UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

Commission file number: 0-22594

Alliance Semiconductor Corporation

(Exact name of Registrant as specified in its charter)

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

Common Stock, par value $0.01

      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 þ          No o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     þ

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

      The aggregate market value of the voting common equity held by non-affiliates of the Registrant was approximately $57,208,857 as of September 24, 2004, based upon the closing sale price computed by reference to the closing price for Common Stock as quoted by the NASDAQ National Stock Market reported for such date. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded since such persons may be deemed to be affiliates of Alliance Semiconductor. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

      As of May 31, 2005, there were 35,567,860 shares of Registrant’s Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

      Designated portions of the Company’s definitive proxy statement for its 2005 annual meeting of stockholders (“Proxy Statement”) are incorporated by reference into Part III of this Form 10-K.

ALLIANCE SEMICONDUCTOR CORPORATION

FORM 10-K

For the Period Ended March 26, 2005

TABLE OF CONTENTS

PART I

Forward-Looking Statements

      This Report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, but not limited to, statements as to future operating results and plans that involve risks and uncertainties. We use words such as “expects”, “anticipates”, “believes”, “estimates”, the negative of these terms and similar expressions to identify forward looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to differ materially from any future results, performance or achievements expressed or implied by those projected in the forward-looking statements for any reason, including the risks and uncertainties set forth in Item 1 of Part I hereof (entitled “Business”) and in Item 7 of Part II hereof (entitled “Factors That May Affect Future Results”) and elsewhere in this report. References herein to “Alliance,” “Alliance Semiconductor,” “the Company,” “we,” “our,” “us” and similar words or phrases are references to Alliance Semiconductor Corporation and its subsidiaries, unless the context otherwise requires.

      Alliance Semiconductor Corporation is a worldwide provider of analog and mixed signal products, high-performance memory products and connectivity and networking solutions for the communications, computing, embedded, industrial and consumer markets. Utilizing advanced process technologies and design expertise, we provide leading original equipment manufacturers (“OEMs”) with a broad portfolio of complementary technologies including Analog and Mixed Signal products, chip-to-chip connectivity products, networking controllers and high-performance memory products. Our products are designed to address the complete needs of system developers by leveraging our proprietary advances in Electromagnetic Interference (“EMI”) reduction, power management and timing technology, HyperTransport^tm I/O connectivity and specialized memory solutions for next-generation applications.

      We were incorporated in California on February 4, 1985, and reincorporated in Delaware on October 26, 1993, and are headquartered in Santa Clara, California with major design centers in Bangalore and Hyderabad, India and international sales offices in Asia, Japan and Europe.

      Our transition from being solely focused on memory products to one providing solutions for next-generation applications was a proactive response to the cyclical nature of commodity memory products, a segment subject to periods of prolonged and severe decline in average selling prices (“ASPs”) and end user demand. To offset the effects of declining selling prices and their impact on revenue, we modified our strategy to diversify our product mix to focus on additional, high growth markets with value-added products outside of high performance memory, including Analog and Mixed Signal and System Solutions products. As part of this diversification strategy, we completed two acquisitions during fiscal 2003 and 2002 to accelerate the transition.

      In January 2002, we acquired the assets of PulseCore, Inc. (“PulseCore”), a fabless semiconductor company specializing in Analog and Mixed Signal products built around proprietary advances in EMI frequency timing technology. The acquisition of PulseCore formed the foundation for our Analog and Mixed Signal business unit. The acquisition cost was $5.1 million and was accounted for using the purchase method in accordance with Statement of Financial Accounting Standards (“SFAS”) 141 and, accordingly, PulseCore’s results of operations have been included in the accompanying consolidated financial statements from the date of acquisition. Net revenue from sales of products resulting from the PulseCore acquisition was $7.3 million in fiscal 2005, $4.3 million in fiscal 2004 and $2.9 million in fiscal 2003.

      In January 2003, we completed the acquisition of Chip Engines, Inc. (“Chip Engines”), a development stage company that designs semiconductor products for the networking, communications, cable and storage markets. The acquisition provides new research and development resources to our System Solutions business unit. We held a net investment of $4.8 million in Chip Engines prior to the acquisition in part through our

ownership of Alliance Ventures Management and our investment in Solar Venture Partners. The acquisition was accounted for as a purchase of assets. Chip Engines’ results of operations have been included in the accompanying consolidated financial statements from the date of acquisition.

      In March 2002, we incorporated into Alliance the engineering team and technology of one of our Alliance Ventures investments, SiPackets, which serves as the basis for our Systems Solutions business unit.

      During fiscal 2003, we purchased a perpetual, royalty-free license from API Networks (“API”) for $3.2 million. Alliance’s license of the HyperTransport technology from API allows us to develop new HyperTransport products and to sublicense to third parties for use and for developing new HyperTransport products.

      The ASPs that we are able to command for our memory products are highly dependent on industry-wide production capacity and demand. In fiscal 2003 and much of fiscal 2004, we experienced rapid erosion in product pricing which was not within our control and which will continue to have an adverse material effect on our results of operations. In fiscal 2005, we continued to experience lackluster demand for our memory products which led to additional inventory write-downs for certain memory products of approximately $9.3 million. This in turn resulted in a recorded gross loss of $2.6 million for fiscal 2005. We are unable to predict the future prices for our products. Our net loss was $49.8 million for fiscal 2005, compared to a net loss of $19.4 million for fiscal 2004 and a net loss of $106.0 million for fiscal 2003. Please see the Consolidated Financial Statements for further information on our revenue, profit or loss and total assets for the last three fiscal years.

      Throughout this report, we have indicated our fiscal years as ending on March 31, whereas our fiscal year actually ends on the Saturday nearest the end of March. The fiscal years 2005, 2004, and 2003 all contained 52 weeks.

Reportable Segments

      We operate in three operating segments: Memory, Analog and Mixed Signal, and Systems Solutions. Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the chief operating decision maker in deciding how to allocate resources in assessing performance. Our chief operating decision maker is our Chief Executive Officer.

      Our Analog and Mixed Signal and Systems Solutions operating segments have been aggregated into one reportable segment: Non-Memory — due to commonality of long-term economic characteristics, products and services, the production processes, class of customer and distribution processes. This reportable segment differs from our Memory reportable segment for the following reasons: (a) the combined revenues of the Non- Memory reportable segment has grown to approximately 50% of total net revenues in fiscal 2005, compared to 33% of total net revenues in fiscal 2004 and 25% of total net revenues in fiscal 2003 and is consistent with our diversification strategy away from commodity memories; (b) the operating segments which comprise this reportable segment have a similar gross margin profile which differs from the gross margin profile of the commodity memory business; (c) the sales cycle for each of these operating segments approximate each other but are both longer than the typical memory sales cycle; and (d) the amount of customer support effort is greater for both of these operating segments compared to commodity memories.

      Additionally, we evaluate reportable segment financial performance based on the revenues, gross profit, operating expenses and operating income as follows (in thousands):

      Discrete financial information for each reportable segment, including profit or loss and expenses, was not available prior to fiscal 2004. Information on revenue and assets by geographic regions is included in “Note 16 — Segment and Geographic Information” in the Consolidated Financial Statements.

Analog and Mixed Signal Business Unit

      Our Analog and Mixed Signal business unit is divided into two major lines, Clock and Timing and Power and Systems Management. Sales from the Analog and Mixed Signal business unit accounted for 31% of net revenue during fiscal 2005, 16% of net revenue during fiscal 2004, and 16% of net revenue during fiscal 2003.

      Our Clock and Timing Products provide in-depth coverage and support in Clock Management with cost effective, low power, Clock and Timing solutions that cater to the requirements for PC/Data processing applications and handhelds, high resolution LCD displays, DDR memory modules, consumer applications (MP3 players/recorders, games, etc.), networking, wireless, mobile and other applications.

      Our Clock and Timing Portfolio includes Frequency Synthesizers and Multipliers, Zero Delay Buffers, Distribution and Fan-Out Buffers. The EMI Reduction family of devices, a sub-segment of Clock and Timing, is made up of Frequency Synthesizer and Generators, which are widely used in many designs today to reduce radiated emissions towards regulatory compliance. The EMI reduction family is designed for low cost, very low power consumption, very small package size options and overall timing accuracy and performance.

      The Power and Systems Management portfolio today includes CPU Supervisor Products. These include products that feature POR (“Power On Reset”), WDT (“Watch Dog Timers”), LVS (“Low Voltage

Sense”), BB (“Battery Backup”), brownout detect and control and many more system and device level key functions. In addition to this and based on its core competence in innovative EMI reduction, the Analog and Mixed Signal business unit is expanding its product offering to address compliance issues due to high frequency switching of currents and voltages in Switched Mode Power Supplies (“SMPS”).

System Solutions Business Unit

      Within the System Solutions business unit, we develop connectivity and networking Application Specific Standard Products (“ASSPs”) that address critical bandwidth and performance bottlenecks in legacy and emerging embedded, networking, computing and storage systems. Sales from the System Solutions business unit accounted for 19% of net revenue during fiscal 2005, 17% of net revenue during fiscal 2004, and 9% of net revenue during fiscal 2003.

      The connectivity products include a selection of high-speed bridges based on emerging and established standards including PCI-Express^tm, HyperTransport^tm technology (“HT”), PCI-X, PCI and others. These bridges are designed to work together with the high-speed interfaces on the new generation of leading embedded and discrete microprocessors from AMD, Broadcom, Freescale, Intel, PMC-Sierra and others. Our connectivity products allow system architects to leverage the performance of these leading microprocessors while still maintaining compatibility with legacy PCI/PCI-X based systems. The connectivity products also include a series of industry standard IEEE1149.1 JTAG gateways and controllers that partition a JTAG scan chain into multiple smaller chains for easier fault diagnosis and faster Flash programming.

      We believe that the connectivity product line will be a key building block in a number of different systems including networking and communications systems, storage systems and switches, imaging and graphics systems, LAN switches, servers, access and edge routers. These solutions include a complete “eco-system” that incorporates integrated circuit devices with software drivers, protocol stacks, reference designs, evaluation kits and an extensive set of documentation to speed customer time-to-market.

      The Networking Products Portfolio includes a family of networking media access controllers to address the needs of established and emerging protocols and standards including 10 Gbps Ethernet, Resilient Packet Ring (“RPR”) (IEEE802.17), Generic Framing Procedure (“GFP”) and others. These networking controllers serve a variety of applications and vertical markets including networking, cable infrastructure, storage, compute and others.

Memory Business Unit

      The Memory business unit primarily designs, manufactures and sells Static Random Access Memory (“SRAM”) and Dynamic Random Access Memory (“DRAM”) devices. Sales from the Memory business unit accounted for 50% of net revenue during fiscal 2005, 67% of net revenue during fiscal 2004, and 75% of net revenue during fiscal 2003.

      SRAMs are used for the storage and retrieval of data in telecommunications, data communication, networking, consumer and wireless markets, as well as others. We produce SRAMs for a wide variety of applications, including high-performance or high-bandwidth applications that require a “buffer” or “cache” of high-speed memory to provide data access and data routing quickly. We offer a wide variety of SRAM products, including high-speed synchronous SRAMs and fast asynchronous SRAMs. Synchronous SRAMs address the need for high-bandwidth data path buffers for primarily high-speed communications. Alliance offers a complete family of synchronous SRAMs, including No Turnaround Delay (“NTD”) and synchronous burst devices for these applications. We currently offer more than 60 synchronous SRAM products in densities ranging from 2 Mbit up to 36 Mbit and clock speeds of up to 200 MHz. Our asynchronous SRAMs support

the full range of 3.3V and 5V asynchronous SRAMs used with mainstream digital signal processors (“DSPs”) and microcontrollers. They are offered in densities ranging from 64 Kbit up to 4 Mbit, speed grades as fast as 10ns and in both commercial and industrial temperature grades. Currently, our most advanced SRAM products are manufactured using 0.13-micron process technology. Sales of our SRAM products accounted for 43% of our net revenue in fiscal 2005, 44% of our net revenue in fiscal 2004, and 41% of net revenue during fiscal 2003.

      In fiscal 2004, we ceased developing new DRAM products. Currently DRAM product revenue is derived solely from supplying legacy DRAM products to existing customers. As a result, we expect revenue from DRAM products to comprise a significantly smaller portion of overall revenue in fiscal 2006 and will eventually decline to $0. Sales of our DRAM products accounted for 7% of our net revenue in fiscal 2005, 23% of net revenue in fiscal 2004 and 34% of net revenue in fiscal 2003.

      Timely development and introduction of new products are essential to maintaining our competitive position. We currently develop the vast majority of our products in-house. We use computer-aided design environments to design and prototype new products. Our design process uses network computing, high-level design methodologies, logic and circuit simulators, field-programmable gate array based prototyping and synthesis and physical design tools. During fiscal 2005, 2004, and 2003, we spent approximately $19.6 million, $24.7 million, and $22.9 million, respectively, on product development activities. We plan to continue to invest substantial amounts in development to design additional products.

      The markets for our products are characterized by rapid technological change, evolving industry standards and product obsolescence. Our future success will be highly dependent upon the timely completion and introduction of new products at competitive performance levels. The success of new product offerings, and our existing product lines, depends on a variety of factors, including product selection, successful and timely completion of product development, our ability to secure sufficient foundry, assembly and test capacity for volume manufacturing of our product at competitive prices, achievement of acceptable wafer fabrication yields (the proportion of good die on a silicon wafer) by our independent foundries and our ability to offer products at competitive prices. There can be no assurance that we will be able to identify new product opportunities successfully, or develop and bring to market such new products in a timely and cost effective manner, or that we will be able to respond effectively to new technological changes or new product announcements by others. There also can be no assurance that we can secure adequate capacity for the production of such products, or obtain acceptable manufacturing yields necessary to enable us to offer products at competitive prices. Additionally, there can be no assurance that our products will gain or maintain market acceptance. Such inabilities could materially and adversely affect our results of operations.

      The markets for our products are volatile and subject to rapid technological and price change. Any inventory of products in the markets we serve may be subject to obsolescence and price erosion, which could materially and adversely affect our results of operations.

