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<SEC-DOCUMENT>0000929624-99-000772.txt : 19990430
<SEC-HEADER>0000929624-99-000772.hdr.sgml : 19990430
ACCESSION NUMBER:		0000929624-99-000772
CONFORMED SUBMISSION TYPE:	10-K405
PUBLIC DOCUMENT COUNT:		4
CONFORMED PERIOD OF REPORT:	19990131
FILED AS OF DATE:		19990429

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			NVIDIA CORP/CA
		CENTRAL INDEX KEY:			0001045810
		STANDARD INDUSTRIAL CLASSIFICATION:	SEMICONDUCTORS & RELATED DEVICES [3674]
		IRS NUMBER:				943177549
		STATE OF INCORPORATION:			CA
		FISCAL YEAR END:			1231

	FILING VALUES:
		FORM TYPE:		10-K405
		SEC ACT:		
		SEC FILE NUMBER:	000-23985
		FILM NUMBER:		99605018

	BUSINESS ADDRESS:	
		STREET 1:		1226 TIROS WAY
		STREET 2:		415-617-4000
		CITY:			SUNNYVALE
		STATE:			CA
		ZIP:			94086
		BUSINESS PHONE:		4086174000

	MAIL ADDRESS:	
		STREET 1:		1226 TIROS WAY
		CITY:			SUNNYVALE
		STATE:			CA
		ZIP:			94086
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<DESCRIPTION>FORM 10-K405
<TEXT>

<PAGE>
 
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
 
                      SECURITIES AND EXCHANGE COMMISSION
                             Washington, DC 20549
 
                               ----------------
 
                                   FORM 10-K
 
[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934
 
  For the fiscal year ended January 31, 1999
 
                                      OR
 
[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934
 
  For the transition period from                  to
 
                        Commission file number 0-23985
 
                               ----------------
 
                              NVIDIA CORPORATION
            (Exact name of registrant as specified in its charter)
 
<TABLE>
 <S>                              <C>
            Delaware                                94-3177549
 (State or other jurisdiction of                 (I.R.S. Employer
 incorporation or organization)                Identification No.)
</TABLE>
 
                              3535 Monroe Street
                             Santa Clara, CA 95051
                                (408) 615-2500
  (Address, including zip code, and telephone number, including area code, of
                         principal executive offices)
 
          Securities registered pursuant to Section 12(b) of the Act:
 
                                     None
 
          Securities registered pursuant to Section 12(g) of the Act:
 
                    Common stock, $.001 par value per share
 
   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, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X]  No [_].
 
   Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
 
<TABLE>
     <S>                                                          <C>
     The aggregate market value of the voting stock held by non-
      affiliates of the registrant as of April 15, 1999:          $395,263,118
 
     Number of shares of common stock outstanding as of April
      15, 1999:                                                     29,308,984
</TABLE>
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
   The Registrant has incorporated by reference portions of its Proxy
Statement for its 1999 Annual Meeting of Stockholders to be filed by May 31,
1999.
 
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
 
                               NVIDIA CORPORATION
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
 <C>      <S>                                                              <C>
                                    PART I
 
 Item 1.  Business......................................................     1
 Item 2.  Properties....................................................     9
 Item 3.  Legal Proceedings.............................................     9
 Item 4.  Submission of Matters to a Vote of Security Holders...........    10
 Executive Officers of the Registrant....................................   10
 
                                    PART II
 
 Item 5.  Market for Registrant's Common Stock and Related Stockholder
           Matters......................................................    12
 Item 6.  Selected Financial Data.......................................    13
 Item 7.  Management's Discussion and Analysis of Financial Condition
           and Results of Operations....................................    14
 Item 7a. Quantitative and Qualitative Disclosures About Market Risk....    20
 Item 8.  Financial Statements and Supplementary Data...................    29
 Item 9.  Changes in and Disagreements With Accountants on Accounting
           and Financial Disclosure.....................................    29
 
                                   PART III
 
 Item 10. Directors and Executive Officers of the Registrant............    29
 Item 11. Executive Compensation........................................    29
 Item 12. Security Ownership of Certain Beneficial Owners and
           Management...................................................    29
 Item 13. Certain Relationships and Related Transactions................    29
 
                                    PART IV
 
 Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-
           K............................................................    30
 Signatures..............................................................   52
</TABLE>
<PAGE>
 
FORWARD-LOOKING STATEMENTS
 
   This report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 which are subject to the "safe harbor" created
by those sections. These forward-looking statements include but are not
limited to: statements related to industry trends and future growth in the
markets for 3D graphics processors; our product development efforts; the
timing of our introduction of new products; industry and consumer acceptance
of our products; and future profitability. Discussions containing these
forward-looking statements may be found in "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
These forward-looking statements involve risks and uncertainties that could
cause our actual results to differ materially from those in the forward-
looking statements. We undertake no obligation to publicly release any
revisions to the forward-looking statements or reflect events or circumstances
after the date of this document. The business risks on pages 20 through 29,
among other things, should be considered in evaluating our prospects and
future financial performance.
 
                                    PART I
 
ITEM 1. BUSINESS
 
Overview
 
   We design, develop and market 3D graphics processors and related software
that provide high performance interactive 3D graphics to the mainstream
personal computer ("PC") market. Our graphics processors incorporate a 128-bit
graphics architecture that is designed to deliver a highly immersive,
interactive 3D experience with realistic imagery and stunning effects. The
RIVA family of graphics processors, including the RIVA TNT, provides superior
processing power at competitive prices and is architected to take advantage of
mainstream industry standards such as Microsoft's Direct3D. The highly
integrated design of the RIVA TNT2, RIVA TNT, RIVA128ZX and RIVA128 graphics
processors combines high performance 3D and 2D graphics on a single chip. Our
graphics processors provide a simpler and lower cost graphics solution
relative to competing solutions, including multi-chip or multi-board 2D/3D
graphics subsystems.
 
   Interactive 3D graphics technology is emerging as one of the most
significant new computing developments since the introduction of the graphical
user interface. The visually engaging and interactive nature of 3D graphics
responds to consumers' demands for a convincing simulation of reality beyond
what is possible with traditional 2D graphics. The fundamental interactive
capability of 3D graphics is expected to make it a natural and compelling
medium for existing and emerging applications for entertainment, Internet,
business and education.
 
   Interactive 3D graphics is required across various computing and
entertainment platforms, such as workstations, specialized arcade systems and
home gaming consoles. However, the mainstream PC market has only recently
begun to transition from traditional 2D graphics to high-quality, interactive
3D graphics. Continuing advancements in semiconductor manufacturing have made
available more powerful and affordable microprocessors and 3D graphics
processors, both of which are essential to deliver interactive 3D graphics to
the mainstream PC market. Additionally, the industry has broadly adopted
Microsoft's 3D application programming interface ("API"), Direct3D, which
serves as a common and standard language between software applications and 3D
graphics processors. This has spurred the development of numerous compelling
3D titles, which has, in turn, spurred strong consumer demand.
 
   We believe that a PC's interactive 3D graphics capability represents one of
the primary means by which users differentiate among various systems. PC users
today can easily differentiate the quality of graphics and prefer personal
computers that provide a superior visual experience. These factors have
dramatically increased demand for 3D graphics processors. Mercury Research
estimates that 3D graphics will be standard in every PC unit shipped by 2001.
 
 
                                       1
<PAGE>
 
   We designed our graphics processors to enable PC original equipment
manufacturers ("OEMs") and add-in board manufacturers to build award-winning
products by delivering state-of-the-art interactive 3D graphics capability to
end users while maintaining affordable prices. We believe that by developing
3D graphics solutions that provide superior performance and address the key
requirements of the mainstream PC market, we will accelerate the adoption of
3D graphics throughout this market. The benefits and performance of the RIVA
family of 3D graphics processors have received significant industry validation
and have enabled our customers to win over 250 industry awards. Our products
currently are designed into products offered by seven of the top ten PC OEMs,
such as Compaq, Dell, Gateway, Hewlett-Packard, IBM, Micron, and Packard Bell
NEC, as well as leading motherboard manufacturers such as Intel and leading
add-in board manufacturers such as ASUSTeK, Canopus, Creative, Diamond, ELSA
and Leadtek.
 
   Our objective is to be the leading supplier of high performance 3D graphics
processors for PCs. Our strategy to achieve this objective includes the
following:
 
  . build award-winning products for the mainstream PC market;
 
  . target leading OEMs;
 
  . extend technological leadership in 3D graphics; and
 
  . increase market share.
 
Current Products
 
 RIVA TNT2 Graphics Processor
 
   The RIVA TNT2 3D graphics processor began commercial shipment in April
1999. The RIVA TNT2 extends the performance and function of the RIVA TNT
graphics processor for PC OEMs and graphics card manufacturers. Fabricated on
a .25 micron process technology, the RIVA TNT2 graphics processor delivers
higher performance than the RIVA TNT through improved clock rates for the 3D
processor and memory. The RIVA TNT2 supports 32 megabytes of frame buffer
memory. Increased memory results in a higher performance solution and the
ability to run at very high color depths and resolution for outstanding
quality. Other key performance features include support for a higher bandwidth
connection between the processor and the graphics processor called accelerated
graphics port ("AGP") AGP 4X. This feature will be utilized in future
motherboard solutions from Intel Corporation and others.
 
   The RIVA TNT2 graphics processor also provides support for digital flat
panel displays, the latest display technology for consumers and businesses.
Additional support for extremely high resolution (and refresh rate) monitors
is also included in the RIVA TNT2 graphics processor via a 300 MHz RAMDAC. The
RIVA TNT2 achieves high performance through a high frequency, dual pipeline
architecture.
 
 RIVA TNT Graphics Processor
 
   The RIVA TNT graphics processor enables PC OEMs and add-in board
manufacturers to satisfy end-user performance requirements by providing visual
realism and real-time interactivity. The RIVA TNT graphics processor, our
second-generation product, is highly integrated and delivers high frame rate
3D graphics, as well as 2D graphics, VGA and video processing in a single
processor. The RIVA TNT graphics processor also includes a rich set of
reference drivers and tools that translate between software API and hardware.
These drivers provide the ability to connect to and process data from external
video devices. The software driver is designed to maximize performance of the
graphics processor and to maintain compatibility with each successive
generation of our products. The software drivers have the flexibility to be
continually enhanced in order to further improve the performance of the
processors. The RIVA TNT graphics processor incorporates 7 million
transistors.
 
 
                                       2
<PAGE>
 
   The RIVA TNT graphics processor is produced using a .35 micron technology
and began commercial shipment in July 1998 and began shipping in volume in
August 1998. It has been adopted by several top OEMs and received PC
Magazine's 1998 Editors choice award for graphics processors.
 
 RIVA128ZX Graphics Processor
 
   The RIVA128ZX graphics processor extends the functionality and performance
of the RIVA128 graphics processor and includes two additional design features,
AGP 2X and an 8MB (megabyte) frame buffer. The AGP 2X, Intel's graphics bus,
doubled the available bandwidth between the microprocessor and the graphics
engine. With AGP 2X support, the RIVA128ZX graphics processor is designed to
process more complex 3D computer representations more efficiently. Doubling
the size of the frame buffer to 8MB provides the RIVA128ZX graphics processor
with the ability to support higher resolution displays with more colors,
resulting in a richer real time experience. The RIVA128ZX graphics processor
was produced using a .35 micron manufacturing process.
 
 RIVA128 Graphics Processor
 
   The RIVA128 graphics processor incorporates 3.5 million transistors and
operates on 100 MHz clock speed. The RIVA128 graphics processor breaks through
bottlenecks created by the computationally intensive requirements of 3D
graphics by providing superior processing power. The RIVA128 graphics
processor was produced using a .35 micron manufacturing process.
 
Sales and Marketing
 
   Our sales strategy is a key part of our objective to become the leading
supplier of high performance 3D graphics processors for PCs. Our sales team
works closely with PC OEMs, add-in board manufacturers and industry
trendsetters to define product features, performance, price and timing of new
products. Members of our sales team have a high level of technical expertise
and product and industry knowledge to support a competitive and complex design
win process. We also employ a highly skilled team of application engineers to
assist PC OEMs and add-in board manufacturers in designing, testing and
qualifying system designs that incorporate our products. We believe that the
depth and quality of our design support are key to improving PC OEMs' and add-
in board manufacturers' time-to-market, maintaining a high level of customer
satisfaction among PC OEMs and add-in board manufacturers and fostering
relationships that encourage customers to use the next generation of our
products.
 
   In the 3D graphics market, the sales process involves influencing leading
PC OEMs' and add-in board manufacturers' graphics processor purchasing
decisions, achieving key design wins and supporting the product design into
high volume production. These design wins in turn influence the retail and
system integrator channel that is serviced by add-in board manufacturers. Our
distribution strategy is to work with a relatively small number of leading
add-in board manufacturers that have relationships with a broad range of major
PC OEMs and/or strong brand name recognition in the retail channel. Currently,
we sell the RIVA family of graphics processors directly to motherboard
manufacturers such as Intel and add-in board manufacturers, such as ASUSTeK,
Canopus, Creative, Diamond, ELSA, Leadtek and STB. These manufacturers then
sell boards with our graphics processor to leading OEMs, such as Compaq, Dell,
Gateway, IBM, Micron and Packard Bell NEC, to retail outlets, such as BestBuy
and CompUSA, and to a large number of system integrators. Sales to STB
accounted for 63% and sales to Diamond accounted for 31% of our total revenue
for the year ended December 31, 1997. Sales to STB accounted for 35%, sales to
Diamond accounted for 27%, sales to Creative accounted for 13% and sales to
Intel accounted for 12% of our total revenue for the year ended January 31,
1999. 3Dfx, a 3D graphics company and a competitor, recently announced the
execution of an acquisition agreement with STB, an add-in board manufacturer
and one of our significant customers. As a result of the pending acquisition,
we expect our sales to STB to decline significantly from prior levels, and STB
may cease to be a significant customer. Our business could suffer as a result
of lower sales to STB and increased competition from the combined 3Dfx/STB
entity.
 
                                       3
<PAGE>
 
   Our sales effort is accompanied by a variety of product and corporate
marketing activities, including technical support and product launches. As
part of the product launch effort, we demonstrate new products to highlight
their capabilities. We believe these demonstrations help position our products
favorably relative to products of our competitors. We also maintain close
relationships with key industry analysts and trade press, conduct frequent
press tours and participate, with add-in board manufacturers and OEM
customers, in benchmark tests executed by key trade publications. In addition,
we sponsor and participate in industry tradeshows, marketing communications
and market development activities designed to generate awareness of our
company and our products. We intend to continue to devote significant
resources toward establishing brand recognition, including advertising in key
newspapers and trade magazines and participation in graphics newsgroups and
web sites. We also use our corporate web site to promote our company and our
products.
 
   To encourage software title developers and publishers to develop games
optimized for platforms utilizing our products, we seek to establish and
maintain strong relationships in the software development community.
Engineering and marketing personnel interact with and visit key software
developers to promote and discuss our products, as well as to ascertain
product requirements and solve technical problems. Our developer program makes
products available to partners prior to volume availability to encourage the
development of software titles that are optimized for our products.
 
Manufacturing
 
   We have a "fabless" manufacturing strategy whereby we employ world class
suppliers for all phases of the manufacturing process, including fabrication,
assembly and testing. This strategy leverages the expertise of industry-
leading, ISO-certified suppliers in such areas as fabrication, assembly,
quality control and assurance, reliability and testing. In addition, we are
able to avoid the significant costs and risks associated with owning and
operating manufacturing operations. These suppliers are also responsible for
procurement of raw materials used in the production of our products. As a
result, we can focus resources on product design, additional quality
assurance, marketing and customer support.
 
   The fabrication of semiconductors is a complex process. Contaminants,
defects in masks used to print circuits on wafers, difficulties in the
fabrication process and other factors can cause a substantial percentage of
wafers to be rejected or a significant number of die on each wafer to be
nonfunctional. These problems are difficult to diagnose and time consuming and
expensive to remedy. As a result, semiconductor companies frequently encounter
difficulties in achieving acceptable product yields. When production of a new
product begins we typically pay for wafers, which may or may not have any
functional products. Accordingly, we bear the financial risk until production
is stabilized. Once production is stabilized, we pay for functional die only.
Failure to achieve acceptable yields from any current or future third-party
manufacturer has in the past and would in the future harm our business. We
have in the past experienced difficulties with yields on new products. We have
recently introduced the RIVA TNT2 3D processor and while we have not
experienced yield problems to date, we may experience problems or other delays
while ramping up production.
 
   Our graphics processors are fabricated by Taiwan Semiconductor
Manufacturing Company ("TSMC") and WaferTech, LLC ("WaferTech") and assembled
and tested by Amkor Technology Inc. ("Amkor"), Siliconware Precision
Industries Company Ltd. ("Siliconware") and ChipPAC Incorporated ("ChipPAC").
We receive semiconductor products from our subcontractors, perform incoming
quality assurance and ship them to add-in board manufacturer customers, such
as ASUSTeK, Canopus, Creative, Diamond, ELSA and Leadtek, from our location in
Santa Clara. The add-in board manufacturers then produce boards, combine our
software with their own software and ship the product to the retail and system
integrator market as add-in boards or to OEMs, such as Compaq, Dell, Gateway,
Hewlett Packard, IBM, Micron, Packard Bell NEC and, for inclusion in the OEMs'
products.
 
   In the event of production difficulties, shortages or delays experienced by
any one of our suppliers, our business may suffer. Furthermore, defects could
affect the quality, performance or reliability of our products despite the
quality assurance measures we have taken. Defects like this could require
costly product recalls or
 
                                       4
<PAGE>
 
cessation of shipments, which would harm our business and result in a decline
of revenues, increased costs (associated with return, repair, replacement and
shrinkage resulting from any defects), and cancellations or rescheduling of
customer orders and shipments.
 
Research and Development
 
   We believe that the continued introduction of new and enhanced products
designed to deliver leading 3D graphics performance will be essential to our
future success. Our research and development strategy is to focus on
concurrently developing multiple generations of devices using independent
design teams. Our research and development teams have enabled us to deliver
award-winning products to our OEM customers. The RIVA family of graphics
processors has enabled our customers to win over 250 awards from recognized
industry publications, including PC Magazine, PC Computing, PC World, Computer
Gaming World, PC Games and CNET.
 
   Our research and development efforts are performed within specialized
groups consisting of software engineering, hardware engineering, VLSI design
engineering, process engineering, and architecture and algorithms. These
groups act as a pipeline designed to allow the efficient simultaneous
development of new products. Our software engineering group is responsible for
the development of drivers for the various software APIs. Our hardware
engineering group designs and develops new product hardware. Our VLSI design
engineering group maps our design ideas to specific silicon structures, and
our process engineering group determines how these devices will be fabricated
and communicates with our manufacturers. Our architecture and algorithms group
is responsible for maintaining and further developing what we believe is an
extensible product architecture, intended to allow us to continually add
features to our products without sacrificing compatibility or incurring
significant redesign costs.
 
   A critical component of our product development effort is our partnerships
with leaders in the CAD industry. We have invested significant resources to
develop relationships with industry leaders, including Avant! Corporation,
Cadence Design Systems, Inc., IKOS Systems, Inc. and Synopsys, Inc. We believe
that by forming these relationships, and utilizing next-generation development
tools to design, simulate and verify our products, we will be able to remain
at the forefront of the 3D graphics market and to continue to develop products
on a rapid basis that utilize leading-edge technology.
 
   We have substantially increased our engineering and technical resources as
compared to prior years and have 117 full-time employees engaged in research
and development. Expenditures for research and development after adjustments
for contract funding were $1.2 million in 1996, $7.1 million in 1997 and $25.1
million in the year ended January 31, 1999.
 
