##### Table of Contents









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 3,
2004

Commission File Number 0-26976

Pixar

(Exact name of registrant as specified in its
charter)


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

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

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

As of June 28, 2003, the last day of the
Registrants most recently completed second fiscal quarter,
there were 54,135,552 shares of the Registrants
Common Stock outstanding, and the aggregate market value of such
shares held by non-affiliates of the Registrant (based on the
closing sale price of such shares on the Nasdaq National Market
on June 27, 2003) was $1,377,878,000. 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, 2004, there were
55,960,801 shares of the Registrants Common Stock
outstanding.



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TABLE OF CONTENTS

|             |  |                                                                                            |    |      |    | 
|------------ |  | ------------------------------------------------------------------------------------------ | -- | ---- | -- | 
|             |  |                                                                                            |    | Page
|             |  |                                                                                            |    |     
|PART I      
|Item 1.      |  | Business                                                                                   |    |      | 2  | 
|             |  | Risk Factors                                                                               |    |      | 16 | 
|Item 2.      |  | Properties                                                                                 |    |      | 30 | 
|Item 3.      |  | Legal Proceedings                                                                          |    |      | 31 | 
|Item 4.      |  | Submission of Matters to a
    Vote of Security Holders                                    |    |      | 31 | 
|             |  | Executive Officers of the
    Company                                                      |    |      | 31 | 
|PART II     
|Item 5.      |  | Market for Registrants
    Common Stock and Related Shareholder Matters                   |    |      | 33 | 
|Item 6.      |  | Selected Financial Data                                                                    |    |      | 33 | 
|Item 7.      |  | Managements Discussion
    and Analysis of Financial Condition and Results of  Operations |    |      | 34 | 
|Item 7A.     |  | Quantitative and Qualitative
    Disclosures About Market Risk                             |    |      | 42 | 
|Item 8.      |  | Financial Statements and
    Supplementary Data                                            |    |      | 42 | 
|Item 9.      |  | Changes in and Disagreements
    with Accountants on Accounting and  Financial  Disclosure |    |      | 43 | 
|Item 9A.     |  | Controls and Procedures                                                                    |    |      | 43 | 
|PART III    
|Item 10.     |  | Directors and Executive
    Officers of the Company                                        |    |      | 43 | 
|Item 11.     |  | Executive Compensation                                                                     |    |      | 46 | 
|Item 12.     |  | Security Ownership of
    Certain Beneficial Owners and Management                         |    |      | 50 | 
|Item 13.     |  | Certain Relationships and
    Related Transactions                                         |    |      | 51 | 
|Item 14.     |  | Principal Accounting Fees
    and Services                                                 |    |      | 52 | 
|PART IV     
|Item 15.     |  | Exhibits, Financial
    Statement Schedules and Reports on Form 8-K                        |    |      | 53 | 
|Signatures   |  |                                                                                            | 77 |     
|EXHIBIT 10.7
|EXHIBIT 23.1
|EXHIBIT 31.1
|EXHIBIT 31.2
|EXHIBIT 32.1



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This Annual Report on Form 10-K contains
forward-looking statements that have been made pursuant to the
provisions of the Private Securities Litigation Reform Act of
1995, particularly statements referencing the targeted release
dates of our feature films, our anticipated revenues and
operating expenses, 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, targeted, and variations of such words
and similar expressions. Such forward-looking statements are
based on current expectations, estimates and projections about
our industry and managements beliefs and assumptions.
These statements are not guarantees of future performance and
are subject to certain risks, uncertainties and assumptions that
are difficult to predict; therefore, actual results and outcomes
may differ materially from what is expressed or forecasted in
any such forward-looking statements. Such risks and
uncertainties include those set forth herein under Risk
Factors on pages 16 through 30. Particular attention
should be paid to the cautionary language in Risk Factors
 Our operating results are primarily dependent
on the success of our feature films, and forecasting is
extremely difficult.  Our operating
results have fluctuated in the past, and we expect such
fluctuations to continue,  Our scheduled
successive releases of feature films will continue to place a
significant strain on our resources, and
 The Co-Production Agreement imposes several
risks and restrictions on us. Unless required by law, we
undertake no obligation to update publicly any forward-looking
statements, whether as a result of new information, future
events or otherwise.




PART I






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

General

Pixar was formed in 1986 when Steve Jobs
purchased the computer division of Lucasfilm and incorporated it
as a separate company. We are a leading digital animation studio
with the creative, technical and production capabilities to
create 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
establish and maintain our position as a leading brand in
animated feature films. To date, we have created and produced
five full-length animated feature films: Toy Story, A
Bugs Life, Toy Story 2, Monsters, Inc., and
Finding Nemo, which were marketed and distributed by The
Walt Disney Company (along with its subsidiaries hereinafter
referred to as Disney). Our films have combined
worldwide box office receipts of more than $2.5 billion and
hold five positions in the top eleven grossing animated films of
all time. Toy Story was released in 1995 and generated
over $362 million in worldwide box office revenue. Our
second animated feature film, A Bugs Life, was
released in 1998 and generated over $363 million in
worldwide box office revenue. Our third film, Toy Story
2, was released in 1999 and generated over $485 million
in worldwide box office revenue. Our fourth film,
Monsters, Inc., was released in November 2001 and
generated over $524 million in worldwide box office
revenue, making it the third highest grossing animated feature
film of all time and the fourth highest grossing film released
in 2001. Our fifth animated feature film, Finding Nemo,
was released on May 30, 2003 and as of the end of fiscal
year 2003, had generated over $792 million of worldwide box
office receipts, making it the highest grossing film of 2003 and
the highest grossing animated feature film of all time. Through
March 7, 2004, Finding Nemohas generated over
$862 million in worldwide box office revenue, making it the
ninth highest grossing film ever made. In addition to its
record-breaking performance domestically, Finding Nemois
the first animated film to surpass $500 million in
international box office receipts. In Japan, the most
significant foreign territory released, Finding Nemoset
a new opening weekend record and has achieved over
$101 million in box office receipts through March 7,
2004. Finding Nemowas also the highest grossing film
during calendar 2003 in Argentina, Australia, Austria, Belgium,
China, France, Germany, Hong Kong, Ireland, Mexico, the
Netherlands, Poland, Switzerland, and the United Kingdom.

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

The term of the Co-Production Agreement continues
until delivery to Disney of our fifth Picture, Cars,
which is currently targeted for a 2005 holiday release. Since
the April 2003 delivery of Finding Nemo, we have had the
ability to negotiate and enter into another distribution
agreement with any other third party. We have produced five
highly successful films to date, and we believe that this
success combined with the strength of our financial resources,
position us to negotiate a distribution arrangement beyond the
Co-Production Agreement with more favorable economic terms and
full ownership of our films. In January 2004, we announced that
we had ended our discussions with Disney regarding a new
arrangement with them for films released beyond Cars. We
are currently exploring other alternatives. Although we look
forward to a more favorable agreement for films released after
Cars, 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  The
Co-Production Agreement imposes several risks and restrictions
on us, Risk Factors  We experience
intense competition with respect to our animated feature films,
animation products, and software and Risk
Factors  We face various distribution risks with
respect to our feature films.

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

Business Model and Products

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

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

We intend to continue to develop original
computer-animated feature films for the family entertainment
market. We are currently in various stages of production on
three other original animated feature films: The Incredibles,
Carsand our first feature film produced outside of our
existing Disney relationship (Project 2006). The
Incrediblesand Carswill be produced and distributed
under the Co-Production Agreement and

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will count as the remaining two films of the
original five Pictures to be produced under the Co-Production
Agreement. Brad Bird, who previously directed and wrote the
screenplay of the critically acclaimed animated feature The
Iron Giant, is currently directing The Incredibles,
which is targeted for release on November 5, 2004. John
Lasseter, the Director of Toy Story, A Bugs Life,
and Toy Story 2, and Executive Producer for
Monsters, Inc., Finding Nemoand The
Incredibles, is currently directing Cars, which is
targeted for a 2005 holiday release. Project 2006 was approved
for production in February 2003 and is currently targeted for
release in 2006. See Risk Factors  Our
scheduled successive releases of feature films will continue to
place a significant strain on our resources.


Home Videos.Home
video sales, including VHS and DVD formats, continue to be among
the largest contributors to lifetime revenues of our films.
Through January 3, 2004, our five titles have sold over
152 million home video units worldwide. With the increasing
popularity of the DVD format, more consumers are creating DVD
libraries, and we believe that DVD adoption will continue to
increase. The increasing popularity of the DVD format is one
factor that contributed to the tremendous success of Finding
Nemoand Monsters, Inc. domestic home video
releases. The Finding Nemohome video was released in the
U.S. on November 4, 2003 in both VHS and a 2-disc
Collectors Edition DVD. In 2003, Finding Nemobecame the
best selling home video of all time in the U.S. with sales
of 24.8 million units (19.2 million DVD units and
5.6 million VHS units). In addition, it sold 8 million
units on its first day of release to become the fastest-selling
video ever released, exceeding the previous record holder, our
own, Monsters, Inc., which sold 5 million units
on its first day. Monsters, Inc. home video was
released in the U.S. on September 17, 2002 in both VHS
and a 2-disc Special Edition DVD and was the best selling home
video of 2002 with sales of approximately 20 million units
in the U.S. (11.4 million DVD units and
8.6 million VHS units).

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. 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 continue to explore opportunities to maximize
worldwide home video sales of our library titles. For example,
the domestic home video for both Toy Storyand Toy
Story 2were placed on a sales moratorium on May 1,
2003. Although 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, 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, we expect to re-release
our moratorium titles in formats compatible with the new
technologies.

Television.The
television market for our feature films generally follows the
theatrical and home video release. Toy Storyaired on ABC
in 1997 to kick off ABCs Wonderful World of
Disney. It also aired on The Disney Channel for several
months following its television debut on ABC. In October 2000,
A Bugs Lifebecame the first major animated title
distributed by Disney to air on Pay-Per-View. Toy Story 2began its Pay-Per-View window in March 2001. We also broke
ground in 2001 in the television market with the licensing of
Toy Story, A Bugs Lifeand Toy Story 2in
the domestic network market and in the international broadcast
and premium television markets. Monsters, Inc. was
made available to Pay-Per-View during the latter half of 2002.
Monsters, Inc. made its pay television debut on
Starz!/ Encore in March 2003, the first time a Pixar title has
been licensed to a premium cable network. Finding Nemowas made available to Pay-Per-View beginning in January 2004
and will make its pay television debut on Starz!/ Encore in May
2004. Similar to Monsters, Inc., and Finding
Nemo, we expect The Incrediblesand Carsto be
sold to Pay-Per-View, pay television and network television.
Distribution of television rights for the animated feature films
developed and produced under the Co-Production Agreement are
governed by the Co-Production Agreement.

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Merchandise and Interactive
Games.We believe the characters,
story and music created in our animated feature films provide
significant revenue generation opportunities through various
consumer products such as toys and interactive games. For
example, Pixar and Disney have granted THQ Inc. interactive
rights to create interactive video and computer games for
Finding Nemo, The Incredibles, and Cars.
Distribution of consumer products and licensing of merchandising
based on the animated feature films developed and produced under
the Co-Production Agreement are governed by the Co-Production
Agreement.

Short Films.Producing short films allows us to develop creative talent and
computer animation technology. We have produced a number of
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, accompanied Finding Nemoin theaters. In 2003, we
created and produced our latest animated short film the Academy
Award®-nominated, Boundin.

RenderMan®. We
have been selling our RenderMan® software for nearly
sixteen years. RenderMan® has helped visual effects
studios create visual effects in over 100 films. Of the last 38
films nominated to receive an Academy Award® for visual
effects, 35 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 SKG. RenderMan® is also used in
television broadcasting. Customers also include government
agencies and universities around the world. See
 Technology  RenderMan®
and Managements Discussion and Analysis of Financial
Condition and Results of Operations.

Computer Animation Process

The development and production of animated
feature films is extremely complex and time consuming due to the
very large number of frames and intricate detail of each frame.
At 24 frames per second, a 104-minute animated feature film such
as Finding Nemorequires approximately 150,000 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 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

(Creative Development Process)

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

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Pre-Production

(Pre-Production Process)

The pre-production stage begins when the
screenplay is turned into story boards, which are panels filled
with thousands of sketches that represent the story to be
animated. The story boards are then transferred to film or video
so that they can be electronically edited into a photo play of
the film called a story reel, a process that enables editing of
the film before the production phase begins. Voices are then
selected, recorded and added to the story reel. Animated
dioramas, which are test sequences to prove that the major
technical issues in creating the film have been addressed, are
also created in pre-production. Throughout the creative
development and pre-production processes, plans are developed
for the style, colors and look of the film.

Production

(Production Process)

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

In the animation stage, the digitized models are
animated, or brought to life, in three dimensions by
changing the animation controls over time to create a motion
sequence. The next step in completing a scene requires attaching
to each object and model a description of its surface
characteristics. These shaders describe the pattern,
texture, finish and color for every object in the scene. Next,
lighting is added by placing digital lights into the scene. In
the rendering phase, the renderer takes the modeling, layout,
animation, shading and lighting data and, for each frame in the
sequence, computes a three-dimensional image of what the scene
looks like at that point in time from the point of view of the
camera. The final rendering of a single frame takes an average
of one to four hours, but a small percentage of more complex
frames can take much longer, between 20 and 40 hours each
or more. The final rendered digital image is then sent to our
PixarVision® laser recorders to be printed onto film. While
film is the primary means of distributing motion pictures to
theaters, digital projectors have achieved the brightness and
high resolution necessary to project movies on theater screens
without the use of film. As our films are produced digitally,
they are uniquely suited to this method of presentation. Toy
Story 2was shown digitally in 12 theaters worldwide, making
it the first completely computer-animated feature film to be
shown digitally. Monsters, Inc. and Finding Nemowere shown digitally in 37 and 103 theaters worldwide,
respectively. We expect that The Incredibleswill be
shown even more widely in digital cinemas as the deployment of
these systems is expected to grow substantially this year.

Post-Production

(Post-Production Process)

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. In 1986, the animated short
film Luxo Jr. earned an Academy Award® nomination
for Best Animated Short Film. In 1988, another of our short
films, Tin Toy, became the first computer-animated film
to win the Academy Award® for Best Animated Short Film. In
1998, our animated short film, Geris Game, also won
an Academy Award® for Best Animated Short Film. In 2000,
Toy Story 2won a Golden Globe Award for Best Picture,
Musical or Comedy. In 2002, Monsters, Inc. was
nominated for four Academy Awards® including Best Animated
Feature Film, Best Song, Best Original Score and Best Sound
Editing and received the Academy Award® for Best Song. Our
short film For the Birdswon an Academy Award® for
Best Animated Short Film in 2001 and our film, Mikes
New Car, was nominated for an Academy Award® in 2002
for Best Animated Short Film. Additionally, in 2003, our latest
short film, Boundin, was nominated for an Academy
Award® for Best Animated Short Film and won an Annie Award
for Outstanding Achievement in an Animated Short Subject. In
2003, Finding Nemowon an Academy Award® for Best
Animated Feature Film and was nominated for three other Academy
Awards® including Best Original Screenplay, Best Musical
Score and Best Sound Editing. In addition, for 2003, Pixar won
an Annie Award for Outstanding Achievement in an Animated
Theatrical Feature for Finding Nemoand certain Pixar
employees, voice actors and consultants, were awarded Annie
Awards in the categories of Character Animation, Character
Design in an Animated Feature Production, Directing in an
Animated Feature Production, Effects Animation, Music in an
Animated Feature Production, Production Design in an Animated
Feature Production, Voice Acting in an Animated Feature
Production and Writing in an Animated Feature Production.

John Lasseter is Executive Vice President,
Creative and the senior creative officer at Pixar.
Mr. Lasseter is an Academy Award®-winning director and
animator, the Director of Toy Story, A Bugs Life,
Toy Story 2 and Cars and Executive Producer
for Monsters, Inc., Finding Nemoand The
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. Other directors working with Mr. Lasseter
include Andrew Stanton, Brad Bird and Pete Docter. Finding
Nemo, released on May 30, 2003, was written and
directed by Academy Award®-winning Andrew Stanton, who
served as co-director and co-screenwriter of A Bugs
Lifeand was co-screenwriter of Toy Story, Toy Story
2, and Monsters, Inc. Brad Bird previously
directed and wrote the screenplay of the critically acclaimed
animated feature, The Iron Giant, and is currently
working on The Incredibles, which is targeted for a
November 5, 2004 release. Also working with
Mr. Lasseter is Pete Docter, the Director of
Monsters, Inc. and Academy Award®-nominee for
his role in creating the original story for Toy Story.
Mr. Docter and Mr. Stanton are working on our projects
beyond Project 2006.

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

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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 produce
the type of content that will appeal to a broad audience and to
develop compelling stories and characters. Traditionally, this
process has been extremely difficult. While we have enjoyed box
office success with all of our feature animated films, there can
be no assurance that similar levels of success will be achieved
by our subsequent films, including The Incredibles, Cars
and Project 2006. In addition, there can be no assurance that
voice talent and intellectual property used in the animated
feature film will be available for use in any sequel or other
products related to each feature film. See Risk
Factors  In order for our feature films and related
products to be successful, we must develop appealing creative
content.

Technology

Our technology is an important component of our
films, and our research and development department is a key
strategic asset. 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) MarionetteTM, an animation software system
for articulating, animating and lighting,
(2) RingmasterTM, a production management
software system for scheduling, coordinating and tracking of a
computer animation project and (3) RenderMan®,
a rendering software system for high quality photo-realistic
image synthesis that we use internally and license to third
parties. Each of these systems is critical to the production of
our animated feature films and other animation products.

MarionetteTM.
MarionetteTM is our software system for articulating,
animating and lighting for computer animation.
MarionetteTM 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, MarionetteTM has been designed and
optimized for character articulation and animation.
MarionetteTM is used internally at Pixar on Linux and
Unix workstations.

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

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

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

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Relationship with Disney

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

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

We have produced five 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 after Cars,
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. Prospective
investors in our Common Stock are encouraged to read the
Co-Production Agreement.

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

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passive royalties on such products. We will not
share in any theme park revenues generated as a result of the
Pictures.


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

Financing of Development and
Production.Pixar and Disney share
equally in 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 remaining two 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
Picture and Merchandise. Pursuant to the Co-Production
Agreement, we receive statements and payments of our share of
gross receipts monthly within 45 days after the end of each
calendar month, subject to certain exceptions, and we have the
right to audit Disneys books and records relating to the
Pictures and Merchandise.

Derivative Works.Subject to certain exceptions, Disney and Pixar have mutual
control of the decision to develop, produce or otherwise exploit
any derivative works (or to transfer or license any rights to
exploit any derivative works) during the term of the
Co-Production Agreement or thereafter. Derivative works include
theatrical sequels such as Toy Story 2, made-for-home
video sequels, television productions such as Buzz Lightyear
of Star Command, interactive media products such as
Monsters, Inc. and Finding Nemointeractive

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games, and other derivative works as more
specifically provided in the Co-Production Agreement
(collectively, Derivative Works). Except in certain
very limited circumstances, in the event of a disagreement over
whether to proceed with a Derivative Work, Disneys
decision governs. We are to be given the option to co-finance
and produce, or to participate on a passive financial basis with
respect to, a Derivative Work that is (1) a theatrical
motion picture, (2) a made-for-home video production,
(3) a television production, (4) location-based
entertainment that uses unique characters or other elements from
any of the Pictures or Toy Storyas its primary theme, or
(5) an interactive product such as CD-ROMs, DVDs, video
games and arcade games (collectively, Interactive
Products). Disney recently announced plans to produce a
theatrical sequel to the Toy Storyseries, Toy Story
3. While we have declined to co-finance and produce Toy
Story 3with Disney, should Disney release this sequel, 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
    or Toy Storyas 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 therefrom and any story
elements thereof in theme parks, location-based entertainment
for which Picture or Toy Storycharacters or elements are
not the primary theme and cruise ships.

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

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

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

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

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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. Under the Feature Film Agreement, Disney owns
all of the proprietary rights associated with the first Toy
Storyfilm. Notwithstanding the foregoing, Disney has the
exclusive distribution and exploitation rights with respect to
the Pictures, Derivative Works and ancillary rights relating
thereto. We own the copyright and all other intellectual
property rights in and to all computer programs and other
technology we develop or discover before, during or after the
term of the Co-Production Agreement.

Term and
Termination.The term of the
Co-Production Agreement continues until the delivery to Disney
of Cars, 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
on Toy Story including Toy Story 2are to be
governed by the Co-Production Agreement and not the original
Feature Film Agreement. The original Feature Film Agreement now
applies only to the rights and obligations of Disney and Pixar
relating to the financial participation in, and the production
and distribution of, the theatrical motion picture Toy Storyand the financial participation in certain Merchandise
related to Toy Story(unless gross receipts in any given
month exceed a certain amount, in which case they will be
subject to the Co-Production Agreement), subject to certain
exceptions, and otherwise has no further force or effect.
Additionally, under the Feature Film Agreement, Disney owns all
of the proprietary rights associated with the first Toy Storyfilm.

