UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________

FORM 10-Q

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

For the quarterly period ended ~~May 1,~~July 31, 2005

~~[_]~~OR

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

Commission file number: 0-23985

NVIDIA CORPORATION

(Exact name of registrant as specified in its charter)

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

2701 San Tomas Expressway

Santa Clara, California 95050

(408) 486-2000

(Address, including Zip Code, of Registrant's Principal Executive Offices

and Registrant's Telephone Number, including Area Code)

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

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

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

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

The number of shares of the registrant's common stock outstanding as of ~~May 13,~~August 12, 2005 was ~~168,958,368~~168,692,071 shares.

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NVIDIA CORPORATION

FORM 10-Q

TABLE OF CONTENTS

		Page
	PART I: FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets as of ~~May 1,~~July 31, 2005 and January 30, 2005	1
	Condensed Consolidated Statements of Income for the three and six months ended ~~May 1,~~July 31, 2005 and ~~April~~July 25, 2004	2
	Condensed Consolidated Statements of Cash Flows for the ~~three~~six months ended ~~May 1,~~July 31, 2005 and ~~April~~July 25, 2004	3
	Notes to Condensed Consolidated Financial Statements	4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1315

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2225

Item 4.	Controls and Procedures	3740

	PART II: OTHER INFORMATION
Item 1.	Legal Proceedings	3841

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3841

Item 3.	Defaults Upon Senior Securities	3841

Item 4.	Submission of Matters to a Vote of Security Holders	3841

Item 5.	Other Information	3842

Item 6.	Exhibits	3942

Signature		4043

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (Unaudited)

NVIDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

	May 1,			January 30,			July 31,			January 30,
	2005			2005			2005			2005
ASSETS
Current assets:
Cash and cash equivalents	$	281,004		$	208,512		$	242,170		$	208,512
Marketable securities		450,508			461,533			475,376			461,533
Accounts receivable, net		255,252			296,279			355,393			296,279
Inventories		307,759			315,518			300,955			315,518
Prepaid expenses and other current assets		21,869			19,819			24,756			19,819
Deferred income taxes		3,265			3,265			3,265			3,265
Total current assets		1,319,657			1,304,926			1,401,915			1,304,926

Property and equipment, net		169,236			178,955			178,951			178,955
Deposits and other assets		10,678			9,034			15,977			9,034
Goodwill		108,107			108,107			108,107			108,107
Intangible assets, net		27,416			27,514			23,268			27,514
	$	1,635,094		$	1,628,536		$	1,728,218		$	1,628,536

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	182,146		$	238,223		$	221,047		$	238,223
Accrued liabilities		193,029			182,077			204,451			182,077
Current portion of capital lease obligations		345			856			-			856
Total current liabilities		375,520			421,156			425,498			421,156

Deferred income tax liabilities		20,754			20,754			20,754			20,754
Long-term liabilities		8,233			8,358			6,733			8,358

Stockholders’ equity:
Common stock		173			169			174			169
Additional paid-in capital		672,102			636,618			691,914			636,618
Deferred compensation		(2,638	)		(2,926	)		(2,290	)		(2,926	)
Treasury stock		(72,100	)		(24,644	)		(122,142	)		(24,644	)
Accumulated other comprehensive loss, net		(3,908	)		(3,463	)		(4,218	)		(3,463	)
Retained earnings		636,958			572,514			711,795			572,514
Total stockholders' equity		1,230,587			1,178,268			1,275,233			1,178,268
	$	1,635,094		$	1,628,536		$	1,728,218		$	1,628,536

See accompanying notes to condensed consolidated financial statements.

NVIDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)

	Three Months Ended						Three Months Ended						Six Months Ended
	May 1,			April 25,			July 31,			July 25,			July 31,			July 25,
	2005			2004			2005			2004			2005			2004

Revenue	$	583,846		$	471,905		$	574,812		$	456,061		$	1,158,658		$	927,966
Cost of revenue		373,693			323,069			357,278			315,968			730,971			639,037
Gross profit		210,153			148,836			217,534			140,093			427,687			288,929
Operating expenses:
Research and development		85,913			77,750			85,814			85,420			171,727			163,170
Sales, general and administrative		48,058			47,206			51,683			50,874			99,741			98,080
Total operating expenses		133,971			124,956			137,497			136,294			271,468			261,250
Operating income		76,182			23,880			80,037			3,799			156,219			27,679
Interest income		3,895			2,851			4,867			2,688			8,762			5,539
Interest expense		(10	)		(76	)		(2	)		(46	)		(12	)		(122	)
Other income, net		488			32
Other income (expense), net								354			(42	)		842			(10	)
Income before income tax expense		80,555			26,687			85,256			6,399			165,811			33,086
Income tax expense		16,111			5,338			10,419			1,280			26,530			6,618
Net income	$	64,444		$	21,349		$	74,837		$	5,119		$	139,281		$	26,468
Basic net income per share	$	0.38		$	0.13		$	0.44		$	0.03		$	0.83		$	0.16
Diluted net income per share	$	0.36		$	0.12		$	0.41		$	0.03		$	0.77		$	0.15
Shares used in basic per share computation		168,647			165,171			168,943			166,252			168,795			165,711
Shares used in diluted per share computation		180,492			178,479			180,790			177,419			180,612			177,999

See accompanying notes to condensed consolidated financial statements.

NVIDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended

Six Months Ended

See accompanying notes to condensed consolidated financial statements.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Summary of Significant Accounting Policies

Basis of presentation

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

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

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

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

Stock-Based Compensation

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

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Three Months Ended

May 1,

April 25,

2005

2004

(In thousands, except per share data)

Net income, as reported $ 64,444 $ 21,349
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects 228 306
Deduct: Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (16,846 ) (20,720 )
Pro forma net income $ 47,826 $ 935
Basic net income per share - as reported $ 0.38 $ 0.13
Basic net income per share - pro forma $ 0.28 $ 0.01
Diluted net income per share - as reported $ 0.36 $ 0.12
Diluted net income per share - pro forma $ 0.27 $ 0.01

	Three Months Ended						Six Months Ended
	July 31,			July 25,			July 31,			July 25,
	2005			2004			2005			2004
	(In thousands, except per share data)

Net income, as reported	$	74,837		$	5,119		$	139,281		$	26,468
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		244			291			472			597
Deduct: Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(22,034	)		(21,699	)		(38,880	)		(42,420	)
Pro forma net income (loss)	$	53,047		$	(16,289	)	$	100,873		$	(15,355	)
Basic net income per share - as reported	$	0.44		$	0.03		$	0.83		$	0.16
Basic net income (loss) per share - pro forma	$	0.31		$	(0.10	)	$	0.60		$	(0.09	)
Diluted net income per share - as reported	$	0.41		$	0.03		$	0.77		$	0.15
Diluted net income (loss) per share - pro forma	$	0.29		$	(0.10	)	$	0.56		$	(0.09	)

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

For the purpose of the pro forma calculation, the fair value of stock options granted under our stock option plans ~~has been estimated at the date of grant,~~ and the fair value of shares issued under our employee stock purchase plan ~~has~~have been estimated ~~at the date of purchase,~~ with the following assumptions:

	Stock Options		Employee Stock Purchase Plan

	Three Months Ended		Three Months Ended
	July 31,	July 25,	July 31,	July 25,
	2005	2004	2005	2004
	(Using a binomial model)	(Using the Black-Scholes model)	(Using the Black-Scholes model)	(Using the Black-Scholes model)
Expected life (in years)	3.6 - 5.1	4.0	0.5 - 2.0	1.5
Risk free interest rate	4.1%	3.4%	1.1% - 2.1%	1.9%
Volatility	40% - 46%	80%	41%	80%
Dividend yield	--	--	--	--

Stock Options

Employee Stock Purchase Plan

Three Months Ended

Three Months Ended

May 1,

April 25,

May 1,

April 25,

2005

2004

2005

2004

(Using a binomial model)

(Using the Black-Scholes model)

(Using the Black-Scholes model)

(Using the Black-Scholes model)
Expected life (in years) 3.6 - 5.1 4.0 0.5 - 2.0
1.5
Risk free interest rate 4.0% 2.4% 1.6% - 1.8% 1.9%
Volatility 37% - 48% 80% 41% 80%
Dividend yield -- -- -- --
5

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

	Stock Options		Employee Stock Purchase Plan

	Six Months Ended		Six Months Ended
	July 31,	July 25,	July 31,	July 25,
	2005	2004	2005	2004
	(Using a binomial model)	(Using the Black-Scholes model)	(Using the Black-Scholes model)	(Using the Black-Scholes model)
Expected life (in years)	3.6 - 5.1	4.0	0.5 - 2.0	1.5
Risk free interest rate	4.0%	2.9%	1.1% - 2.1%	1.9%
Volatility	37% - 48%	80%	41%	80%
Dividend yield	--	--	--	--

Note 2 -Recently Issued Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123(R), which requires the measurement and recognition of compensation expense for all stock-based compensation payments. In April 2005, the SEC delayed the effective date of SFAS No. 123(R), which is now effective for annual periods that begin after June 15, 2005. In March 2005, the SEC issued SAB No. 107, which includes interpretive guidance for the initial implementation of SFAS 123(R). SFAS No. 123(R) allows for either prospective recognition of compensation expense or retrospective recognition. We are currently evaluating which expense recognition method we will apply upon adoption of SFAS No. 123(R). We will implement the provisions of SFAS No. 123(R) beginning in fiscal 2007. Once adopted, the standard will have an adverse impact on our operating ~~results and financial condition.~~results.

