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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-K
 (Mark One)[X]
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended March 27, 2004,
 or [   ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from      to          .
 Commission file number: 0-22594  Alliance Semiconductor Corporation
 (Exact name of Registrant as specified in its charter)
 Delaware
    
    77-0057842(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)
 2575 Augustine Drive
Santa Clara, California 95054-2914(Address of principal executive offices) Registrants telephone number, including area code is (408) 855-4900   Securities registered pursuant to Section 12(b) of the Act:
None Securities registered pursuant to Section 12(g) of the Act: Title of each class
    
    Name of each exchange on which registeredCommon Stock, par value $0.01
    
    Nasdaq
 Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [   ] Indicate by check mark 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. [   ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12(b)(2) of the Exchange Act). Yes [X] No [   ] The aggregate market value of the voting common equity held by
non-affiliates of the Registrant was approximately $102,100,000 as of September
26, 2003, 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 27, 2004, there were 35,259,980 shares of Registrants Common
Stock outstanding. The aggregate market value of the voting stock held by
non-affiliates of the registrant on May 27, 2004, based upon the closing price
of the Common Stock on the Nasdaq National Market for such date, was
approximately $81,400,000. DOCUMENTS INCORPORATED BY REFERENCE Designated portions of the Companys definitive proxy statement for its
2004 annual meeting of shareholders (Proxy Statement) are incorporated by
reference into Part III of this Form 10-K.




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TABLE OF CONTENTS  PART IItem 1. BusinessItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission of Matters to a Vote of Security HoldersPART IIItem 5. Market for Registrants Common Equity and Related Stockholder MattersItem 6. Selected Consolidated Financial DataItem 7. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresPART IIIItem 10 Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange ActItem 11. Executive CompensationItem 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related TransactionsItem 14. Principal Accountant Fees and ServicesPART IVItem 15. Exhibits, Financial Statement Schedules and Reports on Form 8-KEXHIBIT INDEXSIGNATURESEXHIBIT 14.01EXHIBIT 21.01EXHIBIT 23.01EXHIBIT 31.01EXHIBIT 31.02EXHIBIT 32.01EXHIBIT 32.02    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 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 7A of Part II hereof (entitled Quantitative and Qualitative Disclosures
About Market Risk) and elsewhere in this report. 
 Item 1. Business Overview Alliance
Semiconductor Corporation (we or the
Company) is a worldwide provider of analog and mixed signal products,
high-performance memory products and system solutions for the communications
computing, embedded, industrial and consumer markets. Utilizing advanced
process technologies and design expertise, we provide leading 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 its proprietary advances in
Electromagnetic Interference (EMI) reduction, power management and timing
technology, HyperTransport 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 revenues from sales of PulseCore
products were $4.3 million in fiscal 2004, $2.9 million in fiscal 2003, and
were immaterial in fiscal 2002. 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. The semiconductor industry is highly cyclical and subject to significant
downturns at various times that are typically characterized by diminished
product demand, production over capacity and under capacity, and accelerated
erosion of ASPs. The market for our memory devices experienced excess supply
relative to demand during fiscal 2002 and 2003 and much of fiscal
2004, which resulted in a significant
downward pressure on ASPs during those fiscal years. 2




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The
ASPs that we are able to command for our memory products is highly
dependent on industry-wide production capacity and demand. In fiscal 2003,
fiscal 2002 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. We are unable to predict
the future prices for our products. Throughout this report, we have indicated our fiscal years as ending on
March 31, whereas the Companys fiscal year actually ends on the Saturday
nearest the end of March. The fiscal years 2004, 2003, and 2002 all contained
52 weeks. Products Analog and Mixed Signal The Companys Analog and Mixed Signal business unit is divided into two
major lines, Clock and Timing and Power and Systems Management. Clock and Timing The Company provides 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 applications and others. The 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. Power and Systems Management The 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). The Company currently produces more than 200 different analog and mixed
signal products. Sales from the Analog and Mixed Signal business unit
accounted for 16% of net revenues for fiscal 2004 and 2003, and less than 1% of
net revenues during fiscal 2002. System Solutions Within the System Solutions business unit, the Company develops
connectivity and networking ASSPs that address critical bandwidth and
performance bottlenecks in legacy and emerging embedded, networking, computing
and storage systems. Connectivity Products The Connectivity Product Portfolio includes a broad selection of
high-speed bridges based on HyperTransport technology (HT) including
HT-to-PCI/PCI-X bridges. These bridges are designed to work together with the
HyperTransport interface on the new generation of leading embedded and discreet
microprocessors from AMD, Broadcom, PMC-Sierra and Transmeta. The Companys
Connectivity Product Portfolio is designed to allow system architects to
leverage the performance of these leading microprocessors while still
maintaining compatibility with legacy PCI/PCI-X based systems. The
Connectivity Product Portfolio also includes a series of industry standard
IEEE1149.1 JTAG gateways and controllers that partition a JTAG scan chain into
multiple smaller chains for easier fault diagnostics and faster Flash
programming. The Company believes the connectivity product line will be a key building
block in a number of different systems including storage systems and switches,
imaging and graphics systems, LAN switches, servers, access and edge routers.
These solutions are 3




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currently planned to 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. Sales from the System Solutions business unit accounted for 17% of net
revenues during fiscal 2004, 9% of net revenues during fiscal 2003, and 0% of
net revenues in fiscal 2002. Networking Products The Networking Product 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 Static Random Access Memory (SRAM) SRAMs are used for the storage and retrieval of data in
telecommunications, data communication, networking, consumer and wireless
markets, as well as others. The Company produces 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. The Company offers 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 buggers 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. The Company currently offers more than 60
synchronous SRAM products in densities ranging from 2 Mbit up to 36 Mbit and
clock speeds of up to 250 MHz. The Companys 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, the Companys most
advanced SRAM products are manufactured using 0.13 micron technology. Sales of
the Companys SRAM products accounted for 44% of the Companys net revenues in
fiscal 2004. During fiscal 2003 and 2002, SRAM products contributed
approximately 41% and 50%, respectively, to the Companys net revenues. Dynamic Random Access Memory(DRAM) The Company has ceased developing new DRAM products and revenues are
derived primarily from supplying legacy DRAM products to existing customers.
As a result, the Company expects revenue from DRAM products to comprise a
significantly smaller portion of overall revenues in fiscal 2005. Sales of the
Companys DRAM products accounted for 23% of the Companys net revenues in
fiscal 2004. During fiscal years 2003 and 2002, DRAM products accounted for
34% and 48%, respectively, of the Companys net revenues. Product Development Timely development and introduction of new products are essential to
maintaining the Companys competitive position. The Company currently develops
the vast majority of its products in-house and has 188 development personnel
(33 in the United States and 155 in India) as of March 31, 2004. The Company
uses computer-aided design environments to design and prototype new products.
The Companys design process uses network computing, high-level design
methodologies, logic and circuit simulators, field-programmable gate array
based prototyping, synthesis and physical design tools. During fiscal 2004,
2003, and 2002, the Company spent approximately $24.7 million, $22.9 million,
and $10.4 million, respectively, on product development activities. The Company
plans to continue to invest substantial amounts in development to design
additional products. The markets for the Companys products are characterized by rapid
technological change, evolving industry standards and product obsolescence. The
Companys 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 its existing product lines, depends on a variety
of factors, including product selection, successful and timely completion of
product development, the Companys ability to secure sufficient foundry,
assembly and test capacity for volume manufacturing, at competitive prices, of
its product, achievement of acceptable wafer fabrication yields (the proportion
of good die on a silicon wafer) by the Companys independent foundries and the
Companys ability to offer products at competitive prices. There can be no
assurance that the Company will be able to identify new 4




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product opportunities successfully, or develop and bring to market such
new products in a timely and cost effective manner, or that the Company will be
able to respond effectively to new technological changes or new product
announcements by others. There also can be no assurance that the Company can
secure adequate capacity for the production of such products, or obtain
acceptable manufacturing yields necessary to enable the Company to offer
products at competitive prices. Additionally, there can be no assurance that
the Companys products will gain or maintain market acceptance. Such
inabilities could materially and adversely affect the Companys results of
operations. The markets for the Companys products are volatile and subject to rapid
technological and price change. Any inventory of products for those markets may
be subject to obsolescence and price erosion, which could materially and
adversely affect the Companys results of operations. Customers The Companys primary customers are major domestic and international
manufacturers of personal computer and computer peripherals, consumer,
networking, telecommunications and wireless products, including: Sony, ZTE,
Cisco, Nortel, Lucent, AFC, Compal, Wistron, and Quanta. A decline in demand
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 the
Companys results of operations. Sales to the Companys customers are typically made pursuant to specific
purchase orders, which may be canceled by the customer without enforceable
penalties. During each of fiscal 2004, 2003 and 2002, no single customer
accounted for more than 10% of the Companys net revenues. Historically, the semiconductor industry in general, and the semiconductor
memory business in particular, have 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, the industry and the Company experienced a significant
downturn. There can be no assurance that the Company will be able to manage its
business in a manner so as to prepare for downturns, when they occur.
Additionally, even if the Company is able to prepare for downturns, any such
downturns would have a significant and material negative impact on the
Companys ability to sell products and its results of operations, and such a
negative impact on the Company may last several years. Sales and Marketing The Company markets and distributes its products through a network of
sales offices, manufacturers representatives and distributors throughout North
America, Europe, Asia and the rest of the world. The Company uses manufacturers representatives and distributors who are
not subject to minimum purchase requirements and who can discontinue marketing
the Companys products at any time. Many of the Companys 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 the Companys results of
operations. The Company believes that its relations with its manufacturers
representatives and distributors generally are good. The Company believes that customer service and technical support are
important competitive factors in selling to major customers. The Company
provides technical support to its customers worldwide. Distributors and
manufacturers representatives supplement the Companys efforts by providing
additional customer service at a local level. The Company also works closely
with its customers in the qualification of its products and providing the
needed quality and reliability data. The Company believes that close contact
with its customers not only improves the customers level of satisfaction but
also provides important insights into future market directions. International revenues accounted for approximately 71%, 69%, and 74% of
net revenues in fiscal 2004, 2003 and 2002, respectively. The Company expects
that international sales will continue to represent a significant portion of
net revenues. In addition, the Companys products are manufactured, assembled
and tested by independent third parties primarily located in Asia and North
America, and the Company has in the past, and intends in the future, to make
investments in certain foundries in Asia or elsewhere, including Israel, in
order to secure production capacity. Due to its international sales and
independent third party manufacturing, assembly and testing operations, the
Company is 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. The Company is also subject to general geopolitical risks in
connection with its international operations, such as political and economic
instability and changes in 5




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diplomatic and trade relationships. In addition, because the Companys
international sales generally are denominated in U.S. dollars, fluctuations in
the U.S. dollar could increase the price in local currencies of the Companys
products in foreign markets and make the Companys 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 the Companys results of operations in the future or
require the Company to modify its current business practices. Manufacturing The Company subcontracts its manufacturing to independent foundries, which
allows the Company to avoid the significant capital investment required for
wafer fabrication facilities. The Company, however, has entered into agreements
providing for the investment of significant sums for the formation of companies
to build and operate manufacturing facilities or to obtain guaranteed capacity
as described below. As a result, the Company focuses its resources on product
design and development, quality assurance, marketing and sales and customer
support. The Company designs its products using proprietary circuit modules and
standard fabrication processes in order to operate within the process
parameters of its contract manufacturers. The Companys 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, the Company 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 the Company believes it currently has
adequate capacity to address market requirements, there can be no assurance
that in the future the Companys current foundry relationships, together with
any additional sources, would be willing or able to satisfy all of the
Companys requirements on a timely basis. The Company has 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. The Company has entered into equity arrangements in order to
obtain an adequate supply of wafers, especially wafers manufactured using
advanced process technologies. The Company will 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 the Company to purchase specified quantities of
wafers over extended periods; and the licensing of certain of the Companys
designs, in order to obtain an adequate supply of wafers using advanced process
technologies. There can be no assurance, however, that the Company would be
able to consummate any such transaction in a timely manner, or at all, or on
terms commercially acceptable to the Company. The Company has in the past experienced disruption of the operations at
its foundries, and any future disruptions for any reason, including work
stoppages, an outbreak of Severe Acute Respiratory Syndrome, fire, earthquakes,
or other natural disasters, could cause delays in shipments of the Companys
products, and could have a material adverse effect on the Companys results of
operations. The Company is using multiple sources for certain of its products, which
may require the Companys customers to perform separate product qualifications.
The Company has not, however, developed alternate sources of supply for certain
other products, and its newly introduced products are typically produced
initially by a single foundry 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 the Company
may cause that customer to satisfy its product requirements from the Companys
competitors, which would adversely affect the Companys results of operations. Reliance on these foundries involves several risks, including constraints
or delays in timely delivery of the Companys products, reduced control over
delivery schedules, quality assurance, costs and loss of production due to
seismic activity, weather conditions and other factors. Although the Company
continuously evaluates sources of supply and may seek to add additional foundry
capacity, there can be no assurance that such additional capacity can be
obtained at acceptable prices, if at all. The occurrence of any supply or other
problem resulting from these risks could have a material adverse effect on the
Companys results of operations. There can be no assurance that problems
affecting manufacturing yields of the Companys products will not occur in the
future. The Company uses 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 the Company. Following assembly, the packaged
devices are further tested and inspected pursuant to the Companys quality
assurance program before shipment to customers. While the timeliness, yield and
quality of product deliveries from the Companys 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, 6




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or any other circumstances that would require the Company to qualify
alternative sources of supply, could delay shipment and result in the loss of
customers, limitations or reductions in the Companys revenue, and other
adverse effects on the Companys results of operations. Most of the Companys
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 to the Company may increase the price charged
to the Company for the services they provide, to the point that the Company may
not be able to profitably have its products produced by such suppliers. The
occurrence of such price increases could have a material adverse effect on the
Companys results of operations. The Company also is subject to the risks of shortages and increases in the
cost of raw materials used in the manufacture or assembly of the Companys
products. Shortages of raw materials or disruptions in the provision of
services by the Companys assembly or testing houses or other circumstances
that would require the Company to seek alternative sources of supply, assembly
or testing could lead to constraints or delays in timely delivery of the
Companys products. Such constraints or delays may result in the loss of
customers, limitations or reductions in the Companys revenue or other adverse
effects on the Companys results of operations. The Companys 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 the Companys foundries or
assembly or testing houses may cause delays in delivery of the Companys
products. The occurrence of any supply or other problem resulting from the
risks described above could have a material adverse effect on the Companys
results of operations. Competition 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 the Companys
customers may be purchasing products from both the Company and the Companys
competitors. The Companys principal competitors include Cypress Semiconductor
Corporation, Integrated Device Technology, Inc., Integrated Silicon Solutions,
Inc., PLX Technology, Samsung, Toshiba, and other U.S., Japanese, Korean and
Taiwanese manufacturers. Most of the Companys competitors and potential
competitors have substantially greater financial, technical, marketing,
distribution and other resources, broader product lines and longer-standing
relationships with customers than the Company. 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 the Company. In addition, the Company has
entered into new markets, where it faces additional competition. Markets for
most of the Companys products are characterized by intense price competition.
The Companys 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 the Company will
be able to develop or market any such products successfully. The Company
believes that its ability to compete successfully depends on a number of
factors both within and outside of its 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 Company products by
effective utilization of intellectual property laws and general market and
economic conditions. There can be no assurance that the Company will be able to
compete successfully in the future. Licenses, Patents and Maskwork Protection The Company seeks to protect its proprietary technology by filing patent
applications in the United States and registering its circuit designs pursuant
to the Semiconductor Chip Protection Act of 1984. As of May 18, 2004, the
Company holds 86 United States patents covering certain aspects of its product
designs or manufacturing technology, which patents expire between 2009 and
2022. The Company also has 17 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 patents held by the Company will be
sufficiently broad to protect the Companys technology. In addition, no
assurance can be given that any patents issued to the Company will not be
challenged, invalidated or circumvented or that the rights granted thereunder
will provide competitive advantages to the Company. The loss of patent
protection on the Companys technology or the circumvention of its patents by
competitors could have a material adverse effect on the Companys ability to
compete successfully in its products business. There can be no assurance that
any existing or future patent applications by the Company will result in issued
patents with the scope of the claims sought by the Company, 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 the Company. 7




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The semiconductor industry is characterized by frequent claims and
litigation regarding patent and other intellectual property rights. The Company
has from time to time received, and believes that it likely will receive in the
future, notices alleging that the Companys products, or the processes used to
manufacture the Companys products, infringe the intellectual property rights
of third parties. The Company is in discussions with one company who has made
claims that some of the Companys products and/or processes infringe patents
held by such company. If the Company determines that the Company possibly
infringes a patent and the patent appears valid, the Company 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 the Companys products do not
infringe the patents in question. Patent litigation is inherently uncertain and
the Company cannot predict the result of any such litigation or the level of
damages that could be imposed if it were determined that certain of the
Companys products or processes infringe any of the patents in question. Copyrights and maskwork protection are also key elements in the conduct of
the Companys business. The Company also relies on trade secrets and
proprietary know-how, which it seeks to protect by confidentiality agreements
with its employees and consultants, and with third parties. There can be no
assurance that these agreements will not be breached, that the Company will
have adequate remedies for any breach, or that its trade secrets and
proprietary know-how will not otherwise become known or be independently
discovered by others. Backlog Sales of the Companys 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. The Companys
business, in line with that of much of the semiconductor industry, is
characterized by short lead-time orders and quick delivery schedules. Also, the
Companys actual shipments depend on the manufacturing capacity of the
Companys foundries and subcontractors. Finally, capacity constraints or
unexpected manufacturing delays may prevent the Company from meeting the demand
for certain of its products. The backlog is not necessarily indicative of
future sales. Investments The Company has had and continues to hold significant investments in
marketable securities and investments in shares that are classified as
long-term. The Company did not record any other-than-temporary write-downs
during fiscal 2004. During fiscal 2003, certain investments in marketable
securities held by the Company 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, the Company recorded
other-than-temporary write-downs in these investments. During the second and
third quarters of fiscal 2003, the Company recorded pre-tax, non-operating
losses of $673,000 and $16.2 million, respectively, on two of its investments.
During the third quarter of fiscal 2003, the Company recorded a pre-tax,
non-operating loss of $14.1 million on its long-term investment in Tower
ordinary shares. At March 31, 2004, a portion of the Companys investment in Tower
ordinary shares was classified as long-term. During the first six months of fiscal 2002, marketable securities held by
the Company experienced significant declines in market value. As a result, the
Company recorded a pre-tax, non-operating loss of $288.6 million during the
second quarter of fiscal 2002. United Microelectronics Corporation At March 31, 2004, the Company owned approximately 161.5 million shares of
United Microelectronics Corporation (UMC) common stock, representing
approximately 1.0% ownership. At March 31, 2003, the Company owned
approximately 245.0 million shares of UMC common stock, representing
approximately 1.7% ownership. The Company received a stock dividend of
approximately 9.5 million shares of UMC common stock in July 2003. The Company accounts for its investment in UMC as an available-for-sale
marketable security in accordance with SFAS 115. In fiscal 2004, the Company
sold 93.0 million shares of UMC common stock for $80.5 million and recorded a
pre-tax, non-operating gain of $29.5 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 the Company repaying in full its
outstanding debt with Chinatrust. (See Note 2 of the consolidated financial
statements included in this report.) 8




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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 the UMC common stock held by the
Company, there can be no assurance that the Companys investment in UMC will
maintain its value. Tower Semiconductor Ltd. At March 31, 2004, the Company owned 8,908,391 ordinary shares of Tower of which 2,672,518 were classified as short-term
and accounted for as an available-for-sale marketable security in accordance
with SFAS 115. During the third quarter of fiscal 2004, the Company, in
conjunction with the other Tower wafer partners and with the agreement of
Towers creditors and shareholders, entered into an agreement to accelerate its
remaining $6.7 million payment related to the fifth and final milestone of the
original Tower Share Purchase Agreement executed in January 2001. This was in
addition to aggregate payments of $4.3 million made during the first and second
quarters of fiscal 2004. In exchange for this accelerated payment, Tower
issued 777,295 ordinary shares for $2.3 million and 628,611 ordinary shares for
$4.4 million during the fourth quarter of fiscal 2004. In connection with the
agreement to accelerate its payment, Alliance agreed to the following
restrictions on its ability to sell, transfer or dispose of its Tower shares:  
    
    30% of all Tower shares acquired by the Company (shares acquired/to
be acquired in exchange for payments made in accordance with the
original Share Purchase Agreement and subsequent amendments, shares
acquired as a result of Towers rights offering in September 2002, and
shares which may be acquired upon exchange of certain wafer credits)
became unrestricted and available-for-sale as of January 2004 subject to
an initial 180 day lock-up period;
    
    the remaining 70% of all Tower shares acquired by the Company are
restricted from sale, transfer, or disposition until January 2006 which
is a two-year extension of the Initial Restricted Period; and
    
    after the amended Initial Restricted period ends, the Company will
still be subject to a Subsequent Restricted Period between January 2006
and January 2008. During this time, the Company may transfer no more
than 6% of its total shares in any quarter on a cumulative basis and no
more than 48% of its total shares by the end of this period. During the period from January 2004 through December 2006, the Company
will also have the option to convert a portion of its prepaid wafer credits to
Tower ordinary shares as opposed to using the credits to offset the cost of
actual wafer purchases. Those credits that would have been used against
quarterly wafer purchases from Towers Fab 2 during that two year period can be
converted to shares based on the average price per Tower share during the last
15 trading days of each quarter. Those 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; reimbursement of unutilized wafer credits will not occur
until December 2007. The Company will also retain its 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
on ordinary share at an exercise price of $7.50 per share through October 31,
2006. In May 2003, the Company paid $3.6 million to Tower Semiconductor in
accordance with the terms of the amended share purchase agreement between the
two companies and received an additional 1,206,839 ordinary shares of Tower at
a purchase price of $2.98 per share. In August 2003, the Company paid $682,000
to Tower in accordance with the terms of the amended share purchase agreement
and received an additional 228,546 ordinary shares of Tower at a purchase price
of $2.98 per share. In the third quarter of fiscal 2003, the Company wrote down its investment
in Tower shares and recorded a pretax, non-operating loss of approximately
$14.1 million. As of March 31, 2004, the Company 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, the Company wrote off a portion of
its investment in wafer credits with Tower and recorded a pretax, operating
loss of approximately $9.5 million. The Company had determined, at that time,
that the value of these credits would not be realized given the Companys sales
forecast of product to be manufactured at Tower. The Company has, and will
retain, an option to convert the remaining $4.4 million of wafer credits to
equity in January 2006. The Companys investment in Tower Semiconductor Ltd. 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 the
Companys investment in Tower shares and wafer credits will not decline further
in value. N. Damodar
Reddy, who is the Companys Chairman and Chief Executive Officer, is a
director of Tower. 9




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Vitesse Semiconductor Corporation At March 31, 2004, the Company owned 95,417 shares of the common stock of
Vitesse Semiconductor Corporation (Vitesse). The Company accounts for its
investment in Vitesse as an available-for-sale marketable security in
accordance with SFAS 115. Vitesses common stock price has historically experienced significant
fluctuations in market value, and has experienced periods of significant
decreases in market value. Given the market risk for the Vitesse common stock
held by the Company, there can be no assurance that the Companys investment in
Vitesse will maintain its value. In January 2001, the Company entered into two derivative contracts
(Derivative Agreements) with a brokerage firm and received aggregate cash
proceeds of approximately $31.0 million. The Derivative Agreements had
repayment provisions that incorporated a collar arrangement with respect to
490,000 shares of Vitesse common stock. The Company, at its option, could
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. Under the Derivative Agreements, if the stock
price of Vitesse exceeded the ceiling of the collar on the Settlement Date,
then the settlement amount also increased by an amount determined by a formula
included in the Derivative Agreements (generally equal to the excess of the
value of the stock over the ceiling of the collar.) If the stock price of
Vitesse declined below the floor of the collar on the Settlement Date, then the
settlement amount also decreased by an amount determined by a formula included
in the Derivative Agreements (generally equal to the excess of the floor of the
collar over the value of the stock.) On January 24, 2003, the Company settled
its derivative contract on 300,000 Vitesse shares by delivering the shares to
the brokerage firm holding the contract. On January 30, 2003, the Company
settled its derivative contract on 190,000 Vitesse shares by delivering the
shares to the brokerage firm holding the contract. Adaptec, Inc. At March 31, 2004, the Company owned 154,444 shares of Adaptec. The
Company records its investment in Adaptec as an available-for-sale marketable
security in accordance with SFAS 115. In December 2001, the Company entered into a derivative contract with a
brokerage firm and received aggregate cash proceeds of $5.0 million. The
contract has repayment provisions that incorporate a collar arrangement with
respect to 362,173 shares of Adaptec common stock. The Company 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 settlement date. In June 2003, the Company settled the derivative contract
it had on 362,173 Adaptec shares by delivering those shares to the brokerage
firm holding the contract. Adaptecs common stock price has historically experienced significant
fluctuations in market value, and has experienced periods of significant
decreases in market value. Given the market risk for the Adaptec common stock
held by the Company, there can be no assurance that the Companys investment in
Adaptec will maintain its value. Alliance Venture Management, LLC In October 1999, the Company 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 the Company
intended to form. Alliance Venture Management does not directly invest in the
investment funds with the Company, 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 and C.N. Reddy. In November 1999, the Company formed Alliance Ventures I, LP (Alliance
Ventures I) and Alliance Ventures II, LP (Alliance Ventures II), both
California limited partnerships. The Company, as the sole limited partner,
owns 100% of the 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, calculated on an annual basis. 10