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

In 2003, 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 during summer

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2003 that competed with Finding Nemo,which was released domestically on May 30, 2003,
included the following:




| |   |                                                                     
| | - | --------------------------------------------------------------------
| |  | X2: X-Men Unitedby
    Fox,                                         
|
| |  | The Lizzie McGuire Movieby Disney,                                  
|
| |  | Daddy Day Careby
    Columbia,                                      
|
| |  | The Matrix Reloadedby Warner Bros.,                                 
|
| |  | Bruce Almightyby
    Universal,                                     
|
| |  | Rugrats Go Wildby
    Paramount,                                    
|
| |  | The Hulkby
    Universal,                                           
|
| |  | Sinbad: Legend of the Seven Seasby Dreamworks,                      
|
| |  | Terminator 3: Rise of the Machinesby Warner Bros.,                  
|
| |  | Pirates of the Caribbean: The Curse of the
    Black Pearlby Disney,
|
| |  | Spy Kids 3D: Game Overby Miramax, and                               
|
| |  | Freaky Fridayby
    Disney.                                         

Finding Nemowas
released on home video in the domestic marketplace on
November 4, 2003. It competed 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. Examples
of home video releases that competed with Finding Nemoincluded the following:



| |   |                                                                         
| | - | ------------------------------------------------------------------------
| |  | Daddy Day Careby
    Fox,                                               
|
| |  | The Matrix Reloadedby Warner Bros.,                                     
|
| |  | Charlies Angels: Full Throttleby Columbia,                             
|
| |  | The Hulkby
    Universal,                                               
|
| |  | Legally Blond 2: Red, White and Blueby MGM,                             
|
| |  | Terminator 3: Rise of the Machinesby Warner Bros.,                      
|
| |  | The Santa Clause 2by Disney,                                            
|
| |  | Bruce Almightyby
    Universal,                                         
|
| |  | X2: X-Men Unitedby
    Fox,                                             
|
| |  | Pirates of the Caribbean: The Curse of the
    Black Pearlby Disney, and
|
| |  | Freaky Fridayby
    Disney.                                             

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 computer graphics imagery (CGI) animated
films. In 2004, a significant increase is expected in the number
of CGI animated films to be released, a trend that could carry
through 2005 and beyond. Animated feature films currently in
production that are primarily CGI include Shrek 2, Shark
Tale, Madagascar, Chicken Little, The Polar Express, A Day With
Wilbur Robinson, Over the Hedge, Jimmy Neutron 2,
Robots, Ice Age 2and Valiant, among
others. Disney is also considering developing and producing
feature-length CGI-animated films based on classic fairy tales,
such as

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Rapunzel Unbraided .
In addition to box office and home video competition, other
family-oriented films may continue to compete with Finding
Nemo, as well as Monsters, Inc. 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 original computer-animated feature films.
Because Disney co-finances the films developed and produced
under the Co-Production Agreement, distributes the films under
the Walt Disney Pictures label and enjoys financial
benefits in the event that such films achieve significant box
office revenues, we believe that Disney desires such films to be
successful. Nonetheless, during its long history, Disney has
been a very successful producer and distributor of its own
animated feature films. While the Co-Production Agreement
imposes restrictions prohibiting Disney from releasing G-rated
films, whether live action or animated, within certain release
windows from our films, it is likely that other family-oriented
motion pictures distributed by Disney or its affiliates will
overlap in the market and compete with our animated feature
films. For example, Pirates of the Caribbean: The Curse of
the Black Pearl, which was released July 9, 2003,
Spy Kids 3D: Game Over, which was released on
July 25, 2003 and Freaky Friday, which was released
on August 6, 2003, competed directly with Finding Nemofor domestic theatrical market share this past summer. The
fourth quarter 2003 home video releases of Pirates of the
Caribbean: The Curse of the Black Pearland Freaky Fridaycompeted with Finding Nemoin the domestic home video
market. In 2004, we expect the theatrical release of J. M.
Barries Neverlandby Miramax on October 22, 2004
and National Treasureon November 24, 2004 to
compete with the worldwide theatrical release of The
Incredibles. 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 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 (owned by SGI), 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®. SGI has licensed several of our
patents that cover certain rendering techniques and may
therefore be better able to market products that compete with
our RenderMan® software. Under appropriate circumstances,
we might elect to license our rendering technology patents to
other companies, some of which may compete with us. In addition,
as PCs become more powerful, software suppliers may also
be able to introduce products for PCs that would be
competitive with RenderMan® in terms of price and
performance for professional users. 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.

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Proprietary Rights

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

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 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

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Microsoft may use the licensed technology in
rendering products, which compete with our RenderMan®
software, and could adversely impact sales of RenderMan®.


Employees

As of March 1, 2004, we had approximately
730 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, Ann Mather, 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, who is fundamental to our
relationship with Disney; however, this employment agreement
does not necessarily assure his services. See
 Employment Agreements. The loss of the
services of any of Messrs. Jobs, Lasseter,
Dr. Catmull, Ms. Mather, 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.




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 2004, 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, Monsters, Inc., and to a
lesser extent, other titles in our film library, (2) the
timing, accuracy and sufficiency of the information we receive
from Disney to determine revenues and associated gross profits,
(3) the timing and amount of non-film related revenues and
expenses, (4) the accuracy of our assumptions and judgments
used to estimate certain revenues and associated gross profits,
(5) the market price of our Common Stock and related
volatility, (6) potential delays in the release date of
The Incredibles, (7) the terms of our next
distribution arrangement and (8) external 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 foreign markets, Disneys
distribution fee, and other distribution costs including talent
participation and residuals. We remain dependent on the timing,
accuracy and sufficiency of the information provided by Disney.

For our business to be successful, our films must
achieve box office success. While we have been successful in the
release of our first five feature films, this level of success
is highly unusual in the motion picture industry, and our future
releases may not achieve similar results. In fiscal 2004, we
will be dependent

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primarily on the foreign home video sales from
Finding Nemo and the worldwide theatrical success of our
sixth feature film, The Incredibles. Our operating
results in 2004 will be dependent on the success of Finding
Nemo in the foreign home video market and the success of
The Incredibles in the worldwide theatrical and worldwide
merchandising markets. In addition, in 2004, we expect continued
contributions from Finding Nemothrough worldwide home
video sales and worldwide television licensing and to a lesser
extent, we expect additional contributions from
Monsters, Inc. through worldwide television
licensing and home video revenues. If The Incredibles,
Finding Nemoand Monsters, Inc. do not generate
sufficient revenues from these sources, our 2004 results would
be adversely affected. To date, we have recognized most of the
revenues we expect to recognize over the lifetime of the Toy
Storyfranchise and A Bugs Life.




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

Although we have experienced a successful track
record with the releases of our feature films, it is difficult
to predict the worldwide box office success of The
Incrediblesbefore its theatrical release on
November 5, 2004. Even if The Incrediblesexperiences a very successful worldwide theatrical run, it
is difficult to predict the related home video, television
licensing, merchandising and ancillary revenue streams. While
customer acceptance is initially measured by box office success,
customer acceptance within each follow-on product category, such
as home video, merchandise or television, depends on factors
unique to each type of product, such as pricing, competitive
products, and the time of year or state of the economy into
which a product is released, among many other factors. In
addition, we have found that the degree of customer acceptance
varies widely among foreign countries. While box office success
is often a good indicator of general customer acceptance, the
relative success of follow-on products is not always directly
correlated, and the degree of correlation is difficult to
predict.

It is also difficult to forecast the amount of
revenues from Finding Nemo, Monsters, Inc. 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 2domestic home
videos are currently subject to a sales moratorium, which began
on May 1, 2003. Although 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, 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. While we are targeting to release The
Incrediblesand Carstheatrically worldwide during
the holiday periods of 2004 and 2005, respectively, the specific
dates of the international releases will depend on
territory-specific factors, such as the local competitive
environment and school holidays. In some instances, the holiday
period may not be the optimal release window for the films.
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 sufficiency of the information we
receive from Disney to determine revenues and associated gross
profits. Although we obtain from Disney the most current
information available to recognize our share of revenue and to
determine our film gross profit, Disney may make subsequent
adjustments to the information that it has provided, which could
have a material impact on us in later periods. For instance,
towards the end of the life cycle for a revenue stream, Disney
may inform us, and has in the past informed us, of additional
distribution costs to those previously forecasted. Such
adjustments have 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, in the past, we have made
adjustments to our home video revenues for estimates on return
reserves that may differ from those reported by Disney. The
estimates on reserves may be

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adjusted periodically based on actual rates of
returns, estimated sell-through information and the related
inventory levels in the distribution channel, as well as other
business and industry information. For example, during the third
quarter of fiscal 2003, we received a settlement on
Monsters, Inc.merchandise revenue, which resulted
in an increase of $3.5 million to our revenues and $0.03 to
our diluted net income per share. During the second quarter of
fiscal 2003, we recognized an adjustment, which reduced our
revenues for Monsters, Inc.domestic home video
after we received updated information from Disney, which
reflected higher returns of domestic home video than had been
originally anticipated. The adjustment in the second quarter of
fiscal 2003 reduced our home video revenues by $4.4 million
and had a net impact of $0.04 to our diluted net income per
share. Furthermore, we may utilize margin normalization in
estimating associated costs, such as with merchandising or home
video, in accordance with the provisions of Statement of
Position 00-2  Accounting by Producers or
Distributors of Films (SOP 00-2). Due to these
factors, the amount and timing of our future revenues and
associated expenses from our films are difficult to forecast,
and it is possible, in any given quarter, that we will not
recognize sufficient film revenue to generate significant
earnings. See Managements Discussion and Analysis of
Financial Condition and Results of Operations in
Item 7 of this Form 10-K.


With respect to capitalized film production
costs, our policy is to amortize these costs over the expected
revenue streams as we recognize revenues from the associated
films. The amount of film costs that will be amortized each
quarter 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 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. Since a substantial
portion of our Overhead is related to the Pictures, and is
therefore reimbursed by Disney, and since we capitalize other
amounts in accordance with SOP 00-2, our reported operating
expenses for fiscal years 2001, 2002 and 2003 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 budget
for The Incrediblesand 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 the budgets of The Incrediblesand Cars equally with Disney. In addition, we have
approved for production our first Pixar-only financed film,
Project 2006. Due to production exigencies, which
are often difficult to predict, it is not uncommon for film
production spending to exceed film production

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budgets, and our current projects may not be
completed within the budgeted amounts. In addition, when
production of each film is completed, we may incur significant
carrying costs associated with transitioning personnel on
creative and development teams from one project to another.
These carrying costs, which are currently shared with Disney and
treated as film costs, increase overall production budgets and
could have a material adverse effect on our results of
operations and financial condition.




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

For 2003, software revenue represented 5% of our
total revenues, and we continue to maintain minimal emphasis on
the commercialization of software products relative to our core
business of producing films. Our fiscal 2004 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 non-film revenue and
    expenses.

Our fiscal 2004 earnings are expected to include
our forecast of other non-film related sources such as interest
income and our effective tax rate. Interest income is difficult
to predict and can fluctuate depending on our cash balance as
well as external factors beyond our control, such as economic
conditions and interest rates available to us during the year.
For example, in 2003, our average cash, cash equivalents and
investment balances increased significantly; however, net
interest income decreased due to declining interest rates during
fiscal 2003. Income tax expense may also fluctuate. Our income
tax rate for fiscal 2003 approximated statutory rates, and we
expect that our income tax rate for fiscal 2004 will also
approximate statutory rates; however, our effective tax rate may
fluctuate in future periods.

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 introduction of new feature films or products
    by our competitors,                                                                                                                             
|
| |  | the final terms of our next distribution
    arrangement, and                                                                                                                                         
|
| |  | external socioeconomic and political events that
    are beyond our control.                                                                                                                          

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



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

Operating expenses for fiscal 2003 increased in
comparison to fiscal 2002, and 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,                                                            
|
| |  | 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, 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 2004. 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 established parallel creative teams so
that we can develop more than one film at a time. These teams
are currently working primarily on The Incredibles, which
is currently scheduled for release on November 5, 2004, and
Cars, as well as future projects, including Project 2006,
our first Pixar-only financed film, as we move towards producing
one feature film per year. We have only produced and released
five feature films to date and have limited experience with
respect to producing animated feature films in parallel. Due to
the strain on our personnel from the effort required for the
release of an upcoming film and the time required for creative
development of future films, it is possible that we would be
unable to release a new film in successive years. In the past,
we have been required, and may continue to be required, to
expand our employee base, increase capital expenditures and
procure additional resources and facilities in order to
accomplish the scheduled releases of our animated feature films.
This growth and expansion has placed, and continues to place, a
significant strain on our resources. We cannot provide any
assurances that The Incredibles, Cars, Project 2006 or
any future animated film will be released as targeted or that
this strain on resources will not have a material adverse effect
on our business, financial condition or results of operations.
In addition, John Lasseters availability has been a key
ingredient in the successful completion of our prior films. As
we move towards achieving one film a year, there 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 his
next feature film, Cars. A lack of his availability may
adversely impact the success and timing of our future films.

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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 our motion
pictures and related products. Under the terms of the
Co-Production Agreement, Disney is required to market and
distribute our feature films 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 material adverse effect on our business, operating
results or financial condition.



| |                                                           
| | ----------------------------------------------------------
| | Disney currently 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.
We currently anticipate the delivery of the fifth Picture,
Cars, approximately mid-2005. However, now that we have
delivered Finding Nemo, we are 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. We
are currently exploring other alternatives.

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

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us under the Co-Production Agreement and,
therefore, may develop, produce or distribute other feature
length animated and computer animated theatrical motion pictures
itself or enter into similar agreements with third parties. See
Business  Competition, and Risk
Factors  We experience intense competition with
respect to our animated feature films, animation products, and
software.




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

Under the Co-Production Agreement, we will
continue to co-finance The Incrediblesand Carsand may co-finance other related products to be developed
and produced pursuant to the Co-Production Agreement. We
co-financed A Bugs Life, Toy Story 2,
Monsters, Inc.and Finding Nemo. We also have
approved for production and have begun financing Project 2006,
our first Pixar-only financed film. If our feature films and
related products do not generate proceeds sufficient to more
than offset our share of their production costs, our business,
operating results and financial condition will be materially
adversely affected.



| |                                                                                       
| | --------------------------------------------------------------------------------------
| | Disney retains the exclusive distribution
    and exploitation rights of each Picture.

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.

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,                                   

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| |   |                                                           
| | - | ----------------------------------------------------------
| |  | 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 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.

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

The success of each animated film developed and
produced by us will depend in large part upon our creative
teams ability to produce content that will appeal to a
broad audience and to develop compelling stories and characters
that will achieve broad market acceptance. Traditionally, this
process has been extremely difficult. While we have enjoyed
worldwide box office success with Toy Story, A Bugs
Life, Toy Story 2, Monsters, Inc., and Finding
Nemo, there can be no assurance that similar levels of
success will be achieved by our subsequent films, including
The Incredibles, Carsand Project 2006.

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

In 2004, competition is expected to continue to
intensify in the family-oriented, animated and live action
feature film market and may affect the ultimate box office
success of The Incredibles, which will be released on
November 5, 2004. Some of the family-oriented animated and
live action feature films that will be released during the 2004
holiday period that could compete with The Incrediblesinclude the following:



| |   |                                         
| | - | ----------------------------------------
| |  | Shark Taleby
    Dreamworks,            
|
| |  | J.M. Barries Neverlandby Miramax,      
|
| |  | Alexanderby Warner
    Brothers,        
|
| |  | The Polar Expressby
    Warner Brothers,
|
| |  | SpongeBob SquarePants Movieby Paramount,
|
| |  | National Treasureby
    Disney,         
|
| |  | Oceans Twelveby Warner Brothers,       

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| |   |                                                                      
| | - | ---------------------------------------------------------------------
| |  | The Brothers Grimmby Dimension Films,                                
|
| |  | Lemony Snickets: A Series of Unfortunate
    Eventsby Paramount, and
|
| |  | The Aviatorby
    Warner Brothers.                                   

We believe competition from animated feature
films and family-oriented feature films may continue to
intensify over the next several years, possibly affecting
Cars, which is currently targeted for a 2005 holiday
release, and Project 2006. Due to a potentially large number of
family-oriented films scheduled for release over the next few
years, it is possible that the market for these films, whether
animated or live action, will become further saturated before we
release The Incredibles, Carsand Project 2006. This
could result in the failure of such films to achieve the
commercial success required for us to profit from such films.

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

There appears to be increasing widespread
acceptance for CGI animated films. In 2004, a significant
increase is expected in the number of CGI animated films to be
released, a trend that could carry through 2005 and beyond.
Animated feature films currently in production that are
primarily CGI include Shrek 2, Shark Tale, Madagascar,
Chicken Little, The Polar Express, A Day With Wilbur Robinson,
Over the Hedge, Jimmy Neutron 2, Robots, Ice Age 2and Valiant, among others. Disney is also considering
developing and producing feature-length CGI-animated films based
on classic fairy tales, such as Rapunzel Unbraided. In
addition to box office and home video competition, other
family-oriented films may continue to compete with
Monsters, Inc.and Finding Nemo, as well as
our film library with respect to related television,
merchandise, and other future revenue sources.

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 SKG successfully produced Antzin
1998, Shrekin 2001 and is scheduled to release
Shrek 2and Shark Talein 2004. In addition,
Fox successfully produced, through its subsidiary Blue Sky,
Ice Age, which was released in March 2002. Other movie
studios may internally develop, license or sub-contract
three-dimensional animation capability, or enter into
co-production agreements with other studios capable of
developing and producing 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. For example,
SGIs subsidiary licenses Maya, which is its next
generation three-dimensional software for creating high quality
animation and visual effects. Maya incorporates many new
features and could be used to make a computer-animated feature
film.

The Co-Production Agreement provides that we will
develop and produce five original computer-animated feature
films. Because Disney co-finances the films developed and
produced under the Co-Production Agreement, distributes the
films under the Walt Disney Pictures label and
enjoys financial benefits in the event that such films achieve
significant box office revenues, we believe that Disney desires
such films to be successful. Nonetheless, during its long
history, Disney has been a very successful producer and
distributor of its own animated feature films. While the
Co-Production Agreement imposes restrictions prohibiting Disney
from releasing G-rated films, whether live action or animated,
within certain release windows from our films, it is likely that
other family-oriented motion pictures distributed by Disney or
its affiliates will overlap in the market and compete with our
animated feature films. For example, Pirates of the
Caribbean: The Curse of the Black Pearl, which was released
July 9, 2003, Spy Kids 3D: Game Over, which was
released on July 25, 2003 and Freaky Friday, which
was released on August 6, 2003, competed directly with
Finding Nemofor domestic theatrical market share this
past summer. The home video releases of Pirates of the
Caribbean: The Curse of the Black Pearl and Freaky Fridayhave also competed with Finding Nemoin the worldwide
home video market. In 2004, we expect the theatrical release of
J.M. Barries Neverlandby

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Miramax on October 22, 2004 and National
Treasureon November 24, 2004 to compete with the
worldwide theatrical release of The Incredibles. Beyond
Cars, Disney may begin to release their 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 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 (owned by SGI), 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®. SGI has licensed several of our
patents that cover certain rendering techniques and may
therefore be better able to market products that compete with
our RenderMan® software. Under appropriate circumstances,
we might elect to license our rendering technology patents to
other companies, some of which may compete with us. In addition,
as PCs become more powerful, software suppliers may also
be able to introduce products for PCs that would be
competitive with RenderMan® in terms of price and
performance for professional users. 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 materially adversely affect our business,
operating results or financial condition.

Our success depends on certain key
employees.

Our success depends to a significant extent on
the performance of a number of senior management personnel and
other key employees, especially our film directors, producers,
animators, creative personnel and technical directors. In
particular, we are dependent upon the services of Steve Jobs,
John Lasseter, Edwin E. Catmull, Ann Mather, 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, who has been
fundamental to Pixars relationship with Disney; however,
such employment agreement does not necessarily assure the
services of Mr. Lasseter. Moreover, although it is standard
in the motion picture industry to rely on employment agreements
as a method of retaining the services of key employees, we have
not required our employees, other than Mr. Lasseter, to
enter into employment agreements. The loss of the services of
any of Messrs. Jobs, Lasseter, Dr. Catmull,
Ms. Mather, Ms. McArthur, Ms. Scali or of other
key employees, especially our film directors, producers,
animators, creative personnel and technical directors, could
have a

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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.

