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NVIDIA 10-Q 2005

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
Q306 FORM 10Q

 

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
 
FORM 10-Q
 
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 30, 2005
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 

Commission file number: 0-23985

NVIDIA CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
94-3177549
(State or Other Jurisdiction of
(I.R.S. Employer
Incorporation or Organization)
Identification No.)

2701 San Tomas Expressway
Santa Clara, California 95050
(408) 486-2000
(Address, including Zip Code, of Registrant's Principal Executive Offices
and 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 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 Exchange Act). Yes [X] No [_]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [_] No [X]

The number of shares of the registrant's common stock outstanding as of November 11, 2005 was 171,176,221 shares.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------



NVIDIA CORPORATION
FORM 10-Q
TABLE OF CONTENTS

 
 
Page
 
PART I: FINANCIAL INFORMATION
 
 
Item 1.
 
Financial Statements (Unaudited)
 
 
 
Condensed Consolidated Balance Sheets as of October 30, 2005 and January 30, 2005
 
    1
 
 
Condensed Consolidated Statements of Income for the three and nine months ended
October 30, 2005 and October 24, 2004
 
    2
 
 
Condensed Consolidated Statements of Cash Flows for the nine months ended
October 30, 2005 and October 24, 2004
 
    3
 
 
Notes to Condensed Consolidated Financial Statements
 
    4
 
 
 
 
Item 2.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
16
 
 
 
 
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
 
27
 
 
 
 
Item 4.
 
Controls and Procedures
 
41
 
 
 
 
PART II: OTHER INFORMATION
 
 
Item 1.
 
Legal Proceedings
 
43
 
 
 
 
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
43
 
 
 
 
Item 3.
 
Defaults Upon Senior Securities
 
43
 
 
 
 
Item 4.
 
Submission of Matters to a Vote of Security Holders
 
43
 
 
 
 
Item 5.
 
Other Information
 
43
 
 
 
 
Item 6.
 
Exhibits
 
44
 
 
 
 
Signature
 
 
45








PART I. FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS (Unaudited)

NVIDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)

 
 
October 30,
 
January 30,
 
 
 
2005
 
2005
 
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
 
$
364,308
 
$
208,512
 
Marketable securities
 
 
421,870
 
 
461,533
 
Accounts receivable, net
 
 
351,737
 
 
296,279
 
Inventories
 
 
284,847
 
 
315,518
 
Prepaid expenses and other current assets
 
 
23,949
 
 
19,819
 
Deferred income taxes
 
 
3,265
 
 
3,265
 
Total current assets
 
 
1,449,976
 
 
1,304,926
 
 
 
 
 
 
 
 
 
Property and equipment, net
 
 
178,505
 
 
178,955
 
Deposits and other assets
 
 
24,713
 
 
9,034
 
Goodwill
 
 
133,107
 
 
108,107
 
Intangible assets, net
 
 
19,207
 
 
27,514
 
 
 
$
1,805,508
 
$
1,628,536
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Accounts payable
 
$
179,777
 
$
238,223
 
Accrued liabilities
 
 
247,390
 
 
182,077
 
Current portion of capital lease obligations
 
 
-
 
 
856
 
Total current liabilities
 
 
427,167
 
 
421,156
 
 
 
 
 
 
 
 
 
Deferred income tax liabilities
 
 
20,754
 
 
20,754
 
Long-term liabilities
 
 
8,146
 
 
8,358
 
 
 
 
 
 
 
 
 
Stockholders’ equity:
 
 
 
 
 
 
 
Common stock
 
 
178
 
 
169
 
Additional paid-in capital
 
 
740,665
 
 
636,618
 
Deferred compensation
 
 
(1,943
)
 
(2,926
)
Treasury stock
 
 
(162,142
)
 
(24,644
)
Accumulated other comprehensive loss, net
 
 
(4,365
)
 
(3,463
)
Retained earnings
 
 
777,048
 
 
572,514
 
Total stockholders' equity
 
 
1,349,441
 
 
1,178,268
 
 
 
$
1,805,508
 
$
1,628,536
 

See accompanying notes to condensed consolidated financial statements.

1


NVIDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)

 
 
Three Months Ended
 
Nine Months Ended
 
 
 
October 30,
 
October 24,
 
October 30,
 
October 24,
 
 
 
2005
 
2004
 
2005
 
2004
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
583,415
 
$
515,591
 
$
1,742,073
 
$
1,443,557
 
Cost of revenue
   
355,247
   
348,849
   
1,086,218
   
987,886
 
Gross profit
   
228,168
   
166,742
   
655,855
   
455,671
 
Operating expenses:
                         
Research and development
   
87,937
   
87,880
   
259,664
   
251,050
 
Sales, general and administrative
   
54,537
   
50,104
   
154,278
   
148,184
 
Settlement costs
   
14,158
   
-
   
14,158
   
-
 
Total operating expenses
   
156,632
   
137,984
   
428,100
   
399,234
 
Operating income
   
71,536
   
28,758
   
227,755
   
56,437
 
Interest income
   
5,380
   
2,633
   
14,143
   
8,172
 
Interest expense
   
-
   
(25
)
 
(13
)
 
(147
)
Other income, net
   
766
   
983
   
1,608
   
973
 
Income before income tax expense
   
77,682
   
32,349
   
243,493
   
65,435
 
Income tax expense
   
12,429
   
6,470
   
38,959
   
13,088
 
Net income
 
$
65,253
 
$
25,879
 
$
204,534
 
$
52,347
 
Basic net income per share
 
$
0.38
 
$
0.16
 
$
1.21
 
$
0.32
 
Diluted net income per share
 
$
0.36
 
$
0.15
 
$
1.13
 
$
0.30
 
Shares used in basic per share computation
   
170,127
   
166,122
   
169,239
   
165,848
 
Shares used in diluted per share computation
   
183,517
   
172,869
   
181,631
   
176,293
 

See accompanying notes to condensed consolidated financial statements.