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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, (collectively Alliance Ventures) 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 the Company owns 100% of
the common units in Alliance Venture Management, it does not hold any Preferred
Member Units and does not participate in the management fees generated by the
management of the investment funds. N. Damodar Reddy and C.N. Reddy, who are
directors of the Company and members of the Companys 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. During fiscal 2004, the
Company incurred $875,000 of commitment fees. This amount was offset by
expenses incurred by the Company on behalf of Alliance Venture Management of
approximately $870,000. Neither N. Damodar Reddy nor C.N. Reddy received any
commitment fees during fiscal 2004 or fiscal 2003. No distribution of cash and/or marketable securities was made to the
partners of Alliance Venture Management during fiscal 2004 or fiscal 2003. After Alliance Ventures I was formed, the Company contributed all of its
then current investments, except UMC, Chartered, and Broadcom, to Alliance
Ventures I to allow Alliance Venture Management to manage these investments.
As of March 31, 2004, 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, 2004, Alliance Ventures III, the focus of which
is investing in emerging companies in the networking and communications market
areas, has invested $52.5 million in 17 companies, with a total fund allocation
of $100.0 million. As of March 31, 2004, 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, 2004, Alliance Ventures V, the focus of which
is investing in emerging companies in the networking and communications
markets, has invested $27.7 million in ten companies, with a total fund
allocation of $60.0 million. During fiscal 2004, the Company invested
approximately $20.0 million in Alliance Venture investee companies. In fiscal 2004, 2003, and 2002, the Company wrote down certain of its
investments in Alliance Ventures and recognized pre-tax, non-operating losses
of approximately $5.5 million, $19.0 million, and $7.3 million, respectively.
Also, several of the Alliance Ventures investments are accounted for under the
equity method due to the Companys ability to exercise significant influence on
the operations of investees resulting from ownership interest and/or board
representation. During fiscal 2004, 2003, and 2002, total equity in the net
losses of Alliance Ventures investee companies was $14.1 million, $15.2
million, and $13.0 million, 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 not only on the skill of the investment managers, but also on
market and other factors outside the control of the managers. The market for
these types of investments has, in the past, often been successful and many
venture capital funds have been profitable, and while the Company has been
successful in certain of its past investments, there can be no assurance as to
any future or continued success. It is possible there will be a downturn in the
success of these types of investments in the future and the Company could
suffer significant diminished success in these investments. It is possible
that many or most, and maybe all, of the Companys venture type investments may
fail, resulting in the complete loss of most or all the money the Company has
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., which have invested in 26 of the 40 total companies
invested in by Alliance 11




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Venture Managements investment funds. Multiple Alliance Venture
Management investment funds may invest in the same investee companies. The
Company acquired Chip Engines in the fourth quarter of
fiscal 2003. As part of this acquisition, the Company 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, the Company repaid the note in full including approximately
$22,000 of accrued interest. See Part III  Item 13  Certain Relationships
and Related Transactions and Note 15 to
Consolidated Financial Statements. Solar Venture Partners, LP Through March 31, 2004, the Company has 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 Web and e-commerce, semiconductors for emerging markets, and design
automation. As of March 31, 2004, the Company held a 73% interest in Solar. Due to the Companys majority interest in Solar, the Company consolidates
Solar. Some of the investments Solar has made are accounted for under the
equity method due to the Companys ability to exert significant influence on
the operations of the investees resulting from ownership interest and/or board
representation. In fiscal 2004, 2003 and 2002 the Company recorded equity in
loss of investees of approximately $1.3 million, $1.4 million and $1.6 million
and wrote down certain Solar investments by $300,000, $5.8 million and $1.0
million, respectively. C.N. Reddy, an officer and director of the Company, is a general partner
of Solar, an investor in Solar and participates in running Solars daily
operations. 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 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 the
companys board of directors. The Company made its 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 the Companys 12




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investments, including its strategic wafer manufacturing investments, the
Company could be viewed as holding a larger portion of its assets in investment
securities than is presumptively permitted by the Act for a company that is not
registered under it. On the other hand, the Company believes that the investments that it
currently holds in UMC and Tower, and previously held in Chartered, even though
in companies that the Company does not control, are properly regarded as
strategic deployments of Company assets for the purpose of furthering the
Companys 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, the Company has
never held itself out as an investment company; its historical development has
focused almost exclusively on the integrated circuit business; the activities
of its officers and employees have been overwhelmingly addressed to achieving
success in the integrated circuit business; and prior to the past few years,
its income (and losses) have been derived almost exclusively from the
integrated circuit business. Accordingly, the Company believes that it is
properly regarded as being primarily engaged in a business other than
investing, reinvesting, owning, holding or trading in securities. In August 2000, the Company applied to the SEC for an order under section
3(b)(2) of the Act confirming its non-investment-company status. In March
2002, the staff of the SEC informed the Company that the staff could not
support the granting of the requested exemption. Since that time, the Company
has been working to resolve its status under the Act. No assurances can be
given that the SEC will agree that the Company is not currently deemed to be an
unregistered investment company in violation of the Act. If the SEC takes the
view that the Company has been operating and continues to operate as an
unregistered investment company in violation of the Act, and does not provide
the Company with a sufficient period to either register as an investment
company or divest itself of investment securities and/or acquire non-investment
securities, the Company may be subject to significant potential penalties. In the absence of exemptions granted by the SEC (which are discretionary
in nature and require the SEC to make certain findings), the Company would be
required either to register as a closed-end investment company under the Act,
or, in the alternative, to divest itself of sufficient investment securities
and/or to acquire sufficient non-investment assets so as not to be regarded as
an investment company under the Act. If the Company elects to register as a closed-end investment company under
the Act, a number of significant requirements will be imposed upon the Company.
These would include, but not be limited to, a requirement that at least 40% of
the Companys board of directors not be interested persons of the Company as
defined in the Act and that those directors be granted certain special rights
with respect to the approval of certain kinds of transactions (particularly
those that pose a possibility of giving rise to conflicts of interest);
prohibitions on the grant of stock options that would be outstanding for more
than 120 days and upon the use of stock for compensation (which could be highly
detrimental to the Company in view of the competitive circumstances in which it
seeks to attract and retain qualified employees); and broad prohibitions on
affiliate transactions, such as the compensation arrangements applicable to the
management of Alliance Venture Management, many kinds of incentive compensation
arrangements for management employees and joint investment by persons who
control the Company in entities in which the Company is also investing (which
could require the Company to abandon or significantly restructure its
management arrangements, particularly with respect to its investment
activities). While the Company could apply for individual exemptions from these
restrictions, there could be no guarantee that such exemptions would be
granted, or granted on terms that the Company would deem practical.
Additionally, the Company would be required to report its financial results in
a different form from that currently used by the Company, which would have the
effect of turning the Companys Statement of Operations upside down by
requiring that the Company report its investment income and the results of its
investment activities, instead of its operations, as its primary sources of
revenue. If the Company elects to divest itself of sufficient investment securities
and/or to acquire sufficient non-investment assets so as not to be regarded as
an investment company under the Act, the Company would need to ensure that the
value of investment securities (excluding the value of U.S. Government
securities and securities of certain majority-owned subsidiaries) does not
exceed forty percent (40%) of the Companys total assets (excluding the value
of U.S. Government securities and cash items) on an unconsolidated basis. In
seeking to meet this requirement, the Company might choose to divest itself of
assets that it considers strategically significant for the conduct of its
operations or to acquire additional operating assets that would have a material
effect on the Companys operations. There can be no assurance that the Company
could identify such operating assets to acquire or could successfully acquire
such assets. Any such acquisition could result in the Company issuing
additional shares that may dilute the equity of the Companys existing
stockholders, and/or result in the Company incurring additional indebtedness,
which could have a material impact on the Companys balance sheet and results
of operations. Were the Company to acquire any additional businesses, there
would be the additional risk that the Companys acquired and
previously-existing businesses could be disrupted while the Company attempted
to integrate the acquired business, as well as risks associated with the
Company attempting to manage a new 13




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business with which it was not familiar. Any of the above risks could
result in a material adverse effect on the Companys results of operations and
financial condition. Employees As of March 31, 2004, the Company had 261 full-time employees, consisting
of 188 in research and development, 12 in marketing, 16 in sales, 22 in
administration and 23 in operations. Of the 188 research and development
employees (33 in the US and 155 in India), 74 have advanced degrees. The
Company believes that the Companys future success will depend, in part, on its
ability to continue to attract and retain qualified technical and management
personnel, particularly highly-skilled design engineers involved in new product
development, for whom competition is intense. The Companys employees are not
represented by any collective bargaining unit, and the Company has never
experienced a work stoppage. The Company believes that its employee relations
are good. The Company has recently experienced and may continue to experience growth
in the number of its employees and the scope of its operating and financial
systems, resulting in increased responsibilities for the Companys management.
To manage future growth effectively, the Company will need to continue to
implement and improve its operational, financial and management information
systems and to hire, train, motivate and manage its employees. There can be no
assurance that the Company will be able effectively to manage future growth,
and the failure to do so could have a material adverse effect on the Companys
results of operations. The Company depends to a large extent on the continued contributions of
its founders, N. Damodar Reddy, Chairman of the Board, Chief Executive Officer
and President of the Company, and his brother C.N. Reddy, Executive Vice
President for Investments and Director of the Company (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 the Company to pursue various other opportunities. As
a result of these departures, some projects have been delayed. The future
success of the Company will depend on its ability to attract and retain
qualified technical and management personnel, particularly highly-skilled
design engineers involved in new product development, for whom 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 the
Companys business. The Company is not insured against the loss of any of its
key employees, nor can the Company 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 the Company 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. 
 Item 2.Properties The Companys executive offices and its principal marketing, sales and
product development operations are located in a 56,600 square foot leased
facility in Santa Clara, California under a lease which expires in July 2006.
The Company has an option to extend the lease for a term of five years. The
Company also leases office space in Hsin-Chu, Taiwan to manage the logistics of
the wafer fabrication, assembly and testing of the Companys products in
Taiwan. The Company leases one building to house its design center in
Bangalore, India, and has purchased a parcel of land in an office park under
development in Hyderabad, India, for product development. The Company also
leases a building in Hyderabad, India to support its design center there. This
leased facility was acquired as part of the Companys acquisition of Chip
Engines. Additionally, the Company leases sales offices in Natick,
Massachusetts; Foothill Ranch, California; Bracknell, United Kingdom; Taipei,
Taiwan; Tokyo, Japan; and ShenZhen, China. The Company believes that its
facilities are suitable and adequate for its needs. 
 Item 3.Legal Proceedings In July 1998, the Company learned that a default judgment was entered
against it in Canada, in the amount of approximately $170 million (USD), in a
case filed in 1985 captioned Prabhakara Chowdary Balla and TritTek Research
Ltd. v. Fitch Research Corporation, et al., British Columbia Supreme Court No.
85-2805 (Victoria Registry). The Company, which had previously not
participated in the case, believes that it never was properly served with
process in this action and that the Canadian court lacks jurisdiction over the
Company in this matter. In addition to jurisdictional and procedural arguments,
the Company also believes it may 14




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have grounds to argue that the claims against the Company should be deemed
discharged by the Companys bankruptcy in 1991. In February 1999, the court
set aside the default judgment against the Company. In April 1999, the
plaintiffs were granted leave by the Court to appeal this judgment. Oral
arguments were made before the Court of Appeals in June 2000. In July 2000, the
Court of Appeals instructed the lower Court to allow the parties to take
depositions regarding the issue of service of process. In September 2003, Mr.
Balla took the deposition of N. Damodar Reddy, and the Companys 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
the Company. The plaintiffs appealed the setting aside of the default judgment
against the Company to the Canadian Supreme Court. In June 2001, the Canadian
Supreme Court refused to hear the appeal of the setting aside of the default
judgment against the Company. The Company believes the resolution of this
matter will not have a material adverse effect on its financial conditions and
its results of operations. On December 3, 2002, the Company and its then Vice President of Sales were
sued in Santa Clara Superior Court by plaintiff SegTec Ltd., an Israeli company
and former sales representative of the Company. In its complaint, SegTec
alleges that the Company terminated an oral sales agreement (Agreement) and
had failed to pay commissions due to SegTec in an amount in excess of $750,000.
SegTec also alleges that the Companys termination of the Agreement was
without cause and that the Company has materially breached the Agreement, and
certain other matters, including misappropriation of trade secrets. Plaintiff
seeks compensatory, incidental, and consequential damages for the
aforementioned allegations, punitive damages for the fraud allegations
specifically, and payment for the value of services rendered. Plaintiff served
the complaint on the Company and its 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 commissions dispute. All remaining
causes of action unrelated to the commission 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, the
Company cannot determine what, if any, effect resolution of this matter will
have on its financial condition. On February 24, 2003, a stockholder of the Company filed a putative
derivative action entitled Fritsche v. Reddy, et al., and Alliance
Semiconductor Corporation (case no. CV 814996) in Santa Clara County Superior
Court. This action, purportedly brought on behalf of the Company, named as
defendants certain current and former officers and directors of the Company.
The Company was named as a nominal defendant. On December 2, 2003, the parties
entered into a formal stipulation of settlement which was subsequently approved
by the court on January 13, 2004. A Final Judgment and Order of Dismissal With
Prejudice was entered by the court on January 20, 2004. In July 2003, the Company was 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
shareholders (including the Company). The lawsuit alleges 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 the Company) 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 shareholders 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. The Company has reviewed a copy
of the complaint, believes it has meritorious defenses and intends to defend
vigorously against the claims asserted against it. Due to the early stage of
the litigation, the Company cannot determine what, if any, effect resolution of
this matter will have on its financial condition. In addition, the Company is party to various legal proceedings and claims,
either asserted or unasserted, which arise in the ordinary course of business.
While the outcome of these claims cannot be predicted with certainty, the
Company does not believe that the outcome of any of these legal matters will have a material adverse effect on the Companys
consolidated financial position, results of operations or cash flows. 
 Item 4.Submission of Matters to a Vote of Security Holders Not applicable. Executive Officers of the Registrant Information concerning executive officers of the Company as of the date of
this report is set forth below: 15




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##### Table of Contents



Name
    
    Age
    
    PositionN. Damodar Reddy
    
    
    65
    
    
    Chairman, President and Chief Executive OfficerC.N. Reddy
    
    
    48
    
    
    Executive Vice President for Investments, DirectorRonald K. Shelton
    
    
    43
    
    
    Vice President, Finance and Administration, and
Chief Financial OfficerRitu Shrivastava
    
    
    53
    
    
    Vice President/General Manager, Technology
Development and Operations
 N. Damodar Reddy is the co-founder of the Company and has served as the
Companys Chairman of the Board, Chief Executive Officer and President from its
inception in February 1985. Mr. Reddy also served as the Companys Chief
Financial Officer from June 1998 until January 1999. Under his guidance, the
Company 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, 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 the Company and has served as a director
of the Company since its inception in February 1985. Mr. Reddy served as
Secretary to the Company from February 1985 to October 2000. Beginning in
February 1985, Mr. Reddy served as the Companys Vice President  Engineering.
In May 1993, he was appointed Senior Vice-President  Engineering and
Operations of the Company. 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. Ronald K. Shelton joined Alliance in April 2002, and was appointed Vice
President, Finance and Administration, and CFO. Mr. Shelton was previously with
empowerTel Networks, a privately held company where he served as CFO from 1999
to 2002. From 1996 to 1999, Mr. Shelton served as CFO of Cirrus Logic, Inc., a
leading supplier of analog and DSP chip solutions for the consumer
entertainment electronics industry. Mr. Shelton was Vice President, Finance and
Administration, and CFO of the Company from 1992 to 1996. Mr. Shelton received
his Bachelors degree in Economics from Stanford University. Ritu Shrivastava joined the Company in November 1993 and is currently Vice
President/General Manager of Technology Development and Operations. Dr.
Shrivastava was designated as an executive officer of the Company in July 1997.
Dr. Shrivastava has been responsible for co-developing many generations of
memory technologies and products at various foundries in Taiwan, Singapore,
Japan, and U.S., which supported the Companys leadership in the successful
fabless model. Prior to joining the Company, Dr. Shrivastava worked at Cypress
Semiconductor Corporation for more than 10 years in various technology
management positions, the last one being Director of Technology Development.
Before Cypress, Dr. Shrivastava was with Mostek Corporation where he was
responsible for one of the first CMOS manufacturing lines in the U.S. for
memory and gate-array applications. Dr. Shrivastava served on the Electrical
Engineering faculty at Louisiana State University where he also received his
Ph.D. Dr. Shrivastava completed his Masters and Bachelors degrees in
Electrical Communication Engineering from Indian Institute of Science,
Bangalore, India and a Bachelors degree in Science from Jabalpur University,
India. Dr. Shrivastava is named inventor in 20 patents related to various
technologies, and is a Fellow of IEEE. He also serves on the editorial board of
IEEE Transactions on Electron Devices as a CMOS editor. 16




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##### Table of Contents



PART II 
 Item 5.Market for Registrants Common Equity and Related Stockholder Matters The Companys Common Stock is listed on the NASDAQ National Market under
the symbol ALSC. The Company completed its initial public offering on December
1, 1993. The following table sets forth, for the periods indicated, the high
and low closing sale prices on NASDAQ for the Companys Common Stock. Fiscal Year
    
    High
    
    Low20031st Quarter
    
    $
    11.45
    
    
    $
    6.522nd Quarter
    
    
    7.19
    
    
    
    3.673rd Quarter
    
    
    4.82
    
    
    
    2.854th Quarter
    
    
    4.29
    
    
    
    2.7220041st Quarter
    
    $
    4.94
    
    
    $
    3.202nd Quarter
    
    
    6.49
    
    
    
    4.273rd Quarter
    
    
    8.73
    
    
    
    5.444th Quarter
    
    
    9.24
    
    
    
    6.55
 As of May 27, 2004, there were approximately 119 holders of record of the
Companys Common Stock. The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain future earnings, if any, for
development of its business and, therefore, does not anticipate that it will
declare or pay cash dividends on its capital stock in the foreseeable future. 
 Item 6.Selected Consolidated Financial Data The following table summarizes selected consolidated financial information
for each of the last five fiscal years ended March 31 and should be read in
conjunction with Item 7-Managements Discussion and Analysis of Financial
Condition and Results of Operations and Item 8-Financial Statements and
Supplementary Data. Year Ended March 31,2004
    
    2003
    
    2002
    
    2001
    
    2000(in thousands, except per share data)Consolidated Statement of Operations Data:Net revenues
    
    $
    26,671
    
    
    $
    18,522
    
    
    $
    26,547
    
    
    $
    208,678
    
    
    $
    89,153Income (loss) from operations
    
    
    (34,443
    )
    
    
    (63,611
    )
    
    
    (79,137
    )
    
    
    (12,692
    )
    
    
    195Gain (loss) on investments, write-down of marketable
securities and venture investments, loss in investees
accounted for under the equity method, and other
income
(expense), net
    
    
    252
    
    
    
    (62,872
    )
    
    
    (311,990
    )
    
    
    (439,585
    )
    
    
    1,058,253Income (loss) before cumulative effect of change in
accounting principle
    
    
    (19,411
    )
    
    
    (106,048
    )
    
    
    (242,771
    )
    
    
    (272,321
    )
    
    
    648,100Net income (loss)
    
    $
    (19,411
    )
    
    $
    (106,048
    )
    
    $
    (240,716
    )
    
    $
    (272,321
    )
    
    $
    648,100Income (loss) per share before effect of change in
accounting principle:Basic
    
    $
    (0.55
    )
    
    $
    (2.85
    )
    
    $
    (5.91
    )
    
    $
    (6.58
    )
    
    $
    15.49Diluted
    
    $
    (0.55
    )
    
    $
    (2.85
    )
    
    $
    (5.91
    )
    
    $
    (6.58
    )
    
    $
    15.07Net income (loss) per share:Basic
    
    $
    (0.55
    )
    
    $
    (2.85
    )
    
    $
    (5.86
    )
    
    $
    (6.58
    )
    
    $
    15.49Diluted
    
    $
    (0.55
    )
    
    $
    (2.85
    )
    
    $
    (5.86
    )
    
    $
    (6.58
    )
    
    $
    15.07Weighted average number of common shares:Basic
    
    
    35,093
    
    
    
    37,160
    
    
    
    41,078
    
    
    
    41,376
    
    
    
    41,829Diluted
    
    
    35,093
    
    
    
    37,160
    
    
    
    41,078
    
    
    
    41,376
    
    
    
    42,992
 17




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##### Table of Contents



March 31,2004
    
    2003
    
    2002
    
    2001
    
    2000(in thousands)Consolidated Balance Sheet Data:Working capital
    
    $
    99,679
    
    
    $
    83,572
    
    
    $
    323,791
    
    
    $
    319,289
    
    
    $
    615,937Total assets
    
    
    260,802
    
    
    
    242,722
    
    
    
    682,570
    
    
    
    853,243
    
    
    
    1,520,442Stockholders equity
    
    
    174,722
    
    
    
    159,220
    
    
    
    451,255
    
    
    
    547,289
    
    
    
    963,955Long-term obligations
    
    
    241
    
    
    
    312
    
    
    
    4,808
    
    
    
    12,568
    
    
    
    2,714
 The following table summarizes selected consolidated financial information
(unaudited) for the fiscal quarters for each of the last two fiscal years ended
March 31, 2004 and 2003, respectively: Fiscal Year 2004
    
    Fiscal Year 20034th Qtr.
    
    3rd Qtr.
    
    2nd Qtr.
    
    1st Qtr.
    
    4th Qtr.
    
    3rd Qtr.

    
    2nd Qtr.
    
