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1 MILBERG WEISS BERSHAD HYNES & LERACH LLP 2 RANDI D. BANDMAN (145212) AZRA Z. MEHDI (220406) 3 SYLVIA WAHBA (197612) 100 Pine Street, Suite 2600 4 San Francisco, CA 94111 Telephone: 415/288-4545 5 415/288-4534 (fax) - and - 6 WILLIAM S. LERACH (68581) 401 B Street, Suite 1700 7 San Diego, CA 92101 Telephone: 619/231-1058 8 619/231-7423 (fax) 9 KAPLAN FOX & KILSHEIMER LLP LAURENCE D. KING (206423) 10 LINDA M. FONG 555 Montgomery Street, Suite 1501 11 San Francisco, CA 94111 Telephone: 415/772-4700 12 415/772-4707 (fax) - and - 13 FREDERIC S. FOX 805 Third Avenue, 22nd Floor 14 New York, NY 10022 Telephone: 212/687-1980 15 212/687-7714 (fax) 16 Co-Lead Counsel for Plaintiffs 17 UNITED STATES DISTRICT COURT 18 NORTHERN DISTRICT OF CALIFORNIA 19 OAKLAND DIVISION 20 21 In re NVIDIA CORPORATION SECURITIES ) Master File No. C-02-0853-CW LITIGATION ) 22 ) CLASS ACTION ) 23 This Document Relates To: ) FIRST AMENDED CONSOLIDATED ) CLASS ACTION COMPLAINT FOR 24 ALL ACTIONS. ) VIOLATION OF THE FEDERAL ) SECURITIES LAWS 25 DEMAND FOR JURY TRIAL 26 27 28 Case 4:02-cv-00853 Document 61-1 Filed 07/28/2003 Page 2 of 73

1 SUMMARY AND OVERVIEW 2 1. This is a securities fraud class action against Nvidia Corporation ("Nvidia" or the 3 "Company") and its senior insiders, on behalf of all persons who purchased the common stock of Nvidia 4 between February 15, 2000 and July 30, 2002, inclusive (the "Class Period").1 5 2. Nvidia operates in a single industry segment: the design, development and marketing of 6 three-dimensional ("3D") graphics, media communication processors and related software for personal 7 computers ("PCs"), workstations and digital entertainment platforms. 8 3. Since the Company went public in 1999, it has enjoyed phenomenal success and was 9 consistently in line with analysts' expectations of revenues and earnings quarter after quarter. Nvidia's 10 former accounting manager, Amy Andren, attributed the Company's ability to meet analysts' expectations 11 to defendants' improper use of various "cookie jar" reserves (bad debt, sales returns, bonus accruals and 12 accounts payable accruals) that were inflated during profitable periods and later reached into and used by 13 defendants when times turned bad. See Andren v. Nvidia Corporation, et al., Case No. CV807900, 14 Complaint (Santa Clara County Super. Ct. May 16, 2002), attached hereto and incorporated herein as 15 Exhibit ("Ex.") 1. 16 4. Defendants2 engaged in the illegal and improper accounting scheme detailed by Andren in 17 order to manipulate Nvidia's earnings and inflate Nvidia's stock price and at the same time sell over $168.6 18 million of Nvidia's stock. Defendants cooked the books and misled the market regarding Nvidia's financial 19 results and ability to maintain continued consistent growth. Defendants created the illusion that Nvidia's 20 profits were rapidly and continuously increasing in line with analysts' expectations when in reality, the 21 Company's profits were erratic and drastically fluctuating. This fluctuation was not what the investors and 22 analysts were expecting based on Nvidia's reported financial results. 23

24 1 The Court's June 11, 2003 Order Granting Defendants' Motion to Dismiss ("Order") dismissed a portion of the claims asserted during this Class Period without leave to amend. Order at 15. In an 25 abundance of caution, and with the intention to maintain all relevant allegations in a single document, plaintiffs include allegations relating to the dismissed claims to preserve plaintiffs' right to appeal the 26 dismissal without leave to amend. The following paragraphs ("¶") contain allegations pertaining to the restatement: 3-12, 43-46, 63-84, 100, 102-111, 116-120, 132-175. 27 2 Defendants are Nvidia and its senior officers, Jen-Hsun Huang, Christine Hoberg, Jeffrey Fisher 28 and Chris Malachowsky, described in ¶¶35-42, infra. FIRST AMENDED CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - C-02-0853-CW - 1 - Case 4:02-cv-00853 Document 61-1 Filed 07/28/2003 Page 3 of 73

1 5. As a result of defendants' accounting manipulations described in this Complaint, defendants 2 caused the annual financial statements (Form 10-Ks) as well as the quarterly financial statements (Form 3 10-Qs) for fiscal year 2000 ("FY00"),3 fiscal 2001 ("FY01"), fiscal 2002 ("FY02") as well as the first 4 quarter in fiscal year 2003 ("1Q03") to be false and misleading. Rather investors and analysts alike relied 5 upon defendants' false statements about the Company's consistent growth in evaluating whether or not to 6 purchase Nvidia stock. 7 6. Defendants manipulated Nvidia's reported financial results during the Class Period by 8 falsifying the Company's books and records. Andren, former Nvidia accounting manager, explained that 9 defendants' scheme included improper accounting practices such as: 10 (a) improperly using various "cookie jar" reserves (bad debt, sales returns, bonus 11 accruals and accounts payable accruals) inflated during profitable periods that defendants later reached into 12 and used when times turned bad; 13 (b) improperly accounting for its inventory; 14 (c) improperly recording revenues each quarter for product shipped to distributors that 15 had not been sold to end users; 16 (d) managing profit margins by manipulating shipments at the end of quarters; and 17 (e) using "back-in" accounting, i.e., instead of compiling revenue and expenses first and 18 using these actual figures to compute gross margins, Nvidia used a targeted gross margin number and then 19 worked backward to achieve those numbers by creating the revenue and expense calculations necessary 20 to achieve the forecasted margins. 21 7. Former Securities and Exchange Commission ("SEC") chairman Arthur Levitt described 22 "cookie jar reserves" as an illusion used to "stash accruals ... during the good times and reach into them 23 when needed in the bad times." Ex. 2. Levitt then described various methods of "Accounting Hocus- 24 Pocus" or "illusions" and defined "Cookie Jar Reserves" as one such illusion: 25 A third illusion played by some companies is using unrealistic assumptions to estimate liabilities for such items as sales returns, loan losses or warranty costs. In doing 26

27 3 Effective January 21, 1998, Nvidia changed its fiscal year-end financial reporting period to a 52- or 53-week year ending on the last Sunday in January. For instance, FY02 ended on January 28, 2002. 28 January 29, 2002 marked the beginning of 1Q03. FIRST AMENDED CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - C-02-0853-CW - 2 - Case 4:02-cv-00853 Document 61-1 Filed 07/28/2003 Page 4 of 73

1 so, they stash accruals in cookie jars during the good times and reach into them when needed in the bad times. 2 Id. Levitt also expressed increasing concern that "the motivation to meet Wall Street earnings expectations 3 may be overriding common sense business practices," making "corporate managers" and others 4 "participants in a game of nods and winks." Id. The SEC's complaint against HealthSouth Corporation 5 and its Chief Executive Officer ("CEO") demonstrates the SEC's position that the manipulating or "fixing" 6 numbers in financial reports to match Wall Street expectations violates federal securities laws. See 7 Securities and Exchange Commission v. HealthSouth Corporation, et al., Civil Action No. 8 CV-03-J-0615-S, Amended Complaint for Injunctive and Other Relief (N.D. Ala. Apr. 3, 2003). Ex. 3. 9 In fact, the SEC brought similar charges against Nvidia. See ¶26, infra. 10 8. Creating and utilizing unnecessary reserves to manage earnings also violates Generally 11 Accepted Accounting Principles ("GAAP") and is expressly forbidden by the SEC. Recently, the SEC 12 found that Microsoft Corporation's ("Microsoft") maintenance of similar undisclosed reserves, accruals, 13 allowances and liability accounts was not in conformity with GAAP and lacked proper documentation and 14 substantiation, as required by the federal securities laws. See In the Matter of Microsoft Corporation, 15 SEC Accounting and Auditing Enforcement Release No. 1563 (June 3, 2002). Ex. 4. In the Microsoft 16 case, the SEC found that senior Microsoft financial personnel relied on their subjective judgments in making 17 adjustments and additions to reserves, without any significant factual support or analysis, such that reserves 18 at the corporate level significantly exceeded the amounts that would have been supported by the 19 information from the operational level. Id. 20 9. As described in ¶¶64-84, defendants here did exactly what the SEC said was wrong in the 21 Microsoft case by arbitrarily causing journal entries to be made to Nvidia's general ledger, without factual 22 support or analysis. These manipulations resulted in reserves being overstated and, hence, public filings 23 based on such financial figures were false. 24 10. Defendants' accounting manipulations of Nvidia's financial reports was so egregious that 25 former accounting manager Andren filed a suit against Nvidia and certain of its senior executives, including 26 defendant Hoberg, alleging that defendants were aware of and maintained "illegal and improper" accounting 27 practices that were in "violation of Securities and Exchange Commission Rule 10-B-5." Ex. 1 at 5, 7, 9. 28

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1 Andren's complaint alleges, among other things, that Nvidia, Hoberg and Controller Richard Cording were 2 aware of and maintained "illegal and improper" accounting practices. Id. at 7, 9. 3 11. Then, on February 14, 2002, after the close of the market, Nvidia admitted its prior 4 financial results may be false and misleading. Defendants issued a press release informing the market that 5 the SEC was investigating the Company's recording and timing of express reserves for a two-and-one-half- 6 year period. See Ex. 5. At the same time, Nvidia also announced that its revenues for 4Q02 were almost 7 $500 million and $1.37 billion for FY02 – an 87% increase over FY01. 8 12. On this news, the Company's shares immediately plunged 12% in after-hours trading on 9 February 14, 2002, and closed down nearly 8% on February 15, 2002 at $57.35. The announcement of 10 record revenues and earnings was insufficient to buffer the news of the SEC investigation. 11 13. Defendants continued to falsely assure the market that the SEC investigation was not 12 significant and that Nvidia would continue to deliver record financial results. However, on March 28, 2002, 13 Ng Kheng Bin, the only top executive of the Company's single most profitable region, the Asia-Pacific 14 region, announced that Nvidia's 2Q03 results would be significantly weaker than expectations. Ex. 6. 15 According to the Company's quarterly and annual reports filed with the SEC, the Asia-Pacific region 16 accounted for over 75% of Nvidia's total revenues for FY01 and FY02 and approximately 65% of 1Q03 17 revenues.4 With the dark cloud of the pending SEC investigation and an ongoing audit committee probe, 18 news about lowered guidance would have caused Nvidia's stock to continue to plummet. 19 14. On the same day, in furtherance of the fraud, the Company, through its appointed public 20 speakers – the Head of Investor Relations and Communications, Michael Hara, and the Head of Public 21 Relations, Derek Perez, lied to the public and said that Nvidia's executive in Asia had no idea what Kheng 22 Bin was talking about and could not make statements as to the well being of the entire Company. In reality, 23 not only was Kheng Bin the most senior executive in the Asia-Pacific region, he was also knowledgeable 24 of over three-quarters of the Company's revenues. 25 15. During the Class Period, Nvidia was a small company with just over 1,000 employees and 26 had a core group of four senior executives, namely, the individual defendants. Of the Company's other 20 27

28 4 Nvidia operates in three geographic regions: Asia-Pacific, U.S./North America and Europe. FIRST AMENDED CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - C-02-0853-CW - 4 - Case 4:02-cv-00853 Document 61-1 Filed 07/28/2003 Page 6 of 73

1 senior executives, Kheng Bin alone was responsible for the Asia-Pacific region, as admitted by Nvidia in 2 its Corporate Executive Profiles. Id. As the only senior executive responsible for the Asia-Pacific region, 3 Kheng Bin had the same access to the same nonpublic information as the other members of executive 4 management. Upon public disclosure of Kheng Bin's statement, Nvidia immediately sought to discount the 5 accuracy of this revelation, vehemently denying that the Company had lowered its 2Q03 revenue numbers. 6 Notably, Kheng Bin never retracted his statement, and, indeed, on July 30, 2002, the Company admitted 7 what it had known all along – that Nvidia would not meet its previously announced revenue and earnings 8 numbers for 2Q03. The sheer magnitude of the revenue shortfall – over 32% – calls into question Nvidia's 9 denial of the effect of weak demand on Nvidia's bottom line. 10 16. Despite defendants' denial of the accuracy of Kheng Bin's statement, investors reacted 11 negatively to the Taiwanese news reports of lowered 2Q03 sales forecast in light of the ongoing SEC 12 investigation. On March 28, 2002, the price of Nvidia stock fell as much as 8% to $41.87. 13 17. On April 29, 2002, Nvidia pre-announced record 1Q03 financial results and further 14 announced that Nvidia's internal Audit Committee had determined that Nvidia must restate its previously 15 reported financial results for the first three quarters of FY02, FY01 and FY00. As a result of the 16 restatement, earnings per share ("EPS") for the three-year period were unchanged and net income for 17 FY02 increased by approximately $2.8 million, net income for FY01 decreased by approximately $3.7 18 million and net income for FY00 increased by approximately $2.9 million or $0.02 cents per diluted share. 19 Put simply, Nvidia, by virtue of the restatement, admitted that its annual and quarterly financial results for 20 FY00, FY01 and the first three quarters of 2002, were false and misleading when issued. 21 18. Nvidia attempted to downplay the restatement by claiming that "out of an abundance of 22 caution [Nvidia] decided to restate" or that Nvidia "elected to restate." These statements are an extension 23 of Nvidia's deception of the public. Under GAAP, restatements of past financial statements are a 24 disfavored method of recognizing an accounting change. The type of restatement announced by Nvidia was 25 mandated by GAAP in order to correct misstatements and therefore was an admission that Nvidia's 26 financial results were incorrect based on information available to defendants at the time the results were 27 originally reported. Indeed, Chief Financial Officer ("CFO") Hoberg, who was responsible for the 28

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1 financials during the restated period, was removed from office as a direct result of the SEC investigation 2 and the subsequent restatement of Nvidia's financials. 3 19. In addition, Nvidia was counting on Microsoft's introduction of the Xbox gaming console 4 to turn Nvidia into a household name. Microsoft had granted Nvidia a very lucrative contract to supply 5 graphics processor chips for its Xbox gaming console. However, within a couple of weeks after the 6 November 15, 2001 public launch of the Xbox, hackers had already deciphered various security 7 components of the Xbox. By late February/early March 2002, Andrew Shane Huang, then a doctoral 8 student at the Massachusetts Institute of Technology ("MIT"), had extracted the security keys of the Xbox. 9 See Declaration of Andrew Shane Huang, attached hereto and incorporated herein as Ex. 7. Extracting 10 the security keys would allow people to install hardware that enabled use of the Xbox without paying 11 licensing fees. It also allowed the use of the Xbox to run other operating systems, like Linux, thereby using 12 the Xbox as a PC. 13 20. Andrew Huang's reverse engineering was a huge problem for Microsoft and Nvidia 14 because people could play games on the Xbox without paying licensing fees. Additionally, if people could 15 use the Xbox (at an average cost of $299.00 at introduction and $199.00 or less currently) as a PC, both 16 Nvidia and Microsoft were in danger of losing a significant source of revenue – the PC market. 17 21. Based on an Nvidia Company-wide email in March/April 2002, it was known within the 18 Company that an MIT student had hacked into the Nvidia Xbox Media Communications Processor 19 ("MCPX") chips. The email further informed employees that the Company was already redesigning the 20 Xbox MCPX graphics chip. Given that the updated version of the Xbox chip was released in August 21 2002, and given that CEO Huang identified a 10- to 12-week lead time for the manufacture of chips, 22 Nvidia had begun redesigning the chip in the February-April 2002 timeframe. Andrew Huang's experience 23 with contract semiconductor manufacturers corroborates this design and manufacturing timeline. Hence, 24 Nvidia's Xbox chips were already obsolete by March 2002, and Nvidia's July 2002 $21 million inventory 25 writeoff related to Xbox chips was belated. 26 22. On May 22, 2002, Nvidia reported record 1Q03 financial results and reiterated Nvidia's 27 growth for 2Q03 revenues of $588-$600 million. 28

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1 23. However, after the close of the market, on July 30, 2002, Nvidia shocked the investing 2 community by announcing that Nvidia expected to report preliminary revenues for 2Q03 that were over 3 32% lower than the guidance previously provided, i.e., $410-$430 million versus the $588-$600 million 4 previously projected by Nvidia. Ex. 8. Nvidia attributed the decreased revenues to weakness in the PC 5 industry and the "significant" inventory writeoff, part of which defendant Huang attributed to chips 6 manufactured for Microsoft's Xbox video game console. Defendant Huang stated that a significant amount 7 of its chip inventory was now obsolete because Microsoft changed the security codes in the chip. Exs. 9, 8 10. When announcing the 2Q03 decline, defendants portrayed weakness in the PC industry as a sudden 9 phenomenon, when weakness in the PC industry was a known concern to companies dependent on PC 10 sales for revenues. Id. 11 24. Thus, no longer able to illegally use reserves to manipulate its earnings, Nvidia shares 12 plunged 24% in after-hours trading on this news from its closing price of $16.22 to $12.35 on July 30, 13 2002. When trading resumed the next day, Nvidia shares fell further, for a total decline of 32%, to close 14 at $11.07. 15 25. On August 30, 2002, CEO Huang and Interim CFO Mary Dotz filed certifications 16 mandated by the SEC certifying the accuracy of Nvidia's financials. The certifications further noted that the 17 investigation by the Corporation Finance Division of the SEC into Nvidia's prior financial results was 18 continuing as of August 15, 2002. 19 26. Indeed, on April 25, 2003, Nvidia acknowledged that it had "reached a deal with the SEC 20 agreeing not to break securities laws in the future, after receiving a notice indicating authorities would 21 recommend charges against it for violating accounting rules" relating to the SEC's prior investigation. See 22 Ex. 11. 23 27. As demonstrated by the stock chart, during the Class Period, taking advantage of the 24 artificial inflation of the stock price, defendants sold 4,308,227 shares for proceeds of over $168.6 million. 25 Meanwhile, investors had lost tens of millions of dollars as a result of defendants' fraudulent conduct. 26 27 28

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NVIDIA CORPORATION vs. Philadelphia Semiconductor Index Daily Prices From: 12/31/1999 to 8/23/2002 700

11/13/01 - 12/26/01 Insiders sell Total Insider Sales 1,103,215 shares Shares Sold: 4,308,227 for $66,708,746 600 Proceeds: $168,647,483 NVDA

500

8/17/01 - 9/28/01 5/19/00 - 6/30/00 Insiders sell Insiders sell 8/24/00 - 9/15/00 393,752 shares for $15,413,841 400 657,748 shares Insiders sell for $18,942,890 3/1/00 - 3/29/00 570,052 shares for $21,504,851 6/4/02 - 6/7/02 Insiders sell 2/20/01 - 3/27/01 415,960 shares Insiders sell for $10,859,060 Insiders sell 300,000 shares 867,500 shares for $9,577,483 for $25,640,295 300 100 = 12/31/1999

200 PHILADELPHIA SEMICONDUCTOR INDEX

100

Class Period: 2/15/00 - 7/30/02 0 12/31/1999 04/13/2000 07/28/2000 11/08/2000 02/23/2001 06/07/2001 09/25/2001 01/08/2002 04/23/2002 08/05/2002 02/23/2000 06/07/2000 09/19/2000 01/02/2001 04/17/2001 07/30/2001 11/14/2001 03/01/2002 06/13/2002

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1 JURISDICTION AND VENUE 2 28. Jurisdiction is conferred by §27 of the Securities Exchange Act of 1934 ("Exchange Act"). 3 The claims asserted herein arise under and pursuant to §§10(b) and 20(a) of the Exchange Act [15 U.S.C. 4 §§78j(b) and 78t(a)], and Rule 10b-5 [17 C.F.R. §240.10b-5] promulgated thereunder by the SEC. 5 29. Venue is proper in this District pursuant to §27 of the Exchange Act. Many of the acts and 6 transactions giving rise to the violations of law complained of herein, including the preparation and 7 dissemination to the investing public of false and misleading information, occurred in this District. 8 30. The Company's principal place of business is in Santa Clara, California where the day-to- 9 day operations of the Company are directed and managed. 10 31. Nvidia's shares were actively traded on the National Association of Securities Dealers 11 Automatic Quotation System ("NASDAQ"), and Nvidia is under an obligation to comply with NASDAQ 12 rules and regulations, as well as GAAP and the securities laws of the United States. 13 32. In connection with the acts, conduct and other wrongs complained of, the defendants, 14 directly or indirectly, used the means and instrumentalities of interstate commerce, the United States mails, 15 and the facilities of the national securities markets. 16 THE PARTIES 17 33. Lead plaintiffs Metzler Investment GmbH and Garrett Zwart purchased Nvidia common 18 stock during the Class Period and were damaged thereby. 19 34. Defendant Nvidia is headquartered in Santa Clara, California. Nvidia designs, develops, 20 and markets 3D graphics processors and related software. The Company's products provide interactive 21 3D graphics to the mainstream PC market. Nvidia's stock is traded in an efficient market on NASDAQ. 22 INDIVIDUAL DEFENDANTS 23 35. Defendant Huang was, at all times relevant hereto, President and CEO of Nvidia. Huang 24 co-founded Nvidia in January 1993 with defendant Malachowsky and Curtis Priem. Huang has been 25 Nvidia's CEO and member of the Board of Directors since the very beginning. During the Class Period, 26 Huang participated in the issuance of false and/or misleading statements, including the preparation of the 27 28

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1 false and/or misleading press releases detailed in ¶¶132-178, 181-184. During the Class Period, Huang 2 sold 1,190,000 shares of Nvidia stock for proceeds of over $50 million.5 3 36. Defendant Hoberg was the CFO of Nvidia until April 29, 2002 when she was removed 4 as CFO and put on paid leave of absence. Hoberg joined Nvidia in December 1998 and is a Certified 5 Public Accountant. During the Class Period, Hoberg participated in the issuance of false and/or misleading 6 statements, including the preparation of the false and/or misleading press releases detailed in ¶¶132-178. 7 During the Class Period, Hoberg sold 575,715 shares of Nvidia stock for proceeds of over $22.3 million. 8 37. Defendant Fisher was, at all times relevant hereto, the Vice President of Worldwide Sales. 9 Fisher joined Nvidia in March 1994, only 15 months after the Company was founded. Fisher hosted 10 quarterly and annual sales meetings with sales personnel from all over the world. The quarterly sales 11 meetings occurred via conference call from the Santa Clara headquarters, while the annual sales meetings 12 were off site. Nvidia sales and marketing programs to promote sales were the topic of discussion at these 13 meetings. Fisher spoke on behalf of the Company to introduce various new Nvidia products and was also 14 responsible for announcements of business relationships with other companies. Additionally, Fisher was 15 responsible for establishing contracts with the original equipment manufacturers ("OEMs") and contract 16 equipment manufacturers ("CEMs"). While in possession of adverse undisclosed information, Fisher sold 17 954,300 shares of Nvidia stock for insider-trading proceeds of over $36.3 million. Fisher had the power 18 to influence and control and did influence and control, directly or indirectly, the decision making of Nvidia, 19 including the content and dissemination of the various false and misleading statements as detailed in ¶¶132- 20 178, 181-184. Hence, Fisher was a control person. 21 38. Defendant Malachowsky was, at all times relevant hereto, the Vice President of Hardware 22 Engineering. Malachowsky co-founded Nvidia with Huang in 1993 and has been the Vice President of 23 Hardware Engineering since 1993. As a developer of graphics chips (hardware), Malchowsky was crucial 24 to the smooth functioning of the Company. During the Class Period, Malachowsky was in possession of 25 adverse undisclosed information and had actual knowledge that the public documents and statements issued 26 or disseminated in the name of Nvidia were materially false and misleading. While in possession of adverse 27 5 All share and per-share amounts have been adjusted for Nvidia's 2-for-1 stock splits in June 2000 28 and August 2001. FIRST AMENDED CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - C-02-0853-CW - 10 - Case 4:02-cv-00853 Document 61-1 Filed 07/28/2003 Page 12 of 73

1 undisclosed information, Malachowsky sold 1,547,960 shares of Nvidia stock for insider trading proceeds 2 of over $48.6 million. Malachowsky had the power to influence and control, and did influence and control, 3 directly or indirectly, the decision making of Nvidia, including the content and dissemination of the various 4 false and misleading statements as detailed in ¶¶132-178, 181-184. Hence, Malachowsky was a control 5 person. 6 39. The individuals named as defendants in ¶¶35-38 are referred to herein as the "Individual 7 Defendants." According to Nvidia's SEC filings, during the Class Period, Nvidia had a small core group 8 of executive officers, namely the four Individual Defendants. 9 40. As detailed by witnesses in ¶¶58-62, infra, the Individual Defendants, because of their 10 senior executive and managerial positions with the Company, possessed the power and authority to control 11 the contents of Nvidia's quarterly reports, press releases and presentations to securities analysts, money 12 and portfolio managers and institutional investors, i.e., the market. Each defendant was provided with 13 copies of the Company's reports and press releases alleged herein to be misleading prior to or shortly after 14 their issuance and had the ability and opportunity to prevent their issuance or cause them to be corrected. 15 Because of their senior executive and managerial positions, the Individual Defendants had access to the 16 adverse material nonpublic information available described herein regarding the Company's business 17 operations, financial condition, products, markets, customer relationships and present and future business 18 prospects and product demand, via access to internal corporate documents, conversations or connections 19 with corporate officers and employees, attendance at Nvidia's management and/or Board of Directors' 20 meetings and committees thereof and via reports and other information provided to them in connection 21 therewith. In fact, running the business and maintaining its financial health, in addition to the commercial 22 success of Nvidia's products were the principal responsibilities of the Individual Defendants. 23 41. The Individual Defendants are liable for the false statements pled herein in ¶¶132-178, 181- 24 184, as those statements were each "group published" information, the result of the collective action of the 25 Individual Defendants. The Individual Defendants knew or recklessly disregarded that said adverse 26 undisclosed information had not been disclosed to and was being concealed from the investing public. The 27 Individual Defendants also knew that the positive representations being made were then materially false and 28 misleading.

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1 42. Each of the Individual Defendants either knew or deliberately disregarded the fact that the 2 illegal acts and practices and misleading statements and omissions described herein would adversely affect 3 the integrity of the market for Nvidia stock and would artificially inflate or maintain the price of that stock. 4 Each of the defendants, by acting as herein described, did so knowingly or in such a reckless manner as 5 to constitute a fraud and deceit upon plaintiffs and members of the class plaintiffs seek to represent. 6 CONFIDENTIAL WITNESSES 7 43. Andren, formerly referred to as Confidential Witness ("CW") 1, was employed as the 8 accounting manager at Nvidia during the Class Period from January 2000 through May 2001. Andren was 9 responsible for managing the information recorded in Nvidia's general ledger (including revenue, inventory 10 and the various reserve accounts) which formed the basis for publicly issued financial statements. Because 11 of Andren's responsibilities, which included attending quarterly-close meetings with defendant Hoberg, 12 generating monthly close reports, coordinating audits, preparing financial press release schedules, and 13 managing the day-to-day accounting duties, including cost accounting and overseeing accounts payables 14 and accounts receivables, she was familiar with the accounting practices of defendants. 15 44. CW2 was employed as the director of quality assurance at Nvidia during the Class Period 16 from February 2000 through February 2001. CW2 was responsible for overseeing quality testing of 17 Nvidia's graphic process as well as for document control. Because Nvidia's processors moved around 18 various international destinations before reaching their final destination, Nvidia maintained a document 19 depository at its Santa Clara headquarters. CW2 was in charge of quality testing and document control 20 and was familiar with Nvidia's record-keeping as well as quality testing procedures. 21 45. CW3 was employed as a design automation/computer aided design ("DA/CAD") engineer 22 at Nvidia during the Class Period from October 2000 until September 2001. CW3 was previously 23 employed by 3dfx Interactive, Inc. ("3dfx"), which was acquired by Nvidia in December 2000.6 Because 24 CW3 was present at the April 2001 meeting in Austin, Texas where defendant Huang made a presentation 25 in the kitchen area of the Austin office, CW3 was familiar with the speech that CEO Huang made to the 26 3dfx engineers. 27 6 Although the 3dfx acquisition was finalized in April 2001, CW2 was on Nvidia's payroll beginning 28 mid-December 2000. FIRST AMENDED CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - C-02-0853-CW - 12 - Case 4:02-cv-00853 Document 61-1 Filed 07/28/2003 Page 14 of 73

1 46. CW4 was employed as an office manager at 3dfx/Nvidia before and during the Class 2 Period from 1998 through April 2002. CW4 was responsible for assisting the 3dfx engineers with various 3 administrative tasks and was present during Nvidia's acquisition of 3dfx. CW4 attended several meetings 4 hosted by defendant Huang for all the employees at the Austin office. 5 47. CW5 was employed as a program manager in the marketing/sales department before and 6 during the Class Period from January 1999 through January 2002. CW5 worked with end users of Nvidia 7 graphics products (also known as system builders or "SBs") on a rebate or co-op fund the rebate/co-op 8 fund program. Thus, CW5 was familiar with Nvidia's practices relating to this program. 9 48. CW6 was employed as an engineering services manager at Nvidia during the Class Period 10 from May 2000 to January 2002. He/she oversaw the maintenance and management of Nvidia's design 11 database, which was used to keep track of chip and board designs and maintain document control. CW6 12 attended monthly and quarterly Company-wide meetings hosted by defendants Huang and Hoberg. 13 Attendance at the meetings and information provided by Huang and Hoberg at these meetings gave CW6 14 insight into their management style. 15 49. CW7 was employed as a marketing programs manager at Nvidia before and during the 16 Class Period from March 1999 to November 2000. As marketing programs manager, CW7 coordinated 17 product launch efforts. CW7 attended meetings hosted by Huang and Hoberg. According to CW7, at 18 the time he/she joined Nvidia, the Company had recently gone public and was still small enough that CW7 19 had informal contact with the Company's upper management. 20 50. CW8 was employed as a signal integrity engineer during the Class Period from February 21 2002 to January 2003. CW8 was with Nvidia when he/she received the email concerning the Xbox 22 hacking and that Nvidia was redesigning the MCPX chip in March/April 2002. 23 51. CW9 was employed as a technical sales manager during the Class Period from March 24 2000 to June 2002. CW9 was responsible for sales to numerous large customers, including Hewlett- 25 Packard, ELSA, Creative Labs, PNY and others. In his/her role as sales manager, CW9 attended sales 26 meetings hosted by defendant Fisher for the worldwide sales staff. 27 52. CW10 was employed as a group manager OEM Channel Marketing from October 1998 28 to October 2001. CW10 was responsible for marketing and sales promotions for numerous large

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1 customers, like Dell Computer Corporation, Apple Computer, Inc., Compaq Computer Corporation and 2 others. CW10's role was to increase sales by analyzing marketing programs budgeting and funding for 3 those programs. CW10 was responsible for drafting quarterly budgets for marketing programs and 4 frequently met with finance manager Kelly Perez to discuss marketing budgets. 5 SUBSTANTIVE ALLEGATIONS 6 Description of the Company and Its Products 7 53. Nvidia was founded in 1993 by defendants Huang and Malachowsky, and Curtis Priem. 8 Nvidia went public on January 21, 1999, raising approximately $39 million on an offering of 3.5 million 9 shares. At the time of the initial public offering ("IPO"), Nvidia had never been profitable. 10 54. Nvidia designs, develops and markets 3D graphics and media communication processors 11 and related software for personal computers, workstations and digital entertainment platforms. Nvidia's 12 graphics processors are used for a variety of applications, including games, digital image editing, business 13 productivity, the Internet and industrial design. 14 55. A majority of Nvidia's sales of graphics processors were to a limited number of customers 15 – primarily to add-in board and motherboard manufacturers and CEMs, which incorporate Nvidia 16 processors in the boards they sell to PC OEMs, retail outlets and systems integrators. 17 56. In FY02, sales to Nvidia's two largest customers accounted for 34% of revenues – 20% 18 of the sales were to Edom and 14% to Micro-Star (both of which are located in the Asia-Pacific region). 19 Sales to Edom accounted for 25% and 15% of the total revenue in FY01 and FY00, respectively. 20 57. On March 5, 2000, Nvidia entered into an agreement with Microsoft to develop and sell 21 processors for use in the Xbox video game console for which Microsoft paid Nvidia an advance of $200 22 million against processor purchases. On February 14, 2001, Nvidia announced that Xbox graphics 23 processing unit and Xbox media communications processors were released to Taiwan Semiconductor 24 Manufacturing Company ("TSMC") for prototype fabrication, for which commercial shipment began in July 25 2001. The Xbox was Microsoft's entry into the video gaming console market and competed against 26 already established competitors like Sony's Playstation and Nintendo's Game Cube. 27 58. During the Class Period, the Company only had four executive officers, each of whom is 28 a named defendant herein – Huang, Hoberg, Fisher and Malachowsky. Nvidia's Report on Form 10-K

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1 for FY02 filed on May 14, 2002 lists Huang, Fisher and Malachowsky as executive officers. Instead of 2 CFO Hoberg, who stepped down on April 29, 2002, the FY02 Form 10-K lists Dotz, the Interim CFO. 3 The Form 10-K provides detailed biographies on each of these individuals. Further, in the section entitled 4 "Compensation of Executive Officers" of the Definitive Schedule 14A filed on May 28, 2002 ("Def. 14A"), 5 only Huang, Hoberg, Fisher and Malachowsky are listed as executive officers. See Def. 14A at 18-19. 6 59. From the time that CEO Huang founded Nvidia in 1993, he was involved in managing 7 every aspect of the Company. Nvidia in its SEC filings admits that Huang is crucial to the Company's 8 success and that losing him would "harm Nvidia's business." According to former Nvidia accounting 9 manager Amy Andren, Huang met with CFO Hoberg and engaged in illegal and improper accounting 10 practices by manipulating revenues, earnings and gross profit margins to reflect figures that would be more 11 in line with Wall Street analysts' estimates. Former engineering services manager CW6 stated that Huang 12 and Hoberg were very connected to every aspect of the Company's business and kept themselves informed 13 of all developments. CW6 said that Huang and Hoberg met with each other regularly and often traveled 14 together to events, including to investor or shareholder meetings. They also hosted monthly and quarterly 15 Company-wide meetings, where they discussed various aspects of the Company's progress. 16 60. In describing management, former Nvidia marketing programs manager CW7 stated that 17 management regularly ate in the cafeteria with other Nvidia employees. CW7 described CEO Huang as 18 a micro-manager – someone who knew every aspect of the Company, including the name of every 19 employee and a unique fact about them. CW7 stated that CFO Hoberg was also very visible and 20 accessible to the Nvidia employees. Moreover, CW7 described a closeness between employees and 21 management, stating that when Nvidia stock hit $100.00, CEO Huang had his ear pierced in front of all 22 the employees, and Head of Investor Relations Hara, got a weave and had his hair styled like a geisha. 23 The witness said Hoberg was supposed to get a tattoo, but her husband protested. Instead, she painted 24 her fingernails green and wore blue eye shadow all day. 25 61. CW6 and CW10 recalled that Huang often stressed that Nvidia was "30 days away from 26 going out of business" in an effort to keep people working hard. 27 62. Defendant Fisher was also actively involved in directing day-to-day sales and marketing 28 efforts for various Nvidia products. According to former sales manager CW9, Fisher hosted quarterly and

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1 annual sales meetings with sales personnel from all over the world. The quarterly sales meetings occurred 2 via conference call from the Santa Clara headquarters, while the annual sales meetings were off site. Nvidia 3 sales and marketing programs to promote sales were the topic of discussion at these meetings. CW9 was 4 present at these meetings. 5 Nvidia's Accounting and Finance Organization 6 63. According to Andren, former Nvidia accounting manager, the accounting and finance 7 groups at Nvidia were part of the corporate group. The accounting and finance managers reported to the 8 Controller, Cording, who in turn reported to defendant Hoberg. The accounting group handled general 9 ledger accounts, accounts payable, accounts receivable, cost accounting and inventory. The finance group 10 handled forecasts, budgets, analysts' expectations and dealt with investor relations. Kelly Perez, the 11 manager of financial planning and analysis, was the head of the finance group. Andren was the head of the 12 accounting group. 13 DEFENDANTS' FRAUDULENT SCHEME AND UNLAWFUL COURSE OF CONDUCT 14 64. Defendants manipulated Nvidia's reserves on a quarterly basis to ensure that Nvidia's 15 revenues and earnings were in line with analysts' expectations and Street consensus. According to Andren, 16 the hot buttons for manipulation were rebate reserves, sales return reserves, bad debt reserves, inventory 17 reserves, bonus accruals and revenues. Andren said that accounting policies were "made up as they went 18 along." Andren stated that Nvidia's former finance manager, Susan Hudgins, had set up the accounting 19 department and also designed the various types of reserves used by defendants as "cookie jar" reserves. 20 65. Andren stated that there were also no set procedures with regard to recording revenues, 21 cash reconciliation, deferred revenue and inventory reserves. Recording revenues was supposed to be 22 Andren's responsibility, but Perez, the manager of financial planning and analysis, actually performed this 23 task. Defendants manipulated the revenues reported each quarter by manipulating shipments at quarter- 24 end. Andren also described how defendants managed the revenues, gross profit margin and EPS reported 25 each quarter by manipulating shipments on the weekend of the quarter-end cutoff. At the end of each 26 quarter, Hoberg and Cording directed Perez to monitor the shipments and shipments of certain products 27 28

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1 would either be stopped prematurely on Saturday or early Sunday or continued until midnight on Sunday, 2 depending on whether Nvidia was in line with analysts' expectations. 3 66. Further, based on the amounts of credit memos issued in the month following quarter-end, 4 Andren believed that some customer orders had been shipped early or some sales representatives may 5 have made deals with customers where they offered large discounts in exchange for early shipment. 6 Andren stated that the sales group would also offer significant discounts to distributors at quarter-end, but 7 a few weeks later, large shipments would be returned from these distributors due to overstocking. 8 67. Defendants also manipulated journal entries for reserves. Before the close of each quarter, 9 i.e., before all journal entries were recorded for the quarter, Andren provided Cording with quarterly 10 reserve schedules for sales return reserves and bad debt reserves. Prior to recording the appropriate 11 adjustments (journal entries) for the reserve balances to the general ledger, Cording directed Perez to 12 review the schedules. Andren stated that Perez, who also kept track of the analysts' expectations, would 13 arbitrarily plug numbers into the reserve schedules without any factual basis for the numbers. This was 14 done in order to obtain the "expected" revenue, gross margin, and EPS goals set by defendants Huang and 15 Hoberg consistent with analysts' expectations. When Perez had determined what the reserves needed to 16 be, she would give the revised schedules back to the accounting department – either to Andren or to 17 Menchie Thompson, the general ledger accountant – to record the revised adjustments in the general 18 ledger. On numerous occasions, Andren verbally expressed disagreement to defendant Hoberg, as well 19 as Cording, with Perez's manipulation of reserves figures. Hoberg failed to remedy the improper 20 accounting. 21 68. Andren stated that when Mary Dotz first arrived at Nvidia as the Assistant Controller 22 around March 2000, Dotz also had concerns about Nvidia's accounting policies, particularly the 23 unsubstantiated adjustments to the initial reserve journal entries. Dotz advised Andren that she should 24 record journal entries prior to giving the schedules to Perez so it would be more apparent how Perez 25 changed the numbers. From that point on, Andren maintained all iterations of the reserve schedules on her 26 computer and saved them as schedule "1," "2," and so forth. According to Andren, by the time she left 27 Nvidia in May 2001, Dotz took the "if you can't beat them, join them" strategy and told Andren that "you 28 have to realize who the players are."

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1 69. In addition, defendants failed to maintain any policies or procedures with respect to cash 2 reconciliation. According to Andren, at one quarterly-close meeting she attended in December 2000, it 3 was disclosed that $700 million in cash had not been reconciled for at least four or five months. Andren 4 stated that she had to repeatedly ask Cording for the cash reconciliation figures since Andren needed these 5 to reconcile the general ledger cash accounts. But Andren never received the cash reconciliation figures 6 and felt that she had a difficult time doing her job because Andren only saw half the puzzle – revenues and 7 not cash. Andren even told Cording that, as a shareholder, Andren would want to know the accurate 8 amount of cash the Company had on hand. Nvidia's failure to reconcile its cash accounts was a major 9 weakness in its internal controls and led to inaccurate cash balances being reported in its quarterly financial 10 statements during the Class Period. 11 70. Former Nvidia marketing group manager, CW10, corroborated Andren's account of the 12 management of earnings. During meetings with finance manager Perez to discuss quarterly marketing 13 budgets, CW10 stated that Perez explained to him/her on numerous occasions that money was often 14 moved around, and, if necessary, funds could be found "here or there." Perez even admitted to CW10 that 15 this practice of shifting money around was not good. CW10 recalled that money would appear when 16 necessary, explaining that Nvidia often had "close calls" at the ends of quarters in which the Company was 17 in danger of not making its numbers. As an example of money appearing, Perez informed CW10 that the 18 Company was able to procure funds to sponsor the San Jose Sharks hockey team when the Company was 19 supposedly on a tight budget. 20 Defendants Formulated Their Scheme to Defraud at Quarterly-Close Meetings 21 71. On the Friday after the Sunday closing the quarter, and approximately two to three weeks 22 before Nvidia issued its press release announcing the quarter's financial results, a quarterly-close meeting 23 was held, which defendant Hoberg, as well as Controller Cording, attended. Andren also attended these 24 meetings along with Dave Melynchuk from the accounting group. Perez attended for the finance group. 25 According to Andren, the purpose of these meetings was to go over the preliminary "actual" numbers for 26 the quarter and determine what needed to be done, i.e., what reserves or accruals needed to be massaged 27 or manipulated, so that the financial numbers reported were in line with analysts' expectations. According 28

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1 to Andren, Cording described these quarterly-close meetings as meetings to "craft the story for the 2 auditors." 3 72. Andren stated that Perez would present the quarterly numbers to be released to the public 4 at these meetings. The "What If" or "WIF" list was discussed and reviewed at the meeting to determine 5 which reserve to use as a cushion for that quarter if revenues, EPS and gross margins were not in line with 6 analysts' expectations. According to Andren, the WIF list was created by former financial manager Susan 7 Hudgins and consisted of various reserves that were available for manipulation by defendants. The WIF 8 list included sales return reserves, bad-debt reserves, inventory reserves, bonus accruals and rebate co-op 9 funds reserves. 10 73. After these quarterly-close meetings, Andren stated that defendant Hoberg, Cording and 11 Perez met with defendant Huang to show him the financial results and discuss whether Huang's goal of 12 attaining 38% gross margin had been met. It was well known throughout Nvidia's accounting and finance 13 groups that Huang wanted Nvidia to have gross margins at 38%. Andren stated that, at quarterly-close 14 meetings, Hoberg, Cording and Perez would sometimes say that they must adjust certain accounts because 15 Huang wanted to have gross margins at 38%. Andren stated that after these meetings with Huang 16 sometimes the numbers changed if Huang wanted the EPS numbers to be a certain amount. 17 74. In fact, Melynchuk told Andren that defendant Huang got very upset when Huang was not 18 routinely kept informed of Nvidia's gross margins. One day in April 2001, Melynchuk and Cording were 19 eating in the cafeteria and Huang came over and began yelling at them because he was missing cost of 20 goods schedules. Huang told Cording and Melynchuk that he wanted to have certain schedules so he could 21 monitor the Company's gross margins. 22 75. Andren also believed that defendant Huang was aware of, encouraged and participated 23 in managing earnings. Andren was present at a round-table finance lunch meeting in October/November 24 2000, where she heard Huang say that he "wanted Nvidia to be the next Intel and he would do whatever 25 it took to get there." Huang also reiterated at this meeting how important it was that Nvidia consistently 26 met analysts' expectations. Huang held these meetings every month or every other month and had a 27 representative from each department report on their progress. 28

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1 76. Accounts of other confidential witnesses demonstrate that defendant Huang knew of the 2 accounting manipulations. CW4 stated that defendant Huang frequently visited Austin, Texas, where 3dfx 3 was headquartered. When Huang was in town, CW4 stated that Huang would host motivational meetings 4 with all Austin employees in the kitchen area in building three. CW4 stated that at these meetings Huang 5 discussed earnings and specific engineering issues. 6 77. CW3 corroborated CW4's account of frequent meetings of the entire Austin office, 7 consisting of 40-50 people in the kitchen area. At an April 2001 meeting, CW3 recalled that Huang 8 explained that companies in the PC industry usually experienced a dip in earnings in the second quarter of 9 the calendar year, but Nvidia remained surprisingly resistant to industry earnings trends and would 10 experience growth. Huang explained to the group gathered in the Austin office kitchen area that Nvidia 11 was able to accomplish this because Nvidia employed certain accounting practices to avoid problems with 12 decreasing earnings. Huang further explained that Nvidia had a "mind-share" in the way it kept its books 13 which allowed the Company to maintain growth and keep an edge in a declining market. CW3's 14 recollection of Huang's accounting philosophy is consistent with and corroborates Andren's description of 15 defendants' failure to maintain proper accounting policies and procedures. 16 78. Andren stated that she personally brought the issue of the complete lack of controls and 17 substantiation relating to the calculation of reserves to defendant Hoberg's attention. Andren stated that, 18 instead of correcting the situation, Hoberg ignored Andren's pleas. According to Andren, the accounting 19 manipulations continued to occur. 20 79. This and other information detailed below demonstrates that not only did defendants Huang 21 and Hoberg know of the manipulation of earnings at Nvidia, they actively participated in and directed 22 persons in the accounting and finance departments to achieve the desired revenues, EPS and gross margins. 23 SPECIFICS OF DEFENDANTS' SCHEME AND MANIPULATIONS OF RESERVES 24 Defendants Improperly Recognized 25 Revenues During the Class Period 26 80. Nvidia's revenue recognition policy, as outlined in its SEC filings, was to recognize revenue 27 sold to distributors when the distributor sold it to end users. This is consistent with GAAP. The 28 responsibility of preparing the deferred revenue reports for inventory still unsold to end users was properly

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1 an accounting function. According to Andren, instead of preparing deferred revenue reports based on 2 actual inventory still unsold to end users, by obtaining the monthly point of sale ("POS") reports from the 3 distributors (showing a listing of the inventory at hand, including beginning and ending units), Perez 4 arbitrarily calculated these numbers. The amount of stock remaining at the distributor would be subtracted 5 from revenue because it was not a sale according to GAAP and Nvidia's accounting policy. 6 81. Instead of the accounting group calculating the amount of deferred revenue from the POS 7 reports, Perez set up a spreadsheet entitled "DefRev." The numbers in the "DefRev" spreadsheet were 8 manipulated to arrive at a total deferred revenue amount that would ensure Nvidia's EPS was in line with 9 analysts' expectations. 10 82. Andren argued about these figures with Perez, stating that she objected to recording 11 revenue amounts that were given to her from the Finance Group based on expected results, rather than 12 providing actual numbers to the public. At Nvidia, Kelly Perez at Huang and Hoberg's direction, controlled 13 all numbers released to the public and in public filings, rather than obtaining actual figures from Nvidia's 14 accounting department. 15 83. Andren objected to using the arbitrary numbers provided by Perez. Notwithstanding the 16 receipt of actual numbers, Andren stated that Perez, at Hoberg's instructions, would not revise her 17 "DefRev" spreadsheet containing inaccurate deferred revenue data. 18 Defendants Improperly Manipulated Reserves 19 84. Specific examples of defendants' quarterly accounting manipulations with respect to the 20 reserves are as follows: 21 (a) Sales return reserves: According to Andren, Nvidia kept four quarters' worth of 22 product returns reserve on the books. Andren saved sales return reserve calculations in a spreadsheet 23 entitled "sales returns" or "sales allowance." Returns were calculated based on the life of a given product, 24 with newer products assigned a higher return rate. Andren emailed or provided in hard-copy form these 25 spreadsheets to Perez. Perez would review the numbers, but then arbitrarily plug in the returns reserve 26 amounts into the spreadsheet to arrive at Nvidia's revenues, gross margin and EPS. According to Andren, 27 Perez would regularly manipulate the numbers to be in line with Wall Street expectations. For instance, 28 Andren stated that, although returns reserve numbers were not supposed to be arbitrarily calculated, Perez

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1 would arbitrarily drop or raise return rates for different products in order to back into the desired EPS 2 results. 3 (i) When Dotz first came on board at Nvidia, she asked Andren to conduct 4 a historical analysis of Nvidia's reserve figures. Because of defendants' consistent manipulation, Andren 5 could not find documentation to support a complete analysis, but a historical review indicated that the return 6 reserves were consistently over-reserved. Andren could not substantiate the excessive returns reserves. 7 Andren knew that Nvidia was essentially banking it to "use for a rainy day." Andren repeatedly brought 8 the sales returns reserve problems to defendant Hoberg and Cording's attention. 9 (ii) Andren's account of returns reserve manipulation is corroborated by CW2, 10 former director of quality assurance at Nvidia. CW2 was responsible for document control, as well as 11 quality testing of Nvidia products, and hence kept track of product returns. During CW2's employment 12 at Nvidia, he/she recalled that Nvidia's independent auditor, KPMG LLP ("KPMG"), initially raised the 13 same issues with respect to the manner in which reserves were accrued at Nvidia that Dotz initially raised. 14 CW2 heard from Cording that KPMG began asking for adjustments in the reserve accruals even before 15 CW2 began working for Nvidia in February 2000. In May/June 2000, Hoberg and Cording told CW2 16 that KPMG was requesting that Nvidia implement more conservative reserve rates. Because CW2 17 received no guidelines from Hoberg or Cording, neither CW2, nor Hoberg or Cording did anything about 18 KPMG's request for Nvidia to develop a more accurate method for predicting future returns. 19 (iii) In fact, CW2 recalled a particular instance in October 2000 where KPMG 20 voiced its concerns regarding Nvidia's methodology for calculating reserves during 2000 directly to Hoberg 21 and Controller Cording. During conversations with defendant Hoberg and Cording, shortly after October 22 2000, CW2 learned that KPMG believed Cording's determination of the percentage of customer returns 23 was too high in 2000 resulting in Nvidia accruing excessive amounts in reserves. Hoberg and Cording told 24 CW2 that the auditors wanted the reserves to be accurate and reflect the actual amounts of expected 25 returns, which is why KPMG suggested that Nvidia implement an "early warning system" to more 26 realistically predict returns. 27 (iv) CW2 recalled that KPMG continued "bugging" Hoberg and Cording with 28 this request. CW2 stated that because he/she received no instructions from Hoberg or Cording to

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1 formulate a new system for predicting returns, nothing was done in response to KPMG's request at least 2 as of February 2001 when CW2 left Nvidia. 3 (v) KPMG's continued concern with Nvidia's sales return reserves policy and 4 the timing of KPMG's warnings is corroborated by Andren. Andren stated that KPMG had routinely 5 questioned the unsubstantiated sales return reserves and grew increasingly frustrated with the overstated 6 reserve. In January/February 2001, Andren and defendant Hoberg were present at a conference call with 7 KPMG audit partners Mike and Anna, from the San Jose KPMG office, regarding the year-end January 8 2001 audit. Cording, Perez and Melynchuk were also present on the conference call. During this call, the 9 KPMG audit partner, Mike, informed Hoberg that KPMG was so concerned about Nvidia's 10 unsubstantiated reserves that KPMG would have to issue some sort of a warning or reportable condition. 11 (vi) Generally Accepted Auditing Standards ("GAAS") describes reportable 12 conditions as follows: 13 [M]atters coming to the auditor's attention that, in his judgment, should be communicated to the audit committee because they represent significant deficiencies in the design 14 or operation of internal control, which could adversely affect the organization's ability to record, process, summarize, and report financial data consistent with the 15 assertions of management in the financial statements. 16 See AU §325.02. 17 A reportable condition may be of such magnitude as to be considered a material weakness. A material weakness in internal control is a reportable condition in which the 18 design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that misstatements caused by error or fraud in amounts 19 that would be material in relation to the financial statements being audited may occur and not be detected within a timely period by employees in the normal course 20 of performing their assigned functions. 21 See AU §325.15. 22 (b) Bad Debt Reserves: Andren was responsible for preparing the bad-debt reserve 23 calculation. The auditors required specific reserves to be established for the known risky accounts. In 24 addition, a general reserve was established for the remaining accounts receivable balance. After Andren 25 prepared the Excel spreadsheet, typically entitled "Bad Debt.xls" by quarter, it would be saved to the 26 shared finance directory in the "Press Release" folder. Cording would review it before the accounting 27 department recorded any journal entries. Andren stated the calculation for the general reserve changed 28 each quarter and was not based on historical trends or a fixed, substantiated percentage. Instead, as

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1 directed by defendant Hoberg, Cording would review the schedule and arbitrarily adjust the reserve as 2 needed to obtain the "expected" sales, general and administrative ("SG&A") expense and EPS. After 3 Cording adjusted the general reserve he would notify Andren that the "Bad Debt" schedule was final and 4 the accounting department would record a journal entry – based on the unsubstantiated calculation 5 prepared by Cording. The "Bad Debt" schedule included the amount of the adjustment and it was attached 6 as part of the support for the "final adjustments journal" entry that was recorded at the end of each month. 7 (c) Accounts Payable Accrual: Andren disclosed that Nvidia also used a $500,000 8 general, unsubstantiated accrual for accounts payable to manage earnings. KPMG questioned Cording 9 and Perez as to the necessity for this accrual, especially after the implementation of the new accounting 10 system, SAP, which was designed to "catch" all liabilities associated with open purchase orders for which 11 assets had been received, but an invoice had not. Rather than eliminating the accrual, defendants made the 12 decision to slightly reduce the accrual to $250,000 and keep this unsubstantiated general accrual on the 13 books as another "cookie jar" reserve that would be used to offset future unexpected expenses. 14 (d) Bonus Accruals: According to Andren, Nvidia also manipulated its bonus accruals 15 to manage SG&A expense and research and development ("R&D") expense. In general, when Nvidia's 16 preliminary expenses were below analysts' expectations, defendants would simply increase them by 17 accruing for future expenses into the current period, in a sense establishing a "cookie jar" reserve for future 18 unexpected SG&A and R&D expenses. Each quarter, the accounting department would record a standard 19 accrual for bonuses. A spreadsheet was prepared to support the four classifications of bonuses: 20 (i) MBO/Sales Commissions; (ii) Special Bonuses for engineers for special projects; (iii) LT Compensation 21 Agreements of target bonuses; and (iv) General. 22 (i) Andren stated that this accrual inevitably would be adjusted as defendants 23 determined what needed to be adjusted in order to report EPS in line with analysts' expectations. As a 24 specific example of this practice, Andren stated that defendant Huang had directed the payroll manager, 25 Carol Swithenbank, via email to "accrue me $100,000 in bonus" in addition to the standard accrual. 26 Andren was copied on this email, and the accounting department recorded this additional accrual on the 27 bonus spreadsheet and prepared the journal entry as part of the "final adjustments journal" entry, attaching 28

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1 Huang's email as support. Andren stated there was at least one more instance during her employment at 2 Nvidia that Huang sent an email directing Andren to accrue him additional bonus monies. 3 (ii) Andren stated that Nvidia intentionally did not disclose these bonus accrual 4 numbers to its auditors, KPMG. During the first two weeks after Andren joined the Company in 5 January/February 2000, KPMG auditor Anna asked Andren for schedules supporting bonus accrual 6 numbers. Andren provided this information to KPMG. When Hudgins found out that Andren had given 7 this information to KPMG, she was upset at Andren because Hudgins "liked to keep the numbers close 8 to her [Hudgins]" and wanted to keep control over them so she could "play[] with the General bonus." 9 Since Andren had already provided these to KPMG, Hudgins had to manipulate the rebate reserves 10 instead. 11 (iii) After this incident, Cording instructed Andren not to give anymore detailed 12 schedules to KPMG. Andren recalled that separate schedules were created for KPMG that did not 13 include all the details. Also, subsequent to this initial interaction, Cording and Perez decided to personally 14 handle any questions KPMG had with discretionary monies, including returns reserves, inventory reserves, 15 deferred revenues and others. 16 (iv) Andren also stated that, instead of preparing audit and press release 17 schedules concurrently with journal entries, Perez prepared them after revenues, EPS and gross margin 18 numbers were finalized. Perez, at Hoberg's instructions, "backed in" entries to match announced results. 19 (e) Inventory Reserves: Andren stated that inventory reserves should have been based 20 on standard inventory at hand. Andren stated that rather than performing a physical inspection count of 21 the inventory on hand, Cording and Dave Melynchuk would work out the numbers with the distributors. 22 Cording refused to do a physical count of inventory, but would have Perez manipulate inventory schedules 23 so she could mold them to "fit their story." Perez handled the inventory reserves even though Melynchuk 24 was the person in the accounting group who was responsible for them. 25 (f) Rebate/Co-Op Funds Reserves: According to CW5, Nvidia implemented a rebate 26 or co-op funds program to create demand for Nvidia's products in the market. The program offered 27 incentives in the form of $1.00 in advertising funds for each Nvidia chip purchased by the system builders 28 or SBs. CW5 handled smaller SBs like MicroPro and Monarch-Atlanta. One condition for receiving

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1 funds was that the advertisement had to include the Nvidia logo, and Nvidia sent the SBs payment after 2 the advertisement ran. CW5 said that SBs faxed a claim to Nvidia when they wanted to apply earned 3 funds toward advertising. In the course of CW5's duties as a program manager for the rebate/co-op fund 4 program, he/she frequently communicated with a woman in the accounting department, who repeatedly 5 expressed concerns about Nvidia's accounting treatment of the co-op funds. CW5 was also informed that 6 the European office was submitting unsubstantiated astronomical claims of $50,000-$100,000 at a time, 7 which CW5 and the woman in accounting found to be highly suspect. Andren corroborated that the 8 rebate/co-op fund reserves were also manipulated by defendants. Andren stated that KPMG was 9 constantly informing Nvidia that they were over-reserved on rebates. 10 NVIDIA KNEW OF THE HACKING OF MCPX CHIPS BUT FAILED TO TAKE A TIMELY INVENTORY WRITEOFF 11 85. Nvidia, a fledgling company, was aspiring to make itself a household name by associating 12 with another company that already had that honor – Microsoft. On November 15, 2001, Microsoft 13 publicly launched the Xbox gaming console. Microsoft's Xbox features the nForce-derivative unified 14 memory architecture of Nvidia's Xbox Graphics Processing Unit ("XGPU") MCPX to power the video 15 game system's graphics, audio and networking capabilities. Ex. 7, ¶10. The Xbox was praised as the most 16 technologically sophisticated piece of gaming hardware ever. Its PC-derived design heightened the interest 17 of hackers to tinker with the Xbox almost the day it hit the market. Dan Johnson, a computer programming 18 buff who had previously hacked the ePod Web appliance to run Windows CE programs, slept outside a 19 local Wal-Mart the night before the Xbox came out to buy it. See Ex. 12. 20 86. The launch version of the Xbox used mostly off-the-shelf PC hardware, including a Pentium 21 III processor and a standard hard drive. Id. It was basically a computer that hackers were very interested 22 in souping up to run standard Linux and Windows software. Id. In contrast, other gaming consoles 23 available at the time were custom-built machines that could not be easily modified. Id. For example, 24 Nintendo's Game Cube did not use standard DVD media or even standard screws to hold the case 25 together. Id. 26 87. Indeed, sometime in May 2001, at an Xbox recruiting presentation to students at the 27 renowned MIT, Jay Allard, the General Manager of Microsoft's Xbox Division, seemed "honestly 28

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1 surprised" at the students' query whether Microsoft had any plans to make it tough to hack the Xbox to run 2 Linux. See Ex. 7, ¶6. The thought that Xbox consoles might be reclaimed as Linux PCs had not even 3 crossed Allard's mind and appeared to be the least of his concerns because the Xbox was being developed 4 on a very aggressive schedule. Id. The primary reason was that Microsoft wanted to capitalize on the 5 upcoming holiday season to boost Xbox sales. 6 88. Once this possibility was pointed out to Microsoft, Microsoft did indeed take measures 7 to prevent the use of the Xbox to run operating systems. At a subsequent presentation at the University 8 of Texas in Austin, Microsoft informed students there that Microsoft had implemented some hardware 9 security features that would prevent hackers from running a different operating system on the Xbox. See 10 id., ¶7. Based on Nvidia's relationship and role in the creation and design of the Xbox, Nvidia knew of 11 the hacking possibilities and was involved in the enhanced security measures. 12 89. Even the enhanced security measures did not deter many hackers. For example, MIT 13 student Andrew Huang extracted the contents of the FLASH Read Only Memory ("FLASH ROM") within 14 merely two weeks of the Xbox's November 2001 public release. Id., ¶8. Andrew Huang wanted to 15 reclaim his Xbox as a PC. Id. The FLASH ROM contained the code necessary to initialize the Xbox to 16 be able to use the Xbox as a PC. Id. It also contained the basic kernel code required to boot the 17 "dashboard" or games. Id. Huang promptly informed Microsoft's Jon Thomasen of the FLASH ROM 18 extraction and informed Thomasen of his desire to understand the functionality of the Xbox FLASH ROM. 19 Id., ¶10. Andrew Huang also discovered that in order to understand the functional elements of the Xbox 20 FLASH ROM, it was crucial to reverse engineer Xbox's MCPX chip. Id. 21 90. Further, upon discovering the high level of security built into the Xbox, Andrew Huang was 22 even more determined to better understand the security mechanisms employed in the Xbox. Andrew 23 Huang began posting information related to the reverse engineering of the Xbox on his website, 24 http://www.xenatera.com/bunnie/proj/anatak/xboxmod.html, in the section entitled, "Bunnie's adventures 25 hacking the Xbox." See id., ¶9, Ex. A. 26 91. In late February/early March 2002, Andrew Huang successfully extracted the security keys 27 in the Xbox Nvidia chips. Id., ¶¶11-12. He wrote a detailed paper about his findings, which he submitted 28 to the MIT Artificial Intelligence ("AI") Lab as a technical memo on May 26, 2002. Id., Ex. B.