2




NVIDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
 
Nine Months Ended
 
 
 
October 30,
 
October 24,
 
 
 
2005
 
2004
 
Cash flows from operating activities:
         
Net income
 
$
204,534
 
$
52,347
 
Adjustments to reconcile net income to net cash provided by operating activities:
             
Non-cash realized gain on investment exchange
   
(96
)
 
(533
)
Depreciation and amortization
   
74,189
   
71,512
 
Stock-based compensation
   
830
   
1,052
 
Bad debt expense
   
163
   
(245
)
Other
   
85
   
-
 
Changes in operating assets and liabilities:
             
Accounts receivable
   
(55,621
)
 
(122,041
)
Inventories
   
30,671
   
(63,313
)
Prepaid expenses and other current assets
   
(3,956
)
 
(830
)
Deposits and other assets
   
(5,995
)
 
(556
)
Accounts payable
   
(62,494
)
 
77,678
 
Accrued liabilities
   
38,715
   
17,958
 
Net cash provided by operating activities
   
221,025
   
33,029
 
Cash flows from investing activities:
             
Purchases of marketable securities
   
(182,531
)
 
(222,783
)
Sales and maturities of marketable securities
   
217,286
   
178,635
 
Purchases of property, equipment and intangible assets
   
(56,155
)
 
(49,284
)
Investments in non-affiliates
   
(9,684
)
 
-
 
Net cash used in investing activities
   
(31,084
)
 
(93,432
)
Cash flows from financing activities:
             
Common stock issued under employee stock plans
   
104,729
   
30,823
 
Stock repurchases
   
(138,509
)
 
(24,644
)
Principal payments on capital leases
   
(856
)
 
(3,511
)
Retirement of common stock
   
491
   
-
 
Net cash provided by (used in) financing activities
   
(34,145
)
 
2,668
 
Change in cash and cash equivalents
   
155,796
   
(57,735
)
Cash and cash equivalents at beginning of period
   
208,512
   
214,422
 
Cash and cash equivalents at end of period
 
$
364,308
 
$
156,687
 
 
             
Supplemental disclosures of cash flow information:
             
Cash paid for interest
 
$
12
 
$
147
 
Net payment of income taxes
 
$
2,659
 
$
410
 
 
             
Non cash activities:
             
Acquisition of business - goodwill adjustment
 
$
25,000
 
$
1,091
 
Application of customer advance to accounts receivable
 
$
-
 
$
11,508
 
Marketable security received from investment exchange
 
$
96
 
$
688
 
Asset retirement obligation
 
$
1,611
 
$
4,483
 
Deferred stock-based compensation
 
$
153
 
$
974
 
Unrealized losses from marketable securities
 
$
1,127
 
$
3,294
 
Assets acquired by assuming related liabilities
 
$
4,048
 
$
-
 

See accompanying notes to condensed consolidated financial statements.



3




NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Note 1 - Summary of Significant Accounting Policies

Basis of presentation

The accompanying unaudited condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Securities and Exchange Commission, or SEC, Regulation S-X. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, except as otherwise noted, considered necessary for a fair statement of results of operations and financial position have been included. The results for the interim periods presented are not necessarily indicative of the results expected for any future period. The following information should be read in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended January 30, 2005. 

Fiscal year

We operate on a 52 or 53-week year, ending on the Sunday nearest January 31. Fiscal year 2006 is a 52-week year, compared to fiscal year 2005 which was a 53-week year. The third quarters of fiscal year 2006 and fiscal year 2005 were both 13-week quarters.

Reclassifications

Certain prior fiscal year balances were reclassified to conform to the current fiscal year presentation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, accounts receivable, inventories, income taxes and contingencies. These estimates are based on historical facts and various other assumptions that we believe are reasonable.

Stock-Based Compensation 

We use the intrinsic value method, as prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, to account for our stock-based employee compensation plans. As such, compensation expense is recorded if on the date of grant the current fair value per share of the underlying stock exceeds the exercise price per share. Compensation cost for our stock-based compensation plans as determined consistent with Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, would have decreased net income in the periods presented to the pro forma amounts indicated below:




4




NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

 
 
Three Months Ended
 
Nine Months Ended
 
 
 
October 30,
 
October 24,
 
October 30,
 
October 24,
 
 
 
2005
 
2004
 
2005
 
2004
 
 
 
(In thousands, except per share data)
 
Net income, as reported
 
$
65,253
 
$
25,879
 
$
204,534
 
$
52,347
 
Add: Stock-based employee compensation
expense included in reported net income, net
of related tax effects
 
 
225
 
 
244
 
 
697
 
 
842
 
Deduct: Stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects
 
 
(19,402
)
 
(25,135
)
 
(58,282
)
$
(67,556
)
Pro forma net income (loss)
 
$
46,076
 
$
988
 
$
146,949
 
$
(14,367
)
Basic net income per share - as reported
 
$
0.38
 
$
0.16
 
$
1.21
 
$
0.32
 
Basic net income (loss) per share - pro forma
 
$
0.27
 
$
0.01
 
$
0.87
 
$
(0.09
)
Diluted net income per share - as reported
 
$
0.36
 
$
0.15
 
$
1.13
 
$
0.30
 
Diluted net income (loss) per share - pro forma
 
$
0.25
 
$
0.01
 
$
0.81
 
$
(0.09
)

During the first quarter of fiscal 2006, we transitioned from a Black-Scholes model to a binomial model for calculating the estimated fair value of new stock-based compensation awards granted under our stock option plans.  As a result of recent regulatory guidance, including SEC Staff Accounting Bulletin No. 107, or SAB No. 107, and in anticipation of the impending effective date of Financial Accounting Standards Board, or FASB, Statement of Financial Accounting Standards No. 123(R), or SFAS No. 123(R), Share-Based Payment, we reevaluated the assumptions we use to estimate the value of employee stock options and shares issued under our employee stock purchase plan, beginning with stock options granted and shares issued under our employee stock purchase plan in our first quarter of fiscal 2006.  We determined that the use of implied volatility is expected to be more reflective of market conditions and, therefore, can reasonably be expected to be a better indicator of expected volatility than historical volatility. Additionally, in the first quarter of fiscal 2006, we began segregating options into groups for employees with relatively homogeneous exercise behavior in order to make full use of the capabilities of the binomial valuation model.  As such, the expected term is based on detailed historical data about employees' exercise behavior, vesting schedules, and death and disability probabilities.  We believe the resulting binomial calculation provides a more refined estimate of the fair value of our employee stock options. For our employee stock purchase plan, we decided to continue to use the Black-Scholes model to calculate the estimated fair value. 
 
