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NVIDIA 10-Q 2007
q208form10q.htm
 
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 July 29, 2007
 
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, and telephone number,
including area code, of principal executive offices)

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 o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
x Large accelerated filer                                                           o Accelerated filer                                                                o Non-accelerated filer

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
 
The number of shares of common stock, $.001 par value, outstanding as of August 15, 2007 was 365,874,872.


 
 
NVIDIA CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JULY 29, 2007

TABLE OF CONTENTS
 
 
 
Page
 
 
3
 
4
 
5
 
6
24
34
34
 
 
 
 
 
35
35
49
50
50
50
51
52



 



CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands, except per share data)

 
   
Three Months Ended
   
Six Months Ended
 
   
July 29, 
2007
     
July 30,
2006
   
July 29, 
2007
   
July 30,
2006
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue   $
935,253
    $
 687,519
    $
 1,779,533
    $
 1,369,326
 
      Cost of revenue
   
511,261
     
395,391
     
975,403
     
788,525
 
Gross profit
   
423,992
     
292,128
     
804,130
     
580,801
 
Operating expenses:
                               
      Research and development
   
157,952
     
127,257
     
316,273
     
250,459
 
      Sales, general and administrative
   
81,280
     
69,055
     
161,851
     
133,017
 
Total operating expenses
   
239,232
     
196,312
     
478,124
     
383,476
 
Operating income
   
184,760
     
95,816
     
326,006
     
197,325
 
      Interest income
   
15,625
     
8,818
     
28,833
     
17,626
 
      Interest expense
   
     
(6
)
   
     
(7
)
      Other income (expense), net
   
466
     
(106
)
   
(199
)
   
(350
)
Income before income tax expense
   
200,851
     
104,522
     
354,640
     
214,594
 
      Income tax expense
   
28,119
     
17,769
     
49,649
     
36,481
 
Income before change in accounting principle
   
172,732
     
86,753
     
304,991
     
178,113
 
Cumulative effect of change in accounting principle
   
     
     
     
704
 
Net income
 
$
172,732
     
86,753
   
$
304,991
   
$
178,817
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic net income per share:
                               
   Prior to cumulative effect of change in accounting principle
 
$
0.47
     
0.25
   
$
0.84
   
$
0.51
 
       Cumulative effect of change in accounting principle
   
     
     
     
 
Basic net income per share
 
$
0.47
     
0.25
   
$
0.84
   
$
0.51
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares used in basic per share computation
   
364,870
     
350,244
     
362,850
     
349,090
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted net income per share:
                               
Prior to cumulative effect of change in accounting principle
 
$
0.43
     
0.22
   
$
0.76
   
$
0.46
 
    Cumulative effect of change in accounting principle
   
     
     
     
 
Diluted net income per share
 
$
0.43
     
0.22
   
$
0.76
   
$
0.46
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares used in diluted per share computation
   
402,553
     
385,589
     
400,638
     
387,485
 


 
See accompanying Notes to Condensed Consolidated Financial Statements.


3



CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands)

 
 
July 29,
2007
 
 
January 28,
2007
 
ASSETS
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
         Cash and cash equivalents
 
$
914,745
 
 
$
544,414
 
         Marketable securities
 
 
656,818
 
 
 
573,436
 
         Accounts receivable, net
 
 
508,435
 
 
 
518,680
 
         Inventories
 
 
276,305
 
 
 
354,680
 
         Prepaid expenses and other current assets
 
 
41,102
 
 
 
40,560
 
Total current assets
 
 
2,397,405
 
 
 
2,031,770
 
Property and equipment, net
 
 
264,832
 
 
 
260,828
 
Goodwill
 
 
293,383
 
 
 
301,425
 
Intangible assets, net
 
 
54,735
 
 
 
45,511
 
Deposits and other assets
 
 
25,912
 
 
 
35,729
 
      Total assets
 
$
3,036,267
 
 
$
2,675,263
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
         Accounts payable
 
$
323,381
 
 
$
272,075
 
         Accrued liabilities
 
 
357,417
 
 
 
366,732
 
Total current liabilities
 
 
680,798
 
 
 
638,807
 
Deferred tax and other long-term liabilities
 
 
95,191
 
 
 
29,537
 
Commitments and contingencies - see Note 13
 
 
 
 
 
 
 
 
Stockholders’ equity:
 
 
 
 
 
 
 
 
         Preferred stock
 
 
 
 
 
 
         Common stock
 
 
402
 
 
 
388
 
         Additional paid-in capital
 
 
1,493,240
 
 
 
1,295,650
 
         Treasury stock, at cost
 
 
(736,506
)
 
 
(487,120
)
         Accumulated other comprehensive income, net
 
 
1,586
 
 
 
1,436
 
         Retained earnings
 
 
1,501,556
 
 
 
1,196,565
 
Total stockholders' equity
 
 
2,260,278
 
 
 
2,006,919
 
         Total liabilities and stockholders' equity
 
$
3,036,267
 
 
$
2,675,263
 

 
 
See accompanying Notes to Condensed Consolidated Financial Statements.


