Edgar Filing: NVIDIA CORP

NVDA 2011 Q3 10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the quarterly period ended October 30, 2011



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

Commission file number: 0-23985

NVIDIA CORPORATION

(Exact name of registrant as specified in its charter)



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

2701 San Tomas Expressway

Santa Clara, California 95050

(408) 486-2000

(Address, including zip code, and telephone number,

including area code, of principal executive offices)

N/A

(Former name, former address and former fiscal year if changed since last report)

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 Q No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes Q No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer x	Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No Q

The number of shares of common stock, $0.001 par value, outstanding as of November 17, 2011, was 610,653,436

NVIDIA CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED October 30, 2011

TABLE OF CONTENTS



		Page
	PART I : FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	a) Condensed Consolidated Statements of Income for the three and nine months ended October 30, 2011 and October 31, 2010	3

	b) Condensed Consolidated Balance Sheets as of October 30, 2011 and January 30, 2011	4

	c) Condensed Consolidated Statements of Cash Flows for the nine months ended October 30, 2011 and October 31, 2010	5

	d) Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38

Item 4.	Controls and Procedures	39

	PART II : OTHER INFORMATION

Item 1.	Legal Proceedings	40

Item 1A.	Risk Factors	40

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	55

Item 6.	Exhibits	55

Signature		57

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

NVIDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(In thousands, except per share data)



	Three Months Ended					Nine Months Ended
	October 30, 2011		October 31, 2010			October 30, 2011			October 31, 2010

Revenue	$	1,066,180	$	843,912		$	3,044,736		$	2,656,933
Cost of revenue	509,463		451,850			1,478,232			1,674,202
Gross profit	556,717		392,062			1,566,504			982,731
Operating expenses
Research and development	256,498		204,527			735,743			633,267
Sales, general and administrative	103,129		83,752			304,779			273,495
Total operating expenses	359,627		288,279			1,040,522			906,762
Income from operations	197,090		103,783			525,982			75,969
Interest income	4,356		4,220			14,936			14,596
Other income (expense), net	3,341		(4,418		)	(2,099		)	(5,302		)
Income before income tax expense	204,787		103,585			538,819			85,263
Income tax expense	26,514		18,723			73,754			3,768
Net income	$	178,273	$	84,862		$	465,065		$	81,495

Basic net income per share	$	0.29	$	0.15		$	0.77		$	0.14
Shares used in basic per share computation	607,063		577,323			600,563			572,420

Diluted net income per share	$	0.29	$	0.15		$	0.76		$	0.14
Shares used in diluted per share computation	613,560		582,648			614,688			584,500

See accompanying Notes to Condensed Consolidated Financial Statements.

NVIDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(In thousands)



	October 30, 2011			January 30, 2011
ASSETS
Current assets:
Cash and cash equivalents	$	566,816		$	665,361
Marketable securities	2,181,538			1,825,202
Accounts receivable, net	371,261			348,770
Inventories	319,602			345,525
Prepaid expenses and other	34,573			32,636
Deferred income taxes	26,281			9,456
Total current assets	3,500,071			3,226,950
Property and equipment, net	551,757			568,857
Goodwill	648,053			369,844
Intangible assets, net	342,839			288,745
Deposits and other assets	46,323			40,850
Total assets	$	5,089,043		$	4,495,246

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	307,943		$	286,138
Accrued liabilities and other	578,741			656,544
Total current liabilities	886,684			942,682
Other long-term liabilities	206,960			347,713
Capital lease obligations, long-term	21,949			23,389
Commitments and contingencies - see Note 14	—			—
Stockholders’ equity:
Preferred stock	—			—
Common stock	698			677
Additional paid-in capital	2,846,266			2,500,577
Treasury stock, at cost	(1,496,904		)	(1,479,392		)
Accumulated other comprehensive income	8,997			10,272
Retained earnings	2,614,393			2,149,328
Total stockholders' equity	3,973,450			3,181,462
Total liabilities and stockholders' equity	$	5,089,043		$	4,495,246

See accompanying Notes to Condensed Consolidated Financial Statements.

NVIDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)



	Nine Months Ended
	October 30, 2011			October 31, 2010
Cash flows from operating activities:
Net income	$	465,065		$	81,495
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	152,310			140,596
Stock-based compensation expense	100,918			74,985
Other	13,689			5,382
Deferred income taxes	14,242			(172		)
Excess tax benefits from stock-based compensation	(52,703		)	—
Changes in operating assets and liabilities:
Accounts receivable	(8,834		)	(24,567		)
Inventories	39,748			(46,746		)
Prepaid expenses and other current assets	35			3,798
Deposits and other assets	(2,992		)	4,864
Accounts payable	9,218			(21,868		)
Accrued liabilities and other long-term liabilities	(232,058		)	23,357
Net cash provided by operating activities, net of effect of acquisition	498,638			241,124
Cash flows from investing activities:
Purchases of marketable securities	(1,324,350		)	(1,193,323		)
Proceeds from sales and maturities of marketable securities	953,808			931,099
Purchases of property and equipment and intangible assets	(93,553		)	(76,547		)
Acquisition of businesses, net of cash acquired	(348,884		)	—
Other	(1,890		)	(1,656		)
Net cash used in investing activities	(814,869		)	(340,427		)
Cash flows from financing activities:
Proceeds from issuance of common stock under employee stock plans	176,490			104,131
Payments under capital lease obligations	(1,188		)	(875		)
Excess tax benefits from stock-based compensation	52,703			—
Payment of notes payable assumed from acquisition	(10,319		)	—
Net cash provided by financing activities	217,686			103,256
Change in cash and cash equivalents	(98,545		)	3,953
Cash and cash equivalents at beginning of period	665,361			447,221
Cash and cash equivalents at end of period	$	566,816		$	451,174
Supplemental disclosures of cash flow information:
Cash paid for income taxes, net	$	3,857		$	2,522
Cash paid for interest on capital lease obligations	$	2,254		$	2,359
Other non-cash activities:
Assets acquired by assuming related liabilities	$	12,064		$	67,785
Change in unrealized gains from marketable securities	$	(1,274	)	$	497

See accompanying Notes to Condensed Consolidated Financial Statements.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 - Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP, 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 fiscal year ended January 30, 2011.

Fiscal Year

We operate on a 52 or 53-week year, ending on the last Sunday in January. Fiscal year 2012 and fiscal year 2011 are both 52-week years. The third quarters of fiscal years 2012 and 2011 are both 13-week quarters.

Reclassifications

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

Principles of Consolidation

Our condensed consolidated financial statements include the accounts of NVIDIA Corporation and its wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP, 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, cash equivalents and marketable securities, accounts receivable, inventories, income taxes, goodwill, stock-based compensation, warranty liabilities, litigation, investigation and settlement costs and other contingencies. These estimates are based on historical facts and various other assumptions that we believe are reasonable.

Revenue Recognition

Product Revenue

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

Our policy on sales to certain distributors, with rights of return, is to defer recognition of revenue and related cost of revenue until the distributors resell the product, as the level of returns cannot be reasonably estimated.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Our customer programs primarily involve rebates, which are designed to serve as sales incentives to resellers of our products in various target markets. We accrue for 100% of the potential rebates and do not apply a breakage factor. We recognize a liability for these rebates at the later of the date at which we record the related revenue or the date at which we offer the rebate. Rebates typically expire six months from the date of the original sale, unless we reasonably believe that the customer intends to claim the rebate. Unclaimed rebates are reversed to revenue.

Our customer programs also include marketing development funds, or MDFs. We account for MDFs as either a reduction of revenue or an operating expense, depending on the nature of the program. MDFs represent monies paid to retailers, system builders, original equipment manufacturers, or OEMs, distributors and add-in card partners that are earmarked for market segment development and expansion and typically are designed to support our partners’ activities while also promoting NVIDIA products. Depending on market conditions, we may take actions to increase amounts offered under customer programs, possibly resulting in an incremental reduction of revenue at the time such programs are offered.

We also record a reduction to revenue by establishing a sales return allowance for estimated product returns at the time revenue is recognized, based primarily on historical return rates. However, if product returns for a particular fiscal period exceed historical return rates we may determine that additional sales return allowances are required to properly reflect our estimated exposure for product returns.

License and Development Revenue

For license arrangements that require significant customization of our intellectual property components, we generally recognize this license revenue over the period that services are performed. For most license and service arrangements, we determine progress to completion based on actual direct labor hours incurred to date as a percentage of the estimated total direct labor hours required to complete the project. We periodically evaluate the actual status of each project to ensure that the estimates to complete each contract remain accurate. A provision for estimated losses on contracts is made in the period in which the loss becomes probable and can be reasonably estimated. Costs incurred in advance of revenue recognized are recorded as deferred costs on uncompleted contracts. If the amount billed exceeds the amount of revenue recognized, the excess amount is recorded as deferred revenue. Revenue recognized in any period is dependent on our progress toward completion of projects in progress. Significant management judgment and discretion are used to estimate total direct labor hours. Any changes in or deviations from these estimates could have a material effect on the amount of revenue we recognize in any period.

Royalty revenue is recognized related to the distribution or sale of products that use our technologies under license agreements with third parties. We recognize royalty revenue upon receipt of a confirmation of earned royalties and when collectability is reasonably assured from the applicable licensee.

Inventories

Inventory cost is computed on an adjusted standard basis, which approximates actual cost on an average or first-in, first-out basis. Inventory costs consist primarily of the cost of semiconductors purchased from subcontractors, including wafer fabrication, assembly, testing and packaging, manufacturing support costs, including labor and overhead associated with such purchases, final test yield fallout, inventory provisions and shipping costs. We write down our inventory to the lower of cost or estimated market value. Obsolete or unmarketable inventory is completely written off based upon assumptions about future demand, future product purchase commitments, estimated manufacturing yield levels and market conditions. If actual market conditions are less favorable than those projected by management, or if our current inventory or our future product purchase commitments to our suppliers exceed our forecasted future demand for such products, additional future inventory write-downs may be required that could adversely affect our operating results. Inventory reserves once established are not reversed until the related inventory has been sold or scrapped. If actual market conditions are more favorable than expected and we sell products that we have previously written down, our reported gross margin would be favorably impacted.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Adoption of New and Recently Issued Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board, or FASB, issued guidance regarding the presentation of comprehensive income. The new standard requires the presentation of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The new standard also requires presentation of adjustments for items that are reclassified from other comprehensive income to net income in the statement where the components of net income and the components of other comprehensive income are presented. The updated guidance is effective on a retrospective basis for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. The adoption of this guidance will not have a material impact on our financial statements.

In May 2011, the FASB issued additional guidance on fair value measurements that clarifies the application of existing guidance and disclosure requirements, changes certain fair value measurement principles and requires additional disclosures about fair value measurements. The updated guidance is effective on a prospective basis for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. The adoption of this guidance will not have a material impact on our financial statements.

In September 2011, the FASB issued amended guidance to simplify how entities test goodwill for impairment. The amended guidance permits an assessment of qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit in which goodwill resides is less than its carrying value. For reporting units in which this assessment concludes it is more likely than not that the fair value is more than its carrying value, the amended guidance eliminate the requirement to perform further goodwill impairment testing as outlined in the previously issued standards. The updated guidance is elective for annual and interim impairment tests performed beginning with our fiscal year 2013 and early adoption is permitted. We do not expect the new guidance to significantly impact our consolidated condensed financial statements.

Note 2 - Stock-Based Compensation

We measure stock-based compensation expense at the grant date of the related equity awards, based on the fair value of the awards, and recognize the expense using the straight-line attribution method over the requisite employee service period adjusted for estimated forfeitures. We estimate the fair value of employee stock options on the date of grant using a binomial model and we use the closing trading price of our common stock on the date of grant as the fair value of awards of restricted stock units, or RSUs. We calculate the fair value of our employee stock purchase plan using the Black-Scholes model.

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



	Three Months Ended				Nine Months Ended
	October 30, 2011		October 31, 2010		October 30, 2011		October 31, 2010
Cost of revenue	$	3,049	$	2,490	$	8,274	$	6,582
Research and development	$	19,308	$	14,104	$	59,594	$	43,251
Sales, general and administrative	$	10,872	$	8,585	$	33,050	$	25,155

During the three and nine months ended October 30, 2011, we granted approximately 3.0 million and 6.3 million stock options respectively, with an estimated total grant-date fair value of $21.8 million and $51.4 million, respectively and a per option weighted average grant-date fair value of $7.35 and $8.20, respectively. During the three and nine months ended October 30, 2011, we granted approximately 3.1 million and 6.8 million RSUs, respectively, with an estimated total grant-date fair value of $43.9 million and $111.8 million, respectively, and a per RSU weighted average grant-date fair value of $14.34 and $16.43, respectively.

