suppliers of GPUs or GPU intellectual property for handheld and embedded devices that incorporate advanced graphics functionality as part of their existing solutions, such as ~~ATI, Bitboys,~~AMD, Broadcom, Fujitsu Limited, Imagination Technologies Ltd., ARM Holdings plc, Marvell Technology Group Ltd, or Marvell, NEC Corporation, Qualcomm Incorporated, Renesas Technology, ~~Corp.,~~ Seiko-Epson, Texas Instruments Incorporated, and Toshiba America, Inc.; and

·	suppliers of application processors for handheld and embedded devices that incorporate multimedia processing as part of their existing solutions such as Broadcom, Texas Instruments Inc., Qualcomm Incorporated, Marvell, Freescale Semiconductor Inc., Samsung and ST Microelectronics.

We expect substantial competition from Intel’s publicized focus on moving to selling platform solutions dominated by Intel products, such as when Intel achieved success with its Centrino platform solution. In addition to its current Centrino notebook platform initiative, and its announced upcoming desktop initiative branded as VIIV, we expect that Intel is now focused on developing and selling platform solutions for all segments including professional workstations and servers. AMD has also begun to focus on selling platform solutions. If Intel ~~continues~~and AMD continue to pursue these initiatives, we may not be able to successfully compete in these segments.

If and to the extent we offer products outside of the consumer and enterprise PC, notebook, workstation, PDA, cellular phone, and video game console markets, we may face competition from some of our existing competitors as well as from companies with which we currently do not compete. We cannot accurately predict if we will compete successfully in any new markets we may enter. If we are unable to compete in our current and any new markets, our financial results will suffer.

Patents and Proprietary Rights

We rely primarily on a combination of patents, trademarks, trade secrets, employee and third-party nondisclosure agreements and licensing arrangements to protect our intellectual property in the United States and internationally. Our issued patents have expiration dates from September 4, 2007 to ~~September 2,~~December 8, 2024. We have numerous patents issued and pending in the United States and in foreign countries. Our patents and pending patent

applications primarily relate to technology used by us in connection with our ~~products, including our digital media processors.~~products. We also rely on international treaties and organizations and foreign laws to protect our intellectual property. We continuously assess whether and where to seek formal protection for particular innovations and technologies based on such factors as: the commercial significance of our operations and our competitors’ operations in particular countries and regions; the location in which our products are manufactured; our strategic technology or product directions in different countries; and the degree to which intellectual property laws exist and are meaningfully enforced in different jurisdictions.

Our pending patent applications and any future applications may not be approved. In addition, any issued patents may not provide us with competitive advantages or may be challenged by third parties. The enforcement of patents by others may harm our ability to conduct our business. Others may independently develop substantially equivalent intellectual property or otherwise gain access to our trade secrets or intellectual property. Our failure to effectively protect our intellectual property could harm our business. We have licensed technology from third parties for incorporation in some of our ~~digital media processors,~~products and for defensive reasons, and expect to continue to enter into such license ~~agreements for future products.~~agreements. These licenses may result in royalty payments to third parties, the cross licensing of technology by us or payment of other consideration. If these arrangements are not concluded on commercially reasonable terms, our business could suffer.

Employees

As of January ~~29, 2006~~28, 2007 we had ~~2,737~~4,083 employees, ~~1,654~~2,668 of whom were engaged in research and development and ~~1,083~~1,415 of whom were engaged in sales, marketing, operations and administrative positions. None of our employees are covered by collective bargaining agreements, and we believe our relationships with our employees are good.

Financial Information by Business Segment and Geographic Data

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 is composed of products that support desktop PCs, notebook PCs, professional workstations and ~~professional workstations;~~other GPU-based products; the MCP Business is composed of NVIDIA nForce products that operate as a single-chip or chipset that ~~can off-load~~provide system functions, such as ~~audio processing~~high speed storage and network communications, and perform these operations independently from the host CPU; our Handheld GPU Business is composed of products that support handheld ~~personal digital assistants,~~PDAs, cellular phones and other handheld devices; and our Consumer Electronics Business is concentrated in products that support video game consoles and other digital consumer electronics devices and is composed of revenue from our contractual arrangements with SCE to jointly develop a custom GPU ~~incorporating our next-generation GeForce GPU and SCE’s system solutions in~~for SCE’s 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 ~~$121.2~~$242.3 million, $131.6 million and ~~$101.5~~$118.0 million for fiscal years 2007, 2006 and 2005, respectively, 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~~Certain prior period amounts have been restated to ~~reflect~~conform to the presentation of our ~~new reporting structure.~~current fiscal quarter.

Our CODM does not review any information regarding total assets 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. The information included in Note 1514 of the Notes to Consolidated Financial Statements is hereby incorporated by reference.

Executive Officers of the Registrant

The following sets forth certain information regarding our executive officers, their ages and their positions as of January ~~29, 2006:~~28, 2007:

Name	Age		Position
Jen-Hsun Huang	42	43	President, Chief Executive Officer and Director
Marvin D. Burkett	63	64	Chief Financial Officer
Ajay K. Puri	51	52	Senior Vice President, Worldwide Sales
~~Jeffrey D. Fisher~~	47		~~Senior Vice President, GPU Business Unit~~
David M. Shannon	50	51	Senior Vice President, General Counsel and Secretary
~~Daniel F. Vivoli~~	45		~~Senior Vice President, Marketing~~

Jen-Hsun Huang co-founded NVIDIA in April 1993 and has served as its President, Chief Executive Officer and a member of the Board of Directors since its inception. From 1985 to 1993, Mr. Huang was employed at LSI Logic Corporation, a computer chip manufacturer, where he held a variety of positions, most recently as Director of Coreware, the business unit responsible for LSI’s “system-on-a-chip” strategy. From 1983 to 1985, Mr. Huang was a microprocessor designer for Advanced Micro Devices, Inc. a semiconductor company. Mr. Huang holds a B.S.E.E. degree from Oregon State University and an M.S.E.E. degree from Stanford University.

Marvin D. Burkett joined NVIDIA as Chief Financial Officer in September 2002. From February 2000 until joining NVIDIA, Mr. Burkett was a financial consultant and served as Chief Financial Officer of Arcot Systems, a security software company. From 1998 to 1999, Mr. Burkett was the Executive Vice President and Chief Financial Officer of Packard Bell NEC. Mr. Burkett also previously spent 26 years at Advanced Micro Devices, Inc.~~, or AMD,~~ where he held a variety of positions including Chief Financial Officer, Senior Vice President and Corporate Controller. Mr. Burkett holds B.S. and M.B.A. degrees from the University of Arizona.

Ajay K. Puri joined NVIDIA in December 2005 as Senior Vice President, Worldwide Sales. Prior to NVIDIA, he held positions in sales, marketing, and general management over a 22-year career at Sun Microsystems, Inc. Mr. Puri previously held marketing, management consulting, and product development positions at Hewlett-Packard ~~Development~~ Company, ~~L.P.,~~ Booz Allen Hamilton Inc., and Texas Instruments Incorporated. Mr. Puri holds an M.B.A. degree from Harvard University, an M.S.E.E. degree from ~~Caltech,~~the California Institute of Technology and a B.S.E.E. degree from the University of Minnesota.

~~Jeffrey D. Fisher~~ joined in July 1994 and served as the Executive Vice President, Worldwide Sales of NVIDIA until December 2005, when he became Senior Vice President of the GPU Business Unit. He has over 20 years of sales and marketing experience in the semiconductor industry. Mr. Fisher holds a B.S.E.E. degree from Purdue University and an M.B.A. degree from Santa Clara University.

David M. Shannon joined NVIDIA in August 2002 as Vice President and General Counsel. Mr. Shannon became Secretary of NVIDIA in April 2005 and a Senior Vice President in December 2005. From 1993 to 2002, Mr. Shannon held various counsel positions at Intel, including the most recent position of Vice President and Assistant General Counsel. Mr. Shannon also practiced for eight years in the law firm of Gibson Dunn and Crutcher, focusing on complex commercial and high-technology related litigation. Mr. Shannon holds B.A. and J.D. degrees from Pepperdine University.

~~Daniel F. Vivoli~~ became the Senior Vice President, Marketing in December 2005. Mr. Vivoli served as Executive Vice President of Marketing from December 1997 to December 2005. From 1988 to December 1997, Mr. Vivoli held management positions, most recently as Vice President of Product Marketing, at Silicon Graphics, Inc., a computing technology company. From 1983 to 1988, Mr. Vivoli held various marketing positions at Hewlett-Packard Company. Mr. Vivoli holds a B.S.E.E. degree from the University of Illinois at Champaign-Urbana.

Available Information

Our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, or the Exchange Act, are available free of charge on or through our Internet ~~website,~~web site, http://www.nvidia.com, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange ~~Commission.~~Commission, or the SEC. Our ~~website~~web site and the information contained therein as connected thereto is not intended to be incorporated into ~~the~~this Annual Report on Form 10-K.

ITEM 1A. RISK FACTORS

In evaluating NVIDIA and our business, the following factors should be considered in addition to the other information in this Annual Report on Form 10-K. ~~Any~~Before you buy our common stock, you should know that making such an investment involved some risks including, but not limited to, the risks described below. Additionally, any one of the following risks could seriously harm our business, financial condition and results of operations, which could cause our stock price to decline. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.

Risks Related to Our Operations

The matters relating to the Audit Committee of the Board of Directors, or the Board, review of our historical stock option granting practices and the restatement of our consolidated financial statements have resulted in litigation, which could harm our financial results.

On August 10, 2006, NVIDIA announced that the Audit Committee of the Board, with the assistance of outside legal counsel, was conducting a review of our stock option practices covering the time from NVIDIA’s initial public offering in 1999, our fiscal year 2000, through June 2006. The Audit Committee reached the conclusion that incorrect measurement dates were used for financial accounting purposes for stock option grants in certain prior periods. As a result, NVIDIA recorded additional non-cash stock-based compensation expense, and related tax effects, related to stock option grants.

The Audit Committee’s review of NVIDIA’s stock option practices identified a number of occasions on which the measurement date used for financial accounting and reporting purposes for stock options granted to certain of our employees was different from the actual grant date. To correct these accounting errors, we amended our Annual Report on Form 10-K for the year ended January 29, 2006 and our Quarterly Report on Form 10-Q for the three months ended April 30, 2006, to restate the consolidated financial statements contained in those reports.

This review of our historical stock option granting practices required us to incur substantial expenses for legal, accounting, tax and other professional services, diverted our management’s attention from our business, and in the future could adversely affect our business, financial condition, results of operations and cash flows.

Our historical stock option granting practices and the restatement of our prior financial statements have exposed us to greater risks associated with litigation and regulatory proceedings. Ten derivative complaints have been filed in state and federal court pertaining to allegations relating to stock option grants. We cannot assure you that these or future similar complaints, or any future litigation or regulatory action will result in the same conclusions reached by the Audit Committee. The conduct and resolution of these matters will be time consuming, expensive and could distract our management’s attention from the conduct of our business which could negatively impact our business.

We voluntarily contacted the SEC regarding the Audit Committee’s review and, as of the date of the filing of this Form 10-K, the SEC is continuing the inquiry of our historical stock option grant practices it began in late August 2006. In October 2006, we met with the SEC and provided it with a review of the status of the Audit Committee’s review and in November 2006 we voluntarily provided the SEC with further documents. We plan to continue to cooperate with the SEC in its inquiry.

While we believe that we have made appropriate judgments in concluding the correct measurement dates for option grants, the SEC may disagree with the manner in which we have accounted for and reported, or not reported, the financial impact of past option grant measurement date errors, and there is a risk that its inquiry could lead to circumstances in which we may have to further restate our prior financial statements, amend prior filings made with the SEC, or otherwise take other actions not currently contemplated. Any such circumstance could also lead to future delays in filing our SEC reports. Furthermore, if we are subject to adverse findings in any of these matters, we could be required to pay damages or penalties or have other remedies imposed upon us which could harm our business, financial condition, results of operations and cash flows.

Because our gross margin for any period depends on a number of factors, our failure to forecast any change in such factors could adversely affect our gross margin.

We continue to pursue ~~measures in an effort to improve our~~improved gross margin. Our gross margin for any period depends on a number of factors, including the mix of our products sold, average selling prices, introduction of new products, sales discounts, unexpected pricing actions by our competitors, the cost of product components, and the yield of wafers produced by the foundries that manufacture our products. such as:

·	the mix of our products sold;

·	average selling prices;

·	introduction of new products;

·	sales discounts;

·	unexpected pricing actions by our competitors;

·	the cost of product components; and

·	the yield of wafers produced by the foundries that manufacture our products.

If we incorrectly forecast the impact of any of the aforementioned factors on our business, we may be unable to take action in time to counteract any negative impact on our gross margin. In addition, if we are unable to meet our gross margin target for any period or the target set by analysts, the trading price of our common stock may decline.

Our failure to estimate customer demand properly may result in excess or obsolete inventory or, conversely, may result in inadequate inventory levels, either of which could adversely affect our financial results.

Our inventory purchases are based upon future demand forecasts, which may not accurately predict the quantity or type of our products that our customers will want in the future. In forecasting demand, we must make multiple assumptions any of which may prove to be incorrect. Situations that may result in excess or obsolete inventory, which could result in write-downs of the value of our inventory and/or a forced reduction in average selling prices, and where our gross margin could be adversely affected include:

·	~~if there were a sudden and significant decrease in demand for our products;~~

·	~~if there were a higher incidence of inventory obsolescence because of rapidly changing technology and customer requirements;~~

·	~~if we fail to estimate customer demand properly for our older products as our newer products are introduced; or~~

·	~~if our competition were to take unexpected competitive pricing actions.~~

Conversely, if we underestimate our customers’ demand for either our older or newer products, we may have inadequate manufacturing capability and may not be able to obtain sufficient inventory to fill our customers’ orders on a timely basis, which could affect our revenue results. Even if we are able to increase production levels to meet customer demand, we may not be able to do so in a cost effective manner. Inability to fill our customers' orders on a timely basis could damage our customer relationships, result in lost revenue, cause a loss in market share or damage our reputation.

1211

~~Because we order materials in advance of anticipated customer demand our ability to reduce our inventory purchase commitments quickly in response to any revenue shortfalls is limited.~~

Substantially all of our sales are made on the basis of purchase orders rather than long-term agreements. As a result, we may commit resources to the production of products without having received advance purchase commitments from customers. Any inability to sell products to which we have devoted significant resources could harm our business. In addition, cancellation or deferral of product orders could result in our holding excess inventory, which could adversely affect our gross margin and restrict our ability to fund operations. We may build inventories during periods of anticipated growth. Additionally, because we often sell a substantial portion of our products in the last month of each quarter and, therefore, we recognize a substantial portion of our revenue in the last month of each quarter, we may not be able to reduce our inventory purchase commitments in a timely manner in response to any revenue shortfalls. We could be subject to excess or obsolete inventories and be required to take corresponding inventory write-downs if growth slows or if we incorrectly forecast product demand, which could negatively impact our gross margin and financial results.

We are dependent on key personnel and the loss of these employees could negatively impact our business.

Our performance is substantially dependent on the performance of our executive officers and key employees. None of our executive officers or employees is bound by an employment agreement, meaning our relationships with our executive officers and employees are at will. We do not have “key person” life insurance policies on any of our employees. The loss of the services of any of our executive officers, technical personnel or other key employees, particularly Jen-Hsun Huang, our President and Chief Executive Officer, would harm our business. Our success will depend on our ability to identify, hire, train and retain highly qualified technical and managerial personnel. Our failure to attract and retain the necessary technical and managerial personnel would harm our business. The integration of new executives or personnel could disrupt our ongoing operations.

Failure to achieve expected manufacturing yields for existing and/or new products ~~would~~could reduce our gross margin and could adversely affect our ability to compete effectively.

Semiconductor manufacturing yields are a function both of product design, which is developed largely by us, and process technology, which typically is proprietary to the manufacturer. Since low yields may result from either design or process technology failures, yield problems may not be effectively determined or resolved until an actual product exists that can be analyzed and tested to identify process sensitivities relating to the design rules that are used. As a result, yield problems may not be identified until well into the production process. Resolution of yield problems requires cooperation by and communication between us and the manufacturer.

Because of our potentially limited access to wafer fabrication capacity from our manufacturers, any decrease in manufacturing yields could result in an increase in our per unit costs and force us to allocate our available product supply among our customers. This could potentially harm customer relationships, our reputation, our revenue and our gross profit. Our wafer manufacturers may be unable to achieve or maintain acceptable manufacturing yields in the future. Our inability to achieve planned yields from our wafer manufacturers ~~would~~could reduce our gross margin. We also face the risk of product recalls or product returns resulting from design or manufacturing defects that are not discovered during the manufacturing and testing process. A significant number of product returns due to a defect or recall could damage our reputation, ~~and~~ result in our customers working with our ~~competitors.~~competitors, and could adversely impact our financial results.

To stay competitive we may have to invest more resources in research and development than anticipated, which could increase our operating expenses and negatively impact our operating results.

If new competitors, technological advances by existing competitors or other competitive factors require us to invest significantly greater resources than anticipated in our research and development efforts, our operating expenses would increase. We have ~~substantially~~ increased our engineering and technical resources and ~~have 1,654~~had 2,668 full-time employees engaged in research and development as of January 28, 2007, 1,654 full-time employees as of January 29, 2006 and 1,231 full-time employees as of January 30, ~~2005 and 1,057 employees as of January 25, 2004.~~2005. Research and development expenditures were ~~$352.1~~$553.5 million, ~~$335.1~~$357.1 million and ~~$270.0~~$348.2 million for fiscal 2007, 2006, and 2005, respectively. Research and ~~2004, respectively.~~development expenses for fiscal 2007 included $70.1 million related to non-cash stock-based compensation, net of associated payroll taxes, which we began to record in the first quarter of fiscal 2007 as a result of our adoption of SFAS No. 123(R). If we are required to invest significantly greater

resources than anticipated in research and development efforts without an increase in revenue, our operating results ~~would~~could decline. In order to remain competitive, we anticipate that we will continue to devote substantial resources to research and development, and we expect these expenses to increase in absolute dollars in the foreseeable future due to the increased complexity and the greater number of products under development as well as hiring additional employees. Research and development expenses are likely to fluctuate from time to time to the extent we make periodic incremental investments in research and development and these investments may be independent of our level of revenue.

Our operating expenses are relatively fixed and we may ~~have limited ability~~not be able to reduce operating expenses quickly in response to any revenue shortfalls.

Our operating expenses, which are comprised of research and development expenses and sales, general and administrative expenses, represented ~~24.0%~~27.6%, 24.1% and ~~26.7%~~27.5% of our total revenue during fiscal years ended 2007, 2006 and 2005, respectively. Operating expenses for fiscal 2007 included ~~litigation settlement costs~~$108.5 million related to non-cash stock-based compensation, net of ~~$14.2 million~~associated payroll taxes, which we began to record in fiscal ~~2006.~~2007 as a result of our adoption of SFAS No. 123(R). Since we often recognize a substantial portion of our revenue in the last month of each quarter, we may not be able to adjust our operating expenses in a timely manner in response to any revenue shortfalls. If we are unable to reduce operating expenses quickly in response to any revenue shortfalls, our financial results would be negatively impacted.

Failure to transition to new manufacturing process technologies could adversely affect our operating results and gross margin.

Our strategy is to utilize the most advanced manufacturing process technology appropriate for our products and available from commercial third-party foundries. Use of advanced processes may have greater risk of initial yield problems and higher product cost. Manufacturing process technologies are subject to rapid change and require significant expenditures for research and development. We continuously evaluate the benefits of migrating to smaller geometry process technologies in order to improve performance and reduce costs. We currently use 0.15 micron, 0.14 micron, 0.13 micron, 0.11 micron, 90 nanometer and 9065 nanometer process technologies for our families of GPUs, MCPs, Handheld GPUs and ~~Handheld GPUs.~~application processors.

We have experienced difficulty in migrating to new manufacturing processes in the past and, consequently, have suffered reduced yields, delays in product deliveries and increased expense levels. We may face similar difficulties, delays and expenses as we continue to transition our products to smaller geometry processes. Moreover, we are dependent on our relationships with our third-party manufacturers to migrate to smaller geometry processes successfully. Additionally, we compete with companies that own their own manufacturing facilities. These competitors may be able to move to a new state of the art manufacturing process more quickly than our manufacturing partners. If our suppliers fall behind our competitors in the manufacturing processes, the development and customer demand for our products and the use of our products could be negatively impacted. The inability by us or our third-party manufacturers to effectively and efficiently transition to new manufacturing process technologies may adversely affect our operating results and our gross margin.

Our inventory purchases are based upon future demand forecasts or orders from our customers, which may not accurately predict the quantity or type of our products that our customers will want in the future or ultimately end up purchasing. In forecasting demand, we must make multiple assumptions any of which may prove to be incorrect. Situations that may result in excess or obsolete inventory, which could result in write-downs of the value of our inventory and/or a reduction in average selling prices, and where our gross margin could be adversely affected include:

·	if there were a sudden and significant decrease in demand for our products;

·	if there were a higher incidence of inventory obsolescence because of rapidly changing technology and customer requirements;

·	if we fail to estimate customer demand properly for our older products as our newer products are introduced; or

·	if our competition were to take unexpected competitive pricing actions.

Conversely, if we underestimate our customers’ demand for either our older or newer products, we may have inadequate manufacturing capability and may not be able to obtain sufficient inventory to fill our customers’ orders on a timely basis. Even if we are able to increase production levels to meet customer demand, we may not be able to do so in a cost effective or timely manner. Inability to fill our customers’ orders on a timely basis could damage our customer relationships, result in lost revenue, cause a loss in market share or damage our reputation.

Because we order materials in advance of anticipated customer demand our ability to reduce our inventory purchase commitments quickly in response to any revenue shortfalls is limited.

Substantially all of our sales are made on the basis of purchase orders rather than long-term agreements. As a result, we may commit resources to the production of products without having received advance purchase commitments from customers. We may build inventories during periods of anticipated growth which does not occur. Any inability to sell products to which we have devoted significant resources could harm our business. In addition, cancellation or deferral of product orders could result in our holding excess inventory, which could adversely affect our gross margin and restrict our ability to fund operations. Additionally, because we often sell a substantial portion of our products in the last month of each quarter, we may not be able to reduce our inventory purchase commitments in a timely manner in response to any revenue shortfalls. We could be subject to excess or obsolete inventories and be required to take corresponding inventory write-downs if growth slows or does not materialize or if we incorrectly forecast product demand, which could negatively impact our gross margin and financial results.

Our operating results are unpredictable and may fluctuate, and if our operating results are below the expectations of securities analysts or investors, the trading price of our stock could decline.

Many of our revenue components fluctuate and are difficult to predict, and our operating expenses are largely independent of revenue in any particular period. It is, therefore, difficult for us to accurately forecast revenue and profits or losses. As a result, it is possible that in some quarters our operating results could be below the expectations of securities analysts or investors, which could cause the trading price of our common stock to ~~decline, perhaps substantially.~~decline. We believe that our quarterly and annual results of operations may continue to be affected by a variety of factors that could harm our revenue, gross profit and results of operations.

Any one or more of the factors discussed in this ~~Annual Report on~~ Form 10-K or other factors could prevent us from achieving our expected future revenue or net income. Accordingly, we believe that period-to-period comparisons of our results of operations should not be relied upon as an indication of future performance. In addition, the results of any quarterly or full fiscal year period are not necessarily indicative of results to be expected for a subsequent quarter or a full fiscal year.

Risks Related to Our Products

If we are unable to achieve design wins, our products may not be adopted by our target markets ~~and~~or customers either of which could negatively impact our financial results.

The future success of our business depends to a significant extent on our ability to develop new competitive products for our target markets and customers. We believe achieving design wins, which entails having our existing and future products chosen for hardware components or subassemblies designed by PC OEMs, ODMs, and add-in board and motherboard manufacturers, will aid our future success. Our OEM, ODM, and add-in board and motherboard manufacturers’ customers typically introduce new system configurations as often as twice per year, typically based on spring and fall design ~~cycles.~~cycles or in connection with trade shows. Accordingly, when our customers are making their design decisions, our existing products must have competitive performance levels or we must timely introduce new products in order to be included in new system configurations. This requires that we do the following:

·	anticipate the features and functionality that customers and consumers will demand;

·	incorporate those features and functionalities into products that meet the exacting design requirements of OEMs, ODMs, and add-in board and motherboard manufacturers;

·	price our products competitively; and

·	introduce products to the market within the limited design cycle for OEMs, ODMs, and add-in board and motherboard manufacturers.

If OEMs, ODMs, and add-in board and motherboard manufacturers do not include our products in their systems, they will typically not use our products in their design systems until at least the next design configuration. Therefore, we endeavor to develop close relationships with our OEMs and ODMs in an attempt to allow us to better anticipate and address customer needs in new products so that our products will achieve design wins.

Our ability to achieve design wins also depends in part on our ability to identify and ~~ensure compliance~~be compliant with evolving industry standards. Unanticipated changes in industry standards could render our products incompatible with products developed by major hardware manufacturers and software developers, including AMD, Intel and Microsoft. Such changes would require us to invest significant time and resources to redesign our products to ~~ensure compliance~~be compliant with relevant standards. If our products are not in compliance with prevailing industry standards for a significant period of time, our ability to achieve design wins could suffer. If we are unable to achieve new design wins for existing or new customers, we may lose market share and our operating results would be negatively impacted.

Achievement of design wins may not result in the success of our products and could result in a loss of market share.

The process of being qualified for inclusion in an OEM or ODM product can be lengthy and could cause us to miss a cycle in the demand of ~~end users~~end-users for a particular product feature, which also could result in a loss of market share and harm our business. Even if we do have design wins for OEM and ODM products, we may not be able to successfully develop or introduce new products in sufficient volumes within the appropriate time to meet ~~both~~ the OEM, ODM, add-in board and motherboard manufacturers’ design cycles as well as other market demand. Additionally, even if we achieve a significant number of design wins, there can be no assurance that our OEM and ODM customers will actually take the design to production or that the design will be commercially successful. Furthermore, there may be changes in the timing of product orders due to unexpected delays in the introduction of our customers’ products that could negatively impact the success of our products. Any of these factors could result in a loss of market share and could negatively impact our financial results.

Our business results could be adversely affected if our product development efforts are unsuccessful.

We have in the past experienced delays in the development of some new products. Any delay in the future or failure of our GPUs or other processors to meet or exceed specifications of competitive products could materially harm our business. The success of our new product introductions will depend on many factors, including the following:

·	proper new product definition;

·	timely completion and introduction of new product designs;

·	the ability of third-party manufacturers to effectively manufacture our new products in a timely manner;

·	dependence on third-party subcontractors for assembly, testing and packaging of our products and in meeting product delivery schedules and maintaining product quality;

·	the quality of ~~any~~ new products;

·	differentiation of new products from those of our competitors;

·	market acceptance of our products and our customers' products; and

·	availability of adequate quantity and configurations of various types of memory products.

A critical component of our product development effort is our partnerships with leaders in the ~~computer aided design, or~~ CAD industry. We have invested significant resources to develop relationships with industry leaders, including Cadence Design Systems, Inc. and Synopsys, Inc., often assisting these companies in the product definition of their new products. We believe that forming these relationships and utilizing next-generation development tools to design, simulate and verify our products will help us remain at the forefront of the 3D graphics, communications and networking segments and develop products that utilize leading-edge technology on a rapid basis. We believe this approach assists us in meeting the new design schedules of PC OEMs and other manufacturers. If these relationships are not successful, we may not be able to develop new products in a timely manner, which could result in a loss of market share, a decrease in revenue and a negative impact on our operating results. Our failure to successfully develop, introduce or achieve market acceptance for new processors would harm our business.

Our failure to identify new market or product opportunities, or develop new products could harm our business.

As our GPUs or other processors develop and competition increases, we anticipate that product life cycles at the high end will remain short and average selling prices will decline. In particular, we expect average selling prices and gross margins for our processors to decline as each product matures and as unit volume increases. As a result, we will need to introduce new products and enhancements to existing products to maintain or improve overall average selling prices and gross margins. In order for our processors to achieve high volumes, leading PC OEMs, ODMs, and add-in board and motherboard manufacturers must select our processor for design into their products, and then successfully complete the designs of their products and sell them. We may be unable to successfully identify new product opportunities or to develop and bring to market new products in a timely fashion. In addition, we cannot guarantee that new products we develop will be selected for design into PC OEMs’, ODMs’, and add-in board and motherboard manufacturers’ products, that any new designs will be successfully completed, or that any new products will be sold.

As the complexity of our products and the manufacturing process for our products increases, there is an increasing risk that we will experience problems with the performance of our products and that there will be delays in the development, introduction or volume shipment of our products. We may experience difficulties related to the production of current or future products or other factors that may delay the introduction or volume sale of new products we develop. In addition, we may be unable to successfully manage the production transition risks with respect to future products. Failure to achieve any of the foregoing with respect to future products or product enhancements could result in rapidly declining average selling prices, reduced margins and reduced demand for products or loss of market share. In addition, technologies developed by others may render our processors non-competitive or obsolete or result in our holding excess inventory, any of which would harm our business.

We could suffer a loss of market share if our products contain significant defects.

Products as complex as those we offer may contain defects or experience failures when introduced or when new versions or enhancements to existing products are released. We have in the past discovered defects and incompatibilities with customers’ hardware in some of our products and may experience delays or loss of revenue to correct any defects or incompatibilities in the future. Errors in new products or releases after commencement of

commercial shipments could result in failure to achieve market acceptance or loss of design wins. Our products typically go through only one verification cycle prior to beginning volume production and distribution. As a result, our products may contain defects or flaws that are undetected prior to volume production and distribution. If these defects or flaws exist and are not detected prior to volume production and distribution, we may be required to reimburse customers for costs to repair or replace the affected products in the field. We may also be required to incur additional research and development costs to find and correct the defect, which could divert the attention of our management and engineers from the development of new products. These costs could be significant and could adversely affect our business and operating results. We may also suffer a loss of reputation, loss of revenues and/or a loss in our market share, ~~either~~any of which could materially harm our financial results.

Risks Related to Our Partners and Customers

~~There can be no assurance that the PlayStation3 will achieve long term commercial success.~~

In April 2005, we finalized our definitive agreement with SCE to jointly develop a custom GPU incorporating our next-generation GeForce GPU and SCE’s system solutions in SCE’s PlayStation3. Our collaboration with SCE includes license fees and royalties for the PlayStation3 and all derivatives, including next-generation digital consumer electronics devices. In addition, we are licensing software development tools for creating shaders and advanced graphics capabilities to SCE. During fiscal 2006, we recognized $49.0 million of revenue from our contractual arrangements with SCE to jointly develop a custom GPU incorporating our next-generation GeForce GPU and SCE’s system solutions in SCE’s PlayStation3. Depending on the ultimate success of this next-generation platform, we expect to generate, starting in fiscal 2007, revenue ranging from $50 million to $100 million annually from license fees and royalties over the next five years, with the possibility of additional royalties for several years thereafter. There can be no assurance that the PlayStation3 will achieve long term commercial success, given the intense competition in the game console market. Additionally, we do not have control over the launch date or pricing of the Playstation3. As such, we do not have control over when we will receive royalties. If we do not receive royalties as we anticipate, our revenue and gross margin may be adversely affected.

We may not be able to realize the potential financial or strategic benefits of business acquisitions, which could hurt our ability to grow our business, develop new products or sell our products.

In the past we have acquired and invested in other businesses that offered products, services and technologies that we believed would help expand or enhance our existing products and services or help expand our distribution channels. We may enter into future acquisitions of, or investments in, businesses, in order to complement or expand our current businesses or enter into a new business market. For example, in February 2006 we completed the acquisition of ULi, ~~Electronics, Inc., or ULi, a leading developer~~in March 2006 we completed the acquisition of ~~core logic technology, for approximately $53 million paid~~Hybrid Graphics and in ~~cash.~~January 2007 we completed the acquisition of PortalPlayer. If we do consider ~~an acquisition,~~other acquisitions, a strategic alliance or a joint venture, the negotiations could divert management’s attention as well as other resources. For any previous or future acquisition or investment, including the acquisitions of ULi, Hybrid Graphics and PortalPlayer, the following risks could impair our ability to grow our business and develop new products, and ultimately, could impair our ability to sell our products, which could negatively impact our growth or our financial results:

·	difficulty in combining the technology, products, operations or workforce of the acquired business with our business;

·	difficulty in operating in a new or multiple new locations;

·	disruption of our ongoing ~~businesses:~~businesses;

·	disruption of the ongoing business of the company we acquire;

·	difficulty in realizing the potential financial or strategic benefits of the transaction;

·	~~diversion of management’s attention from our business;~~

·	difficulty in maintaining uniform standards, controls, procedures and policies;

·	disruption of or delays in ongoing research and development efforts;

·	diversion of capital and other resources;

·	assumption of liabilities;

·	diversion of resources and unanticipated expenses resulting from litigation arising from potential or actual business acquisitions or investments;

·	difficulties in entering into new markets in which we have limited or no experience and where competitors in such markets have stronger positions; and

·	impairment of relationships with employees and customers, or the loss of any of our key employees or of our target’s key employees, as a result of the integration of new businesses and management personnel.

In addition, the consideration for any future acquisition could be paid in cash, shares of our common stock, the issuance of convertible debt securities or a combination of cash, convertible debt and common stock. If we pay all or a portion of the purchase price in cash, our cash reserves would be reduced. We paid for the acquisitions of Hybrid Graphics, ULi and PortalPlayer with primarily cash. If the consideration is paid with shares of our common stock, or convertible debentures, the holdings of our existing stockholders would be diluted. We cannot forecast the number, timing or size of future acquisitions, or the effect that any such acquisitions might have on our operations or financial results.

~~We sell our products to a small number of customers and our business could suffer by the loss of any of these customers.~~

We have only a limited number of customers and our sales are highly concentrated. Sales to our two largest customers accounted for approximately 26%, 31%, and 36% of our revenue during fiscal 2006, 2005 and 2004, respectively. During the first quarter of fiscal 2006, Microsoft indicated that it would not order any more Xbox-related products from us after our second fiscal quarter. As a result, the second quarter of fiscal 2006 was the last quarter during which we recognized revenue from the sale of our Xbox-related products to Microsoft. Although a small number of our other customers represents the majority of our revenue, their end customers include a large number of OEMs and system integrators throughout the world who, in many cases, specify the graphics supplier. Our sales process involves achieving key design wins with leading PC OEMs and major system builders and supporting the product design into high volume production with key CEMs, ODMs, motherboard and add-in board manufacturers. These design wins in turn influence the retail and system builder channel that is serviced by CEMs, ODMs, motherboard and add-in board manufacturers. Our distribution strategy is to work with a small number of leading independent CEMs, ODMs, motherboard manufacturers, add-in board manufacturers and distributors, each of which has relationships with a broad range of system builders and leading PC OEMs. If we were to lose sales to our PC OEMs, CEMs, ODMs, motherboard and add-in board manufacturers and were unable to replace the lost sales with sales to different customers, or if they were to significantly reduce the number of products they order from us, our revenue may not reach or exceed the expected level in any period, which could harm our financial condition and our results of operations.

