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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Commission file number: 0-22594

ALLIANCE SEMICONDUCTOR CORPORATION

2575 Augustine Drive
Santa Clara, California 95054-2914
(Address of principal executive offices)

Registrant’s telephone number, including area code is (408) 855-4900

Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:

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

As of August 9, 2002, there were 37,395,464 shares of Registrant’s Common Stock outstanding.

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ALLIANCE SEMICONDUCTOR CORPORATION

Form 10-Q
for the Quarter Ended June 30, 2002

INDEX

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Part I — Financial Information

ITEM 1
CONSOLIDATED FINANCIAL STATEMENTS

ALLIANCE SEMICONDUCTOR CORPORATION
Consolidated Balance Sheets
(in thousands)
(unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

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ALLIANCE SEMICONDUCTOR CORPORATION
Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

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ALLIANCE SEMICONDUCTOR CORPORATION
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

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ALLIANCE SEMICONDUCTOR CORPORATION
Notes to Consolidated Financial Statements
(in thousands, except per share amounts)
(unaudited)

Note 1. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared by Alliance Semiconductor Corporation (the “Company”) in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosure, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted in accordance with such rules and regulations. In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments, consisting only of normal, recurring adjustments, necessary to present fairly the consolidated financial position of the Company and its subsidiaries, and their consolidated results of operations and cash flows. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on July 15, 2002.

For purposes of presentation, the Company has indicated the first three months of fiscal 2003 and 2002 as ending on June 30; whereas, in fact, the Company’s fiscal quarters ended on June 29, 2002 and June 30, 2001, respectively. The financial results for the first quarter of fiscal 2003 and 2002 were reported on a 13-week quarter.

The results of operations for the three months ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ending March 31, 2003, and the Company makes no representations related thereto.

Note 2. Balance Sheet Components

Short term Investments

Short term investments include the following available-for-sale securities and derivatives at June 30, 2002 and March 31, 2002 (in thousands):

Long term Investments

At June 30, 2002 and March 31, 2002, the Company’s long term investments were as follows (in thousands):

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Inventory

Other Current Assets

Goodwill and Intangible Assets

June 30, 2002

March 31, 2002

Accumulated Other Comprehensive Income

June 30, 2002:

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March 31, 2002:

Note 3. Purchase of Technology License

On April 20, 2002, the Company entered into an agreement through its subsidiary, SiPackets, to acquire a perpetual license from API Networks. In June 2002, the Company acquired a perpetual license from API Networks for $3.2 million. API is a fabless semiconductor company and the leader in the development of high-speed HyperTransport I/O interconnect components for performance and bandwidth-intensive embedded applications. API currently offers a family of HyperTransport to PCI bridges and switches. Alliance’s license of the HyperTransport technology from API will allow it to be the sole source for API’s current products, to develop new HyperTransport products, and to sublicense third parties to use and develop HyperTransport products. Alliance is also acquiring certain existing sublicenses previously granted by API, including royalties from those sublicenses. This intangible asset will be expensed on a straight-line basis over a period of 36 months, beginning in the second quarter of fiscal 2003.

Note 4. Investment in United Microelectronics Corporation

At June 30, 2002, the Company owned approximately 298.1 million shares of United Microelectronics Corporation (“UMC”) common stock, representing approximately less than 1% ownership. At March 31, 2002, the Company owned approximately 313.1 million shares of United Microelectronics Corporation (“UMC”) common stock, representing approximately less than 1% ownership. In May 2000, the Company received an additional 56.6 million shares of UMC by way of a stock dividend. In January 2002, the Company received an additional 51.0 million shares of UMC by way of stock dividend.

Of the 298.1 million shares of UMC owned by Alliance at June 30, 2002, approximately 113.2 million are subject to a “lock-up” or no-trade period. Of this amount, approximately 28.3 million shares became eligible for sale in July 2002 and equal amounts will become available for sale every six-months through January 2004. The portion of the investment in UMC which is restricted from sale for more than twelve months (approximately 19% of the Company’s holding at June 30, 2002), is accounted for under the cost method and is presented as a long-term investment. As this long-term portion becomes current over time, the investment will be transferred to short-term investments and will be accounted for as an available-for-sale marketable security in accordance with SFAS 115. In the first quarter of fiscal 2003, the Company sold 15.0 million shares of UMC stock for $20.9 million and recorded a pre-tax non-operating gain of $11.7 million. Of this $20.9 million, the Company received $15.0 million in cash and had a receivable of $5.9 million at June 30, 2002. During the first quarter of fiscal 2003, the Company received $7.3 million related to the sale of UMC stock during the fourth quarter of fiscal 2002, which was a receivable at March 31, 2002.

At June 30, 2002, the Company owned approximately 241.5 million shares of UMC that were available-for-sale and recorded an unrealized gain of approximately $83.9 million, net of deferred taxes of approximately $56.6 million as part of Accumulated Other Comprehensive Income in the stockholders’ equity section of the balance sheet. Also at June 30, 2002, the Company owned 56.7 million shares of UMC that are recorded at cost.

At March 31, 2002, the Company owned 256.5 million shares of UMC that were available for sale and recorded an unrealized gain of approximately $135.2 million, net of deferred taxes of approximately $91.3 million as part of Accumulated Other Comprehensive Income in the stockholders’ equity section of the balance sheet. At March 31, 2002, the Company owned 56.7 million shares of UMC that were recorded at cost.