For the purpose of the pro forma calculation, the fair value of stock options granted under our stock option plans and the fair value of shares issued under our employee stock purchase plan have been estimated with the following assumptions:

 
Stock Options
 
Employee Stock Purchase Plan
 
Three Months Ended
 
Three Months Ended
 
October 30,
 
October 24,
 
October 30,
 
October 24,
 
2005
 
2004
 
2005
 
2004
 
(Using a binomial model)
 
(Using the Black-Scholes model)
 
(Using the Black-Scholes model)
 
(Using the Black-Scholes model)
Expected life (in years)
3.6 - 5.1
 
4.0
 
0.5 - 2.0
 
0.5 - 2.0
Risk free interest rate
4.4%
 
3.2%
 
0.9% - 3.7%
 
1.1% - 2.1%
Volatility
34% - 38%
 
80%
 
30% - 45%
 
80%
Dividend yield
--
 
--
 
--
 
--
 

5


NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

 
Stock Options
 
Employee Stock Purchase Plan
 
Nine Months Ended
 
Nine Months Ended
 
October 30,
 
October 24,
 
October 30,
 
October 24,
 
2005
 
2004
 
2005
 
2004
 
(Using a binomial model)
 
(Using the Black-Scholes model)
 
(Using the Black-Scholes model)
 
(Using the Black-Scholes model)
Expected life (in years)
3.6 - 5.1
 
4.0
 
0.5 - 2.0
 
0.5 - 2.0
Risk free interest rate
4.0% - 4.4%
 
3.0%
 
0.9% - 3.7%
 
1.1% - 2.1%
Volatility
34% - 48%
 
80%
 
30% - 45%
 
80%
Dividend yield
--
 
--
 
--
 
--

Note 2 - Recently Issued Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123(R), which requires the measurement and recognition of compensation expense for all stock-based compensation payments. In April 2005, the SEC delayed the effective date of SFAS No. 123(R), which is now effective for annual periods that begin after June 15, 2005. In March 2005, the SEC issued SAB No. 107, which includes interpretive guidance for the initial implementation of SFAS 123(R). SFAS No. 123(R) allows for either prospective recognition of compensation expense or retrospective recognition. We are currently evaluating which expense recognition method we will apply upon adoption of SFAS No. 123(R). We will implement the provisions of SFAS No. 123(R) beginning in fiscal 2007. Once adopted, the standard will have an adverse impact on our operating results.
    
In June 2005, the FASB issued SFAS No. 154, or SFAS No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS No. 154 applies to all voluntary changes in accounting principle, and changes the requirements for accounting for and reporting of a change in accounting principle. We will adopt SFAS 154 during the first quarter of fiscal 2007. We do not expect the adoption of SFAS No. 154 to have a material impact on our consolidated financial position, results of operations or cash flows.

In June 2005, the FASB ratified the Emerging Issues Task Force’s, or EITF’s, Issue No. 05-06, or EITF No. 05-06, Determining the Amortization Period for Leasehold Improvements. EITF No. 05-06 provides that the amortization period used for leasehold improvements acquired in a business combination or purchased after the inception of a lease be the shorter of (a) the useful life of the assets or (b) a term that includes required lease periods and renewals that are reasonably assured upon the acquisition or the purchase. The provisions of EITF No. 05-06 are effective on a prospective basis for leasehold improvements purchased or acquired. We adopted EITF No. 05-06 during the second quarter of fiscal 2006 and it did not have a material impact on our consolidated financial position, results of operations or cash flows.

Note 3 - 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 common equivalent shares outstanding during the period, using the treasury stock method. Under the treasury stock method, the effect of stock options outstanding is not included in the computation of diluted net income per share for periods when their effect is anti-dilutive. The following is a reconciliation of the numerators and denominators of the basic and diluted net income per share computations for the periods presented:

6


NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

 
 
Three Months Ended
 
Nine Months Ended
 
 
 
October 30,
 
October 24,
 
October 30,
 
October 24,
 
 
 
2005
 
2004
 
2005
 
2004
 
 
 
(In thousands, except per share data)
 
Numerator:
 
 
 
 
 
 
 
 
 
 
 
 
 
Numerator for basic and diluted net
income per share
 
$
65,253
 
$
25,879
 
$
204,534
 
$
52,347
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
 
 
 
 
 
Denominator for basic net income per
share, weighted average shares
 
 
170,127
 
 
166,122
 
 
169,239
 
 
165,848
 
Effect of dilutive securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock options outstanding
 
 
13,390
 
 
6,747
 
 
12,392
 
 
10,445
 
Denominator for diluted net income per
share, weighted average shares
 
 
183,517
 
 
172,869
 
 
181,631
 
 
176,293
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic net income per share
 
$
0.38
 
$
0.16
 
$
1.21
 
$
0.32
 
Diluted net income per share
 
$
0.36
 
$
0.15
 
$
1.13
 
$
0.30
 

Diluted net income per share for the three and nine months ended October 30, 2005 does not include the effect of 4.8 million and 5.6 million anti-dilutive common equivalent shares, respectively. The weighted-average exercise price of stock options excluded from the computation of diluted net income per share was $35.96 and $35.06 for the three and nine months ended October 30, 2005, respectively. Diluted net income per share for the three and nine months ended October 24, 2004 does not include the effect of 31.9 million and 13.9 million anti-dilutive common equivalent shares, respectively. The weighted-average exercise price of stock options excluded from the computation of diluted net income per share was $20.88 and $27.75 for the three and nine months ended October 24, 2004, respectively.

Note 4 - Guarantees

FASB Interpretation No. 45, or FIN 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. In addition, FIN 45 requires disclosures about the guarantees that an entity has issued, including a tabular reconciliation of the changes of the entity’s product warranty liabilities.

We record a reduction to revenue for estimated product returns at the time revenue is recognized primarily based on historical return rates. The reductions to revenue for estimated product returns for the three and nine months ended October 30, 2005 and October 24, 2004 are as follows:

Description
 
Balance at Beginning of Period
 
Additions (1)
 
Deductions (2)
 
Balance at End of Period
 
 
 
(In thousands)
 
Three months ended October 30, 2005
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for sales returns
 
$
10,687
 
$
8,576
 
$
(9,237
)
$
10,026
 
Three months ended October 24, 2004
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for sales returns
 
$
11,039
 
$
4,138
 
$
(4,357
)
$
10,820
 
Nine months ended October 30, 2005
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for sales returns
 
$
11,687
 
$
22,720
 
$
(24,381
)
$
10,026
 
Nine months ended October 24, 2004
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for sales returns
 
$
9,421
 
$
14,747
 
$
(13,348
)
$
10,820
 
(1) Allowances for sales returns are charged as a reduction to revenue.
(2) Represents amounts written off against the allowance for sales returns.