During the three and nine months ended October 31, 2010, we granted approximately 3.0 million and 5.7 million stock options, respectively, with an estimated total grant-date fair value of $13.7 million and $33.5 million, respectively, and a per option weighted average grant-date fair value of $4.60 and $5.90, respectively. During the three and nine months ended October 31, 2010, we granted approximately 3.9 million and 6.8 million RSUs, respectively, with an estimated total grant-date fair value of $40.8 million and $91.9 million, respectively, and a per RSU weighted average grant-date fair value of $10.53 and $13.50, respectively.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Of the estimated total grant-date fair value, we estimated that the stock-based compensation expense related to the equity awards that are not expected to vest was $11.8 million and $29.2 million, for the three and nine months ended October 30, 2011, respectively. As of October 30, 2011 and October 31, 2010, the aggregate amount of unearned stock-based compensation expense related to our equity awards was $206.1 million and $164.7 million, respectively, adjusted for estimated forfeitures. As of October 30, 2011, and October 31, 2010, we expect to recognize the unearned stock-based compensation expense related to stock options over an estimated weighted average amortization period of 2.7 years and 1.8 years, respectively. As of October 30, 2011 and October 31, 2010, we expect to recognize the unearned stock-based compensation expense related to RSUs over an estimated weighted average amortization period of 2.7 years and 2.6 years, respectively.

Valuation Assumptions

We utilize a binomial model for calculating the estimated fair value of new stock-based compensation awards granted under our equity incentive plans. We have determined that the use of implied volatility is expected to be reflective of market conditions and, therefore, can be expected to be a reasonable indicator of our expected volatility. We also segregate options into groups of employees with relatively homogeneous exercise behavior in order to calculate the best estimate of fair value using the binomial valuation model. As such, the expected term assumption used in calculating the estimated fair value of our stock-based compensation awards using the binomial model is based on detailed historical data about employees' exercise behavior, vesting schedules, and death and disability probabilities. Our management believes the resulting binomial calculation provides a reasonable estimate of the fair value of our employee stock options. For our employee stock purchase plan, we continue to use the Black-Scholes model.

We estimate forfeitures at the time of grant and revise the estimates of forfeiture, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on historical experience.

The fair value of stock options granted under our equity incentive plans and shares issued under our employee stock purchase plan have been estimated at the date of grant with the following assumptions:



	Three Months Ended		Nine Months Ended
	October 30, 2011	October 31, 2010	October 30, 2011	October 31, 2010
Stock Options	(Using a binomial model)
Expected life (in years)	4.1-4.9	4.0-5.5	3.6-5.4	3.1-6.7
Risk free interest rate	1.9-2.4%	1.9-2.7%	1.9-3.8%	1.9-3.0%
Volatility	58-65%	46-47%	46-65%	43-53%
Dividend yield	—	—	—	—



	Three Months Ended				Nine Months Ended
	October 30, 2011		October 31, 2010		October 30, 2011	October 31, 2010
Employee Stock Purchase Plan	(Using a Black-Scholes model)
Expected life (in years)	0.5-2.0		0.5-2.0		0.5-2.0	0.5-2.0
Risk free interest rate	0.1-0.2%		0.2-0.5%		0.1-0.7%	0.2-0.8%
Volatility	61	%	47	%	57-61%	45-47%
Dividend yield	—		—		—	—

Equity Award Activity

The following summarizes the stock option and RSU activity under our equity incentive plans:

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



	Options Outstanding		Weighted Average Exercise Price
Stock Options	(In thousands)		(Per share)
Balances, January 30, 2011	44,001		$	12.88
Granted	6,271		$	16.22
Exercised	(13,714	)	$	10.69
Cancelled	(1,514	)	$	14.61
Balances, October 30, 2011	35,044		$	14.26



	RSUs Outstanding		Weighted Average Grant-Date Fair Value
Restricted Stock Units	(In thousands)		(Per share)
Balances, January 30, 2011	10,612		$	13.23
Granted	6,802		$	16.43
Vested	(3,441	)	$	12.02
Cancelled	(713	)	$	14.62
Balances, October 30, 2011	13,260		$	15.11

Note 3- Patent Cross License Agreement

On January 10, 2011, we entered into a six-year patent cross licensing agreement, or the License Agreement, with Intel Corporation. Under the License Agreement, Intel has granted to NVIDIA and its qualified subsidiaries, and NVIDIA has granted to Intel and Intel’s qualified subsidiaries, a non-exclusive, non-transferable, worldwide license, without the right to sublicense to all patents that are either owned or controlled by the parties at any time that have a first filing date on or before March 31, 2017, to make, have made (subject to certain limitations), use, sell, offer to sell, import and otherwise dispose of certain semiconductor- and electronic-related products anywhere in the world. NVIDIA’s rights to Intel’s patents have certain specified limitations, including but not limited to, NVIDIA was not granted a license to: (1) certain microprocessors, defined in the License Agreement as “Intel Processors” or “Intel Compatible Processors;” (2) certain chipsets that connect to Intel Processors; or (3) certain flash memory products. In connection with the License Agreement, NVIDIA and Intel mutually agreed to settle all outstanding legal disputes. Under the License Agreement, Intel will pay NVIDIA an aggregate amount of $1.5 billion , payable in annual installments, as follows: a $300 million payment on each of January 18, 2011, January 13, 2012 and January 15, 2013 and a $200 million payment on each of January 15, 2014, 2015 and 2016.

Accounting for the Agreement

The License Agreement between NVIDIA and Intel includes multiple elements. As a result, we determined each element of the License Agreement, their fair value and when they should be recognized. We allocated the total consideration, comprising of the cash payments from Intel and the estimated fair value of the license we received from Intel, to the legal settlement and the license to Intel based on the estimated relative fair value of these elements as follows:



	(In thousands)
Legal settlement	$	57,000
License to Intel	1,583,000
License from Intel	(140,000		)
Total cash consideration	$	1,500,000

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The elements of the License Agreement are accounted for as follows:


1	Legal settlement: In connection with the License Agreement, both parties agreed to settle all outstanding legal disputes. The fair value allocated to the settlement of $57.0 million was recorded in the fourth quarter of fiscal year 2011, as a benefit to operating expense.

License to Intel: We will recognize $1,583.0 million in total, or $66.0 million per quarter, as revenue over the term of the agreement of six years, the period over which Intel will have access to newly filed NVIDIA patents. Consideration received in advance of the performance period has been classified as deferred revenue. In the third quarter and first nine months of fiscal year 2012, we recognized $66.0 million and $153.9 million of revenue, respectively, as our performance obligation under the agreement commencing on April 2011.

License from Intel: We recognized $140.0 million as an intangible asset upon execution of the agreement in the fourth quarter of fiscal year 2011. Amortization expense of $5.0 million per quarter will be charged to cost of sales over the seven year estimated useful life of the technology beginning in April 2011. In the third quarter and first nine months of fiscal year 2012, we recognized amortization expense of $5.0 million and $11.7 million, respectively.

Fair Value Determination

In determining the estimated fair value of the elements of the License Agreement, we assumed the highest and best use of each element from a market participant perspective. The inputs and assumptions used in our valuation included projected revenue, royalty rates, discount rates, useful lives and income tax rates, among others. The development of a number of these inputs and assumptions in the model required a significant amount of management judgment and is based upon a number of factors, including the selection of industry comparables, royalty rates, market growth rates and other relevant factors. Changes in any number of these assumptions may have had a substantial impact on the estimated fair value of each element. These inputs and assumptions represent management’s best estimate at the time of the transaction.

Note 4 – Net Income Per Share

The following is a reconciliation of the numerator and denominators of the basic and diluted net income per share computations for the periods presented:



	Three Months Ended				Nine Months Ended
	October 30, 2011		October 31, 2010		October 30, 2011		October 31, 2010
	(In thousands, except per share data)
Numerator:
Net Income	$	178,273	$	84,862	$	465,065	$	81,495
Denominator:
Denominator for basic net loss per share, weighted average shares	607,063		577,323		600,563		572,420
Effect of dilutive securities:
Equity awards outstanding	6,497		5,325		14,125		12,080
Denominator for diluted net income per share, weighted average shares	613,560		582,648		614,688		584,500
Net Income per share:
Basic net Income per share	$	0.29	$	0.15	$	0.77	$	0.14
Diluted net Income per share	$	0.29	$	0.15	$	0.76	$	0.14

Diluted net income per share for the three and nine months ended October 30, 2011 does not include the effect of anti-dilutive common equivalent shares from 25.1 million and 22.0 million stock options and RSUs, respectively. Diluted net income per share for the three and nine months ended October 31, 2010 does not include the effect of anti-dilutive common equivalent shares from 40.3 million and 27.9 million stock options and RSUs, respectively.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 5 – Income Taxes

We recognized income tax expense of $26.5 million and $73.8 million for the three and nine months ended October 30, 2011, respectively and $18.7 million and $3.8 million for the three and nine months ended October 31, 2010, respectively. Income tax expense as a percentage of income before taxes, or our effective tax rate, was 13.0% and 13.7% for the three and nine months ended October 30, 2011, respectively and 18.1% and 4.4% for the three and nine months ended October 31, 2010, respectively.

Our effective tax rate on income before tax for the first nine months of fiscal year 2012 of 13.7% was lower than the United States federal statutory rate of 35.0% due primarily to income earned in jurisdictions where the tax rate is lower than the United States federal statutory tax rate. Further, our annual projected effective tax rate as of the first nine months of fiscal year 2012 of 15.2% differs from our effective tax rate for the first nine months of fiscal year 2012 of 13.7% due to favorable discrete events that occurred in the first nine months of fiscal year 2012 primarily attributable to the expiration of statutes of limitations in certain non-U.S. jurisdictions for which we had not previously recognized related tax benefits.

Our effective tax rate on income before tax for the first nine months of fiscal year 2011 of 4.4% was lower than the United States federal statutory rate of 35.0% primarily due to income earned in jurisdictions where the tax rate is lower than the United States federal statutory tax rate and the significant impact of certain discrete tax events that occurred during this time. Our annual projected effective tax rate as of the first nine months of fiscal year 2011 was 18.8% and differs from our effective tax rate for the first nine months of fiscal year 2011 of 4.4% due to favorable discrete events that occurred in the first nine months of fiscal year 2011 primarily attributable to the expiration of statutes of limitations in certain non-U.S. jurisdictions for which we had not previously recognized related tax benefits.

As of October 30, 2011, we recorded unrecognized tax benefits of approximately $28.1 million of which $16.1 million is in connection with the acquisition of Icera and $12.0 million is related to income tax positions taken in various jurisdictions. The $28.1 million of unrecognized tax benefits recorded as of October 30, 2011 consists of $8.1 million recorded in non-current income tax payable and $20.0 million reflected as a reduction to the related deferred tax assets. Additionally, we recognized tax benefits related to the expiration of statutes of limitations in certain non-U.S. jurisdictions in the nine months ended October 30, 2011 of approximately $7.5 million. There have been no other significant changes to our unrecognized tax benefits and any related interest or penalties from our fiscal year ended January 30, 2011. For the nine months ended October 30, 2011, there have been no material changes to our tax years that remain subject to examination by major tax jurisdictions.

While we believe that we have adequately provided for all uncertain tax positions, amounts asserted by tax authorities could be greater or less than our accrued position. Accordingly, our provisions on federal, state and foreign tax related matters to be recorded in the future may change as revised estimates are made or the underlying matters are settled or otherwise resolved with the respective tax authorities. As of October 30, 2011, we do not believe that our estimates, as otherwise provided for, on such tax positions will significantly increase or decrease within the next twelve months.

Note 6 - Marketable Securities

All of our cash equivalents and marketable securities are classified as “available-for-sale” securities. These securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income, a component of stockholders’ equity, net of tax.