4



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands) 

 
   
 Six Months Ended   
 
 
 
July 29, 2007
 
 
July 30, 2006
 
Cash flows from operating activities:
 
 
 
 
 
 
Net income
 
$
304,991
 
 
$
178,817
 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
 
 
Stock-based compensation
 
 
66,865
 
 
 
51,953
 
Depreciation and amortization
 
 
63,226
 
 
 
48,239
 
Deferred income taxes
 
 
39,277
 
 
 
28,237
 
Excess tax benefits from stock-based compensation
 
 
 
 
 
(14,362
)
Cumulative effect of change in accounting principle
 
 
 
 
 
(704
)
In-process research and development
 
 
 
 
 
602
 
Other
 
 
185
 
 
 
51
 
Changes in operating assets and liabilities, net of acquisitions:
 
 
 
 
 
 
 
 
Accounts receivable
 
 
10,950
 
 
 
(132,259
)
Inventories
 
 
78,489
 
 
 
(118,315
)
Prepaid expenses and other current assets
 
 
(842
)
 
 
(8,883
)
Deposits and other assets
 
 
2,437
 
 
 
(4,399
)
Accounts payable
 
 
50,685
 
 
 
32,508
 
Accrued liabilities
 
 
21,337
 
 
 
5,913
 
Net cash provided by operating activities
 
 
637,600
 
 
 
67,398
 
 
 
 
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
 
 
 
       Purchases of marketable securities
 
 
(455,909
)
 
 
(159,034
)
Sales and maturities of marketable securities
 
 
374,661
 
 
 
94,293
 
       Purchases of property and equipment and intangible assets
 
 
(67,703
)
 
 
(40,778
)
Acquisition of businesses, net of cash and cash equivalents
 
 
 
 
 
(67,026
)
Net cash used in investing activities
 
 
(148,951
)
 
 
(172,545
)
 
 
 
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
 
 
 
       Common stock issued under employee stock plans
 
 
131,068
 
 
 
102,430
 
       Stock repurchase
 
 
(249,386
)
 
 
(174,978
)
       Excess tax benefits from stock-based compensation
 
 
 
 
 
14,362
 
Net cash used in financing activities
 
 
(118,318
)
 
 
(58,186
)
 
 
 
 
 
 
 
 
 
Change in cash and cash equivalents
 
 
370,331
 
 
 
(163,333
)
Cash and cash equivalents at beginning of period
 
 
544,414
 
 
 
551,756
 
Cash and cash equivalents at end of period   $
 914,745
    $
 388,423
 
 
 
 
 
 
 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
 
 
 
 
 
       Cash paid for income taxes, net
 
$
3,505
 
 
$
24,645
 
Other non-cash activities:
 
 
 
 
 
 
 
 
       Unrealized losses from marketable securities
 
$
(564
)
 
$
697
 
       Assets acquired by assuming related liabilities
 
$
 
 
$
13,506
 
       Deferred compensation
 
$
 
 
$
3,604
 

See accompanying Notes to Condensed Consolidated Financial Statements

5

 
 
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 28, 2007.  
 
Fiscal year
 
We operate on a 52 or 53-week year, ending on the Sunday nearest January 31. The first and second quarters of fiscal years 2008 and 2007 were all 13-week quarters.

Reclassifications
 
Certain prior fiscal year balances have been reclassified to conform to the current fiscal year presentation.
 
Principles of Consolidation
 
Our condensed consolidated financial statements include the accounts of NVIDIA Corporation and its wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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, goodwill, stock-based compensation expense and contingencies. These estimates are based on historical facts and various other assumptions that we believe are reasonable.

Revenue Recognition
 
Product Revenue 
 
We recognize revenue from product sales when persuasive evidence of an arrangement exists, the product has been delivered, the price is fixed and determinable, and collection is reasonably assured. For most sales, we use a binding purchase order and in certain cases we use a contractual agreement as evidence of an arrangement. We consider delivery to occur upon shipment provided title and risk of loss have passed to the customer based on the shipping terms. At the point of sale, we assess whether the arrangement fee is fixed and determinable and whether collection is reasonably assured. If we determine that collection of a fee is not reasonably assured, we defer the fee and recognize revenue at the time collection becomes reasonably assured, which is generally upon receipt of payment.
 
Our policy on sales to distributors with rights of return is to defer recognition of revenue and related cost of revenue until the distributors resell the product.

6


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

    We record estimated reductions to revenue for customer programs at the time revenue is recognized. Our customer programs primarily involve rebates, which are designed to serve as sales incentives to resellers of our products in various target markets. We account for rebates in accordance with Emerging Issues Task Force Issue 01-09, or EITF 01-09, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products) and, as such, we accrue for 100% of the potential rebates and do not apply a breakage factor. Rebates typically expire six months from the date of the original sale, unless we reasonably believe that the customer intends to claim the rebate. Unclaimed rebates are reversed to revenue upon expiration of the rebate.
 
 Our customer programs also include marketing development funds, or MDFs. We account for MDFs as either a reduction of revenue or an operating expense in accordance with EITF 01-09. MDFs represent monies paid to retailers, system builders, original equipment manufacturers, or OEMs, distributors and add-in card partners that are earmarked for market segment development and expansion and typically are designed to support our partners’ activities while also promoting NVIDIA products. Depending on market conditions, we may take actions to increase amounts offered under customer programs, possibly resulting in an incremental reduction of revenue at the time such programs are offered.
 