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

Under the Feature Film Agreement and the
Co-Production Agreement, Disney is required to distribute the
animated feature films in a manner consistent with those of
Disneys premier animated films. Currently, distribution of
our films generally 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,
(4) non-theatrical exhibition, such as airlines, schools
and armed forces facilities and (5) marketing of other
rights of the picture, which may include licensing of
merchandise, such as toys, interactive games and soundtrack
recordings. Although the Co-Production Agreement provides us
with some protection, we cannot provide any assurances that our
feature films made under the Co-Production Agreement will be
distributed through all of these outlets. See
Business  Business Model and Products.

Although we have enjoyed a tremendously
successful track record with our first five 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 to finance 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 five animated feature
films, Toy Story, A Bugs Life, Toy Story 2,
Monsters, Inc., and Finding Nemo. 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

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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 two
unreleased Pictures, The Incrediblesand Carspursuant to the Co-Production Agreement. We are also solely
financing Project 2006. In the future, we may co-finance other
derivative works such as sequels and television productions. The
future development and production costs of The Incredibles,
Cars, Project 2006 and films beyond, and any future
expansion of our studio and headquarters in Emeryville,
California, may have an adverse impact on our cash and
investment balances. We expect to fully finance the production
costs of films for release after Cars. As of
January 3, 2004, we had approximately $521.9 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, and the development and
production costs of The Incrediblesand Cars, as
well as development and production costs for Project 2006. 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
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 owns approximately 53.6% of our outstanding Common
Stock as of March 1, 2004. 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.

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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
and 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.

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
materially adversely impact our business, financial condition or
results of operations. For example, many of the actors who
provide voice talent for the Pictures and Derivative Works are
members of the Screen Actors Guild (SAG) and/or the American
Federation of Television and Radio Artists (AFTRA) and the
current SAG and AFTRA contract expires June 30, 2005. If a
work stoppage did occur, 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.

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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-seven patents in force in the
United States and fifteen 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 against
claims of infringement or invalidity. Any such litigation could
result in substantial costs and diversion of resources and could
have a material adverse effect on our business, operating
results or financial condition. See Business 
Proprietary Rights.



| |                                                      
| | -----------------------------------------------------
| | Others may assert infringement claims
    against us.

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



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

We also rely on certain technology that we
license from third parties, including software that we integrate
and use with our internally developed software. We cannot
provide any assurances that these third-party

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technology licenses will continue to be available
to us on commercially reasonable terms. The loss of, or
inability to maintain any of these technology licenses could
result in delays in feature film releases or product releases
until equivalent technology could be identified, licensed and
integrated. Any such delays in feature film releases or product
releases could materially adversely affect our business,
operating results and financial condition. See
Business  Proprietary Rights.


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

The market price of our Common Stock is highly
volatile and is subject to wide fluctuations in response to a
wide variety of factors, including the publication of box office
results for our feature films and those of our competitors,
fluctuations in our quarterly or annual results of operations,
changes in financial estimates by securities analysts,
announcements made by us, Disney, or our competitors, budget
increases, delays in or cancellation of feature film or other
product release dates, speculation about the negotiation of
terms or conditions of our next distribution arrangement, or
socioeconomic, political or other factors. For example, during
fiscal 2003, our Common Stock closed as low as $50.19 and as
high as $74.20 per share, and during fiscal 2002, our
Common Stock closed as low as $30.67 and as high as
$61.42 per share. Moreover, in recent years, the stock
market has experienced extreme price and volume fluctuations,
some of which have been unrelated or disproportionate to the
operating performances of the companies affected. These broad
market and industry fluctuations may adversely affect the market
price of our Common Stock. In the past, following periods of
volatility in the market price of a companys securities,
securities class action litigation has often been instituted
against such a company. If brought against Pixar, such
litigation could result in substantial costs and a diversion of
managements attention and resources, which could have a
material adverse effect on our business, operating results or
financial condition. See Market for Registrants
Common Stock and Related Shareholder Matters.

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

Our reported financial results could be
affected if significant changes in current accounting principle
are adopted.

Recent actions and public comments from the SEC
have focused on the integrity of financial reporting generally.
Similarly, Congress has considered a variety of bills that could
affect certain accounting principles. The FASB and other
regulatory accounting agencies have recently introduced several
new or proposed accounting standards, such as accounting for
stock options, some of which represent a significant change from
current practices. Changes in our accounting for stock options
could materially increase our reported expenses.

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 equated to 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; however, our
primary facility in Emeryville, California was designed to
withstand a 7.0 Richter scale magnitude earthquake with
minimal structural damage to the building.






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

Our primary studio and headquarters facility,
which we own, is located at 1200 Park Avenue, Emeryville,
California and consists of approximately 215,000 square
feet of office space on approximately 16 acres. In

30



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##### Table of Contents



addition we lease approximately
39,000 square feet of office and warehouse space, which are
located primarily within close proximity to our Emeryville
facility. We believe that our properties and facilities are
suitable and adequate for current operations. In March 2000, we
purchased an existing building on 1.76 acres in Emeryville,
adjacent to our primary facility, for $7.7 million, which
will allow for future expansion or development. We are currently
occupying space in the building and we are renting portions of
the building to a few commercial tenants. In November 2002, we
purchased approximately 2.24 acres of land adjacent to our
primary facility for $9.4 million, also for future
expansion. Our primary studio and headquarters facility together
with the additional land purchases noted above represents our
Emeryville Campus. Through January 3, 2004, we have
incurred total capital expenditures for our Emeryville Campus of
$116.7 million. We used existing cash resources to fund
these facility-related costs. See Managements
Discussion and Analysis of Financial Condition and Results of
Operations  Liquidity and Capital Resources in
Item 7 of this Form 10-K.







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

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






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

None.




EXECUTIVE OFFICERS OF THE COMPANY

The executive officers of Pixar and their ages as
of March 1, 2004 are as follows:

|                 |  |     |    |          |  |                                                                    
|---------------- |  | --- | -- | -------- |  | -------------------------------------------------------------------
|Name             |  | Age |    | Position
|                 |  |     |    |         
|Steve Jobs       |  |     | 49 |          |  | Chairman and Chief Executive Officer                               
|Edwin E. Catmull |  |     | 58 |          |  | President                                                          
|Ann Mather       |  |     | 43 |          |  | Executive Vice President, Chief Financial Officer
    and Secretary
|John Lasseter    |  |     | 47 |          |  | Executive Vice President, Creative                                 
|Sarah McArthur   |  |     | 46 |          |  | Executive Vice President, Production                               
|Lois J. Scali    |  |     | 55 |          |  | 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. Catmullis
a co-founder of Pixar and in January 2001 was promoted to
President. He has served as a member of the executive team and
as Chief Technical Officer of Pixar since the incorporation of
the company. In 1979, Dr. Catmull brought his
high-technology expertise to the film industry as vice president
of the Computer Division of Lucasfilm, Ltd. During that time,
Dr. Catmull managed four development efforts in the areas
of computer graphics, video editing, video games and digital
audio. He was also a key developer of RenderMan®, the
program that creates realistic digital effects for computer
graphics and animation. Dr. Catmull has been honored with
three Scientific and Technical Engineering Awards from The
Academy of

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Motion Picture Arts and Sciences for his work,
including an Oscar for significant advancements to the
field of motion picture rendering as exemplified in Pixars
RenderMan®. He also won the Coons Award, which is the
highest achievement in computer graphics, for his lifetime
contributions. Dr. Catmull is a member of the Academy of
Motion Picture Arts and Sciences and the Science and Technical
Awards Committee. Dr. Catmull earned his B.S. degrees in
computer science and physics and his Ph.D. in computer science
from the University of Utah.


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

Mr. Lasseteris
a two-time Academy Award®-winning director and animator. In
addition to serving as head of all of Pixar Animation
Studios films and projects as Executive Vice President,
Creative, he directed Toy Story, (the first
feature-length computer animated film), A Bugs Lifeand Toy Story 2. He is the Executive Producer of
Monsters, Inc., Finding Nemoand The
Incrediblesand in 2001 he was given an honorary doctorate
degree from the American Film Institute and in 2003, he was
awarded the Art Directors Guilds coveted Honorary
Contribution to Cinematic Imagery Award. Mr. Lasseter is
currently in development on 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
films and television commercials while at Pixar: Luxo Jr.(1986 Academy Award® nominee), Reds Dream(1987), Tin Toy(1988 Academy Award® Winner) and
Knick Knack(1989), which was produced as a
3D stereoscopic film. Tin Toywas the first computer
animated film to win an Oscar®, when it won the 1988
Academy Award® for Best Animated Short Film. In February
2004, Mr. Lasseter was given the Art Directors Guilds
coveted honorary Contribution to Cinematic Imagery Award.
Mr. Lasseter also designed and animated the Stained Glass
Knight character in the 1985 Steven Spielberg production,
Young Sherlock Holmes. Mr. Lasseter joined
Lucasfilms Computer Division in 1984, and was a founding
member of Pixar when it was formed in February 1986. Prior to
this, he spent five years as an animator at The Walt Disney
Company, where he worked on such films as The Fox and the
Houndand Mickeys Christmas Carol. He earned
his B.F.A. in film from the California Institute of the Arts
where he produced two animated films, each winners of the
student Academy Award® for Animation: Lady and the Lampin 1979 and Nightmarein 1980. His very first award
came at the age of five when he won $15.00 from the Model
Grocery Market in Whittier, California for a crayon drawing of
the Headless Horseman.

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

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




PART II






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

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

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

|     |                |      |   |       |  |  |   |       | 
|---- | -------------- | ---- | - | ----- |  |  | - | ----- | 
|     |                | 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 | 

As of March 1, 2004, we had approximately
5,577 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, 2004 was $66.81 per share. We have never paid
any cash dividends on our Common Stock. We intend to retain any
earnings for use in our business and do not anticipate paying
any cash dividends on our Common Stock in the foreseeable future.






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

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

|                             |  |                                       |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |           | 
|---------------------------- |  | ------------------------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- |  |  | - | --------- | 
|                             |  |                                      
|                             |  | Fiscal Year                          
|                             |  |                                      
|                             |  | 1999                                  |         | 2000 |  | 2001 |         | 2002 |  | 2003
|                             |  |                                       |         |      |  |      |         |      |  |     
|                             |  |                                      
|                             |  | (In thousands, except per share data)
|Revenue                      |  | $                                     | 121,037 |      |  | $    | 172,267 |      |  | $    | 70,223  |  |  | $ | 201,724 |  |  | $ | 262,498   | 
|Net income                   |  |                                       | 49,224  |      |  |      | 78,433  |      |  |      | 36,217  |  |  |   | 89,950  |  |  |   | 124,768   | 
|Basic net income per share   |  |                                       | 1.07    |      |  |      | 1.66    |      |  |      | 0.75    |  |  |   | 1.78    |  |  |   | 2.30      | 
|Diluted net income per share |  |                                       | 0.99    |      |  |      | 1.57    |      |  |      | 0.71    |  |  |   | 1.68    |  |  |   | 2.17      | 
|Total assets                 |  |                                       | 374,905 |      |  |      | 479,603 |      |  |      | 523,294 |  |  |   | 732,066 |  |  |   | 1,000,953 | 
|Total shareholders equity   |  |                                       | 344,707 |      |  |      | 435,720 |      |  |      | 505,686 |  |  |   | 713,062 |  |  |   | 940,510   | 

33



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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|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 consolidated financial statements and notes
thereto included in Item 8 of this Form 10-K.

Overview

Pixar was formed in 1986 when Steve Jobs
purchased the computer division of Lucasfilm and incorporated it
as a separate company. In 1991, we entered into a feature film
agreement (the Feature Film Agreement) with Walt
Disney Pictures, a wholly owned subsidiary of the Walt Disney
Company (together with its subsidiaries and affiliates
collectively referred to herein as Disney), for the
development and production of up to three animated feature films
to be marketed and distributed by Disney. Our share of revenues
and expenses from Toy 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 and
the like. The Co-Production Agreement generally provides that we
will be responsible for the production of each Picture, while
Disney will be responsible for the marketing, promotion,
publicity, advertising and distribution of each Picture.

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. 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. We are
currently in various stages of production on the remaining two
films, The Incrediblesand Cars. These films will
be produced and distributed under the Co-Production Agreement
and will count as the fourth and fifth films of the Pictures to
be produced under the Co-Production Agreement. The
Incrediblesis scheduled to be released November 5,
2004 and Carsis currently scheduled for a 2005 holiday
release.

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

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##### Table of Contents



These reimbursed costs through the end of fiscal
2003 are set forth in Note 4 of Notes to Financial
Statements.


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

Critical Accounting Policies



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

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



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

Under the Co-Production Agreement, we share
equally with Disney in the profits of 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. The
amount of revenue recognized in any given quarter or quarters
from all of our films depends on the timing, accuracy and
sufficiency of the information we receive from Disney to
determine revenues and associated gross profits. Although Disney
provides us with the most current information available to
enable us to recognize our share of revenue and determine our
film gross profit, we may make adjustments to that information
based on our estimates and judgments. For example, our
theatrical revenues may be adjusted for our estimated reserves
on potential uncollectible amounts to be received from
theatrical exhibitors. We also make adjustments to our home
video revenues for estimates on return reserves that may differ
from those reported by Disney. The estimates on reserves may be
adjusted periodically based on actual rates of returns,
inventory levels in the distribution channel, as well as other
business and industry information. In addition, we utilize
margin normalization, such as with merchandising or home video,
in accordance with the provisions of SOP 00-2. This may
result in the utilization of budgeted or forecasted information
rather than actual costs incurred if it is deemed to be a more
accurate reflection of our participation. Similar to return
reserves, these expense estimates are reviewed and may be
adjusted periodically to ensure the most accurate depiction of
our participation is reflected. Such adjustments were made to
home video reserve and home video and merchandise expense
estimates during fiscal 2002 and 2003. Additionally, during the
fourth quarter of fiscal 2003, our fiscal reporting period
differed from that of Disney. Consequently, it was necessary to
use a combination of information from Disney and our own
estimates to determine our revenues for the period between
Disneys fiscal period end and ours.

Disney may also make subsequent adjustments to
the information that it has provided, and these adjustments
could have a material impact on our operating results in later
periods. As updated information becomes available from Disney on
a more timely basis, it may result in a change of estimation for
revenue recognition. For example, we received updated
information from Disney in the first quarter of fiscal 2003,
which decreased previously recorded home video expenses by
$3.2 million for all of our film titles on a cumulative
basis. This resulted in an increase of $0.03 to our diluted net
income per share for our first quarter

35



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##### Table of Contents



of fiscal 2003. We also received a settlement on
Monsters, Inc.merchandise revenue for the third
quarter ended September 27, 2003, which resulted in an
increase of $3.5 million to our revenues and $0.03 to our
diluted net income per share. During fiscal 2002, one-time
adjustments to A Bugs Lifeand Toy Story 2home video reserves and margins and merchandising revenues
had a positive net impact of $0.19 to our diluted net income per
share. During the second quarter of fiscal 2003, we recognized
an adjustment which 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
and had a net impact of $0.04 to our diluted net income per
share in the second quarter of fiscal 2003. Additionally, we
have the right to audit Disneys books and records related
to the Pictures according to the terms of the Co-Production
Agreement, which could result in adjustments that may be
material to the financial statements in any given quarter or
quarters. Any revenue received in advance from Disney is
deferred and recorded as revenue when earned.


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



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

We capitalize our share of direct film production
costs in accordance with SOP 00-2. Film production costs
include costs to develop and produce computer animated motion
pictures, which primarily consists of salaries, equipment and
overhead. With regard to the Pictures, we capitalize film
production costs in excess of reimbursable amounts from Disney.
With respect to Project 2006 and beyond, 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.
In addition to the films produced, we are also working on
concept development for several new projects.

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

Results of Operations

Our 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 90%, 96% and 95% of our total revenue in
fiscal 2001, 2002 and 2003, 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 3,
2004 were driven primarily by the worldwide theatrical release,
domestic home video release, merchandise and ancillary royalties
from Finding Nemo. By the end of fiscal 2003, Finding
Nemo had generated approximately $792 million in
worldwide box office receipts, comprised of

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$340 million domestically and
$452 million internationally. We also recognized domestic
home video sales of approximately 24.8 million home video
units, comprised of 5.6 million VHS units and
19.2 million DVD units. Continuing revenues from
Monsters, Inc. and our library titles also
contributed to fiscal 2003 results.




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

Total revenue, which consists of film revenue and
software revenue, amounted to $70.2 million in 2001,
$201.7 million in 2002 and $262.5 million in 2003.

Film revenue was $63.4 million in 2001,
$193.6 million in 2002 and $250.4 million in 2003.
Film revenues for 2001 consisted of revenues from our library
titles (Toy Story, A Bugs Life and Toy
Story 2) of $50.5 million and $12.1 million
from Monsters, Inc.domestic theatrical release.
Revenues from our library titles resulted from television
licensing, home video sales and merchandise sales, and ancillary
royalties, including revenues resulting from a one-time
transaction associated with interactive games. Film revenues for
2002 consisted of $141.5 million from
Monsters, Inc.and $50.1 million in revenues
from our library titles. Revenues for Monsters, Inc.were derived from worldwide home video sales, foreign box
office receipts, merchandise sales and ancillary royalties.
Revenues from our library titles resulted primarily from
international television licensing, worldwide home video sales,
merchandising sales and ancillary royalties. Included within
these amounts were revenues of $20.1 million as a result of
one-time adjustments to film revenue from A Bugs Lifeand Toy Story 2home video reserves and margins
and merchandising revenues, which had a net impact of $0.19 to
our diluted net income per share. The higher revenues in 2002
relative to 2001 were primarily due to the tremendous success of
Monsters, Inc.in both foreign theatrical and
worldwide home video markets.

Film revenues for 2003 consisted of
$189.2 million from Finding 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. During fiscal 2003, we
received updated information from Disney, which decreased
previously recorded home video expenses by $3.2 million for
all of our film titles on a cumulative basis. We also received a
settlement on Monsters, Inc.merchandise revenue,
which resulted in an increase of $3.5 million to our
revenues. Library titles contributed $38.0 million for
fiscal 2003, resulting from merchandising, worldwide home video
sales and foreign television licensing. The higher revenues in
2003 relative to 2002 were primarily due to the tremendous
success of Finding Nemoin both worldwide theatrical and
domestic home video markets. In May 2003, two of our library
titles, Toy Storyand Toy Story 2, were
placed on a domestic home video sales moratorium.

Software revenue includes software license
revenue, principally from RenderMan®, and royalty revenue
from licensing Physical Effects, Inc. (PEI)
technology to a third party. Software revenue was
$6.9 million in 2001, $8.1 million in 2002 and
$12.1 million in 2003. 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 2003, 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 2001, 2002 and 2003, Disney accounted
for 91%, 96% and 94%, respectively, of our total revenue.



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

Cost of film revenue was $11.8 million in
2001, $41.0 million in 2002, and $38.0 million in
2003, and represents primarily amortization of capitalized film
costs. Cost of film revenue as a percentage of film revenue for
fiscal 2001, 2002 and 2003 was 19%, 21% and 15%, respectively.
Our cost of film revenue as a percentage of film revenue may
vary for any given period due to changes in the mix of film
revenue as the gross profit varies by film, as well as for
revisions to estimates on revenue to be received under the
individual-film-forecast-

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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 Storyrevenue
has no related cost, as film costs were fully amortized by
December 31, 1997. For fiscal 2001, the cost of revenue
percentage was the result of amortization of capitalized film
costs for our library titles. For fiscal 2002, the cost of
revenue percentage was driven by Monsters, Inc.,
which had a higher amortization percentage than our library
titles in the prior year. For fiscal 2003, the cost of revenue
percentage was driven by Finding Nemo. The decrease in
cost of film revenue as a percentage of total film revenue from
2002 to 2003 can be attributable to a higher proportion of
revenues resulting from Finding Nemo, which had a lower
amortization percentage than Monsters, Inc.in the
prior year, since we expect to receive more revenues from
Finding Nemoover its lifetime. Additionally, the cost
amortization percentages from our library titles have declined
in the current year relative to the prior year.


Cost of software revenue consists of the direct
cost and manufacturing overhead required to reproduce and to
package our software products, as well as amortization of
purchased technology. Cost of software revenue includes no
amortization of internal software development expenses since no
such expenses have been capitalized. Cost of software revenue as
a percentage of the related revenue decreased from 8% in 2001 to
7% in 2002 and then decreased to less than 1% in 2003. Cost of
software revenue in 2001 and 2002 was due primarily to the
amortization of purchased technology associated with the 1998
acquisition of PEI. Approximately $2.7 million of the PEI
purchase price was assigned to purchased technology, which PEI
licensed to a third party. Amortization of this purchased
technology was completed in 2002.