7


NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

In connection with certain agreements that we have executed in the past, we have at times provided indemnities to cover the indemnified party for matters such as tax, product and employee liabilities. We have also on occasion included intellectual property indemnification provisions in our technology related agreements with third parties. Maximum potential future payments cannot be estimated because many of our agreements do not have a maximum stated liability. As such, we have not recorded any liability in our condensed consolidated financial statements for such indemnifications.

Note 5 - Comprehensive Income

Comprehensive income consists of net income and other comprehensive income or loss. Other comprehensive income or loss components include unrealized gains or losses on available-for-sale securities, net of tax. The components of comprehensive income, net of tax, were as follows:


 
 
Three Months Ended
 
Nine Months Ended
 
 
 
October 30,
 
October 24,
 
October 30,
 
October 24,
 
 
 
2005
 
2004
 
2005
 
2004
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
65,253
 
$
25,879
 
$
204,534
 
$
52,347
 
Net change in unrealized gains (losses) on available-for-sale securities
 
 
(1,093
)
 
1,656
 
 
(2,338
)
 
(3,426
)
Tax effect of unrealized gains (losses) on available-for-sale securities
 
 
219
 
 
(1,056
 
468
 
 
969
 
Reclassification adjustments for net realized losses on available-for-sale securities included in net income
 
 
910
 
 
91
 
 
1,210
 
 
131
 
Tax effect of reclassification adjustments for net realized losses on available-for-sale securities included in net income
 
 
(182
)
 
(18
)
 
(242
)
 
(26
)
Total comprehensive income
 
$
65,107
 
$
26,552
 
$
203,632
 
$
49,995
 

Note 6 - 3dfx Asset Purchase

During fiscal year 2002, we completed the purchase of certain assets from 3dfx Interactive, Inc., or 3dfx, for an aggregate purchase price of approximately $74.2 million. The 3dfx asset purchase was accounted for under the purchase method of accounting and closed on April 18, 2001. Under the terms of the Asset Purchase Agreement, the cash consideration due at the closing was $70.0 million, less $15.0 million that was loaned to 3dfx pursuant to a Credit Agreement dated December 15, 2000. The Asset Purchase Agreement also provided, subject to the other provisions thereof, that if 3dfx properly certified that all its debts and other liabilities had been provided for, then we would have been obligated to pay 3dfx two million shares of NVIDIA common stock. If 3dfx could not make such a certification, but instead properly certified that its debts and liabilities could be satisfied for less than $25.0 million, then 3dfx could have elected to receive a cash payment equal to the amount of such debts and liabilities and a reduced number of shares of our common stock, with such reduction calculated by dividing the cash payment by $25.00 per share. If 3dfx could not certify that all of its debts and liabilities had been provided for, or could not be satisfied for less than $25.0 million, we would not be obligated under the agreement to pay any additional consideration for the assets.
 
In October 2002, 3dfx filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Northern District of California. In March 2003, we were served with a complaint filed by the Trustee appointed by the Bankruptcy Court which sought, among other things, payments from us as additional purchase price related to our purchase of certain assets of 3dfx. In early November 2005, after many months of mediation, NVIDIA and the Official Committee of Unsecured Creditors of 3dfx reached a conditional settlement of the Trustee’s claims against NVIDIA. This conditional settlement, which will be subject to the review and approval of the Bankruptcy Court, calls for a payment of approximately $30.6 million to the 3dfx estate. Under the settlement, $5.6 million relates to various administrative expenses and Trustee fees, and $25.0 million relates to the satisfaction of debts and liabilities owed to the general unsecured creditors of 3dfx. As such, during the three months ended October 30, 2005, we recorded $5.6 million as a charge to settlement costs and $25.0 million as additional purchase price for 3dfx. Please see Note 11 for further information regarding this litigation.

8


NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

The 3dfx asset purchase price of $95.0 million and $4.2 million of direct transaction costs were allocated based on fair values presented below.

 
 
 
Fair Market Value
 
Straight-Line Amortization Period
 
 
 
(In thousands)
 
(Years)
 
Property and equipment
 
$
2,433
 
 
1-2
 
Trademarks
 
 
11,310
 
 
5
 
Goodwill
 
 
85,418
 
 
--
 
Total
 
$
99,161
 
 
 
 

The final allocation of the purchase price of the 3dfx assets is contingent upon the amount of and circumstances surrounding additional consideration, if any, that we may pay related to the 3dfx asset purchase.

Note 7 - Goodwill and Intangible Assets

We are currently amortizing our intangible assets with finite lives over periods ranging from 3 to 5 years. The components of our amortizable intangible assets are as follows:
 
 
 
October 30, 2005
 
January 30, 2005
 
 
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated
Amortization
 
Net Carrying Amount
 
 
 
(In thousands)
 
Technology licenses
 
$
21,585
 
$
(12,604
)
$
8,981
 
$
17,236
 
$
(9,841
)
$
7,395
 
Patents
   
23,500
   
(18,813
)
 
4,687
   
23,260
   
(15,400
)
 
7,860
 
Acquired intellectual property
   
27,086
   
(23,238
)
 
3,848
   
27,086
   
(18,578
)
 
8,508
 
Trademarks
   
11,310
   
(10,247
)
 
1,063
   
11,310
   
(8,544
)
 
2,766
 
Other
   
1,495
   
(867
)
 
628
   
1,494
   
(509
)
 
985
 
Total intangible assets
 
$
84,976
 
$
(65,769
)
$
19,207
 
$
80,386
 
$
(52,872
)
$
27,514
 

Amortization expense associated with intangible assets for the three and nine months ended October 30, 2005 was $4.2 million and $12.9 million, respectively. Amortization expense associated with intangible assets for the three and nine months ended October 24, 2004 was $5.0 million and $15.3 million, respectively. Amortization expense for the net carrying amount of intangible assets at October 30, 2005 is estimated to be $4.1 million for the remainder of fiscal 2006, $10.5 million in fiscal 2007, $4.2 million in fiscal 2008, and $0.4 million in fiscal 2009 and thereafter.

9


NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

The carrying amount of goodwill is as follows:

 
 
October 30,
 
 
 
January 30,
 
   
2005
     
2005
 
 
(In thousands)
3dfx
$
75,326
 
 
$
50,326
 
MediaQ
 
52,913
 
 
 
52,913
 
Other
 
4,868
 
 
 
4,868
 
Total goodwill
$
133,107
 
 
$
108,107
 

During the three month period ended October 30, 2005, we recorded $25.0 million as goodwill for the purchase of certain assets of 3dfx. Please see Note 6 for further information.