We depend on foundries and independent contractors to manufacture our products and these third parties may not be able to satisfy our manufacturing requirements, which would harm our business.

We do not manufacture the semiconductor wafers used for our products and do not own or operate a wafer fabrication facility. Our products require wafers manufactured with state-of-the-art fabrication equipment and ~~techniques. We~~techniques so we utilize industry-leading suppliers ~~such as Chartered, SMIC, TSMC, and UMC~~ to produce our semiconductor ~~wafers and utilize independent subcontractors to perform assembly, testing and packaging.~~wafers. We depend on these suppliers to allocate to us a portion of their manufacturing capacity sufficient to meet our needs, to produce products of acceptable quality and at acceptable manufacturing yields, and to deliver those products to us on a timely basis at acceptable prices. Currently, one foundry manufactures the majority of our products. These manufacturers may be unable to meet our near-term or long-term manufacturing or pricing requirements. We obtain manufacturing services on a purchase order basis. The foundries we use have no obligation to provide us with any specified minimum quantities of product. ~~Suppliers, such as Chartered, SMIC, TSMC, and UMC,~~These suppliers, including the fabrication facility that produces a majority of our products, fabricate wafers for other companies, including some of our competitors, and could choose to prioritize capacity for other users, reduce or eliminate deliveries to us, or increase the prices that they charge us on short notice. If we are unable to meet customer demand due to reduced or eliminated deliveries, we could lose sales to customers, which would negatively impact our revenue and our reputation. Because the lead-time needed to establish a strategic relationship with a new manufacturing partner could be several quarters, there is no readily available alternative source of supply for any specific product. In addition, the time and effort to qualify a new foundry could result in additional expense, diversion of resources or lost sales any of which would negatively impact our financial results. We believe that long-term market acceptance for our products will depend on reliable relationships with third-party manufacturers we may use to ensure adequate product supply and competitive pricing so that we are able to respond to customer demand.

1816

We are dependent on third parties ~~located outside of the United States~~ for assembly, testing and packaging of our products, which reduces our control over the delivery and quantity of our products.

Our processors are assembled, tested and ~~tested~~packaged by independent subcontractors, such as ASE, Amkor, ~~Technology Inc.,~~ KYEC, SPIL, and ~~STATS ChipPAC Incorporated, all of which are located outside of the United States.~~ChipPAC. We do not have long-term agreements with any of these subcontractors. As a result of our dependence on third-party subcontractors for assembly, testing and packaging of our products, we do not directly control product delivery schedules or product quality. Demand for qualified independent subcontractors to assemble and test products is high. If demand for these subcontractors exceeds the number of qualified subcontractors, we may experience capacity constraints, which could result in product shortages, a decrease in the quality of our products or an increase in product cost. Any of our subcontractors may decide to prioritize the orders of one of our competitors over our orders. Any product shortages or quality assurance problems ~~or political instability outside of the United States~~ could increase the costs of manufacture, assembly or testing of our products, which could cause our gross margin to decline. Due to the amount of time typically required to qualify assemblers and testers, we could experience significant delays in the shipment of our products if we are required to find alternative third parties to assemble, test or ~~test~~package our products or components. Any such delays could result in a loss of reputation or a decrease in sales to our customers.

~~We rely on third-party vendors to supply software development tools to us for~~There can be no assurance that the ~~development of our new products and we may be unable to obtain the tools necessary to develop these products.~~PlayStation3 will achieve long term commercial success.

In ~~the design~~April 2005, we finalized our definitive agreement with SCE to jointly develop a custom GPU for SCE’s PlayStation3. Our collaboration with SCE includes license fees and ~~development of new products and product enhancements, we rely on third-party software development tools. While we currently are not dependent on any one vendor~~royalties for the ~~supply of these tools, some or~~PlayStation3 and all ~~of these tools may not be readily available in the future. For example,~~derivatives, including next-generation digital consumer electronics devices. In addition, we ~~have experienced delays in the introduction of products in the past as a result of the inability of then available~~are licensing software development tools for creating shaders and advanced graphics capabilities to ~~fully simulate~~SCE. During fiscal 2007, we recognized $92.9 million of revenue from our contractual arrangements with SCE. There can be no assurance that the ~~complex features and functionalities of our products. The design requirements necessary to meet consumer demands for more features and greater functionality from processors~~PlayStation3 will achieve long term commercial success, given the intense competition in the ~~future~~game console market. If we do not receive royalties as we anticipate, our revenue and gross margin may exceed the capabilities of the software development tools that are available to us. If the software development tools we use become unavailable or fail to produce designs that meet consumer demands, our business could suffer.be adversely affected.

~~Difficulties~~As we continue to work directly with more foreign customers, any difficulties in collecting accounts receivable ~~could result in significant charges against income and the deferral of revenue recognition from sales to affected customers, which~~ could harm our operating results and financial condition.

Our accounts receivable are highly concentrated and make us vulnerable to adverse changes in our customers' businesses and to downturns in the economy and the industry. In addition, difficulties in collecting accounts receivable or the loss of any significant customer could materially and adversely affect our financial condition and results of operations. We continue to work directly with more foreign customers and it may be difficult to collect accounts receivable from them. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. This allowance consists of an amount identified for specific customers and an amount based on overall estimated exposure. ~~In addition, we purchase credit insurance on selected customers’ accounts receivable balances in an effort to further mitigate our exposure for such losses.~~ If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required, we may be required to defer revenue recognition on sales to affected customers and we may be required to pay higher credit insurance premiums, which could adversely affect our operating results. We may have to record additional reserves or write-offs and/or defer revenue on certain sales transactions in the future, which could negatively impact our financial results.

We rely on third-party vendors to supply software development tools to us for the development of our new products and we may be unable to obtain the tools necessary to develop or enhance new or existing products.

When we design and develop new products or product enhancements, we rely on third-party software development tools to assist us in the design, simulation and verification of new products or enhancements to existing products. Although we currently are not dependent on any one vendor for the supply of these tools, some or all of these tools may not be readily available in the future. Additionally, the software development tools available at the time that we are designing, simulating or verifying a product may not be sophisticated enough or technologically advanced enough for our purposes. For example, we have experienced delays in the introduction of products in the past as a result of the inability of then available software development tools to fully simulate the complex features and functionalities of our products. Therefore, the design requirements necessary to meet consumer demands for more features and greater functionality from our processors in the future may exceed the capabilities of the software development tools that are available to us. If the software development tools we use become unavailable or fail to produce designs that meet consumer demands, we may miss design cycles or lose design wins either of which could result in a loss of market share, a decrease in revenue or negatively impact our operating results.

1917

We sell our products to a small number of customers and our business could suffer by the loss of any of these customers.

We have only a limited number of customers and our sales are highly concentrated. Sales to one significant customer accounted for approximately 12% of our total revenue during fiscal 2007. Sales to two significant customers during fiscal 2006 accounted for approximately 26% of our total revenue. In addition, one customer has historically comprised a significant portion of our Handheld GPU business revenue. Although a small number of our other customers represents the majority of our revenue, their end customers include a large number of OEMs and system integrators throughout the world who, in many cases, specify the graphics supplier. Our sales process involves achieving key design wins with leading PC OEMs and major system builders and supporting the product design into high volume production with key CEMs, ODMs, add-in board and motherboard manufacturers. These design wins in turn influence the retail and system builder channel that is serviced by CEMs, ODMs, add-in board and motherboard manufacturers. Our distribution strategy is to work with a small number of leading independent CEMs, ODMs, add-in board and motherboard manufacturers, and distributors, each of which has relationships with a broad range of system builders and leading PC OEMs. If we were to lose sales to our PC OEMs, CEMs, ODMs, add-in board and motherboard manufacturers and were unable to replace the lost sales with sales to different customers, or if they were to significantly reduce the number of products they order from us, our revenue may not reach or exceed the expected level in any period, which could harm our financial condition and our results of operations.

Risks Related to Our Competition

As Intel and AMD continue to pursue platform solutions, we may not be able to successfully compete and our business would be negatively impacted.

We expect substantial competition from both Intel’s and AMD’s strategy of selling platform solutions, such as the success Intel achieved with its Centrino platform solution. In addition to the Centrino notebook platform solution, Intel has announced a desktop initiative branded as VIIV. Shortly after its acquisition of ATI, AMD also announced a platform solution. Such platform solutions do not require a discrete GPU from a third-party supplier such as NVIDIA. Prior to its acquisition of ATI, AMD did not sell their own GPUs but instead relied on companies such as ATI or NVIDIA to supply graphics technology. If AMD and Intel continue to pursue platform solutions in desktop and notebook PCs, we may be unable to sell GPUs to either company. Additionally, we expect that Intel and AMD will extend this strategy to other segments including professional workstations and servers. To the extent Intel and AMD are successful with the platform strategy, they would no longer need our discrete GPU solutions which would negatively impact our business.

The market for GPU, MCP, ~~and~~ Handheld GPUs and application processors is highly competitive and we may be unable to compete.

The market for GPUs, MCPs and Handheld GPUs is intensely competitive and is characterized by rapid technological change, evolving industry standards and declining average selling prices. We believe that the principal competitive factors in this market are performance, breadth of product offerings, access to customers and distribution channels, backward-forward software support, conformity to industry standard ~~APIs,~~application programming interfaces, manufacturing capabilities, price of processors and total system costs of add-in boards and motherboards. We believe that our ability to remain competitive will depend on how well we are able to anticipate the features and functions that customers will demand and whether we are able to deliver consistent volumes of our products at acceptable levels of quality. We expect competition to increase both from existing competitors and new market entrants with products that may be less costly than ours, or may provide better performance or additional features not provided by our products, which could harm our business.

For example, we are the largest supplier of AMD 64 chipsets with 53% segment share. NVIDIA nForce MCP unit shipments for AMD64-based CPUs increased over 113% calendar year-over-calendar year, based on the Mercury Research Fourth Quarter 2006 PC Processor Forecast Report. Decline in demand in the AMD segment would harm our business.

An additional significant source of competition is from companies that provide or intend to provide GPU, MCP, and Handheld GPU solutions. Some of our competitors may have or be able to obtain greater marketing, financial, distribution and manufacturing resources than we do and may be more able to adapt to customer or technological changes. Our current competitors include the following:

·	suppliers of discrete MCPs that incorporate a combination of networking, audio, communications and input/output, or I/O, functionality as part of their existing solutions, such as ~~ATI Technologies, Inc., or ATI,~~AMD, Broadcom, ~~Corporation, or Broadcom,~~SIS, VIA, and Intel;

·	suppliers of GPUs, including MCPs that incorporate 3D graphics functionality as part of their existing solutions, such as ~~ATI,~~AMD, Intel, Matrox Electronics Systems Ltd., ~~Silicon Integrated Systems, Inc., VIA Technologies, Inc., and~~ XGI Technology, Inc.;, SIS and VIA;

suppliers of GPUs or GPU intellectual property for handheld and embedded devices that incorporate advanced graphics functionality as part of their existing solutions, such as ~~ATI, Bitboys,~~AMD, Broadcom, Fujitsu Limited, Imagination Technologies Ltd., ARM Holdings plc, Marvell, NEC Corporation, Qualcomm Incorporated, Renesas Technology, ~~Corp.,~~ Seiko-Epson, Texas Instruments Incorporated, and Toshiba America, Inc.; and

·	suppliers of application processors for handheld and embedded devices that incorporate multimedia processing as part of their existing solutions such as Broadcom, Texas Instruments Inc., Qualcomm Incorporated, Marvell, Freescale Semiconductor Inc., Samsung and ST Microelectronics.

If and to the extent we offer products outside of the consumer and enterprise PC, notebook, workstation, PDA, cellular phone, and video game console markets, we may face competition from some of our existing competitors as well as from companies with which we currently do not compete. We cannot accurately predict if we will compete successfully in any new markets we may enter. If we are unable to compete in our current ~~and any~~or new markets, our financial results will suffer.

~~As Intel continues to pursue platform solutions, we may not be able to successfully compete.~~

We expect substantial competition from Intel’s publicized focus on moving to selling platform solutions dominated by Intel products, such as when Intel achieved success with its Centrino platform solution. In addition to its current Centrino notebook platform initiative, and its announced upcoming desktop initiative branded as VIIV, we expect that Intel is now focused on developing and selling platform solutions for all segments including professional workstations and servers. If Intel continues to pursue these initiatives, we may not be able to successfully compete in these segments.

Risks Related to Market Conditions

We are subject to risks associated with international operations which may harm our business.

~~A significant portion of our~~Our semiconductor wafers are manufactured, assembled, tested and packaged by third-parties located outside of the United States. Additionally, we generated ~~84%, 76% and 75%~~83.6% of our ~~total~~ revenue for fiscal 2007 and 84.0% of our revenue for fiscal 2006 from sales to customers outside of the United States and other ~~Americas for fiscal 2006, 2005 and 2004, respectively.~~Americas. The manufacture, assembly, test and packaging of our products outside of the United States, operation of offices outside of the United States, and sales to ~~these~~

customers outside of the United States and other Americas subjects us to a number of risks associated with conducting business outside of the United States and other Americas, including, but not limited to:

·	international economic and political conditions;

·	unexpected changes in, or impositions of, legislative or regulatory requirements;

·	labor issues in foreign countries;

·	cultural differences in the conduct of business;

·	inadequate local infrastructure;

·	delays resulting from difficulty in obtaining export licenses for certain technology, tariffs, quotas and other trade barriers and restrictions;

·	transportation delays;

·	longer payment cycles;

·	difficulty in collecting accounts receivable;

·	fluctuations in currency exchange rates;

·	impact of currency exchange rate fluctuations on the price of our products to our customers, or on the supplies that we buy;

·	imposition of additional taxes and penalties;

·	different legal standards with respect to protection of intellectual property;

·	the burdens of complying with a variety of foreign laws; and

·	other factors beyond our control, including terrorism, civil unrest, war and diseases such as severe acute respiratory syndrome and the Avian flu.

If sales to any of our customers outside of the United States and other Americas are delayed or cancelled because of any of the above factors, our revenue may be negatively impacted.

We have offices outside of the United States, including offices in Taiwan, Japan, Korea, China, Hong Kong, India, France, Russia, Germany, Finland and England. During fiscal ~~2006,~~2007, we ~~substantially increased our~~added 934 international employee resources from 242 employees as of January 30, 2005 to 615 full-time employees as of January 29, 2006. On February 20, 2006, we completed the acquisition of ULi, a leading developer of core logic technology, which added approximately $18 to $22 employees to our international operations. As a result of our acquisition of PortalPlayer, we acquired land and a building under construction in Hyderabad, India. Our operations in our international locations are subject to many of the risks contained in the above list. We intend to continue to expand our ~~international~~ operations and expect to open other international offices. Difficulties with our international operations, including finding appropriate staffing and office space, may divert management’s attention and other resources any of which could negatively impact our operating results.

Currently, all of our arrangements with third-party manufacturers and subcontractors provide for pricing and payment in United States dollars as are sales to our customers located outside of the United States and other Americas. Increases in the value of the United States’ dollar relative to other currencies would make our products more expensive, which would negatively impact our ability to compete. Conversely, decreases in the value of the United States’ dollar relative to other currencies could result in our suppliers raising their prices in order to continue doing business with us. To date, we have not engaged in any currency hedging activities, although we may do so in the future. Fluctuations in currency exchange rates could harm our business in the future.

We are dependent on the PC market and the rate of its growth has and may in the future have a negative impact on our business.

We derive the majority of our revenue from the sale of products for use in the desktop PC and notebook PC markets, including professional workstations. We expect to continue to derive most of our revenue from the sale or license of products for use in the desktop PC and notebook PC markets in the next several years. A reduction in sales of PCs, or a reduction in the growth rate of PC sales, will reduce demand for our products. Moreover, changes in demand could be large and sudden. Since PC manufacturers often build inventories during periods of anticipated growth, they may be left with excess inventories if growth slows or if they incorrectly forecast product transitions. In these cases, PC manufacturers may abruptly suspend substantially all purchases of additional inventory from suppliers like us until ~~the~~their excess inventory has been absorbed, which would have a negative impact on our business.

If our products do not continue to be ~~accepted~~adopted by the consumer and enterprise desktop PC, notebook PC, workstation, PDA, cellular phone, and video game console markets or if the demand in these markets for new and innovative products decreases, our business and operating results would suffer.

Our success depends in part upon continued broad adoption of our processors for 3D graphics and multimedia in consumer and enterprise PC, notebook PC, workstation, PDA, cellular phone, and video game console applications. The market for processors has been characterized by unpredictable and sometimes rapid shifts in the popularity of products, often caused by the publication of competitive industry benchmark results, changes in pricing of dynamic random-access memory devices and other changes in the total system cost of add-in boards, as well as by severe price competition and by frequent new technology and product introductions. ~~Only a small number of products have achieved broad~~Broad market acceptance is difficult to achieve and such market acceptance, if achieved, is difficult to sustain due to intense competition and frequent new technology and product introductions. ~~Since the~~Our GPU ~~Business is our core business,~~and MCP businesses comprised over 86.5% of fiscal 2007 revenue. As such, our financial results would suffer if for any reason our current or future GPUs or MCPs do not continue to achieve widespread ~~acceptance in~~adoption by the PC market. If we are unable to complete the timely development of products or if we were unable to successfully and cost-effectively manufacture and deliver products that meet the requirements of the consumer and enterprise PC, notebook, workstation, PDA, cellular phone, and ~~workstation~~video game console markets, we may experience a decrease in revenue which could negatively impact our operating results. Additionally, there can be no assurance that the industry will continue to demand new products with improved standards, features or performance. If our customers, OEMs, ODMs, add-in-card and motherboard manufacturers, system builders and consumer electronics companies, do not continue to design products that require more advanced or efficient processors and/or the market dodoes not continue to demand new products with increased performance, features, functionality or standards, sales of our products could decline.

Our failure to comply with any applicable environmental regulations could result in a range of consequences, including fines, suspension of production, excess inventory, sales limitations, and criminal and civil liabilities.

We may be subject to various state, federal and international laws and regulations governing the environment, including restricting the presence of certain substances in electronic products and making producers of those products financially responsible for the collection, treatment, recycling and disposal of those products. ~~For example, the semiconductor industry is moving towards becoming compliant with the~~The European Union Directive on Restriction of Hazardous Substances Directive, or ~~RoHS Directive, which will become effective in July 2006. The~~ RoHS Directive, is European legislation that restricts the use of a number of substances, including ~~lead.~~lead, and other hazardous substances in electrical and electronic equipment in the market in the European Union which became effective on July 1, 2006. Similarly, the State of California has adopted certain restrictions, which go into effect in 2007, that restrict the use of certain materials in electronic products, ~~that~~which are intended to harmonize with the RoHS directive and other states are contemplating similar legislation. China has ~~promulgated use restrictions on the same substances as~~adopted similar legislation to the RoHS directive ~~but has not yet defined either the scope of the affected products or an effective date of any such restrictions.~~which began to go into effect on March 1, 2007.

Also, we could face significant costs and liabilities in connection with the European Union Directive on Waste Electrical and Electronic Equipment, ~~Directive,~~ or WEEE. The WEEE directs members of the European Union to enact laws, regulations, and administrative provisions to ensure that producers of electric and electronic equipment are financially responsible for the collection, recycling, treatment and environmentally responsible disposal of certain products sold into the market after August 15, ~~2005~~2005. Implementation in certain European Union member states has been delayed into 2007. Similar legislation has been or may be enacted in other jurisdictions, including the United States, Canada, Mexico, China and ~~from products in use prior to that date that are being replaced.~~Japan, the cumulative impact of which could be significant. We continue to evaluate the impact of specific registration and compliance activities required by WEEE.

It is possible that unanticipated supply shortages, delays or excess non-compliant inventory may occur as a result of such regulations. Failure to comply with any applicable environmental regulations could result in a range of consequences including costs, fines, suspension of production, excess inventory, sales limitations, ~~and~~ criminal and civil ~~liabilities.~~

~~Hostilities involving~~liabilities and could impact our ability to conduct business in the ~~United States and/or terrorist attacks could harm our business.~~

~~The financial, political, economic and other uncertainties following the terrorist attacks on the United States in 2001 led to a weakening~~countries that have adopted these types of the global economy. Similar terrorist acts and/or the threat of future outbreak or continued escalation of hostilities involving the United States and Iraq or other countries could adversely affect the growth rate of our revenue and have an adverse effect on our business, financial condition or results of operations. In addition, any escalation in these events or similar future events may disrupt our operations or those of our customers, distributors and suppliers, which could also adversely affect our business, financial condition or results of operations.

regulations.

2220

We are exposed to fluctuations in the market values of our portfolio investments and in interest rates.

At the end of fiscal 2007, we had $1.12 billion in cash, cash equivalents and marketable securities. We invest our cash in a variety of financial instruments, consisting principally of investments in commercial paper, money market funds and highly liquid debt securities of corporations, municipalities and the United States government and its agencies. These investments are denominated in U.S. dollars.

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 the cash equivalents and marketable securities are treated as “available-for-sale” under SFAS No. 115. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate debt securities may have their market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or if the decline in fair value of our publicly traded equity investments is judged to be other-than-temporary. We may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. However, because any debt securities we hold are classified as “available-for-sale,” no gains or losses are recognized due to changes in interest rates unless such securities are sold prior to maturity.

Our business is cyclical in nature and an industry downturn could harm our financial results.

Our business is directly affected by market conditions in the highly cyclical semiconductor industry, including alternating periods of overcapacity and capacity constraints, variations in manufacturing costs and yields, significant expenditures for capital equipment and product development and rapid technological change. If we are unable to respond to changes in our industry, which can be unpredictable and rapid, in an efficient and timely manner, our operating results could suffer. In particular, from time to time, the semiconductor industry has experienced significant and sometimes prolonged downturns characterized by diminished product demand and accelerated erosion of average selling prices. If we cannot take appropriate actions such as reducing our manufacturing or operating costs to sufficiently offset declines in demand during a downturn, our revenue and earnings will suffer.

Political instability in Taiwan and in The People’s Republic of China or elsewhere could harm our business.

Because of our reliance on foundries and independent contractors located in Taiwan and The People’s Republic of China, and because we have offices in these locations, our business may be harmed by political instability in Taiwan, including the worsening of the strained relations between The People’s Republic of China and Taiwan. Also if relations between the United States and The People’s Republic of China are strained due to foreign relations events. If any of our suppliers experienced a substantial disruption in their operations, as a result of a natural disaster, political unrest, economic instability, acts of terrorism or war, equipment failure or other cause, it could harm our business.

~~We are exposed to fluctuations in the market values of our portfolio investments and in interest rates.~~

We invest in a variety of financial instruments, consisting principally of investments in commercial paper, money market funds and highly liquid debt securities of corporations, municipalities and the United States government and its agencies. These investments are denominated in United States dollars.

We account for our investment instruments in accordance with SFAS No. 115. All of the cash equivalents and marketable securities are treated as “available-for-sale” under SFAS No. 115. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate debt securities may have their market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or if the decline in fair value of our publicly traded equity investments is judged to be other-than-temporary. We may suffer losses in principal if forced to sell securities that decline in market value due to changes in interest rates. However, because our debt securities are classified as “available-for-sale,” no gains or losses are recognized due to changes in interest rates unless such securities are sold prior to maturity.

Risks Related to Government Action, Regulatory Action, Intellectual Property, and Litigation

The pending investigation by the United States Department of Justice regarding investigation into the market for Graphics Processors could adversely affect our business.

On November 29, 2006, we received a subpoena from the San Francisco Office of the Antitrust Division of the United States Department of Justice, or DOJ, in connection with the DOJ's investigation into potential antitrust violations related to graphics processing units and cards. No specific allegations have been made against us. We plan to cooperate with the DOJ in its investigation. As of March 14, 2007, 42 civil complaints have been filed against us. The majority are pending in the Northern District of California, a number are pending in the Central District of California, and other cases are pending in several other Federal district courts. Although the complaints differ, they generally purport to assert federal and state antitrust claims based on alleged price fixing, market allocation, and other alleged anti-competitive agreements between us and Advanced Micro Devices, Inc., or AMD, as a result of its acquisition of ATI Technologies, Inc., or ATI. Many of the cases also assert a variety of state law unfair competition or consumer protection claims on the same allegations and some cases assert unjust enrichment or other common law claims. The complaints are putative class actions alleging classes of direct and/or indirect purchasers of our graphic processing units and cards. The plaintiffs in a few of the Northern District of California actions have filed a motion with the Judicial Panel on Multidistrict Litigation asking that all pending and subsequent cases be consolidated in one court for all pre-trial discovery and motion practice. A hearing on this motion is set for March 29, 2007. We believe the allegations in the complaints are without merit and intend to vigorously defend the cases.

Expensing employee stock options ~~in future periods will~~ materially and aversely ~~affect~~affects our reported operating results and could also adversely affect our competitive ~~position as well.~~position.

Since inception, we have used stock options and our employee stock purchase program as fundamental components of our compensation packages. ~~To date we generally have not recognized compensation cost for employee stock options or shares sold pursuant to our employee stock purchase program.~~ We believe that these incentives directly motivate our employees and, through the use of vesting, encourage our employees to remain with us. As a result of adjustments arising from our restatement related to stock option grant dates, our operating results for fiscal years prior to fiscal 2007 contain recorded amounts of stock-based compensation expense. For our fiscal 2000 through 2006, this stock-based compensation expense was calculated using primarily the intrinsic value-based method under Accounting Principles Board Opinion No. 25, or APB 25, Accounting for Stock Issued to Employees and related interpretations.

In December 2004, the Financial Accounting Standards Board, or FASB, issued SFAS No. 123(R), ~~Share-Based Payment,~~ 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.~~ SFAS No. 123(R) requires that we record compensation expense for stock options and our employee stock purchase plan

using the fair value of those awards. ~~Expensing these incentives in future periods will materially and adversely affect our reported operating results as the~~During fiscal 2007, we recorded $116.7 million, related to stock-based compensation, ~~expense would be charged directly against~~net of the associated payroll tax impact resulting from our reported earnings. We anticipate that our stock-based compensation expense will be approximately $18 to $22 million for the first quarter of fiscal 2007 and we are unsure how the market will react to this adverse affect onrestatement, which negatively impacted our operating ~~results, which could~~results. We believe that SFAS No. 123(R) will continue to negatively impact our ~~stock price.~~operating results.

To the extent that SFAS No. 123(R) makes it more expensive to grant stock options or to continue to have an employee stock purchase program, we may decide to incur increased cash compensation costs. In addition, actions that we may take to reduce stock-based compensation expense that may be more severe than any actions our competitors may implement may make it difficult to attract, retain and motivate employees, which could adversely affect our competitive position as well as our business and operating results.

We are ~~currently involved in patent~~a party to litigation, which, if ~~not~~determined adversely to us, could harm our business and financial condition.

We are a party to litigation. There can be no assurance that actions that have been brought against us or any brought by us will be resolved ~~favorably, could require~~in our favor. Any claim that is successfully asserted against us may cause us to pay ~~damages.~~

Wesubstantial damages and other related fees. Regardless of whether these lawsuits are ~~currently involved~~resolved in ~~patent litigation. On October 19, 2004, Opti Incorporated,~~our favor or ~~Opti, filed~~if we are the plaintiff or the defendant in the litigation, any lawsuits to which we are a ~~complaint for patent infringement~~party will likely be expensive and time consuming to defend or resolve. Such lawsuits could also harm our relationships with existing customers and result in the diversion of management’s time and attention away from business operations, which could harm our business. Costs of defense and any damages resulting from litigation a ruling against us in the United States District Court for the Eastern District of Texas. Opti asserts that unspecified NVIDIA chipsets infringe five United States patents held by Opti. Opti seeks unspecified damages for our alleged conduct, attorneys fees and triple damages because of our alleged willful infringement of these patents. NVIDIA filedor a response to this complaint in December 2004. After a case management conference in July 2005, discovery began and a trial date has now been set for July 2006. A court mandated mediation was held in January 2006 and did not resolve the matter. We believe the claims asserted against us are without merit and we will continue to defend ourselves vigorously.

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 eachsettlement 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. In November 2004, NVIDIA soughtlitigation could adversely affect our cash flow and was granted permission to intervene in two of the three pending AVG lawsuits. Our complaint in intervention alleged that both of the patents in suit were invalid and that, to the extent AVG’s claims target NVIDIA products, the asserted patents were not infringed.

On December 19, 2005, AVG and substantially all of the named defendants and intervenors, including NVIDIA, settled all of pending claims; the only surviving claims will relate solely to two non-settling defendants. As part of the settlement, the defendants and intervenors paid an undisclosed aggregate amount to AVG. In exchange, all pending claims between the settling parties were dismissed with prejudice, and AVG granted 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 fully and finally waived any claims for indemnification they may have had against any other settling party.

Our defenses against Opti may be unsuccessful. If this case goes forward, or if other patent litigation matters involving us arise, we expect that they will result in additional legal and other costs, such as those costs associated with the AVG suit, regardless of the outcome, which could be substantial.

~~Our industry is characterized by vigorous protection and pursuit of intellectual property rights and positions which could result in significant expense.~~

The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights and positions, which have resulted in protracted and expensive litigation. The graphics processor industry, in particular, has been recently characterized by the aggressive pursuit of intellectual property positions, and we expect our competitors and others will continue to aggressively pursue intellectual property positions. The technology that we use to design and develop our products and that is incorporated into our products may be subject to claims that it infringes the patents or intellectual property rights of others. Our success is dependent on our ability to

develop new products without infringing or misappropriating the intellectual property rights of others or by licensing the intellectual property of third parties. As such, we have licensed technology from third parties for incorporation into our products, and expect to continue to enter into license agreements with third parties for future products. These licenses may result in royalty payments to third parties, the cross licensing of technology by us or payment of other consideration. If these arrangements are not concluded on commercially reasonable terms, or at all, our competitive position and our business could suffer.financial results.

Our ability to compete will be harmed if we are unable to adequately protect our intellectual property.

We rely primarily on a combination of patents, trademarks, trade secrets, employee and third-party nondisclosure agreements, and licensing arrangements to protect our intellectual property in the United States and internationally. We have numerous patents issued, allowed and pending in the United States and in foreign countries. Our patents and pending patent applications primarily relate to technology used by us in connection with our ~~products, including our processors.~~products. We also rely on international treaties and organizations and foreign laws to protect our intellectual property. The laws of certain foreign countries in which our products are or may be manufactured or sold, including various countries in Asia, may not protect our products or intellectual property rights to the same extent as by the laws of the United States. This makes the possibility of piracy of our technology and products more likely. We continuously assess whether and where to seek formal protection for particular innovations and technologies based on such factors ~~as the:~~as:

·	the commercial significance of our operations and our competitors’ operations in particular countries and regions;

·	the location in which our products are manufactured;

·	our strategic technology or product directions in different countries; and

·	the degree to which intellectual property laws exist and are meaningfully enforced in different jurisdictions.

Our pending patent applications and any future applications may not be approved. In addition, any issued patents may not provide us with competitive advantages or may be challenged by third parties. The enforcement of patents by others may harm our ability to conduct our business. Others may independently develop substantially equivalent intellectual property or otherwise gain access to our trade secrets or intellectual property. Our failure to effectively protect our intellectual property could harm our business. We have licensed technology from third parties for incorporation in our digital media processors and for defensive reasons, and expect to continue to enter into such license agreements. These licenses may result in royalty payments to third parties, the cross licensing of technology by us or payment of other consideration. If these arrangements are not concluded on commercially reasonable terms, our business could suffer.

Litigation to defend against alleged infringement of intellectual property rights or to enforce our intellectual property rights and the outcome of such litigation could result in substantial costs to us.

~~From time to time we receive notices or are included in legal actions alleging that we have infringed patents or other intellectual property rights owned by third parties.~~ We expect that as the number of issued hardware and software patents increases and as competition ~~in our product lines~~ intensifies, the volume of intellectual property infringement claims and lawsuits may increase. We may become involved in ~~future~~ lawsuits or other legal proceedings alleging patent infringement or other intellectual property rights violations by us or by our customers that we have agreed to indemnify them for certain claims of infringement arising out of the sale of our products to these customers. An unfavorable ruling could include significant damages, invalidation of a patent or family of patents, indemnification of customers, payment of lost profits, or, when it has been sought, injunctive relief.

In addition, we may need to commence litigation or other legal proceedings ~~may be necessary~~in order to:

·	assert claims of ~~infringement;~~infringement of our intellectual property;

·	enforce our ~~patents~~patents;

·	protect our trade secrets or know-how; or

·	determine the enforceability, scope and validity of the propriety rights of others.

If we have to initiate litigation in order to protect our intellectual property, our operating expenses may increase which could negatively impact our operating results. Our failure to effectively protect our intellectual property could harm our business.

If infringement claims are made against us or we are found to infringe a third parties’ patent, we may seek licenses under the ~~claimants’~~third parties’ patents or other intellectual property rights. In addition, ~~we or~~ an indemnified customer may be required to obtain a license to a third parties’ patents or intellectual property. However, licenses may not be offered to us at all or on terms acceptable to us, particularly by competitors. If we fail to obtain a license from a third party for technology that we use or that is used in one of our products used by an indemnified customer, we could be subject to substantial liabilities or have to suspend or discontinue the manufacture and sale of one or more of our products either of which could reduce our revenue and harm our business. Furthermore, the indemnification of a customer may increase our operating expenses which could negatively impact our operating results.

Alternatively, we may initiate claims or litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights, which could be costly. If we have to initiate a claim, our operating expenses may increase which could negatively impact our operating results. Additionally, if one of our patents is invalidated or found to be unenforceable, we would be unable to license the patent which could result in a loss of revenue.

Regardless of the outcome, litigation or negotiations involving intellectual property rights can be very costly and can divert management’s attention from other matters. We may be unsuccessful in defending or pursuing these lawsuits or claims. An unfavorable ruling could include significant damages, invalidation of a patent or family of patents, indemnification of customers, payment of lost profits, or, when it has been sought, injunctive relief.

Our operating results may be adversely affected if we are subject to unexpected tax liabilities.

We are subject to taxation by a number of taxing authorities both in the United States and throughout the world. Tax rates vary among the jurisdictions in which we operate. Significant judgment is required in determining our provision for our income taxes as there are many transactions and calculations where the ultimate tax determination is uncertain. Although we believe our tax estimates are reasonable, any of the below could cause our effective tax rate to be materially different than that which is reflected in historical income tax provisions and accruals:

·	the jurisdictions in which profits are determined to be earned and taxed;

·	adjustments to estimated taxes upon finalization of various tax returns;

·	changes in available tax credits;

·	changes in share-based compensation expense;

·	changes in tax laws, the interpretation of tax laws either in the United States or abroad or the issuance of new interpretative accounting guidance related to uncertain transactions and calculations where the tax treatment was previously uncertain; and

·	the resolution of issues arising from tax audits with various tax authorities.

Should additional taxes be assessed as a result of any of the above, our operating results could be adversely affected. In addition, our future effective tax rate could be adversely affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in tax laws or changes in the interpretation of tax laws.

While we believe that we currently have adequate internal control over financial reporting, we are exposed to risks from legislation requiring companies to evaluate those internal controls.