We also record a reduction to revenue by establishing a sales return allowance for estimated product returns at the time revenue is recognized, based primarily on historical return rates. However, if product returns for a particular fiscal period exceed historical return rates we may determine that additional sales return allowances are required to properly reflect our estimated exposure for product returns.

License and Development Revenue 
 
For license arrangements that require significant customization of our intellectual property components, we generally recognize this license revenue using the percentage-of-completion method of accounting over the period that services are performed. For all license and service arrangements accounted for under the percentage-of-completion method, we determine progress to completion based on actual direct labor hours incurred to date as a percentage of the estimated total direct labor hours required to complete the project. We periodically evaluate the actual status of each project to ensure that the estimates to complete each contract remain accurate. A provision for estimated losses on contracts is made in the period in which the loss becomes probable and can be reasonably estimated. To date, we have not recorded any such losses. Costs incurred in advance of revenue recognized are recorded as deferred costs on uncompleted contracts. If the amount billed exceeds the amount of revenue recognized, the excess amount is recorded as deferred revenue. Revenue recognized in any period is dependent on our progress toward completion of projects in progress. Significant management judgment and discretion are used to estimate total direct labor hours. Any changes in or deviations from these estimates could have a material effect on the amount of revenue we recognize in any period.

Recently Issued Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards No. 157, or SFAS No. 157, Fair Value Measurements. SFAS No. 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting from the application of SFAS No. 157 relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. We are required to adopt the provisions of SFAS No. 157 beginning with our fiscal quarter ending April 27, 2008. We are currently evaluating the impact that SFAS No. 157 will have on our consolidated financial position, results of operations and cash flows.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, or SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. We are required to adopt the provisions of SFAS No. 159 beginning with our fiscal quarter ending April 27, 2008, although earlier adoption is permitted. We are currently evaluating the impact that SFAS No. 159 will have on our consolidated financial position, results of operations and cash flows.

7



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

 
Adoption of FASB Interpretation No. 48

On January 29, 2007, we adopted FASB Interpretation No. 48, or FIN 48, Accounting for Uncertainty in Income Taxes, issued in July 2006. FIN 48 applies to all tax positions related to income taxes subject to FASB Statement of Financial Accounting Standards No. 109, or SFAS No. 109, Accounting for Income Taxes. Under FIN 48 we recognize the benefit from a tax position only if it is more-likely-than-not that the position would be sustained upon audit based solely on the technical merits of the tax position. The cumulative effect of adoption of FIN 48 did not result in a material adjustment to our tax liability for unrecognized income tax benefits. Our policy to include interest and penalties related to unrecognized tax benefits as a component of income tax expense did not change as a result of implementing the FIN 48. Please refer to Note 3 of these Notes to Condensed Consolidated Financial Statements for additional information.

Note 2 - Stock-Based Compensation

At the beginning of fiscal 2007, we adopted the provisions of Statement of Financial Accounting Standards No. 123(R), or SFAS No. 123(R), Share-Based Payment. SFAS No. 123(R) establishes accounting for stock-based awards exchanged for employee services. Accordingly, we measure stock-based compensation at grant date, based on the fair value of the awards, and we recognize that compensation as expense using the straight-line attribution method over the requisite employee service period, which is typically the vesting period of each award. We elected to adopt the modified prospective application method provided by SFAS No. 123(R). Our estimates of the fair values of employee stock options are calculated using a binomial model.

For option grants prior to our adoption of SFAS No. 123(R), we record stock-based compensation expense equal to the amount that would have been recognized if the fair value method provided in accordance with Statement of Financial Accounting Standards No. 123, or SFAS No. 123, Accounting for Stock-Based Compensation, as amended by Statement of Financial Accounting Standards No. 148, or SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosures, had been used.

Cumulative Effect of Change in Accounting Principle
 
Our adoption of SFAS No. 123(R) resulted in a cumulative benefit from the accounting change of $0.7 million during fiscal year 2007, which reflects the net cumulative impact of estimating forfeitures in the determination of period expense by reversing the previously recognized cumulative compensation expense related to those forfeitures, rather than recording forfeitures when they occur as previously permitted.

Our condensed consolidated income statements include stock-based compensation expense, net of amounts capitalized as inventory, as follows:

   
Three Months Ended
   
Six Months Ended
 
   
July 29, 
2007
   
July 30, 
 2006
   
July 29, 
2007
   
July 30, 
 2006
 
   
(In thousands)
 
Cost of revenue
 
$
2,702
   
$
1,746
   
$
5,511
   
$
2,973
 
Research and development
 
$
16,421
   
$
16,588
   
$
38,821
   
$
31,014
 
Sales, general and administrative
 
$
10,337
   
$
10,532
   
$
22,533
   
$
17,104
 

During the three and six months ended July 29, 2007, we granted approximately 0.9 million and 5.7 million stock options, respectively, with an estimated total grant-date fair value of $13.7 million and $69.8 million, respectively, and a per option weighted average grant-date fair value of $15.52 and $12.22, respectively. Of the estimated total grant-date fair value, we estimated that the stock-based compensation expense related to the awards that are not expected to vest was $2.6 million and $13.5 million for the three and six months ended July 29, 2007, respectively.
 
