we cannot provide any assurances that future distribution agreements will provide us with our current level of risk minimization related to the financing of marketing and distribution expenses. 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 six animated feature films. Accordingly, we
have 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.



We are currently co-financing our remaining unreleased Picture, Cars, pursuant to the Co-Production Agreement. We are
also solely financing beyond the Co-Production Agreement our first feature film as well as other projects in various stages of development. The future production costs of Cars, and subsequent films, and any future expansion of our studio and
headquarters in Emeryville, California, may have an adverse impact on our cash and investment balances. As of January 1, 2005, we had $854.8 million in cash, cash equivalents 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, production costs for Cars, as well as production and development costs for future films and development projects. 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 film
production costs and construction 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



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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.



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 processes 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 owned approximately 51.0% of our outstanding Common Stock as of March 1, 2005. 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 developed certain plans to respond in the event of a
disaster, there can be no assurance that they will be effective in the event of a specific 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 of a short-term power outage, we have installed UPS (uninterrupted power source) equipment to protect our RenderFarm and other sensitive equipment, along with two 1.5 Megawatt backup generators; however, a
long-term power outage could disrupt our operations. Prices for electricity have in the past risen dramatically and may increase in the future. An increase in prices would increase our operating costs, which could in turn adversely affect our
profitability. We do not carry earthquake insurance for earthquake related losses and although we carry business interruption insurance for other potential losses, there can be no assurance that such insurance will be sufficient to compensate us for
losses that may occur. Any losses or damages incurred by us could have a material adverse effect on our business and results of operations.



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



The continued threat of terrorism within the United States and abroad, military action and heightened security measures in
response to such threats, as well as other socioeconomic and political events, may cause significant disruption to commerce, including the entertainment industry, throughout the world. For example, the terrorist attacks in New York and Washington,
D.C. on September 11, 2001 disrupted commerce throughout the United States and Europe. Such disruption in the future could have a material 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 may be directly or indirectly dependent upon certain union members, and work stoppages or strikes organized by such unions could have a material adverse impact on our business, financial condition or results of
operations. If a work stoppage occurs, it could delay the completion of our films and have a material adverse effect on our business operating results or financial condition.



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 have twenty-nine patents in force in the United States and eighteen patents in force 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. 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 and expensive. In addition, effective copyright, patent
and trade secret protection may be unavailable or limited in certain foreign countries. We generally rely on electronically delivered software licenses that include an electronic acceptance by the purchaser, 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.



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 protect our patents, to determine the validity and scope of the proprietary rights of others, or to defend



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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 have a material adverse effect on 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 have a material adverse effect on our business, operating
results and financial condition. See Business  Proprietary Rights.



The market price of our Common Stock has been very 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, speculation about the negotiation of terms or conditions of our next distribution arrangement, or socioeconomic, political or other factors. For
example, during fiscal 2004, our Common Stock closed as low as $62.42 and as high as $94.56 per share, and during fiscal 2003, our Common Stock closed as low as $50.19 and as high as $74.20 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 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.



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While we believe we currently have adequate internal control over financial reporting, we are required to assess our
internal control over financial reporting on an annual basis and any future adverse results from such assessment could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price.



Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, (Section
404) and the rules and regulations promulgated by the SEC to implement Section 404, we are required to include in our Form 10-K an annual report by our management regarding the effectiveness of our internal control over financial reporting.
The report includes, among other things, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year. This assessment must include disclosure of any material weaknesses in our internal control
over financial reporting identified by management.



Managements assessment of internal controls over financial reporting requires management to make subjective judgments and, because this requirement to provide a management report is newly effective, some of our judgments will be in
areas that may be open to interpretation. Therefore our management report may be uniquely difficult to prepare and our auditors, who are required to issue an audit report along with our managements report, may not agree with managements
assessments. While we currently believe our internal control over financial reporting is effective, the effectiveness of our internal controls to future periods is subject to the risk that our controls may become inadequate because of changes in
conditions, and, as a result, the degree of compliance of our internal control over financial reporting with the policies or procedures may deteriorate.



If we are unable to assert that our internal control over financial reporting is effective in any future period (or if our auditors are unable to express
an opinion on the effectiveness of our internal controls), we could lose investor confidence in the accuracy and completeness of our financial reports, which would have an adverse effect on our stock price.



We are subject to risks caused by the availability and cost of insurance.



Changing conditions in the insurance industry have affected most areas of
corporate insurance. These changes have in the past and may in the future result in higher premium costs, higher deductibles and lower insurance coverage limits. Due to these factors, we have elected to self-insure certain risks. For example, we do
not carry earthquake insurance due to its high cost.



Item 2.Properties



Our primary studio and headquarters facility is located at 1200 Park Avenue, Emeryville, California and consists of approximately 247,000 square feet of
office space for two buildings, which we own. In addition, we lease approximately 40,000 square feet of office and warehouse space, which are located within close proximity to our Emeryville facility, as well as approximately 4,000 square feet of
office space in Seattle, Washington, which is occupied by our RenderMan® software group. We believe that our properties and facilities are suitable and adequate for current operations. In November 2002, we purchased approximately 2.24 acres of land adjacent to our primary facility for $9.4
million, for future expansion. Our primary studio and headquarters facility together with the additional land purchases noted above represents our Emeryville Campus. 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.



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



No matters were submitted to a vote of security holders during the quarter ended January 1, 2005.



EXECUTIVE OFFICERS OF THE COMPANY



The executive officers of Pixar and their ages as of March 1, 2005 are as follows:



|               |  |     |  |                                                                
|-------------- |  | --- |  | ---------------------------------------------------------------
|Name           |  | Age |  | Position                                                       
|Steve Jobs     |  | 50  |  | Chairman and Chief Executive Officer                           
|Edwin Catmull  |  | 59  |  | President                                                      
|Simon Bax      |  | 45  |  | Executive Vice President, Chief Financial Officer and Secretary
|John Lasseter  |  | 48  |  | Executive Vice President, Creative                             
|Sarah McArthur |  | 47  |  | Executive Vice President, Production                           
|Lois J. Scali  |  | 56  |  | 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.



Dr. Catmull is a co-founder of Pixar and has served as President
since January 2001. Dr. Catmull also served as Chief Technical Officer from the Companys inception until January 2001. Previously he was Vice President of the Computer Division of Lucasfilm, Ltd., where he managed four development efforts in
the areas of computer graphics, video editing, video games and digital audio. 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®. He also won the Coons Award, which is the
highest achievement in the computer graphics field, for his lifetime contributions and was awarded the animation industrys Ub Iwerks Award. Dr. Catmull is a member of the Academy of Motion Picture Arts and Sciences and the National
Academy of Engineering. 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. Bax has served as Executive Vice President and Chief Financial Officer since May of 2004. From September 2001 to April 2004, Mr. Bax served as
a consultant and acted as a principal in two partnerships formed to raise funds to co-finance films with a major studio. From June 2003 to present, Mr. Bax has served as chairman at SmartJog S.A., a company that provides secure digital content
delivery between film and television distributors and broadcast facilities throughout the world. From 1994 through 2001, Mr. Bax was Chief Financial Officer for Fox Filmed Entertainment where he managed finance, information technology and strategic
planning related to the production and distribution of all films produced by the companys Motion Picture Group. In addition, he oversaw the financial functions of Twentieth Century Fox Television and Fox Television Studios, and was responsible
for studio operations worldwide. Mr. Bax is a graduate of Gonville and Caius College at the University of Cambridge in England. He is currently a member of the Academy of Motion Picture Arts and Sciences and the British Academy of Film and
Television Arts.



Mr. Lasseter is 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 Life and Toy Story 2. He
is the Executive Producer of Monsters, Inc., Finding Nemo and The Incredibles and in 2001 he was given an honorary doctorate degree from the American Film Institute and in 2003 and 2004, he was awarded the Art Directors
Guilds coveted Honorary Contribution to Cinematic Imagery Award. Mr. Lasseter is currently directing his fourth feature film, Cars. 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



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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 Toy was 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 Hound and
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 Lamp in 1979 and Nightmare in 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. McArthur has served as Vice President, Production since May 1997 and was promoted to Executive Vice President, Production in February 1999. Ms.
McArthur oversees all Pixar production teams and manages all aspects of making the films. From 1989 to April 1997, Ms. McArthur worked at 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 Beast and an Executive Producer on The Lion King. She was appointed Director of Production in late 1991 and promoted to Vice President of Production in 1994. Prior to working at Disney, Ms. McArthur worked at the Mark
Taper Forum as their Production Manager of special projects. Ms. McArthur earned her B.A. degree in Theatre from the University of California, Santa Barbara, and she attended Carnegie-Mellon Universitys M.F.A. program in 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. Scali has 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.



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PART II



Item 5.Market for Companys Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities



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
|2003           |  |      |       |     |   |      
|First Quarter  |  | $    | 57.38 |     | $ | 48.50
|Second Quarter |  |      | 62.24 |     |   | 50.79
|Third Quarter  |  |      | 75.15 |     |   | 58.40
|Fourth Quarter |  |      | 72.50 |     |   | 65.05
|               |  |     
|               |  | High |       | Low
|2004           |  |      |       |     |   |      
|First Quarter  |  | $    | 70.50 |     | $ | 60.60
|Second Quarter |  |      | 70.58 |     |   | 62.35
|Third Quarter  |  |      | 81.96 |     |   | 65.50
|Fourth Quarter |  |      | 95.12 |     |   | 76.04



As of March 1, 2005,
we had approximately 6,596 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 1, 2005 was $90.06 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 included on pages 56-82, and with Item 7  Managements Discussion and Analysis of Financial Condition and Results of Operations.



|                             |  |                                       |         |      |   |         |  |      |         |      |   |           |  |   |          
|---------------------------- |  | ------------------------------------- | ------- | ---- | - | ------- |  | ---- | ------- | ---- | - | --------- |  | - | ---------
|                             |  | Fiscal Years                         
|                             |  | 2000                                  |         | 2001 |   | 2002    |  | 2003 |         | 2004
|                             |  | (In thousands, except per share data)
|Revenue                      |  | $                                     | 172,267 |      | $ | 70,223  |  | $    | 201,724 |      | $ | 262,498   |  | $ | 273,472  
|Net income                   |  |                                       | 78,433  |      |   | 36,217  |  |      | 89,950  |      |   | 124,768   |  |   | 141,722  
|Basic net income per share   |  |                                       | 1.66    |      |   | 0.75    |  |      | 1.78    |      |   | 2.30      |  |   | 2.50     
|Diluted net income per share |  |                                       | 1.57    |      |   | 0.71    |  |      | 1.68    |      |   | 2.17      |  |   | 2.38     
|Total assets                 |  |                                       | 479,603 |      |   | 523,294 |  |      | 732,066 |      |   | 1,002,056 |  |   | 1,275,037
|Total shareholders equity   |  |                                       | 435,720 |      |   | 505,686 |  |      | 713,062 |      |   | 940,510   |  |   | 1,220,095



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. Our
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 Financial Statements and notes thereto included on pages 56-82 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



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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. It was pursuant to the Feature Film Agreement that Toy Storywas developed, produced, and distributed. Our
share of revenues and expenses from Toy Storyis governed by the terms of the Feature Film Agreement.



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



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 of the Pictures.



Our second feature film, A Bugs Life, was released in November 1998 and counted as the first original Picture under the Co-Production
Agreement. 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. In May 2003, we released Finding Nemo, our fifth animated feature film, which counts as the third original Picture under the Co-Production Agreement.
In November 2004, we released The Incredibles, our sixth animated feature film, which counts as the fourth original Picture under the Co-Production Agreement. We are currently in production on Cars, which is scheduled for release on
June 9, 2006. Carswill be produced and distributed under the Co-Production Agreement and will count as the fifth and final film of the Pictures to be produced under the Co-Production Agreement. We are also in production on our first feature
film outside of our Disney relationship.



The term of the
Co-Production Agreement continues until we deliver our fifth and final Picture,Cars,to Disney. However, since our April 2003 delivery ofFinding Nemoto Disney, we have had the right to negotiate and enter into another distribution
agreement with any third party. In January 2004, we announced that we had ended our discussions with Disney regarding extending our relationship with them by entering into a new arrangement for films released beyondCars. Since that time, we
have had preliminary meetings with various major motion picture studios regarding a potential distribution agreement for the films we release after Cars, and we continue to explore our options with respect to a future distribution agreement.



We have produced six highly successful films to date, and we
believe that this success, combined with our strong financial resources, position us to negotiate a new distribution arrangement with a major studio that will provide us with, among other things, (1) better economic terms than we currently have
under the Co-Production Agreement and (2) full ownership of our films. With respect to the distribution of our films after Cars, we currently are not pursuing alternatives, other than entering into such an agreement with a major studio.



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Although we look forward to a more favorable distribution agreement for films released afterCars,
we also understand that distributing our films through another studio may increase some of the risks we face in the motion picture industry. See  Relationship with Disney, Risk Factors  We experience intense competition
with respect to our animated feature films and software and Risk Factors  We face various distribution risks with respect to our feature films.



Pixar and Disney jointly finance all production costs relating to the Pictures on an equal basis. Pursuant to the terms of
the Co-Production Agreement the parties established a mutually acceptable funding mechanism to ensure that sums would be available in a timely manner to fund production costs. In practice, Pixar prepares funding requests for forecasted film
production costs and Disney funds its share on a monthly basis at approximately the beginning of the month. All payments to Pixar from Disney for development and production of ToyStoryunder the Feature Film Agreement, and the
Pictures under the Co-Production Agreement have been recorded as cost reimbursements. Accordingly, no revenue has been recognized for such reimbursements; rather, we have netted the reimbursements against the related costs. These reimbursed costs
through the end of fiscal 2004 are set forth in Note 4 of Notes to Financial Statements.



Critical Accounting Policies



Revenue Recognition



We recognize film
revenue from the distribution of all 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.
| | - |  | --------------------------------------------------------



Under the Co-Production Agreement, we share equally with Disney in the profits of The Incredibles, Finding Nemo, 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 under which Disney fully financed the
production costs and shares a specified percentage of Toy Story profits with Pixar after certain agreed upon costs and fees are deducted. We recognize revenue from our films net of distribution fees, reserves for returns, and marketing and
distribution expenses. Disney provides us with gross receipt information, return reserve information, marketing and distribution costs and any other fees and expenses. We utilize this information to determine our portion of the revenue by applying
the contractual provisions included in our arrangements with Disney. We may also adjust certain of Disneys estimates, such as home video returns and distribution expenses, based on Pixars historical experience and other industry
information. The amount of revenue recognized in any given quarter or quarters from all of our films depends on the timing, accuracy, and sufficiency of 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, in the past we have made revisions, and we are likely to make revisions in the future, to that
information based on our estimates and judgments. Such information includes theatrical bad debt reserves and expenses, home video return reserves and expenses, merchandise expenses, and estimates for both revenues and related expenses resulting from
differences between Disneys fiscal reporting period and ours.



For example, in the past, our theatrical revenues have been adjusted for our estimated reserves on potential uncollectible amounts to be received from theatrical exhibitors. Estimated reserves for uncollectible amounts are



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established based on a review of the industry, discussions with Disney, and our historical experience. To date we have not experienced significant losses,
and therefore we have not had significant reserves for uncollectible receivables. The total allowance against our revenue for theatrical exhibitor uncollectible amounts approximated $2.2 million and $1.0 million at January 3, 2004 and January 1,
2005, respectively.



We have also made adjustments to our home
video revenues for estimates on return reserves that may differ from those reported by Disney. In determining our home video reserves for a particular title, we review information such as Disneys current return reserves, the historical return
reserves for our previous titles, actual rates of returns, inventory levels in the distribution channel and other business and industry trend information that is available. Disney has provided and may continue to provide us with reserve information
that may differ substantially from our historical experience with our previous titles. Unless Disney provides a sufficient rationale as to why the market and sales performance are substantially different for a particular title, we have and may
continue to record reserves more consistent with our historical experience. Our home video return reserves exceeded Disneys estimates by $27.8 million and $2.5 million at January 3, 2004 and January 1, 2005, respectively. The estimate for
return reserves, whether based on historical information or more current information from Disney, is inherently subjective and may differ significantly from actual results. Our original estimates on reserves may be revised in future periods as new
and additional information becomes available. See Note 9 of Notes to Financial Statements for further discussion on reserves for returns.



We have utilized margin normalization, such as with merchandise or home video expenses, in accordance with the provisions of SOP 00-2. This may result in
the utilization of budgeted or forecasted information to calculate an ultimate lifetime expense margin, 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 that the most accurate depiction of our participation is reflected. For example, during fiscal 2004, we received updated information from Disney that supported a reduction in
the ultimate expense projections for Finding NemoandMonsters, Inc. As a result, we revised our estimate of domestic home video and merchandise expense, which increased our revenues by $13.8 million for the year.



Disney may also make subsequent adjustments to the information that it has
provided, and these adjustments could have a significant impact on our operating results in later periods. As updated information becomes available from Disney, it may result in a change of estimation for revenue recognition. For example, we
received updated information from Disney in the first quarter of 2003, which decreased previously recorded home video expenses by $3.2 million for all of our film titles on a cumulative basis. During the second quarter of 2003, we recognized an
adjustment that reduced our Monsters, Inc.domestic home video revenue after we received updated information from Disney, which reflected higher returns of domestic home video than had been originally anticipated. This adjustment reduced our
home video revenues by $4.4 million for the quarter. We also received a settlement on Monsters, Inc.merchandise revenue during the third quarter of 2003, which resulted in an increase of $3.5 million to our revenues.