Given the market risk for securities, when these shares are ultimately sold, it is possible that additional gain or loss will be reported. If the Company sells more that 50% of its original holdings of UMC, the Company will start to lose a proportionate share of its wafer production capacity rights, which could materially affect its ability to conduct its business.

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Note 5. Investment in Chartered Semiconductor Manufacturing Ltd. (“Chartered”)

At June 30, 2002, the Company owned approximately 16.4 million ordinary shares or 1.64 million American Depository Shares (“ADSs”) of Chartered Semiconductor Manufacturing (“Chartered”). The Company does not own a material percentage of the equity of Chartered. The Company accounts for its investment in Chartered as an available-for-sale security in accordance with SFAS 115. At June 30, 2002, the Company recorded an unrealized gain of approximately $2.9 million, net of taxes of approximately $1.6 million as part of Accumulated Other Comprehensive Income in the stockholders’ equity section of the balance sheet. At March 31, 2002, the Company recorded an unrealized gain of approximately $10.1 million, net of taxes of approximately $5.8 million as part of Accumulated Other Comprehensive Income in the stockholders’ equity section of the balance sheet.

Given the market risk for securities, when these shares are ultimately sold, it is possible that additional gain or loss will be reported. If the Company sells more than 50% of its original holdings of Chartered, the Company will start to lose a proportionate share of its wafer production capacity rights, which could materially affect its ability to conduct its business.

Note 6. Investment in Broadcom Corporation

At June 30, 2002, the Company owned 75,000 shares of the common stock of Broadcom Corporation (“Broadcom”). The Company accounts for its investment in Broadcom as an available-for-sale marketable security in accordance with SFAS 115.

At June 30, 2002, the Company recorded an unrealized gain of approximately $810,000, net of taxes of approximately $548,000, as part of Accumulated Other Comprehensive Income in the stockholders’ equity section of the balance sheet.

In fiscal 2002, the Company entered into a cashless collar arrangement with a brokerage firm with respect to all 75,000 shares of Broadcom common stock. The collar arrangement consists of a written call option to buy 75,000 shares of Broadcom common stock at a price of $64.72 and a purchased put option to sell 75,000 shares at a price of $36.72 through August 2002.

Note 7. Investment in Vitesse Semiconductor Corporation

At June 30, 2002, the Company owned 728,000 shares of the common stock of Vitesse Semiconductor Corporation (“Vitesse”). The Company accounts for its investment in Vitesse as an available-for-sale marketable security in accordance with SFAS 115. In January 2001, the Company entered into two derivative contracts (“Derivative Agreements”) with a brokerage firm and received aggregate cash proceeds of approximately $31.0 million. The Derivative Agreements have repayment provisions that incorporate a collar arrangement with respect to 490,000 shares of Vitesse Semiconductor common stock. The Company, at its option, may settle the contracts by either delivering shares of Vitesse common stock or making a cash payment to the brokerage firm in January 2003, the maturity date of the Derivative Agreements. The number of Vitesse shares to be delivered or the amount of cash to be paid is determined by a formula in the Derivative Agreements based upon the market price of the Vitesse shares on the settlement date. Under the Derivative Agreements, if the stock price of Vitesse exceeds the ceiling of the collar, then the settlement amount also increases by an amount determined by a formula included in the Derivative Agreements (generally equal to the excess of the value of the stock over the ceiling of the collar.) If the stock price of Vitesse declines below the floor of the collar, then the settlement amount also decreases by an amount determined by a formula included in the Derivative Agreements (generally equal to the excess of the floor of the collar over the value of the stock.)

At June 30, 2002, the Company recorded an unrealized loss of approximately $660,000, net of taxes of $445,000 as part of Accumulated Other Comprehensive Income in the stockholders’ equity section of the balance sheet, with respect to the unhedged Vitesse shares.

At March 31, 2002, the Company owned 728,000 shares of Vitesse and recorded an unrealized gain of approximately $292,000, net of taxes of $197,000 as part of Accumulated Other Comprehensive Income in the stockholders’ equity section of the balance sheet.

Vitesse’s stock, like many other high technology stocks, has historically experienced material and significant fluctuations in market value, and will probably continue to do so in the future. Additionally, because it is common

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that high technology stocks, like Vitesse’s and the Company’s, move as a group, it is likely that Vitesse’s stock and the Company’s stock can both suffer significant loss in value at the same time. This occurred in fiscal 2002 and 2001. Therefore, there can be no assurance that the Company’s investment in Vitesse will not decline further in value.

Note 8. Investment in PMC-Sierra Corporation

At June 30, 2002, the Company owned 68,152 shares of PMC-Sierra Corporation (“PMC”) common stock. The Company records its investment in PMC as an available-for-sale marketable security in accordance with SFAS 115. At June 30, 2002, the Company recorded an unrealized loss of approximately $50,000, net of taxes of approximately $27,000, as part of Accumulated Other Comprehensive Income in the stockholders’ equity section of the balance sheet.

At March 31, 2002, the Company owned 68,152 shares of PMC-Sierra and recorded an unrealized gain of approximately $271,000, which is net of taxes of $130,000, as part of Accumulated Other Comprehensive Income in the stockholders’ equity section of the balance sheet.