During the three and six months ended July 30, 2006, we granted approximately 0.9 million and 6.8 million stock options, respectively, with an estimated total grant-date fair value of $9.7 million and $73.6 million, respectively, and a per option weighted average grant date fair value of $10.57 and $10.74, respectively. Of the estimated total grant-date fair value, we estimated that the stock-based compensation expense related to the awards that are not expected to vest was $1.9 million and $14.2 million for the three and six months ended July 30, 2006, respectively.



8


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

As of July 29, 2007 and July 30, 2006, the aggregate amount of unearned stock-based compensation expense related to our stock options was $175.0 million and $176.3 million, respectively, adjusted for estimated forfeitures.  We will recognize the unearned stock-based compensation expense related to stock options over an estimated weighted average amortization period of 2.0 years for the six months ended July 29, 2007 and July 30, 2006, respectively.

 Valuation Assumptions

In 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.  We reevaluated the assumptions we used 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.  At that time, our management also determined that the use of implied volatility is expected to be more reflective of market conditions and, therefore, could reasonably be expected to be a better indicator of our expected volatility than historical volatility. We also segregated options into groups for employees with relatively homogeneous exercise behavior in order to calculate the best estimate of fair value using the binomial valuation model.  As such, the expected term assumption used in calculating the estimated fair value of our stock-based compensation awards using the binomial model is based on detailed historical data about employees' exercise behavior, vesting schedules, and death and disability probabilities.  Our management believes 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 continued to use the Black-Scholes model.

SFAS No. 123(R) also requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on historical experience. If factors change and we employ different assumptions in the application of SFAS No. 123(R) in future periods, the compensation expense that we record under SFAS No. 123(R) may differ significantly from what we have recorded in the current period.

The fair value of stock options granted under our stock option plans, and shares issued under our employee stock purchase plan have been estimated at the date of grant using a straight-line attribution method with the following assumptions:

   
Stock Options
   
Employee Stock Purchase Plan
 
   
Three Months Ended
   
Three Months Ended
 
   
July 29,
2007
   
July 30,
2006
   
July 29,
2007
   
July 30,
2006
 
   
(Using a binomial
model)
   
(Using a binomial
model)
   
(Using the Black-
Scholes model)
   
(Using the Black-
Scholes model)
 
Expected life (in years)
   
3.8 - 5.2
     
3.6 - 5.1
     
0.5 - 2.0
     
0.5 - 2.0
 
Risk free interest rate
    5.0 %     5.1 %     3.7%-5.1 %     2.3%-4.6 %
Volatility
    37%-40 %     41%-51 %     38%-47 %     30%-41 %
Dividend yield
   
     
     
     
 
 
   
Stock Options
   
Employee Stock Purchase Plan
 
   
Six Months Ended
   
Six Months Ended
 
   
July 29,
2007
   
July 30,
2006
   
July 29,
2007
   
July 30,
2006
 
   
(Using a binomial
model)
   
(Using a binomial
model)
   
(Using the Black-
Scholes model)
   
(Using the Black-
Scholes model)
 
Expected life (in years)
   
3.8 - 5.8
     
3.6 - 5.1
     
0.5 - 2.0
     
0.5 - 2.0
 
Risk free interest rate
    4.6%-5.0 %     4.7%-5.1 %     3.5%-5.2 %     1.6%-4.6 %
Volatility
    37%-45 %     39%-51 %     38%-47 %     30%-45 %
Dividend yield
   
     
     
     
 


9


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

 Equity Incentive Program
 
We consider equity compensation to be long term compensation and an integral component of our efforts to attract and retain exceptional executives, senior management and world-class employees. We believe that properly structured equity compensation aligns the long-term interests of stockholders and employees by creating a strong, direct link between employee compensation and stock appreciation, as stock options are only valuable to our employees if the value of our common stock increases after the date of grant.

 2007 Equity Incentive Plan
 
At the Annual Meeting of Stockholders held on June 21, 2007, our stockholders approved the NVIDIA Corporation 2007 Equity Incentive Plan, or the 2007 Plan.
 
The 2007 Plan authorizes the issuance of incentive stock options, nonstatutory stock options, restricted stock, restricted stock unit, stock appreciation rights, performance stock awards, performance cash awards, and other stock-based awards to employees, directors and consultants. Only our employees may receive incentive stock options. The 2007 Plan succeeds our 1998 Equity Incentive Plan, our 1998 Non-Employee Directors’ Stock Option Plan, our 2000 Nonstatutory Equity Incentive Plan, and the PortalPlayer, Inc. 2004 Stock Incentive Plan, or the Prior Plans. Except as set forth below, on June 21, 2007, all of the shares remaining available for issuance under the Prior Plans were available for issuance under the 2007 Plan and any shares of Common Stock subject to outstanding options and stock awards granted under the Prior Plans that expired or terminated for any reason prior to exercise or settlement were available for issuance pursuant to stock awards under the 2007 Plan. Following adoption of the 2007 Plan, no additional stock options will be granted under any of the Prior Plans except for a reserve of 100,000 shares from the 1998 Plan that may be used for stock option grants to newly hired employees of our Company and our affiliates who are foreign nationals or are employed outside the United States.  This reserve may be utilized until September 30, 2007, when we anticipate that such steps as are necessary or appropriate to permit participation in the 2007 Plan by employees, directors or consultants who are foreign nationals or are employed outside the United States will be complete. All options and stock awards granted under the Prior Plans shall remain subject to the terms of the Prior Plans with respect to which they were originally granted. Up to 101,845,177 shares of our common stock may be issued pursuant to stock awards granted under the 2007 Plan.
 