Any revisions to our estimated reserves, margin normalization or updated
information from Disney, as noted above, as well as findings from audit rights offered in accordance with the terms of the Co-Production Agreement, could have a material effect on our financial statements in any given quarter or quarters. See Note 8
and Note 9 of Notes to Financial Statements for additional discussion on such adjustments and revisions.



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,
ToyStory, A Bugs Life, Toy Story 2 andMonsters, Inc.are classified as library titles. The term library title 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 our revenue recognition policy for film revenue.



Software Revenue



Revenue for software licenses is 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, we recognize revenues when all of the following conditions are met:



| |  |  | persuasive evidence of an agreement exists;
| | - |  | -------------------------------------------



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| |  |  | 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. Our determination of
fair value of each element in multi-element arrangements is based on vendor-specific objective evidence (VSOE). We limit our 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



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 consist of salaries, equipment and overhead. With regard to the Pictures, we capitalize film production costs in excess of
reimbursable amounts from Disney. For film projects outside of our existing Disney relationship, we capitalize all film production costs. 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.



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



Results of Operations



Our revenues are derived primarily from our animated feature films and
related products, and to a lesser extent, software licensing. Feature film revenue and related products represented 96%, 95% and 95% of our total revenue in fiscal 2002, 2003 and 2004, respectively. Significant film revenue streams include worldwide
theatrical, home video, television and consumer products. Home video sales, including VHS and DVD formats, continue to be among the largest contributors to lifetime revenues of our films. The television market for our feature films generally follows
the theatrical and home video release. We intend to release all of our films on television, which includes Pay-Per-View, pay television and network television.



Our results for the year ended January 1, 2005 were driven primarily by worldwide home video and consumer products revenue fromFinding Nemo and
the worldwide theatrical release of The Incredibles. By the end of fiscal 2004,The Incredibles had generated approximately $530 million in worldwide box office receipts, comprised of $252 million domestically and $278 million
internationally. Additionally, the films in our film library contributed approximately 25% of our total revenues underscoring the long-term value of these highly successful franchises.



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Revenue



Total revenue, which consists of film revenue and software revenue, amounted to $201.7 million in 2002, $262.5 million in
2003 and $273.5 million in 2004.



Film revenue was $193.6
million in 2002, $250.4 million in 2003, and $260.8 million in 2004. Film revenues for 2002 consisted of $141.5 million fromMonsters, Inc. and $50.1 million in revenues from our remaining library titles. Revenues forMonsters, Inc.
were derived from worldwide home video sales, foreign box office receipts, merchandise sales and ancillary royalties. Revenues from our other library titles resulted primarily from international television licensing, worldwide home video sales,
merchandising sales and ancillary royalties. During 2002, we reduced our home video return reserves for A Bugs Life and Toy Story 2, which increased our revenues by $3.7 million. Additionally, we adjusted our estimates on expense
margins on home video and merchandise forToy Story 2 and A Bugs Life, which increased our revenues by $10.6 million for the year. Disney also provided us with updated information on A Bugs Life and Toy Story 2home video and merchandise activities that increased our revenues by approximately $5.8 million for the year.



Film revenues for 2003 consisted of $189.2 million fromFinding Nemo, primarily attributable to domestic home video revenues and worldwide
theatrical revenues.Monsters, Inc. contributed $22.6 million, resulting primarily from domestic television licensing and merchandising revenues. Our remaining library titles contributed $38.0 million for fiscal 2003, resulting from
merchandise sales, worldwide home video sales and foreign television licensing. During 2003, Disney provided updated information reflecting higher home video return activity than had been originally anticipated which reduced revenues by $4.4
million. We also received a settlement onMonsters, Inc. merchandise revenue, which resulted in an increase of $3.5 million to our revenues. Additionally, we received updated information from Disney relating to home video expenses, which
decreased previously recorded home video expenses by $3.2 million for all of our film titles on a cumulative basis. The higher revenues in 2003 relative to 2002 were primarily due to the tremendous success ofFinding Nemo in both worldwide
theatrical and domestic home video markets. In May 2003, two of our library titles,Toy Story andToy Story 2, were placed on a domestic home video sales moratorium. Internationally, these two titles were placed on moratorium at
various dates beginning in the Spring of 2004.



Film revenues
for 2004 included $150.8 million from Finding Nemo, primarily attributable to worldwide home video revenues and consumer products revenues. The Incredibles, which began its worldwide theatrical release in November 2004, generated
revenues of $40.4 million during the year. Our library titles also generated revenues of $67.4 million during the year including $33.8 million from Monsters, Inc., primarily from home video sales and television licensing. Animation services
revenues contributed $2.2 million to total film revenues for the year. During 2004, revisions to reserve estimates that were established in prior years for Monsters, Inc.international home video reserves and Finding Nemodomestic home
video reserves resulted in approximately $8.1 million and $15.6 million in revenues, respectively. See Note 9 of Notes to Financial Statements for further discussion on reserves for returns. Additionally, we adjusted our estimates on expense margins
for Finding NemoandMonsters, Inc. home video and merchandise, which increased our revenues by $13.8 million for the year.



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 $8.1 million in 2002, $12.1 million in 2003, and $12.6 million in 2004. 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 2004, 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 2002, 2003 and 2004, Disney
accounted for 96%, 94% and 90%, respectively, of our total revenue. The revenue from Disney consists primarily of film related revenues. Because of our relationship with Disney under the Co-Production Agreement, Disney is expected to represent
significantly greater than 10% of our revenues in 2005 and in the near future.



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Cost of Revenue



Cost of revenue was $41.5 million in 2002, $38.1 million in 2003, and $29.9 million in 2004, and represents primarily
amortization of capitalized film costs. Cost of revenue as a percentage of revenue for fiscal 2002, 2003 and 2004 was 21%, 14% and 11%, respectively. Our cost of revenue as a percentage of 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-computation 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 Story revenue has no related cost, as film costs have been fully amortized. The decrease in cost of revenue as a
percentage of total film revenue from 2002 to 2003 can be attributable to a higher proportion of revenues resulting fromFinding Nemo, which had a lower amortization percentage thanMonsters, Inc. in the prior year, since we expect to
receive more revenues fromFinding Nemo over its lifetime. Additionally, the cost amortization for the remaining library titles declined in 2003 relative to 2002. The decrease in cost of film revenue as a percentage of total film revenue for
2004 compared to 2003 can be attributable to favorable revisions on estimates of revenue to be received, primarily for Finding Nemoand Monsters, Inc. Due to the continued success of our films, the amortization costs for our films have
decreased relative to their respective amortization percentages in the prior year due to increases in their ultimate revenue.



Operating Expenses



Total operating expenses increased from $19.5 million in 2002 to $30.5 million in 2003 to $34.9 million in 2004. We expect our operating expenses to
continue to increase as a result of the growth of the studio as we ramp up to meet the needs of multiple films in production. Additionally, our proportion of operating expenses previously borne by Disney has and will continue to increase as we near
the end of the term of our Co-Production Agreement. During fiscal 2003, our operating expenses included approximately $3.2 million of costs related to an employee bonus in recognition of their contribution to the box office success ofFinding
Nemo. Additionally, we wrote off $1.9 million in costs previously capitalized for future film projects. In reviewing our projects in development, we determined it unlikely that these projects would be green-lit for production within the next
three years; therefore, under SOP 00-2, we expensed these amounts. During fiscal 2004, our operating expenses included approximately $2.1 million of costs related to an employee bonus in recognition of their contribution to the box office success
ofThe Incredibles.



We anticipate operating expenses
to continue to increase in future periods due to the growth experienced by the studio as we dedicate more resources to our productions not governed by the Co-Production Agreement. 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 of the Pictures. The funding received from Disney is treated as operating expense reimbursements. See Note 4 of Notes to Financial
Statements for additional discussion of Disneys operating expense reimbursements. 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 our first feature film to be produced outside of the existing
relationship with Disney, and certain allocated costs that have been reimbursed by Disney in our previous films 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 Marionette and Ringmaster
animation and production management software and for creative development for future films. Research and development expenses were $8.5 million in 2002, $15.3 million in 2003, and $17.4 million in 2004. The increase in research and development
costs for 2003 over 2002 was primarily attributable to the $1.9 million write off of development projects and the higher employee related expenses associated with employee bonus referred to above, as well as additional staffing. The increase in
research and development costs for 2004 over 2003 was primarily attributable to increased creative development and short film projects, as well as a decrease in Disneys reimbursement of allocated costs under the Co-Production



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Agreement. This increase was partially offset by the write off of development projects in 2003 as described above. 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 $1.3 million in 2002, $2.4 million in 2003, and $2.5 million in 2004. The increase in expense in 2003 as compared to 2002 is primarily due to higher employee related costs resulting from the
employee bonus discussed above and increased public relations and corporate marketing costs. Sales and marketing expenses remained relatively unchanged in 2004 compared to 2003. 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 $9.7 million in 2002 to $12.8 million in 2003 to $15.0 million in 2004. The increase from 2002 to 2003 was primarily due to the incentive compensation referred to above and an increase in professional
fees. The increase in 2004 compared to 2003 was primarily due to increased professional fees and a decrease in Disneys reimbursement of allocated costs under the Co-Production Agreement as mentioned above. General and administrative expenses
are expected to continue to increase in future periods.



Interest Income and Other, net



Interest income and other, net was $10.3 million in 2002, $10.5 million in 2003, and $12.4 million in 2004. Even though cash, cash equivalents and investments increased in 2003, declining interest rates in 2003 caused interest income to
remain flat when compared to 2002. The increase in 2004 compared to 2003 was the result of higher average cash and investment balances.



Income Taxes



Income tax expense of $61.1 million, $79.7 million, and $79.4 million reflects our effective tax rates of 40.4%, 39.0%, and 35.9% for fiscal 2002, 2003
and 2004, respectively. In 2002 and 2003, our income tax rate approximated U.S. Federal and California State statutory rates. In 2004, our effective tax rate was lower than the statutory tax rate primarily as a result of the recognition of a federal
tax benefit associated with certain income earned outside the U.S. for fiscal years 2000 through 2004. We recorded the benefit for fiscal years 2000 through 2003 in 2004 as the availability of this tax benefit in prior years was uncertain and was
therefore not factored into our tax rate until 2004. Our effective tax rate for 2005 is expected to increase from our 2004 rate. See Note 5 of Notes to Financial Statements.



Capitalized Film Production Costs



We had $140.0 million in capitalized film production costs as of January 1, 2005, consisting of costs relating toToy Story 2, A Bugs Life,
Monsters, Inc., Finding Nemo, The Incredibles andCars, all of which are being co-financed by Disney under the Co-Production Agreement. Capitalized film production costs also include costs related to our first Pixar-only financed film and
films in development. AllToy Story capitalized film costs have been fully amortized.



Liquidity and Capital Resources



Cash, cash equivalents and investments increased from $521.9 million at January 3, 2004 to $854.8 million at January 1, 2005. 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 expenditures.



In 2002, net cash used in operating activities of $5.1 million was primarily attributable to net income of $90.0 million
adjusted for 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 of $47.6 million and



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an increase in unearned revenue of $5.2 million partially offset by a net increase in our receivable from Disney of $115.8 million, an increase in
capitalized film production costs of $43.9 million, an increase in prepaid expenses of $10.8 million, an increase of deferred income taxes of $11.3 million, a decrease in accounts payable of $2.5 million and a decrease in income taxes payable to
$1.8 million.



In 2003, cash provided by operating activities
of $124.8 million was primarily attributable to net income of $124.8 million adjusted for the tax benefit from stock option exercises of $39.4 million, the non-cash impact of depreciation and amortization expense and amortization of capitalized film
production costs totaling $45.4 million, increases in income taxes payable of $37.6 million, decreases in prepaid expenses and other assets of $12.8 million, increases in accrued liabilities of $3.7 million, increases in unearned revenue of $1.8
million, and a decrease in other receivables of $1.9 million partially offset by a net increase in our receivable from Disney of $68.9 million, capitalized film production costs of $53.2 million, deferred income taxes of $17.6 million, the gain on
sales of investments of $1.3 million, and an increase in our trade accounts receivable of $1.0 million.



In 2004, net cash provided by operating activities of $271.4 million was primarily attributable to net income of $141.7 million adjusted for the tax
benefit from stock option exercises of $56.7 million, the non-cash impact of depreciation and amortization expense and amortization of capitalized film production costs of $36.3 million, a net decrease in our receivable from Disney of $130.2
million, an increase in accrued liabilities of $14.0 million, an increase in accounts payable of $3.6 million partially offset by an increase in capitalized film production costs of $60.9 million, a decrease in income taxes payable of $23.5 million,
an increase of deferred income taxes of $17.3 million, an increase in trade accounts receivable of $3.4 million, an increase in other receivables of $3.8 million and an increase in prepaid expenses and other assets of $1.2 million.



In fiscal 2002, 2003 and 2004, cash used in investing activities primarily
consisted of the purchase of investments and the purchase of property and equipment, offset by net proceeds from sales of investments.



In fiscal 2002, 2003 and 2004, cash provided by financing activities primarily consisted of proceeds from exercised stock options.



As of January 1, 2005, our principal source of liquidity was approximately
$854.8 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. We will co-finance the
final original Picture we have in production,Cars, pursuant to the Co-Production Agreement. 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 year 2005, we expect to spend approximately $80 million to $85 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 as well as film projects beyond the Co-Production Agreement, which will directly impact working capital.



Facility Related Capital
Expenditures.    In fiscal year 2005, we expect to spend approximately $12 million to $14 million related to capital expenditures for our Emeryville Campus and other facility related projects.



We believe that our current available funds and forecasted cash from
operations in fiscal 2005 will be sufficient to satisfy our currently anticipated cash needs for working capital and capital expenditures, including the production costs ofCarsand the production and development costs associated with films
beyond 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 campus 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.



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Contractual Obligations.    At January 1, 2005, 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
|                            |  | Total |       | Less Than1 Year        |   | 1-3Years |  | 3-5Years |     | More Than5 Years
|Operating lease obligations |  | $     | 1,236 |                        | $ | 719      |  | $        | 459 |                  | $ | 58 |  | $ | 
|                            |  |       |       |                        |   |          |  |          |     |                  |   |    |  |   |  
|Total                       |  | $     | 1,236 |                        | $ | 719      |  | $        | 459 |                  | $ | 58 |  | $ | 
|                            |  |       |       |                        |   |          |  |          |     |                  |   |    |  |   |  



Off-Balance Sheet Arrangements.



As of January 1, 2005, we did not have any off-balance
sheet arrangements.



Recent Accounting Pronouncements



On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123 Revised 2004 (SFAS 123R), Share-Based Payment. The statement replaces SFAS 123, supersedes APB 25, and amends SFAS No. 95, Statementof Cash Flows. SFAS 123R requires the
measurement of all employee share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense in our statements of income. The accounting provisions of SFAS 123R are
effective for reporting periods beginning after June 15, 2005. We are required to adopt SFAS 123R no later than our third quarter of fiscal year 2005, which begins July 3, 2005. SFAS 123R eliminates the ability to account for share-based
compensation transactions using APB 25, and generally would require instead that such transactions be accounted for using a fair-value based method. Companies are required to recognize an expense for compensation cost related to share-based payment
arrangements including stock options and employee stock purchase plans. While the fair value method under SFAS 123R is very similar to the fair value method under SFAS 123 with regards to measurement and recognition of stock-based compensation,
management is currently evaluating the impact of several of the key differences between the two standards on our financial statements. For example, SFAS 123 permits us to recognize forfeitures as they occur while SFAS 123R will require us to
estimate future forfeitures and adjust our estimate on a quarterly basis. SFAS 123R will also require a classification change in the statement of cash flows; whereby, a portion of the tax benefit from stock options will move from operating cash
flows to financing cash flows (total cash flows will remain unchanged). The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. We have not yet determined whether the
adoption of SFAS 123R will result in amounts that are similar to the current pro forma disclosures under SFAS 123 as we are still in the process of evaluating the requirements under SFAS 123R. Current estimates of option values using the
Black-Scholes method may not be indicative of results from valuation methodologies ultimately adopted in the final rules. The cumulative effect of adoption, if any, applied on a modified prospective basis, would be measured and recognized on July 3,
2005.



In March 2004, the Emerging Issues Task Force (EITF)
reached a final consensus on Issue 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF 03-1 requires that when the fair value of an investment security is less than its carrying value, an
impairment exists for which the determination must be made as to whether the impairment is other-than-temporary. The EITF 03-1 impairment model applies to all investment securities accounted for under SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securitiesand to investment securities accounted for under the cost method to the extent an impairment indicator exists. Under the guidance, the determination of whether an impairment is other-than-temporary
and therefore would result in a recognized loss depends on market conditions and managements intent and ability to hold the securities with unrealized losses. In September 2004, the FASB approved FASB Staff Position (FSP) EITF 03-1
which defers the effective date for recognition and measurement guidance contained in EITF 03-1 until certain issues are resolved; however the disclosure requirements remain effective for annual periods ending after June 15, 2004. We will adopt the
recognition and measurement guidance at the time of final issuance. We believe that the adoption of EITF 03-1 will not have a material effect on our results of operations, financial position or cash flows.