Section 404 of the Sarbanes-Oxley Act of 2002 requires our management to report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal control structure and procedures for financial reporting. We have an ongoing program to perform the system and process evaluation and testing necessary to comply with these requirements. ~~This legislation is relatively new~~However, the manner in which companies and ~~neither companies nor~~their independent public accounting firms ~~have significant experience in complying with its requirements. As a result,~~apply these requirements and testing companies’ internal controls, remains subject to some uncertainty. To date, we have incurred, and we expect to continue to incur increased expense and to devote additional management resources to Section 404 compliance. Despite our efforts, if we identify a material weakness in internal controls, there can be no assurance that we will be able to remediate such material weakness identified in a timely manner, or that we will be able to maintain all of the controls necessary to determine that our internal control over financial reporting is effective. In the event that our chief executive officer, chief financial officer or our independent registered public accounting firm determine that our internal control over financial reporting is not effective as defined under Section 404, investor perceptions of us may be adversely affected and could cause a decline in the market price of our stock.

Changes in financial accounting standards or interpretations of existing standards could affect our reported results of operations.

We prepare our consolidated financial statements in conformity with United States generally accepted accounting principles. These principles are constantly subject to review and interpretation by the SEC and various bodies formed to interpret and create appropriate accounting principles. A change in these principles can have a significant effect on our reported results and may even retroactively affect previously reported transactions.

Risks Related to our Common Stock

~~Our stock price may continue to experience significant short-term fluctuations.~~

The trading price of our common stock has fluctuated greatly. These price fluctuations have been rapid and severe. We believe that our quarterly and annual results of operations may continue to be affected by a variety of

factors that could harm our revenue, gross profit and results of operations, any of which could impact our stock price. Additionally, the price of our common stock may continue to fluctuate greatly in the future due to factors that are non-company specific, such as the decline in the United States and/or international economies, acts of terror against the United States, war or due to a variety of company specific factors, including quarter to quarter variations in our operating results, shortfalls in revenue, gross margin or earnings from levels expected by securities analysts and the other factors discussed in these risk factors.

Provisions in our certificate of incorporation, our bylaws and our agreement with Microsoft could delay or prevent a change in control.

Our certificate of incorporation and bylaws contain provisions that could make it more difficult for a third party to acquire a majority of our outstanding voting stock. These provisions include the following:

·	the ability of the ~~board of directors~~Board to create and issue preferred stock without prior stockholder approval;

·	the prohibition of stockholder action by written consent;

·	a classified ~~board of directors;~~Board; and

·	advance notice requirements for director nominations and stockholder proposals.

On March 5, 2000, we entered into an agreement with Microsoft in which we agreed to develop and sell graphics chips and to license certain technology to Microsoft and its licensees for use in the Xbox. Under the agreement, if an individual or corporation makes an offer to purchase shares equal to or greater than 30% of the outstanding shares of our common stock, Microsoft may have first and last rights of refusal to purchase the stock. The Microsoft provision and the other factors listed above could also delay or prevent a change in control of NVIDIA.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Our headquarters complex is located on a leased site in Santa Clara, California and is comprised of ~~five~~six buildings. Additionally, we lease three other buildings in Santa Clara with one used as warehouse space and the other two used as lab space. Outside of Santa Clara, we lease space in Austin and Houston, Texas; Berkeley, California; Beaverton, Oregon; Bedford, Massachusetts; Bellevue and Kirkland, Washington; ~~Chandler, Arizona;~~Madison, Alabama; Charlotte and Durham, North Carolina; Greenville, South Carolina; and Fort Collins, ~~Colorado; and Redmond, Washington.~~Colorado. These facilities are used as design centers and/or sales and administrative offices.

Outside of the United States, we lease space in Taipei and ~~Hsin Chu,~~Neihu in Taiwan; Tokyo, Japan; Seoul, Korea; Beijing, Shanghai, and Shenzhen, China; Wanchai, and Shatin, New Territories, Hong Kong; Bangalore, Hyderabad and Pune, India; Paris, France; Moscow, Russia; Munich and Wurselen, Germany; Helsinki, Finland and Theale, England. These facilities are used primarily to support our customers and operations and as sales and administrative offices. The office lease spaces in Wurselen, Germany, Shenzhen, China and Bangalore, Pune and ~~Pune,~~Hyderabad, India are used primarily as design centers. Additionally, as a result of our acquisition of PortalPlayer, we acquired a building under construction in Hyderabad, India, which will be used primarily as a design center.

We believe that we currently have sufficient facilities to conduct our operations for the next twelve months, although we expect to lease additional facilities throughout the world as our business requires. For additional information regarding obligations under leases, see Note 1112 of the Notes to the Consolidated Financial Statements under the subheading “Lease Obligations,” which information is hereby incorporated by reference.

ITEM 3. LEGAL PROCEEDINGS

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~~Interactive, Inc., or 3dfx, which 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.~~lease, CarrAmerica. 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.~~lease, Carlyle Fortran Trust. The landlords’ complaints both ~~assert~~asserted 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~~$15 million. In October 2002, 3dfx filed for ~~Chapter~~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, for purposes of discovery, with a complaint filed by the Trustee in the 3dfx bankruptcy ~~case for purposes of discovery.~~case. 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~~our motion to dismiss the landlords’ respective amended complaints and allowed the landlords to have until February 4, 2006 to amend their complaints. The ~~landlords’ refiled~~landlords re-filed claims against NVIDIA in early February 2006, and NVIDIA again ~~requested~~filed motions requesting the District Court to dismiss all such claims. The District Court took both motions under submission. On September 29, 2006, the court dismissed the CarrAmerica action in its entirety and without leave to amend. The court found, among other things, that CarrAmerica lacks standing to bring the lawsuit and that such standing belongs exclusively to the bankruptcy trustee. On October 27, 2006, CarrAmerica filed a notice of appeal from that order. On December 15, 2006, the District Court also dismissed the Carlyle complaint in its entirety, finding that Carlyle lacked standing to pursue some of its claims, ~~made by the landlords. A hearing on NVIDIA’s new~~and that certain other claims were substantively unmeritorious. NVIDIA has filed motions to ~~dismiss is set~~recover its litigation costs and attorneys fees against both Carlyle and Carr. Those motions are currently scheduled for hearing onin early April, 17, 2006. Discovery is stayed pending this hearing 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.

2007.

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. On December 23, 2005, the Court issued its ruling denying the ~~Trustee's~~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 Court expressly denied the ~~Trustee's~~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, iswas subject to a confirmation process through a vote of creditors and the review and approval of the Bankruptcy Court after notice and hearing.~~The scope and schedule for that confirmation process has yet to be determined, butwe expect that hearing to now occur sometime in the next few months.~~ The Trustee ~~has~~ advised that he ~~intends~~intended to object to the ~~settlement. The~~ settlement, ~~with the Creditors’ Committee calls~~which would have called for a payment by NVIDIA of approximately $30.6 million to the 3dfx estate. Under the settlement, $5.6 million ~~relates~~related to various administrative expenses and Trustee fees, and $25.0 million ~~relates~~related to the satisfaction of debts and liabilities owed to the general unsecured creditors of 3dfx. ~~As such,~~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.

~~The~~

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. In addition, while the conditional settlement agreement was awaiting the confirmation process, the Bankruptcy Court, over objection of the Creditors’ Committee and NVIDIA, ~~has~~ ordered the discovery portion of the Trustee’s litigation to ~~proceed~~proceed. The expert discovery was completed, but the Bankruptcy Court also ruled on a Trustee discovery motion allowing additional discovery of NVIDIA. Because that order would have required NVIDIA to disclose privileged attorney-client communications, NVIDIA asked the District Court to review that order and to stay its execution while the ~~settlement~~District Court’s review is ~~pending approval through~~pending. The District Court did issue the ~~confirmation process. However,~~requested stay order on August 3, 2006. Oral argument on that matter was held on November 15, 2006, and the District Court reversed the Bankruptcy Court’s order by order of its own dated December 15, 2006. The District Court permitted certain limited additional discovery, but concluded that on the record before it, there was no ~~trial date has been~~basis to set inaside the ~~Trustee's action. In addition, following~~attorney-client privilege.

Following the Trustee’s filing of a Form 8-K on behalf of 3dfx, in which the Trustee disclosed the terms of the proposed settlement agreement between NVIDIA and the Creditor’s Committee, certain shareholders of 3dfx filed a petition with the Bankruptcy Court to appoint an official committee to represent the claimed ~~interest’s~~interests of 3dfx shareholders. That petition was granted and an Equity ~~Holder’s~~Holders Committee was appointed. ~~Counsel~~Since that appointment, the Equity Holders Committee has filed a competing plan of reorganization/liquidation. The Equity Holders plan assumes that 3dfx can raise additional equity capital that would be used to retire all of 3dfx’s debts. Upon the payment of that debt, the Equity Holders Committee contends that NVIDIA would be obliged to pay the stock consideration provided for in the asset purchase agreement. By virtue of stock splits since the execution of the asset purchase agreement, the stock consideration would now total four million shares of our common stock. The Equity Holders’ Committee filed a motion with the Bankruptcy Court for an order giving it standing to bring that lawsuit to enforce the Asset Purchase Agreement. Over our objection, the Bankruptcy Court granted that motion on May 1, 2006 and the Equity Holders’ Committee filed its Complaint for Declaratory Relief against NVIDIA that same day. NVIDIA moved to dismiss the Complaint for Declaratory Relief, and the Bankruptcy court granted that motion with leave to amend. The Equity Committee thereafter amended its complaint, and NVIDIA moved to dismiss that amended complaint as well. At the hearing on December 21, 2006, the Bankruptcy Court granted the motion as to one of the Equity Holders’ Committee’s claims, and denied it as to the others. However, the Bankruptcy Court also ruled that NVIDIA would only be required to answer the first three causes of action by which the Equity Holders’ Committee seeks a determination that the Asset Purchase Agreement was not terminated before 3dfx filed for bankruptcy protection, that the 3dfx bankruptcy estate still holds some rights in the Asset Purchase Agreement, and that the agreement is capable of being assumed by the bankruptcy estate. In addition, the Equity Holders Committee filed a motion seeking Bankruptcy court approval of investor protections for Harbinger Capital Partners Master Fund I, Ltd., an equity investment firm that has conditionally agreed to pay no more than $51.5 million for preferred stock in 3dfx. The hearing on that motion was held on January 18, 2007, and the court approved the proposed protections. Beginning on March 21, 2007, NVIDIA and the Trustee are scheduled to try the question of the value of the assets 3dfx conveyed to NVIDIA and, in particular, whether the price NVIDIA paid for those assets was reasonably equivalent to the value of the assets 3dfx sold to NVIDIA.

Lawsuits related to our historical stock option granting practices and SEC inquiry

In June 2006, the Audit Committee of the Board of NVIDIA, or the Audit Committee, began a review of our stock option practices based on the results of an internal review voluntarily undertaken by management. The Audit Committee, with the assistance of outside legal counsel, completed its review on November 13, 2006 when the Audit Committee reported its findings to our full Board. The review covered option grants to all employees, directors and consultants for all grant dates during the period from our initial public offering in January 1999 through June 2006. Based on the findings of the Audit Committee and our internal review, we identified a number of occasions on which we used an incorrect measurement date for financial accounting and reporting purposes.

Concurrently with our internal review and the SEC’s inquiry, since September 29, 2006, ten derivative cases have been filed in state and federal courts asserting claims concerning errors related to our historical stock option granting practices and associated accounting for stock-based compensation expense. These complaints have been filed in various courts, including the California Superior Court, Santa Clara County, the United States District Court for the ~~Equity Holder’s Committee has announced an intention~~Northern District of California, and the Court of Chancery of the State of Delaware in and for New Castle County. Plaintiffs filed a consolidated complaint in the United States District Court for the Northern District of California on February 28, 2007. The California Superior Court cases have been consolidated and plaintiffs are scheduled to file a ~~competing Plan~~consolidated complaint on or before March 22, 2007. All of ~~Reorganization~~the cases purport to be brought derivatively on behalf of NVIDIA against members of our Board and several of our current and former officers and directors. All allege in substantially similar fashion claims for, among other things, breach of fiduciary duty, unjust enrichment, insider selling, abuse of control, gross mismanagement, waste, constructive fraud, and violations of Sections 10(b) and 14(a) of the Securities Exchange Act of 1934, or ~~Liquidation~~the Exchange Act. The plaintiffs seek to recover for NVIDIA, among other things, damages in ~~the Trustee’s case.~~an unspecified amount, rescission, punitive damages, treble damages for insider selling, and fees and costs. Plaintiffs also seek an accounting, a constructive trust and other equitable relief.We intend to take all appropriate action in response to these complaints.

2826

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. In its complaint, Opti ~~asserts~~asserted that unspecified NVIDIA chipsets infringe five ~~U.S.~~United States patents held by Opti. Opti ~~seeks~~sought unspecified damages for our alleged conduct, attorneys’ fees and triple damages for alleged willful infringement by NVIDIA. In April 2006, the District Court issued a Markman ruling adopting Opti's proposed construction on 13 of the 15 terms at issue and Opti dropped from the lawsuit two of the five United States patents that Opti alleged NVIDIA infringes, and elected to pursue the three remaining patents at trial.

In August 2006, Opti and NVIDIA settled this litigation. Under that settlement, NVIDIA was obligated to pay to Opti $11.0 million dollars for past and present licenses to the patents in suit and NVIDIA agreed to make additional quarterly payments to Opti should NVIDIA use certain patented technology after January 31, 2007. The case has now been dismissed with prejudice. The agreements with Opti call for us to pay $11.0 million in exchange for Opti’s dismissal of its lawsuit against us and for certain patent license rights. Of this $11.0 million, we recorded $8.0 million as a patent-related intangible asset and $3.0 million as a charge to cost of revenue.

Department of Justice Subpoena and Investigation

On November 29, 2006, we received a subpoena from the San Francisco Office of the Antitrust Division of the United States Department of Justice, or DOJ, in connection with the DOJ's investigation into potential antitrust violations related to graphics processing units and cards. No specific allegations have been made against us. We plan to cooperate with the DOJ in its investigation. As of March 14, 2007, 42 civil complaints have been filed against us. The majority are pending in the Northern District of California, a number are pending in the Central District of California, and other cases are pending in several other Federal district courts. Although the complaints differ, they generally purport to assert federal and state antitrust claims based on alleged price fixing, market allocation, and other alleged anti-competitive agreements between us and Advanced Micro Devices, Inc., or AMD, as a result of its acquisition of ATI Technologies, Inc., or ATI. Many of the cases also assert a variety of state law unfair competition or consumer protection claims on the same allegations and some cases assert unjust enrichment or other common law claims. The complaints are putative class actions alleging classes of direct and/or indirect purchasers of our graphic processing units and cards. The plaintiffs in a few of the Northern District of California actions have filed a ~~response to~~motion with the Judicial Panel on Multidistrict Litigation asking that all pending and subsequent cases be consolidated in one court for all pre-trial discovery and motion practice. A hearing on this ~~complaint in December 2004. A case management conference was held in July 2005 where a trial date was~~motion is set for July 2006. A court mandated mediation was held in January 2006 and did not resolve the matter. Discovery continues, as well as preparation for the Markman hearing on claim construction. The Markman hearing is scheduled for April 13, 2006.March 29, 2007. We believe the ~~claims asserted against us~~allegations in the complaints are without merit and ~~we will continue~~intend to vigorously defend ourselves vigorously. We do not have sufficient information to determine whether a loss is probable. As such, we have not recorded any liability in our consolidated financial statements for such, if any, loss.the cases.

~~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. In November 2004, NVIDIA sought and was granted permission to intervene in two of the three pending AVG lawsuits. Our complaint in intervention alleged that both of the patents in suit were invalid and that, to the extent AVG’s claims target NVIDIA products, the asserted patents were not infringed.

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.

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

No matters were submitted to a vote of our security holders during the fourth quarter of fiscal ~~2006.~~2007.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is traded on the ~~Nasdaq National~~NASDAQ Global Select Market under the symbol NVDA. Public trading of our common stock began on January 22, 1999. Prior to that, there was no public market for our common stock. As of March ~~3, 2006,~~2, 2007, we had approximately ~~434~~461 registered stockholders, not including those shares held in street or nominee name.

The following table sets forth for the periods indicated the high and low sales price for our common stock as quoted on the ~~Nasdaq National~~NASDAQ Global Select Market:

	High	Low	High		Low
Year ended January 28, 2007
First Quarter (through March 3, 2006)	$50.72	$42.87
Fiscal year ending January 27, 2008
First Quarter (through March 2, 2007)			$	34.91	$	29.71

Year ended January 29, 2006
Fiscal year ended January 28, 2007
Fourth Quarter	$46.76	$32.55	$	38.96	$	30.90
Third Quarter	$35.95	$27.04	$	34.59	$	20.85
Second Quarter	$29.39	$21.52	$	31.88	$	17.17
First Quarter	$29.60	$20.92
First Quarter ⁽¹⁾			$	30.84	$	21.44

Year ended January 30, 2005
Fourth Quarter	$24.96	$13.14
Third Quarter	$15.89	$9.30
Second Quarter	$24.11	$14.40
First Quarter	$27.35	$20.63
Fiscal year ended January 29, 2006
Fourth Quarter ⁽¹⁾			$	23.38	$	16.28
Third Quarter ⁽¹⁾			$	17.98	$	13.52
Second Quarter ⁽¹⁾			$	14.70	$	10.76
First Quarter ⁽¹⁾			$	14.80	$	10.46

⁽¹⁾Reflects a two-for-one stock split effective on April 6, 2006.

Dividend Policy

We have never paid and do not expect to pay cash dividends for the foreseeable future.

Equity Compensation Plan Information

Information regarding our equity compensation plans, including both stockholder approved plans and non-stockholder approved plans, will be contained in our definitive Proxy Statement with respect to our Annual Meeting of Stockholders under the caption "Equity Compensation Plan Information," and is incorporated by reference into this report.

Issuer Purchases of Equity Securities

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~~$300 million. Subsequently, on March 6, 2006, we announced that our Board had approved a $400 million increase to the original stock repurchase program. As a result of this increase, the amount of common stock the Board has authorized to be repurchased has now been increased to a total of $700 million. The repurchases will be made from time to time in the open market, in privately negotiated transactions, or in structured stock repurchase programs, in compliance with the Exchange Act, Rule 10b-18, subject to market conditions, applicable legal requirements, and other factors. The program does not obligate NVIDIA to acquire any particular amount of common stock and the program may be suspended at any time at our discretion.

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 a potential incremental number of shares of our common stock, within a pre-determined range, at the end of the term of the agreement. During the fourth quarter of fiscal 2006, we repurchased 1.3 million shares of our common stock for $50.0 million under a structured share repurchase transaction, which we recorded on the trade date of the transaction. Through the end of ~~the fourth quarter of~~ fiscal ~~2006,~~2007, we have repurchased ~~8.5~~27.3 million shares under our stock repurchase program for a total cost of ~~$213.2~~$488.1 million. During the first quarter of fiscal ~~2007,~~2008, we entered into a structured share repurchase transaction to repurchase shares of our common stock for ~~$50.0~~$125.0 million that we expect to settle prior to the end of our first fiscal quarter.

On March 6, 2006, we announced that our Board had approved an increase in our existing stock repurchase program. We announced a $400 million increase to the original stock repurchase program we had announced in August 2004. As a result of this increase, the amount of common stock the Board of Directors has authorized to be repurchased has now been increased to a total of $700 million. The repurchases will be made from time to time in the open market, in privately negotiated transactions, or in structured stock repurchase transactions, in compliance with the Securities and Exchange Commission Rule 10b-18, subject to market conditions, applicable legal requirements, and other factors. The program does not obligate NVIDIA to acquire any particular amount of common stock and the program may be suspended at any time at our discretion.

3028

Period

Total Number of Shares Purchased

Average Price Paid per Share

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1)

October 31, 2005 through November 27, 2005 - $ - - $ 136,846,554

November 28, 2005 through December 25, 2005 - $ - - $ 136,846,554

December 26, 2005 through January 29, 2006 1,355,260 (3) $36.89 1,355,260 (3) $ 86,846,554

Total 1,355,260 $36.89 (2) 1,355,260

Period	Total Number of Shares Purchased			Average Price Paid per Share			Total Number of Shares Purchased as Part of Publicly Announced Plans of Programs			Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs ⁽¹⁾
October 30, 2006 - November 26, 2006		-		$	-			-			311,869,417
November 27, 2006 - December 24, 2006		-		$	-			-			311,869,417
December 25, 2006 - January 28, 2007		2,868,123	⁽³⁾	$	34.87	⁽²⁾		2,868,123	⁽³⁾		211,869,417
Total		2,868,123		$	34.87			2,868,123

⁽¹⁾ We have an ongoing authorization from the Board, subject to certain specifications, to repurchase shares of our common stock up to an aggregate maximum amount of ~~$700.0~~$700 million on the open market, in negotiated transactions or through structured stock repurchase agreements through August 2007.

⁽²⁾Represents weighted average price paid per share during the fourth quarter of fiscal ~~2006.~~2007.

⁽³⁾ 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. During the fourth quarter of fiscal ~~2006,~~2007, we repurchased ~~1.3~~2.9 million shares of our common stock for ~~$50.0~~$100 million under a structured share repurchase transaction. This transaction required that we make an up-front payment.

Stock Performance Graph

The following graph compares the cumulative total stockholder return for our common stock, the S & P 500 Index and the S & P 500 Semiconductors Index for the five years ended January 28, 2007. The graph assumes that $100 was invested on January 25, 2002 in our common stock or on January 31, 2002 in each of the S & P 500 Index and the S & P Semiconductors Index. Total return assumes reinvestment of dividends in each of the indices indicated. We have never paid cash dividends on our common stock. Our results are calculated on fiscal year-end basis and each of the S & P 500 Index and the S & P Semiconductors Index are calculated on month-end basis. Total return is based on historical results and is not intended to indicate future performance.

	1/25/2002		1/24/2003		1/25/2004		1/30/2005		1/29/2006		1/28/2007
NVIDIA Corporation	$	100	$	15.53	$	35.27	$	34.95	$	70.64	$	96.14
S & P 500	$	100	$	76.98	$	103.6	$	110.05	$	121.47	$	139.11
S & P Semiconductors	$	100	$	44.26	$	88.1	$	66.21	$	76.56	$	72.09

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with our financial statements and the notes thereto, and with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The consolidated statement of income data for the years ended January 28, 2007, January 29, 2006, and January 30, 2005 ~~and January 25, 2004~~ and the consolidated balance sheet data as of January ~~29, 2006~~28, 2007 and January ~~30, 2005~~29, 2006 have been derived from and should be read in conjunction with our audited consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K. The consolidated statement of income data for the ~~years~~year ended January ~~26, 2003~~25, 2004 and the consolidated balance sheet data as of January ~~27, 2002 is~~30, 2005, are derived from audited consolidated financial statements and the notes thereto which are not included in this Annual Report on Form 10-K. The consolidated statement of income data for the year ended January 26, 2003 and the consolidated balance sheet data as of January 25, 2004 and January 26, 2003 ~~and January 27, 2002 is~~are derived from ~~audited~~unaudited consolidated financial statements ~~and the notes thereto~~ which are not included in this Annual Report on Form 10-K.

	Year Ended
	January 28,		January 29,		January 30,		January 25,		January 26,
	2007 (B, C)		2006 (D)		2005		2004 (E, F)		2003 (G, H)
	(In thousands, except per share data)
Consolidated Statement of Income Data:
Revenue	$	3,068,771	$	2,375,687	$	2,010,033	$	1,822,945	$	1,909,447
Income from operations	$	453,452	$	336,664	$	95,176	$	49,788	$	82,201
Net income	$	448,834	$	301,176	$	88,615	$	48,630	$	50,901
Basic net income per share	$	1.27	$	0.89	$	0.27	$	0.15	$	0.17
Diluted net income per share	$	1.15	$	0.82	$	0.25	$	0.14	$	0.15
Shares used in basic per share computation (A)		352,404		339,380		332,124		321,848		307,026
Shares used in diluted per share computation (A)		391,504		365,704		351,624		344,108		331,654

Year Ended

January 29,

January 30,

January 25,

January 26,

January 27,

2006 (A)

2005

2004 (B, C)

2003 (D, E)

2002 (F, G)

(in thousands, except per share data)

Consolidated Statement of Income Data:

Revenue $ 2,375,687 $ 2,010,033 $ 1,822,945 $ 1,909,447 $ 1,369,471
Gross profit $ 910,795 $ 649,486 $ 528,878 $ 576,012 $ 519,238
Income from operations $ 340,097 $ 113,593 $ 90,157 $ 143,986 $ 241,732
Income before income tax expense $ 360,221 $ 125,445 $ 86,673 $ 150,557 $ 252,749
Income tax expense $ 57,635 $ 25,089 $ 12,254 $ 59,758 $ 75,825
Net income $ 302,586 $ 100,356 $ 74,419 $ 90,799 $ 176,924
Basic net income per share $ 1.78 $ 0.60 $ 0.46 $ 0.59 $ 1.24
Diluted net income per share $ 1.65 $ 0.57 $ 0.43 $ 0.54 $ 1.03
Shares used in basic per share computation 169,690 166,062 160,924 153,513 143,015
Shares used in diluted per share computation 182,951 176,558 172,707 168,393 171,074

	January 29,		January 30,		January 25,		January 26,		January 27,		January 28,		January 29,		January 30,		January 25,		January 26,
	2006		2005		2004		2003		2002		2007		2006		2005		2004		2003
	(in thousands)										(In thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and marketable securities	$	950,174	$	670,045	$	604,043	$	1,028,413	$	791,377	$	1,117,850	$	950,174	$	670,045	$	604,043	$	1,028,413
Total assets	$	1,915,299	$	1,628,536	$	1,399,344	$	1,617,015	$	1,503,174	$	2,675,263	$	1,954,687	$	1,663,551	$	1,452,040	$	1,658,035
Capital lease obligations, less current portion	$	--	$	--	$	856	$	4,880	$	5,861	$	--	$	--	$	--	$	856	$	4,880
Deferred revenue	$	217	$	11,500	$	--	$	--	$	70,193
Non-current deferred income tax liabilities	$	8,260	$	20,754	$	8,609	$	--	$	--
Other long-term debt	$	--	$	--	$	--	$	300,000	$	300,000	$	--	$	--	$	--	$	--	$	300,000
Long-term liabilities	$	10,624	$	8,358	$	4,582	$	--	$	--
Total stockholders’ equity	$	1,457,756	$	1,178,268	$	1,051,185	$	932,687	$	763,819	$	2,006,919	$	1,495,992	$	1,221,091	$	1,089,493	$	960,933
Cash dividends declared per common share	$	--	$	--	$	--	$	--	$	--	$	--	$	--	$	--	$	--	$	--

~~Convertible Debenture Redemption Expense~~

On October 24, 2003, we fully redeemed the Notes. The aggregate principal amount of the Notes outstanding was $300.0 million, which included $18.6 million of Notes that we had purchased in the open market during the three months ended October 26, 2003. The redemption price was equal to approximately 102.7% of the outstanding principal amount of the Notes, plus accrued and unpaid interest up to, but excluding, the redemption date. In connection with the redemption of the Notes, we recorded a one-time charge in fiscal 2004 of approximately $13.1 million, which included a $7.6 million redemption premium and $5.5 million of unamortized issuance costs.

Liquidity and Capital Resources

As of January 28, 2007

As of January 29, 2006

(In millions)

Cash and cash equivalents $ 544.4 $ 551.8
Marketable securities 573.4 398.4
Cash, cash equivalents, and marketable securities $ 1,117.8 $ 950.2

Year Ended

January 28,

January 29,

January 30,

2007

2006

2005

(in millions)

Net cash provided by operating activities $ 587.1 $ 446.4 $ 132.2
Net cash used in investing activities (540.8 ) (41.8 ) (152.0 )
Net cash provided by (used in) financing activities (53.6 ) (61.4 ) 13.8

As of January ~~29, 2006,~~28, 2007, we had ~~$950.2 million~~$1.12 billion in cash, cash equivalents and marketable securities, an increase of ~~$280.1~~$167.6 million from the end of fiscal ~~2005. As of January 30, 2005, we had $670.0 million in cash, cash equivalents and marketable securities, an increase of $66.0 million from the end of fiscal 2004.~~2006. Our portfolio of cash equivalents and marketable securities is managed by several financial institutions. Our investment policy requires the purchase of top-tier investment grade securities, the diversification of asset type and certain limits on our portfolio duration.

Operating activities generated cash of $587.1 million, $446.4 million, ~~$132.2 million,~~ and ~~$49.7~~$132.2 million during fiscal years 2007, 2006 and 2005, respectively. The annual cash provided by operating activities in amounts greater than net income is due primarily to non-cash charges to earnings and ~~2004, respectively.~~the tax benefit on the exercise of stock options. Non-cash charges to earnings included stock-based compensation and depreciation and amortization on our long-term assets. Upon adoption of SFAS No. 123(R) in fiscal 2007, non-cash charges to earnings included $116.7 million of stock-based compensation expense and related deferred income tax impact. The increase in cash flows from operating activities in fiscal 2006 when compared to fiscal 2005 was primarily related to the ~~$202.2~~$212.6 million increase in net income and changes in operating assets and liabilities. On our consolidated balance sheet, accrued liabilities increased $77.2 million from fiscal 2005 to fiscal 2006 primarily due to the recording of income taxes payable for fiscal 2006, the increase in accruals related to customer programs and the recording of $30.6 million in relation to 3dfx, of which $25.0 million was recorded as an adjustment to goodwill. Accounts payable decreased $58.8 million and inventories decreased ~~$60.7~~$60.9 million from fiscal 2005 to fiscal 2006 primarily as a result of significant reductions in older products, offset by an increase in new products. Accounts receivable increased $21.9 million primarily due to increased sales and improved linearity of sales, and cash collections during the fourth quarter of fiscal 2006 as compared to the fourth quarter of fiscal 2005. The increase in cash flows from operating activities in fiscal 2005 when compared to fiscal 2004 was primarily related to the $25.9 million increase in net income and changes in operating assets and liabilities. On our consolidated balance sheet, accrued liabilities increased $37.3 million

primarily due to an increase in rebates payable, which resulted from increased OEM business. Accounts payable increased $52.9 million primarily due to purchases from subcontract manufacturers for inventory. Offsetting these increases, our accounts receivable increased $99.6 million primarily due to increased sales during the fourth quarter of fiscal 2005 as compared to the fourth quarter of fiscal 2004.

Investing activities have consisted primarily of purchases and sales of marketable securities, acquisition of businesses and purchases of property and equipment, which include leasehold improvements for our facilities, and intangible assets. Investing activities used cash of $540.8 million, $41.8 million and $152.0 million during fiscal years 2007, 2006 and 2005, respectively. Net cash used by investing activities during fiscal 2007 was primarily due to $401.8 million of cash used for our acquisitions of PortalPlayer, ULi and Hybrid Graphics during the fiscal year. Additionally, net cash used in investing activities included capital expenditures of $145.3 million attributable to purchases of new research and development equipment, hardware equipment, technology licenses, software, intangible assets and leasehold improvements at our various facilities. These uses of cash were offset by $6.2 million of net proceeds from sales of marketable securities. Net cash used by investing activities during fiscal 2006 was primarily due to $79.6 million for capital expenditures primarily attributable to purchases of new research and development equipment, hardware equipment, technology licenses, software, intangible assets and leasehold improvements at our headquarters facility in Santa Clara, California and at our international sites. In addition, we used cash of $12.1 million ~~to acquire certain assets~~for our acquisition of a private company and $9.7 million ~~related to~~for the investments we made during fiscal 2006 in non-affiliated companies. These uses of cash were offset by $59.6 million of net proceeds from sales of marketable securities. ~~Investing activities used cash of $152.0 million and provided cash of $88.0 million during fiscal 2005 and 2004, respectively.~~ Net cash used by investing activities during fiscal 2005 was primarily due to $84.7 million of net purchases of marketable securities. In addition, we used $67.3 million for capital expenditures primarily attributable to purchases of leasehold improvements for our new data center at our headquarters campus, new research and development emulation equipment, technology licenses, software and intangible assets. We expect to spend approximately ~~$80~~$120 million to ~~$100~~$140 million for capital expenditures during fiscal ~~2007,~~2008, primarily for purchases of software licenses, emulation equipment, computers and engineering workstations. In addition, we may continue to use cash in connection with the acquisition of new businesses or assets.

Financing activities used cash of $53.6 million, $61.4 million ~~during fiscal 2006 compared to~~and provided cash ~~provided~~ of $13.8 million during fiscal ~~2005.~~years 2007, 2006 and fiscal 2005, respectively. Net cash used by financing activities in fiscal 2007 was primarily due to $275.0 million paid towards our stock repurchase program, offset by cash proceeds of $221.2 million from common stock issued under employee stock plans. Cash used in fiscal 2006 resulted primarily ~~resulted~~ from $188.5 million related to our stock repurchase program, offset by $127.5 million of common stock issued under employee stock plans. In fiscal 2005, the cash provided was primarily from $42.5 million of common stock issued under employee stock plans, offset by $24.6 million related to our stock repurchase program. Financing activities provided cash of $13.8 million during fiscal 2005 compared to cash used of $270.3 million during fiscal 2004. Cash provided in fiscal 2005 primarily resulted from $42.5 million of common stock issued under employee stock plans, offset by $24.6 million related to our stock repurchase program. In fiscal 2004, the cash used was primarily due to the $300.0 million redemption of the Notes, which included $18.6 million of Notes that we had purchased during the three months ended October 26, 2003.

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~~$300 million. Subsequently, on March 6, 2006, we announced that our Board had approved a $400 million increase to the original stock repurchase program. As a result of this increase, the amount of common stock the Board has authorized to be repurchased has now been increased to a total of $700 million. The repurchases will be made from time to time in the open market, in privately negotiated transactions, or in structured stock repurchase programs, in compliance with the Securities Exchange Act of 1934, or the Exchange Act, Rule 10b-18, subject to market conditions, applicable legal requirements, and other factors. The program does not obligate NVIDIA to acquire any particular amount of common stock and the program may be suspended at any time at our discretion.

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 a potential incremental number of shares of our common stock, within a pre-determined range, at the end of the term of the agreement. During ~~the fourth quarter of~~ fiscal ~~2006,~~2007, we repurchased ~~1.3~~10.3 million shares of our common stock for ~~$50.0~~$275.0 million under a structured share repurchase ~~transaction,~~transactions, which we recorded on the trade date of the transaction. Through the end of ~~the fourth quarter of~~ fiscal ~~2006,~~2007, we have repurchased ~~8.5~~27.3 million shares under our stock repurchase program for a total cost of ~~$213.2~~$488.1 million. During the first quarter of fiscal ~~2007,~~2008, we entered into a structured share repurchase transaction to repurchase shares of our common stock for ~~$50.0~~$125.0 million that we expect to settle prior to the end of our first fiscal quarter.

On March 6, 2006, we announced that our Board of Directors had approved an increase in our existing stock repurchase program. We announced a $400 million increase to the original stock repurchase program we had announced in August 2004. As a result of this increase, the amount of common stock the Board of Directors has authorized to be repurchased has now been increased to a total of $700 million. The repurchases will be made from time to time in the open market, in privately negotiated transactions, or in structured stock repurchase transactions, in compliance with the Securities and Exchange Commission Rule 10b-18, subject to market conditions, applicable legal requirements, and other factors. The program does not obligate NVIDIA to acquire any particular amount of common stock and the program may be suspended at any time at our discretion.