~~NVIDIA CORPORATION AND SUBSIDIARIES~~In June 2005, the FASB issued SFAS No. 154, or SFAS No. 154,

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3

~~(Unaudited)~~. SFAS No. 154 applies to all voluntary changes in accounting principle, and changes the requirements for accounting for and reporting of a change in accounting principle. We will adopt SFAS 154 during the first quarter of fiscal 2007. We do not expect the adoption of SFAS No. 154 to have a material impact on our consolidated financial position, results of operations or cash flows.

Note 3 - Net Income Per Share

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

Three Months Ended

Six Months Ended

(In thousands, except per share data)

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Diluted net income per share for the three and six months ended July 31, 2005 does not include the effect of ~~10.8~~4.1 million and ~~11.7~~11.3 million ~~stock options as of May 1, 2005 and April 25, 2004, respectively, which were anti-dilutive.~~anti-dilutive common equivalent shares, respectively. The weighted-average exercise price of stock options excluded from the computation of diluted net income per share was ~~$29.39~~$34.76 and ~~$29.20~~$29.32 for the three and six months ended ~~May 1,~~July 31, 2005, respectively. Diluted net income per share for the three and ~~April~~six months ended July 25, 2004 does not include the effect of 14.0 million and 13.2 million anti-dilutive common equivalent shares, respectively. The weighted-average exercise price of stock options excluded from the computation of diluted net income per share was $27.93 and $28.37 for the three and six months ended July 25, 2004, respectively.

Note 4 - Guarantees

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

We record a reduction to revenue for estimated product returns at the time revenue is recognized primarily based on historical return rates. The reductions to revenue for estimated product returns for the three and six months ended ~~May 1,~~July 31, 2005 and ~~April~~July 25, 2004 are as follows:

~~NVIDIA CORPORATION AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

~~(Unaudited)~~

Description	Balance at Beginning of Period		Additions (1)		Deductions (2)			Balance at End of Period		Balance at Beginning of Period		Additions (1)		Deductions (2)			Balance at End of Period
	(In thousands)									(In thousands)
Three months ended May 1, 2005
Three months ended July 31, 2005
Allowance for sales returns	$	11,687	$	5,931	$	(6,813	)	$	10,805	$	10,805	$	8,213	$	(8,331	)	$	10,687
Three months ended April 25, 2004
Three months ended July 25, 2004
Allowance for sales returns										$	8,066	$	6,532	$	(3,559	)	$	11,039
Six months ended July 31, 2005
Allowance for sales returns										$	11,687	$	14,144	$	(15,144	)	$	10,687
Six months ended July 25, 2004
Allowance for sales returns	$	9,421	$	4,077	$	(5,432	)	$	8,066	$	9,421	$	10,609	$	(8,991	)	$	11,039

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

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

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

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Note 5 - Comprehensive Income

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

Three Months Ended

May 1,

April 25,

2005

2004

(In thousands)

Net income $ 64,444 $ 21,349
Net change in unrealized losses on available-for-sale securities (719 ) (3,276 )
Tax effect of the change in unrealized losses on available-for-sale securities 144 1,320
Reclassification adjustments for net realized (gains) losses on available-for-sale securities included in net income 163 (49 )
Tax effect of reclassification adjustments for net realized (gains) losses on available-for-sale securities included in net income (33 ) 10
Total comprehensive income $ 63,399 $ 19,354

	Three Months Ended						Six Months Ended
	July 31,			July 25,			July 31,			July 25,
	2005			2004			2005			2004
	(In thousands)

Net income	$	74,837		$	5,119		$	139,281		$	26,468
Net change in unrealized losses on available-for-sale securities		(526	)		(1,807	)		(1,245	)		(5,078	)
Tax effect of unrealized losses on available-for-sale securities		105			705			249			2,024
Reclassification adjustments for net realized losses on available-for-sale securities included in net income		138			91			301			36
Tax effect of reclassification adjustments for net realized losses on available-for-sale securities included in net income		(27	)		(18	)		(60	)		(7	)
Total comprehensive income	$	74,527		$	4,090		$	138,526		$	23,443

~~NVIDIA CORPORATION AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

Note 6 - 3dfx Asset Purchase

During fiscal year 2002, we completed the purchase of certain assets from 3dfx Interactive, Inc., or 3dfx, for an aggregate purchase price of approximately $74.2 million. The 3dfx asset purchase was accounted for under the purchase method of accounting and closed on April 18, 2001. Under the terms of the Asset Purchase Agreement, the cash consideration due at the closing was $70.0 million, less $15.0 million that was loaned to 3dfx pursuant to a Credit Agreement dated December 15, 2000. The Asset Purchase Agreement also provided, subject to the other provisions thereof, that if 3dfx properly certified that all its debts and other liabilities had been provided for, then we would have been obligated to pay 3dfx two million shares of NVIDIA common stock. If 3dfx could not make such a certification, but instead properly certified that its debts and liabilities could be satisfied for less than $25.0 million, then 3dfx could have elected to receive a cash payment equal to the amount of such debts and liabilities and a reduced number of shares of our common stock, with such reduction calculated by dividing the cash payment by $25.00 per share. If 3dfx could not certify that all of its debts and liabilities had been provided for, or could not be satisfied, for less than $25.0 million, we would not be obligated under the agreement to pay any additional consideration for the assets. We are currently party to litigation relating to certain aspects of the asset purchase and 3dfx’s subsequent bankruptcy in October 2002. Please see Note 11 for further information regarding this litigation.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The 3dfx asset purchase price of $70.0 million and direct transaction costs of $4.2 million were allocated based on fair values presented below.

	Fair Market Value		Straight-Line Amortization Period
	(In thousands)		(Years)

Property and equipment	$	2,433		1-2
Trademarks		11,310		5
Goodwill		60,418		--
Total	$	74,161

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

Note 7 - Goodwill and Intangible Assets

We are currently amortizing our intangible assets with finite lives over periods ranging from 13 to 5 years. The components of our amortizable intangible assets are as follows:

January 30, 2005

Gross CarryingAmount

AccumulatedAmortization

Net CarryingAmount

Gross CarryingAmount

Net CarryingAmount

Gross CarryingAmount

AccumulatedAmortization

Net CarryingAmount

Gross CarryingAmount

Net CarryingAmount

Amortization expense associated with intangible assets for the three and six months ended July 31, 2005 was $4.4 million and $8.7 million, respectively. Amortization expense associated with intangible assets for the three and six months ended July 25, 2004 was $5.3 million and $10.3 million, respectively. Amortization expense for the net carrying amount of intangible assets at July 31, 2005 is estimated to be $8.3 million for the remainder of fiscal 2006, $10.4 million in fiscal 2007, $4.1 million in fiscal 2008, and $0.5 million fiscal 2009 and thereafter.

As of July 31, 2005 and January 30, 2005, the carrying amount of goodwill is as follows:

	(In thousands)

3dfx	$	50,326
MediaQ		52,913
Other		4,868
Total goodwill	$	108,107

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Amortization expense associated with intangible assets for the three months ended May 1, 2005 and April 25, 2004 was $4.3 million and $5.0 million, respectively. Amortization expense for the net carrying amount of intangible assets at May 1, 2005 is estimated to be $12.7 million for the remainder of fiscal 2006, $10.3 million in fiscal 2007, $4.0 million in fiscal 2008, and $0.4 million in fiscal 2009 and thereafter.

~~As of May 1, 2005 and January 30, 2005, the carrying amount of goodwill is as follows:~~

(In thousands)

3dfx $ 50,326
MediaQ 52,913
Other 4,868
Total goodwill $ 108,107

Note 8 - Marketable Securities

We account for our investment instruments in accordance with Statement of Financial Accounting Standards No. 115, or SFAS No. 115,Accounting for Certain Investments in Debt and Equity Securities. All of our cash equivalents and marketable securities are treated as “available-for-sale” under SFAS No. 115. Cash equivalents consist of financial instruments which are readily convertible into cash and have original maturities of three months or less at the time of acquisition. Marketable securities consist primarily of highly liquid investments with a maturity of greater than three months when purchased and some equity investments. We classify our marketable securities at the date of acquisition in the available-for-sale category as our intention is to convert them into cash for operations. These securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), a component of stockholders’ equity, net of tax. Realized gains and losses on the sale of marketable securities are determined using the specific-identification method. Net realized losses for the three and six months ended ~~May 1,~~July 31, 2005 were ~~$0.2~~$0.1 million and ~~net~~$0.3 million, respectively. Net realized ~~gains~~losses for the three and six months ended ~~April~~July 25, 2004 were $0.1 ~~million.~~million and nil, respectively.