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On December 16, 2004, the FASB issued Statement No. 153 (SFAS 153), Exchanges of
Non-monetary Assets, an amendment of APB Opinion No. 29. SFAS 153 addresses the measurement of exchanges of non-monetary assets and redefines the scope of transactions that should be measured based on the fair value of the assets exchanged. SFAS
153 is effective for non-monetary asset exchanges beginning in our third quarter of fiscal 2005. We believe that the adoption of SFAS 153 will not have a material effect on our results of operations, financial position or cash flows.



On October 22, 2004, the American Jobs Creation Act of 2004 (the
AJCA) became law in the United States. In December 2004, the FASB issued FASB Staff Position (FSP) No. FAS 109-1, Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on
Qualified Production Activities Provided by the American Jobs Creation Act of 2004. The AJCA introduced a tax deduction of up to 9 percent (when fully phased-in) of the lesser of (a) qualified production activities income, as
defined in the AJCA, or (b) taxable income (after the deduction for the utilization of any net operating loss carryforwards). FSP No. FAS 109-1 clarifies that the qualified production activities deduction provided for under the AJCA should be
accounted for as a special deduction in accordance with Statement 109. We believe that the adoption of FSP No. FAS 109-1 will not have a material effect on our results of operations, financial position or cash flows.



Item 7A.Quantitative and Qualitative Disclosures About Market Risk



Investment Portfolio.    We invest in a variety of investment grade, interest-bearing securities, 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 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, Accounting for Certain Investments in Debt and Equity Securities. The table below provides information
regarding our investment portfolio at January 1, 2005. The table presents principal cash flows and related weighted-average fixed interest rates presented by expected maturity date (dollars in thousands):



|                               |  |                 |         |   |             |   |         |       |  |   |         |  
|------------------------------ |  | --------------- | ------- | - | ----------- | - | ------- | ----- |  | - | ------- | -
|                               |  | Less Than1 Year |         |   | Over 1 Year |   |         | Total | 
|Available-for-sale securities  |  | $               | 473,867 |   |             | $ | 352,256 |       |  | $ | 826,123 |  
|Weighted-average interest rate |  |                 | 2.76    | % |             |   | 2.79    | %     |  |   | 2.77    | %



Impact of Foreign
Currency Rate Changes.    Disney and its affiliates distribute our products in foreign markets; therefore, 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 56. 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), on page 82.



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



Not applicable.



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Item 9A.Controls and Procedures



Evaluation of disclosure controls and procedures.    Our management evaluated, with the participation of our Chief Executive
Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our Chief Executive Officer and our Chief
Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.



Managements annual report on internal control over financial reporting; audit report of the independent registered public accounting
firm.    The information required to be furnished pursuant to these items is set forth under the captions Managements Report on Internal Control Over Financial Reporting and Report of Independent
Registered Public Accounting Firm on pages 56 and 57, which are incorporated herein by reference.



Changes in internal control over financial reporting.    There was no change in our internal control over financial reporting
that occurred during the quarter ended January 1, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



Item 9B.Other Information



None.



PART III



Item 10.Directors and Executive Officers of the Company



Directors



The members of our Board of Directors as of March 1, 2005 are as follows:



|                   |  |     |  |                                     
|------------------ |  | --- |  | ------------------------------------
|Name               |  | Age |  | Position with Pixar                 
|Steve Jobs         |  | 50  |  | Chairman and Chief Executive Officer
|Edwin E. Catmull   |  | 59  |  | President and Director              
|Skip M. Brittenham |  | 63  |  | Director                            
|Susan L. Decker    |  | 42  |  | Director                            
|Joseph A. Graziano |  | 61  |  | Director                            
|Lawrence B. Levy   |  | 45  |  | Director                            
|Joe Roth           |  | 56  |  | Director                            
|Larry W. Sonsini   |  | 64  |  | 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.



Dr. Catmull
is a co-founder of Pixar and has served as President since January 2001. Dr. Catmull also served as Chief Technical Officer from the Companys inception until January 2001. Previously he was Vice President of the Computer Division of Lucasfilm,
Ltd., where he managed four development efforts in the areas of computer graphics, video editing, video games and digital audio. 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®. He also won the Coons Award, which is the highest achievement in the computer graphics field, for his lifetime contributions and was awarded the animation industrys Ub Iwerks Award. Dr. Catmull is a member
of the Academy of Motion Picture Arts and Sciences and the National Academy of Engineering. Dr. Catmull earned his B.S. degrees in computer science and physics and his Ph.D. in computer science from the University of Utah.



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Mr. Brittenham has served as a director of Pixar since August 1995. He is a senior partner with
the entertainment law firm of Ziffren, Brittenham, Branca, Fischer, Gilbert-Lurie, Stiffelman & Cook LLP, which was 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, Los Angeles.



Ms. Decker has served as a director of Pixar since
June 2004. She has served as Yahoo!s Chief Financial Officer since June 2000 and as Executive Vice President, Finance and Administration since January 2002. Prior to that, Ms. Decker also served as Yahoo!s Senior Vice President, Finance
and Administration from June 2000 to January 2002. From August 1986 to May 2000, Ms. Decker held several positions for Donaldson, Lufkin & Jenrette, including Director of Global Research from 1998 to 2000. Prior to 1998, she was a Publishing
& Advertising Equity Securities Analyst for 12 years. Ms. Decker also serves as a director on the boards of Costco Wholesale and the Stanford Institute of Economic and Policy Research. Ms. Decker holds a B.S. degree from Tufts University with
double majors in computer science and economics and a M.B.A. from Harvard Business School.



Mr. Graziano has served as a director of Pixar since August 1995. From June 1989 to December 1995, he was the Executive Vice President and Chief Financial Officer and a member of the Board of Directors of Apple
Computer, Inc. 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. Levy has served as a director of Pixar since April
1999. 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. From June 2000 to December 2000, Mr. Levy was President
and Chief Executive Officer and a director of Shockwave.com. 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 a partner at the law firm of Wilson Sonsini Goodrich & Rosati specializing in intellectual property protection and licensing. 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 Entertainment, Starz!/Encore Group and Fox
Entertainment Group. Mr. Roth recently directed the family comedy Christmas with the Kranks, starring Tim Allen and Jamie Lee Curtis which is based on John Grishams best selling novel Skipping Christmas, and is currently
directing a film based on Richard Prices acclaimed novel Freedomland. In 2004, Mr. Roth produced the 76th Annual Academy Awards® telecast. 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. Mr. Sonsini also serves as a director for Echelon Corporation, Engenio Information Technologies, Inc., LSI Logic Corporation and Silicon Valley
Bancshares. Mr. Sonsini received A.B. and L.L.B. degrees from the University of California, Berkeley.



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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.



Audit Committee and Audit Committee Financial Expert



Pixar has a separately designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the Exchange Act). The Audit Committee
currently consists of Messrs. Graziano and Levy and Ms. Decker. In the first half of fiscal 2004, Jack S. Wadsworth, Jr. was also a member of the Audit Committee; however, Mr. Wadsworth did not stand for reelection last year. The Board of Directors
has determined that each of Messrs. Graziano and Levy and Ms. Decker is (1) an audit committee financial expert, as that term is defined in Item 401(h) of Regulation S-K of the Exchange Act, and (2) independent as defined by the listing
standards of the NASDAQ National Market and Section 10A(m)(3) of the Exchange Act.



Code of Ethics



We have adopted a Code of
Business Conduct that applies to all our directors, officers (including our principal executive officer, principal financial officer and controller) and employees. The Code of Business Conduct can be found on our website at
http://corporate.pixar.com/ in the Corporate Governance portion of our Investor Relations section. We will also post on this section of our website any amendment to the Code of Business Conduct, as well as any waivers that are required to be
disclosed pursuant to the rules of the SEC or the NASDAQ National Market.



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 we complied with all Section 16(a) filing requirements applicable to our executive
officers, directors and 10% shareholders during fiscal 2004.



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Item 11.Executive Compensation



Summary Compensation Table



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



|                                                               |  |              |  |                     |                             |       |                                                            |                |                          |  |           |  |   |                
|-------------------------------------------------------------- |  | ------------ |  | ------------------- | --------------------------- | ----- | ---------------------------------------------------------- | -------------- | ------------------------ |  | --------- |  | - | ---------------
|                                                               |  |              |  | Annual Compensation |                             |       | Long TermCompensationAwardsSecuritiesUnderlying Options(#) |                | All OtherCompensation(2)
|Name and Principal Position                                    |  | Year         |  | Salary(1)           |                             | Bonus |                                                            |                |                         
|Steve Jobs Chairman, Chief Executive Officer                   |  | 200420032002 |  | $                   | 525352                      |       | $                                                          |             |                          |  |        |  | $ |             
|                                                               |  |              |  |                     |                            
|Edwin E. Catmull President                                     |  | 200420032002 |  |                     | 545,019530,012521,950       |       |                                                            | 120,00343,334 |                          |  |        |  |   | 1,8502,1502,000
|                                                               |  |              |  |                     |                            
|Simon Bax(3) Executive Vice President, Chief Financial Officer |  | 200420032002 |  |                     | 310,583                   |       |                                                            | 200,000      | (4)                      |  | 400,000 |  |   | 2,000        
|                                                               |  |              |  |                     |                            
|John Lasseter Executive Vice President, Creative               |  | 200420032002 |  |                     | 2,862,3072,776,9882,595,542 |       |                                                            |             |                          |  |        |  |   | 6753,3252,000  
|                                                               |  |              |  |                     |                            
|Lois Scali(5) Executive Vice President, General Counsel        |  | 200420032002 |  |                     | 458,246347,131             |       |                                                            | 207,217      | (4)                      |  | 300,000 |  |   | 1,7902,210    

---

|(1) | For fiscal 2004 and 2002, amounts shown represent 52 weeks of salary. For fiscal 2003, amounts shown represent 53 weeks of salary. See Note 1 of Notes to Financial Statements.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | This amount consists of employer-matching contributions under the Companys 401(k) Plan. Fiscal 2004 and 2002 were 52-week years, while fiscal 2003 was a 53-week year.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Mr. Bax joined Pixar in May 2004.
|--- | ---------------------------------



|(4) | Includes a signing bonus of $200,000.
|--- | -------------------------------------



|(5) | Ms. Scali joined Pixar in March 2003.
|--- | -------------------------------------



Option Grants in Last Fiscal Year



The following table sets forth, for each of the Named Officers included in the Summary Compensation Table, the stock options granted under Pixars
stock option plans during fiscal 2004.



|                 |  |                                              |     |  |                                                        |    |  |                      |       |                    |          |                                                                                                 |   |            |  |   |           
|---------------- |  | -------------------------------------------- | --- |  | ------------------------------------------------------ | -- |  | -------------------- | ----- | ------------------ | -------- | ----------------------------------------------------------------------------------------------- | - | ---------- |  | - | ----------
|                 |  | Number ofSecuritiesUnderlyingOptions Granted |     |  | % of TotalOptionsGranted toEmployees in Fiscal Year(1) |    |  | ExercisePrice ($/SH) |       | Expiration Date(2) |          | Potential Realizable Value atAssumed Annual Rates of Stock Price Appreciation forOption Term(3)
|Name             |  |                                              |     |  |                                                        | 5% |  | 10%                 
|Steve Jobs       |  |                                             |     |  |                                                       |    |  | $                    |      |                    |          |                                                                                                 | $ |           |  | $ |          
|Edwin E. Catmull |  |                                             |     |  |                                                       |    |  |                      |      |                    |          |                                                                                                 |   |           |  |   |          
|Simon Bax        |  | 400,000                                      | (4) |  | 33.14                                                  | %  |  |                      | 68.27 |                    | 05/03/14 |                                                                                                 |   | 17,173,854 |  |   | 43,521,919
|John Lasseter    |  |                                             |     |  |                                                       |    |  |                      |      |                    |          |                                                                                                 |   |           |  |   |          
|Lois Scali       |  |                                             |     |  |                                                       |    |  |                      |      |                    |          |                                                                                                 |   |           |  |   |          



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---

|(1) | We granted options to purchase 1,206,900 shares of Common Stock to employees in fiscal 2004.
|--- | --------------------------------------------------------------------------------------------



|(2) | Options may terminate before their expiration upon the termination of optionees status as an employee or consultant, the optionees death or an acquisition of Pixar.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | The 5% and 10% assumed rates of appreciation are provided in accordance with rules of the SEC and do not represent our estimates or projections of future Common Stock price growth.
This table does not take into account any appreciation in the price of the Common Stock from the date of grant to date.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | This option is a non-statutory stock option granted under the 1995 Stock Plan. It has an exercise price equal to the fair market value on the date of grant and vests over a
four-year period at the rate of one-fourth at the end of each year from the vesting start date.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Option Exercises and Holdings



The following table sets forth, for each of the Named Officers, certain information concerning stock options exercised during fiscal 2004, and the number of shares subject to both exercisable and unexercisable stock options as of January 1,
2005. 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 January 1, 2005.



|                 |  |                                         |             |                |               |                                                                          |             |                                                                 |               |  |   |           |  |   |           
|---------------- |  | --------------------------------------- | ----------- | -------------- | ------------- | ------------------------------------------------------------------------ | ----------- | --------------------------------------------------------------- | ------------- |  | - | --------- |  | - | ----------
|Name             |  | Number ofSharesAcquired on Exercise (#) |             | Value Realized |               | Number of SecuritiesUnderlying UnexercisedOptions at Fiscal Year End (#) |             | Value of Unexercised In-the-money Options at Fiscal Year End(1)
|                 |  |                                         | Exercisable |                | Unexercisable |                                                                          | Exercisable |                                                                 | Unexercisable
|Steve Jobs       |  |                                        |             | $              |              |                                                                          |            |                                                                 |              |  | $ |          |  | $ |          
|Edwin E. Catmull |  | 155,000                                 |             |                | 6,797,250     |                                                                          | 145,000     |                                                                 | 125,000       |  |   | 8,570,950 |  |   | 7,388,750 
|Simon Bax        |  |                                        |             |                |               |                                                                          |            |                                                                 | 400,000       |  |   |          |  |   | 6,936,000 
|John Lasseter    |  | 320,000                                 |             |                | 13,943,731    |                                                                          | 65,013      |                                                                 | 599,987       |  |   | 3,842,918 |  |   | 35,465,232
|Lois Scali       |  | 25,000                                  |             |                | 863,350       |                                                                          | 50,000      |                                                                 | 225,000       |  |   | 1,771,000 |  |   | 7,969,500 

---

|(1) | Market value of underlying securities based on the closing price of Pixars Common Stock on December 31, 2004 (the last trading day of fiscal 2004) on the NASDAQ National
Market of $85.61 minus the exercise price.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Employment
Agreements



In March 2001, we entered into an employment
agreement with John Lasseter (the Employment Agreement), which has a term of 10 years. The Employment Agreement supersedes 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 provided for an initial 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



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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. In the event of a change of control, as defined in the
Employment Agreement, we must accelerate the unvested portion of Mr. Lasseters option so that the option would be exercisable in full, and we may be required to pay Mr. Lasseter certain payments described in the Employment Agreement.



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. In lieu of compensation for attending each meeting, Mr. Levy receives health insurance coverage for himself and his dependents. In fiscal 2004, the value of Mr. Levys benefits
approximated $17,000.



Non-employee directors are eligible to
receive option grants pursuant to our 2004 Equity Incentive Plan (Equity Plan) which was approved by the shareholders in August 2004. The Equity 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 Equity 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 a non-employee 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. Prior
to the August 2004 adoption of the Equity Plan, our non-employee directors received option grants pursuant to our 1995 Director Option Plan (the Director Plan), which was replaced by the Equity Plan. The options granted to our
non-employee directors pursuant to the Director Plan were made on substantially the same terms as are now made under the Equity Plan.



The table below sets forth the options granted to Pixars non-employee directors in fiscal 2004:



|                   |  |                   |  |                             |  |                      |       |               |             
|------------------ |  | ----------------- |  | --------------------------- |  | -------------------- | ----- | ------------- | ------------
|Name               |  | Grant Type        |  | Number ofOptionsGranted (#) |  | ExercisePrice ($/SH) |       | Date of Grant
|Skip M. Brittenham |  | Subsequent Option |  | 10,000                      |  | $                    | 77.72 |               | August 2004 
|Susan L. Decker    |  | First Option      |  | 30,000                      |  |                      | 68.69 |               | June 2004   
|Joseph A. Graziano |  | Subsequent Option |  | 10,000                      |  |                      | 77.72 |               | August 2004 
|Lawrence B. Levy   |  | Subsequent Option |  | 10,000                      |  |                      | 65.72 |               | May 2004    
|Joe Roth           |  | Subsequent Option |  | 10,000                      |  |                      | 76.96 |               | October 2004
|Larry W. Sonsini   |  | Subsequent Option |  | 10,000                      |  |                      | 68.40 |               | April 2004  



Ms. Decker will be
eligible for a Subsequent Option under the Equity Plan on the third anniversary of the date she became a non-employee director. Messrs. Sonsini, Levy, Brittenham, Graziano and Roth are eligible for Subsequent Options each year on the anniversary of
the dates they became directors.