Operating Capital and Capital Expenditure Requirements

We believe that our existing cash balances and anticipated cash flows from operations will be sufficient to meet our operating, acquisition and capital requirements for at least the next 12 months. However, there is no assurance that we will not need to raise additional equity or debt financing within this time frame. Additional financing may not be available on favorable terms or at all and may be dilutive to our then-current stockholders. We also may require additional capital for other purposes not presently contemplated. If we are unable to obtain sufficient capital, we could be required to curtail capital equipment purchases or research and development expenditures, which could harm our business. Factors that could affect our cash used or generated from operations and, as a result, our need to seek additional borrowings or capital include:

· decreased demand and market acceptance for our products and/or our customers’ products;

· inability to successfully develop and produce in volume production our next-generation products;

· competitive pressures resulting in lower than expected average selling prices; and

· new product announcements or product introductions by our competitors.

For additional factors see “Item 1A. Risk Factors - Risks Related to Our Operations - Our operating results are unpredictable and may fluctuate, and if our operating results are below the expectations of securities analysts or investors, our stock price could decline.”

~~Shelf Registration Statement~~

In December 2003, we filed a Form S-3 with the SEC under its "shelf" registration process. This shelf registration was declared effective by the SEC on March 25, 2004. Under this shelf registration statement, we may sell common stock, preferred stock, debt securities, warrants, stock purchase contracts and/or stock purchase units in one or more offerings up to a total dollar amount of $500.0 million. Unless otherwise indicated in the applicable prospectus supplement, we intend to use the proceeds for working capital and general corporate purposes.

3dfx Asset Purchase

~~The 3dfx asset purchase~~On December 15, 2000, NVIDIA Corporation and one of our indirect subsidiaries entered into an agreement, which closed on April 18, ~~2001.~~2001, to purchase certain graphics chip assets from 3dfx. 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~~or the Creditors’ Committee, reached a conditional settlement of the Trustee’s claims against NVIDIA. This conditional settlement, ~~which will be~~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 ~~calls~~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 ~~relates~~related to various administrative expenses and Trustee fees, and $25.0 million ~~relates~~related to the satisfaction of debts and liabilities owed to the general unsecured creditors of 3dfx. ~~As such,~~Accordingly, during the three ~~months~~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.

Please refer to Note 1112 of the Notes to Consolidated Financial Statements for further information regarding this litigation.

Contractual Obligations

The following summarizes our contractual obligations that are not on our balance sheet as of January ~~29, 2006~~28, 2007 and the effect such obligations are expected to have on our liquidity and cash flow in future periods:

Contractual Obligations	Total		Within 1 Year		2-3 Years		4-5 Years		After 5 Years		Total		Within 1 Year		2-3 Years		4-5 Years		After 5 Years
	(in thousands)										(In thousands)
Operating leases	$	172,483	$	29,557	$	57,717	$	55,606	$	29,603	$	167,765	$	33,890	$	65,432	$	61,998	$	6,445
Purchase obligations (1)		401,571		401,571		--		--		--		364,486		364,486		--		--		--
Capital purchase obligations												4,829		4,829
Total contractual obligations	$	574,054	$	431,128	$	57,717	$	55,606	$	29,603	$	537,080	$	403,205	$	65,432	$	61,998	$	6,445

⁽¹⁾Represents our inventory purchase commitments as of January ~~29, 2006.~~28, 2007.

During the fiscal year 2007, we entered into a confidential patent licensing arrangement. Our commitment for future license payments under this arrangement could range from $97.0 million to $110.0 million over a ten year period; however, the net outlay under this arrangement may be reduced by the occurrence of certain events covered by the arrangement.

Off-Balance Sheet Arrangements

~~We have~~As of January 28, 2007, we had no material off-balance sheet arrangements as defined in Regulation S-K 303(a)(4)(ii).

Recently Issued Accounting Pronouncements

In ~~December 2004,~~July 2006, the Financial Accounting Standards Board, or FASB, issued Interpretation No. 48, or FIN 48, Accounting for Uncertainty in Income Taxes. FIN 48 applies to all tax positions related to income taxes subject to FASB Statement 109, Accounting for Income Taxes. Under FIN 48 a company would 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. FIN 48 clarifies how a company would measure the income tax benefits from the tax positions that are recognized, provides guidance as to the timing of the derecognition of previously recognized tax benefits, and describes the methods for classifying and disclosing the liabilities within the financial statements for any unrecognized tax benefits. FIN 48 also addresses when a company should record interest and penalties related to tax positions and how the interest and penalties may be classified within the financial statements. Any differences between tax liability amounts recognized in the statements of operations as a result of adoption of FIN 48 would be accounted for as a cumulative effect adjustment to the beginning balance of retained earnings. FIN 48 is effective for fiscal years beginning after December 15, 2006. The provisions of FIN 48 will be effective as of first quarter of fiscal 2008. We believe that the cumulative effect of adoption of FIN 48 will not result in any material change to the beginning balance of our retained earnings.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. ~~123(R),~~157, or SFAS No. ~~123(R),~~157, ~~Share-Based Payment~~, 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 Staff Accounting Bulletin No. 107, or SAB No. 107, which includes interpretive guidance for the initial implementation of SFAS No. 123(R). SFAS No. 123(R) allows for either prospective recognition of compensation expense or retrospective recognition. We intend to adopt SFAS No. 123(R) using the modified prospective method, which requires the application of the accounting standard as of January 30, 2006, the first day of our fiscal 2007. Expensing these incentives in future periods will materially and adversely affect our reported operating results as the stock-based compensation expense would be charged directly against our reported earnings. We anticipate that our stock-based compensation expense will be approximately $18 to $22 million for the first quarter of fiscal 2007 and we are unsure how the market will react to this adverse affect on our operating results, which could impact our stock price.

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 SAB No. 107, and in anticipation of the impending effective date of SFAS No. 123(R), 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.

~~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~~Fair Value Measurements. SFAS No. ~~154 applies~~157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. The changes to ~~all voluntary changes~~

~~in accounting principle,~~current practice resulting from the application of this Statement relate to the definition of fair value, the methods used to measure fair value, and ~~changes~~ the ~~requirements for accounting for and reporting~~expanded disclosures about fair value measurements. We are required to adopt the provisions of ~~a change in accounting principle. We will adopt~~ SFAS ~~154 during the first~~No. 157 beginning with our fiscal quarter ~~of fiscal~~ending April 29, 2007. We do not ~~expect~~believe the adoption of SFAS No. ~~154 to~~157 will have a material impact on our consolidated financial position, results of operations or cash flows.

In ~~June 2005,~~September 2006, the ~~FASB ratified~~SEC issued Staff Accounting Bulletin No. 108, or SAB No. 108, Considering 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~~Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements~~. EITF No. 05-06~~, which provides ~~that~~interpretive guidance on how 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~~effects of the ~~assets~~carryover or ~~(b)~~reversal of prior year misstatements should be considered in quantifying a ~~term that includes required lease periods and renewals that are reasonably assured upon~~current year misstatement. We adopted the ~~acquisition or the purchase. The~~ provisions of ~~EITF~~SAB No. ~~05-06 are effective on a prospective basis for leasehold improvements purchased or acquired. We adopted EITF~~108 in our fiscal year 2007. The adoption of SAB No. ~~05-06 during the second quarter of fiscal 2006 and it~~108 did not have a material impact on our consolidated financial position, results of operations or cash flows.

In ~~November 2005,~~February 2007, the FASB issued ~~Staff Position,~~Statement of Financial Accounting Standards No. 159, or ~~FSP, FAS115-1/124-1,~~SFAS No. 159, The ~~Meaning of Other-Than-Temporary Impairment~~Fair Value Option for Financial Assets and ~~Its Application to Certain Investments~~Financial Liabilities, which addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. This FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The guidance in this FSP amends. SFAS No. ~~115,~~ ~~Accounting~~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 ~~Certain Investments~~which the fair value option has been elected be reported in ~~Debt and Equity Securities, and SFAS No. 124,~~ ~~Accounting for Certain Investments Held by Not-for-Profit Organizations~~~~, and APB Opinion No. 18,~~ ~~The Equity Method of Accounting for Investments in Common Stock~~.earnings. We will adopt this FSP during the first quarter of fiscal 2007. We do not believe the adoption of this FSP will have a material impact on our consolidated financial position, results of operations or cash flows.

~~In November 2005, the FASB issued FSP FAS123(R)-3,~~ ~~Transition Election to Accounting for the Tax Effects of Share-Based Payment Awards.~~ ~~This FSP requires an entity to follow either the transition guidance for the additional-paid-in-capital pool as prescribed in SFAS No. 123(R),~~ ~~Share-Based Payment~~~~, or the alternative transition method as described in the FSP. An entity that adopts SFAS No. 123(R) using the modified prospective application may make a one-time election~~are required to adopt the ~~transition method described in this FSP. An entity may take up to one year from the later of its initial adoption~~provisions of SFAS No. ~~123(R) or the effective date of this FSP to evaluate its available transition alternatives and make its one-time election. This FSP became effective in November 2005.~~159 beginning with our fiscal quarter ending April 27, 2008, although earlier adoption is permitted. We are currently evaluating the impact that ~~the adoption of this FSP could~~SFAS No. 159 will have on our consolidated financial position, results of operations or cash flows.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

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 the cash equivalents and marketable securities are treated as “available-for-sale” under SFAS No. 115. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. However, because we classify our debt securities as “available-for-sale”, no gains or losses are recognized due to changes in interest rates unless such securities are sold prior to maturity or declines in fair value are determined to be other than temporary. 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.

As of January ~~29, 2006,~~28, 2007, we performed a sensitivity analysis on our floating and fixed rate financial investments. According to our analysis, parallel shifts in the yield curve of both +/- 0.5% would result in changes in fair market values for these investments of approximately ~~$2.6~~$3.0 million.

Exchange Rate Risk

We consider our direct exposure to foreign exchange rate fluctuations to be minimal. Currently, sales and arrangements with third-party manufacturers provide for pricing and payment in United States dollars, and, therefore, are not subject to exchange rate fluctuations. Increases in the value of the United States’ dollar relative to other currencies would make our products more expensive, which could negatively impact our ability to compete. Conversely, decreases in the value of the United States’ dollar relative to other currencies could result in our suppliers raising their prices in order to continue doing business with us. To date, we have not engaged in any currency hedging activities, although we may do so in the future. Fluctuations in currency exchange rates could harm our business in the future.

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this ~~item~~Item is set forth in our Consolidated Financial Statements and Notes thereto included in this Annual Report on Form 10-K.

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

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES

Controls and Procedures

Disclosure Controls and Procedures

Based on their evaluation as of January ~~29, 2006,~~28, 2007, our management, including our Chief Executive Officer and Chief Financial Officer, have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the ~~Securities Exchange Act of 1934, or the~~ Exchange Act) were effective to ensure that the material information required to be disclosed by us in this Annual Report on Form 10-K was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and instructions for Form 10-K.effective.

Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of January ~~29, 2006~~28, 2007 based on the criteria set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the criteria set forth in Internal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of January ~~29, 2006.~~28, 2007.

Our management’s assessment of the effectiveness of our internal control over financial reporting as of January ~~29, 2006~~28, 2007 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal controls over financial reporting during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls, will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within NVIDIA have been detected.

ITEM 9B.OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, ~~AND~~ EXECUTIVE OFFICERS ~~OF THE REGISTRANT~~AND CORPORATE GOVERNANCE

Identification of Directors

Reference is made to the information regarding directors appearing under the heading ~~“Election~~“Proposal 1- Election of Directors” in our ~~2006~~2007 Proxy Statement, which information is hereby incorporated by reference.

Identification of Executive Officers

Reference is made to the information regarding executive officers appearing under the heading “Executive Officers of the Registrant” in Part I of this Annual Report on Form 10-K, which information is hereby incorporated by reference.

Identification of Audit Committee and Financial Expert

Reference is made to the information regarding directors appearing under the heading “Report of the Audit Committee of the Board of Directors” and “Information about the Board of Directors and Corporate Governance” in our ~~2006~~2007 Proxy Statement, which information is hereby incorporated by reference.

Material Changes to Procedures for Recommending Directors

Reference is made to the information regarding directors appearing under the heading ~~“Election~~“Information about the Board of ~~Directors”~~Directors and Corporate Governance” in our ~~2006~~2007 Proxy Statement, which information is hereby incorporated by reference.

Compliance with Section 16(a) of the Exchange Act

Reference is made to the information appearing under the heading “Section 16(a) Beneficial Ownership Reporting Compliance” in our ~~2006~~2007 Proxy Statement, which information is hereby incorporated by reference.

Code of ~~Ethics~~Conduct

Reference is made to the information appearing under the heading ~~“Code~~“Information about the Board of ~~Ethics”~~Directors and Corporate Governance - Code of Conduct” in our ~~2006~~2007 Proxy Statement, which information is hereby incorporated by reference. The full text of our “Worldwide Code of ~~Ethics”~~Conduct” and “Financial Team Code of ~~Ethics”~~Conduct” are published on ~~our~~the Investor Relations portion of our web site, under Corporate Governance, at www.nvidia.com.

ITEM 11. EXECUTIVE COMPENSATION

~~Reference~~The information required by this item is ~~made to~~hereby incorporated by reference from the ~~information appearing under the heading~~section entitled “Executive Compensation” in our ~~2006~~2007 Proxy ~~Statement, which information is hereby incorporated by reference.~~Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Ownership of NVIDIA Securities

~~Reference~~The information required by this item is ~~made to~~hereby incorporated by reference from the ~~information appearing in our 2006 Proxy Statement under the heading~~section entitled “Security Ownership of Certain Beneficial Owners and Management”~~, which information is hereby incorporated by reference.~~ in our 2007 Proxy Statement.

Equity Compensation Plan Information

Information ~~regarding~~concerning our equity compensation plans, including both stockholder approved plans and non-stockholder approved plans, ~~will be contained in our definitive Proxy Statement with respect to our Annual Meeting of Stockholders under the caption "Compensation-Equity Compensation Plan Information," and~~ is hereby incorporated by reference ~~into this report.~~from the section entitled “Equity Compensation Plan Information” in our 2007 Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

~~Reference is made to the~~The information ~~appearing in our 2006 Proxy Statement under the heading “Certain Transactions,” which information~~required by this item is hereby incorporated by ~~reference.~~reference from the sections entitled “Transactions with Related Persons” and “Information about the Board of Directors and Corporate Governance - Independence of the Members of the Board of Directors” in our 2007 Proxy Statement.

ITEM 14. PRINCIPAL ~~ACCOUNTING~~ACCOUNTANTS FEES AND SERVICES

~~Reference is made to the~~The information ~~appearing in our 2006 Proxy Statement, which information~~required by this item is hereby incorporated by ~~reference.~~reference from the section entitled “Fees Billed by the Independent Registered Public Accounting Firm” in our 2007 Proxy Statement.

5351

PART IV

ITEM 15.EXHIBITS, FINANCIAL STATEMENT SCHEDULES

Page
(a)
1.
Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm, PricewaterhouseCoopers LLP
55
53

~~Report of Independent Registered Public Accounting Firm, KPMG LLP~~
57
~~Consolidated Balance Sheets as of January 29, 2006 and January 30, 2005~~
58
Consolidated Statements of Income for the years ended January 28, 2007, January 29, 2006, and January 30, 2005 ~~and January 25, 2004~~
59
55

Consolidated Balance Sheets as of January 28, 2007, and January 29, 2006
56
Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the years ended January 28, 2007, January 29, 2006, and January 30, 2005 ~~and January 25, 2004~~
60
57

Consolidated Statements of Cash Flows for the years ended January 28, 2007, January 29, 2006, and January 30, 2005 ~~and January 25, 2004~~
61
58

Notes to Consolidated Financial Statements
63
60

(a)
2.
Financial Statement Schedules

Schedule II Valuation and Qualifying Accounts
92
93

(a)
3.
Exhibits
93

The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as a part of this Annual Report on Form 10-K.
94

5452

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Tothe Stockholders and Board of Directors
NVIDIA Corporation:

We have completed integrated audits of NVIDIA Corporation’s ~~fiscal 2006 and 2005~~ consolidated financial statements and of its internal control over financial reporting as of January ~~29, 2006~~28, 2007, in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated ~~financial~~financial statements and financial statement schedule

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)~~(1)~~(2) present fairly, in all material respects, the financial position of NVIDIA Corporation and its subsidiaries at January ~~29, 2006~~28, 2007 and January ~~30, 2005~~29, 2006, and the results of their operations and their cash flows for each of the ~~two~~three years in the period ended January ~~29, 2006~~28, 2007 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2)presents fairly, in all material respects, the information set forth therein ~~as of January 29, 2006 and January 30, 2005 and for each of the two years in the period ended January 29, 2006~~ when read in conjunction with the related consolidated financial statements. These financial statements and ~~the~~ financial statement ~~schedule~~schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedulebased on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 of the Notes to Consolidated Financial Statements, the Company changed the manner in which it accounts for stock-based compensation in fiscal 2007.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in Management’s Annual Report on Internal Control over Financial Reportingappearing under Item 9A, that the Company maintained effective internal control over financial reporting as of January ~~29, 2006~~28, 2007 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January ~~29, 2006,~~28, 2007, based on criteria established in Internal Control - Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,
55
accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
53

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

~~/s/~~ PricewaterhouseCoopers LLP
San Jose, ~~California~~CA
March ~~16, 2006~~15, 2007

56

~~REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM~~

~~The Board of Directors and Stockholders~~
~~NVIDIA Corporation:~~

We have audited the accompanying consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows of NVIDIA Corporation and subsidiaries (the “Company”) for the year ended January 25, 2004. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule for the year ended January 25, 2004 as listed in the index of Item 15. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audit.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and the cash flows of NVIDIA Corporation and subsidiaries for the year ended January 25, 2004 in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

~~/s/ KPMG LLP~~
~~Mountain View, California~~
~~February 12, 2004~~

57

~~NVIDIA CORPORATION AND SUBSIDIARIES~~
~~CONSOLIDATED BALANCE SHEETS~~
~~(In thousands, except share and per share data)~~

January 29,

January 30,

2006

2005

ASSETS

Current assets:
Cash and cash equivalents $ 551,756 $ 208,512
Marketable securities 398,418 461,533
Accounts receivable, less allowances of $10,837 and $13,153 in 2006 and 2005, respectively 318,186 296,279
Inventories 254,792 315,518
Prepaid expenses and other current assets 24,387 19,819
Deferred income taxes 1,393 3,265
Total current assets 1,548,932 1,304,926

Property and equipment, net 178,152 178,955
Deposits and other assets 27,477 9,034
Goodwill 145,317 108,107
Intangible assets, net 15,421 27,514
$ 1,915,299 $ 1,628,536

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable $ 179,395 $ 238,223
Accrued liabilities 259,264 182,077
Current portion of capital lease obligations -- 856
Total current liabilities 438,659 421,156

Deferred income tax liabilities 8,260 20,754
Other long-term liabilities 10,624 8,358
Commitments and contingencies - see Note 11

Stockholders’ equity:
Preferred stock, $.001 par value; 2,000,000 shares authorized; none issued -- --
Common stock, $.001 par value; 1,000,000,000 shares authorized;
179,963,979 shares issued and 171,477,456 outstanding in 2006; and
169,173,898 shares issued and 167,089,545 outstanding in 2005
180 169
Additional paid-in capital 798,251 636,618
Deferred compensation (1,676 ) (2,926 )
Treasury stock (212,142 ) (24,644 )
Accumulated other comprehensive loss, net (1,957 ) (3,463 )
Retained earnings 875,100 572,514
Total stockholders' equity 1,457,756 1,178,268
$ 1,915,299 $ 1,628,536

~~See accompanying notes to consolidated financial statements.~~

5854
NVIDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)

Year Ended

Year Ended

Year Ended

January 29,

January 30,

January 25,

2006

2005

2004

Year Ended
January 28,
2007

Year Ended
January 29,
2006

Year Ended
January 30,
2005

Revenue $ 2,375,687 $ 2,010,033 $ 1,822,945 $ 3,068,771 $ 2,375,687 $ 2,010,033
Cost of revenue 1,464,892 1,360,547 1,294,067 1,768,322 1,465,654 1,362,478
Gross profit 910,795 649,486 528,878 1,300,449 910,033 647,555
Operating expenses:
Research and development 352,099 335,104 269,972 553,467 357,123 348,220
Sales, general and administrative 204,441 200,789 165,249 293,530 202,088 204,159
In-process research and development -- -- 3,500
Settlement costs 14,158 -- -- - 14,158 —
Total operating expenses 570,698 535,893 438,721 846,997 573,369 552,379
Income from operations 340,097 113,593 90,157 453,452 336,664 95,176
Interest income 20,698 11,422 18,561 41,820 20,698 11,422
Interest expense (72 ) (164 ) (12,010 ) (21 ) (72 ) (164 )
Other income (expense), net (502 ) 594 3,033 (771 ) (502 ) 594
Convertible debenture redemption expense -- -- (13,068 )
Income before income tax expense 360,221 125,445 86,673 494,480 356,788 107,028
Income tax expense 57,635 25,089 12,254 46,350 55,612 18,413
Income before change in accounting principle 448,130 301,176 88,615
Cumulative effect of change in accounting principle, net of tax 704 - -
Net income $ 302,586 $ 100,356 $ 74,419 $ 448,834 $ 301,176 $ 88,615

Basic income per share
Income before change in accounting principle $ 1.27 $ 0.89 $ 0.27
Cumulative effect of change in accounting principle - - -
Basic net income per share $ 1.78 $ 0.60 $ 0.46 $ 1.27 $ 0.89 $ 0.27

Shares used in basic per share computation(1) 352,404 339,380 332,124

Diluted income per share:
Income before change in accounting principle $ 1.15 $ 0.82 $ 0.25
Cumulative effect of change in accounting principle - - -
Diluted net income per share $ 1.65 $ 0.57 $ 0.43 $ 1.15 $ 0.82 $ 0.25
Shares used in basic per share computation(1) 169,690 166,062 160,924
Shares used in diluted per share computation 182,951 176,558 172,707

Shares used in diluted per share computation ⁽¹⁾
391,504 365,704 351,624

⁽¹⁾Reflects a two-for-one stock split effective on April 6, 2006.
See accompanying notes to consolidated financial statements.
55
NVIDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)

January 28,
2007

January 29,
2006

ASSETS

Current assets:
Cash and cash equivalents $ 544,414 $ 551,756
Marketable securities 573,436 398,418
Accounts receivable, less allowances of $15,749 and $10,837 in 2007 and 2006, respectively 518,680 318,186
Inventories 354,680 254,870
Prepaid expenses and other current assets 31,141 24,387
Deferred income taxes 9,419 2,682
Total current assets 2,031,770 1,550,299
Property and equipment, net 260,828 178,152
Goodwill 301,425 145,317
Intangible assets, net 45,511 15,421
Deposits and other assets 28,349 27,477
Deferred income taxes 7,380 38,021
$ 2,675,263 $ 1,954,687

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable $ 272,075 $ 179,395
Accrued liabilities 366,732 259,264
Total current liabilities 638,807 438,659
Other long-term liabilities 29,537 20,036
Commitments and contingencies - see Note 12
Stockholders’ equity:
Preferred stock, $.001 par value; 2,000,000 shares authorized; none issued — —
Common stock, $.001 par value; 1,000,000,000 shares authorized; 388,308,979 shares issued and 360,988,504 outstanding in 2007; and 359,927,958 shares issued and 342,954,912 outstanding in 2006 ⁽¹⁾
388 360
Additional paid-in capital 1,295,650 965,604
Deferred compensation - (3,604 )
Treasury stock, at cost (27,227,145 shares in 2007 and 16,889,716 shares in 2006) (487,120 ) (212,142 )
Accumulated other comprehensive income (loss), net 1,436 (1,957 )
Retained earnings 1,196,565 747,731
Total stockholders' equity 2,006,919 1,495,992
$ 2,675,263 $ 1,954,687

⁽¹⁾Reflects a two-for-one stock split effective on April 6, 2006.
See accompanying notes to consolidated financial statements.

5956

NVIDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
(In thousands, except share data)

Common Stock

Additional
Paid in

Deferred

Treasury

Accumulated Other Comprehensive

Retained

Total Stockholders’

Total Comprehensive

Shares

Amount

Capital

Compenation

Stock

Income (Loss)

Earnings

Equity

Income

Balances, January 26, 2003 157,790,022 $ 158 $ 531,186 $ (156 ) $ -- $ 3,760 $ 397,739 $ 932,687 $ 94,451
Issuance of common stock from stock plans 6,355,765 6 37,667 -- -- -- -- 37,673
Tax benefit from stock plans -- -- 8,488 -- -- -- -- 8,488
Deferred compensation -- -- 6,140 (5,984 ) -- -- -- 156
Amortization of deferred compensation -- -- -- 672 -- -- -- 672
Unrealized loss, net of $1,940 tax effect -- -- -- -- -- (383 ) -- (383 ) (383 )
Reclassification adjustment for net gains included in net income, net of $632 tax effect -- -- -- -- -- (2,527 ) -- (2,527 ) (2,527 )
Net income -- -- -- -- -- -- 74,419 74,419 74,419
Balances, January 25, 2004 164,145,787 164 583,481 (5,468 ) -- 850 472,158 1,051,185 71,509
Issuance of common stock from stock plans 5,028,111 5 42,497 -- -- -- -- 42,502
Stock repurchase (2,084,353 ) -- -- -- (24,644 ) -- -- (24,644 )
Tax benefit from stock plans -- -- 11,845 -- -- -- -- 11,845
Reversal of deferred compensation -- -- (1,205 ) 1,205 -- -- -- --
Amortization of deferred compensation -- -- -- 1,337 -- -- -- 1,337
Unrealized loss, net of $1,470 tax effect -- -- -- -- -- (4,468 ) -- (4,468 ) (4,468 )
Reclassification adjustment for net losses included in net income, net of ($38) tax effect -- -- -- -- -- 155 -- 155 155
Net income -- -- -- -- -- -- 100,356 100,356 100,356
Balances, January 30, 2005 167,089,545 169 636,618 (2,926 ) (24,644 ) (3,463 ) 572,514 1,178,268 96,043
Issuance of common stock from stock plans 10,831,746 11 127,486 -- -- -- -- 127,497
Stock repurchase (6,402,170 ) -- -- -- (188,509 ) -- -- (188,509 )
Tax benefit from stock plans -- -- 34,821 -- -- -- -- 34,821
Cancellation of shares (41,665 ) -- (520 ) -- 1,011 -- -- 491
Reversal of deferred compensation -- -- (154 ) 154 -- -- -- --
Amortization of deferred compensation -- -- -- 1,096 -- -- -- 1,096
Unrealized loss, net of $845 tax effect -- -- -- -- -- (120 ) -- (120 ) (120 )
Reclassification adjustment for net losses included in net income, net of ($407) tax effect -- -- -- -- -- 1,626 -- 1,626 1,626
Net income -- -- -- -- -- -- 302,586 302,586 302,586
Balances, January 29, 2006 171,477,456 $ 180 $ 798,251 $ (1,676 ) $ (212,142 ) $ (1,957 ) $ 875,100 $ 1,457,756 $ 304,092

Common Stock

Additional
Paid-in
Capital (1)

Deferred Compensation

Treasury
Stock

Accumulated
Other
Comprehensive
Income (Loss)

Retained
Earnings

Total
Stockholders’
Equity

Total
Comprehensive
Income

Outstanding Shares (1)

Amount

Balances,
January 25, 2004
328,291,574 $ 328 $ 770,278 $ (39,903 ) $ — $ 850 $ 357,940 $ 1,089,493 $ 45,720
Issuance of common stock from stock plans 10,056,222 10 42,492 — — — — 42,502
Stock repurchase (4,168,706 ) — — — (24,644 ) — — (24,644 )
Tax benefit from stock-based compensation — — 8,616 — — — — 8,616
Reversal of deferred compensation — — (5,359 ) 5,359 — — — —
Amortization of deferred compensation — — (145 ) 20,967 — — — 20,822
Unrealized loss, net of $1,470 tax effect — — — — — (4,468 ) — (4,468 ) (4,468 )
Reclassification adjustment for net losses included in net income, net of ($38) tax effect — — — — — 155 — 155 155
Net income — — — — — — 88,615 88,615 88,615
Balances, January 30, 2005 334,179,090 338 815,882 (13,577 ) (24,644 ) (3,463 ) 446,555 1,221,091 84,302
Issuance of common stock from stock plans 21,663,492 22 127,475 — — — — 127,497
Stock repurchase (12,804,340 ) — — — (188,509 ) — — (188,509 )
Tax benefit from stock-based compensation — — 24,868 — — — — 24,868
Cancellation of shares (83,330 ) — (520 ) — 1,011 — — 491
Reversal of deferred compensation — — (2,101 ) 2,101 — — — —
Amortization of deferred compensation — — — 7,872 — — — 7,872
Unrealized loss, net of $845 tax effect — — — — — (120 ) — (120 ) (120 )
Reclassification adjustment for net losses included in net income, net of ($407) tax effect — — — — — 1,626 — 1,626 1,626
Net income — — — — — — 301,176 301,176 301,176
Balances, January 29, 2006 342,954,912 360 965,604 (3,604 ) (212,142 ) (1,957 ) 747,731 1,495,992 302,682
Issuance of common stock from stock plans 28,381,021 28 221,132 — — — — 221,160
Stock repurchase (10,337,429 ) — — — (274,978 ) — — (274,978 )
Tax deficit from stock-based compensation — — (8,482 ) — — — — (8,482 )
Reversal of deferred compensation — — (3,604 ) 3,604 — — — —
Stock-based compensation expense related to acquisitions — — 2,914 — — — — 2,914
Stock-based compensation related to employees — — 118,790 — — — — 118,790
Unrealized gain, net of $1,223 tax effect — — — — — 3,509 — 3,509 3,509
Reclassification adjustment for net gains included in net income, net of $78 tax effect — — — — — (116 ) — (116 ) (116 )
Impact of change in accounting principle, net of ($379) tax effect — — (704 ) — — — — (704 )
Net income — — — — — — 448,834 448,834 448,834
Balances, January 28, 2007 360,988,504 $ 388 $ 1,295,650 $ - $ (487,120 ) $ 1,436 $ 1,196,565 $ 2,006,919 $ 452,227
⁽¹⁾Reflects a two-for-one stock split effective on April 6, 2006.

See accompanying notes to consolidated financial statements.

6057
NVIDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

Year Ended

January 28,
2007

January 29,
2006

January 30,
2005

Cash flows from operating activities:
Net income $ 448,834 $ 301,176 $ 88,615
Adjustments to reconcile net income to net cash provided by operating activities:
Cumulative effect of change in accounting principle (704 ) — —
Bad debt expense (benefit) 205 (492 ) (844 )
In-process research and development 14,002 — —
Depreciation and amortization 107,562 97,977 102,597
Stock-based compensation expense related to employees 116,735 7,872 20,822
Gross tax benefit from stock-based compensation (188 ) — —
Tax benefit (deficit) from stock-based compensation (8,482 ) 24,868 8,616
Deferred income taxes 41,766 (2,691 ) 8,694
Net loss on retirements of property and equipment 251 1,005 412
Non-cash realized gain on investment exchange — (96 ) (533 )
Changes in operating assets and liabilities:
Accounts receivable (175,261 ) (21,415 ) (110,312 )
Inventories (91,395 ) 60,916 (80,906 )
Prepaid expenses and other current assets (5,294 ) (4,568 ) (5,569 )
Deposits and other assets 7,314 (8,073 ) (1,458 )
Accounts payable 38,613 (58,828 ) 52,941
Accrued liabilities and other long-term liabilities 93,153 48,757 49,125
Net cash provided by operating activities 587,111 446,408 132,200
Cash flows from investing activities:
Purchases of marketable securities (220,834 ) (338,058 ) (313,760 )
Proceeds from sales and maturities of marketable securities 227,067 397,686 229,068
Acquisition of businesses, net of cash and cash equivalents (401,800 ) (12,131 ) —
Purchases of property and equipment and intangible assets (145,256 ) (79,600 ) (67,261 )
Investments in affiliates
—
(9,684 ) -
Net cash used in investing activities (540,823 ) (41,787 ) (151,953 )
Cash flows from financing activities:
Proceeds from issuance of common stock under employee stock plans 221,160 127,497 42,502
Payments for stock repurchases (274,978 ) (188,509 ) (24,644 )
Gross tax benefit from stock-based compensation 188 — —
Other — (365 ) (4,015 )
Net cash provided by (used in) financing activities (53,630 ) (61,377 ) 13,843
Change in cash and cash equivalents (7,342 ) 343,244 (5,910 )
Cash and cash equivalents at beginning of period 551,756 208,512 214,422
Cash and cash equivalents at end of period $ 544,414 $ 551,756 $ 208,512

Supplemental disclosures of cash flow information:
Cash paid for interest $ — $ 12 $ 163
Cash paid for income taxes, net $ 26,628 $ 3,368 $ 763

58

NVIDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
(In thousands)

Year Ended

Year Ended

Year Ended

January 29,

January 30,

January 25,

2006

2005

2004

Cash flows from operating activities:
Net income $ 302,586 $ 100,356 $ 74,419
Adjustments to reconcile net income to net cash provided by operating activities:
In-process research and development -- -- 3,500
Non-cash realized gain on investment exchange (96 ) (533 ) --
Depreciation and amortization 97,977 102,597 82,016
Net loss on retirements of property and equipment 1,005 412 --
Write-off of convertible debenture issuance costs -- -- 5,485
Deferred income taxes (10,622 ) 12,141 55,135
Stock-based compensation 1,096 1,337 672
Bad debt expense (benefit) (492 ) (844 ) 731
Tax benefit from employee stock plans 34,821 11,845 8,488
Changes in operating assets and liabilities:
Accounts receivable (21,415 ) (110,312 ) (88,222 )
Inventories 60,726 (81,280 ) (85,126 )
Prepaid expenses and other current assets (4,568 ) (5,569 ) (2,698 )
Deposits and other assets (8,073 ) (1,458 ) (3,482 )
Accounts payable (58,828 ) 52,941 43,506
Accrued liabilities 52,291 50,567 (44,746 )
Net cash provided by operating activities 446,408 132,200 49,678
Cash flows from investing activities:
Purchases of marketable securities (338,058 ) (313,760 ) (734,642 )
Sales and maturities of marketable securities 397,686 229,068 1,021,590
Acquisition of businesses (12,131 ) -- (71,303 )
Purchases of property and equipment and intangible assets (79,600 ) (67,261 ) (127,604 )
Investments in non-affiliates (9,684 ) -- --
Net cash provided by (used in) investing activities (41,787 ) (151,953 ) 88,041
Cash flows from financing activities:
Redemption of convertible debenture -- -- (300,000 )
Common stock issued under employee stock plans 127,497 42,502 37,757
Stock repurchase (188,509 ) (24,644 ) --
Principal payments on capital leases (856 ) (4,015 ) (8,048 )
Retirement of common stock 491 -- --
Net cash provided by (used in) financing activities (61,377 ) 13,843 (270,291 )
Change in cash and cash equivalents 343,244 (5,910 ) (132,572 )
Cash and cash equivalents at beginning of period 208,512 214,422 346,994
Cash and cash equivalents at end of period $ 551,756 $ 208,512 $ 214,422

Supplemental disclosures of cash flow information:
Cash paid for interest $ 12 $ 163 $ 15,167
Cash paid (refund) for income taxes, net $ 3,368 $ 763 $ (211 )

Year Ended

January 28,
2007

January 29,
2006

January 30,
2005

Other non-cash activities:
Unrealized gains/losses from marketable securities $ 4,492 $ 1,068 $ 5,745
Deferred stock-based compensation $ 3,604 $ (2,101 ) $ (5,359 )
Acquisition of business - goodwill adjustment $ 17,862 $ 25,765 $ 1,091
Assets acquired by assuming related liabilities $ 37,251 $ — $ —
Acquisition of business - stock option conversion $ 2,914 $ — $ —
Application of customer advance to accounts receivable $ — $ — $ 11,508
Marketable security received from investment exchange $ — $ 96 $ 688
Asset retirement obligation $ — $ 1,835 $ 4,483

61

~~NVIDIA CORPORATION AND SUBSIDIARIES~~

~~CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)~~

~~(In thousands)~~

Other non-cash activities:
Acquisition of business - goodwill adjustment $ 25,765 $ 1,091 $ --
Assets recorded under capital lease arrangements $ -- $ -- $ 2,528
Application of customer advance to accounts receivable $ -- $ 11,508 $ 46,866
Marketable security received from investment exchange $ 96 $ 688 $ --
Asset retirement obligation $ 1,835 $ 4,483 $ --
Unrealized gains/losses from marketable securities $ 1,068 $ 5,745 $ 4,850
Deferred stock-based compensation $ 154 $ 1,205 $ 6,140

See accompanying notes to consolidated financial statements.

