ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Delaware 94-3177549 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 165,452,881. 9 35 35 36 36 36 36 36 programmable 3D processor PCs to mulitmedia-rich mo bile phones. graphics, networking and communications features and performance and ultra-low power designs, enabling our customers to achieve award-winning performance in their products. leading CEMs, including Celestica Hong Kong Ltd., Mitac International Corporation, Micro-Star International Co. Ltd., or Micro-Star, and Sanmina SCI Corporation, and leading motherboard and add-in board manufacturers, including Abit Computer Corporation, ASUSTeK Computer Inc., Canopus Corporation, Gainward Co. Ltd., Gigabyte Technology Co. Ltd., Guillemot Corporation, LeadTek Research, Inc. and PNY Technologies. In August 2003, we completed the acquisition of MediaQ, Inc., a leading provider of graphics and multimedia technology for handheld devices. MediaQ’s products, now branded as our GoForce products, are manufactured at UMC. President, Chief Executive Officer and Director Marvin D. Burkett Chief Financial Officer Jeffrey D. Fisher Executive Vice President, Worldwide Sales David M. Shannon Vice President, General Counsel Di Ma Vice President, Operations Daniel Executive Vice President, Marketing defend ourselves vigorously. High Low Year ended January 25, 2004 First Quarter (through March 31, 2003) $ 14.83 $ 9.33 Year ended January 26, 2003 Fourth Quarter $ 18.27 $ 9.99 Third Quarter $ 16.98 $ 7.20 Second Quarter $ 40.65 $ 14.30 First Quarter $ 68.35 $ 30.37 Year ended January 27, 2002 Fourth Quarter $ 71.71 $ 42.00 Third Quarter $ 49.31 $ 23.88 Second Quarter $ 49.67 $ 33.90 First Quarter $ 43.48 $ 21.57 Year Ended January 26, January 27, January 28, January 30, January 31, (In thousands, except per share data) Consolidated Statement of Income Data: Revenue $ 1,909,447 $ 1,369,471 $ 735,264 $ 374,505 $ 158,237 Gross profit 576,012 519,238 272,879 141,843 48,491 Operating income 143,986 241,732 128,135 58,617 4,516 Income before income tax expense 150,557 252,749 144,808 60,371 4,487 Income tax expense 59,758 75,825 46,339 19,412 357 Net income $ 90,799 $ 176,924 $ 98,469 $ 40,959 $ 4,130 Basic net income per share $ 0.59 $ 1.24 $ 0.75 $ 0.34 $ 0.07 Diluted net income per share $ 0.54 $ 1.03 $ 0.62 $ 0.28 $ 0.04 Shares used in basic per share computation 153,513 143,015 130,998 119,488 58,260 Shares used in diluted per share computation 168,393 171,074 159,294 144,392 109,572 January 26, 2003 January 27, 2002 January 28, 2001 January 30, 2000 January 31, 1999 (In thousands) Consolidated Balance Sheet Data: Cash, cash equivalents and marketable securities $ 1,028,413 $ 791,377 $ 674,275 $ 61,560 $ 50,257 Total assets 1,617,015 1,503,174 1,016,902 203,085 113,332 Capital lease obligations, less current portion 4,880 5,861 378 962 1,995 Deferred revenue — 70,193 200,000 — — Long-term debt 300,000 300,000 300,000 500 — Total stockholders’ equity 932,687 763,819 407,107 127,424 64,209 Cash dividends declared per common share — — — — — which included a $7.6 million redemption premium and $5.5 million of unamortized issuance costs. of certain non-fraud financial reporting, books and records, and internal control its 0.13 micron technology. liabilities. report. For all 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. 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. Receivable Our current credit insurance agreement expires on December 31, 2004. doubtful accounts receivable has ranged between 1% and 2%. As of January We also recognize federal, state and foreign deferred tax Year Ended January 26, 2003 January 27, 2002 January 28, 2001 Revenue 100.0 % 100.0 % 100.0 % Cost of revenue 69.5 62.1 62.9 Cost of revenue related to stock option exchange 0.3 — — Gross profit 30.2 37.9 37.1 Operating expenses: Research and development 11.8 11.3 11.7 Sales, general and administrative 7.9 7.2 8.0 Stock option exchange 2.9 — — Amortization of goodwill 0.0 0.7 — Acquisition related charges 0.0 0.7 — Discontinued use of property 0.0 0.3 — Total operating expenses 22.6 20.2 19.7 Operating income 7.6 17.7 17.4 Interest and other income, net 0.3 0.8 2.3 Income before income tax expense 7.9 18.5 19.7 Income tax expense 3.1 5.5 6.3 Net income 4.8 % 13.0 % 13.4 % MCP products. competitors. fiscal 2003. commissions, a $16.6 million increase in legal and accounting expenses associated with various legal proceedings, a $9.0 million increase in equipment and software primarily related to the enhancement of our computer systems, a $7.9 million increase in tradeshow and product launch costs, and a $2.6 million increase in facilities costs due to the move into a new building at our headquarters and a full year of occupation in all headquarter buildings as well as other increases associated with general administrative activities and travel and entertainment expenses. On September 26, 2002, we commenced an offer, During fiscal 2002, amortization of goodwill was associated with goodwill from the asset purchase from 3dfx. The initial allocation of the purchase price included $57.4 million of goodwill, plus approximately $3.0 million of intangible assets previously allocated to workforce in place, which was reclassified into goodwill as of the beginning of fiscal 2003. Acquisition related charges are attributable to expenses related to the acquisition of assets from 3dfx in fiscal 2002. These charges primarily consisted of bonuses Discontinued use of property consists of write-offs of $3.7 million relating to our previous office space in Santa Clara, California. Since we relocated in June 2001, we have been unable to secure a subtenant for our previous office space due to the decrease in demand for commercial rental space in Silicon Valley. The write-offs consist of all remaining costs related to the preexisting lease, including rental payments, capitalized leasehold improvements, and furniture and fixtures. 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 of approximately $13.1 million, which included a $7.6 million redemption premium and $5.5 million of unamortized issuance costs. contingencies. Contractual Cash Obligations Total 1 Year 2-3 Years 4-5 Years After 5 Years (in thousands) Convertible subordinated notes $ 300,000 — — $ 300,000 — Interest on convertible subordinated notes(1) $ 67,687 $ 14,250 $ 28,500 $ 24,937 — Capital lease obligations $ 11,316 $ 6,260 $ 5,056 — — Operating leases $ 219,096 $ 22,995 $ 46,180 $ 47,201 $ 102,720 Purchase obligations(2) $ 210,270 $ 210,270 — — — Royalty and license commitments $ 2,612 $ 1,871 $ 741 — — Other $ 520 — $ 520 — — Total contractual cash obligations $ 811,501 $ 255,646 $ 80,997 $ 372,138 $ 102,720 which could harm our business. Factors that could affect our cash used or generated from operations and, as a result, our " (in thousands) January 25, 2004. Our strategy is to utilize the most advanced harm our gross margins. PCI Express compatible GPUs, we expect that our partners will be able to launch PCI Express compatible solutions in April 2004. During fiscal Risks Related to Our Partners our business could suffer by the loss of these customers. subcontractors to perform assembly, testing and packaging. Our wafer requirements represent a significant portion of the total production capacity at TSMC. 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. These manufacturers may be unable to meet our near-term or long-term . 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 or test our products or components. Any delays in delivery of our products could harm our business. products, which c ould harm our business. Our failure to achieve one or more design wins would harm our business. during downturns. and consumer electronics segments. have an adverse effect on our business, financial condition or results of operations. In addition, foreign relations events. Furthermore, any substantial disruption in our suppliers’ operations, either as a result of a natural disaster, political unrest, economic instability, acts of terrorism or war, equipment failure or other cause, could harm our business. 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 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. AND RELATED STOCKHOLDER MATTERS Page (a) Exhibits 12, 2004 January 26, 2003 January 27, 2002 ASSETS Current assets: Cash and cash equivalents $ 346,994 $ 333,000 Restricted cash — 7,000 Marketable securities 681,419 458,377 Accounts receivable, less allowances of $17,468 and $18,079 in 2003 and 2002, respectively 154,501 147,348 Inventories 145,046 213,877 Prepaid expenses and other current assets 12,393 8,078 Prepaid and deferred taxes 11,249 66,429 Total current assets 1,351,602 1,234,109 Property and equipment, net 135,152 120,128 Deposits and other assets 10,473 11,897 Prepaid and deferred taxes 43,317 55,921 Goodwill 54,227 50,326 Intangible assets, net 22,244 30,793 $ 1,617,015 $ 1,503,174 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 141,129 $ 214,019 Accrued liabilities 228,467 141,210 Current portion of note and capital lease obligations 5,676 3,896 Interest payable on convertible debenture 4,176 4,176 Deferred revenue — 70,193 Total current liabilities 379,448 433,494 Capital lease obligations, less current portion 4,880 5,861 Long-term convertible debenture 300,000 300,000 Stockholders’ equity: Common stock, $.001 par value; 1,000,000,000 shares authorized; 157,790,022 and 149,553,130 shares issued and outstanding in 2003 and 2002, respectively 158 150 Additional paid-in capital 531,030 456,621 Accumulated other comprehensive income, net 3,760 108 Retained earnings 397,739 306,940 Total stockholders’ equity 932,687 763,819 $ 1,617,015 $ 1,503,174 Year Ended January 26, 2003 Year Ended January 27, 2002 Year Ended January 28, 2001 Revenue $ 1,909,447 $ 1,369,471 $ 735,264 Cost of revenue 1,327,271 850,233 462,385 Cost of revenue related to stock option exchange (1) 6,164 — — Gross profit 576,012 519,238 272,879 Operating expenses: Research and development 224,873 154,752 86,047 Sales, general and administrative 151,485 98,944 58,697 Stock option exchange (1) 55,668 — — Amortization of goodwill — 10,093 — Acquisition related charges — 10,030 — Discontinued use of property — 3,687 — Total operating expenses 432,026 277,506 144,744 Operating income 143,986 241,732 128,135 Interest and other income, net 6,571 11,017 16,673 Income before income tax expense 150,557 252,749 144,808 Income tax expense 59,758 75,825 46,339 Net income $ 90,799 $ 176,924 $ 98,469 Basic net income per share $ 0.59 $ 1.24 $ 0.75 Diluted net income per share $ 0.54 $ 1.03 $ 0.62 Shares used in basic per share computation 153,513 143,015 130,998 Shares used in diluted per share computation 168,393 171,074 159,294 Common Stock Shares Amount Additional Paid in Capital Deferred Compen- sation Retained Earnings Accumulated Other Comprehensive Income Total Stockholders’ Equity Total Comprehensive Income Balances, January 30, 2000 124,400,628 $ 124 $ 95,871 $ (118 ) $ 31,547 $ — $ 127,424 Issuance of common stock from stock plans 9,664,606 10 19,900 — — — 19,910 Sale of common stock under public offering, net of issuance costs of $9.6 million 2,800,000 3 96,666 — — — 96,669 Tax benefit from stock plans — — 63,199 — — — 63,199 Stock granted in exchange for intangibles and services 50,000 — 1,324 — — — 1,324 Amortization of deferred compensation — — — 112 — — 112 Net income — — — — 98,469 — 98,469 98,469 Balances, January 28, 2001 136,915,234 137 276,960 (6 ) 130,016 — 407,107 Issuance of common stock from stock plans 12,637,896 13 90,830 — — — 90,843 Tax benefit from stock plans — — 88,932 — — — 88,932 Amortization of deferred compensation — — — 6 — — 6 Issuance cost — — (101 ) — — — (101 ) Unrealized gain — — — — — 528 528 528 Tax effect of unrealized gain — — — — — (213 ) (213 ) (213 ) Cumulative translation adjustments — — — — — (207 ) (207 ) (207 ) Net income — — — — 176,924 — 176,924 176,924 Balances, January 27, 2002 149,553,130 150 456,621 — 306,940 108 763,819 177,032 Issuance of common stock from stock plans 4,421,823 4 25,483 — — — 25,487 Stock option exchange offer 3,815,069 4 39,902 — — — 39,906 Tax benefit from stock plans — — 9,180 — — — 9,180 Deferred compensation — — — (156 ) — — (156 ) Unrealized gain — — — — — 5,742 5,742 5,742 Tax effect of unrealized gain — — — — — (2,297 ) (2,297 ) (2,297 ) Cumulative translation adjustments — — — — — 207 207 207 Net income — — — — 90,799 — 90,799 90,799 Balances, January 26, 2003 157,790,022 $ 158 $ 531,186 $ (156 ) $ 397,739 $ 3,760 $ 932,687 $ 94,451 Year Ended January 26, 2003 Year Ended January 27, 2002 Year Ended January 28, 2001 Cash flows from operating activities: Net income $ 90,799 $ 176,924 $ 98,469 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 58,216 43,491 15,724 Deferred income taxes 29,768 (51,914 ) (27,201 ) Stock-based compensation (156 ) 364 5 Amortization of deferred compensation — 6 112 Issuance of common stock in exchange for stock options 39,906 — — Bad debt expense 1,917 1,446 909 Tax benefit from employee stock plans 9,180 88,932 63,199 Changes in operating assets and liabilities: Accounts receivable (9,070 ) (43,806 ) (38,673 ) Inventories 68,831 (123,497 ) (51,914 ) Prepaid income taxes 38,016 (38,016 ) (23,167 ) Prepaid expenses and other current assets (4,315 ) 277 (6,814 ) Deposits and other assets 63 (13,957 ) 1,344 Accounts payable (72,890 ) 141,717 13,789 Accrued liabilities 26,564 108,646 22,127 Deferred revenue (11,797 ) (129,807 ) 200,000 Net cash provided by operating activities 265,032 160,806 267,909 Cash flows from investing activities: Purchases of marketable securities (639,500 ) (472,917 ) — Sales and maturities of marketable securities 422,200 15,320 — Purchase of certain assets from various businesses — (64,109 ) — Business acquisition (3,901 ) — — Purchases of property and equipment (63,123 ) (96,966 ) (36,329 ) Release of restricted cash 7,000 17,500 (24,500 ) Net cash used in investing activities (277,324 ) (601,172 ) (60,829 ) Cash flows from financing activities: Convertible debenture, net of issuance costs — (75 ) 290,838 Sale of common stock under public offering, net of issuance costs — (101 ) 96,669 Common stock issued under employee stock plans 25,487 90,476 19,910 Sale lease back financing 5,734 11,246 — Principal payments on capital leases (4,935 ) (2,455 ) (1,782 ) Net cash provided by financing activities 26,286 99,091 405,635 Change in cash and cash equivalents 13,994 (341,275 ) 612,715 Cash and cash equivalents at beginning of period 333,000 674,275 61,560 Cash and cash equivalents at end of period $ 346,994 $ 333,000 $ 674,275 Supplemental disclosures of cash flow information: Cash paid for interest $ 15,100 $ 14,830 $ 160 Cash paid (refund) for taxes $ (35,101 ) $ 26,429 $ 235 Non cash financing and investing activities: Issuance of common stock in exchange for an intangible asset $ — $ — $ 1,319 in April 1998. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, accounts receivable, inventories and income taxes. These estimates are based on historical facts and various other assumptions that we believe are reasonable. 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 of highly liquid investments with a maturity of greater than three months when purchased. revenue. On October 24, 2003, we fully redeemed the convertible subordinated debenture. In connection with the redemption, we recorded a $13.1 million charge, which included $5.5 million of unamortized issuance costs. properly reflect our estimated exposure for product returns. approximately insurance and letters of credit. We also account for income tax contingencies in accordance with Statement of Financial Accounting Standards No. 5, tax. 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 Year Ended Year Ended Year Ended (in thousands, except per share data) Net income $ 90,799 $ 176,924 $ 98,469 Goodwill and workforce amortization, tax effected $ — $ 7,065 $ — Adjusted net income $ 90,799 $ 183,989 $ 98,469 Reported basic earnings per share $ 0.59 $ 1.24 $ 0.75 Reported diluted earnings per share $ 0.54 $ 1.03 $ 0.62 Adjusted basic earnings per share $ 0.59 $ 1.29 $ 0.75 Adjusted diluted earnings per share $ 0.54 $ 1.08 $ 0.62 January 26, 2003 January 27, 2002 (in thousands) 3dfx $ 50,326 $ 50,326 Other 3,901 — Total goodwill $ 54,227 $ 50,326 (In thousands, except per share data) January 26, 2003 January 27, 2002 Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization (in thousands) Technology licenses $ 7,028 $ (3,972 ) $ 6,115 $ (2,317 ) Patents 10,319 (4,478 ) 10,319 (1,215 ) Acquired intellectual property 11,117 (5,236 ) 11,013 (2,913 ) Trademarks 11,310 (4,021 ) 11,310 (1,759 ) Other 250 (73 ) 250 (10 ) Total intangible assets $ 40,024 $ (17,780 ) $ 39,007 $ (8,214 ) Description Balance at Beginning of Period Additions Deductions Balance at End of Period (In thousands) Year ended January 26, 2003 Allowance for sales returns and allowances $ 15,586 $ 20,147 $ 22,505 $ 13,228 Year ended January 27, 2002 Allowance for sales returns and allowances $ 7,092 $ 17,171 $ 8,677 $ 15,586 Year ended January 28, 2001 Allowance for sales returns and allowances $ 4,092 $ 12,436 $ 9,436 $ 7,092 Year Ended January 26, 2003 Year Ended January 27, 2002 Year Ended January 28, 2001 (in thousands, except per share data) Net income, as reported $ 90,799 $ 176,924 $ 98,469 Add: Stock option exchange expense included in reported net income, net of related tax effects 37,285 — — Less: Compensation expense determined under fair value based method for stock options exchanged on October 25, 2002, net of related tax effects (167,714 ) — — Less: Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (37,698 ) (89,274 ) (30,735 ) Pro forma net income (loss) $ (77,328 ) $ 87,650 $ 67,734 Basic net income per share $ 0.59 $ 1.24 $ 0.75 Basic net income (loss) per share—pro forma $ (0.50 ) $ 0.61 $ 0.52 Diluted net income per share $ 0.54 $ 1.03 $ 0.62 Diluted net income (loss) per share—pro forma $ (0.50 ) $ 0.51 $ 0.43 Year Ended January 26, 2003 Year Ended January 27, 2002 Year Ended January 28, 2001 Weighted average expected life (in months) 10 6 8 Risk free interest rate 3.7 % 4.7 % 6.2 % Volatility 88 % 83 % 85 % Dividend yield — — — Year Ended January 26, 2003 Year Ended January 27, 2002 Year Ended January 28, 2001 Weighted average expected life (in years) 4 4 4 Risk free interest rate 3.8 % 4.3 % 5.7 % Volatility 88 % 83 % 85 % Dividend yield — — — Year Ended January 26, 2003 Year Ended January 27, 2002 Year Ended January 28, 2001 (in thousands, except per share data) Numerator: Numerator for basic net income per share $ 90,799 $ 176,924 $ 98,469 Numerator for diluted net income per share $ 90,799 $ 176,924 $ 98,469 Denominator: Denominator for basic net income per share, weighted average shares 153,513 143,015 130,998 Effect of dilutive securities: Stock options outstanding 14,880 28,059 28,296 Denominator for diluted net income per share, weighted average shares 168,393 171,074 159,294 Net income per share: Basic net income per share $ 0.59 $ 1.24 $ 0.75 Diluted net income per share $ 0.54 $ 1.03 $ 0.62 pre sented. Year Ended January 26, Year Ended January 27, Year Ended January 28, 2001 (in thousands) Stock options outstanding 5,892 2,504 4,476 Convertible debentures 6,472 6,472 6,472 12,364 8,976 10,948 beginning after June 15, 2003. The adoption of EITF No. 00-21 did not have a significant impact on our results of operations or financial position. goodwill in fiscal 2003. In addition, amortization of goodwill ceased in accordance with 3dfx Straight-Line Amortization Period (in thousands) (years) Property and equipment $ 2,433 1-2 Trademarks 11,310 5 Goodwill 60,418 — Total $ 74,161 SFAS No. 142. January 26, 2003 January 27, 2002 Amortized Cost Unrealized Gain/(Loss) Estimated Fair Value Amortized Cost Unrealized Gain/(Loss) Estimated Fair Value (in thousands) Asset-backed securities $ 92,286 $ (100 ) $ 92,186 $ 121,614 $ 193 $ 121,807 Commercial paper 109,465 — 109,465 53,238 — 53,238 Obligations of the U.S. government & its agencies 359,003 2,836 361,839 179,709 303 180,012 U.S. corporate notes, bonds, and obligations 262,914 3,530 266,444 282,886 28 282,914 Certificate of deposit — — — 15,060 1 15,061 Money market 192,754 — 192,754 145,503 — 145,503 Total $ 1,016,422 $ 6,266 $ 1,022,688 $ 798,010 $ 525 $ 798,535 Classified as: Cash equivalents $ 341,269 $ 340,158 Marketable securities 681,419 458,377 Total $ 1,022,688 $ 798,535 26, 2003: January 26, 2003 January 27, 2002 Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value (in thousands) Less than one year $ 592,025 $ 593,714 $ 415,910 $ 415,969 Due in 1 – 5 years 424,397 428,974 382,100 382,566 Total $ 1,016,422 $ 1,022,688 $ 798,010 $ 798,535 January 26, 2003 January 27, 2002 (in thousands) Inventories: Raw materials $ 17,510 $ 13,367 Work in-process 13,179 77,130 Finished goods 114,357 123,380 Total inventories $ 145,046 $ 213,877 January 26, 2003 January 27, 2002 (in thousands) Property and Equipment: Software $ 48,006 $ 33,717 Test equipment 49,961 32,330 Computer equipment 54,479 40,169 Leasehold improvements 54,416 36,728 Construction in process 4,862 14,745 Office furniture and equipment 17,359 12,880 229,083 170,569 Accumulated depreciation and amortization (93,931 ) (50,441 ) Property and equipment, net $ 135,152 $ 120,128 January 26, 2003 January 27, 2002 (in thousands) Accrued Liabilities: Accrued customer programs $ 50,018 $ 55,627 Customer advances 58,396 — Taxes payable 82,952 62,922 Accrued payroll and related expenses 20,575 16,389 Other 16,526 6,272 Total accrued liabilities $ 228,467 $ 141,210 Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, obligation it assumes under that guarantee. In addition, FIN 45 requires disclosures about the guarantees that an entity has issued, including a rollforward of the entity’s product warranty liabilities. who are not directors, officers or 10% stockholders. The 2000 Plan provides for the issuance of nonstatutory stock options, stock bonuses and restricted stock purchase rights. 25, 2004. 25, 2004. Options Options Outstanding Weighted Average Balances, January 30, 2000 8,779,656 39,382,800 $ 2.75 Authorized 24,487,914 — — Granted (21,854,750 ) 21,854,750 20.20 Exercised — (9,020,610 ) 1.85 Cancelled 1,667,584 (1,667,584 ) 7.37 Balances, January 28, 2001 13,080,404 50,549,356 10.30 Authorized 9,954,182 — — Granted (15,159,700 ) 15,154,700 38.14 Exercised — (12,282,958 ) 6.87 Cancelled 1,541,369 (1,541,369 ) 13.90 Balances, January 27, 2002 9,416,255 51,879,729 19.14 Authorized 13,957,063 — Granted (8,522,650 ) 8,522,650 28.09 Shares of common stock issued in exchange for stock options (3,815,069 ) — — Exercised — (3,816,695 ) 4.62 Cancelled—unvested (1) 18,067,604 (18,067,604 ) 36.53 Cancelled—vested (2) 2,882,376 (2,882,376 ) 32.51 Balances, January 26, 2003 31,985,579 35,635,704 $ 12.93 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 — $ 0.09 312,000 4.1 $ 0.09 312,000 $ 0.09 0.33 — 0.33 178,900 4.6 $ 0.33 178,900 $ 0.33 0.66 — 0.79 629,460 4.9 $ 0.75 629,460 $ 0.75 1.04 — 1.38 378,419 5.0 $ 1.32 378,419 $ 1.32 1.58 — 2.25 6,973,921 5.3 $ 1.79 6,684,921 $ 1.79 4.09 — 5.88 5,944,418 6.6 $ 4.82 3,802,501 $ 4.69 8.56 — 11.90 4,961,273 8.4 $ 9.94 1,220,428 $ 9.13 14.97 — 22.34 9,924,425 7.8 $ 16.86 4,027,208 $ 16.80 24.63 — 36.88 5,409,388 8.1 $ 30.27 2,221,609 $ 29.36 37.17 — 53.61 923,000 8.8 $ 41.51 617,125 $ 42.97 65.47 — 65.47 500 9.0 $ 65.47 125 $ 65.47 $ 0.09 — $65.47 35,635,704 7.1 $ 12.93 20,072,696 $ 10.03 25, 2004: Option, as determined using the Black-Scholes option-pricing model. In determining the fair value of the Eligible Options using the Black-Scholes option-pricing model, Debentures Year ending January: Operating Capital (in thousands) 2004 $ 22,995 $ 6,260 2005 23,210 4,188 2006 22,970 868 2007 23,299 — 2008 23,902 — 2009 and thereafter 102,720 — Total $ 219,096 11,316 Less amount representing interest, at rates ranging from 8% to 10% (760 ) Present value of minimum lease payments 10,556 Less current portion 5,676 Long term portion $ 4,880 January 26, 2003 January 27, 2002 (in thousands) Classes of Property and Equipment: Computer equipment $ 4,347 $ 4,348 Test equipment 6,895 6,894 Office equipment and furniture 5,261 596 Software and other 634 629 17,137 12,467 Accumulated amortization (8,683 ) (4,249 ) Leased property and equipment, net $ 8,454 $ 8,218 Year Ended January 26, 2003 Year Ended January 27, 2002 Year Ended January 28, 2001 (in thousands) Current: Federal $ — $ — $ — State 135 134 205 Foreign 20,555 38,673 10,136 Total current 20,690 38,807 10,341 Deferred: Federal 20,569 (43,738 ) (15,866 ) State 9,319 (8,176 ) (11,335 ) Foreign — — — Total deferred 29,888 (51,914 ) (27,201 ) Charge in lieu of taxes attributable to employer stock option plans 9,180 88,932 63,199 Provision for income taxes $ 59,758 $ 75,825 $ 46,339 Year Ended January 26, 2003 Year Ended January 27, 2002 Year Ended January 28, 2001 (in thousands) Domestic $ 20,764 $ 39,613 $ 105,147 Foreign 129,793 213,136 39,661 $ 150,557 $ 252,749 $ 144,808 Year Ended January 26, 2003 Year Ended January 27, 2002 Year Ended January 28, 2001 (in thousands) Tax expense computed at Federal Statutory Rate $ 52,695 $ 88,462 $ 50,683 State income taxes (benefit), net of federal tax effect (4,241 ) (531 ) 2,547 Foreign tax rate differential 23,222 (7,489 ) (3,747 ) Research and experimental credit (12,048 ) (4,736 ) (3,274 ) Other 130 119 130 Provision for income taxes $ 59,758 $ 75,825 $ 46,339 The tax effect of temporary differences that gives rise to significant portions of the deferred tax assets and liabilities are presented below: January 26, 2003 January 27, 2002 (in thousands) Net operating loss carryforwards $ 57,868 $ 141,882 Accruals and reserves, not currently deductible for tax purposes 10,243 202 Property, equipment and intangible assets 5,733 226 Research and other tax credit carryforwards 87,265 46,060 Total gross deferred tax assets 161,109 188,370 Less valuation allowance (106,663 ) (104,036 ) Net deferred tax assets $ 54,446 $ 84,334 U.S. Year Ended January 26, 2003 Year Ended January 27, 2002 Year Ended January 28, 2001 (in thousands) Revenue: U.S. and North America $ 603,750 $ 243,697 $ 77,809 Asia Pacific 1,232,942 1,071,726 556,088 Europe 72,755 54,048 101,367 Total revenue $ 1,909,447 $ 1,369,471 $ 735,264 As of January 26, 2003 As of January 27, 2002 (in thousands) Long-lived assets: U.S. and North America $ 319,494 $ 268,272 Asia Pacific 1,658 462 Europe 2,182 1,259 Total long-lived assets $ 323,334 $ 269,993 Year Ended January 26, 2003 Year Ended January 27, 2002 Year Ended January 28, 2001 Revenue: Customer A 15 % 14 % 4 % Customer B 23 % 9 % — Customer C 9 % 10 % 5 % Customer D 17 % 20 % 25 % Customer E 1 % 7 % 10 % As of January 26, 2003 As of January 27, 2002 Accounts Receivable: Customer A 12 % 16 % Customer B — — Customer C 17 % 9 % Customer D 18 % 14 % Customer E 1 % 6 % Fiscal 2003 Quarters Ended Jan. 26, 2003 Oct. 27, 2002 July 28, 2002 April 28, 2002 (in thousands, except per share data) Statement of Operations Data: Revenue $ 468,953 $ 430,304 $ 427,285 $ 582,905 Cost of revenue 301,442 322,106 327,983 375,740 Cost of revenue related to stock option exchange — 6,164 — — Gross profit 167,511 102,034 99,302 207,165 Net income (loss) 50,936 (48,636 ) 5,254 83,245 Basic net income (loss) per share $ .32 $ (.32 ) $ .03 $ .55 Diluted net income (loss) per share $ .30 $ (.32 ) $ .03 $ .47 Fiscal 2002 Jan. 27, 2002 Oct. 28, 2001 July 29, 2001 April 29, 2001 As Restated As Reported As Restated As Reported As Restated As Reported (in thousands, except per share data) Statement of Operations Data: Revenue $ 503,688 $ 364,976 $ 370,241 $ 259,875 $ 260,259 $ 240,932 $ 240,932 Cost of revenue 314,377 231,508 231,698 157,636 156,571 146,712 149,295 Gross profit 189,311 133,468 138,543 102,239 103,688 94,220 91,637 Net income 76,033 41,315 44,661 32,926 33,576 26,650 25,867 Basic net income per share $ .52 $ .29 $ .31 $ .23 $ .24 $ .19 $ .19 Diluted net income per share $ .43 $ .24 $ .26 $ .19 $ .20 $ .16 $ .16 SCHEDULE Description Balance at Beginning of Period Additions(3) Deductions Balance at End of Period (in thousands) Year ended January 26, 2003 Allowance for sales returns and allowances $ 15,586 $ 20,147 $ 22,505 (1) $ 13,228 Allowance for doubtful accounts $ 2,493 $ 2,413 $ 666 (2) $ 4,240 Year ended January 27, 2002 Allowance for sales returns and allowances $ 7,092 $ 17,171 $ 8,677 (1) $ 15,586 Allowance for doubtful accounts $ 1,311 $ 2,628 $ 1,446 (2) $ 2,493 Year ended January 28, 2001 Allowance for sales returns and allowances $ 4,092 $ 12,436 $ 9,436 (1) $ 7,092 Allowance for doubtful accounts $ 2,351 $ 1,985 $ 3,025 (2) $ 1,311 Signature President, Chief Executive Officer Tench Coxe James C. Gaither Harvey C. Jones William J. Miller A. Brooke Seawell Mark A. Stevens xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 193426, 200325, 2004¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934þx No¨þxþx No¨26, 200225, 2003 was approximately $1,974,616,679.$2,476,223,470. Shares of common stock held by each current executive officer and director and by each person who is known by the registrant to own 5% or more of the outstanding common stock have been excluded from this computation in that such persons may be deemed to be affiliates of the registrant. Share ownership information of certain persons known by the registrant to own greater than 5% of the outstanding common stock for purposes of the preceding calculation is based solely on information on Schedule 13G filed with the Commission and is as of July 26, 2002.25, 2003. This determination of affiliate status is not a conclusive determination for other purposes.31, 20035, 2004 was 159,036,369.20032004 Annual Meeting of Stockholders to be filed by May 27, 2003.NVIDIA CORPORATION 29109 PART II 1112132235 PART III PART IV 37 38 70 71“safe harbor”"safe harbor" created by those sections. These forward-looking statements include but are not limited to: statements related to industry trends and future growth in the markets for three dimensional, or 3D, graphics anddigital media communication processors; our product development efforts; the timing of our introduction of new products; industry and consumer acceptance of our products; and future profitability. Discussions containing these forward-looking statements may be found in “Business”"Business" and “Management’s"Management’s Discussion and Analysis of Financial Condition and Results of Operations.”" These forward-looking statements involve risks and uncertaintiesun certainties that could cause our actual results to differ materially from those in the forward-looking statements. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document. The “Business Risks”"Business Risks" section, among other things, should be considered in evaluating our prospects and future financial performance.are one of the world’s largest “fabless” semiconductor companies, supplyingdesign, develop and market graphics processing units, or GPUs, media and media communications processors, or MCPs, ultra-low power media processors, or UMPs, and related software that are integral to a wide variety of visual computing platforms, including enterprise personal computers, or PCs, consumer PCs, professional workstations, notebook PCs, personal digital assistants, cellular phones, game consoles and digital entertainment platforms. We provide an architecturally compatible “top-to-bottom” family of award-winning graphics processing units, or GPUs, which set the standard for performance, quality, compatibility and features for a broad range of personal computing platforms. Our graphics and communications processors are used for a wide variety of applications, including games, digital content creation, personal digital image editing, business productivity and product and industrial design. Our mission is to be the most important visual computing company in the world.media centers. We were incorporated in California in April 1993 and reincorporated in Delaware in April 1998.Interactive 3D graphics are integral Our mission is to variousbe the most important visual computing company in the world .platformsand business solutions. Our award-winning GPUs deliver superior performance and crisp visual quality for PC-based applications such as workstations, consumermanufacturing, science, e-business, entertainment and commercial desktop PCs, Internet applianceseducation. Our MCPs perform highly demanding multimedia processing for broadband connectivity, communications and breakthrough audio capabilities. Our UMPs deliver a great visual experience by accelerating graphics and video gaming consoles. 3D graphicsapplications while implementing design techniques that result in high performance and ultra-low power consumption.powerful broadband mediumkey element of our corporate strategy. In fiscal 2004, we offered a top-to-bottom family of DirectX 9 GPUs for desktop and notebook PCs. As consumer awareness and demand grew throughout the year, DirectX 9 GPUs gained market share. We are the segment share leader for desktop standalone DirectX 9 GPUs according to Mercury Research, reflecting the success of ou r strategy and the depth and strength of our GeForce FX family of programmable GPU products.enables the communicationbring together entertainment choices and visualization of information, whether it is in professional applications like digital content creation and computer assisted design and computer assisted manufacturing, or CAD/CAM, or commercial applications like financial analysis and business-to-business collaboration or simply surfing the Internet or playing games. The visually engaging and interactive nature of 3D graphics responds to consumers’ demands forallow access via a convincing simulation of reality beyond what is possible with traditional 2D graphics. We expect that the fundamental interactive capability and distributive nature of 3D graphics will make it the primary broadband medium for a digitally connected world.We believe that a PC’s interactive 3D graphics capability representsremote control. Media Center PCs represent one of the primary means users differentiate among various systems.most exciting growth opportunities in the PC users today can easily differentiateand consumer electronics market. Driven by the qualityproliferation of graphicsdigital content, home networking, and preferdigital displays, there is excitement around this platform, which is capable of recording, storing, sharing, and processing our growing libraries of digital content. Over a million Media Center PCs were sold during calendar 2003. The combination of our D irectX 9 GPU with high-definition digital video technology, digital media software, and our close working relationship with Microsoft helped us become the technology partner of choice for 46 of the 50 Media Center PCs that provideshipped worldwide during our fiscal 2004. We believe Media Center PCs have a superior visual experience. These factorslegitimate opportunity to be the center of home entertainment in the future and represent one of the most exciting ways to participate in the digital media era. We are engaged with customers around the world in Media Center PC designs of all price points and form factors.1 dramatically increased demandshipped over 10 million units to date. Our st rategy remains to aggressively innovate, bringing new levels of performance in system bandwidth, networking and communications, while addressing critical needs such as network security.3D graphics processors. Mercury Research estimates that 188.6 million 3D graphicsthe handheld industry. With innovative technologies, such as ultra-low power digital media processors, were sold worldwide in 2002 and that 275.3 millionfuture cell phones will be sold worldwideable to receive television programs, record digital video like a camcorder, enable video phone calls and be a portable game player. We see an exciting opportunity to leverage NVIDIA’s resources and expertise in 2006.Continuing advancementsdigital media processing to offer products for the multimedia handset era. The handheld business is building momentum with respect to megapix el camera phones and new video telephony designs.semiconductor processMicrosoft’s Xbox video game console. Our product portfolio is designed to provide advanced processing and manufacturing have made available more powerfulrendering power at competitive prices and affordable microprocessors and 3D graphics processors, both of which are essential to deliver interactive 3D graphics to the PC market. Additionally, themaximum performance from industry has broadly adopted Microsoft Corporation’s Direct3Dstandards such as Microsoft’s DirectX Application Programming Interface, or API, and Silicon Graphics, Inc.’s, or SGI’s, OpenGL API which serve as common and standard languages between software applications and 3D graphics processors, allowing the development of numerous 3D applications and resulting in increased consumer demand.We believe that a substantial market opportunity exists for providers of performance 3D graphics processors, particularly as performance 3D graphics have become an increasingly important requirement and point of differentiation for PC original equipment manufacturers, or OEMs. Consumer PC users demand a compelling visual experience and compatibility with existing and next-generation 3D graphics applications at an affordable price. Application developers require high-performance, standards-based 3D architectures with broad market penetration. Since graphics is a key point of differentiation, PC OEMs continually seek to incorporate leading-edge, cost-effective 3D graphics solutions to build award-winning products. We believe that providers of interactive 3D graphics solutions compete based on their ability to leverage their technology expertise to simultaneously meet the needs of end users, application developers and OEMs.Our ProductsWe have five major product families: GeForce, nForce, GeForce Go, Quadro and TNT2. In addition, we sell a two-processor chipset for use in the Xbox video game console. Our entire product line provides superiorprocessing and rendering power at competitive prices and is designed to deliver the maximum performance from industry standards such as Microsoft’s DirectX API and SGI’s OpenGL API on Windows operating systems and Linux platforms.GeForce.GPUs.Our GPU products support desktop PCs, notebook PCs and professional workstations. We have three major families of GPUs: GeForce, Go and Quadro.GPUs. InGPUs and includes the GeForce FX, GeForce4 and GeForce2. Our most advanced GPU family is the GeForce FX series. Introduced in November 2002, we introduced our newest flagship GPU, the GeForce FX. The GeForce FX architecture is our first fully programmable cinematic GPU and is also our first to be manufactured using 0.13-micron process technology. TheOur GeForce FX 5950 GPU is one of the PCsemiconductor industry’s most complex application specific integrated circuits, or ASICs, containingASICs. The GeForce FX 5950 GPU contains over 125135 million transistors and is the first GPU to reachreaches processor clock speeds up to 500MHz500 megahertz, or MHz, and memory clock speeds up to 1 gigahertz, or GHz. The GeForce FX family is designed for the enthusiast, performance and mainstream consumer product line of the PC market.segments. The GeForce family, which also includes the GeForce2 GeForce3 and GeForce4 isare designed to deliver the highesta balance of performance and features for every price product line ranging from mainstream to performance PCs.nForce. The nForce family represents our platform processors for desktop PCs. We define a platform processor as a chipset that can off-load system functions, such as audio processingthe value and network communications, and perform these operations independently from the host central processing unit, or CPU. The nForce family is the industry’s first highly-integrated platform processor to incorporate a comprehensive set of multimedia capabilities, such as 2D, 3D, DVD, HDTV, Dolby Digital audio playback and fast broadband and networking communications. nForce is a two-chip solution, which includes either a System Platform Processor, or SPP, or Integrated Graphics Processor, or IGP, combined with a Media Communications Processor, or MCP. The nForce configuration is determined by the OEM or system builder. The nForce family is designed to be compatible with Advanced Micro Devices’ AthlonXP and Duron microprocessors. In July 2002, we introduced our second generation platform processor, the nForce2. The nForce2 was the industry’s first platform processor to support dual DDR400 memory, simultaneous local-area network, or LAN, and wide-area network, or WAN, up to six high-speed USB 2.0 and three FireWire (IEEE 1394a) ports and our GeForce4 MX graphics core with all processing done only in the IGP.low-cost PC segments.GeForce Go.The GeForce Go family representsand Quadro Go families represent our mobilenotebook GPUs which consists ofand include the GeForce FX Go, GeForce4 Go, GeForce2 Go, QuadroFX Go, Quadro4 GL Go and Quadro2 Go GPUs. These GPUs are designed to deliver desktop graphics performance and features for multiple notebook configurations from desktop replacements, performance notebooks and thin-and-lights to mobile workstations. The GeForce Go products are designed to serve the needs of both corporate and consumer users. The Quadro Go products are designed to serve the needs of workstation professionals in the area of product design and digital content creation. The Quadro2 Go is the industry’s first Independent Software Vendor, or ISV, certified driver for notebooks. In November 2002, our GeForce2 Go mobile GPU was designed into HP’s Compaq Tablet PC TC1000, one of the industry’s first tablet notebook PCs. In January 2003, the GeForce4 Go was designed into Apple Computer’s new PowerBook notebooks, marking the first time NVIDIA’s mobile GPUs were incorporated into an Apple mobile platform. XGL and the Quadro NVS workstation solutions are designed to meet the needs of a number of workstation applications such as industrial product design, digital content creation, non-linear video editing, scientific and financial visualization, general purpose business and financial trading. NVIDIA Quadro products are fully certified by several software developers for all professional workstation applications, andan d are designed to deliver the graphics performance and precision required by professional applications.2 TNT2.MCPs.Our MCP product family, known as nForce, supports desktop PCs, notebook PCs and professional workstations.TNT2nForce family represents our MCPs for AMD-based desktop, notebook and workstation PCs and includes the nForce2 and nForce3. We define a MCP as a single-chip or chipset that can off-load system functions, such as audio processing and network communications, and perform these operations independently from the host central processing unit, or CPU. The nForce2 integrates a comprehensive set of graphics processors deliversmultimedia capabilities, such as two-dimensional, or 2D, three-dimensional, or 3D, digital video disc, or DVD, high-definition television, or HDTV, Dolby Digital audio playback and fast broadband and networking communications. nForce2 is a two-chip solution, which includes either a Syste m Platform Processor, or SPP, or an Integrated Graphics Processor, or IGP, combined with a MCP. The nForce2 family is designed to be compatible with AMD’s AthlonXP and Duron microprocessors. The nForce2 configuration is determined by the OEM or system builder. The nForce3 family is a single-chip MCP, designed to be compatible with AMD Athlon64, Athlon 64 FX and Opteron 64-bit CPUs. nForce3 products which consist of the nForce3, nForce3 Professional and nForce3 Go, are designed to complement the latest 64-bit CPUs while delivering innovative technologies for networking, storage and system performance.at affordable prices, making themto manufacturers that support liquid crystal display, or LCD, screen resolutions up to 320 x 240 pixels. The GoForce 2150 offers a host of advanced features for cellular phones and PDAs, including support for 1.3-megapixel image capture, accelerated graphics for gaming, and motion Joint Photographic Experts Group, or JPEG, capture and playback. Using dedicated hardware accelerator engines, the popular graphics hardware for enterpriseGoForce 2150 delivers high performance multimedia applications and consumer value PCs. The TNT2 family has been in production since April 1999.drives high-resolution displays, while extending handheld battery life through a variety of unique power management techniques.Xbox.Xbox.Our Xbox platform processor supports Microsoft’s Xbox video game system.The Xbox processors feature theplatform processor features dual-processing architecture, ofwhich includes NVIDIA’s GPU designed specifically for the Xbox, or XGPU, and a MCP to power the video game system’sXbox’s standout graphics, audio and networking capabilities. The XGPU is athattha t contains more that 60 million transistors. The amount of computing horsepower is dedicated to one goal—goal – to create stunning, never-before-seen imagery. The MCP is based on two powerful digital signal processors with 4 billion operations per second dedicated to 3D audio and network processing. The MCP performs the processing for the broadband networking functions and high-speed peripherals. In addition, it is the most sophisticated audio processor ever built.Our products are currently designed into products offered by virtually every leading branded PC OEM, including Acer Inc., Apple Computer, Inc., Dell Computer Corporation, eMachines Inc., Fujitsu-Siemens Computers, Gateway Inc., Hewlett Packard Company, IBM, Micron Electronics Inc., NEC Corporation, Packard Bell NEC Inc., Silicon Graphics Inc., and Sony Corporation, as well as leading contract equipment manufacturers, or CEMs, including Celestica Hong Kong Ltd., Mitac International Corporation, Micro-Star International Co. Ltd., and Sanmina SCI Corporation, and leading motherboard and add-in board manufacturers, including Abit Computer Corporation, ASUSTeK Computer Inc., Canopus Corporation, Gainward Co. Ltd., Gigabyte Technology Co. Ltd., Guillemot Corporation, LeadTek Research, Inc. and PNY Technologies.platform processorsMCPs and graphics processorsUMPs to enable PC OEMs, original design manufacturers, or ODMs, system builders, motherboard and add-in board manufacturers to build award-winning products by delivering state-of-the-art interactive 3D graphics, audio, networking and communications capability, while maintaining affordable prices. We believe that by developing 3D graphics and media communications solutions that provide superior performance and address the key requirements of the PC market,and handheld segments, we will accelerate the adoption of 3D graphicshigh-definition digital media platforms and devices throughout this market.these segments. We combine scalable architectural technology with mass market economies-of-scale to deliver a complete family of products that spans workstations to low-cost value PCs.platform processorsMCPs and graphics processorsUMPs for a broad range of desktop PCs, workstations, laptops,notebooks, video game consoles, Internet appliances, handhelds and any future computing device with a display. Our current focus is on the desktop PC, workstation, notebook PC, mulitmedia-rich mobile laptopphones and game console product lines, and we plan to expand into other product lines. Our strategy to achieve this objective includes the following key elements:the PC and digital entertainmentthese platforms by providing award-winning performance at every price point. By developing 3D graphics and media communications solutions that provide superior performance and address the key requirements of these platforms, we believe that we will accelerate the adoption of 3D graphics.graphics and rich digital media. As part of our strategy, we have closely aligned our product development with Direct3D and OpenGL, which we believe maximizes third-partyt hird-party software support. Direct3D and OpenGL are application programming interfaces, or APIs, that enable software developers to write their applications to a standard without specific knowledge of hardware implementations.3 3D graphicsdigital media processors. We believe that design wins with these industry leaders provide market validation of our products, increase brand awareness and enhance our ability to penetrate additional leading customer accounts. In addition, we believe that close relationships with OEMs and ODMs will allow us to better anticipate and address customer needs with future generations of our products. Our productsFor example, our GPUs are currently designed into products offeredoffe red by virtually every leading branded PC OEM, including Acer, Inc., or Acer, Apple Computer, Inc., or Apple, Dell Computer Corporation, or Dell, eMachines, Inc., or eMachines, Fujitsu-Siemens Computers, or Fujitsu-Siemens, Gateway, Inc., or Gateway, Hewlett Packard Company, or HP, International Business Machines, Inc., or IBM, micronpc.com,Micron Electronics, Inc. , or Micron, NEC Packard BellCorporation, or NEC, SGI, and Sony Corporation, or Sony.PCs.PCs and handheld devices. A fundamental aspect of our strategy is to actively recruit the best 3D graphics and video, networking and communications engineers in the industry, and we believe that we have assembled an exceptionally experienced and talented engineering team. Our research and development strategy is to focus on concurrently developing multiple generationsgenerat ions of graphics processorsGPUs, MCPs and UMPs using independent design teams. As we have in the past, we intend to leverage this strategy to achieve new levels ofsuccess in the 3D graphics business.success. We intend to achieve a leading share of the market by devoting substantial resources to building award-winning families of products for a wide range of applications.3Dhigh-definition graphics and system architecture positions us to help drive this transformation. We are leveraging our expertise in the processing and transmission of high-bandwidth digital media to develop products designed to address the requirements of high-bandwidth concurrent multimedia.3D graphics processorsGPUs, MCPs and UMPs for desktop PCs.PCs and handheld devices. Our sales and marketing teams work closely with PC OEMs, ODMs, system integrators, motherboard manufacturers, add-in board manufacturers and industry trendsetters, collectively our Channel, to define product features, performance, price and timing of new products. Members of our sales team have a high level of technical expertise and product and industry knowledge to support a competitive and complex design win process. We also employ a highly skilled team of application engineers to assist the Channel in designing, testing and qualifying system designs that incorporate our products. We believe that the depth and quality of our designd esign support are key to improving the Channels’Channel’s time-to-market, maintaining a high level of customer satisfaction within the Channel and fostering relationships that encourage customers to use the next generation of our products.3D graphics market,segments we serve, the sales process involves achieving key design wins with leading PC OEMs and major system integrators and supporting the product design into high volume production with key ODMs, motherboard manufacturers and add-in board manufacturers. These design wins in turn influence the retail and system integrator channel that is serviced by add-in board and motherboard manufacturers. Our distribution strategy is to work with a number of leading independent contract equipment manufacturers, or CEMs, ODMs, motherboard manufacturers, add-in board manufacturers and stocking representatives, each of which has relationships with a broad range of major PC OEMs and/or strong brand name recognition in the retail channel. Currently, we sell a significant majority of our graphics processorsdigital media process ors directly to stocking representatives, CEMs, ODMs, motherboard manufacturers and add-in board manufacturers, which then sell boards and systems with our graphics processorproducts to leading OEMs, retail outlets and to a large number of system integrators. Although a limitedsmall number of our customers represent the majority of our revenue, their end customers include a large number of OEMs and system integrators throughout the world.4 OEMs,OEM, including Acer, Apple, Dell, eMachines, Fujitsu-Siemens, Gateway, HP, IBM, Legend Computer, Medion AG, Micron, NEC, Packard Bell, Samsung,SGI and Sony, and Toshiba, as well as system integrators throughout the world.limitedsmall number of customers. Sales to Microsoft accounted for 23%, sales to Edom Technology Co., Ltd., or Edom, accounted for 17%21%, sales to Microsoft accounted for 15%, sales to Atlantic Semiconductor, or Atlantic, accounted for 12% and sales to Micro-Star accounted for 15%12% of our total revenue for fiscal 2003.2004. Edom is anand Atlantic are independent stocking representative andrepresentatives. Micro-Star is a CEM, and each purchaseof these companies purchases our products and resellresells these products to PC OEMs and system integrators.partnersdevelopers prior to volume availability to encourage the development of software titles that are optimized for our products. actually purchased by our customers as well as shipment schedules are subject to revisions that reflect changes in both the customers’ requirements and in manufacturing availability. The semiconductor industry is characterized by short lead time orders and quick delivery schedules. In light of industry practice and experience, we believe that only a small portion of our backlog is non-cancelable and that the dollar amount associated with the non-cancelable portion is not significant.believe that backlogdirectly manufacture semiconductor wafers used for our products. Instead we utilize what is known as of any particular date is indicative of future results.ManufacturingWe have a “fabless”"fabless" manufacturing strategy whereby we employ world-class suppliers for all phases of the manufacturing process, including wafer fabrication, assembly, testing and testing.packaging. This strategy leverages the expertise of industry-leading suppliers that are certified by the International Organization for Standardization, or ISO, in such areas as fabrication, assembly, quality control and assurance, reliability and testing. In addition, we are ablethis strategy allows us to avoid many of the significant costs and risks associated with owning and operating manufacturing operations. TheseOur suppliers are also responsible for procurement of most of the raw materials used in the production of our products.produc ts. As a result, we can focus our resources on product design, additional quality assurance, marketing and customer support.Our graphics processors have been Taiwan Semiconductor Manufacturing Company, or TSMC. However, on March 26, 2003, we announced that we havehad formed a multi-year strategic alliance under which IBM will manufacture some of our next-generation GeForce GPUs. As partIn July 2003, we began production of the agreement, we will gain access to IBM’s suite of foundry services and manufacturing technologies, including power-efficient copper wiring, and a roadmap that is designed to lead to 65nm (nanometer; a billionth of a meter) in the next several years, giving us valuable tools to advance our GPUs. IBM plans to begin manufacturing the next-generation GeForce graphics processor this summerFX 5700 GPU at IBM’s plant in East Fishkill, New York.graphics processorsGPUs, MCPs and UMPs are assembled, tested and testedpackaged by Advanced Semiconductor Engineering, Amkor Technology, ChipPAC Incorporated and Siliconware Precision Industries Company Ltd. We receive semiconductor products from our subcontractors, perform incoming quality assurance and then ship them to CEMs, stocking representatives, motherboard and add-in board manufacturer customers from our Santa Clara, California warehouse and third-party warehouses in Singapore and Hong Kong. Generally, these manufacturers assemble and test the boards based on our design kit and test specifications, then ship the products to retailers, system integrators or OEMs as motherboard and add-in board solutions. Our hardware and software development teams work closely with certification agencies, Microsoft Windows Hardware Quality Labs and our OEM customers to ensure that both our boards and software drivers are certified for inclusion in the OEMs’ products.5 graphics processorsGPUs, MCPs and UMPs using independent design teams. Our research and development efforts are performed within specialized groups consisting of software engineering, hardware engineering, very large scale integration, or VLSI, design engineering, process engineering, and architecture and algorithms. These groups act as a pipeline designed to allow the efficient simultaneous development of multiple generations of products.have investedinvest significant resources to developin the development of relationships with industry leaders, including Cadence Design Systems, Inc., IKOS 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 market 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 manufacturers.8321,057 full-time employees engaged in research and development as of January 26, 2003,25, 2004, compared to 619832 employees as of January 27, 2002.26, 2003. During fiscal years 2004, 2003 2002 and 2001,2002, we incurred research and development expenditures of $270.0 million, $224.9 million and $154.8 million, and $86.0 million, respectively.3D graphics processorsGPUs, MCPs and UMPs for PCs and handhelds 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, manufacturing capabilities, price of graphicsdigital media processors and total system costs of add-in boards or motherboards. We expect competition to increase both from existing competitors and new market entrants with products that may be less costly than our 3D graphics processorsours, or that may provide better performance or additional features not provided by our products.3D graphicsGPU, MCP and UMP solutions for the PC market.and handheld segments. Our competitors include the following:integrated core logic chipsetsMCPs that incorporate a combination of 3D graphics, networking, audio, communications and Input/Output, or I/O, functionality as part of their existing solutions, such as ATI Technologies, Inc., or ATI, Intel Corporation, or Intel, Silicon Integrated Systems, ATI Technologies Inc., and VIA Technologies, Inc.;, or VIA;graphics add-in boards that utilize their internally developed graphics chips, such as ATI Technologies Inc., Creative Technology and Matrox Electronics Systems Ltd.;suppliers of mobile graphics processorsstandalone desktop GPUs that incorporate 3D graphics functionality as part of their existing solutions, such as ATI, TechnologiesCreative Technology, Matrox Electronics Systems Ltd. and XGI Technology, Inc., Trident Microsystems, Inc.;VIA Technologies, Inc.;VIA; andcompanieshave traditionally focused on the professional marketincorporate advanced graphics functionality as part of their existing solutions, such as ATI and provide high end 3D solutions for PCs and workstations, including 3Dlabs (a Creative Technology company) and ATI Technologies Inc.Seiko-Epson.3D graphics processor market,personal computer, consumer electronics and handheld segments, 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 marketssegments we may enter.6 property. As of January 26, 2003, we owned 91 issuedproperty in the United States and internationally. We have numerous patents 16 issued foreign patents, and have 203pending in the United States patent applications pending and 19in foreign patent applications pending.countries. Our issued patents have expiration dates from September 4, 2007 to October 16, 2020. As of January 26, 2003, our patents and pending patent applications relatedrelate to technology used by us in connection with our products, including our graphicsdigital media processors. 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.graphicsdigital media processors, and expect to continue to enter into license agreements for future products. These licenses may result in royalty payments to third parties, the cross licensing of technology by us or paymentpa yment of other consideration. If these arrangements are not concluded on commercially reasonable terms, our business could suffer.26, 200325, 2004 we had 1,5131,825 employees, 8321,057 of whom were engaged in research and development and 681768 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.3D graphics and media communication processorsGPUs, MCPs, UMPs and related software forthat are integral to a wide variety of visual computing platforms including enterprise PCs, consumer PCs, professional workstations, notebook PCs, personal digital assistants, cellular phones, game consoles and digital entertainment platforms.media centers. The information included in Note 1216 of the Notes to the Consolidated Financial Statements is hereby incorporated by reference.26, 2003:25, 2004:Jen-Hsun Huang 40 3961 6045 4448 4751 50F. Vivoli43 427 “system-on-a-chip”"system-on-a-chip" strategy. From 1983 to 1985, Mr. Huang was a microprocessor designer for Advanced Micro Devices, 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. A 34-year semiconductor veteran, Mr. Burkett also previously spent 26 years at Advanced Micro Devices, or AMD, where he held a variety of positions including CFO, senior vice president and corporate controller. Mr. Burkett holds B.S. and M.B.A. degrees from the University of Arizona.22over 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.high-techhigh-technology related litigation. Mr. Shannon holds B.A. and J.D. degrees from Pepperdine University.&and Exchange Commission.four buildings, representing approximately 500,000 total square feet. The leases related to our headquarters complex expire in 2012 and include two seven-year renewals at our option.five buildings. Additionally, we lease one buildingthree other buildings in Santa Clara with one used as warehouse space under a lease expiring in Novemberand the other two used as lab space. Outside of 2007. We alsoSanta Clara, we lease space for three design centers: one building in Berkeley, California; Austin, Texas; Beaverton, Oregon; Bedford, Massachusetts; Bellevue, Washington; Chandler, Arizona; Durham, North Carolina, under a lease that expires in December 2007; one building in Beaverton, Oregon, under a lease that expires in November 2004;Carolina; Greenville, South Carolina; and one building in Fort Collins, Colorado, under a lease that expires in June 2004. In addition, we leaseColorado. These facilities are used as design centers and/or sales and administrative offices in Texas, Washington, Arizona, Massachusetts, South Carolina, France, Singapore, Taiwan, Japan, South Korea, Hong Kong, Germany andoffices.KingdomStates, we lease space in Singapore; Taipei, Taiwan; Hsinchu, Taiwan; Yokohama, Japan; Seoul, Korea; Paris, France; Wurselen, Germany; Munich, Germany; and Theale, England. These facilities are used primarily to support our customers. customers and operations and as sales and administrative offices.8 February 19, 2002 anDecember 15, 2000, NVIDIA stockholder, Dominic Castaldo, on behalf of himselfCorporation and purportedly on behalf of a classone of our stockholders,indirect subsidiaries entered into an agreement to purchase certain graphics chip assets from 3dfx Interactive, Inc., or 3dfx. The asset purchase closed on April 18, 2001. In May 2002, we were served with a complaint filed an action in the United States District Court for the Northern District of California (the “Northern District”) against NVIDIA and certain current and former NVIDIA officers, alleging violations of the federal securities laws arising out of our announcement on February 14, 2002 of an internal investigation of certain accounting matters. Approximately 13 similar actions were filed in the Northern District, one additional individual action was filed in the Southern District (together, the “Federal Class Actions”), along with three related derivative actions against us, certain of our current and former executive officers, directors and our independent auditors, KPMG LLP, in California Superior Court and in Delaware Chancery Court (collectively the “Actions”). The two related derivative actions filed in California Superior Court have been consolidated and are currently stayed pursuant to a voluntary stipulation agreement. The Actions allege claims in connection with various alleged statements and omissions to the public and to the securities markets and seek damages together with interest and reimbursement of costs and expenses of the litigation. The derivative actions also seek disgorgement of alleged profits from insider trading by officers and directors. The Actions are in the preliminary stages. The Federal Class Actions have been consolidated and lead plaintiffs appointed. Plaintiffs filed a consolidated amended complaint and, in response, NVIDIA filed a motion to dismiss. On March 28, 2003 the court granted NVIDIA’s motion and dismissed the consolidated amended complaint as to all claims and defendants with leave to amend. Plaintiffs must file their second consolidated amended complaint by May 12, 2003. NVIDIA has also filed a motion to dismiss the derivative action filed in Delaware. A hearing on this motion was held April 23, 2003 and a ruling is expected within the next month. We are obligated to indemnify our officers and directors, to the extent permitted by the law, in connection with the Actions and have insurance for such individuals, to the extentlandlord of the limits of the applicable insurance policies and subject to potential reservations of rights. We intend to vigorously defend these Actions. We are unable, however, to predict the ultimate outcome of the Actions. There can be no assurance we will be successful in defending the Actions, and if we are unsuccessful we may be subject to significant damages. Even if we are successful, defending the Actions is likely to be expensive and may divert management’s attention from other business concerns and harm our business.The staff of the Enforcement Division of the Securities & Exchange Commission (“SEC”) informed us in January 2002 that it had concerns relating to certain accounting matters and that the SEC along with the U.S. Attorney’s Office for the Northern District of3dfx’s San Jose, California had authorized investigations into such matters.commercial real estate lease. In accordance with the suggestion and advice of the SEC staff, we launched a review of these matters. On April 29, 2002, we announced that the Audit Committee of our Board of Directors had, with assistance from the law firm of Cooley Godward LLP and forensic auditors from the accounting firm of KPMG LLP, concluded its review and determined that it was appropriate to restate our financial statements for fiscal 2000, 2001 and the first three quarters of fiscal 2002. The Audit Committee has worked and continues to work in cooperation with the SEC. After receiving a Wells notice indicating the SEC staff intended to recommend to the SEC that an enforcement action be initiated, we reached an agreement in principle with the SEC staff in April 2003 that would resolve the SEC’s investigation of us in matters related to the restatement. The agreement is subject to final approval of the SEC. Under the terms of the agreement in principle, NVIDIA, without admitting or denying liability or wrongdoing, would agree to an administrative cease and desist order prohibiting any future violations of certain non-fraud financial reporting, books and records, and internal control provisions of the federal securities laws. We would not be required to pay any fines or penalties. The documentation of the agreement and the SEC’s review of the agreement may take several weeks or months to complete. Further, there can be no assurance that the agreement will be approved by the SEC. Notwithstanding the above, actions by the SEC or other governmental or regulatory agencies with respect to us or our personnel arising out of the restatement of our financial statements or other matters may take significant time, may be expensive and may divert management’s attention from other business concerns and harm our business.On April 18, 2001, we completed the purchase of certain assets of 3dfx, including patents and patent applications. 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 provides, subject to the other provisions thereof, that if 3dfx certifies to our satisfaction all its debts and other liabilities have been provided for, then we are obligated to pay 3dfx two million shares of NVIDIA common stock. If 3dfx cannot make such a certification, but instead certifies to our satisfaction that its debts and liabilities can be satisfied for less than $25.0 million, then 3dfx can elect to receive a cash payment equal to the amount of such debts and liabilities and receive 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 cannot certify that all of its debts and liabilities have been provided for, or can be satisfied, for less than $25.0 million, we are not obligated under the agreement to pay any additional consideration for the assets. On October 15, 2002, 3dfx filed for Chapter 11 bankruptcy protection. We believe thatprotection in the bankruptcy filingUnited States Bankruptcy Court for the Northern District of California. In December 2002, we were served with a complaint filed by 3dfx will allow a determination of the full number and scopelandlord of 3dfx’s debtsAustin, Texas commercial real estate lease. The landlords’ complaints both assert claims for, among other things, interference with contract, successor liability and liabilities. NVIDIA may be obligated underfraudulent transfer. The landlords’ are seeking to recover, among other things, amounts owed on their leases in the Asset Purchase Agreement to pay 3dfx the contingent consideration following this determination, subject to offsets for NVIDIA’s claims against 3dfx arising from the Asset Purchase Agreement. Onaggregate amount of approximately $10 million. In March 12, 2003, we were served with a complaint filed by the Trustee forappointed by the Bankruptcy Court to represent the interests of the 3dfx seeking,bankruptcy estate. The Trustee’s complaint asserts claims for, among other things, successor liability and fraudulent transfer. The Trustee’s complaint seeks additional paymentpayments from us, the amount of which has not been quantified. The landlords’ actions have been removed to the Bankruptcy Court from the Superior Court of California and consolidated with the Trustee’s action for purposes of discovery. Discovery is currently proceeding and no trial date has been set. We believe the purchased assets and the assumption by us of 3dfx’s liabilities. In addition, Carlyle Fortran Trust and CarrAmerica, former landlords of 3dfx, have filed suitsclaims asserted against us seeking payment of the rents due by 3dfx.We were engaged with Microsoft in discussions relatedare without merit and we will continue to pricing and volumes of the Xbox chipset. These discussions and our agreement contemplated use of a third party to resolve matters and on April 23, 2002 Microsoft submitted the matter to binding arbitration. On February 6, 2003, NVIDIA and Microsoft announced that the companies had settled all issues related to pricing of the Microsoft Xbox GPU and MCP chipset and have ended the arbitration between them. In addition to resolving this pricing dispute, we have agreed to collaborate with Microsoft on future cost reductions for the Xbox.ITEM 5. MARKET9 FOR REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS31, 2003,5, 2004, we had approximately 1,515436 stockholders of record, not including those shares held in street or nominee name. High Low First Quarter (through March 5, 2004) $ 24.33 $ 21.15 Fourth Quarter $ 25.88 $ 17.08 Third Quarter $ 21.47 $ 15.26 Second Quarter $ 27.75 $ 13.55 First Quarter $ 14.83 $ 9.33 Fourth Quarter $ 18.27 $ 9.99 Third Quarter $ 16.98 $ 7.20 Second Quarter $ 40.65 $ 14.30 First Quarter $ 68.35 $ 30.37 “Compensation—Equity"Compensation-Equity Compensation Plan Information,”" and is incorporated by reference into this report.“Management’s"Management’s Discussion and Analysis of Financial Condition and Results of Operations.”" The consolidated statement of income data for the years ended January 25, 2004, January 26, 2003 and January 27, 2002 and January 28, 2001 and the consolidated balance sheet data as of January 26, 200325, 2004 and January 27, 200226, 2003 have been derived from and should be read in conjunction with our audited consolidated financial statements and the notes thereto included herein. The consolidated statement of income data for the years ended January 30, 200028, 2001 and January 31, 199930, 2000 is derived from audited consolidated financial statements and the notes thereto which are not included in this Annual ReportRepor t on Form 10-K. The consolidated balance sheet data as of January 27, 2002, January 28, 2001 and January 30, 2000 and January 31, 1999 is derived from audited consolidated financial statements and the notes thereto which are not included in this Annual Report on Form 10-K.
2003(A, B)
2002(C, D)
2001
2000
1999 (A)10 Fiscal 2003 included $40,365 in additional revenue related to our settlement of our arbitration with Microsoft regarding Xbox pricing. Year Ended January 25, January 26, January 27, January 28, January 30, 2000 (in thousands, except per share data) Consolidated Statement of Income Data: Revenue $ 1,822,945 $ 1,909,447 $ 1,369,471 $ 735,264 $ 374,505 Gross profit $ 528,878 $ 576,012 $ 519,238 $ 272,879 $ 141,843 Income from operations $ 90,157 $ 143,986 $ 241,732 $ 128,135 $ 58,617 Income before income tax expense $ 86,673 $ 150,557 $ 252,749 $ 144,808 $ 60,371 Income tax expense $ 12,254 $ 59,758 $ 75,825 $ 46,339 $ 19,412 Net income $ 74,419 $ 90,799 $ 176,924 $ 98,469 $ 40,959 Basic net income per share $ 0.46 $ 0.59 $ 1.24 $ 0.75 $ 0.34 Diluted net income per share $ 0.43 $ 0.54 $ 1.03 $ 0.62 $ 0.28 Shares used in basic per share computation 160,924 153,513 143,015 130,998 119,488 Shares used in diluted per share computation 172,707 168,393 171,074 159,294 144,392 January 25, January 26, January 27, January 28, January 30, 2004 2003 2002 2001 2000 (in thousands) Consolidated Balance Sheet Data: Cash, cash equivalents and marketable securities $ 604,043 $ 1,028,413 $ 791,377 $ 674,275 $ 61,560 Total assets $ 1,399,344 $ 1,617,015 $ 1,503,174 $ 1,016,902 $ 203,085 Capital lease obligations, less current portion $ 856 $ 4,880 $ 5,861 $ 378 $ 962 Deferred revenue -- -- $ 70,193 $ 200,000 -- Deferred income tax liability $ 8,609 -- -- -- -- Long-term debt -- $ 300,000 $ 300,000 $ 300,000 $ 500 Long-term liabilities $ 4,582 -- -- -- -- Total stockholders’ equity $ 1,051,185 $ 932,687 $ 763,819 $ 407,107 $ 127,424 Cash dividends declared per common share -- -- -- -- -- (B)11 Fiscal 2003 included a charge for stock option exchange expenses of $61,832 related to personnel associated with cost of revenue (for manufacturing personnel), research and development, and sales, general and administrative of $6,164, $35,417 and $20,251, respectively.(C)Fiscal 2002 included $10,030 of acquisition charges attributable to expenses related to our acquisition of assets from 3dfx.(D)Fiscal 2002 included a charge of $3,687 related to our relocation from our previous headquarters.We are one of the world’s largest “fabless” semiconductor companies, supplying graphics and media communications processors and related software that are integral to personal computers, professional workstations and digital entertainment platforms. We provide an architecturally compatible “top-to-bottom” family of award-winning graphics processing units, or GPUs, which set the standard for performance, quality, compatibility and features for a broad range personal computing platforms. Our graphics and communications processors are used for a wide variety of applications, including games, digital content creation, personal digital image editing, business productivity and product and industrial design. Our mission is to be the most important visual computing company in the world.Microsoft Pricing SettlementWe were engaged with Microsoft in discussions related to pricing and volumesXbox chipset. These discussions and our agreement contemplated useNotes outstanding was $300.0 million, which included $18.6 million of a third partynotes that we repurchased during the three months ended October 26, 2003. The redemption price was equal to resolve matters and on April 23, 2002 Microsoft submitted the matter to binding arbitration. On February 6, 2003, NVIDIA and Microsoft announced that the companies had settled all issues related to pricingapproximately 102.7% of the Microsoft Xbox GPU and MCP chipset and have ended the arbitration between them. In addition to resolving this pricing dispute, we have agreed to collaborate with Microsoft on future cost reductions for the Xbox. As a resultoutstanding principal amount of the settlement,Notes, plus accrued and unpaid interest up to, but excluding, the redemption date. In connection with the redemption of the Notes, we recognized $40.4recorded a one-time charge of approximately $13.1 million, in additional revenue in fiscal 2003.Strategic Alliance with IBMMarch 26,September 11, 2003, we announced that the Securities and Exchange Commission, or SEC, had concluded its investigation of us and that we have formedreached a multi-year strategic alliance under which IBM will manufacture our next-generation GeForce GPUs. As part of thefinal agreement we will gain access to IBM’s suite of foundry services and manufacturing technologies, including power-efficient copper wiring, and a roadmap that is designed to lead to 65nm (nanometer; a billionth of a meter) in the next several years, giving us valuable tools to advance our GPUs. IBM plans to begin manufacturing the next-generation GeForce graphics processor this summer at IBM’s plant in East Fishkill, New York.Beyond the chip manufacturing technology, IBM also offers an automated management system that not only controls production on the factory floor, but provides a connection for customer and supplier systems and processes, allowing closer integration across the supply chain. IBM’s automated management system provides us with opportunities ranging from improved operation to greater efficiency and competitive advantage, while using e-business techniques to adapt to real-time, on-demand influences from the marketplace.Securities & Exchange CommissionIn April 2003, subsequent to receiving a Wells notice indicating the SEC staff intended to recommend to the SEC that an enforcement action be initiated, we reached an agreement in principle with the SEC staff that would resolveresolving an investigation undertaken by the SEC’s investigation of us in matters related to the restatement. The agreement is subject to final approval of the SEC.staff. Under the terms of the agreement, in principle, NVIDIA, without admitting or denying liability or wrongdoing, would agreeagreed to an administrative cease and desist order prohibiting any future violationsprovisions of the federal securities laws. We would not be requiredprovisions. There is no requirement to pay any fines or penalties.documentationimpact that this announcement may have on our future revenue from the sale of Xbox processors to Microsoft is uncertain, but we do not believe that it will have a significant impact upon us for at least 18 – 24 months. Revenue from Microsoft during fiscal 2004, fiscal 2003 and fiscal 2002 accounted for 15%, 23% and 9%, respectively, of our total revenue.12 agreementfirst semiconductor companies to manufacture select up-coming GPUs at TSMC's 0.11 um (micron) process technology. We will combine TSMC's 0.11 micron process with our own engineering designs, to deliver high-performance and the SEC’s reviewlow-power consumption in a graphics processor. TSMC's 0.11 micron process technology is fundamentally a photolithographic shrink of the agreement may take several weeks or monthsits industry-leading 0.13 micron process. Though actual results are design-dependent, TSMC's 0.11 micron high-performance process also includes transistor enhancements that improve speed and reduce power consumption relative to complete. Further, there can be no assurance that the agreement will be approved by the SEC.customer programs, revenue recognition, sales returns, allowance for doubtful accounts receivable, inventories, investments, intangiblelong-lived assets, goodwill, income taxes, financing operationsstock-based compensation and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.13 Audit Committeeaudit committee has reviewed our disclosures relating to them in this MD&A.Our policy on sales to distributors and stocking representatives is to defer recognition of revenue and related cost of revenue until the distributors and representatives resell the product. We record estimated reductions to revenue for customer programs at the time revenue is recognized. If market conditions decline, we may take actions to increase customer incentive offerings, possibly resulting in an incremental reduction of revenue at the time the incentive is offered. We also record a reduction to revenue for estimated product returns at the time revenue is recognized based on historical return rates.AllowanceWe record estimated reductions to revenue for Doubtful 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 hist orically 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.andreceivable for estimated losses resulting from the financial inability of our customers to make required payments. Management determines this allowance, which consists of an amount identified for specific customer issues as well as an amount based on general estimated exposure. Our overall estimated exposure excludes amounts covered by credit insurance and letters of credit. If the financial condition of our customers or insurance carrier were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required that could adversely affect our operating results. Furthermore, there can be no assurance that we will be able to obtain credit insurance in the future.26, 2003,25, 2004, our allowance for doubtful accounts receivable was $4.2$2.3 million and our gross tradeaccounts receivable balance was $175.1$219.5 million. Of the $175.1$219.5 million, $42.4$39.7 million was covered by credit insurance and $4.2$3.0 million was covered by letters of credit. As a percentage of our gross trade receivables,accounts receivable balance, our allowance for26, 2003,25, 2004, our allowance for doubtful accounts receivable represented 2%1% of our gross trade receivables.accounts receivable balance. If our allowance for doubtful accounts receivable would have been recorded at 1% or 3%2% of our gross trade receivablesaccounts receivable balance, then our allowance for doubtful accounts receivable balance at January 26, 200325, 2004 would have been approximately $1.8$4.4 million, or $5.3 million, respectively, rather than the actual balanceb alance of $4.2$2.3 million.14 “Accountingor SFAS No. 109,Accounting for Income Taxes” (“SFAS 109”), 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.liabilitiesassets or assetsliabilities for our estimate of future tax effects attributable to temporary differences and carryforwards; and we record a valuation allowanceall owance 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.For the fiscal year ended January 26, 2003, we recorded net$54.4 million that we believe will be recovered. However, should there be a change in our ability to recover any or partcomplex tax laws. Our estimates of thecurrent and deferred tax asset of $54.4 million, ourassets and liabilities may change based, in part, on added certainty or finality to an anticipated outcome, changes in accounting or tax provision would increaselaws in the periodUnited States, or U.S., or foreign jurisdictions where we operate, or changes in other facts or circumstances. In addition, we recognize liabilities for potential U.S. 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 recoveryrecorded tax liability is not probable. 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.15 26, 2003,25, 2004, we recordedhad a valuation allowance of $106.7. The$182.7 million. Of the total valuation allowance, $117.0 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,realization is sustained, will be accounted for as a credit to shareholders’stockholders' equity.RestatementOn April 29, 2002, Of the Company announced that it would be restating its previously reported resultsremaining valuation allowance at January 25, 2004, $21.4 million relates to federal and state tax attributes acquired in certain acquisitions for the first three quarters of fiscal 2002 and for fiscal years 2001 and 2000. This restatement was the result of an extensive review directed by the Company’s independent Audit Committee, with assistance from the law firm of Cooley Godward LLP and forensic accountants from KPMG LLP. The Company’s Audit Committee initiated its review at the request of, and in full cooperation with, the staffwhich realization of the Securities & Exchange Commission (SEC). The Company’s Audit Committee and its team conducted a thorough review of the Company’s records with respectrelated deferred tax assets was determined not more likely than not to all issues raised by the SEC staff for the periods mentioned. The Company’s Audit Committee workedbe realized due, in close cooperation with the SECpart, to provide it with extensive information and conclusions of the review.As discussed in the Form 8-K filed by NVIDIA on May 1, 2002, the adjustments that were reflected in our restated financial statements fell generally into four categories:The first category involved mistakes that were foundpotential utilization limitations as a result of ownership changes; and $44.3 million relates to certain state deferred tax assets that management determined not more likely than not to be realized due, in part, to projections of future taxable income. To the internal review process undertaken by our Audit Committee. An exampleextent realization of thisthe deferred tax assets related to certain acquisitions becomes probable, recognition of these tax benefits would first categoryreduce 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.accidental double-bookingpossibility of various loss contingencies arising in the ordinary course of business. We consider the likelihood of loss or impairment of an expense.The second category involved adjustments relatingasset or the incurrence of a liability, as well as our ability to estimates madereasonably estimate the amount of loss in connection withdetermining loss contingencies. An estimated loss contingency is accrued when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals in which we concluded that there was not sufficient current evidence to support an estimate.The third area related to past accounting judgments that, upon review, we concluded were incorrect, but we did not reach a conclusionshould be adjusted and whether they were made in good faith or bad faith.new accruals are required.The fourth category related to waived audit adjustments for prior periods, which were items previously identified as part of the normal quarterly review and annual audit process, but for which we had concluded we were not required to make adjusting entries in order to prepare our financial statements under generally accepted accounting principles.For additional information on the restatement, refer to Note 13 of the Notes to Consolidated Financial Statements. Year Ended January 25, January 26, January 27, 2004 2003 2002 Revenue 100.0% 100.0% 100.0% Cost of revenue 71.0 69.5 62.1 Cost of revenue related to stock option exchange -- 0.3 -- Gross profit 29.0 30.2 37.9 Operating expenses: Research and development 14.8 11.8 11.3 Sales, general and administrative 9.1 7.9 7.2 In-process research and development 0.2 -- -- Stock option exchange -- 2.9 -- Amortization of goodwill 0.0 0.0 0.7 Acquisition related charges 0.0 0.0 0.7 Discontinued use of property 0.0 0.0 0.3 Total operating expenses 24.1 22.6 20.2 Income from operations 4.9 7.6 17.7 Interest and other income, net 0.5 0.3 0.8 Convertible debenture redemption expense (0.7) 0.0 0.0 Income before income tax expense 4.7 7.9 18.5 Income tax expense 0.6 3.1 5.5 Net income 4.1% 4.8% 13.0% 16 and January 28, 2001and $735.3 million inwhich represented a decrease of 5% from fiscal 2001, which represented2003 to 2004 and an increase of 39% from fiscal 2002 to 2003 and 86%2003. The revenue decrease from fiscal 20012003 to 2002. The growthfiscal 2004 was primarily the result of increaseda significant decrease in sales of Xbox processors to Microsoft, offset by growth in our graphics processors driven byGPU, MCP and UMP products. The revenue growth from fiscal 2002 to fiscal 2003 was primarily the result of significant shipmentssales of Xbox processors in addition to the strong overall demand for our products in the workstation, mobileGPU and platform processor product lines.North Americaother Americas accounted for 75%, 68% and 82% of total revenue for fiscal 2004, 2003 and 2002, respectively. Revenue by geographicalgeographic region is allocated to individual countries based on the location to which the products are initially billed even if the foreign CEMs’ and add-in board and motherboard manufacturers’ revenue is attributable to end customers located in the United States.a different location. The decreaseincrease in the percentage of revenue from sales to customers outside of the United States and other Americas for fiscal 2004 as compared to fiscal 2003 is primarily attributabledue to increaseddecreased sales of the graphicsXGPUs and media communication processorsMCPs used in the Microsoft Xbox product, which are billed to Microsoft in the United States.Although we achieved substantial growth The decrease in the percentage of revenue from sal es to customers outside of the United States for fiscal 2003 as compared to fiscal 2002 is primarily due to increased sales of XGPUs and MCPs used in the Microsoft Xbox product.fiscal 2001market acceptance of our products and/or our customers’ products, our ability to 2002, we do not expect to sustain this rate of growthsuccessfully develop and produce our products in future periods. In addition, we expect that thevolume production, competitive pressures resulting in lower than expected average selling prices, ofand new product announcements or product introductions by our products will decline over the lives of the products. The declines in average selling prices of 3D graphics processors in general may accelerate as the market continues to develop and competition increases.graphics processorsproducts sold.isfor fiscal 2004 as compared to fiscal 2003 decreased primarily due to a shift in the ratiomix of gross profitproduct sales to revenue.our new generation of GeForce FX products. Our GeForce FX products generally have experienced lower gross margins were 30%, 38% and 37%than previous GeForce products. This decrease was offset by an increase in gross margins on sales of Xbox processors in fiscal 2004 when compared to fiscal 2003, 2002 and 2001, respectively.which resulted from the pricing settlement with Microsoft that we announced on February 6, 2003. Gross margin for fiscal 2003 as compared to fiscal 2002 decreased primarily due to thea shift in mix of business and an inventory write-down. During fiscal 2003,product sales that included more sales of Xbox processors which, at that time, generally havehad lower margins than our other products, comprised 23% of our overall revenue as compared to 9% in fiscal 2002. See Note 11 of our Notes to Consolidated Financial Statements for further description of our relationship with Microsoft.pro ducts. In addition, during the second quarter of fiscal 2003 we wrote downdecrease was due to an inventory write-down of approximately $21$21.0 million related to certain Xbox processors and nForce chipsets. Gross margin increased fromplatform processors during the second quarter of fiscal 2001 to fiscal 2002 due to an increase in unit shipments2003, and the favorable impactstock option exchange expense of $6.2 million that was charged to cost of revenue related to manufacturing personnel during the higher margin GeForce graphics processors, partially offset by increased salesthird quarter of the lower margin Xbox graphics and media communication processors.Although we achieved substantial growth in gross profit during fiscal 2003 from the same period a year ago, weWe do not expect past results to sustain this ratebe indicative of growth in future periods.We remain intensely focused on driving down cost and improving gross margins.We expect improvement in our gross margins and believe our gross margins can be 30% or more.our next generation products, and a $10.5 million increase in facilities costs due to the move into a new building at our headquarters and a full year of occupation in all headquarter buildings as well as other expenses during the year. Research and development expenses increased by $68.7 million, or 80%, from fiscal 2001 to 2002 primarily due to a $31.9 million increase related to additional personnel, including certain employees hired from 3dfx in connection with our acquisition of certain of their assets as discussed below, a $14.3 million increase associated with lab equipment, software licenses, maintenance fees and depreciation charges, a $11.7 million increase related to engineering costs to develop our next generation products, and a $10.8 million increase in facilities costs due to the move into several buildings at our new headquarters and other expenses during the year.17 Sales, general and administrative expenses increased $40.2 million, or 69%, from fiscal 2001 to 2002 primarily due to a $21.5 million increase related to additional personnel and commissions, a $6.2 million increase in tradeshow and product launch costs, and a $12.5 million increase in facilities costs due to the move into several buildings at our new headquarters and other increases associated with general administrative activities, an American Red Cross donation associated with the events of September 11, 2001, and travel and entertainment expenses.ExchangeExchange.(the “Offer”)or the Offer, to our employees to exchange outstanding stock options with exercise prices equal to or greater than $27.00 per share, (“or Eligible Options”).Options. Stock options to purchase an aggregate of approximately 20,615,000 shares were eligible for tender at the commencement of the Offer, representing approximately 39% of our outstanding stock options as of the commencement date. Only employees of NVIDIA or one of our subsidiaries as of September 26, 2002 who continued to be employees through the Offer termination date of October 24, 2002 were eligible to participate in the Offer. Employees who were on medical, maternity,maternit y, worker’s compensation, military or other statutorily protected leave of absence, or a personal leave of absence, were also eligible to participate in the Offer. Employees who were terminated on or before the Offer termination date of October 24, 2002, were not eligible to participate in the Offer. In addition, our Chief Executive Officer and Chief Financial Officer and members of our Board of Directors were not eligible to participate in this Offer.Eligible employees who participated in the Offer received, in exchange for the cancellation of Eligible Options, a fixed amount of consideration, represented by fully vested, non-forfeitable common stock and applicable withholding taxes, equal to the number of shares underlying such Eligible Options, multiplied by $3.20, less the amount of applicable tax withholdings, divided by $10.46, the closing price of our common stock as reported on the Nasdaq National Market on October 24, 2002. We concluded that the consideration paid for the Eligible Options represented “substantial consideration” as required by Issue 39(f) of EITF Issue No. 00-23 “Issues Relating to Accounting for Stock Compensation Under APB Opinion No. 25 and FASB Interpretation No. 44,” as the $3.20 per Eligible Option was at least the fair value for each Eligible Option, as determined using the Black-Scholes option-pricing model. In determining the fair value of the Eligible Options using the Black-Scholes option-pricing model, we used the following assumptions: (i) the expected remaining life was deemed to be the remaining term of the options, which was approximately 7.8 years; (ii) a volatility of 50.0% during the expected life; (iii) a risk-free interest rate of 3.71%; and (iv) no dividends. The amount of $3.20 per Eligible Option was established at the commencement of the offer period and remained unchanged throughout the offer period.Variable accounting is not required under Issue 39(a) of EITF Issue No. 00-23 for Eligible Options subject to the Offer that were not surrendered for cancellation, because: (i) the shares of our common stock offered as consideration for the surrendered options were fully vested and non-forfeitable; and (ii) the number of shares to be received by an employee who accepted the Offer was based on the number of surrendered Eligible Options multiplied by $3.20, divided by the fair value of the stock at the date of exchange. We further concluded that the “look back” and “look forward” provisions of FASB Interpretation No. 44, paragraph 45 did apply to the stock options surrendered for cancellation. Based on the terms of the Offer, variable accounting is not required for any of our outstanding stock options existing at the time of the Offer. We do not intend to grant stock options to any participants in the Offer for at least six months following October 24, 2002. If any stock options are granted toparticipants in the Offer within the six months following October 24, 2002, those stock options will receive variable accounting.$61,832,000,$61.8 million, consisting of $39,906,000$39.9 million in fully vested, non-forfeitable shares of our common stock (approximately 3,815,000 shares) and $21,926,000$21.9 million in employer and employee related taxes. The number of fully vested, non-forfeitable shares of our common stock to be issued was determined by dividing the total consideration due (less the amount of applicable tax withholdings) by the closing price of our common stock on October 24, 2002, of $10.46 per share.The shares of our common stock issued in exchange for Eligible Options were fully vested. However, a portion of the shares equal to 25% of the total consideration, based on the closing price of our common stock on the offer termination date, have a six month holding period, and a portion of the shares equal to 25% of such total consideration have a one year holding period. Withholding taxes and other charges were deducted from the remaining 50% of the total consideration, and the shares issued after such withholding did not have a holding restriction.18 GoodwillGoodwill.have completed our annual goodwill impairment test for fiscal 20032004 and concluded that there was no impairment.ChargesCharges.forto former 3dfx employees.PropertyProperty.Interest and Other Income, NetInterest In December 2001, we filed a complaint against Extreme Networks Inc., the sublessor of the property, seeking payment of lease payments and other income, net decreased to $6.6 millionproperty charges for the period of July 2001 through December 2001 and seeking a declaration that we are not liable for any future payments under the lease. In July, 2003, we settled the matter with Extreme Networks and in fiscalAugust, 2003, from $11.0 million in fiscal 2002the complaint was dismissed with prejudice.$16.7 million in fiscal 2001. Interest Expense which primarily consists of interest earned on cash, cash equivalents and marketable securities. Interest income decreased from $23.2 million to $18.6 million from fiscal 2003 to fiscal 2004 primarily due to lower average balances of cash, cash equivalents and marketable securities in fiscal 2004 when compared to fiscal 2003. This was caused by the redemption of our $300.0 million convertible subordinated debentures in October 2003. Interest income decreased $4.5from $27.7 million to $23.2 million from fiscal 2002 to fiscal 2003 primarily due to the decline in market interest rates. Interest income increased $6.4 million from fiscal 2001 to fiscal 2002 due to higher average cash balances as a result of a $200.0 million advance received from Microsoft in connection with our agreement with Microsoft and the receipt of $387.5 million from our 4¾% convertible subordinated note and common stock offerings, which both closed in October 2000. which primarily consists of interest incurred as a result of capital lease obligations and, prior to the redemption in October 2003, interest on our convertible debt was flatsubordinated debentures. Interest expense decreased from $16.5 million to $12.0 million from fiscal 20022003 to fiscal 2003. Interest expense increased in fiscal 2002compared to fiscal 20012004 primarily due to the issuanceredemption of our convertible subordinated debentures.notesdebentures due 2007, or 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 2000.19 $75.8 million and $46.3$75.8 million in fiscal 2004, 2003 2002 and 20012002 respectively. Income taxestax expense as a percentage of pretax income werebefore taxes, or our annual effective tax rate, was 14.1% in fiscal 2004, 39.7% in fiscal 2003 and 30.0% in fiscal 2002 and 32.0%2002.2001. 2004 included the $3.5 million MediaQ IPR&D write-off for which no tax benefit was recognized, the $75.0 million income tax benefit of certain tax contingencies as a result of settlement of our IRS exam, the $38.2 million income tax expense for the accrual of U.S. deferred income taxes on previous permanently reinvested foreign earnings and the $33.6 million income tax expense for the establishment of a valuation allowance on certain previously recognized state deferred tax assets determined not more likely than not to be realized due, in part, to projections of future sources of taxable income.theour annual effective tax rate from fiscal 2002 to fiscal 2003 was primarily due to our not recording any income tax expense or benefit for the third quarter of fiscal 2003 as our loss before income tax expense for that quarter was primarily attributable to a stock compensation charge for which no tax benefit may be available.26, 2003,25, 2004, we had $1.03 billion$604.0 million in cash, cash equivalents and marketable securities, an increasea decrease of $237.0$424.4 million from the end of fiscal 2002. In2003. The decrease was primarily due to the $300.0 million redemption of the Notes in October 2003 and the $71.3 million acquisition of MediaQ in August 2001, we began to invest in marketable securities.2003. 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.$160.8 million and $267.9$160.8 million during fiscal 2004, 2003 2002 and 2001,2002, respectively. The increasedecrease in cash flows from operating activities in fiscal 20032004 when compared to fiscal 20022003 was primarily due to the increase in inventory and decrease in inventories, prepaid expenses and other current assets and deferredincome taxes payable due to the settlement of certain tax assets offset by the decrease in accounts payable.used inprovided by investing activities was $277.3 million in fiscal 2003,2004 was primarily due to $217.3$286.9 million of net purchasessales and maturities of marketable securities. We incurred $63.1securities as we liquidated a significant portion of our marketable securities portfolio in order to obtain the cash required to redeem the $300.0 million Notes in October 2003. This increase in cash from sales and maturities of marketable securities was offset by $127.6 million in capital expenditures in fiscal 2003 primarily attributable to our new headquarters facility, as well as for purchases of computernew research and development emulation equipment, to support increased researchtechnology licenses and development.software and $71.3 million for the acquisition of MediaQ. We expect to spend approximately $50.0$80.0 million to $60.0$100.0 million for capital expenditures induring fiscal 2004,2005, primarily for software licenses, emulation equipment, computer and engineering workstations and future phases of our enterprise resource planning system implementation.workstations. In addition, we may continue to use cash in connection with the acquisition of new businesses or assets. cash of $26.3 million during fiscal 2003 compared to $99.1 million in fiscal 2002.2003. The decreaseincrease in cash used in fiscal 20032004 when compared to fiscal 20022003 was primarily due to a decrease in employee stock option exercises.Common Stock and Convertible Subordinated Debenture OfferingIn October 2000, we sold 2,800,000 shares of our common stock andthe $300.0 million of convertible subordinated debentures due October 15, 2007 in a public offering. Proceeds from the offering were approximately $387.5 million after deducting underwriting discounts, commissions and offering expenses. Issuance costs related to the offering are being amortized to interest expense on a straight-line basis over the termredemption of the debentures. Interest onNotes, which included $18.6 million of Notes that we had purchased during the convertible subordinated debentures accrues at the rate of 4 ¾% per annum and is payable semiannually in arrears on April 15 andthree months ended October 15 of each year, commencing April 15, 2001. The convertible subordinated debentures are redeemable at our option on or after October 20,26, 2003. The debentures are 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.3dfx Asset PurchaseOn April 18, 2001, we completed the purchase of certain assets of 3dfx, including patents and patent applications. 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 provides, subject to the other provisions thereof, that if 3dfx certifies to our satisfaction all its debts and other liabilities have been provided for, then we are obligated to pay 3dfx two million shares of NVIDIA common stock. If 3dfx cannot make such a certification, but instead certifies to our satisfaction that its debts and liabilities can be satisfied for less than $25.0 million, then 3dfx can elect to receive a cash payment equal to the amount of such debts and liabilities and receive 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 cannot certify that all of its debts and liabilities have been provided for, or can be satisfied, for less than $25.0 million, we are not obligated under the agreement to pay any additional consideration for the assets. On October 15, 2002, 3dfx filed for Chapter 11 bankruptcy protection. We believe that the bankruptcy filing by 3dfx will allow a determination of the full number and scope of 3dfx’s debts and liabilities. NVIDIA may be obligated under the Asset Purchase Agreement to pay 3dfx the contingent consideration following this determination, subject to offsets for NVIDIA’s claims against 3dfx arising from the Asset Purchase Agreement. On March 12, 2003, we were served with a complaint by the Trustee for 3dfx seeking, among other things, additional payment for the purchased assets and the assumption by us of 3dfx’s liabilities. In addition, Carlyle Fortran Trust and CarrAmerica, former landlords of 3dfx, have filed suits against us seeking payment of the rents due by 3dfx.Contractual Cash ObligationsThe following summarizes our contractual cash obligations that are both on our balance sheet and off balance sheet as of January 26, 2003 and the effect such obligations are expected to have on our liquidity and cash flow in future periods: (1)20 Our convertible subordinated notes due 2007 possess a fixed interest rate of 4¾%. The amount of interest obligation assumes that the notes are held until maturity and not redeemed or converted into shares of common stock at an earlier date. The convertible subordinated notes are redeemable at our option on or after October 20, 2003. The notes are convertible at the option of the holder at any time prior to the close of business on the maturity date. As such, actual future cash obligations may be significantly lower.(2)Represents our noncancelable inventory purchase commitments as of January 26, 2003.needne ed to seek additional borrowings or capital include:“Business Risks—"Business Risks – 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.”InformationConsistentkey factors that could affect our liquidity include:Section 10A(i)(2)the Securities and Exchange Commission, or SEC, under their "shelf" registration process. This shelf registration was declared effective by the SEC on March 25, 2004. Under this shelf registration process, 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. In particular, we expect to incur significant operating expenses in connection with:Securities Exchange ActAsset 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 1934, as addedNVIDIA 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 n umber of shares of our common stock, with such reduction calculated by Section 202dividing 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. We are currently party to litigation relating to certain aspects of the Public Company Accounting Reformasset purchase and Investor Protection Act of 2002, NVIDIA is responsible for disclosing the nature3dfx’s subsequent bankruptcy in October 2002. Please refer to Note 13 of the non-audit services approved byNotes to the Consolidated Financial Statements for further information regarding this litigation.21 Audit Committee during a quartercontractual obligations that are both on our balance sheet and off balance sheet as of January 25, 2004 and the effect such obligations are expected to be performed by KPMG LLP,have on our independent auditor. Non-audit services are services other than those provided by KPMG LLPliquidity and cash flow in connection with an audit or a reviewfuture periods:Contractual Obligations Total Within 1 Year 2–3 Years 4-5 Years After 5 Years Capital lease obligations, including interest $ 5,047 $ 4,179 $ 868 $ -- $ -- Operating leases 206,242 24,635 49,950 50,625 81,032 Purchase obligations (1) 213,289 213,289 -- -- -- Other liabilities reflected on our balance sheet under GAAP 6,520 2,020 3,000 1,500 -- Total contractual obligations $ 431,098 $ 244,123 $ 53,818 $ 52,125 $ 81,032 NVIDIA’s financial statements. During the fourth quarter of fiscal year 2003, our Audit Committee did approve new and recurring engagements performed by KPMG LLP for the following non-audit services (1) income tax, transactional tax and payroll tax return preparation, (2) general tax consultation and advice, (3) international statutory audits, and (4) consultation regarding accounting standards and issues.“New"New Accounting Pronouncements,”" which information is hereby incorporated by reference.22 (“or SFAS No. 115”),115,Accounting for Certain Investments in Debt and Equity Securities. All of the cash equivalents and marketable securities are treated as “available-for-sale”"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 interestinte rest 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 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”"available-for-sale", no gains or losses are recognized due to changes in interest rates unless such securities are sold prior to maturity. 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 26, 2003,25, 2004, we performed a sensitivity analysis was performed on our floating and fixed rate financial investments. ParallelAccording to our analysis, parallel shifts in the yield curve of both +/-5050 basis points would result in changes in fair market values for these investments of approximately $3.5$2.7 million.Our convertible subordinated notes due 2007 possess a fixed interest rate of 4¾% and are not subject to interest rate fluctuations.“Management’s"Management's Discussion and Analysis of Financial Condition and Results of Operations,”" our business is subject to the risks set forth below.23 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.Many of our revenue components fluctuate and are difficultpredict, and our operating expenses are largely independent of revenue in any particular period. It is therefore difficult for ustransition 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. We believe that our quarterly and annual results of operations will be affected by a variety of factors that could harm our revenue, gross profit and results of operations.Factors that have affected our results of operations in the past, andnew manufacturing process technologies could affect our results of operations in the future, include the following:demand and market acceptance for our products and/or our customers’ products;the successful development and volume production of next-generation products;new product announcements or product introductions by our competitors;our ability to introduce new products in accordance with OEM design requirements and design cycles;competechanges in the timing of product orders due to unexpected delays in the introduction of our customers’ products;effectively.fluctuations in the availability of manufacturing capacity or manufacturing yields;declines in spending by corporations and consumers related to perceptions regarding an economic downturn in the U.S. and international economies;competitive pressures resulting in lower than expected average selling prices;product rates of return in excess of that forecasted or expected due to quality issues;the rescheduling or cancellation of customer orders;the loss of a key customer or the termination of a strategic relationship;seasonal fluctuations associated with the PC market;substantial disruption in our suppliers’ operations, either as a result of a natural disaster, equipment failure, terrorism or other cause;supply constraints for and changes in the cost of the other components incorporated into our customers’ products, including memory devices;our ability to reduce the manufacturing costs of our products;legal and other costs related to defending intellectual property and other types of lawsuits;bad debt write-offs;costs associated with the repair and replacement of defective products;unexpected inventory write-downs; andintroductions of enabling technologies to keep pace with faster generations of processors and controllers.Any one or more of the factors discussed above could prevent us from achieving our expected future revenue or net income.Our operating expenses are relatively fixed, and we order materials in advance of anticipated customer demand. Therefore, we have limited ability to reduce expenses quickly in response to any revenue shortfalls.Most of our operating expenses are relatively fixed in the short term, and we may be unable to adjust spending sufficiently in a timely manner to compensate for any unexpected sales shortfall. 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 profit margins and restrict our ability to fund operations. We may build memory and component inventories during periods of anticipated growth and in connection with selling workstation boards directly to major OEMs. We could be subject to excess or obsolete inventories and be required to take corresponding write-downs if growth slows or if we incorrectly forecast product demand. A reduction in demand could negatively impact our gross margins and financial results.We may be required to reduce prices in response to competition or to pursue new market opportunities. If new competitors, technological advances by existing competitors or other competitive factors require us to invest significantly greater resources than anticipated in research and development or sales and marketing efforts, our business could suffer. 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 period are not indicative of results to be expected for a full fiscal year.We need to develop new products and to manage product transitions in order to succeed.Our business depends to a significant extent on our ability to successfully develop new products for the 3D graphics market. Our add-in board and motherboard manufacturers and major OEM customers typically introduce new system configurations as often as twice per year, typically based on spring and fall design cycles. Accordingly, our existing products must have competitive performance levels or we must timely introduce new products with such performance characteristics in order to be included in new system configurations. This requires that we do the following:anticipate the features and functionality that consumers will demand;incorporate those features and functionality into products that meet the exacting design requirements of PC OEMs, CEMs and add-in board and motherboard manufacturers;price our products competitively; andintroduce the products to the market within the limited window for PC OEMs and add-in board and motherboard manufacturers.As a result, we believe that significant expenditures for research and development will continue to be required in the future. The success of new product introductions will depend on several factors, including the following:proper new product definition;timely completion and introduction of new product designs;the ability of IBM, TSMC and any additional third-party manufacturers to effectively manufacture our new products in a timely manner;the quality of any new products;differentiation of new products from those of our competitors;market acceptance of our products and our customers’ products; andavailability of adequate quantity and configurations of various types of memory products. semiconductor process technology appropriate for our products and available from commercial third-party foundries. Use of advanced processes hasmay 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 and 0.13 micron process technologies for our family of GPUs, MCPs and UMPs. The majority of our newest GPUs, the GeForce FX and the GeForce FX Go products are manufactured in 0.13-micron process technology.resulted in initial yield problems. New products that we introduce may not incorporate the features and, functionality demanded by PC OEMs, add-in board and motherboard manufacturers and consumers of 3D graphics. In addition, we may not successfully develop or introduce new products in sufficient volumes within the appropriate time to meet both the PC OEMs’ design cycles and market demand. Weconsequently, have in the past experiencedsuffered reduced yields, delays in the development of some new products. Our failureproduct deliveries and increased expense levels. Moreover, we are dependent on our relationships with our third-party manufacturers to successfully develop, introduce or achieve market acceptance for new 3D graphics products would harm our business. In particular, we experienced delays in the introduction of graphics processors using our next generation technology during the second half of fiscal 2003 and any such delays in the future or failure of these or other processorsmigrate to meet or exceed specifications of competitive products could materially harm our business.Our failure to identify new product opportunities or develop new products could harm our business.As our 3D graphics processors develop and competition increases, we anticipate that product life cycles at the high end will remain short and average selling prices willsmaller geometry processes successfully. We may continue to decline. In particular, we expect average selling prices and gross margins for our 3D graphics processorshave difficulty migrating 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 overall average selling prices and gross margins. In order for our 3D graphics processors to achieve high volumes, leading PC OEMs and add-in board and motherboard manufacturers must select our 3D graphics processor for design into their products, and thenmanufacturing process technologies 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 inon a timely fashionbasis. Our inability to transition to new products. In addition, we cannot guarantee that new products we develop will be selected for design into PC OEMs’ 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 products increases, there is an increasing risk that we will experience problems with the performance of products and that there will be delays in the development, introduction or volume shipment of our products. Wetechnologies may experience difficulties related to the production of current or future products or other factors may delay the introduction or volume sale of new products we developed. 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 3D graphics products 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 offered by us may contain defects or 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 certain of our products and may experience delays or loss of revenue to correct any new defects in the future. Errors in new products or releases after commencement of commercial shipments could result in loss of market share or failure to achieve market acceptance. 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. These costs could be significant and could adversely affect our businessoperating results and operating results.The risk of low yields is compounded by the offshore location of most of our manufacturers, increasing the effort and time required to identify, communicate and resolve manufacturing yield problems. recall,rec all, our business could suffer.Failure to transition to new manufacturing process technologies could affect our ability to compete effectively.Our strategy is to utilize the most advanced 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. 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 process technology for the GeForce4, Quadro4, GeForce3, Quadro DCC, Xbox and nForce families of graphics processors, and we believe that the transition of our products to increasingly smaller geometries will be important to our competitive position. In November 2002, we introduced our newest flagship GPU, the GeForce FX 5800 Ultra, which is our first GPU to be manufactured in 0.13-micron process technology. Other companies in the industry have experienced difficulty in migrating to new manufacturing processes and, consequently, have suffered reduced yields, delays in product deliveries and increased expense levels. We have experienced and may continue to experience similar difficulties and the corresponding negative effects. Moreover, we are dependent on our relationships with our third-party manufacturers to migrate to smaller geometry processes successfully. We may be unable to migrate to new manufacturing process technologies successfully or on a timely basis.We may be unable to manage our growth and, as a result, may be unable to successfully implement our strategy.Our rapid growth has placed, and is expected to continue to place, a significant strain on our managerial, operational and financial resources. As of January 26, 2003, we had 1,513 employees as compared to 1,123 employees as of January 27, 2002. We expect that the number of our employees will increase over the next 12 months. Our future growth, if any, will depend on our ability to continue to implement and improve operational, financial and management information and control systems on a timely basis, as well as our ability to maintain effective cost controls. Further, we will be required to manage multiple relationships with various customers and other third parties. Our systems, procedures or controls may not be adequate to support our operations and our management may be unable to achieve the rapid execution necessary to successfully implement our strategy.None ofMarv Burkett and David Shannon are our only officers or employees is bound by an employment agreement, and so our relationships with theseour other officers and employees are at will. We do not have “key person”"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.Wesubjectbased upon future demand forecasts. If there were to risks associated with international operations whichbe a sudden and significant decrease in demand for our products, or if there were a higher incidence of inventory obsolescence because of rapidly changing technology and customer requirements, we could be required to write-down our inventory and our gross margins could be adversely affected.24 harmfluctuate, and if our business.operating results are below the expectations of securities analysts or investors our stock price could declineOur reliance on foreign third-party manufacturing, assembly, testing.packaging operations subjectsare 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 numberresult, it is possible that in some quarters our operating results could be below the expectations of risks associated with conducting business outsidesecurities analysts or investors, which could cause the trading price of the United States, including the following:unexpected changes in, or impositionsour common stock to decline, perhaps substantially. We believe that our quarterly and annual results of legislative or regulatory requirements;delays resulting from difficulty in obtaining export licenses for certain technology, tariffs, quotas and other trade barriers and restrictions;longer payment cycles;imposition of additional taxes and penalties;the burdens of complying withoperations may be affected by a variety of foreign laws;factors that could harm our revenue, gross profit and results of operations.other factors beyondcontrol, including terrorismresults of operations in the past, and war, which may delaycould affect our results of operations in the shipmentfuture, include the following:products.customers’ products;We also are subjectgeneral political risksperceptions regarding an economic downturn in connectionthe U.S. and international economies;international trade relationships.suppliers’ operations, either as a result of a natural disaster, equipment failure, terrorism or other cause;lawsresults of certain foreign countriesany quarterly period are not indicative of results to be expected for a full fiscal year.25 whichadvance of anticipated customer demand. Therefore, we have limited ability to reduce expenses quickly in response to any revenue shortfalls.productsoperating expenses are orrelatively fixed in the short term, and we may be manufactured or sold, including various countriesunable to adjust spending sufficiently in Asia, may not protect our products or intellectual property rightsa timely manner to the same extent as do the laws of the United States. This makes the possibility of piracy of our technology and products more likely.Currently,compensate for any unexpected sales shortfall. Substantially all of our arrangements with third-party manufacturers provide for pricing and payment in U.S. dollars, andsales are made on the basis of purchase orders rather than long-term agreements. As a result, we may commit resources to datethe production of products without having received advance purchase commitments from customers. Any inability to sell products to which we have not engaged in any currency hedging activities, although we may do so in the future. Fluctuations in currency exchange ratesdevoted significant resources could harm our business in the future.Hostilities involving the United States and/or terrorist attacks could harm our business.The financial, political, economic and other uncertainties following the terrorist attacks upon the United States have led to a weakening of the global economy. Recent economic data, such as the United States unemployment rate and consumer confidence measures, appear to indicate that international hostilities involving the United States has further weakened the global economy. The reduction in business and investor confidence is also reflected in the weakening equity markets. Subsequent terrorist acts and/or the threat of future outbreak or continued escalation of hostilities involving the United States 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 escalationcancellation or deferral of product orders could result in these events or similar future events may disrupt our operations or those of our customers, distributors and suppliers,holding excess inventory, which could adversely affect our profit margins and restrict our ability to fund operations. We may build inventories during periods of anticipated growth and in co nnection with selling workstation boards directly to major OEMs. 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. A reduction in demand could negatively impact our gross margins and financial results.financial conditioncould suffer. We have substantially increased our engineering and technical resources and have 1,057 full-time employees engaged in research and development as of January 25, 2004, compared to 832 employees as of January 26, 2003. During fiscal years 2004, 2003 and 2002, research and development expenditures represented 15%, 12% and 11% as a percentage of revenue, respectively.resultsHSI. HSI is a complex piece of operations.Failure in operation or future enhancement or implementationnetworking technology that performs high-speed bi-directional interconnect protocol conversion. Using HSI, we expect to transform some of our enterprise resource planning system could harmGPUs into PCI Express compatible GPUs. With our operations.2003,2005, we initiated an examinationexpect to launch and be in full production with a top-to-bottom product line of SAP A.G.,next generation PCI Express GPUs based on our current enterprise resource planning, or ERP, system to enhance our information systems in business, finance, operations and service. During fiscal 2003, we implemented certain additional functionalities based upon the results of the ERP examination and we expectto implement additional functionalities in fiscal 2004.brand new NV4X architecture. If we arefail to deliver PCI Express in a timely manner or if our PCI Express compatible products do not ablemeet consumer and/or analysts expectations, our business could suffer.implement additionaldevelop new products and to manage product transitions in order to succeed.our current ERP system or there are delays or downtime asthe market within the limited window for OEMs, ODMs, and add-in board and motherboard manufacturers.26 the implementation, the efficiency of our business applications and business operations could be harmed. We are heavily dependent upon the proper functioning of our internal systems to conduct our business. System failure or malfunctioning may result in disruptions of operations and inability to process transactions. Our results of operations and financial position could be harmed if we encounter unforeseen problems with respect to system operations or future implementations.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 includenew product introductions will depend on several factors, including the following:boardquality of directors to createany new products;issue preferred stock without prior stockholder approval;our customers' products; andprohibition of stockholder action by written consent;a classified board of directors; andadvance notice requirements for director nominations and stockholder proposals.On March 5, 2000, we entered into an agreement with Microsoft in which we agreedcomputer aided design, or CAD, industry. We have invested significant resources to develop relationships with industry leaders, including Cadence Design Systems, Inc., IKOS Systems, Inc. and sell graphics chips and to license certain technology to Microsoft and its licensees for useSynopsys, Inc., often assisting these companies in the Xbox. Inproduct 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 event that an individual or corporation makes an offer to purchase shares equal to or greater than 30%forefront of the outstanding shares3D graphics market 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 our common stock, Microsoft has first and last rights of refusal to purchase the stock. The provision could also delay or prevent a change in control of NVIDIA.WePC manufacturers. If these relationships are not successful, we may not be able to realizedevelop new products in a timely manner.potential financialmost advanced semiconductor process technology appropriate for our products and available from commercial third-party foundries. Use of advanced processes has in the past resulted in initial yield problems. New products that we introduce may not incorporate the features and functionality demanded by OEMs, ODMs, add-in board and motherboard manufacturers and consumers of personal computers and consumer electronics. In addition, we may not successfully develop or strategic benefitsintroduce new products in sufficient volumes within the appropriate time to meet both the OEMs’ design cycles and market demand. We have in the past experienced delays in the development of business acquisitionssome new products. Our failure to successfully develop, introduce or achieve market acceptance for new digital media processors would harm our business. In particular, we experienced delays in the introduction of digital media processors using our next generation technology during the first half of fiscal 2004 and any such delays in the future or failure of these or other processors to meet or exceed specifications of competitive products could materially harm our business.hurtresult 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 abilitydigital media processors non-competitive or obsolete or result in our holding excess inventory, any of which would harm our business.27 growexisting products are released. We have in the past discovered defects and incompatibilities with customers’ hardware in certain of our products and may experience delays or loss of revenue to correct any new defects in the future. Errors in new products or releases after commencement of commercial shipments could result in loss of market share or failure to achieve market acceptance. 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. These costs could be significant and could adversely affect our business and 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 products and services or help expand our distribution channels. For any previous or future acquisition or investment, 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:difficulty in combining the technology, operations or workforce of the acquired business;disruption of our ongoing businesses;difficulty in realizing the potential financial or strategic benefits of the transaction;difficulty in maintaining uniform standards, controls, procedures and policies; andpossible impairment of relationships with employees and customers as a result of any 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, or a combination of cash and common stock. If the consideration is paid with our common stock, existing stockholders would be further diluted.are dependent onsell our products to a small number of customers and we are subject to order and shipment uncertainties.We primarily sell our products to add-in board and motherboard manufacturers and CEMs, which incorporate graphics products in theboards they sell to PC OEMs and system builders. Sales to add-in board and motherboard manufacturers and CEMs are primarily dependent onOur sales process involves achieving key design wins with leading PC OEMs. The number ofOEMs 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 manufacturers, CEMs and leading PC OEMsadd-in board manufacturers. Our distribution strategy is limited. We expect thatto work with a small number of leading independent CEMs, ODMs, motherboard manufacturers, add-in board and motherboard manufacturers and stocking representatives, each of which has relationships with a broad range of system builders and leading PC OEMs. Currently, we sell a significant majority of our digital media processors dire ctly to stocking representatives, CEMs, directly,ODMs, motherboard and add-in board manufacturers, which then sell boards with our graphics processor to leading PC OEMs, retail outlets and to a smalllarge number of PC OEMs indirectly, will continue to account for a substantial portion of our revenue for the foreseeable future.system builders. As a result, our business could be harmed by the loss of business from PC OEMs, orCEMs, ODMs, motherboard and add-in board and motherboard manufacturers and CEMs.manufacturers. In addition, revenue from PC OEMs, CEMs, ODMs, motherboard and add-in board and motherboard manufacturers CEMs and PC OEMs that have directly or indirectly accounted for significant revenue in past periods, individually or as a group, may not continue, or may not reach or exceed historical levels in any future period.Our business may be harmed by instability in Asia due to the concentration of customers who are located or have substantial operations in Asia, including Taiwan. The People’s Republic of China and Taiwan have in the past experienced strained relations. A worsening of these relationships or the development of hostilities between the two could result in disruptions in Taiwan and possibly other areas of Asia, which could harm our business. In addition, if relations between the U.S. and The People’s Republic of China become strained, our business could be harmed. While we believe political instability in Asia has not harmed our business, because of our reliance on companies with operations in Asia, continued economic and political instability in Asia might harm it.customers’customers' businesses and to downturns in the economy and the industry. 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, excludingexposure. As of the amounts covered by credit insurance.of fiscal 2004, fiscal 2003 and fiscal 2002 our allowance for doubtful accounts represented 0.1%, 0.2% and 0.2% of revenue for each fiscal year, respectively. If the financial condition of our customers or insurance carrier were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required which could adversely affect our operatingopera ting results. Furthermore, there can be no assurance that we will be able to attain credit insurance in the future. We may have to record additional reserves or write-offs in the future, which could harm our business.We rely on third-party vendors to supply us tools for the development of our new products and we may be unable to obtain the tools necessary to develop these products.In the design 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 for the supply of these tools, some or all of these tools may not be readily available in the future. 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. The design requirements necessary to meet consumer demands for more features and greater functionality from 3D graphics products in the future may exceed the capabilities of the software development tools 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.There can be no assurance that the Xbox program will achieve long term commercial success.There can be no assurance that the Xbox program will achieve long term commercial success, given the high level of competition in the game console product line. During fiscal 2003, sales of Xbox processors comprised 23% of our overall revenue. If the Xbox program is not successful, our business may be harmed. foreign 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.primarily utilize TSMC, IBM and UMC to produce our semiconductor wafers and utilize independentmanufacturingmanufact uring requirements. We obtain manufacturing services on a purchase order basis andbasis. TSMC has no obligation to provide us with any specified minimum quantities of product. TSMC, fabricatesIBM and UMC fabricate wafers for other companies, including certain of our competitors, and could choose to prioritize capacity for other users or reduce or eliminate deliveries to us on short notice. 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. We believe that long-term market acceptance for our products will depend on reliable relationships with TSMC, IBM, UMC and any other manufacturers used by us to ensure adequate product supply to respond to customer demand.Our wafer requirements represent a significant portion of the total production capacity of TSMC. Although our products are designed using TSMC’s process design rules, TSMC may be unable to achieve or maintain acceptable yields or deliver sufficient quantities of wafers on a timely basis and/or at an acceptable cost. Additionally, TSMC may not continue to devote resources to the production of our products, or to advance the process design technologies on which the manufacturing of our products are based. Any difficulties like these would harm our business.Because of our reliance on TSMC, 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, or if relations between the U.S. and The People’s Republic of China are strained due to foreign relations events. Furthermore, any substantial disruption in our suppliers’ operations, either as a result of a natural disaster, political unrest, economic instability, acts of terrorism or war, equipment failure or other cause, could harm our business.28 plans to beginbegan manufacturing the next-generation GeForce graphics processor this summerin July 2003 at IBM’s plant in East Fishkill, New York.graphicsdigital media processors are assembled and tested by Siliconware Precision Industries Company Ltd., Amkor Technology, ChipPAC Incorporated and Advanced Semiconductor Engineering. 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. Any product shortages or quality assurance problems could increase the costs of manufacture, assembly or testing of our products and could harm our business. Due to the amount of time29 industry isplatform processor and handheld industries are highly competitive and we may be unable to compete.3D graphics processorsGPUs, MCPs and UMPs for PCs and handhelds in which we compete 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, manufacturing capabilities, price of graphicsdigital media processors and total system costs of add-in boards and motherboards. We expect competition to increase both from existing competitors and new market entrants with products that may be less costly than our 3D graphics processors,ours, or may provide better performance or additional features not provided by our products. We may be unable to compete successfully in the emerging PC graphics market.30 3D graphicsGPU and MCP solutions for the PC market.and handheld segments. Our competitors include the following:integrated core logic chipsets that incorporate 3D graphics functionality as part of their existing solutions, such as Intel, Silicon Integrated Systems, ATI Technologies Inc. and VIA Technologies, Inc.;suppliers of graphics add-in boards that utilize their internally developed graphics chips, such as ATI Technologies Inc., Creative Technology and Matrox Electronics Systems Ltd.;suppliers of mobile graphics processorsMCPs that incorporate 3D graphics functionality as part of their existing solutions, such as ATI, TechnologiesIntel, Silicon Integrated Systems and VIA; Trident Microsystems, Inc.;VIA Technologies, Inc.; VIA;andcompanieshave traditionally focused on the professional marketincorporate advanced graphics functionality as part of their existing solutions, such as ATI and provide high end 3D solutions for PCs and workstations, including 3Dlabs (a Creative Technology company) and ATI Technologies Inc.Seiko-Epson.3D graphics processor market,personal computer, consumer electronics and handheld segments, 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.We may not successfully compete with Intel in the integrated chipset product line.It is projected by analysts that integrated chipsets are likely to become a majority share of the PC graphics market. We have recently introduced and begun shipment of the nForce2 platform processor, our second generation integrated 3D graphics chipset. The nForce platform processor is initially designed to support microprocessors produced by AMD. Intel is the dominant supplier of integrated 3D graphics chipsets. Intel has significantly greater resources than we do, and the nForce platform processor, or other 3D graphics products that we may introduce, may not compete effectively against Intel’s current chipset products or its future products, either in terms of price or performance.In addition, due to the widespread industry acceptance of Intel’s microprocessor architecture and interface architecture, including its accelerated graphics port architecture, or AGP, Intel exercises significant influence over the PC industry and over companies developing products for such architecture. Any significant modifications by Intel to the AGP, the microprocessor or core logic components or other aspects of the PC microprocessor architecture could result in incompatibility with our technology, which would harm our business.In addition, any delay in the public release of information relating to modifications like this could harm our business.In addition to its influence over the PC architecture, Intel has asserted intellectual property rights in various PC architecture interfaces. For example, as a result of patents held by Intel, it has asserted that companies wishing to develop a chipset compatible with the Pentium 4 microprocessor or similar microprocessors obtain a license from Intel. We believe that the principal competitive factors in the market are performance, breadth of product offerings, access to customers and distribution channels, backward-forward software support, conformity to industry standard APIs, manufacturing capabilities, price of graphics processors and total system costs of add-in boards and motherboards. In September 2001 Intel filed a patent infringement suit against VIA Technologies, Inc. with respect to a VIA Technologies, Inc. chipset for the Pentium 4. We do not have a license from Intel for such a chipset.We expect Intel to continue to do the following:invest heavily in research and development and continue development of integrated 3D graphics products;maintain its position as the largest manufacturer of PC microprocessors;use its intellectual property position with respect to the PC microprocessor and architecture to defend its position in 3D graphics, including the filing of patent infringement suits against competitors;follow business practices in its PC business, which strongly encourage use of Intel integrated chipsets;increasingly dominate the PC platform; andpromote its product offerings through advertising campaigns designed to engender brand loyalty among PC users.as the 3D graphics processors for hardware components or subassemblies designed by PC OEMs, ODMs, and add-in board and motherboard manufacturers. Our add-in board and motherboard manufacturers and major OEM and ODM customers typically introduce new system configurations as often as twice per year, generally based on spring and fall design cycles. Accordingly, our existing products must have competitive performance levels or we must timely introduce new products with such performance characteristics in order to be included in new system configurations. Our failure to achieve one or more design wins would harm our business. The process of being qualified for inclusion in a PCan OEM’s product canca n be lengthy and could cause us to miss a cycle in the demand of end users for a particular product feature, which also could harm our business.Financial and Market Conditionsdependentsubject to risks associated with international operations which may harm our business.PC marketUnited States, including the following:slowdownburdens of complying with a variety of foreign laws; and31 its growth hasconnection with our international trade relationships. In addition, 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 do the laws of the United States. This makes the possibility of piracy of our technology and products more likely.future have a negative impact onfuture. Fluctuations in currency exchange rates could harm our business.During fiscal 2003, we derived most of our revenue from the sale of products for usebusiness in the desktop PC market, from professional workstations to low-cost PCs. We expect to continue to derive most of our revenue from the sale or license of products for usefuture.the desktop PC market in the next several years. The PC market ischaracterized by rapidly changing technology, evolvingnature and an industry standards, frequent new product introductions and significant price competition. These factors result in short product life cycles and regular reductions of average selling prices over the life of a specific product. 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 have incorrectly forecast product transitions. In these cases, PC manufacturers may abruptly suspend substantially all purchases of additional inventory from suppliers like us until the excess inventory has been absorbed. The slowing of both the domestic and international economy has led to a reduction in the demand for PCs and to a reduction in inventory purchases by PC manufacturers, which adversely impacted our revenue during fiscal 2003. Any continued reduction in the demand for PCs generally, or for a particular product that incorporates our 3D graphic processors,downturn could harm our business.The acceptancenext generation productsovercapacity and capacity constraints, variations in business PC 3D graphics may not continue to develop.Our success will depend in part upon the demandmanufacturing costs and yields, significant expenditures for performance 3D graphics for business PC applications. The market for performance 3D graphics on business PCs has only recently begun to emergecapital equipment and is dependent on the future development of, and substantial end-user and OEM demand for, 3D graphics functionality. As a result, the market for business PC 3D graphics computing may not continue to develop or may not grow at a rate sufficient to support our business. The development of the market for performance 3D graphics in business PCs will in turn depend on theproduct development and availabilityrapid 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 a large number of business PC software applications that support oraverage selling prices. If we cannot take advantage of performance 3D graphics capabilities. Currently, there are only a limited number of software applications like this, most of which are games,appropriate actions such as reducing our costs to sufficiently offset declines in demand, our revenues and a broader base of software applications may not develop in the near term or at all. Consequently, a broad market for full function performance 3D graphics on business PCs may not develop. Our business prospectsearnings will suffer if the market for business PC 3D graphics fails to develop or develops more slowly than expected.3D graphics solutionproducts may not continue to be accepted by the PC market.3D graphicsdigital media processors for high performance 3D graphics in PC and consumer electronics applications. The market for 3D graphicsdigital media 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 dynamic random memory devices pricing 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 market acceptance and such market acceptance, if achieved, is difficult to sustain due to intense competition. Since the PC marketsegment is our core business, our business would suffersuff er if for any reason our current or future 3D graphicsdigital media processors do not continue to achieve widespread acceptance in the PC market.segment. 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 PC market,segment, our business would be harmed.The semiconductor industry is cyclicalnaturethe future have a negative impact on our business.an industry downturnnotebook PC segments, 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 and notebook PC segments 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 have incorrectly forecast product transitions. In these cases, PC manufacturers may abruptly suspend substantially all purchases of additional inve ntory from suppliers like us until the excess inventory has been absorbed.32 semiconductor industry historically has been characterized byfinancial, political, economic and other uncertainties following the following factors:rapid technological change;cyclical market patterns;significant average selling price erosion;fluctuating inventory levels;alternating periodsterrorist attacks upon the United States led to a weakening of overcapacitythe global economy. Subsequent terrorist acts and/or the threat of future outbreak or continued escalation of hostilities involving the United States or other countries could adversely affect the growth rate of our revenue and capacity constraints; andvariations in manufacturing costs and yields and significant expenditures for capital equipment and product development.the industry has experienced significant economic downturns at various times, characterized by diminished product demandany escalation in these events or similar future events may disrupt our operations or those of our customers, distributors and accelerated erosion of average selling prices. We may experience substantial period-to-period fluctuations insuppliers, which could adversely affect our business, financial condition or results of operationsoperations.general semiconductor industry conditions.hashad been initiated against the issuing company. Since February 2002, multiple securities class action lawsuits and several derivative suits have been filed against us. We expect that this litigation, whether or not resolved favorably, may result in substantial cost and a diversion of management’s attention and resources, which could harm our revenues and earnings. Any adverse determination in this litigation could also subject us to significant liabilities. See “Legal Proceedings” and Note 9 of the Notes to Consolidated Financial Statements for a description of this litigation.For additional information regarding risks associatedof portfolio investments andadversely impacted due to a rise in interest rates, see Item 7A “Quantitative and Qualitative Disclosures About Market Risk—Interest Rate Risk.”3D graphics marketdigital media processor industry in particular has been characterized recently by the aggressive pursuit of intellectual property positions, and we expect our competitors to continue to pursue aggressive intellectual property positions. In addition, 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 may increase. If infringement claims are made against us, we may seek licenses under the claimants’ patents or other intellectual property rights. However, licenses may not be offered at all or on terms acceptable to us, particularly by competitors. The failure to obtain a license from a third party for technology used by us could cause us to incur substantial liabilities and to suspend the manufacture of and sale of one or more products, which could reduce our revenues and harm our business. Furthermore, we may initiate claims or litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights. We have agreed to indemnify certain customers for certain claims of infringement arising out of sale of our products.Litigation against us or our customers concerning infringement would likely result in significant expense to us and divert the efforts of our technical and management personnel.We are currently subject to claims of patent infringement, and we may be subject to patent infringement claims or suits brought by other parties in the future. We do not believe that current actions will have a material impact on our business or financial condition. However, these claims and any future lawsuits could divert our resources and result in the payment of substantial damages.33 graphicsdigital media processors, and expect to continue to enter into license agreements for future products. These licenses may result in royalty payments to third parties, the cross-licensingcross licensing of technology by us or paymentpa yment of other consideration. If these arrangements are not concluded on commercially reasonable terms, our business could suffer.and resolution of related litigation arising out of the restatement of our financial statements or other matters could harm our business.staffresults of our exam were submitted to the Joint Committee on Taxation, or the Joint Committee, for review.Enforcement Division of the Securities & Exchange Commission (“SEC”) informed ussettlement in January 2002 that it had concerns relating to certain accounting matters and that the SEC along with the U.S. Attorney’s Office for the Northern District of California had authorized investigations into such matters. In accordance with the suggestion and advice of the SEC staff, we launched a review of these matters. On April 29, 2002, we announced that the Audit Committee of our Board of Directors had, with assistance from the law firm of Cooley Godward LLP and forensic auditors from the accounting firm of KPMG LLP, concluded its review and determined that it was appropriate to restate our financial statements for the fiscal 2000, 2001 and the first three quarters of fiscal 2002. The Audit Committee has worked and continues to work in cooperation with the SEC. After receiving a Wells notice indicating the SEC staff intended to recommendyear ended January 25, 2004 because we had certainty as to the SEC thatoutcome of certain tax contingencies for which we had established liabilities. However, the failure of the Joint Committee to agree with our settlement may result in a material adverse impact on the results of our operations in the period in which the matter is either resolved or in which an enforcement action be initiated, we reached an agreement in principle with the SEC staff in April 2003 that would resolve the SEC’s investigationunfavorable outcome becomes probable and reasonably estimable. Please refer to Part II, Item 7 "Results of us in matters relatedOperations - Income Taxes" and Note 14 of our Notes to the restatement. The agreement isConsolidated Financial Statements for further information.final approvalchanges in financial accounting standards, which may affect our reported financial results or the way we conduct business.SEC. Understock option is equal to the termsfair market value on the date of the agreement in principle, NVIDIA, without admitting or denying liability or wrongdoing, would agreegrant. If any change to an administrative cease and desist order prohibiting any future violationsU.S. GAAP is adopted that requires us to recognize compensation expense for our employee stock options, our reported results of certain non-fraud financial reporting, books and records, and internal control provisions of the federal securities laws. We would not be required to pay any fines or penalties. The documentation of the agreement and the SEC’s review of the agreement may take several weeks or months to complete. Further, there can be no assurance that the agreement will be approved by the SEC. Notwithstanding the above, actions by the SEC or other governmental or regulatory agencies with respect to us or our personnel arising out of the restatement of our financial statements or other matters may take significant time,operations may be expensive and may divert management’s attention from other business concerns and harm our business.adversely affected.34 ITEM 9. CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone.PART III35 “Election"Election of Directors”Directors" in our 20032004 Proxy Statement, which information is hereby incorporated by reference.“Management”"Management" in Part I of this Annual Report on Form 10-K, which information is hereby incorporated by reference.“Section"Section 16(a) Beneficial Ownership Reporting Compliance”Compliance" in our 20032004 Proxy Statement, which information is hereby incorporated by reference.“Executive Compensation”"Executive Compensation" in our 20032004 Proxy Statement, which information is hereby incorporated by reference.20032004 Proxy Statement under the heading “Security"Security Ownership of Certain Beneficial Owners and Management”Management" and “Equity"Equity Compensation Plan Information,”" which information is hereby incorporated by reference.20032004 Proxy Statement under the heading “Certain"Certain Transactions,”" which information is hereby incorporated by reference.36 ITEM 14. CONTROLS AND PROCEDURESControls and ProceduresOur Chief Executive Officer and our Chief Financial Officer, after evaluating the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c)) as of a date (the “Evaluation Date”) within 90 days before the filing date of this annual report, have concluded that, as of the Evaluation Date, our disclosure controls and procedures were adequate and designed to ensure that material information relating to us and our consolidated subsidiaries would be made known to them by others within those entities.There were no significant changes in our internal controls or, to our knowledge, in other factors that could significantly affect our disclosure controls and procedures subsequent to the Evaluation Date.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 theobjectives 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. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. (a)1.Consolidated Financial Statements Report of KPMG LLP, Independent Auditors1. Consolidated Financial Statements 39 38 40 41 42 42 43 Notes to Consolidated (a)2. Financial StatementsStatement Schedules 442.Financial Statement Schedules66 Schedule II Valuation and Qualifying Accounts693. 3. (b)Reports on Form 8-K None(b)4. Reports on Form 8-K (i) On November 6, 2003, NVIDIA filed ina report on Form 8-K, dated November 6, 2003, furnishing under "Item 12. Disclosure of Results of Operations and Financial Condition" its financial information for the fourth quarter of fiscalthree and nine months ended October 26, 2003. 37 and Stockholders“Company”"Company") as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule as listed in the accompanying index. 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 audits.26, 200325, 2004 and January 27, 200226, 2003 and the results of their operations and their cash flows for each of the years in the three-year period ended January 26, 2003,25, 2004, in conformity with accounting principles generally accepted in the United States of America. 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.13, 200338 inIn thousands, except share and per share data) January 25, January 26, 2004 2003 ASSETS Current assets: Cash and cash equivalents $ 214,422 $ 346,994 Marketable securities 389,621 681,419 Accounts receivable, less allowances of $11,731 and $17,468 in 2004 and 2003, respectively 196,631 154,501 Inventories 234,238 145,046 Prepaid expenses and other current assets 14,539 12,393 Deferred income taxes 3,261 11,249 Total current assets 1,052,712 1,351,602 Property and equipment, net 190,029 135,152 Deposits and other assets 7,731 10,473 Deferred income taxes -- 43,317 Goodwill 108,909 54,227 Intangible assets, net 39,963 22,244 $ 1,399,344 $ 1,617,015 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 185,342 $ 141,129 Accrued liabilities 144,755 228,467 Current portion of note and capital lease obligations 4,015 5,676 Interest payable on convertible debenture -- 4,176 Total current liabilities 334,112 379,448 Deferred income tax liabilities 8,609 -- Capital lease obligations, less current portion 856 4,880 Long-term convertible debenture -- 300,000 Long-term liabilities 4,582 -- Commitments and contingent liabilities – see Note 13 Stockholders’ equity: Common stock, $.001 par value; 1,000,000,000 shares authorized; 164,145,787 and 157,790,022 shares issued and outstanding in 2004 and 2003, respectively 164 158 Additional paid-in capital 583,481 531,030 Deferred compensation (5,468 ) -- Accumulated other comprehensive income, net 850 3,760 Retained earnings 472,158 397,739 Total stockholders' equity 1,051,185 932,687 $ 1,399,344 $ 1,617,015 39 inIn thousands, except per share data) Year Ended Year Ended Year Ended January 25, January 26, January 27, 2004 2003 2002 Revenue $ 1,822,945 $ 1,909,447 $ 1,369,471 Cost of revenue 1,294,067 1,327,271 850,233 Cost of revenue related to stock option exchange (1) -- 6,164 -- Gross profit 528,878 576,012 519,238 Operating expenses: Research and development 269,972 224,873 154,752 Sales, general and administrative 165,249 151,485 98,944 In-process research and development 3,500 -- -- Stock option exchange (1) -- 55,668 -- Amortization of goodwill -- -- 10,093 Acquisition related charges -- -- 10,030 Discontinued use of property -- -- 3,687 Total operating expenses 438,721 432,026 277,506 Income from operations 90,157 143,986 241,732 Interest income 18,561 23,246 27,713 Interest expense (12,010 ) (16,467 ) (16,173 ) Other income (expense), net 3,033 (208 ) (523 ) Convertible debenture redemption expense (13,068 ) -- -- Income before income tax expense 86,673 150,557 252,749 Income tax expense 12,254 59,758 75,825 Net income $ 74,419 $ 90,799 $ 176,924 Basic net income per share $ 0.46 $ 0.59 $ 1.24 Diluted net income per share $ 0.43 $ 0.54 $ 1.03 Shares used in basic per share computation 160,924 153,513 143,015 Shares used in diluted per share computation 172,707 168,393 171,074 (1)The $61,832 stock option exchange expense for the year ended January 26, 2003, relates to personnel associated with cost of revenue (for manufacturing personnel), research and development, and sales, general and administrative of $6,164, $35,417 and $20,251, respectively.40 inIn thousands, except share data) Common Stock Additional Deferred Accumulated Other Total Stock- Total Paid inCapital Compens-ation ComprehensiveIncome Retained Earnings holders’Equity ComprehensiveIncome Balances, January 28, 2001 136,915,234 $137 $276,960 $(6) $-- $130,016 $407,107 Issuance of common stock from stock plans 12,637,896 13 90,830 -- -- -- 90,843 Tax benefit from stock plans -- -- 88,932 -- -- -- 88,932 Amortization of deferred compensation -- -- -- 6 -- -- 6 Issuance cost -- -- (101) -- -- -- (101) Unrealized gain -- -- -- -- 528 -- 528 528 Tax effect of unrealized gain -- -- -- -- (213) -- (213) (213) Cumulative translation adjustments -- -- -- -- (207) -- (207) (207) Net income -- -- -- -- -- 176,924 176,924 176,924 Balances, January 27, 2002 149,553,130 150 456,621 -- 108 306,940 763,819 177,032 Issuance of common stock from stock plans 4,421,823 4 25,483 -- -- -- 25,487 Stock option exchange offer 3,815,069 4 39,902 -- -- -- 39,906 Tax benefit from stock plans -- -- 9,180 -- -- -- 9,180 Deferred compensation -- -- -- (156) -- -- (156) Unrealized gain -- -- -- -- 5,742 -- 5,742 5,742 Tax effect of unrealized gain -- -- -- -- (2,297) -- (2,297) (2,297) Cumulative translation adjustments -- -- -- -- 207 -- 207 207 Net income -- -- -- -- -- 90,799 90,799 90,799 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 related tax effect -- -- -- -- (4,850) -- (4,850) (4,850) Tax effect of unrealized loss 1,940 -- 1,940 1,940 Reclassification adjustment for net gains included in net income -- -- -- -- -- -- -- (3,159) Tax effect of reclassification adjustment for net gains included in net income -- -- -- -- -- -- -- 632 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 $68,982 41 inIn thousands) Year Ended Year Ended Year Ended January 25, January 26, January 27, 2004 2003 2002 Cash flows from operating activities: Net income $ 74,419 $ 90,799 $ 176,924 Adjustments to reconcile net income to net cash provided by operating activities: In-process research and development 3,500 -- -- Depreciation and amortization 82,016 58,216 43,491 Write-off of convertible debenture issuance costs 5,485 -- -- Deferred income taxes 55,135 29,768 (51,914 ) Stock-based compensation -- (156 ) 364 Amortization of deferred compensation 672 -- 6 Issuance of common stock in exchange for stock options -- 39,906 -- Bad debt expense 731 1,917 1,446 Tax benefit from employee stock plans 8,488 9,180 88,932 Changes in operating assets and liabilities: Accounts receivable (41,356 ) (9,070 ) (43,806 ) Inventories (85,126 ) 68,831 (123,497 ) Prepaid income taxes -- 38,016 (38,016 ) Prepaid expenses and other current assets (2,698 ) (4,315 ) 277 Deposits and other assets (3,482 ) 63 (13,957 ) Accounts payable 43,506 (72,890 ) 141,717 Accrued liabilities (44,746 ) 26,564 108,646 Customer advance / deferred revenue (46,866 ) (11,797 ) (129,807 ) Net cash provided by operating activities 49,678 265,032 160,806 Cash flows from investing activities: Purchases of marketable securities (734,642 ) (639,500 ) (472,917 ) Sales and maturities of marketable securities 1,021,590 422,200 15,320 Purchase of certain assets from various businesses -- -- (64,109 ) Acquisition of businesses (71,303 ) (3,901 ) -- Purchases of property and equipment and intangible assets (127,604 ) (63,123 ) (96,966 ) Release of restricted cash -- 7,000 17,500 Net cash provided by (used in) investing activities 88,041 (277,324 ) (601,172 ) Cash flows from financing activities: Redemption of convertible debenture (300,000 ) -- -- Common stock issued under employee stock plans 37,757 25,487 90,476 Sale lease back financing -- 5,734 11,246 Principal payments on capital leases (8,048 ) (4,935 ) (2,455 ) Issuance costs -- -- (176 ) Net cash provided by (used in) financing activities (270,291 ) 26,286 99,091 Change in cash and cash equivalents (132,572 ) 13,994 (341,275 ) Cash and cash equivalents at beginning of period 346,994 333,000 674,275 Cash and cash equivalents at end of period $ 214,422 $ 346,994 $ 333,000 Supplemental disclosures of cash flow information: Cash paid for interest $ 15,167 $ 15,100 $ 14,830 Cash paid (refund) for income taxes, net $ (211 ) $ (35,101 ) $ 26,429 Non-cash financing and investing activities: Assets recorded under capital lease arrangements $ 2,528 $ -- $ -- Unrealized gains/(losses) from marketable securities $ (4,850 ) $ 5,742 $ 528 Deferred stock-based compensation $ 6,140 $ -- $ -- 42 1—1 - Organization and Summary of Significant Accounting PoliciesNVIDIA Corporationsubsidiaries (the “Company”) designs, developsmarket graphics processing units, or GPUs, media and markets 3D graphics andcommunications processors, or MCPs, ultra-low power media communication processors, or UMPs, and related software forthat are integral to a wide variety of visual computing platforms, including enterprise personal computers, or PCs, consumer PCs, professional workstations, notebook PCs, personal digital assistants, cellular phones, game consoles and digital entertainment platforms. The Company operatesmedia centers. We operate in one industry segment in the United States and other Americas, Asia and Europe. InWe were incorporated in California in April 1998, the Company was1993 and reincorporated as ain Delaware corporation.Theaccounting principlesin the United States of America requires management to make estimates and assumptions that affect the recordedreported amounts of assets and liabilities the disclosureand disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from thesethose estimates.The Company considers26, 2003, the Company’s25, 2004, our cash and cash equivalents were $347.0$214.4 million, which consists of $192.8$143.7 million invested in money market funds.In accordance with StatementW e classify our marketable debt securities at the date of Financial Accounting Standards No. 115 (“SFAS No. 115”),Accounting for Certain Investmentsacquisition in Debt and Equity Securities, the Company has classified all marketable securitiesavailable-for-sale category as available-for-sale, as the Company’sour intention is to convert them into cash for operations. SuchThese securities are reported at fair value with the related unrealized gains and losses net of taxes, excluded from earnings and shown separately as a component ofincluded in accumulated other comprehensive income, withina component of stockholders’ equity. Interest earned on marketable securities is included in interest income.equity, net of tax. Realized gains and losses on the sale of marketable securities are determined using the specific-identification method.revenues.43 STATEMENTS—STATEMENTS – (Continued)its financing arrangements,our convertible subordinated debenture, see Note 9, the Company13, we incurred certain direct issuance costs from third parties who performed services that assisted in the closing of the related transaction. These issuance costs arewere included in other assets on theour consolidated balance sheet under "deposits and areother assets" and were amortized on a straight line basis over the term of the financing.The Company accounts for as expense in the period in which they are incurred. Advertising expenses for fiscal 2004, 2003 2002 and 20012002 were approximately $11.3 million, $6.8 million and $4.6 million, and $4.0 million, respectively.the Company’sour Board of Directors approved a two-for-one stock split of the Company’sour common stock for stockholders of record on August 28, 2001, effected in the form of a 100% stock dividend. The transfer agent distributed the shares resulting from the split on September 17, 2001. All share and per-share numbers contained herein reflect this stock split.The Company recognizesThe Company’sFor all 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. 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. The Company recordsThe CompanyOur 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 h istorically 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.recordsinclude marketing development funds, or MDFs, which we also account for in accordance with EITF 01-9. MDFs represent monies paid to retailers, system builders, 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.44 For all However, if product returns for a particular fiscal period exceed historical return rates we may determine that additional sales the Company uses a binding purchase order and, in certain cases, we use a contractual agreement as evidence of an arrangement. The Company considers deliveryreturn allowances are required to occur upon shipment provided title and risk of loss have passed to the customer. At the point of sale, the Company assesses whether the arrangement fee is fixed and determinable and whether collection is reasonably assured. If the Company determines that collection of a fee is not reasonably assured, the Company defers the fee and recognizes revenue at the time collection becomes reasonably assured, which is generally upon receipt of cash.the Companyus to concentrations of credit risk consist primarily of cash equivalents, marketable securities and trade accounts receivable. All marketable securities are held in the Company’sour name, managed by several investment managers and held primarily withby one major financialcustodial institution. Three customers accounted forNVIDIA CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)47%54% of the Company’sour accounts receivable balance at January 26, 2003. The Company performs25, 2004. We perform ongoing credit evaluations of itsour customers’ financial condition and maintainsmaintain 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 excluding theexcludes amounts covered by credit insurance.(“or SFAS No. 144”),144,Accounting for the Impairment or Disposal of Long-Lived Assets,long-lived assets, such as property plant and equipment, and purchased 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 carryingcar rying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by 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 to be disposed of would be separately presented in the consolidated balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and would no longer be depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the consolidated balance sheet.Goodwillintangiblereporting for obligations associated with the retirement of tangible long-lived assets not subjectand the associated asset retirement costs. The standard applies to amortization are tested annually for impairment, and are tested for impairment more frequently if events and circumstances indicatelegal 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 mightretirement obligation be impaired. An impairment lossrecognized in the period in which it is recognizedincurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the extent that the carrying amount exceedsof the asset’s fair value.Priorassociated asset and this additional carrying amount is depreciated over the life of the asset. Under our current operating lease agreements for our headquarters facility, we may be obligated to return a minimal amount of property to its original condition upon lease termination based on the adoption of SFAS No. 144, the Company accounted for long-lived assets in accordance with SFAS No. 121,Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.landlord’s discretion at that time. We believe this obligation, if any, is immaterial.The Company records45 marketable securities, accounts receivable, accounts payable and accrued liabilities approximate their fair values due to their relatively short maturities as of January 26, 200325, 2004 and January 27, 2002. The26, 2003. 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, a component of the Company’s convertible subordinated notes based on quoted market prices asstockholders’ equity, net of January 26, 2003 was $260.2 million.The Company usesitsour functional currency. Foreign currency assets and liabilities are remeasured into U.S. dollars at end-of-period exchange rates, except for inventories, prepaid expenses and other current assets, property, plant and equipment, deposits and other assets and equity, which are remeasured at historical exchange rates. Revenue and expenses are remeasured at average exchange rates in effect during eachNVIDIA CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)“Interest and other"Other income net”(expense), net" and to date have not been significant.the Companywe completed the adoption of Statement of Financial Accounting Standards No. 142, (“or SFAS No. 142”),142,Goodwill and Other Intangible Assets. As required by SFAS No. 142, the Companywe discontinued amortizing the remaining balances of goodwill as of the beginning of fiscal 2003. All remaining and future acquired goodwill will be subject to impairment tests annually, or earlier if indicators of potential impairment exist, using a fair-value-based approach. All other intangible assets will continue to be amortized over their estimated useful lives and assessed for impairment under SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets.In conjunction with the implementation of SFAS No. 142, during the first quarter of fiscal 2003 the Company completed a transitional goodwill impairment test and concluded that no impairment was indicated. Upon adoption of the new business combination rules, acquired workforce no longer met the definition of an identified intangible asset. As a result, the net balance of $1.8 million was reclassified to goodwill in fiscal 2003. The adoption of SFAS No. 142 ceased the amortization of goodwill, which otherwise would have been approximately $13.0 million for the year ended January 26, 2003. the Company haswe have elected to perform itsour annual impairment review during the fourth quarter. The Company hasWe have completed itsour annual goodwill impairment test and concluded that there was no impairment. The effects of the adoption ofHad SFAS No. 142 arebeen adopted in fiscal 2002, our results would have been as follows:
January 26,
2003
January 27,
2002
January 28,
2001 The carrying amount of goodwill is as follows: Year Ended January 27, 2002 Net income $ 176,924 Goodwill and workforce amortization, tax effected $ 7,065 Adjusted net income $ 183,989 Reported basic earnings per share $ 1.24 Reported diluted earnings per share $ 1.03 Adjusted basic earnings per share $ 1.29 Adjusted diluted earnings per share $ 1.08 NVIDIA CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)The components of our amortizable intangible assets are as follows: Amortization expense for the net carrying amount of intangible assets at January 26, 2003 is estimated to be $9.7 million in fiscal 2004, $7.8 million in fiscal 2005, $4.3 million in fiscal 2006, $0.5 million in fiscal 2007 and $14,000 in fiscal 2008.New Accounting PronouncementsIn October 2001, the FASB issued SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supercedes SFAS No. 121 and the accounting and reporting provisions of APB Opinion No. 30 as it relates to the disposal of a segment of a business. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company adopted SFAS No. 144 effective fiscal 2003. The adoption of SFAS 144 has not had an impact on the Company’s consolidated financial position or results of operations.In June 2002, the FASB issued Statement of Financial Account Standards No. 146 (“SFAS No. 146”),Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 requires that the liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. Adopting SFAS 146 did not have a material effect on the Company’s financial position or results of operations.In November 2002, the FASB issued Interpretation No. 45 (“FIN 45”),Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 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 rollforward of the entity’s product warranty liabilities. FIN 45 is effective on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company adopted FIN 45 effective fiscal 2003.NVIDIA CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)The Company records a reduction to revenue for estimated product returns and warranty obligations at the time revenue is recognized based on historical return rates. In connection with certain agreements that the Company has executed in the past, the Company has at times provided indemnities to cover the indemnified party for matters such as tax, product and employee liabilities. The Company has also on occasion included intellectual property indemnification provisions in the terms of its 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. The Company has not recorded any liability in its consolidated financial statements for such indemnifications.In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, (“or SFAS No. 148”),148,Accounting for Stock-Based Compensation – Transition and Disclosure.Disclosure, amends the disclosure requirements of Statement of Financial Accounting Standards No. 123, or SFAS No. 148 provides alternative methods of transition123,Accounting for a voluntary change Stock-Based Compensation,to require more prominent disclosures in both annual and interim financial statements regarding the fair value based methodmet hod of accounting for stock-based employee compensation. SFAS No. 148 also requires that disclosurescompensation and the effect of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. Additionally, SFAS No. 148 requires disclosure of the pro forma effect in interim financial statements. The transition and annual disclosure requirements of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. The Company adopted SFAS No. 148 effective fiscal 2003.used on reported results.46 Stock-Based CompensationThe Company usesWe use the intrinsic value method, as prescribed by Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees,to account for itsour stock-based employee compensation plans. Deferred compensation arising from stock-based awards is amortized in accordance with Financial Accounting Standards Board Interpretation No. 28, which generally accelerates the compensation expense as compared to the straight-line method. 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.NVIDIA CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)As permitted under Statement of Financial Accounting Standards No. 123 (“SFAS No.123”),Accounting for Stock-Based Compensation,the Company has elected to follow Accounting Principles Board Opinion No. 25 and related Interpretations in accounting for stock-based awards to employees. Compensation cost for the Company’sour stock-based compensation plans as determined consistent with SFAS No. 123, would have decreased net income to the pro forma amounts indicated below: Year Ended Year Ended Year Ended January 25, January 26, January 27, 2004 2003 2002 (In thousands, except per share data) Net income, as reported $ 74,419 $ 90,799 $ 176,924 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects 537 -- -- Add: Stock option exchange expense included in reported net income, net of related tax effects -- 37,285 -- Deduct: Compensation expense determined under fair value based method for stock options exchanged on October 25, 2002, net of related tax effects -- (167,714 ) -- Deduct: Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (74,513 ) (37,698 ) (89,274 ) Pro forma net income (loss) $ 443 $ (77,328 ) $ 87,650 Basic net income per share – as reported $ 0.46 $ 0.59 $ 1.24 Basic net income (loss) per share – pro forma $ 0.00 $ (0.50 ) $ 0.61 Diluted net income per share – as reported $ 0.43 $ 0.54 $ 1.03 Diluted net income (loss) per share – pro forma $ 0.00 $ (0.50 ) $ 0.51 Year Ended Year Ended Year Ended January 25, January 26, January 27, 2004 2003 2002 Weighted average expected life of stock options (in years) 4 4 4 Risk free interest rate 2.4% 3.8% 4.3% Volatility 80% 88% 83% Dividend yield -- -- -- the Company’sour Employee Stock Purchase Plan, (the “Purchase Plan”)or the Purchase Plan, has been estimated at the date of purchase using the Black-Scholes option pricing model with the following assumptions: Year Ended Year Ended Year Ended January 25, January 26, January 27, 2004 2003 2002 Weighted average expected life of stock options (in months) 9 10 6 Risk free interest rate 1.7% 3.7% 4.7% Volatility 80% 88% 83% Dividend yield -- -- -- 47 and January 28, 2001 was approximately $3.76, $14.27 and $8.79, and $7.04, respectively.NVIDIA CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)For the purpose of the pro forma calculation, the fair value of options granted under the Company’s stock option plans has been estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions: For the purpose of the pro forma calculation, the weighted-average per share fair value of options granted during the years ended January 26, 2003, January 27, 2002 and January 28, 2001 was approximately $28.09, $23.94 and $13.02, respectively.presented. NVIDIA CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Year Ended Year Ended Year Ended January 25, January 26, January 27, 2004 2003 2002 (In thousands, except per share data) Numerator: Numerator for basic and diluted net income per share $ 74,419 $ 90,799 $ 176,924 Denominator: Denominator for basic net income per share, weighted average shares 160,924 153,513 143,015 Effect of dilutive securities: Stock options outstanding 11,783 14,880 28,059 Denominator for diluted net income per share, weighted average shares 172,707 168,393 171,074 Net income per share: Basic net income per share $ 0.46 $ 0.59 $ 1.24 Diluted net income per share $ 0.43 $ 0.54 $ 1.03
2003
2002 Year Ended Year Ended Year Ended (In thousands) Stock options outstanding 7,906 5,892 2,504 Convertible subordinated debentures (equivalent common shares upon assumed conversion) -- 6,472 6,472 7,906 12,364 8,976 $54.62 and $30.41$54.62 for the years ended January 25, 2004, January 26, 2003 and January 27, 2002, and January 28, 2001, respectively. The convertible subordinated debentures arewere convertible into shares of common stock at a conversion price of $46.36 per share and were anti-dilutive for allthe years ended January 26, 2003 and January 27, 2002. The convertible subordinated debentures were no longer outstanding as of January 25, 2004 due to the redemption on October 24, 2003.48 shown.2—6.49 Fair Market Value (In thousands) Accounts receivable $ 1,505 -- Inventories 4,066 -- Other assets 612 -- Property and equipment 1,460 9 months – 3 years Deferred income tax assets 1,601 -- In-process research and development 3,500 -- Goodwill 53,695 -- Intangible assets: Existing technology 13,100 1 – 3 years Customer relationships 2,100 18 months Backlog 600 3 months Non-compete agreement 150 18 months Total assets acquired 82,389 Current liabilities (2,115 ) -- Current liabilities recognized in connection with the business combination (2,591 ) -- Long-term deferred income tax liabilities (6,380 ) -- Total liabilities assumed (11,086 ) Net assets acquired $ 71,303 the Companywe completed the purchase of certain assets from various businesses, including 3dfx Interactive, Inc. (“3dfx”), or 3dfx, and other asset purchases, for an aggregate purchase price of approximately $79.1 million. These purchases have been accounted for under the purchase method of accounting. Excluding the 3dfx transaction, the aggregate purchase price for all other purchases is immaterial to theour consolidated financial statements of the Company.Onstatements.50 2001, the Company completed the2001. The 3dfx asset purchase of certain assets of 3dfx, including patents and patent applications.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 provides,provided, subject to the other provisions thereof, that if 3dfx certifies to the Company’s satisfactionproperly certified that all its debts and other liabilities havehad been provided for, then the Company iswe would have been obligated to pay 3dfx two million shares of NVIDIA common stock. If 3dfx cannotcould not make such a certification, but instead certifies to the Company’s satisfactionproperly certified that its debts and liabilities cancould be satisfied for less than $25.0 million, then 3dfx can electcould have elected to receive a cash payment equal to the amount of such debts and liabilities and receive a reduced number of shares of NVIDIAour common stock, with such reduction calculated by dividing the cash payment by $25.00 per share. If 3dfx cannotcould not certify that all of its debts and liabilities havehad been provided for, or cancould not be satisfied, for less than $25.0 million, NVIDIA iswe would not be obligated under the agreement to pay any additional consideration for the assets. On October 15, 2002, 3dfx filed for Chapter 11 bankruptcy protection. The Company believes that the bankruptcy filing by 3dfx will allow a determinationWe are currently party to litigation relating to certain aspects of the full numberasset purchase and scope of 3dfx’s debts and liabilities. NVIDIA may be obligated under the Asset Purchase Agreementsubsequent bankruptcy in October 2002. Please refer to pay 3dfx the contingent consideration following this determination, subject to offsets for NVIDIA’s claims against 3dfx arising from the Asset Purchase Agreement. On March 12, 2003, the Company was served with a complaint by the Trustee for 3dfx seeking, among other things, additional payment for the purchased assets and the assumption by the Company of 3dfx’s liabilities. In addition, Carlyle Fortran Trust and CarrAmerica, former landlords of 3dfx, have filed suits against the Company seeking paymentNote 13 of the rents due by 3dfx.As of January 26, 2003,Notes to the Consolidated Financial Statements for further information regarding this litigation.NVIDIA CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)the new accounting rules. Straight-Line Amortization Period (In thousands) (Years) Property and equipment $ 2,433 1-2 Trademarks 11,310 5 Goodwill 60,418 -- Total $ 74,161 3—4 – Goodwill January 25, 2004 January 26, 2003 (In thousands) 3dfx $ 50,326 $ 50,326 MediaQ 53,695 -- Other 4,888 3,901 Total goodwill $ 108,909 $ 54,227 51 January 25, 2004 January 26, 2003 Gross CarryingAmount AccumulatedAmortization Net CarryingAmount Gross CarryingAmount Net CarryingAmount (In thousands) Technology licenses $ 15,178 $ (7,161 ) $ 8,017 $ 7,028 $ (3,972 ) $ 3,056 Patents 19,319 (8,992 ) 10,327 10,319 (4,478 ) 5,841 Acquired intellectual property 27,067 (10,590 ) 16,477 11,117 (5,236 ) 5,881 Trademarks 11,310 (6,283 ) 5,027 11,310 (4,021 ) 7,289 Other 250 (135 ) 115 250 (73 ) 177 Total intangible assets $ 73,124 $ (33,161 ) $ 39,963 $ 40,024 $ (17,780 ) $ 22,244 The Company accountsWe account for itsour 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 Company’sour cash equivalents and marketable securities are treated as “available-for-sale”"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 of highly liquid investments with a maturity of greater than three months when purchased. The Company classifies itsW e classify our marketable debt securities at the date of acquisition in the available-for-sale category as the Company’sour intention is to convert them into cash for operations. These securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income, a component of stockholders’ equity, net of tax. Realized gains and losses on the sale of marketable securities are determined using the specific-identification method. Net realized gains for fiscal 2004, fiscal 2003 and fiscal 2002 were $576,000$2.9 million, $0.3 million and $168,000,$0.2 million, respectively.26, 200325, 2004 and at January 27, 2002: January 25, 2004 Amortized Cost Unrealized Gain Unrealized (Loss) (1) Estimated Fair Value (In thousands) Asset-backed securities $ 65,147 $ 214 $ (127 ) $ 65,234 Commercial paper 15,592 -- -- 15,592 Obligations of the U.S. government & its agencies 198,084 574 (111 ) 198,547 U.S. corporate notes, bonds, and obligations 175,678 957 (90 ) 176,545 Money market 143,661 -- -- 143,661 Total $ 598,162 $ 1,745 $ (328 ) $ 599,579 Classified as: Cash equivalents $ 209,958 Marketable securities 389,621 Total $ 599,579 52 STATEMENTS—STATEMENTS – (Continued)(1) January 26, 2003 Amortized Cost Unrealized Gain Unrealized (Loss) Estimated Fair Value (In thousands) Asset-backed securities $ 92,286 $ 535 $ (635 ) $ 92,186 Commercial paper 109,465 -- -- 109,465 Obligations of the U.S. government & its agencies 359,003 2,847 (11 ) 361,839 U.S. corporate notes, bonds, and obligations 262,914 3,551 (21 ) 266,444 Money market 192,754 -- -- 192,754 Total $ 1,016,422 $ 6,933 $ (667 ) $ 1,022,688 Classified as: Cash equivalents $ 341,269 Marketable securities 681,419 Total $ 1,022,688 26, 200325, 2004 and at January 27, 200226, 2003 by expected maturity are shown below. January 25, 2004 January 26, 2003 AmortizedCost EstimatedFair Value AmortizedCost EstimatedFair Value (In thousands) Less than one year $ 282,762 $ 283,123 $ 592,025 $ 593,714 Due in 1 – 5 years 315,400 316,456 424,397 428,974 Total $ 598,162 $ 599,579 $ 1,016,422 $ 1,022,688 4—Discontinued Use of PropertyThe Company moved into its new headquarters in June 2001 and was still obligated to pay rent for a portion of its previous office space. Since relocating, the Company has been unable to secure a subtenant for its previous office space due to the decrease in demand for commercial rental space as a result of the declining economy. The Company recorded a loss of approximately $3.7 million during fiscal 2002 for the remaining costs related to the preexisting lease, including rental payments, capitalized leasehold improvements, and furniture and fixtures, as the leased property or improvements have no substantive future use or benefit. In December 2001, we filed a complaint against Extreme Networks Inc., the sublessor of the property, seeking payment of lease payments and other property charges for the period of July 2001 through December 2001 and seeking a declaration that the Company is not liable for any future payments under the lease. No trial date has been set and there is no assurance that the Company will be successful in this matter.Note 5—7 - Balance Sheet Components NVIDIA CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) January 25, January 26, 2004 2003 Inventories: (In thousands) Raw materials $ 22,131 $ 17,510 Work in-process 44,523 13,179 Finished goods 167,584 114,357 Total inventories $ 234,238 $ 145,046 26, 2003, the Company25, 2004, we had outstanding inventory purchase obligations totaling $210.3$213.3 million. 53 January 25, January 26, 2004 2003 (In thousands) Software $ 116,150 $ 48,006 Test equipment 73,287 49,961 Computer equipment 70,173 54,479 Leasehold improvements 58,649 54,416 Construction in process 1,620 4,862 Office furniture and equipment 17,996 17,359 337,875 229,083 Accumulated depreciation and amortization (147,846 ) (93,931 ) Property and equipment, net $ 190,029 $ 135,152 and 2001 was $59.3 million, $42.6 million $24.3 million and $9.6$24.3 million, respectively. Assets recorded under capital leases included in property and equipment were $17.1$19.5 million and $12.5$17.1 million as of January 26, 200325, 2004 and January 27, 2002,26, 2003, respectively. Related accumulated amortization was $8.7$14.0 million and $4.2$8.7 million as of January 25, 2004 and January 26, 2003, respectively. January 25, January 26, 2004 2003 (In thousands) Accrued customer programs $ 54,875 $ 50,018 Customer advances 11,530 58,396 Taxes payable 29,609 82,952 Accrued payroll and related expenses 30,270 20,575 Deferred rent 8,151 5,050 Other 10,320 11,476 Total accrued liabilities $ 144,755 $ 228,467 January 27, 2002, respectively. Note 6—Stockholders’ EquityCommon Stock OfferingIn October 2000,requires that upon issuance of a guarantee, the Company sold an additional 2,800,000 shares of its common stock toguarantor must recognize a liability for the public for net proceeds of approximately $96.7 million, after deducting underwriting discounts, commissions and expensesfair value of the offering.Description Balance at Beginning of Period Additions (1) Deductions (2) Balance at End of Period (In thousands) Year ended January 25, 2004 Allowance for sales returns $ 13,228 $ 23,796 $ (27,603 ) $ 9,421 Year ended January 26, 2003 Allowance for sales returns $ 15,586 $ 20,147 $ (22,505 ) $ 13,228 Year ended January 27, 2002 Allowance for sales returns $ 7,092 $ 17,171 $ (8,677 ) $ 15,586 54 26, 2003,25, 2004, there arewere no shares of preferred stock outstanding and the Company haswe have no current plans to issue any of the authorized preferred stock.the Company’sour Board of Directors approved the 2000 Nonstatutory Equity Incentive Plan, (the “2000 Plan”)or the 2000 Plan, to provide for the issuance of the Company’sour common stock to employees and affiliatesNVIDIA CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)OptionsOption grants issued under the 2000 plan generally expire in six to 10 years. The Compensation Committee appointed by the Board of Directors has the authority to amend the 2000 Plan and to determine the option term, exercise price and vesting period of each grant. OptionsInitial option grants 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 generally vest quarterly over a four-year period. AThere were a total of 21,939,202 shares were authorized for issuance under the 2000 Plan. There were 10,720,060and 10,309,447 shares available for future issuance under the 2000 Plan as of January 26, 2003.(the “1998 Plan”)or the 1998 Plan, was adopted by the Company’sour Board of Directors on February 17, 1998 and was approved by the Company’sour stockholders on April 6, 1998 as an amendment and restatement of the Company’sour then existing Equity Incentive Plan which had been adopted on May 21, 1993. The 1998 Plan provides for the issuance of the Company’sour common stock to directors, employees and consultants. The 1998 Plan provides for the issuance of stock bonuses, restricted stock purchase rights, incentive stock options or nonstatutory stock options. On the last day of each fiscal year, starting with the year ending January 31, 1999, the aggregate number of shares of common stock that are available for issuance are automatically increased by a number of shares equal to five percent (5%) of the Company’sour outstanding common stocksto ck on 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. There arewere a total of 101,298,229110,094,385 shares authorized for issuance and 21,265,51918,647,584 shares are available for future issuance under the 1998 Plan as of January 26, 2003.Optionsinitial options granted1998 Plan 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 generally vest quarterly over a four year period. Options granted prior to December 1997 could be exercised prior to full vesting. Any unvested shares so purchased were subject to a repurchase right in favor of the Company at a repurchase price per share that was equal to the original per share purchase price. The right to repurchase at the original price would lapse at the rate of 25% per year over the four-year period from the date of grant. As of January 26, 2003, there were no shares subject to repurchase.55 the Company’sour Board of Directors adopted the 1998 Non-Employee Directors’ Stock Option Plan, (the “Directors Plan”)or the Directors Plan, to provide for the automatic grant of non-qualified options to purchase shares of the Company’sour common stock to directors of the Companyus who are not employees or consultants of the Companyus or of an affiliate of the Company.us. The Directors Plan was amended on May 22, 2002.the Company’sour 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”).Grant. Previously, such a director was entitled to a grant of 200,000 shares, vesting monthly over a four-year period.NVIDIA CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)(“or 2002 Grants”).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.(“or Annual Grant”).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.(“or Committee Grant”).Grant. The Committee Grants vest 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.grantedg ranted 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.26, 2003.25, 2004. In July 2000, the Company’sour Board of Directors amended the 1998 Plan to incorporate the automatic grant provisions of the amended Directors Plan. Future grants to non-employee directors will be made out of the 1998 Plan until such time as shares may become available under the amended Directors Plan.56 the Company’sour Board of Directors approved the 1998 Employee Stock Purchase Plan, (the “Purchase Plan”).or the Purchase Plan. In June 1999, the planPurchase Plan was amended to increase the number of shares reserved for issuance automatically each year at the end of the Company’sour 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 of the Companyus 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 shares. There are a total of 15,681,35219,199,814 shares authorized for issuance. At January 26, 2003, 2,104,67025, 2004, 3,760,932 shares have been issued under the Purchase Plan and 13,576,68215,438,882 shares are available for future issuance.NVIDIA CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)“employee"employee stock purchase plan”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.the Companyus or an affiliate of the Companyus designated by the Board. Employees who participate in an offering may have up to 10% of their earnings withheld pursuant to the Purchase Plan 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 orand the purchase date of each offering period at 85% at the fair market value of the common stock on the relevant purchase date. Employees may end their participation in the offering at any time during the offering period, anda nd participation ends automatically on termination of employment with the Companyus and in each case their contributions are refunded.
Available for Grant
Price Per Share OptionsOutstanding Weighted Average Price PerShare Balances, January 28, 2001 13,080,404 50,549,356 $10.30 Authorized 9,954,182 -- -- Granted (15,159,700) 15,154,700 38.14 Exercised -- (12,282,958) 6.87 Cancelled 1,541,369 (1,541,369) 13.90 Balances, January 27, 2002 9,416,255 51,879,729 19.14 Authorized 13,957,063 -- -- Granted (8,522,650) 8,522,650 28.09 Shares of common stock issued in exchange for stock options (3,815,069) -- -- Exercised -- (3,816,695) 4.62 Cancelled - unvested (1) 18,067,604 (18,067,604) 36.53 Cancelled – vested (2) 2,882,376 (2,882,376) 32.51 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 (1)57 Includes 16,193,886 unvested stock options cancelled in exchange for shares of common stock.(2)Includes 2,649,607 vested stock options cancelled in exchange for shares of common stock.STATEMENTS—STATEMENTS – (Continued)26, 2003: Options Outstanding Options Exercisable Range of Exercise Prices NumberOutstanding Weighted Average ExercisePrice NumberExercisable Weighted Average ExercisePrice $0.09 - $0.09 12,000 2.6 $0.09 12,000 $0.09 0.33 – 0.33 166,900 3.6 $0.33 166,900 $0.33 0.66 – 0.79 571,360 3.9 $0.75 571,360 $0.75 1.04 – 1.38 357,291 4.0 $1.31 357,291 $1.31 1.58 – 2.25 4,915,622 4.4 $1.78 4,914,122 $1.78 4 .09 – 5.88 4,644,781 5.6 $4.80 4,185,698 $4.77 7.65 – 11.07 4,744,990 7.0 $9.41 2,431,695 $9.45 11.51 – 17.18 14,880,723 6.1 $14.52 4,265,731 $15.18 17.53 – 26.25 7,838,336 6.7 $20.12 4,130,320 $19.79 26.38 – 39.54 4,003,202 7.1 $32.36 2,392,121 $30.83 42.98 – 53.61 631,000 7.6 $43.36 614,562 $43.17 65.47 – 65.47 500 8.0 $65.47 218 $65.47 $0.09 - $65.47 42,766,705 6.1 $14.20 24,042,018 $12.46 7—10 – Retirement PlanThe Company has(the “Plan”)or the Plan, covering substantially all of itsour United States employees. Under the Plan, participating employees may defer up to 100 percent of their pre-tax earnings, subject to the Internal Revenue Service annual contribution limits.8—11 – Stock Option Exchangethe Companywe commenced an offer, (the “Offer”)or the Offer, to itsour employees to exchange outstanding stock options with exercise prices equal to or greater than $27.00 per share, (“or Eligible Options”).Options. Stock options to purchase an aggregate of approximately 20,615,000 shares were eligible for tender at the commencement of the Offer, representing approximately 39% of the Company’sour outstanding stock options as of the commencement date. Only employees of NVIDIA or one of itsour subsidiaries as of September 26, 2002 who continued to be employees through the Offer termination date of October 24, 2002 were eligible to participate in the Offer. Employees who were on medical, maternity, worker’s compensation, military or other statutorily protected leave of absence, or a personal leave of absence, were also eligible to participate in the Offer. Employees who were terminated on or before the Offer termination date of October 24, 2002, were not eligible to participate in the Offer. In addition, the Company’sour Chief Executive Officer and Chief Financial Officer and members of the Company’sour Board of Directors were not eligible to participate in this Offer.andless applicable withholding taxes, equal to the number of shares underlying such Eligible Options, multiplied by $3.20, less the amount of applicable tax withholdings, divided by $10.46, the closing price of the Company’sour common stock as reported on the Nasdaq National Market on October 24, 2002. The CompanyWe concluded that the consideration paid for the Eligible Options represented “substantial consideration”"substantial consideration" as required by Issue 39(f) of EITF Issue No. 00-23 “Issues"Issues Relating to Accounting for Stock Compensation Under APB Opinion No. 25 and FASB Interpretation No. 44,”" as the $3.20 per Eligible Option was at least the fair value for each EligibleNVIDIA CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)the Companywe used the following assumptions: (i) the expected remaining life was deemed to be the remaining term of the options, which was approximately 7.8 years; (ii) a volatility of 50.0% during the expected life; (iii) a risk-free interest rate of 3.71%; and (iv) no dividends. The amount of $3.20 per Eligible Option was established at the commencement of the offer period and remained unchanged throughout the offer period.58 the Company’sour common stock offered as consideration for the surrendered options were fully vested and non-forfeitable; and (ii) the number of shares to be received by an employee who accepted the Offer was based on the number of surrendered Eligible Options multiplied by $3.20, divided by the fair value of the stock at the date of exchange. The CompanyWe further concluded that the “look back”"look back" and “look forward”"look forward" provisions of FASB Interpretation No. 44, paragraph 45 did apply to the stock options surrendered for cancellation. Based on the terms of the Offer, variable accounting is not required for any of the Company’sour outstanding stockstoc k options existing at the time of the Offer. The Company doesWe do not intend to grant stock options to any participants in the Offer for at least six months following October 24, 2002. If any stock options arewere granted to participants in the Offer within the six months following October 24, 2002, those stock options will receivewould have received variable accounting.the Company waswe were obligated to exchange approximately 18,843,000 Eligible Options for total consideration of $61,832,000,$61.8 million, consisting of $39,906,000$39.9 million in fully vested, non-forfeitable shares of the Company’sour common stock (approximately 3,815,000 shares) and $21,926,000$21.9 million in employer and employee related taxes. The number of fully vested, non-forfeitable shares of the Company’sour common stock to be issued was determined by dividing the total consideration due (less the amount of applicable tax withholdings) by the closing price of the Company’sour common stock on October 24, 2002, of $10.46 per share.the Company’sour common stock issued in exchange for Eligible Options were fully vested. However, a portion of the shares equal to 25% of the total consideration, based on the closing price of the Company’sour common stock on the offer termination date, have a six month holding period, and a portion of the shares equal to 25% of such total consideration have a one year holding period. Withholding taxes and other charges were deducted from the remaining 50% of the total consideration, and the shares issued after such withholding dodid not have a holding restriction.9—12 - Discontinued Use of PropertyNotesthe Companywe sold $300$300.0 million of 4¾% convertible subordinated notes (the “Notes”)debentures, or the Notes, due October 15, 2007.2007 in a public offering. Proceeds net of issuance costsfrom the offering were approximately $290.8 million.million after deducting underwriting discounts, commissions and offering expenses. Issuance costs are beingrelated to the offering totaled $9.2 million and were amortized to interest expense on a straight-line basis, which approximates the interest rate method over the term of the notes.Notes. Interest on the Notes accruesaccrued at the rate of 4¾% per annum and iswas 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, 2003 and 2002 and 2001 was $14.2$10.4 million, $14.2 million and $4.3$14.2 million, respectively. The Notes arewere redeemable at the Company’sour option on or aftera fter October 20, 2003. The Notes are2003 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. In the event of a fundamental change, as defined in the Notes indenture, each holder of the Notes has the right, subject to certain conditions and restrictions, to require the Company to repurchase the Notes, in whole or in part, at a59 STATEMENTS—STATEMENTS – (Continued)repurchase price of 100%repurchaseredemption date. In connection with its debt financing arrangement, the Company incurred certain direct, incremental costs from third parties who performed services that assisted in the closingredemption of the related transactions. These costs totaling $9.2Notes, we recorded a charge in our consolidated income statement of approximately $13.1 million, arewhich included in depositsa $7.6 million redemption premium and other assets$5.5 million of unamortized issuance costs.the Company’s consolidated balance sheet and are amortized using the straight line method over the term of the financing.Lease ObligationsIn April 2000, the Company entered into leases for its new headquarters complexa leased site in Santa Clara, California.California and is comprised of five buildings. The first phase of two buildings was completed in June 2001, the second phase of one building was completed in July 2001 and the last phase consisting of one building was completed in February 2002. Therelated leases expire in 2012 and each includes two seven-year renewals at the Company’sour option. Future minimum lease payments under these operating leases total approximately $205.5$193.8 million over the remaining terms of the leases and are included in the future minimum lease payment schedule below.the newour headquarters, the Company haswe have other office facilities under operating leases expiring through 2016.fiscal 2013. Future minimum lease payments under the Company’sour noncancelable capital and operating leases as of January 26, 2003,25, 2004, are as follows: Year ending January: Operating Capital (In thousands) 2005 $ 24,635 $ 4,179 2006 24,887 868 2007 25,063 -- 2008 25,500 -- 2009 25,125 -- 2010 and thereafter 81,032 -- Total $ 206,242 5,047 Less amount representing interest at rates ranging from 5% - 10% (176 ) Present value of minimum lease payments 4,871 Less current portion 4,015 Long term portion $ 856 January 25, January 26, 2004 2003 (In thousands) Computer equipment $ 4,331 $ 4,347 Test equipment 9,309 6,895 Office equipment and furniture 5,232 5,261 Software and other 634 634 19,506 17,137 Accumulated amortization (14,016 ) (8,683 ) Leased property and equipment, net $ 5,490 $ 8,454 60 STATEMENTS—STATEMENTS – (Continued)Rent expense for the years ended January 26, 2003, January 27,and January 28, 2001 was approximately $25.6 million, $13.8 million and $3.1 million, respectively.LitigationOn February 19, 2002 an NVIDIA stockholder, Dominic Castaldo, on behalf of himself and purportedly on behalf ofwe were served with a class of Company stockholders,complaint filed an action in the United States District Court for the Northern District of California (the “Northern District”) against the Company and certain current and former officers of the Company, alleging violations of the federal securities laws arising out of the Company’s announcement on February 14, 2002 of an internal investigation of certain accounting matters. Approximately 13 similar actions were filed in the Northern District, one additional individual action was filed in the Southern District (together, the “Federal Class Actions”), along with three related derivative actions against the Company, certain of its current and former executive officers, directors and its independent auditors, KPMG LLP, in California Superior Court and in Delaware Chancery Court (collectively the “Actions”). The two related derivative actions filed in California Superior Court have been consolidated and are currently stayed pursuant to a voluntary stipulation agreement. The Actions allege claims in connection with various alleged statements and omissions to the public and to the securities markets and seek damages together with interest and reimbursement of costs and expenses of the litigation. The derivative actions also seek disgorgement of alleged profits from insider trading by officers and directors. The Actions are in the preliminary stages. The Federal Class Actions have been consolidated and lead plaintiffs appointed. Plaintiffs filed a consolidated amended complaint and, in response, NVIDIA filed a motion to dismiss. On March 28, 2003 the court granted NVIDIA’s motion and dismissed the consolidated amended complaint as to all claims and defendants with leave to amend. Plaintiffs must file their second consolidated amended complaint by May 12, 2003. NVIDIA has also filed a motion to dismiss the derivative action filed in Delaware. A hearing on this motion was held April 23, 2003 and a ruling is expected within the next month. The Company is obligated to indemnify its officers and directors in connection with the Actions to the extent permitted by the law, and has insurance for such individuals, to the extentlandlord of the limits of the applicable insurance policies and subject to potential reservations of rights. The Company intends to vigorously defend these Actions. The Company is unable, however, to predict the ultimate outcome of the Actions. There can be no assurance the Company will be successful in defending the Actions, and if the Company is unsuccessful the Company may be subject to significant damages. Even if the Company is successful, defending the Actions is likely to be expensive and may divert management’s attention from other business concerns and harm the Company’s business.The staff of the Enforcement Division of the Securities & Exchange Commission (“SEC”) informed the Company in January 2002 that it had concerns relating to certain accounting matters and that the SEC along with the U.S. Attorney’s Office for the Northern District of3dfx’s San Jose, California had authorized investigations into such matters.commercial real estate lease. In accordance with the suggestion and advice of the SEC staff, the Company launched a review of these matters. On April 29, 2002, the Company announced that the Audit Committee of its Board of Directors had, with assistance from the law firm of Cooley Godward LLP and forensic auditors from the accounting firm of KPMG LLP, concluded its review and determined that it was appropriate to restate the Company’s financial statements for fiscal 2000, 2001 and the first three quarters of fiscal 2002. The Audit Committee has worked and continues to work in cooperation with the SEC. See Note 14 for recent developments regarding this matter.On April 18, 2001, the Company completed the purchase of certain assets of 3dfx, including patents and patent applications. 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 provides, subject to the other provisions thereof, that if 3dfx certifies to the Company’s satisfaction that all its debts and other liabilities have been provided for, then theNVIDIA CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Company is obligated to pay 3dfx two million shares of NVIDIA common stock. If 3dfx cannot make such certification, but instead certifies to the Company’s satisfaction that its debts and liabilities can be satisfied for less than $25.0 million, then 3dfx can elect to receive a cash payment equal to the amount of such debts and liabilities and receive a reduced number of shares of NVIDIA common stock, with such reduction calculated by dividing the cash payment by $25.00 per share. If 3dfx cannot certify that all of its debts and liabilities have been provided for, or can be satisfied for less than $25.0 million, NVIDIA is not obligated under the agreement to pay any additional consideration for the assets. On October 15, 2002, 3dfx filed for Chapter 11 bankruptcy protection. The Company believes thatprotection in the bankruptcy filing by 3dfx will allow a determinationUnited States Bankruptcy Court for the Northern District of the full number and scope of 3dfx’s debts and liabilities. NVIDIA may be obligated under the Asset Purchase Agreement to pay 3dfx the contingent consideration following this determination, subject to offsets for NVIDIA’s claims against 3dfx arising from the Asset Purchase Agreement. On March 12, 2003, the Company wasCalifornia. In December 2002, we were served with a complaint filed by the landlord of 3dfx’s Austin, Texas commercial real estate lease. The landlords’ complaints both assert claims for, among other things, interference with contract, successor liability and fraudulent transfer. The landlords’ are seeking to recover, among other things, amounts owed on their leases in the aggregate amount of approximately $10 million. In March 2003, we were served with a complaint filed by the Trustee forappointed by the Bankruptcy Court to represent the interests of the 3dfx seeking,bankruptcy estate. The Trustee’s complaint asserts claims for, among other things, successor liability and fraudulent transfer. The Trustee’s complaint seeks additional paymentpayments from us, the amount of which has not been quantified. The landlords’ actions have been removed to the Bankruptcy Court from the Superior Court of California and consolidated with the Trustee’s action for purposes of discovery. Discovery is currently proceeding and no trial date has been set. We believe the purchased assetsclaims asserted against us are without merit and the assumption by the Company of 3dfx’s liabilities. In addition, Carlyle Fortran Trust and CarrAmerica, former landlords of 3dfx, have filed suits against the Company seeking payment of the rents due by 3dfx.The Company was engaged with Microsoft in discussions relatedwe will continue to pricing and volumes of the Xbox chipset. These discussions and the Company’s agreement contemplated use of a third party to resolve matters and on April 23, 2002 Microsoft submitted the matter to binding arbitration. On February 6, 2003, the Company and Microsoft announced that the companies had settled all issues related to pricing of the Microsoft Xbox GPU and MCP chipset and have ended the arbitration between them. In addition to resolving this pricing dispute, the Company has agreed to collaborate with Microsoft on future cost reductions for the Xbox.The Company isdefend ourselves vigorously.doeswe do not believe that the ultimate outcome of any of these proceedings will have a material adverse effect on itsour 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.NVIDIA CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)10—14 – Income Taxes Year Ended Year Ended Year Ended January 25, January 26, January 27, 2003 (In thousands) Current: Federal $ -- $ -- $ -- State 221 135 134 Foreign (51,590 ) 20,555 38,673 Total current (51,369 ) 20,690 38,807 Deferred: Federal 19,861 20,569 (43,738 ) State 35,274 9,319 (8,176 ) Foreign -- -- -- Total deferred 55,135 29,888 (51,914 ) Charge in lieu of taxes attributable to employer stock option plans 8,488 9,180 88,932 Provision for income taxes $ 12,254 $ 59,758 $ 75,825 61 consistconsists of the following: Year Ended Year Ended Year Ended January 25, January 26, January 27, (In thousands) Domestic $ (17,816 ) $ 20,764 $ 39,613 Foreign 104,489 129,793 213,136 $ 86,673 $ 150,557 $ 252,749 Year Ended Year Ended Year Ended January 25, January 26, January 27, (In thousands) Tax expense computed at Federal Statutory Rate $ 30,336 $ 52,695 $ 88,462 State income taxes (benefit), net of federal tax effect 544 (4,241 ) (531 ) Foreign tax rate differential (11,671 ) 23,222 (7,489 ) Research and experimental credit (5,230 ) (12,048 ) (4,736 ) In-process research and development 1,225 -- -- Change in estimates (36,766 ) -- -- Increase in beginning of year valuation allowance 33,599 -- -- Other 217 130 119 Provision for income taxes $ 12,254 $ 59,758 $ 75,825 NVIDIA CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) For the fiscal year ended Deferred tax assets: (In thousands) Net operating loss carryforwards $ 105,503 $ 57,988 Accruals and reserves, not currently deductible for tax purposes 10,286 10,243 Property, equipment and intangible assets 19,194 5,733 Research and other tax credit carryforwards 99,806 87,265 Gross deferred tax assets 234,789 161,229 Less valuation allowance (182,669 ) (106,663 ) Net deferred tax assets 52,120 54,566 Deferred tax liabilities: Unremitted earnings of foreign subsidiary(ies) (57,468 ) -- Net deferred tax asset (liability) $ (5,348 ) $ 54,566 62 27, 2002, the Company established25, 2004, we had a valuation allowance on deferred tax assets of $104.0 million, which was increased to $106.7 million for$182.7 million. Of the fiscal year ended January 26, 2003. Thetotal valuation allowance, for both fiscal years 2002 and 2003$117.0 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, willrealization is sustained, would be accounted for as a credit to stockholders’stockholders' equity.The Company has not established a Of the remaining valuation allowance as of January 25, 2004, $21.4 million relates to federal and state tax attributes acquired in certain acquisitions for which realization of the related deferred tax liabilityassets was determined not more likely than not to be realized due, in part, to potential utilization limitations as a result of stock ownership changes, and $44.3 million relat es to certain state deferred tax assets that management determined not more likely than not 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.$344.6$152.5 million of undistributed earnings as of as of January 26, 200325, 2004 for certain non-U.S. subsidiaries as the Company intendswe intend to reinvest these earnings indefinitely in operations outside the United States.26, 2003, the Company25, 2004, we had a federal net operating loss carryforward of approximately $157.1$280.3 million and cumulative state net operating loss carryforwards of approximately $90.0$162.2 million. The federal net operating loss carryforward will expire beginning in fiscal year 20232012 and the state net operating loss carryforwards will begin to expire in fiscal year 20082005 according to the rules of theeach particular state. As of January 26, 2003, the Company25, 2004, we had federal research and experimentation tax credit carryforwards of approximately $49.0$60.3 million that will begin to expire in fiscal year 2019.2008; and federal foreign tax credit carryforwards of approximately $0.2 million that will begin to expire in fiscal year 2006. The research and experimentation tax credit carryforward attributable to states is approximately $42.1approximat ely $50.4 million, of which approximately $40.0$49.1 million is attributable to the State of California and may be carried over indefinitely, and approximately $2.1$1.3 million is attributable to various other states and will expire beginning in fiscal year 20182016 according to the rules of theeach particular state. The Company hasWe have other California state tax credit carryforwards of approximately $3.6$3.3 million that will begin to expire in fiscal year 2010.2006. 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.11—15 – Microsoft Agreement(the “Microsoft Agreement”)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. The terms of the Microsoft Agreement also state that in the event that an individual or corporation makes an offer to purchase shares equal to or greater than thirty percent (30%) of the outstanding shares of the Company’sour common stock, Microsoft has first and last rights of refusal to purchase the stock. In April 2000, Microsoft paid us $200.0 million under the Microsoft Agreement as an advance against processor purchases and for licensing ourits technology. This advance was fully utilized by purchases made by Microsoft through the quarter ended April 28, 2002 and Microsoft is currently payingp aying in advance for processor chipsetsthe two-chip platform processors sold to it.63 STATEMENTS—STATEMENTS – (Continued)The Company waschipset. These discussions and our agreementplatform processors. The Microsoft Agreement contemplated the use of a third party to resolve disputed matters, and on April 23, 2002 Microsoft submitted the matterpricing dispute to binding arbitration. On February 6, 2003, the CompanyNVIDIA and Microsoft announced that arbitration was over and the companies had settled all issues related to pricing of the Microsoft Xbox GPU and MCP chipset and have ended the arbitration between them.platform processors. In addition to resolving this pricing dispute, the Company haswe have agreed to collaborate with Microsoft on future cost reductions for the Xbox, (together “thetogether the Microsoft Settlement”).Settlement. As a result of the Microsoft Settlement, we recorded $40.4 million in additional revenue in the fourth quarter of fiscal 2003. The balance of $35.1 million in paymentspayment s that the Companywe had received from Microsoft in excess of revenue recognized on sales to Microsoft as of January 26, 2003 was not required to be returned to Microsoft and rather was left with the Companyus to credit towards future purchases. This amount iswas classified as “Customer Advances”"Customer Advances" within the balance of Accrued Liabilities in the Company’sour consolidated balance sheet as of January 26, 2003.12—16 - Segment InformationThe Company operates in a single industry segment: thedevelopmentdevelop and marketing of 3D graphics and media communication processorsmarket GPUs, MCPs, UMPs and related software for personal computers, or PCs, workstationssoftware. We operate in one industry segment in the United States and digital entertainment platforms. The Company’sother Americas, Asia and Europe. Our chief operating decision maker, the Chief Executive Officer, reviews financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance. Revenue by geographical region is allocated to individual countries based on the location to which the products are initially billed even if the foreign contract equipment manufacturers’, or CEMs’, and add-in board and motherboard manufacturers’ revenue is attributable to end customers located in the United States.a different location. The following table summarizes information pertaining to the Company’sour operations in different geographic areas: Year Ended Year Ended Year Ended January 25, January 26, January 27, Revenue: (In thousands) U.S. and Other Americas $ 450,869 $ 603,750 $ 243,697 Asia Pacific 1,265,329 1,232,942 1,071,726 Europe 106,747 72,755 54,048 Total revenue $ 1,822,945 $ 1,909,447 $ 1,369,471 As of As of January 25, January 26, Long-lived assets (including property & equipment, goodwill and intangible assets): (In thousands) U.S. and Other Americas $ 335,167 $ 208,698 Asia Pacific 1,653 1,365 Europe 2,081 1,560 Total long-lived assets $ 338,901 $ 211,623 64 STATEMENTS—STATEMENTS – (Continued) Year Ended Year Ended Year Ended January 25, January 26, January 27, Revenue: Customer A 12% 15% 14% Customer B 15% 23% 9% Customer C 12% 9% 10% Customer D 21% 17% 20% As of As of January 25, January 26, Accounts Receivable: Customer A 15% 12% Customer B -- -- Customer C 18% 17% Customer D 21% 18% 13—17 – Quarterly Summary (Unaudited)
Quarters Ended Jan. 25, 2004 Oct. 26, 2003 July 27, 2003 April 27, 2003 (In thousands, except per share data) Statement of Operations Data: Revenue $ 472,119 $ 486,069 $ 459,774 $ 404,983 Cost of revenue $ 333,914 $ 351,938 $ 329,800 $ 278,415 Gross profit $ 138,205 $ 134,131 $ 129,974 $ 126,568 Net income $ 24,166 $ 6,356 $ 24,150 $ 19,747 Basic net income per share $ 0.15 $ 0.04 $ 0.15 $ 0.12 Diluted net income per share $ 0.14 $ 0.04 $ 0.14 $ 0.12 Jan. 26, 2003 Oct. 27, 2002 July 28, 2002 April 28, 2002 (In thousands, except per share data) Statement of Operations Data: Revenue $ 468,953 $ 430,304 $ 427,285 $ 582,905 Cost of revenue $ 301,442 $ 322,106 $ 327,983 $ 375,740 Cost of revenue related to stock option exchange $ -- $ 6,164 $ -- $ -- Gross profit $ 167,511 $ 102,034 $ 99,302 $ 207,165 Net income (loss) $ 50,936 $ (48,636 ) $ 5,254 $ 83,245 Basic net income (loss) per share $ 0.32 ($0.32 ) $ 0.03 $ 0.55 Diluted net income (loss) per share $ 0.30 ($0.32 ) $ 0.03 $ 0.47 65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)In January 2002, the Audit Committee of the Company’s Board of Directors initiated a review of certain financial matters at the request of, and in cooperation with, the staff of the Securities & Exchange Commission. Based on the findings of the review, the Company’s consolidated financial statements for the first three quarters of fiscal 2002 and for the fiscal years 2001 and 2000 were restated. In addition, the financial results announced by the Company on February 14, 2002, for the fourth quarter of fiscal 2002 were also impacted (together, the “Restatement”). As a result of the Restatement, total net income for the three year period increased by approximately $1.3 million.As a result of the Restatement, for fiscal 2002 total revenue decreased $1.9 million, cost of revenue decreased $3.3 million, operating expenses increased by $1.6 million, resulting in a decrease in net income of less than $0.2 million. The quarterly financial statements below reflect the following adjustments made to fiscal 2002 as a result of the Restatement:Of the $1.9 million in adjustments to revenue in fiscal 2002, $0.4 million, $0.3 million and $1.2 million related to adjustments to increase the accrual for a customer rebate program in the second quarter, third quarter and fourth quarter, respectively. In addition, the Restatement included a $5.0 million adjustment that deferred revenue related to sales to Microsoft of our Xbox media communications processor from the third quarter to the fourth quarter, which had no impact on total fiscal 2002 revenue.Of the $3.3 million in adjustments to cost of revenue in fiscal 2002, $2.5 million, $0.2 million and $2.3 million primarily related to adjustments to decrease the work-in-process inventory scrap reserve in the first quarter, third quarter and fourth quarter, respectively, offset by $1.2 million primarily related to an adjustment to increase the work-in-process inventory scrap reserve in the second quarter as well as other miscellaneous adjustments in various quarters that totaled approximately $0.5 million.Of the $1.6 million in adjustments to operating expenses in fiscal 2002, $0.8 million and $1.7 million primarily related to adjustments to increase our payroll accrual in the first quarter and fourth quarter, respectively, offset by $0.5 million and $0.4 million to decrease our payroll accrual in the second quarter and third quarter, respectively. In addition, the Restatement included a reclassification of approximately $0.6 million from the fourth quarter to the first quarter to correct the amortization of a support contract as well as other miscellaneous offsetting adjustments in various quarters, none of which had a significant impact on total fiscal 2002 operating expenses.Note 14—Subsequent Events (Unaudited)On March 26, 2003, the Company announced that it has formed a multi-year strategic alliance under which IBM will manufacture the Company’s next-generation GeForce GPUs. As part of the agreement, the Company will gain access to IBM’s suite of foundry services and manufacturing technologies, including power-efficient copper wiring, and a roadmap that is designed to lead to 65nm (nanometer; a billionth of a meter) in the next several years, giving the Company valuable tools to advance its GPUs. IBM plans to begin manufacturing the next-generation GeForce graphics processor this summer at IBM’s plant in East Fishkill, New York.In April 2003, subsequent to receiving a Wells notice indicating the SEC staff intended to recommend to the SEC that an enforcement action be initiated, the Company reached an agreement in principle with the SEC staff that would resolve the SEC’s investigation of the Company in matters related to the restatement. The agreement is subject to final approval of the SEC. Under the terms of the agreement in principle, the Company, without admitting or denying liability or wrongdoing, would agree to an administrative cease and desist order prohibiting any future violations of certain non-fraud financial reporting, books and records, and internal control provisions of the federal securities laws. The Company would not be required to pay any fines or penalties. The documentation of the agreement and the SEC’s review of the agreement may take several weeks or months to complete. Further, there can be no assurance that the agreement will be approved by the SEC.NVIDIA CORPORATION AND SUBSIDIARIESII—II – VALUATION AND QUALIFYING ACCOUNTSDescription Balance at Beginning of Period Additions (3) Deductions Balance at End of Period (In thousands) Year ended January 25, 2004 Allowance for sales returns and allowances $ 13,228 $ 23,796 $ (27,603) (1 ) $ 9,421 Allowance for doubtful accounts $ 4,240 $ 731 $ (2,661) (2 ) $ 2,310 Year ended January 26, 2003 Allowance for sales returns and allowances $ 15,586 $ 20,147 $ (22,505) (1 ) $ 13,228 Allowance for doubtful accounts $ 2,493 $ 2,413 $ (666) (2 ) $ 4,240 Year ended January 27, 2002 $ 7,092 $ 17,171 $ (8,677) (1 ) $ 15,586 Allowance for doubtful accounts $ 1,311 $ 2,628 $ (1,446) (2 ) $ 2,493 (1)66 Exhibit Number Description of Document 2.1(1) Asset Purchase Agreement, dated as of December 15, 2000, by and among NVIDIA Corporation, NVIDIA US Investment Company and 3dfx Interactive, Inc. 3.1(2) Amended and Restated Certificate of Incorporation. 3.3(3) Certificate of Amendment of Amended and Restated Certificate of Incorporation. 3.3(4) Bylaws, as amended. 4.1 Reference is made to Exhibits 3.1 and 3.2. 4.2(5) Specimen Stock Certificate. 4.3(6) Second Amended and Restated Investors’ Rights Agreement, dated August 19, 1997 between the Company and the parties indicated thereto and First Amendment to Second Amended and Restated Investors’ Rights Agreement, dated July 22, 1998. 4.4(7) Second Amendment to Second Amended and Restated Investors’ Rights Agreement, dated April 12, 1999. 10.1(8) Form of Indemnity Agreement between NVIDIA Corporation and each of its directors and officers. 10.2(9) 1998 Equity Incentive Plan, as amended. 10.5(10) 1998 Employee Stock Purchase Plan, as amended. 10.6(11) Form of Employee Stock Purchase Plan Offering, as amended. 10.7(12) 1998 Non-Employee Directors’ Stock Option Plan. 10.11(13) 2000 Nonstatutory Equity Incentive Plan, as amended 10.12(14) Lease dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests III for Building A. 10.13(15) Lease dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests III for Building B. 10.14(16) Lease dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests III for Building C. 10.15(17) Lease dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests III for Building D. 10.16(18) Employment Agreement between NVIDIA Corporation and David Shannon, dated July 12, 2002. 10.17(19) Employment Agreement between NVIDIA Corporation and Marvin Burkett, dated August 12, 2002. 21.1(20) List of Registrant’s Subsidiaries. 23.1(20) Consent of KPMG LLP. 24 Power of Attorney (included in signature page) 31.1(20) Rule 13a-14(a)/15d-14(a) President and Chief Executive Officer Certification 31.2 (20) Rule 13a-14(a)/15d-14(a) President and Chief Financial Officer Certification 32.1(20)* Certification of the Chief Executive Officer pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002. 32.2(20)* Certification of the Chief Financial Officer pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002. 67 (1) Previously filed as Exhibit 2.1 to our Annual Report on Form 10-K405, for the year ended January 28, 2001 filed on April 27, 2001 (No. 000-23985) and incorporated by reference herein. (2) Previously filed as Exhibit 4.1 to our Registration Statement on Form S-8 filed on March 23, 1999 (No. 333-74905) and incorporated by reference herein. (3) Previously filed as Exhibit 3.4 to our Quarterly Report on Form 10-Q, for the quarter ended July 28, 2002 filed on September 10, 2002 (No. 000-23985) and incorporated by reference herein. (4) Previously filed as Exhibit 3.1 to our Quarterly Report on Form 10-Q, for the quarter ended July 29, 2001 filed on September 10, 2001 (No. 000-23985) and incorporated by reference herein. (5) Previously filed as Exhibit 4.2 to our Registration Statement on Form S-1/A filed on April 24, 1998 (No. 333-47495), as amended, and incorporated by reference herein. (6) Previously filed as Exhibit 4.3 to our Registration Statement on Form S-1/A filed on Nov. 20, 1998 (No. 333-47495), as amended, and incorporated by reference herein. (7) Previously filed as Exhibit 4.4 to our Quarterly Report on Form 10-Q, for the quarter ended May 2, 1999 filed on June 15, 1999 (No. 000-23985) and incorporated by reference herein. (8) Previously filed as Exhibit 10.1 to our Registration Statement on Form S-1 filed on March 6, 1998 (No. 333-47495), as amended, and incorporated by reference herein. (9) Previously filed as Exhibit 10.2 to our Annual Report on Form 10-K, for the year ended January 26, 2003 filed on April 25, 2003 (No. 000-23985) and incorporated by reference herein. (10) Previously filed as Exhibit 99.4 to our Registration Statement on Form S-8 filed on December 8, 2000 (No. 333-51520) and incorporated by reference herein. (11) Previously filed as Exhibit 99.5 to our Registration Statement on Form S-8 filed on September 23, 2002 (No. 333-100010) and incorporated by reference herein. (12) Previously filed as Exhibit 10.7 to our Quarterly Report on Form 10-Q/A, for the quarter ended April 28, 2002 filed on July 3, 2002 (No. 000-23985) and incorporated by reference herein. (13) Previously filed as Exhibit 10.11 to our Annual Report on Form 10-K, for the year ended January 26, 2003 filed on April 25, 2003 (No. 000-23985) and incorporated by reference herein. (14) Previously filed as Exhibit 10.1 to our Registration Statement on Form S-3/A filed on April 20, 2000 (No. 333-33560), as amended, and incorporated by reference herein. (15) Previously filed as Exhibit 10.2 to our Registration Statement on Form S-3/A filed on April 20, 2000 (No. 333-33560), as amended, and incorporated by reference herein. (16) Previously filed as Exhibit 10.3 to our Registration Statement on Form S-3/A filed on April 20, 2000 (No. 333-33560), as amended, and incorporated by reference herein. (17) Previously filed as Exhibit 10.4 to our Registration Statement on Form S-3/A filed on April 20, 2000 (No. 333-33560), as amended, and incorporated by reference herein. (18) Previously filed as Exhibit 10.19 to our Quarterly Report on Form 10-Q, for the quarter ended October 27, 2002 filed on December 10, 2002 (No. 000-23985) and incorporated by reference herein. (19) Previously filed as Exhibit 10.20 to our Quarterly Report on Form 10-Q, for the quarter ended October 27, 2002 filed on December 10, 2002 (No. 000-23985) and incorporated by reference herein. (20) Filed herewith. (2)68 Represents uncollectible accounts written off against the allowance for doubtful accounts.(3)Allowances for sales returns are charged as a reduction to revenue. Allowances for doubtful accounts are charged to expenses.SIGNATURESApril 25, 2003.March 29, 2004.NVIDIA CorporationBy:/s/ JEN-HSUN HUANG Jen-Hsun HuangPresident and Chief Executive Officerattorneys-in-factattorneys-in-facts and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitutes or substitute,substitutes, may lawfully do or cause to be done by virtue hereof.Title Date Title Date/s/ JEN-HSUN HUANGJen-Hsun Huang/s/ JEN-HSUN HUANG
ExecutiveJen-Hsun Huang April 25, 2003/s/ MARVIN D. BURKETTMarvin D. Burkett /s/ MARVIN D. BURKETT Marvin D. Burkett April 25, 2003/s/ TENCH COXE /s/ TENCH COXEDirector March 29, 2004 Director April 25, 2003/s/ JAMES C. GAITHER /s/ JAMES C. GAITHERDirector March 29, 2004 Director April 25, 2003/s/ HARVEY C. JONES /s/ HARVEY C. JONESDirector March 29, 2004 Director April 25, 2003/s/ WILLIAM J. MILLER /s/ WILLIAM J. MILLERDirector Director April 25, 2003/s/ A. BROOKE SEAWELL /s/ A. BROOKE SEAWELLDirector Director April 25, 2003/s/ MARK A. STEVENS /s/ MARK A. STEVENSDirector March 29, 2004 DirectorApril 25, 2003I, Jen-Hsun Huang, certify that: 1.I have reviewed this annual report on Form 10-K of NVIDIA Corporation; 2.69 Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:a)designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;b)evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); andc)presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):a)all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; andb)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and6.The registrant’s other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.Date: April 25, 2003/s/ JEN-HSUN HUANG Jen-Hsun HuangPresident and Chief Executive OfficerI, Marvin D. Burkett, certify that:1.I have reviewed this annual report on Form 10-K of NVIDIA Corporation;2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:a)designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;b)evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); andc)presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):a)all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; andb)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and6.The registrant’s other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.Date: April 25, 2003/s/ MARVIN D. BURKETT Marvin D. BurkettChief Financial OfficerEXHIBIT INDEXExhibitNumberDescription of Document2.1(1)Asset Purchase Agreement, dated as of December 15, 2000, by and among NVIDIA Corporation, NVIDIA US Investment Company and 3dfx Interactive, Inc.3.1(2)Amended and Restated Certificate of Incorporation.3.3(3)Certificate of Amendment of Amended and Restated Certificate of Incorporation.3.3(4)Bylaws, as amended.4.1Reference is made to Exhibits 3.1 and 3.2.4.2(5)Specimen Stock Certificate.4.3(6)Second Amended and Restated Investors’ Rights Agreement, dated August 19, 1997 between the Company and the parties indicated thereto and First Amendment to Second Amended and Restated Investors’ Rights Agreement, dated July 22, 1998.4.4(7)Second Amendment to Second Amended and Restated Investors’ Rights Agreement, datedApril 12, 1999.4.5(8)Indenture dated October 12, 2000 between NVIDIA Corporation and Chase Manhattan Bank and Trust Company, National Association, as Trustee.4.6(9)Supplemental Indenture No. 1, dated as of October 12, 2000 between NVIDIA Corporation and Chase Manhattan Bank and Trust Company, National Association as Trustee.10.1(10)Form of Indemnity Agreement between NVIDIA Corporation and each of its directorsand officers.10.21998 Equity Incentive Plan, as amended.10.3(11)Form of Incentive Stock Option Agreement under the 1998 Equity Incentive Plan.10.4(12)Form of Nonstatutory Stock Option Agreement under the 1998 Equity Incentive Plan.10.5(13)1998 Employee Stock Purchase Plan, as amended.10.6(14)Form of Employee Stock Purchase Plan Offering, as amended.10.7(15)1998 Non-Employee Directors’ Stock Option Plan.10.8(16)Form of Nonstatutory Stock Option Agreement under the 1998 Non-Employee Directors’ Stock Option Plan (Initial Grant).10.9(17)Form of Nonstatutory Stock Option Agreement under the 1998 Non-Employee Directors’ Stock Option Plan (Annual Grant).10.10(18)Form of Nonstatutory Stock Option Agreement under the 1998 Non-Employee Directors’ Stock Option Plan (Committee Grant).10.112000 Nonstatutory Equity Incentive Plan, as amended10.12(19)Lease dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests III for Building A.10.13(20)Lease dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests III for Building B.10.14(21)Lease dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests III for Building C.10.15(22)Lease dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests III for Building D.10.16(23)Employment Agreement between NVIDIA Corporation and David Shannon, dated July 12, 2002.10.17(24)Employment Agreement between NVIDIA Corporation and Marvin Burkett, datedAugust 12, 2002.21.1List of Registrant’s Subsidiaries.23.1Consent of KPMG LLP.99.1Certification of Chief Executive Officer pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002.99.2Certification of Chief Financial Officer pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002.(1)Previously filed as Exhibit 2.1 to our Annual Report on Form 10-K405, for the year ended January 28, 2001 filed on April 27, 2001 (No. 000-23985) and incorporated by reference herein.(2)Previously filed as Exhibit 4.1 to our Registration Statement on Form S-8 filed on March 23, 1999 (No. 333-74905) and incorporated by reference herein.(3)Previously filed as Exhibit 3.4 to our Quarterly Report on Form 10-Q, for the quarter ended July 28, 2002 filed on September 10, 2002 (No. 000-23985) and incorporated by reference herein.(4)Previously filed as Exhibit 3.1 to our Quarterly Report on Form 10-Q, for the quarter ended July 29, 2001 filed on September 10, 2001 (No. 000-23985) and incorporated by reference herein.(5)Previously filed as Exhibit 4.2 to our Registration Statement on Form S-1/A filed on April 24, 1998 (No. 333-47495), as amended, and incorporated by reference herein.(6)Previously filed as Exhibit 4.3 to our Registration Statement on Form S-1/A filed on Nov. 20, 1998 (No. 333-47495), as amended, and incorporated by reference herein.(7)Previously filed as Exhibit 4.4 to our Quarterly Report on Form 10-Q, for the quarter ended May 2, 1999 filed on June 15, 1999 (No. 000-23985) and incorporated by reference herein.(8)Previously filed as Exhibit 4.5 to our Annual Report on Form 10-K405, for the year ended January 28, 2001 filed on April 27, 2001 (No. 000-23985) and incorporated by reference herein.(9)Previously filed as Exhibit 4.6 to our Annual Report on Form 10-K405, for the year ended January 28, 2001 filed on April 27, 2001 (No. 000-23985) and incorporated by reference herein.(10)Previously filed as Exhibit 10.1 to our Registration Statement on Form S-1 filed on March 6, 1998 (No. 333-47495), as amended, and incorporated by reference herein.(11)Previously filed as Exhibit 10.3 to our Registration Statement on Form S-1 filed on March 6, 1998 (No. 333-47495), as amended, and incorporated by reference herein.(12)Previously filed as Exhibit 10.4 to our Registration Statement on Form S-1 filed on March 6, 1998 (No. 333-47495), as amended, and incorporated by reference herein.(13)Previously filed as Exhibit 99.4 to our Registration Statement on Form S-8 filed on December 8, 2000 (No. 333-51520), and incorporated by reference herein.(14)Previously filed as Exhibit 99.5 to our Registration Statement on Form S-8 filed on September 3, 2002 (No. 333-100010), and incorporated by reference herein.(15)Previously filed as Exhibit 10.7 to our Quarterly Report on Form 10-Q/A, for the quarter ended April 28, 2002 filed on July 3, 2002 (No. 000-23985) and incorporated by reference herein.(16)Previously filed as Exhibit 10.8 to our Registration Statement on Form S-1 filed on March 6, 1998 (No. 333-47495), as amended, and incorporated by reference herein.(17)Previously filed as Exhibit 10.9 to our Registration Statement on Form S-1/A filed on April 24, 1998 (No. 333-47495), as amended, and incorporated by reference herein.(18)Previously filed as Exhibit 10.12 to our Registration Statement on Form S-1/A filed on April 24, 1998 (No. 333-47495), as amended, and incorporated by reference herein.(19)Previously filed as Exhibit 10.1 to our Registration Statement on Form S-3/A filed on April 20, 2000 (No. 333-33560), as amended, and incorporated by reference herein.(20)Previously filed as Exhibit 10.2 to our Registration Statement on Form S-3/A filed on April 20, 2000 (No. 333-33560), as amended, and incorporated by reference herein.(21)Previously filed as Exhibit 10.3 to our Registration Statement on Form S-3/A filed on April 20, 2000 (No. 333-33560), as amended, and incorporated by reference herein.(22)Previously filed as Exhibit 10.4 to our Registration Statement on Form S-3/A filed on April 20, 2000 (No. 333-33560), as amended, and incorporated by reference herein.(23)Previously filed as Exhibit 10.19 to our Quarterly Report on Form 10-Q, for the quarter ended October 27, 2002 filed on December 10, 2002 (No. 000-23985) and incorporated by reference herein.(24)Previously filed as Exhibit 10.20 to our Quarterly Report on Form 10-Q, for the quarter ended October 27, 2002 filed on December 10, 2002 (No. 000-23985) and incorporated by reference herein.