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

Total operating expenses increased from
$16.4 million in 2001 to $19.5 million in 2002 and to
$30.5 million in 2003. Although we expected our operating
expenses to increase as a result of the growth of the studio as
we ramp up to meet the needs of multiple films in production,
during fiscal 2003, our operating expenses also included certain
unanticipated expenses. For example, we expensed approximately
$3.2 million of costs related to a one-time incentive
compensation to our employees in recognition of their
contribution to the box office success of Finding Nemo,
and 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-lighted for production within the next three
years, therefore, under SOP 00-2, we expensed these amounts.

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 production of our two
current film projects remaining under the Co-Production
Agreement and 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 Project 2006
for production and because it is our first feature film to be
produced outside of the existing relationship with Disney,
certain costs that were previously reimbursed by Disney will now
be expensed as incurred.

Research and
Development.Research and development
expenses consist primarily of salaries and support for personnel
conducting research and development for the RenderMan®
product, for our proprietary MarionetteTM and
RingmasterTM animation and production management
software and for creative development for future films. Research
and development expenses were $6.3 million in 2001,
$8.5 million in 2002 and $15.3 million in 2003. The
increase in research and development costs for 2002 over 2001
was primarily attributable to an increase in employee related
expenses associated with additional staffing for research and
development and an increase in short film project costs and
creative development costs. Research and development in 2003
increased from 2002 due to the $1.9 million write off of
development projects and the higher employee related expenses
associated with the one-time incentive compensation referred to
above, as

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well as additional staffing. We expect research
and development expenses to continue to increase in future
periods as we increase our investments in our proprietary
technology. To date, all research and development costs not
reimbursed by Disney have been expensed as incurred.


Sales and Marketing.Sales and marketing expenses consist primarily of salaries and
related overhead, as well as public relations, advertising,
technical support and trade show costs required to support our
software segment. Sales and marketing expenses were
$2.0 million in 2001, $1.3 million in 2002 and
$2.4 million in 2003. The decrease in expenses during 2002
as compared to 2001 can be attributed to greater reimbursements
received from Disney for marketing costs related to
Monsters, Inc.and our other Pictures. The increase
in expense in 2003 as compared to 2002 is primarily due to
higher employee related costs resulting from the one-time
incentive compensation and increased public relations and
corporate marketing costs. 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 $8.1 million in 2001 to $9.7 million in
2002 to $12.8 million in 2003. The increase in general and
administrative expenses from 2001 to 2002 was primarily due to
increases in employee related costs, professional fees and
certain one-time settlements paid in the fourth quarter of 2002.
The increase from 2002 to 2003 was primarily due to the one-time
incentive compensation referred to above and an increase in
professional fees. General and administrative expenses are
expected to continue to increase in future periods.



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

Other income, net was $14.7 million in 2001,
$10.3 million in 2002 and $10.5 million in 2003. Other
income consists primarily of interest income from investments.
The decrease from 2001 to 2002 is primarily due to a one-time,
non-recurring settlement of approximately $2.0 million,
unrelated to our core business in 2001, as well as a decline in
interest rates when compared to the prior year. 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.



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

Income tax expense of $20.0 million,
$61.1 million and $79.7 million reflects our effective
tax rates of 35.6%, 40.4% and 39.0% for 2001, 2002 and 2003,
respectively. Our income tax rate was lower in 2001 due to the
utilization of research and experimentation credits for federal
and state tax purposes, as well as the utilization of certain
other state credits and exemptions. In 2002 and 2003, our income
tax rate approximated U.S. Federal and California State
statutory rates. Our effective tax rate may fluctuate in future
periods. See Note 6 of Notes to Financial Statements.

Capitalized Film Production Costs

We had $107.7 million in capitalized film
production costs as of January 3, 2004, consisting of costs
relating to Toy Story 2, A Bugs Life,
Monsters, Inc., Finding Nemo, The Incrediblesand
Cars, all of which are being co-financed by Disney under
the Co-Production Agreement. Capitalized film production costs
also include costs related to Project 2006, our first Pixar-only
financed film. In the second quarter of fiscal 2003, 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-lighted for production within three years following their
initial cost capitalization. Therefore, under SOP 00-2, these
amounts were expensed in the second quarter of fiscal 2003. All
Toy Storycapitalized film costs were fully amortized as
of December 31, 1997.

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Liquidity and Capital Resources

Cash, cash equivalents and investments increased
from $339.1 million at December 28, 2002 to
$521.9 million at January 3, 2004. 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 and tax payments.
In 2001, cash provided by operating activities was attributable
to net income of $36.2 million resulting primarily from
film revenue related to our film library and
Monsters, Inc., net cash collections on Disney
receivables of $60.3 million, the non-cash impact of
deferred income taxes and tax benefit from stock option
exercises of $12.3 million, and the non-cash impact of
depreciation and amortization expense and amortization of
capitalized film production costs, totaling $18.8 million.
Cash provided by operating activities for 2001 was partially
offset by capitalized film production costs of
$40.8 million, decreases in net accounts payable and
accrued liabilities of $5.2 million, income taxes payable
of $6.8 million and unearned revenue of $13.3 million.
In 2002, cash provided by operating activities was attributable
to net income of $90.0 million resulting primarily from
film revenue related to our film library and
Monsters, Inc., the non-cash impact of the tax
benefit from stock option exercises of $38.6 million, the
non-cash impact of depreciation and amortization expense and
amortization of capitalized film production costs, totaling
$47.1 million and an increase in unearned revenue of
$5.2 million. Cash used in operating activities for 2002
included increases in our receivable from Disney of
$115.9 million, capitalized film production costs of
$43.9 million, decreases in accounts payable of
$2.5 million, income taxes payable of $1.6 million and
deferred income taxes of $11.2 million. In 2003, cash
provided by operating activities was attributable to net income
of $124.8 million resulting primarily from film revenue
related to Finding Nemo, Monsters, Inc., and our
film library, the non-cash impact of 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,
decrease in other receivables of $1.9 million, and
increases in income taxes payable of $36.4 million. Cash
used in operating activities for 2003 included increases in our
receivable from Disney of $67.8 million, capitalized film
production costs of $53.2 million, and deferred income
taxes of $17.6 million. In 2001, 2002 and 2003, 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 2001, 2002 and
2003, cash provided by financing activities primarily consisted
of proceeds from exercised stock options.

As of January 3, 2004, our principal source
of liquidity was approximately $521.9 million in cash, cash
equivalents and investments. Our future capital commitments
primarily consist of obligations to fund production costs of
films and derivative products under the Co-Production Agreement
and beyond. Pursuant to the Co-Production Agreement, we will
co-finance the next two original animated feature films we have
in production, The Incrediblesand Cars. In the
future, we may co-finance other derivative works such as
theatrical sequels, direct to home video sequels, interactive
products and television productions. Additionally, we have
already approved for production our first film beyond the
Co-Production Agreement and will finance those costs entirely.
We also have obligations to pay portions of any revenue derived
from each feature film produced under the Co-Production
Agreement to our entertainment law firm in consideration for
services rendered.

Film Production
Costs.In fiscal year 2004, we expect
to spend approximately $70 million to $75 million, net
of Disneys film cost reimbursements, on direct film costs
and other costs to fund our ongoing film projects under the
Co-Production Agreement and beyond, which will directly impact
working capital.

Facility Related Capital
Expenditures.In fiscal year 2004, we
expect to spend approximately $13 million to
$15 million related to capital expenditures for our
Emeryville headquarters and studio and other facility related
projects.

We believe that our current available funds and
forecasted cash from operations in fiscal 2004 will be
sufficient to satisfy our currently anticipated cash needs for
working capital and capital expenditures, including the
production costs of The Incrediblesand Cars, as
well as the production and development costs associated with
films not covered under the Co-Production Agreement. There can
be no assurance that current and forecasted cash from operations
will be sufficient to fund operations. To date, we have chosen
to use our

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existing cash resources to fund both the
construction on our Emeryville facility and film production
costs. We may continue to use our cash resources for such
expenditures, or may choose to finance such capital expenditures
through issuance of additional equity or debt securities, by
obtaining a credit facility or by some other financing mechanism.


Contractual
Obligations.At January 3, 2004,
we had contractual commitments to make payments under operating
leases. Payments due under these long-term obligations are as
follows (in thousands):

|                            |       |       |       |                        |  |       |     |       |  |           |     |     |  |   |    |    |  |   |   |   | 
|--------------------------- | ----- | ----- | ----- | ---------------------- |  | ----- | --- | ----- |  | --------- | --- | --- |  | - | -- | -- |  | - | - | - | 
|                            |       |       |       |                       
|                            |       |       |       | Payments Due by Period
|                            |       |       |       |                       
|                            |       |       |       | Less Than              |  | 1-3   |     | 3-5   |  | More Than
|                            |       | Total |       | 1 Year                 |  | Years |     | Years |  | 5 Years  
|                            |       |       |       |                        |  |       |     |       |  |          
|Operating lease obligations |       | $     | 1,421 |                        |  | $     | 882 |       |  | $         | 481 |     |  | $ | 58 |    |  | $ |  |  
|                            |       |       |       |                        |  |       |     |       |  |           |     |     |  |   |    |    |  |   |   |  
|                            | Total |       | $     | 1,421                  |  |       | $   | 882   |  |           | $   | 481 |  |   | $  | 58 |  |   | $ |  | 
|                            |       |       |       |                        |  |       |     |       |  |           |     |     |  |   |    |    |  |   |   |  

Off-Balance Sheet Arrangements.

As of January 3, 2004, we did not have any
off-balance sheet arrangements.

Recent Accounting Pronouncements

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

In June 2002, the FASB issued
SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities (SFAS 146).
SFAS 146 requires recording costs associated with exit or
disposal activities at their fair values when a liability has
been incurred. Under previous guidance, certain exit costs were
accrued upon managements commitment to an exit plan, which
is generally before an actual liability has been incurred. Pixar
adopted SFAS 146 effective with the beginning of fiscal
2003. The adoption of SFAS 146 has not had an impact on our
financial position or results of operations.

In January 2003, the FASB issued FASB
Interpretation No. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an Interpretation
of FASB Statements No. 5, 57 and 107 and a Recision of
FASB Interpretation No. 34 (FIN 45). FIN 45
clarifies the requirements for a guarantors accounting for
and disclosure of certain guarantees issued and outstanding in
interim and annual financial statements. FIN 45 also
clarifies that a guarantor is required to recognize, at
inception of a guarantee, the liability for the fair value of
the obligation undertaken. The disclosure requirements are
effective for financial statements of interim and annual periods
after December 31, 2002. The initial recognition and
initial measurement provisions of FIN 45 are applicable to
guarantees issued or modified after December 31, 2002.
Pixar adopted the provisions of FIN 45 effective with the
beginning of fiscal 2003. The adoption of FIN 45 has not
had a material impact on our financial statements or results of
operations.

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

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activities. Issue No. 00-21 is effective for
all revenue arrangements entered into in fiscal periods
beginning after June 15, 2003, with early adoption
permitted. Pixar adopted Issue No. 00-21 effective the
beginning of fiscal 2003. The adoption of Issue No. 00-21
has not had a material impact on our financial statements or
results of operations.


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






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

Investment
Portfolio.We invest in a variety of
investment grade, 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. The table
below provides information regarding our investment portfolio at
January 3, 2004. The table presents principal cash flows
and related weighted-average fixed interest rates presented by
expected maturity date (dollars in thousands):

|                               |  |           |         |        |  |       |         |   |  |   |         |  
|------------------------------ |  | --------- | ------- | ------ |  | ----- | ------- | - |  | - | ------- | -
|                               |  | Less than |         | Over   |  |      
|                               |  | 1 Year    |         | 1 Year |  | Total
|                               |  |           |         |        |  |      
|Available-for-sale securities  |  | $         | 189,251 |        |  | $     | 284,352 |   |  | $ | 473,603 |  
|Weighted-average interest rate |  |           | 2.98    | %      |  |       | 1.59    | % |  |   | 2.15    | %

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 53.
The supplementary financial information required by this item is
included in the notes to the financial statements under the
subsection entitled Quarterly Financial Information
(Unaudited), beginning on page 74.

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

Not applicable.






|         |                        
|-------- | -----------------------
|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 January 3, 2004. 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.

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 3, 2004 that has materially
affected, or is reasonably likely to materially affect, our
internal control over financial reporting.




PART III






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

Directors

The members of our Board of Directors as of
March 1, 2004 are as follows:

|                       |  |     |    |                     |  |                                     
|---------------------- |  | --- | -- | ------------------- |  | ------------------------------------
|Name                   |  | Age |    | Position with Pixar
|                       |  |     |    |                    
|Steve Jobs             |  |     | 49 |                     |  | Chairman and Chief Executive Officer
|Edwin E. Catmull       |  |     | 58 |                     |  | President and Director              
|Skip M. Brittenham     |  |     | 62 |                     |  | Director                            
|Joseph A. Graziano     |  |     | 60 |                     |  | Director                            
|Lawrence B. Levy       |  |     | 44 |                     |  | Director                            
|Joe Roth               |  |     | 55 |                     |  | Director                            
|Larry W. Sonsini       |  |     | 63 |                     |  | Director                            
|John S. Wadsworth, Jr. |  |     | 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. Catmullis
a co-founder of Pixar and in January 2001 was promoted to
President. He has served as a member of the executive team and
as Chief Technical Officer of Pixar since the incorporation of
the company. In 1979, Dr. Catmull brought his
high-technology expertise to the film industry as vice president
of the Computer Division of Lucasfilm, Ltd. During that time,
Dr. Catmull managed four development efforts in the areas
of computer graphics, video editing, video games and digital
audio. He was also a key developer of RenderMan®, the
program that creates realistic digital effects for computer
graphics and animation. Dr. Catmull has been honored with
three Scientific and Technical Engineering Awards from The
Academy of Motion Picture Arts and Sciences for his work,
including an Oscar for significant advancements to the
field of motion picture rendering as exemplified in Pixars
RenderMan®. He also won the Coons Award, which is the
highest achievement in computer graphics, for his lifetime
contributions. Dr. Catmull is a member of the Academy of
Motion Picture Arts and Sciences and the Science and Technical
Awards Committee. Dr. Catmull earned his B.S. degrees in
computer science and physics and his Ph.D. in computer science
from the University of Utah.

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

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

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

Mr. Rothhas
served as a director of Pixar since October 2000. Mr. Roth,
who recently produced the 76th Annual Academy Awards®
telecast, 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.
Prior to founding Revolution Studios, Mr. Roth served as
Chairman of the Walt Disney Studios from April 1996 to January
2000, Chairman of the Walt Disney Motion Picture Group from
August 1994 to April 1996 and Chairman of Twentieth Century Fox
from July 1989 to November 1992. In addition, Mr. Roth ran
Caravan Pictures from 1992 to 1994. Prior to his time at
Twentieth Century Fox, Mr. Roth was a producer/director and
co-founded Morgan Creek Pictures. Mr. Roth is a graduate of
Boston University.

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

Mr. Wadsworthhas served as a director of Pixar
since December 2002. Mr. Wadsworth is Honorary Chairman of
Morgan Stanley Asia Limited and an Advisory Director for Morgan
Stanley globally, having spent nearly two decades overseeing
Morgan Stanleys policy and business strategies throughout
Asia and Australia. After joining Morgan Stanley in 1978,
Mr. Wadsworth had numerous responsibilities in the
U.S. Investment Banking Division, including serving on the
Investment Banking Operating Committee, Chairman of Morgan
Stanley Ventures and a member of the Firms Management
Committee. From 1963 to 1978, Mr. Wadsworth was with the
First Boston Corporation. Mr. Wadsworth is also a Trustee
and Vice Chairman of the Asia Society, a Trustee of Williams
College, a member of the Board of Trustees of the Guggenheim
Museum of New York and a Partner of Manitou Ventures.
Mr. Wadsworth earned a B.A. from Williams College and a
M.B.A. from the University of Chicago, Graduate School of
Business.

Executive Officers

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

44



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##### Table of Contents



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 members of the
Audit Committee are Messrs. Graziano, Levy and Wadsworth.
The Board of Directors has determined that each of
Messrs. Graziano, Levy and Wadsworth 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 its 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/. 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 by 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 2003.

45



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##### Table of Contents








|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

Summary Compensation Table

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

|                            |                                      |      |      |                     |  |            |           |              |  |              |         |           |     |  |         |   |  |   |       |         |    
|--------------------------- | ------------------------------------ | ---- | ---- | ------------------- |  | ---------- | --------- | ------------ |  | ------------ | ------- | --------- | --- |  | ------- | - |  | - | ----- | ------- | ---
|                            |                                      |      |      |                     |  |            |           | Long Term    |  |             
|                            |                                      |      |      |                     |  |            |           | Compensation |  |             
|                            |                                      |      |      |                     |  | Awards     |           |             
|                            |                                      |      |      | Annual Compensation |  | Securities |           |             
|                            |                                      |      |      |                     |  | Underlying |           | All Other   
|Name and Principal Position |                                      | Year |      | Salary(1)           |  | Bonus      |           | Options(#)   |  | Compensation
|                            |                                      |      |      |                     |  |            |           |              |  |             
|Steve Jobs                  |                                      |      | 2003 |                     |  | $          | 53        |              |  | $            |        |           |     |  |        |   |  | $ |      |        
|                            | Chairman, Chief Executive Officer    |      |      | 2002                |  |            |           | 52           |  |              |         |          |     |  |         |  |  |   |       |        |    
|                            |                                      |      | 2001 |                     |  |            | 52        |              |  |              |        |           |     |  |        |   |  |   |      |        
|Edwin E. Catmull            |                                      |      | 2003 |                     |  |            | 530,012   |              |  |              | 120,003 |           |     |  |        |   |  |   | 2,150 | (5)    
|                            | President                            |      |      | 2002                |  |            |           | 521,950      |  |              |         | 43,334    |     |  |         |  |  |   |       | 2,000   | (4)
|                            |                                      |      | 2001 |                     |  |            | 498,088   |              |  |              |        |           |     |  |        |   |  |   | 2,000 | (4)    
|Ann Mather                  |                                      |      | 2003 |                     |  |            | 445,221   |              |  |              | 100,805 |           |     |  |        |   |  |   | 2,126 | (5)    
|                            | Executive Vice President,            |      |      | 2002                |  |            |           | 432,474      |  |              |         | 36,401    |     |  |         |  |  |   |       | 2,000   | (4)
|                            | Chief Financial Officer              |      |      | 2001                |  |            |           | 416,074      |  |              |         |          |     |  |         |  |  |   |       | 2,000   | (4)
|John Lasseter               |                                      |      | 2003 |                     |  |            | 2,776,988 |              |  |              |        |           |     |  |        |   |  |   | 3,325 | (5)    
|                            | Executive Vice President, Creative   |      |      | 2002                |  |            |           | 2,595,542    |  |              |         |          |     |  |         |  |  |   |       | 2,000   | (4)
|                            |                                      |      |      | 2001                |  |            |           | 2,122,694    |  |              |         | 5,000,000 | (2) |  |         |  |  |   |       | 573,044 | (3)
|Sarah McArthur              |                                      |      | 2003 |                     |  |            | 445,221   |              |  |              | 100,805 |           |     |  |        |   |  |   | 2,126 | (5)    
|                            | Executive Vice President, Production |      |      | 2002                |  |            |           | 437,308      |  |              |         | 36,401    |     |  |         |  |  |   |       | 2,000   | (4)
|                            |                                      |      | 2001 |                     |  |            | 419,246   |              |  |              |        |           |     |  |        |   |  |   | 2,000 | (4)    
|Lois Scali                  |                                      |      | 2003 |                     |  |            | 347,131   |              |  |              | 207,217 | (7)       |     |  | 300,000 |   |  |   | 2,210 | (5)    
|                            | Executive Vice President, General    |      |      | 2002                |  |            |           |             |  |              |         |          |     |  |         |  |  |   |       |        |    
|                            | Counsel(6)                           |      |      | 2001                |  |            |           |             |  |              |         |          |     |  |         |  |  |   |       |        |    



---



|    |                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | For fiscal 2003, amounts shown represent
    53 weeks of salary. See Note 1 of Notes to Financial
    Statements.                                                                                            
|   
|(2) | This amount includes $60,000 that was paid to a
    third party.                                                                                                                                             
|   
|(3) | This amount includes $332,947 paid in lieu of
    vacation, $238,097 paid in lieu of a sabbatical and $2,000
    employer 401K match.                                                                        
|   
|(4) | Commencing January 1, 2001,
    employer-matching contribution under the Companys 401K
    plan.                                                                                                            
|   
|(5) | This amount includes employer-matching
    contributions through January 3, 2004. Fiscal 2003 was a
    53-week year, therefore, one additional week was expensed for
    the employer matching contribution.
|   
|(6) | Ms. Scali joined Pixar in March 2003.                                                                                                                                                                        
|   
|(7) | Includes a signing bonus of $200,000, a portion
    of which is reimbursable to Pixar if Ms. Scali leaves
    voluntarily within 18 months of her commencement of
    employment.                            