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1 Meanwhile, both Microsoft and Nvidia already knew of this security code breach. See id., ¶¶14, 16-18. 2 When Andrew Huang offered to fly out to Microsoft in June 2002 to explain his findings, he was told that 3 there would be no need for that because Microsoft was already fully aware of all the security issues 4 presented in his paper. Id., ¶14. 5 92. Indeed, defendants were also fully aware of the security issues presented by the Xbox and 6 had already begun designing a new chip to go into a new version of the Xbox in March/April 2002. 7 According to former Nvidia engineer CW8, sometime in March/April 2002, the witness received a 8 division-level email from the Public Relations Division headed by Derek Perez stating that an MIT student 9 had successfully hacked into the Xbox and downloaded the security access codes from the MCPX 10 processor. The email further said that the chip would have to be redesigned to stop the hackers from 11 copying games to DVDs. This information was also included in a newsletter sent to all employees from the 12 Human Resources Department. 13 93. Andrew Huang, who hacked into the Xbox MCPX chip, was of the opinion that the 14 security flaws that existed in the launch version of the Xbox were sufficiently severe that the Nvidia MCPX 15 chip would have to be redesigned to prevent people from installing hardware that enabled use of the Xbox 16 without paying licensing fees or use of the Xbox to run Linux or other programs. Id., ¶15. 17 94. Moreover, based on the fact that a revised, more secure Nvidia MCPX chip was delivered 18 to consumers in August 2002 in an Xbox revision known as "v1.1," the project to redesign the MCPX 19 security features started, in earnest, sometime between February and April 2002. Id., ¶16. According to 20 Andrew Huang, these type of revisions required either a very extensive (and hence time consuming to 21 execute) set of metal mask changes, or a full place-and-route of the changed portions of the MCPX chip 22 – also a time-consuming process for a chip with as many features as the MCPX chip. Id. 23 95. It is clear from these facts that defendants knew by March 2002 or early April 2002, i.e., 24 before the end of 1Q03, that it would have exposure from obsolete inventory as a result of the hacking of 25 the launch version of MCPX chip. Under even the most aggressive schedule, Nvidia needed over two 26 months from the time it began redesigning the MCPX chip to the time those changes were implemented into 27 the newly redesigned chip and mass production had begun. Id., ¶17. This does not even factor in the time 28

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1 required to ship the chips to Microsoft or its equipment manufacturer, Xbox installation time and subsequent 2 distribution times to retail. Id., ¶18. 3 96. According to Nvidia's own SEC filings, even after the chips are manufactured by Nvidia's 4 contract equipment manufacturer, TSMC, Nvidia receives these chips at either the Santa Clara, California 5 warehouse or third-party warehouses in Singapore and Hong Kong, performs incoming quality assurance 6 and then ships them to its customers' CEM, stocking representatives, motherboard and add-in board 7 manufacturer customers. FY02 Form 10-K at 7. 8 97. In fact, during the conference call discussing Nvidia's 2Q03, CEO Huang informed analysts 9 that Nvidia ships chips to Microsoft in one quarter, and Microsoft manufacturers the Xboxes in the quarter 10 after Nvidia ships chips. Ex. 13 at 86. Further, CEO Huang confirmed that manufacturing lead times for 11 Xbox chips were standard – between 10 and 12 weeks from wafers to chips. Id. Hence, the earliest 12 Nvidia knew of the hacking was March 2002 and the latest was April 2002 because there is simply no 13 other way in which Microsoft could have shipped Xboxes with a revised MCPX chip in August 2002 in 14 absence of this knowledge by Nvidia. 15 98. In fact, one analyst expressed concern and surprise at Nvidia's inventory writeoff 16 announcement, stating in part: 17 We are somewhat concerned by the inventory write-down on Xbox product, considering our expectation that NVDA had been building specific product for a specific program for 18 a specific customer .... 19 See Ex. 14. 20 99. However, in order to inflate the price of Nvidia's securities, defendants caused the 21 Company to falsely report its financial results included in press releases and SEC filings during the Class 22 Period. Defendants caused the Company to falsely report its financial results in violation of GAAP and 23 SEC rules by failing to take an inventory writeoff for obsolete inventory. 24 DEFENDANTS' ACCOUNTING MANIPULATIONS VIOLATED GAAP 25 100. In order to inflate the price of Nvidia's securities, defendants caused the Company to falsely 26 report its financial results included in press releases and SEC filings during the Class Period, 4Q00 through 27 1Q03. Defendants caused the Company to falsely report its financial results in violation of GAAP and SEC 28

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1 rules by managing earnings through manipulation of various reserves and accruals, as well as improperly 2 recognizing deferred revenues and inventory. 3 101. GAAP are those principles recognized by the accounting profession as the conventions, 4 rules and procedures necessary to define accepted accounting practice at a particular time. SEC 5 Regulation S-X, 17 C.F.R. §210.4-01(a)(1) ("Regulation S-X"), states that financial statements filed with 6 the SEC that are not prepared in compliance with GAAP are presumed to be misleading and inaccurate 7 despite footnote or other disclosure. Regulation S-X requires that interim financial statements must also 8 comply with GAAP, with the exception that interim financial statements need not include disclosures that 9 would be duplicative of disclosures accompanying annual financial statements. 17 C.F.R. §210.10-01(a). 10 Nvidia's Improper Revenue Recognition Violated GAAP 11 102. Throughout the Class Period, Nvidia inappropriately managed its reported revenue by 12 manipulating its deferred revenues. See ¶¶64-66, 80-83. 13 103. GAAP, as described by Financial Accounting Standards Board ("FASB") Statement of 14 Concepts ("FASCON") No. 5, provides the basic requirements for revenue to be recognizable: (a) revenue 15 must be realizable (collectible); and (b) revenue must have been earned. See FASCON 5, ¶83. 16 104. Nvidia's revenue recognition policy on sales to distributors, as disclosed in its FY00, FY01 17 and FY02 Reports on Form 10-K filed with the SEC, provides: 18 The Company's policy on sales to distributors is to defer recognition of sales and related [gross profit] until the distributors resell the product. 19 FY00 Form 10-K. 20 [The Company's] policy on sales to distributors ... is to defer recognition of sales 21 and related cost of sales until the distributors ... resell the product. 22 FY01 Form 10-K. 23 [The Company's] policy on sales to distributors and stocking representatives is to defer recognition of [sales] and related cost of [sales] until the distributors and 24 representatives resell the product. 25 FY02 Form 10-K. 26 105. As described in ¶¶64-66, 80-83, however, Nvidia, violated GAAP, SEC rules and its own 27 revenue recognition policy when recording sales prior to distributors reselling the product. 28

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1 Nvidia's Improper Accounting for Reserves and Accruals Violated GAAP 2 106. Throughout the Class Period, Nvidia engaged in a scheme to consistently manage its 3 revenues and costs in order to report financial results that were in line with analysts' expectations each 4 quarter. See ¶¶64-79, 84. 5 107. By manipulating and managing its earnings as described in ¶¶64-79, 84, Nvidia violated 6 one of the most basic concepts of GAAP – reliability. FASCON No. 2 states, "The reliability of a measure 7 rests on the faithfulness with which it represents what it purports to represent, coupled with an assurance 8 for the user, which comes through verification." See FASCON 2, ¶59. FASCON No. 2 further states 9 "It is, therefore, a desirable quality of an accounting measure that it should be capable of replication.... 10 'Verifiable financial accounting information provides results that would be substantially duplicated by 11 independent measurers using the same measurement methods ....'" See FASCON 2, ¶82 (citation omitted). 12 108. In attempts to "smooth" earnings, defendants caused Nvidia's reported quarterly and annual 13 earnings throughout the Class Period to be both overstated and understated. As described in FASCON 14 No. 2, the FASB's view on understated financial information is the same as overstated financial information: 15 The Board emphasizes that any attempt to understate results consistently is likely to raise 16 questions about the reliability and the integrity of information about those results and will probably be self-defeating in the long run.... Bias in estimating components of 17 earnings, whether overly conservative or unconservative, usually influences the timing of earnings or losses rather than their aggregate amount. As a result, 18 unjustified excesses in either direction may mislead one group of investors to the possible benefit or detriment of others. 19 * * * 20 The best way to avoid the injury to investors that imprudent reporting creates is to try to 21 ensure that what is reported represents what it purports to represent. 22 See FASCON 2, ¶¶96-97. 23 109. As discussed in ¶¶64-79, 84, Nvidia used several accounting gimmicks to smooth its 24 earnings. The "smoothing" of earnings or "earnings management" to avoid erratic spikes and dips in 25 earnings is an improper accounting practice. GAAP requires that, in order for a reserve to be recorded, 26 the liability must be probable (likely to occur) and the amount be reasonably estimable. See FASB 27 Statement of Financial Accounting Standards No. 5 ("SFAS 5"), ¶8. By maintaining general unspecified 28 "cookie jar" reserves, as described in ¶84, Nvidia violated GAAP as set forth in SFAS 5. SFAS 5

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1 specifically states, "General or unspecified business risks do not meet the conditions for accrual ... and no 2 accrual for loss shall be made." See SFAS 5, ¶14. 3 110. In addition to the GAAP violations noted above, the SEC released Staff Accounting 4 Bulletin No. 99 – Materiality ("SAB 99") during August 1999. SAB 99 expresses the SEC's views "that 5 exclusive reliance on certain quantitative benchmarks to assess materiality in preparing financial statements 6 ... is inappropriate." Further, SAB 99 specifically addresses "managed earnings" as follows: 7 [T]he staff believes that a registrant and the auditors of its financial statements should not assume that even small intentional misstatements in financial statements, for example those 8 pursuant to actions to "manage" earnings, are immaterial. While the intent of management does not render a misstatement material, it may provide significant evidence of materiality. 9 The evidence may be particularly compelling where management has intentionally misstated items in the financial statements to "manage" reported earnings. In that instance, it 10 presumably has done so believing that the resulting amounts and trends would be significant to users of the registrant's financial statements.7 The staff believes that investors 11 generally would regard as significant a management practice to over- or under- state earnings up to an amount just short of a percentage threshold in order to 12 "manage" earnings. Investors presumably also would regard as significant an accounting practice that, in essence, rendered all earnings figures subject to a 13 management-directed margin of misstatement. 14 SAB 99. 15 111. Additionally, the SEC's recently issued Accounting and Auditing Enforcement Release No. 16 1563 states that relying on subjective judgments in making adjustments to reserves without any significant 17 factual support or analysis is in violation of federal securities laws and lacks sufficient substantiation under 18 GAAP. See Ex. 4 at 3. 19 Nvidia's Improper Accounting for Inventory Violated GAAP 20 112. Under GAAP, defendants were required to record the estimated loss from purchase 21 commitments with contract manufacturers in 1Q03, as provided by Accounting Research Bulletin ("ARB") 22 No. 43, Chapter 4, Statement 10: 23 Accrued net losses on purchase commitments for goods for inventory, measured in the same way as are inventory losses, should, if material, be recognized in the accounts and 24 the amounts thereof separately disclosed in the income statement. 25 ARB 43, Chapter 4, Statement 10. 26 27 7 SAB 99 further states, "Assessments of materiality should occur not only at year-end, but also 28 during the preparation of each quarterly or interim financial statement." FIRST AMENDED CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - C-02-0853-CW - 32 - Case 4:02-cv-00853 Document 61-1 Filed 07/28/2003 Page 34 of 73

1 113. By the time the 1Q03 financial statements were filed with the SEC on May 22, 2002, 2 defendants knew they faced a liability for its purchase commitments of at least $21 million, and this amount 3 should have been recorded as a loss on Nvidia's 1Q03 financial statements. See ¶¶85-99. 4 114. On July 30, 2002, defendants belatedly announced that the Company was taking a charge 5 for the obsolete Xbox inventory. In its Report on Form 10-Q for 2Q03, Nvidia belatedly recorded a loss 6 from obsolete purchase commitments, which was then $21 million. In 2Q03, Nvidia's Report on Form 7 10-Q stated that: 8 Gross margins for the second quarter and first half of fiscal 2003 as compared to the same periods of fiscal 2002 decreased primarily due to the shift in mix of business and an 9 inventory write-down of approximately $21 million related to certain Xbox processors and nForce chipsets. 10 2Q03 Form 10-Q at 17. 11 115. By failing to record its loss from excessive purchase commitments, Nvidia overstated its 12 1Q03 gross profit by $21 million, overstated its net income by $14.7 million and overstated its EPS by at 13 least $0.08. 14 Nvidia's Restatement Is an Admission that 15 Nvidia's Financial Statements Violated GAAP 16 116. On February 14, 2002, defendants issued a press release entitled, "Nvidia Corporation 17 Conducting Review of Certain Transactions at the Request of the SEC." The press release stated in part: 18 Nvidia® Corporation (Nasdaq:NVDA) today announced that, in response to an inquiry from the Securities and Exchange Commission (SEC), it is conducting an internal 19 review of the recording of certain reserves and the timing of recording certain expenses relating to the fourth quarter of fiscal 2000, and the first three quarters of fiscal 2001. 20 Fiscal 2000 ended on January 30, 2000 and fiscal 2001 ended on January 28, 2001. 21 In connection with the SEC's previously announced investigation of alleged insider trading by certain non-executive employees, NVIDIA provided emails and other materials 22 to the SEC for the period from December 1999 to March 2000. Based on its review of these materials, the SEC informed NVIDIA in January 2002 of specific 23 questions relating to 1) the recording of reserves in the fourth quarter of fiscal 2000 and the first quarter of fiscal 2001; and 2) the possibility that certain 24 product costs of up to $3.6 million should have been recorded in the first quarter of fiscal 2001, but were recorded in the second and third quarters in that same 25 year. 26 Ex. 5. 27 28

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1 117. After a three-month internal audit, defendants announced that they were restating financial 2 results for FY00, FY01 and the first three quarters of FY02. On April 29, 2002, defendants announced 3 that the areas of corrections were categorized as follows: 4 One bucket of corrections relate to simple mistakes, just errors that we find through this review. An example of that would be accidentally double booking an 5 expense or failing to release an accrual when it should have been. 6 A second category of things that we found were estimates where we couldn't find sufficient support to convince ourselves that the estimate was fully supported. So, 7 of course, when we established reserves and accruals, we're frequently estimat[ing] the [accreting] impact of future [reserves]. And although there may have been support at the 8 time for some of those, we weren't able to locate it. And out of an abundance of caution, we decided to restate the results in those instances. 9 An example would be an inventory reserve where we elected to write a 10 product down to zero, but then sold it for some amount, usually a low amount in a subsequent quarter. If we couldn't [find] adequate support for taking the product 11 down to zero in our inventory, we assumed perfect hindsight and restated in accordance with what it was actually sold for. 12 A third bucket would be questionable accounting judgment, that is, where we 13 made an accounting judgment that we believe was made in good faith but is at least arguable. In a couple of those cases we elected to restate. And then the fourth is past 14 or waived audit adjustments. As many of the people on the call will know, when the company's books are audited and the auditors review them they quite commonly identify 15 things that they feel could be changed for one reason or another, but are not requiring the change, either because it's not material or some other reason. 16 See Ex. 15 at 4-5. The restated results were reported in the Report on Form 10-K for the fiscal year 17 ended January 27, 2002, filed with the SEC on May 14, 2002. Additionally, defendant Hoberg stepped 18 down as CFO, and Corporate Controller Mary Dotz took over as Interim CFO. 19 118. The fact that Nvidia restated its financial statements for FY00, FY01 and FY02, including 20 the following quarterly restatements – 2Q00, 3Q00, 4Q00, 1Q01, 2Q01, 3Q01, 4Q01, 1Q02, 2Q02, 21 and 3Q02 – is an admission that the financial statements originally issued were false and that the 22 misstatement of revenues, expenses and net income was material. 23 (a) Pursuant to GAAP, as set forth in Accounting Principles Board 20 ("APB 20"), 24 the type of restatement announced by Nvidia was to correct for material errors in its previously issued 25 financial statements. An error exists where there has been (i) a mathematical mistake; (ii) a mistake in the 26 application of accounting principles; or (iii) oversight or misuse of facts that existed at the time the 27 financial statements were prepared. See APB 20, ¶¶7-13. 28

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1 (b) The restatement of past financial statements is a disfavored method of recognizing 2 an accounting change, as it dilutes confidence by investors in the financial statements, makes it difficult to 3 compare financial statements and is often difficult, if not impossible, to generate the numbers when 4 restatement occurs. See APB 20, ¶14. Thus, GAAP provides that financial statements should only be 5 restated in limited circumstances, i.e., when there is a change in the reporting entity, when there is a change 6 in accounting principles used or to correct an error in previously issued financial statements. Nvidia's 7 restatement was not due to a change in reporting entity or accounting principle but, rather, was due to 8 errors in previously issued financial statements. 9 119. The fact that Nvidia corrected its financial statements through a restatement indicates that 10 the errors were not merely a change in estimate based on events that occurred after the financial statements 11 were issued. Otherwise, the restatement would violate APB 20, ¶31, which states, "[a] change in an 12 estimate should not be accounted for by restating amounts reported in financial statements of 13 prior periods." Thus, the restatement is an admission by Nvidia that the revenues, expenses and resulting 14 net income reported during the Class Period were incorrect based on information available to defendants 15 at the time the results were originally reported. It is also an admission that the Company's previously issued 16 financial results and its public statements regarding those results were materially false and misleading. See 17 ¶110 regarding SAB 99 and the SEC's view of materiality. 18 120. Further, Nvidia admits, through its disclosure regarding its restated financial statements, that 19 the restatement revolves around errors and, specifically, the misuse of facts available to defendants at the 20 time the financial statements were originally reported. The first category involved mistakes. An example 21 of this first category is the accidental double-booking of an expense. The second category involved 22 adjustments relating to estimates made in connection with accruals, in which Nvidia concluded that there 23 was not sufficient current evidence to support an estimate. The third area related to past 24 accounting judgments that upon review [Nvidia] concluded were incorrect, but did not reach a 25 conclusion whether they were made in good faith or bad faith. See ¶117. 26 Other GAAP Principles Violated 27 28

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1 121. Due to the accounting improprieties discussed in ¶¶64-120 above, the Company presented 2 its financial statements in a manner that violated GAAP, including the following fundamental accounting 3 principles: 4 (a) The principle that interim financial reporting should be based upon the same 5 accounting principles and practices used to prepare annual financial statements was violated (APB 28, 6 ¶10); 7 (b) The principle that financial reporting should provide information that is useful to 8 present and potential investors and creditors and other users in making rational investment, credit and 9 similar decisions was violated (FASCON 1, ¶34); 10 (c) The principle that financial reporting should provide information about the economic 11 resources of an enterprise, the claims to those resources and effects of transactions, events and 12 circumstances that change resources and claims to those resources was violated (FASCON 1, ¶40); 13 (d) The principle that financial reporting should provide information about how 14 management of an enterprise has discharged its stewardship responsibility to owners (stockholders) for the 15 use of enterprise resources entrusted to it was violated. To the extent that management offers securities 16 of the enterprise to the public, it voluntarily accepts wider responsibilities for accountability to prospective 17 investors and to the public in general (FASCON 1, ¶50); 18 (e) The principle that financial reporting should provide information about an 19 enterprise's financial performance during a period was violated. Investors and creditors often use 20 information about the past to help in assessing the prospects of an enterprise. Thus, although investment 21 and credit decisions reflect investors' expectations about future enterprise performance, those expectations 22 are commonly based at least partly on evaluations of past enterprise performance (FASCON 1, ¶42); 23 (f) The principle that financial reporting should be reliable in that it represents what it 24 purports to represent was violated. That information should be reliable as well as relevant is a notion 25 central to accounting (FASCON 2, ¶¶58-59); 26 (g) The principle of completeness, which means nothing is left out of the information 27 that may be necessary to ensure that it validly represents underlying events and conditions, was violated 28 (FASCON 2, ¶79); and

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1 (h) The principle that conservatism be used as a prudent reaction to uncertainty to try 2 to ensure that uncertainties and risks inherent in business situations are adequately considered was violated. 3 The best way to avoid injury to investors is to try to ensure that what is reported represents what it purports 4 to represent (FASCON 2, ¶¶95, 97). 5 122. Further, the undisclosed adverse information concealed by defendants during the relevant 6 period is the type of information which, because of SEC regulations, regulations of the national stock 7 exchanges and customary business practice, is expected by investors and securities analysts to be disclosed 8 and is known by corporate officials and their legal and financial advisors to be the type of information which 9 is expected to be, and must be, disclosed. 10 Defendants Knew that They Would Not Meet 2Q03 Revenue and Earnings Guidance Yet Continued to 11 Mislead the Public About Nvidia's Future Earnings 12 123. Under the scrutiny of the SEC and the market, defendants knew they had lost their ability 13 to further manipulate earnings to meet Wall Street expectations. They also knew that any signals of 14 weakness in Nvidia's sales in the midst of the SEC investigation into the Company's accounting would have 15 a devastating effect on Nvidia's stock price. 16 124. During this sensitive time, Nvidia's marketing director for the Asia-Pacific region, Kheng 17 Bin, admitted during a March 28, 2002 interview that Nvidia's 2Q03 financial results would be "worse" 18 than the first quarter because the second quarter is the "weak sales season." At the time, the Company 19 vehemently and falsely denied the report, saying: "The story is false." Ex. 16. Even though Nvidia lists 20 Kheng Bin among its senior management on its corporate website, Nvidia, through its official public 21 spokespersons, stated that, "It would be hard for a person in that region to have visibility to the overall well- 22 being of the company." Id. This statement was a blatant lie in light of the fact that the Asia-Pacific region 23 accounted for over three-quarters of the Company's revenues. Kheng Bin's statement of lower 2Q03 24 revenues was based on internal Company information available to him, as well as other senior management. 25 Kheng Bin did not have special secret knowledge. 26 125. Further, defendants concede in Nvidia's Report on Form 10-K for FY02 that its business 27 may be harmed by instability in Asia due to the concentration of customers who are located or have 28 substantial operations in Asia. FY02 Form 10-K at 30. Indeed, the Asia-Pacific region accounted for

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1 78.3% and 75.6% of Nvidia's reported FY02 and FY01 revenues, respectively. Id. at 67. For 1Q03, 2 the Asia-Pacific region accounted for about 65% of the total revenues. Id. Essentially, the Asia-Pacific 3 region constituted over three-quarters over the Company's total revenues. 4 126. Merely one month after the February 14, 2002 SEC announcement that it was investigating 5 Nvidia's accounting practices, true information about Nvidia weakened sales would have continued to 6 erode Nvidia's stock price. 7 127. Further, the Company admits that it is dependent on the PC market. During FY02, it 8 derived most of its revenues from the sale of products for use in the PC market and expected to continue 9 to do so for the next several years. Id. at 34; 1Q03 Form 10-Q at 27-28. 10 128. During the first half of 2002, industry analysts, based on information provided by the 11 Company, applauded Nvidia's ability to maintain solid revenues and earnings despite the weak PC market. 12 129. Despite knowledge of this industry-wide seasonal trend, defendants denied the accuracy 13 of Kheng Bin's admission relating to Nvidia's 2Q03 revenues. Armed with the same knowledge as Kheng 14 Bin, defendants knew, at least as of March 28, 2002 that they would have a weak 2Q03 sales season. 15 Notably, Kheng Bin never retracted his March 28, 2002 statement. In fact, Kheng Bin, the top Asian 16 executive responsible for over 3/4 of the Company's revenues, was correct – Nvidia did have a weak sales 17 2Q03 season. 18 130. By March 28, 2002, defendants were at least deliberately reckless in failing to inform 19 investors of the true condition of Nvidia's financials. Additionally, when defendants filed the 1Q03 financial 20 results with the SEC on May 22, 2002, they affirmatively misled investors by stating that Nvidia would have 21 revenues of $588-$600 million for 2Q03. 22 THE FACTS BEGAN TO BE REVEALED 23 131. On July 30, 2002, Nvidia admitted that it would indeed have significantly lower sales for 24 2Q03. Nvidia announced that, contrary to prior guidance of $588-$600 million, Nvidia's revenues would 25 drop as much as 32% to $410-$430 million. Ex. 8. Defendant Huang, in a conference call after the 26 issuance of the press release, stated that the drop was a result of the general weakness in the PC industry 27 and because Nvidia had to take a "significant" inventory writeoff for obsolete Xbox inventory and nForce 28 chips. Exs. 8-10.

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1 DEFENDANTS' FALSE AND MISLEADING STATEMENTS DURING THE CLASS PERIOD 2 132. False Statements: On February 15, 2000, Nvidia reported record revenues and earnings 3 for 4Q00 and the year ended January 30, 2000, in a press release which stated in part: 4 For the fourth quarter of fiscal 2000, revenues increased to $128.5 million, 5 compared to $65.5 million for the fourth quarter of fiscal 1999, an increase of 96%. Net income for the fourth quarter was $14.6 million, or [$.10] per fully diluted share, compared 6 to $7.7 million or [$.07] per fully diluted share in the fourth quarter of fiscal 1999. 7 * * * 8 For the year ended January 30, 2000, revenues increased 137% to $374.5 million, compared to $158.2 million for the year ended January 31, 1999. Net income 9 for the year increased 822% to $38.1 million, or [$.27] per fully diluted share, compared to $4.1 million, or [$.04] per fully diluted share, for the prior fiscal year. 10 "The Fourth quarter capped an extraordinary year of growth for NVIDIA," 11 stated Jen-Hsun Huang, president and CEO of NVIDIA. 12 * * * 13 "Fiscal 2000 was a milestone year for NVIDIA.... And most importantly, we've built a strong foundation to drive our continued growth." 14 133. On February 15, 2000, following the issuance of the press release, Nvidia held a 15 conference call. During the conference call, defendants Huang and Hoberg repeated the financial results 16 reported in the press release. The financial results reported in the February 15, 2000 press release and 17 conference call were repeated to the market in analysts' reports and in the Company's Report on Form 18 10-K filed on March 13, 2000. 19 134. Reasons Why and Defendants' Knowledge that 2Q00, 3Q00, 4Q00 and FY00 Financial 20 Results Were Materially False and Misleading When Made: The financial results reported in the press 21 release, conference call, analysts' reports and the Company's Reports on Forms 10-K and 10-Q were 22 materially false and misleading because Nvidia inappropriately managed its reported revenues by 23 (a) monitoring and stopping shipments prematurely to stay in line with analysts' expectations; (b) improperly 24 using unsubstantiated "cookie-jar" reserves to manipulate reported net income, gross margin and EPS; 25 (c) manipulating deferred revenues, returns reserves, inventory reserves, accruals for customer programs 26 and general bonus accruals; and (d) establishing a general, unsubstantiated accrual for accounts payable. 27 28

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1 Nvidia has admitted that its quarterly results for 2Q00, 3Q00 and 4Q00 were materially false and 2 misleading and has restated its 2Q00, 3Q00 and 4Q00 financial results as follows:

3 As Reported As Restated 4 2Q00 (in Thousands) (in Thousands) Gross Profits $28,392 $28,792 5 Operating Income $9,463 $10,038 6 Net Income $6,686 $7,077 7 Diluted EPS $0.05 $0.05 8 As Reported As Restated 9 3Q00 (in Thousands) (in Thousands) 10 Gross Profits $36,820 $40,268 11 Operating Income $15,107 $18,732 12 Net Income $10,564 $13,029 Diluted EPS $0.07 $0.09 13 14 As Reported As Restated 4Q00 (in Thousands) (in Thousands) 15 Gross Profits $48,646 $47,711 16 Operating Income $20,839 $20,846 17 Net Income $14,587 $14,592 18 Diluted EPS $0.10 $0.10

19 Nvidia has also admitted its FY00 financial results were materially false and misleading and has restated 20 its FY00 financial results as follows: 21 As Reported As Restated 22 (in Thousands) (in Thousands) 23 Gross Profits $138,930 $141,843 Operating Income $54,412 $58,617 24 Net Income $38,098 $40,959 25 Diluted EPS $0.26 $0.28 26 135. As set forth in ¶¶116-120, Nvidia's restatement of its financial results is an admission that 27 the financial statements originally issued were false and that the financial results were not reliable in violation 28

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1 of FASCON No. 2. By managing earnings, Nvidia's reported quarterly and annual earnings were both 2 overstated and understated. Understatements, similar to overstatements, are improper inasmuch as they 3 raise questions about the reliability and integrity of the information. See FASCON 2, ¶¶96-97. Nvidia also 4 violated SFAS 5, ¶¶8, 14, by maintaining general unspecified reserves, and SEC Regulation S-X, 17 5 C.F.R. §210.4-01(a)(1), which requires financial statements filed with the SEC to comply with GAAP. 6 136. Each of the Individual Defendants, as part of the core group of executive officers, knew 7 or was deliberately reckless in not knowing that Nvidia's 2Q00, 3Q00, 4Q00 and FY00 financial results 8 were false and misleading because: 9 (a) Plaintiffs have been informed by numerous former Nvidia employees that 10 defendants engaged in improper accounting practices to manage reported revenues and earnings. As set 11 forth in ¶¶43-45, 47, 52, these former employees include the former accounting manager (Andren), a 12 former director of quality assurance (CW2), a former engineer in the Austin office who attended defendant 13 Huang's meetings (CW3), a former program manager of Nvidia's rebate/co-op fund program (CW5), and 14 a former Nvidia group manager – OEM Channel Marketing (CW10). 15 (b) As detailed in ¶¶64-67, 78, 83, defendants failed to maintain proper accounting 16 policies and procedures but "made them up as they went along." Instead of reporting "actual" numbers, 17 defendants manipulated "actual" numbers to report numbers in line with analysts' expectations. Former 18 accounting manager Andren expressed disagreement to senior management, including, specifically, 19 defendant Hoberg, with the manipulation of numbers. 20 (c) As detailed in ¶¶71-72, defendants held a quarterly-close meeting on a Friday two 21 to three weeks before Nvidia issued its press release announcing the quarter's results. The objective of 22 these meetings was to "craft the story for the auditors." These meetings were attended by defendant 23 Hoberg, among others. At these meetings, defendants discussed the "WIF" list, comprised of reserves 24 available for managing earnings. Defendants determined at these meetings which reserve was to be used 25 as a cushion for that quarter if revenues and EPS were not in line with analysts' expectations. This 26 demonstrates that not only was defendant Hoberg aware of the accounting manipulations, but she directed 27 and actively participated in the wrongful acts that led to the false and misleading financial statements. 28

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1 (d) As detailed in ¶¶73-77, defendant Hoberg, Cording and Perez met with defendant 2 Huang after the quarterly-close meetings to show Huang the financial results and discuss whether Huang's 3 goal of 38% gross profit margin had been achieved. The fact that the numbers in the financial results 4 changed sometimes after the meeting with Huang demonstrates that defendant Huang was not only aware 5 of the accounting manipulations but directed these acts. 6 (e) As detailed in ¶¶76-77, defendant Huang knew about Nvidia's creative 7 bookkeeping methods and, in fact, bragged to the Austin office employees that Nvidia had a "mind-share" 8 in the way it kept its books that allowed the Company to remain resistant to industry earnings trends, 9 maintain growth and keep an edge in a declining market. 10 (f) As detailed in ¶¶64-84, 100-115, defendants were aware of and participated in 11 a scheme to use reserves, including sales return reserves, bad-debt reserves, inventory reserves, rebate 12 reserves, bonus accruals and accounts payable accruals to manage earnings. 13 (g) As detailed in ¶¶84(a)(ii)-(vi), Nvidia's auditor, KPMG, had advised defendants 14 on several occasions that Nvidia must implement better reserves calculations policies, or KPMG would 15 have to issue a warning or "reportable condition." A specific example is when KPMG informed defendant 16 Hoberg and Cording that Nvidia's calculation of sales return reserves did not reflect "actual" reserves and 17 required defendants to implement new sales return reserves forecasting procedures. 18 (h) As detailed in ¶¶80-83, defendants did not have any policies in place to ascertain 19 deferred revenues. Instead of waiting for "actual" numbers from POS reports, Perez (at the instruction of 20 senior management) would arbitrarily calculate deferred revenues by using analysts' expectations for 21 revenues and EPS as a starting point. 22 (i) As detailed in ¶¶116-120, defendants admitted, by virtue of the restatement, that 23 the revenues, expenses and resulting net income reported during the Class Period were incorrect, and, 24 hence, their statements relating to those financial results were false and misleading. 25 137. False Statements: On May 16, 2000, Nvidia reported record revenues and earnings for 26 1Q01 ended April 30, 2000, in a press release which stated in part: 27 For the first quarter of fiscal 2001, revenues increased to $148.5 million, compared to $71.0 million for the first quarter of fiscal 2000, an increase of 109 percent. 28 Operating income for the first quarter was $25.6 million, compared to $9.0 million in the

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1 first quarter of fiscal 2000. Net income for the first quarter of fiscal 2001 was $18.3 million, or [$.12] per fully diluted share, compared to $6.3 million, or [$.05] per fully 2 diluted share for the first quarter of fiscal 2000. 3 * * * 4 "The first quarter of fiscal 2001 was a landmark quarter for NVIDIA," stated Jen-Hsun Huang, president and CEO at NVIDIA. 5 * * * 6 "In March 2000, we officially announced our entry into the consumer electronics 7 market with Microsoft's launch of the X-Box game console. Microsoft selected NVIDIA to build both the custom graphics processing unit and the media/communications processor 8 for this revolutionary product. X-Box represents a radical new platform for the digital entertainment market, and we are very excited to be playing a major role." 9 138. On May 16, 2000, following the issuance of the press release, Nvidia held a conference 10 call. During the conference call, defendants Huang and Hoberg repeated the financial results reported in 11 the press release. The financial results reported in the May 16, 2000 press release and conference call 12 were repeated to the market in analysts' reports and in the Company's Report on Form 10-Q filed on June 13 14, 2000. 14 139. Reasons Why and Defendants' Knowledge that 1Q01 Financial Results Were Materially 15 False and Misleading When Made: The financial results reported in the press release, conference call, 16 analysts' reports and the Company's Reports on Forms 10-K and 10-Q were materially false and 17 misleading because Nvidia inappropriately managed its reported revenues by (a) monitoring and stopping 18 shipments prematurely to stay in line with analysts' expectations; (b) improperly using unsubstantiated 19 "cookie-jar" reserves to manipulate reported net income, gross margin and EPS; (c) manipulating deferred 20 revenues, returns reserves, inventory reserves, accruals for customer programs and general bonus accruals; 21 and (d) establishing a general, unsubstantiated accrual for accounts payable. Nvidia has admitted that its 22 results for 1Q01 were materially false and misleading and has restated its 1Q01 financial results as follows: 23 As Reported As Restated 24 (in Thousands) (in Thousands) 25 Gross Profits $55,508 $51,519 26 Operating Income $25,564 $20,282 27 Net Income $18,287 $14,695 28 Diluted EPS $0.12 $0.09

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1 140. As set forth in ¶¶116-120, Nvidia's restatement of its financial results is an admission that 2 the financial statements originally issued were false and that the financial results were not reliable in violation 3 of FASCON No. 2. By managing earnings, Nvidia's reported 1Q01 earnings were overstated. 4 Overstatements of earnings in financial statements are improper inasmuch as they raise questions about the 5 reliability and integrity of the information. See FASCON 2, ¶¶96-97. Nvidia also violated SFAS 5, ¶¶8, 6 14, by maintaining general unspecified reserves, and SEC Regulation S-X, 17 C.F.R. §210.4-01(a)(1), 7 which requires financial statements filed with the SEC to comply with GAAP. 8 141. Additionally, for the reasons set forth in ¶136, each of the Individual Defendants knew or 9 was deliberately reckless in not knowing that Nvidia's 1Q01 financial results were false and misleading. 10 142. False Statements: On August 21, 2000, Nvidia reported record revenues and earnings for 11 2Q01 ended July 30, 2000, in a press release which stated in part: 12 For the second quarter of fiscal 2001, revenues increased to $170.4 million, compared to $78.0 million for the second quarter of fiscal 2000, an increase of 118 13 percent. Operating income for the second quarter of fiscal 2001 was $29.0 million, compared to $9.5 million in the second quarter of fiscal 2000. Net income for the second 14 quarter of fiscal 2001 was $22.5 million, or [$.14] per fully diluted share, compared to $6.7 million, or [$.05] per fully diluted share for the second quarter of fiscal 2000. 15 143. On August 21, 2000, following the issuance of the press release, Nvidia held a conference 16 call. During the conference call, defendants Huang and Hoberg repeated the financial results reported in 17 the press release. The financial results reported in the August 21, 2000 press release and conference call 18 were repeated to the market in analysts' reports and in the Company's Report on Form 10-Q filed on 19 September 13, 2000. 20 144. Reasons Why and Defendants' Knowledge that 2Q01 Financial Results Were Materially 21 False and Misleading When Made: The financial results reported in the press release, conference call, 22 analysts' reports and the Company's Report on Form 10-Q were materially false and misleading because 23 Nvidia inappropriately managed its reported revenues by (a) monitoring and stopping shipments 24 prematurely to stay in line with analysts' expectations; (b) improperly using unsubstantiated "cookie-jar" 25 reserves to manipulate reported net income, gross margin and EPS; (c) manipulating deferred revenues, 26 returns reserves, inventory reserves, accruals for customer programs and bonus accruals; and 27 28

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1 (d) establishing a general, unsubstantiated accrual for accounts payable. Nvidia has admitted its 2Q01 2 financial results were materially false and misleading and has restated its 2Q01 financial results as follows:

3 As Reported As Restated 4 (in Thousands) (in Thousands) Gross Profits $63,767 $63,984 5 Operating Income $29,023 $30,663 6 Net Income $22,522 $23,637 7 Diluted EPS $0.14 $0.15 8 145. As set forth in ¶¶116-120, Nvidia's restatement of its financial results is an admission that 9 the financial statements originally issued were false and that the financial results were not reliable in violation 10 of FASCON No. 2. By managing earnings, Nvidia's reported 2Q01 earnings were understated. 11 Understatements, similar to overstatements, are improper inasmuch as they raise questions about the 12 reliability and integrity of the information. See FASCON 2, ¶¶96-97. Nvidia also violated SFAS 5, ¶¶8, 13 14, by maintaining general unspecified reserves, and SEC Regulation S-X, 17 C.F.R. §210.4-01(a)(1), 14 which requires financial statements filed with the SEC to comply with GAAP. 15 146. Additionally, for the reasons set forth in ¶136, each of the Individual Defendants knew or 16 was deliberately reckless in not knowing that Nvidia's 2Q01 financial results were false and misleading. 17 147. False Statements: On November 9, 2000, Nvidia announced record revenues and earnings 18 for 3Q01 and the nine months ended October 29, 2000, in a press release which stated in part: 19 For the third quarter of fiscal 2001, revenues increased to $198.2 million, 20 compared to $97.0 million for the third quarter of fiscal 2000, an increase of 104 percent. Operating income for the third quarter of fiscal 2001 was $36.6 million, 21 compared to $15.1 million in the third quarter of fiscal 2000. Net income for the third quarter of fiscal 2001 was $28.1 million, or [$.18] per diluted share, compared to 22 $10.6 million, or [$.08] per diluted share for the third quarter of fiscal 2000. 23 * * * 24 "Our third quarter highlights the continued execution of our core strategy," stated Jen-Hsun Huang, president and CEO of Nvidia.... "We are in a terrific position 25 for continued growth." 26 148. On November 9, 2000, following the issuance of the press release, Nvidia held a 27 conference call. During the conference call, defendants Huang and Hoberg repeated the financial results 28 reported in the press release. The financial results reported in the November 9, 2000 press release and

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1 conference call were repeated to the market in analysts' reports and in the Company's Report on Form 2 10-Q filed on December 8, 2000. 3 149. Reasons Why and Defendants' Knowledge that 3Q01 Financial Results Were Materially 4 False and Misleading When Made: The financial results reported in the press release, conference call, 5 analysts' reports and the Company's Report on Form 10-Q were materially false and misleading because 6 Nvidia inappropriately managed its reported revenues by (a) monitoring and stopping shipments 7 prematurely to stay in line with analysts' expectations; (b) improperly using unsubstantiated "cookie-jar" 8 reserves to manipulate reported net income, gross margin and EPS; (c) manipulating deferred revenues, 9 returns reserves, inventory reserves, accruals for customer programs and general bonus accruals; and 10 (d) establishing a general, unsubstantiated accrual for accounts payable. Nvidia has admitted its 3Q01 11 financial results were materially false and misleading and has restated its 3Q01 financial results as follows:

12 As Reported As Restated 13 (in Thousands) (in Thousands) Gross Profits $73,522 $73,892 14 Operating Income $36,647 $37,018 15 Net Income $28,068 $28,320 16 Diluted EPS $0.17 $0.18 17 150. As set forth in ¶¶116-120, Nvidia's restatement of its financial results is an admission that 18 the financial statements originally issued were false and that the financial results were not reliable in violation 19 of FASCON No. 2. By managing earnings, Nvidia's reported 3Q01 earnings were understated. 20 Understatements, similar to overstatements, are improper inasmuch as they raise questions about the 21 reliability and integrity of the information. See FASCON 2, ¶¶96-97. Nvidia also violated SFAS 5, ¶¶8, 22 14, by maintaining general unspecified reserves, and SEC Regulation S-X, 17 C.F.R. §210.4-01(a)(1), 23 which requires financial statements filed with the SEC to comply with GAAP. 24 151. Additionally, for the reasons set forth in ¶136, each of the Individual Defendants knew or 25 was deliberately reckless in not knowing that Nvidia's 3Q01 financial results were false and misleading. 26 Further, defendants' statements that their record financials were the result of their "continued execution of 27 28

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1 [their] core strategy" were false because their continued growth stemmed from their manipulation of income, 2 gross margin and EPS, rather than from the implementation of a legitimate strategy. 3 152. False Statements: On February 14, 2001, Nvidia announced record revenues and earnings 4 for 4Q01 and the year ended January 28, 2001, in a press release which stated in part: 5 For the fourth quarter of fiscal 2001, revenues increased to $218.2 million, compared to $128.5 million for the fourth quarter of fiscal 2000, an increase of 70 6 percent. Operating income for the fourth quarter of fiscal 2001 was $39.1 million, compared to $20.8 million in the fourth quarter of fiscal 2000. Net income for the fourth 7 quarter of fiscal 2001 was $31.1 million, or [$.19] per diluted share, compared to $14.6 million, or [$.10] per diluted share for the fourth quarter of fiscal 2000, an increase 8 of 113 percent. 9 * * * 10 Revenues for the year ended January 28, 2001, were $735.3 million, an increase of 96 percent compared to revenues of $374.5 million for the year ended January 11 30, 2000. Operating income for the year ended January 28, 2001, was $130.3 million compared to $54.4 million for the year ended January 30, 2000. Net income for the 12 year ended January 28, 2001 was $99.9 million, an increase of 162 percent compared to net income of $38.1 million for the year ended January 30, 2000. Diluted 13 net income per share for the year ended January 28, 2001 was [$.63], compared to a diluted net income per share of [$.27], for the year ended January 30, 2000. 14 "2000 was characterized by our terrific growth ... as well as [laid] the 15 foundation for strong growth in 2001 and beyond," stated Jen-Hsun Huang, president and CEO of NVIDIA. 16 153. On February 14, 2001, following the issuance of the press release, Nvidia held a 17 conference call. During the conference call, defendants Huang and Hoberg repeated the financial results 18 reported in the press release. The financial results reported in the February 14, 2001 press release and 19 conference call were repeated to the market in analysts' reports and in the Company's amended Report 20 on Form 10-K filed on May 25, 2001. 21 154. Reasons Why and Defendants' Knowledge that 4Q01 and FY01 Financial Results Were 22 Materially False and Misleading When Made: The financial results reported in the press release, conference 23 call, analysts' reports and the Company's Report on Form 10-K were materially false and misleading 24 because Nvidia inappropriately managed its reported revenues by (a) monitoring and stopping shipments 25 prematurely to stay in line with analysts' expectations; (b) improperly using unsubstantiated "cookie-jar" 26 reserves to manipulate reported net income, gross margin and EPS; (c) manipulating deferred revenues, 27 returns reserves, inventory reserves, accruals for customer programs and general bonus accruals; and 28

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1 (d) establishing a general, unsubstantiated accrual for accounts payable. Nvidia has admitted its 4Q01 and 2 FY01 financial results were materially false and misleading and has restated its 4Q01 and FY01 financial 3 results as follows:

4 As Reported As Restated 5 (in Thousands) (in Thousands) Gross Profits $82,369 $83,484 6 Operating Income $39,057 $40,170 7 Net Income $31,060 $31,817 8 Diluted EPS $0.19 $0.20 9 As Reported As Restated 10 (in Thousands) (in Thousands) 11 Gross Profits $275,166 $272,879 12 Operating Income $130,291 $128,135 Net Income $99,937 $98,469 13 Diluted EPS $0.63 $0.62 14 155. As set forth in ¶¶116-120, Nvidia's restatement of its financial results is an admission that 15 the financial statements originally issued were false and that the financial results were not reliable in violation 16 17 of FASCON No. 2. By managing earnings, Nvidia's reported 4Q01 earnings were understated. 18 Understatements, similar to overstatements, are improper inasmuch as they raise questions about the reliability and integrity of the information. See FASCON 2, ¶¶96-97. Nvidia also violated SFAS 5, ¶¶8, 19 20 14, by maintaining general unspecified reserves, and SEC Regulation S-X, 17 C.F.R. §210.4-01(a)(1), 21 which requires financial statements filed with the SEC to comply with GAAP. 156. Additionally, for the reasons set forth in ¶136, each of the Individual Defendants knew or 22 23 was deliberately reckless in not knowing that Nvidia's 4Q01 and FY01 financial results were false and 24 misleading. 157. False Statements: On May 22, 2001, Nvidia announced revenues and earnings for 1Q02 25 26 ended April 29, 2001, in a press release which stated in part: For the first quarter of fiscal 2002, revenues increased to $240.9 million, 27 compared to $148.5 million for the first quarter of fiscal 2001, an increase of 62 percent. Pro forma operating income for the first quarter of fiscal 2002 was $41.7 million, 28

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1 compared to pro forma operating income of $25.6 million in the first quarter of fiscal 2001. Pro forma net income, which excludes the effects of acquisition related charges 2 and amortization of goodwill and purchased intangible assets, for the first quarter of fiscal 2002 was $33.0 million, or [$.20] per diluted share, compared to pro forma net income 3 of $18.3 million, or [$.12] per diluted share for the first quarter of fiscal 2001. 4 Actual net income for the first quarter of fiscal 2002 was $25.9 million or [$.16] per diluted share, compared to net income of $18.3 million, or [$.12] per diluted 5 share for the first quarter of fiscal 2001. 6 158. On May 22, 2001, following the issuance of the press release, Nvidia held a conference 7 call. During the conference call, defendants Huang and Hoberg repeated the financial results reported in 8 the press release. The financial results reported in the February 15, 2000 press release and conference 9 call were repeated to the market in analysts' reports and in the Company's Report on Form 10-Q filed on 10 June 12, 2001. 11 159. Reasons Why and Defendants' Knowledge that 1Q02 Financial Results Were Materially 12 False and Misleading When Made: The financial results reported in the press release, conference call, 13 analysts' reports and the Company's Report on Form 10-Q were materially false and misleading because 14 Nvidia inappropriately managed its reported revenues by (a) monitoring and stopping shipments 15 prematurely to stay in line with analysts' expectations; (b) improperly using unsubstantiated "cookie-jar" 16 reserves to manipulate reported net income, gross margin and EPS; (c) manipulating deferred revenues, 17 returns reserves, inventory reserves, accruals for customer programs and general bonus accruals; and 18 (d) establishing a general, unsubstantiated accrual for accounts payable. Nvidia has admitted its 1Q02 19 financial results were materially false and misleading and has restated its 1Q02 financial results as follows:

20 As Reported As Restated 21 (in Thousands) (in Thousands) Gross Profits $91,637 $94,220 22 Operating Income $31,438 $32,557 23 Net Income $25,867 $26,650 24 Diluted EPS $0.16 $0.16 25 160. As set forth in ¶¶116-120, Nvidia's restatement of its financial results is an admission that 26 the financial statements originally issued were false and that the financial results were not reliable in violation 27 of FASCON No. 2. By managing earnings, Nvidia's reported 1Q02 earnings were understated. 28

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1 Understatements, similar to overstatements, are improper inasmuch as they raise questions about the 2 reliability and integrity of the information. See FASCON 2, ¶¶96-97. Nvidia also violated SFAS 5, ¶¶8, 3 14, by maintaining general unspecified reserves, and SEC Regulation S-X, 17 C.F.R. §210.4-01(a)(1), 4 which requires financial statements filed with the SEC to comply with GAAP. 5 161. Additionally, for the reasons set forth in ¶136, each of the Individual Defendants knew or 6 was deliberately reckless in not knowing that Nvidia's 1Q02 financial results were false and misleading. 7 162. False Statements: On August 14, 2001, Nvidia announced record revenues and earnings 8 for 2Q02 ended July 29, 2001, in a press release which stated in part: 9 For the second quarter of fiscal 2002, revenues increased to $260.3 million, compared to $170.4 million for the second quarter of fiscal 2001, an increase of 53 10 percent. 11 * * * 12 Actual net income for the second quarter of fiscal 2002 was $33.6 million, or [$.20] per diluted share, compared to actual net income of $22.5 million, or [$.14] per 13 diluted share, for the second quarter of fiscal 2001. 14 163. On August 14, 2001, following the issuance of the press release, Nvidia held a conference 15 call. During the conference call, defendants Huang and Hoberg repeated the financial results reported in 16 the press release. The financial results reported in the August 14, 2001 press release and conference call 17 were repeated to the market in analysts' reports and in the Company's Report on Form 10-Q filed on 18 September 10, 2001. 19 164. Reasons Why and Defendants' Knowledge that 2Q02 Financial Results Were Materially 20 False and Misleading When Made: The financial results reported in the press release, conference call, 21 analysts' reports and the Company's Report on Form 10-Q were materially false and misleading because 22 Nvidia inappropriately managed its reported revenues by (a) monitoring and stopping shipments 23 prematurely to stay in line with analysts' expectations; (b) improperly using unsubstantiated "cookie-jar" 24 reserves to manipulate reported net income, gross margin and EPS; (c) manipulating deferred revenues, 25 returns reserves, inventory reserves, accruals for customer programs and general bonus accruals; and 26 (d) establishing a general, unsubstantiated accrual for accounts payable. Nvidia has admitted its 2Q02 27 financial results were materially false and misleading and has restated its 2Q02 financial results as follows: 28

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1 As Reported As Restated 2 (in Thousands) (in Thousands) Gross Profits $103,668 $102,239 3 Operating Income $45,303 $44,374 4 Net Income $33,576 $32,926 5 Diluted EPS $0.20 $0.19 6 165. As set forth in ¶¶116-120, Nvidia's restatement of its financial results is an admission that 7 the financial statements originally issued were false and that the financial results were not reliable in violation 8 of FASCON No. 2. By managing earnings, Nvidia's reported 2Q02 earnings were overstated. 9 Overstatements of earnings in financial statements are improper inasmuch as they raise questions about the 10 reliability and integrity of the information. See FASCON 2, ¶¶96-97. Nvidia also violated SFAS 5, ¶¶8, 11 14, by maintaining general unspecified reserves, and SEC Regulation S-X, 17 C.F.R. §210.4-01(a)(1), 12 which requires financial statements filed with the SEC to comply with GAAP. 13 166. Additionally, for the reasons set forth in ¶136, each of the Individual Defendants knew or 14 was deliberately reckless in not knowing that Nvidia's 2Q02 financial results were false and misleading. 15 167. False Statements: On November 8, 2001, Nvidia announced record revenues and earnings 16 for 3Q02 ended October 28, 2001, in a press a press release which stated in part: 17 For the third quarter of fiscal 2002, revenues increased to $370.2 million, 18 compared to $198.2 million for the third quarter of fiscal 2001, an increase of 87 percent. 19 * * * 20 Actual net income for the third quarter of fiscal 2002 was $44.7 million, or 21 $0.26 per diluted share, compared to actual net income of $28.1 million, or $0.17 per diluted share, for the third quarter of fiscal 2001. 22 168. On November 8, 2001, following the issuance of the press release, Nvidia held a 23 conference call. During the conference call, defendants Huang and Hoberg repeated the financial results 24 reported in the press release. On the conference call, defendant Hoberg stated that Nvidia expected 25 growth margins to remain within the Company's model of 35%-40% due to the continued gross margin 26 impact. The financial results reported in the November 8, 2001 press release and conference call were 27 28

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1 repeated to the market in analysts' reports and in the Company's Report on Form 10-Q filed on November 2 23, 2001. 3 169. Reasons Why and Defendants' Knowledge that 3Q02 Financial Results Were Materially 4 False and Misleading When Made: The financial results reported in the press release, conference call, 5 analysts' reports and the Company's Report on Form 10-Q were materially false and misleading because 6 Nvidia inappropriately managed its reported revenues by (a) monitoring and stopping shipments 7 prematurely to stay in line with analysts' expectations; (b) improperly using unsubstantiated "cookie-jar" 8 reserves to manipulate reported net income, gross margin and EPS; (c) manipulating deferred revenues, 9 returns reserves, inventory reserves, accruals for customer programs and general bonus accruals; and 10 (d) establishing a general, unsubstantiated accrual for accounts payable. Nvidia has admitted its 3Q02 11 financial results were materially false and misleading and has restated its 3Q02 financial results as follows:

12 As Reported As Restated 13 (in Thousands) (in Thousands) Gross Profits $138,543 $133,468 14 Operating Income $62,120 $57,340 15 Net Income $44,661 $41,315 16 Diluted EPS $0.26 $0.24 17 170. As set forth in ¶¶116-120, Nvidia's restatement of its financial results is an admission that 18 the financial statements originally issued were false and that the financial results were not reliable in violation 19 of FASCON No. 2. By managing earnings, Nvidia's reported 3Q02 quarterly earnings were overstated. 20 Overstatements of earnings in financial statements are improper inasmuch as they raise questions about the 21 reliability and integrity of the information. See FASCON 2, ¶¶96-97. Nvidia also violated SFAS 5, ¶¶8, 22 14, by maintaining general unspecified reserves, and SEC Regulation S-X, 17 C.F.R. §210.4-01(a)(1), 23 which requires financial statements filed with the SEC to comply with GAAP. 24 171. Additionally, for the reasons set forth in ¶136, each of the Individual Defendants knew or 25 was deliberately reckless in not knowing that Nvidia's 3Q02 financial results were false and misleading. 26 27 28

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1 172. False Statements: On February 14, 2002, Nvidia issued a press release entitled "NVIDIA 2 Reports Record Revenues and Earnings for Fourth Quarter and Fiscal Year 2002." The press release 3 stated in part: 4 For the fourth quarter of fiscal 2002, revenues increased to $499.9 million, compared to $218.2 million for the fourth quarter of fiscal 2001, an increase of 129 5 percent. 6 * * * 7 Actual net income for the fourth quarter of fiscal 2002 was $73.0 million, or $0.41 per diluted share, compared to actual net income of $31.1 million, or $0.19 per 8 diluted share, for the fourth quarter of fiscal 2001. 9 Revenues for the year ended January 27, 2002 were $1.37 billion, an increase of 87 percent compared to revenues of $735.3 million for the year ended 10 January 28, 2001. 11 * * * 12 Actual net income for the year ended January 27, 2002 was $177.1 million, or $1.04 per diluted share, compared to actual net income of $99.9 million, or $0.63 per 13 diluted share, for the year ended January 28, 2001. 14 173. On February 14, 2002, following the issuance of the press release, Nvidia held a 15 conference call. During the conference call, defendants Huang and Hoberg repeated the financial results 16 reported in the press release. The financial results reported in the February 14, 2002 press release and 17 conference call were repeated to the market in analysts' reports and in the Company's Report on Form 18 10-K filed on May 14, 2002. 19 174. Reasons Why and Defendants' Knowledge that FY02 Financial Results Were Materially 20 False and Misleading When Made: The financial results reported in the press release, conference call, 21 analysts' reports and the Company's Report on Form 10-K were materially false and misleading because 22 Nvidia inappropriately managed its reported revenues by (a) monitoring and stopping shipments 23 prematurely to stay in line with analysts' expectations; (b) improperly using unsubstantiated "cookie-jar" 24 reserves to manipulate reported net income, gross margin and EPS; (c) manipulating deferred revenues, 25 returns reserves, inventory reserves, accruals for customer programs and general bonus accruals; and 26 (d) establishing a general, unsubstantiated accrual for accounts payable. As detailed in ¶¶159-173, Nvidia 27 has admitted that its FY02 financial results were materially false and misleading and has restated those 28 financial results.