Note 8 - Marketable Securities

We account for our investment instruments in accordance with Statement of Financial Accounting Standards No. 115, or SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. All of our cash equivalents and marketable securities are treated as “available-for-sale” under SFAS No. 115. Cash equivalents consist of financial instruments which are readily convertible into cash and have original maturities of three months or less at the time of acquisition. Marketable securities consist primarily of highly liquid investments with a maturity of greater than three months when purchased and some equity investments. We classify our marketable securities at the date of acquisition in the available-for-sale category as our intention is to convert them into cash for operations. These securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), a component of stockholders’ equity, net of tax. Realized gains and losses on the sale of marketable securities are determined using the specific-identification method. Net realized gains for the three months ended October 30, 2005 were $0.2 million and net realized losses for the nine months ended October 30, 2005 were $0.1 million.  Net realized gains for the three and nine months ended October 24, 2004 were $0.9 million. 

Note 9 - Balance Sheet Components
 
Certain balance sheet components are as follows:

 
 
October 30,
 
January 30,
 
 
 
2005
 
2005
 
  Inventories:
 
(In thousands)
 
Raw materials
 
$
29,091
 
$
23,225
 
Work in-process
 
 
100,125
 
 
130,211
 
Finished goods
 
 
155,631
 
 
162,082
 
Total inventories
 
$
284,847
 
$
315,518
 

The significant decrease in work-in-process primarily relates to the ramping of our GeForce 6 series products in the fourth quarter of fiscal 2005.

At October 30, 2005, we had outstanding inventory purchase obligations totaling approximately $349 million.

 
 
October 30,
 
January 30,
 
 
 
2005
 
2005
 
  Deposits and other assets:
 
(In thousands)
 
Investments in non-affiliates
 
$
11,684
 
$
2,000
 
Long-term prepayments
 
 
7,918
 
 
2,594
 
Other
 
 
5,111
 
 
4,440
 
Total deposits and other assets
 
$
24,713
 
$
9,034
 

The $9.7 million increase in investments in non-affiliates is related to investments in two private companies.

10


NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

 
 
October 30,
 
January 30,
 
   
2005
 
2005
 
  Property and Equipment:
 
(In thousands)
 
Software
 
$
147,865
 
$
125,310
 
Test equipment
   
90,803
   
86,883
 
Computer equipment
   
101,215
   
82,428
 
Leasehold improvements
   
85,874
   
79,160
 
Construction in process
   
4,200
   
3,264
 
Office furniture and equipment
   
21,991
   
18,777
 
 
   
451,948
   
395,822
 
Accumulated depreciation and amortization
   
(273,443
)
 
(216,867
)
Property and equipment, net
 
$
178,505
 
$
178,955
 

 
 
October 30,
 
January 30,
 
 
 
2005
 
2005
 
Accrued Liabilities:
 
(In thousands)
 
Accrued customer programs
 
$
79,087
 
$
83,013
 
Deferred revenue
 
 
133
 
 
11,500
 
Taxes payable
 
 
64,629
 
 
28,826
 
Accrued payroll and related expenses
 
 
40,334
 
 
37,016
 
Deferred rent
 
 
11,756
 
 
10,844
 
Accrued settlement costs
   
39,158
   
-
 
Other
 
 
12,293
 
 
10,878
 
Total accrued liabilities
 
$
247,390
 
$
182,077
 
 
 
 
October 30,
 
January 30,
 
 
 
2005
 
2005
 
Long-term Liabilities:
 
(In thousands)
 
Asset retirement obligation
 
$
6,146
 
$
4,483
 
Technology licenses
 
 
2,000
 
 
3,875
 
Total long-term liabilities
 
$
8,146
 
$
8,358
 

During fiscal 2006, we continued the expansion and completed leasehold improvements at our international sites. As a result, we recorded an additional liability of $1.7 million during the third quarter of fiscal 2006 to return the properties at these sites to their original condition upon lease termination.

Note 10 - Segment Information
 
Our Chief Executive Officer, who is considered to be our chief operating decision maker, or CODM, reviews financial information presented on an operating segment basis for purposes of making operating decisions and assessing financial performance. During the first quarter of fiscal 2006, we reorganized our operating segments to bring all major product groups in line with our strategy to position ourselves as the worldwide leader in programmable graphics processor technologies. We now report financial information for four product-line operating segments to our CODM: the GPU Business, which is composed of products that support desktop PCs, notebook PCs and professional workstations; the MCP Business, which is composed of NVIDIA nForce products; the WMP Business, which supports handheld personal digital assistants, cellular phones and other handheld devices; and the Consumer Electronics Business, which is composed of revenue from our contractual arrangements with Sony Computer Entertainment, or SCE, for the development of their PlayStation3, revenue from sales of our Xbox-related products, revenue from our license agreement with Microsoft relating to the successor product to their initial Xbox gaming console, the Xbox360, and related devices, and digital media processor products. In addition to these operating segments, we have the “All Other” category that includes human resources, legal, finance, general administration and corporate marketing expenses, which total $44.5 million for the third quarter of fiscal 2006, $24.9 million for the third quarter of fiscal 2005, $96.1 million for the first nine months of fiscal 2006, and $75.7 million for the first nine months of fiscal 2005, that we do not allocate to our other operating segments. “All Other” also includes the results of operations of other miscellaneous operating segments that are neither individually reportable, nor aggregated with another operating segment. Revenue in the “All Other” category is primarily derived from sales of memory.  All prior period amounts have been restated to reflect our new reporting structure.

11


NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

Our CODM does not review any information regarding property and equipment on an operating segment basis. Operating segments do not record intersegment revenue, and, accordingly, there is none to be reported.  The accounting policies for segment reporting are the same as for NVIDIA as a whole. 