51



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Compensation Committee Interlocks and Insider Participation



Pixars Compensation Committee was formed in 1995 and is currently
composed of Mr. Graziano and Ms. Decker. 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



The following table sets forth the beneficial ownership of Common Stock of Pixar as of March 1, 2005 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.



|                                                                         |  |                    |  |                    |  
|------------------------------------------------------------------------ |  | ------------------ |  | ------------------ | -
|Name of Beneficial Owner                                                 |  | Number ofShares(1) |  | Percent ofTotal(1) |  
|Steve Jobs c/o Pixar 1200 Park Avenue, Emeryville, CA 94608              |  | 30,000,001         |  | 51.04              | %
|The TCW Group, Inc.(2) 865 South Figueroa St., Los Angeles, CA 90017     |  | 9,859,402          |  | 16.77              | %
|Wellington Management Company LLP(3) 75 State Street, Boston, MA 02109   |  | 4,095,760          |  | 6.97               | %
|Entities affiliated with FMR Corp(4) 82 Devonshire St., Boston, MA 02109 |  | 3,133,749          |  | 5.33               | %
|Simon T. Bax                                                             |  |                   |  | *                  |  
|Edwin E. Catmull(5)                                                      |  | 498,800            |  | *                  |  
|John Lasseter(6)                                                         |  | 229,839            |  | *                  |  
|Lois Scali(7)                                                            |  | 110,000            |  | *                  |  
|Skip M. Brittenham(8)                                                    |  | 60,000             |  | *                  |  
|Susan L. Decker                                                          |  | 5,000              |  | *                  |  
|Joseph A. Graziano(9)                                                    |  | 20,000             |  | *                  |  
|Lawrence B. Levy(10)                                                     |  | 45,010             |  | *                  |  
|Joe Roth(11)                                                             |  | 40,000             |  | *                  |  
|Larry W. Sonsini(12)                                                     |  | 31,365             |  | *                  |  
|All directors and executive officers as a group (12 persons)(13)         |  | 31,065,015         |  | 52.34              | %

---

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



|(1) | Based on 58,776,532 shares outstanding on March 1, 2005. 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 that the individual has the right to acquire within sixty days of March 1, 2005 through the exercise of any stock option or other right. Unless otherwise indicated in the footnotes, each person has sole voting and
investment power (or shares such powers with his or her spouse) with respect to the shares shown as beneficially owned.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | As indicated in the Schedule 13G/A filed by The TCW Group, Inc. pursuant to the Exchange Act on February 14, 2005.
|--- | ------------------------------------------------------------------------------------------------------------------



|(3) | As indicated in the Schedule 13G filed by Wellington Management Company LLP pursuant to the Exchange Act on February 14, 2005.
|--- | ------------------------------------------------------------------------------------------------------------------------------



|(4) | As indicated in the Form 13G/A filed by FMR Corp. pursuant to the Exchange Act on February 14, 2005. The following natural persons exercise dispositive power for the shares held by
entities affiliated with FMR Corp.: Edward C. Johnson 3d and Abigail P. Johnson.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

|(5) | Includes 250,000 shares subject to options that are exercisable within 60 days of March 1, 2005.
|--- | ------------------------------------------------------------------------------------------------



|(6) | Includes 18,348 shares subject to options that are exercisable within 60 days of March 1, 2005.
|--- | -----------------------------------------------------------------------------------------------



|(7) | All 110,000 shares are subject to options that are exercisable within 60 days of March 1, 2005.
|--- | -----------------------------------------------------------------------------------------------



|(8) | All 60,000 shares are subject to options that are exercisable within 60 days of March 1, 2005.
|--- | ----------------------------------------------------------------------------------------------



|(9) | All 20,000 shares are subject to options that are exercisable within 60 days of March 1, 2005.
|--- | ----------------------------------------------------------------------------------------------



|(10) | Includes 20,000 shares subject to options that are exercisable within 60 days of March 1, 2005.
|---- | -----------------------------------------------------------------------------------------------



|(11) | All 40,000 shares are subject to options that are exercisable within 60 days of March 1, 2005.
|---- | ----------------------------------------------------------------------------------------------



|(12) | Includes 26,837 shares subject to options that are exercisable within 60 days of March 1, 2005.
|---- | -----------------------------------------------------------------------------------------------



|(13) | Includes 570,185 shares subject to options that are exercisable within 60 days of March 1, 2005.
|---- | ------------------------------------------------------------------------------------------------



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 Pixars compensation plans as of January 1, 2005.



|                                                           |  |                                                                                        |  |                                                                          |       |                                                                                                                                             |           |    
|---------------------------------------------------------- |  | -------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------ | ----- | ------------------------------------------------------------------------------------------------------------------------------------------- | --------- | ---
|Plan Category                                              |  | Number of Securitiesto be Issued UponExercise ofOutstandingOptions, Warrantsand Rights |  | Weighted-AverageExercise Price ofOutstanding Options,Warrants and Rights |       | Number of SecuritiesRemaining Availablefor Future IssuanceUnder EquityCompensation
Plans(Excluding SecuritiesReflected in the First Column) |          
|Equity compensation plans approved by security holders     |  | 8,101,683                                                                              |  | $                                                                        | 41.32 |                                                                                                                                             | 3,029,816 | (1)
|Equity compensation plans not approved by security holders |  |                                                                                       |  |                                                                          |      |                                                                                                                                             |          |    
|                                                           |  |                                                                                        |  |                                                                          |       |                                                                                                                                             |           |    
|Total                                                      |  | 8,101,683                                                                              |  | $                                                                        | 41.32 |                                                                                                                                             | 3,029,816 |    
|                                                           |  |                                                                                        |  |                                                                          |       |                                                                                                                                             |           |    

---

|(1) | Includes 1,752,788 shares that were added to the shares reserved for issuance on January 1, 2005 pursuant to an evergreen formula. Pixars 2004 Equity Incentive Plan
incorporates an evergreen formula pursuant to which on January 1 of each year (beginning January 1, 2005 and ending January 1, 2014) the aggregate number of shares reserved for issuance under the 2004 Equity Incentive Plan will increase by a number
of shares equal to the lesser of (i) 3% of the outstanding shares on the immediately preceding date or (ii) an amount determined by the Board.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Item 13.Certain Relationships and Related Transactions



We have engaged the law firm of Ziffren, Brittenham, Branca, Fischer, Gilbert-Lurie, Stiffelman, & Cook 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 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 June 2003, Pixar entered into a Reimbursement Agreement with its Chief Executive Officer, Steve Jobs, for the reimbursement of expenses incurred by Mr.
Jobs in the operation of his private plane when used for Pixar business. Such expenses incurred for Pixar business approximated $91,000 during 2003. No expenses were incurred during 2004.



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.



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Item 14.Principal Accounting Fees and Services



Accounting Fees



The following table sets forth the fees paid or accrued by Pixar for services provided by KPMG LLP (KPMG), the Companys independent registered
public accounting firm for each of our last two fiscal years:



|                       |  |              |         |      |   |        
|---------------------- |  | ------------ | ------- | ---- | - | -------
|                       |  | Fiscal Years
|                       |  | 2003         |         | 2004
|Audit Fees(1)          |  | $            | 238,767 |      | $ | 668,000
|Audit-Related Fees (2) |  |              | 19,563  |      |   | 5,000  
|Tax Fees(3)            |  |              | 74,390  |      |   | 45,009 
|All Other Fees(4)      |  |              |        |      |   | 1,350  
|                       |  |              |         |      |   |        
|Total                  |  | $            | 332,720 |      | $ | 719,359
|                       |  |              |         |      |   |        

---

|(1) | These are fees for professional services performed by KPMG for the January 1, 2005 audits of Pixars annual financial statements and managements assessment over the
effectiveness of internal controls over financial reporting and the effectiveness of internal controls over financial reporting as required under Section 404 of the Sarbanes-Oxley Act of 2002, review of financial statements included in Pixars
annual report on Form 10-K and review of financial statements included in Pixars quarterly reports on Form 10-Q, and services that are normally provided in connection with statutory and regulatory filings or engagements.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | During fiscal year 2003, amounts consisted primarily of advisory services rendered in conjunction with our preliminary assessment of our readiness to meet the provisions of Section
404 of the Sarbanes-Oxley Act of 2002 pertaining to internal controls over financial reporting and accounting consultations regarding accounting and financial reporting. During fiscal year 2004, amounts represent payments for consultation regarding
financial accounting and reporting standards.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | During fiscal 2003, these amounts consisted of professional services performed by KPMG with respect to tax compliance, tax advice and tax planning. This includes preparation of
original and amended tax returns for Pixar; refund claims; payment planning; tax audit assistance; and tax work stemming from Audit-Related items. During fiscal 2004, these amounts consisted of professional services performed by KPMG
with respect to tax compliance.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | These fees were paid for an annual subscription to KPMGs online accounting research tool.
|--- | ------------------------------------------------------------------------------------------



Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Registered Public Accounting Firm



The Audit Committees policy is to pre-approve all
audit and permissible non-audit services provided by the Companys independent registered public accounting firm. These services may include audit services, audit-related services, tax services and other services. Pre-approval is detailed as to
the particular service or category of services and is generally subject to a specific budget. Since the May 6, 2003 effective date of the SEC rules stating that an auditor is not independent of an audit client if the services it provides to the
client are not appropriately approved, each new engagement of KPMG was approved in advance by the Audit Committee, and none of those engagements made use of thede minimus exception to pre-approval contained in the SECs rules.



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PART IV



Item 15.Exhibits and Financial Statement Schedules



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



1.    Financial Statements.



|                                                                                                                          |  |   
|------------------------------------------------------------------------------------------------------------------------- |  | --
|Managements Report on Internal Control Over Financial Reporting                                                          |  | 56
|Reports of Independent Registered Public Accounting Firm                                                                  |  | 57
|Balance Sheets as of January 3, 2004 and January 1, 2005                                                                  |  | 59
|Statements of Income for the fiscal years ended December 28, 2002, January 3, 2004, and January 1, 2005                   |  | 60
|Statements of Shareholders Equity and Comprehensive Income as of December 28, 2002, January 3, 2004, and January 1, 2005 |  | 61
|Statements of Cash Flows for the fiscal years ended December 28, 2002, January 3, 2004, and January 1, 2005               |  | 62
|Notes to Financial Statements                                                                                             |  | 63



2.Financial Statement Schedules.    Schedules have been omitted as the required information is either not required, not applicable, or otherwise included in the Financial Statements and
notes thereto on pages 56-82.



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



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



(c)Financial Statement Schedule.    See Item 15(a) above.



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##### Table of Contents

MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING



Pixars management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f)
and 15d-15(f) under the Securities Exchange Act of 1934. Pixars internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that:



| |  |  | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the companys assets that could have a material effect
on the financial statements.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Because of its
inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions and that the degree of compliance with the policies or procedures may deteriorate.



Management assessed the effectiveness of Pixars internal control over financial reporting as of January 1, 2005. In making this assessment,
management used the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).



Based on its assessment and those criteria, management believes that Pixar maintained effective internal control over
financial reporting as of January 1, 2005.



Pixars
independent registered public accounting firm, KPMG LLP, has issued an audit report on our assessment of Pixars internal control of financial reporting. This report appears on page 57 of this Annual Report on Form 10-K.











|                                                |  |                                                                  
|----------------------------------------------- |  | -----------------------------------------------------------------
|/s/    STEVE JOBS                               |  | /s/    SIMON T. BAX                                              
|STEVE JOBS Chairman and Chief Executive Officer |  | SIMON T. BAX Executive Vice President and Chief Financial Officer



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The Board of Directors and Shareholders

Pixar:



We have audited
managements assessment, included in the accompanying Managements Report on Internal Control over Financial Reporting appearing on page 56 of this Annual Report on Form 10-K, that Pixar maintained effective internal control over
financial reporting as of January 1, 2005, based on the criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Pixars management is
responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on managements assessment and
an opinion on the effectiveness of the internal control over financial reporting of Pixar based on our audit.



We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.



A companys
internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the companys assets that could have a material effect on the financial statements.



Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



In our opinion, managements assessment that Pixar maintained effective
internal control over financial reporting as of January 1, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control  Integrated Framework issued by COSO. Also, in our opinion, Pixar
maintained, in all material respects, effective internal control over financial reporting as of January 1, 2005, based on the criteria established in Internal Control  Integrated Framework issued by COSO.



We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the balance sheets of Pixar as of January 3, 2004 and January 1, 2005, 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 January 1, 2005, and our report dated March 16, 2005 expressed an unqualified opinion on those financial statements.



/s/    KPMG LLP

San Francisco, California

March 16, 2005



57



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The Board of Directors and Shareholders

Pixar:



We have audited the accompanying balance sheets of Pixar as of January 3, 2004 and January 1, 2005, 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 January 1, 2005. These financial statements are the responsibility of the management of Pixar. Our responsibility is to express an opinion on these financial statements based on our audits.



We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). 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 January 3, 2004
and January 1, 2005, and the results of its operations and its cash flows for each of the years in the three-year period ended January 1, 2005, in conformity with accounting principles generally accepted in the United States of America.



We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the internal control over financial reporting of Pixar as of January 1, 2005, based on criteria established in Internal Control  Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 16, 2005 expressed an unqualified opinion on managements assessment of, and the effective operation of, internal control over
financial reporting.



/s/    KPMG LLP

San Francisco, California

March 16, 2005



58



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##### Table of Contents

PIXAR



BALANCE SHEETS



|                                                                                                                                                                           |  |                                   |           |                |   |           |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------- | --------- | -------------- | - | --------- | -
|                                                                                                                                                                           |  | January 3,2004                    |           | January 1,2005 |  
|                                                                                                                                                                           |  | (In thousands, except share data) |          
|ASSETS                                                                                                                                                                     |  |                                   |           |                |   |           |  
|Cash and cash equivalents                                                                                                                                                  |  | $                                 | 48,320    |                | $ | 28,661    |  
|Investments                                                                                                                                                                |  |                                   | 473,603   |                |   | 826,123   |  
|Trade accounts receivable, net of allowance for doubtful accounts of $186 and $177 as of January 3, 2004 and January 1, 2005,
respectively                                 |  |                                   | 2,152     |                |   | 5,581     |  
|Receivable from Disney, net of reserve for returns and allowance for doubtful accounts of $29,920 and $3,479 as of January 3, 2004 and January
1, 2005, respectively       |  |                                   | 198,280   |                |   | 68,074    |  
|Other receivables                                                                                                                                                          |  |                                   | 4,465     |                |   | 8,307     |  
|Prepaid expenses and other assets                                                                                                                                          |  |                                   | 1,047     |                |   | 2,227     |  
|Deferred income taxes                                                                                                                                                      |  |                                   | 51,496    |                |   | 70,424    |  
|Property and equipment, net                                                                                                                                                |  |                                   | 115,026   |                |   | 125,602   |  
|Capitalized film production costs, net                                                                                                                                     |  |                                   | 107,667   |                |   | 140,038   |  
|                                                                                                                                                                           |  |                                   |           |                |   |           |  
|Total assets                                                                                                                                                               |  | $                                 | 1,002,056 |                | $ | 1,275,037 |  
|                                                                                                                                                                           |  |                                   |           |                |   |           |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                       |  |                                   |           |                |   |           |  
|Accounts payable                                                                                                                                                           |  | $                                 | 1,803     |                | $ | 5,392     |  
|Income taxes payable                                                                                                                                                       |  |                                   | 37,595    |                |   | 14,077    |  
|Other accrued liabilities                                                                                                                                                  |  |                                   | 13,007    |                |   | 26,971    |  
|Unearned revenue                                                                                                                                                           |  |                                   | 9,141     |                |   | 8,502     |  
|                                                                                                                                                                           |  |                                   |           |                |   |           |  
|Total liabilities                                                                                                                                                          |  |                                   | 61,546    |                |   | 54,942    |  
|                                                                                                                                                                           |  |                                   |           |                |   |           |  
|Commitments and contingencies (Note 7)                                                                                                                                     |  |                                   |           |                |   |           |  
|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; 55,473,176 and 58,426,252 shares issued and outstanding as of January 3, 2004 and
January 1, 2005, respectively |  |                                   | 546,999   |                |   | 687,387   |  
|Accumulated other comprehensive income (loss)                                                                                                                              |  |                                   | 314       |                |   | (2,211    | )
|Retained earnings                                                                                                                                                          |  |                                   | 393,197   |                |   | 534,919   |  
|                                                                                                                                                                           |  |                                   |           |                |   |           |  
|Total shareholders equity                                                                                                                                                 |  |                                   | 940,510   |                |   | 1,220,095 |  
|                                                                                                                                                                           |  |                                   |           |                |   |           |  
|Total liabilities and shareholders equity                                                                                                                                 |  | $                                 | 1,002,056 |                | $ | 1,275,037 |  
|                                                                                                                                                                           |  |                                   |           |                |   |           |  



