10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended October 1, 2005

or

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

For the transition period from              to             .

Commission File Number: 0-26976

Pixar

(Exact name of registrant as specified in its charter)

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

(510) 752-3000

(Registrant’s telephone number, including area code)

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

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

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x.

The number of shares outstanding of the Registrant’s Common Stock as of November 1, 2005 was 118,902,068.

Pixar

FORM 10-Q

Index

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Balance Sheets as of October 1, 2005 and January 1, 2005	Page 2
Statements of Income for the Quarter and Nine Months Ended October 1, 2005 and October 2, 2004	Page 3
Statements of Cash Flows for the Nine Months Ended October 1, 2005 and October 2, 2004	Page 4
Notes to Financial Statements	Page 5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	Page 14
Risk Factors	Page 25
Item 3. Quantitative and Qualitative Disclosures about Market Risk	Page 40
Item 4. Controls and Procedures	Page 40
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	Page 41
Item 4. Submission of Matters to a Vote of Security Holders	Page 42
Item 6. Exhibits	Page 42
SIGNATURE	Page 43
EXHIBIT INDEX	Page 44
EXHIBIT 10.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1

1

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

PIXAR

BALANCE SHEETS

(Unaudited, in thousands, except share data)

	October 1, 2005			January 1, 2005
ASSETS
Cash and cash equivalents	$	39,201		$	28,661
Investments		1,004,463			826,123
Trade accounts receivable, net of allowance for doutbtful accounts of $177 as of October 1, 2005 and January 1, 2005		2,321			5,581
Receivable from Disney, net of reserve for returns and allowance for doubtful accounts of $5,301 and $3,538 as of October 1, 2005 and January 1, 2005, respectively		22,586			68,015
Other receivables		6,604			8,366
Prepaid expenses and other assets		2,955			2,227
Deferred income taxes		75,277			70,424
Property and equipment, net		126,293			125,602
Capitalized film production costs, net		163,762			140,038
Total assets	$	1,443,462		$	1,275,037
LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable	$	1,746		$	5,392
Income taxes payable		26,197			14,077
Other accrued liabilities		14,811			26,971
Unearned revenue		13,223			8,502
Total liabilities		55,977			54,942
Commitments and contingencies
Shareholders’ equity:
Preferred stock; no par value; 5,000,000 shares authorized and no shares issued and outstanding		—			—
Common stock; no par value; 200,000,000 shares authorized; 118,614,486 and 116,852,504 issued and outstanding as of October 1, 2005 and January 1, 2005, respectively		734,522			687,387
Accumulated other comprehensive loss		(3,953	)		(2,211	)
Retained earnings		656,916			534,919
Total shareholders’ equity		1,387,485			1,220,095
Total liabilities and shareholders’ equity	$	1,443,462		$	1,275,037

See accompanying notes to financial statements.

2

PIXAR

STATEMENTS OF INCOME

(Unaudited, in thousands, except per share data)

	Quarter Ended				Nine Months Ended
	October 1, 2005		October 2, 2004		October 1, 2005		October 2, 2004
Revenue
Film	$	41,528	$	40,416	$	222,886	$	155,221
Software		4,284		4,047		10,607		9,355
Total revenue		45,812		44,463		233,493		164,576
Cost of revenue		3,587		4,204		35,318		16,545
Gross profit		42,225		40,259		198,175		148,031
Operating expenses
Research and development		2,575		4,218		8,504		11,770
Sales and marketing		1,460		737		2,974		1,744
General and administrative		4,453		3,828		12,748		9,921
Total operating expenses		8,488		8,783		24,226		23,435
Income from operations		33,737		31,476		173,949		124,596
Interest income and other		7,395		3,088		17,954		8,473
Income before income taxes		41,132		34,564		191,903		133,069
Income tax expense		13,724		12,143		69,906		46,521
Net income	$	27,408	$	22,421	$	121,997	$	86,548
Basic net income per share	$	0.23	$	0.20	$	1.03	$	0.77
Shares used in computing basic net income per share		118,594		113,802		118,087		112,652
Diluted net income per share	$	0.22	$	0.19	$	0.99	$	0.73
Shares used in computing diluted net income per share		123,091		119,344		123,054		118,228

See accompanying notes to financial statements.

3

PIXAR

STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

	Nine Months Ended
	October 1, 2005			October 2, 2004
Cash flows from operating activities:
Net income	$	121,997		$	86,548
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		7,825			5,387
Capitalized film production costs		(58,308	)		(39,797	)
Amortization of capitalized film production costs		34,584			15,935
Provision for return reserves and allowance for doubtful accounts, net		7,482			29,150
Income from warrant received in connection with license agreement		(843	)		—
Warrants adjustment to fair value		(290	)		—
Loss on dispositions of property and equipment		66			—
Loss (gain) on sales of investments		601			(435	)
Tax benefit from stock option exercises		19,527			36,046
Deferred income taxes		(3,867	)		—
Changes in operating assets and liabilities:
Trade accounts receivable		3,260			(676	)
Receivable from Disney		37,947			176,800
Other receivables		1,762			(1,563	)
Prepaid expenses and other assets		828			(15,590	)
Accounts payable		(3,646	)		(289	)
Other accrued liabilities		(12,160	)		1,577
Income taxes payable		12,120			(37,595	)
Unearned revenue		4,298			11,369
Net cash provided by operating activities		173,183			266,867
Cash flows from investing activities:
Purchases of property and equipment		(8,744	)		(11,363	)
Proceeds from sales of property and equipment		162			—
Proceeds from sales of investments		604,322			479,594
Purchases of investments		(785,991	)		(813,543	)
Net cash used in investing activities		(190,251	)		(345,312	)
Cash flows from financing activities:
Proceeds from exercised stock options		27,608			57,670
Net cash provided by financing activities		27,608			57,670
Net increase (decrease) in cash and cash equivalents		10,540			(20,775	)
Cash and cash equivalents at beginning of period		28,661			48,320
Cash and cash equivalents at end of period	$	39,201		$	27,545
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes	$	41,281		$	65,100
Supplemental disclosure of non-cash investing and financing activities:
Warrant received in connection with license agreement	$	1,266		$	—
Unrealized loss on investments, net of tax benefits	$	(1,742	)	$	(1,423	)

See accompanying notes to financial statements.

4

PIXAR

NOTES TO FINANCIAL STATEMENTS

(1) Organization and Basis of Presentation

The Company

Pixar was formed in 1986 when Steve Jobs purchased the computer division of Lucasfilm and incorporated it as a separate company. Pixar (or the “Company”) is a leading digital animation studio with the creative, technical and production capabilities to create animated feature films and related products. The Company’s objective is to create, develop and produce computer-animated feature films with heartwarming stories and memorable characters that appeal to audiences of all ages. Through the creation of entertaining, enduring and successful films, the Company seeks to maintain its position as a leading brand in animated feature films.

Basis of Presentation

The accompanying unaudited financial statements have been prepared in conformity with accounting principles generally accepted in the United States for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the accompanying unaudited financial statements reflect all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation of the financial condition, results of operations, and cash flows of Pixar for the periods presented. These financial statements should be read in conjunction with the audited financial statements as of January 1, 2005, and for each of the years in the three-year period ended January 1, 2005, including notes thereto. These audited financial statements are included in Pixar’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 17, 2005.

On March 23, 2005, Pixar announced that its Board of Directors had approved a two-for-one stock split of the Company’s common stock and a proportional increase in the number of Pixar common shares authorized from 100 million to 200 million. Shareholders of record at the close of trading on April 4, 2005, were entitled to receive one additional share of Pixar common stock for every outstanding share held on such date. The additional shares were distributed on April 18, 2005, and reporting of the Company’s share price on a split-adjusted basis commenced on April 19, 2005. All issued and outstanding share and per share amounts and stock prices related to Pixar’s common stock in the accompanying unaudited financial statements and notes thereto have been restated to reflect the stock split for all periods presented.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes, including estimates of ultimate revenues and ultimate costs and estimates of product sales that will be returned and the amount of receivables that ultimately will be collected. Actual results could differ from those estimates.

The results of operations for the quarter and nine months ended October 1, 2005 are not necessarily indicative of the results expected for the current year or any other period.

Certain amounts reported in previous periods have been reclassified to conform to the 2005 financial statement presentation.

(2) Fiscal Year

Pixar operates on a 52 or 53-week fiscal year, whereby the year ends on the Saturday nearest December 31. Fiscal year 2005 will end on December 31, 2005, and will consist of 52 weeks.

5

PIXAR

NOTES TO FINANCIAL STATEMENTS—(Continued)

(3) Stock Option Accounting

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

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

	Quarter Ended						Nine Months Ended
	October 1, 2005			October 2, 2004			October 1, 2005			October 2, 2004
Net income:
As reported	$	27,408		$	22,421		$	121,997		$	86,548
Fair value-based compensation cost, net of taxes		(4,126	)		(4,052	)		(18,101	)		(13,033	)
Pro forma net income	$	23,282		$	18,369		$	103,896		$	73,515
Basic net income per share:
As reported	$	0.23		$	0.20		$	1.03		$	0.77
Pro forma	$	0.20		$	0.16		$	0.88		$	0.65
Diluted net income per share:
As reported	$	0.22		$	0.19		$	0.99		$	0.73
Pro forma	$	0.19		$	0.16		$	0.86		$	0.63

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

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The weighted-average fair value of options granted was $16.55 and $16.76 for the quarter and nine months ended October 1, 2005, respectively, and $14.08 and $13.56 for the quarter and nine months ended October 2, 2004, respectively. Values were estimated using zero dividend yield for all years; expected volatility of 35% for both the quarter and nine months ended October 1, 2005, and 37% and 39%, respectively, for the corresponding prior year periods; risk-free interest rates of 3.83% and 3.86% for the quarter and nine months ended October 1, 2005, respectively, and 3.59% for both of the corresponding prior year periods; and weighted-average expected lives for all periods of 5.0 years.

(4) Net Income per Share

Basic net income per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted-average number of common and dilutive potential common shares outstanding during the period, using the treasury stock method for options. Of the outstanding options to purchase shares of common stock, for the quarter and nine months ended October 1, 2005, options to purchase approximately 1,851,000 and 84,000 shares, respectively, of common stock were not included in the computation of diluted net income per share because the options’ exercise price was greater than

6

PIXAR

NOTES TO FINANCIAL STATEMENTS—(Continued)

the average market price of the common shares for such periods. Options to purchase approximately 80,000 and 88,000 shares, respectively, of common stock were excluded for the quarter and nine month periods ended October 2, 2004.

The reconciliation of basic and diluted net income per share is as follows (in thousands, except per share amounts):

	Quarter Ended
	October 1, 2005					October 2, 2004
	Net Income		Shares	Net Income per Share		Net Income		Shares	Net Income per Share
Basic net income per share	$	27,408	118,594	$	0.23	$	22,421	113,802	$	0.20
Effect of dilutive options		—	4,497				—	5,542
Diluted net income per share	$	27,408	123,091	$	0.22	$	22,421	119,344	$	0.19
	Nine Months Ended
	October 1, 2005					October 2, 2004
	Net Income		Shares	Net Income per Share		Net Income		Shares	Net Income per Share
Basic net income per share	$	121,997	118,087	$	1.03	$	86,548	112,652	$	0.77
Effect of dilutive options		—	4,967				—	5,576
Diluted net income per share	$	121,997	123,054	$	0.99	$	86,548	118,228	$	0.73

(5) Comprehensive Income

Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income,” establishes standards for the reporting and display of comprehensive income and its components in the financial statements. Items of other comprehensive income (loss) currently consist of unrealized holding gains (losses) on the Company’s investments. The following table sets forth the components of comprehensive income, net of tax (in thousands):

	Quarter Ended					Nine Months Ended
	October 1, 2005			October 2, 2004		October 1, 2005			October 2, 2004
Net income	$	27,408		$	22,421	$	121,997		$	86,548
Unrealized holding (losses) gains on investments, net of tax		(1,207	)		156		(1,742	)		(1,423	)
Comprehensive income	$	26,201		$	22,577	$	120,255		$	85,125

(6) Feature Film and Co-Production Agreements

Feature Film Agreement

In 1991, the Company entered into a feature film agreement with Walt Disney Pictures, a wholly owned subsidiary of Walt Disney Pictures and Television (together with its subsidiaries and affiliates collectively referred to herein as “Disney”), to develop and produce up to three computer-animated feature films (the

7

PIXAR

NOTES TO FINANCIAL STATEMENTS—(Continued)

“Feature Film Agreement”). In 1995, the Company released its first and only feature film under the terms of the Feature Film Agreement, Toy Story. The Company continues to receive compensation based on revenue from the distribution of Toy Story and related products. Based on the individual-film-forecast-computation method, all Toy Story film production costs were fully amortized at December 31, 1997.

Co-Production Agreement

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

The term of the Co-Production Agreement continues until delivery to Disney of the fifth Picture, Cars, which is currently scheduled for a June 9, 2006 release. Since the April 2003 delivery of Finding Nemo, the Company has had the ability to negotiate and enter into another distribution agreement with any other third party. The Company has produced six highly successful films to date, and believes that this success combined with the strength of its financial resources, position Pixar to negotiate a distribution arrangement with more favorable economic terms and full ownership of its films beyond the Co-Production Agreement.

All payments to Pixar from Disney for development and production of films under the Feature Film Agreement and the Co-Production Agreement have been recorded as cost reimbursements. Accordingly, no revenue has been recognized for such reimbursements; rather, the Company has netted the reimbursements against the related costs.

Creative Development Group

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

Components of Capitalized Film Production Costs

The components of capitalized film production costs are as follows (in thousands):

	October 1, 2005		January 1, 2005
In release, net of amortization	$	20,609	$	53,881
In production		135,240		81,741
In development		7,913		4,416
Capitalized film production costs, net	$	163,762	$	140,038

8

PIXAR

NOTES TO FINANCIAL STATEMENTS—(Continued)

Pixar and Disney jointly finance all production costs relating to the Pictures on an equal basis. Film production costs include costs to develop and produce the Pictures, which primarily consist of salaries, equipment and overhead. Additionally, certain operating expenses benefiting the productions, such as certain research and development and certain general and administrative expenses are paid half by Pixar and half by Disney. Pursuant to the terms of the Co-Production Agreement, the parties established a mutually acceptable funding mechanism to ensure that amounts would be available in a timely manner to fund production costs. In practice, Pixar prepares funding requests for forecasted film production costs and Disney funds its share on a monthly basis at approximately the beginning of the month. All payments to Pixar from Disney for development and production of films under the Feature Film Agreement and the Co-Production Agreement have been recorded as cost reimbursements. Accordingly, no revenue has been recognized for such reimbursements; rather, the Company has netted the reimbursements against the related costs.

The table below sets forth the amounts reimbursed by Disney (in thousands):

	Nine Months Ended
	October 1, 2005		October 2, 2004
Production related	$	22,011	$	26,921
Research and development		1,778		5,443
General and administrative		2,488		2,519
Expense related		4,266		7,962
Total reimbursements by Disney	$	26,277	$	34,883

For films in release, the Company expects to amortize, based on current estimates, approximately $18 million to $22 million in capitalized film production costs over the succeeding twelve-month period. The Company has amortized more than 80% of each released film’s original production costs as of October 1, 2005, with the exception of The Incredibles. The Company projects The Incredibles to be approximately 80% amortized by the end of fiscal year 2006.

At October 1, 2005 and January 1, 2005, net receivables from Disney aggregated $22.6 million and $68.0 million, respectively, which consists of receivables for film revenue, advances net of Disney’s actual share of production expenditures for all films under the Co-Production Agreement and amounts due for miscellaneous reimbursements.

(7) Significant Customer and Segment Reporting

Significant Customer

For the quarter and nine months ended October 1, 2005, Disney represented 92% and 94% of total revenue, respectively, compared to 90% and 92%, respectively, for the corresponding prior year periods. As of October 1, 2005 and January 1, 2005, Disney represented 72% and 83% of total accounts receivable, respectively.

Segment Reporting

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

9

PIXAR

NOTES TO FINANCIAL STATEMENTS—(Continued)

The Company’s revenue segment information by film is as follows (in thousands):

	Quarter Ended						Nine Months Ended
	October 1, 2005			October 2, 2004			October 1, 2005			October 2, 2004
The Incredibles	$	11,802	(1)	$	—		$	141,526	(1)	$	—
Finding Nemo		13,731	(1)		22,823	(2)		35,783	(1)		112,418	(2)
Library titles(3)		15,995	(1)		17,102	(4)		44,274	(1)(5)		42,046	(4)
Animation services		—			491			1,303			757
Total film revenue	$	41,528		$	40,416		$	222,886		$	155,221

(1) During the quarter ended October 1, 2005, the Company’s revenues included $9.8 million of additional film revenues, primarily related to a reduction of international home video and television expenses across all of its titles. Such reductions were due to updated information received from Disney during the quarter, which resulted in a revision to net revenues.

(2) During the quarter ended October 2, 2004, the Company reduced Finding Nemo’s foreign home video return reserves, which increased film revenues by $7.4 million. In addition, the Company received updated information from Disney during that quarter that supported a reduction in the ultimate expense projections for Finding Nemo. As a result, the Company revised its estimate of Finding Nemo’s domestic home video expense to reflect the lower ultimate home video expenses. This change resulted in an increase in film revenues of approximately $6.3 million for the quarter ended October 2, 2004.

(3) Library titles include Monsters, Inc., Toy Story 2, A Bug’s Life and Toy Story. For the quarter and nine months ended October 2, 2004, Monsters, Inc. revenues of $12.1 million and $18.8 million, respectively, have been reclassified to “Library titles” to conform to the current year presentation.