Note 9 - Balance Sheet Components

Certain balance sheet components are as follows:

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

At ~~May 1,~~July 31, 2005, we had outstanding inventory purchase obligations totaling approximately ~~$366~~$267 million.

	July 31,			January 30,
Property and Equipment:	2005			2005
	(In thousands)

Software	$	142,228		$	125,310
Test equipment		88,842			86,883
Computer equipment		96,475			82,428
Leasehold improvements		81,991			79,160
Construction in process		3,138			3,264
Office furniture and equipment		20,554			18,777
		433,228			395,822
Accumulated depreciation and amortization		(254,277	)		(216,867	)
Property and equipment, net	$	178,951		$	178,955

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

May 1,

January 30,

Property and Equipment:

2005

2005

(In thousands)

Software $ 125,837 $ 125,310
Test equipment 87,918 86,883
Computer equipment 89,326 82,428
Leasehold improvements 80,381 79,160
Construction in process 1,139 3,264
Office furniture and equipment 20,083 18,777
404,684 395,822
Accumulated depreciation and amortization (235,448 ) (216,867 )
Property and equipment, net $ 169,236 $ 178,955

Accrued Liabilities:

Long-term Liabilities:

Note 10 - Segment Information

Our chief operating decision maker, or CODM, our Chief Executive Officer, reviews financial information presented on an operating segment basis for purposes of making operating decisions and assessing financial performance. During the first quarter of fiscal 2006, we reorganized our operating segments to bring all major product groups in line with our strategy to position ourselves as a leader in graphics and digital media processing solutions for digital devices. We now report financial information for four product-line operating segments to our CODM: the GPU ~~business,~~Business, which is composed of products that support desktop PCs, notebook PCs and professional workstations; the MCP ~~business,~~Business, which is composed of NVIDIA ~~nForce;~~nForce products; the WMP ~~business,~~Business, which supports handheld personal digital assistants, cellular phones and ~~cellular phones;~~other handheld devices; and the Consumer Electronics ~~business,~~Business, which is composed of revenue from our contractual arrangements with Sony Computer Entertainment, or SCE, for the development of their next-generation ~~computer entertainment system,~~PlayStation3, revenue from sales of our Xbox-related products, revenue from our license agreement with Microsoft relating to the successor product to their initial Xbox gaming console, the Xbox360, and related devices, and digital media processor products. In addition to these operating segments, we have the “All Other” category that includes human resources, legal, finance, general administration and corporate marketing expenses, which total ~~$23.9~~$27.7 million for the second quarter of fiscal 2006, $26.0 million for the second quarter of fiscal 2005, $51.6 million for the first ~~quarter~~half of fiscal 2006, and ~~$24.8~~$50.8 million for the first ~~quarter~~half of fiscal 2005, that we do not allocate to our other operating segments. “All Other” also includes the results of operations of other miscellaneous operating segments that are neither individually reportable, nor aggregated with another operating segment. Revenue in the “All Other” category is primarily derived from sales of memory. All prior period amounts have been restated to reflect our new reporting structure.

~~NVIDIA CORPORATION AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

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

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Consumer Electronics

Three Months Ended July 31, 2005:

Three Months Ended July 25, 2004:

Six Months Ended July 31, 2005:

Six Months Ended July 25, 2004:

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

Three Months Ended

Six Months Ended

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

Three Months Ended

May 1,

April 25,

2005

2004
Revenue:

Customer A 17% 31%
Customer B 7% 18%
Customer C 11% 7%
Customer D 14% 5%

	Three Months Ended		Six Months Ended
	July 31,	July 25,	July 31,	July 25,
	2005	2004	2005	2004
Revenue:
Customer A	10%	12%	14%	22%
Customer B	7%	4%	7%	11%
Customer C	13%	20%	10%	13%
Customer D	8%	12%	11%	8%

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Note 11 - Litigation

On December 15, 2000, NVIDIA Corporation and one of our indirect subsidiaries entered into an agreement to purchase certain graphics chip assets from 3dfx. The 3dfx asset purchase closed on April 18, 2001. In May 2002, we were served with a complaint filed by the landlord of 3dfx’s San Jose, California commercial real estate lease. In October 2002, 3dfx filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Northern District of California. 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 appointed by the Bankruptcy Court to represent the interests of the 3dfx bankruptcy estate. The Trustee’s complaint asserts claims for, among other things, successor liability and fraudulent transfer. The Trustee’s complaint seeks additional payments from us, the amount of which has not been quantified. The landlords’ actions were removed to the Bankruptcy Court from the Superior Court of California and consolidated with the Trustee’s action for purposes of discovery. Upon motion by NVIDIA, the District Court withdrew the reference to the Bankruptcy Court of the two actions filed by the landlords. These actions are now before the District Court and should be tried there. The District Court declined, at this time, to withdraw the reference as to the Trustee’s case. Discovery in all actions is currently proceeding and no trial dates have been ~~set.~~set in either the District Court or the Bankruptcy Court. We believe the claims asserted against us are without merit and we will continue to defend ourselves vigorously.

Opti Incorporated

On October 19, 2004, Opti Incorporated, or Opti, filed a complaint for patent infringement against NVIDIA in the United States District Court for the Eastern District of Texas. Opti asserts that unspecified NVIDIA chipsets infringe five U.S. patents held by Opti. Opti seeks unspecified damages for our alleged conduct, attorneys fees and triple damages for alleged willful infringement by NVIDIA. NVIDIA filed a response to this complaint in December 2004. ~~Discovery~~After a case management conference in July 2005, discovery has ~~not~~just begun and noa trial date has now been ~~set.~~set for July 2006. We believe the claims asserted against us are without merit and we will continue to defend ourselves vigorously.

American Video Graphics

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

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

After some consensual reconfigurations proposed by the various parties, in January 2005, the district court judge entered ~~Docket Control~~docket control and ~~Discovery Orders~~discovery orders in the three lawsuits. ~~The~~Plaintiff has recently dismissed one patent from the PC Makers case such that the case now involves ~~four~~three separate patents and is currently scheduled for trial beginning onin September ~~11,~~ 2006. The Game Console Case involves a single patent and is currently scheduled for trial beginning onin December 4, 2006. We believe that, to the extent AVG’s infringement allegations target functionality that may be performed by NVIDIA products, those claims are without merit, and we will continue to defend ourselves and our products vigorously.

~~NVIDIA CORPORATION AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

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

Note 12 - Stock Repurchase Program

On August 9, 2004 we announced that our Board of Directors, or the Board, had authorized a stock repurchase program to repurchase shares of our common stock, subject to certain specifications, up to an aggregate maximum amount of $300.0 million. During the ~~first~~second quarter of fiscal 2006, we repurchased ~~1.9~~1.8 million shares of our common stock for ~~approximately $48.5~~$50.0 million. As part of our share repurchase program, we may from time-to-time enter into structured share repurchase transactions with financial institutions. These agreements generally require that we make an up-front payment in exchange for the right to receive a fixed number of shares of our common stock upon execution of the agreement, and an incremental number of shares of our common stock, within a minimum and a maximum, at the end of the term of the agreement. We entered into two such transactions during the second quarter of fiscal 2006 which, in the aggregate, required up-front payments totaling $25.0 million. Under these agreements, we repurchased 0.9 million shares of our common stock, which we recorded on the tradedate of the transactions. Through the end of the ~~first~~second quarter of fiscal 2006, we have repurchased ~~4.0~~5.8 million shares under our stock repurchase program for a total cost of approximately ~~$73.1~~$123.1 million.

Note 13 - ~~Subsequent Event~~Change in Accounting Estimate

~~On May 19, 2005~~We compute income taxes for interim reporting purposes using estimates of our effective annual income tax rate for the entire fiscal year. During the second quarter of fiscal 2006, we ~~announced~~revised our estimated effective income tax rate for fiscal year 2006 to 16% from the 20% rate that we had used in the ~~Board elected Mark L. Perry as~~first quarter of fiscal 2006. The change in the rate was primarily a ~~new member~~result of changes in our geographic mix of income subject to tax. As a result of the ~~Board~~change, the effective income tax rate for the second quarter of fiscal 2006 was 12.2%. The effect of the change in the estimated annual effective income tax rate for fiscal 2006 was to increase net income by $6.6 million for both the three months and six months ended July 31, 2005. The effect of the change in estimate on ~~May 16, 2005, effective as~~earnings per share was $0.04 for basic earnings per share and $0.03 for diluted earnings per share for the three months ended July 31, 2005. The effect of ~~May 17,~~the change in estimate on basic and diluted earnings per share was $0.04 for the six months ended July 31, 2005.