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1 175. Additionally, for the reasons set forth in ¶136, each of the Individual Defendants knew or 2 was deliberately reckless in not knowing that Nvidia's 4Q02 and FY02 financial results were false and 3 misleading. 4 176. False Statements: On March 28, 2002, Nvidia, through its Vice President of Investor 5 Relations and Communications, Hara, and its Director of Public Relations, Perez, made the following false 6 statements (in bold) on behalf of Nvidia. A Bloomberg News article, entitled, "Nvidia Hasn't Changed 7 Forecasts, Disputes News Report," stated in part: 8 Nvidia Corp., a maker of chips for computers and Microsoft Corp.'s Xbox video- game console, said it hasn't changed its sales forecast, denying a Taiwan newspaper 9 report saying its sales will drop. 10 The company's stock fell as much as 8 percent to $41.87 after a Salomon Smith Barney analyst report said the Commercial Times reported that Nvidia's second-quarter 11 sales will drop, citing an interview [with] Ching-Min Huang, an Nvidia marketing director. 12 Nvidia expects sales to rise as much as 8 percent each quarter this fiscal year, which ends in January, said spokesman Mike Hara. The Santa Clara, California- 13 based company expects sales to rise as much as 80 percent this year, he said. The company hasn't changed either forecast since a February conference call. 14 "The story is false," Hara said. "The article got picked up by the analyst from 15 Salomon and it just snowballed from there. We would never ever change guidance in an interview with an [sic] Taiwanese newspaper." Hara said Huang isn't listed in the 16 company's employment records. 17 Nvidia's Taiwan representative office said Kheng Bin, whose Chinese name can be transliterated as Ching-Min Huang in Mandarin or Kheng Bin in Hokkien, a Chinese 18 dialect, is in fact the company's marketing director for the Asia Pacific. 19 After Ng's identity was confirmed, Nvidia spokesman Derek Perez, confirmed in an e-mailed statement the comments were false. 20 "It is hard for a person in that region to have visibility to the overall well- 21 being of the company as to even make a statement like that," Perez said. Nvidia's Taipei office said Singapore-based Ng wasn't available ... because of the Easter holiday. 22 Andrew Lu, the Taipei-based Salomon analyst who wrote the report, said articles 23 based on interviews with Ng appeared in both the Commercial Times and rival DigiTimes. 24 "The second quarter will be a little worse than the first," Ng said, as cited by the Commercial Times. "The second quarter is the weak sales season." 25 See Ex. 16. 26 177. Reasons Why and Defendants' Knowledge that Hara and Perez's Statements Denying 27 Lowered 2Q03 Financial Results Were Materially False and Misleading When Made: Hara and Perez's 28

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1 statements on March 28, 2002, as detailed in ¶¶123-130, were materially false and misleading at the time 2 made because: 3 (a) The Asia-Pacific region alone accounted for 78.3% and 75.6% of Nvidia's total 4 revenues for FY02 and FY01, respectively. In 1Q03, the Asia-Pacific region accounted for about 65% 5 of quarterly revenues. Additionally, the Company admits that there is a concentration of customers in the 6 Asia-Pacific region. FY02 Form 10-K at 30. The announcement by the Asian region top executive, 7 Kheng Bin, based upon his access to nonpublic information, was reliable. The Individual Defendants had 8 access to this very same information. In the wake of an SEC investigation into Nvidia's accounting 9 practices, an ongoing audit into such practices and the uncertainty of the results of the audit, defendants 10 sought to deflect any further negative press against the Company. 11 (b) Kheng Bin has to date never retracted his statement. Moreover, even if the 12 Individual Defendants did not have this adverse information about 2Q03 weaker sales prior to March 28, 13 2002, certainly by May 22, 2002 they were fully aware of these facts. Yet, they chose to mislead investors 14 in guiding for 2Q03 revenues of $588-$600 million. 15 (c) Hara, as Vice President of Investor Relations and Communications, and Perez, as 16 Head of Public Relations, were both individuals who represented and spoke on behalf of the Company. 17 As such, the public looked to and relied upon these individuals for information about all aspects of the 18 Company. Additionally, Hara attended all conference calls and was present at the time the Individual 19 Defendants reported false financial results or guidance for Nvidia. 20 (d) Both Hara and Perez obtained their information from the Company, which they then 21 relayed to the public at the direction and approval of the Company and the Individual Defendants. 22 178. False Statements: On May 22, 2002, Nvidia reported record revenues and earnings for 23 1Q03 ended April 28, 2002 in a press release that stated, in part: 24 For the first quarter of fiscal 2003, revenues increased to $582.9 million, compared to $240.9 million for the first quarter of fiscal 2002, an increase of 142 25 percent. Actual net income for the first quarter of fiscal 2003 was $83.2 million, or $0.47 per diluted share, compared to actual net income of $26.7 million, or $0.16 per 26 diluted share, for the first quarter of fiscal 2002. 27 179. On May 22, 2002, following the issuance of the press release, Nvidia held a conference 28 call. During the conference call, defendant Huang repeated the financial results reported in the press

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1 release. Defendant Huang reiterated Nvidia's prospects for growth and stated this with respect to the 2 2Q03 outlook: 3 With our strong product portfolio and design win momentum, we [expect to] deliver [a] positive sequential revenue growth of one to three percent for our second quarter, 4 despite an expected sequential decline of five to seven percent in worldwide PC shipments. 5 See Ex. 17. The financial results reported in the May 22, 2002 press release and conference call were 6 repeated to the market in analysts' reports and in the Company's Amended Report on Form 10-Q filed July 7 3, 2002. 8 180. Reasons Why and Defendants' Knowledge that 1Q03 Financial Results Were Materially 9 False or Misleading When Made: The financial results reported in the press release, conference call, 10 analysts' reports and the Company's Report on Form 10-Q were materially false and misleading at the time 11 made because Nvidia failed to take a timely writeoff for obsolete inventory of chips related to the Xbox. 12 (a) As described in ¶¶87-88, even prior to the public launch of the Xbox, Nvidia was 13 aware of the potential for hacking into the security codes of the Xbox chips. 14 (b) As described in ¶89, in November 2001, shortly after the public launch on 15 November 15, 2001 of the Xbox, hackers had already begun extracting certain security features of the 16 Xbox gaming console. 17 (c) As described in ¶¶90-91, by late February/early March 2002, Andrew Huang had 18 extracted the security keys in Xbox Nvidia MCPX chips. 19 (d) As described in ¶92, in March/April 2002, Nvidia knew that it would have to 20 redesign the chip used in the Xbox as a result of this hacking. According to an Nvidia engineer, CW8, a 21 Company-wide email was sent from Perez's division in March/April 2002, stating that an MIT student had 22 successfully hacked into the Xbox's MCPX processor and extracted the security code. The email further 23 stated that the chip was being redesigned. CW8 received this email. 24 (e) As described in ¶¶93-97, based on the types of revisions required in the MCPX 25 chip as well as Nvidia's manufacturing lead times in manufacturing the new version chip released in August 26 2002, defendants knew of the security code breach sometime between February and April 2002. 27 28

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1 181. Additionally, defendants' statements regarding guidance for 2Q03 financial results were 2 materially false and misleading when made because: 3 (a) As early as March 28, 2002, Nvidia's most senior Asia-Pacific executive, Kheng 4 Bin (who was part of Company-wide senior executive management), announced that Nvidia's 2Q03 5 financial results would be lower because the second quarter is the "weak sales season." 6 (b) The Asia-Pacific region alone accounted for 78.3% and 75.6% of Nvidia's total 7 revenues for FY02 and FY01, respectively. In 1Q03, the Asia-Pacific region accounted for about 65% 8 of quarterly revenues. Additionally, the Company admits that there is a concentration of customers in the 9 Asia-Pacific region. FY02 Form 10-K at 30. The announcement by the Asian region top executive, 10 Kheng Bin, based upon his access to nonpublic information, was reliable. The Individual Defendants had 11 access to this very same information. 12 (c) Kheng Bin has, to date, never retracted his statement. Moreover, by May 22, 13 2002, defendants were fully aware of facts indicating that 2Q03 sales would be weak. Yet, they chose to 14 mislead investors in guiding for 2Q03 revenues of $588-$600 million. 15 DEFENDANTS' INSIDER SELLING 16 182. As alleged herein, defendants acted with scienter in that accounts of confidential witnesses 17 indicate that defendants had actual knowledge that the public documents and statements issued or 18 disseminated in the name of Nvidia were materially false and misleading, knew that such statements or 19 documents would be issued or disseminated to the investing public, and knowingly and substantially 20 participated in the issuance or dissemination of such statements or documents as primary violations of the 21 federal securities laws. As set forth elsewhere herein in detail, defendants, by virtue of their receipt of 22 information reflecting the true facts about Nvidia, their control over and/or receipt and/or modification of 23 Nvidia's allegedly materially misleading statements and/or their associations with the Company that made 24 them privy to confidential proprietary information concerning Nvidia, participated in the fraudulent scheme 25 alleged herein. This scheme (a) deceived the investing public regarding Nvidia's business, financial results, 26 demand, growth, operations and the intrinsic value of Nvidia securities; and (b) allowed the Individual 27 Defendants to sell 4,308,227 shares of their Nvidia securities during the Class Period while in possession 28 of materially adverse, undisclosed information, allowing them to reap illicit proceeds of over $168.6 million

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1 and profit from the artificial inflation in the price of Nvidia stock that their scheme had created. The scheme 2 also caused plaintiffs and other members of the class to purchase or otherwise acquire Nvidia securities 3 in a market in which the price of Nvidia securities was artificially inflated. 4 183. Defendants' insider sales, while not necessary to establish their scienter in this case, are 5 clearly probative of their knowledge and strengthen the already strong inference of scienter that is the result 6 of their actual knowledge of the falsity of their statements. 7 184. As Nvidia stock increased in price due to the false positive statements about Nvidia's 8 business detailed herein, Nvidia insiders, while in possession of undisclosed adverse information about 9 Nvidia's business and reported financial results, took advantage of this artificial inflation in Nvidia's stock 10 price by selling the following amounts of Nvidia stock:

11 JEN-HSUN HUANG 12 Date Shares Price Total 13 05/23/00 170,000 $28.235 $4,800,001 14 05/25/00 70,000 $28.036 $1,962,501 15 06/01/00 20,000 $29.500 $590,000 06/02/00 140,000 $31.719 $4,440,625 16 08/28/00 50,000 $38.549 $1,927,458 17 08/29/00 30,000 $38.646 $1,159,376 18 08/30/00 40,000 $39.125 $1,565,000 19 09/01/00 2,000 $40.125 $80,250 20 09/05/00 28,000 $40.183 $1,125,125 21 03/20/01 100,000 $31.755 $3,175,500 03/23/01 100,000 $32.344 $3,234,375 22 03/26/01 50,000 $34.315 $1,715,750 23 12/07/01 50,000 $60.142 $3,007,100 24 12/10/01 87,500 $59.913 $5,242,360 25 12/11/01 40,000 $62.258 $2,490,300 26 12/12/01 30,000 $63.110 $1,893,300 27 12/13/01 109,000 $63.256 $6,894,901 28 12/17/01 33,500 $66.749 $2,236,102

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1 12/18/01 40,000 $66.000 $2,640,000 2 TOTALS 1,190,000 $50,180,023 3 4 CHRISTINE HOBERG 5 Date Shares Price Total 6 05/19/00 73,748 $26.158 $1,929,063 06/09/00 10,000 $32.500 $325,000 7 06/15/00 35,748 $32.500 $1,161,810 8 06/16/00 28,000 $32.500 $910,000 9 09/07/00 73,752 $37.095 $2,735,830 10 03/19/01 118,930 $29.690 $3,531,032 11 03/27/01 8,570 $34.500 $295,665 12 03/27/01 20,000 $34.375 $687,500 08/27/01 59,466 $43.140 $2,565,363 13 08/27/01 14,286 $43.140 $616,298 14 11/13/01 59,465 $54.000 $3,211,110 15 11/13/01 14,285 $54.000 $771,390 16 12/07/01 59,465 $60.142 $3,576,344 17 TOTALS 575,715 $22,316,406 18 19 JEFFREY FISHER 20 Date Shares Price Total 03/01/00 20,000 $15.438 $308,750 21 03/01/00 20,000 $15.625 $312,500 22 03/02/00 20,000 $15.375 $307,500 23 03/14/00 64,000 $34.922 $2,235,000 24 03/17/00 20,000 $25.406 $508,125 25 03/17/00 4,000 $25.781 $103,125 26 03/17/00 6,000 $25.375 $152,250 27 03/17/00 10,000 $25.359 $253,594 03/17/00 20,000 $25.000 $500,000 28

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1 05/19/00 20,000 $25.000 $500,000 2 05/19/00 12,000 $25.000 $300,000 3 05/23/00 20,000 $28.250 $565,000 4 05/23/00 12,000 $28.250 $339,000 5 05/26/00 20,000 $25.548 $510,950 06/01/00 20,000 $29.281 $585,625 6 06/05/00 20,000 $34.000 $680,000 7 06/12/00 20,000 $30.834 $616,688 8 06/16/00 20,000 $35.938 $718,750 9 08/24/00 20,000 $36.815 $736,300 10 08/24/00 20,000 $38.190 $763,800 11 08/24/00 30,000 $36.815 $1,104,450 12 08/28/00 5,000 $39.000 $195,000 08/29/00 15,000 $39.000 $585,000 13 08/31/00 40,000 $40.000 $1,600,000 14 09/05/00 12,300 $40.125 $493,538 15 09/08/00 4,000 $37.780 $151,120 16 02/20/01 20,000 $28.749 $574,977 17 02/21/01 20,000 $27.061 $541,228 18 02/22/01 10,000 $27.499 $274,991 02/22/01 10,000 $27.499 $274,987 19 03/06/01 20,000 $24.070 $481,400 20 03/07/01 20,000 $25.890 $517,800 21 03/14/01 20,000 $27.560 $551,200 22 03/20/01 20,000 $31.220 $624,400 23 03/27/01 20,000 $35.656 $713,125 24 08/20/01 10,000 $41.500 $415,000 25 08/22/01 10,000 $42.275 $422,750 08/28/01 10,000 $44.520 $445,200 26 09/25/01 10,000 $30.635 $306,350 27 11/13/01 40,000 $53.780 $2,151,200 28

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1 11/14/01 20,000 $51.500 $1,030,000 2 11/26/01 20,000 $52.280 $1,045,600 3 11/27/01 20,000 $54.110 $1,082,200 4 11/28/01 14,606 $53.360 $779,376 5 11/28/01 5,396 $53.360 $287,931 11/28/01 7,500 $53.360 $400,200 6 11/28/01 12,498 $53.360 $666,893 7 12/03/01 20,000 $53.240 $1,064,800 8 12/05/01 20,000 $60.000 $1,200,000 9 12/19/01 40,000 $65.216 $2,608,640 10 12/26/01 40,000 $68.313 $2,732,500 11 TOTALS 954,300 $36,318,812 12 CHRIS MALACHOWSKY 13 Date Shares Price Total 14 03/16/00 20,000 $25.125 $502,500 15 03/27/00 147,960 $28.036 $4,148,166 16 06/30/00 200,000 $15.029 $3,005,750 17 09/01/00 5,000 $39.750 $198,750 18 09/05/00 45,000 $40.063 $1,802,813 19 09/15/00 150,000 $35.006 $5,250,938 20 03/22/01 240,000 $32.858 $7,885,981 03/23/01 50,000 $34.813 $1,740,625 21 03/26/01 50,000 $34.571 $1,728,563 22 03/27/01 60,000 $35.563 $2,133.750 23 08/17/01 180,000 $43.756 $7,876,080 24 09/28/01 100,000 $27.695 $2,769,500 25 06/04/02 150,000 $31.857 $4,778,550 26 06/05/02 60,000 $32.028 $1,921,650 06/06/02 40,000 $32.650 $1,306,000 27 28

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1 06/07/02 50,000 $31.432 $1,571,600 2 TOTALS 1,547,960 $48,621,214 3 4 185. Defendant Huang's sales were designed to maximize personal benefit. Based on public 5 filings, as of Nvidia's IPO in January 1999, Huang beneficially owned approximately 2.3 million shares of 6 Nvidia stock given to him as "founder's stock." There is no evidence that Huang paid anything for this 7 stock. Of the 1.9 million shares sold by Huang, he only paid for 187,500 shares. Even those shares were 8 obtained at a pittance – Huang paid an average of $6.50 to exercise options for the 187,500 shares during 9 the Class Period. This was for lower than even the Class Period low of under $11.00. 10 186. Similarly, all of the stock defendant Malachowsky sold during the Class Period was 11 founder's stock. There is no evidence that Malachowsky paid anything for this stock. Hence, all of the 12 $48.6 million in insider sales proceeds that Malachowsky received were profits. 13 187. Furthermore, defendant Fisher's reporting of his stock holdings is incomplete and therefore 14 unreliable. Fisher's Form 4 for the December 2001 reporting period filed on January 10, 2002 states that 15 Fisher has available holdings of 307,986 shares held in family and children trusts and lists zero options held 16 at the end of December 2001. While Fisher's Form 4 for November 2001 lists some options, these 17 options disappeared in Fisher's December 2001 filing. Fisher's failure to account for these options could 18 either be accounted for by his non-reported disposal or forfeiture of these options or his failure to report 19 these holdings. It is impossible to determine what happened to Fisher's options between November and 20 December of 2001 because he failed to properly report either that he sold, forfeited or continued to hold 21 these options. SEC rules and regulations require insiders to report holdings data and purchase or sales 22 transactions. Fisher's failure to report accurate data with respect to his holding is, thus, an omission. 23 188. Similarly, defendant Malachowsky 's reporting throughout the Class Period is also very 24 poor. For example, in June 2000, Malachowsky reported on Form 4 that he owned 477,000 shares in 25 a family partnership and 3,370,000 shares by a trust. On September 15, 2000 Malachowsky filed a Form 26 144 reporting a modest amount of sales during September but failed to properly report these sales and his 27 continued holdings on a Form 4 for September. In November 2000, Malachowsky filed a Form 4 claiming 28 no ownership of stock and a mere 15,000 options. Despite this, on March 22, 2001 Malachowsky filed,

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1 apparently one month late, an intent to sell 120,000 shares of stock, and filed additional Form 144s a few 2 days later. On April 10, 2001 Malachowsky filed a Form 4 reporting that he held some 3.5 million shares 3 of stock. Despite this, just four days later, Malachowsky filed a Form 5 which again reported ownership 4 of no stock. 5 189. The timing of defendants' sales is also particularly suspicious. The Individual Defendants 6 frequently bought and sold during the same periods. In particular, insiders appear to sell and buy at exactly 7 the same time, sometimes the same day as the chart above demonstrates. For example, there are numerous 8 sales by defendants Fisher and Malachowsky during March 1, 2000 through March 27, 2000, sales by 9 all Individual Defendants during May 19, 2000 and June 30, 2000, as well as between August 24, 2000 10 and September 15, 2000. Thereafter, there is no additional selling when the stock is trading at significantly 11 lower levels, until February 20, 2001 through March 27, 2001 when all Individual defendants sold. Again, 12 there is no additional selling until August 17, 2001 through September 28, 2001, then between November 13 13, 2001 through December 26, 2001. 14 190. Individual Defendants' sales of 4,308,227 shares for proceeds of over $168.6 million thus 15 provides additional evidence of scienter. 16 STATUTORY SAFE HARBOR 17 191. The statutory safe harbor provided for forward-looking statements ("FLS") does not apply 18 to the false FLS pled. None of the particular written FLS in Nvidia's allegedly false financial statements 19 or oral FLS in Nvidia's conference calls and meetings with analysts was so identified as required. 20 Defendants are liable for the false FLS pled because, at the time each FLS was made, the speaker knew 21 the FLS was false, and the FLS was authorized and/or approved by an executive officer of Nvidia who 22 knew the FLS was false. None of the historic or present-tense statements made by defendants were 23 assumptions underlying or relating to any plan, projection or statement of future economic performance, 24 as they were not stated to be such assumptions underlying or relating to any projection or statement of 25 future economic performance when made, nor were any of the projections or forecasts made by defendants 26 expressly related to or stated to be dependent on those historic or present-tense statements when made. 27 28

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1 CLASS ACTION ALLEGATIONS 2 192. Plaintiffs bring this lawsuit pursuant to Rule 23(a) and (b)(3) of the Federal Rules of Civil 3 Procedure, on behalf of themselves and on behalf of a class of persons who purchased Nvidia stock from 4 February 15, 2000 through July 30, 2002, inclusive (the "Class"). Excluded from the Class are defendants 5 herein, members of the immediate families of each of the defendants, any person, firm, trust, corporation, 6 officer, director or other individual or entity in which any defendant has a controlling interest or which is 7 related to or affiliated with any of the defendants, and the legal representatives, agents, affiliates, heirs, 8 successors-in-interest or assigns of any such excluded party. 9 193. This action is properly maintainable as a class action for the following reasons: 10 (a) The Class is so numerous that joinder of all Class members is impracticable. As 11 of July 30, 2002, Nvidia had approximately 152 million shares outstanding. Members of the Class are 12 scattered throughout the United States. 13 (b) There are questions of law and fact which are common to members of the Class 14 and which predominate over any questions affecting only individual members. The common questions 15 include, inter alia, the following: 16 (i) Whether the defendants' acts as alleged herein violated the federal securities 17 laws; 18 (ii) Whether defendants participated in and pursued the common course of 19 conduct complained of herein; 20 (iii) Whether documents, SEC filings, press releases and other statements 21 disseminated to the investing public and Nvidia's common stockholders during the Class Period 22 misrepresented material facts about the operations, financial condition and earnings of Nvidia; 23 (iv) Whether the market prices of Nvidia stock during the Class Period were 24 artificially inflated due to material misrepresentations and the failure to correct the material 25 misrepresentations complained of herein; and 26 (v) To what extent the members of the Class have sustained damages and the 27 proper measure of damages. 28

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1 (c) Plaintiffs' claims are typical of the claims of other members of the Class and 2 plaintiffs have no interests that are adverse or antagonistic to the interests of the Class. 3 (d) Plaintiffs are committed to the vigorous prosecution of this action and have retained 4 competent counsel experienced in litigation of this nature. Accordingly, plaintiffs are adequate 5 representatives of the Class and will fairly and adequately protect the interests of the Class. 6 (e) Plaintiffs anticipate that there will not be any difficulty in the management of this 7 litigation as a class action. 8 194. For the reasons stated herein, a class action is superior to other available methods for the 9 fair and efficient adjudication of this action and the claims asserted herein. Because of the size of the 10 individual Class members' claims, few, if any, Class members could afford to seek legal redress individually 11 for the wrongs complained of herein. 12 FIRST CLAIM FOR RELIEF 13 For Violation of Section 10(b) of the Exchange Act and Rule 10b-5 Promulgated Thereunder 14 (Against Nvidia, Huang and Hoberg) 15 195. Plaintiffs incorporate ¶¶1-194 by reference. 16 196. During the Class Period, defendants disseminated or approved the false statements 17 specified above, which they knew or recklessly disregarded were materially false and misleading in that they 18 contained material misrepresentations and failed to disclose material facts necessary in order to make the 19 statements made, in light of the circumstances under which they were made, not misleading. 20 197. Defendants violated §10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder 21 by the SEC in that they: 22 (a) Employed devices, schemes, and artifices to defraud; 23 (b) Made untrue statements of material fact and/or omitted to state material facts 24 necessary in order to make the statements made not misleading; and 25 (c) Engaged in acts, practices, and a course of business which operated as a fraud and 26 deceit upon the purchasers of Nvidia stock in an effort to maintain artificially high market prices for Nvidia 27 stock in violation of §10(b) of the Exchange Act and Rule 10b-5. Defendants are sued as primary 28

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1 participants in the wrongful and illegal conduct charged herein and/or as controlling persons as alleged 2 below. 3 198. In addition to the duties of full disclosure imposed on the defendants by their status as 4 controlling persons of Nvidia, as a result of their affirmative statements and reports, or participation in the 5 making of affirmative statements and reports to the investing public, defendants had a duty to promptly 6 disseminate truthful information that would be material to investors in compliance with the integrated 7 disclosure provisions of the SEC as embodied in SEC Regulation S-X, 17 C.F.R. §§210.1-01, et seq., 8 and SEC Regulation S-K, 17 C.F.R. §§229.10, et seq., and other SEC regulations, including accurate and 9 truthful information with respect to Nvidia's stock, operations, financial condition and earnings so that the 10 market price of Nvidia stock would be based on truthful, complete and accurate information. 11 199. Defendants, individually and in concert, directly and indirectly, by using the means and 12 instrumentalities of interstate commerce and/or of the mails, engaged and participated in a continuous 13 course of conduct to conceal adverse material information about the business, operations and future 14 prospects of Nvidia as specified herein. The defendants employed devices, schemes and artifices to 15 defraud, while in possession of material adverse non-public information and engaged in acts, practices, and 16 a course of conduct as alleged herein in an effort to assure investors of Nvidia's value and performance and 17 continued substantial growth, which included the making of, or the participation in the making of, untrue 18 statements of material facts and omitting to state material facts necessary in order to make the statements 19 made about Nvidia and its business operations and future prospects, in light of the circumstances under 20 which they were made, not misleading, as set forth more particularly herein, and engaged in transactions, 21 practices and a course of business which operated as a fraud and deceit upon the purchasers of Nvidia 22 stock during the Class Period. 23 200. The primary liability and controlling person liability of defendants arises from the fact that 24 during the Class Period, the defendants engaged in a scheme to manage Nvidia's revenues, earnings and 25 gross profit margins in order to ensure that they were in line with analysts' expectations. Defendants 26 engaged in this scheme to prevent the decline in the price of Nvidia stock so that defendants could use 27 Nvidia's artificially inflated stock as currency to reap over $168.6 million in insider trading proceeds. 28

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1 201. The defendants had actual knowledge of the misrepresentations and omissions of material 2 facts set forth herein. Such defendants' material misrepresentations or omissions were done knowingly and 3 for the purpose and effect of concealing Nvidia's operating condition and future business prospects from 4 the investing public and supporting the artificially inflated price of their stock, as demonstrated by said 5 defendants' overstatements and misstatements of Nvidia's business, operations and future earnings 6 prospects and/or financial statements throughout the Class Period. 7 202. As a result of the dissemination of the materially false and misleading information and failure 8 to disclose material facts by all defendants, as set forth above, the market price of Nvidia stock was 9 artificially inflated during the Class Period. In ignorance of the fact that the market price for Nvidia stock 10 was artificially inflated, and relying directly or indirectly on the false and misleading statements made by 11 defendants, or upon the integrity of the market in which the shares trade, and the truth of any 12 representations made to appropriate agencies and to the investing public, at the times at which any 13 statements were made, and/or on the absence of material adverse information that was known by 14 defendants but not disclosed in public statements by defendants during the Class Period, plaintiffs and the 15 other members of the Class acquired Nvidia stock during the Class Period at artificially high prices and 16 were damaged thereby. 17 203. At the time of said misrepresentations and omissions, plaintiffs and other members of the 18 Class were ignorant of their falsity and believed them to be true. Had plaintiffs and the other members of 19 the Class and the marketplace known of the true financial condition and business prospects of Nvidia, 20 which were not disclosed by defendants, plaintiffs and other members of the Class would not have 21 purchased Nvidia stock during the Class Period, or, if they had purchased such stock during the Class 22 Period, they would not have done so at the artificially inflated prices which they paid. 23 204. By virtue of the foregoing, defendants have violated §10(b) of the Exchange Act and Rule 24 10b-5 promulgated thereunder. 25 205. As a direct and proximate result of the wrongful conduct of the defendants, plaintiffs and 26 the other members of the Class suffered damages in connection with their purchases of Nvidia stock during 27 the Class Period. 28

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1 SECOND CLAIM FOR RELIEF 2 For Violation of Section 20(a) of the Exchange Act (Against Nvidia and the Individual Defendants) 3 206. Plaintiffs incorporate ¶¶1-205 by reference. 4 207. The Individual Defendants prepared, or were responsible for preparing, the Company's 5 press releases and SEC filings. The Individual Defendants controlled other employees of Nvidia. Nvidia 6 controlled the Individual Defendants, each of its officers and executives and all of its employees. By reason 7 of such conduct, the Individual Defendants and the Company are liable pursuant to §20(a) of the Exchange 8 Act. 9 208. The Individual Defendants acted as controlling persons of Nvidia within the meaning of 10 §20(a) of the Exchange Act as alleged herein. By virtue of their high-level positions, substantial stock 11 holdings, participation in and/or awareness of Nvidia's operations and/or intimate knowledge of its internal 12 financial condition, business practices, products and the actual progress of development and marketing 13 efforts, the Individual Defendants had the power to influence and control and did influence and control, 14 directly or indirectly, the decision-making of Nvidia, including the content and dissemination of the various 15 statements which plaintiffs contend are false and misleading. Nvidia controlled the Individual Defendants 16 and all of its employees. Each of the Individual Defendants was provided with or had unlimited access to 17 copies of Nvidia's internal reports, press releases, public filings and other statements alleged by plaintiffs 18 to be misleading prior to and/or shortly after these statements were issued and had the ability to prevent 19 the issuance of the statements or cause the statements to be corrected. 20 209. In particular, each of the Individual Defendants had direct involvement in or intimate 21 knowledge of the day-to-day operations of Nvidia and therefore is presumed to have had the power to 22 control or influence the particular transactions giving rise to the securities violations as alleged herein, and 23 exercised the same. 24 210. As set forth above, defendants violated §10(b) of the Exchange Act and Rule 10b-5 by 25 their acts and omissions as alleged in this Complaint. By virtue of their positions as controlling persons, 26 defendants are liable pursuant to §20(a) of the Exchange Act. 27 28

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1 211. As a direct and proximate result of the wrongful conduct of defendants, plaintiffs and other 2 members of the Class suffered damages in connection with their purchases of Nvidia stock during the Class 3 Period. 4 PRAYER FOR RELIEF 5 WHEREFORE, plaintiffs pray for judgment as follows: 6 A. Declaring this action to be a class action properly maintained pursuant to Rule 23 of the 7 Federal Rules of Civil Procedure; 8 B. Awarding plaintiffs and other members of the Class damages together with interest thereon; 9 C. Awarding plaintiffs and other members of the Class such equitable/injunctive and/or other 10 and further relief as may be just and proper under the circumstances; and 11 D. Awarding plaintiffs and other members of the Class costs and expenses of this litigation, 12 including reasonable attorneys' fees, accountants' fees and experts' fees and other costs and disbursements. 13 JURY DEMAND 14 Plaintiffs demand a trial by jury.

15 DATED: July 28, 2003 MILBERG WEISS BERSHAD HYNES & LERACH LLP 16 RANDI D. BANDMAN AZRA Z. MEHDI 17 SYLVIA WAHBA 18

19 / s / Randi D. Bandman 20 RANDI D. BANDMAN 100 Pine Street, Suite 2600 21 San Francisco, CA 94111 Telephone: 415/288-4545 22 415/288-4534 (fax) 23 MILBERG WEISS BERSHAD HYNES & LERACH LLP 24 WILLIAM S. LERACH 401 B Street, Suite 1700 25 San Diego, CA 92101 Telephone: 619/231-1058 26 619/231-7423 (fax) 27 28

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1 KAPLAN FOX & KILSHEIMER LLP LAURENCE D. KING 2 LINDA M. FONG 3 / s / Laurence D. King 4 LAURENCE D. KING 5 555 Montgomery Street, Suite 1501 San Francisco, CA 94111 6 Telephone: 415/772-4700 7 415/772-4707 (fax) KAPLAN FOX & KILSHEIMER LLP 8 FREDERIC S. FOX 805 Third Avenue, 22nd Floor 9 New York, NY 10022 Telephone: 212/687-1980 10 212/687-7714 (fax) 11 Co-Lead Counsel for Plaintiffs 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27

28 G:\Cases-SF\Nvidia\DRD83310.cpt

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1 DECLARATION OF SERVICE BY MAIL PURSUANT TO NORTHERN DISTRICT LOCAL RULE 23-2(c)(2) 2 3 I, the undersigned, declare: 4 1. That declarant is and was, at all times herein mentioned, a citizen of the United States and 5 a resident of the County of San Francisco, over the age of 18 years, and not a party to or interest in the 6 within action; that declarant's business address is 100 Pine Street, 26th Floor, San Francisco, California 7 94111. 8 2. That on July 28, 2003, declarant served the FIRST AMENDED CONSOLIDATED 9 CLASS ACTION COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS 10 by depositing a true copy thereof in a United States mailbox at San Francisco, California in a sealed 11 envelope with postage thereon fully prepaid and addressed to the parties listed on the attached Service List 12 and this document was forwarded to the following designated Internet site at: 13 http://securities.milberg.com 14 3. That there is a regular communication by mail between the place of mailing and the places 15 so addressed. 16 I declare under penalty of perjury that the foregoing is true and correct. Executed this 28th day 17 of July, 2003, at San Francisco, California. 18 19 / s / Monina O. Gamboa 20 Monina O. Gamboa 21 22 23 24 25 26 27 28 Case 4:02-cv-00853 Document 61-1 Filed 07/28/2003 Page 73 of 73 EXHIBIT 1 J JUL/Ul L

C

LAW OFFICE OF DENNIS L. KENNELLY FILED DENNIS L. KENNELLY, No. 064916 2 1030 Curtis Street. Suite 200 20D2 MAY 16 PM 2: 26 Menlo Park, CA 94025 3 Telephone: 650-853-1291 - i 1O RE:. Facsimile: 650-854-7839 - - ;; trc/CLERK 4 AlZ3 a r 1 Attorney for Plaintiff AMY ANDREN

RoseMaty Lee

SUPERIOR COURT FOR THE STATE OF CALIFORNI A COUNTY OF SANTA CLARA

9 1 0 CV6079o o

11 AMY ANDREN, Case No. 12 Plaintifff, COMPLAINT FOR. 11 WRONGFUL TERMINATION IN 1: V. VIOLATION OF PUBLIC POLICY; 21 BREACH OF THE COVENANT OF 14 NVIDLA CORPORATION , a corporation. GOOD FAITH AND FAIR CHRISTINE HOBERG, an individual, DEALING; 1 5 RICHARD CORDING, an individual, and 31 FRAUD AND CONCEALMENT DOES I through X, inclusive, IN THE INDUCEMENT ; 16 1 41 NEGLIGENT Defendants. MISREPRESENTATION; 17 1 51 INTENTIONAL INFLICTION OF EMOTIONAL DISTRESS ; 1 8 61 VIOLATION OF BUSINESS & PROFESSIONS CODE §17,200 19

20

21

22 Plaintiff AMY ANDREN alleges : 23 GENERAL CHARGING ALLEGATIONS 24 1 . At all times relevant herein, PlaintiffAMYYANDREN (hereinafter "Plaintiff')

25 was and is a resident of the City of Sunnyvale, County of Santa Clara, State of 2 6 California.

27 2. Defendant NVIDIA CORPORATION (hereinafter "NVIDIA") is a corporation

28 organized and existing under the laws of the State of California with its principa l COMP NT 1 WJUUJ/U1 2

1 1 place of business in the City of Santa Clara, County of Santa Clara, State o f

2 California.

3 3 . Plaintiff is informed, and on that basis alleges, that at all times relevan t

4 hereto that Defendant CHRISTINE HOBERG (hereinafter "HOBERG") was and is a !

5 I resident of the County of Santa Clara, State of Californi a

6 4 . Plaintiff is informed and believes and, on that basis, alleges that at al l

7 times relevant herein, Defendant RICHARD CORDING (hereinafter "CORDING") was

8 and is a resident of the County of Santa Clara, State of California .

9 10 5. Defendants DOE I through DOE X. inclusive, were at all times relevant

11 herein employees, agents, officers and/or members of the Board of Directors of

12 Defendant NVIDIA. Plaintiff is ignorant of the true names and capacities of the

13 Defendants sued herein as DOES I through X, inclusive, and therefore sues these

14 Defendants by such fictitious names . Plaintiff will pray leave of this Court to amend

15 this Complaint to allege the true names and capacities when ascertained .

16 6 . Plaintiff is informed and believes, and thereon alleges, that each of the

1 7 Defendants herein was, at all times relevant to this action, the agent, employee ,

18 representing partner or joint venturer of the remaining Defendants and was acting

19 within the course and scope of that relationship. Plaintiff is further informed and

20 believes, and thereon alleges, that each of the Defendants herein gave consent to ,

21 ratified and authorized the acts alleged herein to each of the remaining Defendants .

22 7. Plaintiffwas recruited to join NVIDIA as its Accounting Manager . During

23 her interview process certain significant , improper accounting practices in which

24 NVIDIA engaged were not revealed to her . These practices became apparent to

2 5 Plaintiff during her tenure at NVIDIA. Plaintiff protested these practices to no avail

2 6 to the point where she was told to cease her protests or be fired . Plaintiff became

2 7 aware of a letter targeting her for termination in retaliation for protesting the illegal

28 and improper accounting practices . Plaintiff finally, at this stage . realized she could

COMPLAINT 2 Ua/CG/LUUL 11 :U4 VAA 4U(fZU 1 0 5 iajUU4/U1 Z

1 no longer be a participant or overlook the illegal and improper accounting practices

2 in which NVIDIA engaged. Plaintiff resigned her employment under these

3 circumstances and, as such, her resignation was, in fact, a constructive termination .

4 Plaintiff has suffered both economic and non-economic damages as a result of the

5 actions of Defendants in fraudulently recruiting her and in constructively dischargin g

6 her in violation of California Public Policy .

7 FIRST CAUSE OF ACTION

8 [Wrongful Termination in Violation of Pub lic Policy Against Defendant NVIDIA I

9 9 . Plaintiff was employed as the Accounting Manger of NVIDIA from

10 January 3, 2000 through May 16, 2001 . During her tenure at NVIDIA, the Company

11 continued to utilize improper and illegal accounting practices designed to allow the

12 Company to manage its financial results to predetermined target forecasts for gross

13 margin and earnings per share. Plaintiff protested these practices all the way to

14 HOHERG, the Chief Financial Officer of NVIDIA but her protests fell on deaf vars .

15 She found out that she was targeted for termination in retaliation for her protests

16 shortly before she was forced by conscience to submit her resignation .

17 10. The Specific improper accounting practices in which NVIDIAwas engaged

18 are as follows :

19 A. Using the returns reserve policy as away of creating a "slush" fun d

20 I to use to manage gross margin in times when actual revenues were too low or actua l

2 1 expenses were too high to meet targeted gross operating margin requirements . There 22 1 was no consistent articulated returns reserve policy.

23 B . All accounting was done in a back-in fashion. Proper accounting 24 I procedures would have the compilation of revenue and expenses done first and hav e 25 these actual figures be used in the computation of gross margin . NVIDIA used a 26 targeted gross margin number and then worked backward to achieve that by creatin

27 revenue and expense calculations necessary to achieve the forecasted margin which

28 were not reflective of the actual transactions or results that occurred . Examples

COMPLAINT 3 tj UUJ/U1 z

1 would include stopping shipments before the end of a quarter to prevent revenue

2 from being too high and using a nearly-fictional returns reserve to manage expenses

3 as needed. The end result was that the quarterly results of NVIDIA reported to the

4 public and the Securities and Exchange Commission were false and misleading .

5 Based in part on the allegations contained in this Complaint, NVIDIA has restated its

6 financials for fiscal 2000, 2001 and parts of 2002 to reflect a more accurate picture

7 of its financial results as had been portrayed by its previous reports .

8 C. There was no cash reconciliation. i.e., the various bank accounts

9 I at NVIDIA were not reconciled. This was symptomatic of a system that allowed a $1 .8

10 Million double counting of a payroll expense. Plaintiff discovered this error when sh e

1 1 was finally permitted to reconcile the accounts after a system conversion . TypicaI of 1 2 the NVIDIA mentality, rather than restating expenses for the year in which the $1 .8

13 Million had been double counted, HOBERG, CORDING and NVIDIA Financial

14 Reporting Manager KELLY PEREZ (hereinafter "PEREZ") proposed to park it . In a

15 reserve account to be used as another tool in the "managing to forecast" scheme . It

16 was this event that proved to be the final straw that forced the Plaintiff to submit her

17 resignation.

18 11 . Plaintiff protested these practices . She went to HOBERG and Human 19 Resources Department representatives KATHLEEN GRAHAM and JOHN MC SORLEY

20 after he efforts to deal with CORDING and PEREZ had been unsuccessful . She went

21 to new Assistant Controller MARY DOTZ (hereinafter -DOTZ") upon her hire wh o 22 I agreed that her concerns were valid . All of these actions were of no avail. 23 12. In or about March, 2001, Plaintiff accidentally discovered a lette r

2 4 threatening to terminate her employment. She viewed this as retaliation for her

25 pattern of protest. When Plaintiff told DOTZ ; DOTZ apparently then went to the 26 memorandum's author, SUSAN HUDGINS , NVIDIA's Director of Enterprise

27 Solutions. Later that day, HUDGINS accosted Plaintiff in the NVIDIA parking lot ; 28 asked her to whom she had shown the memorandum and told her that if she showed

COMPLAINT 4 v .~ . ~ .. . ..vvL 11 . .n rnit 4vo4vouOa o LJJUUO/UI L

1 the memorandum to anyone or discussed it with anyone, Plaintiff would be

2 terminated immediately. HUDGINS stated that she was passing the message to

3 Plaintiff at the specific instructions of HOBERG, who was standing across the parking

4 lot at the time HUDGINS was delivering the message . HUDGINS repeated her threat i 5 of termination on several occasions before Plaintiffs employment terminated .

6 13 . Plaintiff resigned her employment effective May 17, 2001 . She provided

7 her notice on May 1, 2001 In which she stated that her last day worked would be May

8 16, 2001 . During the notice period, the $1 .8 Million payroll double counting issue

9 reached a head and Plaintiff nearly walked off the job immediately, rather than

10 participate in such an obvious impropriety. Only when she was told that she would

1 1 not have to involve herself in any policy discussions for the remainder of her tenure

12 did she agree to work for her entire notice period .

13 14 . Plaintiffs decision to resign was based on the items listed in paragraph

14 10 above. In addition to the items listed therein, Plaintiff was uncomfortable with the

15 manner in which the Bad Debt Reserve, the Deferred Revenue Calculations and the

16 Fixed Asset and Physical Inventory were handled .

17 15 . The totality of circumstances under which Plaintiff was forced to perform

18 her job made her feel that she was a participant in a violation of Securities and

19 Exchange Commission Rule 10-B-5 (Employment of Manipulative & Deceptive

20 Devices) and the Securities laws of the State of California . As such, Plaintiff resigned

21 I rather than continue participating in what she had come to believe were illegal an d 22 improper accounting practices . As such, Plaintiffs resignation was, in fact, a 23 constructive termination in violation of Public Policy . 24 16. Defendant NVIDIA's actions in constructively terminating Plaintiff s 2 5 I employment have caused Plaintiff to suffer economic damage in the form of lost

26 ' wages, benefits and unvested stock options and such damages are continuing . In 27 1 addition, the actions of NVIDIA have caused the Plaintiff to suffer emotional distres s 28 marked by the loss of professional pride and personal dignity ; all to Plaintiffs loss.

COMPLAINT 5 U .fLhf tJUC 11 .U,) MA 4U5ZV5U49 5 [A007/01 2

1 17. NVIDIA's actions were taken fraudulently, maliciously, oppressively an d

2 in a willful manner as stated above . The acts taken, including the threatening of

3 Plaintiffs employment and the refusal to address her concerns regarding th e

4 propriety of NVIDIA's accounting practices, were both taken and ratified by corporat e

5 I officers, including HOBERG . NVIDIA's Chief Financial Officer . As such, :Plaintiff is

6 I entitled to punitive damages in light of NVIDIA s financial condition- 7 SECOND CAUSE OF ACTION 9 [Breach of The Covenant of Good Faith and Fair Dealing Against NVIDIA] 9 18. Plaintiff hereby reallegeges and incorporates by reference herein as i f 10 fully set forth Paragraphs 1 through 17 of this Complaint .

11 19. A Covenant of Good Faith and Fair Dealing existed incident to the

12 Employment Contract between the Plaintiff and NVIDIA whereby both parties were

13 obligated to treat the other party fairly and to do nothing that would deprive the other

14 party of the benefits of the bargain that had been struck between them- In wrongti a Hy

1s withholding material data before the Plaintiff was hired ; in forcing Plaintiff to

16 participate in illegal and improper accounting practices : in threatening to fire Plaintiff

17 for protesting these practices on the pretext that she was not doing her job and in

18 forcing Plaintiff to resign and in so doing leaving a considerable number of valuable

19 stock options unvested, Defendants breached that Covenant . 20 20. Defendant has suffered economic damages as aforesaid as a result o f 21 that breach and such damages are continuing- Plaintiff will prove the exact amount 22 of those damages at the time of trial

23 THIRD CAUSE OF ACTION

24 [Fraud In The Inducement Against Defendants NVIDTA, HOBERG and CORDING] 25 21 . Plaintiff hereby reallegeges and incorporates by reference herein as i f 26 fully set forth Paragraphs 1 through 20 of this Complaint . 27 22_ Prior to accepting employment with NVIDIA, Plaintiff interviewed with a

28 I number of NVIDIA finance executives, including HOBERG as Chief Financial Officer

COMPLAINT 6 , . ~~ . LUUL It . Ua rAA 4U0ZU-1U SIJ 5 IA008/01 2

1 and CORDING as NVIDIA s Controller. At the time of these interviews, both HOBERG

2 and CORDING were aware of the accounting practices listed in Paragraph 10 above

3 and yet did not tell the Plaintiff of their existence . In fact, Plaintiff specifically told

4 HOBERG that she was very traditional in her views and that she was uncomfortable

5 with any "creative accounting ." In response to a direct question from Plaintiff,

6 HOBERG said that NVIDIA did not engage in such practices . HOBERG's statement

7 in this regard was knowingly and willfully false .

8 23. Plaintiffrelied, to her detriment, on the representations made concerning .

9 her position at NVIDIA by HOBERG and CORDING . Plaintiff was unaware of the

10 illegal and improper practices in which she would be asked to engage at NVIDIA .

11 HOBERG and CORDING were aware of the existence of these practices and knowingly

12 and intentionally concealed their existence from the Plaintiff. Both HOBERG and

13 CORDING knew, or should have known that the requirement that Plaintiff would

14 have to participate in illegal and improper activities would have materially affected

15 her decision whether to accept the position or not. As such, they knowingly

1 6 concealed material information and in the case of HOBERG. made a knowingly false 1 7 statement in response to the creative accounting question asked by the Plaintiff_ The

1 8 purpose of the misrepresentations and concealment on the part of the Defendants

19 HOBERG and CORDING was to get the Plaintiff to accept a position that Plaintiff

20 would not have taken if she had known the true facts . At the time they first

21 interviewed, and later hired . Plaintiff, both CORDING and HOBERG knew they had

22 concealed material facts and made false representations .

23 14. At the time the misrepresentations were made to her and the material 24 facts were concealed from her, Plaintiff was not aware of the falsity of the

25 representations and the existence of the material acts that were intentionally

26 concealed from her. By relying on the representations made to her by HOBERG and

27 CORDING, Plaintiff accepted a position that she otherwise would have shunned and

28 forewent seeking other positions that would have not forced her to be a party to illegal

COMPLAINT 7 VJ/LL/LUUL iL .U, riA 4UOLtfaOOll a wJ uuaiui z

1 and improper activities .

2 25. As a direct result of the actions of NVIDIA, HOBERG and CORDING,

3 Plaintiff has suffered economic damage as aforesaid. In addition, Plaintiff has

4 suffered emotional distress marked by loss of professional pride and personal dignity

5 all to her damage .

6 26. The actions of NVIDIA, HOBERG and CORDING were taken willfully, !

7 intentionally, maliciously and with the intent to defraud the Plaintiff. HOBERG was

8 the Chief Financial Officer of NVIDIA at the time she took the actions for which .

9 damages are sought herein. Accordingly, Plaintiff is entitled to punitive damages

10 against each of them in accordance with their respective financial conditions .

11 FOURTH CAUSE OF ACTION

12 [Negligent Misrepresentation Against Defendants NYIDIA . HOBERG and

13 CORDING]

14 27. Plaintiff hereby reallegeges and incorporates by reference herein as if

15 fully set forth Paragraphs 1 through 26 of this Complaint .

16 28 . Defendants, as the prospective employer, had a duty to reveal material

17 facts concerning the position of Accounting Manager at NVIDIA that was being offered

18 to Plaintiff so that she could make an informed decision as to whether she woul d

19 accept the position or not. This duty was especially true as to facts that were known 20 only to Defendants HOBERG CORDING and others in executive management in

21 NVIDIA., such as the illegal and improper accounting practices in which NVIDIA was

22 engaged and in which the Plaintiff would be required to participate . 23 29 . In failing to disclose the existence of these facts to the Plaintiff as part 24 of the interviewing and hiring process, Defendants breached that duty to Plaintiff. 25 30. As a result of the acts of Defendants NVIDIA, HOBERG and CORDING , 26 Plaintiff has suffered economic damage as aforesaid and emotional distress marke d

27 by loss of personal pride and professional dignity and such damages have continued . 28 Plaintiff will prove the exact amount of such damages at the time of trial .

COMPLAINT' 8 UD/,LL/LUUL 11 :U 0 rAA 4U4ZW305Va l_JU1U/U1 L

FIFTH CAUSE OF ACTION

[Intentional Infliction of Emotional Distress Against Defendants NVIDIA., HOBERG and CORDING]

31 . Plaintiff hereby reallegeges and incorporates by reference herein as if I fully set forth Paragraphs 1 through 30 of this Complaint.

61 32. In taking the actions listed above , including that not limited to

7 misrepresenting the Company' s accounting po licy, concealing illegal and improper 81 1 accounting practices, threatening to fire the Plaintiff when she protested thes e

9 policies, constructively terminating Plaintiffs employment by continuing these

10 policies over her protest and forcing her to resign and have to explain that she had

11 to leave rather than participate in illegal activities when she spoke with prospectiv e

12 I employers, Defendants NVIDI.A, HOBERG and CORDING acted in a manner intended

13 11 to cause or reasonably certain to cause Plaintiff to suffer severe emotional distress.

14 33. As a result of ac tions of Defendants NVIDIA, HOBERG and CORDING,

15 Plaintiff has suffered severe emotional distress marked by the loss of self esteem,

16 professional pride and personal dignity and such damages are continuing.

17 34. The actions of NVIDIA, HOBERG and CORDING were taken willfully,

18 intentionally, maliciously and with the intent to defraud the Plaintiff . HOBERG was

19 the Chief Financial Officer of NVIDIA at the time she took the actions for which

20 damages are sought herein . Accordingly, Plaintiff is entitled to punitive damages

21 against each of them in accordance with their respective financial conditions .

22 SIXTH CAUSE OF ACTION 23 [Violation of Business and Professions Code §17,200 Against All, NVIDIA.

24 HOBERG and CORDING]

25 35. Plaintiff hereby reallegeges and incorporates by reference herein as if

26 fully set forth Paragraphs 1 through 34 of this Complaint . 27 36. Defendants' actions in maintaining accounting policies that were illegal

28 and improper were part of a pattern of conduct that affected the Plaintiff and th e

COMPrATNr 9 5/ZZ/ZUUZ 11 :Utf t•AA 4U5ZII3U6U S j Ull/ U1 4

public at large. 37. Plaintiff is informed and believes and on that basis alleges that the acts

as herein alleged were committed intentionally and with reckless disregard of the Plaintiffs rights and those of the public at large .

38. The acts of Defendants constitute unfair and unlawful competition under

common law as defined and prohibited by the provisions of §17,200 et seq. of the

7 1 California Business and Provisions Code .

S I

9 39. As a result of these actions, Defendants have profited in an amount in

10 excess of $1,000,000, the exact amount of which will be proven at trial- Defendants

11 should be required to disgorge such profits .

12 40 . Plaintiff is further informed and believes and, on that basis, alleges that

13 such unlawful and unfair competition was and is being committed intentionally,

14 willfully and maliciously and with a conscious disregard of Plaintiffs rights, thus

15 entitling the Plaintiff to punitive damages . 16 WHEREFORE, Plaintiff prays for judgment against Defendants, and each of 17 them, as follows: 18 AS TO ALL CAUSES OF ACTION 19 1 . For economic damages according to proof; 20 2. For general damages according to proof; 2 1 3. For costs of suit herein ; 22 4. For attorney's fees as authorized by statute or permitted by case law ; 23 and

24 5. For such other relief as the Court deems just and proper . 25 AS TO THE FIRST CAUSE QF ACTIO N

26 1 . For emotional distress damages of Three Million Dollars ($3 .000,000.00) 27 2. For punitive damages according to proof. 28 ///

COMPLAINT 10 ~&f cvvc ii .VU rttn 4VOCV OOt IJU1Z/U1 2

1 AS TO THE THLRD CAUSE OF ACTION

2 1 . For emotional distress damages of Three Million Dollars ($3,000,000.00)

3 2 . For punitive damages according to proof.

4 AS TO THE FOURTH CAUSE OF ACTIO N 5 1 . For emotional distress damages of T ree Million Dollars ($3,000,000 .00)

6 AS TO THE FIFTH CAUSE OF ACTION

7 1 . For emotional distress damages of Three Million Dollars ($3,000,000.00)

8 2 . For punitive damages according to proof.

9 AS TO THE SIXTH CAUSE OF ACTION

10 1 . For emotional distress damages ofTliree Mil ion Dollars ($3,000,000.00)

11 2. For punitive damages according to proof.

12

13 I Dated : May 16, 2002 14 Attorney for Plaintiff AMY

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CoM LA r 11 EXHIBIT 2 Page 1 of 8

REMARK S

BY

CHAIRMAN ARTHUR LEVITT

SECURITIES AND EXCHANGE COMMISSION

THE "NUMBERS GAME "

NYU CENTER FOR LAW AND BUSINESS ,

NEW YORK, N .Y .

SEPTEMBER 28, 199 8 Thank you very much . Dean Daly, Dean Sexton and to everyone gathered this evening, thank you for welcoming me tonight . I am honored to be here on such an auspicious evening for both NYU and Bill Allen .

The creation of the Center for Law and Business recognizes an important truth : we cannot continue to view the worlds of business and law as parallel but separate universes . And NYU could not have selected a more qualified or thoughtful individual than Bill as its first director . His leadership of the Delaware Court of Chancery -- acknowledged as the nation's most influential arbiter of corporate law -- confirmed his reputation as a great thinker who effortlessly bridges the worlds of law and business . I've heard from friends on Wall Street that it's a far less stressful experience to hear Bill lecture in front of a classroom than from his former seat on the bench .

Seven months ago, I expressed concerns about selective disclosure . Through conference calls or embargoed press releases, analysts and institutional investors often hear about material news before it is made public . In the interval, there is a great deal of unusual trading . The practice had been going on for a long time . And, while everyone was aware of it, and most were extremely uncomfortable with it, few spoke out . As the investor's advocate, the SEC did and we will continue to do so .

Well, today, I'd like to talk to you about another widespread, but too little-challenged custom : earnings management . This process has evolved over the years into wha t can best be characterized as a game among market participants . A game that, if not addressed soon, will have adverse consequences for America's financial reporting system . A game that run s counter to the very principles behind our market's strength an d http://www.sec .gov/news/speech/speecharchive/ I 998/spch220 .txt 9/3/2002 Page 2 of 8

success .

Increasingly, I have become concerned that the motivation to meet Wail Street earnings expectations may be overriding common sense business practices . Too many corporate managers, auditors, and analysts are participants in a game of nods and winks . In the zeal to satisfy consensus earnings estimates and project a smooth earnings path, wishful thinking may be winning the day over faithful representation .

As a result, I fear that we are witnessing an erosion in the quality of earnings, and therefore, the quality of financial reporting . Managing may be giving way to manipulation ; Integrity may be losing out to illusion .

Many in corporate America are just as frustrated and concerned about this trend as we, at the SEC, are . They know how difficult it is to hold the line on good practices when their competitors operate in the gray area between legitimacy and outright fraud .

A gray area where the accounting is being perverted ; where managers are cutting corners ; and, where earnings reports reflect the desires of management rather than the underlying financial performance of the company .

Tonight, I want to talk about why integrity in financial reporting is under stress and explore five of the more common accounting gimmicks we've been seeing . Finally, I will outline a framework for a financial community response to this situation .

This necessary response involves improving both our accounting and disclosure rules, as well as the oversight and function of outside auditors and board audit committees . I am also calling upon a broad spectrum of capital market participants, from corporate management to Wall Street analysts to investors, to stand together and re-energize the touchstone of our financial reporting system : transparency and comparability .

This is a financial community problem . It can't be solved by a government mandate : it demands a financial community response .

THE ROLE OF FINANCIAL REPORTING IN OUR ECONOM Y

Today, America's capital markets are the envy of the world . Our efficiency, liquidity and resiliency stand second to none . Our position, no doubt, has benefited from the opportunity and potential of the global economy . At the same time, however, this increasing interconnectedness has made us more susceptible to economic and financial weakness half a world away .

The significance of transparent, timely and reliable financial statements and its importance to investor protection has never been more apparent . The current financial situations in Asia and Russia are stark examples of this new reality . These markets are learning a painful lesson taught many times before : investors panic as a result of unexpected or unquantifiable bad news .

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If a company fails to provide meaningful disclosure to investors about where it has been, where it is and where it is going, a damaging pattern ensues . The bond between shareholders and the company is shaken ; investors grow anxious ; prices fluctuate for no discernible reasons ; and the trust that is the bedrock of our capital markets is severely tested .

THE PRESSURE TO "MAKE YOUR NUMBERS "

While the problem of earnings management is not new, it has swelled in a market that is unforgiving of companies that miss their estimates . I recently read of one major U .S . company, that failed to meet its so-called "numbers" by one penny, and lost more than six percent of its stock value in one day .

I believe that almost everyone in the financial community shares responsibility for fostering a climate in which earnings management is on the rise and the quality of financial reporting is on the decline . Corporate management isn't operating in a vacuum . In fact, the different pressures and expectations placed by, and on, various participants in the financial community appear to be almost self-perpetuating .

This is the pattern earnings management creates : companies try to meet or beat Wall Street earnings projections in order to grow market capitalization and increase the value of stoc k options . Their ability to do this depends on achieving the earnings expectations of analysts . And analysts seek constant guidance from companies to frame those expectations . Auditors, who want to retain their clients, are under pressure not to stand in the way .

ACCOUNTING HOCUS-POCUS

Our accounting principles weren't meant to be a straitjacket . Accountants are wise enough to know they cannot anticipate every business structure, or every new and innovative transaction, so they develop principles that allow for flexibility to adapt to changing circumstances . That's why the highest standards of objectivity, integrity and judgment can't be the exception . They must be the rule .

Flexibility in accounting allows it to keep pace with business innovations . Abuses such as earnings management occur when people exploit this pliancy . Trickery is employed to obscure actual financial volatility . This, in turn, masks the true consequences of management's decisions . These practices aren't limited to smaller companies struggling to gain investor interest . It's also happening in companies whose products we know and admire .

So what are these illusions? Five of the more popular ones I want to discuss today are "big bath" restructuring charges, creative acquisition accounting, "cookie jar reserves," "immaterial" misapplications of accounting principles, and the premature recognition of revenue .

"Big Bath" Charge s

Let me first deal with "Big Bath" restructuring charges .

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Companies remain competitive by regularly assessing the efficiency and profitability of their operations . Problems arise, however, when we see large charges associated with companies restructuring . These charges help companies "clean up" their balance sheet -- giving them a so-called "big bath . "

Why are companies tempted to overstate these charges? When earnings take a major hit, the theory goes Wall Street will look beyond a one-time loss and focus only on future earnings .

And if these charges are conservatively estimated with a little extra cushioning, that so-called conservative estimate is miraculously reborn as income when estimates change or future earnings fall short .

When a company decides to restructure, management and employees, investors and creditors, customers and suppliers all want to understand the expected effects . We need, of course, to ensure that financial reporting provides this information . But this should not lead to flushing all the associated costs -- and maybe a little extra -- through the financial statements .

Creative Acquisition Accounting

Let me turn now to the second gimmick .

