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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                 ---------------
                                    FORM 10-K

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


     FOR THE FISCAL YEAR ENDED                   COMMISSION FILE NUMBER
         DECEMBER 31, 1996                              0-26976

                                      PIXAR
             (Exact name of registrant as specified in its charter)

               CALIFORNIA                              68-0086179
     (State or other jurisdiction of               (I.R.S. Employer
     incorporation or organization)               Identification No.)

             1001 WEST CUTTING BOULEVARD, RICHMOND, CALIFORNIA 94804
               (Address of principal executive offices) (Zip Code)

       Registrant's telephone number, including area code: (510) 236-4000
                                 ---------------

               Securities registered pursuant to Section 12(b) of
                 the Act: NONE Securities registered pursuant to
                            Section 12(g) of the Act:

                      COMMON STOCK, NO PAR VALUE PER SHARE
                                (Title of Class)

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

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

         As of March 20, 1997, there were 40,141,461 shares of the Registrant's
Common Stock outstanding and the aggregate market value of such shares held by
non-affiliates of the Registrant (based upon the closing sale price of such
shares on the Nasdaq National Market on March 20, 1997) was approximately
$167,113,835. Shares of Common Stock held by each executive officer and director
and by each entity that owns 5% or more of the outstanding Common Stock have
been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.


                       DOCUMENTS INCORPORATED BY REFERENCE

         Certain sections of Pixar's Annual Report to Shareholders for the year
ended December 31, 1996 (the "1996 Annual Report") are incorporated by reference
in Parts II and IV of this Form 10-K to the extent stated herein. Also, certain
sections of Pixar's definitive Proxy Statement for the 1996 Annual Meeting of
Shareholders to be held on June 11, 1997 are incorporated by reference in Part
III of this Form 10-K to the extent stated herein.
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         This Annual Report on Form 10-K and the documents incorporated herein
by reference contain forward-looking statements that have been made pursuant to
the provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are based on current expectations, estimates and
projections about Pixar's industry, management's beliefs, and assumptions made
by management. Words such as "anticipates," "expects," "intends," "plans,"
"believes," "seeks," "estimates," variations of such words and similar
expressions are intended to identify such forward-looking statements. These
statements are not guarantees of future performance and are subject to certain
risks, uncertainties and assumptions that are difficult to predict; therefore,
actual results and outcomes may differ materially from what is expressed or
forecasted in any such forward-looking statements. Such risks and uncertainties
include those set forth herein under " Certain Factors Affecting Business,
Operating Results and Financial Condition" on pages 15 through 26, as well as
those noted in the documents incorporated herein by reference. Particular
attention should be paid to the cautionary language in "Certain Factors
Affecting Business, Operating Results and Financial Condition--Anticipated
Decline in Operating Results in 1997 and Net Losses in 1998," "--Dependence on
Toy Story, Bugs and Toy Story Video Sequel," "--Liquidity Risks, "--Scheduled
Concurrent Release of Films; Management of Growth" and "--Risks Associated With
Co-Production Agreement." Unless required by law, Pixar undertakes no obligation
to update publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.


                                     PART I

ITEM 1.   BUSINESS

GENERAL

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

RECENT DEVELOPMENTS

         On February 24, 1997 Pixar and Walt Disney Pictures and Television, a
wholly-owned subsidiary of Disney, entered into the Co-Production Agreement
("Co-Production Agreement") pursuant to which Pixar, on an exclusive basis, will
produce five computer animated feature-length theatrical motion pictures (the
"Pictures") for distribution by Disney over approximately the next ten years.
Pixar and Disney will co-finance the production costs of the Pictures, co-own
the Pictures (with Disney having exclusive distribution and exploitation
rights), co-brand the Pictures and share equally in the profits of each Picture
and any related merchandise and other ancillary products, after recovery of all
marketing and distribution costs (which will be financed by Disney), a
distribution fee paid to Disney and any other fees or costs, including any
participations provided to talent and the like. The Co-Production Agreement
generally provides that Pixar will produce each Picture and that Disney will
control all decisions relating to marketing, promotion, publicity, advertising
and distribution of each Picture. Disney and Pixar have agreed that the first
Picture under the Co-Production Agreement is the Picture with the working title
"Bugs." The Co-Production Agreement also contemplates that with respect to
theatrical sequels, made-for-home video sequels, television productions,
interactive media products and other derivative works related to the Pictures,
Pixar will have the opportunity to co-finance and produce such products or to
earn passive royalties on such products. Disney and Pixar have announced their
intention to produce a made-for-home video sequel to Toy Story (the "Toy Story
Video Sequel"), and Pixar has already begun work on the production under the
terms of the Co-Production Agreement. Pixar will not share in any theme park
revenues generated as a result of the Pictures.


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         In addition to entering into the Co-Production Agreement, Pixar agreed
to sell, and Disney agreed to purchase for cash, 1,000,000 shares of Pixar
Common Stock which Disney has agreed to hold for at least three years. Pixar
also granted two warrants, each exercisable for five years, to Disney: one
warrant to purchase 750,000 shares of Common Stock at an exercise price of
$20.00 per share and another warrant to purchase 750,000 shares of Common Stock
at an exercise price of $25.00 per share. Pixar granted certain registration
rights for the shares issuable upon exercise of the warrants. This transaction
was consummated in late March 1997 and Pixar received gross proceeds of $15.0
million.  Also in connection with the Co-Production Agreement, Pixar entered
into a new Employment Agreement with John Lasseter, the Academy Award -- winning
director of Toy Story, which contemplates that Mr. Lasseter's services will
continue to be available to Pixar until February 2004. Mr. Lasseter's Employment
Agreement is described in detail in the Pixar's Proxy Statement for the 1997
Annual Meeting of Shareholders to be filed with the Commission within 120 days
after the end of Pixar's fiscal year ended December 31, 1996.

        In late March 1997, Pixar determined to discontinue its business of
producing CD-ROM and other interactive products in favor of other opportunities
made available through the Co-Production Agreement.  See "Business Model and
Products -- Discontinuation of Interactive Products Division."

BUSINESS MODEL AND PRODUCTS

         Pixar's strategy is to develop and produce animated feature films and
related products, such as theatrical sequels, made-for-home video sequels,
soundtracks, toys and other merchandise. Pixar is currently implementing this
strategy through the Co-Production Agreement with Disney.

         Animated Feature Films. Pixar's first computer-animated feature film,
Toy Story, was released on November 22, 1995, and Pixar intends to continue to
develop computer animated feature films for the family entertainment market. In
1995, Pixar began development on a second computer-animated feature film for
Disney, with the working title of Bugs, which shall be the first such film
developed and distributed under the new Co-Production Agreement with Disney. The
screenplay for this film, which is also targeted to the family entertainment
market, is currently under development, but the film is not expected to be
released until the end of 1998 at the earliest. Pixar has established parallel
creative teams so that it can develop more than one film at a time.

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

         Made-For-Home Video Sequels. Disney and Pixar have announced their
intention to produce a made-for- home video sequel to Toy Story, such as
Disney's made-for-home video sequel to Aladdin entitled The Return of Jafar, and
Pixar has begun work on the Toy Story Video Sequel under the terms of the
Co-Production Agreement. Pixar intends in the future to continue to produce
made-for-home video sequels generally based on the same characters as the
original feature film. The Toy Story Video Sequel will also be distributed
pursuant to the Co-Production Agreement. Pixar expects that the Toy Story Video
Sequel and other made-for-home video sequels will be shorter in length and lower
in cost and quality than the theatrical films then under development.

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

         Short Animation Products. Pixar has also in the past produced animated
or partially animated television commercials, including for products such as
Coca-Cola, Listerine, Levi's Jeans, Gummi-Savers (a LifeSavers product) and
Fresca. However, in 1996, Pixar largely discontinued its business of producing
commercials in favor of other


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opportunities. Pixar does still produce short animation projects, such as
30-second Toy Story vignettes for television programming targeted at children.
Moreover, Pixar believes that there may be other opportunities to produce short
animation projects for Disney in connection with work performed under the
Co-Production Agreement. In particular, Pixar believes that there may be
opportunities for short animation projects related to theme parks and children's
television programming. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the 1996 Annual Report.

         Other Products. Pixar has been selling its RenderMan software for over
seven years. RenderMan has helped visual effects studios create visual effects
such as certain dinosaurs in Jurassic Park, the metal cyborg in Terminator 2 and
the ghosts in Casper. RenderMan runs on Unix-based workstations from Silicon
Graphics, Sun Microsystems, Inc. ("Sun"), The Hewlett-Packard Company
("Hewlett-Packard"), International Business Machines Corporation ("IBM") and
Digital Equipment Corp. ("Digital Equipment") as well as the Windows platform.
Examples of RenderMan customers include movie studios such as Disney, Boss Film
Studios, Inc., Digital Domain, Twentieth Century Fox Film Corporation,
Industrial Light and Magic ("ILM"), Columbia/Tri-Star Pictures Inc. and Warner
Bros. Inc. Customers also include government agencies and universities.
RenderMan is sold in several formats, including a Toolkit at a list price of
$5,000 per license. Discounts are available for site or multi-use licenses. As a
result of Pixar's reduced emphasis on the commercialization of software in favor
of products sold for their content, Pixar expects to dedicate less time and
resources to distributing and marketing RenderMan than it has in the past,
particularly shrink-wrapped versions of RenderMan, and expects that sales of
these products may decline. See "-- Technology -- RenderMan." See also
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the 1996 Annual Report.

         Discontinuation of Interactive Products Division. In 1995, Pixar
established a division that focused on the development of interactive CD-ROM
stories and games for PCs. Under a separate prior agreement with Disney, this
division of Pixar developed two CD-ROM titles based on Toy Story -- Toy Story
Interactive Storybook and Toy Story Activity Center. The products developed
under that agreement with Disney were financed and distributed by Disney. All
future CD-ROM products and other interactive products based on feature films
made pursuant to the Co-Production Agreement, if any, will be produced and
distributed pursuant to the terms of the Co-Production Agreement, which provides
Pixar with the option to produce and co-finance such products and to share
equally in the profits, after recovery of marketing and distribution costs.

        After the Co-Production Agreement was executed on February 24, 1997,
Pixar began evaluating the merits of staying in the business of producing
CD-ROM products and comparing those opportunities with opportunities in film
and other potential projects under the Co-Production Agreement. Management
determined that, despite the fact that Pixar's first CD-ROM titles were
successful on relative terms, the resources currently devoted to its
interactive products division would be better allocated to other projects
arising from the Co-Production Agreement, which Pixar believes have greater
potential than CD-ROM titles, such as theatrical films, home video sequels and
short animation projects. Moreover, the CD-ROM and interactive product market
is not growing as fast as expected, the production costs of such products are
increasing and one project under negotiation with a third party was canceled.
For these reasons, Pixar determined in the last week of March 1997 to
discontinue its business of producing CD-ROM and other interactive products and
redirect the approximately 60 employees in this division to film and related
projects within Pixar. This decision is expected to have a material adverse
impact on Pixar's results of operations in 1997.