46



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##### Table of Contents



Option Grants in Last Fiscal Year

The following tables set forth, for each of the
Named Officers named in the Summary Compensation Table, the
stock options granted under Pixars stock option plans
during fiscal 2003.

|                 |  |            |         |                |  |          |       |            |  |                               |       |     |  |  |          |  |  |   |           |  |  |   |            | 
|---------------- |  | ---------- | ------- | -------------- |  | -------- | ----- | ---------- |  | ----------------------------- | ----- | --- |  |  | -------- |  |  | - | --------- |  |  | - | ---------- | 
|                 |  |            |         |                |  |          |       |            |  |                              
|                 |  |            |         |                |  |          |       |            |  | Potential Realizable Value at
|                 |  | Number of  |         | % of Total     |  |          |       |            |  | Assumed Annual Rates of      
|                 |  | Securities |         | Options        |  |          |       |            |  | Stock Price Appreciation for 
|                 |  | Underlying |         | Granted to     |  | Exercise |       |            |  | Option Term(4)               
|                 |  | Options    |         | Employees in   |  | Price    |       | Expiration |  |                              
|Name             |  | Granted(1) |         | Fiscal Year(2) |  | ($/SH)   |       | Date(3)    |  | 5%                            |       | 10%
|                 |  |            |         |                |  |          |       |            |  |                               |       |    
|Steve Jobs       |  |            |        |                |  |          |      |            |  |                               |      |     |  |  |         |  |  |   |          |  |  |   |           | 
|Edwin E. Catmull |  |            |        |                |  |          |      |            |  |                               |      |     |  |  |         |  |  |   |          |  |  |   |           | 
|Ann Mather       |  |            |        |                |  |          |      |            |  |                               |      |     |  |  |         |  |  |   |          |  |  |   |           | 
|John Lasseter    |  |            |        |                |  |          |      |            |  |                               |      |     |  |  |         |  |  |   |          |  |  |   |           | 
|Sarah McArthur   |  |            |        |                |  |          |      |            |  |                               |      |     |  |  |         |  |  |   |          |  |  |   |           | 
|Lois Scali       |  |            | 300,000 | (5)            |  |          | 18.74 | %          |  | $                             | 50.19 |     |  |  | 03/13/13 |  |  | $ | 9,469,266 |  |  | $ | 23,996,980 | 



---



|    |                                                                                                                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Options were granted under the 1995 Stock Plan
    and have exercise prices equal to the fair market value on the
    date of grant.                                                                                                                                                                                            
|   
|(2) | We granted options to purchase
    1,600,750 shares of Common Stock to employees in fiscal
    2003.                                                                                                                                                                                                                            
|   
|(3) | Options may terminate before their expiration
    upon the termination of optionees status as an employee or
    consultant, the optionees death or an acquisition of Pixar.                                                                                                                                                  
|   
|(4) | The 5% and 10% assumed rates of appreciation are
    provided in accordance with rules of the SEC and do not
    represent 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.
|   
|(5) | This option is a nonstatutory stock option, which
    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 2003, and the number of shares subject
to both exercisable and unexercisable stock options as of
January 3, 2004. 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 3, 2004.

|                 |  |             |         |          |  |                        |           |                       |  |             |         |               |  |  |         |  |  |   |            |  |  |   |            | 
|---------------- |  | ----------- | ------- | -------- |  | ---------------------- | --------- | --------------------- |  | ----------- | ------- | ------------- |  |  | ------- |  |  | - | ---------- |  |  | - | ---------- | 
|                 |  |             |         |          |  |                        |           |                       |  |            
|                 |  |             |         |          |  | Number of Securities   |           |                      
|                 |  |             |         |          |  | Underlying Unexercised |           | Value of Unexercised 
|                 |  | Number of   |         |          |  | Options at             |           | In-the-money Options 
|                 |  | Shares      |         |          |  | Fiscal Year End (#)    |           | at Fiscal Year End(1)
|                 |  | Acquired on |         | Value    |  |                        |           |                      
|Name             |  | Exercise    |         | Realized |  | Exercisable            |           | Unexercisable         |  | Exercisable |         | Unexercisable
|                 |  |             |         |          |  |                        |           |                       |  |             |         |              
|Steve Jobs       |  |             |        |          |  | $                      |          |                       |  |             |        |               |  |  |        |  |  | $ |           |  |  | $ |           | 
|Edwin E. Catmull |  |             | 50,000  |          |  |                        | 1,696,752 |                       |  |             | 175,000 |               |  |  | 250,000 |  |  |   | 7,455,000  |  |  |   | 10,650,000 | 
|Ann Mather       |  |             |        |          |  |                        |          |                       |  |             | 125,000 |               |  |  |        |  |  |   | 4,395,313  |  |  |   |           | 
|John Lasseter    |  |             | 195,000 |          |  |                        | 9,016,360 |                       |  |             | 285,010 |               |  |  | 699,990 |  |  |   | 12,141,426 |  |  |   | 29,819,574 | 
|Sarah McArthur   |  |             | 50,000  |          |  |                        | 2,331,598 |                       |  |             | 100,000 |               |  |  | 100,000 |  |  |   | 4,772,500  |  |  |   | 4,772,500  | 
|Lois Scali       |  |             |        |          |  |                        |          |                       |  |             |        |               |  |  | 300,000 |  |  |   |           |  |  |   | 5,673,000  | 



---



|    |                                                                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Market value of underlying securities based on
    the closing price of Pixars Common Stock on
    January 2, 2004 (the last trading day of fiscal 2003) on
    the Nasdaq National Market of $69.10 minus the exercise price.

47



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##### Table of Contents



Employment Agreements

In March 2001, we entered into an employment
agreement with John Lasseter (the Employment
Agreement), which has a term of 10 years. The
Employment Agreement supercedes our prior employment agreement
with Mr. Lasseter, which was entered into in February 1997.
Pursuant to the Employment Agreement, Mr. Lasseter received
a signing bonus of $5,000,000, of which $60,000 was paid to a
third party. The Employment Agreement 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 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.

In March 2003, we agreed with Ms. Scali that
in the event that Ms. Scali is terminated for reasons other
than cause during her first 18 months of employment, we
will pay an amount equal to her then-current monthly salary
times the number of months remaining in her first 18 months
of employment.

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.

Non-employee directors are eligible to receive
option grants pursuant to our 1995 Director Option Plan (the
Director Plan) which was adopted by the Board of
Directors in October 1995, approved by the shareholders in
November 1995 and took effect in November 1995. A total of
400,000 shares of Common Stock have been reserved for
issuance under the Director Plan. As of March 1, 2004,
there were 226,837 options outstanding under the Director Plan.

The Director Plan provides for an automatic grant
of an option to purchase 30,000 shares of Common Stock (the
First Option) to each non-employee director who
first becomes a non-employee director (other than an employee
director who ceases to be an employee but remains a director)
after the effective date of the Director Plan on the date on
which such person first becomes a non-employee director.
Beginning on the third anniversary of the date he or she became
an outside director, each non-employee director will
automatically be granted an option to purchase
10,000 shares of Common Stock (a Subsequent
Option) each year on the date of such anniversary,
provided he or she is then a non-employee director. Each
non-employee director will be eligible to receive a Subsequent
Option, regardless of whether such non-employee director was
eligible to receive a First Option. First Options and each
Subsequent Option will have a term of ten years. One-third of

48



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##### Table of Contents



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.


Mr. Sonsini was granted a Subsequent Option
in April 2003 at an exercise price of $57.22 per share;
Mr. Levy was granted a Subsequent Option in May 2003 at an
exercise price of $54.23 per share; Messrs. Brittenham
and Graziano were each granted Subsequent Options in September
2003 at an exercise price of $72.74 per share; and
Mr. Roth was granted a Subsequent Option in October 2003 at
an exercise price of $67.46 per share. Mr. Wadsworth,
a non-employee director of Pixar, will be eligible for a
Subsequent Option under the Director Plan on the third
anniversary of the date he became a non-employee director.
Messrs. Sonsini, Levy, Brittenham, Graziano and Roth, also
non-employee directors, are eligible for Subsequent Options each
year on the anniversary of the dates they became directors.

Compensation Committee Interlocks and Insider
Participation

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

49



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##### Table of Contents








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

The following table sets forth the beneficial
ownership of Common Stock of Pixar as of March 1, 2004 for
the following: (i) each person who is known by Pixar to own
beneficially more than 5% of the outstanding shares of
Pixars Common Stock; (ii) each of Pixars
directors; (iii) each of the Named Officers; and
(iv) all directors and executive officers of Pixar as a
group.

|                                                                     |                                                  |           |            |            |  |  |       |   | 
|-------------------------------------------------------------------- | ------------------------------------------------ | --------- | ---------- | ---------- |  |  | ----- | - | 
|                                                                     |                                                  | Number of |            | Percent of
|Name of Beneficial Owner                                             |                                                  | Shares(1) |            | Total(1)  
|                                                                     |                                                  |           |            |           
|Steve Jobs                                                           |                                                  |           | 30,000,001 |            |  |  | 53.61 | %
|                                                                     | c/o Pixar 1200 Park Avenue, Emeryville, CA 94608 |           |            |            |  |  |       |   | 
|The TCW Group, Inc.(2)                                               |                                                  |           | 9,585,276  |            |  |  | 17.13 | %
|                                                                     | 865 South Figueroa St., Los Angeles, CA 90017    |           |            |            |  |  |       |   | 
|Entities affiliated with FMR Corp(3)                                 |                                                  |           | 6,743,561  |            |  |  | 12.05 | %
|                                                                     | 82 Devonshire St., Boston, MA 02109              |           |            |            |  |  |       |   | 
|John Lasseter(4)                                                     |                                                  |           | 345,836    |            |  |  | *     |  
|Edwin E. Catmull(5)                                                  |                                                  |           | 453,800    |            |  |  | *     |  
|Sarah McArthur(6)                                                    |                                                  |           | 75,000     |            |  |  | *     |  
|Ann Mather(7)                                                        |                                                  |           | 125,000    |            |  |  | *     |  
|Lois Scali(8)                                                        |                                                  |           | 75,000     |            |  |  | *     |  
|Lawrence B. Levy(9)                                                  |                                                  |           | 35,010     |            |  |  | *     |  
|Joe Roth(10)                                                         |                                                  |           | 30,000     |            |  |  | *     |  
|Larry W. Sonsini(11)                                                 |                                                  |           | 21,365     |            |  |  | *     |  
|Skip M. Brittenham(12)                                               |                                                  |           | 80,000     |            |  |  | *     |  
|Joseph A. Graziano(13)                                               |                                                  |           | 50,000     |            |  |  | *     |  
|John S. Wadsworth, Jr.(14)                                           |                                                  |           | 20,000     |            |  |  | *     |  
|All directors and executive officers as a group
    (12 persons)(15) |                                                  |           | 31,311,012 |            |  |  | 55.16 | %



---



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



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Based on 55,960,801 shares outstanding on
    March 1, 2004. 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, 2004 through the exercise of any stock option or
    other right. Unless otherwise indicated in the footnotes, each
    person has sole voting and investment power (or shares such
    powers with his or her spouse) with respect to the shares shown
    as beneficially owned.
|   
|(2) | As indicated in the Schedule 13G filed by
    The TCW Group, Inc. pursuant to the Exchange Act on
    February 10, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(3) | As indicated in the Form 13G filed by FMR
    Corp. pursuant to the Exchange Act on February 17, 2004.
    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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|(4) | Includes 134,345 shares subject to options
    that are exercisable within 60 days of March 1, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(5) | Includes 200,000 shares subject to options
    that are exercisable within 60 days of March 1, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(6) | All 75,000 shares are subject to options
    that are exercisable within 60 days of March 1, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(7) | All 125,000 shares are subject to options
    that are exercisable within 60 days of March 1, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|(8) | All 75,000 shares are subject to options
    that are exercisable within 60 days of March 1, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(9) | Includes 10,000 shares subject to options
    that are exercisable within 60 days of March 1, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          



|     |                                                                                                   
|---- | --------------------------------------------------------------------------------------------------
|(10) | All 30,000 shares are subject to options
    that are exercisable within 60 days of March 1, 2004.

50



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##### Table of Contents





|     |                                                                                                     
|---- | ----------------------------------------------------------------------------------------------------
|(11) | Includes 16,837 shares subject to options
    that are exercisable within 60 days of March 1, 2004. 
|    
|(12) | All 80,000 shares are subject to options
    that are exercisable within 60 days of March 1, 2004.  
|    
|(13) | All 50,000 shares are subject to options
    that are exercisable within 60 days of March 1, 2004.  
|    
|(14) | Includes 10,000 shares subject to options
    that are exercisable within 60 days of March 1, 2004. 
|    
|(15) | Includes 806,182 shares subject to options
    that are exercisable within 60 days of March 1, 2004.

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 3, 2004.

|                                                               |       |                      |           |                      |  |                       |       |       |  |  |           |           |    
|-------------------------------------------------------------- | ----- | -------------------- | --------- | -------------------- |  | --------------------- | ----- | ----- |  |  | --------- | --------- | ---
|                                                               |       |                      |           |                      |  | Number of Securities 
|                                                               |       |                      |           |                      |  | Remaining Available  
|                                                               |       |                      |           |                      |  | for Future Issuance  
|                                                               |       | Number of Securities |           |                      |  | Under Equity         
|                                                               |       | to be Issued         |           | Weighted-Average     |  | Compensation Plans   
|                                                               |       | Upon Exercise of     |           | Exercise Price of    |  | (Excluding Securities
|                                                               |       | Outstanding Options, |           | Outstanding Options, |  | Reflected in the     
|Plan Category                                                  |       | Warrants and Rights  |           | Warrants and Rights  |  | First Column)        
|                                                               |       |                      |           |                      |  |                      
|Equity compensation plans approved by security
    holders     |       |                      | 9,995,609 |                      |  | $                     | 34.15 |       |  |  | 2,336,178 | (1)      
|Equity compensation plans not approved by
    security holders |       |                      |          |                      |  |                       |      |       |  |  |          |          
|                                                               |       |                      |           |                      |  |                       |       |       |  |  |           |          
|                                                               | Total |                      |           | 9,995,609            |  |                       | $     | 34.15 |  |  |           | 2,336,178 | (1)
|                                                               |       |                      |           |                      |  |                       |       |       |  |  |           |          



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Pixars 1995 Stock Plan incorporates an
    evergreen formula pursuant to which on January 1 of each year
    the aggregate number of shares reserved for issuance under the
    1995 Stock Plan will increase by a number of shares equal to 3%
    of the total issued and outstanding shares as of that date.
    Pursuant to the evergreen formula, 1,586,832 shares were
    added to the shares reserved for issuance on January 1,
    2003 and 1,663,466 shares were added to the shares reserved
    for issuance on January 1, 2004.






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

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

In 2002, we began reimbursing our Chief Executive
Officer, Steve Jobs, for expenses incurred by Mr. Jobs in
the operation of his private plane when used for Pixar business.
During fiscal 2003, we incurred a total of approximately $91,000
of such expenses. In June 2003, Pixar and Mr. Jobs
formalized this arrangement and entered into a Reimbursement
Agreement for the reimbursement of expenses incurred by
Mr. Jobs in the operation of his private plane when used
for Pixar business.

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.

51



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##### Table of Contents








|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accounting Fees and
    Services

Accounting Fees

The following table shows the fees paid or
accrued by Pixar for the audit and other services provided by
KPMG LLP (KPMG) for fiscal years 2002 and 2003:

|                   |       |             |         |         |  |   |         |         | 
|------------------ | ----- | ----------- | ------- | ------- |  | - | ------- | ------- | 
|                   |       |            
|                   |       | Fiscal Year
|                   |       |            
|                   |       | 2002        |         | 2003   
|                   |       |             |         |        
|Audit Fees(1)      |       | $           | 215,290 |         |  | $ | 238,767 |        
|Audit-Related Fees |       |             |        |         |  |   |        |        
|Tax Fees(2)        |       |             | 173,339 |         |  |   | 74,390  |        
|All Other Fees(3)  |       |             | 7,355   |         |  |   | 19,563  |        
|                   |       |             |         |         |  |   |         |        
|                   | Total |             | $       | 395,984 |  |   | $       | 332,720 | 
|                   |       |             |         |         |  |   |         |        



---



|    |                                                                                                                                                                                                                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | These are fees for professional services
    performed by KPMG for the audit of Pixars annual financial
    statements 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) | These are fees for 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.                              
|   
|(3) | These fees 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

Policy on Audit Committee Pre-Approval of
Audit and Permissible Non-Audit Services of Independent
Auditors

The Audit Committees policy is to
pre-approve all audit and permissible non-audit services
provided by the independent auditors. 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 the de minimusexception to pre-approval
contained in the SECs rules.

52



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##### Table of Contents






PART IV






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

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

1.     Financial
Statements.

|                                                                                                                                                  |  |  |    | 
|------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | -- | 
|Independent Auditors Report                                                                                                                      |  |  | 54 | 
|Balance Sheets as of December 28, 2002 and
    January 3, 2004                                                                                    |  |  | 55 | 
|Statements of Income for the years ended
    December 29, 2001, December 28, 2002, and
    January 3, 2004                                        |  |  | 56 | 
|Statements of Shareholders Equity and
    Comprehensive Income for the years ended December 29, 2001,
    December 28, 2002, and January 3, 2004 |  |  | 57 | 
|Statements of Cash Flows for the years ended
    December 29, 2001, December 28, 2002, and
    January 3, 2004                                    |  |  | 58 | 
|Notes to Financial Statements                                                                                                                     |  |  | 59 | 

2.     Financial
Statement Schedule. We have filed the following financial
statement schedule for the years ended December 29, 2001,
December 28, 2002 and January 3, 2004 as part of this
Form 10-K. It should be read in conjunction with our
Financial Statements, and related notes.

|                                                                 |  |  |    | 
|---------------------------------------------------------------- |  |  | -- | 
|Independent Auditors Report on Financial
    Statement Schedule |  |  | 75 | 
|Schedule II  Valuation and
    Qualifying Accounts and Reserves |  |  | 76 | 

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

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

(b) Reports on Form 8-K. The
following current report on Form 8-K was filed by Pixar
during Pixars fourth fiscal quarter ended January 3,
2004: Current Report on Form 8-K dated November 6,
2003, furnishing pursuant to Item 12 Pixars press
release regarding its financial results for the third quarter
and nine months ended September 27, 2003.

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

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

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##### Table of Contents



INDEPENDENT AUDITORS REPORT

The Board of Directors and Shareholders, Pixar:

We have audited the accompanying balance sheets
of Pixar as of December 28, 2002 and January 3, 2004,
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 3, 2004. These
financial statements are the responsibility of Pixars
management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred
to above present fairly, in all material respects, the financial
position of Pixar as of December 28, 2002 and
January 3, 2004, and the results of its operation and its
cash flows for each of the years in the three-year period ended
January 3, 2004, in conformity with accounting principles
generally accepted in the United States of America.