6259

NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Organization and Summary of Significant Accounting Policies

Our Company

NVIDIA Corporation is the worldwide leader in programmable graphics processor technologies. Our products are designed to enhance the end-user experience on consumer and professional computing devices. We have four major product-line operating segments: graphics processing units, or GPUs, media and communications processors, or MCPs, Handheld GPUs, and Consumer Electronics. Our GPU Business is composed of products that support desktop personal computers, or PCs, notebook PCs, professional workstations and ~~professional workstations;~~other GPU-based products; our MCP Business is composed of NVIDIA nForce products that operate as a single-chip or chipset that ~~can off-load~~provide system functions, such as ~~audio processing~~high speed storage and network communications, and perform these operations independently from the host central processing unit, or CPU; our Handheld GPU Business is composed of products that support handheld personal digital assistants, or PDAs, cellular phones and other handheld devices; and our Consumer Electronics Business is concentrated in products that support video game consoles and other digital consumer electronics devices and is composed of our contractual arrangements with Sony Computer Entertainment, or SCE, to jointly develop a custom GPU ~~incorporating our next-generation GeForce GPU and SCE’s system solutions in~~for SCE’s PlayStation3, 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.~~devices. We were incorporated in California in April 1993 and reincorporated in Delaware in April 1998. Our headquarter facilities are in Santa Clara, California.

Fiscal year

We operate on a 52 or 53-week year, ending on the Sunday nearest January 31. Fiscal ~~2006~~years 2007 and ~~2004~~2006 were 52-week years, compared to fiscal 2005 which was a 53-week year.

Stock Split
In March 2006, our Board of Directors, or the Board, approved a two-for-one stock split of our outstanding shares of common stock to be effected in the form of a 100% stock dividend. The stock split was effective on Thursday, April 6, 2006 for stockholders of record at the close of business on Friday, March 17, 2006. All share and per-share numbers contained herein have been retroactively adjusted to reflect this stock split.
Reclassifications

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

Principles of Consolidation

Our 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 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.
60
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 is to defer recognition of revenue and related cost of revenue until the distributors resell the product.
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 01-9, 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. If market conditions decline, 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.
61
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Advertising Expenses
We expense advertising costs in the period in which they are incurred. Advertising expenses for fiscal years 2007, 2006, and 2005 were $14.8 million, $9.2 million, and $15.2 million, respectively.
Rent Expense
We recognize rent expense on a straight-line basis over the lease period and have accrued for rent expense incurred, but not paid.

Product Warranties
We generally offer limited warranty to end-users that range from one to three years for products in order to repair or replace products for any manufacturing defects or hardware component failures. Cost of revenue includes the estimated cost of product warranties that are calculated at the point of revenue recognition. Under limited circumstances, we may offer an extended limited warranty to customers for certain products.

Foreign Currency Translation
We use the United States dollar as our functional currency for all of our subsidiaries. Foreign currency monetary assets and liabilities are remeasured into United States dollars at end-of-period exchange rates. Non-monetary assets and liabilities, including inventories, prepaid expenses and other current assets, property and equipment, deposits and other assets and equity, are remeasured at historical exchange rates. Revenue and expenses are remeasured at average exchange rates in effect during each period, except for those expenses related to the previously noted balance sheet amounts, which are remeasured at historical exchange rates. Gains or losses from foreign currency remeasurement are included in “Other income (expense), net” and to date have not been significant. The aggregate exchange gain (loss) included in determining net income was $(0.5) million in fiscal 2007, $0.01 million in fiscal 2006 and $0.04 million in fiscal 2005.
Cash and Cash Equivalents

We consider all highly liquid investments purchased with an original maturity of three months or less at the time of purchase to be cash equivalents. As of January ~~29, 2006,~~28, 2007, our cash and cash equivalents were ~~$551.8~~$544.4 million, which includes ~~$256.6~~$467.2 million invested in money market funds.
63
~~NVIDIA CORPORATION AND SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

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. We follow the guidance provided by Emerging Issues Task Force Issue No. 03-01, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, in order to assess whether our investments with unrealized loss positions are other than temporarily impaired. Realized gains and losses on the sale of marketable securities are determined using the specific-identification method.
62
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Inventories

Inventory cost is computed on an adjusted standard basis, ~~(which~~which approximates actual cost on an average or first-in, first-out ~~basis).~~basis. Inventory costs consist primarily of the cost of semiconductors purchased from subcontractors, including wafer fabrication, assembly, testing and packaging, manufacturing support costs, including labor and overhead associated with such purchases, final test yield fallout, inventory provisions and shipping costs. We write down our inventory for estimated amounts related to lower of cost or market, obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand, future product purchase commitments, estimated manufacturing yield levels and market conditions. If actual market conditions are less favorable than those projected by management, or if our future product purchase commitments to our suppliers exceed our forecasted future demand for such products, additional future inventory write-downs may be required that could adversely affect our operating results. If actual market conditions are more favorable, we may have higher gross margins when products are sold. Sales to date of such products have not had a significant impact on our gross margin. Inventory reserves once established are not reversed until the related inventory has been sold or scrapped.

Property and Equipment

Property and equipment are stated at cost. Depreciation is computed using the straight-line method based on estimated useful lives, generally three to five years. Depreciation expense includes the amortization of assets recorded under capital leases. Leasehold improvements and assets recorded under capital leases are amortized over the shorter of the lease term or the estimated useful life of the asset.

~~Debt Financing Costs~~Goodwill

We account for goodwill in accordance with Statement of Financial Accounting Standards No. 142, or SFAS No. 142, Goodwill and Other Intangible Assets. Goodwill is subject to our annual impairment test during our fourth quarter of our fiscal year, or earlier if indicators of potential impairment exist, using a fair value-based approach. Our impairment review process compares the fair value of the reporting unit in which the goodwill resides to its carrying value. For the purposes of completing our SFAS No. 142 impairment test, we perform our analysis on a reporting unit basis. We utilize a two-step approach to testing goodwill for impairment. The first step tests for possible impairment by applying a fair value-based test. In computing fair value of our reporting units, we use estimates of future revenues, costs and cash flows from such units. The second step, if necessary, measures the amount of such impairment by applying fair value-based tests to individual assets and liabilities. We elected to perform our annual goodwill impairment review during the fourth quarter of each fiscal year. We completed our most recent annual impairment test during the fourth quarter of fiscal 2007 and concluded that there was no impairment. However, future events or circumstances may result in a charge to earnings due to the potential for a write-down of goodwill in connection with the issuance of the convertible subordinated debentures, see Note 11, we incurred certain direct issuance costs from third parties who performed services that assisted in the closing of the transaction. These issuance costs were included in our consolidated balance sheets under “deposits and other assets” and were amortized on a straight line basis over the term of the financing. On October 24, 2003, we fully redeemed the Notes. In connection with the redemption, we recorded a $13.1 million charge in fiscal 2004, which included the write-off of $5.5 million of unamortized issuance costs.

64

~~NVIDIA CORPORATION AND SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~such tests.

~~Advertising Expenses~~

~~We expense advertising costs in the period in which they are incurred. Advertising expenses for fiscal 2006, 2005, and 2004 were $9.2 million, $15.2 million, and $11.3 million, respectively.~~

~~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 cash.
~~Our policy on sales to distributors is to defer recognition of revenue and related cost of revenue until the distributors resell the product.~~
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 01-9, or EITF 01-9, ~~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. Unclaimed rebates, which historically have not been significant, are reversed to revenue upon expiration of the rebate. Rebates typically expire six months from the date of the original sale.
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 01-9. 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. If market conditions decline, 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
65
~~NVIDIA CORPORATION AND SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~
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.
Concentration of Credit Risk

Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash equivalents, marketable securities and trade accounts receivable. Our investment policy requires the purchase of top-tier investment grade securities, the diversification of asset type and certain limits on our portfolio duration. All marketable securities are held in our name, managed by several investment managers and held by one major financial institution under a custodial arrangement. One customer accounted for approximately ~~11%~~18% of our accounts receivable balance at January ~~29, 2006.~~28, 2007. We perform ongoing credit evaluations of our customers’ financial condition and maintain an allowance for potential credit losses. This allowance consists of an amount identified for specific customers and an amount based on overall estimated exposure. Our overall estimated exposure excludes amounts covered by credit insurance and letters of credit.

63
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Impairment of Long-Lived Assets

In accordance with Statement of Financial Accounting Standards No. 144, or SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, long-lived assets, such as property and equipment and intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. Fair value is determined based on the estimated discounted future cash flows expected to be generated by the asset. Assets and liabilities to be disposed of would be separately presented in the consolidated balance sheet and the assets would be reported at the lower of the carrying amount or fair value less costs to sell, and would no longer be depreciated.

~~Rent Expense~~Fair Value of Financial Instruments

~~We recognize rent expense~~The carrying value of cash, cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair values due to their relatively short maturities as of January 28, 2007 and January 29, 2006. Marketable securities are comprised of available-for-sale securities that 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. Fair value of the marketable securities is determined based on ~~a straight-line basis over the lease period and have accrued for rent expense incurred, but not paid.~~quoted market prices.

Accounting for Asset Retirement Obligations

~~In fiscal 2004, we adopted~~We account for asset retirement obligations in accordance with Statement of Financial Accounting Standards No. 143, or SFAS No. 143, Accounting for Asset Retirement Obligations, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset. During fiscal ~~2005,~~years 2006 and 2007, we ~~completed~~recorded asset retirement obligations to return the leasehold improvements to their original condition upon lease termination at our headquarters facility in Santa Clara, California and ~~recorded a liability of $4.5 million to return the property to its original condition upon lease termination in fiscal year 2013. During fiscal 2006, we continued the expansion of~~ our ~~international facilities, and completed~~ leasehold improvements at our international sites. ~~As a result, we recorded an additional liability of $2.0~~At January 28, 2007 and January 29, 2006, our net asset retirement obligations were $6.4 million ~~of which $0.2~~and $6.5 million, ~~relates to accretion expense, to return the properties at these sites to their original condition upon lease termination.~~respectively.
66
~~NVIDIA CORPORATION AND SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

Income Taxes

Statement of Financial Accounting Standards No. 109, or SFAS No. 109, Accounting for Income Taxes, establishes financial accounting and reporting standards for the effect of income taxes. In accordance with SFAS No. 109, we recognize federal, state and foreign current tax liabilities or assets based on our estimate of taxes payable or refundable in the current fiscal year by tax jurisdiction. We also recognize federal, state and foreign deferred tax assets or liabilities, as appropriate, for our estimate of future tax effects attributable to temporary differences and carryforwards; and we record a valuation allowance to reduce any deferred tax assets by the amount of any tax benefits that, based on available evidence and judgment, are not expected to be realized.
United States income tax has not been provided on earnings of our non-United States subsidiaries to the extent that such earnings are considered to be permanently reinvested.

Our calculation of current and deferred tax assets and liabilities is based on certain estimates and judgments and involves dealing with uncertainties in the application of complex tax laws. Our estimates of current and deferred tax assets and liabilities may change based, in part, on added certainty or finality to an anticipated outcome, changes in accounting standards or tax laws in the United States or foreign jurisdictions where we operate, or changes in other facts or circumstances. In addition, we recognize liabilities for potential United States and foreign income tax contingencies based on our estimate of whether, and the extent to which, additional taxes may be due. If we determine that payment of these amounts is unnecessary or if the recorded tax liability is less than our current assessment, we may be required to recognize an income tax benefit or additional income tax expense in our financial statements, accordingly.
64
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

~~Fair Value of Financial Instruments~~    Litigation, Investigation and Settlement Costs

The carrying value of cash, cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair values due to their relatively short maturities as of January 29, 2006 and January 30, 2005. Marketable securities are comprised of available-for-sale securities that 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. Fair value of the marketable securities is determined based on quoted market prices.

~~Foreign Currency Translation~~

  From time to time, we are involved in legal actions and/or investigations by regulatory bodies. We ~~use~~are aggressively defending our current litigation matters. However, there are many uncertainties associated with any litigation or investigation, and we cannot be certain that these actions or other third-party claims against us will be resolved without costly litigation, fines and/or substantial settlement payments. If that occurs, our business, financial condition and results of operations could be materially and adversely affected. If information becomes available that causes us to determine that a loss in any of our pending litigation, investigations or settlements is probable, and we can reasonably estimate the loss associated with such events, we will record the loss in accordance with accounting principles generally accepted in the United ~~States dollar as~~States. However, the actual liability in any such litigation or investigations may be materially different from our functional currency for all of our subsidiaries. Foreign currency monetary assets and liabilities are remeasured into United States dollars at end-of-period exchange rates. Non-monetary assets and liabilities, including inventories, prepaid expenses and other current assets, property and equipment, deposits and other assets and equity, are remeasured at historical exchange rates. Revenue and expenses are remeasured at average exchange rates in effect during each period, except for those expenses relatedestimates, which could require us to the previously noted balance sheet amounts, which are remeasured at historical exchange rates. Gains or losses from foreign currency remeasurement are included in “Other income (expense), net” and to date have not been significant.record additional costs.

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.

~~Goodwill~~

~~We account for goodwill in accordance with Statement of Financial Accounting Standards No. 142, or SFAS No. 142,~~ ~~Goodwill and Other Intangible Assets~~~~. As required by SFAS No. 142, we discontinued amortizing the~~
67
~~NVIDIA CORPORATION AND SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

remaining balances of goodwill as of the beginning of fiscal 2003. All remaining and future acquired goodwill will be subject to our annual impairment test during our fourth quarter of our fiscal year, or earlier if indicators of potential impairment exist, using a fair value-based approach. Our impairment review process compares the fair value of the reporting unit in which the goodwill resides to its carrying value. For the purposes of completing our SFAS No. 142  i~~mpairment test, we performed our analysis on a reporting unit basis.~~ We utilize a two-step approach to testing goodwill for impairment. The first step tests for possible impairment by applying a fair value-based test. In computing fair value of our reporting units, we use estimates of future revenues, costs and cash flows from such units. The second step, if necessary, measures the amount of such an impairment by applying fair value-based tests to individual assets and liabilities. We elected to perform our annual goodwill impairment review during the fourth quarter of each fiscal year. We completed our most recent annual impairment test during the fourth quarter of fiscal 2006 and concluded that there was no impairment. However, future events or circumstances may result in a charge to earnings due to the potential for a write-down of goodwill in connection with such tests.

~~Stock-Based Compensation~~

~~Statement of Financial Accounting Standards No. 148, or SFAS No. 148,~~ ~~Accounting for Stock-Based Compensation - Transition and Disclosure~~~~, amends the disclosure requirements of Statement of Financial Accounting Standards No. 123, or SFAS No. 123,~~ ~~Accounting for Stock-Based Compensation,~~ to require more prominent disclosures in both annual and interim financial statements regarding the method of accounting for stock-based compensation and the effect of the method used on reported results.

~~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. We recognize compensation cost for awards with pro rata vesting on a straight-line basis. 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:~~

Year Ended

Year Ended

Year Ended

January 29,

January 30,

January 25,

2006

2005

2004

(In thousands, except per share data)

Net income, as reported $ 302,586 $ 100,356 $ 74,419
Add: Stock-based employee compensation expense
included in reported net income, net of related tax effects
920 1,070 537
Deduct: Stock-based employee compensation expense
determined under fair value-based method for all awards,
net of related tax effects
(79,862 ) (87,071 ) (74,513 )
Pro forma net income $ 223,644 $ 14,355 $ 443
Basic net income per share - as reported $ 1.78 $ 0.60 $ 0.46
Basic net income per share - pro forma $ 1.32 $ 0.09 $ 0.00
Diluted net income per share - as reported $ 1.65 $ 0.57 $ 0.43
Diluted net income per share - pro forma $ 1.22 $ 0.08 $ 0.00

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~~
68
~~NVIDIA CORPORATION AND SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

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

Year Ended

Year Ended

Year Ended

January 29,

January 30,

January 25,

2006

2005

2004

(Using a binomial model)

(Using the Black-Scholes model)

(Using the Black-Scholes model)
Weighted average expected life of stock options (in years) 3.6 - 5.1 4.0 4.0
Risk free interest rate 4.0% - 4.4% 3.0% 2.4%
Volatility 34% - 48% 75% - 80% 80%
Dividend yield -- -- --

Employee Stock Purchase Plan

Year Ended

Year Ended

Year Ended

January 29,

January 30,

January 25,

2006

2005

2004

(Using the Black-Scholes model)

(Using the Black-Scholes model)

(Using the Black-Scholes model)
Weighted average expected life of stock options (in years) 0.5 - 2.0 0.5 - 2.0 0.5 -1.0
Risk free interest rate 0.9% - 3.7% 1.1% - 2.1% 1.6% - 2.4%
Volatility 30% - 45% 80% 88%
Dividend yield -- -- --

For the purpose of the pro forma calculation, the weighted average per share fair value of options granted during fiscal 2006, 2005 and 2004 was approximately $10.87, $14.10, and $9.43, respectively. For the purpose of the pro forma calculation, the weighted average fair value of shares purchased under the employee stock purchase plan during fiscal 2006, 2005 and 2004 was approximately $3.44, $5.28, and $3.76, respectively.

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:

Year Ended

January 28,
2007

January 29,
2006

January 30,
2005

(In thousands, except per share data)

Numerator:
Net income $ 448,834 $ 301,176 $ 88,615
Denominator:
Denominator for basic net income per share, weighted average shares 352,404 339,380 332,124
Effect of dilutive securities:
Stock options outstanding 39,100 26,324 19,500
Denominator for diluted net income per share, weighted average shares 391,504 365,704 351,624

Net income per share:
Basic net income per share $ 1.27 $ 0.89 $ 0.27
Diluted net income per share $ 1.15 $ 0.82 $ 0.25

69

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

Year Ended

Year Ended

Year Ended

January 29,

January 30,

January 25,

2006

2005

2004

(In thousands, except per share data)

Numerator:
Numerator for basic and diluted net income per share $ 302,586 $ 100,356 $ 74,419
Denominator:
Denominator for basic net income per share, weighted average shares 169,690 166,062 160,924
Effect of dilutive securities:
Stock options outstanding 13,261 10,496 11,783
Denominator for diluted net income per share, weighted average shares 182,951 176,558 172,707

Net income per share:
Basic net income per share $ 1.78 $ 0.60 $ 0.46
Diluted net income per share $ 1.65 $ 0.57 $ 0.43
Diluted net income per share does not include the effect of ~~the following~~ anti-dilutive common equivalent shares offrom stock options outstanding of ~~5.8~~8.9 million, ~~13.7~~11.6 million and ~~7.9~~27.4 million for ~~the~~ fiscal years 2007, 2006 ~~2005~~ and ~~2004,~~2005, respectively. The weighted average exercise price of stock options excluded from the computation of diluted earnings per share was ~~$35.58, $27.86,~~$30.14, $17.79 and ~~$29.63~~$13.93 for fiscal years 2007, 2006 and 2005, ~~and 2004,~~ respectively.

65
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Recently Issued Accounting Pronouncements

In ~~December 2004,~~July 2006, the Financial Accounting Standards Board, or FASB, issued Interpretation No. 48, or FIN 48, Accounting for Uncertainty in Income Taxes. FIN 48 applies to all tax positions related to income taxes subject to FASB Statement 109, Accounting for Income Taxes. Under FIN 48 a company would 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. FIN 48 clarifies how a company would measure the income tax benefits from the tax positions that are recognized, provides guidance as to the timing of the derecognition of previously recognized tax benefits, and describes the methods for classifying and disclosing the liabilities within the financial statements for any unrecognized tax benefits. FIN 48 also addresses when a company should record interest and penalties related to tax positions and how the interest and penalties may be classified within the financial statements. Any differences between tax liability amounts recognized in the statements of operations as a result of adoption of FIN 48 would be accounted for as a cumulative effect adjustment to the beginning balance of retained earnings. FIN 48 is effective for fiscal years beginning after December 15, 2006. The provisions of FIN 48 will be effective as of first quarter of fiscal 2008. We believe that the cumulative effect of adoption of FIN 48 will not result in any material change to the beginning balance of our retained earnings.

In September 2006, the 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 this Statement 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 29, 2007. We do not believe the adoption of SFAS No. 157 will have a material impact on our consolidated financial position, results of operations or cash flows.

In September 2006, the Securities and Exchange Commission, or SEC, issued Staff Accounting Bulletin No. 108, or SAB No. 108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements, which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. We adopted the provisions of SAB No. 108 in our fiscal year 2007. The adoption of SAB No. 108 did not have a material impact on our consolidated financial position, results of operations or 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 or cash flows.

Note 2 - Stock-Based Compensation

Effective January 30, 2006, we adopted the provisions of Statement of Financial Accounting Standards No. 123(R), or SFAS No. 123(R), Share-Based Payment~~, which requires the measurement and recognition of compensation expense~~. SFAS No. 123(R) establishes accounting for ~~all~~stock-based awards exchanged for employee services. Accordingly, stock-based compensation ~~payments. In April 2005,~~cost is measured at grant date, based on the ~~SEC delayed~~fair value of the ~~effective date~~awards, and is recognized as expense over the requisite employee service period.

  Prior to the adoption of SFAS No. 123(R)

Prior to the adoption of SFAS No. 123(R), we applied Accounting Principles Board Opinion No. 25, or APB No. 25, Accounting for Stock Issued to Employees, and related interpretations to account for our stock-based employee compensation plans. As such, compensation expense was recorded if on the date of grant the current fair value per share of the underlying stock exceeded the exercise price per share. We provided the disclosures required under Statement of Financial Accounting Standards No. 123, or SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosures, in our periodic reports.

66
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

The pro forma information required under SFAS No. 123(R) for periods prior to fiscal 2007 as if we had applied the fair value recognition provisions of SFAS No. 123 to awards granted under our equity incentive plans was as follows for the periods presented:

Year Ended

January 29,
2006

January 30,
2005

(In thousands, except per share data)

Net income, as reported $ 301,176 $ 88,615
Add: Stock-based employee compensation expense
included in reported net income, net of related tax effects
6,644 17,241
Deduct: Stock-based employee compensation expense
determined under fair value-based method for all awards,
net of related tax effects
(90,405 ) (108,430 )
Pro forma net income (loss) $ 217,415 $ (2,574 )

Basic net income per share - as reported $ 0.89 $ 0.27
Basic net income (loss) per share - pro forma $ 0.64 $ (0.01 )
Diluted net income per share - as reported $ 0.82 $ 0.25
Diluted net income (loss) per share - pro forma $ 0.60 $ (0.01 )

Impact of the adoption of SFAS No. 123(R)

We elected to adopt the modified prospective application method beginning January 30, 2006 as provided by SFAS No. 123(R). Accordingly, during fiscal 2007, we recorded stock-based compensation expense for awards granted prior to, but not yet vested, as of January 29, 2006, equal to the amount that would have been recognized if the fair value method required for pro forma disclosure under SFAS No. 123 had been in effect for expense recognition purposes, adjusted for estimated forfeitures. For options granted in fiscal 2007, we measured compensation expense under the provisions of SFAS No. 123(R). We recognized stock-based compensation expense using the straight-line attribution method. Previously reported amounts have not been restated. The effect of stock-based compensation expense, net of associated payroll taxes, for the year ended January 28, 2007 on net income was as follows:

Year Ended

January 28, 2007

(In thousands)

Stock-based compensation expense by type of award:
Employee stock options $ 108,654
Employee stock purchase plan 9,717
Amount capitalized as inventory (1,636 )
Total stock-based compensation 116,735
Tax effect of stock-based compensation (13,995 )
Net effect on net income $ 102,740

67

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

Cumulative Effect of Change in Accounting Principle
The adoption of SFAS No. 123(R) resulted in a cumulative benefit from accounting change of $0.7 million for the three months ended April 30, 2006, which ~~is now effective~~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.

The income statement includes stock-based compensation expense, net of associated payroll taxes, and amounts capitalized as inventory, as follows:

Year Ended

January 28,

January 29,

January 30,

2007

2006

2005

(In thousands)

Cost of revenue $ 8,200 $ 829 $ 1,998
Research and development 70,077 5,943 14,074
Sales, general and administrative 38,458 (2,243) 3,682
Total $ 116,735 $ 4,529 $ 19,754

Prior to adopting SFAS No. 123(R), we presented all tax benefits resulting from the exercise of stock options as operating cash flows in our Statement of Cash Flows. However, as required by our adoption of SFAS No. 123(R) during the twelve months ended January 28, 2007, we began classifying cash flows resulting from gross tax benefits as a part of cash flows from financing activities. Gross tax benefits are realized tax benefits from tax deductions for ~~annual~~exercised options in excess of cumulative compensation cost for those instruments recognized in our consolidated financial statements. The effect of this change in classification on our Consolidated Statement of Cash Flows resulted in cash used from operations of $0.2 million and cash provided from financing activities of $0.2 million for the year ended January 28, 2007.

As of January 29, 2006, we had unearned stock-based compensation related to stock options of $167.9 million before the impact of estimated forfeitures. In our pro forma footnote disclosures prior to the adoption of SFAS No. 123(R), we accounted for forfeitures upon occurrence. SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised if necessary in subsequent periods if actual forfeitures differ from those estimates. Accordingly, as of January 30, 2006, we estimated that ~~begin~~stock-based compensation expense for the awards that are not expected to vest was $32.4 million, and, therefore, the unearned stock-based compensation expense related to stock options was adjusted to $135.5 million after ~~June 15, 2005. In March 2005,~~estimated forfeitures.

During the twelve months ended January 28, 2007, we granted approximately 11.9 million stock options with an estimated total grant-date fair value of $138.4 million, and a weighted average grant-date fair value of $11.78 per option. Of this amount, we estimated that the stock-based compensation expense related to the awards that are not expected to vest was $26.7 million.

As of January 28, 2007, the aggregate amount of unearned stock-based compensation expense related to our stock options was $167.6 million, adjusted for estimated forfeitures, which we will recognize over an estimated weighted average amortization period of 2.0 years.

Approximately $1.6 million of stock-based compensation was capitalized as inventory for the twelve months ending January 28, 2007.

Stock-based compensation expense that would have been recorded under APB No. 25 during the twelve months ended January 28, 2007 was approximately $3.0 million. Upon our adoption of SFAS No. 123(R), we reclassified the unearned stock-based compensation expense balance of approximately $3.6 million that would have been recorded under APB No. 25 to additional paid-in capital in our Consolidated Balance Sheet. The adoption of SFAS No. 123(R) reduced our basic and diluted earnings per share by $0.28 and $0.25, respectively, for the year ended January 28, 2007.

68
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Valuation Assumptions

At the beginning 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 regulatory guidance, including SEC ~~issued~~ Staff Accounting Bulletin No. 107, or SAB No. 107, ~~which includes interpretive guidance for~~Share-Based Payment, and in anticipation of the ~~initial implementation~~impending effective date of SFAS No. 123(R)~~. SFAS No. 123(R) allows for either prospective recognition~~, we reevaluated the assumptions we used to estimate the value of compensation expense or retrospective recognition. We intend to adopt SFAS No. 123(R) using the modified prospective method, which requires the application of the accounting standard as of January 30, 2006, the first day ofemployee stock options and shares issued under our ~~fiscal 2007. Expensing these incentives~~employee stock purchase plan, beginning with stock options granted and shares issued under our employee stock purchase plan in future periods will materially and adversely affect our reported operating results as the stock-based compensation expense would be charged directly against our reported earnings. We anticipate that our stock-based compensation expense will be approximately $18 to $22 million for the first quarter of fiscal ~~2007 and we are unsure how~~2006. At that time, our management also determined that the ~~market will react to this adverse affect on our operating results, which could impact our stock price. However, had we adopted SFAS No. 123(R) in prior periods, the magnitude~~use of ~~the impact of that standard would have approximated the impact of Statement of Financial Accounting Standards No. 123,~~ ~~Accounting for Stock-Based Compensation,~~ assuming the application of the Black-Scholes model as described in the disclosure of pro forma net income (loss) and pro forma net income (loss) per share in Note 1 of the Notes to Consolidated Financial Statements under the subheading “Stock-Based Compensation.” SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation costimplied volatility is expected to be ~~reported as~~more reflective of market conditions and, therefore, could reasonably be expected to be a ~~financing cash flow, rather~~better indicator of our expected volatility than ~~as an operating cash flow as required under current literature.~~historical volatility.

~~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~~Additionally, 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~~2006, we began segregating options into groups for employees with relatively homogeneous exercise behavior in order to calculate the ~~adoption~~best estimate of ~~SFAS No. 154~~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. 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 ~~material impact on our consolidated financial position, results of operations or cash flows.~~straight-line attribution method with the following assumptions:

Stock Options
Year Ended
January 28, 2007
Year Ended
January 29, 2006
Year Ended
January 30, 2005
(Using a
binomial
model)
(Using a
binomial
model)
(Using the
Black-Scholes
model)
Weighted average expected life of stock options (in years) 3.6 - 5.1 3.6 - 5.1 4.0
Risk free interest rate 4.7% - 5.1 % 4.0% - 4.4 % 3.0 %
Volatility 39% - 51 % 34% - 48 % 75% - 80 %
Dividend yield — — —
Employee Stock Purchase Plan
Year Ended
January 28, 2007
Year Ended
January 29, 2006
Year Ended
January 30, 2005
(Using the
Black-Scholes
model)
(Using the
Black-Scholes
model)
(Using the
Black-Scholes
model)
Weighted average expected life of stock options (in years) 0.5 - 2.0 0.5 - 2.0 0.5 - 2.0
Risk free interest rate 1.6% - 5.2 % 0.9% - 3.7 % 1.1% - 2.1 %
Volatility 30% - 47 % 30% - 45 % 80 %
Dividend yield — — —
69
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

    Equity Incentive Program

Overview. 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.
    PortalPlayer, Inc. 2004 Stock Incentive Plan

We assumed the PortalPlayer, Inc. 2004 stock incentive plan, or the 2004 Plan, and all related outstanding options in connection with our acquisition of PortalPlayer, Inc., or PortalPlayer, on January 5, 2007. The 2004 Plan was adopted by the PortalPlayer stockholders in 2004 and as of January 28, 2007, 1,017,644 shares of NVIDIA common stock were authorized for issuance under the 2004 Plan. In addition, any shares subject to outstanding options under the PortalPlayer 1999 stock option plan that expire unexercised or any unvested shares that are forfeited will be available for issuance under the 2004 Plan. The number of shares authorized for issuance under the 2004 Plan will be increased on January 1 from 2007 through 2009 by 460,033 shares and on January 1 from 2010 through 2014 by 276,000 or a number of shares determined by the Board.

Each option we assumed in connection with our acquisition of PortalPlayer has been converted into the right to purchase that number of shares of NVIDIA common stock determined by multiplying the number of shares of PortalPlayer common stock underlying such option by 0.3601 and then rounding down to the nearest whole number of shares. The exercise price per share for each assumed option has been similarly adjusted by dividing the exercise price by 0.3601 and then rounding up to the nearest whole cent. Vesting schedules and expiration dates for the assumed options did not change.

Under the 2004 Plan, options generally vest as to 25% of the shares one year after the date of grant and as to 1/48th of the shares each month thereafter and expire ten years from the date of grant.
    PortalPlayer, Inc. 1999 Stock Option Plan

We assumed options issued under the PortalPlayer, Inc. 1999 Stock Option Plan, or the 1999 Plan, when we completed our acquisition of PortalPlayer on January 5, 2007. The 1999 Plan was terminated upon completion of PortalPlayer’s initial public offering of common stock in calendar 2004. No shares of common stock are available for issuance under the 1999 Plan other than to satisfy exercises of stock options granted under the 1999 Plan prior to its termination and any shares that become available for issuance as a result of expiration or cancellation of an option that was issued pursuant to the 1999 Plan shall become available for issuance under the 2004 Plan. Previously authorized yet unissued shares under the 1999 Plan were cancelled upon completion of PortalPlayer’s initial public offering.

Each option we assumed in connection with our acquisition of PortalPlayer has been converted into the right to purchase that number of shares of NVIDIA common stock determined by multiplying the number of shares of PortalPlayer common stock underlying such option by 0.3601 and then rounding down to the nearest whole number of shares. The exercise price per share for each assumed option has been similarly adjusted by dividing the exercise price by 0.3601 and then rounding up to the nearest whole cent. Vesting schedules and expiration dates did not change.

Under the 1999 Plan, incentive stock options were granted at a price that was not less than 100% of the fair market value of PortalPlayer’s common stock, as determined by its board of directors, on the date of grant. Non-statutory stock options were granted at a price that was not less than 85% of the fair market value of PortalPlayer’s common stock, as determined by its board of directors, on the date of grant.
Generally, options granted under the 1999 Plan are exercisable for a period of ten years from the date of grant, and shares vest at a rate of 25% on the first anniversary of the grant date of the option, and an additional 1/48th of the shares upon completion of each succeeding full month of continuous employment thereafter.
70
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ~~- (Continued)~~

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.
In November 2005, the FASB issued Staff Position, or FSP, FAS115-1/124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, which addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. This FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The guidance in this FSP amends SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, and SFAS No. 124, Accounting for Certain Investments Held by Not-for-Profit Organizations, and APB Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock. This FSP is effective for reporting periods beginning after December 15, 2005. We do not believe the adoption of this FSP will have a material impact on our consolidated financial position, results of operations or cash flows.