PMC’s stock, like many other high technology stocks, has historically experienced material and significant fluctuations in market value, and will probably continue to do so in the future. Additionally, because it is common that high technology stocks, like PMC’s and the Company’s, move as a group, it is likely that PMC’s stock and the Company’s stock can both suffer significant loss in value at the same time. This occurred in fiscal 2002 and 2001. Therefore, there can be no assurance that the Company’s investment in PMC will not further decline in value.

Note 9. Investment in Adaptec, Inc.

At June 30, 2002, the Company owned 1,440,961 shares of Adaptec. The Company records its investment in Adaptec as an available-for-sale marketable security in accordance with SFAS 115. At June 30, 2002, the Company recorded an unrealized loss of approximately $1.0 million, net of tax of approximately $688,000, as part of Accumulated Other Comprehensive Income in the stockholders’ equity section of the balance sheet. At March 31, 2002, the Company owned 1,440,961 shares of Adaptec and recorded an unrealized gain of approximately $2.5 million, net of tax of approximately $1.7 million, as part of Accumulated Other Comprehensive Income in the stockholders’ equity section of the balance sheet.

In December 2001, the Company entered into a derivative contract with a brokerage firm and received aggregate cash proceeds of $5.0 million. The contract has repayment provisions that incorporate a collar arrangement with respect to 362,173 shares of Adaptec common stock. The Company has to deliver a certain number of Adaptec shares in June 2003, the maturity date of the contract. The number of Adaptec shares to be delivered is determined by a formula in the contract based upon the market price of the Adaptec shares on the settlement date. Under the contract, if the stock price of Adaptec is outside of the collar (the floor of which is $16.26 and the ceiling of which is $21.99), the number of Adaptec shares to be delivered equals 362,173. If the stock price of Adaptec is within the collar, the Company will have to deliver that number of Adaptec shares having total value equal to $5.9 million.

Adaptec’s stock, like many other high technology stocks, has historically experienced material and significant fluctuations in market value, and will probably continue to do so in the future. Additionally, because it is common that high technology stocks, like Adaptec’s and the Company’s, move as a group, it is likely that Adaptec’s stock and the Company’s stock can both suffer significant loss in value at the same time. This occurred in fiscal 2002. Therefore, there can be no assurance that the Company’s investment in Adaptec will increase in value or even maintain its value.

Note 10. Investment in Magma Design Automation

In the first quarter of fiscal 2003, the Company sold all of its holdings in Magma Design Automation (“Magma”), a total of 360,244 common stock shares. The Company received gross proceeds of $6.0 million and recorded a pre-tax non-operating gain of $1.2 million.

At March 31, 2002 the Company held 360,244 shares of Magma and recorded an unrealized gain of approximately $1.3 million, net of taxes of $893,000, as part of Accumulated Other Comprehensive Income in the stockholders’ equity section of the balance sheet.

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Note 11. Investment in Tower Semiconductor Corporation

At June 30, 2002, the Company owned 3,927,276 shares of Tower and wafer credits totaling $9.5 million. The Company accounts for its investment in Tower under the cost method based on the Company’s inability to exercise significant influence over Tower’s operations and restrictions to sell the Tower stock. In the first quarter of fiscal 2003, the Company paid $11.0 million to Tower Semiconductor, in accordance with the terms of the share purchase agreement between the two companies. The Company received an additional 1,071,497 shares of Tower and prepaid wafer credits in the first quarter of fiscal 2003 in the amount of $4.4 million. At March 31, 2002, the Company owned 2,855,779 shares of Tower and wafer credits totaling $5.1 million.

Note 12. Alliance Venture Management, LLC

In October 1999, the Company formed Alliance Venture Management, LLC, (“Alliance Venture Management”), a California limited liability corporation, to manage and act as the general partner in the investment funds the Company intended to form. Alliance Venture Management does not directly invest in the investment funds with the Company, but is entitled to a management fee out of the net profits of the investment funds. This management company structure was created to provide incentives to the individuals who participate in the management of the investment funds by allowing them limited participation in the profits of the various investment funds through the management fees paid by the investment funds.

In November 1999, the Company formed Alliance Ventures I, LP (“Alliance Ventures I”) and Alliance Ventures II, LP (“Alliance Ventures II”), both California limited partnerships. The Company, as the sole limited partner, owns 100% of the shares of each partnership. Alliance Venture Management acts as the general partner of these partnerships and receives a management fee of 15% of the profits from these partnerships for its managerial efforts.

At Alliance Venture Management’s inception in November 1999, series A member units and series B member units in Alliance Venture Management were created. The unit holders of series A units and series B units receive management fees of 15% of investment gains realized by Alliance Ventures I and Alliance Ventures II, respectively. In February 2000, upon the creation of Alliance Ventures III, LP (“Alliance Ventures III”), the management agreement for Alliance Venture Management was amended to create series C member units which are entitled to receive a management fee of 16% of investment gains realized by Alliance Ventures III. In January 2001, upon the creation of Alliance Ventures IV, LP (“Alliance Ventures IV”) and Alliance Ventures V, LP (“Alliance Ventures V”), the management agreement for Alliance Venture Management was amended to create series D and E member units which are entitled to receive a management fee of 15% of investment gains realized by Alliance Ventures IV and Alliance Ventures V, respectively.