 
 
GPU
 
MCP
 
WMP
 
CE
 
All Other
 
Consolidated
 
 
 
(In thousands)
 
Three Months Ended
October 30, 2005:
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
427,564
 
$
90,329
 
$
23,194
 
$
9,929
 
$
32,399
 
$
583,415
 
Depreciation expense
 
$
8,442
 
$
2,869
 
$
3,144
 
$
305
 
$
7,887
 
$
22,647
 
Operating income (loss)
 
$
110,873
 
$
4,611
 
$
(3,992
)
$
1,882
 
$
(41,838
)
$
71,536
 
Three Months Ended
October 24, 2004:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
298,427
 
$
45,215
 
$
11,091
 
$
109,165
 
$
51,693
 
$
515,591
 
Depreciation expense
 
$
8,324
 
$
3,158
 
$
3,076
 
$
270
 
$
8,222
 
$
23,050
 
Operating income (loss)
 
$
31,449
 
$
(10,714
)
$
(13,764
)
$
46,958
 
$
(25,171
)
$
28,758
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended
October 30, 2005:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
1,223,316
 
$
238,006
 
$
33,091
 
$
149,550
 
$
98,110
 
$
1,742,073
 
Depreciation expense
 
$
24,721
 
$
9,059
 
$
9,184
 
$
1,002
 
$
23,589
 
$
67,555
 
Operating income (loss)
 
$
261,741
 
$
16,874
 
$
(29,967
)
$
71,609
 
$
(92,502
)
$
227,755
 
Nine Months Ended
October 24, 2004:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
962,203
 
$
113,336
 
$
21,951
 
$
219,676
 
$
126,391
 
$
1,443,557
 
Depreciation expense
 
$
24,596
 
$
9,897
 
$
8,338
 
$
660
 
$
25,027
 
$
68,518
 
Operating income (loss)
 
$
110,722
 
$
(40,319
)
$
(29,815
)
$
87,853
 
$
(72,004
)
$
56,437
 

Revenue by geographic region is allocated to individual countries based on the location to which the products are initially billed even if our customers’ revenue is attributable to end customers that are located in a different location. The following table summarizes information pertaining to our operations in different geographic regions:

 
 
Three Months Ended
 
Nine Months Ended
 
 
 
October 30,
 
October 24,
 
October 30,
 
October 24,
 
 
 
2005
 
2004
 
2005
 
2004
 
 
 
(In thousands)
 
Revenue:
 
 
 
 
 
 
 
 
 
United States
 
$
51,511
 
$
164,815
 
$
282,722
 
$
374,380
 
Other Americas
 
 
6,660
 
 
3,323
 
 
13,625
 
 
6,869
 
China
 
 
102,251
 
 
48,547
 
 
281,401
 
 
201,187
 
Taiwan
 
 
323,272
 
 
199,992
 
 
862,553
 
 
599,649
 
Other Asia Pacific
 
 
69,037
 
 
36,044
 
 
168,677
 
 
115,325
 
Europe
 
 
30,684
 
 
62,870
 
 
133,095
 
 
146,147
 
Total revenue
 
$
583,415
 
$
515,591
 
$
1,742,073
 
$
1,443,557
 

 
12

NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

Revenue from significant customers, those representing approximately 10% or more of total revenue for the respective periods, is summarized as follows:

 
Three Months Ended
 
Nine Months Ended
 
October 30,
 
October 24,
 
October 30,
 
October 24,
 
2005
 
2004
 
2005
 
2004
Revenue:
 
 
 
 
 
 
 
Customer A
0%
 
21%
 
7%
 
16%
Customer B
18%
 
17%
 
15%
 
20%
Customer C
13%
 
7%
 
12%
 
8%
 
Note 11 - Litigation

3dfx

On December 15, 2000, NVIDIA Corporation and one of our indirect subsidiaries entered into an agreement to purchase certain graphics chip assets from 3dfx. The 3dfx asset purchase closed on April 18, 2001.
 
In May 2002, we were served with a California state court complaint filed by the landlord of 3dfx’s San Jose, California commercial real estate lease. In December 2002, we were served with a California state court complaint filed by the landlord of 3dfx’s Austin, Texas commercial real estate lease. The landlords’ complaints both assert claims for, among other things, interference with contract, successor liability and fraudulent transfer and seek to recover, among other things, amounts owed on their leases with 3dfx in the aggregate amount of approximately $10 million. In October 2002, 3dfx filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Northern District of California. The landlords’ actions were subsequently removed to the United States Bankruptcy Court for the Northern District of California and consolidated with a complaint filed by the Trustee in the 3dfx bankruptcy case for purposes of discovery. Upon motion by NVIDIA in 2005, the District Court withdrew the reference to the Bankruptcy Court and the landlord actions were removed to the United States District Court for the Northern District of California.  On November 10, 2005, the District Court granted NVIDIA's motion to dismiss the landlords’ respective amended complaints and allowed the landlords to have until February 4, 2006 to amend their complaints.  Discovery is stayed pending the landlords’ amendment of their respective complaints and no trial date has been set in these actions.  We believe the claims asserted against us by the landlords are without merit and we will continue to defend ourselves vigorously.
 
In March 2003, we were served with a complaint filed by the Trustee appointed by the Bankruptcy Court to represent the interests of the 3dfx bankruptcy estate. The Trustee’s complaint asserts claims for, among other things, successor liability and fraudulent transfer and seeks additional payments from us.  On October 13, 2005, the Court held a hearing on the Trustee’s motion for summary adjudication.  No decision has been issued on this motion as the motion is currently under submission.  In early November 2005, after many months of mediation, NVIDIA and the Official Committee of Unsecured Creditors, or the Creditors’ Committee, reached a conditional settlement of the Trustee’s claims against NVIDIA.  This conditional settlement will be subject to the review and approval of the Bankruptcy Court after notice and hearing. We expect that hearing to occur in early 2006. The Trustee has advised that he intends to object to the settlement. The settlement with the Creditors’ Committee calls for a payment of approximately $30.6 million to the 3dfx estate. Under the settlement, $5.6 million relates to various administrative expenses and Trustee fees, and $25.0 million relates to the satisfaction of debts and liabilities owed to the general unsecured creditors of 3dfx. As such, during the three month period ended October 30, 2005, we recorded $5.6 million as a charge to settlement costs and $25.0 million as additional purchase price for 3dfx. Until the Bankruptcy Court hears and determines to either approve or disapprove the settlement with the Creditors’ Committee, no discovery or other litigation-related activities should take place in the Trustee's action.  Should the settlement not be approved, we will continue to defend ourselves vigorously.  No trial date has been set in the Trustee's action.

13


NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

Opti Incorporated

On October 19, 2004, Opti Incorporated, or Opti, filed a complaint for patent infringement against NVIDIA in the United States District Court for the Eastern District of Texas. Opti asserts that unspecified NVIDIA chipsets infringe five U.S. patents held by Opti. Opti seeks unspecified damages for our alleged conduct, attorneys fees and triple damages for alleged willful infringement by NVIDIA. NVIDIA filed a response to this complaint in December 2004. After a case management conference in July 2005, discovery has just begun and a trial date has now been set for July 2006. A court mandated mediation is set for January 12, 2006. We believe the claims asserted against us are without merit and we will continue to defend ourselves vigorously.

American Video Graphics

In August 2004, a Texas limited partnership named American Video Graphics, LP, or AVG, filed three separate complaints for patent infringement against various corporate defendants, not including NVIDIA, in the United States District Court for the Eastern District of Texas. AVG initially asserted that each of the approximately thirty defendants sells products that infringe one or more of seven separate patents that AVG claims relate generally to graphics processing functionality. Each of the three lawsuits target a different group of defendants; one case involves approximately twenty of the leading personal computer manufacturers, the PC Makers Case, one case involves the three leading video game console makers, the Game Console Case, and one case involves approximately ten of the leading video game publishers, the Game Publishers Case. In November 2004, NVIDIA sought and was granted permission to intervene in two of the three pending AVG lawsuits, the PC Makers Case and the Game Console Case. Our complaint in intervention alleged that both the patents in suit are invalid and that, to the extent AVG’s claims target NVIDIA products, the asserted patents are not infringed. Two other leading suppliers of graphics processing products, Intel Corporation, or Intel, and ATI Technologies, Inc., or ATI, also intervened in the cases, ATI in both the PC Makers and Game Console Case, and Intel in the PC Makers Case.

On November 4, 2005, AVG and substantially all of the named defendants and intervenors, including NVIDIA, reached a settlement in principle of all pending claims; the only surviving claims will relate solely to two non-settling defendants. As part of the settlement, the defendants and intervenors have agreed to pay an undisclosed aggregate amount to AVG. In exchange, all pending claims between the settling parties will be dismissed with prejudice, and AVG will grant to all settling parties a full release of all claims for past damages and a full license for all future sales of accused products under all of AVG’s patents, including the patents in suit. In addition, as part of the settlement, all settling defendants and intervenors have agreed to fully and finally waive any claims for indemnification they may have had against any other settling party. The settlement is subject to the negotiation and execution of a definitive settlement agreement by all settling parties. The process of drafting the settlement documents is underway and we believe we can reasonably anticipate court approval of the settlement before the end of December 2005. During the three months ended October 30, 2005, we accrued our share of the aggregate undisclosed settlement amount.

We are subject to other legal proceedings, but we do not believe that the ultimate outcome of any of these proceedings will have a material adverse effect on our financial position or overall trends in results of operations. However, if an unfavorable ruling were to occur in any specific period, there exists the possibility of a material adverse impact on the results of operations of that period.

Note 12 - Stock Repurchase Program

On August 9, 2004 we announced that our Board of Directors, or the Board, had authorized a stock repurchase program to repurchase shares of our common stock, subject to certain specifications, up to an aggregate maximum amount of $300.0 million. As part of our share repurchase program, we have entered into and we may continue to enter into structured share repurchase transactions with financial institutions. These agreements generally require that we make an up-front payment in exchange for the right to receive a fixed number of shares of our common stock upon execution of the agreement, and an incremental number of shares of our common stock, within a minimum and a maximum, at the end of the term of the agreement. During the third quarter of fiscal 2006, we repurchased 1.3 million shares of our common stock for $40.0 million under a structured share repurchase transaction, which we recorded on the trade date of the transaction. Through the end of the third quarter of fiscal 2006, we have repurchased 7.2 million shares under our stock repurchase program for a total cost of approximately $163.1 million.

14


NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)


Note 13 - Change in Accounting Estimate

We compute income taxes for interim reporting purposes using estimates of our effective annual income tax rate for the entire fiscal year. During the second quarter of fiscal 2006, we revised our estimated effective income tax rate for fiscal year 2006 to 16% from the 20% rate that we had used in the first quarter of fiscal 2006. The change in the rate was primarily a result of changes in our geographic mix of income subject to tax.

Note 14 - Income Taxes

The American Jobs Creation Act of 2004 was signed into law on October 22, 2004. This act provides a special one-time dividends received deduction on the repatriation of certain foreign earnings to a United States taxpayer. We are currently in the process of evaluating whether or not, and to what extent, if any, this provision may benefit NVIDIA. We expect to complete such evaluation before the end of our fiscal year 2006. The range of possible amounts that we are considering for repatriation under this provision is between zero and $500 million. The range of income tax expense we would recognize if we repatriate earnings in this range is expected to be between zero and $27 million.

Note 15 - Settlement Costs

Settlement costs were $14.2 million for the three and nine months ending October 30, 2005.  The settlement costs are associated with two litigation matters, 3dfx and AVG.  Neither of these cases is finally settled and each is subject to judicial review and the completion of appropriate procedures and documents. However, based on the developments in each case, we have concluded that a loss is probable and that we can reasonably estimate the amount of loss.  Please refer to Note 11 for further information. 