PIXAR COMPUTER ANIMATION PROCESS AND DIGITAL BACK LOT

     Pixar Computer Animation Process

         The production of an animated feature film is extremely complex and
time consuming due to the very large number of frames and intricate detail of
each frame. At 24 frames per second, a 77-minute animated feature film such as
Toy Story requires approximately 110,000 individual frames. Animation for a
feature film has traditionally been created through hand-drawn cels, requiring
hundreds of people working for two to three years. Although computers have been
used to assist in some elements of painting cels for more recent releases,
almost every frame is still hand-drawn.


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

         Pixar makes its computer animated films and other projects in three
stages: creative development, production and post-production.


CREATIVE      Story  -- Treatment/ -- Screen- -- Story -- Story --   Voice
DEVELOPMENT  Concept     Outline       Play      Board    Reels    Recording


         Creative Development. Creative development is an iterative process in
which the story and its characters are created and developed. The first step in
creative development involves the development of a story concept, which often
takes the form of a story summary or outline known as a treatment. After
numerous iterations and research into the story and characters, a first draft of
a screenplay is written. The screenplay is then turned into story boards, which
are panels filled with thousands of sketches that represent the story to be
animated. The story boards are then transferred to film or video so that they
can be electronically edited into a photo play of the film called story reels, a
process which enables editing of the film before the production phase begins.
Voices are then selected, recorded and added to the story reels. Throughout the
creative development process, plans are developed for the style, colors and look
of the film.


PRODUCTION Modeling -- Layout -- Animation -- Shading  -- Rendering --   Film
                                                and                    Recording
                                              Lighting


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

         In the animation stage, the digitized models are animated, or "brought
to life," in three dimensions to create a motion sequence. Animation is
performed by defining "key frames," which are the frames containing the extremes
of motion that will occur in a scene. The computer then interpolates frames in
between the two most extreme positions in a particular segment of movement to
create smooth motion. The animators can then adjust the interpolation and key
frames repeatedly until they achieve the desired result. The next step in
completing a scene requires attaching to each object and model a description of
its surface characteristics. These "shaders" describe the pattern, texture,
finish and color for every object in the scene. Next, lighting is added by
placing digital lights into the scene. In the rendering phase, the renderer
takes the modeling, layout, animation, shading and lighting data and, for each
frame in the sequence, computes a three-dimensional image of what the scene
looks like at that point in time from the point of view of the camera. The final
rendering of a single frame can take between one and twenty hours. The final
rendered data is then sent to one of Pixar's film recorders for imaging onto
film.


POST-        Sound  --  Print  -- Sound  --   Color    -- Delivery
PRODUCTION  Effects    Musical    Mixing    Correction    of Print
             Design     Score


         Post-Production. The post-production stage consists of two parallel
processes: the picture process and the sound process. In the picture process,
images are put on film, the film is sent to a laboratory for color correction
and final prints are made. In the sound process, the sound effects and musical
score are added and the final sound is mixed. Pixar's post-production is simpler
than post-production in a live-action film, which requires more significant
editing. In


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most live-action films, many hours of film are shot, and the film is then
significantly edited and re-edited in the post-production stage to create a
feature film. Pixar, like other animation studios, edits the film throughout the
entire creative development and production process. Thus post-production
involves only final editing.

     Digital Back Lot

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

TECHNOLOGY

         Pixar has three core proprietary technologies: (i) Marionette, an
animation software system for modeling, animating and lighting, (ii) Ringmaster,
a production management software system for scheduling, coordinating and
tracking of a computer animation project and (iii) RenderMan, a rendering
software system for high quality photo-realistic image synthesis that Pixar
uses internally and licenses to third parties. Each of these systems is critical
to the production of Pixar's animated feature films and other animation
products.

         Marionette. Marionette is Pixar's software system for modeling,
animation and lighting for computer animation. Marionette is the primary
software tool of every animator and technical director at Pixar. In contrast to
many commercially available animation systems which are designed to address
product design, corporate logo graphics or cinematic special effects, Marionette
has been designed and optimized for character modeling and animation. Marionette
is portable across many of the standard Unix workstations, including those from
Silicon Graphics and Sun. Pixar has also ported Marionette to IBM and
Hewlett-Packard workstations for hardware evaluation purposes.

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

         A key component of Ringmaster is a distributed rendering system for
managing the huge quantity of images and data that must be rendered to create
Pixar's products. Pixar does its rendering on an array of powerful Unix
processors which are dedicated to rendering 24 hours a day. These machines,
which Pixar calls the RenderFarm, are connected via a local area network. To
achieve the desired quality level, the average time to render a single frame at
film resolution is between one and four hours; for video resolution the average
time to render a single frame is between 30 and 90 minutes. Since an animated
feature film contains well over 100,000 frames, each of which may be rendered
several times in the production process, Pixar typically has a large number of
frames to render at any give time. To manage this process, Ringmaster
coordinates and schedules all the processors in the RenderFarm. Ringmaster
includes a compositing system and also maintains an array of disk drives as a
central data repository for the digital image files generated by the rendering
and compositing steps of the production process. Finally, Ringmaster controls
the filming phase of production and is responsible for backing up shots for
archival purposes.

         RenderMan. RenderMan is a rendering software system for high quality
photo realistic image synthesis that Pixar uses internally and also licenses to
third parties. Today, RenderMan is used by many major film studios and special
effects firms. Examples of projects which have used RenderMan include Terminator
2, Jurassic Park, True Lies, Aladdin, Casper and Apollo 13. By licensing
RenderMan to film studios, visual effects houses, commercial production


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facilities and other computer animation companies, Pixar believes that RenderMan
has been established as a de facto industry standard for high quality rendering.

         Pixar has used RenderMan for animation production since 1988, when it
was first used in the making of the short animated film Tin Toy. Since that
time, Pixar has used RenderMan for its films and for more than 40 television
commercials. Pixar also used RenderMan to render approximately 110,000 frames
for the animated feature film, Toy Story, and to render all frames for the two
Toy Story CD-ROM titles.

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

CREATIVE DEVELOPMENT GROUP

         Pixar's creative and technical personnel have collaborated for over ten
years to produce three-dimensional computer animated films. The principal
objective of Pixar's creative group is to use the medium of computer animation
to create heartwarming stories with memorable characters that are targeted for
family entertainment. The members of Pixar's creative and technical teams have
been nominated for and received a number of awards. In 1986, the short animated
film Luxo Jr. earned an Academy Award nomination for Best Short Film (Animated).
In 1988, another of Pixar's short films, Tin Toy, became the first computer
animated film to win the Academy Award for Best Short Film (Animated).

         The creative team at Pixar is under the direction of John Lasseter, an
Academy Award-winning director and animator and the director of Toy Story. In
March 1996, Mr. Lasseter received a Special Achievement Oscar from the Academy
of Motion Picture Arts and Sciences for the development and application of
techniques that made possible the first feature-length computer animated film --
Toy Story. Pixar has built an entire creative team consisting of highly skilled
animators, story artists and other artists highly skilled in the art of
animation, especially computer animation. Pixar strives to hire animators who
have superior acting ability -- those able to make characters and inanimate
objects come to life and appear as though they have their own thought processes.
Pixar's proprietary software tools enable artists unfamiliar with computers to
quickly become skilled in the art of three-dimensional animation. Along with
animators, the creative team at Pixar includes a story department and an art
department. The story department is responsible for a project's concept,
treatment, outline, script, story boards and story reels. The art department is
responsible for the visual development of a project, including the design of
characters and sets and the color, textures, shading and lighting. It is also
quite common for creative contributions to come from the technical group. All
groups work closely together in an iterative process. To encourage
collaboration, Pixar has strived to create a cooperative working environment and
a non-hierarchical culture whereby each member of the creative team, regardless
of position or department, considers the ideas of any other member of the team.

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


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RELATIONSHIP WITH DISNEY

     Prior Agreements

         Pixar's relationship with Disney dates to 1986, when Pixar and Disney
entered into a joint technical development effort that resulted in the Computer
Animated Production System ("CAPS"), a production system owned and used by
Disney in certain of its two-dimensional cel-based animated feature films.
Disney first used CAPS for The Rescuers Down Under and subsequently used it for
other animated feature films, including Beauty and the Beast, Aladdin, The Lion
King and Pocahontas. In 1992, certain employees of Pixar and Disney were jointly
awarded an Academy Award for Scientific and Engineering Achievement for CAPS.

         In May 1991, Pixar entered into a Feature Film Agreement with Walt
Disney Pictures, a wholly-owned subsidiary of Disney, which provided for the
development, production and distribution of up to three feature-length motion
pictures (the "Feature Film Agreement"). It is pursuant to that Feature Film
Agreement that Toy Story and the Toy Story home video were developed, produced
and distributed. In August 1995, Pixar entered into a non-exclusive CD-ROM
development and publishing agreement with Disney Interactive, Inc. ("Disney
Interactive"), a wholly-owned subsidiary of Disney, for the development,
production and distribution of CD-ROM titles based on Toy Story (the "CD-ROM
Agreement"). It is pursuant to the CD-ROM Agreement that the two Toy Story
CD-ROM products were developed, produced and distributed. Both the Feature Film
Agreement and the CD-ROM Agreement were superseded by the Co-Production
Agreement, except as discussed below.

     Co-Production Agreement

         The following is a summary of the Co-Production Agreement, which has
been filed as an exhibit to this Annual Report on Form 10-K. The foregoing
summary is not complete, and reference is made to the Co-Production Agreement
filed as an exhibit to this Annual Report on Form 10-K. This summary is
qualified in all respects by such reference. Shareholders and prospective
investors in Pixar's Common Stock are encouraged to read the Co-Production
Agreement.

         Overview. On February 24, 1997 Pixar and Walt Disney Pictures and
Television entered into the Co-Production Agreement pursuant to which Pixar, on
an exclusive basis, will produce five computer animated feature-length
theatrical motion pictures (the "Pictures") for distribution by Disney over
approximately the next ten years. Pixar and Disney will co-finance the
production costs of the Pictures, co-own the Pictures (with Disney having
exclusive distribution and exploitation rights), co-brand the Pictures and share
equally in the profits of each Picture and any related merchandise and other
ancillary products, after recovery of all marketing and distribution costs
(which will be financed by Disney), a distribution fee paid to Disney and any
other fees or costs, including any participations provided to talent and the
like. The Co-Production Agreement generally provides that Pixar will produce
each Picture and that Disney will control all decisions relating to marketing,
promotion, publicity, advertising and distribution of each Picture. Disney and
Pixar have agreed that the first Picture under the Co-Production Agreement is
the Picture with the working title "Bugs." The Co-Production Agreement also
contemplates that with respect to theatrical sequels, made-for-home video
sequels, television productions, interactive media products and other derivative
works related to the Pictures, Pixar will have the opportunity to co-finance and
produce such products or to earn passive royalties on such products. Disney and
Pixar have announced their intention to produce a made-for-home video sequel to
Toy Story, and Pixar has already begun work on the production under the terms of
the Co-Production Agreement. Pixar will not share in any theme park revenues
generated as a result of the Pictures.