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

San Francisco, California

February 2, 2004


54



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##### Table of Contents



PIXAR

BALANCE SHEETS

|                                                                                                                                                     |                                                                                                                                                                                          |                                            |         |            |         |   |         |           |           | 
|---------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | ---------- | ------- | - | ------- | --------- | --------- | 
|                                                                                                                                                     |                                                                                                                                                                                          | December 28,                               |         | January 3,
|                                                                                                                                                     |                                                                                                                                                                                          | 2002                                       |         | 2004      
|                                                                                                                                                     |                                                                                                                                                                                          |                                            |         |           
|                                                                                                                                                     |                                                                                                                                                                                          |                                           
|                                                                                                                                                     |                                                                                                                                                                                          | (In thousands,                            
|                                                                                                                                                     |                                                                                                                                                                                          | except share data)                        
|ASSETS                                                                                                                                              
|Cash and cash equivalents                                                                                                                            |                                                                                                                                                                                          | $                                          | 44,431  |            |         | $ | 48,320  |          
|Investments                                                                                                                                          |                                                                                                                                                                                          |                                            | 294,652 |            |         |   | 473,603 |          
|Trade accounts receivable, net of allowance for
    doubtful accounts of $188 and $186 as of December 28, 2002
    and January 3, 2004, respectively |                                                                                                                                                                                          |                                            | 1,178   |            |         |   | 2,152   |          
|Receivable from Disney                                                                                                                               |                                                                                                                                                                                          |                                            | 129,339 |            |         |   | 197,177 |          
|Other receivables                                                                                                                                    |                                                                                                                                                                                          |                                            | 6,394   |            |         |   | 4,465   |          
|Prepaid expenses and other assets                                                                                                                    |                                                                                                                                                                                          |                                            | 13,826  |            |         |   | 1,047   |          
|Deferred income taxes                                                                                                                                |                                                                                                                                                                                          |                                            | 32,719  |            |         |   | 51,496  |          
|Property and equipment, net                                                                                                                          |                                                                                                                                                                                          |                                            | 117,423 |            |         |   | 115,026 |          
|Capitalized film production costs                                                                                                                    |                                                                                                                                                                                          |                                            | 92,104  |            |         |   | 107,667 |          
|                                                                                                                                                     |                                                                                                                                                                                          |                                            |         |            |         |   |         |          
|                                                                                                                                                     | Total assets                                                                                                                                                                             |                                            | $       | 732,066    |         |   | $       | 1,000,953 |          
|                                                                                                                                                     |                                                                                                                                                                                          |                                            |         |            |         |   |         |          
|                                                                                                                                                    
|LIABILITIES AND SHAREHOLDERS
    EQUITY                                                                                                            
|Accounts payable                                                                                                                                     |                                                                                                                                                                                          | $                                          | 2,341   |            |         | $ | 1,803   |          
|Income taxes payable                                                                                                                                 |                                                                                                                                                                                          |                                            |        |            |         |   | 37,595  |          
|Accrued liabilities                                                                                                                                  |                                                                                                                                                                                          |                                            | 9,322   |            |         |   | 13,007  |          
|Unearned revenue                                                                                                                                     |                                                                                                                                                                                          |                                            | 7,341   |            |         |   | 8,038   |          
|                                                                                                                                                     |                                                                                                                                                                                          |                                            |         |            |         |   |         |          
|                                                                                                                                                     | Total liabilities                                                                                                                                                                        |                                            |         | 19,004     |         |   |         | 60,443    |          
|                                                                                                                                                     |                                                                                                                                                                                          |                                            |         |            |         |   |         |          
|Commitments and contingencies
    (Note 8)                                                                                                           |                                                                                                                                                                                          |                                            |         |            |         |   |         |          
|Shareholders equity:                                                                                                                                |                                                                                                                                                                                          |                                            |         |            |         |   |         |          
|                                                                                                                                                     | Preferred stock, no par value;
    5,000,000 shares authorized, no shares issued and
    outstanding                                                                                     |                                            |         |           |         |   |         |          |          
|                                                                                                                                                     | Common stock, no par value;
    100,000,000 shares authorized; 52,894,466 and
    55,473,176 shares issued and outstanding as of
    December 28, 2002 and January 3, 2004, respectively |                                            |         | 442,477    |         |   |         | 546,999   |          
|                                                                                                                                                     | Accumulated other comprehensive income                                                                                                                                                   |                                            |         | 2,156      |         |   |         | 314       |          
|                                                                                                                                                     | Retained earnings                                                                                                                                                                        |                                            |         | 268,429    |         |   |         | 393,197   |          
|                                                                                                                                                     |                                                                                                                                                                                          |                                            |         |            |         |   |         |          
|                                                                                                                                                     |                                                                                                                                                                                          | Total shareholders equity                 |         |            | 713,062 |   |         |           | 940,510   | 
|                                                                                                                                                     |                                                                                                                                                                                          |                                            |         |            |         |   |         |          
|                                                                                                                                                     |                                                                                                                                                                                          | Total liabilities and shareholders equity |         | $          | 732,066 |   |         | $         | 1,000,953 | 
|                                                                                                                                                     |                                                                                                                                                                                          |                                            |         |            |         |   |         |          

See accompanying notes to financial statements.

55



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PIXAR

STATEMENTS OF INCOME

|                                                          |                            |                                       |        |              |        |            |        |         |         |   |        |         |         | 
|--------------------------------------------------------- | -------------------------- | ------------------------------------- | ------ | ------------ | ------ | ---------- | ------ | ------- | ------- | - | ------ | ------- | ------- | 
|                                                          |                            |                                      
|                                                          |                            | Years Ended                          
|                                                          |                            |                                      
|                                                          |                            | December 29,                          |        | December 28, |        | January 3,
|                                                          |                            | 2001                                  |        | 2002         |        | 2004      
|                                                          |                            |                                       |        |              |        |           
|                                                          |                            |                                      
|                                                          |                            | (In thousands, except per share data)
|Revenue:                                                  |                            |                                       |        |              |        |            |        |         |         |   |        |        
|                                                          | Film                       |                                       | $      | 63,365       |        |            | $      | 193,591 |         |   | $      | 250,383 |        
|                                                          | Software                   |                                       |        | 6,858        |        |            |        | 8,133   |         |   |        | 12,115  |        
|                                                          |                            |                                       |        |              |        |            |        |         |         |   |        |        
|                                                          |                            | Total revenue                         |        |              | 70,223 |            |        |         | 201,724 |   |        |         | 262,498 | 
|                                                          |                            |                                       |        |              |        |            |        |         |         |   |        |        
|Cost of revenue:                                          |                            |                                       |        |              |        |            |        |         |         |   |        |        
|                                                          | Film                       |                                       |        | 11,769       |        |            |        | 41,003  |         |   |        | 38,029  |        
|                                                          | Software                   |                                       |        | 549          |        |            |        | 531     |         |   |        | 29      |        
|                                                          |                            |                                       |        |              |        |            |        |         |         |   |        |        
|                                                          |                            | Total cost of revenue                 |        |              | 12,318 |            |        |         | 41,534  |   |        |         | 38,058  | 
|                                                          |                            |                                       |        |              |        |            |        |         |         |   |        |        
|                                                          |                            | Gross profit                          |        |              | 57,905 |            |        |         | 160,190 |   |        |         | 224,440 | 
|                                                          |                            |                                       |        |              |        |            |        |         |         |   |        |        
|Operating expenses:                                       |                            |                                       |        |              |        |            |        |         |         |   |        |        
|                                                          | Research and development   |                                       |        | 6,339        |        |            |        | 8,497   |         |   |        | 15,311  |        
|                                                          | Sales and marketing        |                                       |        | 1,991        |        |            |        | 1,334   |         |   |        | 2,422   |        
|                                                          | General and administrative |                                       |        | 8,059        |        |            |        | 9,677   |         |   |        | 12,783  |        
|                                                          |                            |                                       |        |              |        |            |        |         |         |   |        |        
|                                                          |                            | Total operating expenses              |        |              | 16,389 |            |        |         | 19,508  |   |        |         | 30,516  | 
|                                                          |                            |                                       |        |              |        |            |        |         |         |   |        |        
|                                                          |                            | Income from operations                |        |              | 41,516 |            |        |         | 140,682 |   |        |         | 193,924 | 
|Other income                                              |                            |                                       | 14,706 |              |        |            | 10,342 |         |         |   | 10,517 |        
|                                                          |                            |                                       |        |              |        |            |        |         |         |   |        |        
|                                                          |                            | Income before income taxes            |        |              | 56,222 |            |        |         | 151,024 |   |        |         | 204,441 | 
|Income tax expense                                        |                            |                                       | 20,005 |              |        |            | 61,074 |         |         |   | 79,673 |        
|                                                          |                            |                                       |        |              |        |            |        |         |         |   |        |        
|                                                          |                            | Net income                            |        | $            | 36,217 |            |        | $       | 89,950  |   |        | $       | 124,768 | 
|                                                          |                            |                                       |        |              |        |            |        |         |         |   |        |        
|Basic net income per share                                |                            | $                                     | 0.75   |              |        | $          | 1.78   |         |         | $ | 2.30   |        
|                                                          |                            |                                       |        |              |        |            |        |         |         |   |        |        
|Shares used in computing basic net income per
    share   |                            |                                       | 48,276 |              |        |            | 50,473 |         |         |   | 54,219 |        
|                                                          |                            |                                       |        |              |        |            |        |         |         |   |        |        
|Diluted net income per share                              |                            | $                                     | 0.71   |              |        | $          | 1.68   |         |         | $ | 2.17   |        
|                                                          |                            |                                       |        |              |        |            |        |         |         |   |        |        
|Shares used in computing diluted net income per
    share |                            |                                       | 51,030 |              |        |            | 53,400 |         |         |   | 57,422 |        
|                                                          |                            |                                       |        |              |        |            |        |         |         |   |        |        

See accompanying notes to financial statements.

56



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##### Table of Contents



PIXAR

STATEMENTS OF SHAREHOLDERS EQUITY AND
COMPREHENSIVE INCOME

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

See accompanying notes to financial statements.

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PIXAR

STATEMENTS OF CASH FLOWS

|                                                                            |                                                                                                 |                                                           |                                                         |              |         |            |         |          |          |         |        |          |         |          |  
|--------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------- | --------------------------------------------------------- | ------------------------------------------------------- | ------------ | ------- | ---------- | ------- | -------- | -------- | ------- | ------ | -------- | ------- | -------- | -
|                                                                            |                                                                                                 |                                                          
|                                                                            |                                                                                                 | Years Ended                                              
|                                                                            |                                                                                                 |                                                          
|                                                                            |                                                                                                 | December 29,                                              |                                                         | December 28, |         | January 3,
|                                                                            |                                                                                                 | 2001                                                      |                                                         | 2002         |         | 2004      
|                                                                            |                                                                                                 |                                                           |                                                         |              |         |           
|                                                                            |                                                                                                 |                                                          
|                                                                            |                                                                                                 | (In thousands)                                           
|Cash flows from operating activities:                                       |                                                                                                 |                                                           |                                                         |              |         |            |         |          |          |         |        |         
|                                                                            | Net income                                                                                      |                                                           | $                                                       | 36,217       |         |            | $       | 89,950   |          |         | $      | 124,768  |        
|                                                                            | Adjustments to reconcile net income to net cash
    provided by (used in) operating activities: |                                                           |                                                         |              |         |            |         |          |          |         |        |          |        
|                                                                            |                                                                                                 | Amortization of purchased technology                      |                                                         |              | 480     |            |         |          | 480      |         |        |          |        |         
|                                                                            |                                                                                                 | Depreciation and amortization                             |                                                         |              | 7,639   |            |         |          | 7,661    |         |        |          | 7,760   |         
|                                                                            |                                                                                                 | Capitalized film production costs                         |                                                         |              | (40,777 | )          |         |          | (43,915  | )       |        |          | (53,155 | )       
|                                                                            |                                                                                                 | Amortization of capitalized film production costs         |                                                         |              | 11,198  |            |         |          | 39,420   |         |        |          | 37,592  |         
|                                                                            |                                                                                                 | Provision for bad debts                                   |                                                         |              | 394     |            |         |          | 9        |         |        |          |        |         
|                                                                            |                                                                                                 | Loss (gain) on dispositions of property and
    equipment |                                                         |              | 19      |            |         |          | (8       | )       |        |          |        |         
|                                                                            |                                                                                                 | Gain on sales of investments                              |                                                         |              | (32     | )          |         |          | (439     | )       |        |          | (1,259  | )       
|                                                                            |                                                                                                 | Tax benefit from stock option exercises                   |                                                         |              | 9,063   |            |         |          | 38,601   |         |        |          | 39,361  |         
|                                                                            |                                                                                                 | Deferred income taxes                                     |                                                         |              | 3,245   |            |         |          | (11,258  | )       |        |          | (17,599 | )       
|                                                                            | Changes in operating assets and liabilities:                                                    |                                                           |                                                         |              |         |            |         |          |          |         |        |          |        
|                                                                            |                                                                                                 | Trade accounts receivable                                 |                                                         |              | (774    | )          |         |          | 329      |         |        |          | (974    | )       
|                                                                            |                                                                                                 | Receivable from Disney                                    |                                                         |              | 60,338  |            |         |          | (115,827 | )       |        |          | (67,838 | )       
|                                                                            |                                                                                                 | Other receivables                                         |                                                         |              | (2,511  | )          |         |          | (762     | )       |        |          | 1,929   |         
|                                                                            |                                                                                                 | Prepaid expenses and other assets                         |                                                         |              | 895     |            |         |          | (10,778  | )       |        |          | 12,779  |         
|                                                                            |                                                                                                 | Accounts payable                                          |                                                         |              | 3,221   |            |         |          | (2,502   | )       |        |          | (538    | )       
|                                                                            |                                                                                                 | Accrued liabilities                                       |                                                         |              | (8,385  | )          |         |          | 478      |         |        |          | 3,685   |         
|                                                                            |                                                                                                 | Income taxes payable                                      |                                                         |              | (6,845  | )          |         |          | (1,596   | )       |        |          | 36,417  |         
|                                                                            |                                                                                                 | Unearned revenue                                          |                                                         |              | (13,269 | )          |         |          | 5,228    |         |        |          | 697     |         
|                                                                            |                                                                                                 |                                                           |                                                         |              |         |            |         |          |          |         |        |         
|                                                                            |                                                                                                 |                                                           | Net cash provided by (used in) operating
    activities |              |         | 60,116     |         |          |          | (4,929  | )      |          |         | 123,625  |  
|                                                                            |                                                                                                 |                                                           |                                                         |              |         |            |         |          |          |         |        |         
|Cash flows from investing activities:                                       |                                                                                                 |                                                           |                                                         |              |         |            |         |          |          |         |        |         
|                                                                            | Purchases of property and equipment                                                             |                                                           |                                                         | (8,990       | )       |            |         | (13,906  | )        |         |        | (5,363   | )      
|                                                                            | Proceeds from sale of property and equipment                                                    |                                                           |                                                         |             |         |            |         | 55       |          |         |        |         |        
|                                                                            | Proceeds from sale of investments                                                               |                                                           |                                                         | 211,892      |         |            |         | 158,270  |          |         |        | 727,025  |        
|                                                                            | Purchase of investments                                                                         |                                                           |                                                         | (293,060     | )       |            |         | (229,862 | )        |         |        | (906,559 | )      
|                                                                            |                                                                                                 |                                                           |                                                         |              |         |            |         |          |          |         |        |         
|                                                                            |                                                                                                 |                                                           | Net cash used in investing activities                   |              |         | (90,158    | )       |          |          | (85,443 | )      |          |         | (184,897 | )
|                                                                            |                                                                                                 |                                                           |                                                         |              |         |            |         |          |          |         |        |         
|Cash flows from financing activities:                                       |                                                                                                 |                                                           |                                                         |              |         |            |         |          |          |         |        |         
|                                                                            | Proceeds from exercised stock options                                                           |                                                           |                                                         | 23,090       |         |            |         | 78,514   |          |         |        | 65,161   |        
|                                                                            |                                                                                                 |                                                           |                                                         |              |         |            |         |          |          |         |        |         
|                                                                            |                                                                                                 |                                                           | Net cash provided by financing activities               |              |         | 23,090     |         |          |          | 78,514  |        |          |         | 65,161   |  
|                                                                            |                                                                                                 |                                                           |                                                         |              |         |            |         |          |          |         |        |         
|Net increase (decrease) in cash and cash
    equivalents                    |                                                                                                 |                                                           | (6,952                                                  | )            |         |            | (11,858 | )        |          |         | 3,889  |         
|Cash and cash equivalents at beginning of period                            |                                                                                                 |                                                           | 63,241                                                  |              |         |            | 56,289  |          |          |         | 44,431 |         
|                                                                            |                                                                                                 |                                                           |                                                         |              |         |            |         |          |          |         |        |         
|Cash and cash equivalents at end of period                                  |                                                                                                 | $                                                         | 56,289                                                  |              |         | $          | 44,431  |          |          | $       | 48,320 |         
|                                                                            |                                                                                                 |                                                           |                                                         |              |         |            |         |          |          |         |        |         
|Supplemental disclosure of cash flow information:                           |                                                                                                 |                                                           |                                                         |              |         |            |         |          |          |         |        |         
|Cash paid during the period for income taxes                                |                                                                                                 | $                                                         | 15,539                                                  |              |         | $          | 46,750  |          |          | $       | 9,800  |         
|                                                                            |                                                                                                 |                                                           |                                                         |              |         |            |         |          |          |         |        |         
|Supplemental disclosure of non-cash investing and
    financing activities: |                                                                                                 |                                                           |                                                         |              |         |            |         |          |          |         |        |         
|Loss on equipment disposals capitalized as film
    production costs        |                                                                                                 | $                                                         | 228                                                     |              |         | $          | 770     |          |          | $       |       |         
|                                                                            |                                                                                                 |                                                           |                                                         |              |         |            |         |          |          |         |        |         
|Unrealized gain (loss) on investments                                       |                                                                                                 | $                                                         | 1,596                                                   |              |         | $          | 311     |          |          | $       | (1,842 | )       
|                                                                            |                                                                                                 |                                                           |                                                         |              |         |            |         |          |          |         |        |         

See accompanying notes to financial statements.

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PIXAR

NOTES TO FINANCIAL STATEMENTS



|    |                                                            
|--- | -----------------------------------------------------------
|(1) | Summary of Critical and Significant Accounting
    Policies



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

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

Critical Accounting Policies



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

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

The amount of revenue recognized in any given
quarter or quarters from all of the films depends on the timing,
accuracy and sufficiency of the information received from Disney
to determine revenues and associated gross profits. Although
Disney provides the most current information available to enable
the Company to recognize its share of revenue and determine film
gross profit, Disney may also make subsequent adjustments to the
information that it has provided, and these adjustments could
have a material impact on

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PIXAR


NOTES TO FINANCIAL STATEMENTS 
(Continued)

operating results in later periods. As additional
information becomes available from Disney on a more timely
basis, it may result in a change of estimation for revenue
recognition. Additionally, the Company has the right to audit
Disneys books and records related to the Pictures per the
terms of the Co-Production Agreement, which could result in
adjustments that may be material to the financial statements in
any given quarter or quarters. Any revenue received in advance
from Disney is deferred and recorded as revenue when earned.

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



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

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



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

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

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



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

The Company capitalizes its share of direct film
production costs in accordance with SOP 00-2. Film
production costs include costs to develop and produce computer
animated motion pictures, which primarily consists of salaries,
equipment and overhead. Film production costs in excess of
reimbursable amounts from Disney are capitalized. Production
overhead, a component of film costs, includes allocable costs of
individuals or departments with exclusive or significant
responsibility for the production of our films. Substantially
all of our resources are dedicated to the production of our
films. Capitalized production overhead does not include
administrative, general and research and development expenses.
In addition to the films produced, the Company is also working
on concept development, 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.

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

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PIXAR


NOTES TO FINANCIAL STATEMENTS 
(Continued)

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 net realizable
value.

Significant Accounting Policies



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

The Company considers all highly liquid
instruments with an original maturity of 90 days or less to
be cash equivalents. Cash equivalents as of January 3, 2004
consisted of U.S. Treasury Bills and Federal Notes.



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

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



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

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



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

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



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

Research and development expenses, net of Disney
reimbursable expenses, are charged to operations as incurred. In
accordance with SFAS No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed, development costs related to software products
are expensed as incurred until the technological feasibility of
the product has been established. After technological
feasibility is

61



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PIXAR


NOTES TO FINANCIAL STATEMENTS 
(Continued)

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 9. The Company maintains reserves for potential credit
losses and to date, such losses have been within
managements expectations.



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

The Companys fiscal year consists of the 52
or 53-week period ended with the Saturday nearest to
December 31. The 2003 fiscal year ended January 3,
2004 and consisted of 53 weeks. The 2000 and 2001 fiscal
years ended on December 29, 2001 and December 28,
2002, respectively, and each consisted of 52 weeks.



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

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



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

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



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

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



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

The Company reports segment information based on
the management approach. The management approach
designates the internal reporting used by management for making
decisions and assessing perform-

62



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PIXAR


NOTES TO FINANCIAL STATEMENTS 
(Continued)

ance 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.



| |                     
| | --------------------
| | 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 reported in previous years have
been reclassified to conform to the 2003 financial statement
presentation.