In November 2005, the FASB issued FSP FAS123(R)-3, Transition Election to Accounting for the Tax Effects of Share-Based Payment Awards. This FSP requires an entity to follow either the transition guidance for the additional-paid-in-capital pool as prescribed in SFAS No. 123(R), Share-Based Payment, or the alternative transition method as described in the FSP. An entity that adopts SFAS No. 123(R) using the modified prospective application may make a one-time election to adopt the transition method described in this FSP. An entity may take up to one year from the later of its initial adoption of SFAS No. 123(R) or the effective date of this FSP to evaluate its available transition alternatives and make its one-time election. This FSP became effective in November 2005. We continue to evaluate the impact that the adoption of this FSP could have on our consolidated financial position, results of operations or cash flows.
~~Note 2 - Acquisition of MediaQ, Inc.~~

On August 19, 2003, we completed the acquisition of MediaQ, Inc., or MediaQ, a leading provider of graphics and multimedia technology for wireless mobile devices. Our primary reasons for the acquisition of MediaQ, Inc. were to accelerate our entry into the handheld devices market, use MediaQ’s two-dimensional, or 2D, and low power capabilities, allowing us to continue to focus on three-dimensional, or 3D, and advanced video efforts, use existing MediaQ channel and design wins, and enhance MediaQ’s PDA business through our existing OEM and original design manufacturer channels.

The aggregate purchase price consisted of cash consideration of approximately $71.3 million, including $1.3 million of direct acquisition costs and $3.5 million of in-process research and development, or IPR&D, The amount of the IPR&D represents the value assigned to research and development projects of MediaQ that had commenced but had not yet reached technological feasibility and had no alternative future use. In accordance with SFAS No. 2, ~~Accounting for Research and Development Costs~~~~, as clarified by 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 expense as part of the allocation of the purchase price.~~
~~The pro forma results of operations have not been presented for the acquisition of MediaQ because the effect of this acquisition was not considered material.~~

71
~~NVIDIA CORPORATION AND SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -~~ (Continued)

~~Note 3 - 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. 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.

~~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.

72
~~NVIDIA CORPORATION AND SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

~~Note 4 - Goodwill~~

~~The carrying amount of goodwill is as follows:~~

January 29,

January 30,

January 25,

2006

2005

2004

(In thousands)

3dfx $ 75,326 $ 50,326 $ 50,326
MediaQ 52,913 52,913 53,695
Other 17,078 4,868 4,888
Total goodwill $ 145,317 $ 108,107 $ 108,909

During the fourth quarter of fiscal 2006, we recorded $12.2 million as goodwill for the acquisition of a small international company. The acquisition was accounted for under the purchase method of accounting and closed on December 30, 2005. During the third quarter of fiscal 2006, we recorded $25.0 million as goodwill related to the purchase of certain assets of 3dfx. Please refer to Note 3 of the Notes to Consolidated Financial Statements for further information. In fiscal 2005, the amount allocated to MediaQ goodwill was adjusted to $52,913 as a result of additional information that became available. This information was primarily related to liabilities that were less than originally estimated at the time of acquisition.

During fiscal 2005, in conjunction with the reorganization of our business reporting units, we reassigned goodwill to our reporting units using a relative fair value allocation approach. In computing fair value of our reporting units, we use estimates of future revenues, costs and cash flows from such units. The amount of goodwill allocated to our GPU, MCP, Handheld GPU, Consumer Electronics, and All Other segments as of January 29, 2006, was $99.3 million, $15.1 million, $12.7 million, $11.9 million, and $6.3 million, respectively. Please refer to Note 15 of the Notes to Consolidated Financial Statements for further segment information.

~~Note 5 - Amortizable Intangible Assets~~

We are currently amortizing our intangible assets with definitive lives over periods ranging from 1 to 5 years on a straight-line basis. The components of our amortizable intangible assets are as follows:

January 29, 2006

January 30, 2005

Gross Carrying Amount

Accumulated Amortization

Net Carrying Amount

Gross Carrying Amount

Accumulated Amortization

Net Carrying Amount

(In thousands)

Technology licenses $ 21,586 $ (13,595 ) $ 7,991 $ 17,236 $ (9,841 ) $ 7,395
Patents 23,750 (19,911 ) 3,839 23,260 (15,400 ) 7,860
Acquired intellectual property 27,086 (24,516 ) 2,570 27,086 (18,578 ) 8,508
Trademarks 11,310 (10,807 ) 503 11,310 (8,544 ) 2,766
Other 1,494 (976 ) 518 1,494 (509 ) 985
Total intangible assets $ 85,226 $ (69,805 ) $ 15,421 $ 80,386 $ (52,872 ) $ 27,514

Amortization expense associated with intangible assets for fiscal 2006, 2005 and 2004 was $16.9 million, $19.7 million, and $16.2 million, respectively. Future amortization expense for the net carrying amount of intangible assets at January 29, 2006 is estimated to be $10.5 million in fiscal 2007, $4.3 million in fiscal 2008, and $0.6 million in fiscal 2009 and thereafter.
73
~~NVIDIA CORPORATION AND SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

~~Note 6 - 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 losses for fiscal 2006 and 2005 were $2.8 million and $0.4 million, respectively. Net realized gains for fiscal 2004 were $2.9 million.

~~The following is a summary of cash equivalents and marketable securities at January 29, 2006 and January 30, 2005:~~

January 29, 2006

Amortized Cost

Unrealized Gain

Unrealized (Loss)

Estimated Fair Value

(In thousands)

Asset-backed securities $ 224,649 $ 1 $ (983 ) $ 223,667
Commercial paper 138,091 13 (7 ) 138,097
Obligations of the United States government & its agencies 72,753 8 (834 ) 71,927
United States corporate notes, bonds and obligations 179,930 5 (1,467 ) 178,468
Money market 256,593 -- -- 256,593
Total $ 872,016 $ 27 $ (3,291 ) $ 868,752

Classified as:
Cash equivalents $ 470,334
Marketable securities 398,418
Total $ 868,752

74

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

January 30, 2005

Amortized Cost

Unrealized Gain

Unrealized (Loss)

Estimated Fair Value

(In thousands)

Publicly traded equity securities $ 687 $ 220 $ -- $ 907
Asset-backed securities 177,771 1 (1,786 ) 175,986
Commercial paper 7,854 -- -- 7,854
Obligations of the United States government & its agencies 104,768 -- (895 ) 103,873
United States corporate notes, bonds and obligations 182,688 6 (1,874 ) 180,820
Money market 164,377 -- -- 164,377
Total $ 638,145 $ 227 $ (4,555 ) $ 633,817

Classified as:
Cash equivalents $ 172,284
Marketable securities 461,533
Total $ 633,817

~~The following table provides the breakdown of the investments with unrealized losses at January 29, 2006:~~

Less than 12 months

12 months or greater

Total

Fair Value

Gross Unrealized Losses

Fair Value

Gross Unrealized Losses

Fair Value

Gross Unrealized Losses

(In thousands)

Asset-backed securities $ 78,286 $ (334 ) $ 48,293 $ (649 ) $ 126,579 $ (983 )
Commercial paper 19,600 (7 ) -- -- 19,600 (7 )
Obligations of the United States government & its agencies 39,032 (434 ) 22,851 (400 ) 61,883 (834 )
United States corporate notes, bonds and obligations 139,842 (485 ) 64,593 (982 ) 204,435 (1,467 )
Money market -- -- -- -- -- --
Total $ 276,760 $ (1,260 ) $ 135,737 $ (2,031 ) $ 412,497 $ (3,291 )
As of January 29, 2006, we had 143 investments that were in an unrealized loss position with an average unrealized loss duration of less than one year. The gross unrealized losses related to fixed income securities were due to changes in interest rates. We have determined that the gross unrealized losses on investment securities at January 29, 2006 are temporary in nature. We review our investments to identify and evaluate investments that have indications of possible impairment. Factors considered in determining whether a loss is temporary include the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the investee, and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. Our investment policy requires the purchase of top-tier investment grade securities, the diversification of asset type and certain limits on our portfolio duration.
The amortized cost and estimated fair value of cash equivalents and marketable securities classified as available-for-sale at January 29, 2006 and January 30, 2005 by contractual maturity are shown below.

~~All of our marketable securities are debt instruments with the exception of $0.9 million of publicly traded equity securities at January 30, 2005.~~

75
~~NVIDIA CORPORATION AND SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

January 29, 2006

January 30, 2005

Amortized Cost

Estimated Fair Value

Amortized Cost

Estimated Fair Value

(In thousands)

Less than one year $ 491,259 $ 491,246 $ 198,242 $ 197,844
Due in 1 - 5 years 364,065 361,047 416,085 412,141
Due in 6-7 years 16,692 16,459 23,132 22,925
Total $ 872,016 $ 868,752 $ 637,459 $ 632,910

~~Note 7 - Balance Sheet Components~~

~~Certain balance sheet components are as follows:~~

January 29,

January 30,

2006

2005

Inventories:

(In thousands)

Raw materials $ 25,743 $ 23,225
Work in-process 107,847 130,211
Finished goods 121,202 162,082
Total inventories $ 254,792 $ 315,518

~~The significant decrease in work-in-process and finished goods was the result of significant reductions in older products, offset by an increase in new products.~~

January 29,

January 30,

2006

2005

Deposits and other assets:

(In thousands)

Investments in non-affiliates $ 11,684 $ 2,000
Long-term prepayments 7,504 2,594
Other 8,289 4,440
Total deposits and other assets $ 27,477 $ 9,034

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

January 29, 2006

January 30, 2005

Estimated Useful Life

Property and Equipment:

(In thousands)

(Years)

Software $ 153,618 $ 125,310 3 - 5
Test equipment 88,468 86,883 3
Computer equipment 106,061 82,428 3
Leasehold improvements 88,376 79,160 (A)
Construction in process 2,260 3,264 (B)
Office furniture and equipment 21,618 18,777 5
460,401 395,822
Accumulated depreciation and amortization (282,249 ) (216,867 )
Total property and equipment, net $ 178,152 $ 178,955

~~(A) Leasehold improvements are amortized based on the lesser of either the asset’s estimated useful life or the remaining lease term.~~

~~(B) Construction in process represents assets that had not been in service as of the balance sheet date.~~
76
~~NVIDIA CORPORATION AND SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

Depreciation expense for fiscal 2006, 2005, and 2004 was $76.4 million, $71.3 million, and $59.3 million, respectively. Assets recorded under capital leases included in property and equipment were $17.1 million and $19.3 million as of January 29, 2006 and January 30, 2005, respectively. Related accumulated amortization was $17.1 million and $17.8 million as of January 29, 2006 and January 30, 2005, respectively. Amortization expense for fiscal 2006, 2005, and 2004 related to capital leases was $1.2 million, $3.8 million, and $5.4 million, respectively.

January 29,

January 30,

2006

2005

Accrued Liabilities:

(In thousands)

Accrued customer programs $ 90,056 $ 83,013
Deferred revenue 217 11,500
Customer advances 1,556 1,457
Taxes payable 58,355 28,826
Accrued payroll and related expenses 53,080 37,016
Deferred rent 11,879 10,844
Accrued legal settlement 30,600 --
Other 13,521 9,421
Total accrued liabilities $ 259,264 $ 182,077

January 29,

January 30,

2006

2005

Other Long-term Liabilities:

(In thousands)

Asset retirement obligation $ 6,440 $ 4,483
Other long-term liabilities 4,184 3,875
Total other long-term liabilities $ 10,624 $ 8,358

~~Note 8 - 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 fiscal 2006, 2005 and 2004 are as follows:

77

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

Description

Balance at Beginning of Period

Additions (1)

Deductions (2)

Balance at End of Period

(In thousands)

Year ended January 29, 2006
Allowance for sales returns $ 11,687 $ 35,127 $ (36,575 ) $ 10,239
Year ended January 30, 2005
Allowance for sales returns $ 9,421 $ 22,463 $ (20,197 ) $ 11,687
Year ended January 25, 2004
Allowance for sales returns $ 13,228 $ 23,796 $ (27,603 ) $ 9,421

~~(1) Allowances for sales returns are charged as a reduction to revenue.~~

~~(2) Represents amounts written off against the allowance for sales returns.~~

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 these agreements do not have a maximum stated liability. As such, we have not recorded any liability in our consolidated financial statements for such indemnifications.

~~Note 9 - Stockholders’ Equity~~

~~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 a potential incremental number of shares of our common stock, within a pre-determined range, at the end of the term of the agreement. During the fourth quarter of fiscal 2006, we repurchased 1.3 million shares of our common stock for $50.0 million under a structured share repurchase transaction, which we recorded on the trade date of the transaction. Through the end of the fourth quarter of fiscal 2006, we have repurchased 8.5 million shares under our stock repurchase program for a total cost of $213.2 million. During the first quarter of fiscal 2007, we entered into a structured share repurchase transaction to repurchase shares of our common stock for $50.0 million that we expect to settle prior to the end of our first fiscal quarter.

On March 6, 2006, we announced that our Board of Directors had approved an increase in our existing stock repurchase program. We announced a $400 million increase to the original stock repurchase program we had announced in August 2004. As a result of this increase, the amount of common stock the Board of Directors has authorized to be repurchased has now been increased to a total of $700 million. The repurchases will be made from time to time in the open market, in privately negotiated transactions, or in structured stock repurchase transactions, in compliance with the Securities and Exchange Commission Rule 10b-18, subject to market conditions, applicable legal requirements, and other factors. The program does not obligate NVIDIA to acquire any particular amount of common stock and the program may be suspended at any time at our discretion.
78
~~NVIDIA CORPORATION AND SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

~~Convertible Preferred Stock~~

~~As of January 29, 2006, there were no shares of preferred stock outstanding.~~

2000 Nonstatutory Equity Incentive Plan

On August 1, 2000, our Board ~~of Directors~~ approved the 2000 Nonstatutory Equity Incentive Plan, or the 2000 Plan, to provide for the issuance of our common stock to employees and affiliates who are not directors, executive officers or 10% stockholders. The 2000 Plan provides for the issuance of nonstatutory stock options, stock bonuses, ~~and~~ restricted stock purchase rights, restricted stock unit awards and stock appreciation rights. ~~Option grants issued~~Options granted under the 2000 plan generally expire in six to 10 ~~years.~~years from the date of grant. The Compensation Committee appointed by the Board, ~~of Directors~~or the Compensation Committee, has the authority to amend the 2000 Plan and to determine the option term, exercise price and vesting period of each grant. ~~Initial option grants~~Options granted to new employees prior to February 10, 2004, generally vest ratably over a four-year period, with 25% becoming vested approximately one year from the date of grant and the remaining
75% vesting on a quarterly basis over the next three years. ~~Subsequent option grants~~From February 10, 2004, initial options granted to new employees generally vest ratably quarterly over a three-year period. Grants to existing employees in recognition of performance generally vest as to 25% of the shares two years and three months after the date of grant and as to the remaining 75% of the shares subject to the option in equal quarterly installments over a nine month period. We amended our 2000 Plan in October 2006 to add the ability to issue restricted stock unit awards and stock appreciation rights and make certain other modifications. There were a total of 21,939,202 shares authorized for issuance and ~~10,595,890~~18,776,119 shares available for future issuance under the 2000 Plan as of January ~~29, 2006.~~28, 2007.

1998 Equity Incentive Plan

The 1998 Equity Incentive Plan, or the 1998 Plan, was adopted by our Board ~~of Directors~~ on February 17, 1998 and was approved by our stockholders on April 6, 1998 as an amendment and restatement of our then existing Equity Incentive Plan which had been adopted on May 21, 1993. The 1998 Plan provides for the issuance of our common stock to directors, employees and consultants. The 1998 Plan ~~was subsequently amended on March 7, 2006. The 1998 Plan~~ provides for the issuance of stock bonuses, restricted stock purchase rights, incentive stock options or nonstatutory stock options. There were a total of 110,094,385 shares authorized for issuance and ~~5,059,598~~2,570,982 shares available for future issuance under the 1998 Plan as of January ~~29, 2006.~~28, 2007.

Pursuant to the 1998 Plan, the exercise price for incentive stock options is at least 100% of the fair market value on the date of grant or for employees owning in excess of 10% of the voting power of all classes of stock, 110% of the fair market value on the date of grant. For nonstatutory stock options, the exercise price ismust be no less than 85% of the fair market value on the date of grant.

Option grants issued under the 1998 Plan generally expire in six to ten ~~years.~~years from the date of grant. Vesting periods are determined by the Board ~~of Directors~~ or the Compensation ~~Committee of the Board of Directors.~~Committee. Initial option grants to new employees made after February 10, 2004 under the 1998 Plan generally vest ratably ~~each quarter~~quarterly over a three year period. Subsequent option grants ~~are generally granted for performance and~~ generally vest up to 25% of the shares two years and three months after the date of grant and as to the remaining 75% of the shares subject to the option in quarterly installments over a ~~three year~~nine month period.

1998 Non-Employee Directors’ Stock Option Plan

In February 1998, our Board ~~of Directors~~ adopted the 1998 Non-Employee Directors’ Stock Option Plan, or the ~~Directors~~Directors’ Plan, to provide for the automatic grant of non-qualified options to purchase shares of our common stock to our directors who are not employees or consultants of us or of an affiliate of us.

In July 2000, the Board ~~of Directors~~ amended the 1998 Plan to incorporate the automatic grant provisions of the Directors’ Plan into the 1998 Plan. Future automatic grants to non-employee directors will be made according to the terms of the Directors’ Plan, but will be made out of the 1998 Plan until such time as shares may become available for issuance under the amended Directors’ Plan. In May 2002, and subsequently in March 2006, the Directors’ Plan was amended further to reduce the number of shares granted to our non-employee directors. The altered automatic grant provisions of the Directors’ Plan are also incorporated into the 1998 Plan. The terms of the amended Directors’ Plan are described below.

Under the amended Directors’ Plan, each non-employee director who is elected or appointed to our Board for the first time is automatically granted an option to purchase 90,000 shares, which vests quarterly over a three-year period, or Initial Grant.
7971
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)

~~Under the amended Directors Plan,~~On August 1 each year, each non-employee director ~~who is elected or appointed to our Board of Directors for the first time~~ is automatically granted an option to purchase ~~75,000 shares, which vests quarterly over a three-year period, or Initial Grant. Previously, such a director was entitled to a grant of 200,000 shares, vesting monthly over a four-year period.~~

Under the amended Directors Plan, on August 1, 2002, each non-employee director was automatically granted an option to purchase 75,000 shares, which will vest 33% on the first anniversary of the grant date, with the remaining 66% vesting quarterly over the second and third years after the date of grant, provided that the director has attended at least 75% of the meetings during the year following the date of the grant, or 2002 Grants. Previously, such a director was entitled to an annual grant of 80,000 shares, vesting 100% on the first anniversary of the date of the grant.

~~On August 1, 2003 and on each August 1 thereafter, each non-employee director will be automatically granted an option to purchase 25,000~~30,000 shares, or Annual Grant. These Annual Grants will begin vesting on the second anniversary of the date of the grant and vest quarterly during the next year. The Annual Grants will be fully vested on the third anniversary of the date of the grant, provided that the director ~~has~~ attended at least 75% of the meetings during the year following the date of the grant.

On ~~August 1, 2002 and each~~ August 1 of each year, ~~thereafter,~~ each non-employee director who is a member of a committee of the Board, ~~of Directors~~except for the Nominating and Corporate Governance Committee, will automatically be granted an option to purchase ~~5,000~~10,000 shares, or the Committee Grant. The Committee Grants ~~vest~~vests in full on the first anniversary of the date of the grant, provided that the director has attended at least 75% of the meetings during the year following the date of the grant. ~~Previously, such a director was entitled to a grant of 20,000 shares, vesting in full on the first anniversary of the date of the grant.~~ Directors who were members of two committees, Messrs. Cox, Gaither and Jones, waived their grant of an additional ~~5,000~~10,000 shares for being a member of a second committee in fiscal ~~2004,~~ 2005 and 2006.

If a non-employee director fails to attend at least 75% of the regularly scheduled meetings during the year following the grant of an option, rather than vesting as described previously, the ~~2002 Grants and~~ Committee Grants will vest annually over four years following the date of grant at the rate of 10% per year for the first three years and 70% for the fourth year, and the Annual Grants will vest 30% upon the three-year anniversary of the grant date and 70% for the fourth year, such that in each case the entire option will become fully vested on the four-year anniversary of the date of the grant. For ~~the 2002 Grants,~~ Annual Grants and Committee Grants, if the person has not been serving on the Board ~~of Directors~~ or committee since a prior year’s annual meeting, the number of shares granted will be reduced pro rata for each full quarter prior to the date of grant during which such person did not serve in such capacity.

The Compensation Committee administers the amended ~~Directors~~Directors’ Plan. A total of 1,200,000 shares have been authorized and issued under the amended ~~Directors~~Directors’ Plan of which none is available for future issuance as of January ~~29, 2006.~~28, 2007. As described above, future grants to non-employee directors will be made out of the 1998 Plan.

    1998 Employee Stock Purchase Plan

In February 1998, our Board ~~of Directors~~ approved the 1998 Employee Stock Purchase Plan, or the Purchase Plan. In June 1999, the Purchase Plan was amended to increase the number of shares reserved for issuance automatically each year at the end of our fiscal year for the next 10 years (commencing at the end of fiscal 2000 and ending 10 years later in 2009) by an amount equal to 2% of the outstanding shares on each such date, including on an as-if-converted basis preferred stock and convertible notes, and outstanding options and warrants, calculated using the treasury stock method; provided that the maximum number of shares of common stock available for issuance from the Purchase Plan could not exceed ~~26,000,000~~52,000,000 shares. The number of shares will no longer be increased annually as we reached the maximum permissible number of shares at the end of fiscal 2006. There are a total of ~~26,000,000~~52,000,000 shares authorized for issuance. At January ~~29, 2006, 7,531,781~~28, 2007, 18,857,690 shares have been issued under the Purchase Plan and ~~18,468,219~~33,142,310 shares are available for future issuance.

80
~~NVIDIA CORPORATION AND SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

The Purchase Plan is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code. Under the Purchase Plan, the Board has authorized participation by eligible employees, including officers, in periodic offerings following the adoption of the Purchase Plan. Under the Purchase Plan, separate offering periods shall be no longer than 27 months. Under the current offering adopted pursuant to the Purchase Plan, each offering period is 24 months, which is divided into four purchase periods of 6 months.

Employees are eligible to participate if they are employed by us or an affiliate of us as designated by the Board. Employees who participate in an offering may have up to 10% of their earnings withheld pursuant to the Purchase Plan up to certain limitations and applied on specified dates determined by the Board to the purchase of shares of common stock. The Board may increase this percentage at its discretion, up to 15%. The price of common stock purchased under the Purchase Plan will be equal to the lower of the fair market value of the common stock on the commencement date of each offering period and the purchase date of each offering period at 85% at the fair market value of the common stock on the relevant purchase date. During fiscal 2007, 2006 and 2005, employees purchased approximately 3.8 million, 3.6 million, and 4.0 million shares with weighted-average prices of $6.42, $5.59, and $4.36 per share, respectively, and grant-date fair values of $3.64, $1.70, and $1.57 per share, respectively. Employees may end their participation in the Purchase Plan at any time during the offering period, and participation ends automatically on termination of employment with us and in each case their contributions are refunded.

~~The following summarizes the transactions under the 1998 Plan, 2000 Plan and Directors Plan:~~

Options
Available for Grant

Options Outstanding

Weighted Average Price Per Share

Balances, January 26, 2003 31,985,579 35,635,704 $ 12.93
Authorized 8,796,156 -- --
Granted (12,680,144 ) 12,675,144 14.77
Exercised -- (4,688,703 ) 5.17
Cancelled 855,440 (855,440 ) 19.26
Balances, January 25, 2004 28,957,031 42,766,705 $ 14.20
Authorized -- -- --
Granted (8,514,926 ) 8,514,926 23.48
Exercised -- (3,051,875 ) 8.29
Cancelled 2,069,599 (2,069,599 ) 18.82
Balances, January 30, 2005 22,511,704 46,160,157 $ 16.10
Authorized -- -- --
Granted (8,208,893 ) 8,208,893 27.73
Exercised -- (9,037,133 ) 11.89
Cancelled 1,352,677 (1,352,677 ) 20.57
Balances, January 29, 2006 15,655,488 43,979,240 $ 19.00

8172

NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
The following summarizes the transactions under the 1998 Plan, 2000 Plan, 1999 Plan, 2004 Plan and Directors’ Plan:

Options Available for Grant

Options Outstanding

Weighted Average Exercise Price Per Share

Balances, January 25, 2004 57,914,062 85,533,410 $ 7.10
Authorized - - -
Granted (17,029,852 ) 17,029,852 11.74
Exercised - (6,103,750 ) 4.10
Cancelled 4,139,198 (4,139,198 ) 9.41
Balances, January 30, 2005 45,023,408 92,320,314 $ 8.05
Authorized - -
Granted (16,417,786 ) 16,417,786 13.87
Exercised - (18,074,266 ) 5.95
Cancelled 2,705,354 (2,705,354 ) 10.29
Balances, January 29, 2006 31,310,976 87,958,480 $ 9.50
Authorized 1,091,383 - -
Granted and assumed (12,539,612 ) 12,539,612 29.60
Exercised - (24,585,893 ) 8.01
Cancelled 1,917,537 (1,917,537 ) 13.42
Balances, January 28, 2007 21,780,284 73,994,662 $ 13.29
The following table summarizes the options outstanding, options vested and expected to vest and options exercisable as of January 28, 2007:

Options Outstanding

Weighted Average Exercise Price Per Share

Weighted Average Remaining Contractual Term (in years)

Aggregate Intrinsic Value⁽¹⁾

Options outstanding 73,994,662 $ 13.29 3.77 $ 1,363,448,818
Options vested and expected to vest 66,365,198 $ 12.40 3.70 $ 1,282,391,307
Options exercisable 42,212,234 $ 9.30 3.25 $ 943,461,713

⁽¹⁾ The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value for in-the-money options at January 28, 2007, based on the $31.47 closing stock price of our common stock on the NASDAQ Global Select Market, which would have been received by the option holders had all option holders exercised their options as of that date. The total number of in-the-money options outstanding and exercisable as of January 28, 2007 was 72.2 million shares and 41.9 million shares, respectively.
73
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table summarizes information about stock options outstanding as of January ~~29, 2006:~~28, 2007:

Options Outstanding

Options Exercisable

Range of Exercise Prices

Number
Outstanding

Weighted
Average
Remaining
Contractual
Life

Weighted
Average
Exercise
Price

Number
Exercisable

Weighted
Average
Exercise
Price

$0.16  -    $0.17 105,000 0.6 $ 0.16 105,000 $ 0.16
     0.33  -      0.40 290,537 0.9 $ 0.38 290,537 $ 0.38
   0.69  -      0.97 3,740,783 1.3 $ 0.87 3,740,783 $ 0.87
   1.13  -     1.25 112,327 2.8 $ 1.15 97,409 $ 1.13
   2.05  -     2.94 3,006,036 2.5 $ 2.35 3,004,052 $ 2.35
     3.83  -     5.54 4,970,417 3.6 $ 4.70 4,830,338 $ 4.73
    5.76  -      8.59 13,470,438 3.0 $ 7.27 10,562,463 $ 7.30
    8.77  -    13.13 23,143,952 3.7 $ 11.76 11,881,607 $ 11.40
   13.19  -    19.77 11,958,889 4.4 $ 16.30 5,980,184 $ 16.29
20.63  -   30.90 11,498,508 5.3 $ 27.10 1,449,430 $ 22.73
31.97  - 46.94 1,380,007 6.1 $ 37.06 123,646 $ 44.65
   48.99  -   73.01 251,356 7.2 $ 61.62 111,935 $ 60.50
73.87  - 86.40 65,361 6.2 $ 79.04 33,799 $ 79.75
312.42  -  312.42 200 1.0 $ 312.42 200 $ 312.42
1,249.66 and above 851 3.0 $ 1,324.55 851 $ 1,324.55
73,994,662 3.8 $ 13.29 42,212,234 $ 9.30
Year Ended
January 28, 2007
Total intrinsic value of options exercised $ 530.7 million
Total cash received from employees as a result of employee stock option exercises $ 196.2 million

Options Outstanding

Options Exercisable

Range of Exercise Prices

Number Outstanding

Weighted Average Remaining Contractual
Life

Weighted Average Exercise Price

Number Exercisable

Weighted Average Exercise Price

$0.09 - 0.09 2,000 0.9 $ 0.09 2,000 $ 0.09
0.33 - 0.33 112,300 1.6 $ 0.33 112,300 $ 0.33
0.66 - 0.79 327,710 1.8 $ 0.74 327,710 $ 0.74
1.38 - 1.93 3,128,914 2.2 $ 1.75 3,128,914 $ 1.75
2.21 - 2.25 170,250 2.6 $ 2.25 170,250 $ 2.25
4.09 - 5.88 2,387,233 3.5 $ 4.73 2,385,911 $ 4.73
7.65 - 11.07 3,673,508 5.0 $ 9.54 3,251,830 $ 9.62
11.51 - 17.18 10,083,542 4.0 $ 14.49 6,076,088 $ 14.67
17.53 - 26.25 15,871,324 4.7 $ 23.02 6,350,213 $ 20.85
26.38 - 39.54 7,597,959 5.3 $ 32.15 3,625,484 $ 31.93
42.98 - 53.61 624,000 5.6 $ 43.35 623,750 $ 43.35
65.47 - 65.47 500 6.0 $ 65.47 500 $ 65.47
$0.09 - $65.47 43,979,240 4.4 $ 19.00 26,054,950 $ 15.86
We settle employee stock option exercises with newly issued common shares. We do not have any equity instruments outstanding other than the options described above as of January 28, 2007.
74
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Note 103 - ~~Retirement Plan~~3dfx

~~We have a 401(k) Retirement Plan,~~During fiscal year 2002, we completed the purchase of certain assets from 3dfx Interactive, Inc., or ~~the Plan, covering substantially all~~3dfx, for an aggregate purchase price of approximately $74.2 million. On December 15, 2000, NVIDIA Corporation and one of our ~~United States employees.~~indirect subsidiaries entered into an agreement, which closed on April 18, 2001, to purchase certain graphics chip assets from 3dfx. Under the ~~Plan, participating employees may defer up~~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 ~~100 percent of their pre-tax earnings,~~3dfx pursuant to a Credit Agreement dated December 15, 2000. The Asset Purchase Agreement also provided, subject to the ~~Internal Revenue Service annual contribution limits. We do~~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 ~~employer contributions~~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 ~~Plan.~~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, 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. Beginning on March 21, 2007, NVIDIA and the Trustee are scheduled to try the question of the value of the assets 3dfx conveyed to NVIDIA and, in particular, whether the price NVIDIA paid for those assets was reasonably equivalent to the value of the assets 3dfx sold to NVIDIA.
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 see Note 12 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
75
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 4 - 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, 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.

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. The allocation of the purchase price has been prepared on a preliminary basis and reasonable changes are expected as additional information becomes available.
The following is a summary of estimated fair values of the assets we acquired and liabilities we assumed as of January 28, 2007 for acquisitions we completed in fiscal 2007:

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 16,480
Inventories 4,896 - 1,883
Other assets 935 73 12,945
Property and equipment 1,010 134 9,755
In-process research and development - 602 13,400
Goodwill 31,051 27,906 114,816
Intangible assets:
Existing technology 2,490 5,179 8,900
Customer relationships 653 2,650 2,700
Trademark - 482 -
Non-compete agreements - 72 -
Total assets acquired 70,734 39,086 367,545
Current liabilities (16,878 ) (1,373 ) (12,139 )
Acquisition related costs (781 ) (740 ) (7,516 )
Long-term liabilities - (301 ) (46 )
Total liabilities assumed (17,659 ) (2,414 ) (19,701 )
Net assets acquired $ 53,075 $ 36,672 $ 347,844

76
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
ULi
Hybrid Graphics
PortalPlayer
Straight-line depreciation / amortization period
Property and equipment 4 - 49 months 1 month - 36 months 3 months - 60 months
Intangible assets:
Existing technology 3 years 3 years 3 years
Customer relationships 3 years 3 years 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.
Note 5 - Goodwill
The carrying amount of goodwill is as follows:

January 28,
2007

January 29,
2006

(In thousands)

3dfx $ 75,326 $ 75,326
MediaQ 35,342 52,913
ULi 31,051 —
Hybrid Graphics 27,906 —
PortalPlayer 114,816 —
Other 16,984 17,078
Total goodwill $ 301,425 $ 145,317
During fiscal 2007, we recorded $31.1 million, $27.9 million and $114.8 million as goodwill related to our acquisitions accounted for under the purchase method of accounting of ULi, Hybrid Graphics and PortalPlayer, respectively. Please refer to Note 4 of the Notes to Consolidated Financial Statements for further information. In addition, during fiscal 2007, the amount allocated to MediaQ Inc., or MediaQ, goodwill was adjusted to $35.3 million as a result of the reversal of the valuation allowance of deferred tax assets related to our acquisition of MediaQ.
During fiscal 2006, we recorded $12.2 million as goodwill for the acquisition of a small international company accounted for under the purchase method of accounting. In addition, during fiscal 2006, we recorded $25.0 million as goodwill related to the purchase of certain assets of 3dfx. Please refer to Note 3 of the Notes to Consolidated Financial Statements for further information.
77
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In computing fair value of our reporting units, we use estimates of future revenues, costs and cash flows from such units. The amount of goodwill allocated to our GPU, MCP, Handheld GPU, Consumer Electronics, and All Other segments as of January 28, 2007, was $99.3 million, $46.2 million, $137.7 million, $11.9 million, and $6.3 million, respectively. As of January 29, 2006, the amount of goodwill allocated to our GPU, MCP, Handheld GPU, Consumer Electronics, and All Other segments, was $99.3 million, $15.1 million, $12.7 million, $11.9 million, and $6.3 million, respectively. Please refer to Note 14 of the Notes to Consolidated Financial Statements for further segment information.
Note 6 - Amortizable Intangible Assets
We are currently amortizing our intangible assets with definitive lives over periods ranging from 1 to 5 years on a straight-line basis. The components of our amortizable intangible assets are as follows:

January 28, 2007

January 29, 2006

Gross
Carrying
Amount

Accumulated
Amortization

Net Carrying
Amount

Gross
Carrying
Amount

Accumulated
Amortization

Net Carrying
Amount

(In thousands)

Technology licenses $ 37,516 $ (20,480 ) $ 17,036 $ 21,586 $ (13,595 ) $ 7,991
Patents 34,623 (24,569 ) 10,054 23,750 (19,911 ) 3,839
Acquired intellectual property 50,212 (31,894 ) 18,318 27,086 (24,516 ) 2,570
Trademarks 11,310 (11,310 ) - 11,310 (10,807 ) 503
Other 1,494 (1,391 ) 103 1,494 (976 ) 518
Total intangible assets $ 135,155 $ (89,644 ) $ 45,511 $ 85,226 $ (69,805 ) $ 15,421

The increase in the gross carrying amount of acquired intellectual property as of January 28, 2007 as compared to January 29, 2006 is primarily related to $3.1 million, $8.4 million and $11.6 million of intangible assets that resulted from our acquisitions of ULi, Hybrid Graphics and PortalPlayer, respectively, during fiscal 2007. Please refer to Note 4 of our Notes to Consolidated Financial Statements for further information. In addition, the $10.9 million increase in the gross carrying amount of patents is related primarily to patents licensed from Opti Incorporated, or Opti, for $8.0 million as a result of the license and settlement agreements described in Note 12 of our Notes to Consolidated Financial Statements.