      Our primary customers are major domestic and international manufacturers of personal computer and computer peripherals, consumer, networking, telecommunications and wireless products. A decline in demand for our products in these industries or lack of success in developing new markets or new products has had and may continue to have a material adverse effect on our results of operations.

      Sales to our customers are typically made pursuant to specific purchase orders, which may be canceled by the customer without enforceable penalties. In fiscal 2005, Celestica AG, located in Switzerland, accounted for 12% of our net revenue consisting primarily of Systems Solutions revenue in our Non-Memory segment. The loss of this customer would have a material adverse effect on our business and results of operations. During each of fiscal 2004 and fiscal 2003 no single customer accounted for more than 10% of our net revenue.

      Historically, the semiconductor industry in general, and the semiconductor memory business in particular, has experienced cyclical downturns in business every few years. The industry experienced such a downturn in the mid 1990’s and had recovered during the late 1990’s. Beginning in the fourth fiscal quarter of fiscal 2001 and continuing through the first half of fiscal 2004, we, along with others in our industry experienced a significant downturn. During fiscal 2005, we continued to experience lackluster demand for our memory products while continuing our diversification strategy. There can be no assurance that we will be able to manage our business in a manner so as to prepare for downturns, if they occur. Additionally, even if we are able to prepare for downturns, any such downturns would have a significant and material negative impact on our ability to sell products and our results of operations, and such a negative impact on our results may last several years.

      We market and distribute our products through a network of sales offices, manufacturers’ representatives and distributors throughout North America, Europe, Asia and the rest of the world.

      We use manufacturers’ representatives and distributors who are not subject to minimum purchase requirements and who can discontinue marketing our products at any time. Many of our distributors are permitted to return a limited amount of product purchased in exchange for future orders. The loss of one or more manufacturers’ representatives or distributors could have a material adverse effect on our results of operations. We believe that our relations with our manufacturers’ representatives and distributors generally are good.

      We believe that customer service and technical support are important competitive factors in selling to major customers. We provide technical support to our customers worldwide. Distributors and manufacturers’ representatives supplement our efforts by providing additional customer service at a local level. We also work closely with our customers in the qualification of our products and providing the needed quality and reliability data. We believe that close contact with our customers not only improves our customers’ level of satisfaction, but also provides important insights into future market directions.

      International revenue accounted for approximately 65%, 67% and 68% of net revenue in fiscal 2005, 2004 and 2003, respectively. We expect that international sales will continue to represent a significant portion of net revenue for us in each of our segments. In addition, our products are manufactured, assembled and tested by independent third parties primarily located in Asia and North America, and we have in the past, and intend in the future, to make investments in certain foundries in Asia or elsewhere, including Israel, in order to secure production capacity. Due to our international sales and our reliance on independent third parties to manufacture, assemble and test our products, we are subject to the risks of conducting business internationally. These risks include unexpected changes in regulatory requirements, delays resulting from difficulty in obtaining export licenses of certain technology, tariffs and other barriers and restrictions, and the burdens of complying with a variety of foreign laws. We are also subject to general geopolitical risks in connection with our international operations, such as political and economic instability and changes in diplomatic and trade relationships. In addition, because our international sales generally are denominated in U.S. dollars, fluctuations in the U.S. dollar could increase the price in local currencies of our products in foreign markets and make our products relatively more expensive than competitors’ products that are denominated in local currencies. There can be no assurance that such regulatory, geopolitical or other factors will not adversely impact our results of operations in the future or require us to modify our current business practices.

      We subcontract our manufacturing to independent foundries, which allows us to avoid the significant capital investment required for wafer fabrication facilities. 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. Additionally, there is an ongoing risk that our suppliers of wafer fabrication, wafer sort, assembly and test services may increase the price for the services they provide to the point that renders

our products unprofitable. We design our products using proprietary circuit modules and standard fabrication processes in order to operate within the process parameters of our contract manufacturers.

      Our major foundry relationships are with Chartered Semiconductor Manufacturing Ltd. (“Chartered”) in Singapore, Tower Semiconductor, Ltd. (“Tower”) in Israel, Samsung in South Korea and United Microelectronics Corporation (“UMC”) in Taiwan and Japan. In fiscal 2001, we entered into a foundry production agreement with Tower, in conjunction with an investment in a new fabrication facility being constructed by Tower in Israel. Although we believe we currently have adequate capacity to address market requirements, there can be no assurance that in the future our current foundry relationships, together with any additional sources, would be able to satisfy, or our current foundries would be willing to satisfy, all of our requirements on a timely basis. We have encountered delays in the qualification process and production ramp-up in the past, and qualification or production ramp-up at any additional foundries could take longer than anticipated. We have entered into equity arrangements in order to obtain an adequate supply of wafers; especially wafers manufactured using advanced process technologies. To the extent we have resources available, we may continue to consider various possible transactions, including, but not limited to, equity investments in independent wafer manufacturers in exchange for guaranteed production; the formation of new companies to own and operate foundries; the usage of “take or pay” contracts that commit us to purchase specified quantities of wafers over extended periods; and the licensing of certain of our designs in order to obtain an adequate supply of wafers using advanced process technologies. There can be no assurance, however, that we would be able to consummate any such transaction in a timely manner, or at all, or on terms commercially acceptable to us. Although we have access to wafer capacity at both Chartered and Tower, we have no “take or pay” agreements in place nor any contractual obligations to start and take delivery of any minimum number of wafers in any period.

      We have in the past experienced disruption of the operations at our foundries, and any future disruptions for any reason, including work stoppages, epidemic, fire, earthquakes, or other natural disasters, could cause delays in shipments of our products, and could have a material adverse effect on our results of operations.

      We are using multiple sources for certain of our products, which may require our customers to perform separate product qualifications. We have not, however, developed alternate sources of supply for certain other products, and a single foundry typically produces our newly introduced products until alternate sources can be qualified. The requirement that a customer perform separate product qualifications or a customer’s inability to obtain a sufficient supply of products from us may cause that customer to satisfy its product requirements from our competitors, which would adversely affect our results of operations.

      Reliance on these foundries involves several risks, including constraints or delays in timely delivery of our products, reduced control over delivery schedules, quality assurance, costs and loss of production due to seismic activity, weather conditions and other factors. Although we continuously evaluate sources of supply and may seek to add 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 our results of operations. There can be no assurance that problems affecting manufacturing yields of our products will not occur in the future.

      We use offshore subcontractors, which are located primarily in Taiwan, the Philippines, Malaysia, India and Singapore, for die assembly and testing. In the assembly process, the silicon wafers are separated into individual dies that are then assembled into packages and tested in accordance with procedures developed by us. Following assembly, the packaged devices are further tested and inspected pursuant to our quality assurance program before shipment to customers. While the timeliness, yield and quality of product deliveries from our suppliers of assembly and test services have been acceptable to date, there can be no assurance that problems will not occur in the future. Any significant disruption in adequate supplies from these subcontractors, or any other circumstances that would require us to qualify alternative sources of supply, could delay shipment and result in the loss of customers, limitations or reductions in our revenue, and other adverse effects on our results of operations. Most of our wafer foundries, assembly and testing facilities comply with the requirements of ISO 9000.

      There is an ongoing risk that the suppliers of wafer fabrication, wafer sort, assembly and test services may increase their prices to the point that renders our products unprofitable. The occurrence of such price increases could have a material adverse effect on our results of operations.

      We also are subject to the risks of shortages and increases in the cost of raw materials used in the manufacture or assembly of our products. Shortages of raw materials or disruptions in the provision of services by our assembly or testing houses or other circumstances that would require us to seek alternative sources of supply, assembly or testing could lead to constraints or delays in timely delivery of our products. Such constraints or delays may result in the loss of customers, limitations or reductions in our revenue or other adverse effects on our results of operations. Our reliance on outside foundries and independent assembly and testing houses involves several other risks, including reduced control over delivery schedules, quality assurance and costs. Interruptions in supply at our foundries, assembly or testing houses may cause delays in delivery of our products. The occurrence of any supply or other problem resulting from the risks described above could have a material adverse effect on our results of operations.

      The semiconductor industry is intensely competitive and is characterized by price erosion, rapid technological change, product obsolescence and heightened international competition in many markets. Many of our customers may be purchasing products from both our competitors and us. Our principal competitors in each of our segments include Cypress Semiconductor Corporation, ICS Incorporated, Integrated Silicon Solutions, Inc., Maxim Integrated Products, PLX Technology Inc., Pericom Semiconductor Corporation, Samsung Corporation, Toshiba Corporation, and other U.S., Japanese, Korean and Taiwanese manufacturers. Most of our competitors and potential competitors have substantially greater financial, technical, marketing, distribution and other resources, broader product lines and longer-standing relationships with our customers than we do. During an industry downturn such as the recent downturn and such as has occurred previously, companies that have broader product lines and longer-standing customer relationships may be in a stronger competitive position than we are. In addition, we have entered into new markets where we face additional competition. Markets for most of our products are characterized by intense price competition. Our future success will be highly dependent upon the successful development and timely introduction of new products that meet the needs of the market at a competitive price. There can be no assurance that we will be able to develop or market any such products successfully. We believe that our ability to compete successfully depends on a number of factors both within and outside of our control, including price, product quality, performance, success in developing new products, adequate foundry capacity, sources of raw materials, efficiency of production, timing of new product introductions by competitors, protection of our products by effective utilization of intellectual property laws and general market and economic conditions. There can be no assurance that we will be able to compete successfully in the future.

      We seek to protect our proprietary technology by filing patent applications in the United States and registering our circuit designs pursuant to the Semiconductor Chip Protection Act of 1984. As of May 31, 2005, we hold 89 United States patents covering certain aspects of our product designs or manufacturing technology, which patents expire between 2009 and 2025. We also have 14 pending United States patent applications, two of which have been allowed and are expected to be issued as patents. No assurance can be given that the claims allowed on any of our patents will be sufficiently broad to protect our technology. In addition, no assurance can be given that any patents issued to us will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide competitive advantages to us. The loss of patent protection on our technology or the circumvention of our patents by competitors could have a material adverse effect on our ability to compete successfully in our products’ business across the Company and each of our reportable segments. There can be no assurance that any existing or future patent applications by us will result in issued patents with the scope of the claims sought by us, or at all, that any current or future issued or licensed patents, trade secrets or know-how will afford sufficient protection against competitors with similar technologies or processes, or that any patents issued will not be infringed upon or designed around by others.

In addition, there can be no assurance that others will not independently develop proprietary technologies and processes which are the same as or substantially equivalent or superior to those of ours.

      The semiconductor industry is characterized by frequent claims and litigation regarding patent and other intellectual property rights. We have from time to time received and believe that we likely will receive in the future, notices alleging that our products, or the processes used to manufacture our products, infringe upon the intellectual property rights of third parties. If we determine that we possibly infringe upon a patent and the patent appears valid, we will attempt to negotiate a license, if possible. The ultimate conclusion with respect to any alleged infringement must be determined by a court or administrative agency in the event of litigation, and there can be no assurance that a court or administrative agency would determine that our products do not infringe upon the patents in question. As of the date of this report, we do not believe that we have infringed upon any patents asserted by third parties against us, and we do not believe any failure to obtain a license for any such patents will have a material adverse effect on our business. Patent litigation is inherently uncertain and we cannot predict the result of any such litigation or the level of damages that could be imposed if it were determined that certain of our products or processes infringe upon any of the patents in question.

      Copyrights and maskwork protection are also key elements in the conduct of our business. We also rely on trade secrets and proprietary know-how, which we seek to protect by confidentiality agreements with our employees and consultants, and with third parties. There can be no assurance that these agreements will not be breached, that we will have adequate remedies for any breach, or that our trade secrets and proprietary know-how will not otherwise become known or be independently discovered by others.

Backlog

      Sales of our products are made pursuant to standard purchase orders. Purchase orders are subject to changes in quantities of products and delivery schedules in order to reflect changes in the customers’ requirements and to price renegotiations. In addition, orders typically may be canceled at the discretion of the buyer without enforceable penalty. Our business, in line with that of much of the semiconductor industry, is characterized by short lead-time orders and quick delivery schedules. Also, our actual shipments depend on the manufacturing capacity of our foundries and subcontractors. Finally, capacity constraints or unexpected manufacturing delays may prevent us from meeting the demand for certain products. Accordingly, our backlog is not necessarily indicative of future sales. As of March 31, 2005, our backlog amounted to approximately $2.5 million, compared to $4.8 million as of March 31, 2004.

      We have had and continue to hold significant investments in marketable securities and investments in shares that are classified as long-term. We recorded an “other-than-temporary” write-down of approximately $6.1 million in our short-term investment in Tower ordinary shares and a write-down of $10.6 million in our long-term investment in Tower ordinary shares during fiscal 2005. We recorded this write-down as a result of a 57% decrease in the price of Tower ordinary shares during the last two quarters of fiscal 2005. We did not record any “other-than-temporary” write-downs during fiscal 2004. During fiscal 2003, certain of our investments in marketable securities experienced declines in market value as a result of the continued economic slowdown in the semiconductor industry and declines in the stock market in general. As a result, we recorded “other-than-temporary” write-downs in these investments. During the second and third quarters of fiscal 2003, we recorded pretax, non-operating losses of $673,000 and $16.2 million, respectively, on two of our investments. During the third quarter of fiscal 2003, we recorded a pretax, non-operating loss of $14.1 million on our long-term investment in Tower ordinary shares. At March 31, 2005, a portion of our investment in Tower ordinary shares was classified as long-term due to certain selling restrictions.

United Microelectronics Corporation

      At March 31, 2005, we owned approximately 128.1 million shares of United Microelectronics Corporation (“UMC”) common stock, representing approximately 0.8% ownership. At March 31, 2004, we owned

approximately 161.5 million shares of UMC common stock, representing approximately 1.0% ownership. We received a stock dividend of approximately 12.0 million shares of UMC common stock in July 2004.

      We account for our investment in UMC as an available-for-sale marketable security in accordance with Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS 115”). In fiscal 2005, we sold 45.4 million shares of UMC common stock for $31.8 million and recorded a pretax, non-operating gain of $8.0 million.

      As of March 31, 2004, all 145 million shares of UMC common stock, which had been pledged as collateral, had been released by Chinatrust Commercial Bank, Ltd. (“Chinatrust”) as a result of a full repayment of our outstanding debt with Chinatrust.