See accompanying notes
to financial statements



59



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##### Table of Contents

PIXAR



STATEMENTS OF INCOME



|                                                      |  |                                       |         |                |   |                |  |   |        
|----------------------------------------------------- |  | ------------------------------------- | ------- | -------------- | - | -------------- |  | - | -------
|                                                      |  | Fiscal Years Ended                   
|                                                      |  | December 28,2002                      |         | January 3,2004 |   | January 1,2005
|                                                      |  | (In thousands, except per share data)
|Revenue:                                              |  |                                       |         |                |   |                |  |   |        
|Film                                                  |  | $                                     | 193,591 |                | $ | 250,383        |  | $ | 260,831
|Software                                              |  |                                       | 8,133   |                |   | 12,115         |  |   | 12,641 
|                                                      |  |                                       |         |                |   |                |  |   |        
|Total revenue                                         |  |                                       | 201,724 |                |   | 262,498        |  |   | 273,472
|                                                      |  |                                       |         |                |   |                |  |   |        
|Cost of revenue                                       |  |                                       | 41,534  |                |   | 38,058         |  |   | 29,881 
|                                                      |  |                                       |         |                |   |                |  |   |        
|Gross profit                                          |  |                                       | 160,190 |                |   | 224,440        |  |   | 243,591
|                                                      |  |                                       |         |                |   |                |  |   |        
|Operating expenses:                                   |  |                                       |         |                |   |                |  |   |        
|Research and development                              |  |                                       | 8,497   |                |   | 15,311         |  |   | 17,371 
|Sales and marketing                                   |  |                                       | 1,334   |                |   | 2,422          |  |   | 2,484  
|General and administrative                            |  |                                       | 9,677   |                |   | 12,783         |  |   | 15,015 
|                                                      |  |                                       |         |                |   |                |  |   |        
|Total operating expenses                              |  |                                       | 19,508  |                |   | 30,516         |  |   | 34,870 
|                                                      |  |                                       |         |                |   |                |  |   |        
|Income from operations                                |  |                                       | 140,682 |                |   | 193,924        |  |   | 208,721
|Interest income and other                             |  |                                       | 10,342  |                |   | 10,517         |  |   | 12,419 
|                                                      |  |                                       |         |                |   |                |  |   |        
|Income before income taxes                            |  |                                       | 151,024 |                |   | 204,441        |  |   | 221,140
|Income tax expense                                    |  |                                       | 61,074  |                |   | 79,673         |  |   | 79,418 
|                                                      |  |                                       |         |                |   |                |  |   |        
|Net income                                            |  | $                                     | 89,950  |                | $ | 124,768        |  | $ | 141,722
|                                                      |  |                                       |         |                |   |                |  |   |        
|Basic net income per share                            |  | $                                     | 1.78    |                | $ | 2.30           |  | $ | 2.50   
|                                                      |  |                                       |         |                |   |                |  |   |        
|Shares used in computing basic net income per share   |  |                                       | 50,473  |                |   | 54,219         |  |   | 56,760 
|                                                      |  |                                       |         |                |   |                |  |   |        
|Diluted net income per share                          |  | $                                     | 1.68    |                | $ | 2.17           |  | $ | 2.38   
|                                                      |  |                                       |         |                |   |                |  |   |        
|Shares used in computing diluted net income per share |  |                                       | 53,400  |                |   | 57,422         |  |   | 59,545 
|                                                      |  |                                       |         |                |   |                |  |   |        



See accompanying notes
to financial statements



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STATEMENTS OF
SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME



|                                                        |  |                |  |                                              |         |  |                   |        |                      |  |   |                                  |  |   |           |   |  |   |         |  
|------------------------------------------------------- |  | -------------- |  | -------------------------------------------- | ------- |  | ----------------- | ------ | -------------------- |  | - | -------------------------------- |  | - | --------- | - |  | - | ------- | -
|                                                        |  | Common Stock   |  | AccumulatedOther Comprehensive Income (Loss) |         |  | Retained Earnings |        | Shareholders Equity |  |   | TotalComprehensive Income (Loss) | 
|                                                        |  | Shares         |  | Amount                                       |         |  |                   |       
|                                                        |  | (In thousands) | 
|Balances, December 29, 2001                             |  | 49,446         |  | $                                            | 325,362 |  | $                 | 1,845  |                      |  | $ | 178,479                          |  | $ | 505,686   |   |  |   |         |  
|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  |  
|                                                        |  |                |  |                                              |         |  |                   |        |                      |  |   |                                  |  |   |           |   |  |   |         |  
|Exercise of stock options, including tax benefit        |  | 2,579          |  |                                              | 104,522 |  |                   |       |                      |  |   |                                 |  |   | 104,522   |   |  |   |         |  
|Other comprehensive loss (net of tax benefit of $1,177) |  |               |  |                                              |        |  |                   | (1,842 | )                    |  |   |                                 |  |   | (1,842    | ) |  | $ | (1,842  | )
|Net income                                              |  |               |  |                                              |        |  |                   |       |                      |  |   | 124,768                          |  |   | 124,768   |   |  |   | 124,768 |  
|                                                        |  |                |  |                                              |         |  |                   |        |                      |  |   |                                  |  |   |           |   |  |   |         |  
|Balances, January 3, 2004                               |  | 55,473         |  |                                              | 546,999 |  |                   | 314    |                      |  |   | 393,197                          |  |   | 940,510   |   |  | $ | 122,926 |  
|                                                        |  |                |  |                                              |         |  |                   |        |                      |  |   |                                  |  |   |           |   |  |   |         |  
|Exercise of stock options, including tax benefit        |  | 2,953          |  |                                              | 140,388 |  |                   |       |                      |  |   |                                 |  |   | 140,388   |   |  |   |         |  
|Other comprehensive loss (net of tax benefit of $1,630) |  |               |  |                                              |        |  |                   | (2,525 | )                    |  |   |                                 |  |   | (2,525    | ) |  | $ | (2,525  | )
|Net income                                              |  |               |  |                                              |        |  |                   |       |                      |  |   | 141,722                          |  |   | 141,722   |   |  |   | 141,722 |  
|                                                        |  |                |  |                                              |         |  |                   |        |                      |  |   |                                  |  |   |           |   |  |   |         |  
|Balances, January 1, 2005                               |  | 58,426         |  | $                                            | 687,387 |  | $                 | (2,211 | )                    |  | $ | 534,919                          |  | $ | 1,220,095 |   |  | $ | 139,197 |  
|                                                        |  |                |  |                                              |         |  |                   |        |                      |  |   |                                  |  |   |           |   |  |   |         |  





See accompanying notes to financial statements



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STATEMENTS OF CASH FLOWS



|                                                                                            |  |                    |          |   |                |   |          |                |  |   |          |  
|------------------------------------------------------------------------------------------- |  | ------------------ | -------- | - | -------------- | - | -------- | -------------- |  | - | -------- | -
|                                                                                            |  | Fiscal Years Ended |         
|                                                                                            |  | December 28,2002   |          |   | January 3,2004 |   |          | January 1,2005 | 
|                                                                                            |  | (In thousands)     |         
|Cash flows from operating activities:                                                       |  |                    |          |   |                |   |          |                |  |   |          |  
|Net income                                                                                  |  | $                  | 89,950   |   |                | $ | 124,768  |                |  | $ | 141,722  |  
|Adjustments to reconcile net income to net cash (used in) provided by operating activities: |  |                    |          |   |                |   |          |                |  |   |          |  
|Amortization of purchased technology                                                        |  |                    | 480      |   |                |   |         |                |  |   |         |  
|Depreciation and amortization                                                               |  |                    | 7,661    |   |                |   | 7,760    |                |  |   | 7,808    |  
|Capitalized film production costs                                                           |  |                    | (43,915  | ) |                |   | (53,155  | )              |  |   | (60,884  | )
|Amortization of capitalized film production costs                                           |  |                    | 39,420   |   |                |   | 37,592   |                |  |   | 28,513   |  
|Provision for sales return reserves and bad debts                                           |  |                    | 9,155    |   |                |   | 23,575   |                |  |   | 12,271   |  
|Gain on dispositions of property and equipment                                              |  |                    | (8       | ) |                |   |         |                |  |   |         |  
|Gain on sales of investments                                                                |  |                    | (439     | ) |                |   | (1,259   | )              |  |   | (307     | )
|Tax benefit from stock option exercises                                                     |  |                    | 38,601   |   |                |   | 39,361   |                |  |   | 56,668   |  
|Deferred income taxes                                                                       |  |                    | (11,258  | ) |                |   | (17,599  | )              |  |   | (17,298  | )
|Changes in operating assets and liabilities:                                                |  |                    |          |   |                |   |          |                |  |   |          |  
|Trade accounts receivable                                                                   |  |                    | 329      |   |                |   | (974     | )              |  |   | (3,429   | )
|Receivable from Disney                                                                      |  |                    | (124,973 | ) |                |   | (92,516  | )              |  |   | 117,935  |  
|Other receivables                                                                           |  |                    | (762     | ) |                |   | 1,929    |                |  |   | (3,842   | )
|Prepaid expenses and other assets                                                           |  |                    | (10,778  | ) |                |   | 12,779   |                |  |   | (1,180   | )
|Accounts payable                                                                            |  |                    | (2,502   | ) |                |   | (538     | )              |  |   | 3,589    |  
|Other accrued liabilities                                                                   |  |                    | 478      |   |                |   | 3,685    |                |  |   | 13,964   |  
|Income taxes payable                                                                        |  |                    | (1,808   | ) |                |   | 37,595   |                |  |   | (23,518  | )
|Unearned revenue                                                                            |  |                    | 5,228    |   |                |   | 1,800    |                |  |   | (639     | )
|                                                                                            |  |                    |          |   |                |   |          |                |  |   |          |  
|Net cash (used in) provided by operating activities                                         |  |                    | (5,141   | ) |                |   | 124,803  |                |  |   | 271,373  |  
|                                                                                            |  |                    |          |   |                |   |          |                |  |   |          |  
|Cash flows from investing activities:                                                       |  |                    |          |   |                |   |          |                |  |   |          |  
|Purchases of property and equipment                                                         |  |                    | (13,906  | ) |                |   | (5,363   | )              |  |   | (18,384  | )
|Proceeds from sale of property and equipment                                                |  |                    | 55       |   |                |   |         |                |  |   |         |  
|Proceeds from sale of investments                                                           |  |                    | 158,482  |   |                |   | 725,847  |                |  |   | 572,496  |  
|Purchase of investments                                                                     |  |                    | (229,862 | ) |                |   | (906,559 | )              |  |   | (928,864 | )
|                                                                                            |  |                    |          |   |                |   |          |                |  |   |          |  
|Net cash used in investing activities                                                       |  |                    | (85,231  | ) |                |   | (186,075 | )              |  |   | (374,752 | )
|                                                                                            |  |                    |          |   |                |   |          |                |  |   |          |  
|Cash flows from financing activities:                                                       |  |                    |          |   |                |   |          |                |  |   |          |  
|Proceeds from exercised stock options                                                       |  |                    | 78,514   |   |                |   | 65,161   |                |  |   | 83,720   |  
|                                                                                            |  |                    |          |   |                |   |          |                |  |   |          |  
|Net cash provided by financing activities                                                   |  |                    | 78,514   |   |                |   | 65,161   |                |  |   | 83,720   |  
|                                                                                            |  |                    |          |   |                |   |          |                |  |   |          |  
|Net (decrease) increase in cash and cash equivalents                                        |  |                    | (11,858  | ) |                |   | 3,889    |                |  |   | (19,659  | )
|Cash and cash equivalents at beginning of period                                            |  |                    | 56,289   |   |                |   | 44,431   |                |  |   | 48,320   |  
|                                                                                            |  |                    |          |   |                |   |          |                |  |   |          |  
|Cash and cash equivalents at end of period                                                  |  | $                  | 44,431   |   |                | $ | 48,320   |                |  | $ | 28,661   |  
|                                                                                            |  |                    |          |   |                |   |          |                |  |   |          |  
|Supplemental disclosure of cash flow information:                                           |  |                    |          |   |                |   |          |                |  |   |          |  
|Cash paid during the period for income taxes                                                |  | $                  | 46,750   |   |                | $ | 9,800    |                |  | $ | 65,154   |  
|                                                                                            |  |                    |          |   |                |   |          |                |  |   |          |  
|Supplemental disclosure of non-cash investing and financing activities:                     |  |                    |          |   |                |   |          |                |  |   |          |  
|Loss on equipment disposals capitalized as film production costs                            |  | $                  | 770      |   |                | $ |         |                |  | $ |         |  
|                                                                                            |  |                    |          |   |                |   |          |                |  |   |          |  
|Unrealized gain (loss) on investments                                                       |  | $                  | 311      |   |                | $ | (1,842   | )              |  | $ | (2,525   | )
|                                                                                            |  |                    |          |   |                |   |          |                |  |   |          |  



See accompanying notes
to financial statements.



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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 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 and Estimates



The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial statements and the related notes. The following discussion addresses the Companys critical accounting policies, which are those that are most important to the
portrayal of its financial condition and results and require managements most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Changes in
such estimates, based on more accurate future information, or different assumptions or conditions, may affect amounts reported in future periods.



The Companys critical accounting policies are summarized below.



Revenue Recognition



The Company recognizes film revenue from the distribution of its 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 ofThe Incredibles, Finding Nemo, Monsters, Inc., Toy Story
2 andA Bugs Life after Disney recovers its marketing, distribution and other predefined costs and fees. Revenues forToy Story are governed by the terms of the Feature Film Agreement under which Disney fully financed the
production costs and shares a specified percentage of Toy Story profits with Pixar after certain agreed upon costs and fees are deducted. The Company recognizes revenue from its films net of distribution fees, reserves for returns, and
marketing and distribution expenses. Disney provides the Company with gross receipt information, marketing and distribution costs and any other fees and expenses. The Company utilizes this information to determine its portion of the revenue by
applying the contractual provisions included in its arrangements with Disney. The Company also incorporates certain estimates, such as home video returns and distribution expenses, based on Pixars historical experience and other industry
information. The amount of revenue recognized in any given quarter or quarters from all of the Companys films depends on the timing, accuracy, and sufficiency of information it receives from Disney to determine revenues and associated gross
profits. Although Disney provides the Company with the most current



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NOTES TO FINANCIAL STATEMENTS  (Continued)



information available to enable Pixar to recognize its share of revenue and determine its film gross profit, in the past the Company has made revisions, and is likely to
make revisions in the future, to that information based on its estimates and judgments. Such estimates include theatrical bad debt reserves and expenses, home video return reserves and expenses, merchandise expenses, and estimates for both revenues
and related expenses resulting from differences between the Companys and Disneys reporting periods.



For example, in the past, the Companys theatrical revenues have been adjusted for its estimated reserves on potential uncollectible amounts to be
received from theatrical exhibitors. Estimated reserves for uncollectible amounts are established based on a review of the industry, discussions with Disney, and Pixars historical experience. To date the Company has not experienced significant
losses, and therefore it has not had significant reserves for uncollectible receivables. The total allowance against revenue for theatrical exhibitor uncollectible amounts approximated $2.2 million and $1.0 million at January 3, 2004 and January 1,
2005, respectively.



The Company has also made adjustments to
its home video revenues for estimates on return reserves that may differ from those reported by Disney. In determining its home video reserves for a particular title, the Company reviews information such as Disneys current return reserves, the
historical return reserves for its previous titles, actual rates of returns, inventory levels in the distribution channel and other business and industry trend information that is available. Disney has provided and may continue to provide reserve
information that may differ substantially from the Companys historical experience with its previous titles. Unless Disney provides a sufficient rationale as to why the market and sales performance are substantially different for a particular
title, the Company has and may continue to record reserves more consistent with its historical experience. The Companys home video return reserves exceeded Disneys estimates by $27.8 million and $2.5 million at January 3, 2004 and
January 1, 2005, respectively. The estimate for return reserves, whether based on historical information or more current information from Disney, is inherently subjective and may differ significantly from actual results. The Companys original
estimates on reserves may be revised in future periods as new and additional information becomes available. See Note 9 of Notes to Financial Statements for further discussion on reserves for returns.



The Company has utilized margin normalization, such as with merchandise or
home video expenses, in accordance with the provisions of SOP 00-2. This may result in the utilization of budgeted or forecasted information to calculate an ultimate lifetime expense margin, rather than actual costs incurred if it is deemed to be a
more accurate reflection of Pixars participation. Similar to return reserves, these expense estimates are reviewed and may be adjusted periodically to ensure that the most accurate depiction of the Companys participation is reflected.
For example, during fiscal 2004, the Company received updated information from Disney that supported a reduction in the ultimate expense projections for Finding NemoandMonsters, Inc. As a result, the Company revised its estimate of
domestic home video and merchandise expense, which increased its revenues by $13.8 million for the year.



Disney may also make subsequent adjustments to the information that it has provided, and these adjustments could have a material impact on the
Companys operating results in later periods. As updated information becomes available from Disney on a more timely basis, it may result in a change of estimation for revenue recognition. For example, the Company received updated information
from Disney in the first quarter of 2003, which decreased previously recorded home video expenses by $3.2 million for all of its film titles on a cumulative basis. During the second quarter of 2003, the Company recognized an adjustment that reduced
domestic home video revenue for Monsters, Inc. after it received updated information from Disney, which reflected higher returns of domestic home video than had been originally anticipated. This adjustment reduced home video revenues by $4.4
million for the quarter. The Company also received a settlement on Monsters, Inc.merchandise revenue during the third quarter 2003, which resulted in an increase of $3.5 million to film revenues.