(4) During the quarter ended October 2, 2004, the Company reduced its foreign home video return reserves for Monsters, Inc., which increased film revenues by $9.5 million. In addition, the Company adjusted its expense estimates for merchandise, which increased net film revenues by $1.3 million for the quarter ended October 2, 2004.

(5) During the nine months ended October 1, 2005, the Company increased its net revenues relating to Toy Story by approximately $4.1 million, which primarily reflected a reduction in television expenses based on updated information obtained from Disney.

(8) Valuation and Qualifying Accounts and Reserves

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

Classification	Balance at Beginning of Period		Changes to Reserves Impacting Operations			Reductions to Reserves (Actual Returns and Bad Debt Write-offs)			Balance at End of Period
Nine months ended October 1, 2005
Reserve for returns, Disney	$	2,473	$	8,187		$	(5,719	)	$	4,941
Allowance for doubtful accounts, Disney		1,065		(705	)		—			360
Allowance for doubtful accounts, trade		177		—			—			177
Fiscal year ended January 1, 2005
Reserve for returns, Disney	$	27,753	$	12,271		$	(37,551	)	$	2,473
Allowance for doubtful accounts, Disney		2,226		(1,161	)		—			1,065
Allowance for doubtful accounts, trade		186		—			(9	)		177

10

PIXAR

NOTES TO FINANCIAL STATEMENTS—(Continued)

Reserve for Returns, Disney

The Company recognizes revenue from its films under the Co-Production Agreement and Feature Film Agreements net of distribution fees, actual returns, estimated reserve for returns, and marketing and distribution expenses in accordance with FASB Concepts Statement No. 6 and EITF 99-19. The Company makes adjustments to home video revenues for estimates on return reserves (as a percentage of sales) that may differ from those reported by Disney. To the extent that the Company’s reserve for returns percentage differs from that reported by Disney, such differences are recorded as a reserve against the receivable from Disney. These reserves are reflected above and amounted to $4.9 million and $2.5 million at October 1, 2005 and January 1, 2005, respectively. Furthermore, these reserves can change for a variety of reasons:

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

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

• Reductions to return reserve balances occur when the Company establishes a higher return reserve percentage than Disney and Disney subsequently increases its return reserve percentage to reflect actual return experience. As revenues are incurred and Disney increases its return reserve percentage, the return reserves are reduced.

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

During the nine months ended October 1, 2005, the Company increased its difference in reserves from Disney by approximately $8.2 million relating to The Incredibles and Finding Nemo’s home video revenues. During the second and third quarters of the current year, Disney increased its home video return reserves primarily for The Incredibles, which reduced the Company’s difference in reserves from Disney by approximately $5.7 million.

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

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PIXAR

NOTES TO FINANCIAL STATEMENTS—(Continued)

During 2004, Disney increased its return reserves primarily for Finding Nemo’s international home video revenues, which resulted in a reduction of approximately $37.6 million in the Company’s reserves.

Further, the Company may not always maintain differences in reserves from those reported by Disney. In such instances when the Company relies on Disney’s estimates, it is possible that Disney may make subsequent revisions to those estimates which could result in a change to the Company’s estimate of revenue for a given period. Such reserves and related changes as reported by Disney are not reflected in the above table.

Allowance for Doubtful Accounts, Disney

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

Allowance for Doubtful Accounts, Trade

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

(9) New Accounting Pronouncements

On December 16, 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123 Revised 2004 (“SFAS 123R”), “Share-Based Payment.” The statement replaces SFAS 123, supersedes APB 25, and amends SFAS No. 95, “Statement of Cash Flows.” The accounting provisions of SFAS 123R are effective for annual reporting periods beginning after June 15, 2005. The Company intends to adopt SFAS 123R for its fiscal year beginning January 1, 2006. SFAS 123R requires the measurement of all employee share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense in our statements of income. SFAS 123R eliminates the ability to account for share-based compensation transactions using APB 25, and generally would require instead that such transactions be accounted for using a fair-value based method. Companies are required to recognize an expense for compensation cost related to share-based payment arrangements including stock options and employee stock purchase plans. While the fair value method under SFAS 123R is very similar to the fair value method under SFAS 123 with regards to measurement and recognition of stock-based compensation, management is currently evaluating the impact of several of the key differences between the two standards on the Company’s financial statements. For example, SFAS 123 permits the Company to recognize forfeitures as they occur while SFAS 123R will require the Company to estimate future forfeitures and adjust its estimate on a quarterly basis. SFAS 123R will also require a classification change in the statement of cash flows; whereby, a portion of the tax benefit from stock options will move from operating cash flows to financing cash flows (total cash flows will remain unchanged). The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. Current estimates of option values using the Black-Scholes method may not be indicative of results from valuation methodologies ultimately adopted by the Company. The cumulative effect of adoption, if any, applied on a modified prospective basis, would be measured and recognized on January 1, 2006.

In March 2004, the FASB ratified the measurement and recognition guidance and certain disclosure requirements for impaired securities as described in Emerging Issues Task Force (“EITF”) Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” In November 2005, the FASB issued FASB Staff Position FAS 115-1, “The Meaning of Other-Than-Temporary Impairment and Its

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PIXAR

NOTES TO FINANCIAL STATEMENTS—(Continued)

Application to Certain Investments” (“the FSP”). The FSP nullifies certain requirements of EITF Issue 03-1 and supersedes EITF Topic D-44, “Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value.” The FSP addresses the determination as to when an investment is considered impaired, whether that impairment is other-than-temporary, and the measurement of an impairment loss. The FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The FSP is effective for reporting periods beginning after December 15, 2005. The Company believes that the adoption of the FSP will not have a material effect on its results of operations, financial position or cash flows.

On December 16, 2004, the FASB issued Statement No. 153 (“SFAS 153”), “Exchanges of Non-monetary Assets,” an amendment of APB Opinion No. 29. SFAS 153 addresses the measurement of exchanges of non-monetary assets and redefines the scope of transactions that should be measured based on the fair value of the assets exchanged. SFAS 153 is effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company believes that the adoption of SFAS 153 will not have a material effect on its results of operations, financial position or cash flows.

In May 2005, the FASB issued Statement No. 154 (“SFAS 154”), “Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application as the required method for reporting a change in accounting principle. SFAS 154 provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. The reporting of a correction of an error by restating previously issued financial statements is also addressed by SFAS 154. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company will adopt this pronouncement beginning in fiscal year 2006 and believes that the adoption of SFAS 154 will not have a material effect on its results of operations, financial position or cash flows.

In October 2005, the FASB issued FASB Staff Position 13-1 (“FSP 13-1”), “Accounting for Rental Costs Incurred during a Construction Period.” FSP 13-1 requires that the rental costs associated with ground or building operating leases that are incurred during the construction period be recognized as rental expense. The guidance is effective for the first reporting period beginning after December 15, 2005. The Company believes that the adoption of FSP 13-1 will not have a material effect on its results of operations, financial position or cash flows.

(10) Commitments and Contingencies

Shareholder Litigation. On October 21, 2005, a putative shareholder class action lawsuit was filed against the Company and certain of its officers in the United States District Court for the Northern District of California alleging claims under Section 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. The case is entitled Mataraza v. Pixar, et al., Case No. C-05-4290 JSW. The complaint asserts a class period from January 18, 2005 to June 30, 2005. A similar complaint entitled Grabell v. Pixar, et al., Case No. C-05-4431-MJJ, was filed on November 1, 2005. Consistent with the usual procedures for cases of this kind, it is anticipated that these cases (and any other similar putative shareholder class action suits which might be filed against Pixar) may be consolidated into a single consolidated action. Management believes the lawsuits to be without merit and intends to vigorously defend against the lawsuits. As of October 1, 2005, no loss amount has been accrued because a loss is not considered probable or estimable.

Informal Inquiry by the SEC. The Company has received an informal inquiry from the SEC requesting information regarding the disclosure of its second quarter financial results. The Company is cooperating fully with the inquiry.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements identify prospective information, particularly statements referencing the scheduled release dates of our feature films, our anticipated revenues and operating expenses, our expectations on DVD penetration and the resulting effect on our home video sales and our expectations regarding any future distribution agreement into which we may enter. In some cases, forward-looking statements can be identified by the use of words such as “may,” “could,” “would,” “might,” “will,” “should,” “expect,” “forecast,” “predict,” “potential,” “continue,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “is scheduled for,” “targeted,” and variations of such words and similar expressions. Such forward-looking statements are based on current expectations, estimates, and projections about our industry, management’s beliefs, and assumptions made by management. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict; therefore, actual results and outcomes may differ materially from what is expressed or forecasted in any such forward-looking statements. Such risks and uncertainties include those set forth herein under “Risk Factors” on pages 25 through 39. Unless required by law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

The following discussion should be read in conjunction with the section entitled “Risk Factors” on pages 25 through 39 below and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended January 1, 2005, in addition to our interim financial statements and notes included elsewhere in this report.

Overview

Pixar was formed in 1986 when Steve Jobs purchased the computer division of Lucasfilm and incorporated it as a separate company. In 1991, we entered into a feature film agreement (the “Feature Film Agreement”) with Walt Disney Pictures, a wholly owned subsidiary of the Walt Disney Company (together with its subsidiaries and affiliates collectively referred to herein as “Disney”), for the development and production of up to three animated feature films to be marketed and distributed by Disney. It was pursuant to the Feature Film Agreement that Toy Story was developed, produced, and distributed in 1995. Our share of revenues and expenses from Toy Story is governed by the terms of the Feature Film Agreement.

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

The Co-Production Agreement also contemplates that with respect to theatrical sequels, made-for-home video sequels, television productions, interactive media products and other derivative works related to the Pictures, we will have the opportunity to co-finance and produce such products or to earn passive royalties on such products. We will not share in any theme park revenues generated as a result of the Pictures. Pursuant to the Co-Production Agreement, in addition to co-financing the production costs of the Pictures, Disney will reimburse us for our share of certain general and administrative costs and certain research and development costs that benefit the productions of the Pictures.

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Our second feature film, A Bug’s Life, was released in November 1998 and counted as the first original Picture under the Co-Production Agreement. In November 1999, Toy Story 2, our third animated feature film was released. As a theatrical sequel, Toy Story 2 is a derivative work of the original Toy Story and therefore it does not count toward the five original Pictures to be produced under the Co-Production Agreement. As a derivative work, Toy Story 2 is treated as a Picture under the Co-Production Agreement, and all the provisions applicable to the five original Pictures apply.

In November 2001, we released Monsters, Inc., our fourth animated feature film, which counts as the second original Picture under the Co-Production Agreement. In May 2003, we released Finding Nemo, our fifth animated feature film, which counts as the third original Picture under the Co-Production Agreement. In November 2004, we released The Incredibles, our sixth animated feature film, which counts as the fourth original Picture under the Co-Production Agreement. We are currently in production on Cars, which is scheduled for theatrical release on June 9, 2006. Cars is being produced and distributed under the Co-Production Agreement and will count as the fifth and final film of the Pictures to be produced under the Co-Production Agreement. Additionally, we are in various stages of development and production on our slate of feature films outside of our current Disney relationship.

The term of the Co-Production Agreement continues until we deliver our fifth and final Picture, Cars, to Disney. However, since our April 2003 delivery of Finding Nemo to Disney, we have had the right to negotiate and enter into another distribution agreement with any third party. We have produced six highly successful films to date, and we believe that this success, combined with our strong financial resources, position us to negotiate a new distribution arrangement with a major studio that will provide us with, among other things, (1) better economic terms than we currently have under the Co-Production Agreement and (2) full ownership of our films. With respect to the distribution of our films after Cars, we currently are not pursuing alternatives, other than entering into such an agreement with a major studio. We continue to explore our options with respect to a future distribution agreement.

Although we look forward to a more favorable distribution agreement for films released after Cars, we also understand that distributing our films through another studio may increase some of the risks we face in the motion picture industry. See “Risk Factors—We experience intense competition with respect to our animated feature films, animation products, and software” and “Risk Factors—We face various distribution risks with respect to our feature films.”

Pixar and Disney jointly finance all production costs relating to the Pictures on an equal basis. Pursuant to the terms of the Co-Production Agreement the parties established a mutually acceptable funding mechanism to ensure that amounts would be available in a timely manner to fund production costs. In practice, Pixar prepares funding requests for forecasted film production costs and Disney funds its share on a monthly basis at approximately the beginning of the month. All payments to Pixar from Disney for development and production of Toy Story under the Feature Film Agreement, and the Pictures under the Co-Production Agreement have been recorded as cost reimbursements. Accordingly, no revenue has been recognized for such reimbursements; rather, we have netted the reimbursements against the related costs. These reimbursed costs for the nine months ended October 1, 2005 and October 2, 2004 are set forth in Note 6 of Notes to Financial Statements in Item 1 of this report.

Stock Split

On March 23, 2005, we announced that our Board of Directors had approved a two-for-one stock split of our common stock and a proportional increase in the number of authorized shares of our common stock from 100 million to 200 million. Shareholders of record at the close of trading on April 4, 2005 were entitled to receive one additional share of Pixar common stock for every outstanding share held on such date. The additional shares were distributed on April 18, 2005, and reporting of our share price on a post-split basis commenced on April 19, 2005. All issued and outstanding shares and per share amounts and stock prices related to Pixar’s common stock in this report have been restated to reflect the stock split for all periods presented.

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Critical Accounting Policies

Revenue Recognition

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

• persuasive evidence of a sale or licensing arrangement with a customer exists;

• the film is complete and, in accordance with the terms of the arrangement, has been delivered or is available for immediate and unconditional delivery;

• the license period of the arrangement has begun and the customer can begin its exploitation, exhibition or sale;

• the arrangement fee is fixed or determinable; and

• collection of the arrangement fee is reasonably assured.

Under the Co-Production Agreement, we share equally with Disney in the profits of The Incredibles, Finding Nemo, Monsters, Inc., Toy Story 2 and A Bug’s Life after Disney recovers its marketing, distribution and other predefined costs and fees. Our revenues for Toy Story are governed by the terms of the Feature Film Agreement under which Disney fully financed the production costs and shares a specified percentage of Toy Story profits with Pixar after certain agreed upon costs and fees are deducted. We recognize revenue from our films net of distribution fees, reserves for returns, and marketing and distribution expenses. Disney provides us with gross receipt information, return reserve information, marketing and distribution costs and any other fees and expenses. We utilize this information to determine our portion of the revenue by applying the contractual provisions included in our arrangements with Disney. We may also adjust certain of Disney’s estimates, such as home video returns and distribution expenses, based on Pixar’s historical experience and other industry information. The amount of revenue recognized in any given quarter or quarters from all of our films depends on the timing, accuracy, and sufficiency of information we receive from Disney to determine revenues and associated gross profits. Although Disney provides us with the most current information available to enable us to recognize our share of revenue and determine our film gross profit, in the past we have made revisions, and we may make revisions in the future, to that information based on our estimates and judgments. Such information includes theatrical bad debt reserves and expenses, home video return reserves and expenses, merchandise expenses, and estimates for both revenues and related expenses resulting from differences between Disney’s fiscal reporting period and ours.

For example, in the past, our theatrical revenues have been adjusted for our estimated reserves on potential uncollectible amounts to be received from theatrical exhibitors. Estimated reserves for uncollectible amounts are established based on a review of the industry, discussions with Disney, and our historical experience. To date we have not experienced significant losses, and therefore we have not had significant reserves for uncollectible receivables. See Note 8 of Notes to Financial Statements in Item 1 of this report for further discussion of reserves for uncollectible amounts.

We have also made adjustments to our home video revenues for estimates on return reserves that may differ from those reported by Disney. In determining our home video reserves for a particular title, we review information such as Disney’s current return reserves, the historical returns for our previous titles, actual rates of returns, inventory levels in the distribution channel and other business and industry trend information that are available. Disney has provided and may continue to provide us with reserve information that may differ substantially from our historical experience with our previous titles. Unless Disney provides a sufficient rationale as to why the market and sales performance are substantially different for a particular title, we have and may continue to record reserves more consistent with our historical experience. For example, our home video return reserves exceeded Disney’s estimates by $4.9 million and $2.5 million at October 1, 2005 and January 1, 2005,

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respectively. The estimate for return reserves, whether based on historical information or more current information from Disney, is inherently subjective and may differ significantly from actual results. Our original estimates on reserves may be revised in future periods as new and additional information becomes available. See Note 8 of Notes to Financial Statements in Item 1 of this report for further discussion of reserves for returns.

We have utilized margin normalization, such as with merchandise or home video expenses, in accordance with the provisions of SOP 00-2. This may result in the utilization of budgeted or forecasted information to calculate an ultimate lifetime expense margin, rather than actual costs incurred if it is deemed to be a more accurate reflection of our participation. Similar to return reserves, these expense estimates are reviewed and may be adjusted periodically to ensure that the most accurate depiction of our participation is reflected.

Disney may also make subsequent adjustments to the information that it has provided, and these adjustments could have a significant impact on our operating results in later periods. As updated information becomes available from Disney, it may result in a change of estimation for revenue recognition. For example, during the quarter ended October 1, 2005, our revenues included $9.8 million of additional film revenues, primarily related to a reduction of international home video and television expenses across all of our titles. Such reductions were due to updated information received from Disney during the quarter, which resulted in a revision to our net revenues.