      UMC’s common stock price has historically experienced significant fluctuations in market value, and has experienced significant decreases in market value. Given the market risk for UMC common stock, there can be no assurance that our investment in UMC will maintain its value.

Tower Semiconductor Ltd.

      At March 31, 2005, we owned 8,908,391 ordinary shares of Tower of which 3,207,024 were classified as short-term and accounted for as available-for-sale marketable securities in accordance with SFAS 115. We have the following restrictions on our ability to sell, transfer or dispose of our Tower shares:

      During the fourth quarter of fiscal 2005, we wrote down our short-term and long-term investments in Tower shares and recorded a pretax, non-operating loss of approximately $16.7 million. We determined at that time that the decline in the price of Tower ordinary shares was other than temporary due to a 57% decrease in the share price during the last two quarters of fiscal 2005. During the third quarter of fiscal 2003, we wrote down our investment in Tower ordinary shares and recorded a pretax, non-operating loss of approximately $14.1 million due to an other than temporary decrease in the share price of Tower ordinary shares.

      As of March 31, 2005, we also held $13.9 million of wafer credits acquired as part of the original Tower Share Purchase Agreement. During the second quarter of fiscal 2003, we wrote off a portion of our investment in wafer credits with Tower and recorded a pretax, operating loss of approximately $9.5 million. We had determined at that time that the value of these credits would not be realized given our sales forecast of the products to be manufactured by Tower for us. Through December 2006, we will also have the option to convert a portion of our prepaid wafer credits to Tower ordinary shares as opposed to using the credits to offset the cost of actual wafer purchases. The credits that would have been used against quarterly wafer purchases from Tower’s Fab 2 during that two-year period can be converted to Tower ordinary shares based on the average price per Tower share during the last 15 trading days of each quarter. The credits that would have been used against wafer purchases but are not converted to shares will accrue interest quarterly at the three-month LIBOR rate plus 2.5%. Interest will be paid the following quarter and reimbursement of unutilized wafer credits will not occur until December 2007. We will also retain our option to convert $4.4 million of previously existing wafer credits to Tower ordinary shares in January 2006. As part of a September 2002 Tower rights offering, the Company received 794,995 ordinary shares of Tower as well as warrants to purchase 357,747 ordinary shares of Tower. Each whole warrant entitles the holder to purchase one ordinary share at an exercise price of $7.50 per share through October 31, 2006.

      Our investment in Tower is subject to inherent risks, including those associated with certain Israeli regulatory requirements, political unrest and financing difficulties, which could harm our business and

financial condition. There can be no assurances that our investment in Tower shares and wafer credits will not decline further in value.

      N. Damodar Reddy, our Chairman and Chief Executive Officer, is a director of Tower. As of March 31, 2005, we had a 13.6% share ownership position in Tower.

      A timeline of our investments in Tower is as follows (in millions, except number of shares and per share amounts):

Vitesse Semiconductor Corporation

      During the third quarter of fiscal 2005, we sold 95,577 shares of the common stock of Vitesse Semiconductor Corporation (“Vitesse”) for proceeds of $324,000 and realized a pretax, non-operating gain of $258,000. We no longer hold a position in Vitesse common stock. We had accounted for our investment in Vitesse as an available-for-sale marketable security in accordance with SFAS 115.

      In January 2001, we entered into two derivative contracts (“Derivative Agreements”) with a brokerage firm and received aggregate cash proceeds of approximately $31.0 million. The Derivative Agreements had repayment provisions that incorporated a collar arrangement with respect to 490,000 shares of Vitesse common stock. We had the option to settle the contracts by either delivering shares of Vitesse common stock or making a cash payment to the brokerage firm in January 2003, the maturity date of the Derivative Agreements (the “Settlement Date”). The number of Vitesse shares to be delivered or the amount of cash to be paid was determined by a formula in the Derivative Agreements based upon the market price of the Vitesse shares on the Settlement Date. On January 24, 2003, we settled our derivative contract on 300,000 Vitesse shares by delivering the shares to the brokerage firm holding the contract. On January 30, 2003, we settled our derivative contract on 190,000 Vitesse shares by delivering the shares to the brokerage firm holding the contract.

Adaptec, Inc.

      During the third quarter of fiscal 2005, we sold 154,444 shares of Adaptec common stock for proceeds of $1.2 million and realized a pretax, non-operating loss of $540,000. We no longer hold a position in Adaptec common stock.

      In December 2001, we entered into a derivative contract with a brokerage firm and received aggregate cash proceeds of $5.0 million. The contract had repayment provisions that incorporated a collar arrangement with respect to 362,173 shares of Adaptec common stock. We had 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 was determined by a formula in the contract based upon the market price of the Adaptec shares on the maturity date of the contract. In June 2003, we settled the derivative contract we had on 362,173 Adaptec shares by delivering those shares to the brokerage firm holding the contract.

      In October 1999, we formed Alliance Venture Management LLC (“Alliance Venture Management”), a California limited liability company, to manage and act as the general partner in the investment funds we intended to form. Alliance Venture Management does not directly invest in the investment funds with us, but is entitled to receive (i) a management fee out of the net profits of the investment funds and (ii) a commitment fee based on the amount of capital committed to each partnership, each as described more fully below. This structure was created to provide incentives to the individuals who participate in the management of the investment funds, which includes N. Damodar Reddy, our Chairman, Chief Executive Officer and President, and C.N. Reddy, our Executive Vice President for Investments and a member of our Board of Directors.

      In November 1999, we formed Alliance Ventures I, LP (“Alliance Ventures I”) and Alliance Ventures II, LP (“Alliance Ventures II”), both California limited partnerships. As the sole limited partner, we own 100% of the limited partnership interests in each partnership. Alliance Venture Management acts as the general partner of these partnerships and receives a management fee of 15% based upon realized investment gains from these partnerships for its managerial efforts.

      At Alliance Venture Management’s inception in October 1999, Series A member units and Series B member units in Alliance Venture Management were created. The 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, calculated on an annual basis.

      Each of the owners of the Series A, B, C, D and E member units in Alliance Venture Management (“Preferred Member Units”) paid the initial carrying value for their shares of the Preferred Member Units. While we own 100% of the common units in Alliance Venture Management, we do not hold any Preferred Member Units and do not participate in the management fees generated by the management of the investment funds. N. Damodar Reddy and C.N. Reddy, who are directors and members of our senior management, each hold 48,000 Preferred Member Units, respectively, of the 162,152 total Preferred Member Units outstanding and the 172,152 total member Units outstanding.

      Annually, Alliance Venture Management earns 0.5% of the total fund commitment of Alliance Ventures I, II, III, IV and V (collectively, “Alliance Ventures”). In fiscal 2005, we incurred $875,000 of commitment fees. This amount was offset by expense incurred by us on behalf of Alliance Venture Management of approximately $843,000 with the remaining amount being income to Alliance Venture Management. Neither N. Damodar Reddy nor C.N. Reddy received any commitment fees during fiscal 2005, fiscal 2004 or fiscal 2003.

      No distribution of cash and/or marketable securities was made to the partners of Alliance Venture Management during fiscal 2005, fiscal 2004 or fiscal 2003.

      After Alliance Ventures I was formed, we contributed all of our then current investments, except UMC, Chartered, and Broadcom Corporation, to Alliance Ventures I to allow Alliance Venture Management to manage these investments. As of March 31, 2005, Alliance Ventures I, the focus of which is investing in

networking and communications start-up companies, has invested $20.0 million in nine companies, with a fund allocation of $20.0 million. Alliance Ventures II, the focus of which 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 March 31, 2005, Alliance Ventures III, the focus of which is investing in emerging companies in the networking and communications market areas, has invested $61.1 million in 17 companies with a fund allocation of $100 million. As of March 31, 2005, Alliance Ventures IV, the focus of which is investing in emerging companies in the semiconductor market, has invested $37.6 million in eight companies, with a total fund allocation of $40.0 million. As of March 31, 2005, Alliance Ventures V, the focus of which is investing in emerging companies in the networking and communications markets, has invested $28.0 million in ten companies, with a total fund allocation of $60.0 million. During fiscal 2005, we invested approximately $8.9 million in Alliance Ventures investee companies.

      We do not intend to invest in any new companies through Alliance Ventures.

      In fiscal 2005, 2004 and 2003, we recorded write-downs in Alliance Ventures investee companies of approximately $2.7 million, $5.5 million and $19.0 million, respectively. Also, several of the Alliance Ventures investments are accounted for under the equity method due to our ability to exercise significant influence on the operations of investees resulting from the ownership interest and/or the representation on the Board of Directors of certain investees. The total equity in net losses of Alliance Ventures investee companies was approximately $16.0 million, $14.1 million and $15.2 million during fiscal 2005, 2004 and 2003, respectively.

      Alliance Venture Management generally directs the individual Alliance 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 and other factors outside the control of the managers. In the past the market for these types of investments has been successful and many venture capital funds have been profitable. While we have been successful in certain of our past investments, we cannot be certain as to any future or continued success. It is possible there will be a downturn in the success of these types of investments in the future, resulting in the complete loss of most or all the money we have invested in these types of investments.

      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. (collectively, “Galaxy Venture Partners”), which have invested in 26 of the 40 total companies invested in by Alliance Venture Management’s investment funds. Multiple Alliance Venture Management investment funds may invest in the same investee companies. We acquired Chip Engines, Inc. (“Chip Engines”) in the fourth quarter of fiscal 2003. As part of this acquisition, we assumed net liabilities of approximately $1.1 million, including an outstanding note of $250,000 in principal amount held by Galaxy Venture Partners. During the second quarter of fiscal 2004, we repaid the note in full and approximately $22,000 of accrued interest to Galaxy Venture Partners according to the terms of the note. See “Part III — Item 13 — Certain Relationships and Related Transactions” and “Note 15 to Consolidated Financial Statements.”

Solar Venture Partners, LP

      Through March 31, 2005, we have invested $12.5 million in Solar Venture Partners, LP (“Solar”), a venture capital partnership that focuses on investing in early stage companies in the areas of networking, telecommunications, wireless, software infrastructure enabling efficiencies of the Internet and e-commerce, semiconductors for emerging markets and design automation. As of March 31, 2005, we held a 73% interest in Solar.

      Due to our majority interest in Solar, we account for Solar under the consolidation method. Some of the investments Solar has made are accounted for under the equity method due to its ability to exercise significant influence on the operations of the investees resulting from ownership interest and/or board representation. In fiscal 2005, 2004 and 2003, we recorded equity in the loss of investees of approximately $959,000, $1.3 million and $1.4 million, respectively, and recorded write-downs in certain Solar investments of $473,000, $300,000 and $5.8 million, respectively.

      C.N. Reddy is a general partner of Solar and participates in running its daily operations. Furthermore, certain of our directors, officers and employees including C.N. Reddy have also invested in Solar. Solar has invested in 17 of the 40 total companies in which Alliance Venture Management’s funds have invested. See “Part III — Item 13 — Certain Relationships and Related Transactions” and “Note 15 to the Consolidated Financial Statements.”

Equity Method Investments

      The majority of our investments in venture funds are accounted for under the equity method of accounting. See “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Note 8 — Private Equity Investments” in the Consolidated Financial Statements.

      We review our share of the underlying assets of the companies in which we invest and if our investment is greater than the underlying assets, we generally allocate excess to goodwill as most of the investee companies are in their early formation stage.

      We also perform an analysis on individual venture investee companies in accordance with FIN 46 “Consideration of Variable Interest Entities” (“FIN 46”). FIN 46 requires certain variable interest entities (“VIE”) to be consolidated by the primary beneficiary of the entity if the holders of the variable interest 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 it’s activities without additional subordinated financial support from other parties. As of March 31, 2005, we had one investee company which would qualify as a VIE and for which we were the primary beneficiary. The impact of consolidation of this VIE was not material to our consolidated financial statements.

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”). The Act was primarily meant to regulate “investment companies,” which generally include families of mutual funds of the type offered by the Fidelity and Vanguard organizations (to pick two of many), closed-end investment companies that are traded on the public stock markets, and certain non-managed pooled investment vehicles such as unit investment trusts. In those cases, the entities 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 not controlled by these entities. The fundamental intent of the Act is to protect the interests of public investors from fraud and manipulation by the people who establish and operate 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) concluded that a company could, either deliberately or inadvertently, come to have the defining characteristics of an investment company within the meaning of the Act 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 need to provide additional investor protection, 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, on an unconsolidated basis, either holds more than 45% of its non-cash 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 our board of directors.

      We made our investments in Chartered, UMC and Tower as operating investments primarily intended to secure adequate wafer manufacturing capacity and other strategic goals. Because of the appreciation in value of certain of our investments, including our strategic wafer manufacturing investments, we could be viewed as holding a larger portion of our assets in investment securities than is presumptively permitted by the Act for a company that is not registered under it.

      On the other hand, we believe that the investments that we currently hold in UMC and Tower, and previously held in Chartered, even though in companies that we do not control, are properly regarded as strategic deployments of our assets for the purpose of furthering our integrated circuit business, rather than as the kind of financial investments that generally are considered to constitute investment securities. Applying certain other tests that the Securities and Exchange Commission (“SEC”) utilizes in determining investment company status, we have never held ourselves out as an investment company; our historical development has focused almost exclusively on the integrated circuit business; the activities of our officers and employees have been overwhelmingly addressed to achieving success in the integrated circuit business; and prior to the past few years, our income (and losses) have been derived almost exclusively from the integrated circuit business. Accordingly, we believe that we are properly regarded as being primarily engaged in a business other than investing, reinvesting, owning, holding or trading in securities.

      We believe that we could be viewed as holding a larger portion of the assets in investment securities than is presumptively permitted by the Act for a company that is not registered under the Act. In August 2000, we applied to the SEC for an order under section 3(b)(2) of the Act confirming the non-investment-company status. In March 2002, the staff of the SEC informed us that the staff could not support the granting of the requested exemption. Since that time, we have been working to resolve the status under the Act. First, we have engaged in a routine process to sell certain of our assets that could be deemed to be “investment securities” for purposes of the Act. Specifically, from April 1, 2002 through March 31, 2005, we sold over 59% of our UMC holdings. As a result, together with market factors, the aggregate value of our UMC holdings declined from $470.3 million to $77.5 million. In addition, consistent with prevailing market conditions and the interests of our stockholders, we sold all of our holdings in Adaptec, Inc., Chartered, Magma Design Automation, Broadcom Corporation, PMC-Sierra Corporation and Vitesse Semiconductor Corporation. We continue to work to reduce certain of our holdings, including UMC, consistent with market factors, and the interests of our stockholders. Second, we have engaged in a systematic review of our existing holdings to identify those holdings that are viable candidates to become our controlled subsidiaries, which generally are not deemed “investment securities.” For example, we acquired Chip Engines in January 2003. Third, we have ceased acquiring interests in any new companies through Alliance Ventures. We cannot be certain the SEC will agree that we are not currently deemed to be an unregistered investment company in violation of the Act. If the SEC takes the view that we have been operating and continue to operate as an unregistered investment company in violation of the Act, and does not provide us with a sufficient period to register as an investment company or divest ourselves of investment securities and/or acquire non-investment securities, we may be subject to significant potential penalties.

      In the absence of exemptions granted by the SEC (which are discretionary in nature and require the SEC to make certain findings), we would be required either to register as a closed-end investment company under the Act, or, in the alternative, to divest ourselves 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 we elect to register as a closed-end investment company under the Act, a number of significant requirements will be imposed upon us. These would include, but not be limited to, a requirement that at least 40% of our board of directors not be “interested persons” of Alliance Semiconductor 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 us in view of the competitive circumstances in which we seek 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 us in entities in which we are also investing (which could require us to abandon or significantly restructure our management arrangements, particularly with respect to our investment activities). While we could apply for individual exemptions from these restrictions, there could be no guarantee that such exemptions would be granted, or granted on terms that we would deem practical. Additionally, we would be required to report our financial results in a different form from that currently used by us, which would have the effect of turning our Statement of Operations “upside down” by requiring that we report our investment income and the results of our investment activities, instead of our operations, as our primary sources of revenue.

      If we elect to divest ourselves 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, we 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 our total assets (excluding the value of U.S. Government securities and cash items) on an unconsolidated basis. In seeking to meet this requirement, we might choose to divest ourselves of assets that we consider strategically significant for the conduct of our operations or to acquire additional operating assets that would have a material effect on our operations. There can be no assurance that we could identify such operating assets to acquire or could successfully acquire such assets. Any such acquisition could result in us issuing additional shares that may dilute the equity of our existing stockholders, and/or result in us incurring additional indebtedness, which could have a material impact on our balance sheet and results of operations. Were we to acquire any additional businesses, there would be the additional risk that our acquired and previously-existing businesses could be disrupted while we attempted to integrate the acquired business, as well as risks associated with us attempting to manage a new business with which we were not familiar. Any of the above risks could result in a material adverse effect on our results of operations and financial condition.

Employees

      As of March 31, 2005, we had 281 full-time employees, consisting of 212 in research and development, 12 in marketing, 17 in sales, 18 in administration and 22 in operations. Of the 212 research and development employees 30 are in the US and 182 are in India. We believe that our future success will depend, in part, on our ability to continue to attract and retain qualified technical and management personnel, particularly highly-skilled design engineers involved in new product development, for which competition is intense. Our employees are not represented by any collective bargaining unit and we have never experienced a work stoppage. We believe that our employee relations are good.

      We have recently experienced and may continue to experience growth in the number of our employees and the scope of our operating and financial systems, resulting in increased responsibilities for our management. To manage future growth effectively, we will need to continue to implement and improve our operational, financial and management information systems and to hire, train, motivate and manage our employees. There can be no assurance that we will be able effectively to manage future growth, and the failure to do so could have a material adverse effect on our results of operations.

      We depend to a large extent on the continued contributions of our founders, N. Damodar Reddy, Chairman of the Board, Chief Executive Officer and President of Alliance Semiconductor, and his brother C.N. Reddy, Executive Vice President for Investments and Director of Alliance Semiconductor (collectively referred to as the “Reddys”), as well as other officers and key design personnel, many of whom would be difficult to replace. In the last few years, a number of officers and design personnel left us to pursue various other opportunities. As a result of these departures, some projects have been delayed; however, these delays have not had a material impact on our business. The future success of Alliance Semiconductor will depend on our ability to attract and retain qualified technical and management personnel, particularly highly-skilled design engineers involved in new product development, for which competition is intense. The loss of either of the Reddys or key design personnel could delay product development cycles or otherwise have a material

adverse effect on our business. We are not insured against the loss of any of our key employees, nor can we assure the successful recruitment of new and replacement personnel.

Web Site Access to Our Periodic SEC Reports

      Our primary Internet address is www.alsc.com. We make our periodic SEC Reports (Forms 10-Q and 10-K) and current reports (Form 8-K) as well as proxy statements (Schedule 14A) and Section 16 filings by certain officers, directors and stockholders of Alliance Semiconductor (Forms 3, 4 and 5) available free of charge through our Web site on the same day those filings are made. We may from time to time provide important disclosures to investors by posting them in the investor relations section of our Web site, as allowed by SEC rules.

      Our executive offices and principal marketing, sales and administrative operations are located in a 56,600 square foot leased facility in Santa Clara, California under a lease which expires in July 2006. We have an option to extend the lease for a term of five years. We also lease office space in Hsin-Chu, Taiwan to manage the logistics of the wafer fabrication, assembly and testing of our products manufactured in Taiwan. We lease one building to house our design center in Bangalore, India and have purchased a parcel of land in an office park under development in Hyderabad, India for product development. We also lease a building in Hyderabad, India to support our design center there. This leased facility was acquired as part of our acquisition of Chip Engines. Additionally, we lease sales offices in Natick, Massachusetts; Foothill Ranch, California; Bracknell, United Kingdom; Taipei, Taiwan; Tokyo, Japan; and Shenzhen, China. We use all of our facilities for both reportable segments of our business except for the Hyderabad design center which exclusively supports the Non-Memory segment. We believe that our facilities are suitable and adequate for our needs as a company and for each of our reportable segments.

      In July 1998, we learned that a default judgment was entered against us in Canada, in the amount of approximately $170 million, 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). As we had previously not participated in the case, we believe that we never were properly served with process in this action, and that the Canadian court lacks jurisdiction over us in this matter. In addition to jurisdictional and procedural arguments, we also believe we may have grounds to argue that the claims against us should be deemed discharged by our bankruptcy in 1991. In February 1999, the court set aside the default judgment against us. 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. In September 2003, Mr. Balla took the deposition of N. Damodar Reddy, and our Canadian counsel took the depositions of the plaintiff, Mr. Balla, as well as of some witnesses who had submitted affidavits on behalf of the plaintiff. In its July 2000 Order, the Court of Appeals also set aside the default judgment against us. The plaintiffs appealed the setting aside of the default judgment against us 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 us. We believe the resolution of this matter will not have a material adverse effect on our financial condition or our results of operations. From September 27-29, 2004, the British Columbia Supreme Court heard Mr. Balla’s application to have the 1985 service deemed effective. In November 2004, the court issued a declaration that Mr. Balla had complied with the order for substituted service and thus had effected service on Alliance. Alliance has been granted leave to appeal this decision to the British Columbia Court of Appeal and this appeal is currently underway. That application is ongoing, and the court has not yet issued a ruling.

      On December 3, 2002, Alliance Semiconductor and our then Vice President of Sales were sued in Santa Clara Superior Court by plaintiff SegTec Ltd., an Israeli company and former sales representative of us. In its complaint, SegTec alleges that we 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 our termination of the Agreement was without cause and that we have 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 us and our former Vice President of Sales on December 9, 2002. Plaintiff then served two amended complaints on March 13 and on April 15, 2003. On May 22, 2003, the former Vice President of Sales was successfully dismissed from the lawsuit in his individual capacity, and the entire case against Alliance was successfully ordered to arbitration before the American Arbitration Association to resolve the commission related dispute. All remaining causes of action unrelated to the commission related dispute have been stayed pending the resolution of the arbitration proceedings. No schedule for the arbitration proceedings has yet been set. Due to the early stage of the litigation, we cannot determine what, if any, effect resolution of this matter will have on our financial condition.

      In July 2003, we were named as a defendant in a putative class action lawsuit filed in the United States District Court for the Southern District of New York against Tower, certain of Tower’s directors (including N. Damodar Reddy), and certain of Tower’s stockholders (including Alliance Semiconductor). The lawsuit alleges that a proxy solicitation by Tower seeking approval from the Tower shareholders for a restructuring of a financing agreement between Tower and certain investors (including Alliance) contained false and misleading statements and/or omitted material information in violations of Section 14(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 14a-9 promulgated thereunder, and also alleges that certain defendants (including N. Damodar Reddy and Alliance Semiconductor) have liability under Section 20(a) of the Exchange Act. The lawsuit was brought by plaintiffs on behalf of a putative class of persons who were ordinary stockholders of Tower at the close of business on April 1, 2002, the record date for voting on certain matters proposed in a proxy statement issued by Tower. We have reviewed a copy of the complaint, believe we have meritorious defenses and intend to defend vigorously against the claims asserted against it. Due to the early stage of the litigation, we cannot determine what, if any, effect resolution of this matter will have on our financial condition.

      On February 18, 2005, Kenneth Patrizio, one of our former employees of Alliance Semiconductor International Corp., filed a complaint against us and Anwar Khan, our Vice President of Quality, for various employment related claims seeking unspecified damages. The complaint was amended on May 6, 2005, alleging discrimination and other related violations. The Company and Mr. Khan intend to vigorously defend the suit. Discovery has not begun, so at this early time it is impossible to predict whether the likelihood of an unfavorable outcome is probable or remote.

      In addition, we are 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, we do not believe that the outcome of any of these legal matters will have a material adverse effect on our consolidated financial position, results of operations or cash flows.

      Not applicable.

Executive Officers of the Registrant

      Information concerning executive officers of Alliance Semiconductor as of March 31, 2005, is set forth below:

      N. Damodar Reddy is the co-founder of Alliance Semiconductor and has served as our Chairman of the Board, Chief Executive Officer and President from our inception in February 1985. Mr. Reddy also served as our Chief Financial Officer from June 1998 until January 1999. Under his guidance, we created the fabless model that many memory companies follow today. From September 1983 to February 1985, Mr. Reddy co-founded and served as President and Chief Executive Officer of Modular Semiconductor, Inc., and from 1980 to 1983, he served as manager of Advanced CMOS Technology Development at Synertek, Inc., a subsidiary of Honeywell, Inc. Prior to that time, Mr. Reddy held various research and development and management positions at Four Phase Systems, a subsidiary of Motorola, Inc., Fairchild Semiconductor and RCA Technology Center. In 1995, Mr. Reddy was selected as “Entrepreneur of the Year” in Northern California, an award sponsored by Inc. magazine, Ernst and Young, and Merrill Lynch. Mr. Reddy is a member of the board of directors of Tower Semiconductor Ltd., a publicly traded company, as well as serving on the board of several other privately held companies. He holds a B.S. degree in Electrical Engineering from Osmania University, a M.S. degree in Electrical Engineering from North Dakota State University and a M.B.A. from Santa Clara University. N. Damodar Reddy is the brother of C.N. Reddy.

      C.N. Reddy is the co-founder of Alliance Semiconductor and has served as a director of Alliance Semiconductor since our inception in February 1985. Mr. Reddy served as Secretary to Alliance Semiconductor from February 1985 to October 2000. Beginning in February 1985, Mr. Reddy served as our Vice President — Engineering. In May 1993, he was appointed Senior Vice-President — Engineering and Operations of Alliance Semiconductor. In December 1997, he was appointed Executive Vice President and Chief Operating Officer. In October 2000, Mr. Reddy resigned his positions as Chief Operating Officer and Secretary, and was appointed Executive Vice President for Investments. From 1984 to 1985, he served as Director of Memory Products of Modular Semiconductor, Inc., and from 1983 to 1984, Mr. Reddy served as a SRAM product line manager for Cypress Semiconductor Corporation. From 1980 to 1983, Mr. Reddy served as a DRAM development manager for Texas Instruments, Inc. and, before that he was a design engineer with National Semiconductor Corporation for two years. Mr. Reddy holds a M.S. degree in Electrical Engineering from Utah State University. Mr. Reddy is named inventor of over 15 patents related to SRAM and DRAM designs. C.N. Reddy is the brother of N. Damodar Reddy. Mr. Reddy serves on the Board of Directors of many privately held companies, including several companies in which Alliance Venture Management’s investment funds hold equity interests.

      Jeff Parsons joined Alliance Semiconductor in August 2002 as the Corporate Controller and was appointed the Vice-President of Finance and Administration and Chief Financial Officer effective January 15, 2005. Prior to joining Alliance, Mr. Parsons served as the Director of Finance at Lara Networks from February 2000 to August 2001. He also served as a Director of Finance for Cirrus Logic from April 1996 to July 1999 and worked as a Divisional Controller at Cypress Semiconductor from September 1993 to March 1996. Mr. Parsons received his B.A. from Vanderbilt University in 1980 and his M.B.A. from Carnegie-Mellon University in 1983.

PART II

      Our Common Stock is listed on the NASDAQ National Market under the symbol ALSC. We completed our initial public offering on December 1, 1993. The following table sets forth, for the periods indicated, the high and low closing sale prices as reported on NASDAQ for our Common Stock.

      As of May 31, 2005, there were approximately 110 holders of record our Common Stock.

      We have never declared or paid any cash dividends on our capital stock. We currently intend to retain future earnings, if any, for development of our business and, therefore, do not anticipate that we will declare or pay cash dividends on our capital stock in the foreseeable future.

      We do not have a stock repurchase program and did not repurchase any of our equity securities during the quarter ended March 31, 2005.

      At March 31, selected consolidated financial information for each of the last five fiscal years is as follows and should be read in conjunction with “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in conjunction with the consolidated financial statements and the accompanying notes for the corresponding fiscal years (in thousands, except per share amounts):

      The following table summarizes selected consolidated financial information (unaudited) for the fiscal quarters for each of the last two fiscal years ended March 31, 2005 and 2004, respectively (in thousands, except per share amounts):

      The following discussion should be read in conjunction with our Consolidated Financial Statements, and the accompanying notes to Consolidated Financial Statements included elsewhere in this report. 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.

Overview

      We are a fabless semiconductor company that designs, develops, and markets high-performance memory, analog and mixed signal, and systems solutions products. We operate in two reportable segments: Memory segment and Non-Memory segment. The Memory business unit primarily designs, manufactures and sells SRAM and DRAM devices. SRAM and DRAM sales, which are characterized by intense price pressure and declining margins, have traditionally comprised the majority of our revenue. This business unit contributed 50% of our net revenue during fiscal 2005. In fiscal 2004, we ceased developing new DRAM products. Currently DRAM product revenue is derived solely from supplying legacy DRAM products to existing customers. As a result, we expect revenue from DRAM products to comprise a significantly smaller portion of overall revenue in fiscal 2006, compared to fiscal 2005, as well as on a quarter to quarter basis. DRAM revenue decreased by 75% in fiscal 2005, compared to fiscal 2004, and will eventually decline to $0. Our Non-Memory segment aggregates two operating segments: the Analog and Mixed Signal business unit and the System Solutions business unit. Our Analog and Mixed Signal business unit designs, manufactures and sells products designed to provide Analog and Mixed Signal solutions for the communications, computing, embedded, industrial and consumer markets. The Analog and Mixed Signal business unit has traditionally accounted for a

small, but growing portion of our revenue. Net revenue from Analog and Mixed Signal products comprised 31% of our net revenue during fiscal 2005 and increased by 70%, compared to fiscal 2004. Our System Solutions business unit designs, manufactures and sells products designed to accelerate the transmission and switching of data, video, and voice in high performance and bandwidth-intensive networking, storage, and server markets. The System Solutions business unit has traditionally accounted for a small portion of our revenue. During fiscal 2005, net revenue from System Solutions products comprised 19% of our net revenue and decreased by less than 1%, compared to fiscal 2004. Discrete financial information for each reportable segment, including profit or loss and expenses, was not available prior to fiscal 2004.

      Our net revenue for fiscal 2005, 2004 and 2003 was $23.6 million, $26.7 million and $18.5 million, respectively. The decrease in net revenue in fiscal 2005, compared to fiscal 2004, was driven primarily by a $4.7 million decrease in DRAM revenue offset by a $3.0 million increase in Analog and Mixed Signal revenue. The increase in net revenue in fiscal 2004, compared to fiscal 2003, was driven by a $3.9 million increase in Memory net revenue and a $2.9 million increase in Systems Solutions revenue. Revenue from our Non-Memory business units comprised 50% of net revenue in fiscal 2005, compared to 33% in fiscal 2004. This is consistent with our strategy of diversifying our product portfolio to reduce our dependence on Memory products which generally experience volatile demand and pricing and lower gross margins.

      As a fabless semiconductor company, we rely on third parties to manufacture, assemble and test our products. Our agreements with third party foundries do not include any guaranteed capacity or “take or pay” provisions. As a result of our dependence on third-party wafer foundries, principally Chartered and Tower, our ability to increase our unit sales volumes depends on our ability to increase our wafer capacity allocation from current foundries, add foundries and improve yields of die per wafer. In the past, we have experienced constraints in the supply of wafers from certain of our foundries, however, we are not currently experiencing such constraints. Any such future constraints may have a material adverse effect on our revenue and operating results. In addition, we must order products and build inventory substantially in advance of product shipments. There is a risk that we will forecast incorrectly and produce excess or insufficient inventories of particular product due to volatile product demand, rapid technological and price change. This inventory risk is heightened because certain of our customers place orders with short lead times. As a result, we had to record pretax inventory charges of $9.3 million, $2.9 million and $6.3 million during fiscal 2005, fiscal 2004 and fiscal 2003, respectively.

      Our sales are generally made when purchase orders are received from customers. Because industry practice allows customers to reschedule or cancel orders on relatively short notice, we believe backlog is not a good indicator of our future sales. Cancellations of customer orders or changes in product specifications could result in the loss of anticipated sales without allowing us sufficient time to reduce our inventory and operating expenses.

      International net revenue, principally from customers in Europe and Asia, constituted approximately 65% of net revenue in fiscal 2005. All of our foundries and a majority of our assembly and test subcontractors are located abroad, and we have substantial operations in India. As a result, we are subject to the risks of conducting business internationally including economic fluctuations, changes in trade policy and regulatory requirements, duties, tariffs and other trade barriers and restrictions, the burdens of complying with foreign laws and, possibly, political instability. Additionally, we expect to expand our operations in India over the next several years, if possible. We plan to invest in this operation to the extent that we have the resources to do so.

      We hold equity interests in a number of other companies. We acquired these interests for strategic reasons, such as developing a strong relationship with certain third-party wafer foundries we rely on to manufacture our products. During fiscal 2005, we recorded a write-down in our short and long-term investment in Tower ordinary shares of $16.7 million and a write-down of $3.2 million on one of our Alliance Ventures and Solar Venture Partners investee companies. Assets written down during fiscal 2004 and 2003 included our investments in Alliance Ventures Management and Solar Venture Partners’ funds as well as investments in marketable equity securities. We also hold a large portion of our assets in shares of UMC, a publicly traded company in Taiwan. As a majority of our assets are in marketable securities and venture investments, we run the risk that we will have to record additional write-downs of these assets in the future based on market conditions.

      Because of the significant investments we have made in other businesses, we could be deemed to be an unregistered investment company in violation of the Investment Company Act of 1940 (the “Act”). In August 2000, we applied to the SEC for an order under section 3(b)(2) of the Act confirming our non-investment company status. In March 2002, the staff of the SEC informed us that the staff could not support the granting of the requested exemption. Since that time, we have been working to resolve our status under the Act, principally through divestment of certain strategic investments, including a significant portion of our UMC common stock. During the third quarter of fiscal 2005 we also liquidated our investments in Adaptec and Vitesse common stock. No assurances can be given that the SEC will agree that we are not currently deemed to be an unregistered investment company in violation of the Act. If the SEC takes the view that we have operated and continue to operate as an unregistered investment company in violation of the Act, and does not provide us with a sufficient period to register as an investment company or divest ourselves of investment securities and/or acquire non-investment assets, we may be subject to significant potential penalties. In an effort to comply with the Act, we have divested ourselves of certain securities, ceased acquiring interests in any new companies through Alliance Ventures and taken certain additional actions.

      During fiscal 2005, we used cash of $37.9 million for operations and investments. This includes $29.0 million for operations and purchases of licenses and equipment and $8.9 million for investments in Alliance Ventures investee companies. We sold UMC, Vitesse, and Adaptec common stock shares for proceeds of $33.3 million to finance these activities. During 2004, we repaid in full our $43.6 million outstanding debt with Chinatrust resulting in the release of 145 million shares of UMC common stock, which was held as collateral against the loan. UMC common stock share sales have been, and are expected to continue to be, our main source of liquidity in the near term. There are no restrictions on our ability to sell our shares of UMC common stock and none of our holdings is collateralized. However, the value of our short-term investments in marketable securities, especially our holdings in UMC and Tower, has declined substantially in value in recent quarters, and may continue to decline in value in the future. Although there is an actively traded market for UMC common stock in Taiwan, the shares are not traded in the United States and are subject to many of the same risks as foreign currency in addition to the risks of a company subject to the fluctuations of the semiconductor industry. Continued decreases in the value of our holdings in UMC and Tower may require us to liquidate our holdings faster than we anticipate and result in less cash available for our continued operations. For example, as of March 31, 2005, a 10% decrease in the share price of UMC common stock would result in a $7.8 million decrease in working capital.

      We believe that our current cash, cash equivalents, short-term investments and future cash provided by operations will be sufficient to fund our needs for at least the next twelve months. However, our business has used cash over the last several years and, to the extent we have the ability to do so, we plan to invest in our operations in India. Also, the value of our short-term investments in marketable securities, especially our holdings in UMC and Tower, has declined substantially in value in recent quarters and, as we have a limited ability to sell these securities, they may continue to decline in value in the future. Additionally, we are currently the subject of an audit by the Internal Revenue Service with respect to fiscal and tax years 1999 through 2002. For those years under review we received tax refunds of approximately $32.3 million. At this stage of the audit, the IRS has informed us that there is a high likelihood that certain positions we have taken will be disallowed; however, we believe that it is too early to determine the impact on us of the resolution of this audit. In order to finance general corporate needs, as well as strategic acquisitions and investments in research and development and other general corporate needs, we may rely on the debt and equity markets to provide liquidity. Historically, we have been able to access the debt and equity markets, but this does not necessarily guarantee that we will be able to access these markets in the future or on terms that are acceptable to us. The availability of capital in these markets is affected by several factors, including geopolitical risk, the interest rate environment and the condition of the economy as a whole. In addition, our own operating performance, capital structure and expected future performance may impact our ability to raise capital. If our operating performance falls below expectations, if our short-term investments in marketable securities continue to decrease in value or if there is an adverse determination with respect to the audit, we may have difficulties meeting our longer-term cash needs.

      Our net loss was $49.8 million, or $1.41 per share for fiscal 2005, compared to a net loss of $19.4 million, or $0.55 per share for fiscal 2004 and a net loss of $106.0 million, or $2.85 per share, for fiscal 2003.

      The SEC has issued Financial 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 our 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.

Revenue Recognition

      We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collection is reasonably assured. Collection is not deemed to be reasonably assured if customers receive extended payment terms.

      As we do not have any post-sales obligations or customer acceptance criteria after shipment, product revenue is generally recognized upon shipment of product to customers. We offer our customers a standard warranty for defective parts, and we record an allowance for warranty costs in the period in which the revenue is recorded.

      We offer certain distributor rights of return in the form of stock rotation rights. These rights allow the distributor to return products purchased from us having value up to a contracted fixed percentage of the prior quarter’s shipments to that distributor.

      We have established reserves for warranty claims, rights of returns and allowances on product sales, which are recorded in the same period in which the related revenue is recorded. These provisions are based on estimates using historical sales returns, warranty costs, analysis of credit memo data and other known factors, and these estimates are reviewed periodically to determine if recent actual data deviate from historical trends. If we made different judgments or utilized different estimates then material differences in the amount of our reported revenue may result. Actual returns could differ from these estimates.

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. We recorded pretax, inventory charges of $9.3 million, $2.9 million and $6.3 million during fiscal 2005, fiscal 2004 and fiscal 2003, respectively.

Marketable Securities

      Marketable securities held by Alliance Semiconductor are valued at market prices with unrealized gains or losses recognized in other comprehensive income (loss) in the balance sheet. However, management evaluates our investment in marketable securities for potential “other-than-temporary” declines in value. Such evaluation includes researching commentary from industry experts, analysts and other companies, current and

forecasted business conditions and any other information deemed necessary in the evaluation process. During the fourth quarter of fiscal 2005, we recorded a pretax, non-operating write-down on our short-term investment in Tower ordinary shares of $6.1 million based on 57% decrease in the share price during the last two quarters of fiscal 2005. We also recorded a write-down on our long-term investment of Tower ordinary shares of $10.6 million. We did not record any write-downs in the fair value of our marketable securities during fiscal 2004. We recorded pretax, non-operating write-downs of $673,000 and $16.2 million during the second and third quarters of fiscal 2003, respectively.

Valuation of Alliance Ventures and Solar Venture Investments

      We enter into certain equity investments for the promotion of business and strategic objectives. Our policy is to value these investments at our historical cost. In addition, our policy requires us to periodically review these investments for impairment. For these investments, an impairment analysis requires significant judgment, including an assessment of the investees’ financial condition, viability and valuation of subsequent rounds of financing and the impact of any contractual preferences, as well as the investees’ historical results, projected results and prospects for additional financing. If the actual outcomes for the investees are significantly different from our estimates, our recorded impairments may be understated, and we may incur additional charges in future periods. As a result of management’s analysis of our venture investments, we recorded pretax, non-operating impairment charges related to Alliance Ventures of $2.7 million, $5.5 million and $19.0 million fiscal 2005, 2004 and 2003, respectively. We also recorded pretax, non-operating impairment charges related to Solar Venture Partners of $473,000, $300,000 and $5.8 million during fiscal 2005, 2004 and 2003, respectively.

      At March 31, the percentage of net revenue represented by certain line items in our consolidated statements of operations are set forth in the table below:

      At March 31, net revenue by product line consisted of the following (in thousands, except percentage data):

      In fiscal 2005, our net revenue decreased by $3.1 million, or 12%, to $23.6 million from $26.7 million in fiscal 2004. This decrease was due to a $6.1 million decrease in revenue from Memory products and a $3.0 million increase in revenue from our Analog and Mixed Signal and System Solutions in our Non- Memory Segment products. Revenue generated by our System Solutions business unit resulted primarily from products incorporating technology from a perpetual, royalty-free API license purchased during fiscal 2003. The decrease in Memory revenue resulted from a decrease in unit sales of 31% combined with a decrease in average selling prices (“ASPs”) of 11%. Our net revenue in fiscal 2004 increased by $8.1 million, or 44%, to $26.7 million from $18.5 million in fiscal 2003 due to a 35% increase in unit volume and a 6% decrease in ASPs. This increase was primarily due to an increase in Memory product revenue.

      Our SRAM net revenue for fiscal 2005 was $10.2 million, or approximately 43% of net revenue, compared to $11.6 million, or approximately 44% of net revenue, in fiscal 2004. This represents a decrease of $1.4 million, or 12%, from fiscal 2004, and resulted from an 8% decrease in unit sales combined with a 4% decrease in ASPs. During fiscal 2005, our megabits shipped decreased by 28%, compared to fiscal 2004, while our ASP per megabit increased by 22% resulting in an overall decrease in SRAM revenue of 12%. SRAM net revenue increased by $4.0 million, or 53%, in fiscal 2004 as compared to fiscal 2003. During fiscal 2004, we experienced higher unit volume shipments of higher density asynchronous SRAM products and initial volume shipments of synchronous SRAM products, both of which generally carry higher ASPs on a per unit basis than do lower density products. Lower density products comprised a greater percentage of unit shipments during fiscal 2003. As a result, our ASP on a per unit basis increased 9% in fiscal 2004 from fiscal 2003. During fiscal 2004, our megabits shipped increased 92% from fiscal 2003 and ASPs per megabit shipped decreased 21% which resulted in an overall increase in SRAM revenue of 53%.

      Our DRAM net revenue for fiscal 2005 was $1.6 million, or approximately 7% of net revenue, compared to $6.3 million, or approximately 23% of net revenue, in fiscal 2004. This represented a decrease of $4.7 million or 75% from fiscal 2004 and resulted from a 69% decrease in unit sales combined with a 20% decrease in ASPs. In fiscal 2004, DRAM net revenue decreased by 1% compared to fiscal 2003 due to a 28% decrease in unit sales combined with a 37% increase in ASPs. DRAM net revenue for fiscal 2003 was $6.3 million, or approximately 34% of net revenue. In fiscal 2004, we ceased developing new DRAM products. Currently DRAM product revenue is derived solely from supplying legacy DRAM products to existing customers. Our DRAM revenue will eventually decline to $0.

      Our Analog and Mixed Signal net revenue for fiscal 2005 was $7.3 million, or approximately 31% of net revenue, compared to $4.3 million, or approximately 16% of net revenue in fiscal 2004. This represents an increase of approximately $3.0 million in net revenue from fiscal 2004 and resulted from a 128% increase in

unit sales combined with a 25% decrease in ASPs. Unit volumes tend to be greater in this business unit as the CPU Supervisors product line generates relatively large unit volumes at relatively low ASPs. Analog and Mixed Signal net revenue for fiscal 2003 was $2.9 million, or 16% of net revenue.

      Our System Solutions net revenue for fiscal 2005 was $4.5 million, or approximately 19% of net revenue, compared to $4.5 million, or approximately 17% of total revenue for fiscal 2004. Revenue decreased by less than 1% in fiscal 2005 compared to fiscal 2004 resulting from a 16% increase in unit sales offset by a 14% decrease in ASPs. System Solutions net revenue for fiscal 2003 was $1.6 million, or 9% of net revenue. At March 31, net revenue by geographic location, which is based on the customer’s ship to country location, was as follows (in thousands):

      International net revenue in fiscal 2005 was $15.4 million, or approximately 65% of net revenue. This was a decrease of approximately 14% from fiscal 2004. International net revenue in fiscal 2004 increased by 42% to $17.9 million from $12.6 million in fiscal 2003. International net revenue is derived mainly from customers in Asia and Europe. Net revenue from Asia accounted for approximately 49% and Europe accounted for 13% of net revenue during fiscal 2005. Our Analog and Mixed Signal revenues comprised a larger percentage of net revenue in fiscal 2005, compared to fiscal 2004, with a large portion of the revenue attributed to products shipped to Taiwan and the rest of the Asia region.

      Generally, the markets for our products are characterized by volatile supply and demand conditions, numerous competitors, rapid technological change, and product obsolescence. These conditions could require us to make significant shifts in our 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 our suppliers, lower than anticipated wafer manufacturing yields, lower than expected throughput from assembly and test suppliers, and less than anticipated demand and reduced selling prices. The occurrence of any problems resulting from these risks could have a material adverse effect on our results of operations.

      Our gross loss for fiscal 2005 was $2.6 million, or 11% of net revenue. Our gross profit for fiscal 2004 was $5.8 million and the gross loss for fiscal 2003 was $21.2 million, which represents 22% and 115% of net revenue, respectively. During fiscal 2005 our gross margin was benefited by $9.8 million, or 42%, through the sale of previously reserved inventory. During fiscal 2004, our gross margin was benefited by $14.9 million, or 56%, through the sale of previously reserved inventory. We will continue to receive gross profit and gross margin benefits as we sell inventory which had been previously written down to a lower cost basis. As of March 31, 2005, we have approximately $13.3 million of Memory products that have been written to $0. We also incurred inventory write-downs of $9.3 million, $2.9 million, and $6.3 million during fiscal 2005, 2004, and

2003, respectively, as a result of a reduction in end user demand and severe downward pricing pressure for Memory products. No inventory write-downs were recorded for Non-Memory, Analog and Mixed Signal or System Solutions products, in fiscal 2005.

      At March 31, gross profit (loss) by reportable segments was as follows (in thousands, except percentage data):

      The gross loss, excluding the impact of inventory write-downs and sale of previously reserved products, was $5.9 million, or 25% of net revenue during fiscal 2005. This compares to a gross loss of $15.0 million, or 56% of net revenue, during fiscal 2004 and a gross loss of $50.6 million or 273% of net revenue, during fiscal 2003. This reduction in gross loss, excluding the impact of inventory write-downs, is due to a product mix with increased volume in higher margin Analog and Mixed Signal and System Solutions products, along with a 75% reduction in DRAM net revenue.

      During the second quarter of fiscal 2004, we began volume production of synchronous SRAM products and experienced lower than expected yields resulting in higher than anticipated costs for certain products. There can be no assurance that we will be able to increase yields to an acceptable level. Failure to do so could result in a material adverse effect on our gross profit in future periods.

      During the third quarter of fiscal 2003 we wrote off $9.5 million of prepaid wafer credits resulting from our investment in Tower. We had determined that the value of these credits would not be realized given our sales forecast of products scheduled to be manufactured at Tower. There can be no assurances that our investment in Tower wafer credits will not continue to decline in value.

      We are subject to a number of factors that may have an adverse impact on gross profit, including the availability and cost of products from our suppliers; increased competition and related decreases in unit; changes in the mix of product sold; and the timing of new product introductions and volume shipments. In addition, we may seek to add 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 our cost of revenue in future periods.

      At March 31, research and development (“R&D”) expense as a percentage of net revenue was calculated as follows (in thousands, except percentage data):

      At March 31, R&D expense by reportable segments was as follows (in thousands, except percentage data):

      R&D expense consists primarily of salaries and benefits for engineering design personnel, equipment and software depreciation and amortization, facilities costs, masks, tooling, prototype wafers and finished goods, equipment and software maintenance, consulting and other outside services and license fees.

      R&D expense was $19.6 million, or 83% of net revenue for fiscal 2005, as compared to $24.7 million, or 92% of net revenue for fiscal 2004 and $22.9 million, or 124% of net revenue for fiscal 2003. The decrease in R&D spending from fiscal 2004 to fiscal 2005 is driven primarily by reduced impact of the consolidation of two investee companies. One of these companies was written to $0 and one of these companies was sold during fiscal 2004. The other drivers of this expense reduction were reduced compensation for development personnel and reduced spending on masks and related product tooling. The reduction in compensation was due to a reduction in domestic headcount combined with a reduction in variable compensation. The decrease in R&D expense as a percentage of net revenue from fiscal 2004 to 2005 is due to the aforementioned spending decreases along with a 12% decrease in net revenue. The increase in spending from fiscal 2003 to 2004 was due primarily to increased facilities costs from the acquisition of Chip Engines, which supplements our System Solutions business unit in the Non-Memory segment, increased depreciation as the result of additional CAD software investments, and the amortization of technology licenses.

      We believe that investments in R&D are necessary to remain competitive in the marketplace. As indicated by segment allocation in fiscal 2005 and 2004, we devoted greater R&D resources to the value-added products in our non-memory segment. R&D expense may increase in absolute dollars in future periods due to additional personnel we may acquire as we attempt to diversify our product portfolio through the acquisition of new companies and/or technologies. We plan to expand our operations in India with increased investment in engineering and development resources over the next several quarters to the extent that we have the resources to do so. Such additional investment could have an adverse impact on our liquidity in future quarters.

      The annual impairment test performed as of March 31, 2004, indicated that goodwill was not impaired; however, the annual impairment test performed as of March 31, 2005, indicated goodwill to be impaired primarily due to lower than previously expected revenues and, accordingly, we recorded a pretax operating charge of approximately $1.5 million during the fourth quarter of fiscal 2005 related to the PulseCore acquisition completed in fiscal 2002. As a result of this impairment, the carrying value of goodwill is $0 as of March 31, 2005. We recorded this impairment during the fourth quarter of fiscal 2005 as we had: (a) one full year of unit financial performance to aid us in our analysis and (b) we had completed our business and financial plans for the next fiscal year which gave us additional visibility into the cash flows attributable to this operating unit.

      At March 31, selling, general and administrative (“SG&A”) expense as a percentage of net revenue was calculated as follows (in thousands, except percentage data):

      At March 31, SG&A expense by reportable segments was as follows (in thousands, except percentage data):

      SG&A expense includes salaries and benefits for sales, support, marketing, administrative and executive personnel, insurance, audit and tax preparation costs, legal fees, facilities costs, maintenance, equipment and software depreciation and amortization, commissions, outside marketing costs and travel.

      SG&A expense in fiscal 2005 was $12.5 million, or 53% of net revenue, compared with $15.6 million, or 59% of net revenue in fiscal 2004. The decrease in absolute dollars from fiscal 2004 to 2005 was due a reduction in legal fees and the elimination of the consolidation of two investee companies. One of these investee companies was written to $0 and the other one was sold during fiscal 2004. The decrease in SG&A expense from fiscal 2003 to 2004 was due to lower facilities expense related to the consolidation of the System Solutions and Analog and Mixed Signal offices in the United States. SG&A expense as a percentage of revenue decreased by 6 percentage points in fiscal 2005, compared to fiscal 2004, due to a 20% decrease in expense offset by a 12% decrease in net revenue. As indicated by the segment allocation, we have been incurring greater SG&A expense in our Non-Memory segment as Analog and Mixed Signal and System Solutions products are newer products and require more resources to sell and support these products.

      SG&A expense may increase in absolute dollars and may fluctuate as a percentage of net revenue in the future due to changes in commission expense, which moves up or down depending on the level of net revenue, directors’ and officers’ insurance premiums and administrative costs related to complying with the requirements of recent corporate governance reforms.

      At March 31, gain/(loss) on investments consisted of the following (in thousands):

      As of June 7, 2005, we hold 119.1 million shares of UMC.

      We recorded the following gains and losses during fiscal 2005:

      We recorded the following gains and write-downs during fiscal 2004:

      We recorded the following gains, losses and write-downs during fiscal 2003:

      Marketable securities held by us have experienced significant declines in their market value primarily due to the downturn in the semiconductor and technology sectors and general market conditions. Management evaluates its investments in marketable securities for potential “other-than-temporary” declines in their value. Such evaluations of our investments include researching commentary from industry experts, analysts and other companies.

      During the fourth quarter of fiscal 2005, we recorded a write-down on our investment in Tower ordinary shares of approximately $16.7 million due to a 57% decrease in the share price of Tower ordinary shares during the last two quarters of fiscal 2005. We believe that this decrease is of such duration and magnitude that it is

an other than temporary decrease. At September 30, 2004, the market share price for Tower ordinary shares exceeded the carrying value share price for both our short-term and long-term investment in Tower shares.

      During the third quarter of fiscal 2005, the share price initially decreased by 53% during the quarter prior to recovering and ending the quarter down by 40%, compared to the end of the second quarter of fiscal 2005. Given the fact that there had been some recovery in the share price during the latter part of third fiscal quarter, we determined that the share price decrease was not an “other-than-temporary” decrease and did not record a write-down during the third quarter of fiscal 2005. Subsequently the share price decreased another 29% during the fourth quarter of fiscal 2005. At the time, we had no reason to believe that the value of our investment in Tower would recover in the foreseeable future. This decrease, combined with the fact that Tower was not operating at full capacity and was and continues to be heavily leveraged, led us to determine that the reduction in share price was “other-than-temporary” as of March 31, 2005.

      During the third quarter of fiscal 2003, we recorded an other than temporary write-down of $14.1 million in our investment in Tower shares as we determined at that time that the duration and magnitude of the decrease in the share price was such that a recovery in the share price was not imminent. The share price had decreased by 41% from the end of the first quarter of fiscal 2003 to the end of the third quarter of fiscal 2003. We recorded pretax, non-operating losses of approximately $673,000 and $16.2 million during the third quarter of fiscal 2003 and the second quarter of fiscal 2003, respectively, on our investments in Vitesse and Chartered common stock. These write-downs were based on the continuing decrease in the investments’ stock prices compared to the prices used to record the investment along with the expectation that stock prices would not recover in the near term due to unfavorable business conditions for the companies specialty and the semiconductor industry in general.

      During the second quarter of fiscal 2002, we recorded a pretax, non-operating loss of approximately $250.9 million on our investment in UMC common stock. Specifically, this write-down was the result of a 52% decrease in the price of UMC shares between the end of fiscal 2001 and the end of second quarter of fiscal 2002. This decrease was the result of deteriorating conditions in the semiconductor industry and the general economy combined with the negative impact on worldwide equity markets after the events of September 11, 2001. At the time, we had no reason to believe that the value of our investment in UMC would recover in the foreseeable future and therefore determined that the investment was other than temporarily impaired and that we should record a write-down on our investment in UMC shares.

      We also review the carrying values of our investments in Alliance Ventures and Solar Venture Partners investee companies for potential impairments. As many of these companies are in the development stage, these reviews include future market and revenue generating potential, analysis of current and future cash flows, and ongoing product development and future financing activities. As a result of these reviews, we recorded write-downs in our investments in Alliance Ventures and Solar Ventures investee companies of $3.2 million, $5.8 million, and $24.8 million during fiscal 2005, 2004 and 2003, respectively.

      At March 31, write-downs of marketable securities and venture investments consisted of the following (in thousands):

      Several of the Alliance Ventures and Solar Venture Partners investments are accounted for under the equity method due to our ability to exercise significant influence on the operations of investees resulting from ownership interest and/or board representation. The equity in the losses of the investees of Alliance Ventures and Solar Venture Partners was approximately $16.9 million, $15.4 million and $16.6 million for fiscal 2005, 2004 and 2003, respectively.

      The majority of our investments in venture funds are accounted for under the equity method of accounting. The following summarizes key balance sheet and statement of operations information relating to the underlying investment portfolio for equity method investments. The companies have been segregated between those companies in which our voting interest is a) less than 20% of the voting shares and b) greater than or equal to 20% of the voting shares. All amounts are aggregated for all equity method investments at the respective fiscal year-end (in thousands, except number of companies):

Summary Financial Data

      We review our share of the underlying assets of the companies in which we invest, and if our investment is greater than the underlying assets, we generally allocate the excess to goodwill, as most of our investee companies are in their early formation stage.

      We also performed an analysis on individual venture investee companies in accordance with FIN 46 “Consolidation of Variable Interest Entities” (“FIN 46”). FIN 46 requires certain variable interest entities (“VIE”) 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. As of March 31, 2005, we had one investee company which was classified as a VIE and for which we were the primary beneficiary. The impact of consolidation of this VIE was not material to our consolidated financial statements.

      Other expense, net comprises interest income from short-term investments, foreign withholding tax, interest expense on short- and long-term obligations, losses from the disposal of fixed assets and bank fees. Other expense, net was approximately $1.6 million, $7.9 million and $4.6 million in fiscal 2005, 2004 and 2003, respectively. The decrease in other expense, net, as compared to fiscal 2004, is due primarily to decreases in foreign tax expense from $5.2 million to $1.4 million, a decrease in interest expense of $1.1 million and a decrease in bank fees from 1.3 million to 0.3 million The decreases in interest expense and bank fees are due primarily to the payoff of the Chinatrust loan which was paid back in full on March 2, 2004. The increase in other expense, net in fiscal 2004, as compared to fiscal 2003, was due primarily to an increase in foreign tax expense from $1.0 million to $5.2 million offset by a decrease in interest expense from $2.2 million to $1.1 million. We also recorded losses of $54,000 and $79,000 from the disposal of fixed assets during fiscal 2004 and 2003, respectively.

      In fiscal 2002, on April 1, 2001, we adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” (“SFAS 133”), as amended by SFAS 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 SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 133.” In the fourth quarter of fiscal 2001, we entered into two derivative instruments to hedge our investment in Vitesse Semiconductor common stock. We

designated these 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 in the quarter ended June 30, 2001.

      Our effective tax rate for fiscal 2005, 2004 and 2003, was 25%, 41.2% and 13.5%, respectively.

      During fiscal 2005, 2004 and 2003, we recorded a benefit for income taxes of approximately $16.7 million, $14.1 million and $17.1 million. Prior to fiscal 2005, we maintained a valuation allowance against long-term deferred tax assets resulting from the long-term investments in Alliance Ventures and Tower Semiconductor. During 2005, based on the available objective evidence and the recent history of losses and forecasted taxable losses, management concluded that all of the Company’s net deferred tax assets should be subject to a valuation allowance.

      In addition to the factors discussed elsewhere in this Annual Report on Form 10-K, the following are important factors which could cause actual results or events to differ materially from those contained in any forward looking statements made by or on behalf of Alliance Semiconductor.

We may have difficulties meeting our cash needs.

      We believe that our current cash, cash equivalents, short-term investments and future cash provided by operations will be sufficient to fund our needs for at least the next twelve months. However, our business has used significant cash over the last several years, and the value of our short-term investments in marketable securities, especially our holdings in UMC and Tower, have declined substantially in value in recent quarters. We have limited ability to sell these securities, and they may continue to decline in value in the future. In addition, we are currently the subject of an audit by the Internal Revenue Service with respect to fiscal and tax years 1999 through 2002. For those years under review we received tax refunds of approximately $32.3 million. At this stage of the audit, the IRS has informed us that there is a high likelihood that certain positions we have taken may be disallowed. We believe that it is too early to determine the impact of the resolution of this audit. If our operating performance falls below expectations, if our short-term investments in marketable securities continue to decrease in value or if there is an adverse determination with respect to the audit, we may have difficulties meeting our cash needs. In order to finance general corporate needs, as well as strategic acquisitions and investments in research and development, we may rely on the debt and equity markets to provide liquidity. Historically, we have been able to access the debt and equity markets, but this does not necessarily guarantee that we will be able to access these markets in the future or on terms that are acceptable to us. The availability of capital in these markets is affected by several factors, including geopolitical risk, the interest rate environment and the condition of the economy as a whole. In addition, our own operating performance, capital structure and expected future performance may impact our ability to raise capital. In the event we are not able to meet our cash needs and raise additional capital, our business operations will be materially and adversely affected.

The majority of our assets consist of securities that we have a limited ability to sell and which have experienced significant declines in value.

      We have held, and continue to hold, significant investments in securities of which we have limited ability to dispose. These assets may experience decline in value as a result of factors beyond our control, which may adversely affect our operating results and financial condition. Our investment in UMC, a publicly traded company in Taiwan, represents our largest single asset. UMC common stock has been subject to significant fluctuations in value. For example, the price of UMC common stock decreased by approximately 30% during fiscal 2005 and may continue to decline in value in the future. Additionally, if we were forced to liquidate a significant portion of our UMC common stock, the share price received on such a sale may be negatively impacted by the size of such a sale given our ownership position. Further, UMC shares of common stock are

not tradable in the United States and are subject to many of the same risks associated with foreign currency. Contractual restrictions also limit our ability to transfer approximately 70% of our investment in Tower until January 2006. Tower stock has been subject to significant fluctuations in value. For example, during fiscal 2005, the price of Tower’s ordinary shares decreased by approximately 78% and the price of Tower’s ordinary shares may continue to decline in value in the future. During the third quarter of fiscal 2003, we recorded a pretax, non-operating loss of $14.1 million on our long-term investment in Tower shares. Our investment in Tower is subject to inherent risks, including those associated with certain Israeli regulatory requirements, political unrest and financing difficulties, which could harm Tower’s business and financial condition. Further, through Alliance Venture Management’s investment funds and Solar Venture Partners, we invest in start-up companies that are not traded on public markets. These types of investments are inherently risky and many venture funds have a large percentage of investments decrease in value or fail. During the past several years, many of our investments in securities experienced significant declines in market value. For example, during fiscal 2005, we wrote down one of our Alliance Ventures investments and one of our Solar investments and recognized pretax, non-operating losses of approximately $2.7 million and $473,000, respectively. In fiscal 2004, we wrote down nine of our Alliance Ventures’ investments and two of our Solar investments and recognized pretax, non-operating losses of approximately $5.8 million. Further, we wrote down several of our Alliance Venture Management and Solar investments recognizing pretax, non-operating losses of approximately $24.8 million for fiscal 2003. We cannot be certain that our investment in these securities will not decline further in value. Further declines in our investments can have a material, adverse effect on our operating results and financial condition.

Our financial results could be adversely impacted if we fail to successfully develop, introduce, and sell new products which we have had limited success in doing so to date.

      Like many semiconductor companies, which operate in a highly competitive, dynamic 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. Although we have recently developed and sold Analog and Mixed Signal and System Solutions products to supplement our traditional Memory product offerings, we have a limited operating history in these markets, we have limited product offerings in these markets, and we have had limited success with these products and otherwise developing and selling new products. In fiscal 2005, we wrote down certain of our inventory, recognizing pretax charges of approximately $9.3 million. In addition, our performance during fiscal 2005, 2004 and 2003 was generally characterized by weak demand for our Memory products. Although ASPs of our SRAM and DRAM products, and certain of our other products, have generally declined over time, the selling prices for such products are very sensitive to supply and demand conditions in our target markets. In our most recent quarter we continued to experience declines in the average selling price of most of our SRAM products and we expect the ASPs for most of our SRAM and DRAM products to decline in the future, principally because of increased market competition and an increased supply of competitive products in the market. We no longer develop DRAM products and revenue is derived solely from supplying legacy DRAM products to existing customers. As a result, we expect revenue from DRAM products to comprise a significantly smaller portion of overall revenue in fiscal 2006 than in fiscal 2005, and on a quarter-to-quarter basis. We expect our DRAM revenue to eventually decline to $0. In fiscal 2005, revenue from our sale of DRAM products was approximately $1.6 million, compared to $6.3 million in fiscal 2004. Factors that may affect our ability to develop and sell new products includes:

We are affected by a general pattern of product price fluctuations, which has harmed, and may continue to harm, our business.

      The markets for our 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 ASPs. Although we have recently experienced increased demand for certain of our new products, our overall business during fiscal years 2005, 2004 and 2003 has generally been characterized by a fundamental slowdown in demand for our products. More specifically, for several years our performance generally has been adversely affected by severe declines in end user demand for our Memory products and ASPs of all of our products, and we expect this trend to continue in the future principally because of increased market competition and an increased supply of competitive products in the market. Declining ASPs will adversely affect our gross profit and gross margin. Accordingly, our ability to maintain or increase revenue and gross margin will be highly dependent on our ability to increase unit sales volume, reduce the cost per unit of our existing products, and to successfully develop, introduce and sell new products. We cannot be certain that we will be able to increase unit sales volumes of existing products, develop, introduce and sell new products or significantly reduce our cost per unit. We also cannot be certain that even if we were to increase unit sales volumes and sufficiently reduce our costs per unit, we would be able to maintain or increase revenue or gross margin. For example, in the last year we wrote down certain of our inventory, consisting principally of SRAM products, recognizing pretax charges of approximately $9.3 million. In fiscal 2004, we decided to discontinue development of new DRAM products. Our existing DRAM revenue is derived from selling legacy DRAM products to our existing customer base. We expect that revenue from DRAM products will comprise a significantly smaller percentage of overall revenue in fiscal 2005, and will eventually decline to $0.

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, we applied to the SEC for an order under Section 3(b)(2) of the Investment Company Act of 1940 confirming our non-investment company status. In March 2002, the staff of the SEC informed us that the staff could not support the granting of the requested exemption. Since that time, we have been working to resolve our status under the Act. We cannot be certain that the SEC will agree that we are not currently deemed to be an unregistered investment company in violation of the Act. If the SEC takes the view that we have been operating and continue to operate as an unregistered investment company in violation of the Act, and does not provide us with a sufficient period to either register as an investment company or divest ourselves of investment securities and/or acquire non-investment assets, we may be subject to significant potential penalties. In the absence of exemptions granted by the SEC (which are discretionary in nature and require the SEC to make certain findings), we would be required either to register as a closed-end investment company under the Act, or, in the alternative, to divest ourselves 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. In an effort to comply with the Act, we have divested ourselves of certain securities, ceased acquiring interests in any new companies through Alliance Ventures and taken certain additional actions; nonetheless, we have no assurance that the SEC will grant us an exemption under the Act. In the event we are required to register as a closed-end investment company under the Act, or divest ourselves of sufficient investment securities and/or acquire sufficient non-investment assets so as not to be regarded as an investment company under the Act, our results of operations and financial condition may be materially, adversely affected.

Failure to maintain effective internal controls could have a material adverse effect on our business, operating results and stock price.

      Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to include an internal controls report of management’s assessment of the effectiveness of our internal controls as part of our Annual Report on Form 10-K. Our independent registered public accounting firm is required to attest to, and report on, our management’s assessment. In light of the fact that management has concluded that our internal control over financial reporting was not effective as of March 26, 2005, and our independent registered public accounting firm has issued an adverse opinion on our internal control over financial reporting, we have

dedicated significant resources to remediate the material weaknesses that have rendered our internal control ineffective. Nonetheless, there is no assurance that we will be able to remediate these weaknesses. Even after we have remediated these weaknesses, in the course of future testing and documentation, certain deficiencies may be discovered that will require additional remediation, the costs of which could have a material adverse effect on our results of operations. Separately, our independent registered public accounting firm may not agree with our management’s assessment and may send us a deficiency notice that we are unable to remediate on a timely basis, or we may not be able to retain our independent registered public accounting firm with sufficient resources to attest to and report on our internal control. Moreover, if we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time our management may continue to conclude that we do not have effective internal controls over financial reporting in accordance with Section 404. In the future, if we are unable to assert that our internal control over financial reporting is effective, if our independent registered public accounting firm is unable to attest that our management’s report is fairly stated, if our independent registered public accounting firm is unable to express an opinion on our management’s evaluation or on the effectiveness of the internal controls, or if our independent registered public accounting firm expresses an adverse opinion on our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which in turn could have an adverse effect on our stock price. Additionally, any material weakness in internal control could result in a material misstatement in future financial statements.

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

      We conduct a significant and growing portion of our business internationally. For example, international net revenue, principally from customers in Europe and Asia, constituted approximately 65% of our net revenue in fiscal 2005 and 67% of our net revenue in fiscal 2004. All of our foundries and a majority of our assembly and test subcontractors are abroad, and we conduct significant operations in India, which we expect to continue to expand significantly over the next several years. Accordingly, our international operations are subject to a number of risks, including:

      We cannot be certain that such factors will not adversely impact our results of operations in the future or require us to modify our current business practices.

We rely on third parties to manufacture our products and problems in their performance can seriously harm our financial results.

      We currently rely on independent foundries, including assembly and test facilities, all of which are located overseas, to manufacture all of our products. Reliance on these foundries involves several risks, including:

      In addition, reduced yields in the manufacturing process of our products may adversely affect our operating results. Semiconductor manufacturing yields are a function of both our design technology and a foundry’s manufacturing process technology. Low yields may result from design errors or manufacturing

failures. Yield problems may not be determined or improved until an actual product is made and can be tested. As a result, yield problems may not be identified until the wafers are well into the production process. The risks associated with yields are even greater because we rely exclusively on offshore foundries and assembly and test facilities, which increase the effort and time required to identify, communicate and resolve manufacturing yield problems. If the foundries cannot achieve planned yields, we will experience higher costs and reduced product availability, which could harm our business, financial condition and results of operations.

      Although we continuously evaluate sources of supply and may seek to add foundry capacity, we cannot be certain 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 our results of operations or require us to modify our current business practices. We also rely on offshore subcontractors for die assembly and testing of products, and are subject to the risks of disruption in adequate supply of such services and quality problems associated with such services.

We must build products based on demand forecasts; if such forecasts are inaccurate, we may incur significant losses, and we have taken inventory write-downs recently.

      The cyclical nature of the semiconductor industry periodically results in shortages of advanced process wafer fabrication capacity such as we have experienced from time to time. Our ability to maintain adequate levels of inventory is primarily dependent upon us obtaining sufficient supply of products to meet future demand, and inability to maintain adequate inventory levels may adversely affect our relations with our customers. In addition, we must order products and build inventory substantially in advance of product shipments, and there is a risk that because demand for our products is volatile and subject to rapid technology and price change, we will forecast incorrectly and produce excess or insufficient inventories of particular products. This inventory risk is heightened because certain of our key customers place orders with short lead times. Our customers’ ability to reschedule or cancel orders without significant penalty could adversely affect our liquidity, as we may be unable to adjust our purchases from our independent foundries to match such customer changes and cancellations. We have in the past produced excess quantities of certain products, which have had a material adverse effect on our results of operations. For example, in fiscal 2005 we wrote down certain of our inventory recognizing pretax charges of approximately $9.3 million. In fiscal 2004 and 2003, we recorded pretax charges totaling approximately $2.9 million and $6.3 million, respectively, primarily to reflect such excess and a decline in market value of certain inventory. We cannot be certain that in the future we will not produce excess quantities of any of our products. We also recorded a write-down of our investment in Tower wafer credits of $9.5 million during the second quarter of fiscal 2003. We also cannot be certain that additional write-downs of wafer credits will not occur in future periods. To the extent we produce excess or insufficient inventories of particular products, our results of operations could be adversely affected.

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

      We face intense competition, and many of our 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 we do, any of which factors may place such competitors and potential competitors in a stronger competitive position than us. In addition, the intense competition we face could result in pricing pressures, reduced product revenue, reduced margins or lost market share, any of which could harm our operating results and cause our stock price to decline. We have also recently started selling Analog and Mixed Signal and System Solutions products. The markets for these products include additional competitors, such as Cypress Semiconductor Corporation, ICS Incorporated, Integrated Silicon Solutions, Inc., Maxim Integrated Products, PLX Technology Inc., Pericom Semiconductor Corporation, Samsung Corporation, Toshiba Corporation, and other U.S., Japanese, Korean and Taiwanese manufacturers. Because of our limited operating history in these markets, we may have difficulties competing with more established companies in these markets. Our ability to compete successfully in the rapidly evolving semiconductor technology industry depends on many factors, including:

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 us may increase the price charged to us for the services they provide, to the point that we may not be able to profitably have our products produced by such suppliers. We believe capacity utilization at our suppliers may increase in the future. Typically, if capacity utilization is high for an extended period of time, we will experience increased prices from our suppliers. We cannot be certain that such increases will not occur in the near future. The occurrence of such price increases could have a material adverse affect on our results of operations. In addition, the interruption of our sources of raw materials could have a material adverse effect on our results of operations.

Our future results are likely to fluctuate and failure to meet financial expectations for any period may cause our stock price to decline.

      Our results of operations have historically been, and will continue to be, subject to fluctuations due to a variety of factors, including:

      As a result, we believe that period-to-period comparisons of our results of operations are not necessarily meaningful and one should not rely on these comparisons as indications of future performance. These factors, together with the fact that our expense is primarily fixed and independent of revenue in any particular period, make it difficult for us to accurately predict our revenue and operating results and may cause them to be below market analysts’ expectations in some future quarters, which could cause the market price of our stock to decline significantly.

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. These industry-wide fluctuations in demand have in the past seriously harmed our operating results and we have generally experienced, and expect to continue to experience in the future, declining ASPs for many of our products. If these conditions were to persist, a restructuring of operations, resulting in significant restructuring charges, may become necessary.

We face risks related to sales of our products.

      Sales to a small number of customers represent a significant portion of our revenue. In addition, our sales are generally made by standard purchase orders rather than long-term contracts, and as a result, we cannot predict if and when our customers will purchase additional products from us. Therefore, if we were to lose one of our major customers or experience any material reduction in orders from any of these customers, our revenue and operating results would suffer.

We may fail to successfully integrate businesses that we acquire.

      In the past, we have acquired other companies such as PulseCore and Chip Engines and we may continue to acquire additional companies in the future. Integrating businesses is expensive and time-consuming and it imposes a great strain on our 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 expense related to technology integration and the potential unknown liabilities associated with acquired businesses. If we fail to integrate these businesses successfully, our quarterly and annual results may be seriously harmed.

Our stock price may be volatile and could decline substantially.

      The market price of our common stock has fluctuated significantly in the past, will likely continue to fluctuate in the future and may decline. Fluctuations or a decline in our stock price may occur regardless of our performance. Among the factors that could affect our stock price, in addition to our performance, are:

      In the event our stock trades below the minimum bid price per share of at least $1.00 for thirty consecutive trading days, our stock may be subject to delisting from the NASDAQ National Market. A low stock price may trigger violation of other NASDAQ listing standards. Delisting from NASDAQ would adversely affect the trading price and limit the liquidity of our common stock and cause the value of an investment in our company to substantially decrease.

We are exposed to the risks associated with the slowdown in the U.S. and worldwide economy.

      Among other factors, in the past 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. We experienced a significant slowdown in customer orders across nearly all of our Memory product lines during fiscal years 2002 and 2003 and the first three quarters of fiscal 2004. In addition, we experienced corresponding decreases in revenue and average selling price across most of our product lines during fiscal years 2002 and 2003, and the first three quarters of fiscal 2004 and expect continued pressure on ASPs in the future. Additional restructuring of operations may be required, and our business, financial condition and results of operations may be seriously harmed, if economic conditions were to deteriorate or worsen.

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

      We usually ship more products 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 our quarterly results of operations to be more difficult to predict. Moreover, a disruption in our production or shipping near the end of a quarter could materially reduce our net sales for that quarter. Our reliance on outside foundries and independent assembly and testing houses reduces our ability to control, among other things, delivery schedules.

If we are unable to successfully protect our intellectual property through the issuance and enforcement of patents, our business and results of operations could be harmed.

      We protect our proprietary intellectual property through the filing of patents. We cannot be certain, however, that:

      If any of the above were to occur, our operating results could be adversely affected.

If we are unable to protect and maintain the ownership of intellectual property created by us, our business, and results of operations could be harmed.

      We rely primarily on a combination of license, development and nondisclosure agreements, trademark, trade secret and copyright law and contractual provisions to protect our other, non-patentable intellectual property rights. If we fail to protect these intellectual property rights, our licensees and others may seek to use our technology without the payment of license fees and royalties, which could weaken our competitive position, adversely affect our operating results and increase the likelihood of costly litigation. In addition, effective trade secret protection may be unavailable in certain foreign countries. Although we intend to continue to vigorously defend our intellectual property rights, if we are unsuccessful in doing so, our business and results of operations could be harmed.

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

      The semiconductor industry is characterized by frequent claims and litigation regarding patent and other intellectual property rights. We have from time to time received, and believe that we likely will in the future receive, notices alleging that our products, or the processes used to manufacture our products, infringe the intellectual property rights of third parties. In the event of litigation to determine the validity of any third-party claims, or claims against us for indemnification related to such third-party claims, such litigation, whether or not determined in favor of us could result in significant expense to us and divert the efforts of our technical and management personnel from other matters. In the event of an adverse ruling in such litigation, we 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.

Our operations could be severely harmed by natural disasters or other disruptions to the foundries at which we subcontract manufacturing.

      Our corporate headquarters located in the San Francisco Bay area is near major earthquake faults, and we are subject to the risk of damage or disruption in the event of seismic activity. In addition, we subcontract our wafer fabrication, assembly and testing to independent foundries. We have in the past experienced disruption of the operations at our foundries, and any future disruptions for any reason, including work stoppages, an outbreak of epidemic, fire, earthquakes, or other natural disasters could have a material adverse affect on our results of operations. We cannot be certain that any of the foregoing factors will not materially adversely affect our 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 operations.

Any guidance that we may provide about our business or expected future results may prove to be inaccurate.

      From time to time, we share our views in press releases or SEC filings, on public conference calls and in other contexts about current business conditions and our expectations as to potential future results. Predicting future events is inherently uncertain. Our analyses and forecasts have in the past and, given the complexity and volatility of our business, will likely in the future, prove to be incorrect. We cannot be certain that such predictions or analyses will ultimately be accurate, and investors should treat any such predictions or analyses with appropriate caution. Any analysis or forecast made by us that ultimately proves to be inaccurate may adversely affect our stock price.

We depend on third parties to transport our products.

      We rely on independent carriers and freight haulers to move our products between manufacturing plants and our customers. Any transport or delivery problems because of their errors or because of unforeseen interruptions in their activities due to factors such as strikes, political instability, terrorism, natural disasters and accidents could have a material adverse effect on our results of operations.

Compliance with changing regulation of corporate governance and public disclosure may result in additional expense.

      Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and NASDAQ National Market rules, are creating uncertainty for companies such as ours. These new or changed laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expense and a diversion of management time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, our reputation may be harmed.

We may be unable to attract and retain key personnel who are critical to the success of our business.

      We depend to a large extent on the continued contributions of our founders, N. Damodar Reddy, Chairman of the Board, our Chief Executive Officer and President, and his brother C.N. Reddy, our Executive Vice President for Investments and Director, whom we collectively refer to as the “Reddys”, as well as other officers, operational personnel and key design personnel, many of whom would be difficult to replace. In the last few years, a number of officers and design personnel left us to pursue various other opportunities. To

date, these departures did not have a material impact on our business, but future departures can cause the delay of some projects.

      In addition, we need to enhance our existing finance staff. In fiscal 2005, we did not maintain effective controls over our inventory and cost of goods sold accounts. Specifically, we did not have effective controls to adequately identify, document and analyze work-in-process and finished goods inventory held at third-party subcontractors or to determine the reserves for slow-moving and excess and obsolete inventory in accordance with GAAP. These control deficiencies have resulted in an audit adjustment to net inventory for the year ended March 26, 2005. Additionally, if not remediated, this control deficiency could result in a misstatement to the future financial statements.

      Our future success will depend on our ability to attract and retain qualified technical, management, and finance personnel for which competition is intense globally. The loss of either of the Reddys or design personnel could delay product development cycles or otherwise have a material adverse effect on our business. Additionally, limited human resources and untimely turnovers in the operational staff many result in difficulties in implementing our policies and procedures including those related to our internal controls. We are not insured against the loss of any of our key employees, nor can we assure the successful recruitment of new and replacement personnel.

      At March 31, 2005 we had approximately $2.4 million in cash and cash equivalents, a decrease of $3.7 million from March 31, 2004, and approximately $38.4 million in net working capital, a decrease of $55.0 million from approximately $93.4 million at March 31, 2004.

      We had short-term investments in marketable securities whose fair value was $82.4 million and $159.8 million at March 31, 2005 and March 31, 2004, respectively.

      During fiscal 2005, operating activities used cash of $27.6 million. This was primarily the result of a net loss of $49.8 million adjusted for non-cash charges of $45.4 million combined with the following changes in assets and liabilities:

      During fiscal 2004, operating activities used cash of $7.6 million. This was primarily the result of a net loss of $19.4 million adjusted for non-cash charges of $1.9 million, a decrease in net deferred tax liabilities of $8.9 million and an increase in inventory of $11.6 million, offset by an income tax refund of $32.4 million, an increase in accounts payable of $5.1 million and a decrease in related party receivables of $1.0 million. The increase in inventory during fiscal 2004 was due to sales forecasts being higher than the actual sales achieved during the year. During fiscal 2003, operating activities used $33.7 million. This was primarily the result of a net loss of $106.0 million adjusted for non-cash charges of $78.6 million and a decrease in tax payable and net deferred tax liabilities of $16.7 million, offset by a decrease in inventory of $10.4 million.

      Investing activities provided cash of $23.0 million during fiscal 2005. This is primarily the result of a sale of marketable securities for proceeds of $33.3 million, offset by purchases of Alliance Ventures and other investments of $8.9 million, property and equipment purchases of $764,000 and the purchase of non-exclusive technology licenses for $650,000. Proceeds from the sale of shares of UMC common stock provided $31.8 million of the $33.3 million in total proceeds. Investing activities provided cash of $49.2 million during fiscal 2004. This is primarily the result of sales of marketable securities for $80.5 million, partially offset by an

additional, contractual investment in Tower for $11.0 million, purchases of Alliance Ventures and other investments of $20.0 million, property and equipment purchases of $1.2 million, and the purchase of technology licenses for $430,000. During fiscal 2003, investing activities provided $71.6 million. This resulted from proceeds of marketable securities sales of $116.1 million offset by additional, contractual investments in Tower of $26.0 million, additional venture investments of $11.7 million, property and equipment purchases of $4.1 million and the purchase of a perpetual, royalty-free technology license of $3.2 million.

      Financing activities provided cash of $851,000 during fiscal 2005. This is primarily the result of the proceeds from the issuance of common stock of $884,000 offset by principal payments on lease obligations of $33,000. Financing activities used cash of $42.8 million during fiscal 2004. This is primarily the result of the repayment of short-term debt of $43.6 million. During fiscal 2003, financing activities used $54.1 million. This resulted from $38.1 million of stock repurchases through an approved stock buyback plan and $22.6 million of short-term debt repayment offset by the release of $6.4 million in restricted cash. The stock buyback plan was subsequently terminated.

      At March 31, 2005 and 2004, we had no short-term borrowings. At March 31, 2003, we had short-term borrowings totaling $43.6 million.

      We believe these sources of liquidity and financing will be sufficient to meet our projected working capital and other cash requirements for the next twelve months. However, it is possible that we may need to raise additional funds to finance our activities beyond the next year or to consummate acquisitions of other businesses, products, wafer capacity or technologies. We could raise such funds by selling some of our short-term investments, selling more stock to the public or to selected investors, or by borrowing money. We may not be able to obtain additional funds on terms that would be favorable to our stockholders and us, or at all. If we raise additional funds by issuing additional equity, the ownership percentages of existing stockholders would be reduced.

      In order to obtain an adequate supply of wafers, especially wafers manufactured using advanced process technologies, we have 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 originally the case with Chartered, UMC and Tower, or the usage of “take or pay” contracts that commit us to purchase specified quantities of wafers over extended periods. Manufacturing arrangements such as these may require substantial capital investments, which may require us 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, we have entered into and will continue to enter into various transactions, including the licensing of our integrated circuit designs in exchange for royalties, fees or guarantees of manufacturing capacity.

      The following table summarizes our contractual obligations at March 31, 2005, and the effect such obligations are expected to have on our liquidity and cash flow in future periods (in thousands):

Balance Sheet