Competition
 
   The market for 3D graphics processors for mainstream PCs in which we
compete is intensely competitive and is characterized by rapid technological
change, evolving industry standards and declining average selling prices
("ASP"). We believe that the principal competitive factors in this market are
performance, conformity to industry-standard APIs, software support, access to
customers and distribution channels, manufacturing capabilities, price of
graphics processors and total system costs of add-in boards. We expect
competition to increase both from existing competitors and new market entrants
with products that may be less costly than our 3D graphics processors or may
provide better performance or additional features not provided by our
products. We may be unable to compete successfully in the emerging mainstream
PC graphics market.
 
   Our primary source of competition is from companies that provide or intend
to provide 3D graphics solutions for the mainstream PC market. Our competitors
include the following:
 
  . new entrants in the 3D graphics processor market with existing presence
    in the PC market, such as Intel;
 
  . suppliers of graphics add-in boards that utilize their internally
    developed graphics chips, such as ATI Technologies Inc. ("ATI") and
    Matrox Electronics Systems Ltd. ("Matrox");
 
                                       5
<PAGE>
 
  . suppliers of 2D graphics chips that are introducing 3D functionality as
    part of their existing solutions, such as S3 Incorporated ("S3") and
    Trident Microsystems, Inc. ("Trident");
 
  . companies that have traditionally focused on the professional market and
    provide high end 3D solutions for PCs and workstations, including 3Dlabs
    Inc., Ltd. ("3Dlabs"), Real3D, Silicon Graphics, Inc. ("SGI"), Evans and
    Sutherland Computer Corporation ("Evans") and Intergraph Corporation
    ("Intergraph"); and
 
  . companies with strength in the video game market, such as 3Dfx
    Interactive, Inc. ("3Dfx") and VideoLogic Group plc ("Videologic").
 
   In March 1998, Intel began shipping the i740, a 3D graphics accelerator
that is targeted at the mainstream PC market. Intel has significantly greater
resources than we do, and our products may not compete effectively against
future products introduced by Intel. In addition, we may be unable to compete
effectively against Intel or Intel may introduce additional products that are
competitive with our products in either performance or price or both. We
expect Intel to continue to do the following:
 
  . invest heavily in research and development and new manufacturing
    facilities;
 
  . maintain its position as the largest manufacturer of PC microprocessors
    and one of the largest manufacturers of motherboards;
 
  . increasingly dominate the PC platform; and
 
  . promote its product offerings through advertising campaigns designed to
    engender brand loyalty among PC users.
 
   Intel may in the future develop graphics add-in cards or graphics-enabled
motherboards that could directly compete with graphics add-in cards or
graphics-enabled motherboards that our customers may develop. In addition, due
to the widespread industry acceptance of Intel's microprocessor architecture
and interface architecture, including its AGP, and Intel's intellectual
property position with respect to such architecture, Intel exercises
significant influence over the PC industry generally. Any significant
modifications by Intel to the AGP, the microprocessor or core logic components
or other aspects of the PC microprocessor architecture could result in
incompatibility with our technology, which would harm our business. In
addition, any delay in the public release of information relating to
modifications like this could harm our business.
 
   In April 1998, SGI and Intel announced a strategic relationship, which
includes a broad patent cross-license agreement. We believe that this
agreement will provide SGI with access to Intel processors for the development
of SGI workstations. In addition, we believe that under the cross-license
agreement Intel will have access to SGI graphics patents, which may allow
Intel to compete more effectively with us. SGI also may compete directly with
us as a result of this relationship with Intel. We may be unable to compete
successfully against SGI or Intel. SGI filed a patent infringement lawsuit
against us in April 1998. See "Legal Proceedings."
 
   In December 1998, Intel and S3 announced a strategic relationship, which
included a 10-year patent and technology cross-license agreement. Pursuant to
this agreement, it was announced that S3 obtained a license to Intel's "P6"
system bus and future bus designs. This license will allow S3 to produce a
compatible integrated core logic and graphics chip. As a result of this
relationship, either party may become a more effective competitor of ours,
which could harm our business.
 
   In addition to Intel, we compete with suppliers of graphics add-in boards
that utilize their internally developed graphics chips, such as ATI and
Matrox. We also compete with companies that typically have operated in the PC
2D graphics market and that now offer 3D graphics capability as an enhancement
to their 2D graphics solutions, such as S3 and Trident. Many of these
competitors have introduced 3D graphics functionality on new versions of
existing graphics chips. In addition, our competitors include companies that
traditionally have focused on the production of high-end 3D graphics systems
targeted at the professional market, such as 3Dlabs, Intergraph, Real3D and
SGI. While these companies produce high performance 3D graphics systems, they
 
                                       6
<PAGE>
 
historically have done so at a significantly higher price point than we have
and have focused on the professional and engineering market. Some of these
companies are developing lower cost versions of their 3D graphics technology
to bring workstation-like 3D graphics to mainstream PCs, and we may not be
able to compete successfully against them. We also compete with companies that
have recently entered or are expected to enter the market with an integrated
3D/2D graphics solution, but which have not traditionally manufactured 2D
graphics solutions, such as 3Dfx. In addition to our known competitors, we
anticipate that there will be new entrants in the graphics processor market.
We may be unable to compete effectively against our existing or any new
competitors.
 
   The market for 3D graphic processors is highly fragmented and undergoing a
period of consolidation. Several of our competitors and customers have merged
with other industry participants in order to strengthen their competitive
position. For example, ATI acquired Chromatic Research Inc., a media processor
company, and Micron, one of our OEM customers, acquired Rendition, Inc., a 3D
graphics accelerator company, to explore embedded DRAM applications in the
graphics arena. In addition, 3Dfx recently announced the execution of an
acquisition agreement with STB, an add-in board manufacturer and one of our
significant customers. We expect that consolidation in the 3D graphics market
will continue and it may involve more of our add-in board manufacturers, OEM
customers or competitors. The consolidation of our customers with other
customers or with our competitors could result in a material decline in our
revenue. Consolidation of our competitors could strengthen the competitive
position of those competitors, which could result in pressure on the pricing
of our products. Longer than expected decreases in the average selling price
of our products could harm our business.
 
Patents and Proprietary Rights
 
   We rely primarily on a combination of patent, mask-work protection,
trademarks, copyrights, trade secret laws, employee and third-party
nondisclosure agreements and licensing arrangements to protect our
intellectual property. We have 23 issued patents and 21 patent applications
pending in the United States. Our issued patents have expiration dates from
May 2015 to November 2016. Our issued patents and pending patent applications
relate to technology developed by us in connection with the development of our
3D graphics processors, including the RIVA128, RIVA128ZX, RIVA TNT and RIVA
TNT2 graphics processors. We have no foreign patents or patent applications.
We seek to file for patents that have broad application in the semiconductor
industry and that would provide a competitive advantage. However, our pending
patent applications or any future applications may not be approved, and any
issued patents may not provide us with competitive advantages or may be
challenged by third parties. The patents of others also may adversely affect
our ability to do business. In addition, others may independently develop
substantially equivalent intellectual property or otherwise gain access to our
trade secrets or intellectual property, or disclose our intellectual property
or trade secrets. We may be unable to effectively protect our intellectual
property. We have licensed technology from third parties for incorporation in
our graphics processors and expect to continue to enter into agreements like
this for future products. These licenses may result in royalty payments to
third parties, the cross-license of technology by us or payment of other
consideration. If these arrangements are not concluded on commercially
reasonable terms, our business could suffer.
 
   We attempt to protect our trade secrets and other proprietary information
through confidentiality agreements with manufacturers and other partners,
proprietary information agreements with employees and consultants and other
security measures. We also rely on trademarks and trade secret laws to protect
our intellectual property. Despite these efforts, others may gain access to
our trade secrets, or we may not meaningfully protect our intellectual
property. In addition, effective trade secret protection may be unavailable or
limited in certain foreign countries. Although we intend to protect our rights
vigorously, the measures we take may not be successful. Our failure to
meaningfully protect our intellectual property could harm our business.
 
   The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights or positions, which has resulted in
significant and often protracted and expensive litigation. The 3D graphics
market in particular has been characterized recently by the aggressive pursuit
of intellectual property positions, and we expect our competitors to continue
to pursue aggressive intellectual property positions. In April
 
                                       7
<PAGE>
 
1998, SGI filed a patent infringement lawsuit against us, in May 1998, S3
filed a patent infringement lawsuit against us and in September 1998, 3Dfx
filed a patent infringement lawsuit against us. See "Legal Proceedings." In
addition, from time to time we have received notices alleging that we have
infringed patents or other intellectual property rights owned by third
parties. Based upon our evaluation of the circumstances, we may seek to obtain
a license. In any given case, there is a risk that a license will not be
available on terms that we consider reasonable, or that litigation will ensue.
We currently have three patent infringement lawsuits pending against us, as
discussed above. We expect that, as the number of hardware and software
patents issued continues to increase, and as competition in our markets
intensifies, the volume of intellectual property claims like this will
increase. ST has certain patent licenses that in some cases may allow ST to
manufacture our products without infringing third-party patents. As our
products are manufactured by TSMC or other manufacturers, these licenses will
no longer benefit us and therefore the risk of a third-party claim of patent
infringement against us will increase. In the event infringement claims are
made against us, we may seek licenses under such patents or other intellectual
property rights. However, these licenses may not be available on acceptable
terms or at all. Our failure to obtain a license from a third party for
technology used by us could cause us to incur substantial liabilities and to
suspend the manufacture of products. Furthermore, we may initiate claims or
litigation against third parties for infringement of our proprietary rights or
to establish the validity of our proprietary rights. We have agreed to
indemnify certain customers for claims of infringement arising out of sale of
our product. Litigation by or against us or these customers concerning
infringement would likely, and the SGI, S3 and 3Dfx litigation will, result in
significant expense to us and divert the efforts of our technical and
management personnel, whether or not the litigation results in a favorable
determination for us. In the event of an adverse result in the SGI, S3, 3Dfx
or other litigation, we would be required to do one or more of the following:
 
  . pay substantial damages (which could include treble damages);
 
  . cease the manufacture, use and sale of infringing products;
 
  . expend significant resources to develop non-infringing technology;
 
  . discontinue the use of certain processes; or
 
  . obtain licenses for the infringing technology
 
   We may not be successful in developing non-infringing technology and
licenses may not be available on reasonable terms or at all. In addition,
these development efforts or licenses could require expenditures by us of
substantial time and other resources. Although patent disputes in the
semiconductor industry have often been settled through cross-licensing
arrangements, we cannot guarantee that in the event that SGI, S3, 3Dfx or any
other third-party makes a successful claim against us or our customers, a
cross-licensing arrangement could be reached.
 
   Infringement claims by third parties or claims for indemnification by other
customers or end users of our products resulting from infringement claims may
be asserted in the future. Those assertions or the assertions currently raised
in the SGI, S3 and 3Dfx litigation, if proven to be true, could harm our
business. Any limitations on our ability to market our products, or delays and
costs associated with redesigning our products or payments of license fees to
third parties would harm our business. In addition, our business would suffer
if we were unable to develop or license a substitute technology on
commercially reasonable terms. Any of these negative events could result from
the SGI, S3 or 3Dfx litigation.
 
Employees
 
   As of January 31, 1999, we had 248 employees, 117 of whom were engaged in
engineering and 131 of whom were engaged in sales, marketing, operations and
administrative positions. No employee is covered by collective bargaining
agreements, and we believe that our relationships with our employees are good.
 
   Our ability to operate successfully will depend in significant part upon
the continued service of certain key technical and managerial personnel, and
our continuing ability to attract and retain additional highly qualified
technical and managerial personnel. Competition for these personnel is
intense. We may be unable to retain these
 
                                       8
<PAGE>
 
personnel or to attract or retain other highly qualified technical and
managerial personnel in the future, including key sales and marketing
personnel. The loss of key personnel or the inability to hire and retain
qualified personnel could harm our business.
 
ITEM 2. PROPERTIES
 
   We lease approximately 89,000 square feet in one building in Santa Clara,
California, pursuant to a lease that expires in December 2002. We also lease a
design center consisting of approximately 2,900 square feet in one building in
Durham, North Carolina, pursuant to a lease that expires in March 2002. We may
need to lease additional space in the next few months and are currently
negotiating for additional space. We believe that adequate space would be
available to meet our needs.
 
ITEM 3. LEGAL PROCEEDINGS
 
   On April 9, 1998, we were notified that SGI had filed a patent infringement
lawsuit against us in the United Stated District Court for the District of
Delaware. The suit alleges that the sale and use of our RIVA family of 3D
graphics processors infringes a United States patent held by SGI. The suit
seeks unspecified damages (including treble damages), an order permanently
enjoining further alleged infringement and attorneys' fees. We filed an answer
in this suit and filed counterclaims asserting that the patent in the suit is
neither infringed nor valid. Discovery in this suit has been completed. On
April 6, 1999, we and SGI each filed a motion for summary judgement with the
court. The hearing on such motions and the trial for the suit are each
scheduled for the quarter ending August 1, 1999. Such scheduled dates are
subject to change.
 
   On May 11, 1998, we were notified that S3 had filed a patent infringement
lawsuit against us in the United States District court for the Northern
District of California. The suit alleges that the sale and use of our RIVA
family of 3D graphics processors infringes three United States patents held by
S3. The suit seeks unspecified damages (including treble damages), an order
permanently enjoining further alleged infringement and attorneys' fees. We
filed an answer in this suit and filed counterclaims asserting that the
patents in the suit are neither infringed nor valid. Discovery in this suit is
ongoing. We have filed a motion for summary judgement with the court, and the
parties are briefing claim construction issues. A hearing on these matters is
scheduled to occur in the quarter ending August 1, 1999. Trial for the suit is
scheduled for the quarter ending August 1, 1999. Such scheduled dates are
subject to change.
 
   On September 21, 1998, we were notified that 3Dfx had filed a patent
infringement lawsuit against us in the United States District court for the
Northern district of California. The suit alleges that the sale and use of our
RIVA TNT graphics processor infringes two United States patents held by 3Dfx.
The suit seeks unspecified damages (including treble damages), an order
permanently enjoining further alleged infringement and attorneys' fees. We
filed an answer in this suit and filed counterclaims asserting that the
patents in the suit are neither infringed nor valid. Discovery in this suit
has commenced. Trial for the suit is scheduled for the quarter ending January
30, 2000. Such scheduled dates are subject to change.
 
   Based on our investigation to date, we believe that with respect to each of
the patent claims at issue in these lawsuits, either the claims are invalid or
our products do not infringe the claims. We have conducted and intend to
continue to conduct a vigorous defense with respect to all three lawsuits.
 
   The litigation with SGI, S3 and 3Dfx has resulted, and we expect that it
will continue to result, in significant expense to us and divert the efforts
of our technical and management personnel, whether or not the litigation
results in a favorable determination for us. In the event of an adverse result
in any of these suits, we could be required to do one or more of the
following:
 
  . pay substantial damages (including treble damages);
 
  . preliminarily or permanently cease the manufacture, use and sale of any
    infringing products;
 
                                       9
<PAGE>
 
  . expend significant resources to develop non-infringing technology; or
 
  . obtain a license from SGI, S3 or 3Dfx for any infringing technology.
 
   An adverse result in any of these suits could result in limitations on our
ability to market our products, delays and costs associated with redesigning
our products or payments of license fees or other payments to SGI, S3 or 3Dfx.
Our business would suffer if any of those negative events occurs.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
   In connection with our initial public offering, on January 6, 1999, we
received appropriate stockholder approval, in the form of written consents, of
the following actions:
 
     (a) to amend the Certificate of Incorporation that we filed upon the
  closing of our initial public offering to provide for a classified Board of
  Directors divided into three classes with staggered terms;
 
     (b) to amend our Bylaws to provide, among other things, for the
  following:
 
      . a classified Board of Directors divided into three classes with
        staggered terms;
 
      . to provide for longer advance notice requirements for stockholder
        proposals, to allow stockholders holding 10 percent or more of our
        outstanding stock to fill vacancies on the Board of Directors; and
 
      . for so long as we are subject to certain provisions of California
        law, to allow stockholders with five percent or more of our
        outstanding stock to call special meetings of the stockholders.
 
     (c) to amend our 1998 Equity Incentive Plan to provide, among other
  things, for the automatic annual increase in the number of shares of common
  stock available for issuance under the plan.
 
   We also received the necessary approval from the holders of at least two-
thirds of each class of our then-outstanding preferred stock for the automatic
conversion of all shares of preferred stock into shares of common stock upon
the closing of our initial public offering, so long as the per share price was
$7.00.
 
                     EXECUTIVE OFFICERS OF THE REGISTRANT
 
   The following sets forth certain information regarding our executive
officers as of April 15, 1999:
 
<TABLE>
<CAPTION>
     Name                        Age Position
     ----                        --- --------
     <C>                         <C> <S>
     Jen-Hsun Huang.............  36 President, Chief Executive Officer and
                                     Director
     Mark K. Allen..............  44 Vice President, Operations
     Jeffrey D. Fisher..........  40 Vice President, Sales
     Christine B. Hoberg........  43 Chief Financial Officer
     Chris A. Malachowsky.......  39 Vice President, Engineering
     Curtis R. Priem............  39 Chief Technical Officer
</TABLE>
 
   Jen-Hsun Huang co-founded our company in April 1993 and has served as our
President, Chief Executive Officer and a member of the Board of Directors
since our inception. From 1985 to 1993, Mr. Huang was employed at LSI Logic
Corporation, a computer chip manufacturer, where he held a variety of
positions, most recently as Director of Coreware business unit responsible for
LSI's "system-on-a-chip" strategy. From 1983 to 1985, Mr. Huang was a
microprocessor designer for Advanced Micro Devices, a semiconductor company.
Mr. Huang holds a B.S.E.E. degree from Oregon State University and an M.S.E.E.
degree from Stanford University.
 
   Mark K. Allen has been our Vice President, Operations since October 1998.
From February 1995 to September 1998, Mr. Allen was Senior Vice President of
Operations for C-Cube Microsystems, a digital video
 
                                      10
<PAGE>
 
technology company. From March 1987 to February 1993, Mr. Allen was Vice
President of Worldwide Manufacturing Operations for Cypress Semiconductor
Corp., a manufacturer and supplier of integrated circuits. Mr. Allen holds a
B.S.E.E. degree from Purdue University.
 
   Jeffrey D. Fisher has been our Vice President, Sales since July 1994. From
September 1988 to July 1994, Mr. Fisher held various positions at Weitek
Corporation, a semiconductor technology company, where his last position was
as Director of World Wide Sales. Mr. Fisher holds a B.S.E.E. degree from
Purdue University and an M.B.A. degree from Santa Clara University.
 
   Christine B. Hoberg has been our Chief Financial Officer since December
1998. From June 1992 to December 1998, Ms. Hoberg held various positions at
Quantum Corporation, a mass storage company, where her last position was as
Vice President, Corporate Controller. Ms. Hoberg holds a B.A. in German
Studies from Stanford University and is a certified public accountant.
 
   Chris A. Malachowsky co-founded our company in April 1993 and has been our
Vice President, Engineering since that time. From 1987 until April 1993, Mr.
Malachowsky was a Senior Staff Engineer for Sun Microsystems, Inc., a supplier
of enterprise network computing products. From 1980 to 1986, Mr. Malachowsky
was a manufacturing design engineer at Hewlett-Packard Company. Mr.
Malachowsky was a co-inventor of Sun Microsystems' GX graphics architecture
and has authored 39 patents, most of which relate to graphics. Mr. Malachowsky
holds a B.S.E.E. degree from the University of Florida and an M.S.C.S. degree
from Santa Clara University.
 