We performed an impairment review of our investment portfolio as of October 30, 2011. Based on our quarterly impairment review and having considered the guidance in the relevant accounting literature, we did not record any other than temporary impairment charges during the first nine months of fiscal year 2012. We concluded that our investments were appropriately valued and that no other than temporary impairment charges were necessary on our portfolio of available for sale investments as of October 30, 2011. The following is a summary of cash equivalents and marketable securities at October 30, 2011 and January 30, 2011:

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



	October 30, 2011
	Amortized Cost		Unrealized Gain		Unrealized Loss			Estimated Fair Value
	(In thousands)
Debt securities of United States government agencies	$	607,828	$	1,134	$	(330	)	$	608,632
Corporate debt securities	1,105,438		2,840		(531		)	1,107,747
Mortgage backed securities issued by United States government-sponsored enterprises	141,189		5,005		(31		)	146,163
Money market funds	36,296							36,296
Debt securities issued by United States Treasury	430,233		2,019		(505		)	431,747
Total	$	2,320,984	$	10,998	$	(1,397	)	$	2,330,585
Classified as:
Cash equivalents								$	149,047
Marketable securities								2,181,538
Total								$	2,330,585



	January 30, 2011
	Amortized Cost		Unrealized Gain		Unrealized Loss			Estimated Fair Value
	(In thousands)
Debt securities of United States government agencies	$	531,789	$	1,034	$	(226	)	$	532,597
Corporate debt securities	925,226		3,354		(208		)	928,372
Mortgage backed securities issued by United States government-sponsored enterprises	140,844		4,599		(21		)	145,422
Money market funds	132,586		—		—			132,586
Debt securities issued by United States Treasury	435,091		1,939		(18		)	437,012
Total	$	2,165,536	$	10,926	$	(473	)	$	2,175,989
Classified as:
Cash equivalents								$	350,787
Marketable securities								1,825,202
Total								$	2,175,989

The amortized cost and estimated fair value of cash equivalents and marketable securities which are primarily debt instruments are classified as available-for-sale at October 30, 2011 and January 30, 2011 and are shown below by contractual maturity.



	October 30, 2011				January 30, 2011
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Less than one year	$	1,236,291	$	1,237,962	$	1,176,046	$	1,178,733
Due in 1 - 5 years	984,387		988,574		899,993		904,926
Mortgage-backed securities issued by government-sponsored enterprises not due at a single maturity date	100,306		104,049		89,497		92,330
Total	$	2,320,984	$	2,330,585	$	2,165,536	$	2,175,989

Net realized gains for the three and nine months ended October 30, 2011 were $0.1 million and $0.5 million, respectively. Net realized gains for the three and nine months ended October 31, 2010, were $0.3 million and $1.3 million, respectively.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 7 – Fair Value of Cash Equivalents and Marketable Securities

We measure our cash equivalents and marketable securities at fair value. The fair values of our financial assets and liabilities are determined using quoted market prices of identical assets or quoted market prices of similar assets from active markets. Our Level 1 assets consist of our money market fund deposits. We classify securities within Level 1 assets when the fair value is obtained from real time quotes for transactions in active exchange markets involving identical assets. Our available-for-sale securities are classified as having Level 2 inputs. Our Level 2 assets are valued utilizing a market approach where the market prices of similar assets are provided by a variety of independent industry standard data providers to our investment custodian. There were no significant transfers between Levels 1 and 2 assets for the three and nine months ended October 30, 2011.

Financial assets and liabilities measured at fair value are summarized below:



	Fair value measurement at reporting date using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs
	October 30, 2011		(Level 1)		(Level 2)
	(In thousands)
Debt securities issued by United States government agencies (1)	$	608,632	$	—	$	608,632
Debt securities issued by United States Treasury (2)	431,747		—		431,747
Corporate debt securities (3)	1,107,747		—		1,107,747
Mortgage-backed securities issued by government-sponsored entities (4)	146,163		—		146,163
Money market funds (5)	36,296		36,296		—
Total cash equivalents and marketable securities	$	2,330,585	$	36,296	$	2,294,289


(1)	Includes $23.5 million in Cash Equivalents and $585.1 million in Marketable Securities on the Condensed Consolidated Balance Sheet.


(2)	Includes $23.7 million in Cash Equivalents and $408.1 million in Marketable Securities on the Condensed Consolidated Balance Sheet.


(3)	Includes $65.6 million in Cash Equivalents and $1,042.2 million in Marketable Securities on the Condensed Consolidated Balance Sheet.


(4)	Included in Marketable Securities on the Condensed Consolidated Balance Sheet.


(5)	Included in Cash Equivalents on the Condensed Consolidated Balance Sheet.

Note 8 - 3dfx

During fiscal year 2002, we completed the purchase of certain assets from 3dfx Interactive, Inc., or 3dfx, for an aggregate purchase price of approximately $74.2 million. On December 15, 2000, NVIDIA Corporation and one of our indirect subsidiaries entered into an Asset Purchase Agreement, or the APA, which closed on April 18, 2001, to purchase certain graphics chip assets from 3dfx.

In October 2002, 3dfx filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Northern District of California. In March 2003, the Trustee appointed by the Bankruptcy Court to represent 3dfx’s bankruptcy estate served his complaint on NVIDIA. The Trustee’s complaint asserted claims for, among other things, successor liability and fraudulent transfer and sought additional payments from us. In early November 2005, NVIDIA and the Official Committee of Unsecured Creditors, or the Creditors’ Committee, agreed to a Plan of Liquidation of 3dfx, which included a conditional settlement of the Trustee’s claims against us. This conditional settlement was subject to a confirmation process through a vote of creditors and the review and approval of the Bankruptcy Court. The conditional settlement called for a payment by NVIDIA of approximately $30.6 million to the 3dfx estate. Under the settlement, $5.6 million related to various administrative expenses and Trustee fees, and $25.0 million related to the satisfaction of debts and liabilities owed to the general unsecured creditors of 3dfx. Accordingly, during the three

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

month period ended October 30, 2005, we recorded $5.6 million as a charge to settlement costs and $25.0 million as additional purchase price for 3dfx. The Trustee advised that he intended to object to the settlement.

The conditional settlement reached in November 2005 never progressed through the confirmation process and the Trustee’s case still remains pending appeal. As such, we have not reversed the accrual of $30.6 million - $5.6 million as a charge to settlement costs and $25.0 million as additional purchase price for 3dfx – that we recorded during the three months ended October 30, 2005, pending resolution of the appeal of the Trustee’s case.

The 3dfx asset purchase price of $95.0 million and $4.2 million of direct transaction costs were allocated based on fair values presented below. The final allocation of the purchase price of the 3dfx assets is contingent upon the outcome of all of the 3dfx litigation. Please refer to Note 14 of these Notes to the Condensed Consolidated Financial Statements for further information regarding this litigation.



	Fair Market Value		Straight-Line Amortization Period

Property and equipment	$	2,433	1-2
Trademarks	11,310		5
Goodwill	85,418		—
Total	$	99,161

Note 9: Business Combinations

On June 10, 2011, we completed the acquisition of Icera, Inc. by acquiring all issued and outstanding preferred and common shares in exchange for cash. Icera develops baseband processors for 3G and 4G cellular phones and tablets. In addition to leveraging on the existing Icera business, the objective of the acquisition is to accelerate and enhance the combination of our application processor with Icera’s baseband processor for use in mobile devices such as smartphones and tablets.

Total consideration to acquire Icera was $352.2 million in cash. All existing Icera equity based incentive plans were terminated upon the completion of the acquisition. In connection with the acquisition of Icera, we established a retention program in the aggregate amount of approximately $68.0 million to be paid out to Icera employees over a period of four years.

The allocation of purchase consideration to assets and liabilities is not yet finalized. We continue to evaluate the fair value of certain assets and liabilities related to the acquisition of Icera. Additional information, which existed as of the acquisition date but was at that time unknown to us, may become known to us during the remainder of the measurement period, a period not to exceed 12 months from the acquisition date. Changes to amounts recorded as assets or liabilities may result in a corresponding adjustment to goodwill. During the three months ended October 30, 2011, we adjusted the preliminary values assigned to deferred income tax assets and liabilities in order to reflect additional information obtained since the acquisition date, resulting in an increase to goodwill of $54.5 million. The change of $54.5 million was primarily related to the reduction of net operating loss carryforward as a result of the limitation pursuant to Section 382 of the Internal Revenue Code of 1986, as amended. In addition, we have determined that goodwill from the acquisition of Icera should be allocated to our Consumer Products Business, or CPB, operating segment.

The preliminary fair values of the assets acquired and liabilities assumed by major class in the acquisition of Icera were recognized as follows:

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



	(In thousands)
Cash	$	3,315
Accounts receivable	13,740
Inventory	13,510
Prepaid and other current assets	1,972
Deferred tax assets	16,824
Property, plant and equipment	3,649
Goodwill	278,209
Intangible assets	97,515
Other assets	591
Total assets acquired	429,325

Accounts payable	(6,026		)
Accrued liabilities	(38,865		)
Notes payable	(10,319		)
Income taxes payable	(4,558		)
Deferred income tax liabilities	(17,358		)
Net assets acquired	$	352,199

The preliminary goodwill of $278.2 million arising from the acquisition is primarily attributed to the assembled workforce of Icera and premium paid over net assets acquired. Goodwill recognized is not expected to be deductible for tax purposes. Please refer to Note 10 of these Notes to Condensed Consolidated Financial Statements for further information regarding the activity related to the carrying value of goodwill.

The acquisition-related intangible assets assumed from the acquisition of Icera were recognized as follows based upon their fair values as of June 10, 2011:



Intangible assets	Fair Value (in thousands)		Weighted-average estimated useful lives (in years)
Technology	$	58,300	7.4
In-process technology	$	20,200	indefinite
Customer relationships	$	18,200	6.8

Technology

Technology consists of core technology and existing technology. Core technology represents a series of processes and trade secrets that are used in Icera’s products and form a major part of the architecture of both the current products and planned future releases of current products. We used a profit allocation method to value the core technology of Icera, based on market royalties for similar fundamental technologies. The profit allocation method estimates the cost savings that accrue to the owner of an intangible asset that would otherwise be payable on revenues earned through the use of the asset. The royalty rate we used was based on an analysis of empirical, market-derived royalty rates for guideline intangible assets. Revenue was projected over the expected remaining useful life of the core technology and then the market-derived royalty rate was applied to estimate the royalty savings.

Existing technology is specific to certain products acquired that have also passed technological feasibility. We used an income approach to value Icera’s existing technology. Using this approach, we calculated the estimated fair value using expected future cash flows from specific products discounted to their net present values at an appropriate risk-adjusted rate of return.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

In-Process Technology

In-process technology or IPR&D represents the fair values of incomplete Icera research and development projects that had not reached technological feasibility as of the date of acquisition. In the future, the fair value of each project at the acquisition date will be either amortized or impaired depending on whether the projects are completed or abandoned.

The fair value of the IPR&D was determined using the income approach. Under the income approach, the expected future cash flows from each project under development was estimated and discounted to their net present values at an appropriate risk-adjusted rate of return. Significant factors considered in the calculation of the rate of return were the weighted average cost of capital, the return on assets, as well as the risks inherent in the development process, including the likelihood of achieving technological success and market acceptance. Each project was analyzed to determine the unique technological innovations, the existence and reliance on core technology, the existence of any alternative future use or current technological feasibility, and the complexity, cost and time to complete the remaining development. Future cash flows for each project were estimated based on forecasted revenue and costs, taking into account the expected product life cycles, market penetration and growth rates.

Customer Relationships

Customer relationships represent the fair value of projected cash flows that will be derived from the sale of products to Icera’s existing customers based on existing, in-process, and future versions of the underlying technology.

Supplemental Pro Forma Data (Unaudited)

The unaudited pro forma statement of operations data below gives effect to the acquisition of Icera, as if it had occurred at the beginning of fiscal year 2011. The following data includes the amortization of acquisition-related intangible assets and compensation cost related to a retention program for the nine months ended October 30, 2011 and October 31, 2010, respectively. Transaction costs related to the acquisition of Icera have been shown in the nine months ended October 31, 2010, as if the acquisition had occurred at the beginning of fiscal year 2011. This pro forma data is presented for informational purposes only and does not purport to be indicative of the results of future operations or of the results that would have occurred had the acquisitions taken place at the beginning of fiscal year 2011. Revenue contribution from Icera was not significant for the third quarter of fiscal year 2012.