Our Board of Directors, or the Board, or its duly authorized committee determines the terms of each stock option granted under our 2007 Plan, including the exercise price, the form of consideration paid on exercise, the vesting schedule, restrictions on transfer and the term. The exercise price of a stock option granted under the 2007 Plan may not be less than 100% of the fair market value of the stock subject to the option on the date of grant (for an incentive stock option, not less than 110% if the optionee is a 10% holder of our outstanding stock). The term of an option will not be longer than ten years (although options generally expire prior to such time in connection with a termination of continued service) and may be subject to restrictions on transfer.
 
Unless terminated sooner, the 2007 Plan is scheduled to terminate on April 23, 2017. Our Board may suspend or terminate the 2007 Plan at any time. No awards may be granted under the 2007 Plan while the 2007 Plan is suspended or after it is terminated. The Board may also amend the 2007 Plan at anytime. However, if legal, regulatory or listing requirements require stockholder approval, the amendment will not go into effect until the stockholders have approved the amendment.

PortalPlayer, Inc. 1999 Stock Option Plan, the NVIDIA Corporation 1998 Equity Incentive Plan and 1998 Employee Stock Purchase Plan

The description of the key features of the PortalPlayer, Inc. 1999 Stock Option Plan, NVIDIA Corporation 1998 Equity Incentive Plan and 1998 Employee Stock Purchase Plan,  may 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 28, 2007.

The following summarizes the transactions under the PortalPlayer, Inc. 1999 Stock Option Plan, the NVIDIA Corporation 1998 Equity Incentive Plan and the 2007 Plan:   
 
   
Options Available for Grant
   
Options
Outstanding
   
Weighted Average Exercise Price Per Share
 
Balances, January 28, 2007
   
21,780,284
     
73,994,662
   
$
13.29
 
Additional shares reserved
   
16,743,033
     
-
     
-
 
Granted
   
(5,713,656
)
   
5,713,656
   
$
30.53
 
Exercised
           
(13,809,392
)
 
$
8.49
 
Cancelled
   
1,155,185
     
(1,155,185
)
 
$
27.27
 
Balances, July 29, 2007
   
33,964,846
     
64,743,741
   
$
15.60
 

 
10

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

The aggregate intrinsic value of stock options exercised for the three and six months ended July 29, 2007 was $294.7 million and $386.2 million, respectively. The aggregate intrinsic value of stock options exercised for the three and six months ended July 30, 2006 was $34.8 million and $196.5 million, respectively.

Note 3 - Income Taxes

On January 29, 2007, we adopted FIN 48. The cumulative effect of adoption of FIN 48 did not result in a material adjustment to our tax liability for unrecognized income tax benefits. At the adoption date of January 29, 2007, we had $63.8 million of unrecognized tax benefits, $61.1 million of which would affect our effective tax rate if recognized.  As of July 29, 2007, we had $74.5 million of unrecognized tax benefits, $71.8 million of which would affect our effective tax rate if recognized.  The recognition of the remaining unrecognized tax benefits of $2.7 million, at the adoption date and as of July 29, 2007, would be reported as an adjustment to goodwill to the extent of pre-acquisition unrecognized tax benefits. 

    We have historically classified certain unrecognized tax benefits as income taxes payable, which was included within the current liabilities section of our Condensed Consolidated Balance Sheet. As a result of our adoption of FIN 48, we now classify an unrecognized tax benefit as a current liability, or as a reduction of the amount of a net operation loss carryforward or amount refundable, to the extent that we anticipate payment or receipt of cash for income taxes within one year.  Likewise, the amount is classified as a long-term liability if we anticipate payment or receipt of cash for income taxes during a period beyond a year. As of January 30, 2007, we reclassified unrecognized tax benefits of $33.1 million to income taxes payable and deferred tax liability, which is included within the deferred tax and other long-term liabilities section of our Condensed Consolidated Balance Sheet.  

Our policy to include interest and penalties related to unrecognized tax benefits as a component of income tax expense did not change as a result of implementing FIN 48. At the adoption date of January 29, 2007, we had accrued $6.2 million for the payment of interest related to unrecognized tax benefits, which is included as a component of our unrecognized tax benefits.  There have been no significant changes to these amounts during the six months ended July 29, 2007.

While we believe that we have adequately provided for all tax positions, amounts asserted by tax authorities could be greater or less than our accrued position. Accordingly, our provisions on federal, state and foreign tax-related matters to be recorded in the future may change as revised estimates are made or the underlying matters are settled or otherwise resolved. As of July 29, 2007, we do not believe that our estimates, as otherwise provided for, on such tax positions will significantly increase or decrease within the next twelve months.
 
  We are subject to taxation by a number of taxing authorities both in the United States and throughout the world. As of July 29, 2007, the material tax jurisdictions that are subject to examination include the United States, Hong Kong, Taiwan, China and India and include our fiscal years 2002 through 2007. As of July 29, 2007, we are under examination for U.S. federal tax purposes for fiscal years 2004 through 2006, in Taiwan for fiscal year 2003, and in India for fiscal year 2006.  During the three months ended July 29, 2007, we settled our tax examination in Canada with no significant impact to our Condensed Consolidated Financial Statements.
 