In recent years, whole industries have been remade through consolidations, acquisitions and spin-offs . Some acquirers, particularly those using stock as an acquisition currency, have used this environment as an opportunity to engage in another form of "creative" accounting . I call it "merger magic . "

I am not talking tonight about the pooling versus purchase problem . Some companies have no choice but to use purchase accounting -- which can result in lower future earnings . But that's a result some companies are unwilling to tolerate .

So what do they do? They classify an ever-growing portion of the acquisition price as "in-process" Research and Development, so -- you guessed it -- the amount can be written off in a "one-time" charge -- removing any future earnings drag . Equally troubling is the creation of large liabilities for future operating expenses to protect future earnings -- all under the mask of an acquisition .

Miscellaneous "Cookie Jar Reserves "

A third illusion played by some companies is using unrealistic assumptions to estimate liabilities for such items as sales returns, loan losses or warranty costs . In doing so, they stash accruals in cookie jars during the good times and reach into them when needed in the bad times .

I'm reminded of one U .S . company who took a large one-time loss to earnings to reimburse franchisees for equipment . That equipment, however, which included literally the kitchen sink, had yet to be bought . And, at the same time, they announced that future earnings would grow an impressive 15 percent per year .

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"Materiality "

Let me turn now to the fourth gimmick -- the abuse of materiality -- a word that captures the attention of both attorneys and accountants . Materiality is another way we buil d flexibility into financial reporting . Using the logic of diminishing returns, some items may be so insignificant that they are not worth measuring and reporting with exact precision .

But some companies misuse the concept of materiality . They intentionally record errors within a defined percentage ceiling . They then try to excuse that fib by arguing that the effect on the bottom line is too small to matter . If that's the case, why do they work so hard to create these errors? Maybe because the effect can matter, especially if it picks up that last penny of the consensus estimate . When either management or the outside auditors are questioned about these clear violations of GAAP, they answer sheepishly ...... "It doesn't matter . It's immaterial . "

In markets where missing an earnings projection by a penny can result in a loss of millions of dollars in market capitalization, I have a hard time accepting that some of these so-called non-events simply don't matter .

Revenue Recognitio n

Lastly, companies try to boost earnings by manipulating the recognition of revenue . Think about a bottle of fine wine . You wouldn't pop the cork on that bottle before it was ready . But some companies are doing this with their revenue -- recognizing it before a sale is complete, before the product is delivered to a customer, or at a time when the customer still has options to terminate, void or delay the sale .

ACTION PLA N

Since U .S . capital market supremacy is based on the reliability and transparency of financial statements, this is a financial community problem that calls for timely financial community action .

Therefore, I am calling for immediate and coordinated action : technical rule changes by the regulators and standard setters to improve the transparency of financial statements ; enhanced oversight of the financial reporting process by those entrusted as the shareholders' guardians ; and nothing less than a fundamental cultural change on the part of corporate management as well as the whole financial community .

This action plan represents a cooperative public-private sector effort . It is essential that we work together to assure credibility and transparency . Our nine-point program calls for both regulators and the regulated to not only maintain, but increase public confidence which has made our markets the envy of the world . I believe this problem calls for immediate action that includes the following specific steps :

Improving the Accounting Framewor k

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First, I have instructed the SEC staff to require well- detailed disclosures about the impact of changes in accounting assumptions . This should include a supplement to the financial statement showing beginning and ending balances as well a s activity in between, including any adjustments . This will, I believe, enable the market to better understand the nature and effects of the restructuring liabilities and other loss accruals .

Second, we are challenging the profession, through the AICPA, to clarify the ground rules for auditing of purchased R&D . We also are requesting that they augment existing guidance on restructurings, large acquisition write-offs, and revenue recognition practices . It's time for the accounting profession to better qualify for auditors what's acceptable and what's not .

Third, I reject the notion that the concept of materiality can be used to excuse deliberate misstatements of performance . I know of one Fortune 500 company who had recorded a significant accounting error, and whose auditors told them so . But they still used a materiality ceiling of six percent earnings to justify the error . I have asked the SEC staff to focus on this problem and publish guidance that emphasizes the need to consider qualitative, not just quantitative factors of earnings . Materiality is not a bright line cutoff of three or five percent . It requires consideration of all relevant factors that could impact an investor's decision .

Fourth, SEC staff will immediately consider interpretive accounting guidance on the do's and don'ts of revenue recognition . The staff will also determine whether recently published standards for the software industry can be applied to other service companies .

Fifth, I am asking private sector standard setters to take action where current standards and guidance are inadequate . I encourage a prompt resolution of the FASB's projects, currently underway, that should bring greater clarity to the definition of a liability .

Sixth, the SEC's review and enforcement teams will reinforce these regulatory initiatives . We will formally target reviews of public companies that announce restructuring liability reserves, major write-offs or other practices that appear to manag e earnings . Likewise, our enforcement team will continue to root out and aggressively act on abuses of the financial reporting process .

Improved Outside Auditing in the Financial Reporting Proces s

Seventh, I don't think it should surprise anyone here that recent headlines of accounting failures have led some people to question the thoroughness of audits . I need not remind auditors they are the public's watchdog in the financial reportin g process . We rely on auditors to put something like the good housekeeping seal of approval on the information investors receive . The integrity of that information must take priority over a desire for cost efficiencies or competitive advantage in the audit process . High quality auditing requires well-trained ,

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well-focused and well-supervised auditors .

As I look at some of the failures today, I can't help but wonder if the staff in the trenches of the profession have the training and supervision they need to ensure that audits are being done right . We cannot permit thorough audits to be sacrificed for re-engineered approaches that are efficient, but less effective . I have just proposed that the Public Oversight Board form a group of all the major constituencies to review the way audits are performed and assess the impact of recent trends on the public interest .

Strengthening the Audit Committee Proces s

And, finally, qualified, committed, independent and tough- minded audit committees represent the most reliable guardians of the public interest . Sadly, stories abound of audit committees whose members lack expertise in the basic principles of financial reporting as well as the mandate to ask probing questions . In fact, I've heard of one audit committee that convenes only twice a year before the regular board meeting for 15 minutes and whose duties are limited to a perfunctory presentation .

Compare that situation with the audit committee which meets twelve times a year before each board meeting ; where every member has a financial background ; where there are no personal ties to the chairman or the company ; where they have their own advisers ; where they ask tough questions of management and outside auditors ; and where, ultimately, the investor interest is being served .

The SEC stands ready to take appropriate action if that interest is not protected . But, a private sector response that empowers audit committees and obviates the need for public sector dictates seems the wisest choice . I am pleased to announce that the financial community has agreed to accept this challenge .

As part eight of this comprehensive effort to address earnings management, the New York Stock Exchange and the National Association of Securities Dealers have agreed to sponsor a "blue- ribbon" panel to be headed by John Whitehead, former Deputy Secretary of State and retired senior partner of Goldman, Sachs, and Ira Millstein, a lawyer and noted corporate governance expert . Within the next 90 days, this distinguished group will develop a series of far-ranging recommendations intended to empower audit committees and function as the ultimate guardian of investor interests and corporate accountability . They are going to examine how we can get the right people to do the right things and ask the right questions .

Need for a Cultural Change

Finally, I'm challenging corporate management and Wall Street to re-examine our current environment . I believe we nee d

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to embrace nothing less than a cultural change . For corporate managers, remember, the integrity of the numbers in the financial reporting system is directly related to the long-term interests of a corporation . While the temptations are great, and the pressures strong, illusions in numbers are only that -- ephemeral, and ultimately self-destructive .

To Wall Street, I say, look beyond the latest quarter . Punish those who rely on deception, rather than the practice of openness and transparency .

CONCLUSIO N

Some may conclude that this debate is nothing more than an argument over numbers and legalistic terms . I couldn't disagree more .

Numbers in the abstract are just that -- numbers . But relying on the numbers in a financial report are livelihoods, interests and ultimately, stories : a single mother who works two jobs so she can save enough to give her kids a good education ; a father who labored at the same company for his entire adult life and now just wants to enjoy time with his grandchildren ; a young couple who dreams of starting their own business . These are the stories of American investors .

Our mandate and our obligations are clear . We must rededicate ourselves to a fundamental principle : markets exist through the grace of investors .

Today, American markets enjoy the confidence of the world . How many half-truths, and how much accounting sleight-of-hand, will it take to tarnish that faith ?

As a former businessman, I experienced all kinds of markets, dealt with a variety of trends, fads, fears, and irrational exuberances . I learned that some habits die hard . But, more than anything else, I learned that progress doesn't happen overnight and it's not sustained through short cuts or obfuscation . It's induced, rather, by asking hard questions and accepting difficult answers .

For the sake of our markets ; for the sake of a globalized economy which depends so much on the reliability of America's financial system ; for the sake of investors ; and for the sake of a larger commitment not only to each other, but to ourselves, I ask that we join together t o reinforce the values that have guided our capital markets to unparalleled supremacy . Together, through vigilance and trust, I know, we can succeed .

Thank you .

http://www.sec .gov/news/speech/speecharchlve/ I 998/spch220 .txt 9/3/2002 EXHIBIT 3 UNITED STATES DISTRICT COURT 03 APR -3 PM 4 NORTHERN DISTRICT OF ALABAMA :26 SOUTHERN DIVISION llN .D. L„ls I Ma SECURITIES AND EXCHANGE COMMISSION ,

Plaintiff, Civil Action vs. No. CV-03-J-0615-S HEALTHSOUTH CORPORATION AND RICHARD M. SCRUSHY,

Defendants .

AMENDED COMPLAINT FOR INJUNCTIVE AND OTHER RELIE F

The Securities and Exchange Commission ("Commission") files this Amende d

Complaint for Injunctive and Other Relief and alleges as follows:

INTRODUCTION

Since 1999, HealthSouth Corp. ("HRC"), one of the nation' s largest healthcare providers, has overstated its earnings by at least approximately $1 .4 billion. This massive overstatement occurred because HRC's founder, Chief Executive Officer and Chairman of the Board, Richard M . Scrushy ("Scrushy"), insisted that HRC meet or exceed earnings expectations established by Wall Street analysts . When HRC's earnings fell short of such estimates, Scrushy directed HRC's accounting personnel to "fix it" by artificially inflating the company's earnings to match Wall Street expectations . To balance HRC's books, the false increases in earnings were generally matched by false increases in HRC's assets . By the third quarter of 2002, HRC's assets were overstated by at least approximately $1 .4 billion, or approximately 20 percent of total assets . HRC's most recent reports filed with the Commission continue to reflect the fraudulent numbers . J-i 2. While in possession of material, non-public information concerning the inaccuracies of HRC's financial statements, Scrushy sold at least 13,823,000 shares of

HRC stock based upon such information .

3. Despite the fact that HRC's financial statements were materially misstated, on

August 14, 2002, Scrushy provided a management certification, under oath, certifying that HRC's 2001 Form 10-K contained "no untrue statement of a material fact ." In truth, the financial statements filed with this report overstated HRC's earnings, identified on

HRC's income statement as "Income Before Income Taxes And Minority Interests," by at least 4,700 %.

4. Defendant HRC has engaged in, and unless restrained and enjoined by this Court, will continue to engage in, acts and practices which constitute and will constitute violations of Section 17(a) of the Securities Act of 1933 ("Securities Act") [15 U .S .C. §

77q(a)], Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange

Act of 1934 ("Exchange Act") [15 U .S.C. §§ 78j(b), 78m(a), 78m(b)(2)(A) and

78m(b)(2)(B)] and Rules lOb-5, 12b-20, 13a-1 and 13a-13 thereunder [17 C.F.R. §§

240 .10b-5, 240.12b-20, 240 .13a-1, and 240 .13a-13] .

5 . Defendant Scrushy has engaged in, and unless restrained and enjoined by this

Court, will continue to engage in, acts and practices which constitute and will constitute violations of Section 17(a) of the Securities Act [15 U.S .C. § 77q(a)] and Sections 10(b) and 13(b)(5) of the Exchange Act [15 U.S.C. §§ 78j(b) and 78m(b)(5)] and Rules lOb-5 and 13b2-1 thereunder [17 C .F.R. §§ 240 .10b-5 and 240 .13b2-1], and acts and practices that aid and abet HRC's violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the

2 Exchange Act [15 U.S .C. §§ 78m(a), 78m(b)(2)(A) and 78m(b)(2)(B)] and Rules 12b-20,

13a-1 and 13a-13 thereunder [17 C .F.R. §§ 240.12b-20, 240.13a-1 and 240.13a-13] .

JURISDICTION AND VENUE

6. The Commission brings this action pursuant to Sections 20(b), 20(d) and 20(e) of the Securities Act [15 U .S.C. §§ 77t(b), 77t(d) and 77t(e)] and Sections 21(d), 21(e) and

21A of the Exchange Act [15 U .S.C. §§ 78u(d), 78u(e) and 78u-1] to enjoin the defendants from engaging in transactions, acts, practices and courses of business alleged in this complaint, and transactions, acts, practices, and courses of business of similar purport and object, for disgorgement of illegally obtained funds and prejudgment interest, other equitable relief, and for civil money penalties .

7. This Court has jurisdiction of this action pursuant to Sections 20(b), 20(d), 20(e) and 22(a) of the Securities Act [15 U.S.C. §§ 77t(b), 77t(d), 77t(e) and 77v(a)] and

Sections 21(d), 21(e) and 27 of the Exchange Act [15 U .S .C. §§ 78u(d), 78u(e) and

78aa].

8. The defendants, directly and indirectly, have made use of the mails, the means and instruments of transportation and communication in interstate commerce, and the means and instrumentalities of interstate commerce, in connection with the tr ansactions, acts, practices and courses of business alleged in this Complaint.

9. Venue lies in this Court pursuant to Section 22(a) of the Securities Act [15 U.S.C .

§ 77v(a)] and Section 27 of the Exchange Act [15 U. S.C. § 78aa] because defendant

Scrushy resides within this district and HRC's principal place of business lies within this district.

3 THE DEFENDANT S

10. HealthSouth Corporation ("HRC") was incorporated in Delaware in 1984 and is

headquartered in Birmingham, Alabama. HRC is the nation's largest provider of

outpatient surgery, diagnostic and rehabilitative healthcare services . It owns or operates

over 1,800 different facilities throughout the United States and abroad, including

inpatient and outpatient rehabilitation facilities, outpatient surgery centers, diagnostic

centers, medical centers and other healthcare facilities .

11 . The Company's securities are registered with the Commission pursuant to Section

12(b) of the Exchange Act. For the year ended December 31, 2001, HRC reported total

revenues of $4 billion and net income of $76 million. HRC's stock is listed on the New

York Stock Exchange and is actively traded under the symbol of HRC .

12 . Richard M. Scrushy, age 49, founded HRC and has served as its Chairman since

1994. He served as HRC's Chief Executive Officer ("CEO") from 1994 until August 27,

2002. On January 6, 2003, he reassumed the position of HRC's CEO . Shortly after HRC went public in 1986, Scrushy instructed HRC's senior officers and accounting personnel to materially inflate HRC's earnings to match Wall Street analysts' expectations .

THE SCHEME TO OVERSTATE EARNINGS

13 . Shortly after HRC became publicly traded in 1986, and at Scrushy's instruction, the company began to artificially inflate its earnings to match Wall Street analysts' expectations and maintain the market price for HRC's stock . Between 1999 and the second quarter of 2002, HRC intentionally overstated its earnings, identified as "Income Befor e

4 Income Taxes And Minority Interests," by at least approximately $1 .4 billion in reports

filed with the Commission .

14. The approximate amounts of overstated "Income Before Income Taxes And

Minority Interests" since 1999 in Forms 10-K and 10-Q are as follows:

Income (Loss) before 1999 2000 2001 For six month s Income Taxes and Form 10- Form 10-K Form 10-K ended June 30, Minority Interests K 2002 (in $ millions) Actual $(191) $194 $9 $157 Reported 230 559 434 340 Misstated Amount 421 365 425 183 Misstated Percentage 220% 188% 4,722% 119%

15 . HRC also overstated earnings, identified as "Income Before Income Taxes And

Minority Interests," in the quarterly reports on Form 10-Q filed with the Commission

during these years.

16. Several of these false reports on Forms 10-Q and 10-K were incorporated by

reference into numerous registration statements on Forms S-4 and S-8 that HRC has filed

with the Commission since 1999. HRC has offered and sold securities pursuant to these registration statements.

17. Pursuant to the scheme, on a quarterly basis, HRC's senior officers would present

Scrushy with an analysis of HRC's actual, but as yet unreported, earnings for the quarter as compared to Wall Street's expected earnings for the company .

18. If HRC's actual results fell short of expectations, Scrushy would tell HRC's management to "fix it" by recording false earnings on HRC's accounting records to make up the shortfall.

5 19. HRC's senior accounting personnel then convened a meeting to "fix" the earnings

shortfall . By 1997, the attendees referred to these meetings as "family meetings" and

referred themselves as "family members ."

20. At these meetings, HRC's senior accounting personnel discussed what false

accounting entries could be made and recorded to inflate reported earnings to match Wall

Street analysts' expectations. These entries primarily consisted of reducing a contra

revenue account, called "contractual adjustment," and/or decreasing expenses, (either of

which increased earnings), and correspondingly increasing assets or decreasing liabilities.

21 . The contractual adjustment account is a revenue allowance account that estimates

the difference between the gross amount billed to the patient and the amount that various

healthcare insurers will pay for a specific treatment. HRC deducted this account from gross

revenues to derive net revenues, which were disclosed in HRC's financial statements filed

with the Commission .

22. The corresponding bal ance sheet entri es were made because under generally

accepted accounting principles ("GAAP") an y increase in revenue or decrease in

expenses is generally matched with either an increase in assets or decrease in liabilities .

23 . The false bal ance sheet entries were made to, among other accounts, the Prope rty,

Plant and Equipment ("PP&E") account , cash account , inventory account, and intangible

asset (goodwill) account.

24. For example, HRC senior accounting personnel recorded false ent ries to the fixed asset books of its numerous facilities. The combined amount of the false entries equaled the total amount of fictitious increases to the income statement for that quarter .

6 25. The fictitious fixed asset line item at each facility was listed as "AP Summary ." In the financial statements included in HRC's Form 10-Q for the second quarter ended June

30, 2002, HRC's Balance Sheet overstated gross "property, plant and equipment"

("PP&E") by approximately $1 billion, or 33 per percent of the total PP&E reported . The amount of cash on the same 10-Q was overstated by more than $300 million and the

company's total assets were overstated by more than $1 .4 billion.

26. HRC's accounting personnel designed the false journal entries to the income

statement and balance sheet accounts in a manner calculated to avoid detection by the

outside auditors . For example, instead of increasing the revenue account directly, HRC

inflated earnings by decreasing the "contractual adjustment" account . Because the amounts booked to this account are estimated, there is a limited paper trail and the individual entries to this account are more difficult to verify than other revenue entries .

27. Additionally, each inflation of earnings and corresponding increase in fixed assets were recorded through several intermediary journal entries in order to make the false

inflation more difficult to trace .

28. Furthermore, HRC increased the "AP Summary" line item at various facilities by different amounts because it knew that across the board increases of equal dollar amounts would raise suspicion .

29. HRC also knew that its outside auditors only questioned additions to fixed assets at any particular facility if the additions exceeded a certain dollar threshold . Thus, when artificially increasing the "AP Summary" at a particular facility, HRC was careful not to exceed the threshold.

7 30. HRC also occasionally created false documents to support its fictitious accounting

entries. For example, during the audit of HRC's 2000 financial statements, the auditors

questioned an addition to an asset account at one particular HRC facility. HRC accounting

personnel, knowing that this addition was fictitious, altered an existing invoice (that

reflected an actual purchase of an asset at another facility that approximated the dollar

amount of the fictitious addition) to fraudulently indicate that the facility in question had

actually purchased that asset . This altered invoice was then given to the auditors to support

the recording of the fictitious asset in question . Also, when the auditors asked HRC for a

fixed assets ledger for various facilities, HRC accounting personnel would occasionally re-

generate the fixed asset ledger, replacing the "AP Summary" line item with the name of a

specific fixed asset that did not exist at the facility, while leaving the dollar amount of the

line item unchanged.

31 . While the scheme was ongoing, HRC's senior officers and accounting personnel

periodically discussed with Scrushy the burgeoning false disclosures in HRC's financial

statements, trying to persuade him to abandon the scheme . Scrushy insisted that the

scheme continue because he did not want HRC's stock price to suffer . Indeed, in the fall

of 1997, when HRC's accounting personnel advised Scrushy to abandon the earnings manipulation scheme, Scrushy refused, stating in substance, "not until I sell my stock ."

32. Scrushy has personally profited from the scheme to artificially inflate earnings .

Since 1991, while HRC's share price was affected by HRC's artificially inflated earnings,

Scrushy sold 13,823,000 shares of HRC common stock for proceeds in excess of $170 million.

8 33. Moreover, according to HRC's 2001 Form 10-K, Scrushy received at least $6 .5

million from HRC during 2001 in "Bonus/Annual Incentive Awards ." This bonus payment

was based on HRC's artificially inflated earnings .

34. Further, according to HRC's 2001 Form 10-K, from 1999 through 2001, HRC paid

Scrushy $9 .2 million in salary. Approximately $5 .3 million of this salary was based on

HRC's achievement of certain budget targets . HRC attained these budget targets through

its scheme to artificially inflate earnings .

35. In August 2002, after certain senior HRC officers convinced Scrushy to take steps

to lower Wall Street expectations, Scrushy authorized a scheme to blame a May 2002

Medicare billing guidance, referred to as Transmittal 1753, for reduced future earnings .

Transmittal 1753 required certain healthcare providers to bill Medicare at the lower group

therapy rate when treating multiple patients in a single time period, rather than at the

more lucrative individual rate .

36. On August 27, 2002, HRC issued a press release stating that it expected

Transmittal 1753 to reduce its annual earnings by approximately $175 million .

37. This $175 million projection was false and was primarily intended to lower Wall

Street expectations for HRC's earnings . HRC's internal accounting personnel estimated

that Transmittal 1753 would reduce HRC's expected earnings by only $20-30 million

dollars per year on an ongoing basis. Scrushy intended that, by lowering Wall Street

expectations, this press release would reduce the need to artificially inflate earnings in the

future.

38. In mid-2002, certain HRC senior officers and Scrushy discussed the impact of the scheme to inflate earnings because they were concerned about the consequences of th e

9 August 14, 2002 financial statement certification required under Commission Order No. 4-

460, Order Requiring the Filing of Sworn Statements Pursuant to Section 21(a)(1) of the

Securities Exchange Act of 1934 (June 27, 2002) . ("Order 4-460") . Scrushy agreed that,

going forward, he would not insist that earnings be inflated to meet Wall Street analysts'

expectations.

39. Scrushy knew or was reckless in not knowing that HRC's financial statements

materially overstated its operating results . Nevertheless, on August 14, 2002, he and

HRC's Chief Financial Officer certified under oath that HRC's 2001 Form 10-K containe d

no "untrue statement of material fact ." In truth, the financial statements filed with this

report overstated HRC's earnings, identified as "Income Before Income Taxes And

Minority Interests" on HRC's income statement, by at least 4,700 % .

INSIDER TRADING BY SCRUSHY

40. While in possession of material, non-public information, to wit : the scheme to

artificially inflate NRC's earnings described above, Scrushy sold at least 13,823,000 shares

of HRC common stock for proceeds in excess of $170 million, based upon his knowledge

of HRC's actual financial results and the impact that disclosure of those results would have

on the price of HRC's shares .

CLAIMS FOR RELIEF

COUNT I-FRAUD

Violations of Section 17(a) of the Securities Act 115 U S C & 77g(a)l

41 . Paragraphs 1-40 are hereby realleged and are incorporated herein by reference .

42 . Defendants HRC and Scrushy, from at least 1999 through the second quarter of

2002, in connection with the offer or sale of securities, by use of the means an d

10 instruments of transportation and communication in interstate commerce or by use of the mails,

(a) directly and indirectly employed devices, schemes and artifices to defraud purchasers of such securities;

(b) directly and indirectly obtained money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, not misleading ; and

(c) engaged in transactions, practices and a course of business which would hav e operated as a fraud or deceit upon the purchasers of such securities, all as more particularly described in the paragraphs above .

43 . Defendants HRC and Scrushy knowingly, intentionally and/or recklessly engaged in the aforementioned devices, schemes and artifices to defraud . In engaging in such devices, schemes and artifices to defraud, HRC and Scrushy acted with scienter, that is, wit h an intent to deceive, manipulate or de fraud or with a severe reckless disregard for the t ruth.

44. By reason of the foregoing, Defendants HRC and Scrushy, directly and indirectly, have violated , are violating and, unless restrained and enjoined , will continue to violate

§17(a) of the Securities Act [15 U .S .C. § 77q(a)] .

COUNT II-FRAUD

Violations of Section 10(b) of the Exchange Act 115. U.S.C. § 78i(b)1 and Rule 10b-5 thereunder [17 C.F.R. 4 240.10b-51

45. Paragraphs 1-40 are hereby realleged and are incorporated herein by reference .

46 . Defendants HRC and Scrushy, from at least 1999 through the second quarter 2002, in connection with the purchase or sale of securities described herein, by the use of th e

11 means and instrumentalities of interstate commerce and by use of the mails, directly and

indirectly:

a) employed devices, schemes, and artifices to defraud;

b) made untrue statements of material facts and omitted to state material facts

necessary in order to make the statements made, in light of the circumstances under

which they were made, not misleading ; and

c) engaged in acts, practices, and courses of business which would and did operate

as a fraud and deceit upon the purchasers of such securities, all as more particularly

described in the paragraphs above.

47. HRC and Scrushy knowingly, intentionally, and/or recklessly engaged in the

aforementioned devices, schemes and artifices to defraud, made untrue statements of

material facts and omitted to state material facts, and engaged in fraudulent acts, practices

and courses of business . In engaging in such conduct, HRC and Scrushy acted with scienter,

that is, with an intent to deceive, manipulate or defraud or with a severe reckless disregard

for the truth .

48. By reason of the foregoing, HRC and Scrushy, directly and indirectly, have violated,

are violating and, unless enjoined, will continue to violate Section 10(b) of the Exchang e

Act [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C .F.R. § 240.10b-5].

COUNT III-REPORTING PROVISION S

HRC Liability for Violating Section 13(a) of the Exchange Act [15 U S C & 78m(a)1 and Rules 12b-20 13a-1 and 13a-13 thereunder [17 C.F.R. 44 240.12-20, 240.13a-1 and 240.13a-13 1

49. Paragraphs 1-40 are hereby realleged and are incorporated herein by reference .

12 50. Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder require certain issuers to file with the Commission annual and quarterly reports containing financial statements prepared in conformity with the requirements of the Commission's rules and regulations . In addition, Rule 12b-20 under the Exchange Act requires that such reports contain, in addition to disclosures expressly required by statute and rules, such other information as is necessary to ensure that the statements made in those reports are not, under the circumstances, materially misleading .

51 . HRC violated Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-

13 thereunder by filing annual and periodic reports with the Commission from at least 1999 through the second quarter of 2002 that materially misstated revenues, expenses, assets and liabilities.

COUNT IV-AIDING AND ABETTING REPORTING PROVISIONS

Liability of Scrushy for Aidine and Abetting HRC's Violations of Section 13(a) of the Exchange Act 115 U.S.C. & 78m(a)1 and Rules 12b-20, 13a-1 an d 13a-13 thereunder [17 C.F.R. 44 240.12-20, 240.13a-1 and 13a-13 1

52. Paragraphs 1-40 are hereby realleged and are incorporated herein by reference .

53 . Scrushy, from at least 1999 through the second quarter of 2002, aided and abetted

HRC's violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder, which occurred when HRC filed annual and periodic reports that contained financial statements that were not prepared in conformity with GAAP and contained material misstatements . Through the conduct described in the above paragraphs, Scrushy knowingly or recklessly substantially assisted HRC's violations of this section and rules .

13 COUNT V- BOOKS AND RECORDS AND INTERNAL CONTROLS VIOLATIONS

HRC's Violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act [15 U.S.C. 44 78m(b)(2)(A) and 78m(b)(2)(B)1

54. Paragraphs 1-40 are hereby realleged and are incorporated herein by reference .

55. Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act require reporting companies to make and keep accounting records which accurately reflect their

transactions and the dispositions of their assets, to devise and maintain internal controls

sufficient to allow the preparation of financial statements in conformity with GAAP and

to ensure that transactions are executed in accordance with management's general or

specific authorization .

56. HRC violated Section 13(b)(2)(A) of the Exchange Act by failing to make and

keep books, records, and accounts, which, in reasonable detail, accurately and fairly

reflected the transactions and dispositions of its assets from at least 1999 through the

second quarter of 2002.

57. HRC violated Section 13(b)(2)(B) of the Exchange Act by failing to devise and

maintain a system of internal accounting controls sufficient to provide reasonable

assurances that : (a) transactions were executed in accordance with management's general

or specific authorization ; (b) transactions were recorded as necessary (i) to permit

preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (ii) to maintain

accountability of assets; (c) access to assets was permitted only in accordance with management's general or specific authorization ; and (d) the recorded accountability for assets was compared with the existing assets at reasonable intervals and appropriat e

14 action is taken with respect to any differences from at least 1999 through the second

quarter of 2002 .

COUNT VI- AIDING AND BETTING BOOKS AND RECORDS AND INTERNAL CONTROLS VIOLATION S

Liability of Scrushy for Aiding and Abetting HRC's Violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchanee Act 115 U.S.C. && 78m(b)(2)(A) and 78m(b)(2)(B)1

58. Paragraphs 1-40 are hereby realleged and are incorporated herein by reference .

59. Scrushy, from at least 1999 through the second quarter of 2002, aided and abetted

HRC's violations of 13(b)(2)(A) of the Exchange Act, which occurred when HRC failed

to make and keep books, records, and accounts, which, in reasonable detail, accurately

and fairly reflected the transactions and dispositions of HRC's assets . Through the

conduct described in the above paragraphs, Scrushy knowingly or recklessly substantially

assisted HRC's violations of these sections.

60. Scrushy, from at least 1999 through the second quarter of 2002, aided and abetted

HRC's violations of 13(b)(2)(B) of the Exchange Act, which occurred when HRC failed

to devise and maintain a system of internal accounting controls sufficient to provide

reasonable assurances that: (a) transactions were executed in accordance with

management's general or specific authorization ; (b) transactions were recorded as

necessary (i) to permit preparation of financial statements in conformity with generally

accepted accounting principles or any other criteria applicable to such statements, and (ii)

to maintain accountability of assets ; (c) access to assets was permitted only in accordance with management's general or specific authorization ; and (d) the recorded accountability for assets was compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences . Through the conduct described in the

15 above paragraphs, Scrushy knowingly or recklessly substantially assisted HRC's violations of this section .

COUNT VII- BOOKS AND RECORDS AND INTERNAL CONTROLS VIOLATIONS

Liability of Scrushy for Violating Section 13(b)(5) of the Exchange Act 115 U.S.C. 4478m(b)(5)1 and Rule 13b2-1 [17 C.F.R. & 240.13b2-11 thereunder

61 . Paragraphs 1-40 are hereby realleged and are incorporated herein by reference .

62 . Section 13(b)(5) of the Exchange Act prohibits any person from knowingly

circumventing or knowingly failing to implement a system of internal accounting

controls or knowingly falsifying any book, record, or account required by Section

13(b)(2)(A) of the Exchange Act . Rule 13b2-1 prohibits any person from directly or

indirectly falsifying or causing the falsification of any such books, records or accounts .

Through the conduct described above, Scrushy violated Section 13(b)(5) of the Exchange

Act and Rule 13b2-1 .

PRAYER FOR RELIE F

WHEREFORE, Plaintiff Commission, respectfully prays that the Court :

I.

Make findings of fact and conclusions of law in accordance with Rule 52 of the

Federal Rules of Civil Procedure .

II.

Issue a perm anent injunction enjoining defend ant HRC and its officers, agents,

servants, employees, attorneys, and all persons in active concert or participation with it who receive actual notice of the order by personal service or otherwise , and each of them: a. from violating Section 17 (a) of the Securities Act [15 U .S.C. § 77q(a)] ;

16 b. from violating Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule

IOb-5 thereunder [17 C.F.R. § 240.1Ob-5];

c. from violating Section 13(a) of the Exchange Act [15 U .S.C . § 78m(a)] and Rules

12b-20, 13a-1 and 13a-13 thereunder [17 C .F.R. §§ 240.12b-20, 240.13a-1 and 240.13a-13];

and

d. from violating Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act [15 U .S.C.

§§ 78m(b)(2)(A) and 78m(b)(2)(B)] .

III.

Issue a permanent injunction enjoining defendant Scrushy and his agents, servants,

employees, attorneys, and all persons in active concert or participation with him who receive

actual notice of the order by personal service or otherwise, and each of them :

a. from violating Section 17(a) of the Securities Act [15 U .S .C. § 77q(a)] ; b. from violating Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule

IOb-5 thereunder [17 C .F.R. § 240.1Ob-5]; c. from violating Section 13(b)(5) of the Exchange Act [15 U .S.C. 78m(b)(5)] and

Rule 13b2-1 thereunder [17 C .F.R. § 240.13b2-1J; d. from aiding and abetting violations of Section 13(a) of the Exchange Act [15 U .S.C.

§ 78m(a)] and Rules 12b-20, 13a-1 and 13a-13 thereunder [17 C .F.R. §§ 240.12b-20,

240.13a-1 and 240.13a-13] ; and f. from aiding and abetting violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the

Exchange Act [15 U.S.C. §§ 78m(b)(2)(A) and 78m(b)(2)(B)] .

IV.

17 Issue an Order requiring defendants HRC and Scrushy to disgorge any ill-gotte n gains and losses avoided as a result of the conduct alleged in the Commission' s

Complaint, plus pay prejudgment interest thereon.

18 V.

Issue an Order requiring defendants HRC and Scrushy, pursuant to Section 20(d ) of the Securities Act [15 U.S .C. 77t(d)] and Sections 21(d)(3) and 21A of the Exchange Act

[15 U.S.C. 78u(d)(3) and 78u-1], to pay civil monetary penalties.

VI.

Issue an order requiring HRC to escrow, in an interest-bearing account, all extraordinary payments (whether compensation or otherwise) to any director, officer, partner, controlling person, agent, or employee .

VII.

Issue an Order pursuant to Section 20(e) of the Securities Act [15 U.S.C. § 77t(e)] and Section 21(d)(2) of the Exchange Act [15 U.S.C.§ 78u(d)(2)] permanently prohibiting defendant Scrushy from acting as an officer or director of any issuer that has a class of securities registered with the Commission pursu ant to Section 12 of the Exchange Act [15

U.S.C. § 781] or that is required to file repo rts with the Commission pursuant to Section

15(d) ofthe Exchange Act [ 15 U.S .C.§ 78o(d)] .

VIII.

Issue an Order that retains jurisdiction over this action in order to implement an d carry out the terms of all orders and decrees that may have been entered or to entertain any suitable application or motion by the Commission for additional relief within the jurisdictio n of this Court.

19 IX.

Grant such other and further relief as may be necessary and appropriate .

RESPECTFULLY SUBMITTED,

William P . Hicks DISTRICT TRIAL COUNSEL Gs Bar No. 351649

M. Graham Loomis SENIOR TRIAL COUNSEL Ga. Bar No. 457868

AexRue SENIOR TRIAL COUNSEL Ga. Bar No. 618950

Peter J. Diskin STAFF ATTORNEY Ga. Bar No. 222705

COUNSEL FOR PLAINTIFF U. S. SECURITIES AND EXCHANGE COMMISSION 3475 Lenox Road, N.E., Suite 1000 Atlanta, Georgia 30326-1234 (404) 842-7600 (404) 842-7679 fax

20 CERTIFICATE OF SERVICE

This is to certify that I have this date served the foregoing upon counsel for th e

Defendants via fax and by mailing a true and correct copies to:

J. Mark White, Esq. William M . Bowen, Jr., Esq. White, Dunn & Booker 2025 3`d Avenue, North Birmingham, AL 35203 Fax (205) 323-8907

William N. Clark, Esq . Redden, Mills & Clark 940 Financial Center 505 Twentieth Street North Birmingham, AL 35203 Fax (205) 322-848 1

Attorneys for Richard M. Scrushy

Peter V. Unger, Esq. Fulbright & Jaworski 801 Pennsylvania Ave. Washington, DC 20004-2615 Fax (202) 662-464 3

Attorney for HealthSouth Corporation

/4 This 3 day of April, 2003 .

1224nwon" - M. Graham Loomis Esq.

20 EXHIBIT 4 Microsoft Corporation : Admin . Proc. Rel . No. 34-46017 / June 3, 200 2 Page 1 of 1 1

ttorte 1 Previous Pag e

UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSIO N

SECURITIES EXCHANGE ACT OF 1934 Release No . 46017 / June 3, 200 2

ACCOUNTING AND AUDITING ENFORCEMENT Release No . 1563 / June 3, 200 2

ADMINISTRATIVE PROCEEDING File No . 3 -107

In the Matter of : ORDER INSTITUTING PUBLIC ADMINISTRATIVE PROCEEDINGS PURSUANT TO SECTION 21C O F MICROSOFT CORPORATION, THE SECURITIES EXCHANGE ACT OF 1934, MAKING FINDINGS AND IMPOSING CEASE-AND- Respondent . DESIST ORDE R

I.

The Securities and Exchange Commission ("Commission") deems it appropriate that public administrative proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 (the "Exchange Act") to determine whether Microsoft Corporation ("Respondent") violated Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder .

II .

In anticipation of the institution of these administrative proceedings, Microsoft has submitted an Offer of Settlement ("Offer") that the Commission has determined to accept . Solely for the purposes of these proceedings, and for any other proceeding brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings set forth below, except as to jurisdiction of the Commission over it and over the subject matter of these proceedings, which Respondent admits, Respondent consents to the entry of this Order Instituting Public Administrative Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings and Imposing Cease-and- Desist Order (the "Order") . The Commission has determined that it is appropriate to accept the Offer and accordingly is issuing this Order . http ://www .sec.gov/1itigation/admin/34-46017 .htm 8/16/2002 Microsoft Corporation : Admin . Proc . Rel . No. 34-46017 / June 3, 2002 Page 2 of 11

III.

Accordingly, IT IS HEREBY ORDERED, that administrative proceedings pursuant to Section 21C of the Exchange Act be, and they hereby are, instituted .

IV .

FINDINGS

On the basis of this Order and the Offer of Settlement submitted by Respondent, the Commission finds that :

A . Respondent

Microsoft Corporation is a Washington corporation with its principal place of business in Redmond, Washington . Since its initial public offering in 1986, Microsoft's common stock has been registered with the Commission pursuant to Section 12(g) of the Exchange Act [15 U .S .C. § 781(g)] and is listed on the NASDAQ Stock Market, Inc . At all times relevant herein, Microsoft was required to make and file certain periodic reports with the Commission . Microsoft's principal lines of business consist of providing software for personal computers, office systems and the Internet .

1 Facts

1 . Summary

During Microsoft's fiscal years' ended June 30, 1995, June 30, 1996, June 30, 1997 and June 30, 1998 (the "relevant period"), Microsoft maintained undisclosed reserves, accruals, allowances and liability account s (collectively "reserves" or "reserve accounts") that (a) were not in conformity with generally accepted accounting principles ("GAAP") to a material extent, and/or (b) lacked properly documented support and substantiation, as required by the federal securities laws . Moreover, Microsoft failed to maintain internal controls that were adequate under the federal securities laws . Specifically, during the relevant period, Microsoft maintained between approximately $200 million and $900 million in unsupported and undisclosed reserves, a significant portion of which did not comply with GAAP, which resulted in material inaccuracies in filings made by Microsoft with the Commission .

2. Microsoft Recorded Reserves Without a Properly Documented or Substantiated Basi s

At the end of each fiscal quarter, certain of Microsoft's senior financial personnel, reviewed its reserves . The controllers of the operating units of Microsoft would provide these senior financial personnel with estimates for reserves for their units . These operational reserves represented contingencies faced by each individual operating unit and were described in Microsoft's internal documents as "hard contingencies supported by analysis," "transaction-based," and "systematic ." Microsoft's internal accounting policies dictated that operating-level controllers use formulas and documented analyses to estimate and calculate operating reserve s http ://www .sec.gov/1itigation/admin/34-4601 7 .htm 8/16/2002 Microsoft Corporation : Admin . Proc . Rel. No. 34-46017 / June 3 , 2002 Page 3 of 1 l

each quarter . Additionally, Microsoft's stated policy was to periodically reconcile the operational reserves to the general ledger to ensure that a documented basis existed for the journal entries underlying the operational reserve balances .

By contrast, Microsoft created and maintained certain other reserves that existed only at the corporate level . These corporate reserves were not determined from factually based formulas, analysis or statistics . They were described in Microsoft's records as "based, in part, on judgment regarding the likelihood of future business events ." They were also exempted from Microsoft's account reconciliation process for operational reserves described above, which was part of Microsoft's ordinary accounting procedures and was designed to ensure that there was a substantiated basis for the company's financial statements .

In addition, senior Microsoft financial personnel who reviewed reserve estimates from operating units frequently added additional amounts to the reserve estimates of the operating units, without the analysis or support that Microsoft required of its operating units . These corporate level additions were not determined from factually based formulas, analysis or statistics. Microsoft's records also described them as "based, in part, on judgment regarding the likelihood of future business events ." These corporate level additions were also exempted from the company's account reconciliation process.

These senior Microsoft financial personnel did not obtain sufficient information concerning Microsoft's historical or actual experience with respect to the reserves being accrued for at the corporate level, nor did they rely on the documentation that was prepared by Microsoft's operating subsidiaries or units . Instead, they relied on their subjective judgments in making adjustments to those reserves that existed at the corporate level, without any significant factual support or analysis, and similarly made additions to the operating level reserves, without any significant factual support or analysis, such that these reserves significantly exceeded the amounts that would have been supported by the information from the operational level . As a result, these reserves did not have the documented support as required by the federal securities laws and lacked sufficient substantiation under GAAP .

Following the above-described quarterly financial review, senior financial personnel used the results of the review to prepare Microsoft's publicly filed financial statements and to cause journal entries to be made to Microsoft's general ledger reflecting the corporate level adjustments to the above- described reserves .

4 . Reserves Maintained or Used Without Proper Support or Basis

a . Cyclical Accrual For Marketing Expense s

Marketing expenses represented the largest expense item on Microsoft's statement of operations . For management purposes, Microsoft established budgets for marketing expenses for each fiscal quarter and fiscal year . Management generally determined these budgets as a percentage of forecasted revenue ,

http://www .sec.gov/1itigation/admin/34-46017 .htm 8/16/2002 Microsoft Corporation: Admin. Proc. Rel . No. 34-46017 / June 3, 2002 Page 4 of 1 1

Microsoft typically recorded budgeted marketing expenses as its reported marketing expenses when preparing its quarterly reports filed with the Commission, even though it did not have a documented factual basis for believing that its marketing budget was a reasonable estimation of its marketing expenses . In order to account for the difference between the marketing expenses recorded in its books and records, and its budgeted marketing expenses, Microsoft maintained a "marketing accrual," to which these differences were recorded . Microsoft generally budgeted quarterly marketing expenses as a substantially constant percentage of revenue and the effect of this practice was to depict marketing expense as a substantially constant percentage of revenue on a quarterly basis throughout the year. During the first three quarters of a fiscal year, recorded expenses typically were less than budgeted expenses . Microsoft treated the difference between recorded expenses and budgeted expense as incurred but unbilled expenses . At the end of each of the first three fiscal quarters, Microsoft adjusted recorded marketing expense by increasing recorded expenses to the budgeted amount . The difference between recorded expenses and budget were credited to the marketing accrual . Because Microsoft had insufficient support for recording its marketing expenses as the budgeted amount, this practice did not satisfy the requirement of GAAP that marketing expenses be recorded as and when they are actually incurred .

Microsoft's marketing accrual (i .e., the account containing the difference between recorded expenses and its budgeted marketing expenses) tended to increase during the first three fiscal quarters because, during each of these quarters, the difference between recorded and budgeted marketing expenses would be added into reported expenses . At the end of each fiscal year, Microsoft reversed the marketing accrual and released it into income .2 The following chart shows the quarterly balances of the marketing accrual .

Chart On e

Mark ing Accrual ( in +.ODOs j

$160,001

;1$E

$1 Q0,ni_ ;0

The marketing accrual was not documented as required by the federa l http://www.sec.gov/litigation/admin/34-46017.htm 8/16/2002 Microsoft Corporation: Admin. Proc . Rel. No. 34-46017 / June 3, 2002 Page 5 of 1 1

securities laws and, to a significant extent, was not in conformity with GAAP. Because Microsoft did not analyze and document the use of budgeted amounts as a proxy for actual marketing expenditures, its quarterly financial statements filed with the Commission during the first three quarters of its fiscal years 1995, 1996, 1997 and 1998 did not comply with the requirements of the federal securities laws .

a . Non -Cyclical Reserves

In addition to the annual cyclical accrual for marketing expenses, Microsoft maintained six other reserve accounts that failed to comply with the federal securities laws. These reserve accounts, along with the marketing accrual discussed above, were not in conformity with GAAP to a material extent and/or lacked properly documented support and substantiation as required by the federal securities laws .

i. OEM Sales Reserve

Microsoft derives a significant amount of revenues from licensing agreements with manufacturers of personal computers . These manufacturers were referred to as original equipment manufacturers ("OEMs") . The OEMs installed Microsoft software on

new computers that they sold . Under the licensing agreements, the OEMs were required to report in arrears on a periodic basis the number of computers shipped with pre-installed software and the amount of net royalties due to Microsoft from the sales . In accounting for OEM revenue, Microsoft maintained certain accounts, including a so-called OEM GAAP accrual, which was accrued for earned but unbilled revenue, and a so-called OEM sales reserve .

The OEM GAAP accrual was estimated by OEM accounting specialists at the staff-level of Microsoft and was based upon forecasts having a substantial factual and analytical basis. By contrast, however, the OEM sales reserve was determined by the senior Microsoft financial personnel responsible for the corporate level reserve accounts . However, Microsoft had n o substantiated basis for the corporate level OEM sales reserve or any methodology by which the balance in the OEM sales reserve was calculated . Accordingly, the OEM sales reserve was not documented as required by the federal securities laws and, to a significant extent, was not in conformity with GAAP . From time to time, as shown in Table 1, Microsoft released portions of the OEM sales reserve into income .

ii . Accelerated Depreciation

Microsoft maintained a corporate reserve for accelerated depreciation . In fiscal years 1996 and 1997, Microsoft, for external reporting purposes, reduced the useful lives of its personal computers from three years to one year and the useful lives of its buildings from thirty years to fifteen years . These changes in depreciable lives were made because : (a) in the day-to- day management of the company, Microsoft treated personal computers as consumable supplies, and (b) buildings and related improvements were routinely gutted and refitted as groups moved freely about the Microsoft campus . http://www.sec.gov/litigation/admin/34-46017 .htm 8/16/2002 Microsoft Corporation: Admin. Proc . Rel. No. 34-46017 / June 3, 2002 Page 6 of 1 1

Without regard to the GAAP requirement that changes in depreciable lives of assets be accounted for prospectively rather than retrospectively,3 Microsoft accounted for the impact of the new asset lives cumulatively. in other words, Microsoft accounted for its personal computers and buildings in fiscal years 1996 and 1997 as if they had always had useful lives of one and fifteen years respectively . This resulted in these assets having net book values that were less than they would have been in the absence of the changes in useful lives . The difference in value generated by the old and new useful lives was charged to depreciation expense and credited to an account that Microsoft called "accelerated depreciation . "

Microsoft failed to disclose (a) the changes in asset lives and their effect, and (b) the use of the improper method of accounting for the accelerated depreciation reserve . The accelerated depreciation account was not in compliance with GAAP.

iii . Inventory Obsolescenc e

Statement of Financial Accounting Standards No . 5 ("SFAS 5") requires that certain conditions exist before loss contingencies representing liabilities or asset impairments may be determined and the amount of a reserve accrued . The loss must be probable as of the balance sheet date and reasonably estimable ; significantly, the loss must have occurred prior to the creation of the loss contingency and must not be in the future .4 Furthermore, SFAS 5 prohibits the accrual of reserves for general or unspecified risks .5 As discussed below, Microsoft did not comply with SFAS 5 because the company's senior financial personnel did not properly assess whether inventory losses had occurred, and made no effort to reasonably estimate the losses.

Microsoft maintained a corporate level reserve account for inventory obsolescence that supplemented the inventory obsolescence reserve accounts determined at the operating level . Microsoft maintained factually supported inventory reserve accounts at the operating level, where operations personnel evaluated and documented the need for such accounts . The corporate level inventory obsolescence reserve had no substantiated basis, as required by SFAS 5 . This corporate reserve was not associated with any specific inventory nor was it supported by any statistical or documented analysis during the fiscal years ended June 30, 1995 through June 30, 1998 . The corporate reserves, when combined with operating level reserves, caused the net book value of Microsoft's consolidated inventory to be negative at the end of the fiscal year ended June 30, 1997 . This reserve was, to a significant extent, not in compliance with GAAP, and was not documented as required by the federal securities laws .

iv . Impaired Long Term Assets

Microsoft maintained a corporate reserve account for the valuation of financial assets . According to internal documents, the reserve's purpose was to "allow for potential losses, upon disposition, of Microsoft's financial assets ." These financial assets consisted of equity investments made in various technology companies . Microsoft amortized the cost of these financial assets with monthly charges to income without any basis for th e http://www.sec.gov/1 itigation/admin/34-46017.htm 8/16/2002 Microsoft Corporation: Admin . Proc . Rel. No. 34-46017 / June 3, 2002 Page 7 of 1 1

charges. The appropriate treatment under GAAP would have been to carry the assets at cost or write down the assets to their fair value in the event that the assets had suffered other than temporary declines in fair value .6 Microsoft did not have a proper basis under GAAP for the amounts of the monthly charges in the account during its fiscal years 1995 through 1998 .

4 . Interest Rate Fluctuation s

According to internal documents, the reserve account for interest income was designed to "provide for shifts in interest rates or other economic events which may adversely impact Microsoft's return on its portfolio ." Adjustments to the interest income reserve were made at the "discretion" of senior financial personnel, and Microsoft did not have any factual analysis or statistical support for the balance in this account . This reserve was determined in a manner that did not comply with GAAP, and its balance and the adjustments thereto lacked a proper basis under GAAP . 2

vi . Manufacturing Facilities

Microsoft created a reserve in 1996 because it believed that the value of certain of its manufacturing facilities would be impaired because it was taking steps to outsource certain of its manufacturing activities and dispose of its own facilities that had been engaged in this manufacturing . Microsoft established a reserve account to provide for expenses associated with the disposition of its own plant and equipment, and associated employee- related expenses . Microsoft had no analysis or other factual basis supporting the balance in this account and, consequently, could not establish whether this account pertained to probable losses arising from an event or circumstance that had already occurred or whether it pertained to losses arising from future contingencies . This account therefore was not documented as required by the federal securities laws, and the balances in the account were not determined in a manner that was in conformity with GAAP.

c . Cumulative Balances of Non-Cyclical Reserves

The cumulative balance of the six non-cyclical reserve accounts discussed above is depicted in the chart below :

Chart Tw o

http://www .sec.gov/litigation/admin/34-46017.htm 8/16/2002 Microsoft Corporation: Admin. Proc. Rel . No. 34-46017 / June 3, 2002 Page 8 of 1 1

Hon-Cyclical Reserve Accounts (in $000s )

$7€Q,OCO=1

$40U,OCC

$300,I )CO

$1010,003

13 3 a - . . eT. n

L~!

Moreover, the amounts of quarterly adjustments to the above described six accounts, together with the amounts of the marketing expenses accrual, are depicted below :

Table 1 is attached .

The balances and adjustments displayed in Chart Two and Table 1 above did not have the documentary support required by the federal securities laws, and a material portion thereof lacked a proper basis under GAAP .

4. Microsoft' s Filings With the Commission

As a result of the foregoing, Microsoft filed with the Commission periodic reports and other filings during fiscal years 1995, 1996, 1997, and 1998 that included, directly or by incorporation, financial statements tha t misrepresented Microsoft's financial results by sometimes overstating income and on other occasions understating income .

5. _Mcrosoft's_F'ailure to_Maintan Accurate andComplete Books and Records

In connection with its corporate reserve accounts, Microsoft failed to apply its own internal controls requiring a reconciliation of accounts to the general ledger . As noted above, the corporate reserve accounts were excepted from the company-wide policy that required all accounts be reconciled to the general ledger at least once per quarter.

Microsoft's accounting policies required the reconciliation of accounts as part of an extensive process to close the company's books each quarter . Among other things, the controllers and members of the corporate controllers' group reviewed activity in each general ledger account and reconciled the account balances to the general ledger, attaching supporting documentation for all activity and account balances . The reconciliation http://www.sec.gov/litigation/admin/34-46017 .htm 8/16/2002 Microsoft Corporation: Admin. Proc. Rel . No. 34-46017 / June 3, 2002 Page 9 of 1 1

policy and process were part of a process designed to help ensure the accuracy and integrity of Microsoft's internally and externally reported financial information . However, Microsoft failed to include the corporate reserve accounts in this reconciliation process . As a result, Microsoft lacke d an important safeguard for helping ensure that the adjustments to the corporate reserve accounts and the account balances themselves were appropriate or accurately reported in conformity with GAAP .

V.

LEGAL ANALYSIS OF VIOLATIONS OF THE EXCHANGE ACT REPORTING, RECORD KEEPING~A ~ INTERNAL CONTROL! PROVISION S

Section 13(a) of the Exchange Act requires issuers of registered securities to file periodic reports with the Commission containing information prescribed by specific Commission rules . Rules 13a-1 and 13a-13 require, respectively, the filing of Forms 10-K and 10-Q . Rule 12b-20 requires, in addition to information required in periodic reports by Commission rules, such further material information as may be necessary to make the required statements not misleading . Among other things, Microsoft was required to comply with GAAP .8

Microsoft was required to file periodic reports with the Commission during its fiscal years 1995 through 1998 . These reports were required to be complete and accurate . See SEC v. Savoy In_d__u_stries, 587 F .2d 1149, 1165 (D.C . Cir. 1978) . As previously discussed, Microsoft recorded and adjusted its reserve accounts in ways not permitted under GAAP in its quarterly and annual filings. To a material extent, these reserve accounts lacked factually substantiated bases, and were therefore improper. The limited and inadequate documentation that Microsoft created with respect to these reserve accounts either did not substantiate any permitted basis for the accounts or indicated that the accounts were otherwise impermissible under GAAP . The inclusion of these reserves in Microsoft's financial statements and of the adjustments thereto in its income statements resulted in misstatements of income in certain periodic reports filed with the Commission during the relevant period, which were material . Consequently, Microsoft violated Section 13(a) and Rules 13a-1, 13a-13 and 12b-20 promulgated thereunder .

Section 13(b)(2)(A) of the Exchange Act requires issuers to "make and keep books, records, and accounts, which in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer." "A company's ' books and records' include not only general ledgers and accounting entries, but also memoranda and internal corporate reports ." In the Matter of Gibson Greetings, Inc ., Ward A . Cavanaugh, and James H . Johnsen, Admin . Proc. File No . 3-8866, Release No . 34-36357, 60 SEC Docket 1401 (Oct . 11, 1995) . Further, Section 13(b)(2)(B) of the Exchange Act requires issuers to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles . As described above, Microsoft failed to keep books and records that were in conformity with Section 13(b)(2)(A) .

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Microsoft also had deficient internal controls relating to the corporate reserve accounts . The documentation created by Microsoft either did not adequately explain the basis for any of the corporate reserves or adjustments made to those accounts, or indicated that they were impermissible . In fact, senior Microsoft financial personnel relied upon their undocumented, subjective judgment rather than factual analysis or statistics in establishing and adjusting the corporate reserve accounts . In addition, the corporate reserve accounts were excluded from the company- wide reconciliation process, which required that all balance sheet accounts be reconciled to the general ledger with appropriate documentation of activity.

Consequently, Microsoft violated Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act .

VI .

Based on the foregoing, the Securities and Exchange Commission finds that Microsoft violated Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1 and 13a-13 promulgated thereunder .

VII.

In view of the foregoing, it is appropriate to impose the sanction specified in Respondent's Offer of Settlement .

VIII .

ORDER

ACCORDINGLY, IT IS HEREBY ORDERED THAT, pursuant to Section 21C of the Exchange Act, Microsoft cease-and-desist from committing or causing any violations of, and committing or causing any future violations of, Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1, and 13a-13 promulgated thereunder .

By the Commission .

Jonathan G . Katz Secretary

1 Microsoft's fiscal year begins on July 1 and ends on June 30 .

2 As a consequence of this reversal, the marketing accrual did not affect fiscal year-end results .

3 See, APB Opinion No . 20 ; Accounting Changes, which requires changes in estimates (such as depreciable lives of fixed assets) to be accounted for prospectively. 4 Statement of Financial Accounting Standards No . 5, Paragraph 8 .

5 Id. at Paragraph 14 .

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6 Accounting Principles Board Opinion No . 18, T 6a .

Statement of Financial Accounting Standards No . 115, ¶2 ; 16, provides that individual securities classified as either available-for-sale or held-to-maturity shall be written down to fair value if the enterprise determines that declines in fair value are other than temporary .

8 17 C.F.R. § 210 . 4-01(a)(1) .

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http ://www .sec.gov/1itigation/admin/34-46017.htm 8/16/2002 EXHIBIT 5 Print Results Page 1 U 3

factiva -, Dow Jones & Reuters

NVIDIA Reports Record Revenues and Earnings for Fourth Quarter And Fiscal Year 200 2

1,650 words 14 February 2002 16 :2 5 PR Newswire English (Copyright (c) 2002, PR Newswire)

SANTA CLARA, Calif., Feb . 14 /PRNewswire-FirstCall/ -- NVIDIA(R) Corporation ( Nasdaq : NVDA) today reported record revenues and earnings for the fourth quarter of fiscal 2002 and the year ended January 27, 2002 .

For the fourth quarter of fiscal 2002, revenues increased to $499 .9 million, compared to $218 .2 million for the fourth quarter of fiscal 2001, an increase of 129 percent . Pro forma operating income, which excludes the effects of acquisition related charges and amortization of goodwill and purchased intangible assets, for the fourth quarter of fiscal 2002 was $106 .8 million, compared to pro forma operating income of $39 .1 million in the fourth quarter of fiscal 2001 . Pro forma net income, which excludes the effects of acquisition related charges and amortization of goodwill and purchased intangible assets, for the fourth quarter of fiscal 2002 was $75 .5 million, or $0 .43 per diluted share, compared to pro forma net income of $31 .1 million, or $0.19 per diluted share, for the fourth quarter of fiscal 2001 .

Actual net income for the fourth quarter of fiscal 2002 was $73 .0 million, or $0 .41 per diluted share, compared to actual net income of $31 .1 million, or $0 .19 per diluted share, for the fourth quarter of fiscal 2001 .

Revenues for the year ended January 27, 2002 were $1 .37 billion, an increase of 87 percent compared to revenues of $735 .3 million for the year ended January 28, 2001 . Pro forma operating income for the year ended January 27, 2002 was $264 .7 million compared to $130 .3 million for the year ended January 28, 2001 . Pro forma net income for the year ended January 27, 2002 was $193 .0 million, or $1 .13 per diluted share, compared to pro forma net income of $99 .9 million, or $0 .63 per diluted share, for the year ended January 28, 2001 .

Actual net income for the year ended January 27, 2002 was $177 .1 million, or $1 .04 per diluted share, compared to actual net income of $99 .9 million, or $0 .63 per diluted share, for the year ended January 28, 2001 .

The pro forma net income per share and the actual net income per share and number of shares used in the per-share calculation for all periods presented reflect the two-for-one stock split that was effective September 17, 2001 .