Each of the owners of the series A, B, C, D and E member units paid the initial carrying value for their shares of the member units. While the Company owns 100% of the common units in Alliance Venture Management, it does not hold any series A, B, C, D or E member units and does not participate in the management fees generated by the management of the investment funds. Several of the Company’s senior management hold the majority of the series A, B, C, D or E member units of Alliance Venture Management.

After Alliance Ventures I was formed, the Company contributed all its then current investments, except Chartered, UMC and Broadcom, to Alliance Ventures I to allow Alliance Venture Management to manage these investments. As of June 30, 2002, Alliance Ventures I, whose focus is investing in networking and communication start-up companies, has invested $20.0 million in nine companies, with a fund allocation of $20.0 million. Alliance Ventures II, whose focus is in investing in internet start-up ventures has invested approximately $9.1 million in ten companies, with a total fund allocation of $15.0 million. As of June 30, 2002, Alliance Ventures III, whose focus is investing in emerging companies in the networking and communication market areas, has invested $43.6 million in 13 companies, with a total fund allocation of $100.0 million. As of June 30, 2002, Alliance Ventures IV, whose focus is investing in emerging companies in the semiconductor market areas, has invested $26.3 million in six companies, with a total fund allocation of $40.0 million. As of June 30, 2002, Alliance Ventures V, whose focus is investing in emerging companies in the networking and communication market areas, has invested $17.1 million in nine companies, with a total fund allocation of $60.0 million.

In the first fiscal quarter of 2003 and 2002, the Company wrote-down certain of its investments in Alliance Ventures and recognized pre-tax, non-operating losses of approximately $8.5 and $4.5 million, respectively. Also, several of the Alliance Venture investments are accounted for under the equity method due to the

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Company’s ability to exercise significant influence on the operations of investees resulting primarily from ownership interest and/or board representation. The total equity in the net losses of Alliance Ventures investee companies was approximately $2.2 million and $2.1 million, respectively, for the first quarter of fiscal 2003 and 2002, respectively.

Certain of the Company’s officers have formed private venture funds, which invest in some of the same investments as the Company.

N. Damodar Reddy and C.N. Reddy have formed private venture funds, Galaxy Venture Partners, L.L.C., Galaxy Venture Partners II, L.L.C. and Galaxy Venture Partners III, L.L.C., which invest in some of the same investments as Alliance Venture Management’s investment funds.

In August 2000, the Company agreed to invest $20 million in Solar Ventures (“Solar”), a venture capital partnership whose focus is in investing in early stage companies in the areas of networking, telecommunications, wireless, software infrastructure enabling efficiencies of the Web and e-commerce, semiconductors for emerging markets and design automation. The Company has invested $12.5 million in Solar. Due to changes in the venture capital market, Alliance has decided to limit its investment in Solar to the $12.5 million already invested. C.N. Reddy has invested in Solar. Solar has made investments in some of the same companies as Alliance Venture Management’s investment funds.

Alliance Venture Management generally directs the individual funds to invest in startup, pre-IPO (initial public offering) companies. These types of investments are inherently risky and many venture funds have a large percentage of investments decrease in value or fail. Most of these startup companies fail, and the investors lose their entire investment. Successful investing relies on the skill of the investment managers, but also on market conditions and other factors outside the control of the managers. The market for these types of investments has, in the past, been successful and many venture capital funds have been profitable, and while the Company has been successful in its recent investments, there can be no assurance as to any future or continued success. It is possible there will be a downturn in the success of these types of investments in the future and the Company will suffer significant diminished success in these investments. It is possible that many, and maybe all of the Company’s venture type investments may fail, resulting in the complete loss of some or all the money the Company has invested in these types of investments.

Note 13. Investment in Solar Venture Partners, LP

Through June 30, 2002, the Company has invested $12.5 million in Solar Venture Partners, LP (“Solar”), a venture capital partnership whose focus is in investing in early stage companies in the areas of networking, telecommunications, wireless, software infrastructure enabling efficiencies of the Web and e-commerce, semiconductors for emerging markets and design automation.

Due to the Company’s majority interest in Solar, the Company accounts for Solar under the consolidation method. Some of the investments Solar has made are accounted for under the equity method due to the Company’s ability to exercise significant influence on the operations of the investees resulting primarily from ownership interest and/or board representation. In the first quarter of fiscal 2003, the Company recorded an equity in the loss of investees of approximately $257,000, net of minority interest, and wrote down certain Solar investments by $2.5 million, net of minority interest.

Certain of the Company’s directors and officers are the general partners of Solar and run the day-to-day operations. Furthermore, certain of the Company’s officers and employees have also invested in Solar. Solar has made investments in some of the same companies as Alliance Ventures I, II, III, IV, and V.

Note 14. Derivative Instruments and Hedging Activities

The Company has investments in the common stock of Vitesse, Broadcom, and Adaptec. The Company’s investments expose it to risk related to the effects of changes in the price of Vitesse, Broadcom, and Adaptec common stock. The financial exposure is monitored and managed by the Company. The Company’s risk management focuses on the unpredictability of financial markets and seeks to reduce the potentially adverse effects that the volatility of these markets may have on its operating results. The Company uses cashless collars, which are combinations of option contracts, and forward sales to hedge this risk.

By using derivative financial instruments to hedge exposures to changes in share prices, the Company exposes itself to credit risk and market risk. Credit risk is a risk that the counterparty might fail to fulfill its performance obligations under the terms of the derivative contract. When the fair value of a derivative contract is an asset, the counterparty owes the Company, which creates repayment risk for the Company. When the fair value of a derivative contract is a liability, the Company owes the counterparty and, therefore, does not assume any repayment risk. The Company minimizes its credit (or repayment) risk in derivative instruments by (1) entering into transactions with high-quality counterparties, (2) limiting the amount of its exposure to each counterparty, and (3) monitoring the financial condition of its counterparties.

All derivatives are recognized on the balance sheet at their fair market value. On the date that the Company enters into a derivative contract, it designates the derivative as (1) a hedge of the fair value of a recognized

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asset or liability, or (2) an instrument that is held for trading or non-hedging purposes (a “trading” or “non-hedging” instrument). Since April 1, 2001, the Company has designated all derivative contracts as a fair value hedge and has not entered into derivatives for purposes of trading. Changes in the fair value of a derivative that is highly effective and is designated and qualifies as a fair value hedge, along with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk, are recorded in the current period earnings.

The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as fair-value hedges to specific assets on the balance sheet. The Company also formally assesses (both at the hedge’s inception and on an ongoing basis) whether the derivatives that are used in the hedging transactions have been highly effective in offsetting changes in fair value of the hedged items and whether those derivatives may be expected to remain highly effective in future periods. When it is determined that a derivative is not (or has ceased to be) highly effective as a hedge, the Company discontinues hedge accounting prospectively. The Company discontinues hedge accounting prospectively when (1) it determines that the derivative is no longer effective in offsetting changes in the fair value of a hedged item, (2) that the derivative expires or is sold, terminated or exercised, or (3) management determines that designating the derivative as a hedging instrument is no longer appropriate.

In January 2001, the Company entered into two derivative contracts (“Derivative Agreements”) with a brokerage firm and received aggregate cash proceeds of approximately $31.0 million. The Derivative Agreements have repayment provisions that incorporate a collar arrangement with respect to 490,000 shares of Vitesse Semiconductor common stock. The Company, at its option, may settle the contracts by either delivering Vitesse shares or making a cash payment to the brokerage firm in January 2003, the maturity date of the Derivative Agreements. The number of Vitesse shares to be delivered or the amount of cash to be paid is determined by a formula in the Derivative Agreements based upon the market price of the Vitesse shares on the settlement date. Under the Derivative Agreements, if the stock price of Vitesse exceeds the ceiling of the collar, then the settlement amount also increases by an amount determined by a formula included in the Derivative Agreements (generally equal to the excess of the value of the stock over the ceiling of the collar.) If the stock price of Vitesse declines below the floor of the collar, then the settlement amount also decreases by an amount determined by a formula included in the Derivative Agreements (generally equal to the excess of the floor of the collar over the value of the stock.)

In August 2001, the Company entered into a cashless collar arrangement with a brokerage firm with respect to 75,000 shares of Broadcom common stock. The collar arrangement consists of written call option to buy 75,000 shares of Broadcom common stock at a price of $64.72 and a purchased put option to sell 75,000 shares at a price of $36.72 through August 2002.

In December 2001, the Company entered into a derivative contract with a brokerage firm with respect to 362,173 shares of Adaptec common stock and received aggregate cash proceeds of $5.0 million. The contract has repayment provisions that incorporate a collar arrangement with respect to 362,173 shares of Adaptec common stock. The Company has to deliver a certain number of Adaptec shares in June 2003, the maturity date of the contract. The number of Adaptec shares to be delivered is determined by a formula in the contract based upon the market price of the Adaptec shares on the settlement date. Under the contract, if the stock price of Adaptec is outside of the collar (the floor of which is $16.26 and the ceiling of which is $21.99), the number of Adaptec shares to be delivered equals 362,173. If the stock price of Adaptec is within the collar, the Company will have to deliver that number of Adaptec shares having total value equal to $5.9 million.

During the first quarter of fiscal 2003, the Company recorded a gain of $3.3 million relating to the Vitesse hedged instrument, offset by a loss of $3.3 million on the hedged Vitesse investments. The Company recognized a gain of approximately $982,000 for the Broadcom hedged instrument offset by a loss of $1.4 million on the Broadcom investment. The Company also recorded a gain of $1.6 million relating to the Adaptec derivative contract and a loss of $2.0 million on the hedged Adaptec investments.

During the first quarter of fiscal 2002, the Company recorded a gain of $1.4 million relating to the Vitesse hedged instrument, offset by a loss of $1.4 million on the Vitesse investments.

In the quarter ended June 30, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by the Statement of Financial

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Accounting Standards No. 137, Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133, an amendment of FASB Statement No. 133 and Statement of Financial Accounting Standards No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 133 (referred to hereafter as “SFAS 133”), on April 1, 2001. In accordance with the transition provisions of SFAS 133, the Company recorded an approximate $2.1 million cumulative effect adjustment in earnings as of April 1, 2001.

Note 15. Short term borrowings

At June 30, 2002, the Company had total short term borrowings of $66.4 million. At March 31, 2002, the Company had short term borrowings totaling $66.2 million.

During fiscal 2001, the Company borrowed approximately $22.2 million from a brokerage firm. The loan is secured by 1.6 million shares of Chartered common stock. The loan bears an interest at a rate determined by the prevailing market interest rate. At June 30, 2002 and March 31, 2002, the applicable market rate for the loan was 2.5% and 2.75%, respectively. The outstanding balance on the loan at June 30, 2002 and March 31, 2002 was approximately $16.3 million and $16.2 million, respectively.

In the third quarter of fiscal 2002, the Company entered into a secured loan agreement with Chinatrust Commercial Bank, Ltd, to borrow up to $30.0 million. In January 2002, the Company increased the principal amount it could borrow under the loan agreement to $46.0 million. The loan is secured by UMC stock held by the Company with the aggregate value at least 250% of the outstanding loan balance. The loan bears interest at LIBOR plus 2.5% and matures on December 7, 2002. The principal and accrued interest are payable upon maturity. The loan required that the Company set up an interest escrow deposit account with the bank, which is collateral against any accrued interest. The balance in the interest escrow account as of June 30, 2002 and March 31, 2002 was $1.3 million and $1.8 million, respectively, and is shown as restricted cash on the balance sheet. The loan requires compliance with certain restrictive covenants with which the Company was in compliance at June 30, 2002 and March 31, 2002. The outstanding balance on the Chinatrust loan was $45.7 million at June 30, 2002 and March 31, 2002.

In the fourth quarter of fiscal 2002, the Company issued a $4.8 million promissory note in connection with the acquisition of PulseCore. The note is non-interest bearing and matures on March 29, 2003. Discount on the note of $609,000 was calculated based on an imputed interest rate of 12%. The outstanding balance on the promissory note, net of unamortized discount, was approximately $4.4 and $4.3 million at June 30, 2002 and March 31, 2002, respectively.

Note 16. Comprehensive Income

The following are the components of comprehensive income:

Accumulated other comprehensive income presented in the accompanying consolidated balance sheets consists of the accumulated unrealized gains and losses on available-for-sale investments, net of tax.

Note 17. Net Income Per Share

Basic EPS is computed by dividing net income available to common stockholders (numerator) by the weighted average number of common shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period including stock options, using the treasury stock

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method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the proceeds obtained upon exercise of stock options.

The computations for basic and diluted EPS are presented below (in thousands, except per share amounts):

The following are not included in the above calculation, as they were considered anti-dilutive:

Note 18. Recently Issued Accounting Standards

In June 2002, the FASB issued SFAS No. 146, “Accounting for Exit or Disposal Activities’” (“SFAS 146”). SFAS 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for under EITF No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The scope of SFAS 146 also includes costs related to terminating a contract that is not a capital lease and termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS 146 will be effective for exit or disposal activities that are initiated after December 31, 2002 and early application is encouraged. We will adopt SFAS 146 during the fourth quarter of fiscal 2003. The provisions of EITF No. 94-3 shall continue to apply for an exit activity initiated under an exit plan that met the criteria of EITF No. 94-3 prior to the adoption of SFAS 146. The effect on adoption of SFAS 146 will change on a prospective basis the timing of when restructuring charges are recorded from a commitment date approach to when the liability is incurred.

Note 19. Legal Matters

In July 1998, the Company learned that a default judgment was entered against the Company in Canada, in the amount of approximately $170 million (USD), in a case filed in 1985 captioned Prabhakara Chowdary Balla and TritTek Research Ltd. v. Fitch Research Corporation, et al., British Columbia Supreme Court No. 85-2805 (Victoria Registry). The Company, which had previously not participated in the case, believes that it never was properly served with process in this action, and that the Canadian court lacks jurisdiction over the Company in this matter. In addition to jurisdictional and procedural arguments, the Company also believes it may have grounds to argue that the claims against the Company should be deemed discharged by the Company’s bankruptcy in 1991. In February 1999, the court set aside the default judgment against the Company. In April 1999, the plaintiffs were granted leave by the Court to appeal this judgment. Oral arguments were made before the Court of Appeals in June 2000. In July 2000 the Court of Appeals instructed the lower Court to allow the parties to take depositions regarding the issue of service of process, while also setting aside the default judgment against the Company. The plaintiffs appealed the setting aside of the default judgment against the Company to the Canadian Supreme Court. In June 2001, the Canadian Supreme Court refused to hear the appeal of the setting aside of the default judgment against the Company. The Company believes the resolution of this matter will not have a material adverse effect on its financial conditions and its results of operations.

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In November 2001 Amstrad plc (“Amstrad”) filed suit against the Company in England in the amount of approximately $1.5 million. This claim is based on allegations that a batch of 15,000 parts supplied by the Company, and which were incorporated into Amstrad products, were defective. The Company has investigated whether there are sufficient grounds to dispute the jurisdiction of the English Court to hear this case. In November 2001, the Company had filed suit in the California Superior Court for $45,000 owed for the parts sold to Amstrad that were not paid for. In January 2002, the California Superior Court granted Amstrad’s motion to quash the Company’s California action for lack of jurisdiction. As a consequence, there are no grounds to dispute the jurisdiction of the English Court to hear Amstrad’s suit. The Company has prepared a detailed defense to Amstrad’s suit, which was filed in February 2002. The Company believes the resolution of this matter will not have a material adverse effect on its financial conditions and its results of operations.

In February 1997, Micron Technology, Inc. filed an antidumping petition with the United States International Trade Commission (“ITC”) and United States Department of Commerce (“DOC”), alleging that SRAMs fabricated in Taiwan were being sold in the United States at less than fair value, and that the United States industry producing SRAMs was materially injured or threatened with material injury by reason of imports of SRAMs fabricated in Taiwan. After a final affirmative DOC determination of dumping and a final affirmative ITC determination of injury, DOC issued an antidumping duty order in April 1998. Under that order, the Company’s imports into the United States on or after approximately April 16, 1998 of SRAMs fabricated in Taiwan were subject to a cash deposit in the amount of 50.15% (the “Antidumping Margin”) of the entered value of such SRAMs. (The Company posted a bond in the amount of 59.06% (the preliminary margin) with respect to its importation, between approximately October 1997 and April 1998, of SRAMs fabricated in Taiwan.) In May 1998, the Company and others filed an appeal in the United States Court of International Trade (the “CIT”), challenging the determination by the ITC that imports of Taiwan-fabricated SRAMs were causing material injury to the U.S. industry. Following two remands from the CIT, the ITC, on June 12, 2000, reversed its original determination that Taiwan-fabricated SRAMs were causing material injury to the U.S. industry. The CIT affirmed the ITC’s negative determination on August 29, 2000, and Micron appealed to the U.S. Court of Appeals for the Federal Circuit (“CAFC”). On September 21, 2001, the CAFC affirmed the ITC’s negative injury determination. The Company had made cash deposits in the amount of $1.7 million and had posted a bond secured by a letter of credit in the amount of approximately $1.7 million relating to the Company’s importation of Taiwan-manufactured SRAMs. The balances remained unchanged at December 31, 2001. In January 2002, the decision of the CIT was made final and the DOC revoked the order and instructed the U.S. Customs Service to refund the Company’s cash deposits with interest. The Company received a refund of $2.6 million, including interest of approximately $515,000 from its deposits during the quarter ended March 31, 2002. In the first quarter of fiscal 2003, the Company received approximately $262,000, including interest of approximately $56,000; also, the cash deposit of $1.7 million at March 31, 2002 has been released and became unrestricted in April 2002.

Note 20. Investment Company Act of 1940

Due to the Company’s investments in unconsolidated entities, it has exceeded a threshold in the Investment Company Act of 1940 which could require the Company to register as an investment company. In August 2000, the Company applied to the SEC for an order under section 3(b)(2) of the Act confirming its non-investment-company status. In March 2002, the staff of the SEC informed the Company that the staff could not support the granting of the requested exemption. Since that time, the Company has been working diligently to resolve its status under the Act. Most recently, the Company recommenced informal discussions with the staff of the SEC to assess various means to achieve that goal. The Company anticipates in particular raising with the staff in the near future the possibility of seeking exemptive relief under the Act different from that applied for in 2000. No assurances can be given that the staff and the SEC would act favorably upon such a request, or that the SEC will agree that the Company is not currently deemed to be an unregistered investment company in violation of the Act. If the SEC takes the view that the Company has been operating and continues to operate as an unregistered investment company in violation of the Act, and does not provide the Company with a sufficient period to either register as an investment company or divest itself of investment securities and/or acquire non-investment securities, the Company may be subject to significant potential penalties.

In the absence of exemptions granted by the SEC (if it determines to do so in its discretion after an assessment of the public interest), the Company would be required either to register as a closed-end investment company under the Act, or, in the alternative, to divest itself of sufficient investment securities and/or to acquire sufficient non-investment assets so as not to be regarded as an investment company under the Act.

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If the Company elects to register as a closed-end investment company under the Act, a number of significant requirements will be imposed upon the Company. These would include, but not be limited to, a requirement that at least 40% of the Company’s board of directors not be “interested persons” of the Company as defined in the Act and that those directors be granted certain special rights with respect to the approval of certain kinds of transactions (particularly those that pose a possibility of giving rise to conflicts of interest); prohibitions on the grant of stock options that would be outstanding for more than 120 days and upon the use of stock for compensation (which could be highly detrimental to the Company in view of the competitive circumstances in which it seeks to attract and retain qualified employees); and broad prohibitions on affiliate transactions, such as the compensation arrangements applicable to the management of Alliance Venture Management, many kinds of incentive compensation arrangements for management employees and joint investment by persons who control the Company in entities in which the Company is also investing (which could require the Company to abandon or significantly restructure its management arrangements, particularly with respect to its investment activities). While the Company could apply for individual exemptions from these restrictions, there could be no guarantee that such exemptions would be granted, or granted on terms that the Company would deem practical. Additionally, the Company would be required to report its financial results in a different form from that currently used by the Company, which would have the effect of turning the Company’s Statement of Operations “upside down” by requiring that the Company report its investment income and the results of its investment activities, instead of its operations, as its primary sources of revenue.

If the Company elects to divest itself of sufficient investment securities and/or to acquire sufficient non-investment assets so as not to be regarded as an investment company under the Act, the Company would need to ensure that the value of investment securities (excluding the value of U.S. Government securities and securities of certain majority-owned subsidiaries) does not exceed forty percent (40%) of the Company’s total assets (excluding the value of U.S. Government securities and cash items) on an unconsolidated basis. In seeking to meet this requirement, the Company might choose to divest itself of assets that it considers strategically significant for the conduct of its operations or to acquire additional operating assets that would have a material effect on the Company’s operations. There can be no assurance that the Company could identify such operating assets to acquire or could successfully acquire such assets. Any such acquisition could result in the Company issuing additional shares that may dilute the equity of the Company’s existing stockholders, and/or result in the Company incurring additional indebtedness, which could have a material impact on the Company’s balance sheet and results of operations. Were the Company to acquire any additional businesses, there would be the additional risk that the companies acquired and previously-existing businesses could be disrupted while the Company attempted to integrate the acquired business, as well as risks associated with the Company attempting to manage a new business with which it was not familiar. Any of the above risks could result in a material adverse effect on the Company’s results of operations and financial condition.

Note 24. Subsequent Events

On August 5, 2002, the cashless collar the Company had with respect to its Broadcom shares expired and the Company sold all of its holding in Broadcom Corporation for aggregate proceeds of $2.8 million.

As of August 9, 2002, the Company repurchased 1,015,700 shares of Common Stock for approximately $5.1 million in the second quarter of fiscal 2003.

In August 2002, the Company received approximately 44 million shares of UMC Common Stock by way of a stock dividend.

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

This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those described in the section entitled “Factors That May Affect Future Results”. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect our present expectations and analysis and are inherently susceptible to uncertainty and changes in circumstances. We assume no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements. These risks and uncertainties include those set forth in Item 2 (entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”) of this Report, and in Item 1 (entitled “Business”) of Part I and in Item 7 (entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”) of Part II of the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2002 filed with the Securities and Exchange Commission on July 15, 2002. These forward-looking statements speak only as of the date of this Report. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company’s expectations with regard thereto or to reflect any change in events, conditions or circumstances on which any such forward-looking statement is based, in whole or in part.

Critical Accounting Policies

The U.S. Securities and Exchange Commission (“SEC”) recently issued Financials Reporting Release No. 60, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies” (“FRR 60”), suggesting that companies provide additional disclosure and commentary on their most critical accounting policies. In FRR 60, the SEC defined the most critical accounting policies as the ones that are most important to the portrayal of a company’s financial condition and operating results, and require management to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. On an ongoing basis, we evaluate our judgments and estimates including those related to inventory valuation, marketable securities, valuation of Alliance Venture and Solar investments, and revenue recognition. The methods, estimates, and judgments we use in applying these most critical accounting policies have a significant impact on the results we report in our financial statements.

Inventory Valuation

Our policy is to value inventory at the lower of cost or market on a part-by-part basis. This policy requires us to make estimates regarding the market value of our inventory, including an assessment of excess or obsolete inventory. We determine excess and obsolete inventory based on an estimate of the future demand for our products within a specified time horizon, generally 12 months. The estimates we use for demand are also used for near-term capacity planning and inventory purchasing and are consistent with our revenue forecasts. If our demand forecast is greater than our actual demand, we may be required to take additional excess inventory charges, which will decrease gross margin and net operating results in the future. The Company recorded charges relating to inventory write-downs of $6.3 million, and $6.0 million in the first quarter of fiscal 2003 and fiscal 2002, respectively.

Marketable Securities

Marketable securities held by the Company are generally valued at market prices with unrealized gains or losses recognized in other comprehensive income. However, management evaluates the marketable securities for potential “other than temporary” declines in their value. Such evaluation includes researching commentary from industry experts, analysts and other companies, current and forecasted business conditions and any other information deemed necessary in the evaluation process. There were no losses in the first quarter of fiscal 2003 and fiscal 2002 as a result of such evaluation.

Valuation of Alliance and Solar Venture Investments

We enter into certain equity investments for the promotion of business and strategic objectives. Our policy is to value these investments at our historical cost. In addition, our policy requires us to periodically review these

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investments for impairment. For these investments, an impairment analysis requires significant judgment, including an assessment of the investees’ financial condition, viability and valuation of subsequent rounds of financing and the impact of any contractual preferences, as well as the investees’ historical results, projected results and prospects for additional financing. If the actual outcomes for the investees are significantly different from our estimates, our recorded impairments may be understated, and we may incur additional charges in future periods. In the first quarter of fiscal 2003 and fiscal 2002, the Company recognized an impairment charge of $11.0 million and $4.5 million, respectively, relating to the assessment of the investees’ financial condition.

Revenue Recognition

We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 101 “Revenue Recognition in Financial Statements” (“SAB 101”). SAB 101 requires that four basic criteria be met before revenue can be recognized: 1) evidence an arrangement exists; 2) delivery has occurred; 3) the fee is fixed or determinable; and 4) collectability is reasonably assured. We recognize revenue upon determination that all criteria for revenue recognition have been met. The criteria are usually met at the time of product shipment. We record reductions to revenue for estimated allowances such as returns and competitive pricing programs. If actual returns or pricing adjustments exceed our estimates, additional reductions to revenue would result.

Results of Operations

The percentage of net revenues represented by certain line items in the Company’s consolidated statements of operations for the years indicated, are set forth in the table below.