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

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

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

|                              |                                                  |                      |   |              |        |            |   |         |        |  |   |         |         | 
|----------------------------- | ------------------------------------------------ | -------------------- | - | ------------ | ------ | ---------- | - | ------- | ------ |  | - | ------- | ------- | 
|                              |                                                  |                     
|                              |                                                  | Fiscal Year Ended   
|                              |                                                  |                     
|                              |                                                  | December 29,         |   | December 28, |        | January 3,
|                              |                                                  | 2001                 |   | 2002         |        | 2004      
|                              |                                                  |                      |   |              |        |           
|Net income:                   |                                                  |                      |   |              |        |            |   |         |        |  |   |        
|                              | As reported                                      |                      | $ | 36,217       |        |            | $ | 89,950  |        |  | $ | 124,768 |        
|                              | Fair value-based compensation cost, net of taxes |                      |   | (7,998       | )      |            |   | (13,159 | )      |  |   | (16,856 | )      
|                              |                                                  |                      |   |              |        |            |   |         |        |  |   |        
|                              |                                                  | Pro forma net income |   | $            | 28,219 |            |   | $       | 76,791 |  |   | $       | 107,912 | 
|                              |                                                  |                      |   |              |        |            |   |         |        |  |   |        
|Basic net income per share:   |                                                  |                      |   |              |        |            |   |         |        |  |   |        
|                              | As reported                                      |                      | $ | 0.75         |        |            | $ | 1.78    |        |  | $ | 2.30    |        
|                              | Pro forma                                        |                      | $ | 0.58         |        |            | $ | 1.52    |        |  | $ | 1.99    |        
|Diluted net income per share: |                                                  |                      |   |              |        |            |   |         |        |  |   |        
|                              | As reported                                      |                      | $ | 0.71         |        |            | $ | 1.68    |        |  | $ | 2.17    |        
|                              | Pro forma                                        |                      | $ | 0.58         |        |            | $ | 1.49    |        |  | $ | 1.93    |        

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
$13.95, $18.64 and $26.42 for fiscal years 2001, 2002, and 2003,
respectively. Values were estimated using zero dividend yield
for all years;

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NOTES TO FINANCIAL STATEMENTS 
(Continued)

expected volatility of 45% for 2001, 52% for 2002
and 50% for 2003; risk-free interest rates of 4.34%, 3.59% and
2.97% for 2001, 2002, and 2003, respectively; and
weighted-average expected lives of 4.0 years for 2001,
5.0 years for 2002 and 5.0 years for 2003.



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

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

In June 2002, the FASB issued
SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities (SFAS 146).
SFAS 146 requires recording costs associated with exit or
disposal activities at their fair values when a liability has
been incurred. Under previous guidance, certain exit costs were
accrued upon managements commitment to an exit plan, which
is generally before an actual liability has been incurred. The
Company adopted SFAS 146 effective with the beginning of
fiscal 2003. The adoption of SFAS 146 has not had an impact
on the Companys financial position or results of
operations.

In January 2003, the FASB issued FASB
Interpretation No. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an Interpretation
of FASB Statements No. 5, 57 and 107 and a Recision of FASB
Interpretation No. 34 (FIN 45). FIN 45
clarifies the requirements for a guarantors accounting for
and disclosure of certain guarantees issued and outstanding in
interim and annual financial statements. FIN 45 also
clarifies that a guarantor is required to recognize, at
inception of a guarantee, the liability for the fair value of
the obligation undertaken. The disclosure requirements are
effective for financial statements of interim and annual periods
after December 31, 2002. The initial recognition and
initial measurement provisions of FIN 45 are applicable to
guarantees issued or modified after December 31, 2002. The
Company adopted the provisions of FIN 45 effective with the
beginning of fiscal 2003. The adoption of FIN 45 has not
had a material impact on the Companys financial statements
or results of operations.

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

In December 2002, the FASB issued
SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure that
amends SFAS No. 123, Accounting for Stock-Based
Compensation. The standard provides for
(1) alternative methods of transition for an entity that
voluntarily changes to the fair-value method of accounting for
stock-based employee compensation, (2) requires more
prominent disclosure of the effects of an entitys
accounting policy decisions with respect to stock-based employee
compensation on

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NOTES TO FINANCIAL STATEMENTS 
(Continued)

reported income, and (3) amends APB Opinion
No. 28, Interim Financial Reporting, to require
disclosure of those effects in interim financial information.
SFAS No. 148 is effective for fiscal years ending
after December 15, 2002 and for financial reports
containing condensed financial statements for interim periods
beginning after December 15, 2002. The Company continues to
account for employee stock options using the intrinsic value
method in accordance with APB Opinion No. 25 and adopted
the additional disclosure requirements of SFAS No. 148
in fiscal 2003.



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

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

|                           |  |      |         |            |  |            |       |  |  |   |         | 
|-------------------------- |  | ---- | ------- | ---------- |  | ---------- | ----- |  |  | - | ------- | 
|                           |  |      |         | Gross      |  |           
|                           |  |      |         | Unrealized |  | Estimated 
|                           |  | Cost |         | Gains      |  | Fair Value
|                           |  |      |         |            |  |           
|December 28, 2002:         |  |      |         |            |  |            |       |  |  |   |         | 
|U.S. Treasury Notes        |  | $    | 154,560 |            |  | $          | 2,066 |  |  | $ | 156,626 | 
|Federal agency obligations |  |      | 136,553 |            |  |            | 1,473 |  |  |   | 138,026 | 
|                           |  |      |         |            |  |            |       |  |  |   |         | 
|                           |  | $    | 291,113 |            |  | $          | 3,539 |  |  | $ | 294,652 | 
|                           |  |      |         |            |  |            |       |  |  |   |         | 
|January 3, 2004:           |  |      |         |            |  |            |       |  |  |   |         | 
|U.S. Treasury Notes        |  | $    | 236,388 |            |  | $          | 290   |  |  | $ | 236,678 | 
|Federal agency obligations |  |      | 236,693 |            |  |            | 232   |  |  |   | 236,925 | 
|                           |  |      |         |            |  |            |       |  |  |   |         | 
|                           |  | $    | 473,081 |            |  | $          | 522   |  |  | $ | 473,603 | 
|                           |  |      |         |            |  |            |       |  |  |   |         | 

The contractual maturities of available-for-sale
securities as of January 3, 2004 are as follows (in
thousands):

|                                     |  |      |         |            |  |   |         | 
|------------------------------------ |  | ---- | ------- | ---------- |  | - | ------- | 
|                                     |  |      |         | Estimated 
|                                     |  | Cost |         | Fair Value
|                                     |  |      |         |           
|Due within one year                  |  | $    | 188,919 |            |  | $ | 189,251 | 
|Due after one year through two years |  |      | 284,162 |            |  |   | 284,352 | 
|                                     |  |      |         |            |  |   |         | 
|                                     |  | $    | 473,081 |            |  | $ | 473,603 | 
|                                     |  |      |         |            |  |   |         | 

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NOTES TO FINANCIAL STATEMENTS 
(Continued)



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

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

|                                               |                                   |              |         |            |  |   |         |         | 
|---------------------------------------------- | --------------------------------- | ------------ | ------- | ---------- |  | - | ------- | ------- | 
|                                               |                                   | December 28, |         | January 3,
|                                               |                                   | 2002         |         | 2004      
|                                               |                                   |              |         |           
|Property and equipment:                        |                                   |              |         |            |  |   |         |        
|                                               | Building and land                 |              | $       | 117,131    |  |   | $       | 117,730 | 
|                                               | Furniture, fixtures and equipment |              |         | 21,822     |  |   |         | 22,001  | 
|                                               | Construction in process           |              |         | 1,908      |  |   |         | 4,778   | 
|                                               |                                   |              |         |            |  |   |         |        
|                                               |                                   |              | 140,861 |            |  |   | 144,509 |        
|Less accumulated depreciation and amortization |                                   |              | 23,438  |            |  |   | 29,483  |        
|                                               |                                   |              |         |            |  |   |         |        
|                                               |                                   | $            | 117,423 |            |  | $ | 115,026 |        
|                                               |                                   |              |         |            |  |   |         |        
|Accrued liabilities:                           |                                   |              |         |            |  |   |         |        
|                                               | Employee-related expenses         |              | $       | 6,073      |  |   | $       | 7,715   | 
|                                               | Accrued professional services     |              |         | 1,451      |  |   |         | 1,867   | 
|                                               | Accrued capital expenditures      |              |         | 692        |  |   |         | 1,764   | 
|                                               | Other                             |              |         | 1,106      |  |   |         | 1,661   | 
|                                               |                                   |              |         |            |  |   |         |        
|                                               |                                   | $            | 9,322   |            |  | $ | 13,007  |        
|                                               |                                   |              |         |            |  |   |         |        



|    |                                              
|--- | ---------------------------------------------
|(4) | Feature Film and Co-Production
    Agreements



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

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



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

In 1997, the Company extended its original
relationship with Disney (under which Toy Storywas
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 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 three original Pictures
produced under the Co-Production Agreement were A Bugs
Life, Monsters, Inc.and Finding Nemo. The
Company is currently in various stages of production on the
final two Pictures under this agreement: The Incrediblesand Cars. As a sequel, Toy Story 2did
not count toward the Pictures; however, it was produced under
the Co-Production Agreement and is afforded the same financial
terms as the Pictures. See  Relationship with
Disney  Co-Production Agreement.

The term of the Co-Production Agreement continues
until delivery to Disney of the fifth Picture, Cars,
which is currently targeted for a 2005 holiday release. Since
the April 2003 delivery of Finding Nemo, the

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NOTES TO FINANCIAL STATEMENTS 
(Continued)

Company has had the ability to negotiate and
enter into another distribution agreement with any other third
party. The Company has produced five 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 after Cars, it understands that
distributing its films through another studio may increase some
of the risks Pixar faces in the motion picture industry.

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



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

In addition to the films produced and in process
under the Co-Production Agreement, Pixars creative
development group is working on concept development,
pre-production and production for several new projects that are
not governed by the Co-Production Agreement. Costs related to
these projects, including for example, the first feature film
produced outside the existing Disney relationship (Project
2006), are therefore neither shared nor reimbursed by
Disney. Such costs are capitalized as film costs and will be
amortized under the 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 total film production costs and related
amounts capitalized are as follows (in thousands):

|                                                            |                                                                |           |         |         |  |      |        |         |  |   |        |        |  |   |          |         | 
|----------------------------------------------------------- | -------------------------------------------------------------- | --------- | ------- | ------- |  | ---- | ------ | ------- |  | - | ------ | ------ |  | - | -------- | ------- | 
|                                                            |                                                                |           |         |         |  |      |        | Total  
|                                                            |                                                                | 2001      |         |         |  |      |        | Through
|                                                            |                                                                | and Prior |         | 2002    |  | 2003 |        | 2003   
|                                                            |                                                                |           |         |         |  |      |        |        
|Released Films:                                             |                                                                |           |         |         |  |      |        |         |  |   |        |        |  |   |          |        
|Pixar production costs                                      |                                                                | $         | 150,678 |         |  | $    | 22,321 |         |  | $ | 12,301 |        |  | $ | 185,300  |        
|Disney production funding and reimbursement
    (unaudited) |                                                                |           | 173,749 |         |  |      | 22,321 |         |  |   | 12,301 |        |  |   | 208,371  |        
|                                                            |                                                                |           |         |         |  |      |        |         |  |   |        |        |  |   |          |        
|                                                            | Total film production costs (unaudited)                        |           | $       | 324,427 |  |      | $      | 44,642  |  |   | $      | 24,602 |  |   |          | 393,671 | 
|                                                            |                                                                |           |         |         |  |      |        |         |  |   |        |        |  |   |          |        
|Disney reimbursements of production costs
    (unaudited)   |                                                                |           |         |         |  |      |        |         |  |   |        |        |  |   | (208,371 | )      
|Amortization of deferred compensation                       |                                                                |           |         |         |  |      |        |         |  |   |        |        |  |   | 360      |        
|Participation fees                                          |                                                                |           |         |         |  |      |        |         |  |   |        |        |  |   | 1,550    |        
|Amortization of film production costs                       |                                                                |           |         |         |  |      |        |         |  |   |        |        |  |   | (157,690 | )      
|                                                            |                                                                |           |         |         |  |      |        |         |  |   |        |        |  |   |          |        
|                                                            | Total film production costs capitalized for
    released films |           |         |         |  |      |        |         |  |   |        |        |  |   |          | 29,520  | 
|                                                            |                                                                |           |         |         |  |      |        |         |  |   |        |        |  |   |          |        

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PIXAR


NOTES TO FINANCIAL STATEMENTS 
(Continued)

|                                                            |                                                                     |           |        |        |  |      |        |         |  |   |        |        |   |   |         |         | 
|----------------------------------------------------------- | ------------------------------------------------------------------- | --------- | ------ | ------ |  | ---- | ------ | ------- |  | - | ------ | ------ | - | - | ------- | ------- | 
|                                                            |                                                                     |           |        |        |  |      |        | Total  
|                                                            |                                                                     | 2001      |        |        |  |      |        | Through
|                                                            |                                                                     | and Prior |        | 2002   |  | 2003 |        | 2003   
|                                                            |                                                                     |           |        |        |  |      |        |        
|Films in Production:                                        |                                                                     |           |        |        |  |      |        |         |  |   |        |        |   |   |         |        
|Pixar production costs                                      |                                                                     | $         | 15,068 |        |  | $    | 21,580 |         |  | $ | 40,653 |        |   |   | 77,301  |        
|Disney production funding and reimbursement
    (unaudited) |                                                                     |           | 14,077 |        |  |      | 18,807 |         |  |   | 29,827 |        |   |   | 62,711  |        
|                                                            |                                                                     |           |        |        |  |      |        |         |  |   |        |        |   |   |         |        
|                                                            | Total film production costs (unaudited)                             |           | $      | 29,145 |  |      | $      | 40,387  |  |   | $      | 70,480 |   |   |         | 140,012 | 
|                                                            |                                                                     |           |        |        |  |      |        |         |  |   |        |        |   |   |         |        
|Disney reimbursements of production costs
    (unaudited)   |                                                                     |           |        |        |  |      |        |         |  |   |        |        |   |   | (62,711 | )      
|                                                            |                                                                     |           |        |        |  |      |        |         |  |   |        |        |   |   |         |        
|                                                            | Total film production costs capitalized for films
    in production |           |        |        |  |      |        |         |  |   |        |        |   |   |         | 77,301  | 
|Films in Development or
    Pre-production:                 |                                                                     |           |        |        |  |      |        |         |  |   |        |        |   |   |         |        
|Pixar production costs                                      |                                                                     | $         | 361    |        |  | $    | 783    |         |  | $ | (298   | )(1)   |   |   | 846     |        
|                                                            |                                                                     |           |        |        |  |      |        |         |  |   |        |        |   |   |         |        
|                                                            | Total film development and pre-production costs
    capitalized     |           | $      | 361    |  |      | $      | 783     |  |   | $      | (298   | ) |   |         | 846     | 
|                                                            |                                                                     |           |        |        |  |      |        |         |  |   |        |        |   |   |         |        
|                                                            |                                                                     |           |        |        |  |      |        |         |  |   |        |        |   | $ | 107,667 |        
|                                                            |                                                                     |           |        |        |  |      |        |         |  |   |        |        |   |   |         |        



---



|    |                                                                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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-lighted for production within three years following
    their initial cost capitalization.

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

|                           |       |                   |        |                    |  |                 |       |        |  |   |       |        | 
|-------------------------- | ----- | ----------------- | ------ | ------------------ |  | --------------- | ----- | ------ |  | - | ----- | ------ | 
|                           |       |                   |        |                   
|                           |       |                   |        | Fiscal Years Ended
|                           |       | February 1997 to  |        |                   
|                           |       | December 30, 2001 |        | December 28, 2002  |  | January 3, 2004
|                           |       |                   |        |                    |  |                
|Research and development   |       | $                 | 18,439 |                    |  | $               | 6,846 |        |  | $ | 8,963 |       
|General and administrative |       |                   | 12,337 |                    |  |                 | 3,640 |        |  |   | 4,277 |       
|                           |       |                   |        |                    |  |                 |       |        |  |   |       |       
|                           | Total |                   | $      | 30,776             |  |                 | $     | 10,486 |  |   | $     | 13,240 | 
|                           |       |                   |        |                    |  |                 |       |        |  |   |       |       

For released films, the Company expects to
amortize, based on current estimates, approximately
$15 million to $19 million in capitalized film
production costs during fiscal 2004. This forecast does not
include amortization for The Incredibles, which is
targeted for release on November 5, 2004. In addition, the
Company has amortized more than 80% of each released films
original production costs as of January 3, 2004, with the
exception of Finding Nemo, which is projected to reach
the 80% milestone in the first half of fiscal 2004.

At December 28, 2002 and January 3,
2004, receivables from Disney aggregated $129.3 million and
$197.2 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.



|    |                           
|--- | --------------------------
|(5) | Related Party Transactions

In conjunction with the signing of the
Co-Production Agreement, Pixar issued to Disney two warrants,
each exercisable for five years: one warrant to purchase
750,000 shares of Common Stock at an exercise price of
$20.00 per share and another warrant to purchase
750,000 shares of Common Stock at an exercise price of

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PIXAR


NOTES TO FINANCIAL STATEMENTS 
(Continued)

$25.00 per share. In October 2001, Disney
fully exercised both warrants. In lieu of exercising the
warrants for cash, Disney surrendered the warrants in exchange
for 640,651 shares of Common Stock.



|    |             
|--- | ------------
|(6) | Income Taxes

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

|                                                                        |           |                    |                      |              |       |            |        |   |         |         |        |   |         |         |  
|----------------------------------------------------------------------- | --------- | ------------------ | -------------------- | ------------ | ----- | ---------- | ------ | - | ------- | ------- | ------ | - | ------- | ------- | -
|                                                                        |           |                   
|                                                                        |           | Fiscal Years Ended
|                                                                        |           |                   
|                                                                        |           | December 29,       |                      | December 28, |       | January 3,
|                                                                        |           | 2001               |                      | 2002         |       | 2004      
|                                                                        |           |                    |                      |              |       |           
|Income taxes:                                                           |           |                    |                      |              |       |            |        |   |         |         |        |  
|                                                                        | Current:  |                    |                      |              |       |            |        |   |         |         |        |   |        
|                                                                        |           | Federal            |                      | $            | 8,089 |            |        | $ | 29,697  |         |        | $ | 49,623  |        
|                                                                        |           | State              |                      |              | (460  | )          |        |   | 3,997   |         |        |   | 8,270   |        
|                                                                        |           | Foreign            |                      |              | 68    |            |        |   | 37      |         |        |   | 18      |        
|                                                                        |           |                    |                      |              |       |            |        |   |         |         |        |  
|                                                                        |           |                    | Total current taxes  |              |       | 7,697      |        |   |         | 33,731  |        |   |         | 57,911  |  
|                                                                        |           |                    |                      |              |       |            |        |   |         |         |        |  
|                                                                        | Deferred: |                    |                      |              |       |            |        |   |         |         |        |   |        
|                                                                        |           | Federal            |                      |              | 2,867 |            |        |   | (10,389 | )       |        |   | (16,032 | )      
|                                                                        |           | State              |                      |              | 378   |            |        |   | (869    | )       |        |   | (1,567  | )      
|                                                                        |           |                    |                      |              |       |            |        |   |         |         |        |  
|                                                                        |           |                    | Total deferred taxes |              |       | 3,245      |        |   |         | (11,258 | )      |   |         | (17,599 | )
|                                                                        |           |                    |                      |              |       |            |        |   |         |         |        |  
|Charge in lieu of taxes attributable to employer
    stock option plans |           |                    | 9,063                |              |       |            | 38,601 |   |         |         | 39,361 |  
|                                                                        |           |                    |                      |              |       |            |        |   |         |         |        |  
|                                                                        |           |                    | Total tax provision  |              | $     | 20,005     |        |   | $       | 61,074  |        |   | $       | 79,673  |  
|                                                                        |           |                    |                      |              |       |            |        |   |         |         |        |  

Income tax expense attributable to income from
operations was $20.0 million, $61.1 million, and
$79.7 million for fiscal 2001, 2002 and 2003 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 29,       |        | December 28, |   | January 3,
|                                             |                                               | 2001               |        | 2002         |   | 2004      
|                                             |                                               |                    |        |              |   |           
|Expected income tax expense                  |                                               | $                  | 19,677 |              |   | $          | 52,858 |       |   | $ | 71,554 |      
|Increases (decreases) in tax resulting from: |                                               |                    |        |              |   |            |        |       |   |   |        |      
|                                             | State income taxes, net of federal tax effect |                    |        | 1,165        |   |            |        | 6,626 |   |   |        | 8,148 |  
|                                             | Non deductible expenses                       |                    |        | 1,084        |   |            |        | 351   |   |   |        | 255   |  
|                                             | Research and experimentation credits          |                    |        | (498         | ) |            |        | (128  | ) |   |        |      |  
|                                             | Other tax credits                             |                    |        | (698         | ) |            |        | (182  | ) |   |        | (396  | )
|                                             | Other, net                                    |                    |        | (725         | ) |            |        | 1,549 |   |   |        | 112   |  
|                                             |                                               |                    |        |              |   |            |        |       |   |   |        |      
|Actual tax expense                           |                                               | $                  | 20,005 |              |   | $          | 61,074 |       |   | $ | 79,673 |      
|                                             |                                               |                    |        |              |   |            |        |       |   |   |        |      

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PIXAR


NOTES TO FINANCIAL STATEMENTS 
(Continued)

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

|                         |                              |                                |   |            |        |  |   |        |        | 
|------------------------ | ---------------------------- | ------------------------------ | - | ---------- | ------ |  | - | ------ | ------ | 
|                         |                              | December 28,                   |   | January 3,
|                         |                              | 2002                           |   | 2004      
|                         |                              |                                |   |           
|Deferred tax assets:     |                              |                                |   |            |        |  |   |       
|                         | Deferred compensation        |                                | $ | 428        |        |  | $ | 392    |       
|                         | Capitalized film costs       |                                |   | 33,714     |        |  |   | 48,859 |       
|                         | Reserves and accruals        |                                |   | 3,685      |        |  |   | 3,527  |       
|                         |                              |                                |   |            |        |  |   |       
|                         |                              | Total deferred tax assets      |   |            | 37,827 |  |   |        | 52,778 | 
|                         |                              |                                |   |            |        |  |   |       
|Deferred tax liabilities |                              |                                |   |            |        |  |   |       
|                         | Deferred revenue             |                                |   | 2,126      |        |  |   |       |       
|                         | Deferred gain on investments |                                |   | 1,385      |        |  |   | 208    |       
|                         | Property and equipment       |                                |   | 1,597      |        |  |   | 1,074  |       
|                         |                              |                                |   |            |        |  |   |       
|                         |                              | Total deferred tax liabilities |   |            | 5,108  |  |   |        | 1,282  | 
|                         |                              |                                |   |            |        |  |   |       
|                         |                              | Net deferred tax assets        |   | $          | 32,719 |  |   | $      | 51,496 | 
|                         |                              |                                |   |            |        |  |   |       

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 3, 2004, based on historical taxable income and
projections of future taxable income, the Company believes it is
more likely than not that the Company will realize the benefits
of its deferred tax assets, and therefore no valuation allowance
against those assets has been provided.



|    |                     
|--- | --------------------
|(7) | Shareholders Equity



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

The Company has stock option plans for employees,
consultants and non-employee directors that provide incentive
and nonstatutory stock options.

The option exercise price for incentive stock
options is not less than the fair market value at the grant
date. Nonstatutory options are granted at prices and terms
determined by the Board of Directors, or a committee of the
Board of Directors. Employee and consultant options generally
vest 25% per year over four years. Initial grants to
non-employee directors vest one-third annually for three years;
subsequent grants vest after one year. All options have a term
not greater than ten years from the date of grant. As of
January 3, 2004, the Company had 2,336,178 shares
reserved and available for issuance under the plans.

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PIXAR


NOTES TO FINANCIAL STATEMENTS 
(Continued)

A summary of activity under the option plans
during fiscal 2001, 2002 and 2003 are as follows:

|                                     |           |        |            |                  |   |   |       |       | 
|------------------------------------ | --------- | ------ | ---------- | ---------------- | - | - | ----- | ----- | 
|                                     |           |        |            | Weighted-Average
|                                     |           | Shares |            | Exercise Price  
|                                     |           |        |            |                 
|Outstanding at December 30,
    2000 |           |        | 13,111,853 |                  |   | $ | 24.46 |      
|                                     | Granted   |        |            | 992,500          |   |   |       | 34.55 | 
|                                     | Exercised |        |            | (1,171,933       | ) |   |       | 19.70 | 
|                                     | Forfeited |        |            | (421,908         | ) |   |       | 31.33 | 
|                                     |           |        |            |                  |   |   |       |      
|Outstanding at December 29,
    2001 |           |        | 12,510,512 |                  |   |   | 25.47 |      
|                                     | Granted   |        |            | 2,351,975        |   |   |       | 38.26 | 
|                                     | Exercised |        |            | (3,448,510       | ) |   |       | 22.77 | 
|                                     | Forfeited |        |            | (230,658         | ) |   |       | 31.43 | 
|                                     |           |        |            |                  |   |   |       |      
|Outstanding at December 28,
    2002 |           |        | 11,183,319 |                  |   |   | 28.87 |      
|                                     | 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 |      
|                                     |           |        |            |                  |   |   |       |      

For various price ranges, weighted-average
characteristics of outstanding stock options at January 3,
2004 were as follows:

|                         |  |                     |           |                                |  |                  |      |        |  |                  |       |  |  |  |           |  |  |   |       | 
|------------------------ |  | ------------------- | --------- | ------------------------------ |  | ---------------- | ---- | ------ |  | ---------------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                         |  |                     |           |                               
|                         |  | Options Outstanding |           | Options Vested and Exercisable
|                         |  |                     |           |                               
|                         |  |                     |           | Remaining                      |  | Weighted-Average |      |        |  | Weighted-Average
|Range of Exercise Prices |  | Shares              |           | Life (Years)                   |  | Exercise Price   |      | Shares |  | Exercise Price  
|                         |  |                     |           |                                |  |                  |      |        |  |                 
|$ 0.20 to $ 1.25         |  |                     | 177,617   |                                |  |                  | 1.40 |        |  | $                | 0.40  |  |  |  | 177,617   |  |  | $ | 0.40  | 
|$ 9.60 to $14.50         |  |                     | 301,003   |                                |  |                  | 2.68 |        |  |                  | 12.31 |  |  |  | 301,003   |  |  |   | 12.31 | 
|$15.50 to $23.75         |  |                     | 686,210   |                                |  |                  | 3.98 |        |  |                  | 21.19 |  |  |  | 583,710   |  |  |   | 21.16 | 
|$26.50 to $34.00         |  |                     | 5,312,276 |                                |  |                  | 6.76 |        |  |                  | 28.88 |  |  |  | 1,947,836 |  |  |   | 28.56 | 
|$34.55 to $45.89         |  |                     | 1,850,728 |                                |  |                  | 8.13 |        |  |                  | 40.89 |  |  |  | 314,803   |  |  |   | 40.45 | 
|$48.13 to $61.50         |  |                     | 1,102,275 |                                |  |                  | 9.06 |        |  |                  | 51.17 |  |  |  | 84,775    |  |  |   | 53.50 | 
|$65.56 to $72.74         |  |                     | 565,500   |                                |  |                  | 9.65 |        |  |                  | 66.44 |  |  |  |          |  |  |   |      | 
|                         |  |                     |           |                                |  |                  |      |        |  |                  |       |  |  |  |           |  |  |   |       | 
|                         |  |                     | 9,995,609 |                                |  |                  | 7.02 |        |  |                  | 34.15 |  |  |  | 3,409,744 |  |  |   | 26.11 | 
|                         |  |                     |           |                                |  |                  |      |        |  |                  |       |  |  |  |           |  |  |   |       | 

At January 3, 2004, there were
3,409,744 shares exercisable at a weighted-average exercise
price of $26.11 per share. At December 29, 2001 and
December 28, 2002, there were 4,775,182 and
3,593,426 shares exercisable, respectively, at
weighted-average exercise prices of $19.23 and $22.05,
respectively.



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

In 1992, the Company adopted a 401(k) Profit
Sharing Plan (the 401(k) Plan) that is intended to qualify under
Section 401(k) of the Internal Revenue Code of 1986, as
amended. The 401(k) Plan covers substantially all employees.
Participants may elect to contribute a percentage of their
compensation to this plan, up to the statutory maximum amount.
For the plan year commencing December 29, 2002 and ending
on January 3, 2004, 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 $842,000, $943,000 and $1,015,000 to the
401(k) Plan for fiscal 2001, 2002 and 2003, respectively.

71



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PIXAR


NOTES TO FINANCIAL STATEMENTS 
(Continued)



|    |                              
|--- | -----------------------------
|(8) | Commitments and Contingencies



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

Future minimum lease payments under
non-cancelable operating leases (with initial or remaining lease
terms in excess of one year) as of January 3, 2004 were as
follows (in thousands):

|            |                              |   |     |       | 
|----------- | ---------------------------- | - | --- | ----- | 
|           
|Fiscal Year
|           
|            |                              |  
|2004        |                              | $ | 882 |      
|2005        |                              |   | 314 |      
|2006        |                              |   | 93  |      
|2007        |                              |   | 74  |      
|After 2007  |                              |   | 58  |      
|            |                              |   |     |      
|            | Total minimum lease payments |   | $   | 1,421 | 
|            |                              |   |     |      

Rental expense from operating leases amounted to
approximately $935,000, $814,000 and $982,000 for fiscal 2001,
2002 and 2003, respectively.



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

The Company has obligations to pay portions of
any revenue derived from each feature film produced under the
Co-Production Agreement to our entertainment law firm in
consideration for services rendered. The compensation is subject
to a cap of $500,000 for each theatrical motion picture and a
cap of $200,000 for each sequel or remake, with a total
aggregate cap of $3,000,000. The Company paid participation fees
of $500,000 in fiscal 2003 under this obligation. No payments
were made in fiscal 2001 or 2002.



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

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



|    |                                               
|--- | ----------------------------------------------
|(9) | Significant Customer and Segment
    Reporting



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

In fiscal years 2001, 2002, and 2003, Disney
represented 91%, 96% and 94% of total revenue, respectively, and
92%, 95%, and 97% of total accounts receivable, respectively.



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

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

72



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PIXAR


NOTES TO FINANCIAL STATEMENTS 
(Continued)

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

|                     |  |                    |        |      |  |      |         |  |  |   |         | 
|-------------------- |  | ------------------ | ------ | ---- |  | ---- | ------- |  |  | - | ------- | 
|                     |  |                   
|                     |  | Fiscal Years Ended
|                     |  |                   
|                     |  | 2001               |        | 2002 |  | 2003
|                     |  |                    |        |      |  |     
|Finding Nemo         |  | $                  |       |      |  | $    |        |  |  | $ | 189,166 | 
|Monsters, Inc.       |  |                    | 12,144 |      |  |      | 141,452 |  |  |   | 22,559  | 
|Library titles(1)(2) |  |                    | 50,513 |      |  |      | 50,072  |  |  |   | 38,021  | 
|Animation services   |  |                    | 708    |      |  |      | 2,067   |  |  |   | 637     | 
|                     |  |                    |        |      |  |      |         |  |  |   |         | 
|                     |  | $                  | 63,365 |      |  | $    | 193,591 |  |  | $ | 250,383 | 
|                     |  |                    |        |      |  |      |         |  |  |   |         | 



---



|    |                                                                                                                                                                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Library titles include A Bugs Life, Toy
    Storyand Toy Story 2. For fiscal years 2001, 2002
    and 2003, Toy Story 2revenues of $23.4 million,
    $24.7 million and $22.1 million, respectively, have
    been reclassified to Library titles to conform to
    the current year presentation.
|   
|(2) | Fiscal 2002 includes adjustments that increased
    the net home video reserves and margins and merchandise revenues
    of Toy Story 2and A Bugs Lifeand
    contributed approximately $0.19 to diluted net income per share.                                                                      



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

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

|                           |                              |                    |        |        |  |       |        |        |  |        |      |        |  |        |        |        |  |       |        |        |  |   |      |      |  |   |         |         |  |  |        |        |  |   |      |      | 
|-------------------------- | ---------------------------- | ------------------ | ------ | ------ |  | ----- | ------ | ------ |  | ------ | ---- | ------ |  | ------ | ------ | ------ |  | ----- | ------ | ------ |  | - | ---- | ---- |  | - | ------- | ------- |  |  | ------ | ------ |  | - | ---- | ---- | 
|                           |                              |                   
|                           |                              | Fiscal Years Ended
|                           |                              |                   
|                           |                              |                    |        |        |  |      
|                           |                              | 2001               |        | 2002   |  | 2003 
|                           |                              |                    |        |        |  |      
|                           |                              |                    |        | Net    |  |       |        | Net    |  |        |      | Net   
|                           |                              |                    |        | Income |  |       |        | Income |  |        |      | Income
|                           |                              | Net                |        |        |  | per   |        | Net    |  |        |      | per    |  | Net    |        |        |  | per  
|                           |                              | Income             |        | Shares |  | Share |        | Income |  | Shares |      | Share  |  | Income |        | Shares |  | Share
|                           |                              |                    |        |        |  |       |        |        |  |        |      |        |  |        |        |        |  |      
|Basic net income per share |                              | $                  | 36,217 |        |  |       | 48,276 |        |  | $      | 0.75 |        |  | $      | 89,950 |        |  |       | 50,473 |        |  | $ | 1.78 |      |  | $ | 124,768 |         |  |  | 54,219 |        |  | $ | 2.30 |     
|Effect of dilutive shares: |                              |                    |        |        |  |       |        |        |  |        |      |        |  |        |        |        |  |       |        |        |  |   |      |      |  |   |         |         |  |  |        |        |  |   |      |     
|                           | Stock options                |                    |        |       |  |       |        | 2,754  |  |        |      |        |  |        |        |       |  |       |        | 2,927  |  |   |      |      |  |   |         |        |  |  |        | 3,203  |  |   |      |      | 
|                           |                              |                    |        |        |  |       |        |        |  |        |      |        |  |        |        |        |  |       |        |        |  |   |      |      |  |   |         |         |  |  |        |        |  |   |      |     
|                           | Diluted net income per share |                    | $      | 36,217 |  |       |        | 51,030 |  |        | $    | 0.71   |  |        | $      | 89,950 |  |       |        | 53,400 |  |   | $    | 1.68 |  |   | $       | 124,768 |  |  |        | 57,422 |  |   | $    | 2.17 | 
|                           |                              |                    |        |        |  |       |        |        |  |        |      |        |  |        |        |        |  |       |        |        |  |   |      |      |  |   |         |         |  |  |        |        |  |   |      |     

Options to purchase 647,101, 222,495 and
195,574 shares of common stock in fiscal 2001, 2002 and
2003, 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 30      |        | June 29 |  | September 28 |        | December 28
|                             |  |               |        |         |  |              |        |            
|2002                         |  |               |        |         |  |              |        |             |  |   |         |  |  |   |        | 
|Revenue                      |  | $             | 37,073 |         |  | $            | 22,811 |             |  | $ | 102,456 |  |  | $ | 39,384 | 
|Gross profit                 |  |               | 28,580 |         |  |              | 19,105 |             |  |   | 81,015  |  |  |   | 31,490 | 
|Net income                   |  |               | 15,610 |         |  |              | 10,442 |             |  |   | 46,935  |  |  |   | 16,963 | 
|Basic net income per share   |  |               | 0.32   |         |  |              | 0.21   |             |  |   | 0.93    |  |  |   | 0.33   | 
|Diluted net income per share |  |               | 0.30   |         |  |              | 0.20   |             |  |   | 0.87    |  |  |   | 0.31   | 

|                             |  |               |        |         |  |              |        |           |  |   |        |  |  |   |         | 
|---------------------------- |  | ------------- | ------ | ------- |  | ------------ | ------ | --------- |  | - | ------ |  |  | - | ------- | 
|                             |  |              
|                             |  | 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    | 

Period-to-period comparisons of our results of
operations may not be necessarily meaningful, as our annual and
quarterly revenues may fluctuate due to the timing of our
theatrical releases and related products, such as home video,
television and merchandising. For example, revenues for the
third quarter of fiscal 2002 were significantly higher than the
third quarter of 2003 due to the September 2002 worldwide home
video release of Monsters, Inc. In addition, revenue
for the second and fourth quarter of 2003 were significantly
higher than their respective periods in the previous year due to
the May 2003 domestic theatrical release and November 2003
domestic home video and international theatrical releases of
Finding Nemo.

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INDEPENDENT AUDITORS REPORT ON
SCHEDULE

The Board of Directors and Shareholders

Pixar:


Under date of February 2, 2004, we reported
on the balance sheets of Pixar as of December 28, 2002 and
January 3, 2004, 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 3, 2004, which are included in the 2003 annual
report on Form 10-K. In connection with our audits of the
aforementioned financial statements, we also audited the related
financial statement schedule included herein. This financial
statement schedule is the responsibility of Pixars
management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.

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



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

San Francisco, California

February 2, 2004


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PIXAR

SCHEDULE II  VALUATION AND
QUALIFYING ACCOUNTS AND RESERVES

|                                            |                              |                |   |           |  |              |   |             |  |  |   |      |   |  |   |     | 
|------------------------------------------- | ---------------------------- | -------------- | - | --------- |  | ------------ | - | ----------- |  |  | - | ---- | - |  | - | --- | 
|                                            |                              | Balance at     |   |           |  | Deductions:  |   |            
|                                            |                              | Beginning      |   |           |  | Write Off of |   | Balance at 
|Classification                              |                              | of Year        |   | Additions |  | Accounts     |   | End of Year
|                                            |                              |                |   |           |  |              |   |            
|                                            |                              |               
|                                            |                              | (In thousands)
|Allowance for returns and doubtful accounts |                              |                |   |           |  |              |   |             |  |  |   |      |   |  |   |    
|                                            | Year ended December 29, 2001 |                | $ | 170       |  |              | $ | 394         |  |  | $ | (12  | ) |  | $ | 552 | 
|                                            |                              |                |   |           |  |              |   |             |  |  |   |      |   |  |   |    
|                                            | Year ended December 28, 2002 |                | $ | 552       |  |              | $ | 9           |  |  | $ | (373 | ) |  | $ | 188 | 
|                                            |                              |                |   |           |  |              |   |             |  |  |   |      |   |  |   |    
|                                            | Year ended January 3, 2004   |                | $ | 188       |  |              | $ |            |  |  | $ | (2   | ) |  | $ | 186 | 
|                                            |                              |                |   |           |  |              |   |             |  |  |   |      |   |  |   |    

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SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this Form 10-K to be signed on its behalf
by the undersigned, thereunto duly authorized, on this 18th day
of March, 2004.



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



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

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

POWER OF ATTORNEY

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

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

|                                         |  |                                                                                                       |  |                |  | 
|---------------------------------------- |  | ----------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|                                         |  |                                                                                                       |  |               
|Signature                                |  | Title                                                                                                 |  | Date          
|                                         |  |                                                                                                       |  |               
|                                        
|/s/ STEVE JOBSSteve Jobs                 |  | Chairman of the Board and
    Chief Executive Officer
    (Principal Executive Officer)               |  | March 18, 2004
|                                        
|/s/ ANN MATHERAnn Mather                 |  | Executive Vice President and Chief Financial
    Officer (Principal Financial and Accounting Officer) |  | March 18, 2004
|                                        
|/s/ EDWIN E. CATMULLEdwin E. Catmull     |  | President and Director                                                                                |  | March 18, 2004
|                                        
|/s/ SKIP M. BRITTENHAMSkip M. Brittenham |  | Director                                                                                              |  | March 18, 2004
|                                        
|/s/ JOSEPH A. GRAZIANOJoseph A. Graziano |  | Director                                                                                              |  | March 18, 2004
|                                        
|/s/ LAWRENCE B. LEVYLawrence B. Levy     |  | Director                                                                                              |  | March 18, 2004
|                                        
|/s/ JOE ROTHJoe Roth                     |  | Director                                                                                              |  | March 18, 2004

77



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##### Table of Contents



|                                                 |  |          |  |                |  | 
|------------------------------------------------ |  | -------- |  | -------------- |  | 
|                                                 |  |          |  |               
|Signature                                        |  | Title    |  | Date          
|                                                 |  |          |  |               
|                                                
|/s/ LARRY W. SONSINILarry W. Sonsini             |  | Director |  | March 18, 2004
|                                                
|/s/ JOHN S. WADSWORTH, JR.John S. Wadsworth, Jr. |  | Director |  | March 18, 2004

78



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##### Table of Contents



INDEX TO EXHIBITS

|        |       |          |  |                                                                                                                                                                                                                                                                                                                    
|------- | ----- | -------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |         
|Number  |       | Exhibits
|        |       |         
|        | 3.1   |          |  | Amended and Restated Articles of Incorporation
    (which is incorporated herein by reference to Exhibit 3.3
    to the Registrants Form S-1 Registration Statement,
    Commission File No. 33-97918)                                                                                                            
|        | 3.2   |          |  | Amended and Restated Bylaws (which is
    incorporated herein by reference to Exhibit 3.2 to the
    Registrants Annual Report on Form 10-K for the year
    ended December 30, 2000, Commission File No. 0-26976)                                                                                                
|        | 4.1   |          |  | See Exhibit 3.1                                                                                                                                                                                                                                                                                                    
|        | 4.2   |          |  | See Exhibit 3.2                                                                                                                                                                                                                                                                                                    
|        | 4.3   |          |  | Specimen Common Stock Certificate (which is
    incorporated herein by reference to Exhibit 4.5 to the
    Registrants Form S-1 Registration Statement,
    Commission File No. 33-97918)                                                                                                                         
|        | 10.1* |          |  | 1995 Stock Plan, as amended (which is
    incorporated herein by reference to Exhibit 4.3 to the
    Registrants Form S-8 Registration Statement,
    Commission File No. 333-71706)                                                                                                                              
|        | 10.2* |          |  | 1995 Director Option Plan (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
    Pixar dated January 23, 2003                                                                                                                                                                                                                                           
|        | 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)                               
|        | 23.1  |          |  | Consent of Independent Auditors                                                                                                                                                                                                                                                                                    
|        | 24.1  |          |  | Power of Attorney (See page 77)                                                                                                                                                                                                                                                                                    
|        | 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.

79