"2001 was a defining year for NVIDIA," stated Jen-Hsun Huang, president and CEO of NVIDIA . "Our technology leadership was exemplified by industry firsts in every market we serve, giving us excellent results in each of our businesses . This is a tribute to our employees' focus and relentless execution and the strength of the NVIDIA business model . "

NVIDIA will conduct a conference call with analysts and investors to discuss its fourth quarter and fiscal year 2002 financial results and current financial prospects today at 2 :00 p .m. Pacific Time (5 :00 p .m. Eastern Time) . To listen to the call, please visit the Investor Information section of the NVIDIA web site at http ://www.nvidia.com/ir . A live webcast (listen -only mode) of the conference call will be at the NVIDIA investor relations website ; at http ://www .streetevents .com; and at http://bestcalls .com . The webcast will be recorded and available for replay until February 21, 2002 .

About NVIDIA

NVIDIA Corporation, based in Santa Clara, CA ., is the global leader in advanced graphics and multimedia processing technology for the consumer and professional computing markets . Its 2D, 3D, video and multimedia capabilities make NVIDIA one of the premier semiconductor companies in the world . NVIDIA offers a wide range of products and services, delivering superior performance and crisp visual quality for PC-based applications such as manufacturing, science, e-business, entertainment and education . For more information, please visit the company's Web site at http ://www.nvidia .com .

Certain statements in this press release, including the statements relating to the Company's performance expectations for NVIDIA 's family of products and expectations of continued revenue growth, are forward-looking statements that are subject to risks and uncertainties that could cause results to be materially different than expectations . Such risks and uncertainties include, but are not limited to, manufacturing and other delays relating to new products, difficulties in the fabrication process and dependence of the Company on third-party manufacturers, general industry trends including cyclical trends in the PC and semiconductor industries, the impact of competitive products and pricing alternatives, market acceptance of the Company's ne w http ://global.factiva.com/en/arch/print_results.asp 7/28/2003 Print Results Page 2 of 3

products and the Company's dependence on third-party developers and publishers . Investors are advised to read the Company's Annual Report on Form 10-K and quarterly reports on Form 10-Q filed with the Securities and Exchange Commission, particularly those sections entitled "Business Risks," for a fuller discussion of these and other risks and uncertainties .

NOTE : Registered trademark NVIDIA (R) Corporation, Copyright 2002 . All company and/or product names are trademarks and/or registered trademarks o f their respective manufacturers . NVIDIA CORPORAT IO N PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOM E Excluding Acquisition Related Charges, Amortization of Goodwill and Purchased Intangible Asset s (In thousands, except per share data ) (Unaudited ) Three Mon ths Ended Twelve Months Ende d Jan . 27, Jan . 28, Jan . 27, Jan . 28 , 2002 2001 2002 200 1 Revenue $499,938 $218,219 $1,371,370 $735,26 4 Cost of revenue 315,992 135,849 853,556 460,09 8 Gross profit 183,946 82,370 517,814 275,16 6 Operating expenses : Research and development 43,875 26,446 153,267 86,43 8 Sales, general an d administrative 32,849 16,870 96,210 58,43 7 Discontinued use of property 457 -- 3,687 - - Total operating expenses 77,181 43,316 253,164 144,87 5 Operating income 106,765 39,054 264,650 130,29 1 Interest and other income, net 1,157 6,617 11,017 16,67 3 Income before income tax expense 107,922 45,671 275,667 146,96 4 Income tax expense (A) 32,376 14,615 82,700 47,02 7 Net income $75,546 $31,056 $192,967 $99,93 7 Basic net income per share (B) $0 .51 $0 .23 $1 .35 $0 .7 6 Diluted net income per share (B) $0 .43 $0 .19 $1 .13 $0 .63 Shares used in basic per shar e computation (B) 147,534 136,032 143,015 130,99 8 Shares used in diluted per shar e computation (B) 177,230 161,772 171,074 159,29 4 (A) Reflects an effective tax rate of 30% for the qua rter and yea r ende d January 27, 2002 and 32% for the quarter and year ended Janua ry 28 , 2001 . (B) Reflects a two-for-one stock split effected in Se ptember 2001 . NVIDIA CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) (Unaudited ) Three Months Ended Twelve Months Ended Jan . 27, Jan . 28, Jan . 27, Jan . 28, 2002 2001 2002 200 1 Revenue $499,938 $218,219 $1,371,370 $735,26 4 Cost of revenue 315,992 135,849 853,556 460,09 8 Gross profit 183,946 82,370 517,814 275,16 6 Operating expenses : Research and development 43,875 26,446 153,267 86,43 8 Sales, general an d administrative 32,849 16,870 96,210 58,43 7 Amortization of goodwill an d purchased intangible assets 3,690 -- 12,377 - - Acquisition related charges -- -- 10,337 - - Discontinued use of property 457 -- 3,687 - - Total operating expenses 80,871 43,316 275,878 144,87 5 Operating income 103,075 39,054 241,936 130,29 1 Interest and other income, net 1,157 6,617 11,017 16,67 3 Income before income tax expense 104,232 45,671 252,953 146,96 4 Income tax expense (A) 31,269 14,615 75,886 47,02 7 Net income $72,963 $31,056 $177,067 $99,93 7 Basic net income per share (B) $0 .49 $0 .23 $1 .24 $0 .7 6 Diluted net income per share (B) $0 .41 $0 .19 $1 .04 $0 .6 3 Shares used in basic per shar e computation (B) 147,534 136,032 143,015 130,99 8 http://global .factiva.com/en/arch/print_results.asp 7/28/2003 Print Results Page 3 of 3

Shares used in diluted per shar e computation (B) 177,230 161,772 171, 074 159,29 4 (A) Reflects an effective tax rate of 30% for the quarter an d year ende d January 27, 2002 and 32% for the quart er and year ended January 28 , 2001 . (B) Reflects a two-for-one stock split eff ected in September 2001 . NVIDIA CORPORATI ON CONDENSED CONSOLIDATED BAL ANCE SHEET S (In thousands ) (Unaudited) January 27, January 28 , 2002 200 1 ASSET S Current assets : Cash, cash equivalents an d marketable securities $791,377 $674,27 5 Restricted cash 7,000 24,50 0 Accounts receivable, net 147,348 104,98 8 Inventories, net 209,995 89,90 5 Prepaid and other current assets 8,194 8,355 Prepaid and deferred taxes 66,429 28,38 6 Total current assets 1,230,343 930,40 9 Property and equipment, net 120,128 47,28 0 Deposits and other assets 11,897 10,90 9 Prepaid and deferred taxes 55,921 4,03 4 Goodwill and intangible assets, net 81,119 23,79 5 Total assets $1,499,408 $1,016,42 7 LIABILITIES AND STOCKHOLDERS' EQUIT Y Current liabilities : Accounts payable $213,997 $72,24 1 Accrued liabilities 151,930 33,21 1 Current portion of capital leas e obligations 3,896 58 8 Interest payable on convertibl e debenture 4,176 4,29 5 Deferred revenue 56,979 200,00 0 Total current liabilities 430,978 310,33 5 Capital lease obligations, les s current portion 5,861 37 8 Long-term convertible debenture 300,000 300,00 0 Stockholders' equity 762,569 405,71 4 Total liabilities an d stockholders' equity $1,499,408 $1,016,42 7 MAKE YOUR OPINION COUNT - Click Her e http ://tbutton .prnewswire .com/p rn/11690X27734628

/CONTACT: Ma ry Ann Allencourt , Investor Relations, +1-408 -486-2019, or mallencou rt@ nvidia .com, or Derek Perez , Public Relations , + 1-408 -486-2512 , or dperez@nvidia .com, both of NVIDIA Corporation / 16 :25 EST

Document prn0000020020214dy2e0018 u

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http://global.factiva.com/en/arch/print_results.asp 7/28/2003 EXHIBIT 6 Corporate Biographies Page 1 of 4

DOWNLOAD DRIVERS PRODUCTS 1 POWER OF 8D COMPANY INFO ? NEWS 8 EVENTS ; SUPPOR T

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GO ' fl Company Info I >Corporate Biographies 4k ,,v ~t - Jn NVIDIA Corporate Biographie s

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Jen-Hsun Huang, CEO, President and Co-Founder Jen-Hsun_Huang .jpg len-Hsun Huang .pdf (Bio )

Curtis Priem, Co-Founder and Chief Technical Officer Curtis Priem .jp g Curtis Priem .pdf (Bio )

Chris Malachowsky, Co-Founder and Vice President of Hardware Engineerin g Chris Malachowsky.jp g Chris Malachowsky .pdf (Bio)

David Kirk, Chief Scientist David_ Kirk.jpg David_Kirk.pdf (Bio )

"yA David M . Shannon , Vice President and General Counsel David_Shannon .jpg David_Shannon .pdf (Bio )

Marvin D . Burkett , Chief Financial Officer Marvin_Burkett .jp g Marvin_Burkett .pdf (BID )

Jeffrey Fisher, Executive Vice President of Worldwide Sales Jeffrey Fisher.jp g Jeffrey Fisher.pdf (Bio )

http://www.nvidia.com/view.asp?PAGE=pg-20011011487525 1 / 16/2003 Corporate Biographies Page 2 of 4

Dan Vivoli , Vice President of Marketing Dan_Vivoli .jp g Dan_Vivoli .pdf (Bio ) 1~p

Michael Hara , Vice President of Investor Relations and Communication s Michael_ Hara .jpg Michael_ Hara .pdf (Bio)

John McSorley, Vice President of Human Resources John McSorley .jp g John McSorley .pdf (Bio )

Philip Carmack , Vice President Business Development Philip_Carmack .jpg Philip_Carmack .pdf (Bio )

Di Ma, Vice President of Operations Di_Ma .jp g Di_Ma .pdf (Bio )

Joseph Sura, Vice President of Information Systems Joseph_Sura .jp g N Joseph_Sura .pdf (Blo )

Tommy Lee, Vice President of Systems and Application Engineerin g Tommy_Lee .jpg Tommy_Lee .pdf (Bio )

Dwight Diercks, Vice President of Software Engineering Dwight_Diercks.jp g I Dwight_Diercks.pdf (Bio )

Brian Kelleher, Vice President of Hardware Engineering Brian_Kelleher.jp g Brian_Kelleher.pdf (Blo) http://www.nvidia.com/view.asp?PAGE=pg-20011011487525 1/16/2003 Corporate Biographies Page 3 of 4

Jeff Brown, Director of Workstation Product Marketing Jeff_Brown .jp g Jeff _Brown .pdf (Bio)

Drew Henry, Senior Director, Platform Product Management Drew_Henry .jp g Drew_Henry .pdf (Bio )

Sunder Velamuri, Senior Director, Mobile Product Management Sunder_Velamuri .jpg Sunder_Velamuri .pdf (Bio )

Tony Tamasi, Senior Director of Desktop Product Managemen t Tony _Tamasi .jpg Tony_Tamasi .pdf (Bio )

Derek Perez, Director of PR Derek _Perez .jpg Derek_Perez .pdf (Bio )

Alain Tiquet , Director of European Marketing Alain_Tiquet .jpg Alain_Tiquet .pdf (Bio )

Kheng Bin Ng , Director of Asia Pacific Marketing Kheng_Bin_Ng .jpg g Kheng_Bin_Ng .pdf (Bio)

Mark Daly, Director of Technical Marketing Mark_ Daly.jp g Mark_Daly .pdf(BiO )

http ://www.nvidia.com/view.asp?PAGE=pg-20011011487525 1 / 16/2003 EXHIBIT 7 1 MILBERG WEISS BERSHAD HYNES & LERACH LLP 2 RANDI D. BANDMAN (145212) AZRA Z. MEHDI (220406) 3 SYLVIA WAHBA (197612) 100 Pine Street, Suite 2600 4 San Francisco, CA 9411 1 Telephone : 415/288-4545 5 415/288-4534 (fax) - and - 6 WILLIAM S . LERACH (68581) 401 B Street , Suite 1700 7 San Diego, CA 92101 Telephone : 619/231-1058 8 619/231-7423 (fax)

9 KAPLAN FOX & KILSHEIMER LLP LAURENCE D . KING (206423) 10 LINDA M. FONG 555 Montgomery Street, Suite 1501 11 San Francisco , CA 94111 Telephone : 415/772-4700 12 415/772-4707 (fax) - and - 13 FREDERIC S . FOX 805 Third Avenue, 22nd Floor 14 New York, NY 10022 Telephone : 212/687-1980 15 212/687-7714 (fax)

16 Co-Lead Counsel for Plaintiffs

17 UNITED STATES DISTRICT COURT 18 NORTHERN DISTRICT OF CALIFORNIA 19 OAKLAND DIVISION 20

21 In re NVIDIA CORPORATION SECURITIES ) Master File No. C-02-0853-CW LITIGATION ) 22 ) CLASS ACTION

23 This Document Relates To : ) DECLARATION OF ANDREW SHANE HUANG 24 ALL ACTIONS . )

25

26

27

28 1 I, Andrew Shane Huang, hereby declare as follows :

2 1 . I am over the age of 18, have personal knowledge of the facts below and am

3 competent to testify as to those facts .

4 2. I received my SB and Master's Degree in Engineering from Massachusetts Institute

5 of Technology ("MIT") simultaneously in 1997 . My major was in electrical engineering, and my

6 Master's thesis was on reconfigurable hardware computing .

7 3 . I finished my Ph.D. dissertation in 2002, also at MIT, entitled, "ADAM : A

8 Decentralized Parallel Computer Architecture Featuring Fast Thread and Data Migration and a

9 Uniform Hardware Abstraction." During this time, I worked in the MIT Artificial Intelligence

10 Laboratory ("Al Lab") . In the course of my Ph .D . work, I studied many aspects of computer

11 architecture, security, and hardware design .

12 4. Currently, I am the co-owner of a company called Xenatera, LLC ("Xenatera") .

13 Xenatera is a technology development and consulting firm based in San Diego, California,

14 specializing in delivering timely solutions to unique or unusual design problems . Xenatera can

15 create full custom prototypes and one-of-a-kind products or reverse engineer products for forensics,

16 competition analysis and interoperability.

17 5. Additionally, I recently completed writing a book entitled Hacking the Xbox : An

18 Introduction to Reverse Engineering . The Xbox is a gaming console designed by Microsoft

19 Corporation ("Microsoft") . My book includes, among other things, Xbox security architecture,

20 hardware modification tutorials, an Xbox hardware reference guide, interviews with Xbox hackers

21 ofnote, a discussion ofthe legal challenges on legitimate reverse-engineering activities, and the legal

22 rights and responsibilities of hackers .

23 Xbox Hacking Information Pre-Launch in November 2001

24 6 . About six months or so before the public launch of the Xbox, a senior Microsoft

25 representative, J . Allard ("Allard"), the General Manager of Xbox Division, came to MIT to give the

26 Xbox recruiting presentation to MIT students. A group of students, including me, asked Mr . Allard

27 whether Microsoft had any plans to make it tough to hack the Xbox and run Linux, an operating

28 system on the gaming console . Mr. Allard looked honestly surprised, as if it hadn't even crossed hi s

DECLARATION OF ANDREW SHANE HUANG - C-02-0853-CW - 1 - 1 mind. The reclamation of Xbox consoles into Linux PCs seemed to be the least of his concerns, as

2 the Xbox was being developed on a very aggressive schedule .

3 7 . At a subsequent Microsoft presentation at the University of Texas in Austin, a senior

4 Microsoft representative informed students that Microsoft had implemented some hardware security

5 measures to prevent hackers from running a different operating system on the Xbox .

6 The Xbox Hacking Began Soon After Its Public Release

7 8 . Notwithstanding the enhanced security measures, within two weeks of the public

8 release of the Xbox gaming console on November 15, 2001, I successfully extracted the contents of

9 the Flash Read Only Memory or FLASH ROM . The FLASH ROM contains the code necessary to

10 initialize the Xbox, as well as the basic kernel code required to boot the "dashboard" or games . The

11 initialization code was of great interest to me, since my goal was to reclaim my Xbox as a PC . Upon

12 discovering the high level of security built into the Xbox, it also became my goal to better understand

13 the security mechanisms employed in the Xbox .

14 9. I began posting information related to the reverse engineering of the Xbox on my

15 website, http ://www.xenatera.com/bunnie/proj/anatak/xboxmod.html, in the section entitled,

16 "Bunnie's adventures hacking the Xbox," a copy of which is attached hereto as Exhibit A

17 (downloaded on July 16, 2003).

18 10. Microsoft's Xbox features the nForce-derivative unified memory architecture of

19 Nvidia Corporation's ("Nvidia") Xbox Graphics Processing Unit ("XGPU") and Xbox Media

20 Communications Processor ("MCPX") to power the video game system's graphics, audio and

21 networking capabilities . Beginning in January 2002, I devoted time toward reverse engineering the

22 security codes of the Xbox MCPX chips . Prior to this project and coincident with the FLASH ROM

23 extraction, I was in contact with Jon Thomason of Microsoft regarding my desire to understand the

24 functionality of the Xbox FLASH ROM . My research in January 2002 indicated that reverse

25 engineering the MCPX chip was crucial to understanding the functional elements of the Xbox

26 FLASH ROM.

27 11 . In late February 2002, I built a device to tap the HyperTransport bus . The

28 HyperTransport bus is the link between the Southbridge MCPX and the Northbridge NV2A chip -

DECLARATION OF ANDREW SHANE HUANG - C-02-0853-CW -2- 1 both chips manufactured by Nvidia . The reason this bus was of interest to me was that any secret

2 boot code contained in the Nvidia MCPX chip would traverse this bus on its way to the processor .

3 I did indeed find the secret boot code .

4 12 . I successfully extracted the security keys in the Xbox Nvidia chips sometime in

5 February/March 2002. I wrote a detailed paper about my findings, which I submitted to the MIT Al

6 Lab as a lab technical memo on May 26, 2002, attached hereto as Exhibit B .

7 13 . In August 2002, I presented my findings on the Xbox security system to the

8 Cryptographic Hardware in Embedded Systems (CHES) Conference, attached hereto as Exhibit C .

9 In the presentation, I overviewed the Xbox security mechanism and how it was bypassed . I also

10 analyzed the Xbox security system, giving suggestions for improving the security system, as well

11 as giving some indications of future/alternative vulnerabilities, back doors, and exploits available

12 in the Xbox as a whole.

13 14. In June 2002, I offered to fly out and present my findings to Microsoft . I wanted to

14 underscore to Microsoft that my goal as an academic and as an individual was the constructive

15 analysis of systems and the ultimate improvement of the State of the Art. My offer was met with

16 moderate enthusiasm in some parts of Microsoft, but I was ultimately informed that the Xbox group

17 in particular was not interested in meeting with me because they felt there would be no benefit from

18 my visit, as they were already fully aware of all the security issues I had presented in my paper.

19 15 . In my opinion, the security flaws that existed in the launch version of the Xbox were

20 sufficiently severe that the Nvidia MCPX chip would have to be redesigned to prevent people from

21 installing hardware that enabled use of the Xbox without paying licensing fees or use of the Xbox

22 to run Linux or other programs . In the paper that I initially made available as an MIT Al Lab Note

23 in May 2002, I gave some suggestions, including the use of digital signatures algorithms in the

24 MCPX, that would help improve the robustness of the Xbox security system .

25 16. A revised, more secure Nvidia MCPX chip was delivered to consumers in August

26 2002 in an Xbox revision that was dubbed "v-1 .1" by the hacking community. The project to

27 redesign the MCPX security features (which includes at least a revised secret boot ROM and a patch

28 to a PCI address space decoder, and possibly also a fix to a non-security related issue with the US B

DECLARATION OF ANDREW SHANE HUANG - C-02-0853-CW - 3 - 1 circuitry) more than likely started, in earnest, sometime between February and April 2002, depending

2 on the process used and the strings pulled by Nvidia to get favorable fab cycles from its contract

3 equipment manufacturer, Taiwan Semiconductor Manufacturing Company ("TSMC") . The changes

4 made to the MCPX as deployed in the v1 .1 Xbox go beyond just a simple change of ROM . The

5 MCPX incorporated into the v 1 .1 Xbox also includes at least one bug fix in the PCI address decoder.

6 The removal of a USB daughter card in the vl 1 . Xbox also indicates that something was fixed in the

7 USB controller within the MCPX that alleviated the need for the daughter card . Overall, these

8 changes required either a very extensive (and hence time consuming to execute) set of metal mask

9 changes, or else a full place-and-route of the changed portions of the MCPX chip, also a time-

10 consuming process for a chip with as many features as the MCPX chip .

11 17. The minimum times referenced below are based on my experience with contract

12 semiconductor manufacturing, including the high cost expedited delivery times, and the maximum

13 times are based on my general experience with conventional lead times.

14 Months 15 Description of Procedure Min Max 16 1 . NVDA lay out 0.5 1 .0

17 2. TSMC prototype-run (if any) 0 .5 1 .5 18 3 . TSMC production-run; Nvidia validation integration, testing 1 .0 3 .0 Total Nvidia time from changes "in" to chips "out" (does not include Xbox 2.0 5 .5 19 manufacturing or channel distribution times)

20 18. My minimum estimate of Nvidia's chip turn time is fairly aggressive . I am assuming

21 that Nvidia optimized its whole production process so that detailed specification compliance and

22 reliability testing happened in lockstep with production . The estimate of manufacture time stated

23 here does not include the times required for packaging, testing or quality control, nor does it factor

24 in the time required for Microsoft's contract manufacturer, Flextronics, to tool up the line to use the

25 new parts and corresponding ROM images, or the time required to ship the finished Xboxes from

26 the manufacturing site in Mexico or Europe to Australia and then to America for retail sales .

27 19. Based on my background and knowledge with the chip foundry business, the chips

28 that required less than four months total for production would have required "hot" lots, i . e., fast, low

DECLARATION OF ANDREW SHANE HUANG - C-02-0853-CW -4- 1 volume prototype runs without extensive production testing. However, the cost ofrunning "hot" lots

2 is very high , and considering that Nvidia produced a large volume of these chips (more than 100,000

3 1 per month), it is unlikely that Nvidia used "hot" lots for the production runs-

41 I declare under penalty ofperjury under the laws of the State of California that the foregoing

5 is true and correct. If called as a wi tness, I could and would competently testify thereto. Executed

6 this 2 57 day of July, 2003, at San Diego, California.

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I DECLARATION OF ANDREW SHANE HUANG - C-02-0853-CW -5- EXHIBIT A Page 1 of 1 3 bunnie's adventures hacking the Xbo x

For the benefit of repeat visitors, click here to go to the most recently added stuff.

Other items of interest : • Just in: Get the book on Xbox hacking! " Hacking the Xbox " is a book written by bunnie . It contains Xbox security secrets, hardware mod tutorials, interviews with master hackers, a discussion of the legal challenges facing hackers, an Xbox hardware reference guide, and much much more !

• I'm finally done with my PhD thesis on supercomputer architecture...! can finally spend some more time playing with the Xbox . socketyour flas h ROM decryption (deprecated) JTAG pinouts serial EEPRO M die shots memory locations-In the Xbox (updated) aerogel capacitor and the real tine clock hacking and copyrights The real truth about the Xbox game controllers , their engineers and about Halo (humorous) LDT (Hypertransport) bps tap LPC Multi-I/O expansion card ( coming soon) RCM testpoint map Presentation iven at CHES2002 . CHES is the Cryptographic Hardware and Embedded Systems conference .

Xbox(TM) is a trademark of Microsoft Corporation

Socket for your TSOP FLASH (29F080A-70) in the Xbox )

I figure there are a lot of great software hackers out there going at the xbox to put linux on it (okay so this is written within a week after its intro, so give me a break if this is out of date). I'm more of a hardware-type, so here's my tiny contribution to the effort.

An interesting anecdote, btw, is that when Microsoft came by MIT to give the X-BOX/recruiting presentation to the students here, we asked the guy (I forget his name, but he was important--I do recall he claimed to help define the DHCP spec :-P [it has been pointed out to me by J. T. that this was no other than J Allard himself r yow!]) if they had any plans on making it tough to hack the boxes and run linux. The dude looked honestly surprised and it hadn't even crossed his mind . This was about six months or so before the X-BOX launch . There's some commentary at the bottom of this page on the legal aspects of reverse engineering .

Anyways, something useful during the reverse engineering phase is always having the ability to pull out the BIOS ROM and stick your own in . Except on the X-BOX it ain't socketed. My recommendation is to install an Emulation Technologies S-TS-SM-040_A_ (if they don't have those in stock , the bigger sockets work too--I put a 48 pin socket on my board'coz that 's what I had on hand tonight) . It's a pretty economical device, $12 or so and it goes right in the original footprint on the board.

This is what the socket looks like when in the "open" position :

file://C:ATemp\triACEOK.htm 7/16/2003 Page 2 of 1 3

Click to see what it looks like when it's closed.

You need the following to do this: tongs-style soldering iron (to remove the existing flash device), a fine-tipped soldering iron, a microscope, flux, and some solder paste is always nice, but you can use just plain old fine solder too . If you don't have tongs-style soldering iron, you can just cut the device off the board if you have extras laying around (presumably you also have a ROM burner--I use the Needham's Electronics EMP series) or you can build your own (I built an improved version but I haven't got the docs on the web yet. . .)

file://C :ATemp\triACEOK .htm 7/16/200 3 Page 3 of 1 3

Be sure to clean and recondition the board after removing the ROM before attaching the socket . Be careful about bridging on the socket pins, too, while soldering . If you have a bridge, some flux and chem-wik will usually take care of it. You also have to recondition the ROM before using it in the ROM burner (this is probably the hardest part) . Use a fine-tipped soldering iron to remelt the solder on every pin, and clean the device off with some defluxing agent.

For those of you looking to get the ROM contents of the Nintendo gamecube, it's not as easy as the Xbox. Their motherboard has no generic FLASH or recognizeable ROM part on it; my current suspicion is that it's part of a multi- chip package (or maybe even integrated into the same die--that's unlikely, though, due to the volatility of ROM code as the console matures). I'm guessing the "ARAM" chip contains the ROM (probably a synchronous interface ROM so it can share a common bus easily with an SDRAM) and the "slow" SDRAM in a combo package . . . maybe I'll sacrifice a GameCube for the sake of curiosity and dissolve the package with hot sulfuric or better yet try and shave the package down so I can extract the pinout through visual inspection . I also noticed that the same pins that go to the "high-speed expansion port" appear to go straight from the ARAM chip to a connector, so perhaps an o-scope plus a peripheral that plugs into the port will lend clues. . .if anyone has any info, I'd be curious to hear it.

Tidbits

I'm just your basic yokel poking at a console.. . so...caveat hacker.. . use all the following knowledge at your own risk! Sorry about the formatting . It's pretty much an as-it happens running account of my experiences with the console . More recent stuff is near the bottom .

A tip for those who are trying to extract the ROM images--there are in fact four identical 256k copies of the ROM image in the 1 MB flash ROM . It threw me off at first, I thought perhaps my top two address pins were stuck, but I re- file://C :ATemp\triACEOK .htm 7/16/2003 Page 4 of 1 3 burned the image I obtained into the ROM (same ROM, no copies were made, ftr ;-) and the Xbox boots just fine. A friend (whose identity I'll keep anonymous) insightfully points out that this is quite a reasonable thing to do for adding robustness to the process of FLASH upgrades in the field, and for keeping multiple versions of the BIOS around in case different games rely on features or even bugs found in previous BIOS versions .

Another tidbit on the BIOS image is that with winzip compression, the BIOS image (originally 1024k) compresses down to 1004k. This indicates that a large part (but not necessarily all) of the data in the BIOS is either compressed and/or encrypted (executeable binaries usually compress pretty well) . It is also my opinion upon cursory inspection of the ROM images that no address/data pins were swapped or scrambled on the ROM .

A fellow at U Texas (identity kept anonymous) points out to me that MS gave a talk at their university , and the speaker said that they did implement some security measures to foil hackers that try to run a different OS on the Xbox . The speaker mentioned something about desoldering three chips. One is most likely the FLASH. My guess is if this information is true, there is a PIC 16LC63A microcontroller right next door to the FLASH...I wouldn't be surprised if the PIC microcontroller monitors the FLASH to make sure the right sequence of operations happens, and halts the processor if something is amiss . The third chip . . .well, no guesses on that one yet . Hopefully it's not the nVIDIA MCPX. :-) The speaker at this talk also indicated that the kernel on the Xbox is a much-stripped-down Win2k derivative (from 12 MB to around 23kB). note: it is now known that the PIC does not monitor the FLASH during boot and does little more than coordinate system management activities .

Early BIOS extraction and disassembly

There's an issue with the BIOS decryption that we've encountered-- data in the BIOS does not decrypt by just running the code on a conventional machine using the straight Xbox binaries.

Thanks to Roastbeef for theory (1) and for providing help with disassembly and interpretation of the code .

The two current theories in progress are :

1) byte accesses have their data bits scrambled (while DWORD accesses (cache-line fills for code, etc) do not) 2) some mid-range address bits are scrambled and/or inverted and/or an offset has been applie d

I've gone through the decryption routine of the BIOS finally, and it is a de rivative of RC-4. It sets up an S-box similar to RC-4: caveat hacker: this code may or may not be correct (but let me know if you do find a bug :) THIS CODE IS KNOWN TO BE BOGUS, AS THE BOOT SECTOR IN THE FLASH ROM IS BOGUS AND GETS OVERRIDEN BYA BLOCK IN THE MCPX One can tan the LDT bLis to find the "proper" code .

unsigned char K[256] ; OxFFFFC80 in flash unsigned char S[256] ; 0x10000 in SDRAM

// initialize keys similar to RC-4 for( i = 0 ; i < 256 ; i+ + S[i] = i ; }

j = 0 ; for( i = 0 ; i < 256 ; i++ ) { j = (j + K[i] + S[j]) % 256 ; // RC-4 would do j = (j + K[i] + S[i]) % 25 6

// swap S[i], S[j] temp = S[i] ; file://C:\Temp\triACEOK.htm 7/16/2003 Page 5 of 1 3 S[i] = S[7l ; S[j] = temp ; }

The S-box is a permutation of the numbers 0-255 ; the key is used to scramble up the order of the numbers . You can check if you did the S-box generation correctly by verifying that every number is in there exactly once .

Now, RC-4 would then use this S-box to generate random numbers in a manner that evolves with the encryption stream, but is independant of the ciphertext . The x-box version of this evolves the S-box with feedback from the ciphertext:

unsigned char cipherText[16384] ; OxFFFFA000 in FLASH unsigned char plainText[16384] ; 0x400000 in SDRAM

for( index = 0x4000, i = 0, k = 0 ; index > 0 ; index-- ) { // xbox versio n t = (S[i] ^ cipherText[k]) % 256 ; plainText[k] = t ;

// swap( S[i], S[t] ) ; temp = S[i] ; S[i] = S[t] ; S[t] = temp ;

i = (i + 1) % 256 ; k++ ; how is this significant? well,

1) the above encryption scheme should work okay if data bits are permuted identically on byte reads and writes (S-box integrity is still preserved) 2) the above scheme should work okay if some of the mid-range address bits are permuted

The only bits that I know for sure are not permuted are the lower 9 bits (because the code from OxFFFF FEOO looks good till the end of ROM, and because the copyright signatures at around cfO-d30), and enough high bits to differentiate the major memory regions of the machine . It is quite possible that any number of bits between say, bits 10- 20 are swapped around . Now begins speculation : decryption happens in 16k blocks . If you look at the data at OxFFFFA000, it seems to start and end in the middle of a large region of encrypted code (a histogram of the regions of the ROM indicate what areas might be encrypted or not) . That seems a bit odd. Also, the fact that the cipher is a CFB- mode cipher--ie, the key depends on the ciphertext stream--means that any mutation of the data going into the cipher is going to cause the rest of the cipher to yield garbage . Thus, if say, address bit 10 were swapped, then the largest sequential block one could recover from decrypting any region of the ROM without knowledge of the swap is 512 bytes--short enough to be infuriating to try and figure out what data is "the real deal" with dumb stastitical methods . It also seems like whoever wrote the decryption code did it in pure assembly . I doubt any compiler could produce code of that quality and density... perhaps someone was trying to get everything to fit into a 512-byte limit? ;-)

Things get even more interesting .. .I tried modifying code in the OxFFFF FEOO range, and the Xbox seems to ignore it . I even put NOP's over the whole region, and the Xbox still boots-- even when NOP's are in each of the four copies of the ROM's high 512 boot bytes . Something.. . very. . . strange. . . is going on .

Roastbeef has also provided me with these insights on the PIC :

1) The PIC is powered all the time that the system is plugged into the wall . Maybe this is where they're keeping the real time clock . file://C :\Temp\triACEOK .htm 7/16/2003 Page 6 of 1 3 2) There is an SMBUS connecting the Atmel, PIC and nVidia chipset together . (SMBUS is the Intel equiv. of Philips' 12C bus) 3) DVD ejection is handled in some way by the PIC . (I didn't actually capture data on this, but when I hit the front panel eject button I saw half the activity indicators on the TLA light up) 4) There's some type of SMBUS heartbeat every 2ms . 5) There is no SMBUS or PIC activity in the first second of boot, so none of the decryption stuff can be stored there . (Decryption is probably hit 20k or 30k CPU instructions after power good. . . that's much much less than the -1 .7sec I'm seeing before SMBUS activity .

Update on ROM extraction and decryptio n

I guess it's been a little while since I've updated this page. (trying to write a thesis has been getting in the way of having fun :-) The thoughts du jour are as follows : 1) 1 am certain now that the MCP-X on the Xbox overrides the boot sector in the FLASH ROM (no other conclusion can be drawn from the observed behavior) . Hence, the "cleartext" code that we see in the top 512 bytes of FLASH ROM are possibly bogus: the "real" code that the processor runs comes from some mask ROM or OTP ROM inside the MCP-X. Given the level of paranoia that went into designing the Xbox, I am now assuming that the code extracted in the top 512 bytes of ROM are in fact bogus and placed there as a red herring . 2) I have considered the possibility of decapping the MCP-X and reading out the bits via microscopy . After doing some background research, I think that the MCP-X is done in a TSMC 0 .18u or 0.25u process . This is too fine a line geometry for the optical scopes I have available at my disposal, and contacting Chi wp orks places the price tag of contracting the ROM content removal to be in the $10k range (not to mention copyright issues associated with them taking on the work). (ouch) 3) A number of people on forums and BBSes have suggested using the JTAG boundary scan to try and capture the decrypted data as it enters the processor, or to stop the clock and somehow read the RAM contents out . I think a method along this vein is most likely the best way to extract the decrypted ROM contents . My thought du jour is to actually hack the LDT bus between the northbridge and Southbridge chipsets . It's the smallest pin-count bus (it is 9 bits wide, differential, in each direction), and conveniently, all the traces are right there in one spot on the motherboard : some are even labelled . Plus, LDT is a semi-open standard and the protocol seems to be fairly simple . The challenge is to build a bus tap that doesn't corrupt the data moving at the 400 MHz DDR speeds (!) and capturing at these extremely high data rates. The Xilinx Virtex-II FPGA can actually keep up with these speeds and has an LDT interface capability built into them. The SRAM bus, BTW, uses 2 .5V SSTL-2 signalling at about 200 MHz DDR data rates . To tap it, you'd have to hit well over 128 signals, since the data bus alone to the northbridge is 128 bits wide . Tapping the processor bus is similarly annoying : a stock Mobile Celeron uses AGTL I/Os for the northbridge bus, and you have to tap over 100 signals running at 133 MHz . So. . .off to do some research .

Correction to the above: an o-scope measurement of the LDT clock indicates that the bus is moving at 200 MHz speeds (that's so slow, it's almost DC!) . Count on nVidia and microsoft to do spec inflation by citing the full-duplex bandwidth of the bus. Well. . . okay, that's fair, everybody does it, I just didn't consider it when doing my math the first time through. I wasn't able to figure out definatively if they were really using both clock edges for the data on the bus because I couldn't conveniently get a good enough ground near the signals I wanted to measure, but if their spec says 800 MBytes/sec, I'd imagine it's using both clock edges . Bottom line: it's much easier than I thought to tap the LDT bus. Yay.

JTAG pins ' n' stuff

For the curious and the hardware-minded : the xbox motherboard is a 4-layer board . so most signals ought to be on the outside of the board, and you sholud be able to read it like a book . A Mobile Celeron in BGA2 package is used, although I really didn't find a Mobile Celeron that runs at 733/133 in a BGA2 package .. . the FSB is always 100 MHz for the BGA2 packaged devices . A mystery... the FCBGA package almost looks nicer to lay out too, it has the same pi n file ://C:\Temp\triACEOK.htm 7/16/2003 Page 7 of 1 3 pitch as the BGA2 but it has a hollowed out center in which you can stick decoupling caps . Maybe the pinout of the FCBGA just wasn't optimal for the particular layout they were doing (with the Nvidia northbridge on four layers) or the xbox was designed before intel had released the FCBGA specs but microsoft really really wanted a 133 MHz FSB device. Who knows . . .anyways, you can find a pic of the motherboard without the Celeron on it below . Click on it for a higher res version . . .the picture on the left is just the Celeron region, the pic on the right calls out the JTAG pins in case you have the toolz. . . click for image of pentium region click for i mage of_ JTAG plus

I've had a request to trace the JTAG wires out to the nearest convenient holes or resistor pads . The image on the left shows the key JTAG pins broken out to a set of resistors near the processor. Unfortuneately, the TRST# signal is permanently tied to ground, at least on the board I have. I'm not too familiar with the JTAG spec, but this "optional" pin seems to cause the JTAG state machine to go into its reset state . It needs to be pulsed low on power-on, but pulling it permanently low (as it is on the Xbox) should permantently disable the JTAG bus . Perhaps this was intentional? Who knows. . . .but near the JTAG pads I had called out in the left image, on the flip side of the board, there is this mysterious "hole" in a poured polygon plane which looks like someone deleted a test point or via at the last minute ... perhaps Microsoft put some thought into making the box more hack-proof than first thought . You can see this "hole" on the right hand side image below . If you would like to use the JTAG bus, you could just drill out the TRST# signal (it's connected directly to an internal ground plane) . This would disconnect the TRST# signal from ground; perhaps the JTAG state machine comes up in a recoverable manner upon power up even if TRST# is not pulsed low . ...good luck JTAG hackers .. . click for JTAG location s click for the TRST hole i

Also of note in the above picture to the left (above) is that one pin (so far as I've noticed ...I haven't gone through and tracked through every pin!) nominally called out as "no connect" on the celeron pinout is actually connected to something. Note that on the Pentium III, the pin is known as "TESTP" . This hints that perhaps the die used in the Xbox is a closer relative to the Pentium III perhaps???? The reason why I speculate on this is that there is no "official" Celeron with a 133 MHz FSB in a BGA2 package according to the Intel website .

For the record, I have now recovered two FLASH ROM images from two different Xboxes. They are identical . This is significant because there were some theories that each ROM image was uniquely encrypted and/or downloaded into the box by microsoft at burn-in time (some forums have noted that Xbox field service centers plug the boxes into the net and some mysterious data is sent to or from (assumedly) Microsoft) . So, at least, there is *some* evidence that the ROMs may all be identical on all the xboxes . . .

Die Shots 'n' stuff

My girlfriend and I spent friday night in the lab together (so romantic--she's cool like that :-) and have now decapsulated three of the chips on the xbox : the southbridge (MCPX-1), the GPU (NV2A), and the Celeron . They all look like. . .very modern chips (unfortuneately). In other words, the high-level metal power busses criss-cross the entirety of the chip, obscuring most of the otherwise "interseting" features underneath . I don't really feel like removing the passivation and metallization, so I'll leave them as such . I haven't looked too closely yet but I don't see too many candidate regions for the high-level metal (and thus coarse pitch and easier/cheaper for mask iterations in case of code changes) ROM structure that I was hoping for . The overlay ROM that is currently foiling efforts at decrypting/modifying the BIOS ROM is probably buried in the M 1 or poly layers of the chip . Ah well. .. it was fun taking them apart anyways . Next step : tap the LDT bus...going for the minimum path of resistance with maximum enjoyment/fun factor. . . although tapping the SDRAM busses might be a more direct way of getting to the decrypted code, I really don't feel like soldering hundreds of wires to the board :) file://C:ATemp\triACEOK .htm 7/16/2003 Page 8 of 1 3 Die shots, for the curious :

MCPX full die shot

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NV2A logo Unfortuneately, I have yet to find any neat easter-eggs on the chips.

Die stats for the econmically minded :

. NV2A GPU core : 11 .9mm x 11 .9mm x 0.18mm (142 mm^2) EDHSBGA, 1mm pitch, 4-layer organic substrate with die-up wirebond, similar to Siliconware Precion Industries Co . package. I believe it is fabricated on a 0. 18u TSMC process, has 60 million transistors . . . runs at 233 or 250 MHz, depending on whose rumors you wish to believe today . Interpolating off of graphs, one might believe the raw die cost for this chip is around $50 +/- $10 ; keep in mind nVidia takes a cut when selling to microsoft . . MCPX southbridge : 5 .4mm x 5 .4mm x 0.32mm (29 mm^2), FBGA, 1 mm pitch, die-up wirebond . I also believe thi s file://C :\Temp\triACEOK. htm 7/16/2003 Page 9 of 1 3 is fabricated on a 0.15u TSMC process . • Celeron : 8 .78mm x 10 .97mm x 0.74mm (96 mm^2), Intel BGA2 package, 1 .27mm pitch, flip-chip high performance package. This is, of course, fabricated on an Intel process . Not sure which process generation off the top of m y head. . . some rumors say 0. 18u / 42 million transistors . The estimated manufacturing cost of a Pentium III in 0 .18u / PGA-370 package is $36 (source : MDR). The list price of a mobile celeron-800 is $91, while a Celeron-1000 is $74 (1 /2/02--MDR) .

Serial EEPROM

There is a 256, maybe 128 byte EEPROM on the Xbox which stores, among other things, your serial number, time zone settings, MAC address, and there is some speculation that hard drive keys and encryption keys are stored there as well . The EEPROM is located on the motherboard below the PIC. The EEPROM is a Rhom BR24C02 device (runs on Vcc = 3.3V), and its 12C address code is OxA8 (that's already shifted left to compensate for the LSB r/w bit, the "real" device code is 0x54) . The 12C address was set in part by the address pin straps on the Xbox motherboard . Using an Opencores wishbone-compliant 12C interface by Richard Herveille and my flashburn rev 2 board, I managed to snarf the contents out. (getting the core to compile to my Xilinx Spartan FPGA sucked, btw. Lots of hairy issues with the use of a tristate-buffer with input tied to zero to do wired-OR bus signalling and an overzealous synthesis optimizer :P) I made an ugly little jig for the EEPROM on the back of the fb2 board using a spare "magic" connector I had sitting around. Here's what I got :

00000000 : e31c 5c23 6a58 6837 b712 266c 9911 30d1 . .\#jXh7 . .&1 . .0 . 00000010 : e23e 4d56 f773 2b73 85fe 7fOa 08ef 153c .>MV .s+s ...... < 00000020 : 77ee 6d4e 932f 28ee f861 f794 171f fc11 w .mN . /( . .a ...... 00000030 : 0b84 44ed 3130 3535 3831 3131 3430 3033 . .D .105581114003 00000040 : 0050 f24f 6552 0000 Oale 3533 7185 314d .P .OeR . . . . 53q .1M 00000050 : 5912 3848 1c91 5360 0001 4000 0000 0000 Y .8H . .S' . .@ . . . . . 00000060 : 7561 57fb 2c01 0000 4553 5400 4544 5400 uaW ., . . .EST .EDT . 00000070 : 0000 0000 0000 0000 0a05 0002 0401 0002 ...... 00000080 : 0000 0000 0000 0000 0000 0000 c4ff ffff ...... 00000090 : 0100 0000 0000 0000 0000 0000 0000 0000 ...... 000000aO : 0000 0000 0000 0000 0000 0000 0000 0000 ...... 000000bO : 0000 0000 0000 0000 0000 0000 0000 0000 ...... 000000c0 : 0000 0000 0000 0000 0000 0000 0000 0000 ...... 000000dO : 0000 0000 0000 0000 0000 0000 0000 0000 ...... 000000eO : 0000 0000 0000 0000 0000 0000 0000 0000 ...... 000000f0 : 0000 0000 0000 0000 0000 0000 0000 0000 ......

105581 114003 is Xbox serial number (say hello to big brother--he can track your Xbox wherever you may be!) . You can see the "EST" and "EDT" settings as well. I am thinking it's okay to post this (I hope) . . .I didn't see any copyright notices . ..

file://C :\Temp\triACEOK.htm 7/16/2003 Page 10 of 13

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The ugliness! but it worked. : P

Aerogel Capacito r

Did anyone else notice the aerogel capacitor on the Xbox? There is a 1 Farad 2 .5V cap on there at location C7G10 . What. . .the heck . When I unplug my xbox for longer than a few minutes, I still have to reset the time . Why not use a battery? It's not like the Xbox is going to outlast the shelf-life of a lithium battery . Maybe I'm wrong, but I thought aerogels are relatively new and expensive . . . yeah, I'm probably wrong . I've never priced out an aerogel, so mabye they are cheap. But damn, that's the first I've ever seen an aerogel in a consumer electronics product . A brief analysis of the rationale for this capacitor is provided at this forum link.

Also, there is a resistor that's not populated at R7R4 on the backside of the motherboard . It seems to connect the FLASH ROM's WE line to the MCP . Perhaps by jumpering this you can enable in-system ROM flashing . . .of course, you'd need to find software that does it first.

LDT bus tapping

Well, it's been about three months since I've posted anything significant. Half of that is I've been finishing my PhD thesis, and the other half is that I've been dealing with legal issues versus my work on the Xbox . Well, last week, I finished both my thesis, and I got a grudging thumbs up, so to speak, from Microsoft on my Xbox reverse engineering work. so. . .here I am, again.

In late February, I built a device to tap the LDT bus . The LDT bus is the link between the Southbridge MCPX and the Northbridge NV2A chip . The reason why this bus is of interest, as noted above, is because any secret boot code contained in the MCPX would traverse this bus on its way to the processor . And indeed, I did find the secret boot code. I wrote a paper about my findings, which I have submitted to CHES (Cryptographic Hardware in Embedded Systems) 2002 for review and I have also submitted to the Al Lab at MIT as a lab technical memo . Here is the memo, for more details. Here is an alternate link to the paper . Please use the alternate link , the MIT Al publications server turns out t o file://C :ATemp\triACEOK .htm 7/16/2003 Page 11 of 1 3 be just an aging UltraSparc 5 ; I don't think the sysadmins were anticipating this kind of traffic to the pubs server . . .the alternate link is hosted by MIT's primary web server, a much beefier Sun Fire t.) 280R. Well, at any rate, we've got a new pubs server on order for the Al lab . :)

LPC Multi-I/O expansion card

I am working on an LPC Multi-I/O expansion card, currently out to board fabrication . The card features a FLASH ROM, a 16 Mbit development NVRAM, a real time clock, a 9-pin RS-232 serial port, a PS/2 keyboard port, and a PS/2 file ://C:ATemp\triACEOK .htm 7/16/2003 Page 12 of 1 3 mouse port. This card will, if I'm lucky, provide users with the ability to write their own ROMs and code for the Xbox, and only require users to solder on a single 16-pin header .

Other features that I could add include a floppy drive, parallel port, and another serial port. If you think any of these could be useful for your development work, drop me a line and let me know . However, there may be some issue getting interrupts to work over the LPC header because the type included on the Xbox seems to be the "debug" type instead of the "legacy expansion" type . Once I have tested its basic functions, I will release the schematics board layouts, and bill of materials for free, and perhaps produce a few for people to buy . I will probably step the board at least one more time before releasing it, or possibly producing them with Xenatera Partners. If I do go to production, the boards will be sold strictly as LPC Multi-I/O cards, as they can be used with any PC chipset that supports an LPC header . No code or ROM will ship with the cards--you can probably buy the ROM from someone else if you need it.

I will post more info as soon as I have it! Stay tuned ...

For more info on the LPC port, check out Andy and Luke's page. These guys are great hackers . . .

ROM Testpoints

Some people have been wondering what the meaning of all the silver dots on the back of the Xbox motherboard is . These dots are testpoints that are used in a "bed of nails" tester to rapidly find faults and test components during Xbox production. As a result, almost every important signal has a silver dot. In particular, the FLASH ROM has test points for all of its signals . You can see where they are in this picture .

Important addresses in the Xbox, according to the "boot sector" in the FLASH : (thanks again, Roastbeef! ) 00010000 - S-bo x 00400000 - destination of plaintext FFF00000 - start of flas h FFFC0000 - jam tables FFFFA000 - beginning of ciphertext (4000h bytes) FFFFFC80 - key (256 bytes ) FFFFFE00 - subroutine to program jam tables FFFFFEB4 - subroutine to setup MSR s FFFFFFB8 - subroutine to switch to flat mode FFFFFFFO - IA32 boot vecto r

Note: the above "important locations " are based on the "decoy" boot block in the FLASH.

Updated "important locations" according to the "real" code :

0008F000 - S-box temp storage 00090000 - destination of plaintext (bootloader code that decrypts/decompresses a larger kernel FFF00000 - start of flas h FFFC0000 - jam tables FFFF9EOO - beginning of ciphertext (6000h bytes / 24 kbytes )

[code below contained in MCPX, not visible in FLASH] FFFFFEOO - subroutine to program jam tables FFFFFED2 - turn on the cache s FFFFFEDD - start of RC4/128 decrypt routine FFFFFFA5 - key (16 bytes, RC4/128 ) FFFFFFFO - IA32 boot vecto r file://C:ATemp\triACEOK .htm 7/16/2003 Page 13 of 1 3 Good luck, and thanks for the comments everyone!

00000cfO : OeOe 080b OeOe 0800 0300 436f 7079 7269 ...... Copyri 00000d00 : 6768 7420 2863 2920 4d69 6372 6f73 6f66 ght (c) Microsof 00000d10 : 7420 436f 7270 6f72 6174 696f 6e2e 2041 t Corporation . A 00000d20 : 6c6c 2072 6967 6874 7320 7265 7365 7276 11 rights reserv 00000d30 : 6564 2e82 04d4 2ebe 341d 57dc d848 fc55 ed ...... 4 .W . .H . U

If you are looking for the FLASH ROM contents of the Xbox, you won't be able to download them even though I've extracted them. I got a call [recording edited to protect sensitive info] from Microsoft within 12 hours of posting this page regarding the binaries .. .! fear...

However, for those of you who want to extract the FLASH ROM contents of the Xbox for your own purposes, see the case of "Sony Computer Entertainment, Inc . v. Connectix Corp. " You are actually allowed by law to reverse engineer copyrighted code so long as it is necessary to discover the ideas or functional elements behind the code (still, I'm not allowed to post copyrighted code for free distribution) . Hey, microsoft...what are the ideas and functional elements behind your BIOS ROM? . . . hmm. . .patent search turns up nil on the Xbox ...guess we'll just have to reverse engineer it . (FTR, Nintendo has patented what looks to be the entirety of the N64 console, thus perchance making reverse engineering an N64 illegal--not yet court tested .)

bunnie his loving girlfriend

more game box hacking. ..

This page has been accessed at least ' ' times since the counter was last reset, or December 8, 2001 whichever is more recent.

file://C:\Temp\triACEOK .htm 7/16/2003 EXHIBIT B lab (~; ,1217' massachusetts institute of technology - artificial intelligence laborator y

Keeping Secrets in Hardware : the Microsoft XBoxTM Case Study

Andrew "bunnie" Huan g

Al Memo 2002-008 May 26, 200 2

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This paper discusses the hardware foundations of the cryptosystem employed by the XboxTM video game console from Microsoft . A secret boot block over- lay is buried within a system ASIC. This secret boot block decrypts and verifies portions of an external FLASH-type ROM . The presence of the secret boot block is camouflaged by a decoy boot block in the external ROM . The code contained within the secret boot block is transferred to the CPU in the clear over a set of high-speed busses where it can be extracted using simple custom hardware . The paper concludes with recommendations for improving the Xbox security system . One lesson of this study is that the use of a high-performance bus alone is not a sufficient security measure, given the advent of inexpensive, fast rapid prototyping services and high-performance FPGAs . 1 Introduction and Backgroun d

Every cryptosystem is based on some kind of secret, such as a key . Regardless of the cipher, the security of a cryptosystem is only as strong as the secrecy of the key. Thus, some of the most startlingly effective attacks on a cryptosystem involve no ciphertext analysis, but instead find flaws in the protocols that manage the keys . Cryptosystems based on symmetric ciphers are particularly vulnerable to protocol attacks, since both the sender and the receiver must be trusted to have a copy of the same secret key. Despite the difficulty of key management in symmetric ciphers, they remain attractive because of their algorithmic simplicity and high throughput when compared to public key ciphers . Symmetric cipher key management becomes especially problematic when the re- ceiving party is not trusted or is in a position that can be easily compromised . This is where tamper-resistant hardware comes into play ; a summary of tamper-resistance guidelines can be found in [6] . Many systems employ tamper-resistant hardware tech- niques in varying degrees, including the Sandia National Labs' "Stronglink" microme- chanical 24-bit lock [2], the Clipper chip [1], IBM's 4758 PCI Cryptographic Copro- cessor [3], Cryptographic Smartcards [5] [4], Automatic Teller Machines (ATMs), and now, video game consoles . However, trusting inadequate physical security measures to protect important secrets is risky. [14] and [15] present examples of how some of the aforementioned tamper-resistant systems can be defeated with surprisingly simple and direct methods . In the case of the XboxTM video game console from Microsoft, the secret being protected is a key and an algorithm for decrypting and verifying a bootloader . This bootloader then decrypts and verifies a kernel image . Both the bootloader and ker- nel image are contained in an unsecured FLASH ROM . The kernel then verifies the authenticity and integrity of the applications it runs . Thus, a chain of trust is grown, bottom up, from a seed of trust. This seed-the secret key and an algorithm-is planted in a physically secure, secret boot block . The Xbox architecture results in the deployment of large number of identical de- vices, all of which contain the same secret information . As the analysis below illus- trates, the security of such a system can be readily compromised, even if the secret is protected by tamper-resistant hardware and obscured by algorithmic complexity .

2 Xbox Hardware Cryptosystem Overview

The Xbox crypto protocol presents a strong defense in the face of unsecured FLASH ROM-based modifications . Please refer to figure 1 . The Xbox boots from a 512-byte secret boot block that is hard-coded into the southbridge system ASIC (the "MCPX") . This boot block performs the following functions, in order : • loads the "jam tables", i .e., initializes the console chipset • turns on the processor caches • decrypts the kernel bootloader, contained in FLASH ROM • verifies that decryption was successful • jumps to the decrypted kernel bootloader The bootloader then performs some more system initialization, decrypts a kernel image from FLASH ROM, decompresses and verifies the decrypted image, and enters the kernel. The kernel decryption key is stored within the bootloader image . Note that the secret boot block code is structured so that the bootloader decryption key is never written to main memory, thus defeating an attack that involves eavesdropping on the main memory bus . The bootloader is encrypted with RC-4 using a 128-bit key . The decryption algo- rithm and key are stored in the secret boot block and executed by the Pentium CPU ; the busses between the secret boot block and the CPU are not encrypted but assumed to be secure due to their high speeds . The decryption of the bootloader image is veri- fied by checking for a 32-bit magic number near the end of the plaintext stream . This check only ensures that the ciphertext stream was not corrupted ; one with knowledge of the secret key and the magic number can easily create original bootloader images . It is fairly clear from the code structure of the secret boot block that such a simple, unreliable check was employed because there was not enough space for anything else . The magic number check might also confuse efforts to create original bootloader code based on a key obtained without full knowledge of the secret boot block's contents, such as through a personnel leak or brute force . However, a brute force approach to re- covering the bootloader is probably out of the question, since distributed .net's "bovine" effort, running for over 4 years and currently capable of testing over 100 gigakeys/s, is still working on a 64-bit RC-5 cipher at the time of writing [7] . Given this secure boot protocol, modifying the contents of the FLASH ROM alone will stand a very low chance of revealing anything useful about the console' . This is compounded by the fact that the FLASH ROM contains a decoy boot block with halfway reasonable looking decryption and initialization code . The algorithm in the decoy boot block is a bastardized RC-4, and of course applying this algorithm on the ROM contents yields nothing but white noise . Further discussion on how the secret boot block was discovered is contained in the next section .

3 Breaking the Physical Security

This section provides a chronology of how the Xbox's physical security was reverse engineered. Reading out the FLASH ROM contents and tracing the processor's execution start- ing from the boot vector proved to be futile, as the contents of the boot block in the FLASH ROM were a decoy, cleverly designed to thwart such activity . The code within the FLASH ROM boot block followed the same general flow as the code within the secret boot block, but the decryption algorithm, the keys and the ciphertext start loca- tion were incorrect . This initially resulted in a great deal of confusion but was later explained by the discovery of the secret boot block overlay. The realization of the existence of a secret boot block happened as a result of the observation that overwriting the processor reset vector in the FLASH ROM has no effect on the Xbox boot sequence . This led to a series of experiments that mapped out

' An important exception recently discovered is described in section 6 . pentium CPU bus width : data/others

33 " 64 / busclock- MHz 32+ rate 128 / trusted code 21+ and data : NV2A SDRAM digitally signed northbridge SSTL-2 64 MB with Microsoft security relationship + gfx 200 private key z not yet known MH 200 DDR \\\`- MHz / DDR2 = I~~ key-locked . .. 100Base-T-4----. -- k ► MCPX IDE hard dis Southbridge execuleables. USB cached data, avo games) secret boot $ game - ROM ~~-_-_ -~ controllers

dong[es w; < 10 v 8 / executoebles MHz 24 + DVD dri~e (DVL player, ^ .(game datef etc .) FLASH exeecuteablea) RO M +0(bootloader S kernel )

Figure 1 : Overview of the Microsoft Xbox hardware .

5 the extent of the secret boot block . The block is believed to be 512 bytes in length, situated at the highest location in processor physical memory. The following approaches were then considered for extracting the secret boot block contents : • decapping the MCPX southbridge ASI C • using the JTAG boundary scan on the Pentium to step through the "real" boot se- quenc e • probing the main memory bus for any portions of the boot block that were written to memory • probing the processor-northbridge bus using a logic analyzer or custom hardware • probing the HyperTransport northbridge-southbridge bus using custom hardware The direct approach of decapping the MCPX southbridge ASIC was rejected be- cause this ASIC appears to be manufactured in a O .13µ process with perhaps 6 or 7 metal layers (figure 2) . Extracting the bootblock from this ASIC would require a de- layering facility and access to an electron microscope . While there are companies such as Chipworks that specialize in these kinds of services, it is a difficult, expensive, and time-consuming task .