    1st Qtr.(in thousands, except per share data)Operating Summary:Net revenues
    
    $
    8,934
    
    
    $
    7,102
    
    
    $
    5,561
    
    
    $
    5,074
    
    
    $
    5,065
    
    
    $
    5,062
    
    
    $
    4,096
    
    
    $
    4,299Gross profit (loss)
    
    
    257
    
    
    
    2,402
    
    
    
    1,343
    
    
    
    1,829
    
    
    
    1,207
    
    
    
    (748
    )
    
    
    (10,965
    )
    
    
    (10,716
    )Loss from operations
    
    
    (8,819
    )
    
    
    (7,254
    )
    
    
    (9,608
    )
    
    
    (8,762
    )
    
    
    (10,713
    )
    
    
    (11,008
    )
    
    
    (22,108
    )
    
    
    (19,782
    )Gain (loss) on investments,
write-down of marketable
securities and venture
investments, loss in
investees accounted for
under the equity method,
and other income
(expense), net
    
    
    7,182
    
    
    
    1,932
    
    
    
    (2,397
    )
    
    
    (6,465
    )
    
    
    (6,156
    )
    
    
    (41,274
    )
    
    
    (11,946
    )
    
    
    (3,496
    )Net income (loss)
    
    $
    4,792
    
    
    $
    (6,632
    )
    
    $
    (4,540
    )
    
    $
    (13,031
    )
    
    $
    (25,476
    )
    
    $
    (43,630
    )
    
    $
    (21,679
    )
    
    $
    (15,263
    )Net income
(loss) per share:Basic
    
    $
    0.14
    
    
    $
    (0.19
    )
    
    $
    (0.13
    )
    
    $
    (0.37
    )
    
    $
    (0.72
    )
    
    $
    (1.21
    )
    
    $
    (0.58
    )
    
    $
    (0.38
    )Diluted
    
    $
    0.13
    
    
    $
    (0.19
    )
    
    $
    (0.13
    )
    
    $
    (0.37
    )
    
    $
    (0.72
    )
    
    $
    (1.21
    )
    
    $
    (0.58
    )
    
    $
    (0.38
    )Weighted average number
of common shares:Basic
    
    
    35,208
    
    
    
    35,141
    
    
    
    35,033
    
    
    
    34,988
    
    
    
    35,480
    
    
    
    36,089
    
    
    
    37,292
    
    
    
    39,871Diluted
    
    
    35,897
    
    
    
    35,141
    
    
    
    35,033
    
    
    
    34,988
    
    
    
    35,480
    
    
    
    36,089
    
    
    
    37,292
    
    
    
    39,871
 
 Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the
Consolidated Financial Statements, including the related notes, included in
Item 8-Financial Statements and Supplemental Data. 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 Affecting 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 operates through three
business units: Memory, Systems Solutions and Analog and Mixed Signal. 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 overwhelming
majority of our revenues, and the memory business unit contributed 67% of our
total net revenues during fiscal 2004. We have ceased developing new DRAM
products and revenues are derived primarily 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 revenues in fiscal 2005.
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 revenues. Net revenues from Analog and Mixed Signal
products comprised 16% of our total net revenues during 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, but growing portion of our revenues. During fiscal 2004, net revenues
from System Solution products comprised 17% of our total net revenues. 18




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##### Table of Contents



Although average selling prices of our SRAM and DRAM products have
generally declined over time, the selling prices are very sensitive to supply
and demand conditions in our target markets. During fiscal 2002, fiscal 2003
and most of fiscal 2004, our operating performance has been adversely affected
by severe declines in end user demand and average selling prices. More
recently, market conditions have improved and prices have stabilized, and, in
the last quarter, generally increased. We expect average selling prices for our
products to decline in the future, principally due to continuing and increased
market competition and an increased supply of competitive products in the
market. Our ability to maintain or increase revenues will be highly dependent
upon our ability to increase unit sales volumes of existing products and to
introduce and sell new products in quantities sufficient to compensate for the
anticipated declines in average selling prices of existing products. Declining
average selling prices will adversely affect gross margins unless we are able
to offset such declines with commensurate reductions in per unit costs or
changes in product mix in favor of higher margin products. Our operating
results are also affected by a number of other factors including the volume of
product sales, availability of foundry assembly and test capacity, the timing
and volume of sell-through by our distributors and retail customers to their
customers, variations in manufacturing cycle times, fluctuations in
manufacturing yields and manufacturing capacity utilization, the timing of
significant orders, our ability to match supply with demand, changes in product
and customer mix, market acceptance of new or enhanced versions of our
products, changes in the channels through which our products are distributed,
timing of new product announcements and introductions by us and our
competitors, fluctuations in product costs, increased research and development
expenses, and, to a lesser extent, exchange rate fluctuations. Although the
our net revenues increased by $8.1 million or 44% in fiscal 2004 from fiscal
2003 (principally because of improved performance in the Analog and Mixed
Signal and System Solutions business units, both of which have a limited
operating history and supplement the Memory products that have traditionally
represented the core of our business) our net revenues decreased in fiscal year
2003 by 30% compared to fiscal year 2002, and decreased in fiscal year 2002 by
87% compared to fiscal year 2001. As a fabless semiconductor company, we rely on third parties to
manufacture, assemble and test our products. However, as a result of our
dependence on third-party wafer foundries, principally Chartered Semiconductor
and Tower Semiconductor, our ability to increase our unit sales volumes depends
on our ability to increase our wafer capacity allocation from current
foundries, add additional foundries and improve yields of die per wafer.
During the past two quarters, we have experienced constraints in the supply of
wafers from certain of our foundries. Such constraints may have a material
adverse effect on our revenue and operating results. In addition, 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 financial position in future
quarters. 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 2004, we recorded write-downs of investments of $5.8
million compared with write-downs of $55.8 million during fiscal 2003. Assets
on which we recorded write-downs during fiscal 2004 included our investments in
Alliance Ventures Management and Solar Venture Partners funds. Assets on
which we recorded write-downs during fiscal 2003 included our investments in
Alliance Ventures Management and Solar Venture Partners funds, our investments
in Tower Semiconductor, Chartered Semiconductor and Vitesse Semiconductor
marketable securities and prepaid wafer credits from Tower Semiconductor. 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 the Company has made in other
businesses, we could be deemed to be an unregistered investment company in
violation of the Investment Company Act of 1940. In August 2000, the Company
applied to the SEC for an order under section 3(b)(2) of the Act confirming its
non-investment company status. In March 2002, the staff of the SEC informed
the Company that the staff could not support the granting of the requested
exemption. Since that time, the Company has been working to resolve its status
under the Act. 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 the Company has operated and continues
to operate as an unregistered investment company in violation of the Act, and
does not provide the Company with a sufficient period to either register as an
investment company or divest itself of investment securities and/or acquire
non-investment assets, the Company may be subject to significant potential
penalties. Our sales are generally made by purchase orders. Because industry practice
allows customers to reschedule or cancel orders on relatively short notice,
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. 19




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##### Table of Contents



International net revenues, principally from customers in Europe and Asia,
constituted approximately 71% of the Companys net revenues in fiscal 2004.
All of our foundries and a majority of our assembly and test subcontractors are
located abroad, and we have substantial operations in India. We plan to expand
our operations in India with increased investment in engineering and
development resources over the next several quarters. 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. During fiscal 2004, we used cash of $84.1 million for operations and
investments. This includes $9.3 million for operations and purchases of
licenses and equipment, $11.0 million for investments in Tower Semiconductor,
$20.0 million for investments through Alliance Ventures Management, and $43.8
million for debt and lease repayments. The Company sold UMC common stock
shares for proceeds of $80.5 million to finance these activities. During 2004,
we repaid in full our 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, the Companys main source of liquidity in the near term. The Companys net loss was $19.4 million,
or $0.55 per share, for
fiscal 2004 compared to a net loss of $106.0 million, or $2.85 per share, for
fiscal 2003 and a net loss of $240.7 million, or $5.86 per share, for fiscal
2002. Critical Accounting Policies 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 its most difficult and subjective judgments, often as a result of the need
to make estimates of matters that are inherently uncertain. On an ongoing
basis, we evaluate our judgments and estimates including those related to
inventory valuation, marketable securities, valuation of Alliance Venture and
Solar investments, and revenue recognition. The methods, estimates, and
judgments we use in applying these most critical accounting policies have a
significant impact on the results we report in our financial statements. Inventory Valuation Our policy is to value inventory at the lower of cost or market on a
part-by-part basis. This policy requires us to make estimates regarding the
market value of our inventory, including an assessment of excess or obsolete
inventory. We determine excess and obsolete inventory based on an estimate of
the future demand for our products within a specified time horizon, generally
12 months. The estimates we use for demand are also used for near-term
capacity planning and inventory purchasing and are consistent with our revenue
forecasts. If our demand forecast is greater than our actual demand, we may be
required to take additional excess inventory charges, which will decrease gross
margin and net operating results in the future. The Company recorded charges
relating to inventory write-downs of $2.9 million, $6.3 million, and $30.4
million in fiscal 2004, 2003, and 2002, respectively. Marketable Securities Marketable securities held by the Company are valued at market prices with
unrealized gains or losses recognized in other comprehensive income (loss) in
the balance sheet. However, management evaluates its 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. The Company did not
record any write-downs in the fair value of its marketable securities during
fiscal 2004. The Company recorded pre-tax, non-operating write-downs of
$673,000 and $16.2 million during the second and third quarters of fiscal 2003,
respectively. The Company also recorded pre-tax, non-operating write-downs of
$288.6 million in fiscal 2002. Valuation of Alliance and Solar Venture Investments We enter into certain equity investments for the promotion of business and
strategic objectives. Our policy is to value these investments at our
historical cost. In addition, our policy requires us to periodically review
these 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 20




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##### Table of Contents



a result of managements analysis of its venture investments, the Company
recorded pre-tax, non-operating impairment charges related to Alliance Ventures
of $5.5 million, $19.0 million and $7.3 million during fiscal 2004, fiscal 2003
and fiscal 2002, respectively. The Company also recorded pre-tax,
non-operating impairment charges related to Solar Venture Partners of $300,000,
$5.8 million and $1.0 million during fiscal 2004, fiscal 2003 and fiscal 2002,
respectively. Revenue Recognition The Company recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred, the price is fixed or determinable and
collection is reasonably assured. Under these criteria, product revenue is
generally recognized upon shipment of product to customers, net of accruals for
estimated sales returns and allowances. Additionally, collection is not deemed
to be reasonably assured if customers receive extended payment terms. The provision for estimated sales returns and allowances on product sales is
recorded in the same period the related revenues are recorded. These estimates
are based on historical sales returns, analysis of credit memo data and other
known factors. Actual returns could differ from these estimates. Results of Operations The percentage of net revenues represented by certain line items in the
Companys consolidated statements of operations for the years indicated, is set
forth in the table below. Percentage of Net Revenues for Year Ended March 31,2004
    
    2003
    
    2002Net revenues
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Cost of revenues
    
    
    78
    
    
    
    215
    
    
    
    279Gross profit (loss)
    
    
    22
    
    
    
    (115
    )
    
    
    (179
    )Operating expenses:Research and development
    
    
    92
    
    
    
    124
    
    
    
    39Selling, general and administrative
    
    
    59
    
    
    
    96
    
    
    
    77Write-off of in-process research and development
    
    
    
    
    
    
    8
    
    
    
    3Loss from operations
    
    
    (129
    )
    
    
    (343
    )
    
    
    (298
    )Gain on investments
    
    
    110
    
    
    
    76
    
    
    
    18Write-down of marketable securities and venture investments
    
    
    (22
    )
    
    
    (302
    )
    
    
    (1,118
    )Loss in investees accounted for under the equity method
    
    
    (58
    )
    
    
    (90
    )
    
    
    (55
    )Other expense, net
    
    
    (30
    )
    
    
    (24
    )
    
    
    (20
    )Loss before income taxes, minority interest in consolidated
subsidiaries,
and cumulative effect of change in accounting principle
    
    
    (129
    )
    
    
    (683
    )
    
    
    (1,473
    )Benefit for income taxes
    
    
    (53
    )
    
    
    (92
    )
    
    
    (556
    )Loss before minority interest in consolidated subsidiaries and
cumulative effect of change in accounting principle
    
    
    (76
    )
    
    
    (591
    )
    
    
    (917
    )Minority interest in consolidated subsidiaries
    
    
    3
    
    
    
    18
    
    
    
    2Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    8Net loss
    
    
    (73
    )%
    
    
    (573
    )%
    
    
    (907
    )%
 Net Revenues Year Ended March 31,
    
    Percentage Change2004
    
    2003
    
    2002
    
    2004 to 2003
    
    2003 to 2002(in thousands)SRAM
    
    $
    11,603
    
    
    $
    7,600
    
    
    $
    13,356
    
    
    
    53
    %
    
    
    (43
    )%DRAM
    
    
    6,257
    
    
    
    6,334
    
    
    
    12,786
    
    
    
    (1
    )%
    
    
    (50
    )%Analog and Mixed Signal
    
    
    4,316
    
    
    
    2,948
    
    
    
    160
    
    
    
    46
    %
    
    
    1,743
    %System Solutions
    
    
    4,495
    
    
    
    1,640
    
    
    
    
    
    
    
    174
    %
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    245
    
    
    
    
    
    
    
    (100
    )%Net revenues
    
    $
    26,671
    
    
    $
    18,522
    
    
    $
    26,547
    
    
    
    44
    %
    
    
    (30
    )%
 In fiscal 2004, the Companys net revenues increased by $8.1 million or
44% to $26.7 million from $18.5 million in fiscal 2003. This increase was due
to a $3.9 million increase in revenue from memory products and a $4.2 million
increase in revenue from the Companys analog and mixed signal and system
solutions products. Revenues generated by the Companys Analog and Mixed
Signal business unit resulted primarily from the acquisition of PulseCore
during fiscal 2002. Revenues generated by the Companys System 21




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##### Table of Contents



Solutions business unit resulted primarily from products incorporating
technology from an API license purchased during fiscal 2003. The increase in
memory revenue resulted from an increase in unit sales of 9% combined with an
increase in ASPs of 18%. The Companys net revenues in
fiscal 2003 fell by $8.0 million or 30% to $18.5 million from $26.5 million in
fiscal 2002 due to a 4% increase in unit volume combined with a 34% decrease in
ASPs. This decrease was primarily due to a reduction in memory product
revenue. The Companys SRAM net revenues for fiscal 2004 were $11.6 million or
approximately 44% of total net revenues compared to $7.6 million or
approximately 41% of total net revenues in fiscal 2003. This represents an
increase of $4.0 million or 53% from fiscal 2003 and resulted from a 37%
increase in unit sales combined with a 11% increase in ASPs. The Companys DRAM net revenues for fiscal 2004 were $6.3 million or
approximately 23% of total net revenues compared to $6.3 million or
approximately 34% of total net revenues in fiscal 2003. Revenue was flat to
fiscal 2003 resulting from a 28% decrease in unit sales combined with a 37%
increase in ASPs. In fiscal 2003, DRAM net revenues decreased $6.5 million
from fiscal 2002 due to a 27% decrease in unit sales combined with a 32%
decrease in ASPs. DRAM net revenues for fiscal 2002 were $12.8 million or
approximately 48% of total net revenues. The Company has ceased developing new
DRAM products and revenues are derived primarily from supplying legacy DRAM
products to existing customers. As a result, the Company expects revenue from
DRAM products to comprise a significantly smaller portion of overall revenues
in fiscal 2005. The Companys Analog and Mixed Signal net revenues for fiscal 2004 were
$4.3 million or approximately 16% of total net revenues compared to $2.9
million or approximately 16% of total net revenues in fiscal 2003. This
represents an increase of approximately $1.4 million from fiscal 2003 and
resulted from a 113% increase in unit sales combined with a 23% decrease in
ASPs. Analog and Mixed Signal net revenues for fiscal 2002 were $160,000 or
less than 1% of total net revenues. Revenue generated by this business unit
resulted from the acquired business of PulseCore in fiscal 2002. The Companys System Solutions net revenues for fiscal 2004 were $4.5
million or approximately 17% of total net revenues compared to $1.6 million or
approximately 9% of total revenues in fiscal 2003. This represents an increase
of $2.9 million or 174% from fiscal 2003 and resulted from a 199% increase in
unit sales combined with a 8% decrease in ASPs. There was no revenue generated
from this business in fiscal 2002. The Company continues to focus its efforts in selling to the non-PC
market. Sales to non-PC segments of the market, such as telecommunications,
networking, datacom and consumer in fiscal 2004 accounted for approximately 84%
of the Companys net revenues compared to approximately 83% during fiscal 2003
and 72% in fiscal 2002. The trend away from the PC market is due to the
Companys customer and market diversification efforts. The following illustrates revenues by geographic locations. Revenues are
attributed to countries based on the customers location. Year Ended March 31,2004
    
    2003
    
    2002(in thousands)United States of America
    
    $
    7,848
    
    
    $
    5,814
    
    
    $
    6,968Taiwan
    
    
    5,057
    
    
    
    1,904
    
    
    
    3,894Japan
    
    
    3,558
    
    
    
    2,257
    
    
    
    2,603Asia (except Taiwan and Japan)
    
    
    2,481
    
    
    
    3,740
    
    
    
    4,044Europe (except United Kingdom)
    
    
    5,504
    
    
    
    2,538
    
    
    
    3,735United Kingdom
    
    
    1,975
    
    
    
    1,690
    
    
    
    4,981Rest of world
    
    
    248
    
    
    
    579
    
    
    
    322Total
    
    $
    26,671
    
    
    $
    18,522
    
    
    $
    26,547
 International
net revenues in fiscal 2004 were $18.8 million or
approximately 71% of net revenues. This was an increase of approximately 48%
from fiscal 2003. International net revenues in fiscal 2003 were $12.7 million
which represented a 35% decrease compared to fiscal 2002. International net
revenues are derived mainly from customers in Asia and Europe. Net revenues to
Asia accounted for approximately 42% and Europe accounted for 28% of net
revenues for the Company for fiscal year 2004. Generally, the markets for the Companys products are characterized by
volatile supply and demand conditions, numerous competitors, rapid
technological change, and product obsolescence. These conditions could require
the Company to make significant shifts in its product mix in a relatively short
period of time. These changes involve several risks, including, among others,
constraints or delays in timely deliveries of products from the Companys
suppliers, lower than anticipated wafer manufacturing yields, lower 22




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##### Table of Contents



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 the
Companys results of operations. Gross Profit (Loss) The Companys gross profit for fiscal 2004 was $5.8 million or 22% of
total net revenues. The Companys gross loss for fiscal 2003 and 2002,
respectively, was $21.2 million and $47.4 million, respectively, which
represents 115% and 179% of total net revenues, respectively. During fiscal
2004, the Company sold memory product inventory which had previously been
written down by $23.7 million. During fiscal 2003, the Company sold memory
product inventory which had previously been written down by $35.7 million.
These actions helped the Company to increase its gross profit and gross margin
during fiscal 2004 and 2003. The Company will continue to receive gross profit
and gross margin benefits as it sells inventory which had been previously
written down to a lower cost basis. As of March 31, 2004, the Company has
approximately $16.6 million of memory products that have been written to $0.
The Company also incurred inventory write-downs of $2.9 million, $6.3 million
and $30.4 million during fiscal 2004, 2003 and 2002, 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 either Analog and
Mixed Signal or System Solutions products in fiscal 2004. During the third quarter of fiscal 2003, the Company wrote off $9.5
million of prepaid wafer credits resulting from its investment in Tower. The
Company had determined that the value of these credits would not be realized
given the Companys sales forecast of products scheduled to be manufactured at
Tower. There can be no assurances that the Companys investment in Tower wafer
credits will not continue to decline in value. The gross loss, excluding the impact of inventory write-downs and sale of
previously reserved products, was $15.0 million or 56% of total net revenues
during fiscal 2004. This compares to a gross loss of $50.6 million or 273% of
total net revenues during fiscal 2003 and a gross loss of $18.6 million or 70%
of total net revenues during fiscal 2002. This reduction in gross loss,
excluding the impact of inventory write-downs, is due to a higher percentage of
the Companys revenues coming from the Analog and Mixed Signal and System
Solutions product lines. Both of these product lines earn higher gross margins
than the Companys memory products. During the second quarter of fiscal 2004, the Company 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 the Company will be able to increase yields to an
acceptable level. Failure to do so could result in a material adverse effect
on the Companys gross profit in future periods. The Company is subject to a number of factors that may have an adverse
impact on gross profit, including the availability and cost of products from
the Companys suppliers; increased competition and related decreases in unit
average selling prices; changes in the mix of product sold; and the timing of
new product introductions and volume shipments. In addition, the Company may
seek to add additional foundry suppliers and transfer existing and newly
developed products to more advanced manufacturing processes. The commencement
of manufacturing at a new foundry is often characterized by lower yields as the
manufacturing process needs to be refined. There can be no assurance that the
commencement of such manufacturing will not have a material adverse effect on
the Companys cost of revenues in future periods. Research and Development Year Ended March 31,
    
    Percentage Change2004
    
    2003
    
    2002
    
    2004 to 2003
    
    2003 to 2002(in thousands)Net revenues
    
    $
    26,671
    
    
    $
    18,522
    
    
    $
    26,547
    
    
    
    44
    %
    
    
    (30
    )%Research and development (R&D)
    
    $
    24,653
    
    
    $
    22,933
    
    
    $
    10,435
    
    
    
    8
    %
    
    
    120
    %R&D as a percentage of net revenues
    
    
    92
    %
    
    
    124
    %
    
    
    39
    %
    
    
    (32
    )%
    
    
    85
    %
 Research and development expenses consist 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. Research and development expenses were $24.7 million or 92% of net revenues for
fiscal 2004 as compared to $22.9 million or 124% of net revenues for fiscal
2003 and $10.4 million or 39% of net revenues for fiscal 2002. The increase in
spending during fiscal 2004 compared to fiscal 2003 was due primarily to
increased facilities costs from the acquisition of Chip Engines, increased
depreciation as a result of additional CAD software investments, and the
amortization of technology licenses. The decrease in R&D expenses as a 23




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##### Table of Contents



percentage of net revenues from fiscal 2003 to 2004 is due to the
aforementioned spending increases offset by a 44% increase in net revenues.
The increase in spending from fiscal 2003 to 2002 was due primarily to
increased headcount resulting from the acquisitions of PulseCore, SiPackets,
and Chip Engines, increased depreciation as the result of additional CAD
software investments, the amortization of technology licenses, and the impact
of the consolidation of investee companies. The Company believes that investments in research and development are
necessary to remain competitive in the marketplace. Research and development
expenses may increase in absolute dollars in future periods due to additional
personnel the Company may acquire as it attempts to diversify its 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. Selling, General and Administrative Year Ended March 31,
    
    Percentage Change2004
    
    2003
    
    2002
    
    2004 to 2003
    
    2003 to 2002(in thousands)Net revenues
    
    $
    26,671
    
    
    $
    18,522
    
    
    $
    26,547
    
    
    
    44
    %
    
    
    (30
    )%Selling, general and administrative (SG&A)
    
    $
    15,621
    
    
    $
    17,846
    
    
    $
    20,377
    
    
    
    (12
    )%
    
    
    (12
    )%SG&A as a percentage of net revenues
    
    
    59
    %
    
    
    96
    %
    
    
    77
    %
    
    
    (37
    )%
    
    
    19
    %
 Selling, general and administrative expenses include 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 expenses in fiscal 2004 were $15.6 million or 59% of net revenues
compared with $17.8 million or 96% of net revenues in fiscal 2003. The
decrease from fiscal 2003 to 2004 was due to lower facilities expenses due to
the consolidation of the system solutions and mixed signal offices. The
decrease in SG&A expenses from fiscal 2002 to 2003 was due to lower legal and
tax consulting fees as well as lower commissions resulting from a 30% decrease
in net revenues. The decrease in SG&A expenses as a percentage of net revenues
from fiscal 2003 to 2004 was due to a 44% increase in net revenues combined
with a 12% decrease in expenses. Selling, general and administrative expenses may increase in absolute
dollars and may fluctuate as a percentage of net revenues in the future due to
changes in commission expense, which moves up or down depending on the level of
net revenues, directors and officers insurance premiums and administrative
costs related to complying with the requirements of recent corporate governance
reforms. Gain on Investments The following table summarizes the Companys gain (loss) on investments: Year Ended March 31,2004
    
    2003
    
    2002(in thousands)Sale of UMC shares
    
    $
    29,473
    
    
    $
    24,651
    
    
    $
    (20,813
    )Sale of Broadcom shares
    
    
    
    
    
    
    1,245
    
    
    
    1,636Sale of Magma shares
    
    
    
    
    
    
    1,186
    
    
    
    Sale of Adaptec shares
    
    
    1,098
    
    
    
    (5,423
    )
    
    
    403Sale of Chartered shares
    
    
    
    
    
    
    (5,788
    )
    
    
    Sale of Vitesse shares
    
    
    
    
    
    
    (912
    )
    
    
    Sale of PMC-Sierra shares
    
    
    
    
    
    
    (274
    )
    
    
    Adaptec acquisition of Platys Communications
    
    
    
    
    
    
    
    
    
    
    28,076Write-down of restricted cash
    
    
    (1,284
    )
    
    
    (300
    )
    
    
    Net hedging activities
    
    
    
    
    
    
    (739
    )
    
    
    (5,380
    )Realized gain (loss) on Solar investee
disposition
    
    
    
    
    
    
    497
    
    
    
    (250
    )Realized gain on AVM investee
    
    
    
    
    
    
    
    
    
    
    1,105Total gain on investments
    
    $
    29,287
    
    
    $
    14,143
    
    
    $
    4,777
 24




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##### Table of Contents



The Company recorded the following gains and write-downs during fiscal 2004:  
    
    Gain on the sale of 93.0 million common shares of UMC
    
    A write-down of restricted cash related to its investment in Platys being acquired by Adaptec
    
    Gain on the sale of 362,173 common shares of Adaptec The Company recorded the following gains, losses and write-downs during fiscal 2003:  
    