During fiscal 2007, we entered into a confidential patent licensing arrangement. As part of this arrangement, we recorded a charge of $16.0 million to the cost of revenue category in our statement of income related to past usage of certain patents subject to the arrangement. Our commitment for future license payments under this arrangement could range from $97.0 million to $110.0 million over a ten year period; however, the net outlay under this arrangement may be reduced by the occurrence of certain events covered by the arrangement. The increase in the gross carrying amount of technology licenses as of January 28, 2007 when compared to January 29, 2006 is primarily related to approximately $14.4 million committed by us during fiscal 2007 under this arrangement.
Amortization expense associated with intangible assets for fiscal years 2007, 2006 and 2005 was $19.8 million, $16.9 million and $19.7 million, respectively. Future amortization expense for the net carrying amount of intangible assets at January 28, 2007 is estimated to be $17.1 million in fiscal 2008, $11.1 million in fiscal 2009, $6.9 million in fiscal 2010, $2.8 million in fiscal 2011, $2.0 million in fiscal 2012, and $5.6 million in fiscal 2013 and thereafter.
78
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Note 117 - ~~Financial Arrangements, Commitments~~Marketable Securities
We account for our investment instruments in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and ~~Contingencies~~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 losses for fiscal years 2007 and 2006 were $0.2 million and $2.8 million, respectively.

The following is a summary of cash equivalents and marketable securities at January 28, 2007 and January 29, 2006:

January 28, 2007

Amortized
Cost

Unrealized
Gain

Unrealized
Loss

Estimated
Fair Value

(In thousands)

Asset-backed securities $ 153,471 $ 92 $ (450 ) $ 153,113
Commercial paper 113,576
—
(2 ) 113,574
Obligations of the United States government & its agencies 59,729
—
(627 ) 59,102
United States corporate notes, bonds and obligations 277,641 26 (1,099 ) 276,568
Equity Securities 2,491 3,338
—
5,829
Money market 467,198 — — 467,198
Total $ 1,074,106 $ 3,456 $ (2,178 ) $ 1,075,384
Classified as:
Cash equivalents $ 501,948
Marketable securities 573,436
Total $ 1,075,384

January 29, 2006

Amortized
Cost

Unrealized
Gain

Unrealized
Loss

Estimated
Fair Value

(In thousands)

Asset-backed securities $ 224,649 $ 1 $ (983 ) $ 223,667
Commercial paper 138,091 13 (7 ) 138,097
Obligations of the United States government & its agencies 72,753 8 (834 ) 71,927
United States corporate notes, bonds and obligations 179,930 5 (1,467 ) 178,468
Money market 256,593 — — 256,593
Total $ 872,016 $ 27 $ (3,291 ) $ 868,752
Classified as:
Cash equivalents $ 470,334
Marketable securities 398,418
Total $ 868,752
79
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table provides the breakdown of the investments with unrealized losses at January 28, 2007:

Less than 12 months

12 months or greater

Total

Fair Value

Gross
Unrealized
Losses

Fair Value

Gross
Unrealized
Losses

Fair Value

Gross
Unrealized
Losses

(In thousands)

Asset-backed securities $ 56,663 $ (144 ) $ 64,872 $ (307 ) $ 121,535 $ (451 )
Commercial paper 37,528 (2 ) — — 37,528 (2 )
Obligations of the United States government & its agencies 28,058 (217 ) 31,044 (410 ) 59,102 (627 )
United States corporate notes, bonds and obligations 103,118 (318 ) 110,700 (780 ) 213,818 (1,098 )
Total $ 225,367 $ (681 ) $ 206,616 $ (1,497 ) $ 431,983 $ (2,178 )
As of January 28, 2007, we had 87 investments that were in an unrealized loss position with an average unrealized loss duration of less than one year. The gross unrealized losses related to fixed income securities were due to changes in interest rates. We have determined that the gross unrealized losses on investment securities at January 28, 2007 are temporary in nature. We review our investments to identify and evaluate investments that have indications of possible impairment. Factors considered in determining whether a loss is temporary include the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the investee, and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. Our investment policy requires the purchase of top-tier investment grade securities, the diversification of asset type and certain limits on our portfolio duration.
The amortized cost and estimated fair value of cash equivalents and marketable securities classified as available-for-sale at January 28, 2007 and January 29, 2006 by contractual maturity are shown below.
All of our marketable securities are debt instruments with the exception of $5.8 million of publicly traded equity securities at January 28, 2007.

January 28, 2007

January 29, 2006

Amortized
Cost

Estimated
Fair Value

Amortized
Cost

Estimated
Fair Value

(In thousands)

Less than one year $ 810,754 $ 810,081 $ 491,259 $ 491,246
Due in 1 - 5 years 257,623 256,274 364,065 361,047
Due in 6-7 years 3,238 3,201 16,692 16,459
Total $ 1,071,615 $ 1,069,556 $ 872,016 $ 868,752
80
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 8 - Balance Sheet Components
Certain balance sheet components are as follows:

January 28,
2007

January 29,
2006

(In thousands)

Inventories:

Raw materials $ 56,261 $ 25,743
Work in-process 111,058 107,847
Finished goods 187,361 121,280
Total inventories $ 354,680 $ 254,870 ��

The significant increase in finished goods inventories primarily relates to our build-up of inventory levels of several of our MCP and memory products to meet forecasted sales demand.

January 28, 2007

January 29, 2006

(In thousands)

Deposits and other assets:

Investments in non-affiliates $ 11,684 $ 11,684
Long-term prepayments 8,245 7,504
Other 8,420 8,289
Total deposits and other assets $ 28,349 $ 27,477

January 28,
2007

January 29,
2006

Estimated
Useful Life

(In thousands)

(Years)

Property and Equipment:

Land $ 1,230 $ - (A )
Software and licenses 195,556 153,618 3 - 5
Test equipment 135,607 88,468 3
Computer equipment 113,538 106,061 3
Office furniture and equipment 24,203 21,618 5
Leasehold improvements 92,784 88,376 (B )
Construction in process 6,580 2,260 (C )
569,498 460,401
Accumulated depreciation and amortization (308,670 ) (282,249 )
Total property and equipment, net $ 260,828 $ 178,152
    (A) Land is a non-depreciable asset.
(B) Leasehold improvements are amortized based on the lesser of either the asset’s estimated useful life or the remaining lease term.
(C) Construction in process represents assets that are not in service as of the balance sheet date.

81
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

~~Inventory Purchase Obligations~~Depreciation expense for fiscal years 2007, 2006 and 2005 was $88.0 million, $76.4 million, and $71.3 million, respectively. Assets recorded under capital leases included in property and equipment were $17.1 million as of January 28, 2007 and January 29, 2006. Related accumulated amortization was $17.1 million as of January 28, 2007 and January 29, 2006. Amortization expense for fiscal 2006 and 2005 related to capital leases was $1.2 million, and $3.8 million, respectively. As of January 28, 2007, all assets recorded under capital leases have been fully amortized.

January 28,
2007

January 29,
2006

(In thousands)

Accrued Liabilities:

Accrued customer programs $ 181,182 $ 90,056
Deferred revenue 1,180 217
Customer advances 239 1,556
Taxes payable 37,903 58,355
Accrued payroll and related expenses 81,352 53,080
Deferred rent 12,551 11,879
Accrued legal settlement 30,600 30,600
Other 21,725 13,521
Total accrued liabilities $ 366,732 $ 259,264

AtThe increase in accrued customer programs as of January 28, 2007 when compared to January 29, 2006 ~~we had outstanding inventory purchase obligations totaling $401.6 million.~~primarily relates to an increase in rebates payable to OEMs as a result of our increased sales to OEMs during fiscal 2007 when compared to fiscal 2006. The increase in accrued payroll and related expenses as of January 28, 2007 when compared to January 29, 2006 primarily relates to the significant increase in the number of employees during fiscal 2007.

~~Convertible Subordinated Debentures~~

In October 2000, we sold $300.0 million 4¾% convertible subordinated debentures, or the Notes, due October 15, 2007 in a public offering. Proceeds from the offering were approximately $290.8 million after deducting underwriting discounts, commissions and offering expenses. Issuance costs related to the offering totaled $9.2 million and were amortized to interest expense over the term of the Notes. Interest on the Notes accrued at the rate of 4¾% per annum and was payable semiannually in arrears on April 15 and October 15 of each year, commencing April 15, 2001. Interest expense, excluding the amortization of issuance costs, related to the Notes for fiscal 2004 was $10.4 million. The Notes were redeemable at our option on or after October 20, 2003 and were also convertible at the option of the holder at any time prior to the close of business on the maturity date, unless previously redeemed or repurchased, into shares of common stock at a conversion price of $46.36 per share, subject to adjustment in certain circumstances.

On October 24, 2003, we fully redeemed the Notes. The aggregate principal amount of the Notes outstanding was $300.0 million, which included $18.6 million of Notes that we had purchased in the open market during the three months ended October 26, 2003. The redemption price was equal to approximately 102.7% of the outstanding principal amount of the Notes, plus accrued and unpaid interest up to, but excluding, the redemption date. In

January 28,
2007

January 29,
2006

(In thousands)

Other Long-term Liabilities:

Asset retirement obligation $ 6,362 $ 6,440
Accrued payroll taxes related to stock options 8,995 9,412
Other long-term liabilities 14,180 4,184
Total other long-term liabilities $ 29,537 $ 20,036

82
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 9 - ~~(Continued)~~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 fiscal years 2007, 2006 and 2005 are as follows:
Description

Balance at
Beginning
of Period

Additions ⁽¹⁾

Deductions ⁽²⁾

Balance
at End of
Period

(In thousands)

Year ended January 28, 2007 Allowance for sales returns $ 10,239 $ 37,033 $ (32,795 ) $ 14,477

Year ended January 29, 2006 Allowance for sales returns $ 11,687 $ 35,127 $ (36,575 ) $ 10,239

Year ended January 30, 2005 Allowance for sales returns $ 9,421 $ 22,463 $ (20,197 ) $ 11,687
⁽¹⁾Allowances for sales returns are charged as a reduction to revenue.
⁽²⁾Represents amounts written off against the allowance for sales returns.

In connection with certain agreements that we have executed in the ~~redemption~~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 ~~the Notes,~~these agreements do not have a maximum stated liability. As such, we have not recorded ~~a charge~~any liability in our consolidated ~~statement~~financial statements for such indemnifications.
Note 10 - Stockholders’ Equity
Stock Repurchase Program

On August 9, 2004 we announced that our Board had authorized a stock repurchase program to repurchase shares of ~~income approximately $13.1~~our common stock, subject to certain specifications, up to an aggregate maximum amount of $300 million. Subsequently, on March 6, 2006, we announced that our Board had approved a $400 million ~~which included~~increase to the original stock repurchase program. As a ~~$7.6 million redemption premium~~result of this increase, the amount of common stock the Board has authorized to be repurchased has now been increased to a total of $700 million. The repurchases will be made from time to time in the open market, in privately negotiated transactions, or in structured stock repurchase programs, in compliance with the Securities Exchange Act of 1934, or the Exchange Act, Rule 10b-18, subject to market conditions, applicable legal requirements, and ~~$5.5 million~~other factors. The program does not obligate NVIDIA to acquire any particular amount of common stock and the program may be suspended at any time at our discretion.
83
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 ~~write-off~~right to receive a fixed number of ~~unamortized issuance costs.~~shares of our common stock upon execution of the agreement, and a potential incremental number of shares of our common stock, within a pre-determined range, at the end of the term of the agreement. During fiscal 2007, we repurchased 10.3 million shares of our common stock for $275.0 million under structured share repurchase transactions, which we recorded on the trade date of the transaction. Through the end of fiscal 2007, we have repurchased 27.3 million shares under our stock repurchase program for a total cost of $488.1 million. During the first quarter of fiscal 2008, we entered into a structured share repurchase transaction to repurchase shares of our common stock for $125.0 million that we expect to settle prior to the end of our first fiscal quarter.

Convertible Preferred Stock
As of January 28, 2007 and January 29, 2006, there were no shares of preferred stock outstanding.
Note 11 - 401(k) Retirement Plan
We have a 401(k) Retirement Plan, or the 401(k) Plan, covering substantially all of our United States employees. Under the Plan, participating employees may defer up to 100% of their pre-tax earnings, subject to the Internal Revenue Service annual contribution limits. We do not make employer contributions to the 401(k) Plan.

Note 12 - Financial Arrangements, Commitments and Contingencies
Inventory Purchase Obligations
At January 28, 2007, we had outstanding inventory purchase obligations totaling $364.5 million.
Capital Purchase Obligations
At January 28, 2007, we had outstanding capital purchase obligations totaling $4.8 million.

Lease Obligations

Our headquarters complex is located on a leased site in Santa Clara, California and is comprised of ~~five~~six buildings. The related leases expire in ~~2012~~fiscal 2013 and ~~each includes~~include two seven-year renewals at our ~~option.~~option for five buildings and a three-year renewal option for one building. Future minimum lease payments under these operating leases total ~~$152.8~~$130.0 million over the remaining terms of the leases, including predetermined rent escalations, and are included in the future minimum lease payment schedule below.

In addition to the commitment of our headquarters, we have other domestic and international office facilities under operating leases expiring through fiscal ~~2013.~~2015. Future minimum lease payments under our noncancelable operating leases as of January ~~29, 2006,~~28, 2007, are as follows:

Future Minimum Lease Obligations

(In thousands)

Year ending January:

2008 $ 33,890
2009 33,480
2010 31,952
2011 31,549
2012 30,449
2013 and thereafter 6,445
Total $ 167,765

Operating
Year ending January:

(In thousands)
2007 $ 29,557
2008 29,321
2009 28,396
2010 27,794
2011 27,812
2012 and thereafter 29,603
Total $ 172,483

84
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Rent expense for the years ended January 28, 2007, January 29, 2006 and January 30, 2005 ~~and January 25, 2004~~ was $32.6 million, $29.5 million, and $28.0 million, ~~and $26.4 million,~~ respectively.

~~The following is an analysis of the property and equipment under capital leases by major classes:~~

January 29,

January 30,

2006

2005

(In thousands)

Property and Equipment:

Software and other $ 629 $ 634
Test equipment 6,895 9,125
Computer equipment 4,331 4,331
Leasehold improvements 4 --
Office furniture and equipment 5,232 5,232
$ 17,091 $ 19,322
Accumulated depreciation and amortization (17,091 ) (17,835 )
Total property and equipment, net $ -- $ 1,487

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~~which closed on April 18, 2001.

83
~~NVIDIA CORPORATION AND SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

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.~~lease, CarrAmerica. 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.~~lease, Carlyle Fortran Trust. The landlords’ complaints both ~~assert~~asserted 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~~$15 million. In October 2002, 3dfx filed for ~~Chapter~~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, for purposes of discovery, with a complaint filed by the Trustee in the 3dfx bankruptcy ~~case for purposes of discovery.~~case. 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~~our motion to dismiss the landlords’ respective amended complaints and allowed the landlords to have until February 4, 2006 to amend their complaints. The ~~landlords’ refiled~~landlords re-filed claims against NVIDIA in early February 2006, and NVIDIA again ~~requested~~filed motions requesting the District Court to dismiss all such claims. The District Court took both motions under submission. On September 29, 2006, the court dismissed the CarrAmerica action in its entirety and without leave to amend. The court found, among other things, that CarrAmerica lacks standing to bring the lawsuit and that such standing belongs exclusively to the bankruptcy trustee. On October 27, 2006, CarrAmerica filed a notice of appeal from that order. On December 15, 2006, the District Court also dismissed the Carlyle complaint in its entirety, finding that Carlyle lacked standing to pursue some of its claims, ~~made by the landlords. A hearing on NVIDIA’s new~~and that certain other claims were substantively unmeritorious. NVIDIA has filed motions to ~~dismiss is set~~recover its litigation costs and attorneys fees against both Carlyle and Carr. Those motions are currently scheduled for hearing onin early April, 17, 2006. Discovery is stayed pending this hearing 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.2007.

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. On December 23, 2005, the Court issued its ruling denying the ~~Trustee's~~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 Court expressly denied the ~~Trustee's~~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, iswas subject to a confirmation process through a vote of creditors and the review and approval of the Bankruptcy Court after notice and hearing.~~The scope and schedule for that confirmation process has yet to be determined, butwe expect that hearing to now occur sometime in the next few months.~~ The Trustee ~~has~~ advised that he ~~intends~~intended to object to the ~~settlement. The~~ settlement, ~~with the Creditors’ Committee calls~~which would have called for a payment by NVIDIA of approximately $30.6 million to the 3dfx estate. Under the settlement, $5.6 million ~~relates~~related to various administrative expenses and Trustee fees, and $25.0 million ~~relates~~related to the satisfaction of debts and liabilities owed to the general unsecured creditors of 3dfx. ~~As such,~~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.

~~The~~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.
85
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

In addition, while the conditional settlement agreement was awaiting the confirmation process, the Bankruptcy Court, over objection of the Creditors’ Committee and NVIDIA, ~~has~~ ordered the discovery portion of the Trustee’s litigation to ~~proceed~~proceed. The expert discovery was completed, but the Bankruptcy Court also ruled on a Trustee discovery motion allowing additional discovery of NVIDIA. Because that order would have required NVIDIA to disclose privileged attorney-client communications, NVIDIA asked the District Court to review that order and to stay its execution while the ~~settlement~~District Court’s review is ~~pending approval through~~pending. The District Court did issue the ~~confirmation process. However,~~requested stay order on August 3, 2006. Oral argument on that matter was held on November 15, 2006, and the District Court reversed the Bankruptcy Court’s order by order of its own dated December 15, 2006. The District Court permitted certain limited additional discovery, but concluded that on the record before it, there was no ~~trial date has been~~basis to set inaside the ~~Trustee's action. In addition, following~~attorney-client privilege.

Following the Trustee’s filing of a Form 8-K on behalf of 3dfx, in which the Trustee disclosed the terms of the proposed settlement agreement between NVIDIA and the Creditor’s Committee, certain shareholders of 3dfx filed a petition with the Bankruptcy Court to appoint an official committee to represent the claimed ~~interest’s~~interests of 3dfx shareholders. That petition was granted and an Equity ~~Holder’s~~Holders Committee was appointed. ~~Counsel~~Since that appointment, the Equity Holders Committee has filed a competing plan of reorganization/liquidation. The Equity Holders plan assumes that 3dfx can raise additional equity capital that would be used to retire all of 3dfx’s debts. Upon the payment of that debt, the Equity Holders Committee contends that NVIDIA would be obliged to pay the stock consideration provided for in the asset purchase agreement. By virtue of stock splits since the execution of the asset purchase agreement, the stock consideration would now total four million shares of our common stock. The Equity Holders’ Committee filed a motion with the Bankruptcy Court for an order giving it standing to bring that lawsuit to enforce the Asset Purchase Agreement. Over our objection, the Bankruptcy Court granted that motion on May 1, 2006 and the Equity Holders’ Committee filed its Complaint for Declaratory Relief against NVIDIA that same day. NVIDIA moved to dismiss the Complaint for Declaratory Relief, and the Bankruptcy court granted that motion with leave to amend. The Equity Committee thereafter amended its complaint, and NVIDIA moved to dismiss that amended complaint as well. At the hearing on December 21, 2006, the Bankruptcy Court granted the motion as to one of the Equity Holders’ Committee’s claims, and denied it as to the others. However, the Bankruptcy Court also ruled that NVIDIA would only be required to answer the first three causes of action by which the Equity Holders’ Committee seeks a determination that the Asset Purchase Agreement was not terminated before 3dfx filed for bankruptcy protection, that the 3dfx bankruptcy estate still holds some rights in the Asset Purchase Agreement, and that the agreement is capable of being assumed by the bankruptcy estate. In addition, the Equity Holders Committee filed a motion seeking Bankruptcy court approval of investor protections for Harbinger Capital Partners Master Fund I, Ltd., an equity investment firm that has conditionally agreed to pay no more than $51.5 million for preferred stock in 3dfx. The hearing on that motion was held on January 18, 2007, and the court approved the proposed protections. Beginning on March 21, 2007, NVIDIA and the Trustee are scheduled to try the question of the value of the assets 3dfx conveyed to NVIDIA and, in particular, whether the price NVIDIA paid for those assets was reasonably equivalent to the value of the assets 3dfx sold to NVIDIA.
Lawsuits related to our historical stock option granting practices and SEC inquiry
In June 2006, the Audit Committee of the Board of NVIDIA, or the Audit Committee, began a review of our stock option practices based on the results of an internal review voluntarily undertaken by management. The Audit Committee, with the assistance of outside legal counsel, completed its review on November 13, 2006 when the Audit Committee reported its findings to our full Board. The review covered option grants to all employees, directors and consultants for all grant dates during the period from our initial public offering in January 1999 through June 2006. Based on the findings of the Audit Committee and our internal review, we identified a number of occasions on which we used an incorrect measurement date for financial accounting and reporting purposes.

We voluntarily contacted the SEC regarding the Audit Committee’s review and, as of the date of the filing of this Form 10-K, the SEC is continuing the inquiry of our historical stock option grant practices it began in late August 2006. In October 2006, we met with the SEC and provided it with a review of the status of the Audit Committee’s review and in November 2006 we voluntarily provided the SEC with further documents. We continue to cooperate with the SEC in its inquiry.

Concurrently with our internal review and the SEC’s inquiry, since September 29, 2006, ten derivative cases have been filed in state and federal courts asserting claims concerning errors related to our historical stock option granting practices and associated accounting for stock-based compensation expense. These complaints have been filed in various courts, including the California Superior Court, Santa Clara County, the United States District Court for the ~~Equity Holder’s Committee has announced an intention~~Northern District of California, and the Court of Chancery of the State of Delaware in and for New Castle County. Plaintiffs filed a consolidated complaint in the United States District Court for the Northern District of California on February 28, 2007. The California Superior Court cases have been consolidated and plaintiffs are scheduled to file a ~~competing Plan~~consolidated complaint on or before March 22, 2007. All of ~~Reorganization~~the cases purport to be brought derivatively on behalf of NVIDIA against members of our Board and several of our current and former officers and directors. All allege in substantially similar fashion claims for, among other things, breach of fiduciary duty, unjust enrichment, insider selling, abuse of control, gross mismanagement, waste, constructive fraud, and violations of Sections 10(b) and 14(a) of the Securities Exchange Act of 1934, or ~~Liquidation~~the Exchange Act. The plaintiffs seek to recover for NVIDIA, among other things, damages in ~~the Trustee’s case.~~an unspecified amount, rescission, punitive damages, treble damages for insider selling, and fees and costs. Plaintiffs also seek an accounting, a constructive trust and other equitable relief.We intend to take all appropriate action in response to these complaints.
86
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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. In its complaint, Opti ~~asserts~~asserted that unspecified NVIDIA chipsets infringe five ~~U.S.~~United States patents held by Opti. Opti ~~seeks~~sought unspecified damages for our alleged conduct, attorneys’ fees and triple damages for alleged willful infringement by NVIDIA. In April 2006, the District Court issued a Markman ruling adopting Opti's proposed construction on 13 of the 15 terms at issue and Opti dropped from the lawsuit two of the five United States patents that Opti alleged NVIDIA infringes, and elected to pursue the three remaining patents at trial.

In August 2006, Opti and NVIDIA settled this litigation. Under that settlement, NVIDIA was obligated to pay to Opti $11.0 million dollars for past and present licenses to the patents in suit and NVIDIA agreed to make additional quarterly payments to Opti should NVIDIA use certain patented technology after January 31, 2007. The case has now been dismissed with prejudice. The agreements with Opti call for us to pay $11.0 million in exchange for Opti’s dismissal of its lawsuit against us and for certain patent license rights. Of this $11.0 million, we recorded $8.0 million as a patent-related intangible asset and $3.0 million as a charge to cost of revenue.

Department of Justice Subpoena and Investigation

On November 29, 2006, we received a subpoena from the San Francisco Office of the Antitrust Division of the United States Department of Justice, or DOJ, in connection with the DOJ's investigation into potential antitrust violations related to graphics processing units and cards. No specific allegations have been made against us. We plan to cooperate with the DOJ in its investigation. As of March 14, 2007, 42 civil complaints have been filed against us. The majority are pending in the Northern District of California, a number are pending in the Central District of California, and other cases are pending in several other Federal district courts. Although the complaints differ, they generally purport to assert federal and state antitrust claims based on alleged price fixing, market allocation, and other alleged anti-competitive agreements between us and Advanced Micro Devices, Inc., or AMD, as a result of its acquisition of ATI Technologies, Inc., or ATI. Many of the cases also assert a variety of state law unfair competition or consumer protection claims on the same allegations and some cases assert unjust enrichment or other common law claims. The complaints are putative class actions alleging classes of direct and/or indirect purchasers of our graphic processing units and cards. The plaintiffs in a few of the Northern District of California actions have filed a ~~response to~~motion with the Judicial Panel on Multidistrict Litigation asking that all pending and subsequent cases be consolidated in one court for all pre-trial discovery and motion practice. A hearing on this ~~complaint in December 2004. A case management conference was held in July 2005 where a trial date was~~motion is set for ~~July 2006. A court~~March 29, 2007. We believe the allegations in the complaints are without merit and intend to vigorously defend the cases.

Note 13 - Income Taxes
The provision for income taxes applicable to income before income taxes consists of the following:

Year Ended

January 28,
2007

January 29,
2006

January 30,
2005

(In thousands)

Current:
Federal $ (17 ) $ 22,050 $ —
State (2,401 ) 375 355
Foreign 6,758 11,012 8,826
Total current 4,340 33,437 9,181
Deferred:
Federal 41,721 (2,692 ) 1,237
State — — (620 )
Total deferred 41,721 (2,692 ) 617
Charge in lieu of taxes attributable to employer stock option plans 289 24,867 8,615
Provision for income taxes $ 46,350 $ 55,612 $ 18,413
8487
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ~~- (Continued)~~

mandated mediation was held in January 2006 and did not resolve the matter. Discovery continues, as well as preparation for the Markman hearing on claim construction. The Markman hearing is scheduled for April 13, 2006. We believe the claims asserted against us are without merit and we will continue to defend ourselves vigorously. We do not have sufficient information to determine whether a loss is probable. As such, we have not recorded any liability in our consolidated financial statements for such, if any, loss.

~~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. In November 2004, NVIDIA sought and was granted permission to intervene in two of the three pending AVG lawsuits. Our complaint in intervention alleged that both of the patents in suit were invalid and that, to the extent AVG’s claims target NVIDIA products, the asserted patents were not infringed.

On December 19, 2005, AVG and substantially all of the named defendants and intervenors, including NVIDIA, settled all of pending claims; the only surviving claims will relate solely to two non-settling defendants. As part of the settlement, the defendants and intervenors paid an undisclosed aggregate amount to AVG. In exchange, all pending claims between the settling parties were dismissed with prejudice, and AVG granted 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 fully and finally waived any claims for indemnification they may have had against any other settling party.
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 - Settlement Costs~~

Settlement costs were $14.2 million for fiscal 2006. The settlement costs are associated with two litigation matters, 3dfx and AVG. AVG is settled. The 3dfx matter is not finally settled and is subject to judicial review and the completion of appropriate procedures and documents. However, based on the potential settlement in this case, we have concluded that a loss is probable and that we can reasonably estimate the amount of loss. Please refer to Note 11 of the Notes to Consolidated Financial Statements for further information.

85
~~NVIDIA CORPORATION AND SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -~~ (Continued)

~~Note 13 - Income Taxes~~

~~The provision for income taxes applicable to income before income taxes consists of the following:~~

Year Ended

Year Ended

Year Ended

January 29,

January 30,

January 25,

2006

2005

2004

(In thousands)

Current:
Federal $ 22,050 $ -- $ --
State 375 355 221
Foreign 11,012 8,826 (51,590 )
Total current 33,437 9,181 (51,369 )
Deferred:
Federal (10,622) 4,683 19,861
State -- (620 ) 35,274
Foreign -- -- --
Total deferred (10,622) 4,063 55,135
Charge in lieu of taxes attributable to employer stock option plans 34,820 11,845 8,488
Provision for income taxes $ 57,635 $ 25,089 $ 12,254

Income before income taxes consists of the following:

Year Ended

Year Ended

Year Ended

January 29,

January 30,

January 25,

Year Ended

2006

2005

2004

January 28,
2007

January 29,
2006

January 30,
2005

(In thousands)

(In thousands)

Domestic $ 54,955 $ 9,556 $ (17,816 ) $ (19,617 ) $ 52,112 $ (7,537 )
Foreign 305,266 115,889 104,489 514,097 304,676 114,565
$ 360,221 $ 125,445 $ 86,673 $ 494,480 $ 356,788 $ 107,028

The provision for income taxes differs from the amount computed by applying the federal statutory income tax rate of 35% to income before income taxes as follows:

Year Ended

Year Ended

Year Ended

January 29,

January 30,

January 25,

2006

2005

2004

(In thousands)

Tax expense computed at Federal Statutory Rate $ 126,077 $ 43,906 $ 30,336
State income taxes (benefit), net of federal tax effect 861 230 544
Foreign tax rate differential (57,286) (8,462 ) (11,671 )
Research and experimental credit (12,210) (10,710 ) (5,230 )
In-process research and development -- -- 1,225
Change in estimates -- -- (36,766 )
Increase in beginning of year valuation allowance -- -- 33,599
Other 193 125 217
Provision for income taxes $ 57,635 $ 25,089 $ 12,254

Year Ended

January 28,
2007

January 29,
2006

January 30,
2005

(In thousands)

Tax expense computed at federal statutory rate $ 173,068 $ 124,876 $ 37,460
State income taxes, net of federal tax effect (1,372 ) 847 219
Foreign tax rate differential (97,390 ) (57,286 ) (8,462 )
Research tax credit (35,359 ) (13,175 ) (10,935 )
In-process research and development 4,690 — —
Stock-based compensation 3,564 — —
Other �� (851 ) 350 131
Provision for income taxes $ 46,350 $ 55,612 $ 18,413

86
~~NVIDIA CORPORATION AND SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

The tax effect of temporary differences that gives rise to significant portions of the deferred tax assets and liabilities are presented below:


January 28,
2007

January 29,
2006

(In thousands)

Deferred tax assets:

Net operating loss carryforwards $ 23,272 $ 134,385
Accruals and reserves, not currently deductible for tax purposes 17,702 16,109
Property, equipment and intangible assets 16,436 16,928
Research and other tax credit carryforwards 145,393 146,089
Stock-based compensation 31,835 45,924
Gross deferred tax assets 234,638 359,435
Less valuation allowance (68,563 ) (233,016 )
Deferred tax assets 166,075 126,419
Deferred tax liabilities:

Unremitted earnings of foreign subsidiaries (149,276 ) (85,716 )
Net deferred tax asset
$ 16,799 $ 40,703
88
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

January 29,

January 30,

2006

2005

Deferred tax assets:

(In thousands)

Net operating loss carryforwards $ 138,541 $ 101,238
Accruals and reserves, not currently deductible for tax purposes 12,438 13,373
Property, equipment and intangible assets 16,928 17,182
Research and other tax credit carryforwards 146,089 113,856
Gross deferred tax assets 313,996 245,649
Less valuation allowance (230,707) (190,563 )
Net deferred tax assets 83,289 55,086
Deferred tax liabilities:

Unremitted earnings of foreign subsidiaries (90,156) (72,575 )
Net deferred tax liability
$ (6,867) $ (17,489 )

Income tax expense as a percentage of income before taxes, or our annual effective tax rate, was ~~16.0%~~9.4% in fiscal 2007, 15.6% in fiscal 2006, ~~20.0%~~and 17.2% in fiscal ~~2005, and 14.1% in fiscal 2004.~~2005. The ~~change~~difference in the ~~rate~~effective tax rates amongst the three years was primarily a result of changes in our geographic mix of income subject to ~~tax.~~ tax, with the additional change in mix in fiscal 2007 due to certain stock-based compensation expensed for financial accounting purposes under SFAS No. 123(R), and an increase in the amount of research tax credit benefit in fiscal 2007.

As of January ~~29, 2006,~~28, 2007, we had a valuation allowance of ~~$230.7~~$68.6 million. Of the total valuation allowance, $182.2 million is attributable to certain net operating loss and tax credit carryforwards resulting from the exercise of employee stock options. The tax benefit of these net operating loss and tax credit carryforwards, if and when realized, would be accounted for as a credit to stockholders' equity. Of the remaining valuation allowance as of January 29, 2006, $19.5$3.7 million relates to ~~federal and~~ state tax attributes acquired in certain acquisitions for which realization of the related deferred tax assets was determined not likely to be realized due, in part, to potential utilization limitations as a result of stock ownership changes, and ~~$29.0~~$64.9 million relates to ~~certain~~ state deferred tax assets that management determined not likely to be realized due, in part, to projections of future taxable income. To the extent realization of the deferred tax assets related to certain acquisitions becomes probable, recognition of these acquired tax benefits would first reduce goodwill to zero, then reduce other non-current intangible assets related to the acquisition to zero with any remaining benefit reported as a reduction to income tax expense. To the extent realization of the deferred tax assets related to ~~certain~~ state tax benefits becomes probable, we would recognize an income tax benefit in the period such asset is more likely than not to be realized.

As of January ~~29, 2006,~~28, 2007, with the adoption of SFAS No. 123(R), we have derecognized both deferred tax assets for the excess of tax benefit related to stock-based compensation, reflected in our federal and state net operating loss and research tax credit carryforwards, and the offsetting valuation allowance. Consistent with prior years, the excess tax benefit reflected in our net operating loss and research tax credit carryforwards, in the amount of $344.9 million as of January 28, 2007, will be accounted for as a credit to stockholders’ equity, if and when realized. In determining if and when excess tax benefits have been realized, we have elected to do so on a “with-and-without” approach with respect to such excess tax benefits. We have also elected to ignore the indirect tax effects of stock-based compensation deductions for financial and accounting reporting purposes, and specifically to recognize the full effect of the research tax credit in income from continuing operations.

As of January 28 2007, we had a federal net operating loss carryforward of approximately ~~$374.1~~$770.5 million and cumulative state net operating loss carryforwards of approximately ~~$180.1~~$584.1 million. The federal net operating loss carryforward will expire beginning in fiscal 2012 and the state net operating loss carryforwards will begin to expire in fiscal ~~2007~~2008 according to the rules of each particular state. As of January ~~29, 2006,~~28, 2007 we had federal research ~~and experimentation~~ tax credit carryforwards of approximately ~~$92.1~~$129.0 million that will begin to expire in fiscal 2008. We have other federal tax credit carryforwards of approximately $1.2 million that will begin to expire in fiscal 2011. The research ~~and experimentation~~ tax credit ~~carryforward~~carryforwards attributable to states is approximately ~~$78.2~~$125.6 million, of which approximately ~~$75.3~~$121.3 million is attributable to the State of California and may be carried over indefinitely, and approximately ~~$2.9~~$4.3 million is attributable to various other states and will expire beginning in fiscal 2016 according to the rules of each particular state. We have other California state tax credit carryforwards of approximately ~~$4.9~~$4.8 million that will begin to expire in fiscal ~~2007.~~2009. Utilization of net operating losses and tax credit carryforwards may be subject to limitations due to ownership changes and other limitations provided by the Internal Revenue Code and similar state provisions. If such a limitation applies, the net operating loss and tax credit carryforwards may expire before full utilization.

~~The American Jobs Creation Act~~As of ~~2004, or Act, was signed into law on October 22, 2004. The Act provided a temporary incentive for~~January 28, 2007, United States ~~multinational corporations~~federal and state income taxes have not been provided on approximately $304.0 million of undistributed earnings of non-United States subsidiaries as such earnings are considered to repatriate accumulated income earned outside the United States at a federal effective tax rate of 5.25%. In the fourth quarter of fiscal 2006, we repatriated $420 million in foreign earnings under the Act. The net tax effect of this distribution was minimal because the current tax cost at a 5.25% tax rate was offset by the benefit attributable to reducing our deferred tax liability for taxes on earnings previously provided at the statutory rate of 35%.
87
~~NVIDIA CORPORATION AND SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~be permanently reinvested.

Note 14 - ~~Microsoft Agreement~~

On March 5, 2000, we entered into an agreement with Microsoft Corporation, or the Microsoft Agreement, in which we agreed, under certain terms and conditions, to develop and sell processors for use in the Xbox video game console. Under the Microsoft Agreement, in the event that an individual or corporation makes an offer to purchase shares equal to or greater than 30% of the outstanding shares of our common stock, Microsoft may have first and last rights of refusal to purchase the stock.

~~Note 15 -~~ 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 is composed of products that support desktop PCs, notebook PCs, professional workstations and ~~professional workstations;~~other GPU-based products; the MCP Business is composed of NVIDIA nForce products that operate as a single-chip or chipset that ~~can off-load~~provide system functions, such as ~~audio~~high speed processing and network communications, and perform these operations independently from the host ~~central processing unit, or~~ CPU; our Handheld GPU Business is composed of products that support handheld ~~personal digital assistants,~~PDAs, cellular phones and other handheld devices; and our Consumer Electronics Business is concentrated in products that support video game consoles and other digital consumer electronics devices and is composed of revenue from our contractual arrangements with SCE to jointly develop a custom GPU ~~incorporating our next-generation GeForce GPU and SCE’s system solutions in~~for SCE’s PlayStation3, revenue from sales of our Xbox-related products, revenue from our license agreement with Microsoft Corporation, or 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 ~~$121.2~~$242.3 million, $131.6 million and ~~$101.5~~$118.0 million for fiscal years 2007, 2006 and 2005, respectively, 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~~Certain prior period amounts have been restated to ~~reflect~~conform to the presentation of our ~~new reporting structure.~~current fiscal quarter.

89
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Our CODM does not review any information regarding total assets 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.

For periods prior to the first quarter of fiscal 2005, product-line operating segment information other than revenue was impracticable to obtain primarily due to changes in our enterprise resource system structure that we implemented during the first quarter of fiscal 2005.

GPU

MCP

Handheld GPU

Consumer Electronics

All Other

Consolidated

(In thousands)

Twelve Months Ended January 28, 2007:

Revenue $ 1,994,334 $ 661,483 $ 108,496 $ 96,314 $ 208,144 $ 3,068,771
Depreciation and amortization expense $ 35,785 $ 20,751 $ 17,322 $ 176 $ 33,798 $ 107,832
Operating income (loss) $ 583,873 $ 77,952 $ (41,399 ) $ 84,327 $ (251,301 ) $ 453,452
Twelve Months Ended January 29, 2006:

Revenue $ 1,657,221 $ 352,319 $ 58,745 $ 167,398 $ 140,004 $ 2,375,687
Depreciation and amortization expense $ 33,080 $ 12,092 $ 12,480 $ 1,552 $ 30,817 $ 90,021
Operating income (loss) $ 359,821 $ 32,865 $ (34,922 ) $ 94,696 $ (115,796 ) $ 336,664
Twelve Months Ended January 30, 2005:

Revenue $ 1,348,968 $ 175,663 $ 45,921 $ 259,968 $ 179,513 $ 2,010,033
Depreciation and amortization expense $ 32,849 $ 12,824 $ 11,620 $ 880 $ 32,643 $ 90,816
Operating income (loss) $ 178,597 $ (39,912 ) $ (37,532 ) $ 107,901 $ (113,878 ) $ 95,176
88
~~NVIDIA CORPORATION AND SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

GPU

MCP

Handheld GPU

CE

All Other

Consolidated

(In thousands)

Twelve Months Ended January 29, 2006:

Revenue $ 1,654,397 $ 352,319 $ 58,745 $ 170,222 $ 140,004 $ 2,375,687
Depreciation and amortization expense $ 33,080 $ 12,092 $ 12,480 $ 1,552 $ 30,817 $ 90,021
Operating income (loss) $ 370,636 $ 32,865 $ (34,922 ) $ 83,881 $ (112,363 ) $ 340,097
Twelve Months Ended January 30, 2005:

Revenue $ 1,348,968 $ 175,663 $ 45,921 $ 259,968 $ 179,513 $ 2,010,033
Depreciation and amortization expense $ 32,849 $ 12,824 $ 11,620 $ 880 $ 32,643 $ 90,816
Operating income (loss) $ 178,597 $ (39,912 ) $ (37,532 ) $ 107,901 $ (95,461 ) $ 113,593

Twelve Months Ended January 25, 2004:

Revenue $ 1,259,802 $ 162,435 $ 9,009 $ 280,134 $ 111,565 $ 1,822,945

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 tables summarize information pertaining to our revenue from customers based on invoicing address in different geographic regions:

Year Ended

Year Ended

Year Ended

January 29,

January 30,

January 25,

Year Ended

2006

2005

2004

January 28,
2007

January 29,
2006

January 30,
2005

(In thousands)

(In thousands)

Revenue:

United States $ 340,598 $ 473,721 $ 444,510 $ 332,268 $ 340,598 $ 473,721
Other Americas 38,572 11,045 6,359 171,851 38,572 11,045
China 401,612 269,306 280,975 659,711 401,612 269,306
Taiwan 1,131,784 883,346 834,511 1,118,989 1,131,784 883,346
Other Asia Pacific 250,844 169,888 149,843 483,872 250,844 169,888
Europe 212,277 202,727 106,747 302,080 212,277 202,727
Total revenue $ 2,375,687 $ 2,010,033 $ 1,822,945 $ 3,068,771 $ 2,375,687 $ 2,010,033

January 29,

January 30,

2006

2005

(In thousands)

Long-lived assets

United States $ 161,505 $ 169,872
Other Americas 609 --
China 4,443 1,030
Taiwan 1,020 951
Other Asia Pacific 7,670 3,123
Europe 2,905 3,979
Total long-lived assets $ 178,152 $ 178,955

8990
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)

January 28,
2007

January 29,
2006

(In thousands)

Long-lived assets:

United States $ 241,795 $ 177,568
Other Americas 20,197 9,957
China 5,589 4,645
Taiwan 3,278 1,185
India 13,263 7,332
Other Asia Pacific 1,822 1,905
Europe 3,233 3,037
Total long-lived assets $ 289,177 $ 205,629

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

	Year Ended	Year Ended	Year Ended
	January 29,	January 30,	January 25,	Year Ended
	2006	2005	2004	January 28, 2007			January 29, 2006			January 30, 2005
Revenue:
Customer A	8%	9%	12%		12	%		12	%		7	%
Customer B	5%	13%	15%		5	%		14	%		18	%
Customer C	6%	8%	12%		-	%		5	%		13	%
Customer D	14%	18%	21%
Customer E	12%	7%	9%

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

Title of each class	Name of each exchange on which registered
Common Stock, $0.001 par value per share	The NASDAQ Stock Market, LLC (NASDAQ Global Select Market)

		Page
	PART I
Item 1.	Business	1
Item 1A.	Risk Factors	1210
Item 1B.	Unresolved Staff Comments	2724
Item 2.	Properties	2725
Item 3.	Legal Proceedings	2825
Item 4.	Submission of Matters to a Vote of Security Holders	2927

	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	2928
Item 6.	Selected Financial Data	3130
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3331
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	5048
Item 8.	Consolidated Financial Statements and Supplementary Data	5149
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	5149
Item 9A.	Controls and Procedures	5149
Item 9B.	Other Information	5249

	PART III
Item 10.	Directors, ~~and~~ Executive Officers ~~of the Registrant~~and Corporate Governance	5250
Item 11.	Executive Compensation	5350
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	5351
Item 13.	Certain Relationships and Related Transactions, and Director Independence	5351
Item 14.	Principal ~~Accounting~~Accountants Fees and Services	5351

	PART IV
Item 15.	Exhibits, Financial Statement Schedules	5452
Signatures		9596

	Three Months Ended			For the Fiscal Years Ended																					Total Compensation
	April 30, 2006			2006			2005			2004			2003			2002			2001			2000			Expense
	(In thousands)
Restatement adjustments:
Improper measurement dates for company-wide annual or retention stock option grants	$	1,860		$	5,719		$	17,468		$	31,387		$	27,051		$	21,390		$	9,230		$	1,177		$	115,282
Improper measurement dates for stock option grants during fiscal years 2001 and 2002		115			233			2,039			6,239			32,082			23,079			6,454			-			70,241
Improper measurement dates for stock option grants during fiscal year 2000		(1,738	)		(3,163	)		(1,608	)		1,398			2,612			5,781			4,230			726			8,238
Other issues identified		(1,061	)		644			518			1,345			40			2,750			699			39			4,974
Additional compensation expense		(824	)		3,433			18,417			40,369			61,785			53,000			20,613			1,942			198,735

Tax related effects		140			(2,023	)		(6,676	)		(14,580	)		(21,887	)		(18,477	)		(7,824	)		(723	)		(72,050	)
Impact of restatement adjustments on income (loss) before change in accounting principle		(684	)		1,410			11,741			25,789			39,898			34,523			12,789			1,219			126,685
Cumulative effect of change in accounting principle, net of tax		(704	)		-			-			-			-			-			-			-			(704	)
Impact of restatement adjustments on net income (loss)	$	(1,388	)	$	1,410		$	11,741		$	25,789		$	39,898		$	34,523		$	12,789		$	1,219		$	125,981

Reconciliation:
Stock-based compensation, as originally recorded	$	23,049		$	1,096	$	1,337	$	672	$	(156	)	$	6	$	112	$	662	$	26,778
Restatement adjustments:
Additional compensation expense		(824	)		3,433		18,417		40,369		61,785			53,000		20,613		1,942		198,735
Stock-based compensation, as restated	$	22,225		$	4,529	$	19,754	$	41,041	$	61,629		$	53,006	$	20,725	$	2,604	$	225,513

Weighted average expected life of stock options (in years)	3.6 - 5.1
Risk free interest rate	4.7% - 5.1	%
Volatility	39% - 51	%
Dividend yield	—

Weighted average expected life of stock options (in years)	0.5 - 2.0
Risk free interest rate	1.6% - 5.2	%
Volatility	30% - 47	%
Dividend yield	—

	Year Ended												Year Ended
	Jan. 29,			Jan. 30,			$			%			Jan. 30,			Jan. 25,			$			%			Year Ended											Year Ended
	2006			2005			Change			Change			2005			2004			Change			Change			Jan. 28, 2007			Jan. 29, 2006			$ Change		% Change			Jan. 29, 2006			Jan. 30, 2005			$ Change			% Change
	(in thousands)																								(In millions)											(In millions)
Research and Development:
Salaries and benefits	$	206.0		$	173.6		$	32.4			19	%	$	173.6		$	137.6		$	36.0			26	%	$	280.3		$	205.1		$	75.2		37	%	$	205.1		$	172.6		$	32.5			19	%
Stock-based compensation ⁽¹⁾																										70.1			5.9			64.2		1,088	%		5.9			14.1			(8.2	)		(58	)%
Depreciation and amortization																										59.8			58.2			1.6		3	%		58.2			56.1			2.1			4	%
Computer software and lab equipment		46.4			41.1			5.3			13	%		41.1			36.9			4.2			11	%		57.6			46.4			11.2		24	%		46.4			41.1			5.3			13	%
Facility expense																										38.4			32.0			6.4		20	%		32.0			31.4			0.6			2	%
New product development		28.6			29.0			(0.4	)		(1	)%		29.0			18.6			10.4			56	%		35.7			28.6			7.1		25	%		28.6			29.0			(0.4	)		(1	)%
Facility expense		32.0			31.4			0.6			2	%		31.4			28.3			3.1			11	%
Depreciation and amortization		58.2			56.1			2.1			4	%		56.1			44.6			11.5			26	%
In-process research and development																										14.0			-			14.0		-			-			-			-			-
License and development project costs		(28.9	)		(2.0	)		(26.9	)		(1,345	)%		(2.0	)		--			(2.0	)		--			(18.4	)		(28.9	)		10.5		36	%		(28.9	)		(2.0	)		(26.9	)		(1,345	)%
Other		9.8			5.9			3.9			66	%		5.9			4.0			1.9			48	%		16.0			9.8			6.2		63	%		9.8			5.9			3.9			66	%
Total	$	352.1		$	335.1		$	17.0			5	%	$	335.1		$	270.0		$	65.1			24	%	$	553.5		$	357.1		$	196.4		55	%	$	357.1		$	348.2		$	8.9			3	%

Research and development as a percentage of net revenue		15	%		17	%								17	%		15	%								18	%		15	%							15	%		17	%

	As of January 28, 2007		As of January 29, 2006
	(In millions)
Cash and cash equivalents	$	544.4	$	551.8
Marketable securities		573.4		398.4
Cash, cash equivalents, and marketable securities	$	1,117.8	$	950.2

			Page

(a)	1.	Consolidated Financial Statements

		Report of Independent Registered Public Accounting Firm, PricewaterhouseCoopers LLP	55 53

		~~Report of Independent Registered Public Accounting Firm, KPMG LLP~~	57
		~~Consolidated Balance Sheets as of January 29, 2006 and January 30, 2005~~	58
		Consolidated Statements of Income for the years ended January 28, 2007, January 29, 2006, and January 30, 2005 ~~and January 25, 2004~~	59 55

		Consolidated Balance Sheets as of January 28, 2007, and January 29, 2006	56

		Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the years ended January 28, 2007, January 29, 2006, and January 30, 2005 ~~and January 25, 2004~~	60 57

		Consolidated Statements of Cash Flows for the years ended January 28, 2007, January 29, 2006, and January 30, 2005 ~~and January 25, 2004~~	61 58

		Notes to Consolidated Financial Statements	63 60

(a)	2.	Financial Statement Schedules

		Schedule II Valuation and Qualifying Accounts	92 93

(a)	3.	Exhibits	93
		The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as a part of this Annual Report on Form 10-K.	94

	January 28, 2007			January 29, 2006
ASSETS
Current assets:
Cash and cash equivalents	$	544,414		$	551,756
Marketable securities		573,436			398,418
Accounts receivable, less allowances of $15,749 and $10,837 in 2007 and 2006, respectively		518,680			318,186
Inventories		354,680			254,870
Prepaid expenses and other current assets		31,141			24,387
Deferred income taxes		9,419			2,682
Total current assets		2,031,770			1,550,299
Property and equipment, net		260,828			178,152
Goodwill		301,425			145,317
Intangible assets, net		45,511			15,421
Deposits and other assets		28,349			27,477
Deferred income taxes		7,380			38,021
	$	2,675,263		$	1,954,687

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	272,075		$	179,395
Accrued liabilities		366,732			259,264
Total current liabilities		638,807			438,659
Other long-term liabilities		29,537			20,036
Commitments and contingencies - see Note 12
Stockholders’ equity:
Preferred stock, $.001 par value; 2,000,000 shares authorized; none issued		—			—
Common stock, $.001 par value; 1,000,000,000 shares authorized; 388,308,979 shares issued and 360,988,504 outstanding in 2007; and 359,927,958 shares issued and 342,954,912 outstanding in 2006 ⁽¹⁾		388			360
Additional paid-in capital		1,295,650			965,604
Deferred compensation		-			(3,604	)
Treasury stock, at cost (27,227,145 shares in 2007 and 16,889,716 shares in 2006)		(487,120	)		(212,142	)
Accumulated other comprehensive income (loss), net		1,436			(1,957	)
Retained earnings		1,196,565			747,731
Total stockholders' equity		2,006,919			1,495,992
	$	2,675,263		$	1,954,687

	Common Stock					Additional Paid in			Deferred			Treasury			Accumulated Other Comprehensive			Retained		Total Stockholders’			Total Comprehensive
	Shares			Amount		Capital			Compenation			Stock			Income (Loss)			Earnings		Equity			Income

Balances, January 26, 2003		157,790,022		$	158	$	531,186		$	(156	)	$	--		$	3,760		$	397,739	$	932,687		$	94,451
Issuance of common stock from stock plans		6,355,765			6		37,667			--			--			--			--		37,673
Tax benefit from stock plans		--			--		8,488			--			--			--			--		8,488
Deferred compensation		--			--		6,140			(5,984	)		--			--			--		156
Amortization of deferred compensation		--			--		--			672			--			--			--		672
Unrealized loss, net of $1,940 tax effect		--			--		--			--			--			(383	)		--		(383	)		(383	)
Reclassification adjustment for net gains included in net income, net of $632 tax effect		--			--		--			--			--			(2,527	)		--		(2,527	)		(2,527	)
Net income		--			--		--			--			--			--			74,419		74,419			74,419
Balances, January 25, 2004		164,145,787			164		583,481			(5,468	)		--			850			472,158		1,051,185			71,509
Issuance of common stock from stock plans		5,028,111			5		42,497			--			--			--			--		42,502
Stock repurchase		(2,084,353	)		--		--			--			(24,644	)		--			--		(24,644	)
Tax benefit from stock plans		--			--		11,845			--			--			--			--		11,845
Reversal of deferred compensation		--			--		(1,205	)		1,205			--			--			--		--
Amortization of deferred compensation		--			--		--			1,337			--			--			--		1,337
Unrealized loss, net of $1,470 tax effect		--			--		--			--			--			(4,468	)		--		(4,468	)		(4,468	)
Reclassification adjustment for net losses included in net income, net of ($38) tax effect		--			--		--			--			--			155			--		155			155
Net income		--			--		--			--			--			--			100,356		100,356			100,356
Balances, January 30, 2005		167,089,545			169		636,618			(2,926	)		(24,644	)		(3,463	)		572,514		1,178,268			96,043
Issuance of common stock from stock plans		10,831,746			11		127,486			--			--			--			--		127,497
Stock repurchase		(6,402,170	)		--		--			--			(188,509	)		--			--		(188,509	)
Tax benefit from stock plans		--			--		34,821			--			--			--			--		34,821
Cancellation of shares		(41,665	)		--		(520	)		--			1,011			--			--		491
Reversal of deferred compensation		--			--		(154	)		154			--			--			--		--
Amortization of deferred compensation		--			--		--			1,096			--			--			--		1,096
Unrealized loss, net of $845 tax effect		--			--		--			--			--			(120	)		--		(120	)		(120	)
Reclassification adjustment for net losses included in net income, net of ($407) tax effect		--			--		--			--			--			1,626			--		1,626			1,626
Net income		--			--		--			--			--			--			302,586		302,586			302,586
Balances, January 29, 2006		171,477,456		$	180	$	798,251		$	(1,676	)	$	(212,142	)	$	(1,957	)	$	875,100	$	1,457,756		$	304,092

	Common Stock					Additional Paid-in Capital (1)				Deferred Compensation		Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Retained Earnings		Total Stockholders’ Equity			Total Comprehensive Income
	Outstanding Shares (1)			Amount		Additional Paid-in Capital (1)				Deferred Compensation		Treasury Stock						Retained Earnings		Total Stockholders’ Equity			Total Comprehensive Income
Balances, January 25, 2004		328,291,574		$	328	$	770,278		$	(39,903	)	$	—		$	850		$	357,940	$	1,089,493		$	45,720
Issuance of common stock from stock plans		10,056,222			10		42,492			—			—			—			—		42,502
Stock repurchase		(4,168,706	)		—		—			—			(24,644	)		—			—		(24,644	)
Tax benefit from stock-based compensation		—			—		8,616			—			—			—			—		8,616
Reversal of deferred compensation		—			—		(5,359	)		5,359			—			—			—		—
Amortization of deferred compensation		—			—		(145	)		20,967			—			—			—		20,822
Unrealized loss, net of $1,470 tax effect		—			—		—			—			—			(4,468	)		—		(4,468	)		(4,468	)
Reclassification adjustment for net losses included in net income, net of ($38) tax effect		—			—		—			—			—			155			—		155			155
Net income		—			—		—			—			—			—			88,615		88,615			88,615
Balances, January 30, 2005		334,179,090			338		815,882			(13,577	)		(24,644	)		(3,463	)		446,555		1,221,091			84,302
Issuance of common stock from stock plans		21,663,492			22		127,475			—			—			—			—		127,497
Stock repurchase		(12,804,340	)		—		—			—			(188,509	)		—			—		(188,509	)
Tax benefit from stock-based compensation		—			—		24,868			—			—			—			—		24,868
Cancellation of shares		(83,330	)		—		(520	)		—			1,011			—			—		491
Reversal of deferred compensation		—			—		(2,101	)		2,101			—			—			—		—
Amortization of deferred compensation		—			—		—			7,872			—			—			—		7,872
Unrealized loss, net of $845 tax effect		—			—		—			—			—			(120	)		—		(120	)		(120	)
Reclassification adjustment for net losses included in net income, net of ($407) tax effect		—			—		—			—			—			1,626			—		1,626			1,626
Net income		—			—		—			—			—			—			301,176		301,176			301,176
Balances, January 29, 2006		342,954,912			360		965,604			(3,604	)		(212,142	)		(1,957	)		747,731		1,495,992			302,682
Issuance of common stock from stock plans		28,381,021			28		221,132			—			—			—			—		221,160
Stock repurchase		(10,337,429	)		—		—			—			(274,978	)		—			—		(274,978	)
Tax deficit from stock-based compensation		—			—		(8,482	)		—			—			—			—		(8,482	)
Reversal of deferred compensation		—			—		(3,604	)		3,604			—			—			—		—
Stock-based compensation expense related to acquisitions		—			—		2,914			—			—			—			—		2,914
Stock-based compensation related to employees		—			—		118,790			—			—			—			—		118,790
Unrealized gain, net of $1,223 tax effect		—			—		—			—			—			3,509			—		3,509			3,509
Reclassification adjustment for net gains included in net income, net of $78 tax effect		—			—		—			—			—			(116	)		—		(116	)		(116	)
Impact of change in accounting principle, net of ($379) tax effect		—			—		(704	)		—			—			—			—		(704	)
Net income		—			—		—			—			—			—			448,834		448,834			448,834
Balances, January 28, 2007		360,988,504		$	388	$	1,295,650		$	-		$	(487,120	)	$	1,436		$	1,196,565	$	2,006,919		$	452,227

Other non-cash activities:
Acquisition of business - goodwill adjustment	$	25,765	$	1,091	$	--
Assets recorded under capital lease arrangements	$	--	$	--	$	2,528
Application of customer advance to accounts receivable	$	--	$	11,508	$	46,866
Marketable security received from investment exchange	$	96	$	688	$	--
Asset retirement obligation	$	1,835	$	4,483	$	--
Unrealized gains/losses from marketable securities	$	1,068	$	5,745	$	4,850
Deferred stock-based compensation	$	154	$	1,205	$	6,140

	Stock Options
	Year Ended	Year Ended	Year Ended
	January 29,	January 30,	January 25,
	2006	2005	2004
	(Using a binomial model)	(Using the Black-Scholes model)	(Using the Black-Scholes model)
Weighted average expected life of stock options (in years)	3.6 - 5.1	4.0	4.0
Risk free interest rate	4.0% - 4.4%	3.0%	2.4%
Volatility	34% - 48%	75% - 80%	80%
Dividend yield	--	--	--

	Employee Stock Purchase Plan
	Year Ended	Year Ended	Year Ended
	January 29,	January 30,	January 25,
	2006	2005	2004
	(Using the Black-Scholes model)	(Using the Black-Scholes model)	(Using the Black-Scholes model)
Weighted average expected life of stock options (in years)	0.5 - 2.0	0.5 - 2.0	0.5 -1.0
Risk free interest rate	0.9% - 3.7%	1.1% - 2.1%	1.6% - 2.4%
Volatility	30% - 45%	80%	88%
Dividend yield	--	--	--

	Year Ended
	January 28, 2007
	(In thousands)
Stock-based compensation expense by type of award:
Employee stock options	$	108,654
Employee stock purchase plan		9,717
Amount capitalized as inventory		(1,636	)
Total stock-based compensation		116,735
Tax effect of stock-based compensation		(13,995	)
Net effect on net income	$	102,740

	Stock Options
	Year Ended January 28, 2007			Year Ended January 29, 2006			Year Ended January 30, 2005
	(Using a binomial model)			(Using a binomial model)			(Using the Black-Scholes model)
Weighted average expected life of stock options (in years)		3.6 - 5.1			3.6 - 5.1			4.0
Risk free interest rate		4.7% - 5.1	%		4.0% - 4.4	%		3.0	%
Volatility		39% - 51	%		34% - 48	%		75% - 80	%
Dividend yield		—			—			—

	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

	January 29, 2006							January 30, 2005
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
	(In thousands)

Technology licenses	$	21,586	$	(13,595	)	$	7,991	$	17,236	$	(9,841	)	$	7,395
Patents		23,750		(19,911	)		3,839		23,260		(15,400	)		7,860
Acquired intellectual property		27,086		(24,516	)		2,570		27,086		(18,578	)		8,508
Trademarks		11,310		(10,807	)		503		11,310		(8,544	)		2,766
Other		1,494		(976	)		518		1,494		(509	)		985
Total intangible assets	$	85,226	$	(69,805	)	$	15,421	$	80,386	$	(52,872	)	$	27,514

	January 29, 2006
	Amortized Cost		Unrealized Gain		Unrealized (Loss)			Estimated Fair Value
	(In thousands)
Asset-backed securities	$	224,649	$	1	$	(983	)	$	223,667
Commercial paper		138,091		13		(7	)		138,097
Obligations of the United States government & its agencies		72,753		8		(834	)		71,927
United States corporate notes, bonds and obligations		179,930		5		(1,467	)		178,468
Money market		256,593		--		--			256,593
Total	$	872,016	$	27	$	(3,291	)	$	868,752

Classified as:
Cash equivalents								$	470,334
Marketable securities									398,418
Total								$	868,752

	Less than 12 months					12 months or greater					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
	(In thousands)
Asset-backed securities	$	78,286	$	(334	)	$	48,293	$	(649	)	$	126,579	$	(983	)
Commercial paper		19,600		(7	)		--		--			19,600		(7	)
Obligations of the United States government & its agencies		39,032		(434	)		22,851		(400	)		61,883		(834	)
United States corporate notes, bonds and obligations		139,842		(485	)		64,593		(982	)		204,435		(1,467	)
Money market		--		--			--		--			--		--
Total	$	276,760	$	(1,260	)	$	135,737	$	(2,031	)	$	412,497	$	(3,291	)

	January 29, 2006			January 30, 2005			Estimated Useful Life
Property and Equipment:	(In thousands)						(Years)
Software	$	153,618		$	125,310			3 - 5
Test equipment		88,468			86,883			3
Computer equipment		106,061			82,428			3
Leasehold improvements		88,376			79,160			(A)
Construction in process		2,260			3,264			(B)
Office furniture and equipment		21,618			18,777			5
		460,401			395,822
Accumulated depreciation and amortization		(282,249	)		(216,867	)
Total property and equipment, net	$	178,152		$	178,955

Description	Balance at Beginning of Period		Additions (1)		Deductions (2)			Balance at End of Period
	(In thousands)
Year ended January 29, 2006
Allowance for sales returns	$	11,687	$	35,127	$	(36,575	)	$	10,239
Year ended January 30, 2005
Allowance for sales returns	$	9,421	$	22,463	$	(20,197	)	$	11,687
Year ended January 25, 2004
Allowance for sales returns	$	13,228	$	23,796	$	(27,603	)	$	9,421

	Options Available for Grant			Options Outstanding			Weighted Average Price Per Share
Balances, January 26, 2003		31,985,579			35,635,704		$	12.93
Authorized		8,796,156			--			--
Granted		(12,680,144	)		12,675,144			14.77
Exercised		--			(4,688,703	)		5.17
Cancelled		855,440			(855,440	)		19.26
Balances, January 25, 2004		28,957,031			42,766,705		$	14.20
Authorized		--			--			--
Granted		(8,514,926	)		8,514,926			23.48
Exercised		--			(3,051,875	)		8.29
Cancelled		2,069,599			(2,069,599	)		18.82
Balances, January 30, 2005		22,511,704			46,160,157		$	16.10
Authorized		--			--			--
Granted		(8,208,893	)		8,208,893			27.73
Exercised		--			(9,037,133	)		11.89
Cancelled		1,352,677			(1,352,677	)		20.57
Balances, January 29, 2006		15,655,488			43,979,240		$	19.00

	Options Available for Grant			Options Outstanding			Weighted Average Exercise Price Per Share
Balances, January 25, 2004		57,914,062			85,533,410		$	7.10
Authorized		-			-			-
Granted		(17,029,852	)		17,029,852			11.74
Exercised		-			(6,103,750	)		4.10
Cancelled		4,139,198			(4,139,198	)		9.41
Balances, January 30, 2005		45,023,408			92,320,314		$	8.05
Authorized		-			-
Granted		(16,417,786	)		16,417,786			13.87
Exercised		-			(18,074,266	)		5.95
Cancelled		2,705,354			(2,705,354	)		10.29
Balances, January 29, 2006		31,310,976			87,958,480		$	9.50
Authorized		1,091,383			-			-
Granted and assumed		(12,539,612	)		12,539,612			29.60
Exercised		-			(24,585,893	)		8.01
Cancelled		1,917,537			(1,917,537	)		13.42
Balances, January 28, 2007		21,780,284			73,994,662		$	13.29

	Options Outstanding		Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value⁽¹⁾
Options outstanding		73,994,662	$	13.29		3.77	$	1,363,448,818
Options vested and expected to vest		66,365,198	$	12.40		3.70	$	1,282,391,307
Options exercisable		42,212,234	$	9.30		3.25	$	943,461,713


	Options Outstanding						Options Exercisable
Range of Exercise Prices	Number Outstanding		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price		Number Exercisable		Weighted Average Exercise Price
$0.16 - $0.17		105,000		0.6	$	0.16		105,000	$	0.16
0.33 - 0.40		290,537		0.9	$	0.38		290,537	$	0.38
0.69 - 0.97		3,740,783		1.3	$	0.87		3,740,783	$	0.87
1.13 - 1.25		112,327		2.8	$	1.15		97,409	$	1.13
2.05 - 2.94		3,006,036		2.5	$	2.35		3,004,052	$	2.35
3.83 - 5.54		4,970,417		3.6	$	4.70		4,830,338	$	4.73
5.76 - 8.59		13,470,438		3.0	$	7.27		10,562,463	$	7.30
8.77 - 13.13		23,143,952		3.7	$	11.76		11,881,607	$	11.40
13.19 - 19.77		11,958,889		4.4	$	16.30		5,980,184	$	16.29
20.63 - 30.90		11,498,508		5.3	$	27.10		1,449,430	$	22.73
31.97 - 46.94		1,380,007		6.1	$	37.06		123,646	$	44.65
48.99 - 73.01		251,356		7.2	$	61.62		111,935	$	60.50
73.87 - 86.40		65,361		6.2	$	79.04		33,799	$	79.75
312.42 - 312.42		200		1.0	$	312.42		200	$	312.42
1,249.66 and above		851		3.0	$	1,324.55		851	$	1,324.55
		73,994,662		3.8	$	13.29		42,212,234	$	9.30

	Year Ended
	January 28, 2007
Total intrinsic value of options exercised	$	530.7 million
Total cash received from employees as a result of employee stock option exercises	$	196.2 million

	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			16,480
Inventories		4,896			-			1,883
Other assets		935			73			12,945
Property and equipment		1,010			134			9,755
In-process research and development		-			602			13,400
Goodwill		31,051			27,906			114,816
Intangible assets:
Existing technology		2,490			5,179			8,900
Customer relationships		653			2,650			2,700
Trademark		-			482			-
Non-compete agreements		-			72			-
Total assets acquired		70,734			39,086			367,545
Current liabilities		(16,878	)		(1,373	)		(12,139	)
Acquisition related costs		(781	)		(740	)		(7,516	)
Long-term liabilities		-			(301	)		(46	)
Total liabilities assumed		(17,659	)		(2,414	)		(19,701	)
Net assets acquired	$	53,075		$	36,672		$	347,844

	January 28, 2007							January 29, 2006
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
	(In thousands)
Technology licenses	$	37,516	$	(20,480	)	$	17,036	$	21,586	$	(13,595	)	$	7,991
Patents		34,623		(24,569	)		10,054		23,750		(19,911	)		3,839
Acquired intellectual property		50,212		(31,894	)		18,318		27,086		(24,516	)		2,570
Trademarks		11,310		(11,310	)		-		11,310		(10,807	)		503
Other		1,494		(1,391	)		103		1,494		(976	)		518
Total intangible assets	$	135,155	$	(89,644	)	$	45,511	$	85,226	$	(69,805	)	$	15,421

	January 28, 2007
	Amortized Cost		Unrealized Gain		Unrealized Loss			Estimated Fair Value
	(In thousands)
Asset-backed securities	$	153,471	$	92	$	(450	)	$	153,113
Commercial paper		113,576		—		(2	)		113,574
Obligations of the United States government & its agencies		59,729		—		(627	)		59,102
United States corporate notes, bonds and obligations		277,641		26		(1,099	)		276,568
Equity Securities		2,491		3,338		—			5,829
Money market		467,198		—		—			467,198
Total	$	1,074,106	$	3,456	$	(2,178	)	$	1,075,384
Classified as:
Cash equivalents								$	501,948
Marketable securities									573,436
Total								$	1,075,384

	January 28, 2007			January 29, 2006			Estimated Useful Life
	(In thousands)						(Years)
Property and Equipment:
Land	$	1,230		$	-			(A	)
Software and licenses		195,556			153,618			3 - 5
Test equipment		135,607			88,468			3
Computer equipment		113,538			106,061			3
Office furniture and equipment		24,203			21,618			5
Leasehold improvements		92,784			88,376			(B	)
Construction in process		6,580			2,260			(C	)
		569,498			460,401
Accumulated depreciation and amortization		(308,670	)		(282,249	)
Total property and equipment, net	$	260,828		$	178,152

Description	Balance at Beginning of Period		Additions ⁽¹⁾		Deductions ⁽²⁾			Balance at End of Period
	(In thousands)

Year ended January 28, 2007 Allowance for sales returns	$	10,239	$	37,033	$	(32,795	)	$	14,477

Year ended January 29, 2006 Allowance for sales returns	$	11,687	$	35,127	$	(36,575	)	$	10,239

Year ended January 30, 2005 Allowance for sales returns	$	9,421	$	22,463	$	(20,197	)	$	11,687

	Future Minimum Lease Obligations
	(In thousands)
Year ending January:
2008	$	33,890
2009		33,480
2010		31,952
2011		31,549
2012		30,449
2013 and thereafter		6,445
Total	$	167,765