I. i

Figure 2 : Die shot of the MCPX Southbridge ASI C

The JTAG boundary scan approach was rejected on the grounds that the TRST# pin, used to hold the JTAG chain in reset, was tied active in a manner that was difficult to modify without removing the processor. Removal and socketing of the processor was considered to be prohibitively expensive and time consuming ; the cost of a BGA socket for the Pentium III is estimated to be in the hundreds to thousands of dollars . In addition, the JTAG boundary scan codes for the Pentium III are largely proprietary and would have to be reverse engineered as well . SDRAM probing was rejected on the grounds that far too many pins (128 data pins alone) had to be simultaneously probed, and on the grounds that the decryption routine and/or key could be held entirely in processor cache and never written to SDRAM . Also, the cost of solder-on TQFP-100-to-logic-analyzer adapters is prohibitive (around $600 per adapter ; four are required) . Probing the processor-northbridge bus was re- jected for similar reasons : at least 64 data pins had to be probed, and tapping such a large number of GTL+ signals without causing signal integrity issues was thought to be very difficult . The northbridge-southbridge bus, however, showed promise because of its sim- plicity. The bus has a low signal count (10 unique) and all the signal traces are laid out on the console's motherboard in a straight flow-through fashion (12-mil center-to- center spacing within a differential pair, 13-mil spacing between differential pairs, see figure 4) . In addition, the clock and strobe signals for both the transmit and receive directions are clearly labeled on the motherboard, perhaps for manufacturing debug and test reasons (figure 3) . Data on the nVidia nForce chipset [9], a close relative to the Xbox chipset, indicates that the bus uses the HyperTransport (formerly known as Lightning Data Transport (LDT)) protocol . The specifications for the HyperTransport protocol are open and readily available . [8 ]

Figure.3 : HyperTransport bus layout showing silkscreen informatio n

The primary difficulties in tapping the HyperTransport bus are its high speed (200 MHz DDR) and its use of differential signaling (few logic analyzers come with support for differential signaling) . It is interesting to note that HyperTransport bus protocol analyzers are commercially available from vendors such as FuturePlus, but they cost upward of $25,000 . This price does not include the high-end logic analyzer required to drive the protocol analyzer. The alternative solution to tapping the northbridge-southbridge HyperTransport bus was to build a relatively cheap, fully custom, differential-to-single-ended "Tap Board", and to connect the output of this board to an FPGA . A Xilinx Virtex-E part was used in this study because it was readily available, as it was used as part of the author's thesis work; however, a better choice would be any of the new Xilinx Virtex-II FPGAs . A suitable Virtex-II FPGA would cost about $50 in single quantities . The custom Tap Board uses a two-layer, 6 mil trace/space, 15 mil hole process from Advanced Circuits, offered at a price of $33 per board in small quantities . A Texas Instruments SN65LVDS386 LVDS-to-TTL converter was used to turn the differential HyperTransport signals into a single-ended format . It turns out that the HyperTransport physical signaling specification is similar to LVDS, but with a different common-mode offset . The output of the converter drives a cable to the FPGA board . The FPGA is configured to receive the high speed signals with the CTT (Center-Tap Terminated) "Select I/O" option . CTT is chosen because it allows the single-ended TTL drivers to be terminated with a low impedance to 1 .5V and still function properly . Note that although Virtex-E FPGAs support LVDS directly, the target FPGA board was not originally designed to support the LVDS configuration .

differential signal pair

12 mi l

13 mi l

12 mi l

6 mil trac e

Figure 4 : Dimensions of the HyperTransport signal traces on the motherboard .

The Tap Board has on one edge a pattern of traces with no solder-mask that matches the pattern of traces on the Xbox motherboard . The Tap Board was soldered directly to the Xbox's northbridge-southbridge bus . Only the receive-direction Tap Board was mounted for this study . The mating edge was shaped using a belt sander, so that the tapping traces were flush with the edge of the board, and the board could be mounted at a reclined angle to enhance solderability . The soldermask on the Xbox was removed with fine-grit sand paper, and the Tap Board was carefully aligned by hand, and then held roughly in place by soldering a coarse piece of wire between the Tap Board and the motherboard . A hard-setting adhesive, such as Miller-Stephenson Epoxy 907, was ap- plied to fix the angle and mating distance of the Tap board to the motherboard ; once the epoxy was cured, the holding wire was removed, and the traces between the Tap Board and the Xbox motherboard were easily soldered using a fine-tip iron and a microscope.

Figure 5 : Tap Board connected to the FPGA board . The FPGA board was originally developed by the author for another work.

The polarity of the HyperTransport bus signals was determined by probing the idle state of the wires, assuming that their idle state had a value of 0x00 . Those signals that had the positive and negative pairs swapped relative to the Tap board layout idled to a "1" . Signals with inverted polarity were restored to their true value within the trace capture FPGA .

Figure 6: Close-up of the Tap Board mounted in the Xbo x

A Xilinx Virtex-E FPGA was used to capture traces of HyperTransport bus activ- ity. It was difficult getting the FPGA to manage the 200 MHz DDR data rates with low skew . However, careful hand-layout of the input registers, post-layout timing sim- ulations at nominal temperature and voltage, and iterations to manually tweak delays and skews eventually centered the clock signal within the data signal on the FPGA's input registers . The retimed data was then demultiplexed to a very manageable 100 MHz single-data rate 32-bit wide bus and written into a bank of FIFOs, along with a sequence count that recorded at what cycle relative to a reset signal the data was captured. Some additional logic was incorporated into the FPGA that discarded idle values (0x0000 0000) from the trace FIFOs and formatted the deserialized data relative to the strobe signal, clearly identified on the Xbox motherboard as "RXD8 / RXD*8" (figure 3) in sector 5D (the Xbox motherboard has a coordinate system printed on its periphery) . The reset signal can be determined by probing traces near the HyperTransport bus that behaved like a reset signal . In reality, it is possible that some signal that was not the true reset signal was used to trigger the trace capture, but that is irrelevant as the signal chosen seemed to display a consistent timing relationship with respect to the bus . In fact, the signal used to trigger the trace capture exhibited a 350 ns runt pulse about 67 ms after power-on-reset ; this runt pulse was filtered out by a state machine, as it was erroneously restarting the trace capture . Once traces of data were captured by the FPGA, the order of the bits on the Hy- perTransport bus relative to the Tap Board layout could be determined . This can be done by correlating known values in the FLASH ROM with data values captured on the HyperTransport bus . A 1's count can be used to identify candidate patterns and data sequences for manual correlation . Fortunately, very early on in the trace several distinctive, sequential values are grabbed from the FLASH ROM : a few values from the lowest address in FLASH ROM, followed by a few values from the boot vector, which happens to be identical between the decoy FLASH ROM contents and the secret boot ROM contents . The order of the traces for the receive-direction bus on the moth- erboard are believed to be, from the outside to the inside, bit 8 (CTL strobe), 4#, 0#, 7#, 2#, 3#, CLK#, 5, 6#, and 1#. Signals with # after them are inverted with respect to the Tap Board layout. The raw trace data captured by the FPGA was then dumped to files and manually processed . An example illustrating the format of trace data can be found in figure 7 . The sequence number was critical in determining the boundaries of cache traces ; blocks of 8 or 16 words are fetched by the processor, even when the caches are off . Trace data was differentiated between secret boot code and FLASH ROM data by searching for the first word of the candidate trace in a dump of the FLASH ROM ; if the data could not be found in the FLASH ROM, it was guessed to be secret boot code . Because the processor boots with its caches off, the first roughly 24 million bus cycles contained repeated line fills of the "jam table" initialization code, and were ignored as they just performed the wrote initialization of the chipsets . The caches were then turned on by the boot code, and very clear and simple to read blocks of instructions and data were found. These instruction traces were mapped into the secret boot block using the decoy FLASH ROM boot block as a template . The recovered block of code was then disassembled, and the decryption algorithm was determined to be 128-bit RC-4 . Because the location of the 128-bit key within the secret boot block was ambiguous (the Tap Board only provides data traces without addresses), a brute-force search wa s

10 00000097 664A1D55 : . : E : 000000C 6 00000D5C : 05F108F6 : . : F 0100000 0 00000DEO 2A1A2841 : . : 1 : CCO0300 0 00000E5D B6FE7F68 : . : E A0552C0 1 00000EDA : 5932C662 : . : 1 : 000000F D 0000OF57 F9FBA4C1 : . : E : C7C9400 0 00000FD4 F7F9B6AE : . : 1 000000C 6 00001051 73376133 : . : E : 9EC4940 0 000010CE FDO127AD : . : 1 : 000000D 6 0000114B : 34E8FD29 : . : E C7C9400 0 00001245 : 1814AO22 : . : 1 000000C 6 000012C2 : 38EBD672 : . : E C7C9400 0 00022526 : C6C0847E : . : 1 000000C 6 00022527 : A26216BB : . : E : C7C9400 0 00022528 99DA5F80 : . : E 000000C 6 00022529 453862E3 : . : 1 C7C9400 0 000226D5 B6DF18CO : . : E : 000000C 6 000226D6 : DA562768 : . : 1 C7C9400 0 000226D7 : 0F1D66E3 : . : E : 000000C 6 000226D8 DDC59BS9 : . : 1 8D42CBC D

Figure 7 : An example illustrating the format of trace data captured by the FPGA . Format of the data is "sequence : data : :: aligner : unaligned data". utilized to help isolate the key . A 16-byte sliding "guess key" window over the captured data trace was used as input to an RC-4 decryption engine, and a histogram of the data output was used to determine when the key was found . This information helped resolve some ambiguities in the placement of the data within the secret boot block, and a full picture of the important code within the secret boot block was assembled . Now that the secret boot procedure is understood, it is possible to encrypt a new ROM for the Xbox console, and to further study the structure of the Xbox bootloader and kernel . Given the RC-4 algorithm, the 128-bit key, and the magic check number at the end of the decrypted segment, one can run original code on the Xbox .

4 Lessons Learned

One lesson of this study is that the use of a high-performance bus alone is not a suf- ficient security measure ; the advent of cheap, fast rapid prototyping services and high performance FPGAs allows even poor students to create devices that can tap the bus . However, encrypting a bus introduces its own problems . A secure cipher on a high per- formance bus significantly impacts latency, power consumption, and reliability . Power consumption is increased because the activity factor for the bus approaches 100%, if the encryption scheme is any good . In this case, the power consumed driving the bus would increase by over an order of magnitude, as the observed activity factor on the northbridge-southbridge bus was well below 10% . Reliability is hurt because a single bit error, even during an idle cycle, can corrupt large blocks of data ; with a stream cipher, the corruption would extend until the stream is resynchronized . A compromise solution to the problem is to simply not trust any bus in the system . In this case, the secret boot block might employ a digital signature protocol, such as Authenticode®, using public key algorithms and one-way hashes . [10] Then, all secu- rity rests in the secrecy of the private key, and the strength of the public key algorithm . In order to prevent employee leaks from spreading a private key, a system similar to the BBN SignAssureTMcould be used to manage the key so that no human ever has knowl- edge of the private key . The principal drawback of this method is that it requires extra silicon area to be spent on storing a larger secret boot block, as it is probably difficult, if not impossible, to code a full public key encryption algorithm plus key storage and hardware initialization code within 512 bytes . The above suggestion does not prevent someone from eavesdropping and obtaining the plaintext of the operating system code, but it does effectively defeat any attempt to run original code . The public key scheme could be defeated, however, by a mech- anism that snoops the main memory bus and patches plaintext in main memory . As discussed previously, this approach is possible, but difficult ; however, the tenacity of an attacker should not be underestimated . For example, a known attack on the Sony Playstation2 console was developed that is rumored to work by dynamically patching its high-performance RAMBUS memory system . The difficulty of a memory patch at- tack could be increased by using a simple periodic hash and check of the critical code regions in memory . Buffer overrun exploits are also a point of weakness, and they work regardless of the secret boot protocol . An attacker sniffing an insecure bus could obtain the de- crypted kernel code and analyze it for weaknesses . However, any machine architecture that employs guarded pointers [11] is much more difficult, if not impossible, to attack using buffer overruns . A fast, efficient guarded pointer scheme with a simple hardware implementation is described in [12] . This scheme can easily be adapted to work in a 64-bit architecture . A. Kerckhoffs (1835-1903) once stated that the security of a cryptosystem must not depend on keeping the algorithm secret ; this is referred to as Kerckhoffs' Principle . [13] Another way of stating this is that there is no security through obscurity . In particular, it is an error to assume that a secret, distributed along with the information it guards, is never revealed . For example, the Sega Dreamcast uses a proprietary GD-ROM software format ; but, the drive can read CD-ROM disks . The discovery of a back door in the Dreamcast OS allowed executables to be run directly from a standard CD-ROM, thus nullifying the barrier presented by the proprietary GD-ROM format . Other systems that rely on well-hidden secrets, including the Clipper chip [14] and the smartcards used widely throughout Europe to control access to services such as pay-TV, cell phones and gas, have been shown to be surprisingly vulnerable . [15] In this case, the Tap Board and trace capture FPGA design was developed in spare time over the duration of three weeks-including the 5-day turn time for board fabrication-for a total cost of around $50 per board . In other words, if you ship your secrets in your hardware, it is a good assumption that the users will eventually-and perhaps quickly-know your secrets .

12 The failure of the Microsoft Xbox console security protocol is compounded by the fact that, as a console manufacturer, design-for-test and design-for-m anufacturability is paramount . Creating a console with too much security makes it difficult to debug and manufacture . For example, the backside of the Xbox motherboard is populated with test points-including test points for every pin on the FLASH ROM . These were originally installed because of the desire to quickly test for faults during manufactur- ing . The flip side is that one could build a custom "bed-of-nails" tester jig that uses the the FLASH-ROM test points to reprogram Xbox motherboards with any desired code . This method would be fast, inexpensive and solder-free . The lesson here is that even if a manufacturer is very confident about their trust model and security protocols, it must guard against the possibility that they may someday be broken . To this extent, a sim- ple physical security measure, such as a spray-on conformal coating, would severely hamper the re-use of test structures for improper purposes . This of course greatly com- plicates the repair of hardware failures in the field, but that is a business trade-off the manufacturer must make . A more radical alternative would be to design the gaming system using proprietary hardware and proprietary media formats, thus limiting the practical impact of any at- tack on the console . Game consoles are manufactured in very high volumes, so the cost of developing a simple but effective proprietary format can be amortized . The format could then be patented, providing protection against unauthorized use without the need for secrecy. This approach was taken by Nintendo with their Nintendo 64 console . [ 16] Although patents have a 20 year lifetime, this is an eternity in the video game console industry : the original Nintendo Entertainment System (NES) had its debut in 1985 .

5 Future Work

Understanding the secret Xbox boot protocol is just the first step in understanding the Xbox . It is now possible to investigate the kernel and bootloader in more detail . It has been determined that the kernel is also encrypted with RC-4/128, and it is also believed to be compressed using LZX compression, a scheme employed by Microsoft's canonical distribution format, the "Cabinet" file . The structure and function of the kernel is still being investigated . One important issue to investigate is the privacy of users who use the Xbox for on- line tasks . It is known, through a parallel effort of the author, that information such as the serial number of the console is stored electronically and is probably accessible to the kernel . What happens to this information when the Xbox is plugged into the internet? Because of the encryption used to secure the Xbox, the nature of the information that is relayed to Microsoft's on-line game servers is unknown . Thus, important future work is to try to determine what the Xbox reveals about the user's identity and personal gaming habits .

13 6 Addendum

It has recently been called to the author's attention that the hardware initialization pro- cedure of the Xbox contains a significant weakness. [17] Recall from section 2 that the first step in the Xbox boot process is to load the "jam tables" that configure the console's chipsets . This jam table initialization procedure involves a lengthy and com- plex sequence of writes to various memory-mapped hardware register locations . As a result, the initialization procedure is implemented using a simple bytecode interpreter that reads initialization commands and data from the FLASH ROM . These bytecode commands-stored as plaintext-can be manipulated to cause the initialization procedure to abort before the kernel decryption/verification routine is executed, and to instead run insecure code directly out of the FLASH ROM . In other words, with plaintext-only modifications in the FLASH ROM, one can entirely bypass the Xbox's security mech- anism. One could easily fix this security hole, however, by verifying the jam table's contents prior to bytecode execution with a one-way hash function, or by explicitly coding all initialization functions within the secure boot block . Both of these solutions, however, would require the secure boot block to grow significantly from its current 512-byte size, and neither solution allows easy changes to the initialization procedure in case a bug is found or in case the hardware evolves as a result of cost reduction efforts .

Acknowledgment s

The author would like to acknowledge the support of the on-line electronic community . The author would also like to thank the Electronic Frontier Foundation for providing legal counsel . Hal Abelson and Tom Knight also provided invaluable moral support . Finally, the author would like to thank Nikki Justis for all her love and support, and for giving him such an interesting toy for Christmas .

References

[I] Federal Information Processing Standards Publication , FIPS PUB 185 : Escrowed Enc ryption Standard (EES) http :// www .itl .nist .gov/fipspubs/fip185 .htm

[2] Thomas W. Krygowski, Jeffry J . Sniegowski, M . Steven Rodgers, Stephen Montague, James J. Allen, Jerome F. Jakubczak, Samuel L . Miller, Infras- tructure, Technology and Applications Of Micro-Electro-Mechanical Systems (MEMS), Sandia National Laboratories, Intelligent Micromachine Department, http ://www .mdl.sandia .gov/Micromachine, also appears in Sensor Expo 1999 .

[3] IBM, IBM 4758 PCI Cryptographic Coprocessor, http ://www .ibm.com/security/cryptocards/

[4] Gemplus (a smartcard vendor), Gemplus Corporate Website, http ://www .gemplus .com

14 [5] Pit Joon Lee, Eun Jeong Lee, Yong Duk Kim, How to Implement Cost-Effective and Secure Public Key Cryptosystems Proceedings of the First International Work- shop on Cryptographic Hardware and Embedded Systems (CHES), August 1999 .

[6] Federal Information Processing Standards Publication, FIPS PUB 140-2 : Security Requirements for Cryptographic Modules, http ://csrc.nist.gov/publications/fips/fipsl40-2/fipsl4O2 .pdf

[7] distributed .net, distributed . net : Project RCS, http ://www.distributed .net/rc5/

[8] HyperTransport Consortium, HyperTransportTM1/O Link Specification, version 1.03, http ://www.hypertransport .org

[9] nVidia Corporation, nForce MCP Product Overview, 06.010, http ://www.nvidia .com

[10] Microsoft Developer Network, Introduction to Code Signing, http ://msdn .microsoft.com/workshop/security/authcode/introauthenticode .asp

[I 1] Nicholas P. Carter, Stephen W. Keckler, and William J . Dally, Hardware suppor t for fast capability-based addressing, Proceedings of ASPLOS VI, October 1994, pp. 319-27 .

[12] Jeremy Brown, J .P. Grossman, Andrew Huang, and Thomas F . Knight, Jr ., A capability representation with embedded address and nearly-exact object bounds, Project Aries Technical Memo 5, http ://www .ai .mit .edu/projects/aries/Documents/Memos/ARIES-05 .pdf

[13] Auguste Kerckhoffs, La cryptographie militaire, Journal des sciences militaires, vol . IX,pp . 5-38, Jan. 1883, pp . 161-191, Feb. 1883.

[14] R . Anderson and M . Kuhn, Tamper Resistance - a Cautionary Note, Proceedings of the Second Usenix Workshop on Electronic Commerce, pp . 1-11, November 1996.

[15] R . Anderson and M . Kuhn, Low Cost Attacks on Tamper Resistant Devices, IWSP : International Workshop on Security Protocols, LNCS, 1997 .

[16] Van Hook, et at ., High Performance Low Cost Video Game System with Co- processor Providing High Speed Efficient 3D Graphics and Digital Audio Signal Processing, U .S . Patent 6,239,810, May 29, 2001 .

[17] Private conversation with visor. visor can be reached by sending a personal mes- sage to visor on www .xboxhacker .net

15 EXHIBIT C

Comparison to Stock PC Hardwar e Xbox Motherboard

Aug 13-15, 2002 CHES2002

Aug 13-15, 2002 CHES2002 Aug 13-15, 2002 CHES2002 i Trustable hardware is a cornerstone of

1c+ihlichinri Tri icy

Aug 13-15, 2002 CHES2002 Aug 13-15, 2002 CHES2002

■ Processor jumps to boot vector at games code OxFFFFFFFO

O "Jam Table" jam tables validate HW initialization (unencrypted) games code

V U)

caches turned on jump to kernel

decrypt bootloader bootloader decrypt kernel , to SDRAM jump to bootloader (encrypted) decompress and verify

"'untrusted" code and dat a encryption ke

Aug 13-15, 2002 CHES2002

secure hardware boundary Bus Sniffing Candidates pentium CPU bus width: data/others

133 + 641 bus clock MHz 32+ trusted code rate 28~ 21+ and data: NV2A SDRAM digitally signed northbridge SSTL-2 64 MB with Microsoft security relationship + gfx 200 private key... . not yet known MHz \ 200 8/ DDR MHz T 2 DDR = key-locked 100Base-T. hard disk pop MCPX IDE (executeables, southbridge USB cached data, secret boot save gamnes) game -oo ROM controllers

dongleL wl 1 < 10 8/ executeables MHz 24+ DVD drive (DV D player, {game data / FLASH executeables) ROM (bootloade r + OS kernel) Aug 13-15, 2002 CHES2002 secure hardware boundary

pentium CPU Possible key pa h

133 64/ MHz 32+ 128/ Path of secret key 21+ SDRAM no 64 MB 200 MHz . DDR 200 8/ MHz 2 DDR

10OBase-T-. I DE So ge USB se oot save games) game ROM controllers

ca 8/ dongles w/ .5c,1 0 "PV executeables MHz 24+ rt e (DVD player, )VD t etc .) FLASH eecitt ble ROM (bootloader + OS kernel) Aug 13-15, 2002 CHES2002 secure hardware boundary

pentium CPU

133 64/ MHz 32+ 28/ 21+ Too many pins SDRAM northbridge SSTL-2 64 M B + gfx 200 MHz 200 8/ DDR MHz C 2 DDR = key-locked and disk 10OBase-T .4 MCPX \ e IDE ( ecuteables, southbridge USB cached data, secret boot sava games) game -414 ROM controllers

don w/ < 10 8/ e executeables MHz 24+ DVD driv (DVl7 player, (game .data / etc.) FLASH e)(ecuteables) ROM (bootloade r + OS kernel) Aug 13-15, 2002 CHES2002 secure naraware oouna a

pentium CPU

133 . 64/ MHz 32+ 21128+/

Too many pins! NV SDR north i ge SSTL-2 C~A fast, obscure + gfx 200 MHz layout 200 D MHz C 2/ DDR = key-locked 100Base-T. MCPX I DE sk (a byes, Southbridge USB mched'data, secret boot save games) game ROM controllers

dangles w/ <10 8/ executeables MHz 24+ DVD drive (DUD player (game data ! etc.) FLASH executeables) ROM (bootloader + OS kernel) Aug 13-15, 2002 CHES2002 secure hardware boundary

pentium CPU

133 + 64/ MHz 32+ 128/ NV2A 21+ Reasonable pin SDRAM northbridge SSTL-2 64 MB count, but fast + fx 200 MHHz 200 DR MHz 2 DDR = \ key-focked 1 OOBase-T. IDE Southbridge USB secret boot game -oil ROM controllers C dongles➢w/ < 10 8/ executeable s I MHz 24+ 3VI0 drivo . (DVD player, (game, data ! ) ) etc. FLASH ox6cuteables ROM (bootloade r + OS kernel) . Aug 13-15, 2002 CHES2002 Tx bus

Aug 13-15, 2002 CHES2002

Aug 13-15, 2002 CHES2002

Backdoors

Aug 13-15, 2002 CHES2002 Aug 13-15, 2002 CHES2002

Aug 13-15, 2002 CHES2002

Aug 13-15, 2002

EXHIBIT 8 Press Release Page 1 of 2 SUPPORT , ERS UTAINMENT I COMPANY INFO

S EARCH -~ SV ID 60 1

8 CCK NVIDIA Announces Preliminary Second Quarter Legal info Results

For further information, contact :

Investor Relations Mohamed Siddeek NVIDIA Corporation (408) 486-7371 [email protected]_ co m

Public Relations Derek Perez NVIDIA Corporation (408) 486-2512 dperez@nvidia .com

For Immediate Release

SANTA CLARA, CA . - July 30, 2002 - NVIDIA@ Corporation (Nasdaq : NVDA) today announced that it expects to report total revenues of approximately $410 million to $430 million for the second quarter of fiscal 2003 ending July 28, 2002 . The decrease in revenues from the prior period was primarily the result of broad weakness in the personal computer market. In addition, the Company expects to take a significant inventory write-off in the second quarter. Including the inventory write- off, the Company expects its earnings for the second quarter to be at or above break-even .

NVIDIA expects to announce final second quarter financial results after the market close on August 15, 2002 .

NVIDIA will conduct a conference call with analysts and investors to discuss its preliminary second quarter fiscal 2003 financial results today at 2 :00 P.M . Pacific Time (5 :00 P.M . Eastern Time) . To listen to the conference call, please dial 706-679-0543 ; no password is required. The conference call will also be webcast live (listen-only mode) at the following websites : www .nvidia .com and www .streetevents .com . You must have a compatible media player installed on your computer in order to listen to the webcast . You may download a media player for free at the sites listed above .

Replay of the conference call will be available at the web sites noted above or via telephone by calling 800-642-1687 (or 706-645-9291), passcode 5101002 . The replay of the conference call will be available unti l August 6, 2002 .

About NVIDIA

NVIDIA Corporation, located in Santa Clara, CA, is the global leader in advanced graphics and multimedia processing technology for th e http ://www .nvidia .com/view.asp?10=10_20020730_5598 7/14/2003 Press Release Page 2 of 2 consumer and professional computing markets . Its 2D, 3D, video and multimedia capabilities make NVIDIA one of the premier semiconductor companies in the world . NVIDIA offers a wide range of products and services, delivering superior performance and crisp visual quality for PC- based applications such as manufacturing, science, e-business, entertainment and education .

Certain statements in this press release, including the statements relating to the Company's preliminary results for the second quarter of fiscal 2003 and the expected financial results, are forward-looking statements that are subject to risks and uncertainties that could cause results to be materially different than expectations . Such risks and uncertainties include, but are not limited to, the need to finalize the financial results for the second quarter and have such results reviewed by the Company and KPMG LLP ; the strength of our business model ; customer and distributor acceptance and other issues related to product transitions ; manufacturing and other delays relating to new products ; difficulties in the fabrication process and dependence of the Company on third-party manufacturers ; general industry trends including cyclical trends in the PC and semiconductor industries ; the impact of competitive products and pricing alternatives ; market acceptance of the Company's new products ; the impact of litigation and other proceedings ; and the Company's dependence on third-party developers and publishers . Investors are advised to read the Company's Annual Report on Form 10-K and quarterly reports on Form 10-Q filed with the Securities and Exchange Commission, particularly those sections entitled "Certain Business Risks," for a fuller discussion of these and other risks and uncertainties . NOTE : All other company and/or product names are trademarks and/or registered trademarks of their respective manufacturers. Features, pricing, availability, and specifications are subject to change without notice .

http ://www.nvidia .com/view.asp?10=10_20020730_5598 7/14/2003 EXHIBIT 9 .4vidta Writes Off First-Generation nForc e Page 1 of 5

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July 30, 200 2 Nvidia Writes Off First-Generation nForce l Print Chipset Will Drag Down Nvidia Earnings , Revenues Email Save By Mark Hach- g, ExtnerncTech

For the second quarter, at least, the nForce is not with Nvidia .

Nvidia, one of the most successful companies in the IT space during 2000, will essentially break even for its second quarter of fiscal 2003, the Santa Clara, Calif.- based company reported today . Revenues will drop sharply from the first quarter's revenue of $582 .9 million to between $410 million and $430 million, a drop of as much as 30 percent.

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The drop came from an undisclosed EIN DIGITAL amount of inventory SHOP NOW that was written off, as well as a general VERSION Find the products and weakness in the PC prices you're looking to 0 Desktop s market, Nvidia said . 17 Digital Cameras The bulk of the Pick a Cate gory : 13 Display s inventory was from Any Product Type 0 Handhelds Nvidia's first- Shop by Keyword : 0 Networking generation nForce D Notebooks chipsets, according to 17 Printers Jen-Hsun Huang, Shop by Price Range : 13 Servers president and chief Any (a) „' 0 Wireles s executive, during a Powered by Nextag .com C Security Watc h conference call with view all Guides > > press and analysts. COMMUNITY The other portion of m the wnteoff came fro The CcofmY : A No- Get PC Magazine chips for Microsoft's Xbox that became obsolete as the software giant tried to foil at up to 77% off Co nfide nce Vote and get free software ! hackers. DStadler5S : `...A 'new' normal is a Try Our New Digital commonplace of Forma t We were expecting a number of significant Athlon retail ramps in Q2, but we didn't see that demand materialize," Huang said . "We're going to take the prudent steps recessions . I believe CStrr ent Issu e we'll figure out new of writing down that inventory." ways to grow, but perhaps not for anoth AMD's nForce and recently-introduced nForce2 chipsets are exclusively designed year or so ..." for the AMD Athlon processor, as Nvidia lacks a processor bus license from Intel to manufacture Pentium 4-compatible chipsets . &in. the Discussion

Recent Discussions "Fundamentally, I believe the AMO platform has a place in the marketplace---the • How Much am Dc Athlon and K8 marketplace will be a segment that will serve us well," Huang said . You Get? Aki http://www.pcmag.com/article2 /0,4149,427733,00 .asp 8/27/2002 Nvidia Writes Off First-Generation nForce . Page 2 of 5

Nvidia will not manufacture a mobile nForce, Huang said. • Suite Choic e Pr@vi o _Issu e • wind Qws socket err( The second quarter was "a challenging one", Huang concluded . Nvidia will report (10455 ) d Subscribe its earnings on August 15 . • M ro_$oft Word - I' Subscriber Help Deletion of 0 Gift Subscriptions Documents? 0 Newsletter Help • What CQmes After t 0 Contact the Editors cn~p_~yars ? 0 New Digital Forma t Start a Discussion

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ri Enter your Email : i http://www.pcmag.com/article2/0,4149,427733,00.asp 8/27/2002 EXHIBIT 10 USA: UPDATE 2-Nvidia says 2nd-qtr revenue to miss expectations .

07/30/2002 Reuters English News Service (C) Reuters Limited 2002.

(Adds conference call, analyst comments, byline ; previous dateline SANTA CLARA, Calif .)

By Ben Berkowitz

LOS ANGELES, July 30 (Reuters) - Graphics chip maker Nvidia Corp . on Tuesday warned that revenue for its just-completed second quarter would fall short of expectations because of weakness in demand for personal computers .

Nvidia shares plunged in after-hours trade on the news, falling 24 percent to $12 .35 on lnstinet from a close of $16.22 on Nasdaq .

Santa Clara, California-based Nvidia said it expected to report revenue of $410 million to $430 million for the quarter ended July 28, below the average Wall Street expectation of $567 .9 million as tracked by research firm Thomson First Cali .

Nvidia in late May had said it expected its second-quarter revenue to be up 1 percent to 3 percent from the $582 .9 million it reported in the first fiscal quarter . The new revenue forecast was as much as 32 percent lower than the prior view.

"To state the obvious, it's a pretty awful warning and it's a pretty stark contrast to the company's performance in prior quarters," said Jeremy Lopez, an analyst at Chicago-based research firm Morningstar Inc . '7 think inver.t-rs obviously, by the stock price, had anticipated this ahead of time ."

Nvidia said it would have to take a "significant" write-off of inventory in the quarter, and that including that charge, it expected results to be "at or above break-even ."

On a conference call to discuss the warning, Chief Executive Jen-Hsun Huang said part of the write-off would come from chips manufactured for Microsoft Corp .'s Xbox video game console that are now obsolete because Microsoft has changed the security codes in the chip .

Huang said weak PC sales overall, a larger mix of low-end PC sales versus high-end sales, and excess supply contributed to the overall shortfall .

TSMC , the world's largest contract chipmaker which derives the largest chunk of its revenue from Nvidia, last week issued a cautious forecast and cut capital spending plans because of what it said was weakness in a number of sectors, including PCs and game consoles .

The TSMC warning sent ripples throughout the chip industry, causing Nvidia shares to drop at one point to lows last seen in December 2000, wiping out the 300-plus percent gain that made Nvidia the best-performing stock on the S&P 500 in 2001 .

Nvidia is considered the industry leader in high-end, add-in graphics cards for computers, in addition to the chip it makes for the Xbox .

The company is closely allied with PC chip maker Advanced Micro Devices Inc . , which reported a large loss for the quarter that ended in June. AMO also lowered revenue guidance twice for that quarter.

Huang said he did not expect a significant impact in future quarters from Intel Corp .'s new integrated graphics chips, which are primarily built in to lower-end PCs .

He also said the company still expects its next-generation chipset for high-end graphics, currently known as NV30, to reach retail shelves in time for the holiday season. EXHIBIT 11 UPDATE 2-Nvidia says reached tentative SEC dea l Page 1 of 3

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Quotes & Find Sear chSite News : Quote/Chart/News Find Sews Index symbol/fund/keyword REUTERS 4 UPDATE 2-Nvidia says reached E-mail this article tentative SEC dea l Printer-friendly 4/25/2003 6:00:47 PM {{}} Create Alert

(Adds analyst comments, byline, updates stock to close )

By Ben Berkowitz

LOS ANGELES, April 25 (Reuters) - Nvidia Corp . (N_v_DA) on Friday said it had reached a deal with regulators by which it agreed not to break securities laws in the future, after receiving a notice indicating authorities would recommend charges against it for violating accounting rules .

CBS MARKETWATCH _T.O P NEWS Nvldia s shares fel l nearly 4 percent despite Intel Q2 sales rowi_earnin s double the settlement. Vivendi rejects MGM's $11 .5 billion offer Investors largely U .S. stocks end m the redas Altria, Boeing ignored the SEC deal slide and concentrate d instead on brewing White House forecasts $4 .55 bln---- 2003_d . .. concerns about the company's market share M 'Sign up for FREE e-Newsletters and competition from E-mail address here Sign Up l rivals, an analyst said .

TRACK THESE TOPIC S "I think most of the issue My Po rtfolio Ale rts was largely behind the Company : Nvidia Corp Add Create stock," Pacific Crest Company : Microsoft Corporation Add Create Securities analyst Michael McConnell told Get Breaking News sent directly to youur inbo_ x Reuters . "I see this as Edit My Portfolio I Edit Alerts just nothing more than a formality." http ://cbs .markefwafch .com/fools/quofes/newsarficle .asp?prinf=1 &symb=&guid={22 . . . 7/15/2003 UEDATE'2-Nvidia says reached tentafive'SFC deal Page 2 of 3 The company, whose accounting practices have been under investigation by the Securities and Exchange Commission since early 2002, said in an annual report to the SEC that it had received a "Wells notice" indicating that the agency's staff was going to advise the full commission to take enforcement action related to the probe .

Nvidia said in the report that it then reached a tentative deal with the agency this month.

The Santa Clara, California, company said it would not have to pay any fines or penalties, but must agree to a cease-and-desist order against any future violations of certain federal securities laws .

Nvidia said the review of the agreement could take weeks, or even months to complete, and there is no guarantee the SEC would approve the deal .

In April 2002, Nvidia said that as a result of the investigation and its own internal review, it would restate results going back to its 2000 fiscal year to correct accounting errors .

In the annual report, Nvidia also disclosed that the bankruptcy trustee for a company called 3dfx served it in March with a complaint demanding additional payments under an April 2001 asset purchase agreement between the two companies .

Nvidia said it believes the 3dfx bankruptcy filing would allow a determination of the full extent of that company's debts and liabilities, and in turn Nvidia's obligations under the April 2001 deal .

After rising 317 percent in 2001 to be the best-pe rforming stock on the S&P 500 , Nvidia shares lost nearly 83 percent of their value in 2002 because of the regulato ry probe, a dispute with Microsoft Corp . (MSFT) over chip pricing , and invento ry issues.

But the shares are up more than 17 percent in 2003 after Nvidia settled the dispute with Microsoft, its largest customer accounting for 23 percent of its revenue, and rolled out a series of new chips for the desktop and mobile markets .

The shares closed down 52 cents , or 3 .7 percent, at $13.55 on Nasdaq .

© Reuters 2002 . All rights reserved . Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters and the Reuters sphere logo are registered trademarks and trademarks of the Reuters group of companies around the world .

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CNET tech sites: Price comparisons I Product reviews I Tech news I Downloads I Site map NEws.C0M TECH NEWS HI ST Personal iecwlo Search News.com Hackers, programmers Go! "improve" Xbox Advanced searc h

By David Becker Latest Headlines Staff Writer display on deskto p December 12, 2001, 4 :00 AM PT Red Hat slips into the red From its cutting-edge graphics processor to the video game industry's Cometa Networks gains first built-in hard drive, Microsoft's Xbox has been praised as one of the new CEO most technologically sophisticated game devices ever . But that's just Co-founder downplays not good enough for hardware and software experimenters who have Google IP O been tinkering with the Xbox since the day it went on sale . Scanning the future of privacy From the relatively benign efforts of software coders looking to capitalize on Huawei admits to a little the Xbox's latent online capacity to hardware geeks willing to risk warranties copying and good sense in pursuit of better performance, the PC-derived design of Start-up helps rival IMs the Xbox has encouraged an unprecedented level of tinkering for a game to get along machine in the few weeks it has been on the market . Red Hat liberates low- end Linux "It's a very powerful piece of hardware--that's what motivates us," said Dan Adobe site dings App les Johnson, a high school senior from Sugarland, Texas, and creator of XboxHacker, a Web site dedicated to disseminating the latest information on Microsoft goes its own Xbox tweaks. "It has the potential to do so much else . We can write lots of programs eventually to really exploit this thing ." PC Forum delves into future of tech That's why Johnson--a ,• advertisernen t Wi-Fi firewall gets U .S. computer programming buff approval who has previously hacked Gateway%'' 300 Series Web spec labels XM L the ePod Web appliance to W),)V ith More Memory dr d parts Faster Prt essor ,, ar e.,er befo r run Windows CE programs-- [1t] Sony steadies two- has spent more time legged robot tinkering with his Xbox than Microsoft names ne w playing games on it. 3 sales chief Study: War could Gri m "I went to Wal-Mart the night IT spending before it came out and Expert wary about waited until they opened to information misuse . "I played a get one," he said E-business firm settles couple of games, and then I with FTC started looking for the screws SHIPPING ALWAYS INCLUDED Ohl" On all home PCs Microsoft breaks with in the case to get it open ." standards effort Johnson has made limited modifications to his Xbox so far, preferring to AOL to swap Real audio technolog y leave the riskier work to more hard-core hackers . "I'm very curious, but I kind of draw the line at soldering," he said . Dell steps onto printer stage http ://news.com.com/2100-1040-276907 . htm1 3/25/2003 Hackers, programmers "improve" Xbox I CNET News .com Page 2 of 5

Even for hackers without such limitations, Xbox achievements have been This week's headlines limited so far, thanks to numerous protection measures Microsoft built into the console . News Tools III Hackers have managed to use a faster ATA-100 Get news by mobile ` " p la cable to connect the console's hard disk and DV D " keeps drive. Beyond that, hardware hackers are still in What is this? research mode, working to crack password schemes Content licensing BIOS programming instructions built into the machine . and dissect the basic Displanews on desktop "I thought it would be easier than it is," Johnson said . "I think Microsoft put a lot more time into hacking and protection stuff than we anticipated .

"I think we 're slowly making more and more progress . Just in the last couple of days, we've figured out some of the hard drive passwords--now we can F Enterprise Hardware Senior editor Michae l access stuff on the Xbox hard drive with a PC ." Kanellos covers chips , se rvers , and all th e hardware that runs you r A PC app roach business . (weekly) PCs play a large part in most Xbox hacking activities . Other game consoles F Daily Dispatc h are custom -built machines that defy easy modification . Nintendo's new Our award-winnin g s de to p GameCube, for example, doesn't use standard DVD media or even standard storiese righttto to you r screws to hold the case together . inbox. (daily) Your e-mail her e The Xbox , however, mostly uses off-the-shelf PC hardware , including a s~gn me up! Pentium III processor and standard hard drive , attracting the interest of All News.com "overclocking" enthusiasts who normally spend their time souping up PCs . newsletters

"It's basically a computer , and computer hardware is what I do ," said Keith Whitsitt, owner and editor of overclocking site Icrontic, one of the first sites to explore the guts of the Xbox .

"I was kind of surprised at how not locked-down it was," Whitsitt said . "I thought it was going to be more of a challenge . Honestly, I didn't have to try that hard to crack the Xbox ."

Hacker goals include discovering methods to swap out Xbox components, so original parts can be replaced with a bigger hard drive or faster processor. Whitsitt sees significant interest in modifying the Xbox so it will run standard Linux and Windows software .

Johnson envisions hackers turning the Xbox into an all-purpose home- entertainment center, capable of playing audio and video in the MPEG-4 and DivX formats and handling games for other systems through the use of emulator software.

"I have a whole big stack of old cartridge games," Johnson said . "It would be great to have an arcade system where you could play all kinds of games using emulators."

A business threat? One of the grandest goals, however, may be to crack the various encryption and protection schemes built into Xbox hardware and software to allow Xbox games to run on PCs, a move that could undercut the market for genuin e http ://news.com .com/2100-1040-276907.htm1 3/25/2003 Hackers, programmers "improve" Xbox I CNET News.com Page 3 of 5

Xbox hardware.

Some hackers "will definitely want to be able to load the Xbox operating system onto a PC and run games on a computer," said Whitsitt . "I'm sure that was Microsoft's No. 1 priority when they made the thing, to make sure that doesn't happen . But anything can be reverse-engineered, and the Xbox isn't going to be an exception . "

Gartner analyst P.J . McNealy said that even if hackers succeed in rigging Xbox games to play on a PC, Microsoft has little to fear from such a fringe element.

"It would be a worse problem if people could convert Xbox games into a file format they could share online and burn onto a DVD," he said . "But just given the tiny number of DVD burners on the market today, even that wouldn't be much of a threat .

"It's possible this could be a threat to the distribution channels for Microsoft in 2003 or 2004. I think it's hard to assess at this point, but I don't see any significant threat now."

Microsoft representatives were not available to comment on Xbox modifications, but the Xbox owners' manual strongly warns against such activities, and opening the console's case voids the warranty .

Online gaming the hard way Microsoft has given grudging approval to a more modest type of Xbox tweak, however. A pair of Linux programmers and online PC gaming site GameSpy each have developed software to allow Xbox users to run multiplayer games over broadband Internet connections, a capability Microsoft plans to offer by mid-2002 .

Both systems take advantage of the system's capability for connecting several Xbox units into a local network for multiplayer gaming . By hooking up the Xbox to a broadband-connected PC and running special software on the PC, the independent XboxGW software and the Xbox "tunnel" for the GameSpy Arcade online service allow Xbox owners to expand that local networking capability to online connections.

"Rooty," one of the programmers behind XboxGW, says the software is just a way to deliver a capability Microsoft is still working on .

"When we got our Xboxes, we were promised broadband technology and multiplayer games," he said . "We were pretty disappointed when it wasn't there, so we decided to see what we could do . It was pretty easy . We had it working within like three days of getting the Xbox. "

GameSpy founder and CEO Mark Surfas voiced similar motivations. "We've looked forward to console multiplayer gaming ever since we started the company back in 1995," he said . "Having the Xbox come out with the Ethernet port was something we were looking forward to, and we didn't want to wait to be able to do something with that Ethernet port. " http ://news.com.com/2100-1040-276907.html 3/25/2003 Hackers, programmers "improve" Xbox I CNET News.com Page 4 of 5

Response to both programs has been enthusiastic, with hundreds of players hosting online matches each night for games such as "Halo ." Even Microsoft has been mildly approving, recognizing XboxGW and the GameSpy service as creative but technically daunting approaches to online gaming, while Microsoft puts finishing touches on its Xbox network.

"It's amazing and exciting to see the lengths that garners will go to in order to take their Xbox games online," said Xbox product manager James Bernard . "We think (these) efforts are an interesting science experiment by and for hard-core gamers . (But) in order to engage several players, voice, content download and online support with no PC required, garners will have to wait for the Xbox online service . And it will be worth it . "

Rooty agrees, by and large . "This project was never designed to have more than a six-month life," he said . "We're not looking to replace anything Microsoft is doing . "

Surfas acknowledged GameSpy's Xbox service as something of a research lab for Microsoft as the company finishes its online Xbox service .

"They're clearly very interested in what's going on with hard -core garners and what they want from online gaming ," he said .

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Related News Xbox, GameCube play well with consumers November 21, 2001 • Consoles aplenty for Xbox launch November 15, 200 1 • With Xbox, Microsoft plays for keeps November 15, 200 1 • PC "overclockers" risk danger for faster machines March 1, 2001 • Epods unveils device for Net newbies May 17, 2000 • Get this story's "Big Picture"

Reader Resource s • Xbox review • Xbox games

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http ://news.com .com/2100-1040-276907 .html 3/25/2003 EXHIBIT 13 C C B N - StreetEvent s

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StreetEvents Transcript F I N A L V E R S I O N

NVDA - NVIDIA Corporatio n Q2 2003 NVIDIA Earnings Conference Call Aug . 15 . 2002 / 2 :00PM PT

------Corporate Participants ------* Operator * Michael Har a NVIDIA - VP Investor Relations * Jen Hsun Huang NVIDIA - President and CEO * Mary Dot z NVIDIA - Interim CFO

------Conference Call Participants ------* Analys t * Unknown Speaker

------Presentatio n ------Operator [1] ------Good afternoon and thank you for holding . I would now like to turn the call over to Michael Hara, NVIDIA's vice president of investor relations . Thank you, sir, you may begin .

------Michael Hara, NVIDIA - VP Investor Relations [2 ]

Welcome to Nvidia's conference call for the second fiscal quarter ended July 28, 2002 . Before we begin today's call I would like to take care of some general house cleaning items . Your lines have been placed on a listen-only mode until the question and answer segment of today's call . This call is being recorded . If you have any objections you may disconnect at this time . Please be aware if you decide to ask a question, it will be included on both our live transmission as well as any future use of the recording . Also, shareholders can listen to a live webcast of today's call at Nvidia's investor relation's web site . A replay of the call will be available at the same site on Thursday August 22, 2002, one week from today .

This conference call is the property of Nvidia . Any redistribution or retransmission or rebroadcast of this call or any portion of it without the express written consent of Nvidia is strictly prohibited and may result in civil and criminal penalties .

On the call today from Nvidia are Jen Hsun Huang, Nvidia's president and chief executive officer and Mary Dotz, Nvidia's interim chief financial officer .

During the course of this conference call we may make forward lookin g statements based on current expectations . Forward looking statements pertain to future events and are subject to a number of risks and uncertainties . The company's actual results may differ materially from the results discussed in any forward looking statements . For a complete discussion of factors that could affect the company's future financial results and business, please refer to the company's Form 10-K annual report for the fiscal year ended January 27, 2002 and quarter reports on Form 10-Q and 8-K filed with the Securities and Exchange Commission .

All forward-looking statements are made as of the date hereof based on information available to us today . The company assumes no obligation to update any such statements . The content on the webcast contains time sensitive information and is accurate only as of August 15, 2002 .

Consistent with the requirements under Regulation FB we'll be providing public guidance directly in the conference call and we'll be unable to provide significantly more information in off line conversations during the quarter .

Therefore, questions and/or financial expectations should be asked during the call .

At the end of our remarks there will be time for questions . I'll hand the call now over to Jen Hsun . ------Jen Hsun Huang , NVIDIA - President and CEO [3 ]

Welcome to Nvidia's second quarter conference call . Q2 was a challenge for Nvidia and the PC industry . We recorded revenues of 427 million and diluted earnings per share of 3 cents, both of which were below our expectations . As we discussed in our July 30th conference call, the simultaneous impact of Q1 product inventory in the supply chain, slower than the forecast of PC sales and Intel's inventory clearance of Celerons and order of Pentium4 chip sets substantially contributed to our revenue shortfall . The inventory clearance of the older Pentium4 chip sets also drove a mix shift of low end GPUs . This increase in our sales of TENT2 [ph] And GeForce2 MX processors which lowered our ASPs and reduced our gross margins . We believe as do industry analysts, such as Market Research, that the unusual shift of low end processors and low end chip sets is temporary and not an indication of an economic shift of low end systems .

We also noted on our last conference call that we'll be taking an additional inventory write-off in this quarter related to quantity of XBox chips and excess import chip sets that we built in anticipation of much higher demand of Athalon- based retail PCs . In total we took a charge of 21 million dollars, or nine cents per share .

Although the second quarter will go down as one of our biggest disappointments, we made significant achievements in our corporate development . Despite a weak economic environment, we achieved year-over-year growth of 64 percent, and more than doubled our business for the first six months year-over-year .

On Monday this week, Fortune Magazine ranked Nvidia the number one fastest growing company in•America . During the quarter we continued to advance our strategic position in each of the markets we serve . We maintained our strong position in desktop GPUs, increasing our market share of VX [inaudible] From 79 percent to 83 percent . With the advanced mobile architecture of GeForce4, we simultaneously achieved performance, as well as low powered leadership . In work stations we now offer the highest performance work station GPU . The best priced performance GPU and the broadest product family . And in our chip sets, [inaudible] Poised to capture the unambiguous technology leadership position . We also introduced and launched CG, the industry's first high level graphics language . CG stands for C for graphics and is the foundation of our next generation cinematic [ph] GPUs and will usher in a new era in computer graphics .

In July, David Kirk, Nvidia's chief scientist, was honored by the ACM Cgraph [ph] Organization with the prestigious computer graphics achievement award for outstanding achievement in computer graphics and interactive techniques . We're all very proud of David's achievements, a contribution to the industry and our company .

We've also made two important additions to our management team . Earlier this week we announced the appointment of David Shannon as vice president and general counsel . David is a 17-year industry veteran and joins us from Intel where he served as vice president and assistant general counsel . At Intel, David led the team responsible for corporate licensing, strategic business development, manufacturing, networking, wireless communications and intellectual properties .

Today I'm delighted to announce that Mark Burkett will be joining Nvidia as CFO on September 3rd . He's a 34-year semiconductor veteran and previously spent 26 years with A and D as corporate controller and senior vice president and CFO, where he helped take them from 4 million dollars to over 3 billion dollars in sales .

David and Mark brings a wealth of legal and financial experience from the semiconductor computer and communications industry to Nvidia . I'm delighted to welcome him to our management team and look forward to working with them to take Nvidia to the next level .

Let me now turn the call over to Mary to address the Q2 results in more detail .

------Mary Dotz, NVIDIA - Interim CFO [4 ] ------I want to focus my comments on the actual results for the second quarter ended July 28, 2002 in comparison with actual results for the first quarter ende d April 28th, 2002 .

For the income statement, our revenue decreased 27 percent to 427 million from approximately 583 million reported in Q1 . Our core product sales were down due to the overall decline in the PC industry, combined with a shift in mix to low SPCs . Memory sales decreased due to the shift in mix and the resulting decrease in modeling programs . XBox revenues decreased slightly in Q2 as compared to Q1 . Represented approximately 29 percent of total revenues, compared to 22 percent in Q1 .

Our gross margins decreased to approximately 23 percent compared to 35 and a half percent in Q1 . The decrease was due to shift in the mix of business . The inventory write down of 21 million of a certain XBox processors and in force chip sets and XBox making up a larger percentage of our overall business .

XBox margins declined during the quarter due to Microsoft reaching of volume discounts . We continue to defer our revenues while we proceed through our arbitration .

Operating expenses were 21 .8 percent of revenue . An increase in 640 basis points from Q1 . The biggest drivers for the increase in actual dollars of three million were salary related costs and depreciation on new equipment .

R and D represented 13 .4 percent of revenue, versus nine percent in Q1 . An increase approximately to five million in actual dollars, as we continue to invest in new product development .

SG and A represented approximately eight percent of revenue in Q2 versus 6 .4 percent in Q1 .

A decrease in actual dollars of 1 .6 million, was primarily due to one time costs associated with the internal accounting review in Q1 .

Depreciation and amortization expense was approximately 14 million for the quarter .

Based on the above, operating income was 1 .4 percent compared to 20 .1 percent last quarter . Diluted earnings per share were 3 cents for Q2 . Shares to be issued related to the convertible debenture were excluded from the diluted share calculation this quarter based upon accounting convention, as they would have been accretive to earnings .

Our balance sheet remains strong, with cash and marketable securities totalling 826 million at July 28, 2002, compared to 835 million at April 28, 2002 .

Q1 cash included seven million of restricted cash relating to LCs in place for the developer of our new facility which became unrestricted in Q2 .

We're cash flow positive from operating activities in the second quarter by more than 600,000 . Significant investing cash expenditures in the quarter included 24 million of capital expenditures related to new test equipment . Accounts receivable decreased 18 million to 133 million, compared to 151 million, on April 28, 2002 .

DSOs were 28 for the second quarter compared to 24 for the first quarter .

Our inventory increased 31 million at July 28th, 2002 to 285 million and represents 79 days as compared to 62 days last quarter .

Our inventory position reflects a build plant which was in line with our original assumption for a larger quarter . The increase in inventory is primarily made up of our latest generation GeForce4MX and Ti products . We believe these products continue to be well positioned for the fall season . Deferred revenue increased 13 million, primarily due to deferred revenue on XBox shipments .

Now for the third quarter . We expect our gross margin to increase to between 28 and 30 percent . Operating expenses at 14 to 16 percent for R and D and eight to 10 percent for SG and A . We expect R and D to increase by about ten million quarter over quarter, due to an extraordinary number of new product take outs . These products will contribute to our business starting in Q4 . Our tax rate should remain at 30 percent . Our capital expenditures will be about 80 to 90 million for the year . And our depreciation, about 50 to 60 million for the year .

Interest income net should be one and a half to two million for the next quarter . And our average share should be flat or decreased slightly . In addition, I want to mention that we intend to complete our due diligence and file our CEO and CFO certifications as required by the Securities and Exchange Commission on or before September 11th, 2002, which is the due date for companies for January fiscal year-ends .

Thank you .

I'll hand it over to Jen Hsun to talk about Q3 .

------Jen Hsun Huang, NVIDIA - President and CEO [5 1

We continue to maintain a strong position in the desktop stand-alone GPU market . During the quarter we increased our share of six generation DXAGPUs to 83 percent up from 79 percent in Q1 . Virtually every OEM and top system builders worldwide have embraced the GeForce4 family and recent design wins with Dell, Gateway, IBM, and Apple's new 17-inch IMac continue to drive the momentum of the GeForce4 titanium and MX GPU families in the market . The momentum of our GPUs is also evidenced in the most recent edition of PC World where Nvidia's GPUs captured 25 of the 30 systems submitted for review . Our [inaudible] Partners are number one in retail share and their GeForce based products hold nine of 10 spots in PC World's top ten graphics sports, with [inaudible] Titanium 4200-based solutions nearing the best buy .

In July we announced our second generation platform processor, the nForce 2 . It raises the bar in every category, featuring the industry's first 333 Megahertz Athalon front side bus, and 128 bid dual DER 400 memory interface . The nForce2 is unambiguously the highest performance and most advanced chip set . The nForce2 MCP media and communication processor also takes connectivity to the next level, featuring dual net, an integrated high performance ethernet switch . An nforce- powered PC becomes a residential gateway that simultaneously connects to broadband as well as a home network .

Top tier mother board manufacturers have broadly adopted nForce2, including Albutron [ph], Asustek, Chaintek, Epox [ph], FIC [ph], Letek [ph], MSI [ph] Shuttle and Tatone [ph] . We're beginning to execute our commercial desktop chip set strategy as well . We have a unique ability to service the A and B and commercial and enterprise market due to our technology reputation, software quality and highly stable and reliable nForce platform . I look forward to sharing our exciting progress with you in the near future .

In June we also announced a milestone in computer graphics . We launched CG, a high level language for programming shaders . Shaders are complex programs that create the stunning visual effects you see in movies Star Wars and Shrek . CGE is essentially C for graphics . And synonyms with Microsoft's direct X-9 high level shading language . CG, which we developed in cooperation with Microsoft, is the result of our programmable GPU vision that started over three years ago .

CG will have a profound impact on the computer graphics industry . With a powerful high level language, compiler and development environment, CG will enable 3-D programmers to be far more productive and make arcane cutting edge 3- d effects more accessible . CG enables developers to quickly exploit advances in next generation GPUs by eliminating the difficult and complicated assembly language currently required .

For the end user, the benefit is a stunning and unbelievable experience . CG has already been adopted broadly by the industry . Only one month after CG's official unveiling, over 36,000 developers worldwide have downloaded the compiler and tool kit . And major digital [inaudible] Vendors including Alias Wave Front, Digital Immersion, Discrete and Soft Damaj [ph] Have incorporated CG into their offering tools .

In just a little over two years we've redefined a work station environment . By leveraging our economies of scale and rapid development cycles, we've made highly advanced algorithms accessible to a broad number of professional markets . Our Qudro4 XG family is now offered at multiple price points at virtually every computer OEM . Quadro4 900 XGL delivers such a price performance discontinuity that it earned the 2002 Catalyst Labs All Star Award .

Our new Quadro4 MBS multi-display work station family was awarded a coveted 2002 Best Video Hardware Guide Award from Display Made Technologies Corporation, an independent testing company devoted to video testing, evaluation and optimization . The strength of our top to bottom operating in both desktop and mobile work stations continue do extend our market share lead . During the quarter we continued to gain share in mobile marketplace . According to Market Research Nvidia applies 15 percent of all stand-alone mobile GPUs .

The GeForce to Go was awarded the best mobile component of 2001 from mobile Insights, a leading industry analyst firm based in Mountain View, California .

This award is significant because it is voted upon by a wide variety of industry analysts . Systems using GeForce4 are winning great praise as well, including Editors Choice in ten of the most prestigious publications for their performance, features and power management capabilities . More and more OEMs are choosing Nvidia graphics for their notebooks .

In addition to new notebooks, laptops announced by Toshiba and Dell, systems are now available in Asia from Acer and Legend, China's largest supplier, and in Europe from NEC, Jercom [ph] Olidata[ph] And other system integrators . Nvidia mobile GPUs are available in thinner light notebooks, valued notebooks performance notebooks and mobile work stations . Nvidia's GPUs are perfectly positioned to dominate in an emerging category of desk note, systems that marry desktop components with a preferred notebook form factor and flat panel displays . We'll have more system announcements to share with you in the coming quarters as our mobile momentum continues to build in the fastest growing PC market segment .

We continue to be encouraged with the direction of XBox . Microsoft reported last month that sales in the U .S . increased 131 percent since the $100 price cut in May, enabling them to reach the high end of the XBox sports cast for their fiscal year . In July, Microsoft announced it would start selling XBox in six new countries, including South Korea, Hong Kong, Singapore, Taiwan, New Zealand and Mexico . XBox software sales continue to impress . Two more Xbox titles have been passed the million unit sales mark, and through the end of June, 20 million units of software have been sold for XBox . According to Digital Gaming, an America survey conducted by the research company Strategy Group, 15 percent of gamers plan on buying an XBox, putting it at only two percentage points behind Sony and well ahead of Game Cube .

For Q3 we expect continued momentum of GForce 4, Ti and MX . For main stream mid range and performance desktop PCs, which represent over 95 percent of the overall stand alone GPU market opportunity . The GeForce2 MX and the GeForce4 MX and GeForce 4 Ti families have captured a significant majority of the OEM and top system builder design wins for the fall . We have some exciting new mobile and platform chip design wins that will exemplify the discontinuities our technologies are bringing to market . And combined with seasonal PC increases, we're cautiously optimistic .

Although we in the industry analysts believe that the increase in Celerons and rolling chip sets are unusual inventory adjustments, we may see continued unit and mixed pressure as the channel clears out its inventory of Celerons and STR based 845 V chip sets . Our revenue assumptions have factored in the anticipated effect of the P force Celeron 845G platform ramp as the industry migrates back to historical levels . For Q3 we expect solid growth from our core PC product lines, especially in the mobile platform chip sets and work stations .

Our XBox revenues will decrease sequentially in Q3 by approximately 25 to 35 million dollars due to Microsoft making seasonal adjustments in manufacturing levels . As a result we expect an improvement in gross margins and expect to deliver positive revenue growth of one to five percent and EPS of six to 12 cents . Though we approached the short-term with caution, longer term we remain very excited about our business and industry . 3-D graphics has more innovation head room than any other digital technology . We're still in the early stages of that curve . It continues to be one of the most complex and exciting technology industries to this day . Over the next six months we'll be making a quantum leap forward in our technology . The next generation GPU requires the capability of 0 .13 micron process . With 0 .13 micron our architects and engineers have made major advances in algorithms that, for the first time, will enable cinematic rendering of real time . We believe we're well ahead of our competition to making this important jump from 0 .13 micron and cinematic rendering .