    Gain on the sale of 112.2 million common shares of UMC
    
    Gain on the sale of 75,000 common shares of Broadcom
    
    Gain on the sale of 360,244 common shares of Magma
    
    Loss on the sale of 924,000 common shares of Adaptec
    
    Loss on the sale of 1.6 million shares of Chartered ADSs
    
    Loss on the sale of 143,000 common shares of Vitesse
    
    Loss on the sale of 68,000 common shares of PMC-Sierra
    
    A write-down of restricted cash related to its investment in Platys being acquired by Adaptec
    
    Losses related to its hedges on Adaptec, Broadcom and Vitesse
    
    Realized gain on the sale of one of Solar Venture Partners investee companies The Company recorded the following gains, and losses during fiscal 2002:  
    
    Loss on the sale of 77.8 million common shares of UMC
    
    Gain on the sale of 125,000 common shares of Broadcom
    
    Gain on the sale of 100,000 common shares of Adaptec
    
    Gain on the acquisition of Platys Communications by Adaptec
    
    Losses related to its hedges on Adaptec, Broadcom and Vitesse
    
    Realized loss on one of the Solar Venture Partners investee companies
    
    Realized gain on one of the Alliance Venture Managements investee companies Write-Down of Marketable Securities and Venture Investments The following table summarizes the Companys write-downs of marketable
securities and venture investments: Year Ended March 31,2004
    
    2003
    
    2002(in thousands)Chartered ADSs
    
    $
    
    
    
    $
    (16,212
    )
    
    $
    (12,155
    )PMC-Sierra common shares
    
    
    
    
    
    
    
    
    
    
    (1,048
    )Vitesse common shares
    
    
    
    
    
    
    (673
    )
    
    
    (3,827
    )Tower ordinary shares
    
    
    
    
    
    
    (14,083
    )
    
    
    (20,645
    )UMC common shares
    
    
    
    
    
    
    
    
    
    
    (250,894
    )Alliance Ventures investments
    
    
    (5,487
    )
    
    
    (19,035
    )
    
    
    (7,277
    )Solar Venture Partners investments
    
    
    (300
    )
    
    
    (5,789
    )
    
    
    (1,000
    )Total write-downs
    
    $
    (5,787
    )
    
    $
    (55,792
    )
    
    $
    (296,846
    )
 Loss in Investees Accounted for Under the Equity Method Several of the Alliance Ventures and Solar Venture Partners investments
are accounted for under the equity method due to the Companys 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
$15.4 million, $16.6 million, and $14.6 million for fiscal 2004, 2003 and 2002,
respectively. Other Expense, Net 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 $7.9 million, $4.6 million and $5.3 million in fiscal 2004, 2003
and 2002, respectively. The increase in expense as compared to fiscal 2003 is
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. Foreign tax expense is related to withholding taxes on the sale of
UMC common stock. The decrease in expense in fiscal 2003 as compared to fiscal
2002 is due primarily to a reduction in interest expense from $3.5 million to
$2.2 million. 25




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##### Table of Contents



The Company also recorded losses of $54,000, $79,000 and $4,000 for the
disposal of some fixed assets during fiscal 2004, 2003 and 2002, respectively. Benefit for Income Taxes The Companys effective tax rate for fiscal 2004, 2003 and 2002, was
41.2%, 13.5% and 37.8%, respectively. During fiscal 2004, 2003 and 2002, the Company recorded a benefit for
income taxes of approximately $14.1 million, $17.1 million
and $147.8 million,
respectively, primarily as a result of the write-down of marketable securities
and other investments of $5.8 million, $55.8 million and $296.8 million,
respectively. Factors That May Affect Future Results 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 the Company. Our financial results could be adversely impacted if we fail to successfully
develop, introduce and sell new products and we have had limited success in
doing so. Like many semiconductor companies which frequently 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. Our business has been characterized
by a fundamental slowdown in end customer demand in all the markets our
products serve. More specifically, the Companys performance during fiscal
2004, fiscal 2003 and fiscal 2002 was adversely affected by weak end user
demand for our SRAM and DRAM memory products. Although average selling prices of
our SRAM and DRAM products have generally declined over time, the selling
prices are very sensitive to supply and demand conditions in our target
markets. More recently, market conditions have improved and prices have
stabilized and, in the last two quarters, generally increased. However, we
expect the average selling prices for 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. The Company no longer
develops DRAM products and revenues are derived primarily from supplying legacy
DRAM products to existing customers. As a result, the Company expects revenue
from DRAM products to comprise a significantly smaller portion of overall
revenues in fiscal 2005 than in fiscal 2004. Although the Company has recently
developed and sold analog and mixed signal and system solutions products to
supplement the Companys traditional memory product offerings, the Company has
a limited operating history in these markets and has had limited success.
During fiscal 2004, the Company began volume production of certain synchronous
SRAM products and experienced lower than expected yields resulting in higher
than anticipated costs for such products. There can be no assurance that the
Company will be able to increase yields to an acceptable level. Failure to do
so could result in a material adverse effect on the Companys gross profit in
future quarters. If we fail to introduce new products in a timely manner or
are unable to successfully manufacture such products, or if our customers do
not successfully introduce new systems or products incorporating ours, or
market demand for our new products does not exist as anticipated, our business,
financial condition and results of operations could be seriously harmed. We 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 average selling
prices. Although we have recently experienced increased demand for our
products in markets we serve, our business over the past three fiscal years has
frequently been characterized by a fundamental slowdown in end-customer demand.
More specifically, for several years our performance generally has been adversely
affected by severe declines in end user demand for our memory products and
average selling prices of all of our products. Although our net revenues
increased by $8.1 million or 44% in fiscal 2004 compared to fiscal 2003,
principally because of improved performance in our Analog and Mixed Signal and
System Solutions business units, both of which have a limited operating
history, our net revenues decreased in fiscal 2003 by 30% compared to fiscal
2002 and decreased in fiscal 2002 by 87% compared to fiscal 2001. Although
average selling prices of our SRAM and DRAM products have generally declined
over time, the selling prices are very sensitive to supply and demand
conditions in our target markets. More recently, market conditions have
improved and prices have stabilized and, in the last quarter, generally
increased. However, we expect the average selling prices for 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.
Declining average selling prices will adversely affect the Companys gross
margin. Accordingly, our ability to 26




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maintain or increase revenues will be highly dependent on our ability to
increase unit sales volume and reduce the cost per unit of our existing
products and to successfully develop, introduce and sell new products. There
can be no assurance that the Company will be able to increase unit sales
volumes of existing products, develop, introduce and sell new products or
significantly reduce its cost per unit. There also can be no assurance that
even if we were to increase unit sales volumes and sufficiently reduce our
costs per unit, we would be able to maintain or increase revenues or gross
margin. More recently, the Company has decided to discontinue development of
new DRAM products. The Companys existing DRAM revenue is derived from selling
legacy DRAM products to its existing customer base. The Company expects that
revenues from DRAM products will comprise a significantly smaller percentage of
overall revenue in fiscal 2005. A significant portion of our assets consists 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. 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, and may decline in
value in the future. Additionally, if the Company was forced to liquidate a
significant portion of its UMC common stock, the share price received on such a
sale may be negatively impacted by the size of such a sale given the Companys
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 investments in Tower Semiconductor Ltd., until January
2006. During the third quarter of fiscal 2003, the Company recorded a pre-tax,
non-operating loss of $14.1 million on its long-term investment in Tower
shares. The Companys investment in Tower Semiconductor Ltd. 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. 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, the investments in many of the securities
held by us 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. For example, in fiscal 2004, the
Company wrote down nine of its Alliance Ventures investments
and two of its
Solar investments and recognized pre-tax, non-operating losses of approximately
$5.8 million. In
addition, during the second and third quarters of fiscal 2003, we recorded
pre-tax, non-operating losses of $673,000 and $16.2 million on two of our
investments. In addition, during the first six months of fiscal 2002,
marketable securities held by us experienced significant declines in market
value, and the Company recorded a pre-tax, non-operating loss of
$288.6 million
during the second quarter of fiscal 2002. In addition, we wrote down several
of our Alliance Venture Management and Solar Venture Partners investments
recognizing pre-tax, non-operating losses of approximately $24.8
million and $8.3 million for fiscal 2003 and 2002, respectively. There can be no assurances that the
Companys investment in these securities will not decline further in value. We rely on third parties to perform manufacturing; problems in their
performance can seriously harm our financial results. The Company currently relies on independent foundries to manufacture all
of the Companys products. Reliance on these foundries involves several risks,
including constraints or delays in timely delivery of the Companys products,
reduced control over delivery schedules, quality assurance and costs and loss
of production due to seismic activity, weather conditions and other factors.
Semiconductor manufacturing yields are a function of both our design technology
and the 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 that we do not control for our
wafers, which increases 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. In addition, during the third and fourth quarters of fiscal 2004,
the Company experienced longer lead times and constraints in the supply of
wafers for certain of its products. Failure to resolve such issues may have a
material, adverse effect on the Companys results of operations. In addition,
as a result of the rapid growth of the semiconductor industry based in the
Hsin-Chu Science-Based Industrial Park, severe constraints have been placed on
the water and electricity supply in that region. Any shortages of water or
electricity could adversely affect the Companys foundries ability to supply
the Companys products, which could have a material adverse effect on the
Companys results of operations or financial 27




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condition. Although the Company continuously evaluates sources of supply
and may seek to add additional foundry capacity, there can be no assurance that
such additional capacity can be obtained at acceptable prices, if at all. The
occurrence of any supply or other problem resulting from these risks could have
a material adverse effect on the Companys results of operations. The Company
also relies on domestic and offshore subcontractors for die assembly and
testing of products, and is subject to risks of disruption in adequate supply
of such services and quality problems with such services. Increases in raw materials prices may significantly harm our results. Our semiconductor manufacturing operations require raw materials that must
meet exacting standards. We generally have more than one source available for
these materials, but there are only a limited number of suppliers capable of
delivering certain raw materials that meet our standards. There is an ongoing
risk that the suppliers of wafer fabrication, wafer sort, assembly and test
services to the Company may increase the price charged to the Company for the
services they provide, to the point that the Company may not be able to
profitably have its products produced by such suppliers. The Company believes
capacity utilization at its suppliers is increasing. Typically, if capacity
utilization is high for an extended period of time, the Company will experience
increased prices from its suppliers. There can be no assurance that such
increases will not occur in the near future. The occurrence of such price
increases could have a material adverse affect on the Companys results of
operations. Our results of operations and financial condition could be harmed by efforts to
comply with, or penalties associated with, the Investment Company Act of 1940. In August 2000, the Company applied to the SEC for an order under section
3(b)(2) of the Act confirming its non-investment company status. In March
2002, the staff of the SEC informed the Company that the staff could not
support the granting of the requested exemption. Since that time, the Company
has been working to resolve its status under the Act. No assurances can be
given that the SEC will agree that the Company is not currently deemed to be an
unregistered investment company in violation of the Act. If the SEC takes the
view that the Company has been operating and continues to operate as an
unregistered investment company in violation of the Act, and does not provide
the Company with a sufficient period to either register as an investment
company or divest itself of investment securities and/or acquire non-investment
assets, the Company 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), the Company would be
required either to register as a closed-end investment company under the Act,
or, in the alternative, to divest itself of sufficient investment securities
and/or to acquire sufficient non-investment assets so as not to be regarded as
an investment company under the Act. Either registering as a closed-end
investment company under the Act, or divesting itself of sufficient investment
securities and/or acquiring sufficient non-investment assets so as not to be
regarded as an investment company under the Act, could result in a material
adverse effect on the Companys results of operations and financial condition. We face additional problems and uncertainties associated with international
operations that could seriously harm us. The Company conducts a significant portion of its business
internationally. International net revenues, principally from customers in
Europe and Asia, constituted approximately 71% of the Companys net revenues in
fiscal 2004. All of our foundries and a majority of assembly and test
subcontractors are abroad and we conduct significant operations in India and
are subject to a number of risks resulting from such operations. Such risks
include political and economic instability and changes in diplomatic and trade
relationships, foreign currency fluctuations, unexpected changes in regulatory
requirements, delays resulting from difficulty in obtaining export licenses for
certain technology, tariffs and other barriers and restrictions, and the
burdens of complying with a variety of foreign laws. There can be no assurance
that such factors will not adversely impact the Companys results of operations
in the future or require the Company to modify its current business practices. Our future results are likely to fluctuate. The Companys quarterly and annual results of operations have historically
been, and will continue to be, subject to quarterly and other fluctuations due
to a variety of factors, including: general economic conditions; changes in
pricing policies by the Company, its competitors or its suppliers; anticipated
and unanticipated decreases in unit average selling prices of the Companys
products; fluctuations in manufacturing yields, availability and cost of
products from the Companys suppliers; the timing of new product announcements
and introductions by the Company or its competitors; changes in the mix of
products sold; the cyclical nature of the semiconductor industry; the gain or
loss of significant customers; increased research and development expenses
associated with new product introductions; market acceptance of new or enhanced
versions of the Companys products; seasonal customer demand; and the timing of
significant orders. Results of operations could also be adversely affected by
economic conditions generally or in various 28




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geographic areas, other conditions affecting the timing of customer orders
and capital spending, a continued downturn in the market for electronic
products, or order cancellations or rescheduling. We must build products based on demand forecasts; if such forecasts are
inaccurate, we may incur significant losses. The cyclical nature of the semiconductor industry periodically results in
shortages of advanced process wafer fabrication capacity such as the Company
has experienced from time to time. The Companys ability to maintain adequate
levels of inventory is primarily dependent upon the Company obtaining
sufficient supply of products to meet future demand, and any inability of the
Company to maintain adequate inventory levels may adversely affect its
relations with its customers. In addition, the Company must order products and
build inventory substantially in advance of product shipments, and there is a
risk that because demand for the Companys products is volatile and subject to
rapid technology and price change, the Company will forecast incorrectly and
produce excess or insufficient inventories of particular products. This
inventory risk is heightened because certain of the Companys key customers
place orders with short lead times. The Companys customers ability to
reschedule or cancel orders without significant penalty could adversely affect
the Companys liquidity, as the Company may be unable to adjust its purchases
from its independent foundries to match such customer changes and
cancellations. The Company has in the past produced excess quantities of
certain products, which has had a material adverse effect on the Companys
results of operations. For example, in fiscal 2004, 2003 and 2002, the Company
recorded pre-tax charges totaling approximately $2.9 million, $6.3 million and
$30.4 million, respectively, primarily to reflect such an excess and a decline
in market value of certain inventory. There can be no assurance that the
Company in the future will not produce excess quantities of any of its
products. The Company also recorded a write-down of its investment in Tower
wafer credits of $9.5 million during the second quarter of fiscal 2003. There
can be no assurance that additional write-downs of wafer credits will not occur
in future periods. To the extent the Company produces excess or insufficient
inventories of particular products, the Companys results of operations could
be adversely affected. 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 despite
recent increases in average selling prices during the second half of fiscal
2004, we have generally experienced, and expect to continue to experience in
the future, declining average selling prices for many of our products. If
these conditions were to persist, a restructuring of operations, resulting in
significant restructuring charges, may become necessary. Risks related to sales of our products. Sales to a small number of customers represent a significant portion of
our revenues and if we were to lose one of our major customers or experience
any material reduction in orders from any of these customers, our revenues and
operating results would suffer. Our sales
are generally made by standard purchase orders rather than long-term contracts. We are exposed to the risks associated with a slowdown in the U.S. and
world-wide economy. During fiscal 2003 and fiscal 2002, decreased consumer confidence and
spending and reduced corporate profits and capital spending resulted in a
downturn in the U.S. economy generally and in the semiconductor industry in
particular. Despite evidence of an economic recovery in the most recent fiscal
year, we experienced a significant slowdown in customer orders across nearly
all of our memory product lines during fiscal 2002 and fiscal 2003. In
addition, we experienced corresponding decreases in revenues and average
selling prices across most of our product lines during fiscal 2002, fiscal 2003
and the first half of fiscal 2004 and expect continued pressure on average
selling prices in the future. If adverse economic conditions were to resume,
additional restructuring of operations may be required, and our business,
financial condition and results of operations may be seriously harmed. We may fail to integrate successfully businesses that we acquire. In the past, the Company has acquired other companies such as PulseCore
and Chip Engines and we may continue to acquire additional companies in the
future. If the Company fails to integrate these businesses successfully, or
properly, its quarterly and annual results may be seriously harmed. Integrating
businesses is expensive, time-consuming and a great strain on the Companys
resources. Some specific difficulties in the integration process may include
failure to successfully develop acquired in-process 29




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technology, the difficulty of integrating acquired technology or products,
unanticipated expenses related to technology integration and the potential
unknown liabilities associated with acquired businesses. We may not be able to compete successfully in a highly competitive industry. The Company faces intense competition, and many of its principal
competitors and potential competitors have substantially greater financial,
technical, marketing, distribution and other resources, broader product lines
and longer-standing relationships with customers than does the Company, any of
which factors may place such competitors and potential competitors in a
stronger competitive position than the Company. Quarterly shipments are typically weighted to the end of a quarter. The Company usually ships more product in the third month of each quarter
than in either of the first two months of the quarter, with shipments in the
third month higher at the end of the month. This pattern, which is common in
the semiconductor industry, is likely to continue. The concentration of sales
in the last month of the quarter may cause the Companys quarterly results of
operations to be more difficult to predict. Moreover, a disruption in the
Companys production or shipping near the end of a quarter could materially
reduce the Companys net sales for that quarter. The Companys reliance on
outside foundries and independent assembly and testing houses reduces the
Companys ability to control, among other things, delivery schedules. We may be unable to defend our intellectual property rights and may face
significant expenses 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. The Company
has from time to time received, and believes that it likely will in the future
receive, notices alleging that the Companys products, or the processes used to
manufacture the Companys products, infringe the intellectual property rights
of third parties. In the event of litigation to determine the validity of any
third-party claims, or claims against the Company for indemnification related
to such third-party claims, such litigation, whether or not determined in favor
of the Company, could result in significant expense to the Company and divert
the efforts of the Companys technical and management personnel from other
matters. In the event of an adverse ruling in such litigation, the Company
might be required to cease the manufacture, use and sale of infringing
products, discontinue the use of certain processes, expend significant
resources to develop non-infringing technology or obtain licenses to the
infringing technology. We may have limited ability to raise additional funds to finance strategic
acquisitions and other general corporate needs. In order to finance strategic acquisitions 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 at 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 impacts our ability to raise 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 in the foreseeable future.
However, if our operating performance falls below expectations, we may need
additional funds. Our operations could be severely harmed by natural disasters or other
disruptions to the foundries at which it subcontracts manufacturing. The Companys corporate headquarters are located near major earthquake
faults, and the Company is subject to the risk of damage or disruption in the
event of seismic activity. In addition, the Company subcontracts its
manufacturing to independent foundries. The Company has in the past
experienced disruption of the operations at its foundries, and any future
disruptions for any reason, including work stoppages, an outbreak of Severe
Acute Respiratory Syndrome, fire, earthquakes, or other natural disasters could
have a material adverse affect on the Companys results of operations. There
have been at least two other fires at semiconductor manufacturing facilities in
the Hsin-Chu Science-Based Industrial Park. There can be no assurance that any
of the foregoing factors will not materially adversely affect the Companys
results of operations. If a major earthquake or other natural disaster occurs,
we may require significant amounts of time and money to resume operations and
we could suffer damages that could seriously harm our business and results of
operations. 30




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Recently enacted and proposed changes in securities laws and regulations are
likely to increase our costs. The Sarbanes-Oxley Act of 2002 that became law in July 2002 required
changes in our corporate governance, public disclosure and compliance
practices. The act also required the SEC to promulgate new rules on a variety
of subjects. In addition to final rules and rule proposals already made,
Nasdaq has proposed revisions to its requirements for companies, such as us,
that are Nasdaq-listed. We expect these developments to increase our legal and
financial compliance costs, and to make some activities more difficult, such as
stockholder approval of new option plans. We are continually evaluating and
monitoring regulatory developments and cannot estimate the timing or magnitude
of additional costs we may incur as a result. Liquidity and Capital Resources At March 31, 2004, the Company had approximately $6.1 million in cash and
cash equivalents, a decrease of $1.3 million from March 31, 2003; and
approximately $99.7 million in net working capital, an increase of
approximately $16.1 million from approximately $83.6 million at March 31, 2003. The Company had short-term investments in marketable securities whose fair
value at March 31, 2004 was $159.8 million. 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. 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. During fiscal 2002,
operating activities used cash of $69.3 million. This was primarily the result
of a net loss of $240.7 million adjusted for non-cash charges of $340.3 million
and a decrease in inventory of $35.3 million, offset by a reduction in accounts
payable of $73.2 million and net deferred tax liabilities of $164.1 million. Investing activities provided cash of $49.2 million during fiscal 2004.
This is primarily the result of a sale of marketable securities for $80.5
million, offset in part by an investment in Tower for $11.0 million, purchases
of Alliance Venture 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 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 technology license of $3.2 million. During fiscal 2002,
investing activities provided $60.3 million. This resulted from proceeds of
marketable securities and other investment sales of $94.4 million offset by additional investments
in Tower of $11.0 million and additional venture investments of $21.5 million. 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 and $22.6 million of short-term debt
repayment offset by a $6.4 million reduction in restricted cash. During fiscal
2002, financing activities provided $26.5 million. This resulted from a net
increase in short-term borrowings of $39.7 million offset by stock repurchases
of $7.7 million. At March 31, 2004, the Company had no short-term borrowings. At March 31,
2003, the Company had short-term borrowings totaling $43.6 million. In the third quarter of fiscal 2002, the Company entered into a secured
loan agreement with Chinatrust to borrow up to $30.0 million. In January 2002,
the Company increased the principal amount it could borrow under the loan
agreement to $46.0 million. At that time, the loan was secured by shares of
UMC common stock held by the Company with a minimum aggregate value of 250% of
the outstanding loan balance, earned interest at LIBOR plus 2.5%, and matured
on January 21, 2003. Prior to the original maturation date, the Company and
Chinatrust agreed to extend the loan until March 4, 2003. At that time, both
the Company and Chinatrust agreed to extend the loan until March 2, 2004 (the
Maturity Date) and reduced the principal amount the Company may borrow to
$45.0 million. The principal was due on the Maturity Date and interest was due
every three months for the term of the loan. The Company incurred interest

expense of approximately $1.1 million and $1.7 million during fiscal 2004 and
fiscal 2003, respectively. In the revised loan agreement, the provision for
funds to be held in escrow as collateral for accrued interest was eliminated.
The loan was secured by shares of UMC common stock held by the Company with a
minimum aggregate value of 230% of the outstanding loan balance. The loan
accrued interest at LIBOR plus 2.0%. The outstanding balance of the loan was
paid in full on March 2, 2004. As 31




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of March 31, 2004, all 145 million shares of UMC common stock, which had
been pledged as collateral, had been released by Chinatrust as a result of the
Company repaying in full its outstanding debt with Chinatrust. In the fourth quarter of fiscal 2002, the Company issued a $4.8 million
promissory note in connection with the acquisition of PulseCore. The note was
non-interest bearing and matured on March 29, 2003. Discount on the note of
$609,000 was calculated based on an imputed interest rate of 12%. The
outstanding balance on the promissory note, net of unamortized discount, was
approximately $4.8 million and $4.3 million at March 31, 2003 and 2002,
respectively. On April 11, 2003, the Company paid $4.8 million to settle the
promissory note. On May 20, 2002, the Board of Directors approved, by unanimous written
consent, an increase in the number of shares of the Companys Common Stock that
may be repurchased by the Company from four million to nine million shares.
During fiscal 2003, the Company repurchased 6,034,600 of its own shares for
$38.1 million. Through March 31, 2004, the Company has repurchased 8,155,007
of its own shares for $68.5 million. The Company terminated its stock
repurchase program in January 2004. Management believes these sources of liquidity and financing will be
sufficient to meet the Companys projected working capital and other cash
requirements for the foreseeable future. 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, the Company has entered into
and will continue to consider various possible transactions, including equity
investments in or loans to foundries in exchange for guaranteed production
capacity, the formation of joint ventures to own and operate foundries, as was
the case with Chartered Semiconductor, UMC or Tower, or the usage of take or
pay contracts that commit the Company to purchase specified quantities of
wafers over extended periods. Manufacturing arrangements such as these may
require substantial capital investments, which may require the Company to seek
additional equity or debt financing. There can be no assurance that such
additional financing, if required, will be available when needed or, if
available, will be on satisfactory terms. Additionally, the Company has entered
into and will continue to enter into various transactions, including the
licensing of its integrated circuit designs in exchange for royalties, fees or
guarantees of manufacturing capacity. The following table summarizes our contractual obligations at March 31,
2004 and the effect such obligations are expected to have on our liquidity and
cash flow in future periods: Contractual Obligations
(in thousands) Balance Sheet Less than 1
    