11


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

 
Note 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 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:  

   
Three Months Ended
   
Six Months Ended
 
   
July 29, 
2007
   
July 30, 
2006
   
July 29, 
2007
   
July 30,
 2006
 
   
(In thousands, except per share data)
 
Numerator:
                       
Net income
 
$
172,732
   
$
86,753
   
$
304,991
   
$
178,817
 
Denominator:
                               
Denominator for basic net income per share, weighted average shares
   
364,870
     
350,244
     
362,850
     
349,090
 
Effect of dilutive securities:
                               
Stock options outstanding
   
37,683
     
35,345
     
37,788
     
38,395
 
Denominator for diluted net income per share, weighted average shares
 
 
402,553
   
 
385,589
   
 
400,638
   
 
387,485
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income per share:
                               
Basic net income per share
 
$
0.47
   
$
0.25
   
$
0.84
   
$
0.51
 
Diluted net income per share
 
$
0.43
   
$
0.22
   
$
0.76
   
$
0.46
 

Diluted net income per share for the three and six months ended July 29, 2007 does not include the effect of anti-dilutive common equivalent shares from stock options outstanding of 3.4 million and 11.2 million, respectively. Diluted net income per share for the three and six months ended July 30, 2006 does not include the effect of 7.5 million and 6.8 million anti-dilutive common equivalent shares, respectively.

Note 5 - 3dfx

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. On December 15, 2000, NVIDIA Corporation and one of our indirect subsidiaries entered into an Asset Purchase Agreement, or the APA, which closed on April 18, 2001, to purchase certain graphics chip assets from 3dfx. Under the terms of the APA, 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 APA 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 one million shares, which due to subsequent stock splits now totals four 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 APA to pay any additional consideration for the assets.


12


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

 
      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 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 Bankruptcy Court held a hearing on the Trustee’s motion for summary adjudication. On December 23, 2005, the Bankruptcy Court issued its ruling denying the Trustee’s Motion for Summary Adjudication in all material respects and holding that NVIDIA is prevented from disputing that the value of the 3dfx transaction to NVIDIA was less than $108.0 million. The Bankruptcy Court expressly denied the Trustee’s request to find that the value of the 3dfx assets conveyed to NVIDIA were at least $108.0 million. 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, presented as the centerpiece of a proposed Plan of Liquidation in the bankruptcy case, was subject to a confirmation process through a vote of creditors and the review and approval of the Bankruptcy Court after notice and hearing. The Trustee advised that he intended to object to the settlement, which would have called for a payment by NVIDIA of approximately $30.6 million to the 3dfx estate. Under the settlement, $5.6 million related to various administrative expenses and Trustee fees, and $25.0 million related to the satisfaction of debts and liabilities owed to the general unsecured creditors of 3dfx. Accordingly, 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.
 
However, the conditional settlement never progressed substantially through the confirmation process. On December 21, 2005, the Bankruptcy Court determined that it would schedule trial of one portion of the Trustee’s case against NVIDIA. On January 2, 2007, NVIDIA exercised its right to terminate the settlement agreement on grounds that the Bankruptcy Court had failed to proceed toward confirmation of the Creditors’ Committee’s plan. Trial began on March 21, 2007 on valuation issues in the Trustee's constructive fraudulent transfer claims against NVIDIA. Specifically, the Bankruptcy Court tried four questions: (1) what did 3dfx transfer to NVIDIA in the APA?; (2) of what was transferred, what qualifies as "property" subject to the Bankruptcy Court's avoidance powers under the Uniform Fraudulent Transfer Act and relevant bankruptcy code provisions?; (3) what is the fair market value of the "property" identified in answer to question (2)?; and (4) was the $70 million that NVIDIA paid "reasonably equivalent" to the fair market value of that property?. At the conclusion of the evidence, the Bankruptcy Court asked the parties to submit a post-trial briefing. That briefing was concluded on May 25, 2007, and the Bankruptcy Court’s decision is still pending.
 
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. The final allocation of the purchase price of the 3dfx assets is contingent upon the outcome of all of the 3dfx litigation. Please refer to Note 13 of these Notes to Condensed Consolidated Financial Statements for further information regarding this litigation. 
 
  
 
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
         
 
Note 6 - Business Combinations

On February 20, 2006, we completed our acquisition of ULi Electronics, Inc., or ULi, a core logic developer for the personal computer, or PC, industry. The acquisition represents our ongoing investment in our platform solution strategy and has strengthened our sales, marketing, and customer engineering presence in Taiwan and China. The aggregate purchase price consisted of cash consideration of approximately $53.1 million.

On March 29, 2006, we completed our acquisition of Hybrid Graphics Ltd., or Hybrid Graphics, a developer of embedded 2D and 3D graphics software for handheld devices. The aggregate purchase price consisted of cash consideration of approximately $36.7 million.

On January 5, 2007, we completed our acquisition of PortalPlayer Inc., or PortalPlayer, a leading supplier of semiconductors, firmware, and software for personal media players, or PMPs, and secondary display-enabled computers. We believe that the acquisition will accelerate our ongoing investment in our handheld product strategy. Pursuant to the terms of the acquisition, we paid cash consideration of approximately $344.9 million in exchange for common stock in PortalPlayer and recognized an additional purchase price of $2.9 million, the value of approximately 658,000 options of NVIDIA common stock issued upon conversion of outstanding PortalPlayer stock options. The allocation of the purchase price for the PortalPlayer acquisition has been prepared on a preliminary basis and reasonable changes are expected as additional information becomes available.