   Curtis R. Priem co-founded our company in April 1993 and has been our Chief
Technical Officer since that time. From 1986 to January 1993, Mr. Priem was
Senior Staff Engineer at Sun Microsystems where he architected the GX graphics
products, including the world's first single chip GUI accelerator. From 1984
to 1986, Mr. Priem was a hardware engineer at GenRad, Inc., a supplier of
diagnostic equipment for electronic products. From 1982 to 1984, Mr. Priem was
a staff engineer for Vermont Microsystems, Inc., a personal computer company,
where he architected IBM's Professional Graphics Adapter, the PC industry's
first graphics processor. Mr. Priem has authored 70 patents, all of which
relate to graphics and I/O. Mr. Priem holds a B.S.E.E. degree from Rensselaer
Polytechnic Institute.
 
                                      11
<PAGE>
 
                                    PART II
 
ITEM 5.MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
   Our common stock is traded on the Nasdaq National Market under the symbol
NVDA. Public trading of our stock began on January 22, 1999. Prior to that,
there was no public market for our stock. We have never paid cash dividends on
our capital stock and do not anticipate paying cash dividends for the
foreseeable future. As of January 31, 1999, we had approximately 208
stockholders of record. During the fourth quarter of fiscal 1999, the high
sale price for our common stock as reported by the Nasdaq National Market was
$23.44 and the low sale price as reported by the Nasdaq National Market was
$18.63.
 
Recent Sales of Unregistered Securities
 
   During fiscal 1999, we sold and issued the following unregistered
securities:
 
   On July 22, 1998 and August 14, 1998, we sold Convertible Subordinated
Notes to three investors for an aggregate purchase price of $11.0 million. On
January 15, 1999, the Notes were automatically converted into an aggregate of
1,571,429 shares of Common Stock. We claimed exemptions under the Securities
Act from registration under the Securities Act for the sale and issuance of
these notes by virtue of Section 4(2) promulgated thereunder as transactions
not involving a public offering.
 
   During fiscal 1999, we granted stock options to employees, directors and
consultants covering an aggregate of 6,612,550 shares of our common stock, at
exercise prices ranging from $6.30 to $9.00. Of these shares, 202,775 have
been issued and sold pursuant to the exercise of these options, and options to
purchase 1,692,688 shares of common stock have been cancelled or have lapsed
without being exercised. The sales and issuances of these options were deemed
to be exempt from registration under the Securities Act by virtue of Rule 701
under the Securities Act, in that they were issued pursuant to a written
compensatory benefit plan.
 
Use of Proceeds from Sales of Registered Securities
 
   We commenced our initial public offering on January 21, 1999 pursuant to a
Registration Statement on Form S-1 (File No. 333-47495). The managing
underwriters of the public offering were Morgan Stanley & Co., Hambrecht &
Quist and Prudential Securities (the "Underwriters"). In the offering, we sold
an aggregate of 3,500,000 shares of our common stock for an initial price of
$12.00 per share. The aggregate proceeds from the offering were $42.0 million.
We paid expenses of approximately $4.5 million, of which approximately $2.9
million represented underwriting discounts and commissions and approximately
$1.6 million represented expenses related to the offering. Net proceeds from
the offering were $37.5 million. As of January 31, 1999, none of the net
proceeds had been used. The net proceeds were invested in money market funds.
On February 2, 1999, we sold an additional 525,000 shares of our common stock
at a price of $12.00 per share pursuant to the exercise of the Underwriter's
over-allotment option.
 
                                      12
<PAGE>
 
ITEM 6.SELECTED FINANCIAL DATA
 
   The following selected financial data should be read in conjunction with
our financial statements and the notes thereto, and with Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
statement of operations data for the years ended December 31, 1996 and 1997,
the one month ended January 31, 1998, and the year ended January 31, 1999 and
the balance sheet data as of December 31, 1996 and 1997, January 31, 1998, and
January 31, 1999 have been derived from and should be read in conjunction with
our audited financial statements and the notes included thereto. The statement
of operations data for the years ended December 31, 1994 and 1995 are derived
from audited financial statements and the notes thereto not included. The
balance sheet data as of December 31, 1994 and 1995 are derived from audited
financial statements and the notes thereto not included.
 
<TABLE>
<CAPTION>
                                                                          Year Ended
                                                              Month Ended  January
                              Year Ended December 31,         January 31,    31,
                          ----------------------------------  ----------- ----------
                           1994     1995     1996     1997       1998        1999
                          -------  -------  -------  -------  ----------- ----------
                                  (in thousands, except per share data)
<S>                       <C>      <C>      <C>      <C>      <C>         <C>
Statement of Operations
 Data:
Revenue:
 Product................  $    --  $ 1,103  $ 3,710  $27,280    $11,420    $151,413
 Royalty................       --       79      202    1,791      1,911       6,824
                          -------  -------  -------  -------    -------    --------
  Total revenue.........       --    1,182    3,912   29,071     13,331     158,237
Cost of revenue.........       --    1,549    3,038   21,244     10,071     109,746
                          -------  -------  -------  -------    -------    --------
Gross profit (loss).....       --     (367)     874    7,827      3,260      48,491
                          -------  -------  -------  -------    -------    --------
Operating expenses:
 Research and
  development...........      361    2,426    1,218    7,103      1,121      25,073
 Sales, general and
  administrative........      990    3,677    2,649    4,183        640      18,902
                          -------  -------  -------  -------    -------    --------
  Total operating
   expenses.............    1,351    6,103    3,867   11,286      1,761      43,975
                          -------  -------  -------  -------    -------    --------
  Operating income
   (loss)...............   (1,351)  (6,470)  (2,993)  (3,459)     1,499       4,516
Interest and other
 income (expense), net..      (10)      93      (84)    (130)       (18)        (29)
                          -------  -------  -------  -------    -------    --------
Income (loss) before
 taxes..................   (1,361)  (6,377)  (3,077)  (3,589)     1,481       4,487
Income taxes............       --       --       --       --        134         357
                          -------  -------  -------  -------    -------    --------
  Net income (loss).....  $(1,361) $(6,377) $(3,077) $(3,589)   $ 1,347    $  4,130
                          =======  =======  =======  =======    =======    ========
Basic net income (loss)
 per share..............  $  (.19) $  (.56) $  (.27) $  (.28)   $   .10    $    .28
                          =======  =======  =======  =======    =======    ========
Diluted net income
 (loss) per share.......  $  (.19) $  (.56) $  (.27) $  (.28)   $   .05    $    .15
                          =======  =======  =======  =======    =======    ========
Shares used in basic per
 share computation......    7,048   11,365   11,383   12,677     14,141      14,565
Shares used in diluted
 per share computation..    7,048   11,365   11,383   12,677     26,100      27,393
</TABLE>
 
<TABLE>
<CAPTION>
                                           December 31,          January 31,
                                    --------------------------- --------------
                                     1994   1995   1996   1997   1998   1999
                                    ------ ------ ------ ------ ------ -------
                                                  (in thousands)
<S>                                 <C>    <C>    <C>    <C>    <C>    <C>
Balance Sheet Data:
Cash and cash equivalents.......... $4,555 $3,872 $3,133 $6,551 $7,984 $50,257
Total assets.......................  5,450  6,793  5,525 25,039 30,172 113,332
Capital lease obligations, less
 current portion...................    249  1,137    617  1,891  1,756   1,995
Total stockholders' equity.........  4,629  4,013  1,037  6,897  8,610  64,209
</TABLE>
- --------
(1) See Note 1 of Notes to Financial Statements for an explanation of the
    determination of the number of shares used in per share computations.
 
                                      13
<PAGE>
 
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS
 
   The following discussion and analysis should be read in conjunction with
our financial statements and notes thereto. Our fiscal years ended on December
31 from 1993 to 1997. Effective January 31, 1998, we changed the fiscal year-
end financial reporting period to a 52- or 53- week year ending on the last
Sunday in January. We elected not to restate the previous reporting periods
ending December 31. As a result, the first quarter of fiscal 1999 is a 12-week
period, the fourth quarter of fiscal 1999 is a 14-week period and the second
and third quarters are 13-week periods.
 
Overview
 
   We design, develop and market 3D graphics processors that provide high
performance interactive 3D graphics to the mainstream PC market. We incurred
losses in each year from inception through the first three quarters of 1997.
We incurred a loss in the quarters ended April 26, 1998 and July 26, 1998 and
realized profits in the quarters ended December 31, 1997, October 25, 1998 and
January 31, 1999. As of January 31, 1999, we had an accumulated deficit of
approximately $9.4 million. Since inception in April 1993 through the end of
1994, we were in the development stage and were primarily engaged in product
development and product testing. We introduced our first product, the NV1, in
May 1995. The NV1 was a multimedia accelerator that provided 3D graphics,
video and audio for interactive multimedia, and was targeted primarily to the
game console market. The NV1 was developed in the absence of industry
standards with the goal of establishing our proprietary NV technology as a 3D
graphics standard. By the end of 1996, the PC industry had broadly adopted
Microsoft's Direct3D and SGI's OpenGL 3D APIs. As a result, we experienced a
significant reduction in revenue from sales of the NV1 and stopped selling the
NV1 in the first quarter of 1996. We also ceased development of the NV2, a
product designed for a game console platform, and began developing the RIVA128
graphics processor. We began commercial shipment of the RIVA128 graphics
processor in August 1997, the RIVA128ZX graphics processor in March 1998, the
RIVA TNT graphics processor in July 1998 and the RIVA TNT2 graphics processor
in April 1999. These high performance graphics products are designed to be
compatible with Microsoft's Direct3D and are targeted at the mainstream PC
market.
 
   All of our revenue in 1995 and 1996 was derived from the sale and license
of the NV1, and substantially all of our revenue in 1997 and the year ended
January 31, 1999 was derived from the sale and license of the RIVA family of
graphics processors. We expect that substantially all of our revenue for the
foreseeable future will be derived from the sale and license of our 3D
graphics processors in the mainstream PC market. We recognize product sales
revenue upon shipment, net of allowances, and recognize royalty revenue upon
shipment of product to the licensee's customers. Since we have no other
product line, our business would suffer if for any reason our graphics
processors do not achieve widespread acceptance in the mainstream PC market.
During the spring of 1998, many PC makers experienced reduced demand for their
products, resulting in increased inventories. These market conditions resulted
in reduced orders from our customers and negatively affected our financial
results for the quarter ended July 26, 1998.
 
   A majority of our sales have been to a limited number of customers and
sales are highly concentrated. We sell graphics processors to add-in board
manufacturers, primarily Creative, Diamond and STB and motherboard
manufacturers such as Intel. These manufacturers incorporate our processors in
the boards they sell to PC OEMs, retail outlets and systems integrators. The
average selling prices ("ASPs") for our products, as well as our customers'
products, vary by distribution channel. Substantially all of our sales are
made on the basis of purchase orders rather than long-term agreements. Diamond
accounted for 82% of our total revenue in calendar 1996. Sales to STB
accounted for 63% and sales to Diamond accounted for 31% of our total revenue
in calendar 1997. Sales to STB accounted for 35%, sales to Diamond accounted
for 27%, sales to Creative accounted for 13% and sales to Intel accounted for
12% of our total revenue in fiscal 1999. The number of potential customers for
our products is limited, and we expect that sales to Creative and Diamond will
continue to account for a substantial portion of our revenue for the
foreseeable future. 3Dfx, a 3D graphics company and a competitor, recently
announced the execution of an acquisition agreement with STB. As a result of
the pending acquisition, we expect
 
                                      14
<PAGE>
 
sales to STB to decline significantly from prior levels and STB may cease to
be one of our significant customers. Currently, all of our product sales and
our arrangements with third-party manufacturers provide for pricing and
payment in U.S. dollars. We have not engaged in any foreign currency hedging
activities, although we may do so in the future.
 
   As markets for our 3D graphics processors develop and competition
increases, we anticipate that product life cycles will remain short and ASPs
will continue to decline. In particular, ASPs and gross margins are expected
to decline as each product matures. Our add-in board manufacturers and major
OEM customers typically introduce new system configurations as often as twice
per year, typically based on spring and fall design cycles. Accordingly, our
existing products must have competitive performance levels in order to be
included in new system configurations, or we must timely introduce new
products with such performance characteristics at costs and in sufficient
volumes to maintain overall average selling prices and gross margins. Failure
to achieve necessary costs and volume shipments with respect to future
products or product enhancements could result in rapidly declining ASPs,
reduced margins, reduced demand for products or loss of market share.
 
   Demand for our products has been and will continue to be significantly
affected by actual and anticipated changes in the price and supply of DRAM
products or other components used with PC graphics processors. Large supplies
of SDRAMs in the spring of 1998 resulted in significant price declines for
these components and lowered the total system cost to customers of products
that used SDRAMs, as compared to SGRAMs. This unfavorable component price
competition, in part, negatively impacted sales of our RIVA128ZX graphics
processor during the quarter ended July 26, 1998, as that product operated
only using SGRAMs at that time. Future fluctuations in prices of components
used by customers of 3D graphics processors may harm our business. See
"Certain Business Risks--The Market for Mainstream PC 3D Graphics is New and
Uncertain, --We Need to Develop New Products and Manage Product Transitions in
Order to Succeed" and "--We May be Unable to Obtain Design Wins."
 
   We currently utilize TSMC and WaferTech to produce semiconductor wafers and
utilize independent contractors to perform assembly, test and packaging. We
depend on these suppliers to allocate to us a portion of their manufacturing
capacity sufficient to meet our needs, to produce products of acceptable
quality and at acceptable manufacturing yields, and to deliver those products
to us on a timely basis. These manufacturers may not always be able to meet
our near-term or long-term manufacturing requirements. As our relationships
with our manufacturing partners develop, yields or product performance could
be adversely affected due to difficulties associated with adapting our
technology and product design to the proprietary process technology and design
rules of each manufacturer. A manufacturing disruption experienced by these
manufacturers would impact the production of our products, which would harm
our business. In addition, as the complexity of our products and the
accompanying manufacturing process increases, there is an increasing risk that
we will experience problems with the performance of new products and that
there will be yield problems or other delays in the development or
introduction of these products. We have recently introduced the RIVA TNT2 3D
processor and while we have not experienced yield problems to date, we may
experience problems or other delays while ramping up production. We
experienced difficulty in achieving volume production at TSMC of the RIVA128ZX
graphics processor in the quarter ended July 26, 1998 and, to a lesser degree,
the RIVA TNT graphics processor in the quarter ended October 25, 1998. The
lower yields resulting from these difficulties resulted in part in higher
expenses and lower revenues and a negative gross margin for the quarter ended
July 26, 1998. We obtain manufacturing services on a purchase order basis and
our manufacturers have no obligation to provide us with any specified minimum
quantities of product. In addition, our third-party manufacturers fabricate
wafers, assemble, test and package products for other companies, including
certain of our competitors, and could choose to prioritize capacity for other
uses or reduce or eliminate deliveries to us on short notice. See "Certain
Business Risks--We Depend on Third-Party Manufacturers to Produce our
Products;" and "--Low Manufacturing Yields would Harm our Business."
 
   Substantially all of our sales are made on the basis of purchase orders
rather than long-term agreements. As a result, we may commit resources to the
production of products without having received advance purchase commitments
from customers. Any inability to sell products to which we have devoted
significant resources
 
                                      15
<PAGE>
 
could harm our business. In addition, cancellation or deferral of product
orders could result in our holding excess inventory, which could adversely
affect our profit margins and restrict our ability to fund operations. We
recognize revenue upon shipment of products to the customer. Product returns
or delays or difficulties in collecting accounts receivable could result in
significant charges against income, which could harm our business.
 
   We have in the past entered into contractual agreements with third parties
to provide design, development and support services on a best efforts basis.
All amounts funded to us under these agreements were non-refundable once paid
and recorded primarily as a reduction to research and development expenses. We
developed the NV2 under contract with a third party and recorded a credit to
research and development of $2.0 million in 1996. As part of a strategic
collaboration agreement with ST Microelectronics ("ST"), we received contract
funding in support of research and development and marketing efforts for the
RIVA128 and RIVA128ZX graphics processors. Accordingly, in 1996, 1997 and
fiscal 1999 we recorded reductions, primarily to research and development,
and, to a lesser extent to sales, general and administrative expenses. We
currently do not have any plans to enter into contractual development
arrangements and do not expect contract funding in the future.
 
Results of Operations
 
 Calendar Years Ended December 31, 1996 and 1997 and Fiscal Year Ended January
 31, 1999
 
  Revenue
 
   Product Revenue. Product revenue was $3.7 million in 1996, $27.3 million in
1997 and $151.4 million in the fiscal year ended January 31, 1999 ("Fiscal
1999"). Prior to 1997, product revenue was derived from sales of our NV1
processor. The substantial increase in product revenue from 1996 to 1997 was
due to sales of the RIVA128 graphics processor, which we introduced in August
1997. The growth in revenue in fiscal 1999 was due to increased sales of our
graphics processors and reflects our first full year of sales of our graphics
processors. Revenue from sales outside of the U.S. accounted for 24% of total
revenue for the year ended January 31, 1999. Substantially all of our revenue
from product sales in 1996 and 1997 was derived from sales in the U.S.
Although we achieved substantial growth in product revenue from 1997 to fiscal
1999, we do not expect to sustain this rate of growth in future periods. In
addition, we expect that the ASPs of our products will decline over the lives
of the products. The declines in ASPs of 3D graphics processors generally may
also accelerate as the market develops and competition increases. See "Certain
Business Risks--Semiconductors are Subject to Eroding Average Selling Prices."
 
   Royalty Revenue. ST has a license from us to sell the NV1 multimedia
accelerator and the RIVA128 and RIVA128ZX graphics processors. Royalty revenue
was $202,000 in 1996, $1.8 million in 1997 and $6.8 million in fiscal 1999.
Royalty revenue increased in 1997 as a result of our introduction of the
RIVA128 graphics processor in August 1997 and subsequent sales of the RIVA128
graphics processor by ST. The increase in royalty revenue in fiscal 1999
resulted primarily from increased sales by ST of the RIVA128 graphics
processor and a derivative of the RIVA128ZX graphics processor. Royalty
revenue from sales by ST of the RIVA128 graphics processor represented
approximately 6% of our total revenue in 1997, and royalty revenue from sales
by ST of the RIVA128 graphics processor and a derivative of the RIVA128ZX
graphics processor represented 4% of our total revenue in fiscal 1999. We
expect royalty revenue from ST to decrease in absolute dollars and as a
percentage of total revenue in fiscal 2000 and beyond.
 
  Gross Profit
 
   Gross profit consists of total revenue net of allowances less cost of
revenue. Cost of revenue consists primarily of the costs of semiconductors
purchased from contract manufacturers (including assembly, test and
packaging), manufacturing support costs (labor and overhead associated with
such purchases), inventory provisions and shipping costs. We had a gross
profit of $874,000 in 1996, $7.8 million in 1997 and $48.5 million in fiscal
1999. Excluding royalty revenue, gross margin on product revenue was 18% in
1996, 22% in 1997 and 28% in fiscal 1999. The increase in gross margin on
product revenue in 1997 was primarily due to sales of the
 
                                      16
<PAGE>
 
RIVA128 graphics processor. The sales of the higher margin RIVA TNT graphics
processor and reductions to costs of the RIVA128 graphics processor
contributed to the increase in gross margin in fiscal 1999. Although we
achieved substantial growth in gross profit and gross margin from 1997 to
fiscal 1999, we do not expect to sustain these rates of growth in future
periods.
 
  Operating Expenses
 
   Research and development. Research and development expenses consist of
salaries and benefits, cost of development tools and software, and consultant
costs, net of contract funding and support payments from ST. Research and
development expenses before adjustments for contract funding and support
payments were $5.8 million in 1996, $9.0 million in 1997 and $25.1 million in
fiscal 1999. The increases each year were primarily due to additional
personnel and related costs, such as depreciation charges incurred on capital
expenditures and software license and maintenance fees. We anticipate that we
will continue to devote substantial resources to research and development.
 