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NOTES TO FINANCIAL STATEMENTS  (Continued)



Any revisions to our estimated reserves, margin normalization or updated information from Disney, as noted above, as well as findings from audit rights
offered in accordance with the terms of the Co-Production Agreement, could have a material effect on our financial statements in any given quarter or quarters.



Disneys fiscal periods do not always coincide with the Companys fiscal periods. During the fourth quarter of fiscal 2003, the
Companys reporting period differed from that of Disney. Consequently, it was necessary to use a combination of information from Disney and estimates by the Company to determine the Companys revenues for the period between Disneys
period end and the Companys.



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 Life,Toy Story 2,andMonsters, Inc. are classified as library titles.
The term library title 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 ranges from 6 to 24 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 the Companys resources
are dedicated to the production of our films. Capitalized production overhead does not include general and administrative and research and development expenses. In addition to the films produced, the Company is also working on concept development,
pre-production and 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.



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NOTES TO FINANCIAL STATEMENTS  (Continued)



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 be received
from each film. The Company makes certain estimates and judgments of future gross revenues to be received for each film 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 fair value.



Significant Accounting Policies



Cash and Cash Equivalents



The Company
considers all highly liquid instruments with an original maturity of 90 days or less to be cash equivalents. Cash equivalents as of January 1, 2005 consisted of U.S. Treasury Bills, federal agency notes, and money market funds.



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 are reported as
a component of comprehensive income (loss) until realized. Investments are reviewed on a regular basis to evaluate whether or not any security has experienced an other-than-temporary decline in fair value. If declines in the value of investments
accounted for under SFAS No. 115 are determined to be other than temporary, an investment loss is recorded in the statement of income. When reviewing for other-than-temporary declines in value, management considers current economic and market
conditions as well as credit quality. 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 assigned to each major asset category as below:



|                                |  |                     
|------------------------------- |  | --------------------
|Asset Category                  |  | EstimatedUseful Life
|Buildings                       |  | 30 years            
|Building Improvements           |  | 5-10 years          
|Furniture, Fixtures and Other   |  | 3-10 years          
|Software and Computer Equipment |  | 3 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.



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NOTES TO FINANCIAL STATEMENTS  (Continued)



Long-lived Assets



In accordance with SFAS No. 144, Accounting for the Impairment or Disposal 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 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 8.



Fiscal Year



The Companys fiscal year consists of the 52 or 53-week period ended
with the Saturday nearest to December 31. The 2004 fiscal year ended January 1, 2005 and consisted of 52 weeks. The 2002 and 2003 fiscal years ended on December 28, 2002 and January 3, 2004, respectively, and consisted of 52 and 53 weeks,
respectively.



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.



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NOTES TO FINANCIAL STATEMENTS  (Continued)



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 stock options.



Segment Reporting



In accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, 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 reportable segments. The Company operates in a single
operating segment. Information about the Companys films and major customer is also disclosed in Note 8 of Notes to Financial Statements.



Comprehensive Income



Comprehensive income consists of two components, net income and other comprehensive income (loss). 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. Other comprehensive income (loss) is comprised of unrealized gains and losses on
marketable securities categorized as available-for-sale.



Reclassifications



Certain amounts as
reported in fiscal years 2002 and 2003, including the Balance Sheets and Statements of Cash Flows, have been reclassified to conform to the 2004 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 (SFAS 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 Years Ended |        
|                                                 |  | December 28,2002   |         |   | January 3,2004 |   |         | January 1,2005 | 
|Net income:                                      |  |                    |         |   |                |   |         |                |  |   |         |  
|As reported                                      |  | $                  | 89,950  |   |                | $ | 124,768 |                |  | $ | 141,722 |  
|Fair value-based compensation cost, net of taxes |  |                    | (13,159 | ) |                |   | (16,856 | )              |  |   | (19,460 | )
|                                                 |  |                    |         |   |                |   |         |                |  |   |         |  
|Pro forma net income                             |  | $                  | 76,791  |   |                | $ | 107,912 |                |  | $ | 122,262 |  
|                                                 |  |                    |         |   |                |   |         |                |  |   |         |  
|Basic net income per share:                      |  |                    |         |   |                |   |         |                |  |   |         |  
|As reported                                      |  | $                  | 1.78    |   |                | $ | 2.30    |                |  | $ | 2.50    |  
|Pro forma                                        |  | $                  | 1.52    |   |                | $ | 1.99    |                |  | $ | 2.15    |  
|Diluted net income per share:                    |  |                    |         |   |                |   |         |                |  |   |         |  
|As reported                                      |  | $                  | 1.68    |   |                | $ | 2.17    |                |  | $ | 2.38    |  
|Pro forma                                        |  | $                  | 1.49    |   |                | $ | 1.93    |                |  | $ | 2.09    |  



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NOTES TO FINANCIAL STATEMENTS  (Continued)



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 $18.64, $26.42, and $27.61 for fiscal years 2002, 2003, and 2004, respectively. Values were estimated using zero dividend yield for all years; expected volatility of 52% for 2002, 50% for 2003, and
39% for 2004; risk-free interest rates of 3.59%, 2.97%, and 3.59%, for fiscal 2002, 2003, and 2004, respectively; and weighted-average expected lives of 5.0 years for fiscal 2002, 2003 and 2004.



Recent Accounting Pronouncements



On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123 Revised 2004 (SFAS 123R), Share-Based Payment. The statement replaces SFAS 123, supersedes APB 25, and amends SFAS No. 95, Statementof Cash Flows. SFAS 123R requires the measurement of
all employee share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense in our statements of income. The accounting provisions of SFAS 123R are effective for
reporting periods beginning after June 15, 2005. The Company is required to adopt SFAS 123R no later than its third quarter of fiscal year 2005, which begins July 3, 2005. SFAS 123R eliminates the ability to account for share-based compensation
transactions using APB 25, and generally would require instead that such transactions be accounted for using a fair-value based method. Companies are required to recognize an expense for compensation cost related to share-based payment arrangements
including stock options and employee stock purchase plans. While the fair value method under SFAS 123R is very similar to the fair value method under SFAS 123 with regards to measurement and recognition of stock-based compensation, management is
currently evaluating the impact of several of the key differences between the two standards on the companys financial statements. For example, SFAS 123 permits the Company to recognize forfeitures as they occur while SFAS 123R will require the
Company to estimate future forfeitures and adjust its estimate on a quarterly basis. SFAS 123R will also require a classification change in the statement of cash flows; whereby, a portion of the tax benefit from stock options will move from
operating cash flows to financing cash flows (total cash flows will remain unchanged). The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. Although the Company has not
yet determined whether the adoption of SFAS 123R will result in amounts that are similar to the current pro forma disclosures under SFAS 123, it is currently evaluating the requirements under SFAS 123R. Current estimates of option values using the
Black-Scholes method may not be indicative of results from valuation methodologies ultimately adopted in the final rules. The cumulative effect of adoption, if any, applied on a modified prospective basis, would be measured and recognized on July 3,
2005.



In March 2004, the Emerging Issues Task Force (EITF)
reached a final consensus on Issue 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF 03-1 requires that when the fair value of an investment security is less than its carrying value, an
impairment exists for which the determination must be made as to whether the impairment is other-than-temporary. The EITF 03-1 impairment model applies to all investment securities accounted for under SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securitiesand to investment securities accounted for under the cost method to the extent an impairment indicator exists. Under the guidance, the determination of whether an impairment is other than temporary
and therefore would result in a recognized loss depends on market conditions and managements intent and ability to hold the securities with unrealized losses. In September 2004, the FASB approved FASB Staff Position (FSP) EITF 03-1
which defers the effective date for recognition and measurement guidance contained in EITF 03-1 until certain issues are resolved; however the disclosure



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requirements remain effective for annual periods ending after June 15, 2004. The Company will adopt the guidance at the time of final issuance. The Company believes that
the adoption of EITF 03-1 will not have a material effect on its results of operations, financial position or cash flows.



On December 16, 2004, the FASB issued Statement No. 153 (SFAS 153), Exchanges of Non-monetary Assets, an amendment of APB Opinion No.
29. SFAS 153 addresses the measurement of exchanges of non-monetary assets and redefines the scope of transactions that should be measured based on the fair value of the assets exchanged. SFAS 153 is effective for non-monetary asset exchanges
beginning in the Companys third quarter of fiscal 2005. The Company believes that the adoption of SFAS 153 will not have a material effect on its results of operations, financial position or cash flows.



On October 22, 2004, the American Jobs Creation Act of 2004 (the
AJCA) became law in the United States. In December 2004, the FASB issued FASB Staff Position (FSP) No. FAS 109-1, Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on
Qualified Production Activities Provided by the American Jobs Creation Act of 2004. The AJCA introduced a tax deduction of up to 9 percent (when fully phased-in) of the lesser of (a) qualified production activities income, as
defined in the AJCA, or (b) taxable income (after the deduction for the utilization of any net operating loss carryforwards). FSP No. FAS 109-1 clarifies that the qualified production activities deduction provided for under the AJCA should be
accounted for as a special deduction in accordance with SFAS 109. The Company believes that the adoption of FSP No. FAS 109-1 will not have a material effect on its results of operations, financial position or cash flows.



|(2) | Investments
|--- | -----------



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



|                              |  |      |         |                      |   |                       |  |   |                     |   |  |   |        
|----------------------------- |  | ---- | ------- | -------------------- | - | --------------------- |  | - | ------------------- | - |  | - | -------
|                              |  | Cost |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedFair Value
|January 3, 2004:              |  |      |         |                      |   |                       |  |   |                     |   |  |   |        
|U.S. Treasury Notes and Bills |  | $    | 236,388 |                      | $ | 309                   |  | $ | (19                 | ) |  | $ | 236,678
|Federal agency obligations    |  |      | 236,693 |                      |   | 263                   |  |   | (31                 | ) |  |   | 236,925
|                              |  |      |         |                      |   |                       |  |   |                     |   |  |   |        
|                              |  | $    | 473,081 |                      | $ | 572                   |  | $ | (50                 | ) |  | $ | 473,603
|                              |  |      |         |                      |   |                       |  |   |                     |   |  |   |        
|January 1, 2005:              |  |      |         |                      |   |                       |  |   |                     |   |  |   |        
|U.S. Treasury Notes and Bills |  | $    | 435,048 |                      | $ |                      |  | $ | (1,975              | ) |  | $ | 433,073
|Federal agency obligations    |  |      | 394,708 |                      |   | 6                     |  |   | (1,664              | ) |  |   | 393,050
|                              |  |      |         |                      |   |                       |  |   |                     |   |  |   |        
|                              |  | $    | 829,756 |                      | $ | 6                     |  | $ | (3,639              | ) |  | $ | 826,123
|                              |  |      |         |                      |   |                       |  |   |                     |   |  |   |        



In accordance with
EITF 03-1, the following table summarizes the fair value and gross unrealized losses related to available for sale securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss
position, at January 1, 2005 (in thousands):



|                              |  |                     |         |                       |                   |        |                      |       |                       |       |  |                     |    |                       |  |   |         |  |   |        |  
|----------------------------- |  | ------------------- | ------- | --------------------- | ----------------- | ------ | -------------------- | ----- | --------------------- | ----- |  | ------------------- | -- | --------------------- |  | - | ------- |  | - | ------ | -
|                              |  | Less Than 12 Months |         |                       | 12 Months or More |        |                      | Total |                      
|                              |  | EstimatedFair Value |         | GrossUnrealizedLosses |                   |        | Estimated Fair Value |       | GrossUnrealizedLosses |       |  | EstimatedFair Value |    | GrossUnrealizedLosses | 
|U.S. Treasury Notes and Bills |  | $                   | 433,073 |                       | $                 | (1,975 | )                    |       | $                     |      |  | $                   |   |                       |  | $ | 433,073 |  | $ | (1,975 | )
|Federal agency obligations    |  |                     | 360,554 |                       |                   | (1,656 | )                    |       |                       | 2,494 |  |                     | (8 | )                     |  |   | 363,048 |  |   | (1,664 | )
|                              |  |                     |         |                       |                   |        |                      |       |                       |       |  |                     |    |                       |  |   |         |  |   |        |  
|Total                         |  | $                   | 793,627 |                       | $                 | (3,631 | )                    |       | $                     | 2,494 |  | $                   | (8 | )                     |  | $ | 796,121 |  | $ | (3,639 | )
|                              |  |                     |         |                       |                   |        |                      |       |                       |       |  |                     |    |                       |  |   |         |  |   |        |  



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Market values were determined for each individual security in the investment portfolio. The declines in value of these investments are primarily related
to changes in interest rates and are considered to be temporary in nature.



The contractual maturities of available-for-sale securities as of January 1, 2005 are as follows (in thousands):



|                     |  |      |         |                     |   |        
|-------------------- |  | ---- | ------- | ------------------- | - | -------
|                     |  | Cost |         | EstimatedFair Value
|Due within one year  |  | $    | 475,547 |                     | $ | 473,867
|Due within two years |  |      | 354,209 |                     |   | 352,256
|                     |  |      |         |                     |   |        
|                     |  | $    | 829,756 |                     | $ | 826,123
|                     |  |      |         |                     |   |        



|(3) | Balance Sheet Components
|--- | ------------------------



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



|                                               |  |                |         |                |   |        
|---------------------------------------------- |  | -------------- | ------- | -------------- | - | -------
|                                               |  | January 3,2004 |         | January 1,2005
|Property and equipment:                        |  |                |         |                |   |        
|Building and land                              |  | $              | 117,730 |                | $ | 123,253
|Furniture, fixtures and equipment              |  |                | 22,001  |                |   | 29,362 
|Construction in process                        |  |                | 4,778   |                |   | 8,843  
|                                               |  |                |         |                |   |        
|                                               |  |                | 144,509 |                |   | 161,458
|Less accumulated depreciation and amortization |  |                | 29,483  |                |   | 35,856 
|                                               |  |                |         |                |   |        
|                                               |  | $              | 115,026 |                | $ | 125,602
|                                               |  |                |         |                |   |        
|Other accrued liabilities:                     |  |                |         |                |   |        
|Employee-related expenses                      |  | $              | 7,715   |                | $ | 23,225 
|Accrued professional services                  |  |                | 1,867   |                |   | 1,816  
|Accrued capital expenditures                   |  |                | 1,764   |                |   | 505    
|Other                                          |  |                | 1,661   |                |   | 1,425  
|                                               |  |                |         |                |   |        
|                                               |  | $              | 13,007  |                | $ | 26,971 
|                                               |  |                |         |                |   |        



|(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 ofToy Story and related products. Based on the
individual-film-forecast-computation method, allToy Story film production costs were fully amortized by the year ended December 31, 1997.



Co-Production Agreement



In 1997, the Company extended its original relationship with Disney (under whichToy Story was created and produced) by entering into the
Co-Production Agreement. Under the Co-Production Agreement, the Company agreed to produce, on an exclusive basis, five original computer-animated feature films (the



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Pictures) for distribution by Disney. Pixar and Disney agreed to co-finance, co-own 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 four original Pictures produced under the Co-Production Agreement wereA Bugs Life, Monsters, Inc.,
Finding Nemo,and The Incredibles. The Company is currently in production on the final Picture under this agreement,Cars. As a sequel,Toy Story 2 did not count toward the Pictures; however, it was produced under the
Co-Production Agreement and is afforded the same financial terms as the Pictures.



The term of the Co-Production Agreement continues until delivery to Disney of the fifth Picture, Cars, which is currently scheduled for a June 9, 2006 release. Since the April 2003 delivery ofFinding
Nemo, the Company has had the ability to negotiate and enter into another distribution agreement with any other third party. The Company has produced six highly successful films to date, and believes that this success combined with the strength
of its financial resources, position Pixar to negotiate a distribution arrangement with more favorable economic terms and full ownership of its films beyond the Co-Production Agreement. Although the Company looks forward to a more favorable
agreement for films released afterCars, it understands that distributing its films through another studio may increase some of the risks Pixar faces in the motion picture industry.



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, pre-production and production for several new projects that are not governed by the Co-Production Agreement. Costs related to these projects are therefore neither
shared nor reimbursed by Disney. Such costs are capitalized as film costs and will be amortized under the individual-film-forecast-computation 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 components of total capitalized film production costs are as follows:



|                                             |  |                      |         |     |                      |   |        
|-------------------------------------------- |  | -------------------- | ------- | --- | -------------------- | - | -------
|                                             |  | January 3,      2004 |         |     | January 1,      2005
|                                             |  | (in thousands)      
|In release, (net of amortization)            |  | $                    | 29,520  |     |                      | $ | 53,881 
|In production                                |  |                      | 77,301  |     |                      |   | 81,741 
|In development                               |  |                      | 846     | (1) |                      |   | 4,416  
|                                             |  |                      |         |     |                      |   |        
|Total capitalized film production costs, net |  | $                    | 107,667 |     |                      | $ | 140,038
|                                             |  |                      |         |     |                      |   |        

---

|(1) | In the second quarter of 2003, the Company wrote-off of $1.9 million in costs previously capitalized for future film projects, which the Company determined would not be green-lit
for production within three years following their initial cost capitalization.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Pixar and Disney jointly finance all production costs relating to the Pictures on an equal basis. Film production costs include costs to develop and produce the Pictures, which primarily consists of salaries,
equipment and overhead. Additionally, 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. Pursuant to the terms
of the Co-Production Agreement, the parties established a mutually acceptable funding mechanism to ensure that sums would be available in a timely manner to fund production costs. In practice, Pixar prepares funding requests for forecasted film
production costs and Disney funds its share on a monthly basis at approximately the beginning of the month. All payments to Pixar from Disney for development



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NOTES TO FINANCIAL STATEMENTS  (Continued)



and production of ToyStoryunder 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.