    1-3
    
    4-5
    
    After 5Year
    
    Years
    
    Years
    
    Years
    
    TotalCapital Lease Obligations (including interest)
    
    $
    37
    
    
    $
    4
    
    
    $
    
    
    
    $
    
    
    
    $
    41Long-term Obligations
    
    
    
    
    
    
    237
    
    
    
    
    
    
    
    
    
    
    
    237$
    37
    
    
    $
    241
    
    
    $
    
    
    
    $
    
    
    
    $
    278
 Off-Balance Sheet Less than 1
    
    1-3
    
    4-5
    
    After 5Year
    
    Years
    
    Years
    
    Years
    
    TotalOperating Leases
    
    $
    1,840
    
    
    $
    2,644
    
    
    $
    
    
    
    $
    
    
    
    $
    4,484Commitment to invest in CAD tools
    
    
    2,491
    
    
    
    2,293
    
    
    
    
    
    
    
    
    
    
    
    4,7844,331
    
    
    
    4,937
    
    
    
    
    
    
    
    
    
    
    
    9,268TOTAL
    
    $
    4,368
    
    
    $
    5,178
    
    
    $
    
    
    
    $
    
    
    
    $
    9,546
 32




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Trading Activities Involving Non-Exchange Traded Contracts Accounted for at
Fair Value The Company has used derivative financial instruments to manage the market
risk of certain of its short-term investments. The Company does not use
derivatives for trading or speculative purposes. All derivatives are recognized on the balance sheet at fair value and are
reported in short-term investments and long-term obligations. Classification of
each derivative as current or non current is based upon whether the maturity of
each instrument is less than or greater than 12 months. To qualify for hedge
accounting in accordance with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, the Company requires that the instruments
are effective in reducing the risk exposure that they are designated to hedge.
Instruments that meet established accounting criteria are formally designated
as hedges at the inception of the contract. These criteria demonstrate that the
derivative is expected to be highly effective at offsetting changes in fair
value of the underlying exposure both at inception of the hedging relationship
and on an ongoing basis. The assessment for effectiveness is formally
documented at hedge inception and reviewed at least quarterly throughout the
designated hedge period. The Company applies hedge accounting in accordance with SFAS No. 133,
whereby the Company designates each derivative as a hedge of the fair value of
a recognized asset (fair value hedge). Changes in the value of a derivative,
along with offsetting changes in fair value of the underlying hedged exposure,
are recorded in earnings each period. Changes in the value of derivatives that
do not offset the underlying hedged exposure throughout the designated hedge
period (collectively, ineffectiveness), are recorded in earnings each period. In determining fair value of its financial instruments, the Company uses
dealer quotes as well as methods and assumptions that are based on market
conditions and risks existing at each balance sheet date. All methods of
assessing fair value result in a general approximation of value, and such value
may never actually be realized. Effective Transactions with Related and Certain Other Parties N. Damodar Reddy, the Chairman of the Board, President and Chief Executive
Officer of the Company, is a director and investor in Infobrain, Inc.
(Infobrain) an entity which provides the following services to the Company:
intranet and internet web site development and support, migration of Oracle
applications from version 10.7 to 11i; MRP software design implementation and
training, automated entry of manufacturing data, and customized application
enhancements in support of the Companys business processes. The Company paid
Infobrain approximately $306,000 in fiscal 2003 and $290,000 during fiscal
2004. Mr. Reddy is not involved in the operations of Infobrain. In October 1999, the Company 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 the Company
intended to form. Alliance Venture Management does not directly invest in the
investment funds with the Company, 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 and C.N. Reddy. 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 the Company owns 100% of
the common units in Alliance Venture Management, it does not hold any Preferred
Member Units and does not participate in the management fees generated by the
management of the investment funds. N. Damodar Reddy and C.N. Reddy, who are
directors of the Company and members of the Companys 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. In November 1999, the Company formed Alliance Ventures I, LP (Alliance
Ventures I) and Alliance Ventures II, LP (Alliance Ventures II), both
California limited partnerships. The Company, as the sole limited partner,
owns 100% of the 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, calculated on an annual basis. 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 33




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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. Alliance Venture Management receives 15%  16% of the realized gains of
the venture funds. No distribution of cash and/or marketable securities was
made to the partners of Alliance Venture Management during fiscal 2004 or
fiscal 2003. During fiscal 2002, the Company made distributions of cash and
marketable securities to the partners of Alliance Venture Management totaling
$5.2 million. Details of the distributions are as follows (in thousands): Market Value of
    
    Cash
    
    TotalOfficer/Employee
    
    Stock Distributed
    
    Distributed
    
    DistributionsN. Damodar Reddy
    
    $
    995
    
    
    $
    571
    
    
    $
    1,566C.N. Reddy
    
    
    995
    
    
    
    571
    
    
    
    1,566Non-executive employee
    
    
    1,175
    
    
    
    686
    
    
    
    1,861Former employee
    
    
    126
    
    
    
    76
    
    
    
    202Totals
    
    $
    3,291
    
    
    $
    1,904
    
    
    $
    5,195
 Annually, Alliance Venture Management earns 0.5% of the total fund
commitment of Alliance Ventures I, II, III, IV and V. During fiscal 2004, the
Company incurred $875,000 of commitment fees. This amount was offset by
expenses incurred by the Company on behalf of Alliance Venture Management of
approximately $870,000. Neither N. Damodar Reddy nor C.N. Reddy received any
commitment fees during fiscal 2004 or fiscal 2003. N. Damodar Reddy and C.N. Reddy have formed private venture funds, Galaxy
Venture Partners, L.L.C., Galaxy Venture Partners II, L.L.C. and Galaxy Venture
Partners III, L.L.C., which 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. The Company acquired Chip Engines in the fourth quarter of fiscal
2003. As part of this acquisition, the Company 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, the Company repaid the note in full including approximately
$22,000 of accrued interest. C.N. Reddy, an officer and director of the Company, is a general partner
of Solar, an investor in Solar and participates in running Solars daily
operations. Solar has invested in 17 of the 40 total companies in which
Alliance Venture Managements funds have invested. On May 18, 1998, the Company provided loans to C.N. Reddy and N. Damodar
Reddy and one other director, Sanford Kane, aggregating $1.7 million. The
Reddys loans were used for the payment of taxes resulting from the gain on the
exercise of non-qualified stock options. The loan to Sanford Kane was used for
the exercise of stock options. Under these loans, both principal and accrued
interest were due on December 31, 1999, with accrued interest at rates ranging
from 5.50% to 5.58% per annum. The loan to Sanford Kane was repaid in full at
December 31, 1999. In 1999, 2000, and 2001, the loans to N. Damodar Reddy and
C.N. Reddy were extended such that they became due on December 31, 2002. The
loan to C.N. Reddy was repaid in full as of March 31, 2003 and the loan to N.
Damodar Reddy was repaid in full as of June 30, 2003. The related party receivable is $264,000 as of March 31, 2004 and is
related to loans to various employees, none of whom are officers of the
Company, including those in the Companys India design center. 
 Item 7A.Quantitative and Qualitative Disclosures About Market Risk The Company has exposure to the impact of foreign currency fluctuations
and changes in market values of its investments. The entities in which we hold
investments operate in markets that have experienced significant market price
fluctuations during the year ended March 31, 2003. These entities, in which
the Company holds varying percentage interests, operate and sell their products
in 34




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various global markets; however, the majority of their sales are
denominated in U.S. dollars thus mitigating much of the foreign currency risk.
The Company does not hold any derivative financial instruments at
March 31, 2004. Investment Risk As of March 31, 2004 and March 31, 2003, the Companys short-term
investment portfolio consisted of marketable equity securities in UMC, Tower
Semiconductor, Vitesse and Adaptec, Inc. All of these securities are subject
to market fluctuations. During fiscal 2003, the Company liquidated its
positions in Chartered, PMC-Sierra, Magma and Broadcom and settled the Broadcom
hedge instrument. The Company also reclassified 1,111,321 ordinary shares of
Tower from long-term to short-term in the fourth quarter of fiscal 2003 and
recorded this investment as an available-for-sale marketable security in
accordance with SFAS 115. As of March 31, 2004, the Company has 2,672,518
ordinary shares of Tower that are classified as short-term. During the first six months of fiscal 2002 and the first nine months of
fiscal 2003, marketable securities held by the Company experienced declines in
their market values due to the downturn in the semiconductor industry and
general market conditions. Management evaluated its investments in marketable
securities for potential other-than-temporary declines in their fair value
and determined that write-downs were necessary on December 31, 2002, September
30, 2002 and December 31, 2001. As a result, the Company recorded pre-tax,
non-operating losses of $16.2 million, $673,000 and $288.6 million in the third
and second quarters of fiscal 2003 and the second quarter of fiscal 2002,
respectively. The Company did not record any losses for other-than-temporary
declines in the fair value of its marketable securities during fiscal 2004. The Company also has an investment in the ordinary shares of Tower that is
classified as a long-term investment and is recorded at cost. As of March 31,
2004, the Company has 6,235,873 shares that are recorded as long-term. The
Company reviews its long-term investments periodically to determine if any
impairment has occurred and subsequent write-down is required. During the
third quarter of fiscal 2003 and the second quarter of fiscal 2002, the Company
recorded pre-tax, non-operating losses of $14.1 million and $20.6 million,
respectively, on its investment in Tower shares. As of March 31, 2004, the
Company also had $13.9 million of Tower wafer credits acquired as part of the
original Tower Share Purchase Agreement. During the second quarter of fiscal
2003, the Company wrote off a portion of its investment in Tower wafer credits
recognizing a pre-tax, operating loss of approximately $9.5 million. The
Company determined, at that time, that the value of these credits would not be
realized given the Companys sales forecast of product to be manufactured at
Tower. There can be no assurances that the Companys investment in Tower
ordinary shares and wafer credits will not decline further in value. Short- and long-term investments are subject to declines in the market as
well as risk associated with the underlying investment. The Company
periodically evaluates its investments in terms of credit risk since a
substantial portion of its assets are now in the form of investments, not all
of which are liquid, and may enter into full or partial hedging strategies
involving financial derivative instruments to minimize market risk. During
fiscal 2002 and 2001, the Company entered into indexed debt transactions to
partially hedge its investments in Adaptec and Vitesse. During the fourth
quarter of fiscal 2003, the Company settled its derivative contract on the
Vitesse investment by delivering 490,000 common shares to the brokerage firm
holding the contract. During the first quarter of fiscal 2004, the Company
settled its derivative contract on the Adpatec investment by delivering 362,173
shares to the brokerage firm holding the contract. The Company did not enter
into any additional hedging transactions during fiscal 2004 nor fiscal 2003 but
may do so in the future. Foreign Currency Risk Almost all of the Companys semiconductor business transactions are
conducted in US dollars thus mitigating effects from adverse foreign currency
fluctuations. As of March 31, 2004, the Company owned approximately 161.5 million shares
of common stock of UMC, a publicly traded company in Taiwan. As these shares are not tradable
in the United States, they are subject to many of the same risks associated
with foreign currency. The market value of these holdings on March 31, 2004,
based on the price per share in NTD and the NTD/US dollar exchange rate of NTD
33.18 per US$ was US $139.2 million. The value of these investments could be
impacted by foreign currency fluctuations that could have a material impact on
the financial condition, results of operations, and cash flows of the Company
in the future. 
 Item 8.Financial Statements and Supplementary Data The index to the Companys Consolidated Financial Statements and Schedule,
and the reports of the independent accountants, appear in Part III of this Form
10-K. Selected consolidated quarterly financial data appears in Item 6 above. 35




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Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 
 Item 9A.Controls and Procedures  (a)
    
    Disclosure controls and procedures. Our principal executive officer
and our principal financial officer, after evaluating the effectiveness
of the Companys disclosure controls and procedures (as defined in the
Securities Exchange Act of 1934 Rules 13a-15(e) and 15-d-15(e)) as of
the end of the period covered by this report (the Evaluation Date)
have concluded that as of the Evaluation Date, our disclosure controls
and procedures were effective.(b)
    
    Changes in internal control over financial reporting: Changes in
internal controls. In connection with their audit of the Companys
financial statements as of and for the year ended March 31, 2004, our
independent accountants advised the Company that they had not identified
any deficiencies in the Companys internal control procedures. The
independent accountants also advised the Audit Committee in a report
dated April 20, 2004 that they have removed the reportable condition
which resulted from the fiscal 2003 audit and related to the Companys
accounting and financial reporting infrastructure for venture investee
companies and the accounting for current and deferred income taxes. 
 PART III 
 Item 10. Directors
and Executive Officers of the Registrant The information required by this Item 10 concerning executive officers of
the Company is set forth in Part I of this Form 10-K after Item 4 and below.
The information required by this item with respect to directors is incorporated
by reference to the section captioned Election of Directors contained in the
Proxy Statement. The information regarding Section 16 reporting compliance is
incorporated by reference to the section captioned Section 16(a) Beneficial
Ownership Reporting Compliance contained in the Proxy Statement. Code of Ethics The Company has adopted the Code of Ethics that applies to the principal
executive officer, the principal financial officer, principal accounting
officer or controller, or persons performing similar functions (collectively,
the Finance Managers). This Code of Ethics is included as an exhibit to this
Form 10-K. There have been no waivers under our Code of Ethics. We will post
any waivers, if and when granted, of our Code of Ethics on our website at
www.alsc.com. 
 Item 11.Executive Compensation The information required by this Item 11 is incorporated by reference to
the section captioned Executive Compensation contained in the Proxy
Statement. 
 Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this Item 12 is incorporated by reference to
the section captioned Security Ownership of Certain Beneficial Owners and
Management contained in the Proxy Statement. 
 Item 13.Certain Relationships and Related Transactions The information required by this Item 13 is incorporated by reference to the
section captioned Certain Relationships and Related Transactions contained in
the Proxy Statement. 
 Item 14.Principal Accountant Fees and Services The information required by this Item 14 is incorporated by reference to
the section captioned Principal Accountant Fees and Services contained in the
Proxy Statement. 36




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PART IV 
 Item 15.Exhibits, Financial Statement Schedules and Reports on Form 8-K (a)(1) Financial Statements See Index to Consolidated Financial Statements
on page F-1 of this Form 10-K Annual Report. (2) Report of Independent Accountants See Index to Consolidated
Financial Statements on F-1 of this Form 10-K Annual Report. Schedule II: Valuation and Qualifying Accounts See Index to Consolidated
Financial Statements on F-1 of this Form 10-K Annual Report. (3) Exhibits See Exhibit Index on page 39 of this Form 10-K Annual
Report. (b) A Current Report on Form 8-K was furnished to the Securities and
Exchange Commission on January 26, 2004 that reported the results of operations
and financial condition. (c) See Item 15(a)(3) 37




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EXHIBIT INDEX ExhibitNumber
    
    Document Description3.01(A)
    
    Registrants Certificate of Incorporation3.02(A)
    
    Registrants Certificate of Elimination of Series A Preferred Stock3.03(F)
    
    Registrants Certificate of Amendment of Certificate of Incorporation3.04(A)
    
    Registrants Bylaws4.01(A)
    
    Specimen of Common Stock Certificate of Registrant10.01
    
    Registrants Stock Option Plan adopted by Registrant on April 7, 1992 and amended through September
19, 1996, and related documents (superceded by Exhibit 10.51)10.02(A)
    
    Registrants Directors Stock Option Plan adopted by Registrant on October 1, 1993 and related documents10.03(A)
    
    Form of Indemnity Agreement used between Registrant and certain of its officers and directors10.04(K)
    
    Form of Indemnity Agreement used between the Registrant and certain of its officers10.07*(I)
    
    Subscription Agreement dated February 17, 1995, by and among Registrant, Singapore Technology Pte.
Ltd. and Chartered Semiconductor Manufacturing Pte. Ltd.10.08*(I)
    
    Manufacturing Agreement dated February 17, 1995, between Registrant and Chartered Semiconductor
Manufacturing Pte. Ltd.10.09(D)
    
    Supplemental Subscription Agreement dated March 15, 1995, by and among Registrant, Singapore
Technology Pte. Ltd. and Chartered Semiconductor Manufacturing Pte. Ltd.10.10*(D)
    
    Supplemental Manufacturing Agreement dated March 15, 1995, between Registrant and Chartered
Semiconductor Manufacturing Pte. Ltd.10.11*(E)
    
    Foundry Venture Agreement dated July 8, 1995, by and among Registrant, S3 Incorporated and United
Microelectronics Corporation10.12*(E)
    
    Foundry Capacity Agreement dated July 8, 1995, by and among Registrant, Fabco, S3 Incorporated and
United Microelectronics Corporation10.13*(F)
    
    Foundry Venture Agreement dated September 29, 1995, between Registrant and United Microelectronics
Corporation10.14*(F)
    
    Foundry Capacity Agreement dated September 29, 1995, by and among Registrant, FabVen and United
Microelectronics Corporation10.15*(F)
    
    Written Assurances Re: Foundry Venture Agreement dated September 29, 1995 by and among Registrant,
FabVen and United Microelectronics Corporation10.16*(G)
    
    Letter Agreement dated June 26, 1996 by and among Registrant, S3 Incorporated and United
Microelectronics Corporation10.17(H)
    
    Stock Purchase Agreement dated as of June 30, 1996 by and among Registrant, S3 Incorporated, United
Microelectronics Corporation and United Semiconductor Corporation10.18*(H)
    
    Amendment to Fabco Foundry Capacity Agreement dated as of July 3, 1996 by and among Registrant, S3
Incorporated, United Microelectronics Corporation and United Semiconductor Corporation10.19(H)
    
    Side Letter dated July 11, 1996 by and among Registrant, S3 Incorporated, United Microelectronics
Corporation and United Semiconductor Corporation10.20(I)
    
    1996 Employee Stock Purchase Plan10.21(J)
    
    Letter Agreement dated December 23, 1996 by and among Registrant, S3 Incorporated, United
Microelectronics Corporation and United Semiconductor Corporation10.22(K)
    
    Trademark License Agreement dated as of October 17, 1996 between Registrant and Alliance Semiconductor
International Corporation, a Delaware corporation, as amended through May 31, 199710.23(K)
    
    Restated Amendment to FabCo Foundry Venture Agreement dated as of February 28, 1997 by and among
Registrant, S3 Incorporated, United Microelectronics Corporation and United Semiconductor Corporation10.24(K)
    
    Letter Agreement dated April 25, 1997 by and among Registrant, S3 Incorporated, United
Microelectronics Corporation and United Semiconductor Corporation
 38




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ExhibitNumber
    
    Document Description10.25*(K)
    
    Restated DRAM Agreement dated as of February 28, 1996 between Registrant and United Microelectronics
Corporation10.26*(K)
    
    First Amendment to Restated DRAM Agreement dated as of March 26, 1996 between Registrant and United
Microelectronics Corporation10.27*(K)
    
    Second Amendment to Restated DRAM Agreement dated as of July 10, 1996 between Registrant and United
Microelectronics Corporation10.28(K)
    
    Promissory Note and Security Agreement dated March 28, 1997 between Registrant and Matrix Funding
Corporation10.29*(L)
    
    Sale and Transfer Agreement dated as of March 4, 199810.30(M)
    
    Alliance Venture Management, LLC Limited Liability Company Operating Agreement dated October 15, 199910.31(M)
    
    Alliance Venture Management, LLC Amended Limited Liability Company Operating Agreement dated February
28, 200010.32(M)
    
    Alliance Ventures I, LP Agreement of Limited Partnership dated November 12, 199910.33(M)
    
    Alliance Ventures II, LP Agreement of Limited Partnership dated November 12, 199910.34(M)
    
    Alliance Ventures III, LP Agreement of Limited Partnership dated February 28, 200010.35(N)
    
    Share Purchase Agreement, dated as of July 4, 2000, by and between SanDisk Corporation and Tower
Semiconductor Ltd.10.36(N)
    
    Additional Purchase Obligation Agreement, dated as of July 4, 2000, by and between SanDisk Corporation
and Tower Semiconductor Ltd.10.37(N)
    
    Registration Rights Agreement, dated as of January 18, 2001, by and between Tower Semiconductor Ltd.,
SanDisk Corporation, The Israel Corporation, Registrant, Macronix International Co., Ltd. and
QuickLogic Corporation.10.38(N)
    
    Consolidated Shareholders Agreement, dated as of January 18, 2001 by and among SanDisk Corporation,
The Israel Corporation, Registrant and Macronix International Co., Ltd.10.39(N)
    
    Alliance/Tower Joinder Agreement, dated August 29, 2000, by and between Registrant and Tower
Semiconductor Ltd.10.40(N)
    
    Alliance/TIC Joinder Agreement, dated August 29, 2000, by and between Registrant and The Israel
Corporation10.41(O)
    
    Alliance Venture Management, LLC Amended Limited Liability Company Operating Agreement dated January
23, 200110.42(O)
    
    Alliance Ventures IV, LP Agreement of Limited Partnership dated January 23, 200110.43(O)
    
    Alliance Ventures V, LP Agreement of Limited Partnership dated January 23, 200110.44(O)
    
    Loan Agreement dated May 17, 2001, by and between Registrant and Citibank, N.A.10.45(O)
    
    Share Pledge Agreement dated May 17, 2001, by and between Registrant and Citibank, N.A.10.50(P)
    
    Asset Purchase Agreement dated January 17, 2002 by and between Registrant and PulseCore, Inc.10.51(Q)
    
    Registrants 2002 Stock Option Plan10.55(S)
    
    Tower Semiconductor Agreement; Amendment No.3 to payment schedule of Series A-5 additional purchase
obligations, waiver of Series A-5 conditions, conversion of Series A-4 wafer credits and other
provisions, dated as of November 11, 200314.01
    
    Code of Ethics21.01
    
    Subsidiaries of Registrant23.01
    
    Consent of PricewaterhouseCoopers LLP (San Jose, California)31.01
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of the Companys Chief
Executive Officer31.02
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of the Companys Chief
Financial Officer32.01
    
    Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 of the Companys Chief Executive Officer
 39




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ExhibitNumber
    
    Document Description32.02
    
    Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 of the Companys Chief Financial Officer
   
    
    Management contract or compensatory plan or arrangement required to be
filed as an Exhibit to this Form 10-K.*
    
    Confidential treatment has been granted with respect to certain portions
of this document.**
    
    Confidential treatment has been requested with respect to certain
portions of this document.(A)
    
    The document referred to is hereby incorporated by reference from
Registrants Registration Statement on Form SB-2 (File No. 33-69956-LA)
declared effective by the Commission on November 30, 1993.(C)
    
    The document referred to is hereby incorporated by reference from
Registrants Registration Statement on Form SB-2 (File No. 33-90346-LA)
declared effective by the Commission on March 28, 1995.(D)
    
    The document referred to is hereby incorporated by reference from
Registrants Current Report on Form 8-K filed with the Commission on April
28, 1995.(E)
    
    The document referred to is hereby incorporated by reference from
Registrants Current Report on Form 8-K filed with the Commission on July
24, 1995.(F)
    
    The document referred to is hereby incorporated by reference from
Registrants Current Report on Form 8-K filed with the Commission on
October 23, 1995.(G)
    
    The document referred to is hereby incorporated by reference from
Registrants Quarterly Report on Form 10-Q filed with the Commission on
August 13, 1996.(H)
    
    The document referred to is hereby incorporated by reference from
Registrants Quarterly Report on Form 10-Q filed with the Commission on
November 12, 1996.(I)
    
    The document referred to is hereby incorporated by reference from
Registrants Registration Statement on Form S-8 (File No. 333-13461) filed
with the Commission on October 4, 1996.(J)
    
    The document referred to is hereby incorporated by reference from
Registrants Quarterly Report on Form 10-Q filed with the Commission on
February 11, 1997.(K)
    
    The document referred to is hereby incorporated by reference from
Registrants Annual Report on Form 10-K filed with the Commission on June
27, 1997.(L)
    
    The document referred to is hereby incorporated by reference from
Registrants Current Report on Form 8-K filed with the Commission on March
19, 1998.(M)
    