Our strategic focus is clear . First to capitalize on the benefits of 0 .13 micron process . Two, to drive our cine effects architecture into production and take the industry to the next level . Three, leverage our lead in both architecture and semiconductor process to extend the competitive advantage throughout our entire product family and each of our target markets .

As the largest, fastest growing and one of the most profitable [inaudible] Companies in the world, Nvidia has highlighted the size and importance of visual [inaudible] Market . We believe today is just the tip of the iceberg . 3-D graphics and digital displays will continue to proliferate and advance at [inaudible] Speeds .

We believe visual beauty and richness is one of the most important characteristics of our computing experience and that the leading graphics and visual computing company in the world, the opportunities for us are remarkable . Quite simply, our goal is to light every pixel you see .

Now I'd like to acknowledge the incredible commitment and excellence of our people . Their competitive hunger and desire to be the best truly defines Nvidia . Our people are our most valuable asset and our most competitive advantage . With the addition of David and Mark, we now have a complete and world clas s management team to execute our vision of building one of the most respected technology companies in the world .

I also would like to take this opportunity to recognize and thank Mary and her team for their dedication and incredible effort, her ability to rise to the occasion and perform the duties and responsibilities of CFO with performance, integrity truly exemplified the character that defines Nvidia culture .

With that we'd be happy to take questions 00 :21 :12

------Questions and Answers ------Operator [1 ] ------Ladies and gentlemen, in order to ask a question, press star then the No . 1 on your telephone key pad . Your first question is from Mr . Tim Mahone [ph] .

------Analyst, [2 ] ------I just had two questions . Can you hear me Jen Hsun ?

------Operator [3 ] ------Mr . Mahone [ph] Your line is now open .

------Analyst, [4 ] ------Question for you on the NV 30, has it taped out yet and if so when did it ?

------Jen Hsun Huang, NVIDIA - President and CEO [5 ] ------

I think the most important thing for you to focus on is when is NV 30 going to be in the market . And we're very confident it will be in time for the Christmas season . The most important thing that we ought to focus on with respect to NV 30 is that it's the first next generation graphics processor for us and for the industry . And until we get this architecture into 01 .3 micron, it's impossible to deliver the type of next generation looking field that you would expect from a next generation GPU . We fully expect to be there for the christmas season .

------Analyst, [6 ] ------How about the 1 .3 micron technology? Jen Hsun, would you say the yields look like they're pretty stable at this stage of the game ?

------Jen Hsun Huang , NVIDIA - President and CEO [7 ]

The yield at this point for any new generation process is not expected to be stable, because you want to improve it . And so the thing that is important to focus on is that we've built a couple of test chips and we're delighted with the functionality of the process . It is absolutely clear that next generation GPUs will require 0 .13 micron . I think the first GPU company to get into .13 micron is going to drive the next generation of growth . We were the first in 0 .15 micron, as you recall . It wasn't easy and I don't think going into any new process technology is easy . But I think the results are absolutely worth it .

------Analyst, [8 ] ------A quick one for Mary, house cleaning . Of the 21 million in inventory charge, can you tell us how much of it was for Microsoft related products .

------Mary Dotz, NVIDIA - Interim CFO [9 ] ------Sure, let me pull that out . It was about seven million or so .

------Analyst, [10 ] ------Thank you very much .

------Operator [11 ] ------Your next question is from Mr . Joseph Osha of Merrill Lynch .

Your line is now open .

------Analyst, [12 ] ------Can you hear me now?

------Jen Hsun Huang, NVIDIA - President and CEO [13 ] ------Absolutely .

------Analyst, [14 ]

Two questions I guess not to obsess on NV 30 overly much, but is this a product that we should look for volume in January quarter or might be a little more correct in thinking of it as being introduced in the January quarter and ramping perhaps in the April quarter, that's the first question .

The second question is, given the continued investment, specially at the R and D level, is there some point at which you look at that and say we want to manage that perhaps to a more modest level of sales or is the R and D budget pretty much going to remain sacrosanct here for the next couple of quarters regardless of what revenue does? ------Jen Hsun Huang, NVIDIA - President and CEO [15 ] ------So the first question is NV 30, introduction in the January quarter or revenues in the January quarter ?

------Analyst, [16 ] ------Large scale revenues, Jen Hsun, might be more correct . When might we expect as we try to build our models the thing to really begin to ramp, would perhaps be a better way of putting it .

------Jen Hsun Huang, NVIDIA - President and CEO [17 ]

Large scale revenues . First of all, it's a Christmas product . So you ought to have some revenue contribution in Q4 . But the thing to realize, Joe, is maybe to put it in better perspective, the enthusiast market, which is the tip of the iceberg, is not such a large market that quote large scale revenue contributions will exist . So I think that the number one you should expect it in Q4 . We expect it in Q4 . And we expect the technology to be exciting and we expect the contribution to be meaningful but on large scale it's probably too large of a way to describe the enthusiast market .

The second thing, the question was -

------Analyst, [18 ]

On R and D, given the many things you're working on, R and D is continuing to go up here . Is there a point at which as you managed this company from a financial standpoint, you say, hey, wait a minute we want to dial that back or should I expect to see R and D continue to grow at a similar rate as we look into the January and April quarters ?

------Jen Hsun Huang, NVIDIA - President and CEO [19 ]

I don't think we ought to manage R and D to Q2 . I think we ought to manage it to the potentials of this market . One of the things we're clearly focused on and Q3 is going to represent an important quarter for this, is the transition of almost our entire product line for next year to a new architecture based around NV 30 . We're going to have by the early part of this year and by the end of this year a brand new family of GPUs, pretty much across the board . You're also going to see that we're introducing and taping out new products for every segment of the Athalon and K 8 platform, platform chip sets . And so we've got a lot of new products we want to introduce . And that ultimately drives innovation and that ultimately drives growth . And we fundamentally believe we have to in, continue to innovate because this market opportunities remains to be there . Q2 hasn't fundamentally changed my outlook on that .

------Analyst, [20 ] ------Could you perhaps throw me a bone in terms of how quickly you expect the R and D to grow over the next couple of years here .

------Jen Hsun Huang, NVIDIA - President and CEO [21 ] ------I didn't understand the last part .

------Operator [22 ] ------How, as I look at R and D over the next couple of quarters, should it perhaps continue to grow at the rate it has been just for modeling purposes .

------Jen Hsun Huang, NVIDIA - President and CEO [23 )

Yeah, for modeling purposes, for Q3 we're going to have a pretty substantial increase in R and D and we're expecting Q3 R and D to increase about 10 three million dollars because of all of the tape outs of GPUs and new chip sets we have . I don't expect Q4 to have as many tape outs . So maybe that's probably the way to think of it . The rest of our head count we continue to address judicially and strategically but we're not growing rapidly . And that's probably the best way to think about it .

------Analyst, [24 ] ------Thank you very much .

------Operator [25 ] ------Next question is from Eric Gomberg [ph] Of Thomas Weisel Partners . Analyst, [26 ] ------Can you talk about what your expectations are, where inventories might si t three months from now, in terms of your balance sheet? Would they be coming down?

------Jen Hsun Huang, NVIDIA - President and CEO [27 ]

My guess is that has a lot to do with the size of Q4, and if Q4 continues to improve, we'll continue to build ahead of it and make sure that we're able to serve the needs of our customers . But my sense is that Q3 is - we go into Q3 as a result of Q2 not being as large as we like it to be . So we have a bit more inventory . In the Q4 level in terms of the number of days of inventory, my sense it will come down some . But a lot of it has to do with managing for Q4 and Q1 . So we're watching as we go .

------Analyst, [28 ]

Just a little bit on the gross margin line . Maybe you could provide a little more granularity . Backing out the 21 million in inventory write down this quarter, I got about a 28 percent, slightly above 28 percent gross margin for the second quarter . Just wondering, given XBox is coming down next quarter, where is the gross margin expense? And I think you got it to 28 to 30 . Why wouldn't it be more robust ?

------Jen Hsun Huang , NVIDIA - President and CEO [29 ]

Let me go ahead and take that . So you know that in Q2 our gross margins were challenged partly because of the inventory write downs but also because of a mix shift towards our low end products [inaudible] And Gforce 2 MX . A lot of that has to do with the fact we saw a pretty substantial inventory in the channel of 845 Ds, last generation synchronization version of the Pentium4 chips . There's still some amount of that inventory still in the channel . Hard to say exactly how much of it, how much of that will continue to drive or pull that mix towards the lower end . We see the same thing you see, which is one that's behind us and at one point XBox contributes a little bit less to our overall revenues . We should see our gross margins going up . And we're targeting it to be further up . We're expecting it to be further up . But we ought to be . cautiously optimistic at this point . I think what you're seeing from us is just caution .

------Analyst, [30 ] ------Thanks a lot . ------Operator [31 ] ------Your next question is from Mr . Mark Edelstone from Morgan Stanley .

------Analyst, [32 ] ------First off, congratulations on a CFO hire .

Just a couple questions on the complex of the quarter . Can you give us a sense as to what the subsequently decline was in GPU units ?

------Mary Dotz, NVIDIA - Interim CFO [33 ] ------Let me jump in here, Mark . The decline in units was, let's say, five to 600 units .

------Unknown Speaker [34 ] ------that's pretty well - from a top line perspective .

------Analyst, [35 ]

And similarly can you give us a general sense as to what the percentage increases in T and T 2 and GeForce 2 units were, is it a percentage of the total mix? How many percentage points will that increase of the mix quarter to quarter ?

------Mary Dotz, NVIDIA - Interim CFO [36 ] ------T and T two was again up two percent per the quarter . What was the other one ?

------Analyst, [37 ] ------GeForce2 MX . ------Mary Dotz, NVIDIA - Interim CFO [38 ] ------It's low . I think that was -

------Analyst, [39 ] ------So down in absolute units, I assume but just up as a percentage?

------Jen Hsun Huang, NVIDIA - President and CEO [40 ] ------That's right .

------Analyst, [41 ] ------Then what were memory revenues in the quarter ?

------Mary Dotz, NVIDIA - Interim CFO [42 ] ------Memory revenues were about 17 million .

------Analyst, [43 ] ------Great . And then just two other housekeeping questions if I could . One is the head count at the end of the quarter and then, Jen, can you give us an update on the status of the arbitration procedure .

------Operator [44 ] ------Yes, head count for the quarter was about 1400, by quarter end .

------Jen Hsun Huang , NVIDIA - President and CEO [45 ] ------We don't have anything new to announce on arbitration . Both Microsoft and Nvidia are obviously working very hard on it . But the schedule depends on the arbitrators and the two companies . So we're trying to get it done as quickly as we can . So as soon as we have something to announce, we'll announce it .

------Analyst, [46 ] ------Thanks a lot, guys .

------Operator [47 ] ------Next question is from Mr . Hans Mosesmann from Prudential Securities .

------Analyst, [48 ] ------A few questions . What's the inventory situation in the channel? And I have a full follow-ups . Thanks .

------Jen Hsun Huang, NVIDIA - President and CEO [49 ]

We don't think there's very much GPU inventory in the channel right now . A couple of our products are in allocation, surprisingly . But we have to keep an eye on that . The market is pretty choppy . It certainly was choppy in Q2 . We're seeing that July and early August have seen market improvements . And most people are expecting back to school to be even better than that . But we ought to be cautious concerning what we've experienced in Q2, and I don't think anybody could claim to have a great deal of visibility . We're optimistic but we're cautiously optimistic .

------Analyst, [50 ] ------We've heard a lot about a product called NV 28, are you at liberty to discuss that, and if so, is that a product that could come out this year .

------Jen Hsun Huang, NVIDIA - President and CEO [51 ] ------We haven't announced NV 28 yet . It's not our style to announce and talk about products before we announce it . But we've always said that fall is going to have a new lineup and we will have a new lineup in fall .

------Analyst, [52 ] ------One last thing, would you consider using IBM as a source of supply at .13 micron, or just in general other foundries down the road as you go to the more advanced GPU architectures ?

------Jen Hsun Huang, NVIDIA - President and CEO [53 ]

We are always evaluating foundries, various foundry's technologies . IBM has pretty terrific .13 and silicon insulator and bulkhead technology . So does TSMC, and USFC is also a pretty terrific supplier as well . We're constantly evaluating the various foundries, but we have nothing to announce today .

------Analyst, [54 ] ------Thanks a lot .

------Operator [55 ] ------Your next question is from Mike O'Connell [ph] From Pacific Crest Securities .

------Analyst, [56 ] ------I was wondering, on the month of August, if you could talk about what you're seeing from notebooks specifically other than it was just generally choppy . Has that continued in the first two weeks of this month ?

------Mary Dotz, NVIDIA - Interim CFO [57 ] ------You broke up . Could you give us the last -

------Analyst, [58] ------Just the first two weeks of this month, I was curious, in August, how that' s attracting a [inaudible] Perspective, specifically on notebook sets .

------Jen Hsun Huang, NVIDIA - President and CEO (59 ]

First of all, we're expecting this quarter to see pretty substantial increase in our notebook penetration and notebook sales . We have many exciting design wins that we look forward to introducing to you . In the first two weeks we are seeing that the quarter is tracking up . And our customers are getting ready for back to school and our people are becoming more and more optimistic . But we like to stay cautiously optimistic, and that's probably prudent for everybody involved . But specifically relative to mobile, we're excited to say this quarter is going to likely be the single largest quarter to quarter growth in mobile sales of all the design wins we've had .

------Analyst, [60 ] ------Just one last question I had . Is there, looking at the upcoming Intel price cuts in September, do you feel that could have an adverse effect in August at all just in terms of PT component builds in general ?

------Jen Hsun Huang, NVIDIA - President and CEO [61 ]

I think generally speaking when you look at these scheduled and timed CPU price cuts . It does affect the mother board builds somewhat and the CPU procurement somewhat . But it doesn't generally affect the GPU procurements and builds because in the end it doesn't affect GPUS . So I do think that making higher performance microprocessors more affordable is a generally good thing for the industry . So if it spurs additional PC, consumption of PC sales, I think generally that's good for us .

------Analyst, [62 ] ------Great . Thank you .

------Operator [63 ] ------Your next question is from Mr . Peter Labe from Nutmeg Securities . ------Jen Hsun Huang, NVIDIA - President and CEO [64 ] ------Hi, Peter . Go ahead .

------Operator [65 ] ------Mr . Labe, your line is now open . Mr . Labe's question has been withdrawn . The next response is from David Hodgson from Dundee Securities Corporation .

------Analyst, [66 ]

Can you provide directional guidance given your existing design win momentum and expectations on your market share in both discrete desktop and mobile over the next two to three-quarters or maybe where you expect it to be as you exit your fiscal year, just directionally .

------Jen Hsun Huang, NVIDIA - President and CEO [67 ]

Directionally, the thing I do know is we can look into the fall . The majority of the fall design wins have been predominantly a lot down . So whether it's the performance segment or the mainstream segment or the value stream segment and the laptop design wins and work station design wins, the majority of the fall design wins have been locked down several months ago . I think GeForce4 titanium and GeForce4 MX and the Quadro family and Our to Go family of mobile GPUs are well positioned and I expect to be well positioned . So clearly there's a hole right now with respect to our enthusiast segment, but I expect NV 32 to close that off pretty effectively and increase our technology leadership and have a year again as we've seen in the past . So I think the best, probably the only hold that I can point to that you guys are seeing and I think we're seeing as well, and we have to deliver MB 30 in production to close out that hole and we certainly intend to

aside from that, the rest of our products are well positioned and we'll continue to be aggressive in the marketplace to capture share .

------Analyst, [68 ]

The enthusiast market itself, you mentioned a lot of inventory is GeForce 4, Ti GeForce 4 Mx more focused on the Ti . Given that there's only large numbers of DX 8 games coming out now to market, it could be 12 months before we've got DX 9 . Is there any concern at all of the treadmill of new card adoption is somewhat slowing, given the trends we've seen over the past two to three months? ------Jen Hsun Huang, NVIDIA - President and CEO [69 ]

The GeForce4 titanium series addressed two major categories . One is the Titanium 4600 which addresses the enthusiast segment . When it first came out the price was about 399 dollars . That particular marketplace is important . But it's not extremely large as you mentioned . And we felt that in Q2 and so on in Q2 that particular marketplace was not very large . And that also explains earlier, the earlier question of how much D ram we shipped this quarter . We typically ship D rams with the enthusiast product, the 4600 . We saw sales of D rams or shipments of D rams reduced from about 40 million to about 17 million dollars . So it gives you a sense of the size of the 4600, Ti 4600 market after its initial first quarter launch . So that addresses that .

With respect to the titanium inventory, the thing to realize is that the Ti 4200, that the industry and the press and the analysts generally characterize it as the perfect product, at 64 and 128 megabyte versions, span a range of somewhere between 129 dollars retail all the way up to 179 dollars retail . That product is so incredibly well positioned in the marketplace . But I think we're going to continue to see a lot of momentum there .

So the Ti 4200 shouldn't be confused with the enthusiast market . We call that the performance market and that performance segment continues to be very robust . We saw pretty significant sales of 4200 . But we're going to see significant sales of 4200 this quarter and the quarter beyond, that is my sense . It's just the best product in the segment .

Analyst, [70 ]

Lastly, on the gaming console market . Over the let's say nine to twelve months, Sony is going to make their decision . And I think Microsoft and Nintendo wouldn't be too far behind . Can you give any guidance whether you would expect the same type of model where you're actually generating- it's a revenue model rather than a licensing arrangement similar to Nintendo's or any kind of flavor for what you see for what the future agreements for gaming consoles are looking like, or if you've got any guidance at this point ?

------Jen Hsun Huang, NVIDIA - President and CEO [71 ]

First of all, the current generation game consoles that the market calls the most advanced game consoles has only been shipping for less than 12 months . Most gaming consoles, as you know, Dave, has a life between four to six, seven years . Play Stations 1 are just starting to ramp down . So I think the economic model for the gaming industry is to capitalize on the installed base and everybody has spent so much time and money building the technology and ramping it and advertising it . They need to see a few more years of sales to benefit from that investment . With respect to the next generation that we can speculate about, the goal is to be fairly compensated for your contributions to the product .

Whether it's royalty based or revenue based, in the final analysis I think the only thing that you ought to measure are some profit based, gross profit dollars per gameconsole shipped is what you ought to maximize on .

Whether you derive that through royalties or derive that through gross profit dollars generated from sales is somewhat irrelevant, from my perspective . The most important thing is to be fairly compensated for it .

------Analyst, [72 ] ------Thanks very much .

------Jen Hsun Huang, NVIDIA - President and CEO [73 ]

You asked a question earlier I wanted to make sure I answered clearly . With respect to NV 30 and our next generation GPUs the thing to realize is that next year and not so much - this year is somewhat of a foregone conclusion for those new titles, but next year you'll see the simultaneous release of three very, very important games in the PC industry . Doom 3, [inaudible] 2 and Half Life 2 . Those three games are going to be simultaneously announced next year, and the visuals of those three games are absolutely breathtaking . It is the next generation in every single way and it's going to require high performance GPUs to drive it . My sense is that next year is going to be a very exciting year for GPUs .

------Analyst, [74 ] ------

I can't wait to play myself .

------Jen Hsun Huang, NVIDIA - President and CEO [75 ] ------Yeah, me too .

------Operator [76 ] ------Next question comes from Gil Alexander from Garfield Associates . ------Analyst, [77 ] ------Could you give us some indication for what you expect to be XBox sales in the second half ?

------Jen Hsun Huang, NVIDIA - President and CEO [78 ] ------I can give you some flavor of Q3 . That's probably the most visibility that we have . We did 120 some odd million last quarter and we're expecting to do about 88 million dollar this quarter for XBox sales .

------Analyst, [79 ] ------Could you give us some feel for how you're going to account for your stock options and what it would cost you in the third quarter ?

------Mary Dotz, NVIDIA - Interim CFO [80 ]

Let me take that question . We can't really forecast at this point what the third quarter would be just because there are grants and all sorts of things that would occur over that time period . But what I could tell you is the company's not planning on expensing options at this time . However, of course we would be in line with any new pronouncements from the financial accounting standards board should that occur .

If you want more detailed information on that is refer to our 10-K that we filed, because according to FAS 123, we include in the footnotes of our financial statements the pro forma presentation of what expensing those options would look like . That might give you sort of a historical perspective .

------Unknown Speaker [81 ] ------I couldn't find it exactly . Forgive me .

------Mary Dotz, NVIDIA - Interim CFO [82 ] ------If you call back later I'll be happy to point it out . ------Jen Hsun Huang , NVIDIA - President and CEO [83 ) ------Thanks, Gil .

------Operator [84 ] ------Your next question is from Mr . Tim Mahone [ph], Credit Suisse First Boston .

Analyst, [85 )

Jen Hsun, I wanted to follow up on the Microsoft question again . I'm a little surprised that the next three you would be expecting XBox revenues to be declined and you called it seasonal . Wouldn't we be in a stage at this stage of the game where we would be ramping for back to school and for Christmas and given that your lead times are still, I would imagine, on some of the advanced technology pretty long, are you starting to get some visibility into your January quarter from Microsoft . Do you think revenues will be heading north of the 88 in the January quarter ?

------Jen Hsun Huang, NVIDIA - President and CEO [86 ]

My sense is that the rhythm that Microsoft has their manufacturing, has them building this quarter, which means we shipped it last quarter . And they built it this quarter and shipped it this quarter in anticipation of a pretty large Christmas . So my sense is that their manufacturing rhythm is actually appropriate . Come Christmastime everything that you're going to sell you've already built and shipped and so you probably ought to slow down in anticipation for just clearing out all of the products you've built . My sense is that the rhythm will kick back up again the early part of next year and they'll manufacture it through the July/August time frame .

So I think their manufacturing rhythm is not particularly operating, and in fact doesn ' t make sense .

------Analyst, [87 ] ------Can you confirm for us what your lead times would be for XBox chips today ?

------Jen Hsun Huang, NVIDIA - President and CEO [88 ) ------Manufacturing lead times are pretty standard, between 10 and 12 weeks from the time you start wafers .

------Analyst, [89 ] ------Thank you .

------Operator [90 ] ------Joseph Osha, from Merrill Lynch Global Securities .

------Analyst, [91 ] ------I have a follow-up . Could you talk a little bit about nForce 2 and when we might expect that to begin ramping and may I presume that nForce, nForce 1 is essentially out of the picture at this point ?

------Jen Hsun Huang, NVIDIA - President and CEO [92 ] ------You should expect us to ship nForce 2 for revenues, contributions, quarter in Q3 .

And the answer to the second one is absolutely not .

But you ought to wait a little bit for some exciting news .

------Analyst, [93 ] ------And in terms of K, we're obviously waiting anxiously on hammer, when you said - have you said anything publicly about what your plans are or when might w e expect you to ?

------Jen Hsun Huang, NVIDIA - President and CEO [94 ] ------We typically announce products as we're shipping it, so K8 is not expected to ship until the end of this calendar year . But that will be a good time for you to expect something from us . ------Analyst, [95 ] ------Thank you .

------Operator [96 ] ------Your next response is from Mr . Hans Mosesmann from Prudential Securities .

------Analyst, [97 ] ------I couple questions here . Jensen XBox ASPs, is it accurate, you can assume a $50 price for the chip set or how different is that going forward ?

------Jen Hsun Huang , NVIDIA - President and CEO [98 ] ------That's accurate .

------Analyst, [99 ] ------In terms of the write down for this particular quarter, how much of the 21 million was nForce product? I think you mentioned XBox was seven million or so . What was nForce ?

------Mary Dotz, NVIDIA - Interim CFO [100 ] ------XBox made up, as we said, about seven million hundred or so of it . And the remainder were the XBox products and a few minor other one s

------Analyst, [101 ] ------Great . Thanks .

------Operator [102 ] ------Your next question is from Rui Cordoso, Capital Markets .

------Analyst, [103 ]

Quick question with nForce 2 . You had a number of design wins for nForce on the OEM side with Compaq and a few others . Could you give us a sense where those sit now and will those shift over to nForce 2 or will those be up for renewal in terms of other people having a crack at getting those design wins ?

------Jen Hsun Huang, NVIDIA - President and CEO [104 ]

Other people always have a crack at getting design wins . It's a very competitive market . But I think the thing to realize is that the fall PC season is about to start and we don't announce design wins of our customers on their behalfs . So what we'll do is, as soon as they start shipping, we'll announce the design wins for nForce one as well as nForce 2 . We've been making a lot of progress in the chip set business . It's a market we consider to be very strategic . It's a market we believe we can be very good at . And from our first generation, having captured Compaq and HP and NEC and Packard Bell, we believe that Nvidia is well positioned to be a tier 1 chip set supplier .

NForce 1 continues to do well in design wins for fall . But we really expect nForce will take us to the next level there . This is a business that we're very focused on and one we believe we can add a lot of value to .

------Analyst, [105 ] ------Follow-up question, could you give us a sense of what ASP trends on the notebook graphics side look like ?

------Jen Hsun Huang, NVIDIA - President and CEO [106 ] ------Similar to desktop GPU's .

------Analyst, [107 ] ------Are you seeing any erosion in the near term related to the drop off in the PC market at all? ------Jen Hsun Huang, NVIDIA - President and CEO [108 ] ------No, ASPS and desktop and mobile, in the desktop has side has come down a little bit . But in the mobile it hasn't been really been affected by the same market dynamics and we're expecting GPUs to be in the 20s .

------Analyst, [109 ] ------Great . Thank you .

------Operator [110 ] ------Your final question is a follow-up response from Mr . Michael McConnel of Pacific Crest Securities .

------Analyst, [111 ]

I was wondering I had your primary competitor present early in the week, a conference . The gentleman presenting had made a reference that Doom 3 had the potential to possibly ship during the holiday season . I was wondering if you had any visibility or any expectations for that to happen, or if you were expecting it to start shipping earlier, potentially maybe January and February of next year .

------Jen Hsun Huang, NVIDIA - President and CEO [112 ]

The sooner Doom 3 ships the better . It's such a great game . John Carmat [ph] Has done a great job with it . It's clearly the next level . When you see it you'll realize this is the next level . You'll also realize how much room graphics has to go . But it's really the follow onto the blockbuster of Doom 1 . Personally I look forward to it . I know my children are looking forward to it . I know all my friends at work are looking forward to it, so I'm hoping it ships as soon as possible . When it ships it's going to be great for the entire GPU industry . You're going to see that people will be clamoring for higher performance GPUs . You'll see when Half Life 2 ships next year, it's going to be a pretty spectacular event, and also for On Real [inaudible] Tournament when it ships it will be a spectacular event . So I think all of those three titles will fundamentally drive sales in GPUs and will transform this space .

We haven't seen an event of this importance since probably about four years ago when (inaudible] And a fewer other first person titles came out into the marketplace . I think our next year should be pretty good . I have doubts at this point that Doom 3 will ship during the holiday season . But if it does, I think it would be terrific .

------Analyst, [113 ] ------Thank you .

------Jen Hsun Huang , NVIDIA - President and CEO [114 ] ------Okay . We appreciate all of you joining for us . I look forward to talking to you and reporting on our progress in Q3 . Thank you .

------Operator [115 ] ------Thank you for participating in the conference call, you may now disconnect .

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08 :20am EDT 31-Jul-02 Thomas Weisel Partners LLC (Gomberg,Eric 212 .271 .3765) High-End PC Weakness Leaves NVDA in Lurch(Part 1 of 2 )

July 31, 2002 Thomas Weisel Partners LLC

Semiconductors-nVIDIA Corporation-Market Perform NASDAQ :NVDA-$16 .22-High-End PC Weakness Leaves NVDA in Lurch

Eric Gomberg 212 .271 .3765 egomberg@tweisel .com Alan Curry 212 .271 .3852 acurry@tweisel .com

Key Data Price$16 .22 52-Week Range :$14-$73 Market Cap .(mn) :$2,961 .2 Shares Out .(mn) :182 .6 Avg Daily Vol . :11,238,338 Fiscal Year End :January

Debt/Total Capital :26% Price/TTM Sales :l .7x Net Cash/Share :$4 .58 Book Value/Share :NA Price/Book Value :NM Secular Growth :25 %

FY 2002 2003 2003 Prv 2004 2004 Prv EP S Q1 $0 .20A $0 .47A $0 .47A $0 .10E $0 .41 E Q2 $0 .21A $0 .08E $0 .42E $0 .12E $0 .42 E Q3 $0 .25A $0 .09E $0 .38E $0 .15E $0 .45 E Q4 $0 .46A $0 .09E $0 .40E $0 .15E $0 .47 E Year $1 .05A $0 .70E $1 .65E $0 .52E $1 .75 E P/E 15 .46x 23 .09x 31 .10x

Revenue(mn ) Q1 $240 .9A $582 .9A $582 .9A $410 .OE $630 .O E Q2 $259 .9A $425 .OE $590 .OE $425 .OE $635 .O E Q3 $365 .OA $410 .OE $600 .OE $445 .OE $660 .O E Q4 $503 .7A $400 .OE $620 .OE $455 .OE $700 .O E Year $1369 .5A $1817 .9E $2392 .9E $1735 .OE $2625 .O E TEV/Sales NE NE NE

Executive Summary

* NVIDIA pre-announces substantial downside to Q2 results . NVIDIA now expects its July-quarter (2QFY03) revenue to be $410-$430mn, down 25% sequentially (from previous guidance of 1%-3% sequential growth), with EPS at or slightly above break-even when accounting for an inventory write-down of unspecified magnitude . The shortfall was attributed to a sluggish PC market, with units down 13% sequentially (to -27mn units) versus expectation of a 5%-7% decline, compounded by a market shift away from high-end desktops (6-7mn units in Q2 )

-- FIRST CALL --

in which NVDA derives the bulk of its business . * Company to write down inventory, with further write-downs possible, in our view . While the size of the inventory write-down was not specified, it was primarily attributed to first-generation nForce chipsets whose ASPs (now in the low-$20s) were affected by AMD's weakness, in addition to certain Xbox MCPs (20% of revenue) made obsolete by a switch in the security features of the console (designed to foil hackers) . * We are dramatically lowering estimates prior to the company's reporting official results on August 15 . We are lowering our 2QFY03 estimates accordingly from $590mn to $425mn and from $0 .42 to $0 .08, excluding the effects of the write-down, while lowering our CY02 estimates from $2 .4bn to $1 .9bn and from $1 .68 to $0 .85 and our CY03 estimates from $2 .6bn to $1 .7bn and from $1 .72 to $0 .50 . Multiple factors including competitive threats, leverage to PCs (particularly AMD and high-end desktops) and dependency on Xbox, as well as ongoing high inventory levels create ongoing risk of further estimate reductions .

EXECUTIVE SUMMARY

SUMMARY Slow high end to blame for top-line miss . The shortfall was attributed to a sluggish PC market, with units down 13% sequentially (to -27mn units) versus expectation of a 5%-7% decline, compounded by a market shift away from high-end desktops (6-7mn units in Q2) in which NVDA derives the bulk of its business . NVDA characterized this shift as an anomaly, resulting from Intel's bid to deplete inventories of its Celeron and low-end chipsets, which temporarily diverted sales toward its lower-ASP TNT2 and GeForce2 offerings, pressuring overall gross margin . Gross margin was also negatively impacted by price concessions on NVDA's MCP as Xbox shipments reached a volume milestone and by the overall magnitude of the top-line decline . For these reasons, we have lowered our gross margin assumption to 25% in the July quarter, from 35 .5% in April . While the company claims to have gained share in both mobile and workstation platforms and maintained share in its core desktop franchise, its flagship NV30 has yet to tape out, making a successful holiday launch look increasingly unlikely and share gains by ATYT increasingly likely . In short, while NVDA remains the technology leader in the graphics market, we would not be buyers at depressed prices, pending better understanding of the magnitude of the aforementioned concerns . We remain cautious in our outlook on NVDA and are lowering our estimates dramatically . OUTLOOK We expect NVIDIA to face a continuing challenging environment . In our view, over the near- and medium term, the deck is stacked firmly against the company . We believe most of NVIDIA's challenges are unlikely to be overcome in a single quarter and expect additional bad news to precede good news . In our view, NVIDIA's issues include the following . * Leverage to the high-end desktop market . Several PC OEMs and CPU manufacturers have commented on slowing high-end sales . We believe that with few killer apps likely to drive demand for leading/bleeding-edge processor speeds, high-end desktops may remain a slow growth market for the foreseeable future . * Competitive threats from above and below . We believe that ATI's introduction of the Radeon 9700, in front of NVDA's next-generation offering (which the company noted has yet to reach initial prototyping) may shift the balance of power at the high end of the market and certainly puts the company

-- FIRST CALL -- at risk of losing some of its market share . In our view, Intel's 845g is gaining traction and is likely to command most of the corporate market and a fair share of the consumer market-in aggregate, well above the estimates NVDA continues to espouse . In sum, we believe NVDA is at risk of further market share erosion as well as a more challenging pricing environment . * Leverage to AMD . We believe that AMD continues to be a relative market share loser versus Intel (20% versus 80% currently) . In our view, NVDA's dependence on AMD as a growth engine (as the sole platform for the nForce) is likely to prove an ongoing challenge, as evidenced by the inventory write-down of its first-generation nForce . * Dependence on Xbox . We believe that NVDA has been shipping product for Xbox above rates of end-market sell-through . In our view, this could end up in an inventory overhang (similar to last night's), or a temporary production shutdown . We are somewhat concerned by the inventory write-down on Xbox product, considering our expectation that NVDA had been building specific product for a specific program for a specific customer-since presumably it was building to forecast, it is unclear why it should be on the hook for excess inventory even if security features for the consoles needed to be enhanced to deter hackers . * Inventory likely still an issue . While management did not provide guidance on the amount of the inventory write-down, the company indicated its expectation of being at or above break-even for Q2 . Assuming a 10% decline in gross margin to 25% and modest declines in absolute dollars in both SG&A and R&D, NVDA is likely to generate approximately $20 million in pre-tax income . The implication is that the inventory write-down would be less than $20 million . We remain concerned as the charge accounts for a mere 8% of inventory, while sales are projected to have fallen 27% sequentially . In other words, it is conceivable that inventory levels may have risen and inventory turns may have actually slowed this quarter, even with the inventory write-down, making us concerned that additional write-downs may be on the horizon unless there is very strong 2H demand . A slight positive may be that NVDA appears to be curtailing its raw materials production forecasts based on anecdotal information from TSM's earnings call .

Source : Company reports and Thomas Weisel Partners LLC estimates ...... 7/31/0 2

Additional information available upon request . Thomas Weisel Partners LLC, its affiliates and/or their employees at any time may hold a position in any securities or options of any of the issuers mentioned in this report . Thomas Weisel Partners LLC expects to receive or intends to seek compensation from the following company or companies mentioned in this report over the next three months : nVIDIA Corporation . Analyst compensation is based on, among other factors, the profitability of the brokerage department and of the firm, feedback from institutional investors and Thomas Weisel Partners LLC brokerage personnel, trading revenue and market share in stocks under coverage, stock selection performance, and contributions to investment banking and private equity activities . Thomas Weisel Partners LLC makes a market in the securities of the following company or companies mentioned in this report and may sell any of the securities to or buy them from customers on a principal basis : nVIDIA Corporation . First Call Corporation, a Thomson Financial company . All rights reserved . 888 .558 .250 0

-- FIRST CALL --

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StreetEvents Transcript F I N A L V E R S I O N

NVDA - NVIDIA Corporation NVIDIA Pre- Earnings Conference Call Apr . 29 . 2002 / 7 :30AM PT

------Corporate Participants ------* Michael Hara (ph ) NVIDIA - Vice President of Investor Relations and Communications * Jen-Hsun Huang NVIDIA - President and Chief Executive Officer * Bill Mille r NVIDI A

Conference Call Participants ------* Mark Edelstone (ph ) * Matt Chen (ph ) * Brett Polling (ph) Prudential * Eric Rostoynt (ph) * Rudy Cardosa (ph)

RBC Capital Market s * John Petty (ph) John Petty Research

------Presentation ------Operator [1 ] ------Good morning, and thank you for holding .

Welcome to today's NVIDIA Investors teleconference . Your lines have been placed on a listen-only mode until the question-and-answer segment of today's conference . This call is being recorded . If you have any objections, you may disconnect at this time . Also, shareholders can listen to a live Web cast of today's call at the NVIDIA Web site .

This conference call is the property of NVIDIA . Any redistribution, retransmission or rebroadcast of this call or any portion of it without the expressed written consent of NVIDIA is strictly prohibited and may result in civil and criminal penalties .

I'd like to now turn the call over to Michael Hara (ph) , NVIDIA's vice president of Investor Relations and Communications .

Thank you, sir . You may begin .

------Michael Hara, NVIDIA - Vice President of Investor Relations and Communications [2 ] ------Thank you all for joining us this morning .

Before I turn the call over to Jen-Hsun, I would like to read our Safe Harbor statement . During the course of this conference call, we may make forward- looking statements based on current expectations .

Forward-looking statements pertain to future events and are subject to a number of significant risks and uncertainties . The company's actual results may differ materially from results discussed in any forward-looking statements . For a complete discussion of factors that could affect the company's future financial results and business, please refer to the company's Form 10-K and annual report for the fiscal year ending January 28, 2001 and quarterly reports on Form 10-Q and the reports on Form 8-K filed with the Securities and Exchange Commission .

All forward-looking statements are made as of the date hereof based on information available to us today and the company assumes no obligation to update any such statements . The content of the Web cast contains prime sensitive information that is accurate only as of April 29, 2002 .

At the end of our remarks there will be time for your questions . I will now hand the call over to Jen-Hsun, our president and CEO .

Jen-Hsun Huang, NVIDIA - President and Chief Executive officer [3] ------Thanks, Mike .

I appreciate all of you getting on this call in such short notice . We have a number of announcements this morning .

With me today is Bill Miller (ph) , one of NVIDIA's outside directors who heads up the audit committee, which oversaw our internal financial review process . Also with us is Mary Dotz, who today has been named interim Chief Financial Officer .

First, let me say that we continue to see terrific momentum in our business and we're excited on the deepest and richest tri-transition in the company's history . We're scheduled to release our final results for this quarter on May 22, 2002 . At that time we will conduct our quarterly earnings call to give you updates and go over the results in greater detail .

Based on our preliminary results on our first quarter of fiscal 2003, I'm delighted to tell you that the company expects to report total revenues for the three months ending April 28, 2002 of approximately $570 million to $580 million . This exceeds our previous guidance of $535 million to $540 million and represents an approximate 15 percent sequential increase in revenues from the last quarter of fiscal 2002 .

We expect to report net income of approximately $79 million to $84 million, or 45 to 48 cents per diluted share . As always, our continuing success is a direct result of the hard work of our employees and the focus on their jobs .

Over the last quarter in video transition is desktop product [Inaudible] to the new GeForce 4 series . This series has been embraced by all of the major desktops OEMs worldwide . In addition, the company's nForce platform processors have been adopted by top PC providers, including Compaq, Fujitsu-Siemens, HP and NEC, and more than 100 system builders worldwide . Also, mobile and workstation business momentum has increased dramatically with several new design wins .

Now let me bring you up to date on our Audit Committee's financial review . As a result of the internal review we announced in mid-February, the company is restating its previously reported results for the first three quarters of fiscal 2002 and for fiscal years 2001 and 2000 . As a result, earnings per share for the three-year period will be unchanged . And net income for fiscal 2002 will increase by approximately $2 .8 million or one cent per diluted share . Net income for fiscal 2001 will decrease by approximately $3 .7 million or three cents per diluted share . And net income for fiscal 2001 will increase by approximately $2 .9 million or two cents per diluted share .

This internal review was thorough and covered matters raised over the last three fiscal years . We believe the resulting restatement is appropriate . We have reviewed our infrastructure and believe to have the necessary financial systems and staff in place to keep pace with our growth .

I would now like to turn the call over to Bill Miller (ph) , who oversaw the review . I've asked Bill (ph) to explain the process in greater detail - Bill .

Bill Miller, NVIDIA [4] ------Thank you, Jen . As we stated earlier this year, the SEC opened an inquiry into certain of NVIDIA's financial statements . The company responded to that inquiry by immediately launching a thorough review of financial reports for the past three years, with respect to all the issues that were raised by the SEC staff and any other issues that were suggested by our review .

The review was conducted by the Audit Committee, which is comprised of independent members of NVIDIA's Board of Directors . It includes Brooke Seawell (ph) , Mark Stevens (ph) and me . In addition, we worked with a team selected to ensure the independence of the Audit Committee's review, lawyers from Cooley Godward (ph) and members of KPMG's [Inaudible] accounting team .

From the inception of our review, the board, Audit Committee and management committed themselves to cooperating fully with the SEC, reviewing any questionable accounting entries and taking any necessary corrective actions . We believe we've carried out that mandate . The review was extensive . It encompassed nearly one million e-mails, as well as numerous interviews and an extensive review of the company's financial records . We were given unlimited access to NVIDIA's people and documents . And without exception, all the people at NVIDIA cooperated fully .

We provided the SEC along the way with extensive information about our progress and the conclusions of our review . And our relationship with the SEC continues to be cooperative and constructive . We are looking forward to satisfying them that our review has been thorough and that the actions we have taken are appropriate .

As Jen-Hsun outlined earlier, the company announced that it is restating its previously reported results for the first three quarters of fiscal 2002 and for fiscal years 2001 and 2000 .

We believe these restated results correct all of the incorrect entries that our review identified . We believe - we further believe that NVDA has the necessary financial systems' staff in place today to report its financial results accurately or fairly and is building that capability to keep pace with its future growth .

With that, I'll turn it back to Jen .

------Jen-Hsun Huang , NVIDIA - President and Chief Executive Officer [5 ]

Thank you very much, Bill . All of us appreciate the time, over hundreds of hours, that you put into this review process . Today, we're also announcing that Mary Dotz has been named interim Chief Financial Officer . Mary was previously our corporate comptroller . Christine Hoberg (ph) is taking a leave of absence, and the Board of Directors is in the process of hiring a [Inaudible] to find a permanent CFO .

Mary joined NVIDIA in 2000 . She has worked in finance for more than 20 years and has held senior positions at A&D (ph) , Nissan, and UnitHealth (ph) . We're delighted to have someone of Mary's experience to step into the role of CFO . At the same time, I want to wish Chris well during her hiatus . She has played an instrumental role in the company during this exciting period of marketable growth . And now I'd like to switch gears and talk about XBox . I'm going to read an excerpt from the 8-K that was filed today regarding the pricing dispute between NVDA and Microsoft . For more than seven years, NVDA has been a supplier of graphics processors and other technologies for personal computer and other platforms based on technology from Microsoft Corporation .

On March 5, 2000, we entered into an agreement with Microsoft in which we agreed, under certain terms and conditions, to develop and sell processors for use in the XBox video game console .

On February 14, 2001, we announced that our XBox GPU and XBox media communications processor were released to Taiwan (ph) SemiConductive Company or TSMC for prototype fabrication . These processors are fabricated at a 0 .15 micron process technology, and commercial shipment began in July 2001 . In April 2000, Microsoft paid us $200 million under the agreement as an advance against processor purchases .

This advance has been fully utilized due to purchases made by Microsoft in the quarter ended April 28, 2002 . And Microsoft is currently paying in advance for processor chips that sold to it . We have been engaged with Microsoft i n discussions related to pricing and volumes of the XBox chip set . These discussions and our agreement contemplated use of a third party to resolve matters .

And on April 23, 2002, Microsoft submitted the [Inaudible] arbitration . Microsoft has requested that the arbitration panel require that we supply chip sets in whatever quantities are ordered by Microsoft . Microsoft has also asked for damages for alleged violations of the agreement and requested that the arbitration panel reduce chip set prices paid by Microsoft .

We do not believe we have a requirements obligation to Microsoft . And we plan to submit our position to the arbitration panel shortly . For sales of the XBox media communication processor, we have deferred revenue in an amount equal to the difference between the price being paid by Microsoft and the price Microsoft claims it should be paid .

This amount was approximately $13 million as of January 27, 2002, the end of our fiscal 2002 . We expect that we will continue to defer such amount on future sales of this processor until resolution of the matter . The arbitration will be conducted in New York by a panel under the rules of the American arbitration association .

Let's put XBox and the NVDA chip set into some perspective . For the past two years, Microsoft has been very complementary about NVDA's technology, as the XBox has enjoyed industry acclaim for its advanced graphics and audi o technology . The NVDA design XBox processors were named Best Gaming Chip Set of 2001 by Connors (ph) and Ted (ph) Microdesign Resources, a well-respected industry analyst PIRG (ph) .

A recent popular mechanics article recognized graphics quality as the standout difference between the XBox and other consoles currently available . And I quote, "The picture's so clear, and the faces are much more realistic ." All of us here at NVDA are proud to have been able to provide so many millions of people this stunning experience . I'd like to emphasize NVDA Microsoft continues to enjoy an excellent relationship on several fronts in addition to XBox . We're working together to advance the state of the art in graphics processing and to advance the Windows experience, and we enjoy an excellent working relationship with our industry-leading games group . These are just a few of the areas where we collaborate - we look forward to the arbitration being resolved and to continue our successful relationship with Microsoft .

Before we go onto the Q&A, I would like to reinforce how excited we are about the company and its four businesses . We transition our desktop product family to the new GeForce 4 series which has been embraced by all the major desktop OEMs worldwide . The company's nForce platform processors has been adopted by top PC providers in more than 100 system builders worldwide . And mobile and work station business momentum has increased dramatically with several new design wins .

We expect our core business, excluding Xbox, should be over $2 billion this year, representing approximately 65 percent growth over last year . On May 22 when we announce first quarter results, we will give you an update on our outlook .

I would also like to take this opportunity to thank all of the shareholders who have shown us their support .

We will now take your questions .

------Questions and Answers ------Operator [1 ]

Thank you at this time if you would like to ask a question, please press star, one on your touch tone phone . You will be announced prior to asking your question . Again, if you would like to ask a question please press star, one . To withdraw your question you may press star, two . Star, one to ask a question and star, two to withdraw .

One moment please .

Our first question comes from Mark Edelstone (ph) . You may ask your question .

------Mark Edelstone, [2 ]

Hi, [Inaudible] thanks for going through all the details on all these issues here . I have two primary questions, if I could? The first one is, obviously, when you look at the accounting changes for the three prior fiscal years, these are small numbers and they all net themselves out . I wonder if there's any more detail you could share there about what some of the major categories would be representing the changes ?

------Unidentified [3 ] ------That's a good question . I'm going to have Bill Miller (ph) , who headed up the internal review on behalf of the Audit Committee, give you a detail of that . Go ahead, Bill (ph) . Bill Miller, NVIDIA [4 ]

Sure, Mark (ph) , I'd be happy to . We're not going to try and go through all the detailed line items today, but let me give you some big blocks that you can categorize in that . There's basically four buckets to this .

One bucket of corrections relate to simply mistakes, just errors that we found through this review . An example of that would be accidentally double-booking an expense or failing to release an accrual when it should have been .

A second category of things that we found were estimates where we couldn't find sufficient support to convince ourselves that the estimate was fully supported . So, of course, when we established reserves and accruals, we're frequently estimated the current impact of future events . And although there may have been support at the time for some of those, we weren't able to locate it . And out of abundance of caution, we decided to restate the results in those instances .

An example would be an inventory reserve where we elected to write a product down to zero, but then sold it for some amount, usually a low amount in a subsequent quarter . If we couldn't adequate support for taking the product down to zero in our inventory, we assumed perfect hindsight and restated in accordance with what it was actually sold for .

A third bucket would be questionable accounting judgment, that is, where we made an accounting judgment that we believe was made in good faith but is at least arguable . In a couple of those cases we elected to restate .

And then the fourth is past or waived audit adjustments . As many of the people on the call will know, when the company's books are audited and the auditors review them they quite commonly identify things that they feel could be changed for one reason or another, but are not requiring the change, either because it's not material or some other reason . It is a practice when restating financial, as we're doing today, to incorporate - as we're announcing today - to incorporate those past or waived audit adjustments into the restatement, and we're doing that .

So that's the scope, the landscape of the errors that we're correcting in the course of the restatement that we're announcing today .

------Mark Edelstone, [5 ] ------Bill, let's just follow-up there . I don't know if you have the detailed accounting for it, but do you have some rough feel for what the percentage of the changes are failing to each of the four buckets ?

------Unidentified [6 ]

No, I haven't tried to break them down that way . In fact, they're some of them - different people can bucket different things in different ways . So the largest - actually the largest number is the way our accounting adjustments - I would direct (ph) guess the rest are fairly evenly spread . The mistakes are probably the, you know, mistakes that's probably the second-largest - is the second- largest group, and then probably the accounting issues . The accounting issues, questions of accounting interpretation would be the next, and then I guess the estimates that we couldn't fully support is probably fourth in order of that . But I don't - have tried to exactly add up the numbers on that .

------Mark Edelstone, [7 ] ------OK, great . Thanks, Bill .

And if I could, Jen-Hsun, I had another question as well on the arbitration issues with Microsoft .

I just want to make sure that my understanding is clear here . Based on the disclosure, it would like in your fiscal 2002, and I would guess that it have mostly impacted Q4 that you had deferred revenues in that quarter, and would have had I assume all the expenses associated with those revenues that you deferred . So another way to think about it is your revenues and your operating income were both understated if you will in that quarter by $13 million . Is that a correct analysis ?

------Jen-Hsun Huang, NVIDIA - President and Chief Executive Officer [8 ]

Yes, that's pretty close, and we're going to continue to take the most conservative accounting treatment to the pricing of those processors until we get this arbitration result, which as you know both companies Microsoft and Video (ph) work very closely together on many fronts, and we have a very professional, very cordial relationship, and we look forward to using this as a process of resolving this pricing discussion .

You know, ultimately the thing that we need to keep in perspective is that this is a four to five year program . We're off to a phenomenal start . You know, the penetration rate of Xbox is probably faster than any game consul in previous history, and we're talking about large numbers .

But in the meantime, all of our guidance that we've given to you guys in the past are consistent with the conservative posture that we've taken with Xbox both in the pricing that we're recognizing as well as the volumes that we're recognizing . We're focusing to the low-end what Microsoft guides out to the street . So I think we're in pretty good shape . When this all gets resolved, my sense is that it will be a pretty dramatic, positive impact on our business .

------Mark Edelstone, [9 ] ------And lastly, do you have a rough cut of what the deferred revenues are for Xbox in Ql ?

------Jen-Hsun Huang, NVIDIA - President and Chief Executive Officer [10 ] ------It's approximately the same scale . We ship approximately - almost the same amount of Xbox ships at this quarter as we did all of last year .

------Mark Edelstone, [il l ------OK . So in other words, the revenues are reporting here the $570 to $580 million, and the 45 to 48 cents is not including an additional $13 million of revenues ?

------Jen-Hsun Huang , NVIDIA - President and Chief Executive Officer [12 ]

That's right - approximately $13 million of revenues, and $13 million worth for our pretax income . That's - you know, of course, let me just give a little of bit of [Inaudible] . Let's assume that our entire position is recognized by the arbitrator . But your assessment is correct . And not to mention the over $3 million of additional expenses that we've incurred in this last quarter, because of the rigorous review that the lawyers and the accountants have put fourth .

------Mark Edelstone, [13 ] ------OK, Jen-Hsun . Congratulations on a great quarter, and thanks for taking all the time to go through all these issues with everybody .

------Jen-Hsun Huang, NVIDIA - President and Chief Executive Officer [14 ] ------I appreciate it, Mark (ph) . Thank you very much . I'm absolutely delighted about the quarter .

------Operator [15 ] ------Our next call comes from Joe Osha (ph) . You may ask your question, and please state your company name .

------Matt Chen, [16 ] ------Good morning . This is Matt Chen (ph) calling in for Joe Osha (ph) . Hi, Jen- Hsun .

------Jen-Hsun Huang, NVIDIA - President and Chief Executive Officer [17 ) ------Good morning, Matt (ph) .

------Matt Chen, [18 ] ------Good morning . I just wondered if you could give us some color on the level of Xbox inventory ?

------Unidentified [19 ]

Well, we don't have a drop of inventory, to be honest . We are building to the rates that Microsoft has been requesting, and the rate that they've been requesting for some time, and we're going - we're continuing to do that this quarter . So we have [Inaudible] very little revenue, and very, very low inventory . ------Matt Chen, [20 ] ------So are you comfortable where inventory is right now, or would you be interested in building it further ?

------Unidentified [21 ] ------We're comfortable with what we're doing right now .

------Matt Chen, [22 ] ------Great, and also do you have an approximate data or time frame for when you think the SEC investigations might close? I don't know if that's a fair question .

------Unidentified [23 ]

Sure . All questions are fair . I think that there's one thing that we know with a great deal of certainty : it's that we finished our internal review . In my opinion, that is the single most important phase of this entire process . You know, we need to make sure that with the diligence of our audit committee and the lawyers and the forensic team at KPMG, and you can imagine how many hours [Inaudible] in $3 million worth of expenses was incurred in last quarter .

And the amount of the volume of documentations that was gone through, I am really delighted that we're done with the review process internally . At this point, the audit committee headed up by Bill (ph) will continue to work closely with the SEC as they have been doing, since the beginning of this process . And I'm very comfortable - and I'm very confident - that the relationship will continue to be very constructive .

------Matt Chen, [24 ]

That's great . One more question if I may . Just wondered if you could give us some color on where you saw strength this quarter - we're taking our revenue numbers, 535 (ph) , 540, 570, 580, could you comment on any particular area of strength there that you're seeing ?

------Unidentified [25 ]

We're seeing growth and market share improvements and gains in every market we serve . We are gaining market share in the desktop PC market ; we're gaining market share in laptop . We're gaining market share in work stations . We're gaining market share in the Macintosh market . We've transitioned - this is in fact one of the most complicated quarters in the history of our company .

We talked about at the last conference call that the GeForce 4 family which represents multiple SKUs, multiple product segments, and multiple markets was entering into production this quarter . I'm delighted to report that we now have the entire family of GeForce 4 products in volume production : all of our customers are qualified with the GeForce 4 .

And the GeForce 4, the Quadro 4 (ph) , the Quadro 4 GO (ph) family, and of course some of our most exciting new supply last quarter was the nForce platform processors being adopted by Compaq, by HP, by Andy C . (ph) , Packard Bell - we're just gaining traction in every single market we're serving .

And so I think going forward with our new product transition behind us and entering a very strong product cycle - I think that we're extremely well positioned, but we're seeing growth just across the board .

------Matt Chen, [26 ] ------Thanks a lot . Great work on the quarter .

------Unidentified [27 ] ------Thanks, Matt (ph) .

------Operator [28 ] ------Thank you .

The next question comes from Hans Losethman (ph) . You may ask your question, and please state your company name .

------Brett Polling, Prudential [29 ]

It's actually Brett Polling (ph) for Prudential . Couple of questions, guys . As far as with Intel and the 845g (ph) that's supposed to be released in May time frame, what are you guys seeing from there and just your general thoughts in an integrated space ?

------Unidentified [30 ]

I think the 845g (ph) is going to be a terrific replacement for the 815g (ph) You know, the integrated graphics market is not new . It's been here for quite some time . My expectation is the 845g (ph) will represent a terrific entry level graphics solution for particularly the commercial desktop marketplace .

But I also think that you recognize the graphics industry has in the last year, because of programmable pixel shaders and because of many of the advanced capabilities like dual display and anti-aliasing (ph) , has made such incredible strides that my sense is that - and because the content continues to be rich, and continues to be a core driver for GPUs, my expectation is that we're going to continue to see pretty robust sales in the GPU marketplace .

And then don't forget that there's a very important discontinuity coming, one that really favors external graphics and it's called AGP8X (ph) . I think that's going to be a terrific transition for the industry as well . ------Brett Polling, Prudential [31 ] ------OK . Great, and then on the nForce front, how are you guys seeing demand with the graphics - the chip set with that, as opposed to just a stand-alone court (ph) logic ?

------Unidentified [32 ]

We're actually seeing, and I think what you're highlighting here, is that although we're recognized as one of the premiere graphics companies in the world - and GeForce is such an incredibly popular brand that when we introduced our chip set, there are many markets that asked us to take our graphics out because they saw [Inaudible] the chip set technology itself was so terrific .

And in fact, the nForce was recognized as the best computer chip set in the industry last year . And so I think you're highlighting that people really admired and respected and appreciated the technology that was in the non- graphics area, the network processing area, the audio area, system technolog y area of nForce . So we're seeing strong demand on both sides of it .

Of course, you know, I think the recent press is that Compaq has embraced the nForce in a pretty dramatic way, that HP has embraced nForce in a pretty dramatic way, the largest consumer PC company in Europe, NEC/Packard Bell, has embraced nForce top to bottom .

So I think that you're seeing that people, and certainly the top-tier OEMs in the world and the system builders all over the world, recognize the importance of nForce, and we're going to see continued success there .

The big news about nForce, now that we get this behind us, the initial ramp behind us, is our second-generation nForce is in the pipeline . And, you know, I can't wait to tell you guys about the second-generation nForce, it's going to be terrific .

------Brett Polling, Prudential [33 ] ------OK . And then, I guess following up with second generation and all your other forward road maps, how's, I guess, relationship with TSMC? Any issues with [Inaudible] starts, yields, anything on that front ?

------Unidentified [34 ]

TSMC continues to be one of our most important . partners, one of our most strategic partners . We have a very, very close relationship with TSMC . We manufacture nearly all of their fabs, in 8 inch and 12 inch and deep sub-micron , you know, all the way to 0 .22 micron .

We continue to see terrific support from TSMC . These guys, the management team of TSMC and NVIDIA's management team have terrific chemistry and terrific working relationship together . They've supported us through a period of capacity constraint, enabling us to grow as fast as we have . They continued to support us during these times, and one of the powerful, powerful drivers of our business is our great relationship with TSMC . ------Brett Polling, Prudential [35 ] ------OK . Great . Thanks . And congratulations on the upside announcements, guys .

------Unidentified [36 ] ------Thanks, Brett (ph) . Appreciate it .

------Operator [37 ] ------The next question comes from Eric Rostoynt (ph) . You may ask your question .

------Eric Rostoynt, [38 ] ------Thanks . Good morning .

Jen-Hsun, two questions . One, just a little clarification on the dispute with Microsoft . Is this related to a certain volume price that would kick in and they'd demanded a certain quantity of product, you weren't able to meet that quantity, but they still wanted to get the volume discount based on what the amount of product they were demanding? Is that the nature of the dispute ?

------Jen-Hsun Huang, NVIDIA - President and Chief Executive officer [39 ] ------At the core of the dispute is pricing . And, you know, I would characterize it as the beginning and the end of this dispute .

It is no more complicated than pricing . However, on the flip side of it, because we're talking about such extraordinary volumes of chip sets over the next four, five years, six years, the numbers are quite large . And so instead of having bitter arguments about it, the two sides have decided to be professional, to be cordial and to let somebody else hear our respective positions .

And my sense is that this will get resolved for both companies and it will be terrific for both companies and in the end we're going to ship a ton of game consoles that are going to delight children all over the world and also have an economic model that works .

------Eric Rostoynt, [40 ] ------And do you have any sense how long it will take until the arbitration proceeding is completed ?

------Jen-Hsun Huang, NVIDIA - President and Chief Executive Officer [41 ]

Well, both of our companies hope that it's as fast as possible . Part of the arbitration process, of course, it's some amount of bureaucracy and preparation, but both companies hope that it's as fast as possible . This is something that we'd love to get behind us . But I think that in the meantime, you know, the thing that's really important for me to emphasize is that the guidance that we've given to the Street and the accounting treatment that we're using to recognize the revenues associated with these processors are in the most conservative posture that we can recognize, and I think that even given that we're comfortable with the guidance as it reflects the volume predictions that Microsoft has guided the Street to, as well as the reserves and the deferred revenues associated with the pricing dispute .

------Eric Rostoynt, [42 ] ------And just final question . Have you changed your strategy towards pursuing an Intel Pentium 4 bus license with Intel? You'd mentioned previously that it was not on your plate at this time .

------Jen-Hsun Huang, NVIDIA - President and Chief Executive Officer [43 ] ------You know, I think that we have taken a rather contrarian strategy with respect to our chip set business all along, and I think that people are starting to see the wisdom of that strategy .

Quite frankly, you know, since the founding of our company we've taken a rather contrarian approach to whether we ought to even do graphics at all, if you recall that question . And we believe that you ought to build things that you're passionate about, you ought to build things that you're good at, you ought to build things that you believe you can change the world with .

And in the area of the chip set business, we decided that because it's such an intensely competitive market, that the technology discontinuities were coming at an accelerated rate, that the amount of value we can bring to the chip se t industry was so terrific, we decided we're going to focus in a marketplace where we could unambiguously add value, and we're going to give this company the opportunity to go build a sustainable franchise in a given market before we branch out .

Today, you're seeing that we've locked down 100 of the major OEMs related to Athlan (ph) . There is a wonderful processor coming down the pike called the Hammer (ph) , and the Hammer (ph) processor is going to represent a discontinuity for the PC industry ; we're going to be all over it .

And so I think, you know, I think that over the next several quarters and the next couple years you guys are going to see the wisdom in our strategy .

------Eric Rostoynt, [44 ] ------Great . Thank you .

------Operator [45 ] ------The next question comes from Rudy Cardosa (ph) .

You may ask your question, and please state your company name . ------Rudy Cardosa, RBC Capital Markets [46 ] ------Hi . RBC Capital Markets .

With nForce, we've seen a lot of customers transition from discrete graphics to the integrated graphics with nForce . Could you give us a sense of the price gap between the two in terms of, you know, incremental dollars per unit shipped with that shift over?

------Jen-Hsun Huang, NVIDIA - President and Chief Executive Officer [47 ]

The ASP of a very - what you're finding is that in the low-end part of the market, the entry and mainstream part of the PC marketplace, you're seeing adoption of our nForce . In that particular marketplace, they used to buy Riva (ph) TNTs or Vantas (ph) , and so I think that the difference in the ASP basically is somewhere between the low teens for a stand-alone low-end graphics processor to the mid-twenties for a - mid-twenties to high twenties for an integrated graphics processor with a GeForce 2 in it .

So I think the revenue contribution's clearly positive, and dramatically positive, and I think the value contribution we're able to make to the PC is clearly clearly dramatic .

------Rudy Cardosa, RBC Capital Markets [48 ] ------Could you give us a sense of the ramp with some of these recent design wins, like Compaq and HP, what stage you're at now ?

------Unidentified [49 ] ------Rudy (ph) , could you do that one more time? What was the question again ?

------Rudy Cardosa, RBC Capital Markets [50 ] ------Could you give us a sense of the ramp with some of these recent design wins, like Compaq and HP, what stage you're at now ?

------Unidentified [51 ] ------Oh, ramp . We had, in the case of HP and Compaq and NEC, Packard Bell, we had just begun the ramp toward the middle part of last quarter . So this quarter and next quarter are going to represent the majority of the nForce ramp .

------Rudy Cardosa, RBC Capital Markets [52 ] ------OK . Great . Thank you .

------Operator [53 ] ------Thank you .

And our final question comes from John Petty (ph) . You may ask your question, and please state your company name .

------John Petty, John Petty Research [54 ] ------John Petty (ph) , John Petty Research (ph) . Good morning, guys .

------Unidentified [55 ] ------Good morning, John (ph) . Thanks for getting up so early .

------John Petty, John Petty Research [56 ] ------No problem . A couple of questions . In your restatement, are you going to restate your cash position at all ?

------Unidentified [57 ] ------We're not expecting to restate our cash position or balance sheet .

------Unidentified [58 ] ------No . There's no question about that .

------Bill Miller, NVIDIA [59 ] ------This is Bill Miller (ph) . I just made sure we got [Inaudible] and got it exactly right [Inaudible] just said . That is, there will be some restatements to the balance sheet, of course, but the cash position is unaffected .

------John Petty, John Petty Research [60 ] ------And given the remarkable discounted price of your shares today, is there any possibility that you guys will be buying some back ?

------Unidentified [61 ]

You know, that's a really good question . We've been so focused over the last 90 days on this intensive review process and, of course, delivering our record quarter, transitioning all of our products into production, getting Compaq and HP and Packard Bell into production, we've overlooked this opportunity . But it's been brought up a couple of times this morning . It's a wonderful idea and we're going to take that back to the board and discuss it and figure that out later .

------John Petty, John Petty Research [62 ] ------I think you better hurry .

------Unidentified [63 ] ------Yes . You might be right .

But NVIDIA, maybe, is something that you're recognizing - we have a very, very strong cash position as a company of our size and we continue to be cash flow positive . If you look at - after the intensive review and the answer to the cash question earlier, in the last three years and some $2 .3 billion in revenues, we've discovered that we've understated our earnings by about $1 .3 million, and so I think from a cash position it's not likely to make a difference .

I think, you know, we're just delighted with the growth of our company and we just didn't a chance to think about that one question . It's a terrific question, though .

------John Petty, John Petty Research [64 ] ------Just two more now, and I'll let you go . The Xbox has, let's see, faltered a little bit in Europe, and I wonder if you have put that into your projections ?

------Unidentified [65 ]

In all of our guidance we've used a low range of what Microsoft has guided to the street, and we're comfortable with that guidance . The Xbox, as you know, has recently taken a little bit of heat . But I think that what people fail to see is the extraordinary titles that are in the process of being built .

The first year of PlayStation 2 was - if you compare that to Xbox, the Xbox crushed the PlayStation 2 in its first year . And the second year is when you can really exploit the unique capabilities of a second-generation - or a next generation game console that the Xbox represents .

The titles that are being developed now are just absolutely terrific . The management team at Microsoft running the Xbox program, Robie Baucus (ph) is absolutely world-class . And these guys are determined, they're competitive and we love working with these guys . I think they're going to show the world, starting with E-3 (ph) , that Xbox is going to rock .

------John Petty, John Petty Research [66 ] ------And the final question is, given that you have a significant amount of business come from HP and Compaq, if the merger goes through, have you put a reserve in for possible discount pressure from the new-formed company ?

------Unidentified [67 ] ------You know, I think a majority of the actual product strategies of Compaq and HP are not revealed . We have a reasonable understanding of how they're going to deal with consumer brand of PC where the Presario and the Pavillion, as it relates to nForce, my sense is and I guess what I can tell you is that, I'm very comfortable with both of those brands .

------Unidentified [68 ] ------I'm very comfortable with the nForce design wins in both of them . And my sense is that we're going to [Inaudible] success from that .

I'm delighted that we have design wins on both sides of it . I'm delighted that both companies have invested in the nForce platform and architecture and it makes the integration a little bit less sensitive from our perspective .

------John Petty, John Petty Research [69 ]

I agree with all of that, gentlemen . The only problem is that carrier's (ph) saying that their plan is stated very clearly that the savings are going to come - a large proportion of the savings are going to come from their ability to buy in larger volume and get lower prices as a result of it . And you're clearly in those bulls-eyes . So I'm just wondering, have you made any preparation before that eventually? You don't want another repeat of what happened with Microsoft .

------Unidentified [70 ] ------I see your question . You're making the assumption that our pricing isn't already very aggressive for Compaq and HP .

------John Petty, John Petty Research [71 ] ------I'm sure it 's very, very aggressive .

------Unidentified [72 ]

Compaq and HP are very large customers for us already . And this is - the nForce design win represents for Compaq and HP the lion part of their business and it's our largest design win . These guys deserve good pricing on it, and they'r e getting good pricing on it . My sense is that they'll discover that .

------John Petty, John Petty Research [73 ] ------OK . Great . And I'll join the chorus , congratulations on a terrific quarter .

------Unidentified [74 ] ------Thanks, John (ph) . Appreciate it .

------Operator [75 ] ------Thank you . That does conclude the question and answer portion of today's conference . Gentlemen, I'll turn it back to you for closing statements . ------Unidentified [76 ] ------Thank you, Lisa (ph) . Before closing today, I'd like to thank you, once again, for joining us on short notice and leave you with a few thoughts .

First, we're happy to have completed our internal review and can now turn all of our attention to driving our core business . And we have a world-class management team in place and a financial system in place, and we're taking the opportunity now to conduct a search for a world-class CFO, as well .

Second, the Xbox business is robust and our relationship with Microsoft is strong . The core of the dispute is pricing . We will continue to reserve revenue conservatively and in anticipation of a positive affect on our business when it is resolved .

And finally, we're very excited about the coming year . Our underlying core business is strong . And we look forward to talking to you again about the final results on our conference call in a couple of weeks . Thank you very much .

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Nvidia Hasn't Changed Forecasts, Disputes News Report (Update6 )

(Adds Nvidia spokesman's quote in seventh paragraph . )

Santa Clara, California, March 28 (Bloomberg) -- Nvidia Corp ., a maker of chips for computers and Microsoft Corp .'s Xbox video-game console, said it hasn't changed its sales forecast, denying a Taiwan newspaper report saying its sales will drop . The company's stock fell as much as 8 percent to $41 .87 after a Salomon Smith Barney analyst report said the Commercial Times reported that Nvidia's second-quarter sales will drop, citing an interview Ching-Min Huang, an Nvidia marketing director . Nvidia expects sales to rise as much as 8 percent each quarter this fiscal year, which ends in January, said spokesman Mike Hara . The Santa Clara, California-based company expects sales to rise as much as 80 percent this year, he said . The company hasn't changed either forecast since a February conference call . " The story is false, '' Hara said . ''The article got picked up by the analyst from Salomon and it just snowballed from there . We would never ever change guidance in an interview with an Taiwanese newspaper .'' Hara said Huang isn't listed in the company's employment records . Nvidia's Taiwan representative office said Ng Kheng Bin, whose Chinese name can be transliterated as Ching-Min Huang in Mandarin or Ng Kheng Bin in Hokkien, a Chinese dialect, is in fact the company's marketing director for the Asia Pacific . After Ng's identity was confirmed, Nvidia spokesman Derek Perez, confirmed in an e-mailed statement the comments were false . " It is hard for a person in that region to have visibilit y to the overall well-being of the company as to even make a statement like that, '' Perez said . Nvidia's Taipei office said Singapore-based Ng wasn't available because of the Easter holiday . Andrew Lu, the Taipei-based Salomon analyst who wrote the report, said articles based on interviews with Ng appeared in both the Commercial Times and rival DigiTimes . ' The second quarter will be a little worse than the first, '' Ng said, as cited by the Commercial Times . ''The second quarter is the weak sales season .' ' Nvidia shares pared their losses, falling $1 .14, or 2 .5 percent, to $44 .36 in regular U .S . trading .

--William Selway in the San Francisco newsroom at (415) 743-3511, or wselway@bloomberg .net with reporting by Iain Pocock in Taiwan . Editors : White, Fellman .

Story illustration : to graph the performance of the shares of Nvidia, see : {NVDA US GP }

- Your definitive sourc e If you need help on the BLOOMBERG press the HELP key twice Copyright (c) 2003, Bloomberg, L . P . 2 of 2 BN Nvidia Hasn't Changed Forecasts, Disputes News Report (Update6) Mar 29 2002 0 :0 0

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A - Your definitive sourc e If you need help on the BLOOMBERG press the HELP key twice Copyright (c) 2003, Bloomberg, L . P . EXHIBIT 17 C C B N - StreetEvent s

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StreetEvents Transcript F I N A L V E R S I O N

NVDA - NVIDIA Corporatio n Q1 2003 NVIDIA Earnings Conference Call May . 22 . 2002 / 2 :00PM PT

------Corporate Participants ------* Michael Hara NVIDIA Corp . - Vice President of Investor Relations & Communications * Jen-Hsun Huan g NVIDIA Corp . - President & CEO * Mary Dot z NVIDIA Corp . - Interim CFO

------Conference Call Participant s ------* Gary Shie l Morgan Stanley Dean Witter & Co . * Joseph Osh a Merrill Lynch & Co ., Inc . * Hans Mosesmann Prudential Securitie s * Eric Chen (ph) J .P . Morgan * Jonathon Joseph (ph) Salomon Smith Barney * David Hodgso n Dundee Securities Corp . * Rui Cordos o RBC Capital Markets * Peter Labe (ph ) NetMed Securities Limited * Tim Mann (ph ) CSFB

Presentatio n ------Operator [1 ]

Good afternoon and thank you for holding . Welcome to NVIDIA's quarterly conference call for the first fiscal quarter ending April 28, 2002 .

Your lines have been placed on a listen-only mode until the question-and-answer segment of today's call . This call is being recorded . If you have any objections, you may disconnect at this time . Please be aware that if you decide to ask a question, it may be included in both our live transmission as well as any future use of the recording .

Also, shareholders can listen to a live Webcast of today's call at the NVIDIA Investor Relations Web site . The replay of the call will be available at the same time through the close of business on Thursday, May 29, 2002 -- one week from today .

This conference call is the property of NVIDIA . Any redistribution, retransmission, or rebroadcast of the call or any portion of it without the express written consent of NVIDIA is strictly prohibited and may result in civil and criminal penalties .

On the call today for NVIDIA are Jen-Hsun Huang, NVIDIA President and Chief Executive Officer ; Mary Dotz, NVIDIA Interim Chief Financial Officer ; and Michael Hara, NVIDIA Vice President of Investor Relations and Communications .

I would now like to turn the call over to Michael Hara . Thank you, sir . You may begin .

------Michael Hara, NVIDIA Corp . - Vice President of Investor Relations & Communications [2 ] ------Thank you all for joining us today . Before I turn the call over to Jen-Hsun, I would like to read your -- our Safe Harbor statement .

During the course of this conference call, we may make look (ph) forward- looking statements based on current expectations . Forward-looking statements pertain to future events and are subject to a number of significant risks and uncertainties . The company's actual results may differ materially from results discussed in any forward-looking statements . For a complete discussion of factors that could affect the company's future financial results and business, please refer to the company's annual report on Form 10-K for the fiscal year ended January 27, 2002 and the reports on Form 8-K filed with the Securities and Exchange Commission .

All forward-looking statements are made as of the date hereof based on information available to us today . The company assumes no obligation to update any such statements . The content of the Webcast contains time sensitive information that is only accurate as of may 22, 2002 .

Consistent with the requirements under Regulation FD, we will be providing public guidance directly on the conference call and will not provide other material information in off-line conversations or during the quarter . Therefore, questions around our financial expectations should be asked during this call . At the end of our remarks, there will be time for your questions .

I will now hand the call over to Jen-Hsun .

------Jen-Hsun Huang, NVIDIA Corp . - President & CEO [3] ------Thanks, Mike . Welcome to NVIDIA's quarterly conference call .

I am pleased to announce another record quarter . For the quarter, we reported record revenues of 582 .9 million, up 142 percent from revenues for the first quarter last year and up almost 16 percent sequentially ; net income for the quarter was a record 83 .2 million, and diluted earnings per share were 47 cents -- all meeting or exceeding our previously stated expectations .

Fiscal Q1 was our fifteenth consecutive record quarter . Let me know highlight a number of key success factors that contributed to our record quarter . We entered the quarter with a new product cycle giving us a stronger competitive position than any time in our history . We significantly raised the bar in every core GP market we serve . The OEM and system builders communities reflected our strong position as evidenced by the immediate adoption and new design wins in their desktop PC, workstation, and laptop configurations .

In desktop PCs, the GeForce4 Ti 4600 is the unambiguous performance leader . It has been adopted by every tier-one OEM and is dominating the enthusiast category of the system builder channel in retail . The GeForce4 Ti 4200, with its balance of performance, quality, and price, has been proclaimed the perfect GPU for the main -- performance mainstream . And the GeForce4 MX Series offers the bes t combination of performance and features in the value mainstream market . NVIDIA GPUs are also seeing increasing penetration at Apple in addition to the Power Mac, NVIDIA's the only graphics offered in the revolutionary iMac and th e recently announced eMac .

In the integrated core logic market, our nForce platform processor continues to gain momentum . nForce has been adopted by virtually every major OEM including HP, Compaq, NEC, Fujitsu Siemens, and Micron for their Fl-based PCs as well as the leading motherboard manufacturers including ASUSTeK, Microstar, Chaintek, and Leadtek . This is truly a testament of technology discontinuity nForc e created . nForce has become a key -- a selling feature of Athalon PCs in retail . nForce's popularity is becoming evident in system builder market as well . In the June issue of "PC Pro," the U .K .'s most regarded PC publication, six of the -- six of the 12 systems submitted in the value class were equipped with nForce . We are very confident that nForce will continue to gain design wins and become the dominant core logic for AMD systems (ph) . In the workstation market, we witnessed a number of firsts for NVIDIA . With our new Quadro4 XGL and NVS products, we're now able to serve the workstation market from top to bottom as well as address a new market, the multi-display financial workstation platform . The Quadro4 XGL achieved an industry milestone . It broke the 100 frames per second barrier in ProCDRS for the very first time in history . For professional designers, XGL delivers unprecedented performance . NVIDIA's leadership in workstation technology was affirmed with the recent release of the new Spec View Per (ph) 7 .0 benchmarks . Spec View Per (ph) is the widely respected industry standard for application-based performance and quality benchmarking . The benchmark tests applications in DCC, CAD, manufacturing, and engineering . Quadro4-powered workstations from Compaq, Dell, Fujitsu Siemens, HP, and IBM convincingly led the industry in performance and price performance .

Art Little (ph) , the editor-in-chief of "Catalyst Magazine," the leading journal for workstation industry, sums it up best . "NVIDIA's Quadro4 900 XGL earned our All-Star Award by obliterating the all-time record for each of the three benchmarks that make up the catalyst inaudible (ph) for 3-D applications including NCAD (ph) and DCC . We only extend this award to products that raise the standard for excellence in their respective categories . NVIDIA's Quadro4 900 XGL does just that by decisively leading professional 3-D OpenGL performance . "

The NVS, with our new nView Multi-display Software, brings new capabilities to users that require more than one visual display . NVS is quickly adopt -- becoming adopted as the corporate standard for fortune enterprise (ph) platforms .

We continue to see terrific success with our laptop and Apple efforts . Our new GeForce4 and Quadro4 mobile GPUs lead in both performance and low power consumptions . In just two generations, NVIDIA's mobile GPUs outperformed the competition's best products . We lead the charge for the first Pentium4M-based (ph) laptops in seven new designs from Dell, Toshiba, Pacer (ph) , and Legend (ph) . We have established strong relationships with the leading laptop ODMs, which include Compel (ph) , Quanta (ph) , Samsung, and Windstron (ph) . And Dell and Fujitsu Siemens have adopted Quadro4 Go in their newest mobile workstations .

We're also delighted that GeForce2 Go was named the best mobile component by Mobile Insights (ph) , a leading analyst (ph) firm focused on the mobile and wireless industry . This prestigious award is a reflection of our commitment to the mobile market and our passion to bring innovative technologies that will transform your computing experience in every platform .

As a result of our strong comprehensive portfolio products, we continue to gain market share . Based on analyst estimates, we grew our total graphics market share which include all of desktop and laptop units sequentially from four -- by four percent to 42 percent . In overall desktop units, we grew market share sequentially by four percent to 49 percent . With our strong product families, deep (ph) product road maps, and world-class engineering teams and our proven execution record, we're confident we can continue our progress in each product area we serve going forward .

Let me now turn it over to Mary to discuss our record results . Mary?

------Mary Dotz, NVIDIA Corp . - Interim CFO [4 ] ------Thanks, Jen-Hsun . I'm going to focus my comments on the actual results for the first quarter ended April 28, 2002, and comparisons with actual results for the fourth quarter ended January 27, 2002 . The company adopted Financial Accounting Standard 142 effective Q1 fiscal 2003 and accordingly, discontinued the amortization of goodwill and the discussion of pro forma financial results .

For the income statement, revenue increased 15 .7 percent to 582 .9 million from 503 .7 million reported in Q4 . A majority of our Q1 product revenue was derived from our GeForce family of processors . Our Xbox products contributed 22 percent of revenue . Standalone processor revenue growth was up slightly from Q4 to Q1 . Included in Q1 revenue is 42 million related to memory, compared to 19 million in Q4 . Units shipped to the top PC OEM customers through our contrac t electronics manufacturers, and add-in card partners were approximately 29 percent of total units .

Revenue from workstations still represents less than ten percent of our total revenues, but increased 12 percent in the quarter . Revenue from mobile and Apple were also each less than ten percent of revenue, but increased 33 percent in the quarter . Revenue from nForce, our integrated graphics processor were less than ten percent of revenue, but increased 18 percent in the quarter .

Gross margin of 35 .5 percent was within our target range, but decreased compared to Q4 due to the deferral of Xbox revenue, as noted in the company's 8- K, which was filed with the Securities and Exchange Commission on April 29th in 2002 . Operating expenses were 15 .4 percent of revenue, as compared to 16 . 2 percent in Q4 . The biggest factor contributing to the increase in absolute dollars of eight million, was salary related costs associated with the increase in headcount, and costs associated with the recent completed internal accounting review . This was partially offset by the discontinuation of amortization of goodwill, due to the adoption of FAS-142 in Q1 .

R&D represented nine percent of revenue in Q1, versus 8 .7 percent in Q4, an increase about eight million in absolute dollars . The increase was primarily due to increased salary and software costs . SG&A represented 6 .4 percent of revenue in Q1, versus 6 .9 in Q4 . The increase in absolute dollars of about three million was primarily due to costs associated with the internal accounting review .

Based on the above, operating income was 20 .1 percent of revenue, compared to 21 .3 percent last quarter . Actual net income was 83 .2 million and diluted earnings per share were 47 cents . Shares to be issued, related to the convertible debenture were included in the dilutive shares calculation based on accounting convention, but were not significantly dilutive for the quarter .

Now on to the balance sheet . Cash and marketable securities totaled 835 million at April 28th, 2002, compared to 798 million at January 27th, 2002 . Both cash totals include seven million of restricted cash relating to letters of credit in place for the developer of our new facility . We were cash flow positive from operating activities in the first quarter by 49 million .

The primary source of operating cash was from net income, partially offset by normal changes in working capital . Significant investing cash expenditures in the quarter included 21 million of capital expenditures related to the final build-out of our new campus . There were no significant non-cash items in the quarter .

Accounts receivable increased about four million, to 151 million, compared to 147 million at January 27th, 2002, driven by the increase in revenues . Day sales outstanding were 24 for the first quarter, compared to 27 for the fourth quarter . Excluding the impact of Xbox, DSO was 26 for the quarter . Inventory increased 40 million at April 28th, 2002, to 254 million, and represented 62 days, as compared to 62 days at January 27th, 2002 . Accounts payable decreased 24 million, which primarily reflects the normal life production levels at TSMC, as compared to the Q4 production ramp up for our GeForce4 product introduction .

Accrued liabilities increased about 41 million, primarily due to income taxes on the increased profitability . Deferred revenue is approximately 49 million . We've completed the draw down on the $200 million Microsoft advance in Q1, and Microsoft is now paying us in advance for processor chip-sets . Deferred revenue also includes the deferral of revenue due to the Microsoft arbitration .

For the full fiscal year 2003, we expect gross margins to remain at the lower range of our model, of about 35 to 40 percent, due to the continued deferral of a portion of the Xbox revenue . Operating expenses will be nine to ten percent for R&D and six to seven percent for SG&A . We expect a tax rate of 30 percent, capital expenditures of 70 to 80 million for the year, and depreciation of 50 million . Interest income net of about one to one and a half million for each quarter . We expect average shares to increase by approximately five million shares per quarter .

Thank you, and I'd now like to turn it over to Jen-Hsun to talk about Q2 .

------Jen-Hsun Huang, NVIDIA Corp . - President & CEO [5 ]

Thanks, Mary . Before I talk about Q2 I would like to take the opportunity to update you on the announcements we made on our April 29th conference call . As a result of the internal review of the matters raised by the SEC staff, we have restated our previously reported results for the first three quarters of fiscal 2002, and for fiscal year 2001 and 2000 . The restated results can be found in our Form 10-K for the fiscal year ended January 27th, 2002, which was filed with the Securities and Exchange Commission on May 14th, 2002 .

We have provided SEC with extensive information and to conclusions of the review . We believe our relationship remains constructive, and we intend to continue to cooperate with the SEC . On our last conference call, we announced that Mary Dotz was named interim Chief Financial Officer . Since then, the Board of Directors has retained the executive search firm of Spencer Stewart to begin the process and help us find a permanent CFO .

On April 29th, 2002, we filed an 8-K regarding pricing disputes between NVIDIA and Microsoft . We have subsequently filed a response to the American Arbitration Association . We continue to have an excellent relationship with Microsoft on several fronts .

Now let me talk about our outlook for Q2 . With our strong product portfolio and design win momentum, we deliver positive sequential revenue growth of one to three percent for our second quarter, despite an expected sequential decline of five to seven percent in worldwide PC shipments . We continue to ramp the strongest product lineup in our company's history . With our GeForce4 Ti, GeForce4 MX and GeForce2 MX families, we give our customers the ability to offer products that span a wide range of systems from the value consumer to the extreme enthusiasts . Our new and award winning Quadro4 XGL and NVS family has been adopted by every workstation OEM worldwide . The Go family of mobile GPUs and our innovative mobile AGP package continues to capture design wins and market share during the mobile Pentium IV transition . And nForce is continuing to expand our footprint in the core logic market .

Xbox is off to a better start in both hardware and software sales than PS2 in the first four months . Microsoft is making all the right moves to position itself as a long-term player . Sony and Microsoft's price reduction should be strong, positive catalyst for the gaming industry and with the powerful new games that we see at E3, it should be the making of a fun and exciting Christmas season .

A frequently asked question has been the effect on our business as Intel ramps the 845G integrated graphics chip-set . From our analysis, we believe the PCs that primarily are configured with integrated graphics are basic and commercial PCs . Today these systems are still being served mostly by Pentium III and Celeron class CPUs, coupled with the 810 and 815 ; both have integrated graphics . This week Intel officially announced the 845G (ph) and some of the early reviews support our position that it will not change the ongoing dynamic between integrated graphics and discreet GPUs .

Extreme Tech, the highly regarded tech Web site, stated despite the 845Gs 3D performance shortcomings, this graphics platform would sell very well in the corporate and low-end home computing market . In the value segments where the P IV did [Gap In Audio ] GPU suppliers experienced a minor benefit from increased sales of low cost GPU units, such as our TNT2 class processors .

We estimate that over the course of the next 12 months about ten percent of the PC market may shift back to integrated graphics . Even as the market settles back to its historic levels, we will see an increase in our TAM due to our entry into the AMD integrated graphics market with nForce .

Give the incredibly strong product road map, we anticipate in the second half of the year, we are making several major investments in Q2 that will some impact on our near term earnings growth . We are in the development of our most complex GPU to date, one we believe will represent an important discontinuity for 3D graphics . This groundbreaking GPU will be manufactured in TSMC 0 .13 micron process, and will have an engineering cost that are significantly higher than previous generations .

Due to cost of our next generation GPU development, we expect our operating expenses to be above normal, due to a record number of new chip tape-outs associated with new product, associated new product launches, and developer programs taking place in Q2 .

With the increased investments occurring in Q2, we estimate our fiscal second quarter EPS to be in the range of 44 to 47 cents . We remain positive about our outlook for the entire fiscal year maintaining, our revenue target of 2 . 5 billion representing growth of 70 to 80 percent year-over-year while the PC market is only expected to grow five to 10 percent . We're also raising our EPS target to $1 .82 to $1 .88, up from our previous guidance of $1 .70 to $1 .75 . This is an increase greater than 75 percent over last year .

I'm incredibly proud of our achievements for our first fiscal quarter . With the many challenges facing our company, our management team and our employees rose to the occasion and produced our fifteenth consecutive quarter of exceeding estimates . With the strongest product offering in the company's history, we believe we're well positioned to outgrow the market this year .

I'd be happy to take questions on our many businesses now .

Questions and Answers ------Operator [1 ] ------In order to ask a question, press star , then the number one on your telephone keypad . We'll pause for a moment to compile the Q&A roster .

Your first question is from Mark Edelstone from Morgan Stanley .

------Gary Shiel, Morgan Stanley Dean Witter & Co . [2 ] ------Could you tell us when would you expect to improve the testing procedure for your Xbox in order to somehow improve your profitability ?

------Jen-Hsun Huang, NVIDIA Corp . - President & CEO [3 ] ------I'm sorry . I couldn't hear that .

------Gary Shiel, Morgan Stanley Dean Witter & Co . [4 ] ------Hello? Could you hear me now?

------Jen-Hsun Huang , NVIDIA Corp . - President & CEO [5 ] ------Yes, I can .

------Gary Shiel, Morgan Stanley Dean Witter & Co . [6 ]

OK . Jen-Hsun, this is -- again, this is Gary Shiel for Mark . . First of all, just wondering whether you could tell us when you could -- when you would expect to improve the testing procedure for your Xbox component in order to drive better profitability down the road .

------Jen-Hsun Huang, NVIDIA Corp . - President & CEO [7 ] ------The gross margin target we have for Xbox is -- has always been expected to be lower than our core business . And so it's important to start by understanding that although the revenue component is higher, the earning contribution per unit dollars is lower than our core business .

Nonetheless, the Xbox chip-set -- the Xbox graphics processor is -- remains one of the most complex devices built in any computing platform and certainly in any of our product .lines . And so there -- we -- there remains, you know, ongoing manufacturing and test challenges and yield challenges that I expect us to improve .

The beauty of this, of course, is that the Xbox chip-set is a chip-set we expect to build for the next six years or so, and so we have plenty of time certainly to continue to refine the yield in the final test yield, particularly , that you're mentioning . We've already seen pretty dramatic improvement since the launch of Xbox, and my sense is that there -- there's something along the lines of four to five percent that we could improve in overall final test yield which will contribute to our profitability as you mentioned, you know, in the ongoing months ahead .

This is a very important project for the company and we continue to put a lot of emphasis into it, and I'm expecting us to be able to continue to improve the profit contributions from Xbox .

------Gary Shiel, Morgan Stanley Dean Witter & Co . [8 1 ------That's great . I have a follow-on perhaps for Mary . Mary, the 49 million right now sitting on the deferred revenue -- is that entirely due to the defer on Xbox or is there something else in there as well ?

------Mary Dotz, NVIDIA Corp . - Interim CFO [9 ] ------There are actually two components of it . One component represents the deferral for the Xbox revenues according to the arbitration for Q4 and Q1 . And also, it represents the cash-in-advance position we're currently under with Microsoft .

------Gary Shiel, Morgan Stanley Dean Witter & Co . [10 ] ------Would you just tell us how much is which ?

------Jen-Hsun Huang, NVIDIA Corp . - President & CEO [il l ------If you take a look at our Q4 and Q1, we've reserved approximately 25 million so far for the Xbox revenues that's in dispute .

------Gary Shiel, Morgan Stanley Dean Witter & Co . [12 ] ------OK .

------Jen-Hsun Huang, NVIDIA Corp . - President & CEO [13 ] ------We -- when we reserve -- when we ultimately settle this and where both of our companies are working both pressed to (ph) resolution of this -- once we do that, we'll unroll the other part of it that is ultimately settled upon . So obviously that will improve our gross margins and our earnings accordingly .

The other part of it has to do with what Mary said earlier, which is Microsoft pays in advance for products that we're about to ship . And so there is some amount of revenues that are sitting on our books that are deferred as we -- as we -- as we ship the products subsequently .

------Gary Shiel, Morgan Stanley Dean Witter & Co . [14 ] ------Right .

------Jen-Hsun Huang, NVIDIA Corp . - President & CEO [15 ] ------But that component shouldn't be much . . .

------Gary Shiel, Morgan Stanley Dean Witter & Co . [16 ] ------OK .

inaudible (ph)

------Gary Shiel, Morgan Stanley Dean Witter & Co . [17 ] ------Thank you, very much .

------Jen-Hsun Huang, NVIDIA Corp . - President & CEO [18 ] ------All right . Thanks, Gary (ph) .

------Operator [19 ] ------Your next question is from Joseph Osha, Merrill Lynch .

------Joseph Osha , Merrill Lynch & Co ., Inc . [20 ] ------Hi . Can you hear me ?

------Jen-Hsun Huang , NVIDIA Corp . - President & CEO [21 ] ------Yes, Joe . Go ahead .

------Joseph Osha, Merrill Lynch & Co ., Inc . [22 ] ------Hi . Sorry, I'm on a cell phone here . One question only -- the increase in inventory seemed a little surprising given the slight deceleration in revenue growth . Is inventory at a level that you'd like or especially given some of, you know, what we've heard about wafer starts backing off, are -- you know, are you at this point trying to perhaps bring that inventory number down?

Jen-Hsun Huang, NVIDIA Corp . - President & CEO [23 ]

We're pretty comfortable with the inventory and the WIP (ph) that we have . You know, the thing that people need to understand about our quarter and I think for the students of NVIDIA ' s Q2 over the years, you realize that our Q2 ends i n July . July is one of the most busy months of the year, and . . .

------Joseph Osha, Merrill Lynch & Co ., Inc . [24 ] ------OK .

------Jen-Hsun Huang , NVIDIA Corp . - President & CEO [25 ]

. . . we don't want to -- we don't want to be in a position not to serve the needs of our -- of our aggressive customers that are coming back and building for back-to-school and Christmas especially with -- especially with the type of products that we have in the line right now .

You know, so I think that our inventory and our work in progress levels right now are perfectly appropriate with the -- with the level of business that we're doing and consistent with our typical posture as we go into -- go into Q2 .

------Joseph Osha, Merrill Lynch & Co ., Inc . [26 ] ------So we can expect perhaps to see that number come down next quarter ?

------Jen-Hsun Huang, NVIDIA Corp . - President & CEO [27 ] ------Well, you know, my sense is that at the end of Q2, we tend to -- we tend to and it's hard to say about this time, but we tend to have a lower inventory position at the end of Q2 .

------Joseph Osha, Merrill Lynch & Co ., Inc . [28 ] ------OK .

------Jen-Hsun Huang, NVIDIA Corp . - President & CEO [29 ] ------So your prediction is consistent with mine .

------Joseph Osha, Merrill Lynch & Co ., Inc . [30 ] ------Thank you very much .

------Operator [31 ] ------Your next question is from Hans Mosesmann from Prudential Securities .

------Hans Mosesmann, Prudential Securities [32 ] ------Thanks . Jen-Hsun, a question on your next-generation GPU -- in terms of the timing, when is it going to be introduced? And what kind of performance increase can we expect versus the current Titanium 4 (ph) series of products? Thanks .

------Jen-Hsun Huang, NVIDIA Corp . - President & CEO [33 ]

Our next-generation, you know, it -- typical in video style, there will be a brand new product lineup for fall of this coming year . In the fall of this coming year, we've already mentioned earlier that we're expecting tape-out (ph) expenses and engineering expenses to be dramatically higher this quarter for a variety of reasons . Number one, our next-generation GPU is built on 0 .13 micron . It's only possible to build on 0 .13 micron with the type of things that we're in the process of investing in . I believe our next-generation processor will bring a greater discontinuity (ph) to the graphics market than anything that we've brought relative to -- relative to previous generation before this . That's a big expense for us and you could kind of imagine based on -- based on our historical rhythm when you ought to expect our next-generation major leap (ph) .

In addition to that, we also have a record number of tape-outs (ph) for a variety of products to refresh new features and new initiatives in nearly every segment of our business . We're pretty excited about some of the things that we're doing there . We're not quite ready to talk about it, but just from the -- what we're predicting in terms of engineering expenses for this quarter, you can kind of get a sense of when everything is going to line up . So I think the best guess is probably fall . You know, we've been -- we've been very reliable on that rhythm for the last six years, and my sense is that we're not in the process of changing that .

------Hans Mosesmann, Prudential Securities [34 ] ------OK . And a quick follow-up -- any comments regarding the new product from Intel, the 845G (ph) , and how it impacts your business here in near-term? Thanks .

------Jen-Hsun Huang, NVIDIA Corp . - President & CEO [35 ]

The 845G (ph) has a inaudible (ph) quite a large inaudible (ph) impact . I've probably spent more time talking about the 845G (ph) and dispelling rumors of the 845G (ph) . I'm excited that it's finally here so that at least the reality supports our predictions . You know, the thing that the market needs to understand is this isn't the world's first integrated graphics chip and it certainly isn't Intel's first integrated graphics chip . This is their third- generation integrated graphics chip . And the dynamics in the marketplace doesn't fundamentally change with this . And in fact I think our expectation is that the 845G (ph) will likely do a bit worse than its previous generation, but we'll see . But let's say -- let's say that we assume that it's like the previous generation's . I think the first thing that people need to understand is that the -- when you add the volume of integrated graphics to the volume of standalone graphics chips, so one more time, the sum of integrated graphics plus standalone graphics, far exceeds the number of CPUs that are shipped in those quarters, in any quarter .

And the reason for that has to do with the fact that the majority, or a lot of, and my expectation, our analysis shows about 40 percent of the integrated graphics chip-sets actually ship with an external graphics on it . It makes a lot of sense from the market perspective, it makes a lot of sense from features perspective, customer requirement perspective, OEM profitability perspective . A lot of reasons why, you know, industry standards perspective, there's a lot of reasons why integrated graphics tend not to gain much traction beyond about 30 percent .

Right now we're seeing that the integrated graphics, even before 845G shows up in the marketplace, our expectation is that our current estimation is that about 20 some odd percent, you know, 26, 27 percent is already integrated graphics based on either Celerons or Pentium IIIs, or chip-sets from Taiwanese suppliers . It's already there . And so my sense is that there's some opportunity that some five to ten percent additional coverage for integrated graphics as a result of the 845 .

Now if we annualized about ten percent, that represents about ten million GPUs, probably a little less than that, because the 845 doesn't support the Athlon platform as you know, and the Athlon is about 30 percent of the market . But let's assume it's somewhere between seven to eight percent for, you know, ten percent increase in coverage . That seven to eight million units is all low-end graphics, which has an ASP of about $10 or so . NVIDIA has probably a share of that, let's assume a third, so I think that the total revenue impact, if at all, is probably in the range of, you know, 20, 30, $40 million for the next 12 months .

My sense is that the majority of our, or any of our other new market initiatives, including the nForce or workstations or laptop where we're gaining market share and growing rather quickly as Mary talked about earlier, will more than cover the difference in the impact of the 845 . So it's a rather long explanation, but I think it's an important one . The bottom line is I think the 845 is just way overblown, my final analysis probably represents a reduction in overall GPU TAM for the industry of about 80 to, you know, 80 some odd million dollars, and we'll take a percentage of that .

------Unidentified [36 ] ------Great . Thanks a lot, and congratulations on the quarter .

------Jen-Hsun Huang, NVIDIA Corp . - President & CEO [37 ] ------Hey thanks Hans (ph) .

------Operator [38] ------Your next question is from Eric Chen (ph) from J .P . Morgan .

------Eric Chen, J .P . Morgan [39 ] ------Thanks . First question is for Jen-Hsun . Have you actually seen any tangible signs, of say pickup in Xbox demand since the price cuts that was commenced, especially in Europe and Asia a while back ?

------Jen-Hsun Huang, NVIDIA Corp . - President & CEO [40 ] ------Yeah, hi Eric (ph) . That's actually, you know, from our, from our perspective a bit of an odd question, and let me tell you why . We just haven't seen a reduction in demand ever since anything happened .

------Eric Chen, J .P . Morgan [41 ] ------OK .

------Jen-Hsun Huang, NVIDIA Corp . - President & CEO [42 ]

So, you know, we've been shipping at a rather constant rate since the beginning of the launch . And so, you know, the press and the market reaction to Xbox has always been a bit of a quagmire to us, but nonetheless I think that you could see from our revenues this quarter, and what Mary said earlier regarding the breakout of Xbox, we've been shipping at a pretty steady rate . And it hasn't picked up, but it hasn't dropped either .

------Eric Chen, J .P . Morgan [43 ]

OK . Great . Second question for Mary . You guided to the lower end for the gross margin for the year, and I was wondering if, how much of that is due to pricing, or is it really just because your manufacturing costs just kind of, just got to increase because of the new products ?

------Mary Dotz, NVIDIA Corp . - Interim CFO [44 ]

Yeah, right now the reason we're guiding to the lower end of the margin has to do with the deferral of the Xbox revenue . So we think that with the success of the new products that Jen-Hsun mentioned, we're very comfortable within the rest of the year for the range that we've given . But we think that the, if the deferral continues we're going to be down towards the lower end of the range .

------Eric Chen, J .P . Morgan [45 ] ------OK, great . Thanks .

------Operator [46] ------Your next question is from Jonathon Joseph (ph) from Salomon Smith Barney .

------Jonathon Joseph, Salomon Smith Barney [47 ]

Yeah, good afternoon Jen-Hsun . You've done a good job of laying out the magnitude of the possible impact from the 845G . Can you give us a sense in terms of time, a timeline like when and how many quarters out, one quarter or two quarters, would we expect the maximum impact to be from the 845G, however great or small that may be ?

------Jen-Hsun Huang , NVIDIA Corp . - President & CEO [48 ]

Well it takes, that's a good question John (ph) . I would, I would suspect that in the commercial desktop, and let's break it down by markets and then by segment . On the commercial desktop, I would suspect that the peak of it will likely be sometime say, early next year . Because it would take some time to ramp up the, or ramp down previous generations, commercial desktops .

That's not a very large market for us anyways, and it's predominantly, surprisingly for most people, it's already predominantly 810 and 815 . And so that, my sense is going to be at the largest of the magnitude, but it's also the core market of integrated graphics from Intel . It's also the core market for Intel . If you were to take a look at consumers, my sense is that it will move quickly, but the magnitude will be small . And the reason for that is because consumer PCs tend to refresh very rapidly . My suspicion is that we'll see a blip in Q3, but my sense is that nobody would even notice it .

In the consumer PC market, there's this factor, there's a dynamic that's going to work against this generation of chip-sets, and you're, you know, you're probably hearing about it already, and it's a very important initiative, it's called AGP 8X . It has the capability of doubling graphics performance, and doubling system performance, and it's one that the entire industry beyond just ourselves, is really gravitating towards, and that is what is October, November of this year?

------Jonathon Joseph, Salomon Smith Barney [49 ] ------Right .

------Jen-Hsun Huang , NVIDIA Corp . - President & CEO [50 ]

It would, it would deem this generation of chip-sets pretty much obsolete is my sense in the consumer market . And it's going to drive much more towards the external AGP standalone graphics processors, because it's so fresh, it's so new, it's much, it delivers such a, such a better experience, and so my sense is that in the consumer market you're going to see a slight blip in Q3, you probably won't notice it . In Q4 it's going to come under pressure again because of AGP 8X .

------Jonathon Joseph, Salomon Smith Barney [51 ] ------Now the 845G is only 4X capable, and is your new processor that you'll be introducing this fall, is that 8X capable ?

------Jen-Hsun Huang, NVIDIA Corp . - President & CEO (52 ] ------I guess, I guess there's only two questions, two answers to that question, and I won't be coy, the answer is absolutely yes . AGP 8X is very, very important, and we wouldn't, we wouldn't as a graphics company, we wouldn't miss it .

------Jonathon Joseph, Salomon Smith Barney [53 ]

Right . And then you think that most of the impact from the 845G, which you've admitted there will be some impact, but much less than the press and perhaps some investors think, that's going to be on your T&T line, your low-end line anyway, right ?

------Jen-Hsun Huang, NVIDIA Corp . - President & CEO [54 ]

That's right . And, you know, the ASPS of those, first of all we're not the market leader of low-end $10 graphics chips, to start . But nonetheless, you know, the ASPS of those products are rather low, and the gross profit dollars are, you know, just as low, and my sense is that reducing the industry's TAM by ten million units a year on a, you know, $10 or sub $10 ASP product is not likely to affect the industry by much . And it's likely the same reason why when integrated graphics was first introduced, you know, some several years ago, some two or three years ago I guess it is now, that the impact on the industry wasn't as dramatic as people thought . And so . . .

------Jonathon Joseph, Salomon Smith Barney [55 ]

Last question . The, and you may not be able to answer this Jen-Hsun, but a lot of concern obviously about the PC market in Q2, and about whether we're going to see any seasonal pickup or increase in IT capital spending, or-any kind o f pickup in the second half . Do you have any visibility on that, are your customers telling you anything about their plans going into Q3 and four ?

------Jen-Hsun Huang , NVIDIA Corp . - President & CEO [56 ]

We really don't have much visibility, however, you know, this is the time of the year that, you know, this is, and you know this, this is not unlike Q2 of last year, or the Q2 of before that . This is probably the most uncertain month of the entire PC industry . And asking people for forecasts and asking customers, you know, how they're doing this month, it - typically, you'll get a rather soft answer .

And the reason for that is because everything is pretty much held up until Computext (ph) , which is coming up in a couple of weeks . Computext (ph) starts off a new buying season, new products, you know, new enthusiasm as everybody starts to buy and build through July, which is one of the hottest months of the year, and get ready for back-to-school . we're seeing that in the marketplace the mainstream products - the lower-end products are already rather soft, but we're not expecting it to be any different right now . What we're seeing, however, is our high-end products and particularly the T14200 (ph) , our workstation products, our mobile products, our - the Xbox is still shipping, and the Apple products - I mean we're seeing that for the non-PC products or non-mainstream PC products, those products are still doing quite well .

And so, you know, my expectation is that this is - this is not unlike any other Q2 and it tends to be back-end loaded for most of the people . But we're better prepared this Q2 than we've - you know, we've been in any other Q2 before it . And so my expectation is we'll power right through it .

------Jonathon Joseph, Salomon Smith Barney [57 ] ------Got you . All right . Thanks .

------Jen-Hsun Huang , NVIDIA Corp . - President & CEO [58 ] ------Thanks a lot, John (ph )

------Operator [59 ] ------At this time, I'd like to remind everyone in order to ask a question, press star, then the number one on your telephone keypad .

Your next question is from David Hodgson from Dundee Securities Corporation .

------David Hodgson, Dundee Securities Corp . [60 ] ------Thanks very much .

Jen-Hsun, a question on the high end of the market - I guess it seems to us that over the past 18 to 24 months that that segment's starting to expand, and certainly you look at the sixth and seventh generation forecast, it's going to be a huge market . Can you talk about maybe some of the dynamics behind that growth going forward, how it will benefit you, and how maybe Microsoft's Longhorn are going to help the 3-D industry? Thanks .

------Jen-Hsun Huang, NVIDIA Corp . - President & CEO [61 ]

You know, boy, that's a - that's a great question, and it's something very, very close to our heart . The market for one 199 to 299 retail graphics products sort of slightly beneath the GeForce4 Ti 4600 and, you know, perfectly aligned with, if you will, the Ti 4200 . That's why people call the Ti 4000 - 4200 the perfect product . The - at the $199 to $299 range, there's no question we're experiencing pretty robust sell-throughs .

And the reason for that I think is because the applications that continue to come into the PC industry - and you know that one of the - one of the - one of the healthiest sectors of entertainment right now has to do with, you know, many of these new first-person shooters and Star Wars and first-person strategy games and the graphics are just getting richer and richer and there's no question I'm seeing a continued investment in rich graphics in that area . And there's just some wonderful stuff coming down the pike, you know, over the next - not so much the next three months, but may 12 months out that will push graphics to the next level . And it's a rather large discontinuity (ph) . So I would expect that the - that particular price point continue to do extremely well . Where the GeForce4 Ti is settling into - that's where we're seeing most of our growth .

In terms of - or most of our - most of our robust sell-through right now . In terms of Longhorn, I can't say very much about Longhorn . However, I can say that it's going to be a terrific operating system . It's going to look different . It's going to feel different . And it probably isn't a stretch if we just - if we just use OS10 as an example . Maybe that's the best way to think about it . If we use OS10 as an example, OS10 on the Mac is already fully 3-D . You can't run it with a, you know, older-generation GPU . And even with a GeForce2 class and moving into GeForce3 class, the resolution and the richness of color and the fact that all of the icons are 3-D and future versions of it - you're going to find that the operating system itself requires a great deal of 3-D graphics horsepower .

Now, you know, the goal in life is not to make a - make an operating system with a user interface that forces you to walk down hallways, but there's so many things that you could do to enrich the visual experience to make things look brighter and prettier and more welcoming and easier to use by adding 3-D elements to it . And I think that Apple with OS10 has really shown a lot of people the way . Now you just have to extrapolate from there and imagine what the next-generation operating system could look like if you were to add 3-D graphics technology as its (ph) foundation .

And so I think the - it goes without saying that in about a year-and-a-half, we're going to see a very important discontinuity (ph) in the marketplace for user interfaces . And we're, you know, mobilizing the company and have mobilized the company to fully align with the needs of the - of Microsoft's Longhorn .

------David Hodgson, Dundee Securities Corp . [62 ] ------And just lastly, any comments on some of your old foes (ph) making announcements on expected new products going forward? By those I mean 3-D Labs (ph) and Matrox (ph) . Thank you .

------Jen-Hsun Huang, NVIDIA Corp . - President & CEO [63 ] ------Yes, well, you know I - product introductions is not new to this industry, and every six months - every year, quite frankly, I think almost on a perpetual basis, we're hearing about product announcements .

I think that, you know, you've watched us for some time, and we're rather disciplined as a company, that we ought (ph) to just announce when it's the right time to announce . And we tend to announce every fall and every spring, an d everything in between is a waste of energy for us . And responding to, you know - to competitors that are comparing their next-generation product to our last- generation product is not useful .

And all I can tell you is this - that the Moore's Law is progressing and Moore's Law insures that future generation products are better than past generation products whether it's ours or others . And the one thing I can tell is that the product that we're building and the lineup that we're building is extraordinary beyond anything that's been described so far and it's going to be a very important discontinuity (ph) for us and for the industry, something that we're very excited about, and something that you - that I'm just going to have to force you to wait to hear about .

------David Hodgson, Dundee Securities Corp . [64 ] ------Thanks . Great job in the quarter, and good luck .

------Jen-Hsun Huang, NVIDIA Corp . - President & CEO [65 ] ------Hey, thanks a lot, Dave . I appreciate that .

------Operator [66 ] ------Your next question is from Rui Cordoso, RBC Capital Markets .

------Rui Cordoso, RBC Capital Markets [67 ]

Hi . A question on the nForce - can you give us a sense of the uptake in the white box (ph) PC channels versus the OEM market? And if we look out, let's say, over two or three quarters from now, what do you expect the main market for nForce will be versus the two ?

------Jen-Hsun Huang , NVIDIA Corp . - President & CEO [68 ]

Yes, that's actually a really super good question, and it's one that I have to admit that I didn't know the answer to a year-and-a-half ago when we first started this venture . The outcome is not surprising, but wasn't intuitive when you first think through it .

nForce, as you know, has been the darling of the Athalon PC marketplace . And it's really been a - one of the major features of the AMD platform . People have called it the best chip-set of the year, a technology discontinuity (ph) , and used a lot of words to describe the virtues of nForce . We're really excited about nForce . We're excited about the strategy, we're excited about our next- generation products that are derived from our vision along platform processors . And what we're seeing is that nForce is really ideally suited, you know, with its inner graphics - integrated graphics of GeForce2 - ideally suited for the OEMs . And we're seeing very significant adoption .

I don't think we've ever had a larger adoption at OEMs of any first-generation product . Our first-generation war station (ph) product was not nearly as successful . Our first-generation mobile product was not nearly as successful . Our first-generation desktop PC product was not nearly as successful as our first-generation nForce product at the OEMs .

Now, the question is, "What about the channel?" It turns out that system builders in the channel don't want integrated graphics - not even ours . They would rather buy our external GPU . They would rather buy a GeForce2 MX, a GeForce4 MX, a GeForce4 Ti, and differentiate at the end of the channel, which makes some amount of sense . You want to use - leave for yourself the maximum amount of flexibility to address the needs of your customer base with as few inventory components as you can . And so it makes quite a bit of sense to me actually that nForce was not as successful in the system builder marketplace . But nonetheless, we're seeing terrific traction as a result of all of the OEM upticks . The second generation nForce, which, you know, fall's an important season for us, and the second generation nForce will address, you know, all of the things that we learned in our first generation, and system builders is a very important part of that . And so I hope that, and I expect that our second generation nForce to do much better in the system builder . I hope that answers your question .

------Unidentified [69 ] ------Yeah that's great . Just a follow-up also, could you give us a sense, if you're seeing any uptake on the, on the core logic without, with basically with the graphics turned off ?

------Jen-Hsun Huang, NVIDIA Corp . - President & CEO [70 ]

Yeah, the, our core logic with graphics turned off saw pretty immediate traction, but you know, now is not the time to be relaunching nForce, I mean, we're in the process of focusing on nForce, the follow-on generations and, you know, I'll give you a report at the end of, end of the year on how we do there . My expectation is that we've figured out the magic, and understand the channel dynamics and have the right products to serve it throughout the rest of the year .

------Unidentified [71 ] ------OK, great . Thanks .

------Jen-Hsun Huang , NVIDIA Corp . - President & CEO [72 ] ------Yep, thanks Roy (ph) .

------Operator [73 ] ------Your next question is from Peter Labe (ph) , NetMed (ph) Securities Limited .

------Peter Labe, NetMed Securities Limited [74 ] ------Peter Labe (ph) thanks . Hi Jen-Hsun .

------Jen-Hsun Huang, NVIDIA Corp . - President & CEO [75 ] ------Hi Peter (ph) .

------Peter Labe, NetMed Securities Limited [76] ------Couple of questions on the Microsoft situation, maybe you can't answer it, bu t is there any approximate timetable on the resolution of the pricing dispute, and secondly, I wonder if you could help us maybe at least color-wise, along the grounds of how rapidly does the price decline with the increases in volume of Xbox? What is the erosion factor there, if you can help us ?

------Jen-Hsun Huang , NVIDIA Corp . - President & CEO [77 ]

So first of all, I don't have a schedule . I can only tell you that we're working on it as fast as we can, and both parties are very focused on getting through it . This is a very long-term relationship, it's going to be multiple years, it is extraordinarily large in volume, and, you know, the first year of Xbox, although exciting, it will pale in comparison to what we'll see the second year of Xbox, with all of the things that you guys are seeing and all the smart moves that Robby (ph) and the rest of the team at Microsoft are making .

So that this is a good opportunity for us to resolve, you know, any uncertainties and, or any open questions relating to our manufacturing contract . So anyways, we're working on it as fast as we can . Because it's such a large contract, it's helpful to have somebody shepherd the process and have somebody help us resolve it . We hope that is was going to be private when Microsoft certainly wanted it to be private, but I don't think in the final analysis it makes any difference, and we'll get it resolved as quickly as we can and move on .

In terms of price reductions, the most important thing to realize is its not related to Microsoft's price reductions . You know, Microsoft's business model ultimately is captured through their first party software sales, royalties from third parties, as well as the connection fees of Xbox Live, and so they have multiple ways of monetizing the Xbox franchise . Our business model is rather simpler, and it's about making chips and selling chips, and so, you know, the two businesses in fact needs to be decoupled in terms of its business model . So they're not related to the price reductions . There were just a lot of pricing questions that needs to be resolved, and it's a pricing dispute, and so, you know, we're going to go get that resolved as quickly as we can .

I don ' t have any more specifics that I can offer you at this point . Only tha t

------Peter Labe, NetMed Securities Limited [78 ] ------OK, thanks Jen-Hsun .

------Jen-Hsun Huang, NVIDIA Corp . - President & CEO [79 ] ------. . . only that we're working very hard towards the answer .

------Operator [80 ] ------We have time for one final question . Tim Mann (ph) from CSFB . Tim Mann, CSFB [81 ]

Thanks, and great quarter guys .

------Jen-Hsun Huang , NVIDIA Corp . - President & CEO [82 ] ------Thanks Tim (ph )

------Tim Mann, CSFB [83 ] ------Hey Jen-Hsun, when do you expect nForce maybe to hit as much as ten percent of your overall revenues? If you had to put your forecasting hat on ?

------Jen-Hsun Huang, NVIDIA Corp . - President & CEO [84 ] ------Boy Tim (ph) that's really hard . You know, the overall revenues keeps going up .

------Tim Mann, CSFB [85 ] ------I know .

------Jen-Hsun Huang, NVIDIA Corp . - President & CEO [86 ] ------It makes it really hard for all of the other new businesses to catch up to . You know, the, let's see . You know, I don't expect it, you know, ten percent, ten percent, ten percent . . .

------Tim Mann, CSFB [87 ] ------Well it just helps us get a little more . . .

------Jen-Hsun Huang, NVIDIA Corp . - President & CEO [88 ] ------It's hard, because you're, our top line keeps moving upwards .

------Tim Mann, CSFB [89 ] ------Right .

------Jen-Hsun Huang, NVIDIA Corp . - President & CEO [90 ]

And this, you know, all of our new businesses are chasing it, but our core business, our workstation business, our mobile business, I mean everything just keeps raising it . I guess if we subtracted all of those new businesses out, maybe that's the way to think about it . Right, it's kind of weird to shift everything upwards and expect it to catch up, but if you were to subtract it all out, you know, I wouldn't be surprised if Q3, Q4 that we're on a revenue rate, or run rate that's consistent with ten percent . ------Tim Mann, CSFB [91 ]

OK . Second question is kind of a follow-up to a previous question . Obviously you have a very exciting launch coming in the fall, and you're targeting a .13 micron technology through your foundry partner . I think in previou s conversations with Mike (ph) he's mentioned that, you know, given it's such a large launch that you might have a backup position . I'm wondering if that's still the case, and you're going down kind of two paths, and is that part of the reason for the dramatic increase in the tape out costs ?

------Jen-Hsun Huang , NVIDIA Corp . - President & CEO [92 ]

OK, so I can say that it's not because we have a backup . Our backup is to execute flawlessly, you know, we were the first to use .15 micron TSMC, and it was challenging, but we did it . I'm expecting .13 micron to be challenging, but I'm expecting us to do it . We have nearly perpetual meetings with TSMC looking at, looking at their process, analyzing their process, running test chips, running test wafers .

And I can tell you that Morris (ph) and Rick (ph) and FC (ph) and you know, all of the management of TSMC are fully aligned behind the production ramp of this product, they know the magnitude of the volumes we're looking for, and they know this is important to us . You know, I love it in these type of environments, there is nothing more focusing than making something important, and this is important for both companies . And, you know, I think that you have the, you have now the focus and the attention of two world-class companies to ramp this product into production .

I actually feel pretty terrific about it . You know, it's always, it's always challenging, but out next generation product is not, you know, very few companies in the world can pull it off, but we stand ready to do it, and so I don't think that a backup is necessarily the best approach, I think focus is the best approach .

The reason why our engineering costs and NREs and tape outs are increasing this quarter is because there are so many of them . There's quite a few new products coming out for fall this year . NVIDIA's a larger company now than every before, and we have the capacity to design more products than before, and they just happen to align in Q2 this year, and so I feel, I feel, actually I think it's just going to be terrific . I'm excited about the products .

------Tim Mann, CSFB [93 ] ------OK . Well great, and then congrats again on a great quarter .

------Jen-Hsun Huang, NVIDIA Corp . - President & CEO [94 ] ------Hey thank you very much . Thanks Tim (ph) .

------Operator [95 ] ------This concludes our question and answer session . Are there any closing remarks ?

------Jen-Hsun Huang, NVIDIA Corp . - President & CEO [96 ] ------Yes, thank you all for joining us today, and I look forward to reporting on our exciting progress ahead in Q2 .

------Operator [97 ] ------Thank you for your participation in the NVIDIA first quarter fiscal 2003 financial result conference call . You may now disconnect .

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