Note 14 - Income Taxes

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

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are subject to the “safe harbor” created by those sections. When used in this report, the words “expects,” “believes,” “intends,” “anticipates,” “estimates,” “plans,” and similar expressions are intended to identify forward-looking statements. These forward-looking statements relate to future periods and include, but are not limited to, the features, benefits, capabilities, performance, production and availability of our technology and products, the length of product cycles, our gross margins, our inventories, product life cycles, average selling prices, our strategies as to our GPU, MCP, WMP and Consumer Electronics Businesses, shipments of our WMP products, growth of our businesses, factors contributing to the growth of our businesses, the adoption of PCI Express, additional platform innovations, focus of our competitors on platforms, importance of stock option grants to our business, expensing of stock options, use of the binomial model for calculating the fair value of stock compensation awards, our critical accounting policies,margin, sources of revenue and anticipated revenue, including anticipated revenue derived from ~~sales of Xbox-related products,~~ our relationship with SEC and ~~the development of a GPU for SCE,~~our license with Microsoft, revenue mix, ~~our expectations regarding~~ increases in and reasons for our expenditures, planned capital expenditures, products under development, our cash flow and cash balances, our liquidity, uses of cash, investments of our cash and marketable securities, our tax rate, repatriation of foreign earnings, our quarterly and annual results of operations, our inventories, product life cycles, average selling prices, our strategies as to our GPU, MCP, WMP and Consumer Electronics Businesses, growth of our businesses, our fastest growing business, factors contributing to the growth of our businesses, the ramp of our WMP products, the adoption of PCI Express, additional platform innovations, focus of our competitors on platform solutions, importance of stock option grants to our business, expensing of stock options, use of the binomial model for calculating the fair value of stock compensation awards, our critical accounting policies, our relationship with and the development of a GPU for SCE, the impact of recent accounting pronouncements, expectations regarding our competition and our competitive position, our intellectual property, the importance of our strategic relationships, customer demand, our reliance on a limited number of customers, expansion of our technologies and products, including by investment or acquisition, our internal control over financial reporting, our ability to attract customers, our ability to attract and retain qualified personnel, our foreign currency risk strategy, compliance with the RoHS Directive and other environmental laws and ~~regulations.Forward-looking~~regulations. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, the risks discussed below as well as unanticipated decreases in average selling prices of a particular product, our inability to decrease inventory purchase commitments in a meaningful timeframe, our inability to compete in new markets, the write-down of the value of inventory, entry of new competitors in our established markets, reduction in demand for or market acceptance of our products or our customers’ products, defects in our products, the impact of competitive pricing pressure, new product announcements or introductions by our competitors, disruptions in our relationships ~~withTaiwan~~with Taiwan Semiconductor Manufacturing Company, or TSMC, International Business Machines Corporation, or IBM,United Microelectronics Corporation, or UMC,Chartered Semiconductor Manufacturing, ~~orChartered,~~or Chartered, and other key suppliers, fluctuations in general economic conditions, failure to achieve design wins,the seasonality of the PC and our other product segments, international and political conditions, the concentration of sales of our products to a limited number of customers, unforeseen reductions in demand for our products, our ability to safeguard our intellectual property, delays in the development of new products, delays in volume production of our products, developments in and expenses related to ~~litigationand~~litigation and the matters set forth under the caption “Business Risks.”These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

In this report, all references to “NVIDIA,” “we,” “us,” or “our,” mean NVIDIA Corporation and our subsidiaries.

NVIDIA, GeForce, MXM, SLI, GoForce, NVIDIA Quadro and NVIDIA nForce are our trademarks or registered trademarks in the United States and other countries. We also refer to trademarks of other corporations and organizations in this document.

Overview

Our Company

NVIDIA Corporation is a worldwide leader in graphics and digital media processors. Our products enhance the end-user experience on consumer and professional computing devices. NVIDIA graphics processing units, or GPUs, media and communications processors, or MCPs, and wireless media processors, or WMPs, have broad market reach and are incorporated into a variety of platforms, including consumer and enterprise personal computers, or PCs, notebooks, workstations, personal digital assistants, or PDAs, ~~mobile~~cellular phones, and video game consoles. We were incorporated in California in April 1993 and reincorporated in Delaware in April 1998. Our headquarter facilities are in Santa Clara, California.

~~Recent~~Fiscal 2006 Developments, Future Objectives and Challenges

GPU Business

In February 2005, we announced the GeForce Go 6600, a mobile GPU designed specifically to deliver advanced multimedia functionality without sacrificing portability. Also in February 2005, we introduced the GeForce Go 6800 Ultra mobile GPU - our fastest mobile GPU to date.

In March 2005, we introduced two new GeForce 6 GPUs: a 512MB version of the GeForce 6800 Ultra GPU designed for the enthusiast segment, and a new lower-cost AGP version of the GeForce 6200 GPU, designed to bring Microsoft DirectX 9.0 Shader Model 3.0 technology to the mainstream segment. These two ~~new~~ GPUs utilize the NVIDIA ForceWare software suite and Unified Driver Architecture to incorporate software optimizations that take full advantage of our newest features.

In June 2005, we launched and simultaneously shipped our second generation Shader Model 3.0 GPU, the GeForce 7800 GTX, which is designed to address the high-end enthusiast desktop PC segment. In August 2005, we launched and shipped our second GeForce 7 GPU, the GeForce 7800 GT, which is designed to address the high-end performance desktop PC segment.

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

The combination of our GeForce 7 and GeForce 6 ~~Series~~series of GPUs and our ~~Scalable Link Interface, or~~ SLI technology has created a new class of gaming and workstation class PCs. SLI technology takes advantage of the increased bandwidth of the PCI Express bus architecture to allow two NVIDIA-based graphics cards to operate in a single PC or workstation. In June 2005, we made our SLI technology available to users in the mainstream segment with our GeForce 6600.

MCP Business

In April 2005, we announced the availability of our NVIDIA nForce4 SLI Intel Edition MCP for Intel platforms. This new line of core-logic solutions incorporates a host of new and innovative NVIDIA features that have never before been available on the Intel platform and extends the NVIDIA nForce brand into new segments. In addition, during the first quarter of fiscal 2006, NVIDIA nForce Professional MCP shipped in its first enterprise server platform.

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

Our NVIDIA nForce product line has achieved record revenue ~~during the first quarter of fiscal 2006.~~for three consecutive quarters. We believe that Advanced Micro ~~Device’s,~~Devices’, or AMD’s, transition to K8, our extension into new segments, and our entry into the Intel market will make our MCP Business one of our fastest growing businesses. Furthermore, we believe that our ability to simultaneously innovate using our GPU, MCP, and software knowledge base will allow us to make additional platform innovations in the future. We are now beginning production of a new NVIDIA nForce MCP with an integrated GPU and expect this to be an important new growth driver for both our desktop and mobile businesses.

WMP Business

Our strategy in the WMP Business is to lead innovation and capitalize on the emergence of the mobile phone as a versatile consumer lifestyle device. Our initial focus was on 3G cellular phones. As a result, our current WMP Business has been heavily concentrated at one original equipment manufacturer, or ~~OEM. During~~OEM, and its products have not achieved the ~~second half~~anticipated level of commercial success. However, we expect that we will ramp up production of WMP products related to a number of new design wins with existing and new customers for the holiday season, many of which are scheduled to go into production during the third quarter of fiscal ~~2006, we expect to ship our GoForce products in multiple cellular phone models from five of the top seven OEMs.~~ 2006.

1416

Consumer Electronics Business

In April 2005, we finalized our definitive agreement with Sony Computer Entertainment, or SCE, to jointly develop a custom GPU incorporating our next-generation GeForce GPU and SCE’s system solutions in SCE’s next generation PlayStation3. Our collaboration with SCE includes license fees and royalties for the next generation PlayStation3 and all derivatives, including next generation digital consumer electronics devices. In addition, we are licensing software development tools for creating shaders and advanced graphics capabilities to SCE. In fiscal 2006, we expect to recognize revenue of approximately $40 million from development, software, and license fees associated with this collaboration. Depending on the ultimate success of this next generation platform, we expect to generate, starting in fiscal 2007, revenue ranging from $50 million to $100 million annually from license fees and royalties over the next five years with the possibility of additional royalties for several years thereafter.

During our fiscal 2004, Microsoft Corporation ~~or Microsoft,~~ announced that it had entered into an agreement with one of our competitors to develop technology for future Xbox products and services. During the first quarter of fiscal 2006, Microsoft ~~has~~ indicated that ~~they will~~it would not order any more Xbox-related products from us after our second fiscal ~~quarter and, as such, we have stopped production of such products and do not expect to maintain any related inventory after our second quarter of fiscal 2006. Therefore, we expect that~~quarter. As a result, the second quarter of fiscal 2006 ~~will be~~was the last quarter during which we will recognize revenue from the sale of our Xbox-related products to Microsoft. However, as a result of our license agreement with Microsoft relating to the successor product to their initial Xbox gaming console, ~~which Microsoft has named~~ the Xbox360, and related devices, we ~~anticipate that we will recognize~~recognized an incremental amount of related license revenue from Microsoft ~~in future periods, beginning with~~during the second quarter of fiscal ~~2006.~~2006, and expect to do so in future periods.