    The document referred to is hereby incorporated by reference from
Registrants Annual Report on Form 10-K filed with the Commission on June
30, 2000.(N)
    
    The document referred to is hereby incorporated by reference from
Registrants Quarterly Report on Form 10-Q filed with the Commission on
February 13, 2000.(O)
    
    The document referred to is hereby incorporated by reference from
Registrants Annual Report on Form 10-K filed with the Commission on June
29, 2001.(P)
    
    The document referred to is filed hereby incorporated by reference from
Registrants Quarterly Report on Form 10-Q filed with the Commission on
February 12, 2002. 40




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(Q)
    
    The document referred to is hereby incorporated by reference from
Registrants Annual Report on Form 10-K filed with the Commission on July
15, 2002.(S)
    
    The document referred to is hereby incorporated by reference from
Registrants Quarterly Report on Form 10-Q filed with the Commission on
February 10, 2004. 41




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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized. ALLIANCE SEMICONDUCTOR CORPORATIONBy:
    
    /s/ N. Damodar ReddyN. Damodar ReddyChairman of the Board, President,Chief Executive Officer(Principal Executive Officer)June 10, 2004By:
    
    /s/ Ronald K. SheltonRonald K. SheltonVice President Finance and Administration andChief Financial Officer(Principal Financial and Accounting Officer)June 10, 2004
 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints N. Damodar Reddy and Ronald K. Shelton, or
either of them, his true and lawful attorneys-in-fact and agents, with full
power of substitution and re-substitution, for him and in his name, place and
stead, in any and all capacities to sign any and all amendments to this Report
on Form 10-K, and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or either of them, or their or his
substitutes or substitute, may lawfully do or cause to be done by virtue
hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report on Form 10-K has been signed by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated. Signature
    
    Title
    
    Date/s/ N. Damodar Reddy
N. Damodar Reddy
    
    Director, Chairman of the Board, President,
Chief Executive Officer
    
    June 10, 2004/s/ C. N. Reddy
C. N. Reddy
    
    Director, Executive Vice President for Investments
    
    June 10, 2004/s/ Juan A. Benitez
Juan A. Benitez
    
    Director
    
    June 10, 2004/s/ Sanford L. Kane
Sanford L. Kane
    
    Director
    
    June 10, 2004/s/ Gregory E. Barton
Gregory E. Barton
    
    Director
    
    June 10, 2004
 42




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ALLIANCE SEMICONDUCTOR CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PagesConsolidated Financial Statements:Report of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets as of March 31, 2004 and 2003
    
    
    F-3Consolidated Statements of Operations for the years ended March 31, 2004, 2003 and 2002
    
    
    F-4Consolidated Statements of Stockholders Equity for the years ended March 31, 2004, 2003 and 2002
    
    
    F-5Consolidated Statements of Cash Flows for the years ended March 31, 2004, 2003 and 2002
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-7Financial Statement Schedule:Report of Independent Registered Public Accounting Firm
    
    
    F-32Schedule II  Valuation and Qualifying Accounts
    
    
    F-33
 F-1




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Alliance Semiconductor
Corporation: In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders equity and of
cash flows present fairly, in all material respects, the financial position of
Alliance Semiconductor Corporation and its subsidiaries at March 31, 2004 and
2003, and the results of their operations and their cash flows for each of the
three years in the period ended March 31, 2004 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Companys management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with the
auditing standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion. As discussed in Note 4 to the consolidated financial statements, the
Company changed its method of accounting for derivative instruments effective
April 1, 2001 to comply with Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities. /s/ PricewaterhouseCoopers LLP San Jose, California
June 10, 2004 F-2




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##### Table of Contents



ALLIANCE SEMICONDUCTOR CORPORATION CONSOLIDATED BALANCE SHEETS
(in thousands) March 31,2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    6,107
    
    
    $
    7,358Restricted cash
    
    
    
    
    
    
    1,284Short-term investments
    
    
    159,778
    
    
    
    148,711Accounts receivable, net
    
    
    4,081
    
    
    
    2,058Inventory
    
    
    11,609
    
    
    
    2,862Related party receivables
    
    
    264
    
    
    
    1,282Other current assets
    
    
    2,847
    
    
    
    2,292Total current assets
    
    
    184,686
    
    
    
    165,847Property and equipment, net
    
    
    6,161
    
    
    
    8,434Investment in Tower Semiconductor Ltd. (excluding short-term portion)
    
    
    21,208
    
    
    
    15,822Alliance Ventures and other investments
    
    
    36,082
    
    
    
    38,319Other assets
    
    
    7,290
    
    
    
    5,686Goodwill and intangible assets
    
    
    5,375
    
    
    
    8,614Total assets
    
    $
    260,802
    
    
    $
    242,722LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Short-term borrowings
    
    $
    
    
    
    $
    43,560Accounts payable
    
    
    9,406
    
    
    
    4,298Accrued liabilities
    
    
    2,881
    
    
    
    3,608Income taxes payable
    
    
    33,766
    
    
    
    4,520Deferred income taxes
    
    
    38,921
    
    
    
    23,840Current portion of long-term obligations
    
    
    
    
    
    
    2,213Current portion of capital lease obligation
    
    
    33
    
    
    
    236Total current liabilities
    
    
    85,007
    
    
    
    82,275Long-term obligations
    
    
    237
    
    
    
    264Long-term capital lease obligation
    
    
    4
    
    
    
    48Total liabilities
    
    
    85,248
    
    
    
    82,587Commitments and contingencies (Notes 10 and 14)Minority interest in subsidiary companies
    
    
    832
    
    
    
    915Stockholders equity:Preferred stock, $0.01 par value; 5,000 shares authorized; none issued and outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value; 100,000 shares authorized; 43,409 and 43,132 shares issued and
35,254 and 34,977 shares outstanding at March 31, 2004 and 2003, respectively
    
    
    435
    
    
    
    432Additional paid-in capital
    
    
    200,670
    
    
    
    199,699Treasury stock (8,155 and 8,155 shares at cost)
    
    
    (68,524
    )
    
    
    (68,524
    )Retained earnings
    
    
    6,099
    
    
    
    25,510Accumulated other comprehensive income
    
    
    36,042
    
    
    
    2,103Total stockholders equity
    
    
    174,722
    
    
    
    159,220Total liabilities and stockholders equity
    
    $
    260,802
    
    
    $
    242,722
 The accompanying notes are an integral part of these consolidated financial statements. F-3




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##### Table of Contents



ALLIANCE SEMICONDUCTOR CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data) Year Ended March 31,2004
    
    2003
    
    2002Net revenues
    
    $
    26,671
    
    
    $
    18,522
    
    
    $
    26,547Cost of revenues
    
    
    20,840
    
    
    
    39,744
    
    
    
    73,966Gross profit (loss)
    
    
    5,831
    
    
    
    (21,222
    )
    
    
    (47,419
    )Operating expenses:Research and development
    
    
    24,653
    
    
    
    22,933
    
    
    
    10,435Selling, general and administrative
    
    
    15,621
    
    
    
    17,846
    
    
    
    20,377Write-off of acquired in-process research and development
    
    
    
    
    
    
    1,610
    
    
    
    906Loss from operations
    
    
    (34,443
    )
    
    
    (63,611
    )
    
    
    (79,137
    )Gain on investments
    
    
    29,287
    
    
    
    14,143
    
    
    
    4,777Write-down of marketable securities and venture investments
    
    
    (5,787
    )
    
    
    (55,792
    )
    
    
    (296,846
    )Loss in investees accounted for under the equity method
    
    
    (15,355
    )
    
    
    (16,597
    )
    
    
    (14,634
    )Other expense, net
    
    
    (7,893
    )
    
    
    (4,626
    )
    
    
    (5,287
    )Loss before income taxes, minority interest in consolidated subsidiaries,
and cumulative effect of change in accounting principle
    
    
    (34,191
    )
    
    
    (126,483
    )
    
    
    (391,127
    )Benefit for income taxes
    
    
    (14,083
    )
    
    
    (17,113
    )
    
    
    (147,823
    )Loss before minority interest in consolidated subsidiaries
and cumulative effect of change in accounting principle
    
    
    (20,108
    )
    
    
    (109,370
    )
    
    
    (243,304
    )Minority interest in consolidated subsidiaries
    
    
    697
    
    
    
    3,322
    
    
    
    533Loss before cumulative effect of change in accounting principle
    
    
    (19,411
    )
    
    
    (106,048
    )
    
    
    (242,771
    )Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    2,055Net loss
    
    $
    (19,411
    )
    
    $
    (106,048
    )
    
    $
    (240,716
    )Loss per share before cumulative effect of change in accounting principle:Basic and diluted
    
    $
    (0.55
    )
    
    $
    (2.85
    )
    
    $
    (5.91
    )Cumulative effect of change in accounting principle per share:Basic and diluted
    
    $
    
    
    
    $
    
    
    
    $
    0.05Net loss per share:Basic and diluted
    
    $
    (0.55
    )
    
    $
    (2.85
    )
    
    $
    (5.86
    )Weighted average number of common shares:Basic and diluted
    
    
    35,093
    
    
    
    37,160
    
    
    
    41,078
 The accompanying notes are an integral part of these consolidated financial
statements. F-4




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##### Table of Contents



ALLIANCE SEMICONDUCTOR CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands) AccumulatedCommon Stock
    
    Additional
    
    
    
    
    
    Other
    
    Retained
    
    TotalPaid-In
    
    Treasury
    
    Comprehensive
    
    Earnings
    
    StockholdersShares
    
    Amount
    
    Capital
    
    Stock
    
    Income (Loss)
    
    (Deficit)
    
    EquityBalances at March 31, 2001
    
    
    42,725
    
    
    $
    427
    
    
    $
    197,350
    
    
    $
    (22,762
    )
    
    $
    
    
    
    $
    372,274
    
    
    $
    547,289Issuance of common stock under employee
stock plans
    
    
    242
    
    
    
    3
    
    
    
    1,448
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,451Repurchase of common stock(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,668
    )
    
    
    
    
    
    
    
    
    
    
    (7,668
    )Tax benefit on exercise of stock options
    
    
    
    
    
    
    
    
    
    
    402
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    402Unrealized gain on investments, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150,497
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (240,716
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (90,219
    )Balances at March 31, 2002
    
    
    42,967
    
    
    
    430
    
    
    
    199,200
    
    
    
    (30,430
    )
    
    
    150,497
    
    
    
    131,558
    
    
    
    451,255Issuance of common stock under employee
stock plans
    
    
    165
    
    
    
    2
    
    
    
    499
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    501Repurchase of common stock(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (38,094
    )
    
    
    
    
    
    
    
    
    
    
    (38,094
    )Unrealized loss on investments, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (148,394
    )
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (106,048
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (254,442
    )Balances at
March 31, 2004
    
    
    43,132
    
    
    
    432
    
    
    
    199,699
    
    
    
    (68,524
    )
    
    
    2,103
    
    
    
    25,510
    
    
    
    159,220Issuance of common stock under employee
stock plans
    
    
    277
    
    
    
    3
    
    
    
    971
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    974Repurchase of common stock(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unrealized gain on investments, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,939
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,411
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,528Balances at
March 31, 2004
    
    
    43,409
    
    
    $
    435
    
    
    $
    200,670
    
    
    $
    (68,524
    )
    
    $
    36,042
    
    
    $
    6,099
    
    
    $
    174,722
   (1)
    
    At March 31, 2002, 2003 and 2004, the Company held 2,120, 8,155, and
8,155 shares in treasury, which have not been retired. After taking into
account these treasury shares, the net outstanding shares at March 31,
2002, 2003 and 2004 were 40,847, 34,977, and 35,254, respectively. The accompanying notes are an integral part of these consolidated financial statements. F-5




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ALLIANCE SEMICONDUCTOR CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Year Ended March 31,2004
    
    2003
    
    2002Cash flows from operating activities:Net loss
    
    $
    (19,411
    )
    
    $
    (106,048
    )
    
    $
    (240,716
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    6,737
    
    
    
    5,837
    
    
    
    2,935Minority interest in subsidiary companies, net of tax
    
    
    (697
    )
    
    
    (3,322
    )
    
    
    (533
    )Write-down of in-process research and development
    
    
    
    
    
    
    1,610
    
    
    
    906Loss in investees accounted for under the equity method
    
    
    15,355
    
    
    
    16,597
    
    
    
    14,634Gain on investments
    
    
    (29,287
    )
    
    
    (14,143
    )
    
    
    (3,470
    )Other
    
    
    1,162
    
    
    
    457
    
    
    
    (1,407
    )Write-down of investments
    
    
    5,787
    
    
    
    55,792
    
    
    
    296,846Inventory write-down
    
    
    2,876
    
    
    
    6,338
    
    
    
    30,352Write-down of other assets
    
    
    
    
    
    
    9,479
    
    
    
    Deferred income taxes
    
    
    (8,942
    )
    
    
    857
    
    
    
    (164,074
    )Cumulative effect of change in accounting principle, net of tax
    
    
    
    
    
    
    
    
    
    
    (2,055
    )Changes in assets and liabilities:Accounts receivable
    
    
    (2,023
    )
    
    
    833
    
    
    
    15,177Inventory
    
    
    (11,623
    )
    
    
    10,436
    
    
    
    35,253Related party receivables
    
    
    1,018
    
    
    
    1,112
    
    
    
    (25
    )Other assets
    
    
    (2,155
    )
    
    
    (1,670
    )
    
    
    (402
    )Accounts payable
    
    
    5,108
    
    
    
    1,405
    
    
    
    (73,244
    )Accrued liabilities and other long-term obligations
    
    
    (754
    )
    
    
    (1,701
    )
    
    
    1,206Income tax payable
    
    
    29,246
    
    
    
    (17,567
    )
    
    
    19,274Net cash used in operating activities
    
    
    (7,603
    )
    
    
    (33,698
    )
    
    
    (69,343
    )Cash flows from investing activities:Purchase of property and equipment
    
    
    (1,226
    )
    
    
    (4,126
    )
    
    
    (729
    )Purchase of technology licenses
    
    
    (430
    )
    
    
    (3,150
    )
    
    
    Proceeds from sale of investments
    
    
    80,523
    
    
    
    116,092
    
    
    
    78,550Proceeds from sale of Alliance Venture and other investments
    
    
    1,350
    
    
    
    500
    
    
    
    15,897Investment in Tower Semiconductor Ltd.
    
    
    (11,001
    )
    
    
    (25,976
    )
    
    
    (11,001
    )Acquisition of PulseCore
    
    
    
    
    
    
    
    
    
    
    (948
    )Purchase of Alliance Venture and other investments
    
    
    (20,031
    )
    
    
    (11,699
    )
    
    
    (21,461
    )Net cash provided by investing activities
    
    
    49,185
    
    
    
    71,641
    
    
    
    60,308Cash flows from financing activities:Net proceeds from the issuance of common stock
    
    
    974
    
    
    
    501
    
    
    
    1,451Principal payments on lease obligations
    
    
    (247
    )
    
    
    (369
    )
    
    
    (891
    )Repurchase of common stock
    
    
    
    
    
    
    (38,094
    )
    
    
    (7,668
    )Repayments of short-term borrowings
    
    
    (43,560
    )
    
    
    (22,613
    )
    
    
    (78,850
    )Proceeds from short-term borrowings
    
    
    
    
    
    
    
    
    
    
    118,533Restricted cash
    
    
    
    
    
    
    6,430
    
    
    
    (6,089
    )Net cash provided by (used in) financing activities
    
    
    (42,833
    )
    
    
    (54,145
    )
    
    
    26,486Net increase (decrease) in cash and cash equivalents
    
    
    (1,251
    )
    
    
    (16,202
    )
    
    
    17,451Cash and cash equivalents at beginning of the year
    
    
    7,358
    
    
    
    23,560
    
    
    
    6,109Cash and cash equivalents at end of the year
    
    $
    6,107
    
    
    $
    7,358
    
    
    $
    23,560Supplemental disclosures of cash flow information:Cash refunded for taxes, net
    
    $
    32,388
    
    
    $
    401
    
    
    $
    975Cash paid for interest
    
    $
    1,820
    
    
    $
    2,103
    
    
    $
    3,091Receivable related to sale of UMC shares
    
    $
    
    
    
    $
    
    
    
    $
    7,906
 The accompanying notes are an integral part of these consolidated financial statements. F-6




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ALLIANCE SEMICONDUCTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. The Company and Its Significant Accounting Policies Alliance Semiconductor Corporation (the Company or Alliance), a
Delaware corporation, is a worldwide provider of memory, analog and mixed
signal and system solutions products for the networking, wireless, consumer and
computing markets. Through these integrated business units, Alliance provides
leading OEMs with analog and mixed signal products for Electromagnetic
Interference (EMI) management, high speed chip-to-chip interconnects based on
HyperTransport technology, as well as synchronous and fast asynchronous
static random access memory (SRAMs) and dynamic random access memory
(DRAMs). Principles of Consolidation The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America and
include the accounts of the Company and its direct and indirect subsidiaries.
All significant intercompany accounts and transactions have been eliminated. Use of Estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Estimates and assumptions are reviewed periodically and the effects of
revisions are reflected in the period that they are determined to be necessary.
These estimates include assessing the collectability of accounts receivable,
the use and recoverability of inventory, the realization of deferred tax
assets, valuations associated with the Companys privately held investments and
publicly held investments and useful lives for amortization periods of tangible
and intangible assets, among others. The markets for the Companys products are
characterized by intense competition, rapid technological development, evolving
standards, short product life cycles and price erosion, all of which could
impact the future realizability of the Companys assets. Actual results could differ from those estimates. Basis of Presentation For purposes of presentation, the Company has indicated its fiscal years
as ending on March 31, whereas the Companys fiscal year actually ends on the
Saturday nearest the end of March. The fiscal years ended March 31, 2004, 2003
and 2002 contained 52 weeks. Cash and Cash Equivalents Cash and cash equivalents consist of cash on deposit and highly liquid
money market instruments with banks and financial institutions. The Company
considers all highly liquid investments with maturity from the date of purchase
of three months or less to be cash equivalents. Restricted Cash Restricted cash is comprised of funds deposited with financial
institutions. They cannot be accessed by the Company until certain events have
transpired or until obligations have been fulfilled. Short-Term Investments The Company accounts for its short-term investments in accordance with
Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for
Certain Investments in Debt and Equity Securities. Management determines the
appropriate categorization of investment securities at the time of purchase and
reevaluates such designation as of each balance sheet date. At March 31, 2004 and 2003, equity securities with no restrictions on sale or
that have restrictions that expire within the next year, were designated as
available-for-sale in accordance with SFAS 115. Available-for-sale securities are carried at fair value using available
market information. Unrealized gains and losses are generally reported in
accumulated other comprehensive income (loss) in the balance sheet. F-7




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Derivatives The Company has used derivative financial instruments to manage the market
risk of certain of its short-term investments. The Company does not use
derivatives for trading or speculative purposes. All derivatives are recognized on the balance sheet at fair value and are
reported in short-term investments and long-term obligations. Classification of
each derivative as current or non current is based upon whether the maturity of
each instrument is less than or greater than 12 months. To qualify for hedge
accounting in accordance with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, the Company requires that the instruments
are effective in reducing the risk exposure that they are designated to hedge.
Instruments that meet established accounting criteria are formally designated
as hedges at the inception of the contract. These criteria demonstrate that the
derivative is expected to be highly effective at offsetting changes in fair
value of the underlying exposure both at inception of the hedging relationship
and on an ongoing basis. The assessment for effectiveness is formally
documented at hedge inception and reviewed at least quarterly throughout the
designated hedge period. The Company applies hedge accounting in accordance with SFAS No. 133,
whereby the Company designates each derivative as a hedge of the fair value of
a recognized asset (fair value hedge). Changes in the value of a derivative,
along with offsetting changes in fair value of the underlying hedged exposure,
are recorded in earnings each period. Changes in the value of derivatives that
do not offset the underlying hedged exposure throughout the designated hedge
period (collectively, ineffectiveness), are recorded in earnings each period. In determining fair value of its financial instruments, the Company uses
dealer quotes as well as methods and assumptions that are based on market
conditions and risks existing at each balance sheet date. All methods of
assessing fair value result in a general approximation of value, and such value
may never actually be realized. Inventory Inventory is stated at the lower of standard cost (which approximates
actual cost on a first-in, first-out basis) or market. Market is based on the
estimated net realizable value or current replacement cost. The Company also
evaluates its open purchase order commitments on an on-going basis and accrues
for any expected loss if appropriate. Investments in Non-Publicly-Traded Companies The Company invests in various non-publicly-traded high technology
companies. These investments are included in Alliance Ventures and other
investments in the consolidated balance sheets. If an investment in the voting stock and other factors give
Alliance the ability to exercise significant influence over the operating and
financial policies of the investee, the investment is accounted for under the
equity method. Investments which do not give Alliance the ability to exercise
significant influence over the operating and financial policies of the investee
are accounted for under the cost method. For investments accounted for under
the equity method, the Company includes its share of the earnings or losses of
the investee in its results of operations based on financial information of the
investee. The Company reviews the investments for
impairment when circumstances or events indicate that the carrying value of the
investments may not be recoverable. Property and Equipment Property and equipment are stated at cost and depreciated on a
straight-line basis over the estimated economic useful lives of the assets,
which range from three to seven years. Upon disposal, the cost of the asset and
related accumulated depreciation are removed from the accounts and any
resulting gain or loss is included in the results of operations. Long-Lived Assets Long-lived assets held by the Company are reviewed for impairment whenever
events or circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability is measured by comparison of carrying amounts to
the future net cash flows that an asset is expected to generate. If an asset is
considered to be impaired, the impairment to be recognized is measured by the
amount to which the carrying amount of the assets exceeds the fair value of the asset. F-8




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Revenue Recognition The Company recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred, the price is fixed or determinable and
collection is reasonably assured. Under these criteria, product revenue is
generally recognized upon shipment of product to customers, net of accruals for
estimated sales returns and allowances. Additionally, collection is not deemed
to be reasonably assured if customers receive extended payment terms. The provision for estimated sales returns and allowances on product sales is
recorded in the same period the related revenues are recorded. These estimates
are based on historical sales returns, analysis of credit memo data and other
known factors. Actual returns could differ from these estimates. Research and Development Costs Costs incurred in the research and development of semiconductor devices
are expensed as incurred, including the cost of prototype wafers and new
production mask sets. Goodwill and Intangible Assets The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, on
April 1, 2002. As a result, goodwill is no longer amortized, but is instead
tested for impairment annually or sooner if circumstances indicate that it may
no longer be recoverable. In addition, intangible assets acquired prior to
July 1, 2001 that do not meet the criteria for recognition under SFAS No. 141,
Business Combinations have been reclassified to goodwill. Upon adoption, the Company completed the transitional goodwill impairment
assessment required by SFAS No. 142 and concluded that goodwill was not
impaired as of April 1, 2002. The annual impairment tests performed as of
March 31, 2004 and 2003 indicated that goodwill was not impaired. For the
purpose of measuring the impairment, goodwill was assigned to a reporting unit as
defined by SFAS No. 142. Goodwill is measured and tested for impairment on an annual basis or more
frequently if we believe indicators of impairment exist. The performance of the
test involves a two-step process. The first step requires comparing the fair
value of the reporting unit to its net book value, including goodwill. The fair value of the reporting unit is
determined by taking the market capitalization of the reporting unit as
determined through quoted market prices. A potential impairment exists if the
fair value of the reporting unit is lower than its net book value. The second
step of the process is only performed if a potential impairment exists, and it
involves determining the difference between the fair value of the reporting
units net assets other than goodwill to the fair value of the reporting unit
and if the difference is less than the net book value of goodwill an impairment exists and is recorded. The Company has not been
required to perform this second step of the process since its implementation of
SFAS 142 because the fair value of the reporting unit has exceeded its net book
value at every measurement date. Income Taxes The Company accounts for its deferred income taxes in accordance with the
liability method. Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial statement and income
tax bases of the assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized. Concentration of Risks Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents,
short- and long-term investments and accounts receivable. Cash is deposited with one major bank in the United States while cash
equivalents are deposited with several major financial institutions in the
United States. The Company attempts to limit its exposure to these investments
by placing such investments with several financial institutions and performs
periodic evaluations of these institutions. Short- and long-term investments are subject to declines in market as well
as risk associated with the underlying investment. The Company evaluates its
investments from time to time in terms of credit risk since a substantial
portion of its assets are in the form of investments, not all of which are
liquid, and may enter into full or partial hedging strategies involving
financial derivative instruments to minimize market risk. Since UMC, Vitesse, Adaptec, and Tower are in the semiconductor business,
as is the Company, they may be subject to the same fluctuations in market value
as is the Company, and may experience downturns in value at the same time the
Company is experiencing such downturns. Many of the risks that the Company may
experience as a semiconductor company are also applicable to these companies.
In addition, because they are semiconductor industry participants, they are
subject to additional risks, such as fires and other disasters, excess
fabrication capacity, and other risks known to semiconductor manufacturers.
There can be no assurances that the Companys investment in these companies
will increase in value or even maintain their value. Because of the cyclical
nature of the semiconductor industry, it is possible that these investments,
like the Company, will experience a significant business downturn in the
future, which will significantly depress the value of these stocks.
Additionally, the Company is dependent on its investments in UMC and Tower
because these investments provide the Company with wafer production capacity
rights which are essential to the Companys operations. F-9