	Nine Months Ended
	October 30, 2011		October 31, 2010
	(In thousands, except per share data)
Pro forma net revenue	$	3,065,136	$	2,692,933
Pro forma net income	$	448,491	$	28,645
Pro forma net income per share (basic)	$	0.75	$	0.05
Pro forma net income per share (diluted)	$	0.73	$	0.05

Note 10 - Goodwill

The following table summarizes the activity related to the carrying value of goodwill:




	(In thousands)
Balance as of January 30, 2011	$	369,844
Addition due to business combination	278,209
Balance as of October 30, 2011	$	648,053

Please refer to Note 9 of these Notes to Condensed Consolidated Financial Statements for further information regarding this business combination.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 11 - Intangible Assets

The components of our amortizable intangible assets are as follows:



	October 30, 2011							January 30, 2011
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
	(In thousands)
Technology licenses	$	320,310	$	(89,304	)	$	231,006	$	320,477	$	(62,791	)	$	257,686
Acquisition-related intangible assets	172,039		(74,057		)	97,982		75,339		(61,114		)	14,225
Patents	32,673		(18,822		)	13,851		32,203		(15,369		)	16,834
Total intangible assets	$	525,022	$	(182,183	)	$	342,839	$	428,019	$	(139,274	)	$	288,745

Amortization expense associated with intangible assets for the three and nine months ended October 30, 2011 was $16.4 million and $42.9 million, respectively. Amortization expense associated with intangible assets for the three and nine months ended October 31, 2010 was $7.6 million and $21.9 million, respectively. Amortization expense increased compared to the prior year primarily due to the addition of acquisition-related intangible assets from the Icera acquisition completed on June 10, 2011 and the patent cross license agreement with Intel entered into on January 10, 2011. Please refer to Note 9 of these Notes to Condensed Consolidated Financial Statements for further information regarding the Icera business combination. Future amortization expense related to the net carrying amount of intangible assets at October 30, 2011 is estimated to be $19.1 million for the remainder of fiscal year 2012, $56.8 million in fiscal year 2013, $52.2 million in fiscal year 2014, $52.1 million in fiscal year 2015, $51.2 million in fiscal year 2016 and a total of $111.4 million in fiscal year 2017 and fiscal years subsequent to fiscal year 2017.

Note 12 - Balance Sheet Components

Certain balance sheet components are as follows:



	October 30, 2011		January 30, 2011
Inventories:	(In thousands)
Raw materials	$	69,447	$	67,880
Work in-process	58,798		72,698
Finished goods	191,357		204,947
Total inventories	$	319,602	$	345,525

At October 30, 2011, we had outstanding inventory purchase obligations totaling approximately $472.1 million.



	October 30, 2011		January 30, 2011
Prepaid Expenses and Other:	(In thousands)
Prepaid maintenance	$	12,070	$	12,165
Prepaid insurance	3,684		3,512
Prepaid taxes	—		1,364
Prepaid rent	3,589		3,599
Other	15,230		11,996
Total prepaid expenses and other	$	34,573	$	32,636

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



	October 30, 2011		January 30, 2011
	(In thousands)
Accrued Liabilities:
Deferred revenue	$	236,605	$	245,596
Accrued customer programs (1)	170,062		171,163
Warranty accrual (2)	43,709		107,897
Accrued payroll and related expenses	54,481		71,915
Accrued legal settlement (3)	30,600		30,600
Deferred rent	1,801		3,268
Taxes payable, short- term	8,627		4,576
Other	32,856		21,529
Total accrued liabilities and other	$	578,741	$	656,544

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

(2) Please refer to Note 13 of these Notes to Condensed Consolidated Financial Statements for discussion regarding the warranty accrual.

(3) Please refer to Note 14 of these Notes to Condensed Consolidated Financial Statements for discussion regarding the 3dfx litigation.



	October 30, 2011		January 30, 2011
	(In thousands)
Other Long-Term Liabilities:
Deferred income tax liability	$	77,729	$	46,129
Income taxes payable, long term	61,469		57,590
Asset retirement obligation	9,800		9,694
Deferred revenue	1,534		163,000
Other long-term liabilities	56,428		71,300
Total other long-term liabilities	$	206,960	$	347,713

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 13 - Guarantees

U.S. GAAP 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, U.S. GAAP requires disclosures about the guarantees that an entity has issued, including a tabular reconciliation of the changes of the entity’s product warranty liabilities.

Product Defect

Our products are complex and may contain defects or experience failures due to any number of issues in design, fabrication, packaging, materials and/or use within a system. If any of our products or technologies contains a defect, compatibility issue or other error, we may have to invest additional research and development efforts to find and correct the issue. Such efforts could divert our management’s and engineers’ attention from the development of new products and technologies and could increase our operating costs and reduce our gross margin. In addition, an error or defect in new products or releases or related software drivers after commencement of commercial shipments could result in failure to achieve market acceptance or loss of design wins. Also, we may be required to reimburse customers, including for customers’ costs to repair or replace the products in the field, which could cause our revenue to decline. A product recall or a significant number of product returns could be expensive, damage our reputation and could result in the shifting of business to our competitors. Costs associated with correcting defects, errors, bugs or other issues could be significant and could materially harm our financial results.

During the second quarter of fiscal year 2011, we recorded an additional charge to cover the estimated remaining customer warranty, repair, return, replacement and other costs arising from a weak die/packaging material set in certain versions of our previous generation media and communications processor, or MCP, and graphics processing unit, or GPU, products used in notebook configurations. The net charge amounted to $193.9 million, of which $181.2 million was charged against cost of revenue. The extra remediation costs are primarily due to additional platforms from late failing systems that we had not previously considered to be at risk. Included in the charge are the estimated costs of implementing a settlement reached during the second quarter of fiscal year 2011 with the plaintiffs of a putative consumer class action lawsuit related to this same matter and another related estimated consumer class action settlement. As a result of this settlement, the other estimated settlement, and offsetting insurance reimbursements, we recorded a net charge of $12.7 million to sales, general and administrative expense during the second quarter of fiscal year 2011. Together with the $282.0 million net charge we had previously recorded for related estimated costs, this brings the total cumulative net charge to $475.9 million, of which $466.4 million has been charged against cost of revenue and the remainder has been charged to sales, general and administrative.

The previous generation MCP and GPU products that are impacted were included in a number of notebook products that were shipped and sold in significant quantities. Certain notebook configurations of these products are failing in the field at higher than normal rates. Testing suggests a weak material set of die/package combination, system thermal management designs, and customer use patterns are contributing factors for these failures. We have worked with our customers to develop and have made available for download a software driver to cause the system fan to begin operation at the powering up of the system and reduce the thermal stress on these chips. We have also recommended to our customers that they consider changing the thermal management of the products in their notebook system designs. We intend to fully support our customers in their repair and replacement of these impacted products that fail, and their other efforts to mitigate the consequences of these failures. The weak die/packaging material combination is not used in any of our products that are currently in production.

In September, October and November 2008, several putative securities class action lawsuits were filed against us, asserting various claims related to the impacted MCP and GPU products. Please refer to Note 14 of these Notes to the Condensed Consolidated Financial Statements for further information regarding this litigation and the settlement.

Accrual for Product Warranty Liabilities

Cost of revenue includes the estimated cost of product warranties. Under limited circumstances, we may offer an extended limited warranty to customers for certain products. Additionally, we accrue for known warranty and indemnification issues if a loss is probable and can be reasonably estimated. The estimated product warranty liabilities for the three and nine months ended October 30, 2011 and October 31, 2010 are as follows:

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



	Three Months Ended						Nine Months Ended
	October 30, 2011			October 31, 2010			October 30, 2011			October 31, 2010
	(In thousands)
Balance at beginning of period	$	53,818		$	203,689		$	107,896		$	92,655
Additions (1)	2,010			1,363			4,994			192,461
Deductions (2)	(12,119		)	(54,386		)	(69,181		)	(134,450		)
Balance at end of period	$	43,709		$	150,666		$	43,709		$	150,666

(1) Includes $186,241 for the nine months ended October 31, 2010 for incremental repair and replacement costs from a weak die/packaging material set.

(2) Includes $8,248 and $48,389 for the three and nine months ended October 30, 2011, respectively, and $49,069 and $113,888 for the three and nine months ended October 31, 2010, respectively, for incremental repair and replacement costs from a weak die/packaging material set.

In connection with certain agreements that we have executed in the past, we have at times provided indemnities to cover the indemnified party for matters such as tax, product and employee liabilities. We have also on occasion included intellectual property indemnification provisions in our technology related agreements with third parties. Maximum potential future payments cannot be estimated because many of these agreements do not have a maximum stated liability. As such, we have not recorded any liability in our Condensed Consolidated Financial Statements for such indemnifications. U.S. GAAP 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, disclosures about the guarantees that an entity has issued, including a tabular reconciliation of the changes of the entity’s product warranty liabilities are also required.

Note 14 - Commitments and Contingencies

3dfx

On December 15, 2000, NVIDIA and one of our indirect subsidiaries entered into an Asset Purchase Agreement, or APA, to purchase certain graphics chip assets from 3dfx. The transaction closed on April 18, 2001. That acquisition, and 3dfx’s October 2002 bankruptcy filing, led to four lawsuits against NVIDIA: two brought by 3dfx’s former landlords, one by 3dfx’s bankruptcy trustee and the fourth by a committee of 3dfx’s equity security holders in the bankruptcy estate. The two landlord cases have been settled with payments from the landlords to NVIDIA, and the equity security holders lawsuit was dismissed with prejudice and no appeal was filed. Accordingly, only the bankruptcy trustee suit remains outstanding as more fully explained below.

In March 2003, the Trustee appointed by the Bankruptcy Court to represent 3dfx’s bankruptcy estate served a complaint on NVIDIA asserting claims for, among other things, successor liability and fraudulent transfer and seeking additional payments from us. The Trustee’s fraudulent transfer theory alleged that NVIDIA had failed to pay reasonably equivalent value for 3dfx’s assets, and sought recovery of the difference between the $70 million paid and the alleged fair value, which the Trustee estimated to exceed $50 million. The Trustee’s successor liability theory alleged NVIDIA was effectively 3dfx’s legal successor and therefore was responsible for all of 3dfx’s unpaid liabilities.

On October 13, 2005, the Bankruptcy Court heard the Trustee’s motion for summary adjudication, and on December 23, 2005, denied that motion in all material respects and held that NVIDIA may not dispute that the value of the 3dfx transaction was less than $108 million. The Bankruptcy Court denied the Trustee’s request to find that the value of the 3dfx assets conveyed to NVIDIA was at least $108 million.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

In early November 2005, after several months of mediation, NVIDIA and the Official Committee of Unsecured Creditors, or the Creditors’ Committee, agreed to a Plan of Liquidation of 3dfx, which included a conditional settlement of the Trustee’s claims against us. This conditional settlement was subject to a confirmation process through a vote of creditors and the review and approval of the Bankruptcy Court. The conditional settlement called for a payment by NVIDIA of approximately $30.6 million to the 3dfx estate. Under the settlement, $5.6 million related to various administrative expenses and Trustee fees, and $25.0 million related to the satisfaction of debts and liabilities owed to the general unsecured creditors of 3dfx. Accordingly, during the three month period ended October 30, 2005, we recorded $5.6 million as a charge to settlement costs and $25.0 million as additional purchase price for 3dfx. The Trustee advised that he intended to object to the settlement. The conditional settlement never progressed substantially through the confirmation process.

On December 21, 2006, the Bankruptcy Court scheduled a trial for one portion of the Trustee’s case against NVIDIA. On January 2, 2007, NVIDIA terminated the settlement agreement on grounds that the Bankruptcy Court had failed to proceed toward confirmation of the Creditors’ Committee’s plan. A non-jury trial began on March 21, 2007 on valuation issues in the Trustee’s constructive fraudulent transfer claims against NVIDIA. Specifically, the Bankruptcy Court tried four questions: (1) what did 3dfx transfer to NVIDIA in the APA; (2) of what was transferred, what qualifies as “property” subject to the Bankruptcy Court’s avoidance powers under the Uniform Fraudulent Transfer Act and relevant bankruptcy code provisions; (3) what is the fair market value of the “property” identified in answer to question (2); and (4) was the $70 million that NVIDIA paid “reasonably equivalent” to the fair market value of that property. The parties completed post-trial briefing on May 25, 2007.

On April 30, 2008, the Bankruptcy Court issued its Memorandum Decision After Trial, in which it provided a detailed summary of the trial proceedings and the parties’ contentions and evidence and concluded that “the creditors of 3dfx were not injured by the Transaction.” This decision did not entirely dispose of the Trustee’s action, however, as the Trustee’s claims for successor liability and intentional fraudulent conveyance were still pending. On June 19, 2008, NVIDIA filed a motion for summary judgment to convert the Memorandum Decision After Trial to a final judgment. That motion was granted in its entirety and judgment was entered in NVIDIA’s favor on September 11, 2008. The Trustee filed a Notice of Appeal from that judgment on September 22, 2008, and on September 25, 2008, NVIDIA exercised its election to have the appeal heard by the United States District Court.

The District Court’s hearing on the Trustee’s appeal was held on June 10, 2009. On December 20, 2010, the District Court issued an Order affirming the Bankruptcy Court’s entry of summary judgment in NVIDIA’s favor. On January 19, 2011, the Trustee filed a Notice of Appeal to the United States Court of Appeals for the Ninth Circuit.

While the conditional settlement reached in November 2005 never progressed through the confirmation process, the Trustee’s case still remains pending on appeal. Accordingly, we have not reversed the accrual of $30.6 million – $5.6 million as a charge to settlement costs and $25.0 million as additional purchase price for 3dfx – that we recorded during the three months ended October 30, 2005, pending resolution of the appeal of the Trustee’s case.