Gross Margin Improvement

We continue to remain intensely focused on improving our gross margin. During the ~~first~~second quarter of fiscal 2006, our gross margin was ~~36.0%~~37.8%, which represented an increase of ~~1.8%~~180 basis points from our gross margin of ~~34.2% for the fourth quarter of fiscal 2005 and an increase of 4.5% from our gross margin of 31.5%~~36.0% for the first quarter of fiscal ~~2005. We expect~~2006 and an increase of 710 basis points from our gross margin ~~to improve by approximately 0.5% to 1.0% during~~of 30.7% for the second quarter of fiscal ~~2006 as a result of a continued increase in sales of~~2005. We expect our GeForce 6 products, which now account for more than two-thirds of our GPU revenue, and recognition of SCE development and software revenue, which we expect to produce gross margins that exceed our current gross margin to be approximately 37% to 38% during the third quarter of ~~36.0%.~~fiscal 2006.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, cost of revenue, expenses and related disclosure of contingencies. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, accounts receivable, inventories, long-lived assets, goodwill, income taxes 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.

There were no material changes in our critical accounting policies and estimates during the first quarter of fiscal 2006 from those disclosed in our Annual Report on Form 10-K for the year ended January 30, 2005. Please see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended January 30, 2005 for a discussion of our critical accounting policies and estimates.

1517

Results of Operations

The following table sets forth, for the periods indicated, certain items in our condensed consolidated income statements expressed as a percentage of revenue.

	Three Months Ended		Three Months Ended				Six Months Ended
	May 1,	April 25,	July 31,		July 25,		July 31,		July 25,
	2005	2004	2005		2004		2005		2004


Revenue	100.0%			100.0%		100.0%		100.0%		100.0%
Cost of revenue	64.0	68.5		62.2		69.3		63.1		68.9
Gross profit	36.0	31.5		37.8		30.7		36.9		31.1
Operating expenses:
Research and development	14.7	16.5		14.9		18.7		14.8		17.6
Sales, general and administrative	8.2	10.0		9.0		11.2		8.6		10.5
Total operating expenses	22.9	26.5		23.9		29.9		23.4		28.1
Operating income	13.1	5.0		13.9		0.8		13.5		3.0
Interest and other income, net	0.7	0.6		0.9		0.6		0.8		0.6
Income before income tax expense	13.8	5.6		14.8		1.4		14.3		3.6
Income tax expense	2.8	1.1		1.8		0.3		2.3		0.7
Net income	11.0%	4.5%		13.0%		1.1%		12.0%		2.9%

Three and Six Months Ended ~~May 1,~~July 31, 2005 and ~~April~~July 25, 2004

During the first quarter of fiscal 2006, we reorganized our operating segments to bring all major product groups in line with our strategy to position ourselves as a leader in graphics and digital media processing solutions for digital devices. We now report financial information for four product-line operating segments to our chief operating decision maker, or CODM, ~~the~~our Chief Executive Officer: the GPU Business, which is composed of products that support desktop PCs, notebook PCs and professional workstations; the MCP Business, which is composed of NVIDIA ~~nForce;~~nForce products; the WMP Business, which supports handheld personal digital assistants, cellular phones and ~~cellular phones;~~other handheld devices; and the Consumer Electronics Business, which is composed of revenue from our contractual arrangements with SCE for the development of their next-generation ~~computer entertainment system, and~~PlayStation3, revenue from sales of our Xbox-related products, revenue from our license agreement with Microsoft relating to the successor product to their initial Xbox gaming console, the Xbox360, and related devices, and digital media processor products. Please refer to Note 10 of the Notes to Condensed Consolidated Financial Statements for further information.

Revenue was ~~$583.8~~$574.8 million for the ~~first~~second quarter of fiscal 2006 and ~~$471.9~~$456.1 million for the ~~first~~second quarter of fiscal 2005, which represented an increase of ~~23.7%~~26%. Revenue was $1.16 billion for the first half of fiscal 2006 and $928.0 million for the first half of fiscal 2005, which represented an increase of 25%. A discussion of our revenue results for each of our operating segments is as follows:

GPU Business revenue was ~~$409.9~~$385.8 million for the ~~first~~second quarter of fiscal 2006 and ~~$375.3~~$288.5 million for the ~~first~~second quarter of fiscal 2005, which represented an increase of ~~9.2%~~34%. The revenue increase was primarily the result of increased sales of our desktop products and NVIDIA Quadro workstation ~~products, which was~~products. Desktop revenue increased due to a significant increase in high-end unit sales volume ~~increases~~ and increased average selling prices that were offset by a decrease in sales of mainstream desktop products. Workstation revenue increased due to an increase in average selling prices as a result of the increased mix of ~~sales of our NVIDIA Quadro workstation~~GeForce 6-based products during the ~~first~~second quarter of fiscal 2006. Our current NVIDIA Quadro workstation products have historically reached higher average selling prices than previous series of products, such as our older NVIDIA Quadro workstation products. In addition, sales of our notebook products increased during the first quarter of fiscal 2006 as compared to the first quarter of fiscal 2005 primarily due to an increase in average selling prices. Offsetting these increases was a slight decrease in ~~desktop~~mobile revenue due to ~~significant mainstream unit~~ sales volume decreases that were offset by ~~a significant~~an increase in average selling prices.

GPU Business revenue increased by 20% to $795.8 million for the first half of fiscal 2006 compared to $663.8 million for the first half of fiscal 2005. The increase was the result of sales of our GeForce 6 and GeForce 7 families of desktop GPUs that serve the high-end ~~desktop products.~~ segment. Sales of our NVIDIA Quadro workstation products continued to improve, resulting primarily from an increase in average selling prices.

MCP Business revenue was ~~$71.8~~$75.9 million for the ~~first~~second quarter of fiscal 2006 and ~~$34.9~~$33.2 million for the ~~first~~second quarter of fiscal 2005, which represented an increase of ~~105.7%~~128%. MCP Business revenue increased by 117% to $147.7 million for the first half of fiscal 2006 compared to $68.1 million for the first half of fiscal 2005. The overall increase in MCP Business revenue is primarily due to increased sales of NVIDIA nForce4 products, which we began selling during the fourth quarter of fiscal 2005 and, to a lesser degree, to increased sales of NVIDIA nForce3 products, offset by decreased sales of NVIDIA nForce2 products.

WMP Business revenue was ~~$7.8~~$2.1 million for the ~~first~~second quarter of fiscal 2006 and ~~$5.7~~$5.2 million for the ~~first~~second quarter of fiscal 2005, which represented ~~an increase~~a decrease of ~~36.8%~~59%. WMP Business revenue decreased by 9% to $9.9 million for the first half of fiscal 2006 compared to $10.9 million for the first half of fiscal 2005. The ~~increase~~overall decrease in WMP Business revenue is due to unit sales volume ~~increases and~~decreases, offset by an increase in average selling prices. Our current WMP Business has been heavily concentrated at one original equipment manufacturer, or ~~OEM.~~OEM, and its products have not achieved the anticipated level of commercial success. However, ~~during the second half of fiscal 2006,~~ we expect that we will ramp up production of WMP products related to ~~ship our GoForce products in multiple cellular phone models from five~~a number of new design wins with existing and new customers for the ~~top seven cellular phone OEMs.~~holiday season.

Consumer Electronics Business

Consumer Electronics Business revenue was ~~$58.1~~$81.5 million for the ~~first~~second quarter of fiscal 2006 and ~~$23.8~~$86.7 million for the ~~first~~second quarter of fiscal 2005, which represented ~~an increase~~a decrease of ~~144.1%~~6%. During the ~~first~~second quarter of fiscal 2006, we recognized revenue from our contractual arrangements with SCE for the development of its next-generation ~~computer entertainment system. In addition,~~PlayStation3. No such revenue ~~from sales~~was recognized during the second quarter of ~~Xbox-related products to Microsoft in~~fiscal 2005 as our definitive agreement with SCE was not executed until the first quarter of fiscal ~~2006~~2006. Offsetting the SCE revenue was ~~greater than~~a decrease in sales ofXbox-related products to Microsoftin the ~~first~~second quarter of fiscal ~~2005~~2006 due to unit sales volume ~~increases.~~decreases. During our fiscal 2004, Microsoft Corporation announced that it had entered into an agreement with one of our competitors to develop technology for future Xbox products and services. During the first quarter of fiscal 2006, Microsoft ~~has~~ indicated that ~~they will~~it would not order any more Xbox-related products from us after our second fiscal ~~quarter and, as such, we have stopped production of such products and do not expect to maintain any related inventory after our second quarter of fiscal 2006. Therefore, we expect that~~quarter. As a result, the second quarter of fiscal 2006 ~~will be~~was the last quarter during which we will recognize revenue from the sale of our Xbox-related products to Microsoft. However, as a result of our license agreement with Microsoft relating to the successor product to their initial Xbox gaming console, ~~which Microsoft has named~~ the Xbox360, and related devices, we ~~anticipate that we will recognize~~recognized an incremental amount of related license revenue from Microsoft ~~in future periods, beginning with~~during the second quarter of fiscal 2006, and expect to do so in future periods.