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

A film is classified as a library title after three years from the film’s initial release. Currently, Toy Story, A Bug’s Life, Toy Story 2 and Monsters, Inc. are classified as library titles. The term “library title” is used solely for the purpose of classification and for identifying previously released films. Revenue recognition for such titles is in accordance with our revenue recognition policy for film revenue.

Software Revenue

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

• persuasive evidence of an agreement exists;

• delivery of the product has occurred;

• the fee is fixed or determinable; and

• collection of these fees is probable.

SOP 97-2, as amended, generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair values of the elements. Revenue recognized from multiple-element arrangements is allocated to undelivered elements of the arrangement, such as support services, based on the residual value of the elements. Under the residual method, we allocate and defer revenue for the undelivered elements based on vendor-specific objective evidence of fair value, and recognize the difference between the total arrangement fee and the amount deferred for the undelivered elements as revenue. The determination of fair value of each undelivered element in multiple element arrangements is based on the price charged when the same element is sold separately.

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

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Film Production Costs

We capitalize our share of direct film production costs in accordance with SOP 00-2. Film production costs include costs to develop and produce computer-animated motion pictures, which primarily consist of salaries, equipment and overhead. With regard to the Pictures, we capitalize film production costs in excess of reimbursable amounts from Disney. For film projects outside of our existing Disney relationship, we capitalize all film production costs. Production overhead, a component of film costs, includes allocable costs of individuals or departments with exclusive or significant responsibility for the production of our films. Capitalized production overhead does not include administrative, general and research and development expenses.

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

Results of Operations

Our results for the quarter and nine months ended October 1, 2005 included worldwide home video revenue, continuing international theatrical revenue, television licensing, merchandising, and ancillary royalties from The Incredibles, as well as continued worldwide home video revenue, television licensing, and merchandising from Finding Nemo and our library titles.

Revenue

Total revenue, which consists of film revenue and software revenue, was $45.8 million and $233.5 million for the quarter and nine months ended October 1, 2005, respectively, compared to $44.5 million and $164.6 million in the corresponding prior year periods. The significant contributors of revenues for the nine months ended October 1, 2005 included theatrical, home video, television, and merchandising revenue related to The Incredibles, which was released in theaters in the holiday season of 2004. Additionally, Finding Nemo and the ongoing performance of our library titles contributed to our results during the period. The significant contributors of revenues for the nine months ended October 2, 2004 included worldwide home video revenue, worldwide theatrical revenue, merchandise sales, ancillary royalties, and television licensing related to Finding Nemo as well as the ongoing performance of our library titles.

Film revenue for the quarter ended October 1, 2005 was $41.5 million compared with $40.4 million in the corresponding prior year period. In the current quarter, The Incredibles provided net revenues of $11.8 million, which consisted primarily of television and merchandising revenue. Finding Nemo contributed revenues of $13.7 million and our library titles generated revenues of $16 million. The majority of these revenues resulted from home video sales, television licensing, merchandise licensing, and other licensing related to our films. Included in these amounts are $9.8 million of additional film revenues, primarily related to a reduction of international home video and television expenses across all of our titles. Such reductions were due to updated information received from Disney during the quarter, which resulted in a revision to our net revenues.

Film revenue for the quarter ended October 2, 2004 included $22.8 million from Finding Nemo, which related primarily to worldwide home video revenue, merchandise sales and ancillary royalties. Finding Nemo’s

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foreign home video revenue included $7.4 million related to a decrease in our estimate on foreign home video return reserves due to updated information. In addition, we received updated information from Disney during the quarter that supported a reduction in the ultimate expense projections for Finding Nemo. As a result, we revised our estimate of Finding Nemo’s domestic home video expense to reflect the lower ultimate home video expenses. This change resulted in an increase in film revenues of approximately $6.3 million for the quarter. Also included in film revenues for the quarter ended October 2, 2004 was $17.1 million from our library titles related primarily to home video revenue, merchandise sales, television licensing and ancillary royalties. Film revenues from our library titles included $9.5 million resulting from a decrease in our estimate of foreign home video return reserves for Monsters, Inc. Given the amount of time since the release of Monsters, Inc. on foreign home video and the consistent trend in Disney’s return levels over a number of quarters, we determined that we would adjust our return levels to reflect those of Disney. We also adjusted our estimates on expense margins for Monsters, Inc. merchandise, which increased our revenues by $1.3 million for the period.

Film revenue for the nine months ended October 1, 2005 was $222.9 million compared to $155.2 million in the corresponding prior year period and consisted of $141.5 million from The Incredibles related primarily to worldwide home video revenue, international theatrical revenue, domestic television licensing, derivative products, merchandise licensing, and ancillary royalties. Finding Nemo contributed $35.8 million of film revenue, which related primarily to worldwide home video sales, as well as merchandise licensing and ancillary royalties. Our library titles contributed $44.3 million to film revenue, which consisted primarily of worldwide home video sales, television licensing, merchandise licensing and ancillary royalties, as well as an increase in our net revenues of $4.1 million during the second quarter of 2005 relating to Toy Story, which primarily reflected a reduction in television expenses based on updated information obtained from Disney. Additionally, animation services contributed $1.3 million of revenue during the nine months ended October 1, 2005.

Film revenue for the nine months ended October 2, 2004 included $112.4 million from Finding Nemo, which related primarily to worldwide home video revenue, worldwide theatrical revenue, merchandise sales, ancillary royalties, and television licensing. Also included in film revenues for the nine months ended October 2, 2004 was $42.0 million from our library titles, which consisted of worldwide home video revenue, television licensing, merchandise sales and ancillary royalties. Additionally, animation services contributed $0.8 million of revenue during the nine months ended October 2, 2004.

Software revenue includes license revenue, principally from RenderMan^® and royalty revenue from licensing Physical Effects, Inc. (“PEI”) technology to a third party. PEI, a company we acquired in 1998, licensed certain of its technology to a third party, from which we receive associated royalty revenue on a quarterly basis. Software revenue for the quarter and nine months ended October 1, 2005 was $4.3 million and $10.6 million, respectively, compared to $4.0 million and $9.4 million in the corresponding prior year periods. Software maintenance contracts are recorded as unearned revenue and recognized ratably over the term of the agreement, which is generally twelve months.

For the quarter and nine months ended October 1, 2005, Disney accounted for 92% and 94%, respectively, of our total revenue compared to 90% and 92% for the corresponding prior year periods. The revenue from Disney consisted primarily of film related revenue. Because of our relationship with Disney under the Co-Production Agreement, Disney is expected to continue to represent significantly greater than 10% of our revenue for the remainder of 2005 and for the near future.

Cost of Revenue

Cost of revenue for the quarter and nine months ended October 1, 2005 was $3.6 million and $35.3 million, respectively, compared to $4.2 million and $16.5 million in the corresponding prior year periods. Cost of revenue represents primarily amortization of capitalized film costs. Cost of revenue as a percentage of total revenue for the quarter and nine months ended October 1, 2005 was 7.8% and 15.1%, respectively, as compared to 9.5% and 10.1% for the corresponding prior year periods. Our cost of revenue as a percentage of revenue may vary for any

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given period due to changes in the mix of film revenue as the gross profit varies by film, as well as for revisions to estimates on revenue to be received under the individual-film-forecast-computation method. A change to an individual film’s estimate of revenue to be received may result in an increase or decrease to the amortization of the capitalized film costs relative to a previous period. Toy Story revenue has no related cost, as film costs have been fully amortized. The decrease in cost of revenue as a percentage of total revenue for the quarter ended October 1, 2005 compared to the corresponding prior year period was primarily attributable to higher estimates of revenue to be received under the individual-film-forecast method for Finding Nemo and our library titles relative to the prior year period, partially offset by a higher cost of sales percentage for The Incredibles as compared to Finding Nemo. The increase in cost of film revenue as a percentage of total revenue for the nine months ended October 1, 2005 compared to the corresponding prior year period is attributable to a higher cost of sales percentage for The Incredibles as compared to Finding Nemo. This was partially offset by the decline in the cost amortization percentages from Finding Nemo in the nine months ended October 1, 2005, relative to the corresponding prior year period due to increases in ultimate revenues for the title.

Operating Expenses

Total operating expenses were $8.5 million and $24.2 million, respectively, for the quarter and nine months ended October 1, 2005 compared to $8.8 million and $23.4 million in the corresponding prior year periods. Under the Co-Production Agreement, Disney reimburses us for half of certain general and administrative costs and certain research and development costs that benefit the productions of the Pictures. The funding received from Disney is treated as operating expense reimbursements. Since February 2003, when we approved our first feature film to be produced outside of the existing relationship with Disney, we have begun to expense as incurred, certain costs that were previously reimbursed by Disney. To the extent that personnel, facilities and other expenditures are neither capitalized by us nor allocated to and paid for by Disney, and precede or are not subsequently followed by an increase in revenue, our business, operating results and financial condition will be materially adversely affected.

Research and Development. Research and development expenses consist primarily of salaries and support for personnel conducting research and development for our RenderMan^® software and for our proprietary Marionette^™ and Ringmaster^™ animation and production management software and for creative development for future films and our short film projects. Research and development expenses decreased to $2.6 million and $8.5 million, respectively, for the quarter and nine months ended October 1, 2005 from $4.2 million and $11.8 million for the corresponding prior year periods due to a decrease in employee related costs resulting from a shift in employee resources from research and development to film production, offset by a larger share of operating expenses previously shared with Disney. We believe that research and development expenses may increase in future periods. To date, all research and development costs not reimbursed by Disney have been expensed as incurred.

Sales and Marketing. Sales and marketing expenses consist primarily of salaries and related overhead, as well as public relations, advertising, technical support and trade show costs required to support our software sales. Sales and marketing expenses increased to $1.5 million and $3.0 million, respectively, for the quarter and nine months ended October 1, 2005, from $0.7 million and $1.7 million in the corresponding prior year periods primarily due to increased marketing and publicity initiatives and higher employee related costs. We believe that sales and marketing expenses may increase in future periods, particularly in the areas of public relations, corporate marketing, and consumer products.

General and Administrative. General and administrative expenses consist primarily of salaries of management and administrative personnel, insurance costs and professional fees. General and administrative expenses increased to $4.5 million and $12.7 million, respectively, for the quarter and nine months ended October 1, 2005 from $3.8 million and $9.9 million in the corresponding prior year periods primarily due to increased employee related costs, professional services fees, and an increased proportion of operating expenses previously shared with Disney. General and administrative expenses may continue to increase in future periods.

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Interest Income and Other

Interest income and other was $7.4 million and $18.0 million, respectively, for the quarter and nine months ended October 1, 2005, compared to $3.1 million and $8.5 million in the corresponding prior year periods and consists primarily of interest income on investments. For the quarter and nine months ended October 1, 2005, our interest income and other increased over the corresponding prior year periods primarily due to higher average cash, cash equivalent, and investment balances earning interest at higher average rates.

Income Tax Expense

The income tax rate for the quarter and nine months ended October 1, 2005 was 33.4% and 36.4%, respectively, compared to 35% in each of the corresponding prior year periods. The current quarter’s tax rate is lower than the prior year period due to a number of factors, including reduced state taxes, a federal tax benefit associated with certain income earned outside the U.S., a newly enacted tax deduction related to income attributable to domestic production activities, and certain tax exempt investment income. The lower rate in the corresponding prior nine month period is primarily attributable to the recognition of a federal tax benefit associated with certain income earned outside the U.S. for fiscal years 2000 through 2003, which was recorded in the second quarter of 2004.

Capitalized Film Production Costs

We had $163.8 million in capitalized film production costs as of October 1, 2005, consisting of costs relating to Toy Story 2, A Bug’s Life, Monsters, Inc., Finding Nemo, The Incredibles, and Cars, all of which are being co-financed by Disney under the Co-Production Agreement. Capitalized film production costs also include costs related to our Pixar-only financed films currently in various stages of production and development. All Toy Story capitalized film costs were fully amortized as of December 31, 1997.

Liquidity and Capital Resources

	Nine Months Ended
	October 1, 2005			October 2, 2004
	(in thousands)
Net cash provided by operating activities	$	173,183		$	266,867
Net cash used in investing activities		(190,251	)		(345,312	)
Net cash provided by financing activities		27,608			57,670
Net increase (decrease) in cash and cash equivalents	$	10,540		$	(20,775	)

During the nine months ended October 1, 2005, we generated $173.2 million of cash from operating activities as compared to $266.9 million during the nine months ended October 2, 2004. The decrease in cash generated from operating activities during the nine months of 2005 resulted primarily from increased spending on production costs and differences in the timing of our receivables from Disney, partially offset by an overall increase in net income. The decrease in cash used in investing activities for the nine months ended October 1, 2005 compared to the same period in 2004 was mainly attributable to the timing of purchases and sales of investments, while cash provided by financing activities for the nine months ended October 1, 2005 and October 2, 2004, was solely attributable to proceeds received from the exercise of stock options by employees.

As of October 1, 2005, our principal source of liquidity was approximately $1.0 billion in cash, cash equivalents and investments. Our future capital commitments primarily consist of obligations to fund production costs of films and derivative products under the Co-Production Agreement and beyond. Pursuant to the Co-Production Agreement, we will co-finance the last original animated feature film we have in production, Cars. In the future, we may co-finance other derivative works such as theatrical sequels, direct-to-home-video

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sequels, interactive products and television productions. Additionally, we have already approved for production other films beyond the Co-Production Agreement and have other projects in various stages of development, which we will finance entirely on our own. We also have obligations to pay portions of any revenue derived from each feature film produced under the Co-Production Agreement to our entertainment law firm in consideration for services rendered.

Film Production Costs. For the remainder of 2005, we expect to spend approximately $18 million to $21 million, net of Disney’s film cost reimbursements, on direct film costs and other costs to fund our ongoing film projects under the Co-Production Agreement and beyond, which will directly impact working capital.

Capital Expenditures. For the remainder of 2005, we expect to spend approximately $2 million to $3 million related to capital expenditures for our Emeryville headquarters and studio and other facility related projects.

We believe that our current available funds and forecasted cash from operations for the remainder of 2005 will be sufficient to satisfy our currently anticipated operating needs for the next twelve months, including working capital, capital expenditures, the film production costs of Cars, as well as the production and development costs associated with films not covered under the Co-Production Agreement. There can be no assurance that current and forecasted cash from operations will be sufficient to fund future operations. To date, we have chosen to use our existing cash resources to fund both capital expenditures and film production costs. We may continue to use our cash resources for such expenditures, or may choose at any time to finance such capital expenditures through issuance of additional equity or debt securities, by obtaining a credit facility or by some other financing mechanism.

Contractual Obligations. At October 1, 2005, we had contractual commitments to make payments under operating leases. Payments due under these long-term obligations are as follows (in thousands):

			Payments Due by Period
	Total		Less Than 1 Year		1-3 Years		3-5 Years		More Than 5 Years
Operating lease obligations	$	1,257	$	249	$	754	$	217	$	37

Off-Balance Sheet Arrangements

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

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Recent Accounting Pronouncements

On December 16, 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123—Revised 2004 (“SFAS 123R”), “Share-Based Payment.” The statement replaces SFAS 123, supersedes APB 25, and amends SFAS No. 95, “Statement of Cash Flows.” The accounting provisions of SFAS 123R are effective for annual reporting periods beginning after June 15, 2005. We intend to adopt SFA 123R for our fiscal year beginning January 1, 2006. SFAS 123R requires the measurement of all employee share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense in our statements of income. SFAS 123R eliminates the ability to account for share-based compensation transactions using APB 25, and generally would require instead that such transactions be accounted for using a fair-value based method. Companies are required to recognize an expense for compensation cost related to share-based payment arrangements including stock options and employee stock purchase plans. While the fair value method under SFAS 123R is very similar to the fair value method under SFAS 123 with regards to measurement and recognition of stock-based compensation, management is currently evaluating the impact of several of the key differences between the two standards on our financial statements. For example, SFAS 123 permits us to recognize forfeitures as they occur while SFAS 123R will require us to estimate future forfeitures and adjust our estimate on a quarterly basis. SFAS 123R will also require a classification change in the statement of cash flows; whereby, a portion of the tax benefit from stock options will move from operating cash flows to financing cash flows (total cash flows will remain unchanged). The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. Current estimates of option values using the Black-Scholes method may not be indicative of results from valuation methodologies ultimately adopted by us. The cumulative effect of adoption, if any, applied on a modified prospective basis, would be measured and recognized on January 1, 2006.

In March 2004, the FASB ratified the measurement and recognition guidance and certain disclosure requirements for impaired securities as described in Emerging Issues Task Force (“EITF”) Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” In November 2005, the FASB issued FASB Staff Position FAS 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“the FSP”). The FSP nullifies certain requirements of EITF Issue 03-1 and supersedes EITF Topic D-44, “Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value.” The FSP addresses the determination as to when an investment is considered impaired, whether that impairment is other-than-temporary, and the measurement of an impairment loss. The FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The FSP is effective for reporting periods beginning after December 15, 2005. We believe that the adoption of the FSP will not have a material effect on its results of operations, financial position or cash flows.

On December 16, 2004, the FASB issued Statement No. 153 (“SFAS 153”), “Exchanges of Non-monetary Assets,” an amendment of APB Opinion No. 29. SFAS 153 addresses the measurement of exchanges of non-monetary assets and redefines the scope of transactions that should be measured based on the fair value of the assets exchanged. SFAS 153 is effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. We believe that the adoption of SFAS 153 will not have a material effect on our results of operations, financial position or cash flows.