Rambus Inc.

On July 10, 2008, Rambus Inc. filed suit against NVIDIA, asserting patent infringement of 17 patents claimed to be owned by Rambus. Rambus seeks damages, enhanced damages and injunctive relief. The lawsuit was filed in the Northern District of California in San Jose, California. On July 11, 2008, NVIDIA filed suit against Rambus in the Middle District of North Carolina asserting numerous claims, including antitrust and other claims. NVIDIA seeks damages, enhanced damages and injunctive relief. Rambus has since dropped two patents from its lawsuit in the Northern District of California. The two cases have been consolidated into a single proceeding in the San Francisco division of the Northern District of California. On April 13, 2009, the Court issued an order staying motion practice and allowing only certain document discovery to proceed. On February 11, 2011, the Court lifted the stay and ordered that discovery on other issues could proceed. The Court has since opened motion practice and discovery with respect to ten patents, referred to as the “Farmwald” and “Barth I” patents. Most of the “Farmwald” patents are also subject to patent reexamination requests. The Court has issued a scheduling order through the claim construction proceedings, currently scheduled for March 17, 2012. A case management conference is currently scheduled for January 13, 2012.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

On November 6, 2008, Rambus filed a complaint alleging a violation of 19 U.S.C. Section 1337 based on a claim of patent infringement of nine Rambus patents against NVIDIA and 14 other respondents with the U.S. International Trade Commission, or ITC. Rambus has subsequently withdrawn four of the nine patents at issue. The complaint sought an exclusion order barring the importation of products that allegedly infringe the now five Rambus patents. The ITC instituted the investigation and a hearing was held October 13-20, 2009. The Administrative Law Judge issued an Initial Determination on January 22, 2010, which found the asserted claims of two patents in one patent family infringed but invalid, and the asserted claims of three patents in a separate patent family, valid, infringed and enforceable. This decision was reviewed by the ITC. The ITC issued a Final Decision on July 26, 2010. In its Final Decision, the ITC found that NVIDIA infringed three related patents and issued a limited exclusion order prohibiting import of certain NVIDIA products. NVIDIA is appealing certain aspects of the ruling that were unfavorable to NVIDIA. Rambus is also appealing certain aspects of the ruling that were unfavorable to Rambus. A hearing was held on October 6, 2011 and a decision regarding the appeal has not yet been issued.

On May 13, 2011, the Federal Circuit issued opinions in two related cases that address issues material to the disputes between Rambus and certain other parties in the ITC. Those opinions may positively affect NVIDIA’s defenses in all of the cases brought against NVIDIA by Rambus. In those opinions, the Federal Circuit held Rambus destroyed documents when it had a legal duty to preserve them and that, if done in bad faith, Rambus is to bear the “heavy burden” to prove that NVIDIA suffered no prejudice in its ability to defend the cases brought against it by Rambus. In the ITC’s Final Decision, despite finding Rambus acted in bad faith, the ITC incorrectly placed the burden on NVIDIA to prove actual prejudice. The Federal Circuit remanded both cases to the respective district courts for further proceedings consistent with its opinions. Those proceedings are currently underway.

NVIDIA also sought reexamination of the patents asserted in the ITC, as well as other patents, in the United States Patent and Trademark Office, or USPTO. Proceedings are underway with respect to all challenged patents. With respect to the claims asserted in the ITC, the USPTO has issued a preliminary ruling invalidating many of the claims. The USPTO issued "Right to Appeal Notices" for the three patents found by the administrative law judge to be valid, enforceable and infringed. In the Right to Appeal Notices, the USPTO Examiner has cancelled all asserted claims of one of the patents and allowed the asserted claims on the other two patents. Rambus and NVIDIA both sought review of the USPTO Examiner's adverse findings. On appeal, the Board of Patent Appeals and Interferences (BPAI) found two of the patents subject to reexamination invalid. On October 18, 2011 the BPAI also heard oral argument regarding the third patent, but has not issued rulings to date with respect to that patent.

Rambus has also been subject to an investigation in the European Union. NVIDIA was not a party to that investigation, but has sought to intervene in the appeal of the investigation. As a result of Rambus’ commitments to resolve that investigation, for a period of five years from the date of the resolution, Rambus must now provide a license to memory controller manufacturers, sellers and/or companies that integrate memory controllers into other products. The license terms are set forth in a license made available on Rambus’ website, or the Required Rambus License. On August 12, 2010, we entered into the Required Rambus License. Pursuant to the agreement, Rambus charges a royalty of (i) one percent of the net sales price per unit for certain memory controllers and (ii) two percent of the net sales price per unit for certain other memory controllers, provided that the maximum average net sales price per unit for these royalty bearing products shall be deemed not to exceed a maximum of $20. The agreement has a term until December 9, 2014. However, NVIDIA may terminate the agreement on or after August 12, 2011 with thirty days prior written notice to Rambus. NVIDIA has already provided written notice to Rambus of its' intent to terminate effective immediately upon the removal of the ITC's limited exclusion order.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Also, on December 1, 2010, Rambus filed a lawsuit against NVIDIA and several other companies alleging six claims for patent infringement. This lawsuit is pending in the Northern District of California and seeks damages, enhanced damages and injunctive relief. On the same day, Rambus filed a complaint with the ITC alleging that NVIDIA and several other companies violated 19 U.S.C. Section 1337 based on a claim of patent infringement of three Rambus patents. Rambus seeks exclusion of certain NVIDIA products from importation into the United States. The Northern District of California has stayed the case pending resolution of the ITC investigation. The asserted patents are related to each other, and the three patents in the ITC complaint are also at issue in the lawsuit pending in the Northern District of California. Many of the patents at issue in these lawsuits are also being challenged in Rambus’ other disputes with NVIDIA. A hearing before an Administrative Law Judge of the ITC was held from October 12-20, 2011, and no ruling has been issued to date.

NVIDIA intends to pursue its offensive and defensive cases vigorously in all actions.

Product Defect Litigation and Securities Cases

Product Defect Litigation

In September, October and November 2008, several putative consumer class action lawsuits were filed against us, asserting various claims arising from a weak die/packaging material set in certain versions of our previous generation products used in notebook configurations. Most of the lawsuits were filed in Federal Court in the Northern District of California, but three were filed in state court in California, in Federal Court in New York, and in Federal Court in Texas. Those three actions have since been removed or transferred to the United States District Court for the Northern District of California, San Jose Division, where all of the actions now are currently pending. The various lawsuits are titled Nakash v. NVIDIA Corp., Feinstein v. NVIDIA Corp., Inicom Networks, Inc. v. NVIDIA Corp. and Dell, Inc. and Hewlett Packard, Olivos v. NVIDIA Corp., Dell, Inc. and Hewlett Packard, Sielicki v. NVIDIA Corp. and Dell, Inc., Cormier v. NVIDIA Corp., National Business Officers Association, Inc. v. NVIDIA Corp., and West v. NVIDIA Corp. The First Amended Complaint was filed on October 27, 2008, which no longer asserted claims against Dell, Inc. The various complaints assert claims for, among other things, breach of warranty, violations of the Consumer Legal Remedies Act, Business & Professions Code sections 17200 and 17500 and other consumer protection statutes under the laws of various jurisdictions, unjust enrichment, and strict liability.

The District Court has entered orders deeming all of the above cases related under the relevant local rules. On December 11, 2008, NVIDIA filed a motion to consolidate all of the aforementioned consumer class action cases. On February 26, 2009, the District Court consolidated the cases, as well as two other cases pending against Hewlett Packard, under the caption “The NVIDIA GPU Litigation” and ordered the plaintiffs to file lead counsel motions by March 2, 2009. On March 2, 2009, several of the parties filed motions for appointment of lead counsel and briefs addressing certain related issues. On April 10, 2009, the District Court appointed Milberg LLP lead counsel. On May 6, 2009, the plaintiffs filed an Amended Consolidated Complaint, alleging claims for violations of California Business and Professions Code Section 17200, Breach of Implied Warranty under California Civil Code Section 1792, Breach of the Implied Warranty of Merchantability under the laws of 27 other states, Breach of Warranty under the Magnuson-Moss Warranty Act, Unjust Enrichment, violations of the New Jersey Consumer Fraud Act, Strict Liability and Negligence, and violation of California’s Consumer Legal Remedies Act.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

On August 19, 2009, we filed a motion to dismiss the Amended Consolidated Complaint, and the Court heard arguments on that motion on October 19, 2009. On November 19, 2009, the Court issued an order dismissing with prejudice plaintiffs causes of action for Breach of the Implied Warranty under the laws of 27 other states and unjust enrichment, dismissing with leave to amend plaintiffs’ causes of action for Breach of Implied Warranty under California Civil Code Section 1792 and Breach of Warranty under the Magnuson-Moss Warranty Act, and denying NVIDIA’s motion to dismiss as to the other causes of action. The Court gave plaintiffs until December 14, 2009 to file an amended complaint. On December 14, 2009, plaintiffs filed a Second Amended Consolidated Complaint, asserting claims for violations of California Business and Professions Code Section 17200, Breach of Implied Warranty under California Civil Code Section 1792, Breach of Warranty under the Magnuson-Moss Warranty Act, violations of the New Jersey Consumer Fraud Act, Strict Liability and Negligence, and violation of California’s Consumer Legal Remedies Act. The Second Amended Complaint seeks unspecified damages. On January 19, 2010, we filed a motion to dismiss the Breach of Implied Warranty under California Civil Code Section 1792, Breach of Warranty under the Magnuson-Moss Warranty Act, and California’s Consumer Legal Remedies Act claims in the Second Amended Consolidated Complaint. In addition, on April 1, 2010, Plaintiffs filed a motion to certify a class consisting of all people who purchased computers containing certain of our MCP and GPU products. On May 3, 2010, we filed an opposition to Plaintiffs’ motion for class certification. A hearing on both motions was held on June 14, 2010. On July 16, 2010, the parties filed a stipulation with the District Court advising that, following mediation they had reached a settlement in principle in The NVIDIA GPU Litigation. The settlement in principle was subject to certain approvals, including final approval by the court. As a result of the settlement in principle, and the other estimated settlement, and offsetting insurance reimbursements, NVIDIA recorded a net charge of $12.7 million to sales, general and administrative expense during the second quarter of fiscal year 2011. In addition, a portion of the $181.2 million of additional charges we recorded against cost of revenue related to the weak die/packaging set during the second quarter of fiscal year 2011, relates to estimated additional repair and replacement costs related to the implementation of these settlements. On August 12, 2010, the parties executed a Stipulation and Agreement of Settlement and Release. On September 15, 2010, the Court issued an order granting preliminary approval of the settlement and providing for notice to the potential class members. The Final Approval Hearing was held on December 20, 2010, and on that same day the Court approved the settlement and entered Final Judgment over several objections. In January 2011, several objectors filed Notices of Appeal of the Final Judgment to the United States Court of Appeals for the Ninth Circuit.

On February 28, 2011, a group of purported class members filed a motion with the District Court purporting to seek enforcement of the settlement. The Motion claimed that NVIDIA was not properly complying with its obligations under the settlement in connection with the remedies provided to purchasers of Hewlett-Packard computers included in the settlement. On March 4, 2011, NVIDIA and Class Counsel at Milberg LLP filed oppositions to the Motion. The Court held a hearing on March 28, 2011, and denied the Motion on May 2, 2011.

On July 22, 2011, a putative class action titled Granfield v. NVIDIA Corp. was filed in federal court in Massachusetts asserting claims for breach of implied warranties arising out of the weak die/packaging material set, on behalf of a class of consumers alleged to not be covered by the settlement approved by the California court in The NVIDIA GPU Litigation. On November 3, 2011 the action was transferred to the Northern District of California, San Francisco Division, based upon stipulation of the parties. On September 27, 2011, a second putative class action captioned Van der Maas v. NVIDIA Corp., et al., was filed in the Central District of California against NVIDIA, Asustek Computer Inc., and Asustek Computer International on behalf of certain consumers alleged not to be covered by the NVIDIA GPU settlement. This action asserts claims for violations of California's unfair competition laws, violation of California's Consumer Legal Remedies Act, negligence and strict liability, and violation of the Texas Business and Commerce Code Section 17.50. We intend to defend against the actions vigorously.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Securities Cases

In September 2008, three putative securities class actions, or the Actions, were filed in the United States District Court for the Northern District of California arising out of our announcements on July 2, 2008, that we would take a charge against cost of revenue to cover anticipated costs and expenses arising from a weak die/packaging material set in certain versions of our previous generation MCP and GPU products and that we were revising financial guidance for our second quarter of fiscal year 2009. The Actions purport to be brought on behalf of purchasers of NVIDIA stock and assert claims for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. On October 30, 2008, the Actions were consolidated under the caption In re NVIDIA Corporation Securities Litigation, Civil Action No. 08-CV-04260-JW (HRL). Lead Plaintiffs and Lead Plaintiffs’ Counsel were appointed on December 23, 2008. On February 6, 2009, co-Lead Plaintiff filed a Writ of Mandamus with the Ninth Circuit Court of Appeals challenging the designation of co-Lead Plaintiffs’ Counsel. On February 19, 2009, co-Lead Plaintiff filed with the District Court, a motion to stay the District Court proceedings pending resolution of the Writ of Mandamus by the Ninth Circuit. On February 24, 2009, Judge Ware granted the stay. On November 5, 2009, the Court of Appeals issued an opinion reversing the District Court’s appointment of one of the lead plaintiffs’ counsel, and remanding the matter for further proceedings. On December 8, 2009, the District Court appointed Milberg LLP and Kahn Swick & Foti, LLC as co-lead counsel.