Consumer Electronics Business revenue increased by 26% to $139.6 million for the first half of fiscal 2006 compared to $110.5 million for the first half of fiscal 2005. During the first half of fiscal 2006, we recognized revenue from our contractual arrangements with SCE for the development of its next-generation PlayStation3. No such revenue was recognized during the first half of fiscal 2005 as our definitive agreement with SCE was not executed until the first quarter of fiscal 2006. In addition, revenue from sales of Xbox-related products to Microsoft during the first half of fiscal 2006 was greater than the first half of fiscal 2005 due to unit sales volume increases.

Consolidated Revenue

Revenue from sales to customers outside of the United States and other Americas accounted for ~~83%~~76% and ~~87%~~67% of revenue for the second quarter of fiscal 2006 and 2005, respectively. Revenue from sales to customers outside of the United States and other Americas accounted for 79% and 77% of revenue for the first ~~quarter~~half of fiscal 2006 and 2005, respectively. Revenue by geographic region is allocated to individual countries based on the location to which the products are initially billed even if the revenue is attributable to end customers in a different location. The decrease in the percentage of revenue from sales to customers outside of the United States and other Americas is primarily due to increased sales of ~~GPUs and MCPs used in the Microsoft Xbox product,~~Xbox-related products, which are billed to Microsoft in the United States.

Sales to ~~our~~Microsoft accounted for approximately 13% of revenue for the second quarter of fiscal 2006 and 10% of revenue for the first half of fiscal 2006. Our other three largest customers accounted for approximately ~~42% and approximately 56%~~25% of ~~our~~ revenue for the ~~first~~second quarter of fiscal 2006 and 32% of revenue for the first half of fiscal 2006. Sales to Microsoft accounted for approximately 20% of revenue for the second quarter of fiscal 2005 ~~respectively.~~and 13% of revenue for the first half of fiscal 2005. Our other three largest customers accounted for approximately 28% of revenue for the second quarter of fiscal 2005 and 41% of revenue for the first half of fiscal 2005.

Gross profit consists of total revenue, net of allowances, less cost of revenue. Cost of revenue consists primarily of the cost of semiconductors purchased from subcontractors, including wafer fabrication, assembly, testing and packaging, manufacturing support costs, including labor and overhead associated with such purchases, final test yield fallout, inventory provisions and shipping costs. Cost of revenue also includes development costs for license and service arrangements. Gross margin is the ratio of gross profit to revenue. Our gross margin can vary in any period depending on the mix of types of products sold.

Our gross margin was ~~36.0%~~37.8% and ~~31.5%~~30.7% for the ~~first~~second quarter of fiscal 2006 and the ~~first~~second quarter of fiscal 2005, respectively. Our gross margin was 36.9% and 31.1% for the first half of fiscal 2006 and the first half of fiscal 2005, respectively. A discussion of our gross profit results for each of our operating segments is as follows:

The gross margin of our GPU Business increased during the ~~first~~second quarter of fiscal 2006 as compared to the ~~first~~second quarter of 2005 as well as during the first half of fiscal 2006 as compared to the first half of fiscal 2005 primarily due to the initial sales of our GeForce 7 series GPUs and increased sales of our GeForce 6 series GPUs, which collectively now account for more than ~~two-thirds~~75% of our GPU Business revenue. In addition, revenue from our NVIDIA Quadro workstation products, which typically provide the highest gross margins of any of our products, increased as a percentage of our total GPU Business ~~revenue during the first quarter of fiscal 2006.~~revenue.

The gross margin of our MCP Business increased during the ~~first~~second quarter of fiscal 2006 as compared to the second quarter of fiscal 2005as well as during the first ~~quarter~~half of fiscal 2006 as compared to the first half of fiscal 2005 primarily due to the increase in revenue from sales of our NVIDIA nForce3 and NVIDIA nForce4 products. ~~Our~~Also, our NVIDIA nForce3 and NVIDIA nForce4 products have experienced higher gross margins than our previous generations of NVIDIA nForce products, such as the NVIDIA nForce2.

The gross margin of our WMP Business increased during the second quarter of fiscal 2006 as compared to the second quarter of fiscal 2005 primarily due to an increase in average selling prices. Our WMP Business has been heavily concentrated at one OEM. The gross margin of our WMP Business decreased during the first ~~quarter~~half of fiscal 2006 as compared to the first ~~quarter~~half of fiscal 2005 due to the write-off in the first ~~quarter~~half of fiscal 2006 of certain handheld products that we believe exceeds the demand of that OEM.

Consumer ~~Electronic~~Electronics Business

The gross margin of our Consumer ~~Electronic~~Electronics Business increased during the ~~first~~second quarter of fiscal 2006 as compared to the second quarter of fiscal 2005 as well as during the first ~~quarter~~half of fiscal 2006 as compared to the first half of fiscal 2005 primarily due to ~~development and software revenue from~~the reduction of die costs for Xbox-related products. The reduction in die costs began during the fourth quarter of fiscal 2005 as the result of our ~~contractual arrangements with SCE~~utilization of a different foundry for the ~~development~~manufacturing of ~~its next-generation computer entertainment system. The gross margin on~~ the ~~SCE revenue was approximately 50%.~~semiconductor wafers used for Xbox-related products.

Consolidated Gross Margin

The improvement in our gross margin ~~to 36.0% for the first quarter of fiscal 2006, from 31.5% for the first quarter of fiscal 2005,~~ reflects our continuing focus on delivering cost effective product ~~architecture,~~architectures, enhancing business processes and driving profitable growth. We expect our gross margin to ~~improve by~~be approximately ~~0.5%~~37% to ~~1.0%~~38% during the ~~second~~third quarter of fiscal ~~2006 as we expect our GeForce 6 product family to comprise an increasing portion of our revenue and we expect NVIDIA nForce product revenue to continue to increase.~~2006.

Operating Expenses

Research and Development

	Three Months Ended											Six Months Ended
	July 31,			July 25,			$			%		July 31,			July 25,			$			%
	2005			2004			Change			Change		2005			2004			Change			Change
	(in millions)
Research and Development:
Salaries and related benefits	$	50.1		$	43.3		$	6.8			16%	$	98.9		$	84.2		$	14.7			17%
Computer software and lab equipment		11.5			10.4			1.1			10%		22.4			20.6			1.8			9%
New product development		8.5			8.1			0.4			5%		15.3			12.7			2.6			20%
Facility expense		8.3			8.1			0.2			2%		16.1			15.5			0.6			4%
Depreciation and amortization		14.3			14.2			0.1			1%		28.6			27.7			0.9			3%
License and development project costs		(9.6	)		-			(9.6	)		-		(14.3	)		-			(14.3	)		-
Other		2.7			1.3			1.4			108%		4.7			2.5			2.2			88%
Total	$	85.8		$	85.4		$	0.4			0.5%	$	171.7		$	163.2		$	8.5			5%
Research and development as a percentage of net revenue		14.9	%		18.7	%							14.8	%		17.6	%

Three Months Ended

May 1,

April 25,
$
%

2005

2004

Change

Change

(in millions)

Research and Development:

Salaries and benefits $ 48.9 $ 40.9 $ 8.0 20 %
Computer software and lab equipment 10.9 10.2 0.7 7 %
New product development 6.8 4.6 2.2 48 %
Facility expense 7.8 7.5 0.3 4 %
Depreciation and amortization 14.3 13.5 0.8 6 %
Other (2.8 ) 1.1 (3.9 ) -355 %
Total $ 85.9 $ 77.8 $ 8.1 10 %
Research and development as a percentage of net revenue
15
%

17
%

Research and development expenses were ~~$85.9~~$85.8 million and ~~$77.8~~$85.4 million in the ~~first~~second quarter of fiscal 2006 and fiscal 2005, respectively, an increase of ~~$8.1~~$0.4 million, or ~~10%~~0.5%. This increase was primarily due to ~~an $8.0~~a $6.8 million increase in salaries and benefits related to ~~180~~200 additional personnel and a ~~$2.2~~$1.1 million increase in ~~new product development costs related to an overall increase in product tape-outs~~computer software and ~~prototype materials.~~lab equipment. These increases were offset by ~~a decrease~~an increase of ~~$3.9~~$9.6 million in license and development project costs, primarily related to development costs related to our collaboration with SCE that are classified as cost of revenue in our condensed consolidated income ~~statement. The SCE collaboration was not~~statement and other engineering costs that were capitalized on our condensed consolidated balance sheet and will be expensed on a percentage of completion basis under a development contract. Neither of these development projects were in effect during the ~~first~~second quarter of fiscal 2005.

Research and development expenses were $171.7 million and $163.2 million for the first half of fiscal 2006 and fiscal 2005, respectively, an increase of $8.5 million, or 5%. This increase was primarily due to a $14.7 million increase in salaries and benefits related to 200 additional personnel, a $2.6 million increase in new product development costs related to an overall increase in product tape-outs and prototype materials, and a $1.8 million increase in computer software and lab equipment. These increases were offset by an increase of $14.3 million in license and development project costs, primarily related to development costs related to our collaboration with SCE that are classified as cost of revenue in our condensed consolidated income statement and other engineering costs that were capitalized on our condensed consolidated balance sheet and will be expensed on a percentage of completion basis under a development contract. Neither of these development projects were in effect during the first half of fiscal 2005.