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##### Table of Contents



The Company sells its products to original equipment manufacturers and
distributors throughout the world. The Company performs ongoing credit
evaluations of its customers and, on occasion, may require letters of credit
from its non-U.S. customers. Sales to the Companys customers are typically
made pursuant to specific purchase orders, which may be canceled by the
customer without enforceable penalties. For fiscal 2004, 2003 and 2002, no
single customer accounted for 10% or more of the Companys net revenues. The Company conducts the majority of its business in U.S. dollars and
foreign currency transaction gains and losses have not been material in any
one-year. International sales accounted for approximately $18.8 million, $12.7
million and $19.6 million of net revenues for fiscal 2004, 2003 and 2002,
respectively. Stock-Based Compensation At March 31, 2004, the Company has three stock-based employee compensation
plans, which are described more fully in Note 12. The Company accounts for
these plans under the recognition and measurement principles of Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under those plans had
an exercise price equal to the market value of the underlying common stock on
the date of grant. Had the Company recorded compensation expense based on the
estimated grant date fair value, as defined by SFAS 123, for awards granted
under the Plan, the Directors Plan and its Employee Stock Purchase Plan, the Companys pro forma net
loss and pro forma net loss per share for the years ended
March 31, 2004, 2003 and 2002, would have been as follows (in thousands, except
per share data): March 31,2004
    
    2003
    
    2002Net loss, as reported
    
    $
    (19,411
    )
    
    $
    (106,048
    )
    
    $
    (240,716
    )Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effects
    
    
    (1,638
    )
    
    
    (1,665
    )
    
    
    (2,043
    )Pro forma net loss:
    
    $
    (21,049
    )
    
    $
    (107,713
    )
    
    $
    (242,759
    )Earnings per share:Basic and diluted  as reported
    
    $
    (0.55
    )
    
    $
    (2.85
    )
    
    $
    (5.86
    )Basic and diluted  pro forma
    
    $
    (0.60
    )
    
    $
    (2.90
    )
    
    $
    (5.91
    )
 Net Loss Per Share Basic earnings per share (EPS) is computed by dividing net income
available to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted EPS gives effect to all dilutive
potential common shares outstanding during the period including stock options,
using the treasury stock method. At March 31, 2004, 2003 and 2002, there were 3,592,282, 2,559,862, and
2,480,487 options outstanding to purchase common stock that were excluded from
the diluted loss per share computations because their effect would have been
anti-dilutive. The weighted average purchase prices of these options were
$7.75, $9.16 and $10.66 for fiscal 2004, 2003 and 2002, respectively. Following is a reconciliation of the numerators and denominators used in
the Basic and Diluted EPS computations for the periods presented below: Year Ended March 31,2004
    
    2003
    
    2002(in thousands, except per share data)Net loss available to common stockholders
    
    $
    (19,411
    )
    
    $
    (106,048
    )
    
    $
    (240,716
    )Weighted average common shares outstanding (basic)
    
    
    35,093
    
    
    
    37,160
    
    
    
    41,078Effect of dilutive options
    
    
    
    
    
    
    
    
    
    
    Weighted average common shares outstanding (diluted)
    
    
    35,093
    
    
    
    37,160
    
    
    
    41,078Net loss per share:Basic and diluted
    
    $
    (0.55
    )
    
    $
    (2.85
    )
    
    $
    (5.86
    )
 F-10




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##### Table of Contents



Comprehensive Income In 1999, the Company adopted SFAS 130, Reporting Comprehensive Income,
which requires an enterprise to report, by major components and as a single
total, the change in net assets during the period from non-owner sources. The
Company recorded comprehensive income of $14.5 million during fiscal 2004 and
recorded comprehensive losses of $254.4 million and $90.2 million during fiscal
2003 and 2002, respectively. The components of comprehensive income (loss) are
shown in the Consolidated Statements of Stockholders Equity. Segment Reporting In 1999, the Company adopted SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information which establishes annual and interim
reporting standards for an enterprises business segments and related
disclosures about its products, services, geographic areas and major customers.
The Company has one operating segment, which is to design, develop, and market
high-performance memory, analog and mixed signal and system solutions
products. Recently Issued Accounting Standards In
January 2003, the Financial Accounting Standards
Board (FASB) issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective immediately for all new variable interest entities created or
acquired after January 31, 2003. For variable interest entities created or
acquired before February 1, 2003, the provisions of FIN 46 must be applied for
the first reporting period that ends after March 15, 2004. The
adoption of FIN 46 did not have a material impact on the
Companys financial statements. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133. SFAS No. 149 is generally effective for contracts entered
into or modified after June 30, 2003. The adoption of SFAS 149
did not have a material impact on the Companys financial statements. In May 2003, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. This Statement establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It requires
that an issuer classifies a financial instrument that is within its scope as a
liability (or an asset in some circumstances). Many of those instruments were
previously classified as equity. The Statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The adoption of SFAS 150 did not have a material impact on the Companys
financial statements. F-11




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##### Table of Contents



Note 2. Balance Sheet Components Short-Term Investments Short-term investments include the following available-for-sale securities
and derivatives at March 31, 2004 and 2003 (in thousands): March 31, 2004
    
    March 31, 2003Number of
    
    Adjusted
    
    Market
    
    Number of
    
    Adjusted
    
    MarketShares
    
    Cost Basis
    
    Value
    
    Shares
    
    Cost Basis
    
    ValueUnited Microelectronics Corporation
    
    
    161,461
    
    
    $
    88,452
    
    
    $
    139,179
    
    
    
    244,959
    
    
    $
    139,473
    
    
    $
    142,268Adaptec Inc.
    
    
    154
    
    
    
    1,727
    
    
    
    1,283
    
    
    
    517
    
    
    
    2,101
    
    
    
    3,157Tower Semiconductor Ltd.
    
    
    2,673
    
    
    
    9,163
    
    
    
    18,654
    
    
    
    1,111
    
    
    
    3,548
    
    
    
    3,067Vitesse Semiconductor Corporation
    
    
    95
    
    
    
    66
    
    
    
    662
    
    
    
    95
    
    
    
    66
    
    
    
    219Total
    
    
    
    
    
    $
    99,408
    
    
    $
    159,778
    
    
    
    
    
    
    $
    145,188
    
    
    $
    148,711
 Long-Term Investments At March 31, 2004 and 2003, the Companys long-term investments were as
follows (in thousands): March 31, 2004
    
    March 31, 2003Adjusted
    
    
    
    AdjustedNumber of Shares
    
    Cost Basis
    
    Number of Shares
    
    Cost BasisTower
Semiconductor Ltd.
    
    
    6,236
    
    
    $
    21,208
    
    
    
    4,956
    
    
    $
    15,822Alliance
Ventures investments
    
    
    
    
    
    
    33,051
    
    
    
    
    
    
    
    34,131Solar Venture investments
    
    
    
    
    
    
    3,031
    
    
    
    
    
    
    
    4,188Total
    
    
    
    
    
    $
    57,290
    
    
    
    
    
    
    $
    54,141
 Accounts Receivable March 31,2004
    
    2003(in thousands)Accounts receivable:Trade receivables
    
    $
    5,721
    
    
    $
    3,839Less: allowance for doubtful accounts and sales related
reserves
    
    
    (1,640
    )
    
    
    (1,781
    )$
    4,081
    
    
    $
    2,058
 Inventory March 31,2004
    
    2003(in thousands)Inventory:Work in process
    
    $
    6,768
    
    
    $
    1,721Finished goods
    
    
    4,841
    
    
    
    1,141$
    11,609
    
    
    $
    2,862
 F-12




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Property and Equipment March 31,2004
    
    2003(in thousands)Engineering and test equipment
    
    $
    18,203
    
    
    $
    18,002Computers and software
    
    
    15,412
    
    
    
    14,989Furniture and office equipment
    
    
    918
    
    
    
    933Leasehold improvements
    
    
    1,486
    
    
    
    1,469Land
    
    
    274
    
    
    
    274Automobiles
    
    
    14
    
    
    
    1436,307
    
    
    
    35,681Less: Accumulated depreciation
    
    
    (30,146
    )
    
    
    (27,247
    )$
    6,161
    
    
    $
    8,434
 Depreciation expense for fiscal 2004, 2003 and 2002 was $3.1 million, $3.0
million and $3.1 million, respectively. Property and equipment includes $2.2 million and $2.2 million of assets
under capital leases at March 31, 2004 and 2003, respectively. Accumulated
depreciation of assets under capital leases totaled $1.3 million and $1.0
million at March 31, 2004 and 2003, respectively. Other Assets March 31,2004
    
    2003(in thousands)Prepaids
    
    $
    5,307
    
    
    $
    5,686Deferred Tax Assets
    
    
    1,983
    
    
    
    $
    7,290
    
    
    $
    5,686
 Goodwill and Intangible Assets March 31, 2004 NetAccumulated
    
    IntangibleCost
    
    Amortization
    
    Assets(in thousands)Developed technology
    
    $
    1,592
    
    
    $
    (1,171
    )
    
    $
    421Technology license
    
    
    3,580
    
    
    
    (1,934
    )
    
    
    1,646Acquired workforce
    
    
    2,746
    
    
    
    (1,736
    )
    
    
    1,010Tradename
    
    
    109
    
    
    
    (81
    )
    
    
    28Patents
    
    
    1,403
    
    
    
    (671
    )
    
    
    732Goodwill
    
    
    1,538
    
    
    
    
    
    
    
    1,538$
    10,968
    
    
    $
    (5,593
    )
    
    $
    5,375
 March 31, 2003 NetAccumulated
    
    IntangibleCost
    
    Amortization
    
    Assets(in thousands)Developed technology
    
    $
    1,592
    
    
    $
    (641
    )
    
    $
    951Technology license
    
    
    3,150
    
    
    
    (787
    )
    
    
    2,363Acquired workforce
    
    
    2,746
    
    
    
    (248
    )
    
    
    2,498Tradename
    
    
    109
    
    
    
    (44
    )
    
    
    65Patents
    
    
    1,403
    
    
    
    (204
    )
    
    
    1,199Goodwill
    
    
    1,538
    
    
    
    
    
    
    
    1,538$
    10,538
    
    
    $
    (1,924
    )
    
    $
    8,614
 F-13




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##### Table of Contents



Amortization expense for intangible assets is summarized as follows (in
thousands): Year Ended March 31,2004
    
    2003
    
    2002Developed technology
    
    $
    531
    
    
    $
    531
    
    
    $
    110Technology license
    
    
    1,146
    
    
    
    787
    
    
    
    Acquired workforce
    
    
    1,488
    
    
    
    248
    
    
    
    Tradename
    
    
    36
    
    
    
    36
    
    
    
    8Patents
    
    
    468
    
    
    
    179
    
    
    
    25$
    3,669
    
    
    $
    1,781
    
    
    $
    143
 Intangible assets are being amortized over estimated useful lives of two
to three years. Estimated future amortization expense is as follows (in
thousands): 2005
    
    $
    3,0952006
    
    
    6952007
    
    
    47Total
    
    $
    3,837
 Accrued Liabilities March 31,2004
    
    2003(in thousands)Accrued compensation
    
    $
    1,538
    
    
    $
    1,193Accrued interest payable
    
    
    
    
    
    
    93Accrued other
    
    
    1,343
    
    
    
    2,322$
    2,881
    
    
    $
    3,608
 Accumulated Other Comprehensive Income March 31, 2004 Unrealized
    
    
    
    Net UnrealizedGain/(Loss)
    
    Tax Effect
    
    Gain/(Loss)(in thousands)United Microelectronics Corporation
    
    $
    50,727
    
    
    $
    (20,443
    )
    
    $
    30,284Tower Semiconductor Ltd.
    
    
    9,491
    
    
    
    (3,825
    )
    
    
    5,666Vitesse Semiconductor Corporation
    
    
    596
    
    
    
    (240
    )
    
    
    356Adaptec, Inc.
    
    
    (444
    )
    
    
    180
    
    
    
    (264
    )$
    60,370
    
    
    $
    (24,328
    )
    
    $
    36,042
 March 31, 2003 Unrealized
    
    
    
    
    
    Net UnrealizedGain/(Loss)
    
    Tax Effect
    
    Gain/(Loss)(in thousands)United Microelectronics Corporation
    
    $
    2,795
    
    
    $
    (1,126
    )
    
    $
    1,669Tower Semiconductor Ltd.
    
    
    (481
    )
    
    
    194
    
    
    
    (287
    )Vitesse Semiconductor Corporation
    
    
    153
    
    
    
    (62
    )
    
    
    91Adaptec, Inc.
    
    
    1,056
    
    
    
    (426
    )
    
    
    630$
    3,523
    
    
    $
    (1,420
    )
    
    $
    2,103
 Short-Term Borrowings At March 31, 2004, the Company had no short-term borrowings. At March 31,
2003, the Company had short-term borrowings totaling $43.6 million. In the third quarter of fiscal 2002, the Company entered into a secured
loan agreement with Chinatrust Commercial Bank, Ltd. (Chinatrust) to borrow
up to $30.0 million. In January 2002, the Company increased the principal
amount it could borrow under the F-14




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##### Table of Contents



loan agreement to $46.0 million. At that time, the loan was secured by
shares of UMC common stock held by the Company with a minimum aggregate value
of 250% of the outstanding loan balance, earned interest at LIBOR plus 2.5%,
and matured on January 21, 2003. Prior to the original maturation date, the
Company and Chinatrust agreed to extend the loan until March 4, 2003. At that
time, both the Company and Chinatrust agreed to extend the loan until March 2,
2004 (the Maturity Date) and reduced the principal amount the Company may
borrow to $45.0 million. The principal was due on the Maturity Date and
interest was due every three months for the term of the loan. The Company
incurred interest expense of approximately $1.1 million and $1.7 million during
fiscal 2004 and fiscal 2003, respectively. In the revised loan agreement, the
provision for funds to be held in escrow as collateral for accrued interest was
eliminated. The loan was secured by shares of UMC common stock held by the
Company with a minimum aggregate value of 230% of the outstanding loan balance.
The loan accrued interest at LIBOR plus 2.0%. The outstanding balance of the
loan was paid in full on March 2, 2004. As of March 31, 2004, all 145 million
shares of UMC common stock, which had been pledged as collateral, had been
released by Chinatrust as a result of the Company repaying in full its
outstanding debt with Chinatrust. In the fourth quarter of fiscal 2002, the Company issued a $4.8 million
promissory note in connection with the acquisition of PulseCore. The note was
non-interest bearing and matured on March 29, 2003. Discount on the note of
$609,000 was calculated based on an imputed interest rate of 12%. The
outstanding balance on the promissory note, net of unamortized discount, was
approximately $4.8 million and $4.3 million at March 31, 2003 and 2002,
respectively. On April 11, 2003, the Company paid $4.8 million to settle the
promissory note. Note 3. Write-Down of Marketable Securities and Venture Investments Marketable securities held by the Company 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 the marketable securities for potential other-than-temporary
declines in their value. Such evaluation includes researching commentary from
industry experts, analysts and other companies. Based on the continuing
depression in the investments stock prices from those originally used to
record the investment, and the expectation at the time that the stock prices
would not significantly recover in the next 6 to 9 months due to unfavorable
business conditions for the companies and in the semiconductor industry in
general, management determined that a write-down was necessary at December 31,
2002, September 30, 2002 and September 30, 2001. As a result, the Company
recorded pre-tax, non-operating losses of approximately $16.2 million, $673,000
and $288.6 million during the third and second quarter of fiscal 2003 and the
second quarter of fiscal 2002, respectively, based on the quoted price of the
respective marketable securities. No write-down of marketable securities was
recorded during fiscal 2004. During the third quarter of fiscal 2003, the
Company also recorded a pre-tax, non-operating loss of $14.1 million on its
long-term investment in Tower shares. During fiscal 2004, the Company wrote
down its investments in Alliance Ventures and Solar Ventures and recognized a
pre-tax, non-operating loss of approximately $5.8 million. During fiscal 2003,
the Company wrote down its investments in Alliance Ventures and Solar Ventures
and recognized a pre-tax, non-operating loss of approximately $24.8 million.
During fiscal 2002, the Company wrote down several of its investments in
Alliance Ventures and recognized a pre-tax, non-operating loss of approximately
$8.3 million. Total write-downs of marketable securities and other investments
during fiscal 2004, 2003 and 2002 were recorded as follows (in thousands): Fiscal 2004
    
    Fiscal 2003
    
    Fiscal 2002United Microelectronics Corporation
    
    $
    
    
    
    $
    
    
    
    $
    250,894Vitesse Semiconductor Corporation
    
    
    
    
    
    
    673
    
    
    
    3,827PMC-Sierra Corporation
    
    
    
    
    
    
    
    
    
    
    1,048Chartered Semiconductor Manufacturing, Ltd.
    
    
    
    
    
    
    16,212
    
    
    
    12,155Tower Semiconductor Ltd.
    
    
    
    
    
    
    14,083
    
    
    
    20,645Alliance
Ventures and Solar Ventures Investments
    
    
    5,787
    
    
    
    24,824
    
    
    
    8,277Total
    
    $
    5,787
    
    
    $
    55,792
    
    
    $
    296,846
 Note 4. Cumulative Effect of Change in Accounting Principle  Adoption of SFAS
133 The Company adopted SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities,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. 133and SFAS No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities,
an amendment of FASB Statement No. 133(herein referred to as SFAS 133), on
April 1, 2001. In the fourth quarter of fiscal 2001, the Company entered into
two derivative instruments to hedge its investment in Vitesse Semiconductor
common stock. The Company designated these arrangements as fair value hedges
under SFAS 133. In accordance with the transition provisions of F-15




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SFAS 133, the Company recorded approximately $2.1 million cumulative
effect adjustment in earnings in the quarter ended June 30, 2001. Note 5. Acquisitions Chip Engines, Inc. During fiscal 2003, the Company acquired Chip Engines, a development stage company that designs semiconductor products for
the networking, communications, cable and storage markets. The Company
acquired Chip Engines to help support its diversification strategy and to add
research and development resources to its System Solutions business unit. The
acquisition was completed in January 2003 and was accounted for as an
acquisition of assets and Chip Engines results of operations have been
included in the accompanying consolidated financial statements from the date of
acquisition. The Company held its net investment of $4.8 million in Chip Engines prior
to the acquisition in part through its ownership of Alliance Ventures and
investment in Solar Venture Partners. No consideration was given to the Chip
Engines shareholders in connection with the closing of the acquisition;
however, the acquisition agreement provides for contingent consideration of up
to $3.7 million upon Chip Engines achieving certain milestones including
developing a product and entering into a non-cancelable written purchase order
with certain customers or being added to such customers published approved
vendor list. As Chip Engines was a company in the development stage, which had
not completed a product at closing of the acquisition, management concluded
that the transaction was an acquisition of assets. The entire purchase price
was allocated to individual assets acquired based on their relative fair values
and no goodwill was recorded as a result of the transaction. The values
assigned to the assets acquired was as follows: AmortizationAmount
    
    Period(in thousands)Net assets acquired
    
    $
    (851
    )
    
    ExpensedIn-Process technology
    
    
    1,610
    
    
    2 yearsWorkforce
    
    
    2,746
    
    
    3 yearsPatents
    
    
    1,040
    
    
    3 yearsLicenses
    
    
    250Total
    
    $
    4,795
 No supplemental pro forma information is presented due to the immaterial
effect on prior period results of operations. The allocation of amounts to in-process research and development was
consistent with widely recognized appraisal practices. The Companys analysis
resulted in a $1.6 million charge to acquired in-process research and
development. The acquired in-process technology represents the appraised value
of technologies in the development stage that had yet reached technological
feasibility and do not have alternative future uses. This amount was expensed
as a non-recurring charge upon consummation of the acquisition. At the time of
the acquisition, one product was in development and was approximately
80% complete. This
product is in the final stages of development and is sampling in small quantities. The value assigned to in-process research and development was determined
by identifying research projects in areas for which technological feasibility
had not been established. The Company estimated the expected cash flows from
the projects once commercially viable. The net cash flows were then discounted
back to their present value using discount rates of 30%, which the Company
believes to be appropriate given the business risks inherent in manufacturing
and marketing these products, and a percentage of completion was applied. The
percentage of completion was determined using milestones representing
managements estimate of effort, value added, and degree of difficulty of the
portion of each project completed as of the acquisition date, as compared to
the remaining research and development to be completed to bring each project to
technical feasibility. If the Company does not successfully develop its research projects as
discussed above, its sales and profitability may be adversely affected in
future periods and the value of other intangible assets acquired may become
impaired. Management believes that the in-process research and development
charge is valued consistently with the SEC staffs current views regarding
valuation methodologies. The Company cannot assure the reader that the SEC
staff will not take issue with any assumptions used in its valuation model and
require it to revise the amount allocated to in-process research and
development. As of March 31, 2004, the Company believes that the projections
used in the valuations with respect to each acquisition are still materially
valid; however, there can be no assurance that the projected results will be
achieved. F-16




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On April 20, 2002, the Company entered into an agreement to acquire a
perpetual license from API Networks for $3.2 million. Alliances license of
the HyperTransport technology from API will allow it to be the sole source for
APIs current products, to develop new HyperTransport products, and to
sublicense third parties to use and develop HyperTransport products. This
intangible asset is expensed on a straight-line basis over a period of 36
months, beginning in the second quarter of fiscal 2003. PulseCore, Inc. In fiscal 2002, the Company acquired PulseCore Inc. (PulseCore) in order
to diversify its product base. The acquisition was completed in January 2002.
PulseCore provides a diverse mixed-signal product line built around its low
EMI frequency timing technology. The Company paid $5.1 million for acquiring
the net assets of PulseCore. The acquisition was accounted for using the
purchase method in accordance with SFAS 141 and, accordingly, PulseCores
results of operations have been included in the accompanying consolidated
financial statements from the date of acquisition. No supplemental pro forma information is presented due to the immaterial
effect on prior period results of operations. In connection with this
acquisition, the Company paid $722,000 in cash and cash advances and executed a
$4.2 million note, net of imputed interest of $609,000, in exchange for
PulseCores net assets. The promissory note matured on March 29, 2003, was
non-interest bearing and accordingly, had been discounted to reflect the
implied interest expense. Direct transaction costs relating to the acquisition,
consisting primarily of legal and other professional service fees were
$270,000. The purchase price was allocated to the tangible and intangible
assets acquired and liabilities assumed based in part on an independent
appraisal of their respective fair values. Total consideration paid in
connection with the acquisition was attributable to the following: AmortizationAmount
    