In May 2005, the FASB issued Statement No. 154 (“SFAS 154”), “Accounting Changes and Error Corrections—a replacement of APB No. 20 and FASB Statement No. 3.” SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application as the required method for reporting a change in accounting principle. SFAS 154 provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. The reporting of a correction of an error by restating previously issued financial statements is also addressed by SFAS 154. SFAS 154 is effective for

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accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We will adopt this pronouncement beginning in fiscal year 2006 and believe that the adoption of SFAS 154 will not have a material effect on our results of operations, financial position or cash flows.

In October 2005, the FASB issued FASB Staff Position 13-1 (“FSP 13-1”), “Accounting for Rental Costs Incurred during a Construction Period.” FSP 13-1 requires that the rental costs associated with ground or building operating leases that are incurred during the construction period be recognized as rental expense. The guidance is effective for the first reporting period beginning after December 15, 2005. We believe that the adoption of FSP 13-1 will not have a material effect on our results of operations, financial position or cash flows.

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Risk Factors

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

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

For the remainder of fiscal year 2005, our revenue, operating results, and diluted earnings per share will be largely dependent upon (1) the timing and amount of worldwide revenues and distribution costs for The Incredibles, Finding Nemo, and the titles in our film library, (2) the timing, accuracy, and sufficiency of information we receive from Disney to determine revenues and associated gross profits, (3) the timing and amount of non-film related revenues and expenses, (4) the accuracy of our assumptions and judgments used to estimate certain revenues and associated gross profits, (5) the market price of our Common Stock and related volatility, (6) the terms of our next distribution agreement and (7) domestic and international socioeconomic and political events that are beyond our control.

Dependence on revenue from our feature films.

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

For our business to be successful, our films must achieve box office success. While we have been successful in the release of all six of our feature films, this level of success is highly unusual in the motion picture industry, and our future releases may not achieve similar results. For the remainder of fiscal year 2005, we will be dependent primarily on the television licensing and merchandising revenue of The Incredibles and Finding Nemo and the home video re-release of Toy Story and Toy Story 2, as well as the ongoing performance of our other library titles.

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

Although we have experienced a successful track record with the releases of our feature films, it is difficult to predict their worldwide box office success prior to their release. While the popularity of the film is initially measured by box office success, the film’s success within each follow-on product category, such as home video, merchandise or television, depends on factors unique to each type of product, such as pricing, competitive products, and the time of year or state of the economy into which a product is released, among many other factors. While we have experienced a successful worldwide theatrical and home video release of The Incredibles, it is difficult to predict with certainty the ultimate revenues from all of the revenue streams of The Incredibles. While box office success is often a good indicator of general audience acceptance, the relative success of follow-on products is not always directly correlated, and the degree of correlation is difficult to predict.

It is also difficult to forecast the amount of revenues from Finding Nemo and the titles in our film library. The revenues generated from continued home video and merchandise sales can fluctuate due to various market factors. Because the revenues from films nearing the end of their life cycle tend to be relatively small, minor fluctuations can result in notable variances from our forecast.

Another factor contributing to the difficulty of forecasting film revenues is the home video sales moratorium strategy. This strategy is designed to increase potential sales over the lifetime of a title, to prevent a declining sales price and to support a potentially higher sales price upon re-release. Toy Story was recently re-released

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domestically on DVD on September 6, 2005, in celebration of the 10^th anniversary of its theatrical release. Toy Story 2 is scheduled for re-release on DVD on December 26, 2005. Internationally, Toy Story and Toy Story 2 DVDs are set for re-release across various territories during November and December 2005. This is the first time our titles have been removed from a sales moratorium. It is difficult to predict the actual effect of the sales moratorium strategy on home video sales and it may not generate the results we expect.

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

In addition, the amount of revenue recognized in any given quarter or quarters from all of our films depends on the timing, accuracy, and amount of information we receive from Disney to determine revenues and associated gross profits. Although we obtain from Disney the most current information available to recognize our share of revenue and to determine our film gross profit, Disney may make subsequent revisions to the information that it has provided, which could have a significant impact on us in later periods. For instance, towards the end of the life cycle for a revenue stream, Disney may inform us, and has in the past informed us, of additional distribution costs to those previously forecasted. Such revisions have impacted and may continue to impact our revenue share and our film gross profit. In addition, through information we obtain from other sources, we may make certain judgments and/or assumptions and adjust the information we receive from Disney. For example, we make adjustments to our home video revenues for estimates on return reserves that may differ from those reported by Disney. In determining our home video reserves, we review information which includes Disney’s current return reserves, the historical returns for our previous titles, actual rates of returns, inventory levels in the distribution channel and other business and industry trend information that is available. Disney has provided and may continue to provide us with reserve information that may differ substantially from our historical experience with our previous titles. Unless Disney provides a sufficient rationale as to why the market and sales performance are substantially different for a particular title, we have and may continue to record reserves more consistent with our historical experience. The estimate for return reserves, whether based on historical information or more current information from Disney, is inherently subjective and may differ significantly from actual results. Our original estimates on reserves may be revised in future periods as new and additional information becomes available. For example, during the second quarter of 2005, we recognized an adjustment that reduced our worldwide home video revenues from The Incredibles after we received updated information from Disney, which reflected higher home video returns than had been originally anticipated. This adjustment reduced our home video revenues by $14.1 million in the second quarter of 2005 for revenues that had been recorded in the previous quarter.

We have utilized margin normalization, such as with merchandise or home video expenses, in accordance with the provisions of SOP 00-2. This may result in the utilization of budgeted or forecasted information to calculate an ultimate lifetime expense margin, rather than actual costs incurred if it is deemed to be a more accurate reflection of our participation. Similar to return reserves, these expense estimates are reviewed and may be adjusted periodically to ensure the most accurate depiction of our participation is reflected.

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

With respect to capitalized film production costs, our policy is to amortize these costs over the expected revenue streams as we recognize revenues from the associated films. The amount of film costs that will be amortized each quarter depends on how much future revenue we expect to receive from each film. Unamortized

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film production costs are reviewed for indicators of impairment each reporting period on a film-by-film basis. If estimated remaining gross revenues are not sufficient to recover the unamortized film production costs, the unamortized film production costs will be written down to net realizable value. In any given quarter, if we lower our previous forecast with respect to total anticipated revenue from any individual feature film, we would be required to accelerate amortization of related film costs, resulting in lower gross margins. Such lower gross margins would adversely impact our business, operating results, and financial condition.

Forecasting our operating expenses is extremely difficult.

Our operating expenses will continue to be extremely difficult to forecast. We budget the direct costs of the Pictures with Disney, and we share such costs equally. We capitalize our share of direct costs of film production in accordance with SOP 00-2. A substantial portion of all of our other costs is incurred for the benefit of feature films (“Overhead”), including research and development expenses and general and administrative expenses. Portions of our Overhead are included in the budgets for the Pictures under the Co-Production Agreement, and we share such costs equally with Disney under the Co-Production Agreement. With respect to the portion of our Overhead that is not reimbursed by Disney, we either (1) capitalize such portion as film production costs, if required under SOP 00-2 or (2) charge it to operating expense in the period incurred. A substantial portion of our Overhead is related to the Pictures produced pursuant to the Co-Production Agreement, and is therefore reimbursed by Disney. Since we capitalize other amounts in accordance with SOP 00-2, our reported operating expenses for the nine months ended October 1, 2005 have not reflected, and future reported operating expenses will not reflect, our true level of spending on the production of animated feature films, related products and Overhead. Further, as we continue production of our films beyond the Co-Production Agreement, we expect our operating expenses to continue to increase to the extent that they are not capitalized or shared with Disney.

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

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

Software revenue.

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

Other items affecting forecasting.

Our fiscal year 2005 earnings are expected to include other income and expenses such as interest income and tax expense. Interest income is difficult to predict and can fluctuate depending on our cash, cash equivalents and investment balances as well as external factors beyond our control, such as economic conditions and interest rates available to us during the year. We calculate our current and deferred tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the subsequent year. Adjustments based on filed returns are generally recorded in the period when the tax returns are filed and

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the tax implications are known. Our income tax rate for the third quarter of fiscal year 2005 was different from the U.S. statutory rate primarily due to reduced state taxes, a federal tax benefit associated with certain income earned outside the U.S., a newly enacted tax deduction related to income attributable to domestic production activities, and certain tax exempt investment income. Our effective tax rate may fluctuate in future periods.

Changes in accounting regulations may also have a significant effect on our results of operations. For example, in December 2004, the Financial Accounting Standards Board (“FASB”) enacted Statement of Financial Accounting Standards 123—Revised 2004 (“SFAS 123R”), “Share-Based Payment,” which replaces Statement of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees.” SFAS 123R requires the measurement of all share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of such compensation expense in our statements of income. We intend to adopt SFAS 123R in the first quarter of fiscal year 2006. The pro forma disclosures, previously permitted under SFAS 123 and adopted by Pixar, no longer will be an alternative to financial statement recognition. Although we have not yet determined whether the adoption of SFAS 123R will result in amounts that are similar to the current pro forma disclosures under SFAS 123, we expect the adoption to increase our cost of revenues and operating expenses, and the adoption of SFAS 123R could make our net income less predictable in any given reporting period, could change the way we compensate our employees, or may cause other changes in the way we conduct our business.

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

Our revenues fluctuate significantly.

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

• the timing of the domestic and international theatrical and home video releases of our animated feature films,

• the success of our animated feature films,

• the timing of the release of related products into their respective markets, such as home videos, television, and merchandising,

• the demand for such related products, which is often a function of the success of the related animated feature film,

• Disney’s costs to distribute and promote our feature films and related products under the Co-Production Agreement,

• Disney’s success at marketing our feature films and related products under the Co-Production Agreement,

• the timing and accuracy of information received from Disney and other sources on which we base estimates of revenue to be recognized from our animated feature films and related products,

• the timing and amount of non-film related revenues, such as the licensing of our software,

• the competitive environment,

• the final terms of our next distribution arrangement, and

• external socioeconomic and political events that are beyond our control.

In particular, since our revenue under the Co-Production Agreement is directly related to the success of our animated feature films, our operating results are likely to fluctuate depending on the level of success of our animated feature films and related products. The revenues derived from the production and distribution of an

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animated feature film depend primarily on the film’s acceptance by the public, which cannot be predicted and does not necessarily bear a direct correlation to the production or distribution costs incurred. The commercial success of a motion picture also depends upon promotion and marketing, production costs and other factors. Further, the theatrical success of a feature film can be a significant factor in determining the amount of revenues generated from the sale of the related products.

Our operating expenses fluctuate.

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

• continued investment in proprietary software systems,

• continued and potentially increasing competition costs for creative, technical and administrative talent,

• increased costs associated with the expansion of our facilities,

• increased number of personnel required to support studio growth as we have multiple films in parallel production,

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

• increased proportion of operating expenses previously shared with Disney, and

• increased investment in administrative functions to support our expanding operations.

A portion of our operating expenses that are allocable to film productions is either capitalized by us or reimbursed by Disney under the Co-Production Agreement. To the extent that we do not capitalize (or Disney does not reimburse) the increases in expenses, our operating expenses will increase in the remainder of fiscal year 2005. In addition, as we increase the resources allocated to our productions beyond our feature film Cars, which is the last film to be co-financed with Disney under the current Co-Production Agreement, we expect our operating expenses to increase significantly.

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

We have only produced and released six feature films to date and have limited experience with respect to producing more than one animated feature film at a time. Due to the strain on our personnel from the effort required for the release of an upcoming film and the time required for creative development of future films, it is possible that we would be unable to release a new film in successive years. In the past, we have been required, and may continue to be required, to expand our employee base, increase capital expenditures and procure additional resources and facilities in order to accomplish the scheduled releases of our animated feature films. This growth and expansion has placed, and continues to place, a significant strain on our resources. We cannot provide any assurances that any future animated film will be released as scheduled or that this strain on resources will not have a material adverse effect on our business, financial condition or results of operations. In addition, John Lasseter’s availability has been a key contribution to the successful completion of our prior films. As we move towards releasing one film a year, there has been and will continue to be additional demands placed on his availability. In addition to Mr. Lasseter’s role as our Executive Vice President—Creative, he is also directing Cars, our next feature film. A lack of his availability may adversely impact the success and timing of our future films.

We continuously implement a variety of new and upgraded operational and financial systems, procedures and controls, including improvement and maintenance of our accounting system, other internal management systems and backup systems. Our growth and these diversification activities, along with the corresponding increase in the number of our employees and our rapidly increasing costs, have resulted in increased

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responsibilities for our management team. We will need to continue to improve our operational, financial and management information systems, to hire, train, motivate and manage our employees, to integrate them into Pixar and to provide adequate facilities and other resources for them. We cannot provide any assurance we will be successful in accomplishing all of these activities on a timely and cost-effective basis. Any failure to accomplish one or more of these activities on a timely and cost-effective basis would have a material adverse effect on our business, financial condition and results of operations.

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

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

The decisions regarding the timing of the theatrical release and related products, the marketing and distribution strategy, and the extent of promotional support are important factors in determining the success of our motion pictures and related products. Under the terms of the Co-Production Agreement, Disney is required to market and distribute the Pictures in the same manner as its premier animated films, and Disney is required to consult with us with respect to all major marketing and distribution decisions. While Disney is prohibited from distributing potential competing films within certain release collars, we ultimately do not control (1) the manner in which Disney distributes our animated feature films and related products, (2) the number of theaters to which Disney distributes our feature films, (3) the specific timing of release of our feature films and related products or (4) the specific amount or quality of marketing and promotional support of the feature films and related products as well as the associated promotional and marketing budgets. Because Disney co-finances the films developed and produced under the Co-Production Agreement, distributes the films under the “Walt Disney Pictures” label and enjoys substantial financial benefits in the event that such films achieve significant box office revenues, we believe that Disney desires such films to be successful. Nonetheless, Disney could make certain decisions as to marketing, distribution or promotion of the animated feature films or related products or the marketing and promotion of its own animated or other family films that could have a material adverse effect on our business, operating results or financial condition. In addition, the costs for marketing, distribution and promotion of the films and related products are incurred well in advance of the release of such films and products, and we experience a delay in the receipt of proceeds from such films and products until after Disney recovers such costs. We are also dependent on Disney for receiving accurate information on a timely basis on which we base estimates to recognize revenue and associated gross profit from the animated feature films and related products. If we fail to receive accurate information from Disney, or fail to receive it on a timely basis, it could have a significant adverse effect on our business, operating results or financial condition.

Disney has an exclusive arrangement with us.

We have agreed not to release or authorize the release of any of our feature length animated theatrical motion pictures, other than the Pictures, until twelve months from our delivery of the fifth Picture under the Co-Production Agreement. However, since our April 2003 delivery of Finding Nemo, we have been free to enter into any agreement with any third party for the development, production or distribution of any feature length animated theatrical motion picture (other than the Pictures).

We also agreed that we will not develop or produce any rides or attractions for major theme parks not owned or operated by Disney, and to give Disney a right to negotiate with respect to animated television productions or animated made-for-home video productions that we propose to produce during the term of the Co-Production Agreement. Disney, however, is not similarly restricted by the exclusivity provisions that bind us under the Co-Production Agreement and, therefore, may develop, produce or distribute other feature length animated and theatrical motion pictures itself or enter into similar agreements with third parties. However, if Disney produces any derivative works without Pixar, we are entitled to receive passive royalties pursuant to the terms of the Co-Production Agreement. See “Risk Factors—We experience intense competition with respect to our animated feature films, animation products, and software.”

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We have an obligation to co-finance production costs.

We co-financed the first four films under the Co-Production Agreement, as well as Toy Story 2, and we will continue to co-finance Cars and may co-finance other related products to be developed and produced pursuant to the Co-Production Agreement. For example, we have, in the past, elected to actively participate in various interactive games with Disney where we fund half of the development costs of the games. We also have approved for production and have begun financing Pixar-only financed films. If our feature films and related products do not generate proceeds sufficient to more than offset our share of their production costs, our business, operating results and financial condition will be materially adversely affected.

Disney retains the exclusive distribution and exploitation rights.

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

Disney can terminate the agreement under various circumstances.

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

There are significant risks associated with the motion picture industry.

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

• talent and crew availability,

• financing requirements,

• distribution strategy, including the time of the year and the number of screens on which it is shown,

• the number, quality and acceptance of other competing films released into the marketplace at or near the same time,

• critical reviews,

• the availability of alternative forms of entertainment and leisure time activities,

• piracy and unauthorized recording, transmission and distribution of motion pictures,

• general socioeconomic conditions and political events,

• weather conditions, and

• other tangible and intangible factors.

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All of these factors can change and cannot be predicted with certainty. In addition, motion picture attendance is seasonal, with the greatest attendance typically occurring during the summer and holidays. The release of a film during a period of relatively low theater attendance is likely to affect the film’s box office receipts adversely. Under the terms of the Co-Production Agreement, Pixar is guaranteed theatrical release either during the summer or holiday period. In addition, due to the expected release of a large number of family films by Disney and other movie studios in the next several years, it is possible that further saturation of the family film market, particularly computer graphics imagery (“CGI”) animated films, may adversely impact the commercial success of our films, and therefore have a material adverse effect on our business, financial condition and results of operations.

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

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

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

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

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

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

Animated Feature Films.

Our animated feature films compete and will continue to compete with family-oriented, animated and live action feature films and other family-oriented entertainment products produced by major movie studios, including Disney (as somewhat limited by the Co-Production Agreement), DreamWorks Animation SKG, Inc.

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(“DreamWorks”), Warner Bros. Entertainment (“Warner Bros.”), Sony Pictures Entertainment, Fox Entertainment Group Inc. (“Fox”), Paramount Pictures, Lucasfilm Ltd., Universal Studios, Inc., MGM/UA, and Studio Ghibli as well as numerous other independent motion picture production companies.