   We developed the NV2 under contract with a third party and recorded a
credit to research and development of $3.0 million in 1996. Also, as part of a
strategic collaboration agreement with ST, we received contract funding in
support of research and development and marketing efforts for the RIVA128 and
RIVA128ZX graphics processors. Accordingly, we recorded $2.0 million in 1996
and approximately $2.3 million in 1997 as a reduction primarily to research
and development, and, to a lesser extent, sales, general and administrative
expenses. We were obligated to provide continued development and support to ST
through the end of calendar 1998. As a result, we recorded $2.3 million for
continued development and support in fiscal 1999. We currently do not have any
plans to enter into contractual development arrangements and do not expect
contract funding in the future.
 
   Sales, General and Administrative. Sales, general and administrative
expenses consist primarily of salaries, commissions and bonuses earned by
sales, marketing and administrative personnel, promotional and advertising
expenses, travel and entertainment expenses and legal expenses, net of
contract funding received from ST. Sales, general and administrative expenses
increased from $2.6 million in 1996 to $4.2 million in 1997, primarily due to
incremental promotional expenses, additional personnel and commissions and
bonuses on sales of the RIVA128 graphics processor. Sales, general and
administrative expenses increased from $4.2 million in 1997 to $18.9 million
in fiscal 1999, primarily due to increased promotional expenses, additional
personnel and commissions and bonuses on sales of the RIVA128 and RIVA TNT
graphics processors. We expect sales and marketing expenses to continue to
increase in absolute dollars as we expands sales and marketing efforts and
increase promotional activities. We expect general and administrative expenses
to increase in connection with expenses associated with being a public company
and legal fees related to the SGI, S3 and 3Dfx patent lawsuits, until those
lawsuits are resolved.
 
  Interest and Other Income (Expense), Net
 
   Interest income primarily consists of interest earned on cash and cash
equivalents. Interest expense primarily consists of interest incurred as a
result of capital lease obligations, and in fiscal 1999, in part, to interest
on borrowings under our line of credit agreement. Net interest expense was
$84,000 in 1996, $130,000 in 1997 and $29,000 in fiscal 1999. The increase in
interest expense as a result of additional equipment leased in support of
development activities was offset by an increase in interest income due to
higher average cash balances in fiscal 1999.
 
  Income Taxes
 
   We recorded no income taxes in 1996 and 1997. The income taxes for the one
month ended January 31, 1998, consisted entirely of current federal tax
expense. Income taxes for the year ended January 31, 1999 of $357,000
consisted of $583,000 current federal tax expense and $226,000 deferred
federal tax benefit. We expect to record increasing provisions for income
taxes in fiscal 2000, the amount of which will depend on several
 
                                      17
<PAGE>
 
factors, including the availability of deferred tax assets and research and
development carryforwards. Realization of the deferred tax assets will depend
on future taxable income. See Note 5 of Notes to Financial Statements.
 
Stock-Based Compensation
 
   With respect to stock options granted to employees, we recorded deferred
compensation of $4.3 million in 1997 and $361,000 in the one month ended
January 31, 1998. We amortized approximately $961,000 in 1997, $360,000 in the
one month ended January 31, 1998 and $2.5 million of the deferred compensation
in the year ended January 31, 1999. We will amortize the remainder over the
four-year vesting periods of the options. We anticipate amortization of
approximately $650,000 in fiscal 2000. See Note 3 of Notes to Financial
Statements.
 
Liquidity and Capital Resources
 
   Since inception, we have financed our operations primarily through private
sales of convertible securities totaling $30.7 million and, to a lesser
extent, equipment lease financing, a bank line of credit and proceeds received
from the exercise of employee stock options. As of January 31, 1999, we had
$50.3 million in cash and cash equivalents and $5.0 million in outstanding
bank indebtedness. In January 1999, we sold a total of 3.5 million shares of
common stock in an initial public offering at a price of $12.00 per share, for
net proceeds of $37.5 million. In February 1999, we received an additional
$5.9 million from the underwriters' exercise of their option to purchase an
additional 525,000 shares of common stock. Approximately $5.0 million of the
net proceeds were used to repay in full amounts outstanding under the bank
line of credit in March 1999. The balance of the net proceeds will be used for
general corporate purposes, including capital expenditures and working
capital. We historically have held our cash balances in cash equivalents such
as money market funds or as cash. We place the money market funds with high
quality financial institutions and limit the amount of exposure with any one
financial institution.
 
   We had a $5.0 million credit facility at January 31, 1999. Borrowings under
the line of credit carried interest at prime rate plus 1% and were due in
March 1999. As of January 31, 1999, we had borrowed $5.0 million against the
line of credit, all of which was repaid in March 1999.
 
   Net cash used in operating activities was $279,000 in 1996 and $1.2 million
in 1997. The increase from 1996 to 1997 was a result of substantial increases
in accounts receivable in 1997, partially offset by an increase in accounts
payable. Net cash provided by operating activities was $1.9 million in fiscal
1999, primarily consisting of changes in working capital. Our accounts
receivable are highly concentrated. Two customers accounted for substantially
all of the accounts receivable in 1997 and five customers accounted for
substantially all of the accounts receivable in the year ended January 31,
1999. Although we have not experienced any bad debt write-offs to date, we may
be required to write off bad debt in the future, which could harm our
business.
 
   To date, our investing activities have consisted primarily of purchases of
property and equipment. As of January 31, 1999, in addition to commitments
under operating and capital leases, we had manufacturing commitments of $37.4
million. See Note 4 of Notes to Financial Statements. Our capital
expenditures, including capital leases, increased from $300,000 in 1996 to
$5.8 million in 1997, and to $10.1 million in fiscal 1999. These increases
were due to additional capital leases and purchases of computer equipment,
including workstations and servers to support increased research and
development activities. We expect capital expenditures to increase as we
further expand research and development initiatives and as our employee base
grows. The timing and amount of future capital expenditures will depend
primarily on our future growth. We expect to spend approximately $20.0 million
for capital expenditures in fiscal 2000, primarily for software licenses,
emulation equipment and the purchase of computer and engineering workstations.
 
   We believe that our existing cash balances, anticipated cash flows from
operations and capital lease financing will be sufficient to meet our
operating and capital requirements for at least the next 12 months, although
we could be required, or could elect, to raise additional funds during that
period. We expect that we may need to raise additional equity or debt
financing in the future. Additional financing may not be available on
 
                                      18
<PAGE>
 
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 and/or research and
development expenditures, which could adversely affect our business.
 
Year 2000 Compliance
 
   The Year 2000 issue is the result of computer programs written using two
digits rather than four to define the applicable year. Computer programs that
have such date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
 
   We are heavily dependent upon the proper functioning of our own computer or
data-dependent systems. This includes, but is not limited to, information
systems in business, finance, operations and service. Any failure or
malfunctioning on the part of these or other systems could adversely affect us
in ways that are not currently known, discernible, quantifiable or otherwise
anticipated by us.
 
   Our graphics processors and related software do not depend on any date-
sensitive functions in order to perform in accordance with their respective
designs and their functions should not be negatively affected by the Year 2000
issue. Our products are ultimately used with a number of different hardware
and software products, and to the extent these third-party products are not
Year 2000 compliant, the interoperability of our products may be adversely
affected. Given the number of third-party components and our limited
resources, we do not expect to review these third-party products.
 
   We have conducted and completed an initial audit of our critical internal
financial, informational and operational systems and our electronic design
tools to identify and evaluate those areas of our business that may be
affected by the Year 2000 issue. We have completed a detailed plan to
implement and test any necessary modifications to these key areas to ensure
that they are Year 2000 compliant. Our plan includes the following components:
 
  . independent validation of our Year 2000 assessment procedures;
 
  . formal communications with all significant suppliers, large customers and
    tools vendors to determine the extent to which we are vulnerable to those
    third parties' failure to remedy their own Year 2000 issues; and
 
  . the development of contingency plans to address situations that may
    result if we are unable to achieve Year 2000 readiness of our critical
    operations.
 
   We anticipate that any required remediation programs will be completed by
the end of calendar 1999.
 
   To date, we have not incurred incremental material costs associated with
our efforts to become Year 2000 compliant, as the majority of the costs have
occurred as a result of normal upgrade procedures. We believe that future
costs associated with our Year 2000 compliance efforts will not exceed
$500,000.
 
   In addition to the risks associated with our own systems, we have
relationships with, and are to varying degrees dependent upon, a large number
of third parties that provide information, goods and services to us and
manufacture our graphics processors. Our business could suffer if key
suppliers were to experience Year 2000 issues that caused them to delay
manufacturing or shipment of finished product to us. In addition, our results
of operations could suffer if any of our key customers encounter Year 2000
issues that cause them to delay or cancel substantial purchase orders or
delivery of our product. We have begun to initiate formal communications to
ascertain the Year 2000 compliance of key suppliers and determine the extent
to which we may be vulnerable to those third parties' failure to remedy their
own Year 2000 issues.
 
 
                                      19
<PAGE>
 
   We have completed an inventory of internal systems, hardware, software,
communication networks and non-information technology systems and services. We
are in the process of doing the following:
 
  . assessing specific underlying computer systems, programs and/or hardware;
 
  . evaluating remediation or replacement of Year 2000 non-compliant
    technology;
 
  . conducting validation and testing of technologically compliant Year 2000
    solutions; and
 
  . completing implementation of Year 2000 compliant systems.
 
   While we plan to complete modifications or upgrades of our business-
critical systems prior to the Year 2000, we may be unable to develop a plan to
address the Year 2000 issue in a timely manner or to upgrade any or all of our
major systems in accordance with our plan. If any required modifications or
upgrades or modifications by key suppliers or customers are not completed in a
timely manner or are not successful, we may be unable to conduct our business.
In addition, any upgrades made may not effectively address the Year 2000
issue. Furthermore, the systems of other companies on which we rely for the
manufacture of our products may not be timely converted. A failure to convert
by another company, or a conversion that is incompatible with our systems,
could harm our business.
 
   We or one or more third parties may encounter unforeseen problems with
respect to any of our systems, which could harm our business. We are currently
evaluating possible actions, including accumulating excess inventory of our
finished products, to be taken in the event that our assessment of the Year
2000 issue is not successfully completed on a timely basis, but we have not
yet established a formal contingency plan.
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Interest Rate Risk
 
   The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from the investments
without significantly increasing risk. To minimize potential loss arising from
adverse changes in interest rates, we maintain a portfolio of cash and cash
equivalents primarily in highly rated domestic money market funds. In general,
money market funds are not subject to market risk because the interest paid on
such funds fluctuates with the prevailing interest rate See Note 1 of Notes to
Financial Statements.
 
Exchange Rate Risk
 
   We consider our exposure to foreign exchange rate fluctuations to be
minimal. Currently, all of our arrangements with third-party manufacturers
provide for pricing and payment in U.S. dollars, and, therefore, are not
subject to exchange rate fluctuations. To date, we have not engaged in any
currency hedging activities, although we may do so in the future. Fluctuations
in currency exchange rates could harm our business in the future.
 
Certain Business Risks
 
   In addition to the risks discussed in "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations," our
business is subject to the risks set forth below.
 
   Our operating results are unpredictable and they may fluctuate. Many of our
revenue components fluctuate and are difficult to predict, and our operating
expenses are largely independent of revenue in any particular period. It is
therefore difficult for us to accurately forecast revenue and profits or
losses. We believe that, even if we do achieve significant sales of our
products, our quarterly and annual results of operations will be affected by a
variety of factors that could adversely affect our revenue, gross profit and
results of operations.
 
                                      20
<PAGE>
 
Factors that have affected our results of operations in the past, and are
likely to affect our results of operations in the future, include the
following:
 
  . demand and market acceptance for our products;
 
  . the successful development of next-generation products;
 
  . unanticipated delays or problems in the introduction or performance of
    next-generation products;
 
  . market acceptance of the products of our customers;
 
  . new product announcements or product introductions by our competitors;
 
  . our ability to introduce new products in accordance with OEM design
    requirements and design cycles;
 
  . changes in the timing of product orders due to unexpected delays in the
    introduction of products of our customers or due to the life cycles of
    our customers' products ending earlier than anticipated;
 
  . fluctuations in the availability of manufacturing capacity or
    manufacturing yields;
 
  . competitive pressures resulting in lower than expected average selling
    prices;
 
  . the volume of orders that are received and that can be fulfilled in a
    quarter;
 
  . the rescheduling or cancellation of customer orders;
 
  . the unanticipated termination of strategic relationships;
 
  . seasonal fluctuations associated with the tendency of PC sales to
    decrease in the second quarter and increase in the second half of each
    calendar year; and
 
  . the level of expenditures for our research and development and sales,
    general and administrative functions.
 
   In addition, we may experience difficulties related to the production of
current or future products and other factors may delay the introduction or
volume sale of new products we develop. We believe that quarterly and annual
results of operations also could be affected in the future by other factors,
including the following:
 
  . changes in the relative volume of sales of our products;
 
  . seasonality in the PC market;
 
  . our ability to reduce the process geometry of our products;
 
  . supply constraints for the other components incorporated into our
    customers' products;
 
  . the loss of a key customer;
 
  . changes in the pricing of dynamic random access memory devices ("DRAMs")
    or other components;
 
  . legal and other costs related to defending intellectual property
    litigation;
 
  . costs associated with protecting our intellectual property;
 
  . costs related to acquiring or licensing intellectual property;
 
  . inventory write-downs; and
 
  . foreign exchange rate fluctuations.
 
   Any one or more of the factors discussed above could prevent us from
achieving our expected future revenue or net income.
 
   Because most operating expenses are relatively fixed in the short term, we
may be unable to adjust spending sufficiently in a timely manner to compensate
for any unexpected sales shortfall. We may be required to reduce
 
                                      21
<PAGE>
 
prices in response to competition or to pursue new market opportunities. If
new competitors, technological advances by existing competitors or other
competitive factors require us to invest significantly greater resources than
anticipated in research and development or sales and marketing efforts, our
business could suffer. Accordingly, we believe that period-to-period
comparisons of our results of operations should not be relied upon as an
indication of our future performance. In addition, the results of any
quarterly period are not indicative of results to be expected for a full
fiscal year. As a result of fluctuating operating results or other factors
discussed below, in future quarters our results of operations may be below the
expectations of public market analysts or investors. In that event, the market
price of our common stock could decline.
 
   We have a limited operating history and a history of losses. We have a
limited operating history upon which investors may evaluate our company and
our prospects. Our recent revenue growth may not be sustainable and should not
be considered indicative of future revenue growth, if any. As of January 31,
1999, our accumulated deficit was approximately $9.4 million. Although we
generated net income in the quarters ended January 31, 1999, October 25, 1998
and December 31, 1997, we incurred losses in the quarters ended April 28, 1998
and July 26, 1998, in the first three quarters of fiscal 1997 and in each
quarter of our prior fiscal years. We may not be profitable on a quarterly or
annual basis in the future.
 
   Our 3D graphics solution may not be accepted by the mainstream PC
market. Our success will depend in part upon broad adoption of our 3D graphics
processors for high performance 3D graphics in mainstream PC applications. The
market for 3D graphics processors has been characterized by unpredictable and
sometimes rapid shifts in the popularity of products, often caused by the
publication of competitive industry benchmark results, changes in DRAM pricing
and other changes in the total system cost of add-in boards, as well as by
severe price competition and by frequent new technology and product
introductions. Only a small number of products have achieved broad market
acceptance and such market acceptance, if achieved, is difficult to sustain
due to intense competition. Since we have no other product line, our business,
financial condition and results of operations would be materially adversely
affected if for any reason our current or future 3D graphics processors do not
achieve widespread acceptance in the mainstream PC market. If we are unable to
complete the timely development of or successfully and cost-effectively
manufacture and deliver products that meet the requirements of the mainstream
PC market, our business, financial condition and results of operations would
be materially adversely affected. In addition, the PC industry is seasonal,
and we expect that our financial results in the future will be affected by
such seasonality.
 
   The sub-$1,000 segment of the mainstream PC market has grown rapidly in
recent quarters. We have only recently introduced a 3D graphics processor
targeted at this segment. If this product is not competitive in this segment
and the sub-$1,000 segment continues to account for an increasing percentage
of the units sold in the mainstream PC market, our business, financial
condition or results of operations could be materially adversely affected.
 
   We need to develop new products and manage product transitions in order to
succeed. Our business will depend to a significant extent on our ability to
successfully develop new products for the 3D graphics market. Our add-in board
manufacturers and major OEM customers typically introduce new system
configurations as often as twice per year, typically based on spring and fall
design cycles. Accordingly, our existing products must have competitive
performance levels or we must timely introduce new products with such
performance characteristics in order to be included in new system
configurations. This requires that we do the following:
 
  . anticipate the features and functionality that consumers will demand;
 
  . incorporate those features and functionality into products that meet the
    exacting design requirements of PC OEMs and add-in board manufacturers;
 
  . price our products competitively; and
 
  . introduce the products to the market within the limited window for PC OEM
    and add-in board manufacturer design cycles.
 
 
                                      22
<PAGE>
 
   As a result, we believe that significant expenditures for research and
development will continue to be required in the future. The success of new
product introductions will depend on several factors, including the following:
 
  . proper new product definition;
 
  . timely completion and introduction of new product designs;
 
  . the ability of TSMC, our primary manufacturer, and any additional third-
    party manufacturers to effectively manufacture our new products;
 
  . our ability to design products that effectively utilize the process
    technologies of TSMC or WaferTech or any other third-party manufacturers;
 
  . the quality of any new products;
 
  . differentiation of new products from those of our competitors; and
 
  . market acceptance of our and our customers' products.
 
   Our strategy is to utilize the most advanced process technology appropriate
for our products and available from commercial third-party foundries. Use of
advanced processes has in the past resulted in initial yield problems, as
discussed below. New products that we introduce may not incorporate the
features and functionality demanded by PC OEMs, add-in board manufacturers and
consumers of 3D graphics. In addition, we may not successfully develop or
introduce new products in sufficient volumes within the appropriate time to
meet both the PC OEMs' design cycles and market demand. We have in the past
experienced delays in the development of some new products, as discussed
below. Our failure to successfully develop, introduce or achieve market
acceptance for new 3D graphics products would harm our business.
 
   As markets for our 3D graphics processors develop and competition
increases, we anticipate that product life cycles will remain short and
average selling prices ("ASPs") will continue to decline. In particular, we
expect ASPs and gross margins for our 3D graphics processors to decline as
each product matures and as unit volumes increase. As a result, we will need
to introduce new products and enhancements to existing products to maintain
overall ASPs and gross margins. In order for our 3D graphics processors to
achieve high volumes, leading PC OEMs and add-in board manufacturers must
select our 3D graphics processor for design into their products, and then
successfully complete the designs of their products and sell them. We may be
unable to successfully identify new product opportunities or develop and bring
to market in a timely fashion any new products. In addition, we cannot
guarantee that any new products we develop will be selected for design into PC
OEMs' and add-in board manufacturers' products, that any new designs will be
successfully completed or that any new products will be sold. As the
complexity of our products and the manufacturing process for our products
increases, there is an increasing risk that we will experience problems with
the performance of our products and that there will be delays in the
development, introduction or volume shipment of our products. We recently
introduced the RIVA TNT2 3D processor. While we have not experienced yield
problems to date, we may experience problems or other delays while ramping up
production. We may experience difficulties related to the production of
current or future products or other factors may delay the introduction or
volume sale of new products we developed. In addition, we may be unable to
successfully manage the production transition risks with respect to future
products. Failure to achieve any of the foregoing with respect to future
products or product enhancements could result in rapidly declining ASPs,
reduced margins, reduced demand for our products or loss of market share. In
addition, technologies developed by others may render our 3D graphics products
non-competitive or obsolete or result in our holding excess inventory, either
of which would harm our business.
 
   In the design and development of new products and product enhancements, we
rely on third-party software development tools. While we currently are not
dependent on any one vendor for the supply of these tools, some or all of
these tools may not be readily available in the future. For example, we have
experienced delays in the introduction of products in the past as a result of
the inability of then-available software development tools to fully simulate
the complex features and functionalities of our products. The design
requirements necessary to
 
                                      23
<PAGE>
 
meet consumer demands for more features and greater functionality from 3D
graphics products in the future may exceed the capabilities of the software
development tools available to us. If the software development tools we use
become unavailable or fail to produce designs that meet consumer demands, our
business could suffer.
 
   We may be unable to obtain design wins. Our future success will depend in
large part on achieving design wins, which entails having our existing and
future products chosen as the 3D graphics processors for hardware components
or subassemblies designed by PC OEMs and add-in board manufacturers. Our add-
in board manufacturers and major OEM customers typically introduce new system
configurations as often as twice per year, typically based on spring and fall
design cycles. Accordingly, our existing products must have competitive
performance levels or we must timely introduce new products with such
performance characteristics in order to be included in new system
configurations. Our failure to achieve one or more design wins would harm our
business. The process of being qualified for inclusion in a PC OEM's product
can be lengthy and could cause us to miss a cycle in the demand of end users
for a particular product feature, which also could harm our business.
 
   Our ability to achieve design wins will depend in part on our ability to
identify and ensure compliance with evolving industry standards. Unanticipated
changes in industry standards could render our products incompatible with
products developed by major hardware manufacturers and software developers,
including Intel and Microsoft. This would require us to invest significant
time and resources to redesign our products to ensure compliance with relevant
standards. If our products are not in compliance with prevailing industry
standards for a significant period of time, our ability to achieve design wins
could suffer. Our failure to achieve design wins would result in the loss of
any potential sales volume that could be generated by newly designed PC
hardware component or board subassembly. This would give a competitive
advantage to the 3D graphics processor manufacturer that achieved the design
win.
 
   We are dependent on the PC market, which may not continue to grow. In 1997
and the year ended January 31, 1999, we derived all of our revenue from the
sale or license of products for use in PCs. We expect to continue to derive
substantially all of our revenue from the sale or license of products for use
in PCs. The PC market is characterized by rapidly changing technology,
evolving industry standards, frequent new product introductions and
significant price competition. These factors result in short product life
cycles and regular reductions of average selling prices over the life of a
specific product. Although the PC market has grown substantially in recent
years, this growth may not continue. A reduction in sales of PCs, or a
reduction in the growth rate of PC sales, would likely reduce demand for our
products. Moreover, changes in demand could be large and sudden. Since PC
manufacturers often build inventories during periods of anticipated growth,
they may be left with excess inventories if growth slows or if they have
incorrectly forecast product transitions. In these cases, PC manufacturers may
abruptly suspend substantially all purchases of additional inventory from
suppliers like us until the excess inventory has been absorbed. Any reduction
in the demand for PCs generally, or for a particular product that incorporates
our 3D graphic processors, could harm our business. During the spring of 1998,
many PC makers experienced reduced demand for their products, resulting in
increased inventories. These market conditions, in part, resulted in reduced
orders from our customers and negatively affected our financial results for
the quarter ended July 26, 1998.
 
   The market for mainstream PC 3D graphics is new and uncertain. Our success
will depend, in part, upon the demand for 3D graphics for mainstream PC
applications. The market for 3D graphics on mainstream PCs has only recently
begun to emerge and is dependent on the future development of, and substantial
end-user and OEM demand for, 3D graphics functionality. As a result, the
market for mainstream PC 3D graphics computing may not continue to develop or
may not grow at a rate sufficient to support our business. The development of
the market for 3D graphics on mainstream PCs will in turn depend on the
development and availability of a large number of mainstream PC software
applications that support or take advantage of 3D graphics capabilities.
Currently there are only a limited number of software applications like this,
most of which are games, and a broader base of software applications may not
develop in the near term or at all. Until very recently, the majority of
multimedia PCs incorporated only 2D graphics acceleration technology, and as a
result, the majority of graphics applications currently available for
mainstream PCs are written for 2D acceleration technology.
 
                                      24
<PAGE>
 
Consequently, a broad market for full function 3D graphics on mainstream PCs
may not develop. Our business will suffer if the market for mainstream PC 3D
graphics fails to develop or develops more slowly than expected.
 
   We are dependent on a small number of customers and we are subject to order
and shipment uncertainties. We have only a limited number of customers and our
sales are highly concentrated. We primarily sell our products to add-in board
manufacturers, which incorporate graphics products in the boards they sell to
PC OEMs. Sales to add-in board manufacturers are primarily dependent on
achieving design wins with leading PC OEMs. We believe that the large majority
of our revenue in our most recent five quarters was attributable to products
that ultimately were incorporated into PCs sold by Compaq, Dell, Gateway, IBM,
Micron and Packard Bell NEC. The number of add-in board manufacturers and
leading PC OEMs is limited, and we expect that a small number of add-in board
manufacturers directly, and a small number of PC OEMs indirectly, will
continue to account for a substantial portion of our revenue for the
foreseeable future. As a result, our business could be harmed by the decision
of a single PC OEM or add-in board manufacturer to cease using our products or
by a decline in the number of products sold by a single PC OEM or add-in board
manufacturer or by a small number of customers. In addition, revenue from add-
in board manufacturers or PC OEMs that have directly or indirectly accounted
for significant revenue in past periods, individually or as a group, may not
continue, or may not reach or exceed historical levels in any future period.
 
   Our failure to manage growth could harm our business. Our rapid growth has
placed, and is expected to continue to place, a significant strain on our
managerial, operational and financial resources. As of January 31, 1999, we
had 248 employees as compared to 92 employees as of December 31, 1997. We
expect that the number of our employees will increase substantially over the
next 12 months. Our financial and management controls, reporting systems and
procedures are limited and will need to be upgraded significantly. Although
some new controls, systems and procedures have been implemented, our future
growth, if any, will depend on our ability to continue to implement and
improve operational, financial and management information and control systems
on a timely basis, as well as our ability to maintain effective cost controls.
Our failure to do any of these things could harm our business. Further, we
will be required to manage multiple relationships with various customers and
other third parties. Our systems, procedures or controls may not be adequate
to support our operations and our management may be unable to achieve the
rapid execution necessary to successfully implement our strategy. Our
inability to effectively manage any future growth would harm our business.
 
   We are dependent on key personnel, all of whom are at-will employees. Our
performance will be substantially dependent on the performance of our
executive officers and key employees. None of our officers or employees is
bound by an employment agreement, and our relationships with these officers
and employees are, therefore, at will. We do not have "key person" life
insurance policies on any of our employees. The loss of the services of any of
our executive officers, technical personnel or other key employees,
particularly Jen-Hsun Huang, our President and Chief Executive Officer, would
harm our business. Our success will depend on our ability to identify, hire,
train and retain highly qualified technical and managerial personnel. Our
failure to attract, train, assimilate or retain the necessary technical and
managerial personnel would harm our business.
 
   We depend on third-party manufacturers to produce our products. We do not
manufacture the semiconductor wafers used for our products and do not own or
operate a wafer fabrication facility. Our products require wafers manufactured
with state-of-the-art fabrication equipment and techniques. We utilize TSMC
and WaferTech to produce our semiconductor wafers and utilize independent
contractors to perform assembly, test and packaging. We depend on these
suppliers to allocate to us a portion of their manufacturing capacity
sufficient to meet our needs, to produce products of acceptable quality and at
acceptable manufacturing yields, and to deliver those products to us on a
timely basis. These manufacturers may be unable to meet our near-term or long-
term manufacturing requirements. As our relationships with TSMC and other
manufacturing partners develop, yields or product performance could be
adversely affected due to difficulties associated with adapting our technology
and product design to the proprietary process technology and design rules of
each manufacturer. We obtain manufacturing services on a purchase order basis
and TSMC has no obligation to provide us with any specified minimum quantities
of product. TSMC fabricates wafers for other companies, including certain of
our competitors, and could choose to prioritize capacity for other users or
reduce or eliminate deliveries to us on
 
                                      25
<PAGE>
 
short notice. Because the lead time needed to establish a strategic
relationship with a new manufacturing partner could be several months, there
is no readily available alternative source of supply for any specific product.
We believe that long-term market acceptance for our products will depend on
reliable relationships with TSMC and any other manufacturers used by us to
ensure adequate product supply to respond to customer demand.
 
   There are many other risks associated with our dependence upon third-party
manufacturers, including the following:
 
  . reduced control over delivery schedules, quality assurance, manufacturing
    yields and cost;
 
  . risks associated with international operations;
 
  . the potential lack of adequate capacity during periods of excess demand;
 
  . limited warranties on wafers supplied to us;
 
  . availability of trade credit on favorable terms; and
 
  . potential misappropriation of our intellectual property.
 
   We are dependent primarily on TSMC and we expect in the future to continue
to be dependent upon third-party manufacturers to do the following:
 
  . produce wafers of acceptable quality and with acceptable manufacturing
    yields;
 
  . deliver those wafers to us and our independent assembly and testing
    subcontractors on a timely basis and;
 
  . allocate to us a portion of their manufacturing capacity sufficient to
    meet our needs.
 
   Our wafer requirements represent a small portion of the total production
capacity of TSMC. Although our products are designed using TSMC's process
design rules, TSMC may be unable to achieve or maintain acceptable yields or
deliver sufficient quantities of wafers on a timely basis or at an acceptable
cost. Additionally, TSMC may not continue to devote resources to the
production of our products or to advance the process design technologies on
which the manufacturing of our products are based. Any difficulties like this
would harm our business.
 
   Low manufacturing yields would harm our business. Semiconductor
manufacturing yields are a function both of product design, which is developed
largely by us, and process technology, which is typically proprietary to the
manufacturer. Since low yields may result from either design or process
technology failures, yield problems may not be effectively determined or
resolved until an actual product exists that can be analyzed and tested to
identify process sensitivities relating to the design rules that are used. As
a result, yield problems may not be identified until well into the production
process, and resolution of yield problems would require cooperation by and
communication between us and the manufacturer. The risk of low yields is
compounded by the offshore location of our manufacturers, increasing the
effort and time required to identify, communicate and resolve manufacturing
yield problems. As our relationships with TSMC and any additional
manufacturing partners develop, yields or product performance could suffer due
to difficulties associated with adapting our technology and product design to
the proprietary process technology and design rules of each manufacturer.
Because of our potentially limited access to wafer fabrication capacity from
our manufacturers, any decrease in manufacturing yields could result in an
increase in our per unit costs and force us to allocate our available product
supply among our customers. This could potentially harm customer relationships
as well as revenue and gross profit. Our wafer manufacturers may be unable to
achieve or maintain acceptable manufacturing yields in the future. Our
inability to achieve planned yields from our wafer manufacturers could harm
our business. We also face the risk of product recalls or product returns
resulting from design or manufacturing defects that are not discovered during
the manufacturing and testing process. In the event of a significant number of
product returns due to a defect or recall, our business could suffer.
 
   We may be unable to transition to new manufacturing process
technologies. Our strategy is to utilize the most advanced process technology
appropriate for our products and available from commercial third-party
 
                                      26
<PAGE>
 
foundries. Use of advanced processes may have greater risk of initial yield
problems. Manufacturing process technologies are subject to rapid change and
require significant expenditures for research and development. We continuously
evaluate the benefits of migrating to smaller geometry process technologies in
order to improve performance and reduce costs. We have migrated to the .25
micron technology with the RIVA TNT2 graphics processor and we believe that
the transition of our products to increasingly smaller geometries will be
important to our competitive position. Other companies in the industry have
experienced difficulty in migrating to new manufacturing processes and,
consequently, have suffered reduced yields, delays in product deliveries and
increased expense levels. We may experience these difficulties and the
corresponding adverse effects. Moreover, we are dependent on our relationships
with our third-party manufacturers to migrate to smaller geometry processes
successfully. We may be unable to migrate to new manufacturing process
technologies successfully or on a timely basis.
 
   We are dependent on third-party subcontractors for assembly and testing of
our products. Our graphics processors are assembled and tested by Amkor,
Siliconware and ChipPAC. We do not have long-term agreements with any of these
subcontractors. As a result of our dependence on third-party subcontractors
for assembly and testing of our products, we do not directly control product
delivery schedules or product quality. Any product shortages or quality
assurance problems could increase the costs of manufacture, assembly or
testing of our products and could harm our business. Due to the amount of time
typically required to qualify assemblers and testers, we could experience
significant delays in the shipment of our products if we are required to find
alternative third parties to assemble or test our products or components. Any
delays in delivery of our products could harm our business.
 
   We may be subject to liability resulting from claims of product defects and
incompatibilities. Products as complex as those we offer may contain defects
or failures when introduced or when new versions or enhancements to existing
products are released. We have in the past discovered software defects and
incompatibilities with customers' hardware in certain of our products and we
may experience delays or lost revenue to correct any new defects in the
future. We have not experienced material adverse effects resulting from any
bugs, defects, failures or incompatibilities to date, but errors may be found
in new products or releases after commencement of commercial shipments in the
future despite our testing efforts. This could result in loss of market share
or failure to achieve market acceptance. In addition, our products typically
go through only one verification cycle prior to beginning volume production
and distribution. As a result, our products may contain defects or flaws that
are undetected prior to volume production and distribution. The widespread
production and distribution of defective products could harm our business.
 
   Our products are an integrated component of PCs. Although we have not
experienced any product liability claims to date, the sale and support of our
products may entail the risk of claims like this. In addition, any failure by
our products or software to properly perform could result in claims against us
by our customers. We maintain insurance to protect against certain claims
associated with the use of our products, but our insurance coverage may not
adequately cover any claim asserted against us. A successful claim brought
against us that is in excess of, or excluded from, our insurance coverage,
could harm our business. In addition, even claims that are ultimately
unsuccessful could result in our expenditure of funds in litigation and
management time and resources. We have agreed to indemnify some of our
customers and suppliers against patent infringement, warranty and product
defect claims. We may be subject to material claims in the future and those
claims could result in liability in excess of our insurance coverage. In
addition, our insurance may not cover those claims and appropriate insurance
may not continue to be available to us in the future at commercially
reasonable rates.
 
   Semiconductors are subject to eroding average selling prices. The
semiconductor industry, including the 3D graphics processor industry, has been
characterized, and is likely to continue to be characterized by, rapid erosion
of ASPs due to a number of factors. These factors include rapid technological
change, price/performance enhancements and product obsolescence. We anticipate
that ASPs and gross margins for our products will decrease over product life
cycles due to competitive pressures and volume pricing agreements. Decreasing
ASPs could cause us to experience decreased revenue even though the number of
units sold is increasing. As a result, we may experience substantial period-
to-period fluctuations in future operating results due to ASP erosion.
 
                                      27
<PAGE>
 
Therefore, we must continue to develop and introduce on a timely basis next-
generation products and enhancements to existing new products that incorporate
additional or new features and functionalities and that can be sold at higher
ASPs. Failure to achieve this could cause our revenue and gross margins to
decline, which would harm our business.
 
   Our business is subject to risks associated with international
operations. Our reliance on foreign third-party manufacturing, assembly and
testing operations subjects us to a number of risks associated with conducting
business outside of the United States. These risks include the following:
 
  . unexpected changes in, or impositions of, legislative or regulatory
    requirements;
 
  . delays resulting from difficulty in obtaining export licenses for certain
    technology;
 
  . tariffs, quotas and other trade barriers and restrictions;
 
  . longer payment cycles;
 
  . potentially adverse taxes;
 
  . the burdens of complying with a variety of foreign laws; and
 
  . other factors beyond our control.
 
   We are also subject to general political risks in connection with our
international trade relationships. Although to date our business has not
suffered as a result of these regulatory, political and other factors, these
factors could harm our business in the future or could require us to modify
our current business practices. In addition, the laws of some foreign
countries in which our products are or may be manufactured or sold, including
various countries in Asia, may not protect our products or intellectual
property rights to the same extent as do the laws of the United States. The
possibility of piracy of our technology and products is thus more likely in
these countries. Currently, all of our arrangements with third-party
manufacturers provide for pricing and payment in U.S. dollars, and to date we
have not engaged in any currency hedging activities, although we may do so in
the future. Fluctuations in currency exchange rates could harm our business in
the future.
 
   The semiconductor industry is cyclical, which could cause fluctuations in
our operating results. The semiconductor industry historically has been
characterized by the following factors:
 
  . rapid technological change;
 
  . cyclical market patterns;
 
  . significant ASP erosion;
 
  . fluctuating inventory levels;
 
  . alternating periods of overcapacity and capacity constraints;
 
  . variations in manufacturing costs and yields; and
 
  . significant expenditures for capital equipment and product development.
 
   In addition, the industry has experienced significant economic downturns at
various times, characterized by diminished product demand and accelerated
erosion of ASPs. We may experience substantial period-to-period fluctuations
in results of operations due to general semiconductor industry conditions.
 
   Our stock price could be volatile. The market price of our common stock
could be subject to significant fluctuations in response to our operating
results, announcements of new products by us or our competitors, and other
factors, including general conditions in the 3D graphics and PC markets. In
addition, the stock market in recent months has experienced and continues to
experience extreme price and volume fluctuations, which have affected the
market price of the stock of many companies, and particularly technology
companies. These fluctuations have often been unrelated or disproportionate to
the operating performance of these companies.
 
                                      28
<PAGE>
 
These fluctuations, as well as a shortfall in sales or earnings compared to
securities analysts expectations, changes in analysts recommendations or
projections or general economic and market conditions, may adversely affect
the market price of our common stock. In the past, securities class action
litigation has often been instituted following periods of volatility in the
market price for a company's securities. Litigation like this could result in
substantial costs and a diversion of management attention and resources, which
could harm our business.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
   The financial statements required by this item are submitted as a separate
section of this Form 10-K. See Item 14.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE
 
   Not applicable.
 
                                   PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
   Reference is made to the information regarding Directors and Executive
Officers appearing under the heading "Election of Directors" in the 1999 Proxy
Statement which information is hereby incorporated by reference, and to the
information under the heading "Executive Officers of the Registrant" in Part I
hereof.
 
ITEM 11. EXECUTIVE COMPENSATION
 
   Reference is made to the information appearing under the heading "Executive
Compensation," in the 1999 Proxy Statement, which information is incorporated
by reference.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
   Reference is made to information appearing in the 1999 Proxy Statement,
under the heading "Security Ownership of Certain Beneficial Owners and
Management," which information is hereby incorporated by reference.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
   Reference is made to information appearing in the 1999 Proxy Statement,
under the heading "Certain Transactions," which information is hereby
incorporated by reference.
 
                                      29
<PAGE>
 
                                    PART IV
 
ITEM 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 
<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
 <C> <C> <S>                                                               <C>
 (a)  1. Financial Statements
         Report of KPMG LLP, Independent Auditors........................   32
         Balance Sheets as of December 31, 1997, January 31, 1998, and
         January 31, 1999................................................   33
         Statements of Operations for the years ended 1996 and 1997, one
         month ended January 31, 1998, and year ended January 31, 1999...   34
         Statements of Stockholders' Equity for the years ended December
         31, 1996 and 1997, one month ended January 31, 1998, and year
         ended January 31, 1999..........................................   35
         Statements of Cash Flows for the years ended December 31, 1996
         and 1997, one month ended January 31, 1998, and year ended
         January 31, 1999................................................   36
         Notes to Financial Statements...................................   37
 (a)  2. Financial Statement Schedules
         II--Valuation and Qualifying Accounts...........................   51
         All other schedules are omitted because they are not required,
         or are not applicable, or the required information is shown in
         the financial statements or notes thereto.
 (a)  3. Exhibits
         The exhibits listed in the accompanying index to exhibits are
         filed or incorporated by reference as a part of this annual
         report.
 (b)     Reports on Form 8-K
         No reports on Form 8-K were filed during the fourth quarter
         ended January 31, 1999.
</TABLE>
 
                                       30
<PAGE>
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
 Exhibit
 Number                         Description of Document
 -------                        -----------------------
 <C>     <S>
  3.1    Amended and Restated Certificate of Incorporation. (1)
 
  3.2    Bylaws. (2)
 
  4.1    Reference is made to Exhibits 3.1 and 3.2.
 
  4.2    Specimen Stock Certificate. (2)
 
  4.3    Second Amended and Restated Investors' Rights Agreement, dated August
         19, 1997 between the Company and the parties indicated thereto and
         First Amendment to Second Amended and Restated Investors' Rights
         Agreement, dated July 22, 1998. (2)
 
  10.1   Form of Indemnity Agreement between the Company and each of its
         directors and officers. (2)
 
  10.2   1998 Equity Incentive Plan. (2)
 
  10.3   Form of Incentive Stock Option Agreement under the 1998 Equity
         Incentive Plan. (2)
 
  10.4   Form of Nonstatutory Stock Option Agreement under the 1998 Equity
         Incentive Plan. (2)
 
  10.5   1998 Employee Stock Purchase Plan. (2)
 
  10.6   Form of Employee Stock Purchase Plan Offering. (2)
 
  10.7   1998 Non-Employee Directors' Stock Option Plan. (2)
 
  10.8   Form of Nonstatutory Stock Option Agreement under the 1998 Non-
         Employee Directors' Stock Option Plan (Initial Grant). (2)
 
  10.9   Form of Nonstatutory Stock Option Agreement under the 1998 Non-
         Employee Directors' Stock Option Plan (Annual Grant). (2)
 
  10.10  Form of Nonstatutory Stock Option Agreement under the 1998 Non-
         Employee Directors' Stock Option Plan (Committee Grant). (2)
 
  10.11  Sublease dated April 2, 1998 between Apple Computer, Inc. and the
         Company. (2)
 
  10.12  Loan and Security Agreement, dated September 3, 1998, between the
         Company and Imperial Bank, as amended by letter agreement dated
         November 2, 1998. (2)
 
  23.1   Consent of Independent Auditors
 
  27.1   Financial Data Schedule
 
  27.2   1997 Restated Financial Data Schedule
</TABLE>
- --------
(1) Filed as an exhibit to the Company's Registration Statement on Form S-8
    filed on March 23, 1999 (Registration No. 333-74905) and incorporated
    herein by reference.
(2) Filed as an exhibit to the Company's Registration Statement on Form S-1
    filed on March 6, 1998 (Registration No. 333-47495) and incorporated
    herein by reference.
 
                                      31
<PAGE>
 
                         INDEPENDENT AUDITORS' REPORT
 
The Board of Directors and Stockholders
NVIDIA Corporation:
 
   We have audited the accompanying balance sheets of NVIDIA Corporation (the
Company) as of December 31, 1997, January 31, 1998, and January 31, 1999 and
the related statements of operations, stockholders' equity and cash flows for
each of the years in the two-year period ended December 31, 1997, the one-
month period ended January 31, 1998, and the year ended January 31, 1999. In
connection with our audits of the financial statements, we have also audited
the accompanying financial statement schedule. These financial statements and
financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
 
   We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
   In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of NVIDIA Corporation as of
December 31, 1997, January 31, 1998, and January 31, 1999 and the results of
its operations and its cash flows for each of the years in the two-year period
ended December 31, 1997, the one-month period ended January 31, 1998, and the
year ended January 31, 1999, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
 
/s/ KPMG LLP
 
Mountain View, California
February 23, 1999, except
as to Note 9 which is as of
April 3, 1999
 
                                      32
<PAGE>
 
                               NVIDIA CORPORATION
 
                                 BALANCE SHEETS
 
                       (in thousands, except share data)
 
<TABLE>
<CAPTION>
                                                                 January 31,
                                                  December 31, ----------------
                                                      1997      1998     1999
                                                  ------------ ------- --------
<S>                                               <C>          <C>     <C>
                     ASSETS
Current assets:
  Cash and cash equivalents......................   $ 6,551    $ 7,984 $ 50,257
  Accounts receivable, less allowances of $100,
   $349 and $2,627, respectively.................    12,487     15,399   20,633
  Inventory......................................        25        521   28,623
  Prepaid expenses and other current assets......       278        594    1,599
                                                    -------    ------- --------
    Total current assets.........................    19,341     24,498  101,112
Property and equipment, net......................     5,536      5,512   11,650
Deposits and other assets........................       162        162      570
                                                    -------    ------- --------
                                                    $25,039    $30,172 $113,332
                                                    =======    ======= ========
      LIABILITIES AND STOCKHOLDERS' EQUITY
</TABLE>
 
<TABLE>
<S>                                                 <C>      <C>      <C>
Current liabilities:
  Accounts payable................................. $11,572  $15,312  $ 35,730
  Line of credit...................................      --       --     5,000
  Accrued liabilities..............................   3,245    3,266     5,012
  Current portion of capital lease obligations.....   1,434    1,228     1,386
                                                    -------  -------  --------
    Total current liabilities......................  16,251   19,806    47,128
Capital lease obligations, less current portion....   1,891    1,756     1,995
Commitments and contingencies
Stockholders' equity:
  Convertible preferred stock, $.001 par value;
   10,000,000 shares authorized; 9,327,087 issued
   and outstanding in 1997 and 1998, and none
   outstanding in 1999; aggregate liquidation
   preference of $19,827 in 1997 and 1998..........       9        9        --
  Common stock, $.001 par value; 200,000,000 shares
   authorized; 14,140,585, 14,141,710 and
   28,743,001 shares issued and outstanding in
   1997, 1998 and 1999, respectively...............      14       14        29
  Additional paid-in capital.......................  25,079   25,446    74,372
  Deferred compensation............................  (3,316)  (3,317)     (780)
  Accumulated deficit.............................. (14,889) (13,542)   (9,412)
                                                    -------  -------  --------
    Total stockholders' equity.....................   6,897    8,610    64,209
                                                    -------  -------  --------
                                                    $25,039  $30,172  $113,332
                                                    =======  =======  ========
</TABLE>
 
                See accompanying notes to financial statements.
 
                                       33
<PAGE>
 
                               NVIDIA CORPORATION
 
                            STATEMENTS OF OPERATIONS
 
                     (in thousands, except per share data)
 
<TABLE>
<CAPTION>
                                        Years Ended
                                       December 31,     Month Ended Year Ended
                                      ----------------  January 31, January 31,
                                       1996     1997       1998        1999
                                      -------  -------  ----------- -----------
<S>                                   <C>      <C>      <C>         <C>
Revenue:
  Product...........................  $ 3,710  $27,280    $11,420    $151,413
  Royalty...........................      202    1,791      1,911       6,824
                                      -------  -------    -------    --------
    Total revenue...................    3,912   29,071     13,331     158,237
Cost of revenue.....................    3,038   21,244     10,071     109,746
                                      -------  -------    -------    --------
Gross profit........................      874    7,827      3,260      48,491
                                      -------  -------    -------    --------
Operating expenses:
  Research and development..........    1,218    7,103      1,121      25,073
  Sales, general and
   administrative...................    2,649    4,183        640      18,902
                                      -------  -------    -------    --------
    Total operating expenses........    3,867   11,286      1,761      43,975
                                      -------  -------    -------    --------
    Operating income (loss).........   (2,993)  (3,459)     1,499       4,516
Interest and other income (expense),
 net................................      (84)    (130)       (18)        (29)
                                      -------  -------    -------    --------
Income (loss) before taxes..........   (3,077)  (3,589)     1,481       4,487
Income taxes........................       --       --        134         357
                                      -------  -------    -------    --------
    Net income (loss)...............  $(3,077) $(3,589)   $ 1,347    $  4,130
                                      =======  =======    =======    ========
Basic net income (loss) per share...  $  (.27) $  (.28)   $   .10    $    .28
                                      =======  =======    =======    ========
Diluted net income (loss) per
 share..............................  $  (.27) $  (.28)   $   .05    $    .15
                                      =======  =======    =======    ========
Shares used in basic per share
 computation........................   11,383   12,677     14,141      14,565
Shares used in diluted per share
 computation........................   11,383   12,677     26,100      27,393
</TABLE>
 
 
                See accompanying notes to financial statements.
 
                                       34
<PAGE>
 
                               NVIDIA CORPORATION
 
                       STATEMENTS OF STOCKHOLDERS' EQUITY
 
                       (in thousands, except share data)
 
<TABLE>
<CAPTION>
                          Mandatorily  Preferred Stock     Common Stock    Additional Deferred Accumu-      Total
                          Convertible ------------------ -----------------  Paid-in   Compen-   lated   Stockholders'
                             Notes      Shares    Amount   Shares   Amount  Capital    sation  Deficit     Equity
                          ----------- ----------- ------ ---------- ------ ---------- -------- -------  -------------
<S>                       <C>         <C>         <C>    <C>        <C>    <C>        <C>      <C>      <C>
Balances, December 31,
 1995...................   $     --     7,874,386  $ 8   11,365,300  $11    $12,216    $   --  $(8,223)    $ 4,012
Exercise of Series B
 warrants...............         --        13,889   --           --   --         25        --       --          25
Issuance of common stock
 and stock options for
 services...............         --            --   --        2,200   --         25        --       --          25
Issuance of common stock
 upon exercise of stock
 options................         --            --   --      199,874    1         51        --       --          52
Net loss................         --            --   --           --   --         --        --   (3,077)     (3,077)
                           --------   -----------  ---   ----------  ---    -------    ------  -------     -------
Balances, December 31,
 1996...................         --     7,888,275    8   11,567,374   12     12,317        --  (11,300)      1,037
Issuance of Series D
 preferred stock, net of
 issuance costs of $30..         --     1,438,812    1           --   --      7,537        --       --       7,538
Grant of common stock
 options for lease
 financing and
 consulting services....         --            --   --           --   --        120        --       --         120
Issuance of common stock
 upon exercise of stock
 options................         --            --   --    2,573,211    2        828        --       --         830
Deferred compensation
 related to grant of
 common stock options...         --            --   --           --   --      4,277    (4,277)      --          --
Amortization of deferred
 compensation...........         --            --   --           --   --         --       961       --         961
Net loss................         --            --   --           --   --         --        --   (3,589)     (3,589)
                           --------   -----------  ---   ----------  ---    -------    ------  -------     -------
Balances, December 31,
 1997...................         --     9,327,087    9   14,140,585   14     25,079    (3,316) (14,889)      6,897
Issuance of common stock
 upon exercise of stock
 options................         --            --   --        1,125   --          6        --       --           6
Deferred compensation
 related to grant of
 common stock options...         --            --   --           --   --        361      (361)      --          --
Amortization of deferred
 compensation...........         --            --   --           --   --         --       360       --         360
Net income..............         --            --   --           --   --         --        --    1,347       1,347
                           --------   -----------  ---   ----------  ---    -------    ------  -------     -------
Balances, January 31,
 1998...................         --     9,327,087    9   14,141,710   14     25,446    (3,317) (13,542)      8,610
Issuance of common stock
 upon exercise of stock
 options................         --            --   --      202,775   --        348        --       --         348
Tax benefit from stock
 options................         --            --   --           --   --         45        --       --          45
Issuance of mandatorily
 convertible notes......     11,000            --   --           --   --         --        --       --          --
Sale of common stock
 under public offering,
 net of issuance costs
 of $4.5 million........         --            --   --    3,500,000    4     37,535        --       --      37,539
Conversion of
 mandatorily convertible
 notes into common
 stock..................   (11,000)            --   --    1,571,429    2     10,998        --       --      11,000
Conversion of preferred
 stock into common
 stock..................         --   (9,327,087)   (9)   9,327,087    9         --        --       --          --
Amortization of deferred
 compensation...........         --            --   --           --   --         --     2,537       --       2,537
Net income..............         --            --   --           --   --         --        --    4,130       4,130
                           --------   -----------  ---   ----------  ---    -------    ------  -------     -------
Balances, January 31,
 1999...................         --            --   --   28,743,001  $29    $74,372    $ (780) $(9,412)    $64,209
                           ========   ===========  ===   ==========  ===    =======    ======  =======     =======
</TABLE>
 
                See accompanying notes to financial statements.
 
                                       35
<PAGE>
 
                               NVIDIA CORPORATION
 
                            STATEMENTS OF CASH FLOWS
 
                                 (in thousands)
 
<TABLE>
<CAPTION>
                                          Year Ended
                                         December 31,     Month Ended Year Ended
                                        ----------------  January 31, January 31,
                                         1996     1997       1998        1999
                                        -------  -------  ----------- -----------
<S>                                     <C>      <C>      <C>         <C>
Cash flows from operating activities:
 Net income (loss)....................  $(3,077) $(3,589)   $1,347      $ 4,130
 Adjustments to reconcile net income
  (loss) to net cash provided by
  (used in) operating activities:
  Depreciation........................      802    1,363       219        4,006
  Stock options granted in exchange
   for lease financing and services...       50      120        --           --
  Amortization of deferred
   compensation.......................       --      961       360        2,537
  Changes in operating assets and
   liabilities:
   Accounts receivable................      (24) (11,446)   (2,912)      (5,234)
   Inventory..........................       --       38      (496)     (28,102)
   Prepaid expenses and other current
    assets............................       44     (237)     (316)      (1,005)
   Deposits and other assets..........      (19)     (59)       --         (408)
   Accounts payable...................     (506)  11,295     3,740       20,418
   Accrued liabilities................    2,451      373        21        1,746
                                        -------  -------    ------      -------
     Net cash provided by (used in)
      operating activities............     (279)  (1,181)    1,963       (1,912)
                                        -------  -------    ------      -------
Cash flows used in investing
 activities:
   Purchase of property and
    equipment.........................       (9)  (2,732)     (163)      (7,899)
                                        -------  -------    ------      -------
Cash flows from financing activities:
 Borrowings under line of credit......       --       --        --        5,000
 Common stock issued under stock
  option plans........................       51      830         6          348
 Tax benefit from stock options.......       --       --        --           45
 Sale of common stock under public
  offering, net of issuance costs.....       --       --        --       37,539
 Issuance of mandatorily convertible
  notes...............................                                   11,000
 Net proceeds from sale of preferred
  stock...............................       --    7,538        --           --
 Payments under capital leases........     (502)  (1,037)     (373)      (1,848)
                                        -------  -------    ------      -------
     Net cash provided by (used in)
      financing activities............     (451)   7,331      (367)      52,084
                                        -------  -------    ------      -------
Change in cash and cash equivalents...     (739)   3,418     1,433       42,273
Cash and cash equivalents at beginning
 of period............................    3,872    3,133     6,551        7,984
                                        -------  -------    ------      -------
Cash and cash equivalents at end of
 period...............................  $ 3,133  $ 6,551    $7,984      $50,257
                                        =======  =======    ======      =======
Cash paid for interest................  $   215  $   267    $   31      $   471
                                        =======  =======    ======      =======
Noncash financing and investing
 activities:
 Assets recorded under capiital
  lease...............................   $  265  $ 3,023    $   32      $ 2,245
                                        =======  =======    ======      =======
Deferred compensation related to grant
 of common stock options..............  $    --  $ 4,277    $  361      $    --
                                        =======  =======    ======      =======
</TABLE>
 
                See accompanying notes to financial statements.
 
                                       36
<PAGE>
 
                              NVIDIA CORPORATION
 
                         NOTES TO FINANCIAL STATEMENTS
 
(1) Organization and Significant Accounting Policies
 
 Organization
 
   NVIDIA Corporation (the "Company") designs, develops and markets 3D
graphics processors for the mainstream PC market. The Company operates
primarily in one industry segment in the United States, Europe and Asia. In
April 1998, the Company was reincorporated as a Delaware corporation.
 
 Fiscal Year
 
   Effective January 1, 1998, the Company changed its fiscal year-end
financial reporting period to January 31. The Company elected not to restate
its previous reporting periods ending December 31. Certain disclosures related
to the one month ended January 31, 1997 were not included in these Notes to
Financial Statements due to immateriality. In addition, effective February 1,
1998 the Company changed its fiscal year end from January 31 to a 52- or 53-
week year ending on the last Sunday in January. As a result, the first and
fourth quarters of fiscal 1999 are 12- and 14-week periods, respectively, with
the remaining quarters being 13-week periods.
 
 Cash and Cash Equivalents
 
   The Company considers all highly liquid investments purchased with a
maturity of three months or less at the time of purchase to be cash
equivalents. Currently, the Company's cash equivalents consist of $49.8
million invested in money market funds.
 
 Inventories
 
   Inventories are stated at the lower of first-in first-out, cost or market.
Write-downs to reduce the carrying value of obsolete, slow moving and non-
usable inventory to net realizable value are charged to cost of revenue.
 
 Property and Equipment
 
   Property and equipment are stated at cost. Depreciation is computed using
the straight-line method based on estimated useful lives, generally three to
four years. Depreciation expense includes the amortization of assets recorded
under capital leases. Leasehold improvements and assets recorded under capital
leases are amortized over the shorter of the lease term or the estimated
useful life of the asset.
 
 Software Development Costs
 
   Software development costs are expensed as incurred until the technological
feasibility of the related product has been established. After technological
feasibility is established, any additional software development costs would be
capitalized in accordance with Financial Accounting Standards Board Statement
of Financial Accounting Standards ("SFAS") No. 86, Capitalization of Software
Development Costs. Through January 31, 1999, the Company's process for
developing software was essentially completed concurrently with the
establishment of technological feasibility, and, accordingly, no software
costs have been capitalized to date. Software development costs incurred prior
to achieving technological feasibility are charged to research and development
expense as incurred.
 
 Revenue Recognition
 
   Revenue from product sales is recognized upon shipment, net of appropriate
allowances. The Company's policy on sales to distributors is to defer
recognition of sales and related gross profit until the distributors resell
the product. Royalty revenue is recognized upon shipment of product by the
licensee to its customers. The Company believes that the software sold with
its products is incidental to the product as a whole.
 
                                      37
<PAGE>
 
                              NVIDIA CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS--(Continued)
 
 
 Research and Development Arrangements
 
   The Company entered into contractual agreements to provide design,
development and support services on a best efforts basis. All amounts funded
to the Company under these agreements are non-refundable once paid. The
Company recorded reductions to research and development expense after the
services were performed based on the achievement of contractually specified
milestones and the collectability of amounts was assured.
 
 Accounting for Stock-Based Compensation
 
   The Company uses the intrinsic value method to account for its stock-based
employee compensation plans. Deferred compensation arising from stock-based
awards is amortized in accordance with Financial Accounting Standards Board
Interpretation No. 28.
 
 Income Taxes
 
   The Company records income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates in effect for the year in which those temporary differences are expected
to be recorded or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes
the enactment date.
 
 Fair Value of Financial Instruments
 
   The carrying value of cash, cash equivalents, accounts receivable, accounts
payable and accrued liabilities approximate fair value due to the short
maturity of those instruments.
 
 Comprehensive Income
 
   In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and displaying comprehensive income and its components in financial
statements. The Company had no items of other comprehensive income in all
periods presented.
 
 Business Segments
 
   In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS
No. 131 establishes standards for the way public business enterprises are to
report information about operating segments in annual financial statements and
requires those enterprises to report selected information about operating
segments in interim financial reports issued to shareholders. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997. Therefore, the
Company has made the required disclosures in Note 7 to these financial
statements
 
 Use of Estimates
 
   The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the recorded amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
 
                                      38
<PAGE>
 
                              NVIDIA CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS--(Continued)
 
 
 Net Income (Loss) Per Share
 
   Basic net income (loss) per share is computed using the weighted average
number of common shares outstanding during the period. Diluted net income
(loss) per share is computed using the weighted average number of common and
dilutive common equivalent shares outstanding during the period, using either
the as-if-converted method for mandatorily convertible notes and convertible
preferred stock or the treasury stock method for options and warrants. The
effect of including mandatorily convertible notes, convertible preferred
stock, options and warrants would have been antidilutive during all periods
presented, except for the one-month period ended January 31, 1998 and the
fiscal year ended Jan 31, 1999, and, as a result, such effect has been
excluded from the computation of diluted net loss per share during those anti-
dilutive periods. See Note 3 for information regarding potentially dilutive
outstanding shares of, and warrants to, purchase common stock, convertible
preferred stock and outstanding options to purchase common stock. Pursuant to
SEC Staff Accounting Bulletin No. 98, common stock and convertible preferred
stock issued for nominal consideration and options and warrants granted for
nominal consideration prior to the initial public offering (IPO) are included
in the calculation of basic and diluted net income (loss) per share, as if
they were outstanding for all periods presented. To date, the Company has not
had any issuances or grants for nominal consideration. The following is a
reconciliation of the numerators and denominators of the basic and diluted
earnings per share (EPS) computations for the periods presented:
 
<TABLE>
<CAPTION>
                                           Income/(Loss)    Shares     Per Share
                                            (Numerator)  (Denominator)  Amount
                                           ------------- ------------  ---------
                                             (in thousands, except per share
                                                          data)
   <S>                                     <C>           <C>           <C>
   Year ended December 31, 1996
   Basic and diluted EPS..................    $(3,077)      11,383      $(0.27)
                                              =======       ======      ======
   Year ended December 31, 1997
   Basic and diluted EPS..................    $(3,589)      12,677      $(0.28)
                                              =======       ======      ======
   One month ended January 31, 1998
   Basic EPS..............................    $ 1,347       14,141      $ 0.10
   Effect of dilutive securities:
     Dilutive options outstanding.........                   2,531
     Warrants.............................                     101
     Convertible preferred stock..........                   9,327
                                              -------       ------
   Diluted EPS............................    $ 1,347       26,100      $ 0.05
                                              =======       ======      ======
   Year ended January 31, 1999
   Basic EPS..............................    $ 4,130       14,565      $ 0.28
   Effect of dilutive securities:
     Dilutive options outstanding.........                   2,906
     Warrants.............................                     116
     Mandatorily convertible notes........                     717
     Convertible preferred stock..........                   9,089
                                              -------       ------
   Diluted EPS............................    $ 4,130       27,393      $ 0.15
                                              =======       ======      ======
</TABLE>
 
   As of January 31, 1999, options to acquire 642,750 shares of common stock
with weighted-average exercise prices of $8.86 were not included in the
computation of diluted earnings per share because the options' exercise price
was greater than the average market price of the Company's common shares and,
therefore, the effect would be antidilutive. No options, warrants or
convertible preferred stock outstanding for the years ended December 31, 1996
and 1997 were included in the calculation of diluted earnings per share for
those years because the Company had a net loss in each of those years and to
do so would have been antidilutive.
 
                                      39
<PAGE>
 
                              NVIDIA CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS--(Continued)
 
 
(2) Balance Sheet Components
 
   Certain balance sheet components are as follows:
 
<TABLE>
<CAPTION>
                                            December 31, January 31, January 31,
                                                1997        1998        1999
   Inventory:                               ------------ ----------- -----------
                                                       (in thousands)
   <S>                                      <C>          <C>         <C>
   Work in-process.........................     $--         $ --       $15,385
   Finished goods..........................      25          521        13,238
                                                ---         ----       -------
     Total inventory.......................     $25         $521       $28,623
                                                ===         ====       =======
</TABLE>
 
   At January 31, 1999, the Company had noncancelable inventory purchase
commitments totaling $37.4 million.
 
<TABLE>
<CAPTION>
                                          December 31, January 31, January 31,
                                              1997        1998        1999
   Property and Equipment:                ------------ ----------- -----------
                                                     (in thousands)
   <S>                                    <C>          <C>         <C>
   Purchased engineering software........   $ 3,158      $ 3,181     $ 4,102
   Test equipment........................     1,467        1,478       3,625
   Computer equipment....................     3,264        3,402       9,028
   Leasehold improvements................        74           74         475
   Office furniture and equipment........       259          272       1,361
   Assets held for lease.................       157          166          --
                                            -------      -------     -------
                                              8,379        8,573      18,591
   Accumulated depreciation and
    amortization.........................    (2,843)      (3,061)     (6,941)
                                            -------      -------     -------
     Property and equipment, net.........   $ 5,536      $ 5,512     $11,650
                                            =======      =======     =======
</TABLE>
 
   Assets recorded under capital leases included in property and equipment
were $4,765,000, $5,215,000 and $6,637,000 as of December 31, 1997, January
31, 1998 and January 31, 1999, respectively. Accumulated amortization thereon
was $2,137,000, $2,265,000 and $3,238,000 as of December 31, 1997, January 31,
1998 and January 31, 1999, respectively.
 
<TABLE>
<CAPTION>
                                           December 31, January 31, January 31,
                                               1997        1998        1999
   Accrued Liabilities:                    ------------ ----------- -----------
                                                      (in thousands)
   <S>                                     <C>          <C>         <C>
   Advances on development agreement......    $2,500      $2,292      $   --
   Accrued rebates........................        --          --       1,973
   Other..................................       745         974       3,039
                                              ------      ------      ------
     Total accrued liabilities............    $3,245      $3,266      $5,012
                                              ======      ======      ======
</TABLE>
 
(3) Stockholders' Equity
 
 Mandatorily Convertible Notes
 
   Convertible subordinated non-interest bearing notes were issued to three
major customers in July and August 1998 for a total of $11.0 million. The
notes are subordinated to certain senior indebtedness. On January 15, 1999,
the outstanding principal balance of these notes automatically converted into
1,571,429 shares of common stock of the Company at a conversion price equal to
$7.00 per share.
 
                                      40
<PAGE>
 
                              NVIDIA CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS--(Continued)
 
 
 Convertible Preferred Stock
 
   In 1993, the Company sold 4,303,000 shares of Series A preferred stock at
$0.50 per share, net of $22,000 of issuance costs. In 1994, the Company sold
2,390,831 shares of Series B preferred stock at $1.80 per share, net of
$57,000 of issuance costs. In 1995, the Company sold 416,667 shares of Series
B preferred stock at $1.80 per share. In 1995, the Company sold 750,000 shares
of Series C preferred stock at $6.67 per share, net of $14,000 of issuance
costs. On August 19 and September 12, 1997, the Company sold an aggregate of
1,438,812 shares of Series D preferred stock at $5.26 per share, net of
$30,000 of issuance costs.
 
   The rights, preferences, and privileges of the holders of Series A, B, C
and D convertible preferred stock the Company are as follows:
 
  . Dividends were noncumulative and payable only upon declaration by the
    Board of Directors at a rate of $.04, $.144, $.533 and $.42 per share for
    Series A, B, C and D preferred stock, respectively.
 
  . Holders of Series A, B, C and D preferred stock had a liquidation
    preference of $.50, $1.80, $6.67 and $5.26 per share, respectively, plus
    any declared but unpaid dividends over holders of common stock.
 
  . Each holder of preferred stock had voting rights equal to common stock on
    an "as-if-converted" basis.
 
  . Each share of preferred stock was convertible into common stock at the
    option of the holder on a one-for-one basis, subject to adjustment to
    protect against dilution.
 
   On January 22, 1999, 9,327,087 shares of Series A, B, C and D preferred
stock were automatically converted into common stock upon the completion of
the initial public offering of common stock. As of January 31, 1999, there are
no shares of preferred stock outstanding and the Company has no current plans
to issue any of the authorized preferred stock.
 
 Warrants
 
   During the period 1993 through 1997, the Company granted warrants to
purchase 80,000, 66,877, 10,000 and 29,706 shares of Series A, B, C and D
preferred stock, respectively, in connection with lease financing and
services. These warrants were exercisable at $.50, $1.80, $6.67 and $5.26 for
shares of Series A, B, C and D preferred stock, respectively, and expire from
2003 to 2007. Upon the initial public offering, the warrants outstanding
automatically converted into warrants to purchase common stock. At January 31,
1999, warrants to purchase 158,806 shares of common stock were outstanding.
 
   In October 1998, in connection with a manufacturing agreement, the Company
undertook to grant warrants to purchase 300,000 shares of common stock at an
exercise price of $12 per share. The warrants expired upon the completion of
the initial public offering on January 22, 1999.
 
   The fair value of all warrant issuances calculated using the Black-Scholes
option pricing model was not material, using the following assumptions:
dividend yield--none; expected life--contractual term; risk free interest
rates--6.0% to 6.5%; and volatility--60%.
 
 1998 Equity Incentive Plan
 
   The Equity Incentive Plan (the "Plan"), as amended and restated on February
17, 1998, provides for the issuance of up to 15,000,000 shares of the
Company's common stock to directors, employees and consultants. The Plan
provides for the issuance of stock bonuses, restricted stock purchase rights,
incentive stock options or nonstatutory stock options. Each year on the last
day of each fiscal year, starting with the year ending January 31, 1999, the
aggregate number of shares of common stock that are available for issuance
will automatically be
 
                                      41
<PAGE>
 
                              NVIDIA CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS--(Continued)
 
increased by a number of shares equal to five percent (5%) of the Company's
outstanding common stock on such date, including on an as-if-converted basis
preferred stock and convertible notes, and outstanding options and warrants,
calculated using the treasury stock method. In January 1999, the shares of
common stock available for issuance were increased by 1,778,606 shares
pursuant to this provision.
 
   Pursuant to the Plan, the exercise price for incentive stock options is at
least 100% of the fair market value on the date of grant or for employees
owning in excess of 10% of the voting power of all classes of stock, 110% of
the fair market value on the date of grant. For nonstatutory stock options,
the exercise price is no less than 85% of the fair market value on the date of
grant.
 
   Options generally expire in 10 years. Vesting periods are determined by the
Board of Directors. However, options generally vest ratably over a four year
period, with 25% becoming vested approximately one year from the date of grant
and the remaining 75% vesting on a quarterly basis over the next three years.
Options granted prior to December 1997 could be exercised prior to full
vesting. Any unvested shares so purchased were subject to a repurchase right
in favor of the Company at a repurchase price per share that was equal to the
original per share purchase price. The right to repurchase at the original
price would lapse at the rate of 25% per year over the four-year period from
the date of grant. As of January 31, 1999, there were 941,853 such shares
subject to repurchase.
 
   The Company accounts for the plan using the intrinsic value method. As
such, compensation expense is recorded if on the date of grant the current
fair value per share of the underlying stock exceeds the exercise price per
share. With respect to certain options granted during 1997 and the one month
ended January 31, 1998, the Company recorded deferred compensation of
$4,277,000 and $361,000, respectively, for the difference at the grant date
between the exercise price per share and the fair value per share, based upon
independent valuations and management's estimate of the fair value of the
Company's stock on the various grant dates of the common stock underlying the
options. This amount is being amortized over the vesting period of the
individual options, generally four years.
 
 Non-Employee Directors' Stock Option Plan
 
   In February 1998, the Board adopted the 1998 Non-Employee Directors' Stock
Option Plan (the "Directors' Plan") to provide for the automatic grant of
options to purchase shares of common stock to directors of the Company who are
not employees of or consultants to the Company or an affiliate of the Company
(a "Non-Employee Director"). The Compensation Committee administers the
Directors' Plan. The aggregate number of shares of common stock that may be
issued pursuant to options granted under the Directors' Plan is 300,000
shares.
 
                                      42
<PAGE>
 
                               NVIDIA CORPORATION
 
                   NOTES TO FINANCIAL STATEMENTS--(Continued)
 
 
 Stock-Based Compensation
 
   As permitted under Statement of Financial Accounting Standards No. 123,
("SFAS 123"), the Company has elected to follow Accounting Principles Board
Opinion No. 25 ("APB 25") and related Interpretations in accounting for stock-
based awards to employees. Compensation cost for the Company's stock-based
compensation plans as determined consistent with SFAS 123, would have increased
net loss and would have decreased net income to the pro forma amounts indicated
below:
 
<TABLE>
<CAPTION>
                                                       Month Ended Year Ended
                                                       January 31, January 31,
                                      1996     1997       1998        1999
                                     -------  -------  ----------- -----------
                                      (in thousands except per share data)
   <S>                               <C>      <C>      <C>         <C>
   Net income (loss)--as reported... $(3,077) $(3,589)   $1,347      $ 4,130
   Additional stock-based
    compensation under SFAS
    No. 123.........................     (32)    (105)     (301)      (4,386)
                                     -------  -------    ------      -------
   Net income (loss)--pro forma..... $(3,109) $(3,694)   $1,046      $  (256)
                                     =======  =======    ======      =======
   Basic net income (loss) per
    share--as reported.............. $ (0.27) $ (0.28)   $ 0.10      $  0.28
                                     =======  =======    ======      =======
   Basic net income (loss) per
    share--pro forma................ $ (0.27) $ (0.29)   $ 0.07      $ (0.02)
                                     =======  =======    ======      =======
   Diluted net income (loss) per
    share--as reported.............. $ (0.27) $ (0.28)   $ 0.05      $  0.15
                                     =======  =======    ======      =======
   Diluted net income (loss) per
    share--pro forma................ $ (0.27) $ (0.29)   $ 0.04      $ (0.01)
                                     =======  =======    ======      =======
</TABLE>
 
   The fair value of options granted prior to the initial public offering is
estimated on the date of grant using the minimum value method with the
following weighted-average assumptions: no dividend yield; risk free interest
rate of 5.0% to 6.5%; expected life for the option of five years; and
volatility of 0%.
 
   The weighted-average fair value of options granted during the years ended
1995, 1996, 1997, the one month ended January 31, 1998 and the year ended
January 31, 1999 was approximately $.05, $.08, $1.43, $1.74 and $1.45,
respectively.
 
                                       43
<PAGE>
 
                              NVIDIA CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS--(Continued)
 
 
   The following summarizes the transactions under the equity incentive and
non-employee director plans:
 
<TABLE>
<CAPTION>
                                                                       Share
                                                         Number      Weighted
                                          Available    of Shares   Average Price
                                          for Grant   Under Option   Per Share
                                          ----------  ------------ -------------
   <S>                                    <C>         <C>          <C>
   Balances, December 31, 1996...........  3,506,606    2,176,020       .27
     Authorized..........................  2,000,000           --        --
     Granted............................. (4,950,857)   5,000,857      1.43
     Exercised...........................         --   (2,603,836)     0.32
     Cancelled...........................    868,208     (837,583)     0.29
                                          ----------   ----------
   Balances, December 31, 1997...........  1,423,957    3,735,458      1.78
     Authorized..........................         --           --        --
     Granted.............................   (605,000)     605,000      5.01
     Exercised...........................         --       (1,125)     3.15
     Cancelled...........................         --           --        --
                                          ----------   ----------
   Balances, January 31, 1998............    818,957    4,339,333      2.23
     Authorized..........................  6,878,606           --        --
     Granted............................. (6,592,550)   6,612,550      7.22
     Exercised...........................         --     (202,775)     1.91
     Cancelled...........................  1,692,688   (1,692,688      6.35
                                          ----------   ----------
   Balances, January 31, 1999............  2,797,701    9,056,420      5.12
                                          ==========   ==========
</TABLE>
 
   In July 1998, the Board of Directors adopted a resolution allowing
employees to exchange some or all of their existing unvested options to
purchase common stock of the Company for options having an exercise price of
$6.30 per share. The repriced options retain the same vesting schedule as the
originally issued options, but the repriced options will not become
exercisable until July 1999. Options to purchase approximately 1,253,500
shares of common stock were repriced under this program. Stock options held by
executive officers and directors were not eligible for such repricing.
 
   During 1997, the Company granted common stock options within the Plan to
consultants for services rendered. The fair value of all option grants to non-
employees calculated using the Black-Scholes option pricing model was
$120,000, using the following assumptions: dividend yield--none; expected
life--contractual term; risk free interest rates--6.0% to 6.5%; volatility--
60%.
 
   In 1997, options to purchase 50,000 shares of common stock were granted to
an outside investor during the Series D preferred stock offering. In 1998,
options to purchase 20,000 shares of common stock were granted to an outside
investor.
 
   The following table summarizes information about stock options outstanding
as of January 31, 1999:
 
<TABLE>
<CAPTION>
                                          Number    Weighted Average   Number
                                         of Shares     Remaining      of Shares
   Exercise Prices                      Outstanding Contractual Life Exercisable
   ---------------                      ----------- ---------------- -----------
   <S>                                  <C>         <C>              <C>
   $0.05--$1.30........................  1,575,020        8.19          555,365
   $2.64--$3.15........................  1,544,100        8.84          390,753
   $4.15--$6.30........................  2,791,000        9.48           78,977
   $6.65--$9.00........................  3,146,300        9.52           25,698
                                         ---------                    ---------
   $0.05--$9.00........................  9,056,420        9.16        1,050,793
                                         =========                    =========
</TABLE>
 
                                      44
<PAGE>
 
                              NVIDIA CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS--(Continued)
 
 
Employee Stock Purchase Plan
 
   In February 1998, the Board approved the 1998 Employee Stock Purchase Plan
(the "Purchase Plan"), covering an aggregate of 500,000 shares of common
stock. The Purchase Plan is intended to qualify as an "employee stock purchase
plan" within the meaning of Section 423 of the Code. Under the Purchase Plan,
the Board may authorize participation by eligible employees, including
officers, in periodic offerings following the adoption of the Purchase Plan.
Under the Purchase Plan, the offering period for any offering will be no
longer than 27 months. Under the plan offering adopted pursuant to the
Purchase Plan, each offering period has been set at six months.
 
   Employees are eligible to participate if they are employed by the Company
or an affiliate of the Company designated by the Board. Employees who
participate in an offering generally can have up to 10% of their earnings
withheld pursuant to the Purchase Plan and applied, on specified dates
determined by the Board, to the purchase of shares of common stock. The Board
may increase this percentage at its discretion, up to 15%. The price of common
stock purchased under the Purchase Plan will be equal to 85% of the lower of
the fair market value of the common stock on the commencement date of each
offering period or the relevant purchase date. Employees may end their
participation in the offering at any time during the offering period, and
participation ends automatically on termination of employment with the
Company.
 
(4) Financial Arrangements, Commitments and Contingencies
 
 Short-term Borrowings
 
   In September 1998, the Company entered into a loan and security agreement
with a bank, which included a $5.0 million revolving credit facility with a
borrowing base equal to 75% of eligible accounts. Borrowings under the line of
credit carried interest at prime rate plus 1% and are due in March 1999. As of
January 31, 1999, the Company had borrowed $5.0 million against the line of
credit. The weighted average interest rate for the period the loan was
outstanding was 9%. Outstanding balances are collateralized primarily with
equipment, intellectual property, accounts receivable, and inventory.
 
 Lease Obligations
 
   The Company leases certain office facilities under operating leases
expiring through 2002. Future minimum lease payments under the Company's
noncancelable capital and operating leases as of January 31, 1999, are as
follows (in thousands):
 
<TABLE>
<CAPTION>
   Year ending January                                       Operating Capital
   -------------------                                       --------- -------
   <S>                                                       <C>       <C>
   2000.....................................................  $1,716   $1,696
   2001.....................................................   1,914    1,566
   2002.....................................................   1,969      692
   2003.....................................................   1,801       --
                                                                       ------
   Total payments...........................................            3,954
   Less amount representing interest, at rates ranging from
    8% to 10%...............................................              573
                                                                       ------
   Present value of minimum debt payments...................            3,381
   Less current portion.....................................            1,386
                                                                       ------
   Long term portion........................................           $1,995
                                                                       ======
</TABLE>
 
   Rent expense for 1996, 1997, one month ended January 31, 1998 and the year
ended January 31, 1999 was approximately $408,000, $425,000, $52,000 and
$1,555,000, respectively.
 
                                      45
<PAGE>
 
                              NVIDIA CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS--(Continued)
 
 
 Litigation
 
   On April 9, 1998, the Company was notified that Silicon Graphics, Inc
("SGI") had filed a patent infringement lawsuit against the Company in the
United States District Court for the District of Delaware. The suit alleges
that the sale and use of the Company's RIVA family of 3D graphics processors
infringes a United States patent held by SGI. The suit seeks unspecified
damages (including treble damages), an order permanently enjoining further
alleged infringement and attorneys' fees. On May 11, 1998, the Company was
notified that S3 had filed a patent infringement lawsuit against the Company
in the United States District Court for the Northern District of California.
The suit alleges that the sale and use of the Company's RIVA family of 3D
graphics processors infringes three United States patents held by S3. The suit
seeks unspecified damages (including treble damages), an order permanently
enjoining further alleged infringement and attorneys' fees. On September 21,
1998, the Company was notified that 3Dfx had filed a patent infringement
lawsuit against the Company in the United States District Court for the
Northern District of California. The suit alleges that the sale and use of the
Company's RIVA TNT graphics processor infringes a United States patent held by
3Dfx. The suit seeks unspecified damages (including treble damages), an order
permanently enjoining further alleged infringement and attorneys' fees. The
Company has filed answers to each suit and has filed counterclaims asserting
that the patents in each suit are neither infringed nor valid. Based on its
investigation to date, the Company believes that it has meritorious defenses
to the claims brought and intends to defend itself vigorously with respect to
all three lawsuits.
 
(5) Income Taxes
 
   The Company recorded no provision or benefit for income taxes in 1996 and
1997. The provision for the one month ended January 31, 1998, consisted
entirely of current federal tax expense. The provision for the twelve months
ended January 31, 1999 of $357,000, consists of $538,000 current federal tax
expense, $226,000 deferred federal tax benefit and a $45,000 charge in lieu of
taxes attributable to employer stock option plans.
 
   The provision for income taxes differs from the amount computed by applying
the federal statutory income tax rate to income before taxes as follows:
 
<TABLE>
<CAPTION>
                                    Year Ended
                                   December 31,        Month Ended Year Ended
                                   ----------------    January 31, January 31,
                                    1996      1997        1998        1999
                                   ------    ------    ----------- -----------
   <S>                             <C>       <C>       <C>         <C>
   Tax expense (benefit) computed
    at federal statutory rate.....    (34)%     (34)%       34%         34%
   Loss carryforward for which no
    tax benefit is recognized...       34        34        (34)        (34)
   Alternate Minimum Tax..........     --        --          9           8
                                   ------    ------        ---         ---
   Actual tax rate................     --%       --%         9%          8%
                                   ======    ======        ===         ===
</TABLE>
 
                                      46
<PAGE>
 
                              NVIDIA CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS--(Continued)
 
 
   The tax effect of temporary differences that gives rise to significant
portions of the deferred tax assets are presented below:
<TABLE>
<CAPTION>
                                          December 31, January 31, January 31,
                                              1997        1998        1999
                                          ------------ ----------- -----------
                                                     (in thousands)
   <S>                                    <C>          <C>         <C>
   Net operating loss carryforwards......   $ 3,743      $ 3,380     $    --
   Plant and equipment--depreciation
    differences..........................       173          177         345
   Advances on development contract......       996          996         138
   Research credit carryforwards.........     1,058        1,095       1,775
   Stock options.........................        72           72          72
   Alternate Minimum Tax.................        --          134         357
   Other reserves and accruals...........       229          228       2,323
                                            -------      -------     -------
   Total gross deferred tax assets.......     6,271        6,082       5,010
   Less valuation allowance..............    (6,271)      (6,082)     (4,784)
                                            -------      -------     -------
   Net deferred tax assets...............   $    --      $    --     $   226
                                            =======      =======     =======
</TABLE>
 
   The valuation allowance had a decrease of $189,000 for the period ended
January 31, 1998 and a decrease of $1,298,000 for the year ended January 31,
1999. The Company has established a valuation allowance against that portion
of deferred tax assets where significant uncertainty exists with respect to
future realization.
 
   The Company has federal and California research and experimentation tax
credit carryforwards of approximately $1,297,000 and $478,000, respectively,
as of January 31, 1999. The federal tax credits expire through 2012 and 2018,
and the California tax credits may be carried over indefinitely.
 
(6) Development Agreements
 
   The Company has a strategic collaboration agreement with ST
Microelectronics, Inc. ("ST") for the manufacture, marketing, and sale of
certain of the Company's products. In 1996, ST paid the Company $2,500,000 for
advanced royalty payments and agreed to partially support the research and
development and marketing efforts for certain of the Company's products. In
connection with this agreement the Company recorded royalty income of
$202,000, $1,791,000, $1,911,000, and $6,824,000, in 1996, 1997, the one month
ended January 31, 1998, and the year ended January 31, 1999, respectively; a
reduction to research and development cost of $1,580,000 and $1,936,000 in
1996 and 1997, respectively, and a reduction to sales, general and
administrative expense of $420,000 and $314,000 in 1996 and 1997,
respectively. In January of 1998, ST agreed to forgive the $2,500,000 in
advanced royalty payments in exchange for the Company's obligation to provide
ST continued development and support on certain products developed through
December 31, 1998 which was recorded as a reduction to research and
development expense in fiscal 1999. Accordingly, $2,500,000 is included in
accrued liabilities at December 31, 1997.
 
   In May 1995, the Company entered into a five year strategic alliance
agreement (the "Agreement") with a third party to develop a product, the NV2,
using the Company's technology with the purpose of incorporating the NV2 into
such third party's products. The third party made nonrefundable payments to
the Company to develop the NV2. The Company recorded a reduction to research
and development of $2,000,000 in 1995 and $3,000,000 in 1996. As part of this
agreement, the third party also purchased in July 1995, 750,000 shares of
Series C convertible preferred stock for $5,000,000. The third party revised
its product development plans, and the Company terminated the development of
this particular technology in 1996.
 
   The costs incurred under the development agreements approximated the
amounts recorded as reduction to expenses.
 
                                      47
<PAGE>
 
                              NVIDIA CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS--(Continued)
 
 
(7) Risk and Uncertainties
 
   During 1998, the Company adopted the provisions of SFAS No. 131, Disclosure
about Segments of an Enterprise and Related Information. SFAS No. 131
establishes standards for the reporting by public business enterprises of
information about operating segments, products and services, geographic areas,
and major customers. The method for determining what information to report is
based on the way that management organizes the operating segments with the
Company for making operational decisions and assessments of financial
performance. The Company's chief operating decision maker is considered to be
the Company's Chief Executive Officer ("CEO"). The CEO reviews financial
information presented on a consolidated basis for purposes of making operating
decisions and assessing financial performance.
 
   Product Concentration. The Company operates in a single industry segment:
the design, development and marketing of 3D graphics processors for the PC
market. Substantially all of the Company's revenue from product sales in 1997
and 1998 was derived from sales of 3D graphics processor. Since the Company
has no other product line, the Company's business, financial condition and
results of operations would be materially adversely affected if for any reason
its current or future 3D graphics processors do not achieve widespread
acceptance in the mainstream PC market.
 
   Customer Concentration. The Company has only a limited number of customers
and its sales are highly concentrated. The Company primarily sells its
products to add-in board manufacturers, which incorporate graphics products in
the boards they sell to PC OEMs. Sales to add-in board manufacturers are
primarily dependent on achieving design wins with leading PC OEMs, and the
Company believes that a significant portion of its revenue in the year ended
January 31, 1999 was attributable to products that ultimately were
incorporated into PCs sold by Compaq, Dell, Gateway, IBM, Micron and Packard
Bell NEC. As a result, the Company's business, financial condition and results
of operations could be materially adversely affected by the decision of a
single PC OEM or add-in board manufacturer to cease using the Company's
products or by a decline in the number of PCs or boards sold by a single PC
OEM or add-in board manufacturers.
 
   The following table summarizes geographic information on net sales:
 
<TABLE>
<CAPTION>
                                             Year Ended
                                            December 31,  Month Ended Year Ended
                                           -------------- January 31,  January
                                            1996   1997      1998      31, 1999
                                           ------ ------- ----------- ----------
   <S>                                     <C>    <C>     <C>         <C>
   U.S.................................... $3,863 $29,071   $13,331    $120,788
   Europe.................................     --      --        --       7,800
   Asia Pacific...........................     49      --        --      29,649
                                           ------ -------   -------    --------
       Total revenue...................... $3,912 $29,071   $13,331    $158,237
                                           ====== =======   =======    ========
</TABLE>
 
                                      48
<PAGE>
 
                              NVIDIA CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS--(Continued)
 
 
   Revenues to significant customers, those representing approximately 10% or
more of total revenue for the respective periods, are summarized as follows:
 
<TABLE>
<CAPTION>
                             Year Ended
                            December 31,
                            ---------------     Month Ended       Year Ended
                             1996     1997    January 31, 1998 January 31, 1999
   Sales                    ------   ------   ---------------- ----------------
   <S>                      <C>      <C>      <C>              <C>
     Customer A............     --       63%         59%              35%
     Customer B............     82%      31%         39%              27%
     Customer C............     --       --          --               13%
     Customer D............     --       --          --               12%
</TABLE>
 
<TABLE>
<CAPTION>
                                  As of            As of            As of
                            December 31, 1997 January 31, 1998 January 31, 1999
   Accounts Receivable      ----------------- ---------------- ----------------
   <S>                      <C>               <C>              <C>
     Customer A............         52%              57%              19%
     Customer B............         48%              43%              28%
     Customer C............         --               --               18%
     Customer D............         --               --               14%
</TABLE>
 
   No customers accounted for more than 10% of accounts receivable as of
December 31, 1996.
 
   Markets. In the year ended January 31, 1999, the Company derived all of its
revenue from the sale or license of products for use in PCs. The PC market is
characterized by rapidly changing technology, evolving industry standards,
frequent new product introductions and significant price competition,
resulting in short product life cycles and regular reductions in average
selling prices over the life of a specific product. In addition, the Company's
success will depend in part upon the emerging mainstream PC 3D graphics
market. This market has only recently begun to emerge and is dependent on
future development of a substantial customer and computer manufacturer demand
for 3D graphics functionality. If the market for mainstream PC 3D graphics
fails to develop or develops more slowly than expected, the Company's
business, financial condition and results of operations could be materially
adversely affected.
 
   Intellectual Property. The Company relies primarily on a combination of
patent, mask work protection, trademarks, copyrights, trade secret laws,
employee and third-party nondisclosure agreements and licensing arrangements
to protect its intellectual property. Vigorous protection and pursuit of
intellectual property rights or positions characterize the semiconductor
industry, which in turn has resulted in significant and often protracted and
expensive litigation. The 3D graphics market in particular has been
characterized recently by the aggressive pursuit of intellectual property
positions. Infringement claims by third parties or claims for indemnification
by customers, vendors or end users of the Company's products resulting from
infringement claims could be asserted in the future and such assertions, if
proven to be true, could materially adversely affect the Company's business,
financial condition and results of operations. Any limitations on the
Company's ability to market its products, or delays and costs associated with
redesigning its products or payments of license fees to third parties, or any
failure by the Company to develop or license a substitute technology on
commercially reasonable terms, could have a material adverse effect on the
Company's business, financial condition and results of operations.
 
                                      49
<PAGE>
 
                              NVIDIA CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS--(Continued)
 
 
(8) Quarterly Summary (Unaudited)
(in thousands, except per share data)
 
<TABLE>
<CAPTION>
                                                  Three Months Ended
                         -----------------------------------------------------------------------
                                                        Dec.    April    July     Oct.    Jan.
                         March 30, June 29,  Sept. 28,   31,     26,      26,      25,     31,
                           1997      1997      1997     1997    1998     1998     1998    1999
                         --------- --------  --------- ------- -------  -------  ------- -------
<S>                      <C>       <C>       <C>       <C>     <C>      <C>      <C>     <C>
Statement of Operations
 Data:
Revenue.................  $    65  $     6    $ 5,466  $23,534 $28,263  $12,134  $52,303 $65,537
Cost of revenue.........      208      150      4,548   16,338  20,873   12,961   33,566  42,346
Gross profit (loss).....     (143)    (144)       918    7,196   7,390     (827)  18,737  23,191
Net income (loss).......   (1,176)  (1,265)    (2,572)   1,424  (1,021)  (9,652)   7,141   7,662
 
Basic net income (loss)
 per share..............  $  (.10) $  (.11)   $  (.19) $   .10 $  (.07) $  (.68) $   .50 $   .48
Diluted net income
 (loss) per share.......  $  (.10) $  (.11)   $  (.19) $   .06 $  (.07) $  (.68) $   .26 $   .27
</TABLE>
 
(9) Subsequent Events
 
   The Company sold 525,000 shares of common stock at $12 per share on
February 2, 1999 pursuant to the Underwriters' over-allotment option. Net
proceeds to the Company were $5.9 million.
 
   In March 1999, the Company repaid its $5.0 million outstanding under a bank
line of credit.
 
   On April 3, 1999, the Company entered into a five year software licensing
agreement with a major supplier for $10.0 million.
 
                                      50
<PAGE>
 
                               NVIDIA CORPORATION
 
                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
                                 (in thousands)
 
<TABLE>
<CAPTION>
                                   Additions
                          Balance  Charged to Charged                  Balance
                         Beginning Costs and  to Other                 at End
      Description        of Period  Expenses  Accounts Deductions (1) of Period
      -----------        --------- ---------- -------- -------------- ---------
<S>                      <C>       <C>        <C>      <C>            <C>
Year ended January 31,
 1999
Allowances for sales
 returns and doubtful
 accounts..............    $349      6,281        --       3,983       $2,647
                           ====      =====      ====       =====       ======
One month ended January
 31, 1998
Allowances for sales
 returns and doubtful
 accounts..............    $100        249        --          --       $  349
                           ====      =====      ====       =====       ======
Year ended December 31,
 1997
Allowances for sales
 returns and doubtful
 accounts..............    $ --        100        --          --       $  100
                           ====      =====      ====       =====       ======
</TABLE>
- --------
(1) Represents amounts written off against the allowance for sales returns.
 
                                       51
<PAGE>
 
                                   SIGNATURES
 
   Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on April 28, 1999.
 
                                          NVIDIA Corporation
 
                                                   /s/ Jen-Hsun Huang
                                          By: _________________________________
                                                      Jen-Hsun Huang
                                            President, Chief Executive Officer
                                                       and Director
 
   Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
 
<TABLE>
<CAPTION>
             Signature                           Title                    Date
             ---------                           -----                    ----
<S>                                  <C>                           <C>
  /s/ Jen-Hsun Huang                 President, Chief Executive      April 28, 1999
____________________________________ Officer and Director
   Jen-Hsun Huang                    (Principal Executive
                                     Officer)
  /s/ Christine B. Hoberg            Chief Financial Officer         April 28, 1999
____________________________________
   Christine B. Hoberg
                                     Director
____________________________________
   Tench Coxe
  /s/ James C. Gaither               Director                        April 28, 1999
____________________________________
   James C. Gaither
  /s/ Harvey C. Jones, Jr.           Director                        April 28, 1999
____________________________________
   Harvey C. Jones, Jr.
  /s/ William J. Miller              Director                        April 28, 1999
____________________________________
   William J. Miller
  /s/ A. Brooke Seawell              Director                        April 28, 1999
____________________________________
   A. Brooke Seawell
                                     Director
____________________________________
   Mark A. Stevens
</TABLE>
 
                                       52
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.1
<SEQUENCE>2
<DESCRIPTION>CONSENT OF INDEPENDENT AUDITORS
<TEXT>

<PAGE>
 
                                                                   EXHIBIT 23.1
 
                        CONSENT OF INDEPENDENT AUDITORS
 
The Board of Directors and Stockholders
NVIDIA Corporation:
 
   We consent to incorporation by reference in the registration statements
(No. 333-74905) on Form S-8 of NVIDIA Corporation of our report February 23,
1999, except as Note 9 which is as of April 3, 1999, relating to the balance
sheets of NVIDIA Corporation as of January 31, 1999 and 1998, and the related
statements of operations, stockholders' equity, and cash flows for each of the
years in the two-year period ended December 31, 1997, the one-month period
ended January 31, 1998, and the year ended January 31, 1999, and related
schedule, which report appears in the January 31, 1999 annual report on Form
10-K of NVIDIA Corporation.
 
                                          KPMG LLP
 
Mountain View, California
April 28, 1999
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27.1
<SEQUENCE>3
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>

<TABLE> <S> <C>

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEET AS OF JANUARY 31, 1999 AND THE STATEMENT OF INCOME FOR THE YEAR
ENDED JANUARY 31, 1999
</LEGEND>
<MULTIPLIER> 1,000
       
<S>                             <C>
<PERIOD-TYPE>                   YEAR
<FISCAL-YEAR-END>                          JAN-31-1999
<PERIOD-START>                             FEB-01-1998
<PERIOD-END>                               JAN-31-1999
<CASH>                                          50,257
<SECURITIES>                                         0
<RECEIVABLES>                                   23,260
<ALLOWANCES>                                   (2,627)
<INVENTORY>                                     28,623
<CURRENT-ASSETS>                               101,112
<PP&E>                                          18,591
<DEPRECIATION>                                 (6,941)
<TOTAL-ASSETS>                                 113,332
<CURRENT-LIABILITIES>                           47,128
<BONDS>                                              0
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                          0
<COMMON>                                            29
<OTHER-SE>                                      64,180
<TOTAL-LIABILITY-AND-EQUITY>                   113,332
<SALES>                                        151,413
<TOTAL-REVENUES>                               158,237
<CGS>                                          109,746
<TOTAL-COSTS>                                  109,746
<OTHER-EXPENSES>                                43,975
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                                 291
<INCOME-PRETAX>                                  4,487
<INCOME-TAX>                                       357
<INCOME-CONTINUING>                              4,130
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                     4,130
<EPS-PRIMARY>                                     0.28
<EPS-DILUTED>                                     0.15
        

</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27.2
<SEQUENCE>4
<DESCRIPTION>1997 RESTATED FINANCIAL DATA SCHEDULE
<TEXT>

<TABLE> <S> <C>

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF DECEMBER 31, 1997 AND THE STATEMENT OF OPERATIONS FOR THE YEAR ENDED
DECEMEBR 31, 1997
</LEGEND>
<RESTATED> 
<MULTIPLIER> 1,000
       
<S>                             <C>
<PERIOD-TYPE>                   YEAR
<FISCAL-YEAR-END>                          DEC-31-1997
<PERIOD-START>                             JAN-01-1997
<PERIOD-END>                               DEC-31-1997
<CASH>                                           6,551
<SECURITIES>                                         0
<RECEIVABLES>                                   12,587
<ALLOWANCES>                                     (100)
<INVENTORY>                                         25
<CURRENT-ASSETS>                                19,341
<PP&E>                                           8,379
<DEPRECIATION>                                 (2,843)
<TOTAL-ASSETS>                                  25,039
<CURRENT-LIABILITIES>                           16,251
<BONDS>                                              0
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                          9
<COMMON>                                            14
<OTHER-SE>                                       6,874
<TOTAL-LIABILITY-AND-EQUITY>                    25,039
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</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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