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are subject to the “safe harbor” created by those sections. When used in this report, the words “expects,” “believes,” “intends,” “anticipates,” “estimates,” “plans,” and similar expressions are intended to identify forward-looking statements. These forward-looking statements relate to future periods and include, but are not limited to, the features, benefits, capabilities, performance, production and availability of our technology and products, the length of product cycles, products under development, product life cycles, average selling prices, expansion of our technologies and products, including by investment or acquisition, our gross margin, sources of revenue and anticipated revenue, including anticipated revenue derived from our relationship with Sony Computer Entertainment, or SCE, revenue mix, increases in and reasons for our expenditures, including capital expenditures, our cash flow and cash balances, our liquidity, uses of cash, investments of our cash and marketable securities, our tax rate, repatriation of foreign earnings, our quarterly and annual results of operations, our foreign currency risk strategy, our critical accounting policies, the impact of recent accounting pronouncements, our inventories, our strategies as to and growth of our GPU, MCP, WMP and Consumer Electronics businesses, factors contributing to the growth of our businesses, our relationship with and the development of a GPU for SCE, use of our graphics cards by Apple Computer, Inc., the importance of our strategic relationships, customer demand, our ability to attract customers, our reliance on a limited number of customers, the rate of adoption of PCI Express, platform innovations and solutions, our ability to attract and retain qualified personnel, importance of stock option grants, expensing of stock options, use of the binomial model for calculating the fair value of stock compensation awards, expectations regarding our competition and our competitive position, factors affecting competition and our ability to compete, our intellectual property and intellectual property strategy, our litigation and settlement of litigation, our internal control over financial reporting, and compliance with the RoHS Directive and other environmental laws and regulations. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, the risks discussed below as well as unanticipated decreases in average selling prices of our products, our inability to decrease inventory purchase commitments in a meaningful time frame, delays in the development or release of new products, delays in volume production of our products, incompatibility with a partner's product, our inability to compete in new markets, the write-down of the value of inventory, entry of new competitors in our established markets, reduction in demand for or market acceptance of our products or our customers’ products, defects in our products or software, the impact of competitive pricing pressure, new product announcements or introductions by our competitors, unforeseen reductions in demand for our products, disruptions in our relationships with Taiwan Semiconductor Manufacturing Company, or TSMC, International Business Machines Corporation, or IBM, United Microelectronics Corporation, or UMC, Chartered Semiconductor Manufacturing, or Chartered, and other key suppliers, insufficient manufacturing availability, fluctuations in general economic conditions, failure to achieve design wins, the seasonality of the PC and our other product segments, international and political conditions, the loss of an important customer, our ability to safeguard our intellectual property, delays in the development of new products, developments in and expenses related to litigation, developments in litigation settlements and the matters set forth under the caption “Business Risks.” These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
 
In this report, all references to “NVIDIA,” “we,” “us,” or “our,” mean NVIDIA Corporation and our subsidiaries.
 
NVIDIA, GeForce, MXM, SLI, GoForce, NVIDIA Quadro and NVIDIA nForce are our trademarks or registered trademarks in the United States and other countries. We also refer to trademarks of other corporations and organizations in this document.
 
Overview
 
Our Company
 
NVIDIA Corporation is the worldwide leader in programmable graphics processor technologies. Our products enhance the end-user experience on consumer and professional computing devices. NVIDIA graphics processing units, or GPUs, media and communications processors, or MCPs, and wireless media processors, or WMPs, have broad market reach and are incorporated into a variety of platforms, including consumer and enterprise personal computers, or PCs, notebooks, workstations, personal digital assistants, or PDAs, cellular phones, and video game consoles. We were incorporated in California in April 1993 and reincorporated in Delaware in April 1998. Our headquarter facilities are in Santa Clara, California.
 
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Fiscal 2006 Developments, Future Objectives and Challenges
 
GPU Business
 
In February 2005, we announced the GeForce Go 6600, a mobile GPU designed specifically to deliver advanced multimedia functionality without sacrificing portability.  Also in February 2005, we introduced the GeForce Go 6800 Ultra mobile GPU.  
 
In March 2005, we introduced two new GeForce 6 GPUs: a 512MB version of the GeForce 6800 Ultra GPU designed for the enthusiast segment, and a new lower-cost AGP version of the GeForce 6200 GPU, designed to bring Microsoft DirectX 9.0 Shader Model 3.0 technology to the mainstream segment.  These two GPUs utilize the NVIDIA ForceWare software suite and Unified Driver Architecture to incorporate software optimizations that take full advantage of our newest features. 
 
In June 2005, we launched and shipped our second generation Shader Model 3.0 GPU, the GeForce 7800 GTX, which is designed to address the high-end enthusiast desktop PC segment. In August 2005, we launched and shipped our second GeForce 7 GPU, the GeForce 7800 GT, which is designed to address the high-end performance desktop PC segment.

In June 2005, we made our SLI technology available to users in the mainstream segment with the release of our GeForce 6600.

In July 2005, we introduced two new NVIDIA Quadro GPUs, the NVIDIA Quadro FX 4500 and the NVIDIA Quadro FX 3450, which are designed for the high-end and mainstream professional segments, respectively. Both products support our Scalable Link Interface, or SLI, technology.

In September 2005, we launched and shipped the new NVIDIA GeForce Go 7800 GTX, the flagship of the NVIDIA notebook GPU product line.

In October 2005, we announced that we will be the exclusive provider of all graphics cards offered on the first PCI Express platform from Apple Computer, Inc., or Apple. In addition, the first ever Apple Power Mac will incorporate our Quadro professional-class GPU.

In November 2005, we introduced and shipped the NVIDIA GeForce 7800 GTX 512 GPU, which is based on the award-winning GeForce 7 Series architecture. We also announced the immediate availability of the NVIDIA GeForce 6800 GS GPU, which is based on the GeForce 6 Series architecture.
 
The combination of our GeForce 7 and GeForce 6 series of GPUs and our SLI technology has created a new class of gaming and workstation class PCs.  SLI technology takes advantage of the increased bandwidth of the PCI Express bus architecture to allow two NVIDIA-based graphics cards to operate in a single PC or workstation. 
 
MCP Business
 
In April 2005, we announced the availability of our NVIDIA nForce4 SLI Intel Edition MCP for Intel platforms.  This line of core-logic solutions incorporates a host of new and innovative features that have never before been available on the Intel platform and extends the NVIDIA nForce brand into new segments.  In addition, during the first quarter of fiscal 2006, NVIDIA nForce Professional MCP shipped in its first enterprise server platform. 

In August 2005, we announced that the NVIDIA nForce4 SLI X16 Intel Edition technology featured in the Dell Dimension XPS 600 desktop PC was immediately available.

In September 2005, we introduced and shipped the NVIDIA nForce 400 MCP and GeForce 6100 integrated GPU family. This represents the first integrated GPU solution to support Microsoft DirectX 9.0 Shader Model 3.0 technology. We expect this to be an important new growth driver for our GPU and MCP businesses.
 
Our NVIDIA nForce product line has achieved record revenue for five consecutive quarters.  We believe that Advanced Micro Devices’, or AMD’s, transition to K8, our extension into new segments, and our entry into the Intel market will make our MCP Business one of our fastest growing businesses. Furthermore, we believe that our ability to simultaneously innovate using our GPU, MCP, and software knowledge base will allow us to make additional platform innovations in the future. 

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WMP Business
 
Our strategy in the WMP Business is to lead innovation and capitalize on the emergence of the mobile phone as a versatile consumer lifestyle device.  Our initial focus was on 3G cellular phones.  Through the first half of fiscal 2006, our WMP Business had been heavily concentrated at one original equipment manufacturer, or OEM, and