On January 22, 2010, Plaintiffs filed a Consolidated Amended Class Action Complaint for Violations of the Federal Securities Laws, asserting claims for violations of Section 10(b), Rule 10b-5, and Section 20(a) of the Exchange Act. The consolidated complaint sought unspecified compensatory damages. We filed a motion to dismiss the consolidated complaint in March 2010 and a hearing was held on June 24, 2010 before Judge Seeborg. On October 19, 2010, Judge Seeborg granted our motion to dismiss with leave to amend. On December 2, 2010, co-Lead Plaintiffs filed a Second Consolidated Amended Complaint. We moved to dismiss the Second Consolidated Amended Complaint on February 14, 2011. Following oral argument, on October 12, 2011, Judge Seeborg granted our motion to dismiss without leave to amend, and on November 8, 2011, Plaintiffs filed a Notice of Appeal to the Ninth Circuit.

Accounting for Loss Contingencies

While there can be no assurance of favorable outcomes, we believe the claims made by other parties in the above ongoing matters are without merit and we intend to vigorously defend the actions. With the exception of the 3dfx and product defect litigation cases, we have not recorded any accrual for contingent liabilities associated with the legal proceedings described above based on our belief that liabilities, while possible, are not probable. Further, any possible range of loss in these matters cannot be reasonably estimated at this time. We are engaged in other legal actions not described above arising in the ordinary course of its business and, while there can be no assurance of favorable outcomes, we believe that the ultimate outcome of these actions will not have a material adverse effect on our operating results, liquidity or financial position.

Note 15 - Stockholders’ Equity

Stock Repurchase Program

We did not enter into any structured share repurchase transactions or otherwise purchase any shares of our common stock during the three and nine months ended October 30, 2011. Through October 30, 2011, we have repurchased an aggregate of 90.9 million shares under our stock repurchase program for a total cost of $1.46 billion. As of October 30, 2011, we are authorized, subject to certain specifications, to repurchase shares of our common stock up to $1.24 billion through May 2013.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Convertible Preferred Stock

As of October 30, 2011 and January 30, 2011, there were no shares of preferred stock outstanding.

Common Stock

We are authorized to issue up to 2,000,000,000 shares of our common stock at $0.001 per share par value.

Note 16 – Comprehensive Income

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



	Three Months Ended						Nine Months Ended
	October 30, 2011			October 31, 2010			October 30, 2011			October 31, 2010
	(In thousands)
Net income	$	178,273		$	84,862		$	465,065		$	81,495
Net change in unrealized gains (losses) on available-for-sale securities, net of tax	(5,324		)	1,653			(901		)	1,408
Less reclassification adjustments for net realized gains on available-for-sale securities included in net income, net of tax	(113		)	(220		)	(374		)	(911		)
Total comprehensive income	$	172,836		$	86,295		$	463,790		$	81,992

Note 17 - Segment Information

Our Chief Executive Officer, who is considered to be our chief operating decision maker, or CODM, reviews financial information presented on an operating segment basis for purposes of making operating decisions and assessing financial performance.

Our GPU business is comprised primarily of our GeForce discrete and chipset products which support desktop and notebook personal computers, or PCs, plus memory products. Our GPU business also includes license revenue from the License Agreement with Intel. Our professional solutions business, or PSB, is comprised of our Quadro professional workstation products and other professional graphics products, including our NVIDIA Tesla high-performance computing products. Our CPB is comprised of our Tegra mobile products plus license, royalty, other revenue and associated costs related to video game consoles and other digital consumer electronics devices.

The “All Other” category includes non-recurring charges and benefits that we do not allocate to our operating segments as these expenses and credits are not included in the segment operating performance measures evaluated by our CODM. There were no non-recurring charges or benefits for the three and nine months ended October 30, 2011 and October 31, 2010, respectively.

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

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



	GPU			PSB		CPB			All Other		Consolidated
	(In thousands)
Three Months Ended October 30, 2011
Revenue	$	644,802		$	230,295	$	191,083		$	—	$	1,066,180
Depreciation and amortization expense	$	29,547		$	5,427	$	17,413		$	—	$	52,387
Operating income (loss)	$	146,843		$	95,887	$	(45,640	)	$	—	$	197,090
Three Months Ended October 31, 2010
Revenue	$	581,863		$	210,115	$	51,934		$	—	$	843,912
Depreciation and amortization expense	$	31,488		$	7,782	$	7,516		$	—	$	46,786
Operating income (loss)	$	48,521		$	87,027	$	(31,765	)	$	—	$	103,783
Nine Months Ended October 30, 2011
Revenue	$	1,920,935		$	642,425	$	481,376		$	—	$	3,044,736
Depreciation and amortization expense	$	89,238		$	17,414	$	45,658		$	—	$	152,310
Operating income (loss)	$	406,833		$	235,635	$	(116,486	)	$	—	$	525,982
Nine Months Ended October 31, 2010
Revenue	$	1,913,130		$	614,935	$	128,868		$	—	$	2,656,933
Depreciation and amortization expense	$	97,180		$	20,379	$	23,037		$	—	$	140,596
Operating income (loss)	$	(57,846	)	$	246,117	$	(112,302	)	$	—	$	75,969

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



	Three Months Ended				Nine Months Ended
	October 30, 2011		October 31, 2010		October 30, 2011		October 31, 2010
	(In thousands)
Revenue:
China	$	209,986	$	282,300	$	732,202	$	930,981
Taiwan	293,171		220,322		857,717		687,474
Other Asia Pacific	223,597		112,292		561,708		395,091
United States	180,245		79,474		442,733		227,633
Other Americas	84,868		78,737		228,223		216,419
Europe	74,313		70,787		222,153		199,335
Total revenue	$	1,066,180	$	843,912	$	3,044,736	$	2,656,933

Revenue from significant customers, those representing 10% or more of total revenue, aggregated approximately 11% of our total revenue from one customer for the three and nine months ended October 30, 2011, respectively. Revenue from significant customers, those representing 10% or more of total revenue, aggregated approximately 12% of our total revenue from one customer and 13% of our total revenue from one customer for the three and nine months ended October 31, 2010, respectively.

Accounts receivable from significant customers, those representing 10% or more of total accounts receivable, aggregated approximately 18% of our accounts receivable balance from one customer at October 30, 2011 and approximately 11% of our accounts receivable balance from one customer at January 30, 2011.

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

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the “safe harbor” created by those sections. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “goal,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential” and similar expressions intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. We discuss many of these risks, uncertainties and other factors in this Quarterly Report on Form 10-Q in greater detail under the heading “Risk Factors.” Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this filing. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We hereby qualify our forward-looking statements by these cautionary statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

All references to “NVIDIA,” “we,” “us,” “our” or the “Company” mean NVIDIA Corporation and its subsidiaries, except where it is made clear that the term means only the parent company.

NVIDIA, the NVIDIA logo, CUDA, GeForce, Quadro, Tegra, and Tesla are trademarks and/or registered trademarks of NVIDIA Corporation in the United States and other countries. Other company and product names may be trademarks of the respective companies with which they are associated.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Item 6. Selected Financial Data” of our Annual Report on Form 10-K for the fiscal year ended January 30, 2011 and “Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q and our Condensed Consolidated Financial Statements and related Notes thereto, as well as other cautionary statements and risks described elsewhere in this Quarterly Report on Form 10-Q, before deciding to purchase, hold or sell shares of our common stock.

Overview

Our Company

NVIDIA Corporation invented the graphics processing unit, or GPU, in 1999. Since then, we have strived to set new standards in visual computing with interactive graphics available on devices ranging from tablets and smart phones to notebooks and workstations. Our expertise in programmable GPUs and computer-systems technology has led to breakthroughs in parallel processing which make supercomputing less expensive and widely accessible. We are strategically investing in three major areas – visual computing, high performance computing and mobile computing. We serve the visual computing market with our consumer GeForce graphics products and professional Quadro graphics products; the high performance computing market with our Tesla computing solutions products; and the mobile computing market with our Tegra system-on-chip products.

We have three primary financial reporting segments – GPU, Professional Solutions Business, or PSB and Consumer Products Business, or CPB. Our GPU business is comprised primarily of our GeForce discrete and chipset products which support desktop and notebook personal computers, or PCs, plus memory products. Our GPU business also includes license revenue in connection with the License Agreement with Intel Corporation. Our PSB is comprised of our Quadro professional workstation products and other professional graphics products, including our NVIDIA Tesla high-performance computing products. Our CPB is comprised of our Tegra mobile products that support smartphones, tablets, personal media players, or PMPs, internet television, in-car instrumentation, navigation and entertainment, and other similar devices. CPB also includes license, royalty, other revenue and associated costs related to video game consoles and other digital consumer electronics devices. Original equipment manufacturers, or OEMs, original design manufacturers, or ODMs, add-in-card manufacturers, system builders and consumer electronics companies worldwide utilize our processors as a core component of their entertainment, business and professional solutions.

We were incorporated in California in April 1993 and reincorporated in Delaware in April 1998. Our headquarter facilities are

in Santa Clara, California. Our Internet address is www.nvidia.com. The contents of our website are not a part of this Form 10-Q.

Recent Developments, Future Objectives and Challenges

GPU Business

During the second quarter of fiscal year 2012, we introduced the GeForce 560 GPU, the latest addition to our Fermi architecture-based product family. The GeForce 560 GPU brings performance and features such as PhysX, 3D Vision, SLI and surround technologies to PC games. Additionally, we announced that YouTube is for the first time giving users the ability to view several 3D videos on their NVIDIA 3D Vision PCs and notebooks when using the latest version of the Mozilla Firefox Web browser.

During the second quarter of fiscal year 2012, we also unveiled the first gaming notebook with the GeForce 500M Series of notebook GPUs. The GeForce GTX 560M graphics processor delivers a gaming experience at full 1080p resolution in DirectX 11 title with Optimus technology to deliver longer battery life.

During the first quarter of fiscal year 2012, we launched the GeForce GTX 590 which is powered by dual Fermi GPUs on a single card and targets the enthusiast market.

During the first quarter of fiscal year 2012, we also launched the GeForce GTX 550 Ti, an entry-level gaming GPU for next generation Intel systems. GTX 550 Ti delivers faster performance for DX11 games compared with its closest competitive product.

Professional Solutions Business

During the third quarter of fiscal year 2012, we announced that Oak Ridge National Laboratory, which operates a computing facility for the U.S. Department of Energy, will deploy a new supercomputer, "Titan," based on Tesla GPUs. Titan, a Cray XK6 supercomputer, is expected to be faster and more energy efficient than today's fastest supercomputer.

During the third quarter of fiscal year 2012, we also announced a technology that takes advantage of the parallel processing power of the GPU for image processing. This technology enables processing application developers to now deliver higher quality and more realistic on-air graphics when processing real-time video streams.

During the second quarter of fiscal year 2012, we unveiled the Tesla M2090 GPU that accelerates computational research in AMBER 11, an application which helps simulate behavior of biomolecules. The Tesla M2090 is also suited to a wide range of high performance computing applications like molecular dynamics applications, computer-aided engineering applications, earth science applications and oil and gas applications. We also announced that Tesla GPUs were being used by J.P. Morgan, the investment bank, to deliver a 40-times increase in the end-to-end speed of its risk calculations, while reducing the cost of ownership.

During the first quarter of fiscal year 2012, we announced the new Quadro 400, a new professional graphics solution designed for applications such as Autodesk AutoCAD and other leading CAD/CAM applications. The Quadro 400 GPU offers power efficiency, consuming less than 35 watts, and its low-profile footprint means it offers the flexibility to fit into any workstation, including small form-factor systems. We also announced the new CUDA® 4.0 Toolkit. The new release provides unified virtual addressing, GPU-to-GPU communication and enhanced C++ template libraries which enable more developers to take advantage of GPU computing. We believe this, along with other ongoing initiatives in our Tesla high-performance computing business, will lead to continued growth in the PSB.