We anticipate that we will continue to devote substantial resources to research and development, and we expect these expenses to increase in absolute dollars in the foreseeable future due to the increased complexity and the greater number of products under development.

Sales, General and Administrative

Three Months Ended

Six Months Ended

Sales, General and Administrative:

Sales, general and administrative expenses were ~~$48.1~~$51.7 million and ~~$47.2~~$50.9 million in the ~~first~~second quarter of fiscal 2006 and fiscal 2005, respectively, an increase of ~~$0.9~~$0.8 million, or 2%. This increase was primarily due to a ~~$3.6~~$5.3 million increase related to 6877 additional ~~personnel.~~personnel, a $3.0 million increase in legal expenses primarily due to certain insurance reimbursements that were received during the second quarter of fiscal 2005, and an $0.8 million increase in facilities expense due to the expansion of our international sites. These increases were offset by a $6.2 million decrease in advertising and promotions,primarily associated with a reduction in certain marketing programs, trade show expenses and advertising duringthe second quarter of fiscal 2006 compared to the second quarter of fiscal 2005.

Sales, general and administrative expenses were $99.7 million and $98.1 million for the first half of fiscal 2006 and fiscal 2005, respectively, an increase of $1.6 million, or 2%. This increase was primarily due to an $8.9 million increase related to 77 additional personnel, a $4.5 million increase in legal expenses primarily due to certain insurance reimbursements that were received during the first half of fiscal 2005, and a $1.6 million increase in facilities expense due primarily to the expansion of our international sites. These increases were offset by a ~~$3.3~~$10.0 million decrease in advertising and promotions, primarily associated with a reduction in certain marketing programs, trade show expenses and ~~product launches~~advertising during the first ~~quarter~~half of fiscal 2006 compared to the first half of fiscal 2005. In addition, deprecation and amortization decreased $1.5 million primarily due to the end of life of some intangible assets that occurred during the fourth quarter of fiscal 2005.

We expect sales, general and administrative expenses to continue to increase in absolute dollars as we continue to support our operations and global business expansion efforts, expand our sales, launch our new products, and protect our business interests.

Interest Income and Interest Expense

Interest income consists of interest earned on cash, cash equivalents and marketable securities. Interest income was ~~$3.9~~$4.9 million and ~~$2.9~~$2.7 million in the ~~first~~second quarter of fiscal 2006 and fiscal 2005, respectively, an increase of ~~$1.0~~$2.2 million. ~~This~~Interest income was $8.8 million and $5.5 million for the first half of fiscal 2006 and fiscal 2005, respectively, an increase ~~was~~of $3.3 million. These increases were primarily the result of higher average balances of cash, cash equivalents, and marketable securities and higher yields during the first ~~quarter~~half of fiscal 2006 when compared to the first ~~quarter~~half of fiscal 2005.

Interest expense consists primarily of interest incurred as a result of capital lease obligations. ~~Interest expense was nil in the first quarter of fiscal 2006 and was $0.1 million in the first quarter of fiscal 2005.~~

We recognized income tax expense of ~~$16.1~~$10.4 million and ~~$5.3~~$1.3 million in the ~~first~~second quarter of fiscal 2006 and fiscal 2005, respectively. Income tax expense as a percentage of income before taxes, or our annual effective tax rate, was 12.2% for the second quarter of fiscal 2006 and 20% for the second quarter of fiscal 2005. We recognized income tax expense of $26.5 million and $6.6 million for the first half of fiscal 2006 and fiscal 2005, respectively. Our annual effective tax rate was 16% for the first half of fiscal 2006 and 20% for the first half of fiscal 2005. During the second quarter of fiscal 2006, we reduced our effective tax rate to 16% for the year from the 20% effective tax rate used in the first quarter of fiscal 2006, ~~and the first quarter~~primarily as a result of ~~fiscal 2005. Our~~changes in our geographic mix of income subject to tax.Our annual effective tax rate is lower than the ~~U.S.~~United States Federal Statutory rate of 35% due primarily to income earned in lower tax jurisdictions and research and development tax credits.

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

Liquidity and Capital Resources

As of ~~May 1,~~July 31, 2005, we had ~~$731.5~~$717.5 million in cash, cash equivalents and marketable securities, an increase of ~~$61.5~~$47.5 million from $670.0 million at the end of fiscal 2005. Our portfolio of cash equivalents and marketable securities is managed by several financial institutions. Our investment policy requires the purchase of top-tier investment grade securities, the diversification of asset type and certain limits on our portfolio duration.

Operating activities generated cash of ~~$89.6~~$136.9 million and ~~$61.5~~$32.6 million during the first ~~three months~~half of fiscal 2006 and fiscal 2005, respectively. Cash flows from operating activities for the first ~~quarter~~half of fiscal 2006 were derived primarily from our net income of ~~$64.4~~$139.3 million, and a decrease of ~~$41.0~~$14.6 million in our ~~accounts receivable~~inventories on our condensed consolidated balance ~~sheet,~~sheet. Offsetting these increases is an increase in our accounts receivable of $48.6 million, primarily due to ~~increased consistency~~the decreased linearity of sales ~~distribution~~ during the ~~first~~second quarter of fiscal 2006, aswhich resulted in a higher percentage of our shipments in the last month of the quarter when compared to the fourth quarter of fiscal ~~2005. Offsetting these increases, is~~2005, and a decrease inof our accounts payable of ~~$56.1~~$17.2 million primarily due to the difference in timing of when payments were made to vendors in the ~~first~~second quarter of fiscal 2006 compared to the fourth quarter of fiscal 2005.

Cash used in investing activities has consisted primarily of investments in marketable securities and purchases of property and equipment, which include leasehold improvements for our facilities, and intangible assets. Investing activities used cash of ~~$4.6~~$60.3 million during the first ~~three months~~half of fiscal 2006. Net cash used by investing activities during the first ~~three months~~half of fiscal 2006 was primarily due to ~~$13.5~~$42.7 million of cash used for capital expenditures, ~~for~~including purchases of new research and development equipment, hardware equipment, technology licenses, software and intangible assets, ~~offset by $8.9~~and $17.6 million of net ~~maturities~~purchases of marketable securities. We expect to spend approximately ~~$45.0~~$30 million to ~~$60.0~~$50 million for capital expenditures during the remainder of fiscal 2006, primarily for purchases of software licenses, emulation equipment, ~~computer~~computers and engineering workstations. In addition, we may ~~continue to~~ use cash in connection with the acquisition of new businesses or assets.

Financing activities used cash of ~~$12.5~~$43.0 million during the first ~~three months~~half of fiscal 2006, primarily as a result of ~~$48.5~~$98.5 million of cash used in our stock repurchase program, offset by ~~$36.0~~$55.9 million of common stock issued under employee stock plans.

Stock Repurchase Program

On August 9, 2004 we announced that our Board of Directors, or the Board, had authorized a stock repurchase program ~~under which we may purchase up~~ to ~~$300.0 million~~repurchase shares of our common stock, over a three year period through August 2007. The repurchases will be made in the open market or in privately negotiated transactions, from time to time, in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, subject to ~~market conditions, applicable legal requirements and other factors. Our stock repurchase program does not obligate us~~certain specifications, up to ~~acquire any particular~~an aggregate maximum amount of ~~common stock and may be suspended at any time at our discretion. The repurchases will be funded from our available working capital.~~$300.0 million. During the ~~first~~second quarter of fiscal 2006, we repurchased ~~1.9~~1.8 million shares of our common stock for ~~approximately $48.5~~$50.0 million. As part of our share repurchase program, we may from time-to-time enter into structured share repurchase transactions with financial institutions. These agreements generally require that we make an up-front payment in exchange for the right to receive a fixed number of shares of our common stock upon execution of the agreement, and an incremental number of shares of our common stock, within a minimum and a maximum, at the end of the term of the agreement. We entered into two such transactions during the second quarter of fiscal 2006 which, in the aggregate, required up-front payments totaling $25.0 million. Under these agreements, we repurchased 0.9 million shares of our common stock, which we recorded on the trade date of the transactions. Through the end of the ~~first~~second quarter of fiscal 2006, we have repurchased ~~4.0~~5.8 million shares under our stock repurchase program for a total cost of approximately ~~$73.1~~$123.1 million.

Operating Capital and Capital Expenditure Requirements

We believe that our existing cash balances and anticipated cash flows from operations will be sufficient to meet our operating, acquisition and capital requirements for at least the next 12 months. If we were to need additional equity or debt financing, it may not be available on favorable terms or at all and may be dilutive to our then-current stockholders. We also may require additional capital for other purposes not presently contemplated. If we are unable to obtain sufficient capital, we could be required to curtail capital equipment purchases or research and development expenditures, which could harm our business. Factors that could affect our cash used or generated from operations and, as a result, our need to seek additional borrowings or capital include:

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

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

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

·	new product announcements or product introductions by our competitors.