         Production. The Co-Production Agreement provides a mechanism for
Pixar's submission and the mutual selection of treatments that will be developed
and produced as Pictures. After the selection of a treatment, Pixar generally
controls the production of each Picture. Disney is entitled to designate a
representative at Pixar to monitor the production and production costs of the
Pictures.

         Financing of Development and Production. Pixar and Disney are to
equally share all production costs. Production costs are defined in the
Co-Production Agreement to mean all costs and expenses incurred by Pixar
directly related to or fairly allocable to the creation, development,
pre-production, production, post-production and delivery to


                                       -8-
<PAGE>   9
Disney of the Pictures. Production costs include, among other things, all
carrying costs incurred by Pixar for retaining of employees for production
purposes and the overhead attendant thereto, the costs of all treatments
prepared by Pixar for submission to Disney, all costs of computer hardware and
software used to develop the Pictures, and fair allocations of all costs and
expenses of Pixar associated with or benefiting the Picture, including research
and development, general and administrative and overhead expenses and
facilities. The Co-Production Agreement provides mechanisms for Disney and Pixar
to agree upon the budgets for treatments, development and production of each
Picture. Pixar may not exceed production budgets (which may be revised with
mutual approval) without Disney's written approval, subject to certain limited
exceptions.

         Distribution. Disney has control over all decisions relating to, and is
solely responsible for financing the costs and expenses of, the marketing,
promotion, publicity, advertising and distribution of each Picture, subject to
certain requirements. Provided, in general, that Disney has agreed on the
treatment to be developed into each Picture, Disney has committed to initially
release each Picture within certain windows and not to release other Disney
family films during certain windows, and each Picture is to be distributed and
marketed under the Walt Disney Pictures brand (or the then current Disney brand
for premiere Disney movies) and is to be distributed and marketed by Disney in
all markets and media and on a worldwide basis in a manner similar to that in
which Disney then currently distributes and markets its premiere animated
movies. Disney is to consult with Pixar relating to all such major marketing and
distribution decisions, and Pixar is entitled to designate a representative to
monitor marketing and distribution of the Pictures.

         Division of Gross Receipts. Pixar and Disney are entitled to share
equally in all gross receipts remaining after deduction of: (i) a distribution
fee to Disney, (ii) mutually agreed participations (payments to third parties
such as actors, composers and other artists contingent upon the success of the
Pictures), if any, on a pro rata basis, paid by either Disney or Pixar, and
(iii) Disney's distribution costs. Gross receipts includes all revenues or other
consideration received by Disney from the exploitation of the Pictures and any
related merchandise, books, soundtracks and other tangible personal property
based upon the Pictures, as more specifically provided in the Co-Production
Agreement (collectively, "Merchandise"), subject to certain exceptions relating
primarily to receipts from Disney's affiliates. The distribution fee payable to
Disney is substantially lower than under the prior Feature Film Agreement and
reflects Pixar's commitment to finance half of the production costs of the
Pictures. Distribution costs are broadly defined in the Co-Production Agreement
to include out-of-pocket costs paid (or in certain instances, accrued for
payment) to a third party (or in certain instances, to Disney's affiliates) by
Disney or certain of its affiliates, provided that such out-of-pocket costs are
directly related or fairly allocable to the distribution of the Picture and
Merchandise. Pursuant to the Co-Production Agreement, Pixar will receive
statements and payments of its share of gross receipts monthly within 45 days
after the end of each calendar month, and Pixar has the right to audit Disney's
and its affiliates' books and records relating to the Pictures and Merchandise.

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


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<PAGE>   10
         If Pixar elects to co-finance and produce a Derivative Work, the
Co-Production Agreement provides for the following:

                  (i) with respect to theatrical motion pictures and
         made-for-home video productions, the terms and conditions of the
         Co-Production Agreement are to be extended to cover such Derivative
         Works, subject to certain exceptions;

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

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

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

         A Derivative Work that is a theatrical motion picture would not count
towards the five Pictures to be produced under the Co-Production Agreement. The
Toy Story Video Sequel is the first such Derivative Work that Pixar has elected
to co-finance and produce.

         Creative Controls. Creative controls and decisions with respect to
developing and producing Pictures are generally subject to the mutual approval
of Pixar and Disney. The Co-Production Agreement provides for certain dispute
resolution procedures in the event of disagreement.

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

         Exclusivity. Pixar has agreed not to release or authorize the release
of any feature length animated theatrical motion picture produced by Pixar,
other than the Pictures and Derivative Works produced by Pixar under the
Co-Production Agreement, until twelve months from delivery of the fifth Picture
under the Co-Production Agreement. Pixar has further agreed that it will not
enter into any agreement with any third party for the development, production or
distribution of any feature length animated theatrical motion picture until
after Pixar has delivered the third Picture to Disney under the Co-Production
Agreement. Pixar has also agreed that it will not develop or produce any rides
or attractions for major theme parks not owned or operated by Disney, and to
give Disney a right to negotiate with respect to animated television productions
or animated made-for-home video productions that Pixar proposes to produce
during the term of the Co-Production Agreement.

         Proprietary Rights. The copyrights, trademarks and other intellectual
property rights in and to the Pictures, all new and unique characters and story
elements thereof and the audio-visual images thereof, and Merchandise relating
thereto, shall be jointly owned by Disney and Pixar on an undivided 50/50 basis,
subject to Pixar's ownership rights in the technology and excluding any
intellectual property rights previously owned by Pixar or Disney.
Notwithstanding the foregoing, Disney has the exclusive distribution and
exploitation rights with respect to the Pictures, Derivative Works


                                      -10-
<PAGE>   11
and Merchandise relating thereto. Pixar shall own the copyright and all other
intellectual property rights in and to all computer programs and other
technology developed or discovered by Pixar before, during or after the term of
the Co-Production Agreement.

         Term and Termination. The Co-Production Agreement continues until
delivery to Disney of the fifth Picture produced and financed under the
Co-Production Agreement, unless earlier terminated. Disney is entitled to
terminate the Co-Production Agreement in the event that Disney and Pixar fail to
agree on a treatment for a Picture within one year after the initial theatrical
release of the last Picture for which a treatment has been approved or selected,
subject to certain exceptions. Disney is also entitled to terminate the
Co-Production Agreement in the event that certain types of competitors directly
or indirectly acquire or control a 50% or greater ownership interest in Pixar or
Pixar merges or consolidates into such a competitor. Upon termination by Disney
pursuant to either of the last two sentences, Disney has certain rights to
compel Pixar to complete works in production. In the event of termination, the
Co-Production Agreement provides that its terms and conditions continue to apply
with respect to Pictures, Merchandise and Derivative Works which have been
delivered by Pixar to Disney or which Disney elects to have completed, as well
as all future Merchandise and future Derivative Works relating thereto, but
otherwise terminates.

         Effect on Prior Agreements. All Derivative Works based on Toy Story,
including the Toy Story Video Sequel currently being produced, are to be
governed by the Co-Production Agreement and not the original Feature Film
Agreement or the CD-ROM Agreement. The original Feature Film Agreement now
applies only to the rights and obligations of Disney and Pixar relating to the
financial participation in, and the production and distribution of, the
theatrical motion picture Toy Story and the financial participation in
Merchandise related to Toy Story (unless gross receipts in any given month
exceed a certain amount, in which case they will be subject to the Co-Production
Agreement), and otherwise has no further force or effect. The original CD-ROM
Agreement remains in full force and effect with respect to the first and second
CD-ROM products developed under that agreement, but otherwise has no force or
effect.

COMPETITION

         Pixar experiences intense competition with respect to both animated
feature films and software.

         Movie Studios. Pixar's animated feature films compete and will continue
to compete with feature films and other family oriented entertainment products
produced by major movie studios, including Disney (as somewhat limited by the
Co-Production Agreement), Warner Bros. Inc. (which has acquired Turner
Broadcasting Systems Inc.), Twentieth Century Fox Film Corporation, Paramount
Pictures, Columbia/Tri-Star Pictures Inc., Lucasfilm Ltd. ("Lucasfilm"),
Universal City Studios, Inc. and MGM/UA, as well as numerous other independent
motion picture production companies. Several of these studios have already
developed and released animated feature films, and Pixar expects additional
competition in the animated feature film market from these and other movie
studios. Some of these other movie studios have announced their intention to
enter the animated feature film market, including DreamWorks SKG ("DreamWorks"),
a studio formed in 1994 which is expressly targeting the animated film market.
In particular, DreamWorks owns a significant equity stake in Pacific Data Images
("PDI"), a computer graphics special effects firm, and has begun developing a
computer animated movie with PDI that is expected to be completed by 1998. This
computer animated movie, which has been referred to publicly as "Ants", may
contain similar subject matter as Bugs. Pixar's films will compete with the
feature films of these movie studios for audience acceptance and exhibition
outlets. In addition, Pixar competes and will continue to compete with these
movie studios for the acquisition of literary properties, production financing,
the services of performing artists, and the services of other creative and
technical personnel, particularly in the fields of animation and technical
direction. Most of the other movie studios with which Pixar competes have
significantly greater name recognition and significantly greater financial,
technical, creative, marketing and other resources than does Pixar.

         At least two of these movie studios, Disney and Lucasfilm (through its
affiliate Industrial Light and Magic ("ILM")), have developed their own internal
computer animation capability and have created computer animation for special
effects in animated films. In addition, Pixar believes that Disney is currently
developing and producing a feature film making substantial use of computer
animation. Other movie studios may internally develop, license or sub-contract


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<PAGE>   12
three-dimensional animation capability. Further, Pixar believes that continuing
enhancements in computer hardware and software technology will lower barriers to
entry for studios or special effects companies which intend to produce computer
animated feature films or other products.

         The Co-Production Agreement provides for the development and production
by Pixar of five computer animated feature films. Because Disney co-finances the
films developed and produced under the Co-Production Agreement, distributes the
films under the "Walt Disney Pictures" label and enjoys financial benefits in
the event that such films achieve significant box office revenues, Pixar
believes that Disney desires such films to be successful. Nonetheless, Disney
has been by far the most successful producer of animated feature films, and
family oriented motion pictures distributed by Disney or its affiliates are
likely to be in the market concurrently with and competing with Pixar's animated
feature films. Pixar's contractual arrangement with Disney also presents other
risks. See "Certain Factors Affecting Business, Operating Results And Financial
Condition -- Risks Associated With Co-Production Agreement."