Consumer Products Business

During the third quarter of fiscal year 2012, we shipped Tegra 3, the first quad-core processor for super phones and tablets, which brings PC-class performance levels to tablets and phones. In November, Asus announced that its Eee Pad Transformer Prime, the first device based on Tegra 3, will be available worldwide in December.

During the third quarter of fiscal year 2012, we along with our partners added three more Tegra-based smartphones to the eight already available. These are LG Optimus EX, LG Optimus BQ and Motorola Electrify. In addition, we also added thirteen new tablets, for a total of twenty three currently available. Notable among these are the Asus Slider, Sony Tablet S, Sony Tablet P and Samsung's Galaxy Tab 8.9.

During the second quarter of fiscal year 2012, we announced that the latest Samsung Electronics Galaxy smartphone – the Galaxy R – features our Tegra 2 chip, along with a 4.19-inch screen, and runs on the Android 2.3 (Gingerbread) operating system.

During the second quarter of fiscal year 2012, we completed the acquisition of Icera, Inc., an innovator of baseband processors for 3G and 4G cellular phones and tablets. Icera’s high-speed wireless modem products have been approved by more than 50 carriers across the globe. The total consideration to acquire Icera was $352.2 million in cash. Please refer to Note 9 of the Notes to Condensed Consolidated Financial Statements for further information regarding this business combination.

During the first quarter of fiscal year 2012, we launched along with our partners, the first wave of Android smartphones and tablets. Among them are the Motorola Atrix 4G and LG Optimus 2X smartphones; as well as tablets like the Acer ICONIA Tab A500, Asus Eee Pad Transformer, Dell Streak, LG Optimus Pad and G-Slate, and Motorola Xoom. In addition, Samsung and Sony announced that their Galaxy Tab 10.1 and Sony S1 and S2 projects, respectively, will be using our Tegra™ 2 mobile super chip.

Financial Information by Business Segment and Geographic Data

We report financial information for three operating segments to our CODM: the GPU business is comprised primarily of our GeForce discrete and chipset products which support desktop and notebook PCs, plus memory products. Our GPU business is also comprised of license revenue in connection with the License Agreement with Intel; the PSB, which is comprised of our NVIDIA Quadro professional workstation products and other professional graphics products, including our NVIDIA Tesla high-performance computing products; and our CPB which is comprised of our Tegra mobile products that support smartphones, tablets, personal media players, or PMPs, internet television, in-car instrumentation, navigation and entertainment, and other similar devices. CPB also includes license, royalty, other revenue and associated costs related to video game consoles and other digital consumer electronics devices.

The “All Other” category includes non-recurring charges and benefits that we do not allocate to our other operating segments as these expenses and credits are not included in the segment operating performance measures evaluated by our CODM. There were no non-recurring charges or benefits for the three and nine months ended October 30, 2011 and October 31, 2010, respectively. Please refer to Note 17 of the Notes to the Condensed Consolidated Financial Statements for further disclosure regarding segment information.

Results of Operations

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



	Three Months Ended				Nine Months Ended
	October 30, 2011		October 31, 2010		October 30, 2011		October 31, 2010
Revenue	100.0	%	100.0	%	100.0	%	100.0	%
Cost of revenue	47.8		53.5		48.6		63.0
Gross profit	52.2		46.5		51.4		37.0
Operating expenses
Research and development	24.1		24.3		24.2		23.8
Sales, general and administrative	9.7		9.9		10.0		10.3
Total operating expenses	33.8		34.2		34.2		34.1
Operating Income (loss)	18.5		12.3		17.2		2.9
Interest and other income, net	0.7		—		0.4		0.3
Income (loss) before income tax (benefit)	19.2		12.3		17.6		3.2
Income tax expense (benefit)	2.5		2.2		2.4		0.1
Net Income (loss)	16.7	%	10.1	%	15.2	%	3.1	%

Three and Nine Months Ended October 30, 2011 and October 31, 2010.

Revenue

Revenue was $1.07 billion for our third quarter of fiscal year 2012, compared to $843.9 million for our third quarter of fiscal year 2011, which represents an increase of approximately 26.3%. Revenue was $3.04 billion for the first nine months of fiscal year 2012 and $2.66 billion for the first nine months of fiscal year 2011, which represents an increase of 14.6%. We expect revenue in the fourth quarter of fiscal year 2012 to be relatively flat, plus or minus 2 percent, as compared to the third quarter of fiscal year 2012. A discussion of our revenue results for each of our operating segments is as follows:

GPU Business. GPU business revenue increased approximately 10.8% to $644.8 million in the third quarter of fiscal year 2012, compared to $581.9 million for the third quarter of fiscal year 2011. GPU revenues improved primarily due to strength in our desktop GPU products as demand for our high-end products increased as consumers geared up their PCs for new game title releases. Our share of the total Desktop GPU market also increased according to the latest 2011 PC Graphics Report from Mercury Research. Notebook revenues increased due to a combination of our strong design wins in notebook systems based on Intel’s Sandy Bridge platform and an increase in our share of the total market according to the latest 2011 PC Graphics Report from Mercury Research. Additionally, license revenue of $66.0 million in connection with the License Agreement that we entered into with Intel in January 2011 also contributed to the increase in GPU business revenues. Offsetting these increases were decreases in MCP chipset revenues as these products approach their end of life.

GPU business revenue was relatively flat at $1.92 billion for the first nine months of fiscal year 2012 compared to $1.91 billion for the first nine months of fiscal year 2011. This was primarily the result of an increase in desktop revenues driven by the continued ramp of our Fermi architecture-based GPUs and an increase in notebook revenues driven by strong design wins in notebook systems based on Intel’s Sandy Bridge platform. Additionally, license revenue in connection with the License Agreement that we entered into with Intel in January 2011 also contributed to GPU business revenues in fiscal year 2012. Offsetting these increases was a significant decrease in MCP chipset revenues as these products approach their end of life.

PSB. PSB revenue increased by approximately 9.6% to $230.3 million in the third quarter of fiscal year 2012, compared to $210.1 million in the third quarter of fiscal year 2011. This was mainly due to an increase in demand for our Fermi-generation products in the enterprise markets as well as new growth we are experiencing in emerging geographic markets. Tesla sales also improved on continued Fermi adoption by our customers. PSB revenue increased by 4.5% to $642.4 million for the first nine months of fiscal year 2012 as compared to $614.9 million for the first nine months of fiscal year 2011, driven primarily by strength in our Quadro workstation sales fueled primarily by continued customer adoption of products based on our Fermi architecture.

CPB. CPB revenue increased by 267.9% to $191.1 million in the third quarter of fiscal year 2012, compared to $51.9 million for the third quarter of fiscal year 2011. This was primarily due to significantly higher unit shipment volume of our Tegra 2 products that are included in smartphones and tablets using the Android operating system, which has been steadily gaining market share. Sales of our embedded entertainment products also increased in the third quarter of fiscal year 2012 when compared to the third quarter of fiscal year 2011 driven by customer refreshes of entertainment systems. CPB revenue increased by approximately 273.5% to $481.4 million for the first nine months of fiscal year 2012 as compared to $128.9 million for the first nine months of fiscal year 2011. This revenue growth was also driven primarily by higher unit shipment volume of our Tegra 2 products and increased sales of our embedded entertainment products.

Concentration of Revenue

Revenue from sales to customers outside of the United States and other Americas accounted for 83% and 81% of total revenue for the third quarter of fiscal years 2012 and 2011, respectively and were 85% and 83% for the first nine months of fiscal years 2012 and 2011, 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.

Revenue from significant customers, those representing 10% or more of total revenue, aggregated approximately 11% of our total revenue from one customer for the three and nine months ended October 30, 2011, respectively. Revenue from significant customers, those representing 10% or more of total revenue, aggregated approximately 12% of our total revenue from one customer and 13% of our total revenue from one customers for the three and nine months ended October 31, 2010, respectively.

Gross Profit and Gross Margin

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 and warranty provisions and shipping costs. Cost of revenue also includes development costs for license, service arrangements and stock-based compensation related to personnel associated with manufacturing.

Gross margin is the percentage 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 is significantly impacted by the mix of products we sell. Product mix is often difficult to estimate with accuracy. Therefore, if we experience product transition challenges, if we achieve significant revenue growth in our lower margin product lines, or if we are unable to earn as much revenue as we expect from higher margin product lines, our gross margin may be negatively impacted.

Our overall gross margin was 52.2% and 46.5% for the third quarter of fiscal years 2012 and 2011, respectively and 51.4% and 37.0% for the first nine months of fiscal years 2012 and 2011, respectively. The improvement in gross margin for each of these periods during fiscal year 2012 when compared to fiscal year 2011 was attributable to the high-gross margin revenue we recorded from the License Agreement we entered into with Intel in January 2011, a more favorable overall product mix, the continuing positive impact of improved yields of our 40nm Fermi products and other manufacturing cost reductions. In addition, our gross margin for the first nine months of fiscal year 2012 improved significantly compared to the same period in fiscal year 2011 due to a warranty charge of $181.2 million that we recorded during the first nine months of fiscal year 2011 to cover the estimated remaining customer warranty, repair, return, replacement and other costs arising from a weak die/packaging material set in certain versions of our previous generation products used in notebook configurations. No such charge was made during the first nine months ended fiscal year 2012.

We expect our gross margin for the fourth quarter of fiscal year 2012 to be flat to up 0.5 percentage points from the level that we obtained for the third quarter of fiscal year 2012. We intend to continue to work hard to improve our gross margin by, among other things, focusing on delivering cost effective product architectures and enhancing our business processes.

A discussion of our gross margin results for each of our operating segments is as follows:

GPU Business. The gross margin of our GPU business increased during the third quarter of fiscal year 2012 as compared to the third quarter of fiscal year 2011, as well as during the first nine months of fiscal year 2012 as compared to the first nine months of fiscal year 2011. Contributing to the increase in GPU business gross margin for the third quarter and first nine of fiscal year 2012 were revenue from the License Agreement we entered into with Intel in January 2011 and improved average selling prices, or ASPs, in our desktop and notebook GPU products, helped by the success of our high-end products this fiscal year. Additionally, gross margin for the GPU business was lower in the first nine months of fiscal year 2011 when compared to the first nine months of fiscal year 2012 due to the $181.2 million warranty charge that we recorded during the first nine months of fiscal year 2011 as well as charges that we recorded for inventory reserves in that same period that were significantly in excess of our typical quarterly charges, neither of which recurred during the first nine months of fiscal year 2012.

PSB. The gross margin of our PSB decreased slightly during the third quarter and first nine months of fiscal year 2012 as compared to the third quarter and first nine months of fiscal year 2011. These decreases were primarily due to the mix of products sold.

CPB. The gross margin of our CPB decreased during the third quarter and first nine months of fiscal year 2012 as compared to the third quarter and first nine months of fiscal year 2011. This decrease reflects the higher concentration within the periods of Tegra product revenue, which has lower gross margins than the other revenue components of CPB such as license and royalty revenues.

Operating Expenses



	Three Months Ended										Nine Months Ended
	October 30, 2011			October 31, 2010			$ Change		% Change		October 30, 2011			October 31, 2010			$ Change		% Change
	(in millions)										(in millions)
Research and development expenses	$	256.5		$	204.5		$	52.0	25.4	%	$	735.7		$	633.3		$	102.4	16.2	%
Sales, general and administrative expenses	103.1			83.8			19.3		23.0	%	$304.8			$273.5			$31.3		11.4	%
Total operating expenses	$	359.6		$	288.3		$	71.3	24.7	%	$	1,040.5		$	906.8		$	133.7	14.7	%
Research and development as a percentage of net revenue	24.1		%	24.3		%					24.2		%	23.8		%
Sales, general and administrative as a percentage of net revenue	9.7		%	9.9		%					10.0		%	10.3		%

Research and Development

Research and development expenses were $256.5 million and $204.5 million during the third quarter of fiscal years 2012 and 2011, respectively, an increase of $52.0 million, or 25.4%. Compensation and benefits increased by $29.6 million and stock-based compensation increased by $5.2 million, both of which were primarily related to growth in headcount. Development cost increase by $3.7 million driven by ramp-up efforts on 28nm technology. Also contributing to the increase were other acquisition-related costs of $4.2 million for compensation charges related to the retention program we have established for employees from our acquisition of Icera and $2.3 million of amortization expense for intangible assets associated with our acquisition of Icera in June 2011.

Research and development expenses were $735.7 million and $633.3 million in the first nine months of fiscal years 2012 and 2011, respectively, an increase of $102.4 million, or 16.2%. Compensation and benefits increased by $67.2 million and stock-based compensation increased by $16.3 million, both of which were primarily related to growth in headcount. Also contributing to the increase were other acquisition-related costs of $8.3 million for compensation charges related to the retention program we have established for employees from our acquisition of Icera and $3.8 million of amortization expense for intangible assets associated with our acquisition of Icera in June 2011.

Sales, General and Administrative

Sales, general and administrative expenses were $103.1 million and $83.8 million during the third quarter of fiscal years 2012 and 2011, respectively, an increase of $19.3 million, or 23.0%. Compensation and benefits increased by $10.4 million and stock-based compensation increased by $2.3 million, both of which were primarily related to growth in headcount. Also contributing to the increase were $0.8 million of amortization expense for intangible assets associated with our acquisition of Icera and other acquisition-related costs of $2.2 million for transaction costs and compensation charges related to the retention program we have established for employees from our acquisition of Icera in June 2011.

Sales, general and administrative expenses were $304.8 million and $273.5 million for the first nine months of fiscal years 2012 and 2011, respectively, an increase of $31.3 million, or 11.4%. Compensation and benefits increased by $25.4 million and stock-based compensation increased by $7.9 million, both of which were primarily related to growth in headcount. Also contributing to the increase were acquisition-related costs of $4.3 million for transaction services and $2.5 million for compensation charges related to the retention program we have established for employees from the acquisition of Icera in June 2011. Offsetting these increases was a net charge of $12.7 million recorded during the second quarter of fiscal year 2011 for estimated costs of implementing a settlement with the plaintiffs of a putative consumer class action lawsuit, another related estimated consumer class action settlement, and offsetting insurance reimbursements relating to a weak die packaging material set.

We expect operating expenses to be approximately 372.0 million in the fourth quarter of fiscal year 2012.

Interest Income

Interest income consists of interest earned on cash, cash equivalents and marketable securities. Interest income was $4.4 million and $4.2 million in the third quarter of fiscal years 2012 and 2011, respectively, an increase of $0.2 million. Interest income was $14.9 million and $14.6 million for the first nine months of fiscal years 2012 and 2011, respectively, an increase of $0.3 million. These increases were primarily due to higher average cash balances in the third quarter and first nine months of fiscal year 2012 when compared to the third quarter and first nine months of fiscal year 2011.

Other Income (Expense), net

Other income (expense) primarily consists of realized gains and losses on the sale of marketable securities and foreign currency translation. Net other income (expense) was $3.3 million in the third quarter of fiscal year 2012 compared to $(4.4) million in the third quarter of fiscal year 2011, an income increase of $7.7 million. Net other (expense) was $(2.1) million and $(5.3) million for the first nine months of fiscal years 2012 and 2011, respectively, an income increase of $3.2 million. The increase in income was primarily driven by an increase in foreign currency gains in the third quarter and first nine months of fiscal year 2012.

Income Taxes

Our effective tax rate on income before tax for the first nine months of fiscal year 2012 of 13.7% was lower than the United States federal statutory rate of 35.0% due primarily to income earned in jurisdictions where the tax rate is lower than the United States federal statutory tax rate. Further, our annual projected effective tax rate as of the first nine months of fiscal year 2012 of 15.2% differs from our effective tax rate for the first nine months fiscal year 2012 of 13.7% due to favorable discrete events that occurred in the first nine months of fiscal year 2012 primarily attributable to the expiration of statutes of limitations in certain non-U.S. jurisdictions for which we had not previously recognized related tax benefits.

We expect our effective tax rate in the fourth quarter of fiscal year 2012 to be approximately 14% to 16%, depending primarily on any discrete tax events that may occur in such quarter.

Please refer to Note 5 of the Notes to Condensed Consolidated Financial Statements for further information regarding the components of our income tax expense.

Liquidity and Capital Resources



	As of October 30, 2011		As of January 30, 2011
	(In millions)
Cash and cash equivalents	$	566.8	$	665.4
Marketable securities	2,181.5		1,825.2
Cash, cash equivalents, and marketable securities	$	2,748.3	$	2,490.6



	Nine Months Ended
	October 30, 2011			October 31, 2010
	(In millions)
Net cash provided by operating activities	$	498.6		$	241.1
Net cash used in investing activities	$	(814.9	)	$	(340.4	)
Net cash provided by financing activities	$	217.7		$	103.3

As of October 30, 2011, we had $2.75 billion in cash, cash equivalents and marketable securities, an increase of $257.8 million from $2.49 billion at the end of fiscal year 2011. 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 includes certain limits on our portfolio duration.

Operating activities

Operating activities provided cash of $498.6 million and $241.1 million during the first nine months of fiscal years 2012 and 2011, respectively. The increase in cash provided by operating activities in the first nine months of fiscal year 2012 was primarily due to the significant increase in our net income.

Investing activities

Investing activities consisted primarily of purchases and sales of marketable securities, business acquisitions and purchases of property and equipment, which include leasehold improvements for our facilities and intangible assets. Investing activities used cash of $(814.9) million and $(340.4) million during the first nine months of fiscal years 2012 and 2011, respectively. The increase in investing activities was primarily due to the acquisition of Icera in the second quarter of fiscal year 2012. Please refer to Note 9 of the Notes to the Condensed Consolidated Financial Statements for further details.

We expect to spend approximately $30.0 million to $40.0 million for capital expenditures during the remainder of fiscal year 2012, primarily for leasehold improvements, software licenses, emulation equipment, computers and engineering workstations.

Financing activities

Financing activities provided cash of $217.7 million and $103.3 million during the first nine months of 2012 and 2011, respectively. Net cash provided by financing activities increased in the first nine months of fiscal year 2012 primarily due to an increase of proceeds from the issuance of common stock under our employee stock purchase plan and from the exercise of stock options during the first nine months of fiscal year 2012.

Liquidity

Our primary source of liquidity is cash generated by our operations. Our investment portfolio consisted of cash and cash equivalents, commercial paper, mortgage-backed securities issued by government-sponsored enterprises, equity securities, money market funds and debt securities of corporations, municipalities and the United States government and its agencies. These investments are denominated in United States dollars. As of October 30, 2011, we did not have any investments in auction-rate preferred securities.

All of our cash equivalents and marketable securities are treated as “available-for-sale”. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate debt securities may have their market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or if the decline in fair value of our publicly traded debt or equity investments is judged to be other-than-temporary. We may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. However, because any debt securities we hold are classified as “available-for-sale,” no gains or losses are realized in our statement of operations due to changes in interest rates unless such securities are sold prior to maturity or unless declines in market values are determined to be other-than-temporary. These securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income, a component of stockholders’ equity, net of tax.

As of October 30, 2011 and January 30, 2011, we had $2.75 billion and $2.49 billion, respectively, in cash, cash equivalents

and marketable securities. Our investment policy requires the purchase of top-tier investment grade securities and the diversification of asset types and includes certain limits on our portfolio duration, as specified in our investment policy guidelines. These guidelines also limit the amount of credit exposure to any one issue, issuer or type of instrument. As of October 30, 2011, we were in compliance with our investment policy. As of October 30, 2011, our investments in government agencies and government sponsored enterprises represented approximately 60% of our total investment portfolio, while the financial sector accounted for approximately 26% of our total investment portfolio. Of the financial sector investments, over half are guaranteed by the U.S. government. All of our investments are with A/A2 or better rated securities.

We performed an impairment review of our investment portfolio as of October 30, 2011. Based on our quarterly impairment review, we concluded that our investments were appropriately valued and did not record any impairment during three and nine months ended October 30, 2011.

Net realized gains for the three and nine months ended October 30, 2011 were $0.1 million and $0.5 million, respectively. As of October 30, 2011, we had a net unrealized gain of $9.6 million, which was comprised of gross unrealized gains of $11.0 million, offset by gross unrealized losses of $1.4 million. As of January 30, 2011, we had a net unrealized gain of $10.5 million, which was comprised of gross unrealized gains of $11.0 million, offset by $0.5 million of gross unrealized losses.

Our accounts receivable are highly concentrated and make us vulnerable to adverse changes in our customers’ businesses, and to downturns in the industry and the worldwide economy. One customer accounted for approximately 18% of our accounts receivable balance at October 30, 2011. While we strive to limit our exposure to uncollectible accounts receivable using a combination of credit insurance and letters of credit, difficulties in collecting accounts receivable could materially and adversely affect our financial condition and results of operations. These difficulties are heightened during periods when economic conditions worsen. We continue to work directly with more foreign customers and it may be difficult to collect accounts receivable from them. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. This allowance consists of an amount identified for specific customers and an amount based on overall estimated exposure. If the financial condition of our customers were to deteriorate, resulting in an impairment in their ability to make payments, additional allowances may be required, we may be required to defer revenue recognition on sales to affected customers, and we may be required to pay higher credit insurance premiums, any of which could adversely affect our operating results. In the future, we may have to record additional reserves or write-offs and/or defer revenue on certain sales transactions which could negatively impact our financial results.

Stock Repurchase Program

Our Board of Directors has authorized us, subject to certain specifications, to repurchase shares of our common stock up to an aggregate maximum amount of $2.7 billion through May 2013. The repurchases will be made from time to time in the open market, in privately negotiated transactions, or in structured stock repurchase programs, and may be made in one or more larger repurchases, in compliance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended, subject to market conditions, applicable legal requirements, and other factors. The program does not obligate NVIDIA to acquire any particular amount of common stock and the program may be suspended at any time at our discretion. As part of our share repurchase program, we have entered into, and we may continue to enter into, structured share repurchase transactions with financial institutions. These agreements generally require that we make an up-front payment in exchange for the right to receive a fixed number of shares of our common stock upon execution of the agreement, and a potential incremental number of shares of our common stock, within a pre-determined range, at the end of the term of the agreement. We did not enter into any structured share repurchase transactions or otherwise purchase any shares of our common stock during the three and nine months ended October 30, 2011. Through October 30, 2011, we have repurchased an aggregate of 90.9 million shares under our stock repurchase program for a total cost of $1.46 billion. As of October 30, 2011, we are authorized, subject to certain specifications, to repurchase shares of our common stock up to $1.24 billion through May 2013.

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

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

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

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

· new product announcements or product introductions by our competitors.

We expect to spend approximately $30.0 million to $40.0 million for capital expenditures during the remainder of fiscal year 2012.

For additional factors see “Item 1A. Risk Factors - Risks Related to Our Business, Industry and Partners - Our revenue may fluctuate while our operating expenses are relatively fixed, which makes our results difficult to predict and could cause our results to fall short of expectations.”

Contractual Obligations

At October 30, 2011, we had outstanding inventory purchase obligations totaling approximately $472.1 million. Also in connection with our completion of the acquisition of Icera on June 10, 2011, we have established a retention program in the aggregate amount of approximately $68.0 million to be paid out to Icera employees over a period of four years. There were no other material changes in our contractual obligations from those disclosed in our Annual Report on Form 10-K for the fiscal year ended January 30, 2011.

Please see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” in our Annual Report on Form 10-K for a description of our contractual obligations.

Off-Balance Sheet Arrangements

As of October 30, 2011, we had no material off-balance sheet arrangements as defined in Regulation S-K 303(a)(4)(ii).

Adoption of New and Recently Issued Accounting Pronouncements

Please see Note 1 of the Notes to Condensed Consolidated Financial Statements for a discussion of adoption of new and recently issued accounting pronouncements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Investment and Interest Rate Risk

As of October 30, 2011 and January 30, 2011, we had $2.75 billion and $2.49 billion, respectively, in cash, cash equivalents and marketable securities. We invest in a variety of financial instruments, consisting principally of cash and cash equivalents, commercial paper, mortgage-backed securities issued by government-sponsored enterprises, equity securities, money market funds and debt securities of corporations, municipalities and the United States government and its agencies. As of October 30, 2011, we did not have any investments in auction-rate preferred securities. All of our investments are denominated in United States dollars.

All of the cash equivalents and marketable securities are treated as “available-for-sale.” Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or if the decline in fair value of our publicly traded debt or equity investments is judged to be other-than-temporary. We may suffer losses in principal if we are forced to sell securities that decline in securities market value due to changes in interest rates. However, because any debt securities we hold are classified as “available-for-sale,” no gains or losses are realized in our Condensed Consolidated Statements of Operations due to changes in interest rates unless such securities are sold prior to maturity or unless declines in value are determined to be other-than-temporary. These securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), a component of stockholders’ equity, net of tax.

As of October 30, 2011, we performed a sensitivity analysis on our floating and fixed rate investments. According to our analysis, para