For additional factors see the section entitled “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.~~Risks.”

Other key factors that could affect our liquidity include:

Shelf Registration Statement

In December 2003, we filed a Form S-3 with 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:

·	continuing to develop our technology;

·	hiring additional personnel;

·	expanding our sales and marketing organization and activities;

·	acquiring complementary technologies, assets or businesses; and

·	capital expenditures.

3dfx Asset Purchase

	Three Months Ended						Six Months Ended
	May 1,			April 25,			July 31,			July 25,
	2005			2004			2005			2004
Cash flows from operating activities:
Net income	$	64,444		$	21,349		$	139,281		$	26,468
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		24,893			23,412			49,667			47,486
Stock-based compensation		285			383			562			747
Bad debt expense		(341	)		(496	)		(477	)		(202	)
Other		4			-			85			-
Changes in operating assets and liabilities:
Accounts receivable		49,430			(7,652	)		(48,637	)		(59,834	)
Inventories		7,759			(558	)		14,563			(32,747	)
Prepaid expenses and other current assets		(2,050	)		(1,750	)		(4,937	)		(1,789	)
Deposits and other assets		(1,644	)		476			(6,943	)		(546	)
Accounts payable		(56,077	)		29,276			(17,176	)		37,859
Accrued liabilities		2,876			(2,954	)		10,938			15,153
Net cash provided by operating activities		89,579			61,486			136,926			32,595
Cash flows from investing activities:
Purchases of marketable securities		(56,411	)		(149,680	)		(133,214	)		(170,132	)
Sales and maturities of marketable securities		65,304			75,348			115,614			121,967
Purchases of property and equipment and intangible assets		(13,504	)		(18,599	)
Purchases of property, equipment and intangible assets								(42,689	)		(35,227	)
Net cash used in investing activities		(4,611	)		(92,931	)		(60,289	)		(83,392	)
Cash flows from financing activities:
Common stock issued under employee stock plans		36,011			15,181			55,895			19,787
Stock repurchase		(48,467	)		-
Stock repurchases								(98,509	)		-
Principal payments on capital leases		(511	)		(1,483	)		(856	)		(2,833	)
Retirement of common stock		491			-			491			-
Net cash provided by (used in) financing activities		(12,476	)		13,698
Net cash (used in) provided by financing activities								(42,979	)		16,954
Change in cash and cash equivalents		72,492			(17,747	)		33,658			(33,843	)
Cash and cash equivalents at beginning of period		208,512			214,422			208,512			214,422
Cash and cash equivalents at end of period	$	281,004		$	196,675		$	242,170		$	180,579

Supplemental disclosures of cash flow information:
Cash paid for interest	$	10		$	75		$	12		$	122
Cash paid (refunded) for income taxes	$	901		$	(1,503	)
Net payment (refund) of income taxes							$	1,838		$	(258	)

Other non-cash activities:
Non cash activities:
Acquisition of business - goodwill adjustment							$	-		$	343
Application of customer advance to accounts receivable	$	8,062		$	529		$	10,000		$	10,271
Deferred stock compensation							$	74		$	251
Unrealized losses from marketable securities	$	556		$	3,325		$	944		$	5,041
Deferred stock-based compensation	$	3		$	-

	May 1, 2005							January 30, 2005							July 31, 2005							January 30, 2005
	Gross CarryingAmount		AccumulatedAmortization			Net CarryingAmount		Gross CarryingAmount		Accumulated Amortization			Net CarryingAmount		Gross CarryingAmount		AccumulatedAmortization			Net CarryingAmount		Gross CarryingAmount		Accumulated Amortization			Net CarryingAmount
	(In thousands)														(In thousands)

Technology licenses	$	21,436	$	(10,606	)	$	10,830	$	17,236	$	(9,841	)	$	7,395	$	21,586	$	(11,607	)	$	9,979	$	17,236	$	(9,841	)	$	7,395
Patents		23,260		(16,545	)		6,715		23,260		(15,400	)		7,860		23,380		(17,699	)		5,681		23,260		(15,400	)		7,860
Acquired intellectual property		27,086		(20,281	)		6,805		27,086		(18,578	)		8,508		27,086		(21,859	)		5,227		27,086		(18,578	)		8,508
Trademarks		11,310		(9,110	)		2,200		11,310		(8,544	)		2,766		11,310		(9,676	)		1,634		11,310		(8,544	)		2,766
Other		1,494		(628	)		866		1,494		(509	)		985		1,494		(747	)		747		1,494		(509	)		985
Total intangible assets	$	84,586	$	(57,170	)	$	27,416	$	80,386	$	(52,872	)	$	27,514	$	84,856	$	(61,588	)	$	23,268	$	80,386	$	(52,872	)	$	27,514

	May 1,		January 30,		July 31,		January 30,
Inventories:	2005		2005		2005		2005
	(In thousands)				(In thousands)

Raw materials	$	30,844	$	23,225	$	22,848	$	23,225
Work in-process		102,807		130,211		113,980		130,211
Finished goods		174,108		162,082		164,127		162,082
Total inventories	$	307,759	$	315,518	$	300,955	$	315,518

					July 31,		January 30,
					2005		2005
	May 1,		January 30,		(In thousands)
Accrued Liabilities:	2005		2005
	(In thousands)

Accrued customer programs	$	81,000	$	83,013	$	77,932	$	83,013
Deferred revenue		10,153		11,500		5,584		11,500
Customer advances		9,226		1,457		10,235		1,457
Taxes payable		43,430		28,826		53,395		28,826
Accrued payroll and related expenses		27,829		37,016		35,996		37,016
Deferred rent		11,182		10,844		11,413		10,844
Other		10,209		9,421		9,896		9,421
Total accrued liabilities	$	193,029	$	182,077	$	204,451	$	182,077

	GPU		MCP			WMP			Consumer Electronics		All Other			Consolidated		GPU		MCP			WMP			CE		All Other			Consolidated
Three Months Ended May 1, 2005:
																(In thousands)
Three Months Ended July 31, 2005:
Revenue	$	409,926	$	71,805		$	7,762		$	58,078	$	36,275		$	583,846	$	385,826	$	75,872		$	2,135		$	81,543	$	29,436		$	574,812
Depreciation expense																$	8,219	$	3,080		$	2,882		$	337	$	8,062		$	22,580
Operating income (loss)	$	77,865	$	6,923		$	(15,593	)	$	28,941	$	(21,954	)	$	76,182	$	72,737	$	5,340		$	(10,115	)	$	40,787	$	(28,712	)	$	80,037
Three Months Ended April 25, 2004:
Three Months Ended July 25, 2004:
Revenue	$	375,270	$	34,913		$	5,658		$	23,789	$	32,275		$	471,905	$	288,507	$	33,208		$	5,201		$	86,722	$	42,423		$	456,061
Depreciation expense																$	8,226	$	3,463		$	2,749		$	205	$	8,389		$	23,032
Operating income (loss)	$	61,975	$	(13,836	)	$	(6,792	)	$	8,024	$	(25,491	)	$	23,880	$	17,296	$	(15,769	)	$	(9,258	)	$	32,872	$	(21,342	)	$	3,799

Six Months Ended July 31, 2005:
Revenue																$	795,752	$	147,677		$	9,897		$	139,621	$	65,711		$	1,158,658
Depreciation expense																$	16,279	$	6,190		$	6,040		$	697	$	15,702		$	44,908
Operating income (loss)																$	150,868	$	12,263		$	(25,975	)	$	69,727	$	(50,664	)	$	156,219
Six Months Ended July 25, 2004:
Revenue																$	663,776	$	68,121		$	10,860		$	110,511	$	74,698		$	927,966
Depreciation expense																$	16,273	$	6,739		$	5,263		$	390	$	16,806		$	45,471
Operating income (loss)																$	79,273	$	(29,605	)	$	(16,051	)	$	40,895	$	(46,833	)	$	27,679

Period	Total Number of Shares Purchased		Average Price Paid per Share			Total Number of Shares Purchased as Part of Publicly Announced Plans of Programs		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1)

January 31, 2005 through February 27, 2005		-	$	-			-	$	275,356,213

February 27, 2005 through March 27, 2005		1,351,398	$	25.27			1,351,398	$	241,210,474

March 27, 2005 through May 1, 2005		590,000	$	24.27			590,000	$	226,888,622

Total		1,941,398	$	24.97 (2	)		1,941,398

Number of shares voted For			149,899,287
Number of shares voted Against			2,064,763
Number of shares Abstaining			820,179
Number of Broker Non-Votes			0

Exhibit No.	Description
10.17	Fiscal Year 2006 Variable Compensation Plan (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated May 10, 2005 and incorporated herein by reference).
31.1	Certification of Chief Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
31.2	Certification of Chief Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
32.1*	Certification of Chief Executive Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended.
32.2*	Certification of Chief Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended.