ALLIANCE SEMICONDUCTOR CORP /DE/ - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[x] Quarterly report pursuant to section 13 or 15(d) of the securities exchange act of 1934
For the quarterly period ended December 28, 2002, or


[ ]		Transition report pursuant to section 13 or 15(d) of the securities exchange act of 1934 For the transition period from to .

Commission file number: 0-22594

ALLIANCE SEMICONDUCTOR CORPORATION

(Exact name of Registrant as specified in its charter)


Delaware		77-0057842

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

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

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:


Title of each class		Name of each exchange on which registered

Common Stock, par value $0.01		NASDAQ

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

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

As of February 3, 2003, there were 35,793,459 shares of Registrant’s Common Stock outstanding.

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TABLE OF CONTENTS


Part I — Financial Information
	ITEM 1 CONSOLIDATED FINANCIAL STATEMENTS
		Consolidated Balance Sheets
		Consolidated Statements of Operations
		Consolidated Statements of Cash Flows
		Notes to Consolidated Financial Statements
	Item 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
	Item 4 DISCLOSURE CONTROLS AND PROCEDURES
PART II – Other Information
	ITEM 1 Legal Proceedings
	ITEM 5 Other Information
	ITEM 6 Exhibits and Reports on Form 8-K
SIGNATURES
CERTIFICATIONS
EXHIBIT INDEX
EXHIBIT 99.1
EXHIBIT 99.2

ALLIANCE SEMICONDUCTOR CORPORATION
Form 10-Q
for the Quarter Ended December 28, 2002

INDEX

Page

Part I Financial Information

Item 1 Financial Statements:

Consolidated Balance Sheets (unaudited) as of December 31, 2002 and March 31, 2002 3

Consolidated Statements of Operations (unaudited) for the three and nine months ended December 31, 2002 and 2001 4

Consolidated Statements of Cash Flows (unaudited) for the nine months ended December 31, 2002 and 2001 5

Notes to Consolidated Financial Statements (unaudited) 6

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations 20

Item 3 Quantitative and Qualitative Disclosure about Market Risks 34

Item 4 Disclosure Controls and Procedures 35

Part II Other Information

Item 1 Legal Proceedings 36

Item 5 Other Information 36

Item 6 Exhibits and Reports on Form 8-K 37

Signatures 38

Certifications 39

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Part I — Financial Information

ITEM 1
CONSOLIDATED FINANCIAL STATEMENTS

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


				December 31,			March 31,
				2002			2002

			ASSETS
Current assets:
	Cash and cash equivalents			$	5,799		$	23,560
	Restricted cash				1,543			8,014
	Short term investments				164,049			466,986
	Accounts receivable, net				3,247			2,891
	Inventory				2,060			19,636
	Related party receivables				2,362			2,394
	Other current assets				3,657			10,519

			Total current assets		182,717			534,000
Property and equipment, net					7,562			8,214
Investment in United Microelectronics Corp. (excluding short term portion)					21,877			43,750
Investment in Tower Semiconductor					19,370			16,278
Alliance Ventures and other investments					46,410			72,575
Other assets					6,496			4,294
Goodwill and Intangible assets					5,914			3,459

			Total assets	$	290,346		$	682,570

		LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Short term borrowings			$	46,460		$	66,173
	Accounts payable				3,476			2,893
	Accrued liabilities				7,231			6,178
	Income taxes payable				15,540			22,087
	Deferred income taxes				4,672			107,495
	Current portion of long-term obligations				3,117			4,796
	Current portion of long-term capital lease obligations				214			587

			Total current liabilities		80,710			210,209
Long term obligations					1,482			4,742
Long term capital lease obligation					—			66
Deferred income taxes					6,474			12,827

			Total liabilities		88,666			227,844

Minority interest in subsidiary companies					1,938			3,471

Stockholders’ equity:
	Common stock				430			430
	Additional paid-in capital				199,276			199,200
	Treasury stock				(65,693	)		(30,430	)
	Retained earnings				50,985			131,558
	Accumulated other comprehensive income				14,744			150,497

			Total stockholders’ equity		199,742			451,255

			Total liabilities and stockholders’ equity	$	290,346		$	682,570

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)


					Three months ended						Nine months ended
					December 31,						December 31,

					2002			2001			2002			2001

Net revenues					$	5,062		$	6,347		$	13,457		$	23,526
Cost of revenues						5,810			11,042			35,886			50,849

		Gross loss				(748	)		(4,695	)		(22,429	)		(27,323	)

Operating expenses:
	Research and development					6,321			2,041			16,945			7,226
	Selling, general and administrative					3,939			3,579			13,523			12,004

		Total operating expenses				10,260			5,620			30,468			19,230

Income (loss) from operations						(11,008	)		(10,315	)		(52,897	)		(46,553	)
Gain (loss) on investments						(892	)		219			14,400			(7,593	)
Write-down of marketable securities and venture investments						(35,334	)		(1,750	)		(54,266	)		(296,846	)
Other income (expense), net						(927	)		(1,432	)		(4,357	)		(3,598	)

Income (loss) before income taxes, minority interest in consolidated subsidiaries, equity in loss of investees, and cumulative effect of change in accounting principle						(48,161	)		(13,278	)		(97,120	)		(354,590	)
Provision (benefit) for income taxes						(6,151	)		(4,635	)		(21,751	)		(137,095	)

Income (loss) before minority interest in consolidated subsidiaries, equity in loss of investees, and cumulative effect of change in accounting principle						(42,010	)		(8,643	)		(75,369	)		(217,495	)
Minority interest in consolidated subsidiaries						1,059			—			2,917			—
Equity in loss of investees						(2,679	)		(2,376	)		(8,121	)		(7,006	)

Income (loss) before cumulative effect of change in accounting principle						(43,630	)		(11,019	)		(80,573	)		(224,501	)
Cumulative effect of change in accounting principle						—			—			—			2,055

	Net income (loss)				$	(43,630	)	$	(11,019	)	$	(80,573	)	$	(222,446	)

		Income (loss) per share before cumulative effect of change in accounting principle
				Basic	$	(1.21	)	$	(0.27	)	$	(2.14	)	$	(5.47	)

				Diluted	$	(1.21	)	$	(0.27	)	$	(2.14	)	$	(5.47	)

		Cumulative effect of change in accounting principle
				Basic	$	—		$	—		$	—		$	0.05

				Diluted	$	—		$	—		$	—		$	0.05

			Net income (loss) per share
				Basic	$	(1.21	)	$	(0.27	)	$	(2.14	)	$	(5.42	)

				Diluted	$	(1.21	)	$	(0.27	)	$	(2.14	)	$	(5.42	)

		Weighted average number of common shares
				Basic		36,089			41,311			37,721			41,005

				Diluted		36,089			41,311			37,721			41,005

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)


				Nine months ended December 31,

				2002			2001

Cash flows from operating activities:
	Net loss			$	(80,573	)	$	(222,446	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation and amortization			3,155			2,297
		Minority interest in subsidiary companies, net of tax			(2,917	)		—
		Bad debt expense			27			—
		Equity in loss of investees, net of tax			8,121			7,006
		(Gain) loss on investments			(14,400	)		8,287
		Other income (expense)			1,171			(2,044	)
		Accrued interest			—			2,011
		Write down of investments			54,266			296,846
		Cumulative effect of accounting change, net of tax			—			(2,055	)
		Inventory write down			6,338			17,428
		Write down of other assets			9,479			—
		Changes in assets and liabilities:
			Accounts receivable		(383	)		13,668
			Inventory		11,238			23,814
			Related party receivables		32			49
			Other assets		(3,680	)		(1,921	)
			Accounts payable		583			(73,602	)
			Accrued liabilities		2,425			1,454
			Deferred income tax		(14,772	)		(140,092	)
			Income tax payable		(6,547	)		2,407

		Net cash used in operating activities			(26,437	)		(66,893	)

Cash flows from investing activities:
	Purchase of property and equipment				(1,705	)		(913	)
	Purchase of technology				(3,150	)		—
	Proceeds from sale of investments				97,157			63,404
	Investment in Tower Semiconductor Corporation				(25,976	)		(11,001	)
	Purchase of Alliance Venture and other investments				(8,482	)		(19,293	)

		Net cash provided by investing activities			57,844			32,197

Cash flows from financing activities:
	Net proceeds from issuance of common stock				76			1,075
	Principal payments on lease obligation				(439	)		(687	)
	Repurchase of common stock				(35,263	)		(7,668	)
	Proceeds from (repayments of) short term borrowings				(19,713	)		43,489
	Restricted cash				6,171			(1,207	)

		Net cash provided by (used in) financing activities			(49,168	)		35,002

Net increase (decrease) in cash and cash equivalents					(17,761	)		306
Cash and cash equivalents at beginning of the period					23,560			6,109

Cash and cash equivalents at end of the period				$	5,799		$	6,415

Supplemental disclosure of cash flow information:
		Cash refunded for taxes		$	443		$	81

		Cash paid for interest		$	1,508		$	237

Schedule of non-cash investing and financing activities:
	Property and equipment leases			$	69		$	—

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

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ALLIANCE SEMICONDUCTOR CORPORATION
Notes to Consolidated Financial Statements
(unaudited)

Note 1. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared by Alliance Semiconductor Corporation (“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 nine months of fiscal 2003 and 2002 as ending on December 31; whereas, in fact, the Company’s fiscal quarters ended on December 28, 2002 and December 29, 2001, respectively. The financial results for the third quarter of fiscal 2003 and 2002 were reported on a 13-week quarter.

The results of operations for the nine months ended December 31, 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 December 31, 2002 and March 31, 2002 (in thousands):


	December 31, 2002				March 31, 2002

	Number of		Market		Number of		Market
	Shares		Value		Shares		Value

United Microelectronics Corporation		242,221	$	154,715		256,474	$	385,142
Chartered Semiconductor Manufacturing Ltd.		1,232		5,038		1,642		44,181
Adaptec, Inc.		517		2,950		1,441		19,266
Vitesse Semiconductor Corporation		585		1,346		728		7,137
PMC-Sierra Corporation		—		—		68		1,110
Broadcom Corporation		—		—		75		2,693
Magma Design Automation		—		—		360		7,010
Broadcom hedge		—		—		—		447

			$	164,049			$	466,986

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Long term Investments

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


	December 31, 2002			March 31, 2002

	Number of	Market		Number of		Market
	Shares	Value		Shares		Value

United Microelectronics Corporation	28,338	$	21,877		56,671	$	43,750
Tower Semiconductor Ltd.	6,067		19,370		2,856		16,278
Alliance Ventures investments			41,857				62,322
Solar Venture Partners investments			4,553				10,253

		$	87,657			$	132,603

Inventory


		December 31,		March 31,

		2002		2002

		(in thousands)
Inventory:
	Work in process	$	1,168	$	10,718
	Finished goods		892		8,918

		$	2,060	$	19,636

Other Current Assets


	December 31,		March 31,

	2002		2002

	(in thousands)
Receivable from sale of securities	$	—		$	7,906
Prepaids		3,657			2,613

	$	3,657		$	10,519

Goodwill and Intangible Assets

December 31, 2002


							Net
				Accumulated			Intangible
		Cost		Amortization			Assets

	(in thousands)
Developed technology		$	1,592	$	(508	)	$	1,084
Technology license			3,150		(525	)		2,625
Tradename			109		(35	)		74
Patents			363		(116	)		247
Goodwill			1,884		—			1,884

		$	7,098	$	(1,184	)	$	5,914

March 31, 2002


							Net
				Accumulated			Intangible
		Cost		Amortization			Assets

	(in thousands)
Developed technology		$	1,592	$	(110	)	$	1,482
Tradename			109		(8	)		101
Patents			363		(25	)		338
Goodwill			1,538		—			1,538

		$	3,602	$	(143	)	$	3,459

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Accumulated Other Comprehensive Income

December 31, 2002:


	Unrealized					Net Unrealized
	Gain/(Loss)		Tax Effect			Gain/(Loss)

		(in thousands)
United Microelectronics Corporation	$	22,545	$	(8,486	)	$	14,059
Adaptec, Inc.		995		(401	)		594
Vitesse Semiconductor Corporation		153		(62	)		91

	$	23,693	$	(8,949	)	$	14,744

March 31, 2002:


	Unrealized					Net Unrealized
	Gain/(Loss)		Tax Effect			Gain/(Loss)

			(in thousands)
United Microelectronics Corporation	$	226,521	$	(91,288	)	$	135,233
Chartered Semiconductor Manufacturing Ltd.		15,860		(5,800	)		10,060
Broadcom Corporation		1,358		(548	)		810
Vitesse Semiconductor Corporation		489		(197	)		292
PMC-Sierra Corporation		401		(130	)		271
Adaptec, Inc.		4,203		(1,694	)		2,509
Magma Design Automation		2,215		(893	)		1,322

	$	251,047	$	(100,550	)	$	150,497

Note 3. Purchase of Technology License

On April 20, 2002, the Company entered into an agreement to acquire a perpetual license from API Networks. In June 2002, the Company acquired a perpetual license from API Networks for $3.2 million. 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. This intangible asset is 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 December 31, 2002, the Company owned approximately 270.6 million shares of United Microelectronics Corporation (“UMC”) common stock, representing approximately 1.8% ownership. At March 31, 2002, the Company owned approximately 313.1 million shares of UMC common stock, representing approximately 2.5% ownership. In May 2000, January 2002, and August 2002, the Company received an additional 56.6 million, 51.0 million, and 44.0 million shares of UMC by way of stock dividends. During the first nine months of fiscal 2003, the Company sold 86.6 million shares of UMC.

Of the 270.6 million shares of UMC common stock owned by Alliance at December 31, 2002, approximately 85.0 million are subject to a “lock-up” or no-trade period. Of the shares subject to a “lock-up”, approximately 28.3 million shares became eligible for sale in January 2003 and equal amounts will become available for sale in July 2003 and January 2004. The portion of the investment in UMC which is restricted from sale for more than twelve months (approximately 10% of the Company’s total holdings of UMC common stock at December 31, 2002), is accounted for under the cost method and is presented as a long-term investment. As this long-term portion becomes eligible for sale 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 third quarter of fiscal 2003, the Company sold 40.5 million shares of UMC common stock for $26.5 million and recorded a pre-tax, non-operating gain of $4.4 million.

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As of December 31, 2002, the Company had pledged 145 million shares of UMC common stock to secure a loan with Chinatrust Commercial Bank, Ltd. See Note 15.

UMC’s common stock price has historically experienced significant fluctuations in market value, and has decreased significantly throughout fiscal 2003. Given the market risk for the UMC common stock held by the Company, there can be no assurance that the Company’s investment in UMC will maintain its value.

Note 5. Investment in Chartered Semiconductor Manufacturing Ltd.

At December 31, 2002, the Company owned approximately 12.3 million ordinary shares or 1.23 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.

In the third quarter of fiscal 2003, the Company sold 4.1 million ordinary shares or 410,000 ADSs of Chartered. The Company received gross proceeds of $1.8 million and recorded a pre-tax, non-operating loss of $5.3 million. At December 31, 2002, the Company wrote down its investment in Chartered and recognized a pre-tax, non-operating loss of approximately $16.2 million.

Chartered’s ADS price has historically experienced significant fluctuations in market value, and has decreased significantly throughout fiscal 2003. Given the market risk for the Chartered common stock held by the Company, there can be no assurance that the Company’s investment in Chartered will maintain its value.

Note 6. Investment in Broadcom Corporation

At the beginning of the second quarter of fiscal 2003, the Company held a total of 75,000 common shares in Broadcom Corporation (“Broadcom”). In August 2001, 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 consisted 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. On August 5, 2002, the Company exercised its put option and sold all of its holdings in Broadcom for aggregate proceeds of $2.8 million recognizing a pre-tax, non-operating gain of $1.4 million.

Note 7. Investment in Vitesse Semiconductor Corporation

At December 31, 2002, the Company owned 585,417 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 the second quarter of fiscal 2003, the Company sold 142,876 shares of Vitesse common stock. The Company received gross proceeds of $195,000 and recorded a pre-tax, non-operating loss of $912,000. At September 30, 2002, the Company wrote down its investment in Vitesse and recognized a pre-tax, non-operating loss of approximately $673,000.

Vitesse’s common stock price has historically experienced significant fluctuations in market value, and has decreased significantly throughout fiscal 2003. Given the market risk for the Vitesse ordinary shares held by the Company, there can be no assurance that the Company’s investment in Vitesse will maintain its value.

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stock over the ceiling of the collar.) If the stock price of Vitesse declines below the floor of the collar on the Settlement Date, 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.) On January 24, 2003, the Company settled its derivative contract on 300,000 Vitesse shares by delivering the shares to the brokerage firm holding the contract. On January 30, 2003, the Company settled its derivative contract on 190,000 Vitesse shares by delivering the shares to the brokerage firm holding the contract.

Note 8. Investment in PMC-Sierra Corporation

In the second quarter of fiscal 2003, the Company sold all of its holdings in PMC-Sierra and received gross proceeds of $432,000 and recorded a pre-tax, non-operating loss of $274,000.

Note 9. Investment in Adaptec, Inc.

At December 31, 2002, the Company owned 516,617 shares of Adaptec. The Company records its investment in Adaptec as an available-for-sale marketable security in accordance with SFAS 115.

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 common stock price has historically experienced significant fluctuations in market value, and has decreased significantly throughout fiscal 2003. Given the market risk for the Adaptec common stock held by the Company, there can be no assurance that the Company’s investment in Adaptec will 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 shares. The Company received gross proceeds of $6.0 million and recorded a pre-tax, non-operating gain of $1.2 million.

Note 11. Investment in Tower Semiconductor Corporation

At December 31, 2002, the Company owned 6,067,100 shares of Tower, warrants to purchase 357,747 shares of Tower, and wafer credits of approximately $13.9 million. In the first and third quarters of fiscal 2003, the Company paid $11.0 million each to Tower, in accordance with the terms of the share purchase agreement between the two companies. In exchange, the Company received 1,071,497 and 1,344,829 ordinary shares of Tower and $4.4 million each in wafer credits to be applied against future purchases. In the third quarter of fiscal 2003, the Company exercised its rights distributed to it in connection with a rights offering by Tower and purchased a total of 794,995 ordinary shares of Tower and warrants to purchase a total of 357,747 ordinary shares of Tower for total consideration of approximately $4.0 million. Each right entitled the Company to purchase one ordinary share and 0.45 of a warrant, at a subscription price of $5.00 per right. Each whole warrant entitles the holder to purchase one ordinary share at an exercise price of $7.50 per share through October 31, 2006.

In the quarter ended December 31, 2002, the Company wrote down its investment in Tower shares recognizing a pre-tax, non-operating loss of approximately $14.1 million. In the quarter ended September 30, 2002, the Company wrote off a portion of its investment in wafer credits recognizing a pre-tax, operating loss of approximately $9.5 million. The Company had determined, at that time, that the value of these credits will not be realized given the Company’s sales forecast of product to be manufactured at Tower. There can be no assurances that the Company’s investment in Tower and Tower wafer credits will not decline further in value.

- 10-

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.

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 December 31, 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 December 31, 2002, Alliance Ventures III, whose focus is investing in emerging companies in the networking and communication market areas, has invested $43.9 million in 13 companies, with a total fund allocation of $100.0 million. As of December 31, 2002, Alliance Ventures IV, whose focus is investing in emerging companies in the semiconductor market areas, has invested $27.8 million in six companies, with a total fund allocation of $40.0 million. As of December 31, 2002, Alliance Ventures V, whose focus is investing in emerging companies in the networking and communication market areas, has invested $20.8 million in nine companies, with a total fund allocation of $60.0 million. In the third quarter of fiscal 2003, the Company invested $4.8 million in Alliance Ventures.

In the third quarter of fiscal 2003 and 2002, the Company wrote-down certain of its investments in Alliance Ventures and recognized pre-tax, non-operating losses of approximately $4.5 and $1.0 million, respectively. In the first three quarters of fiscal 2003 and 2002, the Company wrote-down certain of its investments in Alliance Ventures and recognized pre-tax, non-operating losses of approximately $17.5 and $7.5 million, respectively. Also, several of the Alliance Venture investments are accounted for under the equity method due to the 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, net of tax, of the companies

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invested in by Alliance Ventures was approximately $2.4 million and $1.6 million, respectively, for the third quarter of fiscal 2003 and 2002, respectively. The total equity in the net losses of the companies invested in by Alliance Ventures was approximately $7.4 million and $6.3 million, respectively, for the nine months ended December 31, 2002 and 2001, 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.

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. It is possible that many, and maybe all of the Company’s venture 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 December 31, 2002, the Company had 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 third quarter of fiscal 2003, the Company recorded an equity in the loss of investees of approximately $245,000, net of tax, and wrote down certain Solar investments by $539,000. In the first three quarters of fiscal 2003, the Company recorded an equity in the loss of investees of approximately $685,000, net of tax, and wrote down certain Solar investments by $5.8 million.

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

At December 31, 2002, the Company held investments in the common stock of Vitesse and Adaptec and through the second quarter of fiscal 2003, the Company held investments in Broadcom (see Notes 6, 7, and 9 above). In order to reduce the potential volatility in fair value of these investments, the Company used cashless collars, which are combinations of option contracts, and forward sales.

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 asset or liability, or (2) an instrument that is held for trading or non-hedging purposes (a “trading” or “non-hedging”

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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 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.) On January 24, 2003, the Company settled its derivative contract on 300,000 Vitesse shares by delivering the shares to the brokerage firm holding the contract. On January 30, 2003, the Company settled its derivative contract on 190,000 Vitesse shares by delivering the shares to the brokerage firm holding the contract.

In August 2001, 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 consisted 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. On August 5, 2002, the Company exercised its put option and sold all of its holdings in Broadcom for aggregate proceeds of $2.8 million recognizing a pre-tax, non-operating gain of $1.4 million.

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 third quarter of fiscal 2003, the Company recorded a loss of $737,000 relating to the Vitesse hedge instrument, offset by a gain of $784,000 on the hedged Vitesse investment. The Company also recorded a loss of $449,000 relating to the Adaptec hedge instrument and a gain of $434,000 on the hedged Adaptec investment.

During the third quarter of fiscal 2002, the Company recorded a loss of $5.5 million relating to the Vitesse hedge instrument, offset by a gain of $2.5 million on the hedged Vitesse investment. The Company recognized a loss of $1.2 million for the Broadcom hedge instrument offset by a gain of $1.2 million on the hedged Broadcom

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investment. The Company also recorded a gain of $162,000 relating to the Adaptec hedge instrument and a loss of $405,000 on the hedged Adaptec investment.

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 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 December 31, 2002, the Company had total short term borrowings of $46.5 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 was secured by 16.0 million ordinary shares or 1.6 million ADSs of Chartered. The loan bears interest at a rate determined by the prevailing market interest rate. At December 31, 2002 and March 31, 2002, the applicable market rate for the loan was 2.5% and 2.75%, respectively. Due to the reduction in the value of the Chartered shares, the Company paid down the outstanding balance of the loan by $2.3 million during the third quarter of fiscal 2003. The loan is now secured by 12.3 million ordinary shares or 1.23 million ADSs of Chartered. The outstanding balance on the loan at December 31, 2002 and March 31, 2002 was approximately $1.1 million and $16.2 million, respectively.

In the third quarter of fiscal 2002, the Company entered into a secured loan agreement (the “Loan Agreement”) with Chinatrust Commercial Bank, Ltd (“Chinatrust”), 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 Chinatrust loan is required to be secured by UMC stock held by the Company with an aggregate value of at least 250% of the outstanding loan balance. The loan bears interest at LIBOR plus 2.5% and matures on January 21, 2003 (the “Maturity Date”). The principal and accrued interest are payable at the Maturity Date. The Chinatrust loan required that the Company set up an interest escrow deposit account with Chinatrust, which is collateral against any accrued interest. The balance in the interest escrow account as of December 31, 2002 and March 31, 2002 was $259,000 and $1.8 million, respectively, and is shown as restricted cash on the balance sheet. The outstanding balance on the Chinatrust loan was $40.7 million and $45.7 million at December 31, 2002 and March 31, 2002, respectively. The loan requires compliance with certain restrictive covenants with which the Company was compliant as of December 31, 2002. In the third quarter of fiscal 2003, the Company pledged an additional 25 million UMC shares and paid down the outstanding balance by an additional $5.0 million to be in compliance with the covenants. At December 31, 2002, 145 million UMC shares were pledged against the loan balance.

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 $4.6 and $4.3 million at December 31, 2002 and March 31, 2002, respectively.

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Note 16. Comprehensive Income

The following are the components of comprehensive income:


		Three months ended						Nine months ended
		December 31,						December 31,

		2002			2001			2002			2001

Net income (loss)		$	(43,630	)	$	(11,019	)	$	(80,573	)	$	(222,446	)
Unrealized gain and losses on marketable securities, net of deferred taxes of ($418) and $91,602 for three and nine months ended December 31, 2002 and $53,495 and $52,075 for three and nine months ended December 31, 2001			620			80,845			(135,753	)		78,741

	Comprehensive income (loss)	$	(43,010	)	$	69,826		$	(216,326	)	$	(143,705	)

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 (Loss) Per Share

Basic earnings per share (“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 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:


		Three months ended						Nine months ended
		December 31,						December 31,

		2002			2001			2002			2001

Net income (loss)		$	(43,630	)	$	(11,019	)	$	(80,573	)	$	(222,446	)

Weighted average shares outstanding			36,089			41,311			37,721			41,005
Effect of dilutive employee stock options			—			—			—			—

Average shares outstanding assuming dilution			36,089			41,311			37,721			41,005

Net income (loss) per share:
	Basic	$	(1.21	)	$	(0.27	)	$	(2.14	)	$	(5.42	)

	Diluted	$	(1.21	)	$	(0.27	)	$	(2.14	)	$	(5.42	)

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

Three months ended

Nine months ended

December 31,

2002

2001

2002

2001

Employee stock options outstanding

2,060

1,545

2,018

1,618

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

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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.

In November 2002, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 45 (“FIN45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires that a liability be recorded in the guarantor’s balance sheet upon issuance of a guarantee. In addition, FIN 45 requires disclosures about the guarantees that an entity has issued, including a reconciliation of changes in the entity’s product warranty liabilities. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor’s fiscal year-end. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company believes that the adoption of this standard will have no material impact on its financial statements.

In November 2002, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company believes that the adoption of this standard will have no material impact on its financial statements.

In December 2002, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 148, “Accounting for Stock-Based Compensation, Transition and Disclosure.” SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also requires that disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. Additionally, SFAS No. 148 requires disclosure of the pro forma effect in interim financial statements. The transition and annual disclosure requirements of SFAS No. 148 are effective for fiscal years ended after December 15, 2002. The interim disclosure requirements are effective for interim periods beginning after December 15, 2002. The Company believes that the adoption of this standard will have no material impact on its financial statements.

In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The Company is evaluating the impact that the adoption of this standard will have on its financial statements.

Note 19. Legal Matters

In July 1998, the Company learned that a default judgment was entered against it 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

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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.

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 prepared and filed a detailed defense to Amstrad’s suit in February 2002. The Company reached a settlement on November 14, 2002 with Amstrad.

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. In the second quarter of fiscal 2003, the Company received approximately $195,000, including interest of approximately $1,000. No refund was received during the third quarter of fiscal 2003.

On December 3, 2002, the Company and its Vice President of Sales were sued in Santa Clara Superior Court by plaintiff SegTec Ltd., an Israeli company and former sales representative of the Company. In its complaint, SegTec alleges that the Company terminated an oral sales agreement (“Agreement”) and had failed to pay commissions due to SegTec in an amount in excess of $750,000. SegTec also alleges that the Company’s termination of the Agreement was without cause and that the Company has materially breached the Agreement, and certain other matters, including misappropriation of trade secrets. Plaintiff seeks compensatory, incidental, and consequential damages for the aforementioned allegations, punitive damages for the fraud allegations specifically, and payment for the value of services rendered.

Plaintiff served the complaint on the Company and its Vice President of Sales on December 9, 2002. Plaintiff has indicated that it intends to file an amended complaint in the near future and that neither the Company nor its Vice President of Sales need respond to the initial complaint. If an amended complaint is filed, the Company and its Vice President of Sales intend to defend it vigorously.

In addition, the Company is party to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these claims cannot be predicted with certainty, the Company does not believe that the outcome of any of these or any of the above mentioned legal matters will have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

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 (the “Act”) 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 (the “Staff”) 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 and has recommenced informal discussions with the Staff to assess various means to achieve that goal. No assurances can be

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given 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.

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 divests itself of investment securities and/or acquires additional non-investment assets so as not to be regarded as an investment company under the Act, the Company, under the most restrictive test under the Act, 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.

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Note 21. Related Party Transactions

N. Damodar Reddy, the Chairman of the Board, President and Chief Executive Officer of the Company, is a director and investor in Infobrain, Inc. (“Infobrain”) an entity which provides the following services to the Company: intranet and internet web site development and support, migration of Oracle applications from version 10.7 to 11i; MRP software design implementation and training, automated entry of manufacturing data, and customized application enhancements in support of the Company’s business processes. The Company paid Infobrain approximately $234,000 in fiscal 2002 and approximately $256,000 in the first nine months of fiscal 2003. Mr. Reddy is not involved in the operations of Infobrain.

In the third quarter of fiscal 2003, the Company paid Alliance Venture Management, LLC, which is managed by certain of the Company’s officers, $218,750 in management fees. Management fees are based upon the commitment of each fund, Alliance Ventures I, II, III, IV and V. Annually, Alliance Venture Management is paid 1.0% of the total fund commitment of Alliance Ventures I, II, III and 0.5% of the total fund commitment of Alliance Ventures IV, and V. This amount is then offset by the Company’s billings to Alliance Venture Management for expenses incurred by the Company on the behalf of Alliance Venture Management.

Alliance Venture Management receives 15%-16% of the realized gains of the venture funds.

On May 18, 1998, the Company provided loans to two of its officers and a director aggregating $1.7 million. The officers’ loans were used for the payment of taxes resulting from the gain on the exercise of non-qualified stock options. The loan to a director was used for the exercise of stock options. Under these loans, both principal and accrued interest were due on December 31, 1999, with accrued interest at rates ranging from 5.50% to 5.58% per annum. The loan to the director was paid at December 31, 1999. The loans to the officers were extended by one year on December 31, 1999, December 31, 2000, and December 31, 2001, respectively. As of March 31, 2002, $1.6 million in principal amount was outstanding under these loans with accrued interest of $341,000. At December 31, 2002, $1.6 million was outstanding under these loans with accrued interest of $407,000. Subsequent to December 31, 2002, partial payment has been made with respect to each note.

Note 22. Subsequent Events

As of January 14, 2003, 28,338,468 UMC shares were no longer subject to “lock-up” provisions and became available for sale.

On December 23, 2002, the Company entered into an Agreement and Plan of Merger with Chip Engines, Inc., a privately held California corporation, pursuant to which a newly-formed, wholly-owned subsidiary of the Company merged with and into Chip Engines. Chip Engines is a fabless supplier of silicon solutions for next generation Metropolitan Area Network (MAN) platforms. The merger was consummated on January 31, 2003. As a result of the merger, Chip Engines is a wholly-owned subsidiary of Alliance. The Company believes that Chip Engines’ product lines are synergistic to those of the Alliance System Logic Solutions business unit, which develops and delivers high-bandwidth chip to chip interconnects based on HyperTransport technology for networking, storage and server applications. Pursuant to the Agreement and Plan of Merger, the Company is obligated to pay an aggregate merger consideration of up to $4,288,356 in cash to the former holders of Chip Engines stock if certain milestones are achieved.

The Company has received an extension on its secured loan with Chinatrust Commercial Bank. The loan will now mature on March 4, 2003. There are no other changes to the terms of the loan agreement.

On January 24, 2003, the Company settled its derivative contract on 300,000 Vitesse shares by delivering the shares to the brokerage firm holding the contract. On January 30, 2003, the Company settled its derivative contract on 190,000 Vitesse shares by delivering the shares to the brokerage firm holding the contract.

Subsequent to December 31, 2002, partial payment has been made with respect to notes issued by the Company to two of its officers.

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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 30, 2002 filed with the Securities and Exchange Commission on July 15, 2002, and the subsequent Quarterly Report on Form 10-Q for the quarters ended June 29, 2002 and September 28, 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 Ventures 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, and recorded charges of $6.3 million and $17.4 million for the first nine months 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, on a quarterly basis, the marketable securities held by the Company 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 suitable by the Company in the evaluation process.

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Valuation of Alliance Ventures and Solar 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, on a quarterly basis, review these 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, if any, 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 third quarter of fiscal 2003 and fiscal 2002, the Company recognized impairment charges of $5.1 million and $1.8 million, respectively, relating to the assessment of the financial condition of certain investments made by Alliance Ventures and Solar. During the first nine months of fiscal 2003 and fiscal 2002, the Company recorded impairment charges of $23.3 million and $8.3 million, respectively.

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. These revenue recognition 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 result.

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Results of Operations

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


			Three months ended						Nine months ended
			December 31,						December 31,

			2002			2001			2002			2001

Net revenues				100.0	%		100.0	%		100.0	%		100.0	%
Cost of revenues				114.8			174.0			266.7			216.1

	Gross loss			(14.8	)		(74.0	)		(166.7	)		(116.1	)

Operating expenses:
	Research and development			124.9			32.2			125.9			30.7
	Selling, general and administrative			77.8			56.4			100.5			51.0

		Total operating expenses		202.7			88.6			226.4			81.7

Income (loss) from operations				(217.5	)		(162.6	)		(393.1	)		(197.8	)
Gain (loss) on investments				(17.6	)		3.5			107.0			(32.3	)
Write-down of marketable securities and venture investments				(698.0	)		(27.6	)		(403.3	)		(1,261.8	)
Other income (expense), net				(18.3	)		(22.6	)		(32.4	)		(15.3	)

Loss before income taxes, minority interest in consolidated subsidiaries, equity in loss of investees, and cumulative effect of change in accounting principle				(951.4	)		(209.3	)		(721.8	)		(1,507.2	)
Provision (benefit) for income taxes				(121.5	)		(73.0	)		(161.6	)		(582.7	)

Loss before minority interest in consolidated subsidiaries, equity in loss of investees, and cumulative effect of change in accounting principle				(829.9	)		(136.3	)		(560.2	)		(924.5	)
Minority interest in consolidated subsidiaries				20.9			—			21.7			—
Equity in loss of investees				(52.9	)		(37.4	)		(60.3	)		(29.8	)

Loss before cumulative effect of change in accounting principle				(861.9	)		(173.7	)		(598.8	)		(954.3	)
Cumulative effect of change in accounting principle				—			—			—			8.7

Net loss				(861.9	%)		(173.7	%)		(598.8	%)		(945.6	%)

Net Revenues

The Company’s net revenues for the third quarter of fiscal 2003 were $5.1 million, a decrease of $1.3 million or approximately 20% from the same quarter of fiscal 2002. This decrease in sales is due to a 34% decrease in memory unit sales, a 12% decrease in memory average selling prices (“ASPs”) offset by increased revenue generated from business units resulting from the Company’s PulseCore and SiPackets acquisitions. The Company’s total net revenues for the first nine months of fiscal 2003 were $13.5 million, a decrease of $10.1 million or 43% from the first nine months of fiscal 2002. This year over year decrease is primarily due to a 40% decrease in ASPs for the Company’s memory products and a general reduction in the demand for the Company’s memory products offset by increased revenue generated from business units resulting from the Company’s PulseCore and SiPackets acquisitions.

The Company’s DRAM net revenues for the third quarter of fiscal 2003 were $1.5 million, a decrease of $1.4 million or approximately 48% from the same quarter of fiscal 2002. Unit sales for the third quarter fell 39% from the same quarter of fiscal 2002. Overall ASPs for the Company’s DRAM products decreased approximately 14% from the same quarter of fiscal 2002. The Company’s DRAM net revenues for the first nine months of fiscal 2003 were $5.1 million, a decrease of $5.7 million or 53% from the first nine months of fiscal 2002. This year over year decrease is primarily due to a 23% decrease in unit sales along with a 39% decrease in ASPs.

The Company’s SRAM net revenues for the third quarter of fiscal 2003 were $2.2 million, a decrease of $1.2 million or approximately 36% from the same quarter of fiscal 2002 due primarily to a 28% decrease in unit sales along with an 11% decrease in ASPs. The Company’s SRAM net revenues for the first nine months of fiscal

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2003 were $6.1 million, a decrease of $6.4 million from the first nine months of fiscal 2002. This year over year decrease is primarily due to a 17% decrease in unit sales along with a 41% decrease in ASPs.

The Company’s net revenues for non-memory products were $1.4 million for the third quarter of fiscal 2003, an increase of $1.4 million from the third quarter of fiscal 2002. The Company’s net revenues for non-memory products were $2.3 million for the first nine months of fiscal 2003, an increase of $2.3 million from the first nine months of fiscal 2002. These revenues result from sales generated by the Company’s Mixed Signal and System Logic Solutions business units. These business units were established as a result of the Company’s acquisition of PulseCore and SiPackets.

For the third quarter of fiscal 2003, one customer accounted for 10% of the Company’s net revenues. For the third quarter of fiscal 2002, one customer accounted for 22% of the Company’s net revenues and another customer accounted for 10% of the Company’s net revenues.

Net revenues from sales to non-PC segments of the market, such as telecommunications, networking, datacom and consumer for the third quarter of fiscal 2003 were $4.3 million, or approximately 86% of net revenues compared to $4.3 million, or 68% of net revenues during the third quarter of fiscal 2002. Sales to the non-PC segment of the market accounted for $10.9 million, or approximately 81% of net revenues for the first nine months of fiscal 2003 compared to $17.3 million, or 73% for the first nine months of fiscal 2002.

International net revenues for the third quarter of fiscal 2003 were approximately 65% of the Company’s net revenues compared to approximately 67% for the same quarter of fiscal 2002. International net revenues are derived primarily from customers in Europe and Asia. In absolute dollars, international net revenues decreased $1.0 million from the third quarter of fiscal 2002. This decrease was due to inventory reduction efforts by our customers and a fundamental slowdown in demand that started in the Company’s third quarter of fiscal 2001. The Company’s international net revenues were 68% of total net revenues for the first nine months of fiscal 2003 compared to 69% for the first nine months of fiscal 2002. International revenues decreased by $7.1 million for the first nine months of fiscal 2003 compared to the first nine months of fiscal 2002, primarily due to inventory reduction efforts by our customers and a fundamental slowdown in demand.

Generally, the markets for the Company’s products are characterized by volatile supply and demand conditions, rapid technological change and product obsolescence and fierce competition. These conditions could require the Company to make significant shifts in its product mix in a relatively short period of time. These changes involve several risks, including, among others, constraints or delays in timely deliveries of products from the Company’s suppliers; lower than anticipated wafer manufacturing yields; lower than expected throughput from assembly and test suppliers; and less than anticipated demand and selling prices. The occurrence of any problems resulting from these risks could have a material adverse effect on the Company’s results of operations.

Gross Loss

The Company’s gross loss for the third quarter of fiscal 2003 was $748,000 or approximately 15% of net revenues compared to a gross loss of $4.7 million or approximately 74% of net revenues for the same quarter of fiscal 2002. During the third quarter of fiscal 2003, the Company reduced its inventory reserves by approximately $3.5 million due to the sales of previously reserved memory products. The Company will continue to release reserves in subsequent quarters as it sells through previously reserved product. During the third quarter of fiscal 2002, the Company wrote-down its inventory by approximately $1.0 million due to a decrease in demand. The Company’s gross loss for the first nine months of fiscal 2003 was $22.4 million or 167% of net revenues compared to a gross loss of $27.3 million or 116% of net revenues for the same period during fiscal 2002. During the first nine months of fiscal 2003 the Company wrote down its inventory by $6.3 million. This compares to a write-down of $17.4 million taken during the first nine months of fiscal 2002. These inventory write-downs were due to a reduction in end user demand and severe downward pricing pressure for memory products. During the second quarter of fiscal 2003 the Company also wrote-off $9.5 million of prepaid wafer credits resulting from its investment in Tower. The Company has determined that the value of these credits will not be realized given the Company’s sales forecast of products scheduled to be manufactured at Tower.

The Company is subject to a number of factors that may have an adverse impact on gross profit, including the availability and cost of products from the Company’s suppliers; increased competition and related decreases in unit average selling prices; changes in the mix of product sold; and the timing of new product introductions and

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volume shipments. In addition, the Company may seek to add additional foundry suppliers and transfer existing and newly developed products to more advanced manufacturing processes. The commencement of manufacturing at a new foundry is often characterized by lower yields as the manufacturing process needs to be refined. There can be no assurance that the commencement of such manufacturing will not have a material adverse effect on the Company’s gross profits in future periods.

Research and Development

Research and development expenses consist primarily of salaries and benefits for engineering design, facilities costs, equipment and software depreciation and amortization, wafer masks and tooling costs, and test wafers.

Research and development expenses were $6.3 million or approximately 125% of net revenues for the third quarter of fiscal 2003. This compares to $2.0 million or approximately 32% of net revenues for the same quarter of fiscal 2002. The increase in absolute dollars is attributed to expenses absorbed due to the acquisitions of PulseCore and SiPackets. Research and development expenses were $16.9 million or 126% of net revenues for the first nine months of fiscal 2003 compared to $7.2 million or 31% of net revenues for the comparable period during fiscal 2002. This year to year increase is due to the consolidation of two investee companies not previously consolidated as well as increased expenses resulting from the acquisitions of PulseCore and SiPackets.

The Company believes that investments in research and development are necessary to remain competitive in the marketplace and, accordingly, research and development expenses may increase in absolute dollars in future periods due to an increase in research and development personnel and to the extent that the Company acquires new technologies to diversify its existing product bases.

Selling, General and Administrative

Selling, general and administrative expenses include salaries and benefits associated with sales, sales support, marketing and administrative personnel, as well as sales commissions, outside marketing costs, travel, equipment depreciation and software amortization, facilities costs, bad debt expense, insurance and legal costs.

Selling, general and administrative expenses for the third quarter of fiscal 2003 were approximately $3.9 million or 78% of net revenues as compared to approximately $3.6 million or approximately 56% in the third quarter of fiscal 2002. The increase in selling, general and administrative expenses during the third quarter of fiscal 2003 compared to the same quarter in fiscal 2002 was primarily due to an increase in spending as a result of the acquisitions of PulseCore and SiPackets. Selling, general and administrative expenses were $13.5 million or 101% of net revenues for the first nine months of fiscal 2003 as compared to $12.0 million or 51% of net revenues for the comparable period of fiscal 2002. The increase in year to year expenses as well as the increase in expenses as a percentage of revenue is primarily due to increases in expenses resulting from the acquisition of PulseCore and SiPackets, and a 43% decrease in total net revenues.

Selling, general and administrative expenses may increase in absolute dollars, and may also fluctuate as a percentage of net revenues in the future primarily as a result of commissions, which are dependent on the level of revenues.

Gain (Loss) on Investments

During the first nine months of fiscal 2003, the Company recorded a gain on the sale of 86.6 million shares of UMC common stock of $24.3 million, a loss on the sale of 410,000 shares of Chartered ADSs of $5.3 million, a loss on the sale of 924,000 shares of Adaptec common stock of $5.4 million, a loss on the sale of 143,000 shares of Vitesse common stock of $912,000, a loss on the sale of 68,000 shares of PMC-Sierra common stock of $274,000, a gain on the sale of all of its holdings of Broadcom common stock of $1.4 million, and a gain on the sale of all of its holdings of Magma common stock of $1.2 million. The Company recorded a net gain of $7.2 million relating to the derivative contracts, offset by the change in value of the hedged shares of Vitesse, Broadcom and Adaptec common stock of $7.8 million during the first nine months of fiscal 2003.

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Write-down of Marketable Securities and Venture Investments

In the third quarter of fiscal 2003, the Company wrote down four of its Alliance Ventures investments and four of its Solar investments and recognized pre-tax, non-operating losses of approximately $4.5 million and $539,000, respectively. In the same quarter of fiscal 2002, the Company wrote down one of its Alliance Ventures investments and two of its Solar investments and recognized pre-tax, non-operating losses of approximately $1.0 million and $750,000, respectively. The Company wrote down ten of its Alliance Ventures investments and nine of its Solar investments and recognized pre-tax, non-operating losses of approximately $17.5 million and $5.8 million, respectively, during the first nine months of fiscal 2003. The Company wrote down three of its Alliance Ventures investments and two of its Solar investments and recognized a pre-tax, non-operating loss of approximately $7.5 million and $750,000, respectively, during the first nine months of fiscal 2002.

Other Income (Expense), Net

Other Income (Expense), Net represents interest income from short-term investments, interest expense on short and long-term obligations, disposal of fixed assets and bank fees. In the third quarter of fiscal 2003, Other Expense, Net was approximately $927,000 compared to Other Expense, Net of approximately $1.4 million in the third quarter of fiscal 2002. The decrease in expense as compared to the third quarter of fiscal 2002 is due to a reduction in interest expense. Other Expense, Net was $4.4 million for the first nine months of fiscal 2003 compared to $3.6 million for the first nine months of fiscal 2002. The increase in Other Expense, Net is due to withholding taxes on the UMC dividend shares offset by an decrease in interest expense.

Provision (Benefit) for Income Taxes

The Company’s income tax rate for the third quarter of fiscal 2003 was 12.8% and an income tax benefit of approximately $6.2 million was recorded due to a net loss. The income tax rate for the third quarter of fiscal 2002 was 34.9% and an income tax benefit of approximately $4.6 million was recorded due to a net loss. The Company’s income tax rate for the first nine months of fiscal 2003 was 22.4% and an income tax benefit of $21.8 million was recorded due to a net loss. The Company’s income tax rate for the first nine months of fiscal 2002 was 38.7% and an income tax benefit of approximately $137.1 million was recorded due to a net loss.

The decrease in the income tax rate for the third quarter and the first nine months of fiscal 2003 is due to a full valuation allowance which was recorded against the deferred tax asset resulting from the write-down of the Tower investment. The valuation allowance was taken due to sufficient uncertainties regarding the realization of the deferred tax asset.

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Equity in Loss of Investees

Several investments made by Alliance Ventures and Solar are accounted for under the equity method due to the Company’s ability to exercise its influence on the operations of investees resulting primarily from ownership interest and/or board representation. The Company’s proportionate share in the net losses of the equity investees of these venture funds was approximately $2.7 million, net of tax, for the third quarter of fiscal 2003. This compares to a loss of approximately $2.4 million, net of tax, for the third quarter of fiscal 2002. The Company’s share in the net losses of equity investees was $8.1 million for the first nine months of fiscal 2003 compared to a loss of $7.0 million for the first nine months of fiscal 2002.

Cumulative Effect of Change in Accounting Principle-Adoption of FAS 133

The Company adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by the Statement of Financial 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 the fourth quarter of fiscal 2001, the Company entered in various option arrangements known as a cashless collar, to hedge its investment in Vitesse common stock. The Company has designated these option arrangements as fair value hedges under SFAS 133. In accordance with the transition provisions of SFAS 133, the Company recorded approximately $2.1 million cumulative effect adjustment in earnings for the first quarter of fiscal 2002.

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.

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methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also requires that disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. Additionally, SFAS No. 148 requires disclosure of the pro forma effect in interim financial statements. The transition and annual disclosure requirements of SFAS No. 148 are effective for fiscal years ended after December 15, 2002. The interim disclosure requirements are effective for interim periods beginning after December 15, 2002. The Company believes that the adoption of this standard will have no material impact on its financial statements.

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Factors That May Affect Future Results

Our future results are likely to fluctuate

The Company’s quarterly and annual results of operations have historically been, and will continue to be, subject to quarterly and other fluctuations due to a variety of factors, including; general economic conditions; changes in pricing policies by the Company, its competitors or its suppliers; anticipated and unanticipated decreases in unit average selling prices of the Company’s products; fluctuations in manufacturing yields, availability and cost of products from the Company’s suppliers; the timing of new product announcements and introductions by the Company or its competitors; changes in the mix of products sold; the cyclical nature of the semiconductor industry; the gain or loss of significant customers; increased research and development expenses associated with new product introductions; market acceptance of new or enhanced versions of the Company’s products; seasonal customer demand; and the timing of significant orders. Results of operations could also be adversely affected by economic conditions generally or in various geographic areas, other conditions affecting the timing of customer orders and capital spending, a continued downturn in the market for electronic products, or order cancellations or rescheduling. Additionally, because the Company is continuing to increase its operating expenses for personnel and new product development in order to create more sales opportunities and increase sales levels, the Company’s results of operations will be adversely affected if such increased sales levels are not achieved.

We are exposed to the risks associated with the slowdown in the U.S. and world-wide economy.

Among other factors decreased consumer confidence and spending and reduced corporate profits and capital spending have resulted in a downturn in the U.S. economy generally and in the semiconductor industry in particular. As a result of these unfavorable economic conditions, we have experienced a significant slowdown in customer orders across nearly all of our memory product lines during fiscal 2002 and fiscal 2003. In addition, we experienced corresponding decreases in revenues and average selling prices during fiscal 2002 and the nine months of fiscal 2003 and expect continued pressure on average selling prices in the future. If the adverse economic conditions continue or worsen, additional restructuring of operations may be required, and our business, financial condition and results of operations may be seriously harmed.

Our results of operations and financial condition could be harmed by efforts to comply with, or penalties associated with, the Investment Company Act of 1940.

In August 2000, the Company applied to the SEC for an order under section 3(b)(2) of the Investment Company Act of 1940 confirming its non-investment company status. In March 2002, the Staff 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 and has recommenced informal discussions with the Staff to assess various means to achieve that goal. No assurances can be given 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, 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. Either registering as a closed-end investment company under the Act, or divesting itself of sufficient investment securities and/or acquiring sufficient non-investment assets so as not to be regarded as an investment company under the Act, could result in a material adverse effect on the Company’s results of operations and financial condition.

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We face periods of industry-wide semiconductor over-supply that harm our results.

The semiconductor industry has historically been characterized by wide fluctuations in the demand for, and supply of, semiconductors. These fluctuations have helped produce many occasions when supply and demand for semiconductors have not been in balance and that situation exists today. In the past, these industry-wide fluctuations in demand have seriously harmed our operating results and we have recently experienced declining average selling prices for our products. In some cases, industry downturns with these characteristics have lasted more than a year. Prior experience has shown that a restructuring of operations, resulting in significant restructuring charges, may become necessary if an industry downturn persists. When these cycles occur, they will likely seriously harm our business, financial condition, and results of operations and we may need to take further action to respond to them.

We are affected by a general pattern of product price decline and fluctuations, which can harm our business.

The markets for the Company’s products are characterized by rapid technological change, evolving industry standards, product obsolescence, and significant price competition and, as a result, are subject to decreases in average selling prices. The Company has experienced significant deterioration in the average selling prices for its SRAM and DRAM products during the last two fiscal years. The Company is unable to predict the future prices for its products. Historically, average selling prices for semiconductor memory products have declined and the Company expects that average selling prices will decline in the future. Accordingly, the Company’s ability to maintain or increase revenues will be highly dependent on its ability to increase unit sales volume of existing products and to successfully develop, introduce and sell new products. Declining average selling prices will also adversely affect the Company’s gross margin. For example, in fiscal 2002, 2001 and the first nine months of 2003, the Company’s financial results, including gross margin, were materially, adversely affected by declines in average selling prices and unit sales volume for memory products. There can be no assurance that the Company will be able to increase unit sales volumes of existing products, develop, introduce and sell new products or significantly reduce its cost per unit. There also can be no assurance that even if the Company were to increase unit sales volumes and sufficiently reduce its costs per unit, the Company would be able to maintain or increase revenues or gross margin.

Our financial results could be adversely impacted if we fail to develop, introduce, and sell new products.

Like many semiconductor companies, which frequently operate in a highly competitive, quickly changing environment marked by rapid obsolescence of existing products, our future success depends on our ability to develop and introduce new products that customers choose to buy. If we fail to introduce new products in a timely manner or are unable to successfully manufacture such products, or if our customers do not successfully introduce new systems or products incorporating ours, or market demand for our new products does not exist as anticipated, our business, financial condition and results of operations could be seriously harmed.

We must build products based on demand forecasts; if such forecasts are inaccurate, we may incur significant losses.

The cyclical nature of the semiconductor industry periodically results in shortages of advanced process wafer fabrication capacity such as the Company has experienced from time to time. The Company’s ability to maintain adequate levels of inventory is primarily dependent upon the Company obtaining sufficient supply of products to meet future demand, and any inability of the Company to maintain adequate inventory levels may adversely affect its relations with its customers. In addition, the Company must order products and build inventory substantially in advance of products shipments, and there is a risk that because demand for the Company’s products is volatile and subject to rapid technology and price change, the Company will forecast incorrectly and produce excess or insufficient inventories of particular products. This inventory risk is heightened because certain of the Company’s key customers place orders with short lead times. The Company’s customers’ ability to reschedule or cancel orders without significant penalty could adversely affect the Company’s liquidity, as the Company may be unable to adjust its purchases from its independent foundries to match such customer changes and cancellations. The Company has in the past produced excess quantities of certain products, which has had a material adverse effect on the Company’s results of operations. In the first nine months of fiscal 2003, and for all of fiscal 2002 and 2001, the Company recorded pre-tax charges totaling approximately $6.3, $30.4 and $53.9 million, respectively, primarily to reflect an excess and a decline in market value of certain inventory. There can be no assurance that the Company in the future will not produce excess quantities of any of its products. To the extent the Company

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produces excess or insufficient inventories of particular products, the Company’s results of operations could be adversely affected.

We face additional problems and uncertainties associated with international operations that could seriously harm us.

The Company conducts a significant portion of its business internationally and is subject to a number of risks resulting from such operations. Such risks include political and economic instability and changes in diplomatic and trade relationships, foreign currency fluctuations, unexpected changes in regulatory requirements, delays resulting from difficulty in obtaining export licenses for certain technology, tariffs and other barriers and restrictions, and the burdens of complying with a variety of foreign laws. There can be no assurance that such factors will not adversely impact the Company’s results of operations in the future or require the Company to modify its current business practices.

We may fail to integrate successfully businesses that we acquire.

The Company has recently completed two acquisitions and, as of December 31, 2002, was in the process of completing a third acquisition. The Company may continue to acquire additional companies in the future. If the Company fails to integrate these businesses successfully, or properly, its quarterly and annual results may be seriously harmed. Integrating businesses is expensive, time-consuming and a great strain on the Company’s resources. Some specific difficulties in the integration process may include failure to successfully develop acquired in-process technology, the difficulty of integrating acquired technology or products, unanticipated expenses related to technology integration and the potential unknown liabilities associated with acquired businesses.

We may not be able to compete successfully in a highly competitive industry.

The Company faces intense competition, and many of its principal competitors and potential competitors have substantially greater financial, technical, marketing, distribution and other resources, broader product lines and longer-standing relationships with customers than does the Company, any of which factors may place such competitors and potential competitors in a stronger competitive position than the Company.

Quarterly shipments are typically weighted to the end of a quarter.

The Company usually ships more product in the third month of each quarter than in either of the first two months of the quarter, with shipments in the third month higher at the end of the month. This pattern, which is common in the semiconductor industry, is likely to continue. The concentration of sales in the last month of the quarter may cause the Company’s quarterly results of operations to be more difficult to predict. Moreover, a disruption in the Company’s production or shipping near the end of a quarter could materially reduce the Company’s net sales for that quarter. The Company’s reliance on outside foundries and independent assembly and testing houses reduces the Company’s ability to control, among other things, delivery schedules.

We rely on third parties to perform manufacturing; problems in their performance can seriously harm our financial results.

The Company currently relies on independent foundries to manufacture all of the Company’s products. Reliance on these foundries involves several risks, including constraints or delays in timely delivery of the Company’s products, reduced control over delivery schedules, quality assurance and costs and loss of production due to seismic activity, weather conditions and other factors. In addition, as a result of the rapid growth of the semiconductor industry based in the Hsin-Chu Science-Based Industrial Park, severe constraints have been placed on the water and electricity supply in that region. Any shortages of water or electricity could adversely affect the Company’s foundries’ ability to supply the Company’s products, which could have a material adverse effect on the Company’s results of operations or financial condition. Although the Company continuously evaluates sources of supply and may seek to add additional foundry capacity, there can be no assurance that such additional capacity can be obtained at acceptable prices, if at all. The occurrence of any supply or other problem resulting from these risks could have a material adverse effect on the Company’s results of operations. The Company also relies on domestic and offshore subcontractors for die assembly and testing of products, and is subject to risks of disruption in adequate supply of such services and quality problems with such services.

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Increases in raw materials prices may significantly harm our results.

Our semiconductor manufacturing operations require raw materials that must meet exacting standards. We generally have more than one source available for these materials, but there are only a limited number of suppliers capable of delivering certain raw materials that meet our standards. There is an ongoing risk that the suppliers of wafer fabrication, wafer sort, assembly and test services to the Company may increase the price charged to the Company for the services they provide, to the point that the Company may not be able to profitably have its products produced by such suppliers. The occurrence of such price increases could have a material adverse affect on the Company’s results of operations.

Our operations could be severely harmed by natural disasters.

The Company’s corporate headquarters are located near major earthquake faults, and the Company is subject to the risk of damage or disruption in the event of seismic activity. There can be no assurance that any of the foregoing factors will not materially adversely affect the Company’s results of operations. If a major earthquake or other natural disaster occurs, we may require significant amounts of time and money to resume operations and we could suffer damages that could seriously harm our business and results of operation.

We have invested in startup companies that are high risk, illiquid investments and may not recoup our investment.

The Company, through Alliance Venture Management and Solar, invests 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. It is possible that the downturn in the success of these types of investments will continue in the future and the Company will suffer significant diminished success in these investments. There can be no assurance, and in fact it is likely, that many or maybe all of the Company’s venture type investments may fail, resulting in the complete loss of most or all the money the Company invested.

We may be unable to defend our intellectual property rights and may face significant expenses as a result of ongoing or future litigation.

The Company intends to vigorously defend itself in the litigation and claims and, subject to the inherent uncertainties of litigation and based upon discovery completed to date, management believes that the resolution of these matters will not have a material adverse effect on the Company’s financial position. However, should the outcome of any of these actions be unfavorable, the Company may be required to pay damages and other expenses, or may be enjoined from manufacturing or selling any products deemed to infringe the intellectual property rights of others, which could have a material adverse effect on the Company’s financial position or results of operations. Moreover, the semiconductor industry is characterized by frequent claims and litigation regarding patent and other intellectual property rights. The Company has from time to time received, and believes that it likely will in the future receive, notices alleging that the Company’s products, or the processes used to manufacture the Company’s products, infringe the intellectual property rights of third parties. The Company is subject to the risk that it may become party to litigation involving such claims. In the event of litigation to determine the validity of any third-party claims such as the current patent litigation, or claims against the Company for indemnification related to such third-party claims, such litigation, whether or not determined in favor of the Company, could result in significant expense to the Company and divert the efforts of the Company’s technical and management personnel from other matters. In the event of an adverse ruling in such litigation, the Company might be required to cease the manufacture, use and sale of infringing products, discontinue the use of certain processes, expend significant resources to develop non-infringing technology or obtain licenses to the infringing technology. In addition, depending upon the number of infringing products and the extent of sales of such products, the Company could suffer significant monetary damages. In the event of a successful claim against the Company and the Company’s failure to develop or license a substitute technology, the Company’s results of operations could be materially adversely affected.

As a result of an antidumping proceeding commenced in February 1997 by the Department of Commerce (DOC), the Company was required to make a cash deposit equal to 50.15% of the entered value of any SRAMs manufactured (wafer fabrication) in Taiwan, in order to import such goods into the U.S. In January 2002, the

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decision of the United States Court of International Trade was finalized 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 nine months of fiscal 2003, the Company received approximately $457,000, including interest of approximately $57,000.

Liquidity and Capital Resources

At December 31, 2002, the Company had approximately $5.8 million in cash and cash equivalents, a decrease of approximately $17.8 million from March 31, 2002 and approximately $102.0 million in working capital, a decrease of approximately $221.8 million from $323.8 million at March 31, 2002.

Additionally, the Company had short-term investments in marketable securities whose fair value at December 31, 2002 was $164.0 million, a decrease of $303.0 million from $467.0 million at March 31, 2002.

During the first nine months of fiscal 2003, operating activities used cash of $26.4 million. This was primarily the result of a net loss, the impact of non-cash items such as income taxes, gains on investments, offset in part by equity in loss of investees, write down of inventory, investments and other assets, and a decrease in inventory.

During the first nine months of fiscal 2002, operating activities used cash of $66.9 million. This was primarily the result of a net loss, the impact of non-cash items such as income taxes and losses on investments, a decrease in accounts payable, offset by write-downs of investments, and decreases in inventory and accounts receivable.

Investing activities provided cash of $57.8 million during the first nine months of fiscal 2003. This is primarily the result of a sale of marketable securities for $97.2 million, offset in part by an investment made in Tower for $26.0 million, purchases of Alliance Venture and other investments of $8.5 million, the purchase of a technology license for $3.2 million, and equipment purchases of $1.7 million.

Net cash provided by investing activities was $32.2 million during the first nine months of fiscal 2002 as the result of proceeds from the sale of marketable securities for $53.3 million and proceeds from the acquisition of Platys by Adaptec of $10.1 million, offset in part, by $19.3 million of investments by Alliance Ventures, an $11.0 million investment in Tower, and equipment purchases of $913,000.

Financing activities used cash of $49.2 million in the first nine months of fiscal 2003. This is the result of a repurchase of common stock of $35.3 million, repayment of short term debt of $19.7 million offset in part by the release of restricted cash of $6.2 million. Net cash provided by financing activities during the first nine months of fiscal 2002 was approximately $35.0 million and was primarily due to an increase in short-term borrowings of $43.5 million offset by the repurchase of the Company’s stock of approximately $7.7 million.

On May 20, 2002, the Board of Directors approved by unanimous written consent an increase in the number of shares of the Company’s Common Stock that may be repurchased by the Company from four million to nine million shares. In the first nine months of fiscal 2003, the Company repurchased 5,115,400 shares of the Company’s Common Stock.

At December 31, 2002, the Company has no unused line of credit.

The Company believes that its sources of liquidity such as available-for-sale marketable securities and other financing opportunities available to it will be sufficient to meet its projected working capital and other cash requirements for the foreseeable future. However, it is possible that the Company may need to raise additional funds to fund its activities beyond the next year or to consummate acquisitions of other businesses, products, wafer capacity, or technologies. The Company could raise such funds by selling some of its short-term investments, selling more stock to the public or to selected investors, or by borrowing money. The Company may not be able to obtain additional funds on terms that would be favorable to its shareholders and the Company, or at all. If the Company raises additional funds by issuing additional equity, the ownership percentages of existing stockholders would be reduced.

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In order to obtain an adequate supply of wafers, especially wafers manufactured using advanced process technologies, the Company has entered into and will continue to consider various possible transactions, including equity investments in or loans to foundries in exchange for guaranteed production capacity, the formation of joint ventures to own and operate foundries, as was the case with UMC and as is the case with Tower, or the usage of “take or pay” contracts that commit the Company to purchase specified quantities of wafers over extended periods. Manufacturing arrangements such as these may require substantial capital investments, which may require the Company to seek additional equity or debt financing. There can be no assurance that such additional financing, if required, will be available when needed or, if available, will be on satisfactory terms. Additionally, the Company has entered into and will continue to enter into various transactions, including the licensing of its integrated circuit designs in exchange for royalties, fees, or guarantees of manufacturing capacity.

Contractual Obligations
Balance Sheet
(in thousands)


	Less than 1		1-3		4-5		After 5
	Year		Years		Years		Years		Total

Short term Debt	$	46,460	$	—	$	—	$	—	$	46,460
Capital Lease Obligations (including interest)		227		—		—		—		227
Long term Obligations (including short term portion).		3,117		1,414		68		—		4,599

	$	49,804	$	1,414	$	68	$	—	$	51,286

Off-Balance Sheet


		Less than 1		1-3		4-5		After 5
		Year		Years		Years		Years		Total

Operating Leases		$	2,040	$	3,557	$	144	$	—	$	5,741
Commitment to invest in Tower			11,000		—		—		—		11,000

			13,040		3,557		144		—		16,741

	TOTAL	$	62,844	$	4,971	$	212	$	—	$	68,027

Trading Activities Involving Non-Exchange Traded Contracts Accounted for at Fair Value

The Company uses derivative financial instruments to manage the market risk of certain of its short-term investments. The Company does not use derivatives for trading or speculative purposes.

All derivatives are recognized on the balance sheet at fair value and are reported in short term investments and long term obligations. Classification of each derivative as current or non current is based upon whether the maturity of each instrument is less than or greater than 12 months. To qualify for hedge accounting in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” the Company requires that the instruments are effective in reducing the risk exposure that they are designated to hedge. Instruments that meet established accounting criteria are formally designated as hedges at the inception of the contract. These criteria demonstrate that the derivative is expected to be highly effective at offsetting changes in fair value of the underlying exposure both at inception of the hedging relationship and on an ongoing basis. The assessment for effectiveness is formally documented at hedge inception and reviewed at least quarterly throughout the designated hedge period.

The Company applies hedge accounting in accordance with SFAS No. 133, whereby the Company designates each derivative as a hedge of the fair value of a recognized asset (“fair value” hedge). Changes in the value of a derivative, along with offsetting changes in fair value of the underlying hedged exposure, are recorded in earnings each period. Changes in the value of derivatives that do not offset the underlying hedged exposure throughout the designated hedge period (collectively, “ineffectiveness”), are recorded in earnings each period.

In determining fair value of its financial instruments, the Company uses dealer quotes as well as methods and assumptions that are based on market conditions and risks existing at each balance sheet date. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized.

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Effective Transactions with Related and Certain Other Parties

N. Damodar Reddy, the Chairman of the Board, President and Chief Executive Officer of the Company, is a director and investor in Infobrain, Inc. (“Infobrain”) an entity which provides the following services to the Company: intranet and internet web site development and support, migration of Oracle applications from version 10.7 to 11i; MRP design implementation and training, automated entry of manufacturing data, and customized application enhancements in support of the Company’s business processes. The Company paid Infobrain approximately $234,000 in fiscal 2002 and approximately $256,000 in the first nine months of fiscal 2003. Mr. Reddy is not involved in the operations of Infobrain.

Alliance Venture Management receives 15%-16% of the realized gains of the venture funds.

ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS

The Company has exposure to the impact of foreign currency fluctuations and changes in market values of our investments. The entities in which we hold investments operate in markets that have experienced significant market price fluctuations over the nine months ended December 31, 2002. These entities, in which the Company holds varying percentage interests, operate and sell their products in various global markets; however, the majority of their sales are denominated in U.S. dollars thus mitigating much of the foreign currency risk. The Company does not hold any derivative financial instruments for trading purposes at December 31, 2002.

Investment Risk

As of December 31, 2002, the Company’s short term investment portfolio consisted of marketable equity securities in Chartered Semiconductor, UMC, Vitesse Semiconductor, and Adaptec, Inc. All of these securities are subject to market fluctuations. As of March 31, 2002, the Company’s short term investment portfolio consisted of marketable equity securities in Chartered, UMC, Vitesse, Adaptec, PMC-Sierra, Magma, and Broadcom. The Company also had a hedge instrument on the Broadcom shares that was classified as a short term investment. During the first nine months of fiscal 2003, the Company liquidated its positions in PMC-Sierra, Magma, and Broadcom and settled the Broadcom hedge instrument.

During the last six months of fiscal 2002 and the first nine months of fiscal 2003, marketable securities held by the Company have experienced declines in their market values due to the downturn in the semiconductor industry and general market conditions. Management has evaluated the marketable securities for potential “other-than-temporary” declines in their fair value and determined that write-downs were necessary at December 31, 2002, September 30, 2002, and September 30, 2001. As a result, the Company recorded non-operating, pre-tax losses of $16.2 million, $673,000, and $288.5 million in the third and second quarters of fiscal 2003 and the second quarter of fiscal 2002, respectively.

The Company also has an investment in the ordinary shares of Tower that is classified as a long term investment and is recorded at cost. The Company reviews its long term investments periodically to determine if any impairment has occurred and subsequent write-down is required. During the third quarter of fiscal 2003, the Company recorded a non-operating, pre-tax loss of $14.1 million on its Tower investment. During the second quarter of fiscal 2003, the Company wrote off a portion of its investment in wafer credits recognizing a pre-tax, operating loss of approximately $9.5 million. The Company had determined, at that time, that the value of these credits will not be realized given the Company’s sales forecast of product to be manufactured at Tower. There can be no assurances that the Company’s investment in Tower shares and Tower wafer credits will not decline further in value.

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Short and long term investments are subject to declines in the market as well as risk associated with the underlying investment. The Company evaluates its investments from time to time in terms of credit risk since a substantial portion of its assets are now in the form of investments, not all of which are liquid, and may enter into full or partial hedging strategies involving financial derivative instruments to minimize market risk. During fiscal 2002 and 2001, the Company entered into “indexed debt” transactions to partially hedge its investments in Vitesse and Adaptec. The Company has not entered into any additional hedging transactions during the first nine months of fiscal 2003 but may do so in the future.

Foreign Currency Risk

Almost all of the Company’s semiconductor business transactions are conducted in US dollars thus mitigating effects from adverse foreign currency fluctuations.

As of December 31, 2002, the Company owned approximately 270.6 million shares of UMC, a publicly traded company in Taiwan. Since these shares are not tradable in the United States, they are subject to foreign currency risk. The market value of these holdings on December 31, 2002, based on the share price in NTD and the NTD/US dollar exchange rate of NTD 34.76 per US$ is US $172.8 million. As of March 31, 2002, the Company owned approximately 313.1 shares of UMC with a market value of $408.2 million based on the share priced in NTD and the NTD/US dollar exchange rate of NTD 35.02 per US$. During the first nine months of fiscal 2003, the Company received 44.0 million shares of UMC as a result of a stock dividend and sold 86.6 million shares of UMC. The value of these investments could be impacted by foreign currency fluctuations that could have a material impact on the financial condition and results of operations of the Company in the future.

ITEM 4
DISCLOSURE CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures. Our chief executive officer and our chief financial officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)) as of a date (the “Evaluation Date”) within 90 days before the filing date of this quarterly report, have concluded that as of the Evaluation Date, our disclosure controls and procedures were effective, subject to the improvement of our internal controls described in item 4(b) below.

(b) Changes in internal controls. In connection with their audit of the Company’s financial statements as of and for the year ended March 31, 2002, PricewaterhouseCoopers LLP (“PWC”) advised the Company that it had identified certain deficiencies in the Company’s internal control procedures that PWC considered to be a “material weakness” under standards established by the American Institute of Certified Public Accountants. PWC advised the Audit Committee in a letter dated April 26, 2002 that it identified certain deficiencies in the Company’s accounting and financial reporting infrastructure accounting for derivative contracts, marketable securities, venture investments, restructuring of investment balances and related deferred tax accounting, and lack of timely information flow among certain management functions. These matters have been discussed by PWC with the Audit Committee of the Board of Directors of the Company. To address the weakness, the Company has provided additional resources, hired new, more experienced and qualified financial personnel, and has made certain additional operational reforms.

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Part II – Other Information
ITEM 1
Legal Proceedings

The material set forth in Note 19 of Notes to Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q is incorporated herein by reference.

ITEM 5
Other Information

The Investment Company Act of 1940

Following a special study after the stock market crash of 1929 and the ensuing Depression, Congress enacted the Investment Company Act of 1940. The Act was primarily meant to regulate mutual funds, such as the families of funds offered by the Fidelity and Vanguard organizations (to name two of many), and the smaller number of closed-end investment companies that are traded on the public stock markets. In those cases the funds in question describe themselves as being in the business of investing, reinvesting and trading in securities and generally own relatively diversified portfolios of publicly traded securities that are issued by companies that the investment companies do not control. The fundamental intent of the Act is to protect the interests of public investors from fraud and manipulation by the persons who establish and operate such investment companies, which constitute large pools of liquid assets that could be used improperly, or not be properly safeguarded, by the persons in control of them.

When the Act was written, its drafters (and Congress) also felt that a company could, either deliberately or inadvertently, come to have the defining characteristics of an investment company without proclaiming that fact or being willing to voluntarily submit itself to regulation as an acknowledged investment company, and that investors in such a company could be just as much in need of protection as are investors in companies that are openly and deliberately established as investment companies. In order to deal with this perceived potential abuse, the Act and rules under it contain provisions and set forth principles that are designed to differentiate “true” operating companies from companies that may be considered to have sufficient investment-company-like characteristics to require regulation by the Act’s complex procedural and substantive requirements. These provisions apply to companies that own or hold securities, as well as companies that invest, reinvest and trade in securities, and particularly focus on determining the primary nature of a company’s activities, including whether an investing company controls and does business through the entities in which it invests or, instead, holds its securities investments passively and not as part of an operating business. For instance, under what is, for most purposes, the most liberal of the relevant tests, a company may become subject to the Act’s registration requirements if it either holds more than 45% of its assets in, or derives more than 45% of its income from, investments in companies that the investor does not primarily control or through which it does not actively do business. In making these determinations the Act generally requires that a company’s assets be valued on a current fair market value basis, determined on the basis of securities’ public trading price or, in the case of illiquid securities and other assets, in good faith by the company’s board of directors.

The Company viewed its investments in Chartered, UMC, and Tower, as operating investments primarily intended to secure adequate wafer manufacturing capacity and other strategic goals. Accordingly, the Company believes that it should be regarded as being primarily engaged in a business other than investing, reinvesting, owning, holding or trading in securities, and had made the above mentioned application to the SEC for an order under section 3(b)(2) of the Act confirming its non-investment-company status. However, if the Company’s investments in Chartered, UMC and Tower are now viewed as investment securities, it must be conceded that an unusually large proportion of the Company’s assets could be viewed as invested in assets that would, under most circumstances, give rise to investment company status. Therefore, while the Company believes that it has meritorious arguments as to why it should not be considered an investment company and should not be subject to regulation under the Act, there can be no assurance that the SEC will agree. And even if the SEC were to grant some kind of exemption from investment company status to the Company, it may place significant restrictions on the amount and type of investments the Company is allowed to hold, which might force the Company to divest itself of many of its current investments. Significant potential penalties may be imposed upon a company that should be registered under the Act but is not, and the Company is proceeding expeditiously to resolve its status.

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If the Company does not receive an exemption from the SEC, the Company would be required to register under the Act as a closed-end management investment company. 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 Act imposes a number of significant requirements and restrictions upon registered investment companies that do not normally apply to operating companies. 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.

While the Company is working diligently to deal with these investment company issues, there can be no assurance that a manageable solution will be found. The SEC may decline to grant an exemption from investment company status in the Company’s situation, and it may not be feasible for the Company to operate in its present manner as a registered investment company. As a result, the Company might be required to divest itself of assets that it considers strategically necessary for the conduct of its operations, to reorganize as two or more separate companies, or both. Such divestitures or reorganizations could have a material adverse effect upon the Company’s business and results of operations.

ITEM 6
Exhibits and Reports on Form 8-K.


(a)		Exhibits:

		Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the Company’s Chief Executive Officer

		Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the Company’s Chief Financial Officer

(b)		No reports on Form 8-K were filed during quarter ended December 28, 2002.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	Alliance Semiconductor Corporation

February 11, 2003	By: /s/ N. Damodar Reddy

	N. Damodar Reddy
	Chairman of the Board, President, Chief Executive Officer (Principal Executive Officer)

	By: /s/ Ronald K. Shelton

	Ronald K. Shelton Vice President Finance and Administration and Chief Financial Officer (Principal Financial and Accounting Officer)

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CERTIFICATIONS
I, N. Damodar Reddy, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Alliance Semiconductor Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

     a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

     b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

     c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: February 11, 2003

/s/ N. Damodar Reddy

N. Damodar Reddy
Chairman of the Board, President, Chief
Executive Officer (Principal Executive Officer)

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I, Ronald K. Shelton, certify that:

Date: February 11, 2003

/s/ Ronald K. Shelton

Ronald K. Shelton

Vice President Finance and Administration and Chief
Financial Officer (Principal Financial and
Accounting Officer)

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EXHIBIT INDEX


Exhibit 99.1		Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the Company’s Chief Executive Officer

Exhibit 99.2		Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the Company’s Chief Financial Officer

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			Page

Part I		Financial Information
	Item 1	Financial Statements:
		Consolidated Balance Sheets (unaudited) as of December 31, 2002 and March 31, 2002	3
		Consolidated Statements of Operations (unaudited) for the three and nine months ended December 31, 2002 and 2001	4
		Consolidated Statements of Cash Flows (unaudited) for the nine months ended December 31, 2002 and 2001	5
		Notes to Consolidated Financial Statements (unaudited)	6
	Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
	Item 3	Quantitative and Qualitative Disclosure about Market Risks	34
	Item 4	Disclosure Controls and Procedures	35
Part II		Other Information
	Item 1	Legal Proceedings	36
	Item 5	Other Information	36
	Item 6	Exhibits and Reports on Form 8-K	37
Signatures			38
Certifications			39

	1.		I have reviewed this quarterly report on Form 10-Q of Alliance Semiconductor Corporation;

	2.		Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

	3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

	4.		The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

	a)		designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b)		evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

	c)		presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

	a)		all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b)		any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

	Ronald K. Shelton
	Vice President Finance and Administration and Chief Financial Officer (Principal Financial and Accounting Officer)