The table below sets forth the amounts reimbursed by
Disney for the following years:



|                               |  |                    |        |                |   |                |  |   |       
|------------------------------ |  | ------------------ | ------ | -------------- | - | -------------- |  | - | ------
|                               |  | Fiscal Years Ended
|                               |  | December 28,2002   |        | January 3,2004 |   | January 1,2005
|                               |  | (in thousands)    
|Production related             |  | $                  | 42,153 |                | $ | 45,570         |  | $ | 39,415
|                               |  |                    |        |                |   |                |  |   |       
|Research and development       |  |                    | 6,846  |                |   | 8,963          |  |   | 7,579 
|General and administrative     |  |                    | 3,640  |                |   | 4,277          |  |   | 3,689 
|                               |  |                    |        |                |   |                |  |   |       
|Expense related reimbursements |  |                    | 10,486 |                |   | 13,240         |  |   | 11,268
|                               |  |                    |        |                |   |                |  |   |       
|Total reimbursements           |  | $                  | 52,639 |                | $ | 58,810         |  | $ | 50,683
|                               |  |                    |        |                |   |                |  |   |       



For films in release,
the Company expects to amortize, based on current estimates, approximately $32 million to $40 million in capitalized film production costs during fiscal 2005. In addition, the Company has amortized more than 80% of each released films original
production costs as of January 1, 2005, with the exception ofThe Incredibles, which is projected to reach the 80% milestone in 2006.



At January 3, 2004 and January 1, 2005, net receivables from Disney aggregated $198.3 million and $68.1 million, respectively, which consists of
receivables for film revenue, advances net of Disneys actual share of expenditures for all films, and amounts due for miscellaneous reimbursements. In accordance with the Co-Production Agreement, Disney generally renders payments against
detailed participation statements to Pixar monthly, within 45 days after the end of the calendar month, for the first 3 years after a film is released and thereafter quarterly, within 45 days after the end of the quarter.



|(5) | Income Taxes
|--- | ------------



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



|                                                                    |  |                    |         |   |                |   |         |                |  |   |         |  
|------------------------------------------------------------------- |  | ------------------ | ------- | - | -------------- | - | ------- | -------------- |  | - | ------- | -
|                                                                    |  | Fiscal Years Ended |        
|                                                                    |  | December 28,2002   |         |   | January 3,2004 |   |         | January 1,2005 | 
|Income taxes:                                                       |  |                    |         |   |                |   |         |                |  |   |         |  
|Current:                                                            |  |                    |         |   |                |   |         |                |  |   |         |  
|Federal                                                             |  | $                  | 27,662  |   |                | $ | 50,218  |                |  | $ | 36,008  |  
|State                                                               |  |                    | 6,032   |   |                |   | 7,675   |                |  |   | 4,024   |  
|Foreign                                                             |  |                    | 37      |   |                |   | 18      |                |  |   | 16      |  
|                                                                    |  |                    |         |   |                |   |         |                |  |   |         |  
|Total current taxes                                                 |  |                    | 33,731  |   |                |   | 57,911  |                |  |   | 40,048  |  
|                                                                    |  |                    |         |   |                |   |         |                |  |   |         |  
|Deferred:                                                           |  |                    |         |   |                |   |         |                |  |   |         |  
|Federal                                                             |  |                    | (9,922  | ) |                |   | (15,188 | )              |  |   | (15,427 | )
|State                                                               |  |                    | (1,336  | ) |                |   | (2,411  | )              |  |   | (1,871  | )
|                                                                    |  |                    |         |   |                |   |         |                |  |   |         |  
|Total deferred taxes                                                |  |                    | (11,258 | ) |                |   | (17,599 | )              |  |   | (17,298 | )
|                                                                    |  |                    |         |   |                |   |         |                |  |   |         |  
|Charge in lieu of taxes attributable to employer stock option plans |  |                    | 38,601  |   |                |   | 39,361  |                |  |   | 56,668  |  
|                                                                    |  |                    |         |   |                |   |         |                |  |   |         |  
|Total tax provision                                                 |  | $                  | 61,074  |   |                | $ | 79,673  |                |  | $ | 79,418  |  
|                                                                    |  |                    |         |   |                |   |         |                |  |   |         |  



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NOTES TO FINANCIAL STATEMENTS  (Continued)



Income tax expense was $61.1 million, $79.7 million, and $79.4 million for fiscal 2002, 2003 and 2004 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):



|                                              |  |                    |        |                |   |        |                |  |   |        |  
|--------------------------------------------- |  | ------------------ | ------ | -------------- | - | ------ | -------------- |  | - | ------ | -
|                                              |  | Fiscal Years Ended |       
|                                              |  | December 28,2002   |        | January 3,2004 |   |        | January 1,2005 | 
|Expected income tax expense                   |  | $                  | 52,858 |                | $ | 71,554 |                |  | $ | 77,398 |  
|Increases (decreases) in tax resulting from:  |  |                    |        |                |   |        |                |  |   |        |  
|State income taxes, net of federal tax effect |  |                    | 7,827  |                |   | 8,003  |                |  |   | 7,542  |  
|Extraterritorial income exclusion             |  |                    |       |                |   |       |                |  |   | (6,543 | )
|Non-deductible expenses                       |  |                    | 351    |                |   | 228    |                |  |   | 214    |  
|Other, net                                    |  |                    | 38     |                |   | (112   | )              |  |   | 807    |  
|                                              |  |                    |        |                |   |        |                |  |   |        |  
|Actual tax expense                            |  | $                  | 61,074 |                | $ | 79,673 |                |  | $ | 79,418 |  
|                                              |  |                    |        |                |   |        |                |  |   |        |  



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):



|                               |  |                |        |                |   |       
|------------------------------ |  | -------------- | ------ | -------------- | - | ------
|                               |  | January 3,2004 |        | January 1,2005
|Deferred tax assets:           |  |                |        |                |   |       
|Deferred compensation          |  | $              | 414    |                | $ | 392   
|Capitalized film costs         |  |                | 51,629 |                |   | 74,006
|Reserves and accruals          |  |                | 3,721  |                |   | 1,732 
|Deferred loss on investments   |  |                |       |                |   | 1,398 
|Other, net                     |  |                | 32     |                |   | 114   
|                               |  |                |        |                |   |       
|Total deferred tax assets      |  |                | 55,796 |                |   | 77,642
|                               |  |                |        |                |   |       
|Deferred tax liabilities       |  |                |        |                |   |       
|State taxes                    |  |                | 2,954  |                |   | 3,611 
|Property and equipment         |  |                | 1,138  |                |   | 3,304 
|Deferred gain on investments   |  |                | 208    |                |   |      
|Other, net                     |  |                |       |                |   | 303   
|                               |  |                |        |                |   |       
|Total deferred tax liabilities |  |                | 4,300  |                |   | 7,218 
|                               |  |                |        |                |   |       
|Net deferred tax assets        |  | $              | 51,496 |                | $ | 70,424
|                               |  |                |        |                |   |       



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 January 1, 2005, 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.



In 2004, the Company derived significant tax benefits from the Extraterritorial Income (ETI) exclusion allowed under U.S. income tax laws with
respect to certain foreign trade income. The American Jobs Creation Act of 2004, (the AJCA), which the President signed into law on October 22, 2004, repeals the ETI regime for transactions entered into after December 31, 2004, subject
to a phase-out that would allow the Company to claim 80% of the benefits in 2005 and 60% in 2006. The AJCA replaced the ETI exclusion with a deduction for qualifying domestic manufacturing activities, which is phased-in beginning in 2005. It is not
currently known the extent to which the Company will benefit from the domestic manufacturing deduction in future years and whether the provision could partly or entirely replace the lost ETI benefit.



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NOTES TO FINANCIAL STATEMENTS  (Continued)



In December 2004, the Financial Accounting Standards Board (FASB) issued FASB Staff Position FAS 109-1 clarifying that the deduction for
qualified domestic production activities should be accounted for as a special deduction under FASB Statement No. 109, Accounting for Income Taxes,rather than as a tax rate reduction. The Company believes that the adoption of FSP No. FAS
109-1 will not have a material effect on its results of operations, financial position or cash flows.



|(6) | Shareholders Equity
|--- | --------------------



Equity Incentive Plan



The Company has an Equity Plan that was approved by the Companys Shareholders at the Annual Meeting of Shareholders, held on August 20, 2004. The
Equity Plan permits the grant of the following types of incentive awards: (1) stock options, (2) stock appreciation rights, (3) restricted stock, (4) performance units, and (5) performance shares. The Equity Plan is intended to attract, motivate,
and retain (1) employees of Pixar and affiliates, (2) consultants who provide significant services to Pixar and its affiliates, and (3) directors of Pixar who are employees, of neither Pixar nor any affiliate. The Equity Plan also is designed to
encourage stock ownership by employees, directors, and consultants, thereby aligning their interests with those of Pixars shareholders and to permit the payment of compensation that qualifies as performance based compensation.



The Equity Plan replaces the 1995 Stock Option Plan and the 1995 Director
Option Plan (collectively, the 1995 Plans). The total number of initial shares available for issuance under the Equity Plan is equal to the number of shares that remain available for grant under the Companys 1995 Plans as of August 20, 2004
and any shares that otherwise would have been returned to the 1995 Plans after August 20, 2004 on account of the expiration, cancellation or forfeiture of awards granted thereunder. The Equity Plan also incorporates an evergreen formula pursuant to
which on January 1 of each year (beginning January 1, 2005 and ending January 1, 2014) the aggregate number of shares reserved for issuance under the Equity Plan will increase by a number of shares equal to the lesser of (i) 3% of the outstanding
shares on the immediately preceding date or (ii) an amount determined by the Board. As of January 1, 2005, the Company had 3,029,816 shares reserved and available for issuance under the Equity Plan, which includes 1,752,788 shares that were added
pursuant to the evergreen formula. No other types of incentive awards have been granted under the Equity Plan as of January 1, 2005.



The option exercise price for incentive stock options is not less than the fair market value at the grant date. Non-statutory 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 ten years from the date of grant.



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NOTES TO FINANCIAL STATEMENTS  (Continued)



A summary of activity under the option plans during fiscal 2002, 2003 and 2004 are as follows:



|                                 |  |            |   |  |                                |      
|-------------------------------- |  | ---------- | - |  | ------------------------------ | -----
|                                 |  | Shares     |   |  | Weighted-AverageExercise Price
|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
|Granted                          |  | 1,650,750  |   |  |                                | 56.25
|Exercised                        |  | (2,578,710 | ) |  |                                | 25.27
|Forfeited                        |  | (259,750   | ) |  |                                | 35.25
|                                 |  |            |   |  |                                |      
|                                 |  |           
|Outstanding at January 3, 2004   |  | 9,995,609  |   |  |                                | 34.15
|Granted                          |  | 1,286,900  |   |  |                                | 70.05
|Exercised                        |  | (2,953,076 | ) |  |                                | 28.35
|Forfeited                        |  | (227,750   | ) |  |                                | 57.16
|                                 |  |            |   |  |                                |      
|                                 |  |           
|Outstanding at January 1, 2005   |  | 8,101,683  |   |  |                                | 41.32
|                                 |  |            |   |  |                                |      



For various price
ranges, weighted-average characteristics of outstanding stock options at January 1, 2005 were as follows:



|                         |  |                     |  |                                |  |                                |       |        |           |                                |   |      
|------------------------ |  | ------------------- |  | ------------------------------ |  | ------------------------------ | ----- | ------ | --------- | ------------------------------ | - | -----
|                         |  | Options Outstanding |  | Options Vested and Exercisable
|Range of Exercise Prices |  | Shares              |  | RemainingLife (Years)          |  | Weighted-AverageExercise Price |       | Shares |           | Weighted-AverageExercise Price
|$  0.20 to $21.38        |  | 575,879             |  | 2.66                           |  | $                              | 18.27 |        | 523,379   |                                | $ | 17.96
|$23.13 to $26.50         |  | 1,991,922           |  | 5.92                           |  |                                | 26.49 |        | 1,242,435 |                                |   | 26.48
|$27.50 to $33.75         |  | 1,162,739           |  | 6.02                           |  |                                | 31.35 |        | 335,864   |                                |   | 31.53
|$33.80 to $42.74         |  | 1,648,937           |  | 7.18                           |  |                                | 40.14 |        | 357,437   |                                |   | 36.54
|$42.81 to $65.56         |  | 1,260,306           |  | 8.01                           |  |                                | 52.98 |        | 287,056   |                                |   | 51.45
|$65.61 to $75.94         |  | 1,235,150           |  | 9.15                           |  |                                | 67.92 |        | 67,750    |                                |   | 68.49
|$76.96 to $90.67         |  | 226,750             |  | 9.82                           |  |                                | 80.35 |        |          |                                |   |     
|                         |  |                     |  |                                |  |                                |       |        |           |                                |   |      
|                         |  | 8,101,683           |  | 6.88                           |  |                                | 41.32 |        | 2,813,921 |                                |   | 30.33
|                         |  |                     |  |                                |  |                                |       |        |           |                                |   |      



At January 1, 2005,
there were 2,813,921 shares exercisable at a weighted-average exercise price of $30.33 per share. At December 28, 2002 and January 3, 2004, there were 3,593,426 and 3,409,744 shares exercisable, respectively, at weighted-average exercise prices of
$22.05 and $26.11, respectively.



Employee Benefit Plan



In 1992, the Company adopted a 401(k) Profit Sharing
Plan (the 401(k) Plan) that is intended to qualify under Section 401(k) of the Internal Revenue Code of 1986, as amended. The 401(k) Plan covers substantially all employees. Participants may elect to contribute a percentage of their compensation to
this plan, up to the statutory maximum amount. For the plan year commencing January 4, 2004 and ending on January 1, 2005 employer match was 50% of deferrals up to 5% of eligible plan compensation, with a maximum calendar year contribution of $2,000
per participant.



Employer match contributions vest
immediately. The Company contributed $943,000, $1,015,000, and $1,070,000 to the 401(k) Plan for fiscal 2002, 2003 and 2004, respectively.



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NOTES TO FINANCIAL STATEMENTS  (Continued)



|(7) | 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 January 1, 2005
were as follows (in thousands):



|                             |  |   |      
|---------------------------- |  | - | -----
|Fiscal Year                 
|2005                         |  | $ | 719  
|2006                         |  |   | 257  
|2007                         |  |   | 202  
|2008                         |  |   | 58   
|After 2008                   |  |   |     
|                             |  |   |      
|Total minimum lease payments |  | $ | 1,236
|                             |  |   |      



Pixar leases certain
of its facilities and some of its equipment under non-cancelable operating lease arrangements that expire at various dates, and the Company is required to pay property taxes, insurance and normal maintenance costs for certain of our facilities. The
Company occupies an office in Seattle, Washington where the majority of the technical support group for the RenderMan® product is located. The lease expires in September 2008 with an option to extend for an additional 3 years. Pixar also leases certain office space
in Emeryville, California under a 3-year operating lease which expires in January 2006.



Rental expense from operating leases amounted to approximately $814,000, $982,000, and $1,083,000 for fiscal 2002, 2003 and 2004, 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 liability for these participation fees is based on a certain level of performance by each feature film and is only payable when certain thresholds are achieved. The Company paid participation fees of $500,000 in fiscal years 2003 and
2004, respectively, under this obligation. No payments were made in fiscal year 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.



|(8) | Significant Customer and Segment Reporting
|--- | ------------------------------------------



Significant Customer



In fiscal years 2002, 2003, and 2004, Disney represented 96%, 94% and 90% of total revenue, respectively, and 95%, 97%, and 83% of total accounts
receivable, respectively.



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NOTES TO FINANCIAL STATEMENTS  (Continued)



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 statements of income and the Company has no foreign operations. Therefore, the Company operates in a single operating segment.