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

         Computer Graphics Special Effects Firms. Pixar also expects to compete
with computer graphics special effects firms, including ILM, Digital Domain,
PDI, Rhythm & Hues, Boss Film Studios, Inc. and Blue Sky Productions. These
computer graphics special effects firms may be capable of creating their own
three-dimensional computer animated feature films or may produce
three-dimensional computer animated feature films for movie studios that compete
with Pixar. For example, ILM has already created and produced three-dimensional
character animation which was used for the ghosts in the live action film
Casper, and ILM has a royalty-free, paid-up license to use Pixar's RenderMan
software and to obtain at no cost all enhancements and upgrades thereto. Other
computer graphics special effects firms have licensed or may license RenderMan.
Accordingly, Pixar's RenderMan software may not provide Pixar with a competitive
advantage. Pixar believes that the primary competitive factors in the market for
three-dimensional computer animation for feature films include creative content
and talent, product quality, technology, access to distribution channels and
marketing resources. Pixar believes that it presently competes favorably with
respect to each of these factors.

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

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


                                      -12-
<PAGE>   13
PROPRIETARY RIGHTS

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

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

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

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

         In March 1996, Pixar entered into a license agreement with Silicon
Graphics whereby Pixar granted to Silicon Graphics and its subsidiaries a
non-exclusive license to use certain of Pixar's patents covering techniques for
creating computer-generated photorealistic images. These same patents were
licensed to Microsoft Corporation in June 1995. These patents relate to
pseudo-random point sampling techniques in computer graphics which are
incorporated into Pixar's RenderMan. The license agreements with Silicon
Graphics and Microsoft will expire no later than the year 2010.


                                      -13-
<PAGE>   14
Silicon Graphics and Microsoft may use the licensed technology in rendering
products which compete with Pixar's RenderMan software, which could adversely
impact sales of RenderMan.

EMPLOYEES

         As of December 31, 1996, Pixar had a total of 286 employees. Although
none of Pixar's employees is represented by a labor union, it is common for
animators and actors at film production companies to belong to a union, and
there can be no assurance that Pixar's employees will not join or form a labor
union or that Pixar, for certain purposes, will not be required to become a
union signatory. Pixar has not experienced any work stoppages and considers its
relations with the employees to be good.

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


                                      -14-
<PAGE>   15
                       CERTAIN FACTORS AFFECTING BUSINESS,
                    OPERATING RESULTS AND FINANCIAL CONDITION

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

ANTICIPATED DECLINE IN OPERATING RESULTS IN 1997 AND NET LOSSES IN 1998

         A number of factors are expected to lead to a substantial decline in
Pixar's operating results in 1997 and net losses in 1998, as discussed more
fully below.

     End of Toy Story Revenues

         Pixar has already recognized the vast majority of the revenue it
expects to receive from the domestic and international theatrical releases of
Toy Story and expects substantially all of the revenue from the home video of
Toy Story to be recognized in the first two quarters of 1997. Under the terms of
the Feature Film Agreement, which still governs the compensation payable to
Pixar from the home video of Toy Story, Pixar is compensated for the home video
to a lesser extent than it was with respect to the theatrical release of Toy
Story. Pixar does not expect to recognize significant revenue from the Toy Story
home video in the third or fourth quarters of 1997 or in any quarter in 1998.
Pixar also expects limited revenue from the Toy Story CD-ROM products in 1997
and little or no revenue from such products in 1998.

     Reduced CD-ROM Revenue

        Pixar also expects to recognize less CD-ROM revenue in 1997 and 1998
than was previously anticipated. Although its first two CD-ROM products were
successful on relative terms, Pixar determined in the last week of March 1997
to discontinue its business of producing CD-ROM and other interactive products
in favor of other opportunities arising, in part, as a result of entering into
the Co-Production Agreement. This decision is expected to have a material
adverse impact on Pixar's operating results in 1997 and 1998. Pixar will not
recognize any CD-ROM or other interactive product revenue in 1997 or 1998,
other than revenue attributable to the two Toy Story CD-ROM products, and may
incur carrying costs associated with the approximately 60 employees currently
assigned to the interactive products division. Pixar does, however, expect to
be able to reassign most of these employees to Picture productions and other
departments within Pixar.

     Timing of Bugs and Toy Story Video Sequel Releases

         Bugs is not expected to be released until the end of 1998 at the
earliest, and revenue attributable to Bugs is not expected to be recognized
until after all costs have been recovered. Recovery of all costs depends on many
factors and may not occur until six to twelve months after its release at the
earliest, ensuring that Pixar will not recognize any revenue from Bugs until the
second half of 1999 at the earliest. The Toy Story Video Sequel is currently
targeted for release in the second half of 1998, but its release date could
change for a number of reasons. First, Pixar may be unable, for technical or
other reasons, to complete the production of the Toy Story Video Sequel in time
for its scheduled release in the second half of 1998. Second, even if completed,
Disney and Pixar may choose to delay release of the Toy Story Video Sequel until
the 1998 holiday season or thereafter. Depending on the timing of receipt of
revenues by Disney, Pixar may not recognize revenue from the Toy Story Video
Sequel until three to six months after its release at the earliest, meaning that
if the Toy Story Video Sequel were released in late 1998 or thereafter, Pixar
would not recognize any revenue from the Toy Story Video Sequel until 1999 at
the earliest. Third, it is possible that the Toy Story Video Sequel could be
released to the theaters instead of as a made-for-home video. In such event,
Pixar would not expect to recognize any revenue until six to twelve months after
the theatrical release, with the result that Pixar would not recognize any
revenue from such film until 1999, even if released to the theaters in the
second half of 1998.


                                      -15-
<PAGE>   16
     Possible Decline in Sales of RenderMan Due to Shift in Focus

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

      Increase in Operating Expenses

         In 1996, Pixar significantly increased its operating expenses, and
Pixar plans to continue to increase its operating expenses to fund greater
levels of research and development and to expand operations. Specifically, Pixar
expects operating expenses to increase significantly due to continued investment
in proprietary software systems, increased compensation costs as a result of
intense competition for animators, creative personnel and technical directors
and increased costs associated with the expansion of its facilities.
Accordingly, Pixar anticipates significant increases in operating expenses in
each of 1997 and 1998. Finally, Pixar expects its tax rate to increase in 1997
and future years as the result of utilization of net operating losses in 1996.

     Impact on Operating Results

         As a result of the above factors, the only substantial revenue expected
to be recognized in 1997 will be from the Toy Story home video, and
substantially all of that will be recognized in the first and second quarters.
Further, unless the Toy Story Video Sequel is released early in the second half
of 1998 and is an extraordinary success on relative terms, Pixar will not
recognize substantial revenue in 1998. At the same time, Pixar's operating
expenses may increase in 1997 and 1998, even after giving effect to
capitalization of film production costs and allocation of certain operating
expenses to Disney under the Co-Production Agreement. Therefore, Pixar expects
revenue and operating results in the third and fourth quarters of 1997 to
decline substantially from the first and second quarters of 1997 and from the
same quarters of 1996. It is possible that Pixar would even incur operating and
net losses in each of the last two quarters of 1997. Pixar also expects to incur
operating and net losses in each of the first three quarters of 1998 and, unless
the Toy Story Video Sequel is released early in the second half of 1998, the
fourth quarter of 1998 and for the year ending December 31, 1998. See
"Managements' Discussion and Analysis of Financial Condition and Results of
Operations" in the 1996 Annual Report.

POTENTIAL FLUCTUATIONS IN OPERATING RESULTS

         In addition to the factors set forth above, Pixar expects to generally
experience significant fluctuations in its future annual and quarterly operating
results caused by a variety of factors. Pixar expects that its annual and
quarterly operating results, particularly its revenue, will fluctuate due to
factors such as the timing of the domestic and international releases of the
animated feature films, the success of the animated feature films (which can
fluctuate significantly from film to film), the timing of the release of related
products into their respective markets, the demand for the related products
(which is often a function of the success of the related animated feature film),
film production costs, Disney's costs to distribute and promote the feature
films and related products, Disney's success at marketing the films and related
products, the timing of receipt of proceeds from the animated feature films and
related products by Disney, the timing of revenue recognition under the
Co-Production Agreement, the Feature Film Agreement or the CD-ROM Agreement, as
the case may be, the introduction of new feature films or products by Pixar's
competitors, and general economic conditions. In particular, since Pixar's
revenue under the Co-Production Agreement is directly related to the success of
a feature film, Pixar's operating results are likely to fluctuate depending on
the level of success of its animated feature films and related products. The
revenues derived from the production and distribution of an animated feature
film depend primarily on the film's acceptance by the public, which cannot be
predicted and does not necessarily bear a direct correlation to the production
or distribution costs incurred. The commercial success of a motion picture also
depends upon promotion and marketing, production costs and other factors. See
"Risks of Motion Picture Industry -- Commercial Success of a Motion Picture is
Unpredictable." 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.


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<PAGE>   17
         Moreover, Pixar's operating expenses will be extremely difficult to
forecast. The direct costs of film production are budgeted in agreement with
Disney and shared equally. Pixar's share of these direct costs of film
production are capitalized by Pixar in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 53, "Financial Reporting by Producers and
Distributors of Motion Picture Films." A substantial portion of all of Pixar's
other costs are incurred for the benefit of feature films ("Pixar's Overhead"),
including research and development expenses and general and administrative
expenses. Portions of Pixar's Overhead are included in the budgets for the
Pictures and will be shared equally with Disney under the Co-Production
Agreement. The remaining portion of Pixar's Overhead is either capitalized as
film production costs, if required under SFAS No. 53, or charged to operating
expense in the period incurred. Because a substantial portion of Pixar's
Overhead is allocated to the Pictures and reimbursed by Disney and other amounts
are capitalized by Pixar in accordance with SFAS No. 53, Pixar's future reported
operating expenses will not reflect the true level of spending on the production
of animated feature films, related products and overhead.

         Pixar has a valuation allowance as of December 31, 1996 which fully
offsets its gross deferred tax assets due to Pixar's historical losses and the
fact that there is no guarantee Pixar will generate sufficient taxable income in
the future to be able to realize any or all of its deferred tax assets. As a
result, Pixar may not be able to realize a benefit in the future from its net
operating loss carryforwards, nor may it be able to recognize the tax benefits
of net operating losses to be generated in the future.

         As a result of all of the foregoing, Pixar believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful, and its annual and quarterly results of operations should not be
relied upon as any indication of future performance. Due to all of the foregoing
factors, it is likely that in some future period Pixar's operating results will
be below the expectations of public market analysts and investors. In such
event, the price of Pixar's Common Stock would likely be materially adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in the 1996 Annual Report.

DEPENDENCE ON TOY STORY, BUGS AND TOY STORY VIDEO SEQUEL

     Dependence on Toy Story

         For at least 1997, Pixar's revenue and operating results will be almost
entirely dependent upon the success of Toy Story home video and the CD-ROM
products related to Toy Story. Under the Feature Film Agreement, even though Toy
Story grossed more than $350 million worldwide in box office receipts, Pixar's
compensation from these receipts (approximately $18.8 million) was relatively
small compared to that of Disney. Pixar expects to recognize substantially all
of the Toy Story home video revenue in the first two quarters of 1997 and little
or no revenue thereafter. The amount of compensation payable to Pixar from the
Toy Story home video is governed by the prior Feature Film Agreement, pursuant
to which Pixar's compensation rate for home videos is less than it was for
theatrical exhibitions of Toy Story. Pixar also expects limited revenue from its
Toy Story CD-ROM products in 1997 and little or no revenue from such products in
1998. Otherwise, Pixar expects little or no revenue in 1997 and 1998 from Toy
Story or related products. Because Bugs and the Toy Story Video Sequel are not
expected to be released until the end of 1998, all other revenues in the last
half of 1997 and 1998 will be primarily dependent upon Pixar's other businesses,
from which Pixar expects limited revenue. See "Business -- Relationship With
Disney -- Co-Production Agreement."

     Dependence on Bugs and Toy Story Video Sequel

         Beyond 1998, Pixar expects to be significantly dependent upon the
success of Bugs and the Toy Story Video Sequel (the "Current Projects") and
related products. Although creative development on each of the Current Projects
has begun, the Toy Story Video Sequel is not expected to be released any earlier
than the last half of 1998, and Bugs is not expected to be released any earlier
than the end of 1998. There can be no assurance that either of the Current
Projects will be successfully created, developed and released when scheduled or
thereafter. In addition, given the escalation in compensation rates of people
required to work on the Current Projects, the number of people required to work
on the Current Projects, and the equipment needs, the budget for the Current
Projects and subsequent films and related products will be substantially greater
than the budget for Toy Story and will be financed equally by Pixar and Disney
under the Co-Production Agreement. There can be no assurance that Pixar will not
experience difficulties that could delay or prevent the successful development
or production of either of the Current Projects or subsequent animated


                                      -17-
<PAGE>   18
feature films or related products. If Pixar is unable to produce and develop on
a timely basis the Current Projects and subsequent animated feature films and
related products that meet with broad market acceptance, Pixar's business,
operating results and financial condition will be materially adversely affected.

         Risks Associated With Bugs. Under the Co-Production Agreement, Pixar
shares the production costs of Bugs as well as a portion of the receipts. These
costs will initially be capitalized as film production costs under SFAS No. 53
and then be amortized over Bugs's expected revenue stream when revenue is
recognized. If Bugs is not an extraordinary box office success similar to Toy
Story, the amount of revenue recognized will not be significant, and the
capitalized production costs will have to be amortized in large amounts over a
limited number of quarters, resulting in significant costs of film revenue in
those quarters and, potentially, significant quarterly operating and net losses.
Animated feature films that become extraordinary box office successes are rare.
Pixar believes, based on available information, that there is a reasonable basis
to conclude that of the more than 40 animated feature films introduced since
1990, only two movies generated domestic box office revenues greater than Toy
Story, and both of those films were produced and distributed solely by Disney.
During at least the last five years, Pixar believes that there has been no fully
animated feature film (other than Toy Story) produced or developed by a studio
other than Disney that has achieved more than $25 million in domestic box office
revenues. While Bugs will be co-financed, promoted and marketed by Disney, it
will have a different look, theme and musical style than Disney's other recent
animated films (except for Toy Story), and there can be no assurance that it
will have the same audience appeal as Disney's other animated films. For
example, The Nightmare Before Christmas, released in 1993, was an animated
feature film with a different appearance than traditional, hand drawn cel
animated feature films such as Beauty and the Beast, The Lion King, Aladdin,
Pocahontas and The Hunchback of Notre Dame and did not experience the same box
office returns as those films. As a result, even if released, Bugs and related
products may not generate significant revenue and operating results for Pixar,
even if Bugs is critically acclaimed and achieves substantial, but not
extraordinary, box office success. See "-- Risks Associated with Co-Production
Agreement -- Dependence on Disney for Distribution and Promotion of Feature
Films and Related Products," "-- Risks of Motion Picture Industry," and
"Business -- Relationship with Disney. " See also Note 4 of Notes to Financial
Statements in the 1996 Annual Report.

         Risks Associated with Toy Story Video Sequel. There are several
additional risks unique to the Toy Story Video Sequel. First, Pixar has no
experience developing sequels, either theatrical or made- for-home video.
Moreover, the made-for-home video market has only recently begun to develop. As
is typical in the case of an  undeveloped market, demand and market acceptance
are uncertain. Competition in this market is expected to increase dramatically.
Disney alone has announced its intention to distribute several made-for-home
video sequels in the next year, as have other studios. Pixar is at a
disadvantage in the made-for-home video sequel market as compared to other
animation studios in that Pixar cannot produce low cost animation, which
typically characterizes sequels to animated feature films. Finally, the Toy
Story Video Sequel will need to be an extraordinary success on relative terms in
order to generate profits for Pixar. If the Toy Story Video Sequel is not an
extraordinary success on relative terms, Pixar will incur substantial costs of
film revenue in those quarters in which revenue is recognized, which will have a
material adverse effect on its results of operations. There can be no assurance
that the Toy Story Video Sequel will be an extraordinary success on relative
terms, particularly given the recent emergence and uncertainty of the
made-for-home video market.

LIQUIDITY RISKS

         Pursuant to the Co-Production Agreement, Pixar will co-finance the next
five animated feature films which it produces, including Bugs and the second
theatrical film being developed under the Co-Production Agreement (the "Second
Theatrical Film"), and will also co-finance the Toy Story Video Sequel. In the
future, Pixar may co-finance other derivative works such as theatrical sequels,
interactive products and television productions. As Pixar does not expect to
generate substantial, if any, cash from operations in 1997 and 1998, the
production costs of Bugs, the Second Theatrical Film and the Toy Story Video
Sequel are expected to have a material adverse impact on Pixar's cash and
short-term investment balances. As of December 31, 1996, Pixar had approximately
$161 million in cash and short-term investments. Pixar believes that these funds
will be sufficient to meet its anticipated cash needs for working capital and
capital expenditures, including the production costs of Bugs, the Second
Theatrical Film and the Toy Story Video Sequel, until Pixar begins receiving
cash from the release of these films (which is generally not expected to occur
until


                                      -18-
<PAGE>   19
1999). However, even if these films generate cash, unless each is a success such
that Pixar recovers on a timely basis its share of the production costs, as well
as other operating expenses and capital expenditures, Pixar will be required to
seek financing for its ongoing commitments under the Co-Production Agreement and
any other requirements of its operations. Pixar may also seek additional
financing in connection with the expansion of its facilities. See "Properties."
The sale of additional equity or convertible debt securities would result in
additional dilution to Pixar's shareholders. Moreover, there can be no assurance
that Pixar will be successful in obtaining future financing, or even if such
financing is available, that it will be obtained on terms favorable to Pixar or
on terms providing Pixar with sufficient funds to meet its obligations and
objectives. The failure to obtain such financing would have a material adverse
effect on Pixar's business, operating results and financial condition.

SCHEDULED CONCURRENT RELEASE OF FILMS; MANAGEMENT OF GROWTH

         In order to meet its obligations pursuant to the Co-Production
Agreement, Pixar has established parallel creative teams so that it can develop
more than one film at a time. These teams are currently working on Bugs, the
Second Theatrical Film and the Toy Story Video Sequel. Bugs and the Toy Story
Video Sequel are currently targeted for release at or about the same time in
late 1998. Pixar believes that the concurrent release of two major animated
feature films by one company is rare if not unique. Moreover, Pixar has only
produced one prior feature film to date and has no experience with respect to
producing two animated feature films in parallel. Pixar has been required, and
will continue to be required, to expand its employee base, increase capital
expenditures and procure additional resources and facilities in order to
accomplish the scheduled concurrent release of these two feature films. This
period of rapid growth and expansion has placed, and continues to place, a
significant strain on Pixar's resources. There can be no assurance that either
Bugs or the Toy Story Video Sequel will be released as scheduled in late 1998 or
that this strain on resources will not have a material adverse effect on Pixar's
business, financial condition or results of operations. In addition, when the
production of either film is completed, if completed, Pixar may incur
significant carrying costs associated with transitioning personnel on creative
and development teams from one project to another which, although shared with
Disney, could have a material adverse effect on Pixar's results of operations
and financial condition.

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

RISKS ASSOCIATED WITH CO-PRODUCTION AGREEMENT

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

         The decisions regarding the timing of release of motion pictures and
related products and which of Disney's motion pictures and related products will
receive extensive promotional support from the studio are important in
determining the success of the motion picture and related products. Under the
terms of the Co-Production Agreement, Pixar has some general protections with
respect to the marketing and distribution of the feature films in the form of
commitments by Disney as to release windows, the timing of release of other
Disney family films and marketing obligations. However, Pixar ultimately does
not control the manner in which Disney distributes Pixar's animated feature
films and related products, the number of theaters to which Disney distributes
Pixar's feature films, the specific timing of release of the feature films and
related products or the specific amount or quality of promotional support of the
feature films and related products. Because Disney co-finances the films
developed and produced under the Co-Production Agreement, distributes the films
under the "Walt Disney Pictures" label and may enjoy financial benefits in the
event that such films achieve significant box office revenues, Pixar believes
that Disney desires such films to be successful.


                                      -19-
<PAGE>   20
Nonetheless, Disney could make certain decisions as to distribution or promotion
of the animated feature films or related products that could have a material
adverse effect on Pixar's business, operating results or financial condition.
See "Business -- Relationship with Disney."

     Exclusivity

         Pixar has agreed not to release or authorize the release of any feature
length animated theatrical motion picture produced by Pixar, other than the
feature films produced by Pixar under the Co-Production Agreement, until twelve
months from delivery of the fifth feature film under the Co-Production
Agreement. Pixar currently anticipates that the delivery of the fifth Picture
would not occur until at least ten years from the date of the Co-Production
Agreement. Pixar has further agreed that it will not enter into any agreement
with any third party for the development, production or distribution of any
feature length animated theatrical motion picture until after Pixar has
delivered the third feature film to Disney under the Co-Production Agreement.
Pixar has also agreed that it will not develop or produce any rides or
attractions for major theme parks not owned or operated by Disney, and to give
Disney a right to negotiate with respect to animated television productions or
animated made-for-home video productions that Pixar proposes to produce during
the term of the Co-Production Agreement.

     Financing of Production Costs

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

     Rights to Characters and Elements Retained by Disney

         Disney retains the exclusive distribution and exploitation right to all
feature films, all characters and story elements of the feature films and all
related products developed by Pixar under the Co-Production Agreement.
Accordingly, except in certain specified circumstances unlikely to generate
revenue, Pixar is not able to exploit or distribute any of the feature films or
characters or elements of any of the feature films or related products developed
under the Co-Production Agreement without a license from Disney. There can be no
assurances that such a license would be available to Pixar on commercially
reasonable terms or at all. See "Business -- Relationship with Disney."

     Termination

         Under the terms of the Co-Production Agreement, Disney may terminate
the agreement under certain circumstances. There can be no assurance that Disney
would not terminate the Co-Production Agreement under these circumstances.
Disney would not lose any of its rights to distribute and exploit all feature
films and all characters and elements of the feature films and other products
developed by Pixar under the Co-Production Agreement, except for a feature film
or related product then in production as to which Disney does not elect to
proceed, as to which Pixar would regain the rights subject to a lien in favor
Disney for the costs advanced to date. Further, in the event that Disney
terminated the Co-Production Agreement, Pixar would be required to seek
alternative channels for distribution of its animated feature films and related
products. There can be no assurance that Pixar would be able to find a third
party to finance, distribute and promote its animated feature films and related
products on terms acceptable to Pixar, if at all.


                                      -20-
<PAGE>   21


RISKS OF MOTION PICTURE INDUSTRY

     Commercial Success of a Motion Picture is Unpredictable

         The motion picture industry involves a substantial degree of risk. Each
motion picture is an individual artistic work, and its commercial success is
primarily determined by audience reaction, which is unpredictable. The
commercial success of a motion picture also depends upon the quality and
acceptance of other competing films released into the marketplace at or near the
same time, critical reviews, the availability of alternative forms of
entertainment and leisure time activities, general economic conditions and other
tangible and intangible factors, all of which can change and cannot be predicted
with certainty. In addition, motion picture attendance is seasonal, with the
greatest attendance typically occurring during the summer and holidays. The
release of a film during a period of relatively low theater attendance is likely
to affect the film's box office receipts adversely. Further, due to the expected
release of a large number of animated films by Disney and other movie studios in
the next several years, it is possible that the market for animated films will
become saturated. Therefore, there is a substantial risk that some or all of
Pixar's motion pictures will not be commercially successful, which would have a
material adverse effect on Pixar's business, financial condition and results of
operations.

     Completion of a Motion Picture Subject to Uncertainties and Financial Risks

         The production, completion and distribution of motion pictures is
subject to numerous uncertainties, including financing requirements, personnel
availability and the release schedule of competitive films. Pixar is
concurrently developing three motion pictures, Bugs, the Second Theatrical Film
and the Toy Story Video Sequel, which compounds these uncertainties and
jeopardizes the successful, timely and cost-effective production and completion
of each film. Under the Co-Production Agreement, Pixar has increased its
financial involvement in the production costs of motion pictures, subjecting
Pixar to substantial financial risks relating to the production, completion and
release of the motion pictures. In addition, a significant amount of time will
elapse between the expenditure of funds by Pixar and the receipt of revenues
from the animated feature films.

COMPETITION

         Pixar experiences intense competition with respect to both animated
feature films and software.

     Competition From Movie Studios

         Pixar's animated feature films compete and will continue to compete
with feature films and other family oriented entertainment products produced by
major movie studios, including Disney (as somewhat limited by the Co-Production
Agreement), Turner Broadcasting Systems Inc., Warner Bros. Inc. (which has
acquired Turner Broadcasting Systems Inc.), Twentieth Century Fox Film
Corporation, Paramount Pictures, Columbia/Tri-Star Pictures Inc., Lucasfilm,
Universal City Studios, Inc. and MGM/UA, as well as numerous other independent
motion picture production companies. Several of these studios have already
developed and released animated feature films, and Pixar expects additional
competition in the animated feature film market from these and other movie
studios. Some of these other movie studios have announced their intention to
enter the animated feature film market, including DreamWorks, a studio formed in
1994 which is expressly targeting the animated film market. In particular,
DreamWorks owns a significant equity stake in PDI, a computer graphics special
effects firm, and has begun developing a computer animated movie with PDI that
is expected be completed by 1998. This computer animated movie, which has been
referred to publicly as "Ants", may contain similar subject matter as Bugs.
Pixar's films will compete with the feature films of these movie studios for
audience acceptance and exhibition outlets. In addition, Pixar competes and will
continue to compete with these movie studios for the acquisition of literary
properties, production financing, the services of performing artists, and the
services of other creative and technical personnel, particularly in the fields
of animation and technical direction. Most of the other movie studios with which
Pixar competes have significantly greater name recognition and significantly
greater financial, technical, creative, marketing and other resources than does
Pixar.

         At least two of these movie studios, Disney and Lucasfilm (through its
affiliate ILM), have developed their own internal computer animation capability
and have created computer animation for special effects in animated films. In


                                      -21-
<PAGE>   22


addition, Pixar believes that Disney is currently developing and producing a
feature film making substantial use of computer animation. Other movie studios
may internally develop, license or sub-contract three-dimensional animation
capability. Further, Pixar believes that continuing enhancements in computer
hardware and software technology will lower barriers to entry for studios or
special effects companies which intend to produce computer animated feature
films or other products.

         The Co-Production Agreement provides for the development and production
by Pixar of five computer animated feature films. Because Disney co-finances the
films developed and produced under the Co-Production Agreement, distributes the
films under the "Walt Disney Pictures" label and enjoys financial benefits in
the event that such films achieve significant box office revenues, Pixar
believes that Disney desires such films to be successful. Nonetheless, Disney
has been by far the most successful producer of animated feature films, and
family oriented motion pictures distributed by Disney or its affiliates are
likely to be in the market concurrently with and competing with Pixar's animated
feature films. Pixar's contractual arrangement with Disney also presents other
risks. See "-- Risks Associated With Co-Production Agreement" and "Business --
Competition."

     Competition From Computer Graphics Special Effects Firms

         Pixar also expects to compete with computer graphics special effects
firms, including ILM, Digital Domain, PDI, Rhythm & Hues, Boss Film Studios,
Inc. and Blue Sky Productions.  These computer graphics special effects firms
may be capable of creating their own three-dimensional computer animated feature
films or may produce three-dimensional computer animated feature films for movie
studios that compete with Pixar. For example, ILM has already created and
produced three-dimensional character animation which was used for the ghosts in
the live action film Casper, and ILM has a royalty-free, paid-up license to use
Pixar's RenderMan software and to obtain at no cost all enhancements and
upgrades thereto. Other computer graphics special effects firms have licensed or
may license RenderMan. Accordingly, Pixar's RenderMan software may not provide
Pixar with a competitive advantage. See "Business -- Competition."


     Competition From Software Publishers

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


     Competition Could Adversely Impact Pixar

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


                                      -22-
<PAGE>   23
LIMITED OPERATING HISTORY

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

     Risk of Made-For-Home Video Sequels Market

         In addition to feature films, Pixar intends to generate revenue from
made-for-home video sequels, such as the Toy Story Video Sequel. There are
several risks associated with this market. Pixar has no experience developing
made-for-home video sequels. In addition, Pixar expects competition for sequels
to increase and intensify. Further, there can be no assurance that voices and
other intellectual property rights used in the original animated feature film
will be available for use in any made-for-home video sequel, or if available,
that such voices or other intellectual property rights can be obtained at a
reasonable cost. For example, certain of the voices used in Toy Story were
significantly more expensive to obtain for the Toy Story Video Sequel than they
were to obtain for the original feature film.  Moreover, Pixar is at a
disadvantage in this market as compared to other animation studios in that Pixar
cannot produce low-cost animation which typically characterizes made-for-home
video sequels to animated feature films.

DEPENDENCE ON KEY PERSONNEL

         Pixar's success depends to a significant extent on the performance of a
number of senior management personnel and other key employees, especially its
animators, creative personnel and technical directors. In particular, Pixar is
dependent upon the services of Steve Jobs, John Lasseter, Edwin E. Catmull
and Lawrence B. Levy. Pixar does not maintain "key man" life insurance for any
of its employees. Pixar does have employment agreements with Messrs. Lasseter
and Catmull, who are fundamental to Pixar's relationship with Disney. However,
such employment agreements do not necessarily assure the services of these
employees. Pixar believes that it may be particularly difficult to retain its
key employees, especially its animators, creative personnel and technical
directors, during periods in which it is not developing animated feature films.
The loss of the services of any of Messrs. Jobs, Lasseter, Catmull or Levy or of
other key employees, especially its animators, creative personnel and technical
directors, could have a material adverse effect on Pixar's business, operating
results or financial condition. Although none of Pixar's employees are
represented by a labor union, it is common for animators and actors at film
production companies to belong to a union. There can be no assurance that
Pixar's employees will not join or form a labor union or that Pixar, for certain
purposes, will not be required to become a union signatory. See "Business --
Employees" and "Executive Officers of the Company."

NEED TO ATTRACT AND RETAIN QUALIFIED PERSONNEL TO BE SUCCESSFUL

         Pixar's success depends to a significant extent on its ability to
identify, attract, hire, train and retain qualified professional, creative,
technical and managerial personnel. Competition for such personnel is intense,
and there can be no assurance that Pixar will be successful in identifying,
attracting, hiring, training and retaining such personnel in the


                                      -23-
<PAGE>   24
future. The competition for quality animators, creative personnel and technical
directors is especially intense because the entertainment market has
significantly expanded over the past several years. If Pixar is unable to hire,
assimilate and retain qualified personnel in the future, particularly animators,
creative personnel and technical directors, such inability would have a material
adverse effect on Pixar's business, operating results and financial condition.
See "Business -- Employees" and "Executive Officers of the Company."

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

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

DISTRIBUTION RISKS

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

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

         There can be no assurance that Pixar will not experience difficulties
that could delay or prevent the successful development or production of future
animated feature films or other related products. Among other things, because
Pixar is dependent upon a large base of software and a large number of computers
for the development and production of its animated feature films and related
products, an error or defect in the software or a failure in the hardware could
result in a significant delay in production. A significant delay in production
could have a material adverse effect on Pixar's business, operating results or
financial condition. Further, because Pixar relies mostly on internally
developed software, Pixar would not be able to rely upon assistance from third
parties in the event that the software fails. See "Business -- Technology."

CONCENTRATION OF STOCK OWNERSHIP

         Pixar's Chief Executive Officer, Steve Jobs, beneficially owns
approximately 74.7% of the outstanding Common Stock as of March 20, 1997. 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.


                                      -24-
<PAGE>   25
RISK OF SUBSTANTIAL ADDITIONAL COSTS RELATED TO FACILITIES EXPANSION

         Pixar leased significant additional space during 1996, but continues to
seek additional space. Pixar is evaluating such alternatives as building a new
studio facility and leasing additional buildings. Pixar currently expects to
exercise an option to purchase property (which option Pixar purchased in 1996)
and to build a new studio facility on the property. If Pixar purchases the
property and builds a new studio facility, Pixar currently expects to incur
capital expenditures of more than $10 million in 1997 and more than $12 million
in 1998. Pixar may choose to use its existing cash resources for such
expenditures or to finance such capital expenditures through the issuance of
additional equity or debt securities, by obtaining a credit facility or by some
other financing mechanism. If Pixar does not choose to purchase the property and
build a new facility, Pixar would need to write-off more than $900,000 of
capitalized expenses associated with site development and engineering and
architectural plans related to the new building, and would incur an additional
$300,000 charge related to Pixar's share of the site preparation. See
"Properties" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources" in the 1996 Annual
Report.

NEED FOR TECHNOLOGICAL ADVANCEMENT TO BE SUCCESSFUL

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

DEPENDENCE ON PROPRIETARY RIGHTS

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

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

     No Assurance That Efforts to Protect Proprietary Technologies Will Succeed

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


                                      -25-
<PAGE>   26
on "shrink wrap" licenses that are not signed by the end-user and, therefore,
may be unenforceable under the laws of certain jurisdictions. There can be no
assurance that the steps taken by Pixar will prevent misappropriation of its
technology or that its confidentiality or license agreements will be
enforceable. See "Business -- Proprietary Rights."

     Risk That Litigation Will Be Required to Enforce Proprietary Rights

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

     Risks of Infringement Claims

         From time to time Pixar has received, and is likely to receive in the
future, notice of claims of infringement of other parties' proprietary rights.
There can be no assurance that infringement or invalidity claims (or claims for
indemnification resulting from infringement claims) will not be asserted or
prosecuted against Pixar or that any assertions or prosecutions will not
materially adversely affect Pixar's business, financial condition or results of
operations. Irrespective of the validity or the successful assertion of such
claims, Pixar would incur significant costs and diversion of resources with
respect to the defense thereof which could have a material adverse effect on
Pixar's business, financial condition or results of operations. If any claims or
actions are asserted against Pixar, Pixar may seek to obtain a license under a
third party's intellectual property rights. There can be no assurance, however,
that under such circumstances a license would be available on reasonable terms
or at all. See "Business -- Proprietary Rights."

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

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

POSSIBLE VOLATILITY OF SHARE PRICE AND RISK OF LITIGATION

         Pixar believes that factors such as the publication of box office
results for Pixar's or its competitors' feature films, fluctuations in quarterly
or annual results of operations, changes in financial estimates by securities
analysts, announcements by Pixar or by its competitors, budget increases, delays
in or cancellation of feature film or other product release dates, or other
events or factors may cause the market price of Pixar's Common Stock to
fluctuate. Moreover, in recent years, the stock market in general, and the
shares of technology companies in particular, have experienced extreme price and
volume fluctuations, some of which have been unrelated or disproportionate to
the operating performances of such companies. These broad market and industry
fluctuations may adversely affect the market price of Pixar's Common Stock. In
the past, following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted against
such a company. Such litigation could result in substantial costs and a
diversion of management's attention and resources, which would have a material
adverse effect on Pixar's business, operating results and financial condition.


                                      -26-
<PAGE>   27
ITEM 2.   PROPERTIES

         Pixar leases approximately 72,000 square feet of office space in
Richmond, California. Pixar has signed a lease for an additional 46,000 square
feet of office space at the same location which is scheduled to begin in the
second quarter of 1997. The leases expire on various dates ranging from July
1999 to February 2001.

         Pixar will need to seek additional space in the near future and is
evaluating such alternatives as building a new studio facility and leasing
additional buildings. Pixar currently intends to build a new studio facility and
has paid deposits on the purchase of land which are nonrefundable and will be
applied to the purchase price of the property should Pixar elect to purchase the
property. If Pixar purchases the property and builds a new studio facility,
Pixar would incur substantial capital expenditures in 1997 and 1998. If Pixar
does not choose to purchase the property and build a new facility, Pixar would
need to write-off significant capitalized expenses associated with the new
building. See "Business -- Certain Factors Affecting Business, Operating Results
and Financial Condition -- Risk of Substantial Additional Costs Related to
Facilities Expansion". See also "Managements' Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" in the 1996 Annual Report.


ITEM 3.   LEGAL PROCEEDINGS

         Not applicable.


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

         Not applicable.


                                      -27-
<PAGE>   28
                        EXECUTIVE OFFICERS OF THE COMPANY

         The executive officers of Pixar and their ages as of March 20, 1997 are
as follows:

<TABLE>
<CAPTION>
                NAME                        AGE                                POSITION
                ----                        ---                                --------
<S>                                         <C>       <C>
Steve Jobs..........................         42       Chairman, Chief Executive Officer and Office of the President
Edwin E. Catmull....................         51       Executive Vice President, Chief Technical Officer and Office of
                                                        the President
Lawrence B. Levy....................         37       Executive Vice President, Chief Financial Officer, Office of
                                                        the President and Secretary
John Lasseter.......................         40       Vice President, Creative Development
Ralph J. Guggenheim.................         45       Vice President, Feature Film Production
Pamela J. Kerwin....................         48       Vice President, Interactive Products
William T. Reeves...................         45       Technical Director, Feature Films
</TABLE>

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

         Mr. Jobs is a co-founder of Pixar and has served as its Chairman
since March 1991, as its Chief Executive Officer since February 1986 and in
the Office of the President since February 1995. He has been a director of Pixar
since February 1986 and served as Chairman from February 1986 to November 1988.
Mr. Jobs was also a co-founder of NeXT Software, Inc. ("NeXT"), which developed
and marketed object-oriented software for client/server business applications
and the Internet, and served as the Chairman and Chief Executive Officer of NeXT
from October 1985 until February 1997, when NeXT was acquired by Apple Computer,
Inc. ("Apple"). Mr. Jobs currently serves as an advisor to Apple on a limited
basis. Mr. Jobs was a co-founder of Apple, where he co-designed the Apple II and
led the development, manufacturing and marketing of the Macintosh and
LaserWriter printer. Mr. Jobs was awarded the National Technology Medal in 1985,
the Jefferson Award for Public Service in 1987 and was named Entrepreneur of the
Decade by Inc. magazine. Mr. Jobs attended Reed College in Portland, Oregon.

         Dr. Catmull is a co-founder of Pixar and has served as Executive Vice
President and Chief Technical Officer since June 1995 and in the Office of the
President since February 1995. From March 1991 to February 1995, he served as
President, from November 1988 to March 1991 he served as Chairman and from
February 1986 to November 1988 he served as President. Prior to joining Pixar,
he was Vice President of the Computer Division of Lucasfilm. Dr. Catmull
received the Scientific and Engineering Award from The Academy of Motion Picture
Arts and Sciences in 1992 and also received the SIGGRAPH Coons Award for
lifetime contributions in 1993. Dr. Catmull is a member of the Scientific and
Technical Awards Committee of The Academy of Motion Picture Arts and Sciences.
Dr. Catmull received B.S. degrees in computer science and physics and a Ph.D. in
computer science from the University of Utah.

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

         Mr. Lasseter has served as Vice President, Creative Development since
August 1991. Mr. Lasseter joined Pixar in February 1986 as Animator/Director.
From 1984 to 1986, he was an animator at Lucasfilm and from 1979 to 1984 he
worked as an animator at The Walt Disney Company. For his work in directing Toy
Story, Mr. Lasseter


                                      -28-
<PAGE>   29
received an Academy Award in 1996 for Special Achievement, and for his work in
directing Tin Toy, Mr. Lasseter received an Academy Award in 1988 for Best Short
Film (Animated). Mr. Lasseter received a B.F.A. degree in film from the
California Institute of the Arts.

         Mr. Guggenheim has served as Vice President, Feature Film Production
since April 1995. From May 1992 to April 1995, he served as Vice President and
General Manager, Animation Division. From July 1989 to May 1992, he served as
Executive Producer and from February 1986 to July 1989 he served as Director,
Animation Services. Since 1992, Mr. Guggenheim has also served as Vice President
of the production company set up to produce Toy Story. From 1980 to 1986, he was
Director of Editing Research at Lucasfilm's Computer Research Group and from
1978 to 1980 he was Producer of Computer Animated Commercials at the Computer
Graphics Lab of New York Institute of Technology. Mr. Guggenheim received a B.A.
in communications and an M.S. in computer graphics and motion picture production
from Carnegie Mellon University.

         Ms. Kerwin has served as Vice President, Interactive Products since
April 1995. From May 1992 to April 1995, she served as Vice President and
General Manager, Technology Division. From May 1990 to May 1992, she served as
Vice President of Marketing and Sales and from June 1989 to May 1990 she served
as Director of Marketing. From July 1986 to June 1989, she was the Vice
President of Marketing and Sales at Media Cybernetics, which develops and
markets image processing software. From February 1985 to July 1986, Ms. Kerwin
served as Vice President of Marketing for Levine and Rudd, Inc., a marketing
consulting and graphic arts firm. From December 1978 to February 1985, Ms.
Kerwin held various marketing positions at Control Data. Ms. Kerwin received a
B.S. degree in English from Towson State University.

         Dr. Reeves has served as Technical Director, Feature Films Production
since February 1991. Dr. Reeves joined Pixar in February 1986 as Director of
Animation Research and Development. From July 1982 to February 1986, he was
Project Leader of the Modeling and Animation Group at the Computer Division of
Lucasfilm. From September 1980 to July 1982, he was the Project Leader of the
Systems Group and a member of the Computer Graphics Group at Lucasfilm where he
invented a new image synthesis technique called particle systems that enables
the generation of very complex and detailed images. For his work as Technical
Director on Tin Toy, Dr. Reeves received an Academy Award in 1988 for Best Short
Film (Animated). Dr. Reeves received a B.S. in math from the University of
Waterloo in Canada and M.S. and Ph.D. degrees in computer science from the
University of Toronto.


                                      -29-
<PAGE>   30
                                     PART II

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

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

<TABLE>
<CAPTION>
                                                                HIGH     LOW
                                                              -------  -------
<S>                                                           <C>      <C>
1995
   Fourth Quarter (from November 29, 1995)..................  $49 1/2  $22
1996
   First Quarter............................................  $29      $18 1/2
   Second Quarter...........................................  $25 1/2  $16 3/4
   Third Quarter............................................  $19 1/4  $12 1/4
   Fourth Quarter...........................................  $20 1/2  $12 3/4
1997
   First Quarter (through March 20, 1997)...................  $22 3/4  $12 5/8
</TABLE>

         As of March 20, 1997, Pixar had approximately 2,103 shareholders of
record. The price for the Common Stock as of the close of business on March 20,
1997 was $19.75 per share. Pixar has never paid any cash dividends on its Common
Stock. Pixar intends to retain any earnings for use in its business and does not
anticipate paying any cash dividends on its Common Stock in the foreseeable
future.


ITEM 6.   SELECTED FINANCIAL DATA

         The information required by this item is incorporated by reference to
the section entitled "Selected Financial Data" in the 1996 Annual Report.


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

         The information required by this item is incorporated by reference to
the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the 1996 Annual Report.


ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The information required by this item is incorporated by reference to
the section entitled "Financial Statements and Selected Financial Data" in the
1996 Annual Report.


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

         Not applicable.


                                      -30-
<PAGE>   31
                                    PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

         The information required by this item concerning Pixar's directors is
incorporated by reference to the information set forth in the section entitled
"Election of Directors" in Pixar's Proxy Statement for the 1997 Annual Meeting
of Shareholders to be filed with the Commission within 120 days after the end of
the Pixar's fiscal year ended December 31, 1996, except that the information
required by this item concerning the executive officers of Pixar is incorporated
by reference to the information set forth in the section entitled "Executive
Officers of the Company" at the end of Part I of this Form 10-K.


ITEM 11.   EXECUTIVE COMPENSATION

         The information required by this item regarding executive compensation
is incorporated by reference to the information set forth in the sections
entitled "Election of Directors -- Director Compensation" and "Executive Officer
Compensation" in Pixar's Proxy Statement for the 1997 Annual Meeting of
Shareholders to be filed with the Commission within 120 days after the end of
the Pixar's fiscal year ended December 31, 1996.


ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information required by this item regarding security ownership of
certain beneficial owners and management is incorporated by reference to the
information set forth in the section entitled "Security Ownership of Certain
Beneficial Owners and Management" in Pixar's Proxy Statement for the 1997 Annual
Meeting of Shareholders to be filed with the Commission within 120 days after
the end of Pixar's fiscal year ended December 31, 1996.


ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information required by this item regarding certain relationships
and related transactions is incorporated by reference to the information set
forth in the section entitled "Certain Transactions" in Pixar's Proxy Statement
for the 1997 Annual Meeting of Shareholders to be filed with the Commission
within 120 days after the end of Pixar's fiscal year ended December 31, 1996.


                                      -31-
<PAGE>   32
                                     PART IV

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

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

                  1.       Financial Statements. The following financial
                           statements of Pixar and the Independent Auditors'
                           Report therein are incorporated by reference to the
                           portions of Pixar's 1996 Annual Report filed as
                           Exhibit 13.1 to this Form 10-K:

<TABLE>
<S>                                                                               <C>
                           Independent Auditors' Report ........................
                           Balance Sheets as of December 31, 1995 and 1996 .....
                           Statements of Operations for the years ended
                             December 31, 1994, 1995 and 1996 ..................
                           Statements of Shareholders' Equity (Deficit) for the
                             years ended December 31, 1994, 1995 and 1996 ......
                           Statements of Cash Flows for the years ended
                             December 31, 1994, 1995 and 1996 ..................
                           Notes to Financial Statements .......................
</TABLE>

                  2.       Financial Statement Schedule. The following financial
                           statement schedule of Pixar for the years ended
                           December 31, 1994, 1995, and 1996 is filed as part of
                           this Form 10-K and should be read in conjunction with
                           the Financial Statements, and related notes thereto,
                           of Pixar.


                           Independent Auditors' Report on Financial Statement
                           Schedule......................................... S-1
                           Schedule II--Valuation and Qualifying
                           Accounts and Reserves............................ S-2

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

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

         (b)      Reports on Form 8-K. No Reports on Form 8-K were filed during
                  the fourth quarter ended December 31, 1996.

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

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


                                      -32-
<PAGE>   33
                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be signed
on its behalf by the undersigned, thereunto duly authorized, on this 31st day of
March 1997.

                                              PIXAR

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


                                POWER OF ATTORNEY

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

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


<TABLE>
<CAPTION>
              SIGNATURE                                            TITLE                                  DATE
             -----------                                           ------                                ------
<S>                                      <C>                                                         <C>
/s/ Steven P. Jobs                       Chairman of the Board and Chief Executive Officer           March 31, 1997
--------------------------------------   (Principal Executive Officer)
Steven P. Jobs

/s/ Lawrence B. Levy                     Executive Vice President and Chief Financial Officer        March 31, 1997
--------------------------------------   (Principal Financial and Accounting Officer)
Lawrence B. Levy

/s/ Skip M. Brittenham                   Director                                                    March 31, 1997
--------------------------------------
Skip M. Brittenham

/s/ Joseph A. Graziano                   Director                                                    March 31, 1997
--------------------------------------
Joseph A. Graziano

/s/ Larry W. Sonsini                     Director                                                    March 31, 1997
--------------------------------------
Larry W. Sonsini
</TABLE>


                                      -33-
<PAGE>   34
                    INDEPENDENT AUDITORS' REPORT ON SCHEDULE


The Board of Directors and Shareholders
Pixar:

         Under date of January 31, 1997, except as to Note 11, which is as of
March 25, 1997, we reported on the balance sheets of Pixar as of December 31,
1995 and 1996, and the related statements of operations, shareholders' equity
(deficit), and cash flows for each of the years in the three-year period ended
December 31, 1996, which are included in the annual report on Form 10-K. In
connection with our audits of the aforementioned financial statements, we also
audited the related financial statement schedule included herein. This financial
statement schedule is the responsibility of Pixar's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits.

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

                                                           KPMG PEAT MARWICK LLP

Palo Alto, California
January 31, 1997


                                       S-1
<PAGE>   35
                                      PIXAR

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

<TABLE>
<CAPTION>
                                               BALANCE AT                    DEDUCTIONS:
                                                BEGINNING                   WRITE OFFS OF  BALANCE AT
               CLASSIFICATION                    OF YEAR       ADDITIONS      ACCOUNTS     END OF YEAR
              ---------------                 -------------  -------------  -------------  -----------
<S>                                           <C>            <C>            <C>            <C>
Allowance for returns and doubtful accounts
   Year ended December 31, 1994.............     $ 36           $191           $ --           $227
                                                 ====           ====           ====           ====
   Year ended December 31, 1995.............     $227           $ 61           $(32)          $256
                                                 ====           ====           ====           ====
   Year ended December 31, 1996.............     $256           $  3           $ --           $259
                                                 ====           ====           ====           ====
</TABLE>


                                       S-2
<PAGE>   36
                                INDEX TO EXHIBITS



<TABLE>
<CAPTION>
   EXHIBIT
    NUMBER                                                 EXHIBITS
  ---------                                                --------
<S>             <C>                                                                                             <C>
      3.1       Amended and Restated Articles of Incorporation(1).............................................
      3.4       Amended and Restated Bylaws, as amended(1)....................................................
      4.1       See Exhibit 3.1...............................................................................
      4.2       See Exhibit 3.2...............................................................................
      4.5       Specimen Common Stock Certificate(1)..........................................................
      4.6       Common Stock and Warrant Purchase Agreement between the Registrant and Disney
                Enterprises, Inc. dated as of February 23, 1997...............................................
      4.7       Form of Common Stock Purchase Warrant to be issued to Disney Enterprises, Inc.................
      4.8       Form of Registration Rights Agreement by and between the Registrant and Disney
                Enterprises, Inc..............................................................................
     10.1*      1995 Stock Plan, as amended, and forms of agreements thereto(1)...............................
     10.2*      1995 Director Option Plan(1)..................................................................
     10.3*      Form of Indemnification Agreement entered into between the Registrant and each of the
                executive officers and directors(1)...........................................................
     10.4       Agreement between the Registrant and Walt Disney Pictures dated May 3, 1991, as
                amended(1)(5).................................................................................
     10.5       Net Office Lease between the Registrant and Point Richmond R&D
                Associates dated February 15, 1990, as amended(1).............................................
     10.6       Secured Promissory Note between the Registrant and Edwin E. Catmull dated May 10,
                1995(1).......................................................................................
     10.7       Patent License Agreement between the Registrant and Microsoft
                Corporation dated June 21, 1995(1)(5).........................................................
     10.8       Recapitalization Agreement between the Registrant and the sole shareholder and key
                employees of the Registrant dated April 28, 1995 and related agreement thereto(1).............
     10.9*      Employment Agreement between the Registrant and Edwin E. Catmull dated August 1,
                1991(1).......................................................................................
     10.10*     Employment Agreement between the Registrant and John Lasseter dated February 24,
                1997(4).......................................................................................
     10.11*     Employment Agreement between the Registrant and Ralph J. Guggenheim dated
                August 1,1991(1)..............................................................................
     10.12*     Employment Agreement between the Registrant and William T. Reeves dated August 1,
                1991(1).......................................................................................
     10.13      Promissory Note between the Registrant and Steven P. Jobs dated January 13, 1995(1)...........
     10.14      Patent License Agreement between the Registrant and Silicon Graphics, Inc. dated
                March 12, 1996(2).............................................................................
     10.15      Net Office Lease between the Registrant and Point Richmond R&D Associates dated
                November 7, 1995(2)...........................................................................
     10.16      Co-Production Agreement between the Registrant and Walt Disney Pictures and Television
                dated February 24, 1997(4)....................................................................
     10.17      Net Office Lease between the Registrant and Point Richmond R&D Associates dated
                April 1, 1996(3)..............................................................................
</TABLE>


                                       S-3
<PAGE>   37

<TABLE>
<CAPTION>
   EXHIBIT
    NUMBER                                                 EXHIBITS
  ---------                                                --------
<S>             <C>                                                                                             <C>
     10.18      Net Office Lease between the Registrant and Point Richmond R&D Associates dated
                September 12, 1996(3).........................................................................
     11.1       Computation of Net Income (Loss) Per Share...................................................
     13.1       Portions of the Annual Report to Shareholders for the fiscal year ended December 31, 1996,
                expressly incorporated by reference herein....................................................
     23.1       Consent of Independent Auditors...............................................................
     27.1       Financial Data Schedule.......................................................................
</TABLE>

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

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

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

(4)      Documents for which confidential treatment has been requested for
         certain portions of these exhibits.

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

         *  Indicates management compensatory plan, contract or arrangement.


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