13


 
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 
We allocated the purchase price of each of these acquisitions to tangible assets, liabilities and identifiable intangible assets acquired, as well as in-process research and development, or IPR&D, if identified, based on their estimated fair values. The excess of purchase price over the aggregate fair values was recorded as goodwill. The fair value assigned to identifiable intangible assets acquired was based on estimates and assumptions determined by management. Purchased intangibles are amortized on a straight-line basis over their respective useful lives.
 
As of July 29, 2007, the estimated fair values of the purchase price allocated to assets we acquired and liabilities we assumed on the respective acquisition dates were as follows:  
 
   
ULi
   
Hybrid Graphics
   
PortalPlayer
 
   
(In thousands)
 
Fair Market Values
                 
Cash and cash equivalents
 
$
21,551
   
$
1,180
   
$
10,174
 
Marketable Securities
   
-
     
-
     
176,492
 
Accounts receivable
   
8,148
     
808
     
16,850
 
Inventories
   
4,896
     
-
     
2,326
 
Other assets
   
935
     
73
     
12,798
 
Property and equipment
   
1,010
     
134
     
19,996
 
In-process research and development
   
-
     
602
     
13,400
 
Goodwill
   
31,204
     
27,906
     
106,621
 
Intangible assets:
                       
    Existing technology
   
2,490
     
5,179
     
6,700
 
    Customer relationships
   
653
     
2,650
     
2,700
 
    Backlog
   
-
     
-
     
2,200
 
    Patents
   
-
     
-
     
600
 
    Trademark
   
-
     
482
     
-
 
    Non-compete agreements
   
-
     
72
     
-
 
Total assets acquired
   
70,887
     
39,086
     
370,857
 
Current liabilities
   
(17,031
)
   
(1,373
)
   
(14,903
)
Acquisition related costs
   
(781
)
   
(740
)
   
(8,064
)
Long-term liabilities
   
-
     
(301
)
   
(46
)
Total liabilities assumed
   
(17,812
)
   
(2,414
)
   
(23,013
)
Net assets acquired
 
$
53,075
   
$
36,672
   
$
347,844
 
 
 
   
ULi
   
Hybrid Graphics
   
PortalPlayer
 
   
Straight-line depreciation / amortization period
 
Property and equipment
 
4 - 49 months
   
1 - 36 months
   
3 - 60 months
 
Intangible assets:
                 
Existing technology
 
3 years
   
3 years
   
3 years
 
Customer relationships
 
3 years
   
3 years
   
1-3 years
 
Backlog
 
 -
   
 -
   
2 months
 
Patents
 
 -
   
 -
   
3 years
 
Trademark
 
 -
   
3 years
   
 -
 
Non-compete agreements
 
 -
   
3 years
   
 -
 
 
The amount of the IPR&D represents the value assigned to research and development projects of Hybrid Graphics and PortalPlayer that had commenced but had not yet reached technological feasibility and had no alternative future use. In accordance with Statement of Financial Accounting Standards No. 2, or SFAS No. 2, Accounting for Research and Development Costs, as clarified by FASB issued Interpretation No. 4, or FIN 4, Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method an interpretation of FASB Statement No. 2, amounts assigned to IPR&D meeting the above-stated criteria were charged to research and development expenses as part of the allocation of the purchase price.

The pro forma results of operations for these acquisitions have not been presented because the effects of the acquisitions, individually or in the aggregate, were not material to our results.

14


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

Note 7 - Goodwill
 
The carrying amount of goodwill is as follows:

   
July 29,
2007
   
January 28,
2007
 
   
(In thousands)
 
3dfx
 
$
75,326
   
$
75,326
 
MediaQ
   
35,342
     
35,342
 
ULi
   
31,204
     
31,051
 
Hybrid Graphics
   
27,906
     
27,906
 
PortalPlayer
   
106,621
     
114,816
 
Other
   
16,984
     
16,984
 
Total goodwill
 
$
293,383
   
$
301,425
 

    During the first half of fiscal year 2008, goodwill related to PortalPlayer decreased by $8.2 million primarily as a result of a $10.3 million increase in the fair value of land acquired based on a third party appraisal which we obtained as a result of our acquisition of PortalPlayer. This decrease in PortalPlayer goodwill was offset primarily by an increase of $1.9 million as a result of a change in estimated lease exit costs involving a facility leased by PortalPlayer on date of acquisition. Please refer to Note 6 of these Notes to Condensed Consolidated Financial Statements for further information regarding the PortalPlayer acquisition.
 
Note 8 - Amortizable Intangible Assets
 
We are currently amortizing our intangible assets with definitive lives over periods ranging from one to five years, primarily on a straight-line basis. The components of our amortizable intangible assets are as follows:
 

   
July 29, 2007      
   
January 28, 2007      
 
   
Gross Carrying
   
Accumulated
   
Net Carrying
   
Gross Carrying
   
Accumulated
   
Net Carrying
 
   
Amount
   
Amortization
   
Amount
   
Amount
   
Amortization
   
Amount
 
   
(In thousands)                
Technology licenses
   $
58,439
     $
(26,394
 )    $
32,045
     $
37,516
     $
(20,480
 )    $
17,036
 
Patents
   
34,898
     
(26,236
 )    
8,662
     
34,623
     
(24,569
 )    
10,054
 
Acquired intellectual property
   
50,812
     
(36,784
 )    
14,028
     
50,212
     
(31,894
 )    
18,318
 
Trademarks
   
11,310
     
(11,310
 )    
-
     
11,310
     
(11,310
 )    
-
 
Other
   
1,494
     
(1,494
 )    
-
     
1,494
     
(1,391
 )    
103
 
Total intangible assets
   $
156,953
     $
(102,218
 )    $
54,735
     $
135,155
     $
(89,644
 )    $
45,511
 

    The increase in the gross carrying amount of technology licenses as of July 29, 2007 when compared to January 28, 2007 was primarily related to approximately $20.7 million in payments under a confidential patent licensing arrangement that we entered into during fiscal year 2007. Our aggregate commitment for license payments under this arrangement could range from $97.0 million to $110.0 million over a ten year period; however, the net outlay may be reduced by the occurrence of certain events covered by the arrangement.
 
Amortization expense associated with intangible assets for the three and six months ended July 29, 2007 was $5.6 million and $12.6 million, respectively. Amortization expense associated with intangible assets for the three and six months ended July 30, 2006 was $4.0 million and $8.1 million, respectively.  Future amortization expense related to the net carrying amount of intangible assets at July 29, 2007 is estimated to be $9.3 million for the remainder of fiscal 2008, $13.8 million in fiscal 2009, $9.1 million in fiscal 2010, $4.6 million in fiscal 2011, $3.7 million in fiscal 2012 and a total of $14.2 million in fiscal 2013 and fiscal years subsequent to fiscal 2013.

15


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

Note 9 - 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, 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 and unrealized losses for the three and six months ended July 29, 2007 were not material.

Note 10 - Balance Sheet Components

Certain balance sheet components are as follows:
   
July 29,
2007
   
January 28,
2007
 
   
(In thousands)
 
Inventories:
           
Raw materials
  $
33,197
    $
56,261
 
Work in-process
   
65,147
     
111,058
 
Finished goods
   
177,961
     
187,361
 
Total inventories
  $
276,305
    $
354,680
 

At July 29, 2007, we had outstanding inventory purchase obligations totaling approximately $483.4 million.

   
July 29,
2007
   
January 28,
2007
 
   
(In thousands)
 
Deposits and other assets:
           
Investment in non-affiliates
  $
11,684
    $
11,684
 
Long-term prepayments
   
5,953
     
8,245
 
Deferred income taxes
   
-
     
7,380
 
Other
   
8,275
     
8,420
 
         Total deposits and other assets
  $
25,912
    $
35,729
 

   
July 29,
2007
   
January 28,
2007
 
   
(In thousands)
 
Accrued Liabilities:
           
Accrued customer programs
 
$
195,316
   
$
181,182
 
Accrued payroll and related expenses
   
89,481
     
81,352
 
Accrued legal settlement
   
30,600
     
30,600
 
Deferred rent
   
11,980
     
12,551
 
Income and other taxes payable
   
7,707
     
37,903
 
Deferred revenue
   
3,584
     
1,180
 
Other
   
18,749
     
21,964
 
Total accrued liabilities
 
$
357,417
   
$
366,732
 

Please refer to Note 1 of these Notes to Condensed Consolidated Financial Statements for discussion regarding the nature of accrued customer programs and their accounting treatment related to our revenue recognition policies and estimates.


16


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


   
July 29,
2007
   
January 28,
2007
 
   
(In thousands)
 
Deferred tax and other long-term liabilities:
           
Income taxes payable
  $
37,691
    $
-
 
Deferred income tax liability
   
31,897
     
-
 
Other long-term liabilities
   
10,489
     
14,180
 
Accrued payroll taxes related to stock options
   
8,995
     
8,995
 
Asset retirement obligation
   
6,119
     
6,362
 
Total deferred tax and other long-term liabilities
  $
95,191
    $
29,537
 

Please refer to Note 3 of these Notes to Condensed Consolidated Financial Statements for discussion regarding the reclassification of income taxes payable from accrued liabilities to deferred tax and other long-term liabilities as a result of the adoption of FIN 48.
 
Note 11 - 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
   
Six Months Ended
 
   
July 29,
2007
   
July 30
2006
   
July 29,
2007
 
July 30
2006
 
   
(In thousands)
 
Net income
 
$
172,732
   
$
86,753
   
$
304,991
   
$
178,817
 
Net change in unrealized gains (losses) on available-for-sale securities, net of tax
   
320
     
93
     
241
     
(394
)
Reclassification adjustments for net realized gains on available-for-sale securities included in net income, net of tax
   
(18
)
   
(17
)
   
(90
)
   
(24
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income
 
$
173,034
   
$
86,829
   
$
305,142
   
$
178,399
 
 
Note 12 - 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.

       The following table summarizes the changes in the estimated product warranty liabilities for the three months ended July 29, 2007 and July 30, 2006 and six months ended July 29, 2007 and July 30, 2006:  

   
Three Months Ended
   
Six Months Ended
 
   
July 29,
2007
   
July 30
2006
   
July 29,
2007