Competition is expected to continue to intensify in the family-oriented, animated and live action feature film market. In addition, there has been increasing widespread acceptance for CGI-animated films. In 2004, there was a significant increase in the number of CGI-animated films released, a trend that is likely to carry through 2005 and beyond. Primarily CGI-animated feature films currently in production for major studios include A Day With Wilbur Robinson, American Dog, Bee Movie, Flushed Away, Happy Feet, Ice Age 2, Open Season, Over the Hedge, Rapunzel Unbraided, Shrek 3, The Barnyard, and The Wild, among others. Some studios have also announced publicly that they intend to release multiple CGI films per year. In addition to box office and home video competition, other family-oriented films may continue to compete with Finding Nemo and The Incredibles, as well as our film library, with respect to related television, merchandise, and other future revenue sources.

Furthermore, due to the recent success of CGI-animated films, several movie studios have developed their own internal computer animation capability, which may be used for special effects in animated films and live action films in addition to creating CGI-animated feature films. For example, DreamWorks has successfully produced and released Antz in 1998, Shrek in 2001, Shrek 2 and Shark Tale in 2004, and Madagascar in May 2005. In addition, Fox successfully produced, through its subsidiary Blue Sky, Ice Age, which was released in March 2002 and Robots, which was released in March 2005; Warner Bros. released The Polar Express in November 2004 and Disney distributed Valiant, a film co-produced with Vanguard, in the U.S. in August 2005 and Chicken Little, a film produced by its new CGI feature animation department, in November 2005. Other movie studios may internally develop, license or sub-contract three-dimensional animation capability, or enter into co-production agreements with other studios capable of developing and producing three-dimensional CGI-animated films. Further, we believe that continuing enhancements to commercially available computer hardware and software technology have lowered and will continue to lower barriers to entry for studios or special effects companies which intend to produce computer-animated feature films or other products.

Therefore, we believe competition from animated feature films and family-oriented feature films will likely continue to intensify over the next several years. Due to a potentially large number of family-oriented films scheduled for release over the next few years, it is possible that the market for these films, whether animated or live action, will become further saturated.

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

The Co-Production Agreement provides that we will develop and produce five original computer-animated feature films. Because Disney co-finances the films developed and produced under the Co-Production Agreement, distributes the films under the “Walt Disney Pictures” label and enjoys financial benefits in the event that such films achieve significant box office revenues, we believe that Disney desires such films to be successful. Nonetheless, during its long history, Disney has been a very successful producer and distributor of its own animated feature films. While the Co-Production Agreement imposes restrictions prohibiting Disney and its affiliates from releasing animated films or live action family films within certain release windows from our films, it is likely that other family-oriented motion pictures distributed by Disney or its affiliates will overlap in the market and compete with our animated feature films. For example, Pirates of the Caribbean: The Curse of the Black Pearl, Spy Kids 3D: Game Over, and Freaky Friday, competed directly with Finding Nemo for domestic theatrical market share during summer 2003. The home video releases of Pirates of the Caribbean: The Curse of the Black Pearl and Freaky Friday have also competed with Finding Nemo in the worldwide home video market. The theatrical releases of Disney’s National Treasure and Miramax’s Finding Neverland in November 2004

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competed with the worldwide theatrical release of The Incredibles, and the home video release of these films competed with The Incredibles in the worldwide home video market. After Cars, Disney may begin to release its movies during our release windows. This could have an adverse impact on the commercial success required for us to profit from future films. Our contractual arrangement with Disney also presents other risks. See “Risk Factors—The Co-Production Agreement imposes several risks and restrictions on us.”

Computer Graphics Special Effects Firms.

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

Software Publishers.

We also experience competition with respect to our RenderMan^® software product. In particular, we compete with makers of computer graphics imaging and animation software, principally Alias, Discreet (a division of Autodesk), Mental Images GmbH and Avid Technologies. Mental Images and Avid are each marketing competing rendering software products, usually at lower prices than the price at which we offer RenderMan^®. Under appropriate circumstances, we have in the past elected and might in the future elect to license our rendering technology patents to other companies, some of which may compete with us. In addition, as PC’s become more powerful, software suppliers may also be able to introduce products for PC’s that would be competitive with RenderMan^® in terms of price and performance for professional users. In addition, there have been advances in graphics processing unit technology that may impinge on the market for software rendering solutions. Faster and lower cost graphic cards provide capability for users to produce pictures of higher complexity than previously available.

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

Our success depends on certain key employees.

Our success depends to a significant extent on the performance of a number of senior management personnel and other key employees, especially our film directors, producers, animators, creative personnel and technical directors. In particular, we are dependent upon the services of Steve Jobs, John Lasseter, Edwin E. Catmull, Simon Bax, and Lois Scali. We do not currently have “key person” life insurance for any of our employees. We do have an employment agreement with Mr. Lasseter, however, such employment agreement does not necessarily assure the services of Mr. Lasseter. Moreover, although it is standard in the motion picture industry to rely on employment agreements as a method of retaining the services of key employees, we have not required our employees, other than Mr. Lasseter, to enter into employment agreements. The loss of the services of any of Messrs. Jobs, Lasseter, Bax, Dr. Catmull, Ms. Scali or of other key employees, especially our film directors, producers, animators, creative personnel and technical directors, could have a material adverse effect on our business, operating results or financial condition.

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Our Chief Executive Officer has divided responsibilities.

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

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

Our success continues to depend to a significant extent on our ability to identify, attract, hire, train and retain qualified professional, creative, technical and managerial personnel. Competition for the caliber of talent required to make our films, particularly our film directors, producers, animators, creative personnel and technical directors, will continue to intensify as more studios build their in-house CGI-animation or special effects capabilities. There can be no assurance that we will be successful in identifying, attracting, hiring, training and retaining such personnel in the future. If we were unable to hire, assimilate and retain qualified personnel in the future, particularly film directors, producers, animators, creative personnel and technical directors, such inability would have a material adverse effect on our business, operating results and financial condition.

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

Under the Co-Production Agreement, Disney is required to distribute the Pictures in a manner consistent with that of Disney’s premier animated films. Currently, distribution of our films generally includes (1) worldwide theatrical exhibition, (2) worldwide home video sales, (3) worldwide television licensing, including video-on-demand (VOD), pay-per-view, pay television, network, basic cable and syndication, (4) non-theatrical exhibition, such as airlines, schools and armed forces facilities and (5) marketing of other rights of the picture, which may include licensing of merchandise, such as toys, interactive games and soundtrack recordings. Although the Co-Production Agreement provides us with some protection, we cannot provide any assurances that our feature films made under the Co-Production Agreement will be distributed through all of these outlets.

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

We have a limited operating history.

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

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

We are currently co-financing our remaining unreleased Picture, Cars, pursuant to the Co-Production Agreement and solely financing our feature films beyond the Co-Production Agreement. The future production costs of Cars, and subsequent films, and any future expansion of our studio and headquarters in Emeryville, California, may have an adverse impact on our cash and investment balances. As of October 1, 2005, we had $1.0 billion in cash, cash equivalents and investments. We believe that these funds, along with future cash provided by operating activities, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures, production costs for Cars, as well as production and development costs for future films and development projects. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” To date, we have chosen to use our existing cash resources to fund film production costs and construction costs. We may continue to use our cash resources for such expenditures, or may choose to finance such capital expenditures through issuance of additional equity or debt securities, by obtaining a credit facility or by some other financing mechanism. The sale of additional equity or convertible debt securities would result in additional dilution to our shareholders. Moreover, we cannot provide any assurances that we will be successful in obtaining future financing, or even if such financing is available, that we will obtain it on favorable terms or on terms providing us with sufficient funds to meet our obligations and objectives.

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

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

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

Our Chief Executive Officer and Chairman, Steve Jobs, beneficially owned approximately 50.5% of our outstanding Common Stock as of November 1, 2005. As a result, Mr. Jobs, acting alone, is able to exercise sole discretion over all matters requiring shareholder approval, including the election of the entire board of directors and approval of significant corporate transactions, including an acquisition of Pixar. Such concentration of ownership may also have the effect of delaying or preventing a change in control of Pixar, impeding a merger, consolidation, takeover or other business combination involving Pixar, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of Pixar.

Business interruptions could adversely affect our operations.

Our operations are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure and other events beyond our control. Although we have developed certain plans to respond in the event of a disaster, there can be no assurance that they will be effective in the event of a specific disaster. Our facilities in the State of California have in the past and may in the future be subject to electrical blackouts as a consequence of a shortage of available electrical power. In the event of a short-term power outage, we have installed UPS (uninterrupted power source) equipment to protect our RenderFarm and other sensitive equipment, along with two 1.5 Megawatt backup generators; however, a long-term power outage could disrupt our operations. Prices for electricity have in the past risen dramatically and may increase in the future. An increase in prices would increase

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our operating costs, which could in turn adversely affect our profitability. We do not carry earthquake insurance for earthquake related losses and although we carry business interruption insurance for other potential losses, there can be no assurance that such insurance will be sufficient to compensate us for losses that may occur. Any losses or damages incurred by us could have a material adverse effect on our business and results of operations.

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

The continued threat of terrorism within the United States and abroad, military action and heightened security measures in response to such threats, as well as other socioeconomic and political events, may cause significant disruption to commerce, including the entertainment industry, throughout the world. For example, the terrorist attacks in New York and Washington, D.C. on September 11, 2001 disrupted commerce throughout the United States and Europe. Such disruption in the future could have a material adverse effect on our business and results of operations.

Work stoppages could adversely impact our operations.

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

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

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

There are various risks associated with our proprietary rights.

Our efforts to protect our proprietary technologies may not succeed.

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

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our employees, consultants and vendors, and generally control access to and distribution of our software, documentation and other proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our proprietary information, products or technology without authorization, or to develop similar or superior technology independently. Policing unauthorized use of our products is difficult and expensive. In addition, effective copyright, patent and trade secret protection may be unavailable or limited in certain foreign countries. We generally rely on “electronically delivered” software licenses that include an electronic acceptance by the purchaser, which may be unenforceable under the laws of certain jurisdictions. We cannot provide any assurances that the steps we take will prevent misappropriation of our technology or that our confidentiality or license agreements will be enforceable.

Enforcing our proprietary rights may require litigation.

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

Others may assert infringement claims against us.

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

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

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

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

The market price of our Common Stock is highly volatile and is subject to wide fluctuations in response to a wide variety of factors, including the publication of box office results for our feature films and those of our competitors, fluctuations in our quarterly or annual results of operations, changes in financial estimates by securities analysts, announcements made by us, Disney, or our competitors, budget increases, delays in or cancellation of feature film or other product release dates, speculation about the negotiation of terms or conditions of our next distribution arrangement, or socioeconomic, political or other factors. For example, since

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the beginning of fiscal year 2004 through October 1, 2005, our Common Stock closed as low as $31.21 and as high as $53.97 per share. Moreover, in recent years, the stock market has experienced extreme price and volume fluctuations, some of which have been unrelated or disproportionate to the operating performances of the companies affected. These broad market and industry fluctuations may adversely affect the market price of our Common Stock. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against such a company. For instance, in October and November 2005, purported securities class action lawsuits were filed against Pixar.

As described in “Risk Factors—Our operating results have fluctuated in the past, and we expect such fluctuations to continue,” we believe that period-to-period comparisons of our results of operations may not be necessarily meaningful. Accordingly, you should not rely on our annual and quarterly results of operations as any indication of future performance. In addition, it is possible that in some future period our operating results will be below the expectations of public market analysts and investors or the guidance we have provided. In such event, the price of our Common Stock may be materially adversely affected. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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

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

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

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

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

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

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Investment Portfolio. We invest in a variety of investment grade, interest-bearing, fixed income securities, including obligations of corporations, states and municipalities, and national governmental entities and their agencies. This diversification of risk is consistent with our policy to ensure safety of our principal and maintain liquidity. We only invest in securities with an effective maturity of 24 months or less. Our investments are primarily fixed rate obligations and carry a certain degree of interest rate risk. A rise in interest rates could adversely impact the fair market value of these securities.

All of our financial instruments are held for purposes other than trading and are considered “available for sale” per SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities.” The table below provides information regarding our investment portfolio at October 1, 2005. The table presents principal cash flows and related weighted-average fixed interest rates presented by expected maturity date (dollars in thousands):

	Less than 1 Year			Over 1 Year			Total
Available-for-sale securities	$	634,528		$	369,935		$	1,004,463
Weighted-average interest rate		3.10	%		3.82	%		3.36	%

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

Item 4. Controls and Procedures

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

Changes in internal control over financial reporting. There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings

Shareholder Litigation. On October 21, 2005, a putative shareholder class action lawsuit was filed against the Company and certain of its officers in the United States District Court for the Northern District of California alleging claims under Section 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. The case is entitled Mataraza v. Pixar, et al., Case No. C-05-4290 JSW. The complaint asserts a class period from January 18, 2005 to June 30, 2005. A similar complaint entitled Grabell v. Pixar, et al., Case No. C-05-4431-MJJ, was filed on November 1, 2005. Consistent with the usual procedures for cases of this kind, it is anticipated that these cases (and any other similar putative shareholder class action suits which might be filed against Pixar) may be consolidated into a single consolidated action. Management believes the lawsuits to be without merit and intends to vigorously defend against the lawsuits.

Informal Inquiry by the SEC. The Company has received an informal inquiry from the SEC requesting information regarding the disclosure of our second quarter financial results. We are cooperating fully with the inquiry.

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

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

The following proposals were submitted to shareholders at our Annual Meeting of Shareholders held on August 19, 2005. Each of these proposals was approved by a majority of the shares present at the meeting.

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

	Shares For	Shares Withheld
Steve Jobs	105,205,864	10,498,687
Edwin E. Catmull	104,766,140	10,938,411
Skip M. Brittenham	104,017,066	11,687,485
Susan L. Decker	111,476,164	4,228,387
Joseph A. Graziano	111,323,566	4,380,985
Lawrence B. Levy	110,302,844	5,401,707
Joe Roth	111,317,736	4,386,815
Larry W. Sonsini	103,824,107	11,880,444

2. To ratify the appointment of KPMG LLP as our independent registered public accounting firm for the fiscal year ended December 31, 2005.

For	115,312,769
Against	339,150
Abstain	52,632

Item 6. Exhibits

(a) Exhibits

Exhibit 10.1	*	Forms of Agreement Under 2004 Equity Incentive Plan.
Exhibit 31.1		Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2		Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1		Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Indicates management compensatory plan contract or arrangement.

Items 2, 3, and 5 are not applicable and have been omitted.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

PIXAR
By:	/s/    SIMON T. BAX
	Simon T. Bax Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer and Duly Authorized Officer)

Date: November 10, 2005

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EXHIBIT INDEX

Exhibit Number		Description
10.1	*	Forms of Agreement Under 2004 Equity Incentive Plan
31.1		Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Indicates management compensatory plan contract or arrangement.

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EX-10.1

EXHIBIT 10.1

PIXAR

2004 EQUITY INCENTIVE PLAN

STOCK OPTION AGREEMENT

Grant #             

Pixar (the “Company”) hereby grants you, [NAME OF EMPLOYEE] (the “Employee”), an Incentive Stock Option¹ under the Company’s 2004 Equity Incentive Plan (the “Plan”), to purchase shares of common stock of the Company (“Shares”). The date of this Agreement is [DATE] (the “Grant Date”). In general, the latest date this option will expire is [DATE 10 YEARS AFTER GRANT DATE] (the “Expiration Date”). However, as provided in Appendix A (attached hereto), this option may expire earlier than the Expiration Date. Subject to the provisions of Appendix A and of the Plan, the principal features of this option are as follows:

Maximum Number of Shares Purchasable with this Option: [NUMBER A]

Purchase Price per Share: $[NUMBER B]

Scheduled Vesting Dates:	Number of Shares:
Vesting Commencement Date	[ENTER DATE]
Each annual anniversary of the Vesting Commencement Date	[25% OF NUMBER A]

Event Triggering Termination of Option:	Maximum Time to Exercise After Triggering Event*:
Termination of Service within 1 year of Vesting Commencement Date	None
Termination of Service due to Disability	1 year
Termination of Service due to death	1 year
All other Terminations of Service	90 days

* However, in no event may this option be exercised after the Expiration Date.

Your signature below indicates your agreement and understanding that this option is subject to all of the terms and conditions contained in Appendix A and the Plan. For example, important additional information on vesting and termination of this option is contained in Paragraphs 3 through 5 of Appendix A. ACCORDINGLY, PLEASE BE SURE TO READ ALL OF APPENDIX A, WHICH CONTAINS THE SPECIFIC TERMS AND CONDITIONS OF THIS OPTION.

PIXAR		EMPLOYEE
By:
	Title:	[NAME]

¹ This option is intended to qualify as an incentive stock option under Section 422 of the Code. However, to the extent that it exceeds the $100,000 rule of Code Section 422(d) it shall be treated as a nonqualified stock option.

APPENDIX A

TERMS AND CONDITIONS OF STOCK OPTION

1. Grant of Option. The Company hereby grants to the Employee under the Plan, as a separate incentive in connection with his or her service and not in lieu of or other compensation for his or her services, a stock option to purchase, on the terms and conditions set forth in this Agreement and the Plan, all or any part of an aggregate of the maximum number of Shares set forth on the Notice of Grant.

2. Exercise Price. The purchase price per Share for this option (the “Exercise Price”) shall be equal to the Exercise Price set forth on the Notice of Grant.