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



|                   |  |                    |         |     |      |   |         |      |  |   |         |    
|------------------ |  | ------------------ | ------- | --- | ---- | - | ------- | ---- |  | - | ------- | ---
|                   |  | Fiscal Years Ended |        
|                   |  | 2002               |         |     | 2003 |   |         | 2004 | 
|The Incredibles    |  | $                  |        |     |      | $ |        |      |  | $ | 40,442  |    
|Finding Nemo       |  |                    |        |     |      |   | 189,166 |      |  |   | 150,783 | (4)
|Library titles(1)  |  |                    | 191,524 | (2) |      |   | 60,580  | (3)  |  |   | 67,376  | (5)
|Animation services |  |                    | 2,067   |     |      |   | 637     |      |  |   | 2,230   |    
|                   |  |                    |         |     |      |   |         |      |  |   |         |    
|                   |  | $                  | 193,591 |     |      | $ | 250,383 |      |  | $ | 260,831 |    
|                   |  |                    |         |     |      |   |         |      |  |   |         |    

---

|(1) | Library titles includeMonsters, Inc., A Bugs Life, Toy Story andToy Story 2. For fiscal years 2002 and 2003, Monsters, Inc.revenue was $141.5 million
and $22.6 million, respectively, and has been reclassified to Library titles to conform to the current year presentation.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | During 2002, the Company reduced its home video return reserves for A Bugs Life and Toy Story 2, which increased the Companys film revenues by $3.7
million. Additionally, the Company adjusted its estimates on expense margins for Toy Story 2 and A Bugs Life home video and merchandise, which increased its revenues by $10.6 million for the year. Disney also provided the Company
with updated information on A Bugs Life and Toy Story 2home video and merchandise activities that increased net revenues by approximately $5.8 million for the year.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | During 2003, Disney provided updated information reflecting higher home video return activity than had been originally anticipated which reduced revenues by $4.4 million. The
Company also received a settlement onMonsters, Inc. merchandise revenue, which increased net revenues by $3.5 million. Additionally, the Company received updated information from Disney relating to home video expenses, which decreased
previously recorded home video expenses by $3.2 million for all of our film titles on a cumulative basis.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | During fiscal 2004, the Company received updated information from Disney that supported a reduction in the ultimate expense projections for Finding Nemo. As a result, the
Company revised its estimate of Finding Nemo domestic home video expense to reflect the lower ultimate home video expenses, which increased film revenues by approximately $11.8 million for the year. The Company also adjusted its expense
estimate for merchandise revenue which increased film revenues by $0.7 million. In addition, there were approximately $15.6 million in revenues which resulted from revisions to domestic home video reserves that were established in prior years. See
Note 9 of Notes to Financial Statements for further discussion on reserves for returns.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) | This amount includes $8.1 million in revenues, which resulted from revisions to international home video reserves that were established in prior years for Monsters, Inc. See
Note 9 of Notes to Financial Statements for further discussion on reserves for returns. In addition, the Company adjusted its expense estimate for merchandise which increased film revenues by $1.3 million.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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NOTES TO FINANCIAL STATEMENTS  (Continued)



|(9) | Valuation and Qualifying Accounts and Reserves
|--- | ----------------------------------------------



A summary of the valuations and qualifying accounts and reserves included in the balance sheets are as follows (in thousands):



|                                        |  |                            |        |                                        |   |                                                              |  |   |                       |   |  |   |       
|--------------------------------------- |  | -------------------------- | ------ | -------------------------------------- | - | ------------------------------------------------------------ |  | - | --------------------- | - |  | - | ------
|Classification                          |  | Balance atBeginningof Year |        | Changes to ReservesImpactingOperations |   | Reductionsto Reserves (ActualReturns and BadDebt Write-offs) |  |   | Balance atEnd of Year
|Year ended January 1, 2005              |  |                            |        |                                        |   |                                                              |  |   |                       |   |  |   |       
|Reserve for returns, Disney             |  | $                          | 27,753 |                                        | $ | 12,271                                                       |  | $ | (37,551               | ) |  | $ | 2,473 
|Allowance for doubtful accounts, Disney |  |                            | 2,167  |                                        |   |                                                             |  |   | (1,161                | ) |  |   | 1,006 
|Allowance for doubtful accounts, trade  |  |                            | 186    |                                        |   |                                                             |  |   | (9                    | ) |  |   | 177   
|                                        |  |                            |        |                                       
|Year ended January 3, 2004              |  |                            |        |                                        |   |                                                              |  |   |                       |   |  |   |       
|Reserve for returns, Disney             |  |                            | 9,251  |                                        |   | 23,575                                                       |  |   | (5,073                | ) |  |   | 27,753
|Allowance for doubtful accounts, Disney |  |                            | 167    |                                        |   | 2,000                                                        |  |   |                      |   |  |   | 2,167 
|Allowance for doubtful accounts, trade  |  |                            | 188    |                                        |   |                                                             |  |   | (2                    | ) |  |   | 186   
|                                        |  |                            |        |                                       
|Year ended December 28, 2002            |  |                            |        |                                        |   |                                                              |  |   |                       |   |  |   |       
|Reserve for returns, Disney             |  |                            | 2,106  |                                        |   | 7,145                                                        |  |   |                      |   |  |   | 9,251 
|Allowance for doubtful accounts, Disney |  |                            | 58     |                                        |   | 112                                                          |  |   | (3                    | ) |  |   | 167   
|Allowance for doubtful accounts, trade  |  |                            | 552    |                                        |   |                                                             |  |   | (364                  | ) |  |   | 188   



Reserve for Returns, Disney



The Company recognizes revenue from its films under the
Co-Production Agreement and Feature Film Agreements net of distribution fees, actual returns, estimated reserve for returns, and marketing and distribution expenses in accordance with FASB Concepts Statement No. 6 and EITF 99-19. The Company makes
adjustments to home video revenues for estimates on return reserves (as a percentage of sales) that may differ from those reported by Disney. To the extent that the Companys reserve for returns percentage differs from that reported by Disney,
such differences are recorded as a reserve against the receivable from Disney. These reserves are reflected above and amounted to $9.3 million, $27.8 million and $2.5 million at December 28, 2002, January 3, 2004, and January 1, 2005, respectively.
Furthermore, these reserves can change for a variety of reasons:



| |  |  | Changes to reserves that increase the dollar amount of return reserves (with a corresponding decrease in film revenue) occur when (a) the Company establishes and maintains a return
reserve percentage that is higher than Disneys: as revenues are earned, the difference between the Companys higher estimated return reserve percentage results in an increase to the returns reserve, and (b) Disney lowers its return
reserve percentage from a previous period and the Company maintains its higher reserve percentage: as revenues are earned, the difference between Disneys return reserves percentage and the Companys higher estimated return reserves
percentage results in an increase to the returns reserve.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Changes to reserves that decrease return reserves (with a corresponding increase in film revenue) occur when the Company is carrying a higher reserve percentage than Disney and the
Company reduces its return reserve percentage. This results in a reduction of the reserve and an increase in revenue in the period that the Company reduces the percentage.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Reductions to return reserve balances occur when the Company establishes a higher return reserve percentage than Disney and Disney subsequently increases its return reserve
percentage. As revenues are incurred and Disney increases its return reserve percentage, the returns reserve is reduced.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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NOTES TO FINANCIAL STATEMENTS  (Continued)



In determining Pixars home video return reserves for a particular title, the Company reviews information such as Disneys current return
reserves, the historical return reserves for its previous titles, actual rates of returns, inventory levels in the distribution channel and other business and industry trend information that is available. Disney has provided and may continue to
provide the Company with reserve information that may differ substantially from Pixars historical experience with its previous titles. Unless Disney provides the Company with what the Company believes is a sufficient rationale as to why the
market and sales performance are substantially different for a particular title, the Company has and may continue to record reserves more consistent with its historical experience.



During fiscal 2004, the Company increased its return reserves by approximately $46.2 million primarily for differences in
reserve percentage estimates with Disney for Finding Nemosdomestic and international home video revenues, as well as some increases to Monsters, Inc.home video reserves. The Companys reserves were reduced during the year
due to subsequent revisions to its estimates for both Finding Nemoand Monsters, Inc.These revisions reduced the Companys reserves by $33.9 million, of which approximately $8.1 million and $15.6 million increased the
Companys revenues for reversals of reserves which were established in prior years for Monsters, Inc. international home video reserves and Finding Nemodomestic home video reserves, respectively. During 2004, Disney increased its
return reserves primarily for Finding Nemosinternational home video revenues, which resulted in a reduction of approximately $37.6 million in the Companys reserves.



During fiscal 2003, the Company increased its return reserves by approximately $23.6 million for differences in its reserve
estimates primarily for Finding Nemosdomestic home video return reserves, and to a lesser extent Monsters, Inc.home video return reserves and Finding Nemosinternational home video reserves. During 2003, Disney
increased its return reserves for Monsters Inc.which reduced the Companys difference in reserves from Disney by approximately $5.1 million.



During 2002, the Company increased its return reserves primarily for differences from Disney in reserve estimates for Monsters, Inc. international
home video revenues. This increase was offset by adjustments to reduce Pixars home video reserves for A Bugs LifeandToy Story 2 which resulted in an increase to Pixars revenues of $3.7 million.



Further, the Company may not always maintain differences in reserves from
those reported by Disney. In instances when the Company relies on Disney estimates, it is possible that Disney may make subsequent revisions to those estimates which could result in a change to the Companys estimate of revenue for a given
period. Such reserves and related changes as reported by Disney are not reflected in the above table. For example, during the second quarter of 2003, Pixar reduced its Monsters, Inc.domestic home video revenue after receiving updated
information from Disney which reflected higher returns of domestic home video than had originally been anticipated. This adjustment reduced Pixars home video revenue by $4.4 million in 2003 for revenues that had been recorded in a previous
period.



Allowance for Doubtful Accounts, Disney



The Company maintains reserves against potential uncollectible receivables
from theatrical exhibitors. Estimates are established based on a review of the industry, discussions with Disney, and historical experience. To date the Company has not experienced significant losses, and therefore it has not had significant
reserves for uncollectible receivables.



Allowance for Doubtful Accounts,
Trade



The Company maintains an allowance for doubtful
accounts for the estimated losses on trade receivables. Pixar assesses collectability of the receivable by determining whether the creditworthiness of the customer has deteriorated and could result in an inability to collect payment. To date the
Company has not experienced significant losses, and therefore it has not had significant allowance against trade receivables.



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NOTES TO FINANCIAL STATEMENTS  (Continued)



|(10) | Net Income per Share Calculation
|---- | --------------------------------



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



|                             |  |                    |        |                 |        |                   |   |           |  |        |         |                   |        |           |   |        |  |                   |         |  |        |  |   |     
|---------------------------- |  | ------------------ | ------ | --------------- | ------ | ----------------- | - | --------- |  | ------ | ------- | ----------------- | ------ | --------- | - | ------ |  | ----------------- | ------- |  | ------ |  | - | ----
|                             |  | Fiscal Years Ended
|                             |  | December 28, 2002  |        | January 3, 2004 |        | January 1, 2005  
|                             |  | NetIncome          |        | Shares          |        | NetIncomeperShare |   | NetIncome |  | Shares |         | NetIncomeperShare |        | NetIncome |   | Shares |  | NetIncomeperShare
|Basic net income per Share   |  | $                  | 89,950 |                 | 50,473 |                   | $ | 1.78      |  | $      | 124,768 |                   | 54,219 |           | $ | 2.30   |  | $                 | 141,722 |  | 56,760 |  | $ | 2.50
|Effect of dilutive shares:   |  |                    |        |                 |        |                   |   |           |  |        |         |                   |        |           |   |        |  |                   |         |  |        |  |   |     
|Stock options                |  |                    |       |                 | 2,927  |                   |   |           |  |        |        |                   | 3,203  |           |   |        |  |                   |        |  | 2,785  |  |   |     
|                             |  |                    |        |                 |        |                   |   |           |  |        |         |                   |        |           |   |        |  |                   |         |  |        |  |   |     
|Diluted net income per share |  | $                  | 89,950 |                 | 53,400 |                   | $ | 1.68      |  | $      | 124,768 |                   | 57,422 |           | $ | 2.17   |  | $                 | 141,722 |  | 59,545 |  | $ | 2.38
|                             |  |                    |        |                 |        |                   |   |           |  |        |         |                   |        |           |   |        |  |                   |         |  |        |  |   |     



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, using the treasury stock method for options.



Options
to purchase 222,495, 195,574, and 92,003 shares of common stock in fiscal 2002, 2003 and 2004, 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.



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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 29      |        | June 28 |   | September 27 |  | January 3
|2003                         |  |               |        |         |   |              |  |           |        |  |   |        
|Revenue                      |  | $             | 18,657 |         | $ | 48,876       |  | $         | 30,183 |  | $ | 164,782
|Gross profit                 |  |               | 15,707 |         |   | 41,071       |  |           | 25,894 |  |   | 141,768
|Net income                   |  |               | 8,178  |         |   | 19,524       |  |           | 13,193 |  |   | 83,873 
|Basic net income per share   |  |               | 0.15   |         |   | 0.36         |  |           | 0.24   |  |   | 1.52   
|Diluted net income per share |  |               | 0.15   |         |   | 0.34         |  |           | 0.23   |  |   | 1.44   
|                             | 
|                             |  | Quarter Ended
|                             |  | April 3       |        | July 3  |   | October 2    |  | January 1
|2004                         |  |               |        |         |   |              |  |           |        |  |   |        
|Revenue                      |  | $             | 53,824 |         | $ | 66,289       |  | $         | 44,463 |  | $ | 108,896
|Gross profit                 |  |               | 47,920 |         |   | 59,852       |  |           | 40,259 |  |   | 95,560 
|Net income                   |  |               | 26,742 |         |   | 37,385       |  |           | 22,421 |  |   | 55,174 
|Basic net income per share   |  |               | 0.48   |         |   | 0.66         |  |           | 0.39   |  |   | 0.95   
|Diluted net income per share |  |               | 0.46   |         |   | 0.63         |  |           | 0.38   |  |   | 0.91   



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, revenue for the first quarter of fiscal 2004 was significantly higher than the first quarter of 2003 largely due to the timing and success of Finding Nemosworldwide home video performance and continued foreign theatrical
revenues in the first quarter of fiscal 2004. In addition, revenue for the fourth quarter of 2003 was significantly higher than the fourth quarter of 2004 due to the November 2003 domestic home video and international theatrical releases ofFinding Nemo. Further, revenue for the fourth quarter of 2004 is significantly higher than that of other quarters in the same year due to the domestic and foreign theatrical release of The Incrediblesin November 2004.



82



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##### Table of Contents

SIGNATURES



Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on this 16th day of March, 2005.



PIXARBy:

/s/    SIMON T. BAXSimon T. BaxExecutive 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, Simon T. Bax, 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 16, 2005
|                                            |  |                                                                                                  
|/s/    SIMON T.BAXSimon T. Bax              |  | Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |  | March 16, 2005
|                                            |  |                                                                                                  
|/s/    EDWIN E.
CATMULLEdwin E. Catmull     |  | President and Director                                                                            |  | March 16, 2005
|                                            |  |                                                                                                  
|/s/    SKIP M.
BRITTENHAMSkip M.
Brittenham |  | Director                                                                                          |  | March 16, 2005
|                                            |  |                                                                                                  
|/s/    SUSAN L. DECKERSusan L. Decker       |  | Director                                                                                          |  | March 16, 2005
|                                            |  |                                                                                                  
|/s/    JOSEPH A.
GRAZIANOJoseph A.
Graziano |  | Director                                                                                          |  | March 16, 2005
|                                            |  |                                                                                                  
|/s/    LAWRENCE B.
LEVYLawrence B. Levy     |  | Director                                                                                          |  | March 16, 2005
|                                            |  |                                                                                                  
|/s/    JOE ROTHJoe Roth                     |  | Director                                                                                          |  | March 16, 2005
|                                            |  |                                                                                                  
|/s/    LARRY W.
SONSINILarry W. Sonsini     |  | Director                                                                                          |  | March 16, 2005



83



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##### Table of Contents

INDEX TO EXHIBITS



|              |  |                                                                                                                                                                                                                                                                                                
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | 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 Quarterly Report on Form 10-Q for the quarter ended October 2, 2004, 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 (which is incorporated herein by reference to Exhibit 10.2 to the Registrants Annual Report on Form 10-K for the year ended December 28, 2002, Commission File
No. 0-26976)                                                                                         
|              | 
|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*         |  | Offer letter between Ms. Lois Scali and the Registrant dated January 23, 2003 (which is incorporated herein by reference to Exhibit 10.7 to the Registrants Annual Report on Form 10-K
for the year ended January 3, 2004, Commission File No. 0-26976)                                       
|              | 
|10.8          |  | Reimbursement Agreement between the Registrant and Steve Jobs dated June 19, 2003 (which is incorporated herein by reference to Exhibit 10.8 to the Registrants Quarterly Report on Form
10-Q for the quarter ended June 28, 2003, Commission File No. 0-26976)                               
|              | 
|10.9*         |  | Offer letter between Mr. Simon T. Bax and the Registrant dated March 18, 2004                                                                                                                                                                                                                  
|              | 
|10.10*        |  | 2004 Equity Incentive Plan (which is incorporated herein by reference to Exhibit 99.1 to the Registrants Form S-8 Registration Statement, Commission File No.
333-120230)                                                                                                                     
|              | 
|10.11         |  | Forms of Agreement Under 2004 Equity Incentive Plan (which is incorporated herein by reference to Exhibit 99.2 to the Registrants Form S-8 Registration Statement, Commission File No.
333-120230)                                                                                            
|              | 
|23.1          |  | Consent of Independent Registered Public Accounting Firm                                                                                                                                                                                                                                       
|              | 
|24.1          |  | Power of Attorney (See page 83)                                                                                                                                                                                                                                                                
|              | 
|31.1          |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                             
|              | 
|31.2          |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                             
|              | 
|32.1          |  | 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.
|- | ----------------------------------------------------------------