3. Vesting Schedule. Except as otherwise provided in this Agreement, the right to exercise this option will vest in the amounts and on the dates shown on the Notice of Grant. Except to the limited extent provided in paragraph 12, Shares scheduled to vest on any such date actually will vest only if the Employee has not incurred a Termination of Service prior to such date. Notwithstanding the preceding sentence, if the Employee has incurred a Termination of Service prior to such date but immediately continues as a Director or Consultant, the Committee in its discretion may continue the vesting of this option; provided, however, that this option will become a nonqualified stock option (i.e., an option that is not qualified under section 422 of the Code) beginning on the ninety-first (91st) day following the Termination of Service. Unless otherwise determined by the Committee in its discretion or required by law, vesting of stock options will continue during any leave of absence authorized by the Company that is taken by an Employee that will have a duration of up to 90 calendar days, but vesting will suspend on the first day of any leave of absence that will have a duration of greater than 90 calendar days. If the Employee takes a leave of absence which continues for more than ninety (90) days, then this option will become a nonqualified stock option beginning on the ninety-first (91st) day of the leave, unless the Employee’s reemployment rights are guaranteed by statute or by written agreement.

4. Termination of Option. If the Employee incurs a Termination of Service for a reason other than death or Disability, the Employee may, within ninety (90) days after the date of such Termination of Service, or prior to the Expiration Date, whichever shall first occur, exercise any vested but unexercised portion of this option. If the Employee incurs a Termination of Service due to the Employee’s Disability, the Employee may, within twelve (12) months after the date of such Termination or Service, or prior to the Expiration Date, whichever shall first occur, exercise any vested but unexercised portion of this option. Upon the Employee’s Termination of Service, any unvested portion of this option (after applying the rules of Paragraph 12) shall terminate immediately. Notwithstanding any other provision of this Section 4, if the Employee has incurred a Termination of Service but immediately continues as a Director or Consultant, the Committee in its discretion may provide for the exercise of any vested but unexercised portion of this option prior to the earlier of the Expiration Date or another date specified by the Committee.

5. Death of Employee. In the event that the Employee dies while an employee or during the periods described in paragraph 4, the Employee’s designated beneficiary (if beneficiary designations are permitted by the Company in its discretion), or if no such beneficiary survives the Employee, the administrator or executor of the Employee’s estate, may exercise any vested but unexercised portion of the option within twelve (12) months after the date of the Employee’s death, or prior to the Expiration Date, whichever shall first occur. Any such transferee must furnish the Company (a) written notice of his or her status as a transferee, (b) evidence satisfactory to the Company to establish the validity of the transfer of this option and compliance with any laws or regulations pertaining to such transfer, and (c) written acceptance of the terms and conditions of this option as set forth in this Agreement.

6. Persons Eligible to Exercise Option. Except as provided in Paragraph 5 above or as otherwise determined by the Committee in its discretion, this option shall be exercisable during the Employee’s lifetime only by the Employee.

7. Option is Not Transferable. Except as otherwise expressly provided herein, this option and the rights and privileges conferred hereby may not be transferred, pledged, assigned, or otherwise hypothecated in any way (whether by operation of law or otherwise) other than by will or by the laws of descent and distribution.

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Furthermore, this option shall not be subject to sale under execution, attachment, or similar process. Upon any attempt to transfer, pledge, assign, hypothecate, or otherwise dispose of this option, or of any right or privilege conferred hereby, (other than as permitted hereby) or upon any attempted sale under any execution, attachment, or similar process, this option and the rights and privileges conferred hereby immediately shall become null and void.

8. Exercise of Option. The Employee acknowledges that the exercise of this option and the disposition of shares acquired upon exercise of this option must comply with the terms of the Company’s securities trading policy, as it may exist from time to time. This option may be exercised by the person then entitled to do so as to any Shares which may then be purchased (a) by giving notice of exercise in such form or manner as the Company may designate, (b) providing full payment of the Exercise Price (and the amount of any income and employment taxes and applicable fees, if any, the Company determines is required to be withheld by reason of the exercise of this option or as is otherwise required under Paragraph 10 below), and (c) giving satisfactory assurances in the form or manner requested by the Company that the shares to be purchased upon the exercise of this option are being purchased for investment and not with a view to the distribution thereof. Exercise of this option, other than through a stock broker-assisted transaction, will be permitted only during the regular business hours of the Company in Emeryville, CA. Notwithstanding any contrary provision of this Agreement, if the expiration date of this option falls on a Saturday, Sunday or holiday, the Employee may exercise any vested but unexercised portion of this option at any time prior to the close of business on the first business day following that Saturday, Sunday or holiday. In addition, if the option is to be exercised through a stock broker-assisted transaction, the option must be exercised while the applicable stock market is open for trading and before the option otherwise expires.

9. Conditions to Exercise. Except as provided in Paragraph 8 above or as otherwise required as a matter of law, the Exercise Price for this option may be paid in one (1) (or a combination of two (2) or more) of the following forms:

(a) Personal check, a cashier’s check or a money order.

(b) If permitted by the Committee, irrevocable directions to a securities broker approved by the Company to sell all or part of the option shares and to deliver to the Company from the sale proceeds an amount sufficient to pay the Exercise Price and any required withholding taxes. (The balance of the sale proceeds, if any, will be delivered to the Employee.)

(c) In another form permitted by the Committee in accordance with the terms of the Plan.

10. Tax Withholding and Payment Obligations. The Company will assess its requirements regarding tax, social insurance and any other payroll tax withholding and reporting in connection with this option, including the grant, vesting or exercise of this option or sale of shares acquired pursuant to the exercise of this option (“tax-related items”). These requirements may change from time to time as laws or interpretations change. Regardless of the Company’s actions in this regard, the Employee hereby acknowledges and agrees that the ultimate liability for any and all tax-related items is and remains his or her responsibility and liability and that the Company (a) makes no representations or undertaking regarding treatment of any tax-related items in connection with any aspect of this option grant, including the grant, vesting or exercise of this option and the subsequent sale of shares acquired pursuant to the exercise of this option; and (b) does not commit to structure the terms of the grant or any aspect of this option to reduce or eliminate the Employee’s liability regarding tax-related items. In the event the Company determines that it and/or an Affiliate must withhold any tax-related items as a result of the Employee’s participation in the Plan, the Employee agrees as a condition of the grant of this option to make arrangements satisfactory to the Company to enable it to satisfy all withholding requirements. The Employee authorizes the Company and/or an Affiliate to withhold all applicable withholding taxes from any cash compensation due to the Employee. Furthermore, the Employee agrees to pay the Company and/or an Affiliate any amount of taxes the Company and/or an Affiliate may be required to withhold as a result of the Employee’s participation in the Plan that cannot be satisfied by deduction from cash compensation due to the Employee. The Employee acknowledges that he or she may not exercise this option unless the tax withholding obligations of the Company and/or any Affiliate are satisfied.

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11. Suspension of Exercisability. If at any time the Company shall determine, in its discretion, that the listing, registration or qualification of the Shares upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory authority, is necessary or desirable as a condition of the purchase of Shares hereunder, this option may not be exercised, in whole or in part, unless and until such listing, registration, qualification, consent, or approval shall have been effected or obtained free of any conditions not acceptable to the Company. The Company shall make reasonable efforts to meet the requirements of any such state or federal law or securities exchange and to obtain any such consent or approval of any such governmental authority.

12. Change in Control. In the event of a Change in Control, this option shall be subject to the definitive agreement governing such Change in Control. Such agreement, without the Employee’s consent and notwithstanding any provision to the contrary in this Agreement or the Plan, must provide for one of the following: (a) the assumption of this option by the surviving corporation or its parent; (b) the substitution by the surviving corporation or its parent of options with substantially the same terms as this option; (c) the conversion of this option into an option to purchase the consideration received by the stockholders of the Company in the Change in Control; (d) the termination of this option after the Company shall have provided the Employee with the ability to exercise this option as to all Shares, including Shares which otherwise would not be then exercisable, for a period of fifteen (15) days or less before the consummation of the Change in Control; or (e) the cancellation of this option after payment to the Employee of an amount in cash or cash equivalents equal to (A) the fair market value of the Shares subject to this option at the time of the Change in Control minus (B) the Exercise Price of the Shares subject to this option at the time of the Change in Control. In the event the definitive agreement does not provide for one of the foregoing alternatives with respect to the treatment of this option, this option shall have the treatment specified in clause (d) of the preceding sentence. The Committee may, in its sole discretion, accelerate the exercisability and vesting of this option in connection with any of the foregoing alternatives. For purposes of this Agreement, “Change in Control” means the occurrence of any of the following events: (a) any “person” (as such term is used in Sections 13(d) and 14(d) of the 1934 Act), other than any combination of Steve Jobs, members of his immediate family, and any entities holding Shares for the benefit of Steve Jobs or members of his immediate family, becomes the “beneficial owner” (as defined in Rule 13d-3 of the 1934 Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company’s then outstanding voting securities; (b) the consummation of the sale or disposition by the Company of all or substantially all of the Company’s assets; (c) a change in the composition of the Board occurring within a two-year period, as a result of which fewer than a majority of the directors are Incumbent Directors; or (d) the consummation of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or its parent) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity or its parent outstanding immediately after such merger or consolidation. “Incumbent Directors” means directors who either (A) are Directors as of the effective date of the Plan, or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Directors at the time of such election or nomination (but will not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company).

13. No Rights of Stockholder. Neither the Employee (nor any transferee) shall be or have any of the rights or privileges of a stockholder of the Company in respect of any of the Shares issuable pursuant to the exercise of this option, unless and until certificates representing such Shares shall have been issued and recorded on the records of the Company or its transfer agents or registrars and delivered to the Employee (or transferee).

14. Address for Notices. Any notice to be given to the Company under the terms of this Agreement shall be addressed to the Company, in care of its Secretary, at 1200 Park Avenue, Emeryville, California 94608, or at such other address as the Company may hereafter designate in writing.

15. Maximum Term of Option. In no event may this option be exercised after the Expiration Date.

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16. Binding Agreement. Subject to the limitation on the transferability of this option contained herein, this Agreement shall be binding upon and inure to the benefit of the heirs, legatees, legal representatives, successors and assigns of the parties hereto.

17. Plan Governs. This Agreement is subject to all of the terms and provisions of the Plan. In the event of a conflict between one or more provisions of this Agreement and one or more provisions of the Plan, the provisions of the Plan shall govern. Capitalized terms and phrases used and not defined in this Agreement shall have the meaning set forth in the Plan. The Company may, in its discretion, issue newly issued shares or treasury shares pursuant to this option.

18. Incentive Stock Option Rules. If this option is exercised more than three (3) months after the Employee’s Termination of Service for any reason other than Disability or death, this option no longer will be an incentive stock option and instead will be deemed to be a nonqualified stock option (unless the Employee dies within such three-month period). If this option is exercised more than one (1) year after the Participant’s Termination of Service on account of Disability, this option no longer will be an incentive stock option and instead will be deemed to be a nonqualified stock option (unless the Employee dies within such one-year period). If the fair market value (determined on the applicable grant date of the option) of the shares with respect to which incentive stock options are exercisable for the first time by the Employee during any calendar year (under all incentive stock options granted to Employee under all plans of the Company and its Subsidiaries) exceeds $100,000, the portion of the option shares in excess of $100,000 instead shall be deemed to be shares under a nonqualified stock option (rather than under an incentive stock option).

19. Committee Authority. The Committee shall have all discretion, power, and authority to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith. All actions taken and all interpretations and determinations made by the Committee in good faith shall be final and binding upon the Employee, the Company and all other interested persons, and shall be given the maximum deference permitted by law. No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or this Agreement.

20. Captions. The captions provided herein are for convenience only and are not to serve as a basis for the interpretation or construction of this Agreement.

21. Agreement Severable. In the event that any provision in this Agreement shall be held invalid or unenforceable, such provision shall be severable from, and such invalidity or unenforceability shall not be construed to have any effect on, the remaining provisions of this Agreement.

22. Modifications to the Agreement. This Agreement constitutes the entire understanding of the parties on the subjects covered. The Employee expressly warrants that he or she is not executing this Agreement in reliance on any promises, representations, or inducements other than those contained herein. Except as otherwise provided herein, modifications to this Agreement or the Plan can be made only in an express written contract executed by a duly authorized officer of the Company.

23. Amendment, Suspension, Termination. By accepting this option, the Employee expressly warrants that he or she has received an option to purchase stock under the Plan, and has received, read and understood the prospectus for the Plan. The Employee understands that the Plan is discretionary in nature and may be modified, suspended or terminated by the Company at any time.

o 0 o

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PIXAR

2004 EQUITY INCENTIVE PLAN

STOCK OPTION AGREEMENT

Grant #             

Pixar (the “Company”) hereby grants you, [NAME OF EMPLOYEE] (the “Employee”), a Nonqualified Stock Option under the Company’s 2004 Equity Incentive Plan (the “Plan”), to purchase shares of common stock of the Company (“Shares”). The date of this Agreement is [DATE] (the “Grant Date”). In general, the latest date this option will expire is [DATE 10 YEARS AFTER GRANT DATE] (the “Expiration Date”). However, as provided in Appendix A (attached hereto), this option may expire earlier than the Expiration Date. Subject to the provisions of Appendix A and of the Plan, the principal features of this option are as follows:

Maximum Number of Shares Purchasable with this Option: [NUMBER A]

Purchase Price per Share: $[NUMBER B]

Scheduled Vesting Dates:	Number of Shares:
Vesting Commencement Date	[ENTER DATE]
Each annual anniversary of the Vesting Commencement Date	[25% OF NUMBER A]

Event Triggering Termination of Option:	Maximum Time to Exercise After Triggering Event*:
Termination of Service within 1 year of Vesting Commencement Date	None
Termination of Service due to Disability	1 year
Termination of Service due to death	1 year
All other Terminations of Service	90 days

* However, except in the event of death, this option may not be exercised after the Expiration Date.

Your signature below indicates your agreement and understanding that this option is subject to all of the terms and conditions contained in Appendix A and the Plan. For example, important additional information on vesting and termination of this option is contained in Paragraphs 3 through 5 of Appendix A. ACCORDINGLY, PLEASE BE SURE TO READ ALL OF APPENDIX A, WHICH CONTAINS THE SPECIFIC TERMS AND CONDITIONS OF THIS OPTION.

PIXAR		EMPLOYEE
By
	Title:	[NAME]

APPENDIX A

TERMS AND CONDITIONS OF STOCK OPTION

1. Grant of Option. The Company hereby grants to the Employee under the Plan, as a separate incentive in connection with his or her service and not in lieu of or other compensation for his or her services, a stock option to purchase, on the terms and conditions set forth in this Agreement and the Plan, all or any part of an aggregate of the maximum number of Shares set forth on the Notice of Grant.

2. Exercise Price. The purchase price per Share for this option (the “Exercise Price”) shall be equal to the Exercise Price set forth on the Notice of Grant.

3. Vesting Schedule. Except as otherwise provided in this Agreement, the right to exercise this option will vest in the amounts and on the dates shown on the Notice of Grant. Except to the limited extent provided in paragraph 12, Shares scheduled to vest on any such date actually will vest only if the Employee has not incurred a Termination of Service prior to such date. Notwithstanding the preceding sentence, if the Employee has incurred a Termination of Service prior to such date but immediately continues as a Director or Consultant, the Committee in its discretion may continue the vesting of this option. Unless otherwise determined by the Committee in its discretion or required by law, vesting of stock options will continue during any leave of absence authorized by the Company that is taken by an Employee that will have a duration of up to 90 calendar days, but vesting will suspend on the first day of any leave of absence that will have a duration of greater than 90 calendar days.

4. Termination of Option. If the Employee incurs a Termination of Service for a reason other than death or Disability, the Employee may, within ninety (90) days after the date of such Termination of Service, or prior to the Expiration Date, whichever shall first occur, exercise any vested but unexercised portion of this option. If the Employee incurs a Termination of Service due to the Employee’s Disability, the Employee may, within twelve (12) months after the date of such Termination or Service, or prior to the Expiration Date, whichever shall first occur, exercise any vested but unexercised portion of this option. Upon the Employee’s Termination of Service, any unvested portion of this option (after applying the rules of Paragraph 12) shall terminate immediately. Notwithstanding any other provision of this Section 4, if the Employee has incurred a Termination of Service but immediately continues as a Director or Consultant, the Committee in its discretion may provide for the exercise of any vested but unexercised portion of this option prior to the earlier of the Expiration Date or another date specified by the Committee.

5. Death of Employee. In the event that the Employee dies while an employee or during the periods described in paragraph 4, the Employee’s designated beneficiary (if beneficiary designations are permitted by the Company in its discretion), or if no such beneficiary survives the Employee, the administrator or executor of the Employee’s estate, may exercise any vested but unexercised portion of the option within twelve (12) months after the date of the Employee’s death. Any such transferee must furnish the Company (a) written notice of his or her status as a transferee, (b) evidence satisfactory to the Company to establish the validity of the transfer of this option and compliance with any laws or regulations pertaining to such transfer, and (c) written acceptance of the terms and conditions of this option as set forth in this Agreement.

6. Persons Eligible to Exercise Option. Except as provided in Paragraph 5 above or as otherwise determined by the Committee in its discretion, this option shall be exercisable during the Employee’s lifetime only by the Employee.

7. Option is Not Transferable. Except as otherwise expressly provided herein, this option and the rights and privileges conferred hereby may not be transferred, pledged, assigned, or otherwise hypothecated in any way (whether by operation of law or otherwise) other than by will or by the laws of descent and distribution. Furthermore, this option shall not be subject to sale under execution, attachment, or similar process. Upon any attempt to transfer, pledge, assign, hypothecate, or otherwise dispose of this option, or of any right or privilege conferred hereby,

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(other than as permitted hereby) or upon any attempted sale under any execution, attachment, or similar process, this option and the rights and privileges conferred hereby immediately shall become null and void.

8. Exercise of Option. The Employee acknowledges that the exercise of this option and the disposition of shares acquired upon exercise of this option must comply with the terms of the Company’s securities trading policy, as it may exist from time to time. This option may be exercised by the person then entitled to do so as to any Shares which may then be purchased (a) by giving notice of exercise in such form or manner as the Company may designate, (b) providing full payment of the Exercise Price (and the amount of any income and employment taxes and applicable fees, if any, the Company determines is required to be withheld by reason of the exercise of this option or as is otherwise required under Paragraph 10 below), and (c) giving satisfactory assurances in the form or manner requested by the Company that the shares to be purchased upon the exercise of this option are being purchased for investment and not with a view to the distribution thereof. Exercise of this option, other than through a stock broker-assisted transaction, will be permitted only during the regular business hours of the Company in Emeryville, CA. Notwithstanding any contrary provision of this Agreement, if the expiration date of this option falls on a Saturday, Sunday or holiday, the Employee may exercise any vested but unexercised portion of this option at any time prior to the close of business on the first business day following that Saturday, Sunday or holiday. In addition, if the option is to be exercised through a stock broker-assisted transaction, the option must be exercised while the applicable stock market is open for trading and before the option otherwise expires.

9. Conditions to Exercise. Except as provided in Paragraph 8 above or as otherwise required as a matter of law, the Exercise Price for this option may be paid in one (1) (or a combination of two (2) or more) of the following forms:

(a) Personal check, a cashier’s check or a money order.

(b) If permitted by the Committee, irrevocable directions to a securities broker approved by the Company to sell all or part of the option shares and to deliver to the Company from the sale proceeds an amount sufficient to pay the Exercise Price and any required withholding taxes. (The balance of the sale proceeds, if any, will be delivered to the Employee.)

(c) In another form permitted by the Committee in accordance with the terms of the Plan.

10. Tax Withholding and Payment Obligations. The Company will assess its requirements regarding tax, social insurance and any other payroll tax withholding and reporting in connection with this option, including the grant, vesting or exercise of this option or sale of shares acquired pursuant to the exercise of this option (“tax-related items”). These requirements may change from time to time as laws or interpretations change. Regardless of the Company’s actions in this regard, the Employee hereby acknowledges and agrees that the ultimate liability for any and all tax-related items is and remains his or her responsibility and liability and that the Company (a) makes no representations or undertaking regarding treatment of any tax-related items in connection with any aspect of this option grant, including the grant, vesting or exercise of this option and the subsequent sale of shares acquired pursuant to the exercise of this option; and (b) does not commit to structure the terms of the grant or any aspect of this option to reduce or eliminate the Employee’s liability regarding tax-related items. In the event the Company determines that it and/or an Affiliate must withhold any tax-related items as a result of the Employee’s participation in the Plan, the Employee agrees as a condition of the grant of this option to make arrangements satisfactory to the Company to enable it to satisfy all withholding requirements. The Employee authorizes the Company and/or an Affiliate to withhold all applicable withholding taxes from any cash compensation due to the Employee. Furthermore, the Employee agrees to pay the Company and/or an Affiliate any amount of taxes the Company and/or an Affiliate may be required to withhold as a result of the Employee’s participation in the Plan that cannot be satisfied by deduction from cash compensation due to the Employee. The Employee acknowledges that he or she may not exercise this option unless the tax withholding obligations of the Company and/or any Affiliate are satisfied.

11. Suspension of Exercisability. If at any time the Company shall determine, in its discretion, that the listing, registration or qualification of the Shares upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory authority, is necessary or desirable as a condition of the

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purchase of Shares hereunder, this option may not be exercised, in whole or in part, unless and until such listing, registration, qualification, consent, or approval shall have been effected or obtained free of any conditions not acceptable to the Company. The Company shall make reasonable efforts to meet the requirements of any such state or federal law or securities exchange and to obtain any such consent or approval of any such governmental authority.

12. Change in Control. In the event of a Change in Control, this option shall be subject to the definitive agreement governing such Change in Control. Such agreement, without the Employee’s consent and notwithstanding any provision to the contrary in this Agreement or the Plan, must provide for one of the following: (a) the assumption of this option by the surviving corporation or its parent; (b) the substitution by the surviving corporation or its parent of options with substantially the same terms as this option; (c) the conversion of this option into an option to purchase the consideration received by the stockholders of the Company in the Change in Control; (d) the termination of this option after the Company shall have provided the Employee with the ability to exercise this option as to all Shares, including Shares which otherwise would not be then exercisable, for a period of fifteen (15) days or less before the consummation of the Change in Control; or (e) the cancellation of this option after payment to the Employee of an amount in cash or cash equivalents equal to (A) the fair market value of the Shares subject to this option at the time of the Change in Control minus (B) the Exercise Price of the Shares subject to this option at the time of the Change in Control. In the event the definitive agreement does not provide for one of the foregoing alternatives with respect to the treatment of this option, this option shall have the treatment specified in clause (d) of the preceding sentence. The Committee may, in its sole discretion, accelerate the exercisability and vesting of this option in connection with any of the foregoing alternatives. For purposes of this Agreement, “Change in Control” means the occurrence of any of the following events: (a) any “person” (as such term is used in Sections 13(d) and 14(d) of the 1934 Act), other than any combination of Steve Jobs, members of his immediate family, and any entities holding Shares for the benefit of Steve Jobs or members of his immediate family, becomes the “beneficial owner” (as defined in Rule 13d-3 of the 1934 Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company’s then outstanding voting securities; (b) the consummation of the sale or disposition by the Company of all or substantially all of the Company’s assets; (c) a change in the composition of the Board occurring within a two-year period, as a result of which fewer than a majority of the directors are Incumbent Directors; or (d) the consummation of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or its parent) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity or its parent outstanding immediately after such merger or consolidation. “Incumbent Directors” means directors who either (A) are Directors as of the effective date of the Plan, or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Directors at the time of such election or nomination (but will not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company).

13. No Rights of Stockholder. Neither the Employee (nor any transferee) shall be or have any of the rights or privileges of a stockholder of the Company in respect of any of the Shares issuable pursuant to the exercise of this option, unless and until certificates representing such Shares shall have been issued and recorded on the records of the Company or its transfer agents or registrars and delivered to the Employee (or transferee).

14. Address for Notices. Any notice to be given to the Company under the terms of this Agreement shall be addressed to the Company, in care of its Secretary, at 1200 Park Avenue, Emeryville, California 94608, or at such other address as the Company may hereafter designate in writing.

15. Maximum Term of Option. Except to the limited extent provided in paragraph 5 above, this option is not exercisable after the Expiration Date.

16. Binding Agreement. Subject to the limitation on the transferability of this option contained herein, this Agreement shall be binding upon and inure to the benefit of the heirs, legatees, legal representatives, successors and assigns of the parties hereto.

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17. Plan Governs. This Agreement is subject to all of the terms and provisions of the Plan. In the event of a conflict between one or more provisions of this Agreement and one or more provisions of the Plan, the provisions of the Plan shall govern. Capitalized terms and phrases used and not defined in this Agreement shall have the meaning set forth in the Plan. The Company may, in its discretion, issue newly issued shares or treasury shares pursuant to this option.

18. Committee Authority. The Committee shall have all discretion, power, and authority to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith. All actions taken and all interpretations and determinations made by the Committee in good faith shall be final and binding upon the Employee, the Company and all other interested persons, and shall be given the maximum deference permitted by law. No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or this Agreement.

19. Captions. The captions provided herein are for convenience only and are not to serve as a basis for the interpretation or construction of this Agreement.

20. Agreement Severable. In the event that any provision in this Agreement shall be held invalid or unenforceable, such provision shall be severable from, and such invalidity or unenforceability shall not be construed to have any effect on, the remaining provisions of this Agreement.

21. Modifications to the Agreement. This Agreement constitutes the entire understanding of the parties on the subjects covered. The Employee expressly warrants that he or she is not executing this Agreement in reliance on any promises, representations, or inducements other than those contained herein. Except as otherwise provided herein, modifications to this Agreement or the Plan can be made only in an express written contract executed by a duly authorized officer of the Company.

22. Amendment, Suspension, Termination. By accepting this option, the Employee expressly warrants that he or she has received an option to purchase stock under the Plan, and has received, read and understood the prospectus for the Plan. The Employee understands that the Plan is discretionary in nature and may be modified, suspended or terminated by the Company at any time.

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PIXAR

2004 EQUITY INCENTIVE PLAN

STOCK OPTION AGREEMENT

Grant #             

Pixar (the “Company”) hereby grants you, [NAME OF DIRECTOR] (the “Director”), a Nonqualified Stock Option under the Company’s 2004 Equity Incentive Plan (the “Plan”), to purchase shares of common stock of the Company (“Shares”). The date of this Agreement is [DATE] (the “Grant Date”). In general, the latest date this option will expire is [DATE 10 YEARS AFTER GRANT DATE] (the “Expiration Date”). However, as provided in Appendix A (attached hereto), this option may expire earlier than the Expiration Date. Subject to the provisions of Appendix A and of the Plan, the principal features of this option are as follows:

Maximum Number of Shares Purchasable with this Option: 60,000 Shares

Purchase Price per Share: $[PRICE]

Scheduled Vesting Dates:	Number of Shares:
Vesting Commencement Date	[ENTER DATE]
Each annual anniversary of the Vesting Commencement Date	20,000

Event Triggering Termination of Option:	Maximum Time to Exercise After Triggering Event*:
Termination of Service within 1 year of Vesting Commencement Date	None
All other Terminations of Service	1 year

* However, except in the event of death, this option may not be exercised after the Expiration Date.

Your signature below indicates your agreement and understanding that this option is subject to all of the terms and conditions contained in Appendix A and the Plan. For example, important additional information on vesting and termination of this option is contained in Paragraphs 3 through 5 of Appendix A. ACCORDINGLY, PLEASE BE SURE TO READ ALL OF APPENDIX A, WHICH CONTAINS THE SPECIFIC TERMS AND CONDITIONS OF THIS OPTION.

PIXAR		DIRECTOR
By
	Title:	[NAME]

1

APPENDIX A

TERMS AND CONDITIONS OF STOCK OPTION

1. Grant of Option. The Company hereby grants to the Director under the Plan, as a separate incentive in connection with his or her service and not in lieu of or other compensation for his or her services, a stock option to purchase, on the terms and conditions set forth in this Agreement and the Plan, all or any part of an aggregate of the maximum number of Shares set forth on the Notice of Grant

2. Exercise Price. The purchase price per Share for this option (the “Exercise Price”) shall be equal to the Exercise Price set forth on the Notice of Grant.

3. Vesting Schedule. Except as otherwise provided in this Agreement, the right to exercise this option will vest in the amounts and on the dates shown on the Notice of Grant. In addition, in the event of the Director’s Termination of Service due to death or Disability, this option will vest as to all of the covered shares. Except to the limited extent provided in paragraph 12 and in the preceding sentence, Shares scheduled to vest on any such date actually will vest only if the Director has not incurred a Termination of Service prior to such date.

4. Termination of Option. If the Director incurs a Termination of Service for any reason, the Director may, within twelve (12) months after the date of such Termination of Service, or prior to the Expiration Date, whichever shall first occur, exercise any vested but unexercised portion of this option. Upon the Director’s Termination of Service, any unvested portion of this option (after applying the rules of Paragraph 12) shall terminate immediately.

5. Death of Director. In the event that the Director dies while a Director or during the periods described in paragraph 4, the Director’s designated beneficiary (if beneficiary designations are permitted by the Company in its discretion), or if no such beneficiary survives the Director, the administrator or executor of the Director’s estate, may exercise any vested but unexercised portion of the option within twelve (12) months after the date of the Director’s death. Any such transferee must furnish the Company (a) written notice of his or her status as a transferee, (b) evidence satisfactory to the Company to establish the validity of the transfer of this option and compliance with any laws or regulations pertaining to such transfer, and (c) written acceptance of the terms and conditions of this option as set forth in this Agreement.

6. Persons Eligible to Exercise Option. Except as provided in Paragraph 5 above or as otherwise determined by the Committee in its discretion, this option shall be exercisable during the Director’s lifetime only by the Director.

7. Option is Not Transferable. Except as otherwise expressly provided herein, this option and the rights and privileges conferred hereby may not be transferred, pledged, assigned, or otherwise hypothecated in any way (whether by operation of law or otherwise) other than by will or by the laws of descent and distribution. Furthermore, this option shall not be subject to sale under execution, attachment, or similar process. Upon any attempt to transfer, pledge, assign, hypothecate, or otherwise dispose of this option, or of any right or privilege conferred hereby, (other than as permitted hereby) or upon any attempted sale under any execution, attachment, or similar process, this option and the rights and privileges conferred hereby immediately shall become null and void.

8. Exercise of Option. The Director acknowledges that the exercise of this option and the disposition of shares acquired upon exercise of this option must comply with the terms of the Company’s securities trading policy, as it may exist from time to time. This option may be exercised by the person then entitled to do so as to any Shares which may then be purchased (a) by giving notice of exercise in such form or manner as the Company may designate, (b) providing full payment of the Exercise Price (and the amount of any income and employment taxes and applicable fees, if any, the Company determines is required to be withheld by reason of the exercise of this option or as is otherwise required under Paragraph 10 below), and (c) giving satisfactory assurances in the form or

2

manner requested by the Company that the shares to be purchased upon the exercise of this option are being purchased for investment and not with a view to the distribution thereof. Exercise of this option, other than through a stock broker-assisted transaction, will be permitted only during the regular business hours of the Company in Emeryville, CA. Notwithstanding any contrary provision of this Agreement, if the expiration date of this option falls on a Saturday, Sunday or holiday, the Director may exercise any vested but unexercised portion of this option at any time prior to the close of business on the first business day following that Saturday, Sunday or holiday. In addition, if the option is to be exercised through a stock broker-assisted transaction, the option must be exercised while the applicable stock market is open for trading and before the option otherwise expires.

9. Conditions to Exercise. Except as provided in Paragraph 8 above or as otherwise required as a matter of law, the Exercise Price for this option may be paid in one (1) (or a combination of two (2) or more) of the following forms:

(a) Personal check, a cashier’s check or a money order.

(b) If permitted by the Committee, irrevocable directions to a securities broker approved by the Company to sell all or part of the option shares and to deliver to the Company from the sale proceeds an amount sufficient to pay the Exercise Price and any required withholding taxes. (The balance of the sale proceeds, if any, will be delivered to the Director.)

(c) In another form permitted by the Committee in accordance with the terms of the Plan.

10. Tax Withholding and Payment Obligations. The Company will assess its requirements regarding tax, social insurance and any other payroll tax withholding and reporting in connection with this option, including the grant, vesting or exercise of this option or sale of shares acquired pursuant to the exercise of this option (“tax-related items”). These requirements may change from time to time as laws or interpretations change. Regardless of the Company’s actions in this regard, the Director hereby acknowledges and agrees that the ultimate liability for any and all tax-related items is and remains his or her responsibility and liability and that the Company (a) makes no representations or undertaking regarding treatment of any tax-related items in connection with any aspect of this option grant, including the grant, vesting or exercise of this option and the subsequent sale of shares acquired pursuant to the exercise of this option; and (b) does not commit to structure the terms of the grant or any aspect of this option to reduce or eliminate the Director’s liability regarding tax-related items. In the event the Company determines that it and/or an Affiliate must withhold any tax-related items as a result of the Director’s participation in the Plan, the Director agrees as a condition of the grant of this option to make arrangements satisfactory to the Company to enable it to satisfy all withholding requirements. The Director authorizes the Company and/or an Affiliate to withhold all applicable withholding taxes from any cash compensation due to the Director. Furthermore, the Director agrees to pay the Company and/or an Affiliate any amount of taxes the Company and/or an Affiliate may be required to withhold as a result of the Director’s participation in the Plan that cannot be satisfied by deduction from cash compensation due to the Director. The Director acknowledges that he or she may not exercise this option unless the tax withholding obligations of the Company and/or any Affiliate are satisfied.

11. Suspension of Exercisability. If at any time the Company shall determine, in its discretion, that the listing, registration or qualification of the Shares upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory authority, is necessary or desirable as a condition of the purchase of Shares hereunder, this option may not be exercised, in whole or in part, unless and until such listing, registration, qualification, consent, or approval shall have been effected or obtained free of any conditions not acceptable to the Company. The Company shall make reasonable efforts to meet the requirements of any such state or federal law or securities exchange and to obtain any such consent or approval of any such governmental authority.

12. Change in Control. In the event of a Change in Control, this option shall be subject to the definitive agreement governing such Change in Control. Such agreement, without the Director’s consent and notwithstanding any provision to the contrary in this Agreement or the Plan, must provide for one of the following:

3

(a) the assumption of this option by the surviving corporation or its parent; (b) the substitution by the surviving corporation or its parent of options with substantially the same terms as this option; (c) the conversion of this option into an option to purchase the consideration received by the stockholders of the Company in the Change in Control; (d) the termination of this option after the Company shall have provided the Director with the ability to exercise this option as to all Shares, including Shares which otherwise would not be then exercisable, for a period of fifteen (15) days or less before the consummation of the Change in Control; or (e) the cancellation of this option after payment to the Director of an amount in cash or cash equivalents equal to (A) the fair market value of the Shares subject to this option at the time of the Change in Control minus (B) the Exercise Price of the Shares subject to this option at the time of the Change in Control. In the event the definitive agreement does not provide for one of the foregoing alternatives with respect to the treatment of this option, this option shall have the treatment specified in clause (d) of the preceding sentence. The Committee may, in its sole discretion, accelerate the exercisability and vesting of this option in connection with any of the foregoing alternatives. For purposes of this Agreement, “Change in Control” means the occurrence of any of the following events: (a) any “person” (as such term is used in Sections 13(d) and 14(d) of the 1934 Act), other than any combination of Steve Jobs, members of his immediate family, and any entities holding Shares for the benefit of Steve Jobs or members of his immediate family, becomes the “beneficial owner” (as defined in Rule 13d-3 of the 1934 Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company’s then outstanding voting securities; (b) the consummation of the sale or disposition by the Company of all or substantially all of the Company’s assets; (c) a change in the composition of the Board occurring within a two-year period, as a result of which fewer than a majority of the directors are Incumbent Directors; or (d) the consummation of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or its parent) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity or its parent outstanding immediately after such merger or consolidation. “Incumbent Directors” means directors who either (A) are Directors as of the effective date of the Plan, or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Directors at the time of such election or nomination (but will not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company).

13. No Rights of Stockholder. Neither the Director (nor any transferee) shall be or have any of the rights or privileges of a stockholder of the Company in respect of any of the Shares issuable pursuant to the exercise of this option, unless and until certificates representing such Shares shall have been issued and recorded on the records of the Company or its transfer agents or registrars and delivered to the Director (or transferee).

14. Address for Notices. Any notice to be given to the Company under the terms of this Agreement shall be addressed to the Company, in care of its Secretary, at 1200 Park Avenue, Emeryville, California 94608, or at such other address as the Company may hereafter designate in writing.

15. Maximum Term of Option. Except to the limited extent provided in paragraph 5 above, this option is not exercisable after the Expiration Date.

16. Binding Agreement. Subject to the limitation on the transferability of this option contained herein, this Agreement shall be binding upon and inure to the benefit of the heirs, legatees, legal representatives, successors and assigns of the parties hereto.

17. Plan Governs. This Agreement is subject to all of the terms and provisions of the Plan. In the event of a conflict between one or more provisions of this Agreement and one or more provisions of the Plan, the provisions of the Plan shall govern. Capitalized terms and phrases used and not defined in this Agreement shall have the meaning set forth in the Plan. The Company may, in its discretion, issue newly issued shares or treasury shares pursuant to this option.

18. Committee Authority. The Committee shall have all discretion, power, and authority to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation and application of

4

the Plan as are consistent therewith. All actions taken and all interpretations and determinations made by the Committee in good faith shall be final and binding upon the Director, the Company and all other interested persons, and shall be given the maximum deference permitted by law. No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or this Agreement.

19. Captions. The captions provided herein are for convenience only and are not to serve as a basis for the interpretation or construction of this Agreement.

20. Agreement Severable. In the event that any provision in this Agreement shall be held invalid or unenforceable, such provision shall be severable from, and such invalidity or unenforceability shall not be construed to have any effect on, the remaining provisions of this Agreement.

21. Modifications to the Agreement. This Agreement constitutes the entire understanding of the parties on the subjects covered. The Director expressly warrants that he or she is not executing this Agreement in reliance on any promises, representations, or inducements other than those contained herein. Except as otherwise provided herein, modifications to this Agreement or the Plan can be made only in an express written contract executed by a duly authorized officer of the Company.

22. Amendment, Suspension, Termination. By accepting this option, the Director expressly warrants that he or she has received an option to purchase stock under the Plan, and has received, read and understood the prospectus for the Plan. The Director understands that the Plan is discretionary in nature and may be modified, suspended or terminated by the Company at any time.

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5

PIXAR

2004 EQUITY INCENTIVE PLAN

STOCK OPTION AGREEMENT

Grant #             

Pixar (the “Company”) hereby grants you, [NAME OF DIRECTOR] (the “Director”), a Nonqualified Stock Option under the Company’s 2004 Equity Incentive Plan (the “Plan”), to purchase shares of common stock of the Company (“Shares”). The date of this Agreement is [DATE] (the “Grant Date”). In general, the latest date this option will expire is [DATE 10 YEARS AFTER GRANT DATE] (the “Expiration Date”). However, as provided in Appendix A (attached hereto), this option may expire earlier than the Expiration Date. Subject to the provisions of Appendix A and of the Plan, the principal features of this option are as follows:

Maximum Number of Shares Purchasable with this Option: 20,000 Shares

Purchase Price per Share: $[PRICE]

Scheduled Vesting Dates:	Number of Shares:
Vesting Commencement Date	[ENTER DATE]
First annual anniversary of the Vesting Commencement Date	20,000

Event Triggering Termination of Option:	Maximum Time to Exercise After Triggering Event*:
Termination of Service within 1 year of Vesting Commencement Date	None
All other Terminations of Service	1 year

* However, except in the event of death, this option may not be exercised after the Expiration Date.

Your signature below indicates your agreement and understanding that this option is subject to all of the terms and conditions contained in Appendix A and the Plan. For example, important additional information on vesting and termination of this option is contained in Paragraphs 3 through 5 of Appendix A. ACCORDINGLY, PLEASE BE SURE TO READ ALL OF APPENDIX A, WHICH CONTAINS THE SPECIFIC TERMS AND CONDITIONS OF THIS OPTION.

PIXAR		DIRECTOR
By
	Title:	[NAME]

1

APPENDIX A

TERMS AND CONDITIONS OF STOCK OPTION

1. Grant of Option. The Company hereby grants to the Director under the Plan, as a separate incentive in connection with his or her service and not in lieu of or other compensation for his or her services, a stock option to purchase, on the terms and conditions set forth in this Agreement and the Plan, all or any part of an aggregate of the maximum number of Shares set forth on the Notice of Grant

2. Exercise Price. The purchase price per Share for this option (the “Exercise Price”) shall be equal to the Exercise Price set forth on the Notice of Grant.

3. Vesting Schedule. Except as otherwise provided in this Agreement, the right to exercise this option will vest in the amounts and on the dates shown on the Notice of Grant. In addition, in the event of the Director’s Termination of Service due to death or Disability, this option will vest as to all of the covered shares. Except to the limited extent provided in paragraph 12 and in the preceding sentence, Shares scheduled to vest on any such date actually will vest only if the Director has not incurred a Termination of Service prior to such date.

4. Termination of Option. If the Director incurs a Termination of Service for any reason, the Director may, within twelve (12) months after the date of such Termination of Service, or prior to the Expiration Date, whichever shall first occur, exercise any vested but unexercised portion of this option. Upon the Director’s Termination of Service, any unvested portion of this option (after applying the rules of Paragraph 12) shall terminate immediately.

5. Death of Director. In the event that the Director dies while a Director or during the periods described in paragraph 4, the Director’s designated beneficiary (if beneficiary designations are permitted by the Company in its discretion), or if no such beneficiary survives the Director, the administrator or executor of the Director’s estate, may exercise any vested but unexercised portion of the option within twelve (12) months after the date of the Director’s death. Any such transferee must furnish the Company (a) written notice of his or her status as a transferee, (b) evidence satisfactory to the Company to establish the validity of the transfer of this option and compliance with any laws or regulations pertaining to such transfer, and (c) written acceptance of the terms and conditions of this option as set forth in this Agreement.

6. Persons Eligible to Exercise Option. Except as provided in Paragraph 5 above or as otherwise determined by the Committee in its discretion, this option shall be exercisable during the Director’s lifetime only by the Director.

7. Option is Not Transferable. Except as otherwise expressly provided herein, this option and the rights and privileges conferred hereby may not be transferred, pledged, assigned, or otherwise hypothecated in any way (whether by operation of law or otherwise) other than by will or by the laws of descent and distribution. Furthermore, this option shall not be subject to sale under execution, attachment, or similar process. Upon any attempt to transfer, pledge, assign, hypothecate, or otherwise dispose of this option, or of any right or privilege conferred hereby, (other than as permitted hereby) or upon any attempted sale under any execution, attachment, or similar process, this option and the rights and privileges conferred hereby immediately shall become null and void.

8. Exercise of Option. The Director acknowledges that the exercise of this option and the disposition of shares acquired upon exercise of this option must comply with the terms of the Company’s securities trading policy, as it may exist from time to time. This option may be exercised by the person then entitled to do so as to any Shares which may then be purchased (a) by giving notice of exercise in such form or manner as the Company may designate, (b) providing full payment of the Exercise Price (and the amount of any income and employment taxes and applicable fees, if any, the Company determines is required to be withheld by reason of the exercise of this option or as is otherwise required under Paragraph 10 below), and (c) giving satisfactory assurances in the form or

2

manner requested by the Company that the shares to be purchased upon the exercise of this option are being purchased for investment and not with a view to the distribution thereof. Exercise of this option, other than through a stock broker-assisted transaction, will be permitted only during the regular business hours of the Company in Emeryville, CA. Notwithstanding any contrary provision of this Agreement, if the expiration date of this option falls on a Saturday, Sunday or holiday, the Director may exercise any vested but unexercised portion of this option at any time prior to the close of business on the first business day following that Saturday, Sunday or holiday. In addition, if the option is to be exercised through a stock broker-assisted transaction, the option must be exercised while the applicable stock market is open for trading and before the option otherwise expires.

9. Conditions to Exercise. Except as provided in Paragraph 8 above or as otherwise required as a matter of law, the Exercise Price for this option may be paid in one (1) (or a combination of two (2) or more) of the following forms:

(a) Personal check, a cashier’s check or a money order.

(b) If permitted by the Committee, irrevocable directions to a securities broker approved by the Company to sell all or part of the option shares and to deliver to the Company from the sale proceeds an amount sufficient to pay the Exercise Price and any required withholding taxes. (The balance of the sale proceeds, if any, will be delivered to the Director.)

(c) In another form permitted by the Committee in accordance with the terms of the Plan.

10. Tax Withholding and Payment Obligations. The Company will assess its requirements regarding tax, social insurance and any other payroll tax withholding and reporting in connection with this option, including the grant, vesting or exercise of this option or sale of shares acquired pursuant to the exercise of this option (“tax-related items”). These requirements may change from time to time as laws or interpretations change. Regardless of the Company’s actions in this regard, the Director hereby acknowledges and agrees that the ultimate liability for any and all tax-related items is and remains his or her responsibility and liability and that the Company (a) makes no representations or undertaking regarding treatment of any tax-related items in connection with any aspect of this option grant, including the grant, vesting or exercise of this option and the subsequent sale of shares acquired pursuant to the exercise of this option; and (b) does not commit to structure the terms of the grant or any aspect of this option to reduce or eliminate the Director’s liability regarding tax-related items. In the event the Company determines that it and/or an Affiliate must withhold any tax-related items as a result of the Director’s participation in the Plan, the Director agrees as a condition of the grant of this option to make arrangements satisfactory to the Company to enable it to satisfy all withholding requirements. The Director authorizes the Company and/or an Affiliate to withhold all applicable withholding taxes from any cash compensation due to the Director. Furthermore, the Director agrees to pay the Company and/or an Affiliate any amount of taxes the Company and/or an Affiliate may be required to withhold as a result of the Director’s participation in the Plan that cannot be satisfied by deduction from cash compensation due to the Director. The Director acknowledges that he or she may not exercise this option unless the tax withholding obligations of the Company and/or any Affiliate are satisfied.

11. Suspension of Exercisability. If at any time the Company shall determine, in its discretion, that the listing, registration or qualification of the Shares upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory authority, is necessary or desirable as a condition of the purchase of Shares hereunder, this option may not be exercised, in whole or in part, unless and until such listing, registration, qualification, consent, or approval shall have been effected or obtained free of any conditions not acceptable to the Company. The Company shall make reasonable efforts to meet the requirements of any such state or federal law or securities exchange and to obtain any such consent or approval of any such governmental authority.

12. Change in Control. In the event of a Change in Control, this option shall be subject to the definitive agreement governing such Change in Control. Such agreement, without the Director’s consent and notwithstanding any provision to the contrary in this Agreement or the Plan, must provide for one of the following:

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(a) the assumption of this option by the surviving corporation or its parent; (b) the substitution by the surviving corporation or its parent of options with substantially the same terms as this option; (c) the conversion of this option into an option to purchase the consideration received by the stockholders of the Company in the Change in Control; (d) the termination of this option after the Company shall have provided the Director with the ability to exercise this option as to all Shares, including Shares which otherwise would not be then exercisable, for a period of fifteen (15) days or less before the consummation of the Change in Control; or (e) the cancellation of this option after payment to the Director of an amount in cash or cash equivalents equal to (A) the fair market value of the Shares subject to this option at the time of the Change in Control minus (B) the Exercise Price of the Shares subject to this option at the time of the Change in Control. In the event the definitive agreement does not provide for one of the foregoing alternatives with respect to the treatment of this option, this option shall have the treatment specified in clause (d) of the preceding sentence. The Committee may, in its sole discretion, accelerate the exercisability and vesting of this option in connection with any of the foregoing alternatives. For purposes of this Agreement, “Change in Control” means the occurrence of any of the following events: (a) any “person” (as such term is used in Sections 13(d) and 14(d) of the 1934 Act), other than any combination of Steve Jobs, members of his immediate family, and any entities holding Shares for the benefit of Steve Jobs or members of his immediate family, becomes the “beneficial owner” (as defined in Rule 13d-3 of the 1934 Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company’s then outstanding voting securities; (b) the consummation of the sale or disposition by the Company of all or substantially all of the Company’s assets; (c) a change in the composition of the Board occurring within a two-year period, as a result of which fewer than a majority of the directors are Incumbent Directors; or (d) the consummation of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or its parent) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity or its parent outstanding immediately after such merger or consolidation. “Incumbent Directors” means directors who either (A) are Directors as of the effective date of the Plan, or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Directors at the time of such election or nomination (but will not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company).

13. No Rights of Stockholder. Neither the Director (nor any transferee) shall be or have any of the rights or privileges of a stockholder of the Company in respect of any of the Shares issuable pursuant to the exercise of this option, unless and until certificates representing such Shares shall have been issued and recorded on the records of the Company or its transfer agents or registrars and delivered to the Director (or transferee).

14. Address for Notices. Any notice to be given to the Company under the terms of this Agreement shall be addressed to the Company, in care of its Secretary, at 1200 Park Avenue, Emeryville, California 94608, or at such other address as the Company may hereafter designate in writing.

15. Maximum Term of Option. Except to the limited extent provided in paragraph 5 above, this option is not exercisable after the Expiration Date.

16. Binding Agreement. Subject to the limitation on the transferability of this option contained herein, this Agreement shall be binding upon and inure to the benefit of the heirs, legatees, legal representatives, successors and assigns of the parties hereto.

17. Plan Governs. This Agreement is subject to all of the terms and provisions of the Plan. In the event of a conflict between one or more provisions of this Agreement and one or more provisions of the Plan, the provisions of the Plan shall govern. Capitalized terms and phrases used and not defined in this Agreement shall have the meaning set forth in the Plan. The Company may, in its discretion, issue newly issued shares or treasury shares pursuant to this option.

18. Committee Authority. The Committee shall have all discretion, power, and authority to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation and application of

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the Plan as are consistent therewith. All actions taken and all interpretations and determinations made by the Committee in good faith shall be final and binding upon the Director, the Company and all other interested persons, and shall be given the maximum deference permitted by law. No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or this Agreement.

19. Captions. The captions provided herein are for convenience only and are not to serve as a basis for the interpretation or construction of this Agreement.

20. Agreement Severable. In the event that any provision in this Agreement shall be held invalid or unenforceable, such provision shall be severable from, and such invalidity or unenforceability shall not be construed to have any effect on, the remaining provisions of this Agreement.

21. Modifications to the Agreement. This Agreement constitutes the entire understanding of the parties on the subjects covered. The Director expressly warrants that he or she is not executing this Agreement in reliance on any promises, representations, or inducements other than those contained herein. Except as otherwise provided herein, modifications to this Agreement or the Plan can be made only in an express written contract executed by a duly authorized officer of the Company.

22. Amendment, Suspension, Termination. By accepting this option, the Director expressly warrants that he or she has received an option to purchase stock under the Plan, and has received, read and understood the prospectus for the Plan. The Director understands that the Plan is discretionary in nature and may be modified, suspended or terminated by the Company at any time.

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EX-31.1

EXHIBIT 31.1

CERTIFICATIONS

I, Steve Jobs, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Pixar;

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

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

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 10, 2005

/s/    STEVE JOBS        

Steve Jobs

Chairman and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATIONS

I, Simon T. Bax, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Pixar;

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

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

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 10, 2005

/s/    SIMON T. BAX        

Simon T. Bax

Executive Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Steve Jobs, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Pixar on Form 10-Q for the period ended October 1, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Form 10-Q fairly presents in all material respects the financial condition and results of operations of Pixar.

By:	/s/    STEVE JOBS
Name:	Steve Jobs
Title:	Chairman and Chief Executive Officer

Date: November 10, 2005

I, Simon T. Bax, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Pixar on Form 10-Q for the period ended October 1, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Form 10-Q fairly presents in all material respects the financial condition and results of operations of Pixar.

By:	/s/    SIMON T. BAX
Name:	Simon T. Bax
Title:	Executive Vice President and Chief Financial Officer

Date: November 10, 2005