    Period(in thousands)Developed technology
    
    $
    1,592
    
    
    3 yearsIn-Process technology
    
    
    906
    
    
    ExpensedTangible assets
    
    
    635Tradename
    
    
    109
    
    
    3 yearsPatents
    
    
    363
    
    
    3 yearsGoodwill
    
    
    1,538
    
    
    IndefiniteTotal
    
    $
    5,143
 The allocation of amounts to developed technology and in-process research
and development were consistent with widely recognized appraisal practices. The
Companys analysis resulted in a valuation of developed technology at $1.6
million. Developed technology represents technologies that have reached
technological feasibility, and therefore can be capitalized. The Company is
amortizing the developed technology on a straight-line basis over a period of
three years. The Companys analysis also resulted in a $906,000 charge to
acquired in-process research and development. The acquired in-process
technology represents the appraised value of technologies in the development
stage that had not yet reached technological feasibility and do not have
alternative future uses. Such amount was expensed as a non-recurring charge
upon consummation of the acquisition. At the time of acquisition, several
products were under development with completion rates between 70% and
90%. All
of the products classified as in-process research and development are
currently shipping. The value assigned to in-process research and development was determined
by identifying research projects in areas for which technological feasibility
had not been established. For PulseCore valuations, the Company estimated the
expected cash flows from the projects once commercially viable. The net cash
flows were then discounted back to their present value using discount rates of
35%, which the Company believes to be appropriate given the business risks
inherent in manufacturing and marketing these products, and a percentage of
completion was applied. The percentage of completion was determined using
milestones representing managements estimate of effort, value added, and
degree of difficulty of the portion of each project completed as of the
acquisition date, as compared to the remaining research and development to be
completed to bring each project to technical feasibility. If the Company does not successfully develop its research projects
discussed above, its sales and profitability may be adversely affected in
future periods and the value of other intangible assets acquired may become
impaired. Management believes that the in-process research and development
charge is valued consistently with the SEC staffs current views regarding
valuation methodologies. The Company cannot assure the reader that the SEC
staff will not take issue with any assumptions used in its valuation model and
require it to revise the amount allocated to in-process research and
development. As of March 31, 2004, the Company believes that the projections
used in the valuations with respect to each acquisition are still materially
valid; however, there can be no assurance that the projected results will be
achieved. F-17




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In April 2003, the Company paid $4.8 million to settle the promissory note
issued in conjunction with the acquisition of PulseCore in fiscal 2002. Note 6. Investment in Marketable Securities United Microelectronics Corporation At March 31, 2004, the Company owned approximately 161.5 million shares of
United Microelectronics Corporation (UMC) common stock, representing
approximately 1.0% ownership. At March 31, 2003, the Company owned
approximately 245.0 million shares of UMC common stock, representing
approximately 1.7% ownership. The Company received a stock dividend of
approximately 9.5 million shares of UMC common stock in July 2003. The Company accounts for its investment in UMC as an available-for-sale
marketable security in accordance with SFAS 115. In fiscal 2004, the Company
sold 93.0 million shares of UMC common stock for $80.5 million and recorded a
pre-tax, non-operating gain of $29.5 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 as a result of
the Company repaying in full its outstanding debt with Chinatrust. (See Note 2
of the consolidated financial statements included in this report.) 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 the UMC common stock held by the
Company, there can be no assurance that the Companys investment in UMC will
maintain its value. Vitesse Semiconductor Corporation At March 31, 2004, the Company owned 95,417 shares of the common stock of
Vitesse Semiconductor Corporation (Vitesse). The Company accounts for its
investment in Vitesse as an available-for-sale marketable security in
accordance with SFAS 115. Vitesses common stock price has historically experienced significant
fluctuations in market value, and has experienced periods of significant
decreases in market value. Given the market risk for the Vitesse common stock
held by the Company, there can be no assurance that the Companys investment in
Vitesse will maintain its value. In January 2001, the Company entered into two derivative contracts
(Derivative Agreements) with a brokerage firm and received aggregate cash
proceeds of approximately $31.0 million. The Derivative Agreements had
repayment provisions that incorporated a collar arrangement with respect to
490,000 shares of Vitesse common stock. The Company, at its option, could
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. Under the Derivative Agreements, if the stock
price of Vitesse exceeded the ceiling of the collar on the Settlement Date,
then the settlement amount also increased by an amount determined by a formula
included in the Derivative Agreements (generally equal to the excess of the
value of the stock over the ceiling of the collar). If the stock price of
Vitesse declined below the floor of the collar on the Settlement Date, then the
settlement amount also decreased by an amount determined by a formula included
in the Derivative Agreements (generally equal to the excess of the floor of the
collar over the value of the stock). On January 24, 2003, the Company settled
its derivative contract on 300,000 Vitesse shares by delivering the shares to
the brokerage firm holding the contract. On January 30, 2003, the Company
settled its derivative contract on 190,000 Vitesse shares by delivering the
shares to the brokerage firm holding the contract. Adaptec, Inc. At March 31, 2004, the Company owned 154,444 shares of Adaptec. The
Company records its investment in Adaptec as an available-for-sale marketable
security in accordance with SFAS 115. In December 2001, the Company entered into a derivative contract with a
brokerage firm and received aggregate cash proceeds of $5.0 million. The
contract has repayment provisions that incorporate a collar arrangement with
respect to 362,173 shares of Adaptec F-18




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common stock. The Company 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 settlement date. In June 2003,
the Company settled the derivative contract it had on 362,173 Adaptec shares by
delivering those shares to the brokerage firm holding the contract. Adaptecs common stock price has historically experienced significant
fluctuations in market value, and has experienced periods of significant
decreases in market value. Given the market risk for the Adaptec common stock
held by the Company, there can be no assurance that the Companys investment in
Adaptec will maintain its value. Note 7. Investment in Tower Semiconductor Ltd. At March 31, 2004, the Company owned 8,908,391 ordinary shares of Tower
of which 2,672,518 were classified as short-term
and accounted for as an available-for-sale marketable security in accordance
with SFAS 115. During the third quarter of fiscal 2004, the Company, in
conjunction with the other Tower wafer partners and with the agreement of
Towers creditors and shareholders, entered into an agreement to accelerate its
remaining $6.7 million payment related to the fifth and final milestone of the
original Tower Share Purchase Agreement executed in January 2001. This was in
addition to aggregate payments of $4.3 million made during the first and second
quarters of fiscal 2004. In exchange for this accelerated payment, Tower
issued 777,295 ordinary shares for $2.3 million and 628,611 ordinary shares for
$4.4 million during the fourth quarter of fiscal 2004. In connection with the
agreement to accelerate its payment, Alliance agreed to the following
restrictions on its ability to sell, transfer or dispose of its Tower shares:  
    
    30% of all Tower shares acquired by the Company (shares acquired/to
be acquired in exchange for payments made in accordance with the
original Share Purchase Agreement and subsequent amendments, shares
acquired as a result of Towers rights offering in September 2002, and
shares which may be acquired upon exchange of certain wafer credits)
became unrestricted and available-for-sale as of January 2004 subject to
an initial 180 day lock-up period;
    
    the remaining 70% of all Tower shares acquired by the Company are
restricted from sale, transfer, or disposition until January 2006 which
is a two-year extension of the Initial Restricted Period; and
    
    after the amended Initial Restricted period ends, the Company will
still be subject to a Subsequent Restricted Period between January 2006
and January 2008. During this time, the Company may transfer no more
than 6% of its total shares in any quarter on a cumulative basis and no
more than 48% of its total shares by the end of this period. During the period from January 2004 through December 2006, the Company
will also have the option to convert a portion of its prepaid wafer credits to
Tower ordinary shares as opposed to using the credits to offset the cost of
actual wafer purchases. Those credits that would have been used against
quarterly wafer purchases from Towers Fab 2 during that two year period can be
converted to shares based on the average price per Tower share during the last
15 trading days of each quarter. Those 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; reimbursement of unutilized wafer credits will not occur
until December 2007. The Company will also retain its 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
on ordinary share at an exercise price of $7.50 per share through October 31,
2006. In May 2003, the Company paid $3.6 million to Tower Semiconductor in
accordance with the terms of the amended share purchase agreement between the
two companies and received an additional 1,206,839 ordinary shares of Tower at
a purchase price of $2.98 per share. In August 2003, the Company paid $682,000
to Tower in accordance with the terms of the amended share purchase agreement
and received an additional 228,546 ordinary shares of Tower at a purchase price
of $2.98 per share. In the third quarter of fiscal 2003, the Company wrote down its investment
in Tower shares and recorded a pretax, non-operating loss of approximately
$14.1 million. As of March 31, 2004, the Company 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, the Company wrote off a portion of
its investment in wafer credits with Tower and recorded a pretax, operating
loss of approximately $9.5 million. The Company had determined, at that time,
that the value of these credits would not be realized given the Companys sales
forecast of product to be manufactured at Tower. The Company has, and will
retain, an option to convert the remaining $4.4 million of wafer credits to
equity F-19




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in January 2006. The
Companys investment in Tower Semiconductor Ltd. 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 the
Companys investment in Tower shares and wafer credits will not decline further
in value. N. Damodar
Reddy, who is the Companys Chairman and Chief Executive Officer, is a
director of Tower. Note 8. Private Equity Investments Alliance Venture Management, LLC In October 1999, the Company 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 the Company
intended to form. Alliance Venture Management does not directly invest in the
investment funds with the Company, 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 and C.N. Reddy. In November 1999, the Company formed Alliance Ventures I, LP (Alliance
Ventures I) and Alliance Ventures II, LP (Alliance Ventures II), both
California limited partnerships. The Company, as the sole limited partner,
owns 100% of the 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, calculated on an annual basis. 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 the Company owns 100% of
the common units in Alliance Venture Management, it does not hold any Preferred
Member Units and does not participate in the management fees generated by the
management of the investment funds. N. Damodar Reddy and C.N. Reddy, who are
directors of the Company and members of the Companys 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. During fiscal 2004, the
Company incurred $875,000 of commitment fees. This amount was offset by
expenses incurred by the Company on behalf of Alliance Venture Management of
approximately $870,000. Neither N. Damodar Reddy nor C.N. Reddy received any
commitment fees during fiscal 2004 or fiscal 2003. No distribution of cash and/or marketable securities was made to the
partners of Alliance Venture Management during fiscal 2004 or fiscal 2003. After Alliance Ventures I was formed, the Company contributed all of its
then current investments, except UMC, Chartered, and Broadcom, to Alliance
Ventures I to allow Alliance Venture Management to manage these investments.
As of March 31, 2004, 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, 2004, Alliance Ventures III, the focus of which
is investing in emerging companies in the networking and communications market
areas, has invested $52.5 million in 17 companies, with a total fund allocation
of $100.0 million. As of March 31, 2004, Alliance Ventures IV, the focus of
which is investing in emerging companies in the semiconductor market, has
invested $37.6 million in eight F-20




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companies, with a total fund allocation of $40.0 million. As of March 31,
2004, Alliance Ventures V, the focus of which is investing in emerging
companies in the networking and communications markets, has invested $27.7
million in ten companies, with a total fund allocation of $60.0 million.
During fiscal 2004, the Company invested approximately $20.0 million in
Alliance Venture investee companies. In fiscal 2004, 2003 and 2002, the Company wrote down certain of its
investments in Alliance Ventures and recognized pre-tax, non-operating losses
of approximately $5.5 million, $19.0 million and $7.3 million, respectively.
Also, several of the Alliance Ventures investments are accounted for under the
equity method due to the Companys ability to exercise significant influence on
the operations of investees resulting from ownership interest and/or board
representation. During fiscal 2004, 2003 and 2002, total equity in the net
losses of Alliance Ventures investee companies was $14.1 million, $15.2 million
and $13.0 million, 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. The market for these
types of investments has, in the past, often been successful and many venture
capital funds have been profitable, and while the Company has been successful
in certain of its past investments, there can be no assurance as to any future
or continued success. It is possible there will be a downturn in the success of
these types of investments in the future and the Company will suffer
significant diminished success in these investments. It is possible that many
or most, and maybe all, of the Companys venture type investments may fail,
resulting in the complete loss of most or all the money the Company has
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., 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. The Company acquired Chip Engines in the
fourth quarter of fiscal 2003. As part of this acquisition, the Company
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, the Company repaid the note in full
including approximately $22,000 of accrued interest. Investment in Solar Venture Partners, LP Through March 31, 2004, the Company has 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 Web and e-commerce, semiconductors for emerging markets, and design
automation. As of March 31, 2004, the Company held a 73% interest in Solar. Due to the Companys majority interest in Solar, the Company consolidates
Solar. Some of the investments Solar has made are accounted for under the
equity method due to the Companys ability to exert significant influence on
the operations of the investees resulting from ownership interest and/or board
representation. In fiscal 2004, 2003 and 2002 the Company recorded equity in
loss of investees of approximately $1.3 million, $1.4 million and $1.6 million
and wrote down certain Solar investments by $300,000, $5.8 million and $1.0
million, respectively. C.N. Reddy, an officer and director of the Company, is a general partner
of Solar, an investor in Solar and participates in running Solars daily
operations. Solar has invested in 17 of the 40 total companies in which
Alliance Venture Managements funds have invested. Note 9. Derivative Instruments and Hedging Activities During fiscal 2003, the Company had investments in Broadcom, Vitesse, and
Adaptec that were hedged using derivative instruments to help reduce the
potential volatility in fair value of the investments. The Company uses
cashless collars, which are combinations of option contracts and forward sales
contracts, to hedge this risk. As of March 31, 2003, the Company had a
derivative instrument in place to hedge the investment in Adaptec common stock.
The hedge on the Broadcom investment was settled during the second quarter of
fiscal 2003 and the hedge on the Vitesse investment was settled during the
fourth quarter of fiscal 2003. By using derivative financial instruments to hedge exposures to changes in
share prices, the Company exposes itself to credit risk and market risk.
Credit risk is a risk that the counterparty might fail to fulfill its
performance obligations under the terms of the F-21




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derivative contract. When the fair value of a derivative contract is an
asset, the counterparty owes the Company, which creates repayment risk for the
Company. When the fair value of a derivative contract is a liability, the
Company owes the counterparty and, therefore, does not assume any repayment
risk. The Company minimizes its credit (or repayment) risk in derivative
instruments by (1) entering into transactions with high-quality counterparties,
(2) limiting the amount of its exposure to each counterparty, and (3)
monitoring the financial condition of its counterparties. All derivatives are recognized on the balance sheet at their fair market
value. On the date that the Company enters into a derivative contract, it
designates the derivative as (1) a hedge of the fair value of a recognized
asset or liability, or (2) an instrument that is held for trading or
non-hedging purposes (a trading or non-hedging instrument). Since April 1,
2001, the Company has designated all derivative contracts as a fair value hedge
and has not entered into derivatives for purposes of trading. Changes in the
fair value of a derivative that is highly effective and is designated and
qualifies as a fair value hedge, along with changes in the fair value of the
hedged asset or liability that are attributable to the hedged risk, are
recorded in the current period earnings. The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk-management objective and
strategy for undertaking various hedge transactions. This process includes
linking all derivatives that are designated as fair-value hedges to specific
assets on the balance sheet. The Company also formally assesses (both at the
hedges inception and on an ongoing basis) whether the derivatives that are
used in the hedging transactions have been highly effective in offsetting
changes in fair value of the hedged items and whether those derivatives may be
expected to remain highly effective in future periods. When it is determined
that a derivative is not (or has ceased to be) highly effective as a hedge, the
Company discontinues hedge accounting prospectively. The Company discontinues
hedge accounting prospectively when (1) it determines that the derivative is no
longer effective in offsetting changes in the fair value of a hedged item, (2)
that the derivative expires or is sold, terminated or exercised, or (3)
management determines that designating the derivative as a hedging instrument
is no longer appropriate. In January 2001, the Company entered into two derivative contracts
(Derivative Agreements) with a brokerage firm and received aggregate cash
proceeds of approximately $31.0 million. The Derivative Agreements had
repayment provisions that incorporated a collar arrangement with respect to
490,000 shares of Vitesse common stock. The Company, at its option, could
settle the contracts by either delivering Vitesse shares or making a cash
payment to the brokerage firm in January 2003, the maturity date of the
Derivative Agreements. The number of Vitesse shares to be delivered or the
amount of cash to be paid was determined by a formula in the Derivative
Agreements based upon the market price of the Vitesse shares on the settlement
date. Under the Derivative Agreements, if the stock price of Vitesse exceeded
the ceiling of the collar, then the settlement amount also increased by an
amount determined by a formula included in the Derivative Agreements (generally
equal to the excess of the value of the stock over the ceiling of the collar.)
If the stock price of Vitesse declined below the floor of the collar, then the
settlement amount also decreased by an amount determined by a formula included
in the Derivative Agreements (generally equal to the excess of the floor of the
collar over the value of the stock.) On January 24, 2003, the Company settled
its derivative contract on 300,000 Vitesse shares by delivering the shares to
the brokerage firm holding the contract. On January 30, 2003, the Company
settled its derivative contract on 190,000 Vitesse shares by delivering the
shares to the brokerage firm holding the contract. In August 2001, the Company entered into a cashless collar arrangement
with a brokerage firm with respect to all 75,000 shares of Broadcom common
stock. The collar arrangement consisted of a written call option to buy 75,000
shares of Broadcom common stock at a price of $64.72 and a purchased put option
to sell 75,000 shares at a price of $36.72 through August 2002. On August 5,
2002, the Company exercised its put option and sold all of its holdings in
Broadcom for aggregate proceeds of $2.8 million recognizing a pre-tax,
non-operating gain of $1.4 million. In December 2001, the Company entered into a derivative contract with a
brokerage firm with respect to 362,173 shares of Adaptec common stock and
received aggregate cash proceeds of $5.0 million. The contract has repayment
provisions that incorporate a collar arrangement with respect to 362,173 shares
of Adaptec common stock. The Company has to deliver a certain number of
Adaptec shares in June 2003, the maturity date of the contract. The number of
Adaptec shares to be delivered was determined by a formula in the contract based
upon the market price of the Adaptec shares on the settlement date. In June
2003, the Company settled the derivative contract it had on 362,173 Adaptec
shares by delivering those shares to the brokerage firm holding the contract. During
fiscal 2004, the Company recorded a net gain of $1.1 million related to its settlement of the Adaptec hedge instrument. During fiscal 2003, the Company recorded a gain of $3.7 million relating
to the Vitesse hedge instrument, offset by a loss of $3.7 million on the hedged
Vitesse investment. The Company also recorded a gain of $2.1 million relating
to the Adaptec hedge instrument and a loss of $2.6 million on the hedged
Adaptec investment. Before exercising its put option, the Company recorded a
gain of $1.1 million for the Broadcom derivative offset by a loss of the
Broadcom investment of $1.4 million in fiscal 2003. F-22




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During fiscal 2002, the Company recorded a gain of $2.2 million relating
to the Vitesse hedge instrument, offset by a loss of $6.9 million on the
Vitesse investments. The Company recognized a gain of approximately $448,000
for the Broadcom hedge instrument offset by a loss of $832,000, on the Broadcom
investment. The Company also recorded a gain of $680,000 relating to the
Adaptec derivative contract and a loss of $1.0 million on the Adaptec
investments. Note 10. Leases, Commitments and Contingencies Operating Leases The Company leases its headquarters facility under an operating lease that
expires in June 2006. Under the terms of the lease, the Company is required to
pay property taxes, insurance and maintenance costs. In addition, the Company
also leases sales and design center offices under operating leases, which
expire between 2004 and 2008. Future minimum fiscal rental payments under non-cancelable operating
leases are as follows: Fiscal Year
    
    (In thousands)2005
    
    $
    1,8402006
    
    
    1,8432007
    
    
    7132008
    
    
    88Total payments
    
    $
    4,484
 Rent expense for fiscal 2004, 2003 and 2002, was $2.3 million, $2.5
million and $2.2 million, respectively. Capital Leases At March 31, 2004, equipment under capital leases amounted to
approximately $2.2 million compared to $2.2 million at March 31, 2003. The
original lease terms ranged from three to five years. The following is a schedule of future minimum fiscal lease payments under
capital leases: Fiscal Year
    
    (In thousands)2005
    
    $
    372006
    
    
    4Total payments minimum lease payments
    
    
    41Amount representing interest
    
    
    (4
    )37Less current portion
    
    
    (33
    )Long-term capital lease obligations
    
    $
    4
 Investment Company Act of 1940 Because of the appreciation in value over the past few years of the
Companys investments, including its strategic wafer manufacturing investments,
the Company believes that it could be viewed as holding a larger portion of its
assets in investment securities than is presumptively permitted by the
Investment Company Act of 1940 (the Act) for a company that is not registered
under it. In August 2000, the Company applied to the SEC for an order under
section 3(b)(2) of the Act confirming its non-investment-company status. In
March 2002, the staff of the SEC informed the Company that the staff could not
support the granting of the requested exemption. Since that time, the Company
has been working to resolve its status under the Act. No assurances can be F-23




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##### Table of Contents



given that the SEC will agree that the Company is not currently deemed to
be an unregistered investment company in violation of the Act. If the SEC
takes the view that the Company has been operating and continues to operate as
an unregistered investment company in violation of the Act, and does not
provide the Company with a sufficient period to either register as an
investment company or divest itself of investment securities and/or acquire
non-investment securities, the Company may be subject to significant potential
penalties. In the absence of exemptions granted by the SEC (which are discretionary
in nature and require the SEC to make certain findings), the Company would be
required either to register as a closed-end investment company under the Act,
or, in the alternative, to divest itself of sufficient investment securities
and/or to acquire sufficient non-investment assets so as not to be regarded as
an investment company under the Act. If the Company elects to register as a closed-end investment company under
the Act, a number of significant requirements will be imposed upon the Company.
These would include, but not be limited to, a requirement that at least 40% of
the Companys board of directors not be interested persons of the Company as
defined in the Act and that those directors be granted certain special rights
with respect to the approval of certain kinds of transactions (particularly
those that pose a possibility of giving rise to conflicts of interest);
prohibitions on the grant of stock options that would be outstanding for more
than 120 days and upon the use of stock for compensation (which could be highly
detrimental to the Company in view of the competitive circumstances in which it
seeks to attract and retain qualified employees); and broad prohibitions on
affiliate transactions, such as the compensation arrangements applicable to the
management of Alliance Venture Management, many kinds of incentive compensation
arrangements for management employees and joint investment by persons who
control the Company in entities in which the Company is also investing (which
could require the Company to abandon or significantly restructure its
management arrangements, particularly with respect to its investment
activities). While the Company could apply for individual exemptions from these
restrictions, there could be no guarantee that such exemptions would be
granted, or granted on terms that the Company would deem practical.
Additionally, the Company would be required to report its financial results in
a different form from that currently used by the Company, which would have the
effect of turning the Companys Statement of Operations upside down by
requiring that the Company report its investment income and the results of its
investment activities, instead of its operations, as its primary sources of
revenue. If the Company elects to divest itself of sufficient investment securities
and/or to acquire sufficient non-investment assets so as not to be regarded as
an investment company under the Act, the Company would need to ensure that the
value of investment securities (excluding the value of U.S. Government
securities and securities of certain majority-owned subsidiaries) does not
exceed forty percent (40%) of the Companys total assets (excluding the value
of U.S. Government securities and cash items) on an unconsolidated basis. In
seeking to meet this requirement, the Company might choose to divest itself of
assets that it considers strategically significant for the conduct of its
operations or to acquire additional operating assets that would have a material
effect on the Companys operations. There can be no assurance that the Company
could identify such operating assets to acquire or could successfully acquire
such assets. Any such acquisition could result in the Company issuing
additional shares that may dilute the equity of the Companys existing
stockholders, and/or result in the Company incurring additional indebtedness,
which could have a material impact on the Companys balance sheet and results
of operations. Were the Company to acquire any additional businesses, there
would be the additional risk that the Companys acquired and
previously-existing businesses could be disrupted while the Company attempted
to integrate the acquired business, as well as risks associated with the
Company attempting to manage a new business with which it was not familiar.
Any of the above risks could result in a material adverse effect on the
Companys results of operations and financial condition. Commitments and Contingencies Alliance applies the disclosure provisions of FIN 45 to its agreements
that contain guarantee or indemnification clauses. These disclosure provisions
expand those required by SFAS No. 5 Accounting for Contingencies, by
requiring that guarantors disclose certain types of guarantees, even if the
likelihood of requiring the guarantors performance is remote. The following
is a description of significant arrangements in which Alliance is a guarantor. Indemnification Obligations Alliance is a party to a variety of agreements pursuant to which it may be
obligated to indemnify the other party with respect to certain matters.
Typically, these obligations arise in the context of contracts entered into by
Alliance, under which Alliance customarily agrees to hold the other party
harmless against losses arising from a breach of representations and covenants
related to such matters as title to assets sold, certain intellectual property
rights, and certain income taxes. Generally, payment by Alliance is
conditioned on the other party making a claim pursuant to the procedures
specified in the particular contract, which procedures F-24




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##### Table of Contents



typically allow Alliance to challenge the other partys claims. Further,
Alliances obligations under these agreements may be limited in terms of time
and/or amount, and in some instances, Alliance may have recourse against third
parties for certain payments made by it under these agreements. It is not possible to predict the maximum potential amount of future
payments under these or similar agreements due to the conditional nature of
Alliances obligations and the unique facts and circumstances involved in each
particular agreement. Historically, payments made by Alliance under these
agreements did not have a material effect on its business, financial condition
or results of operations. Alliance believes that if it were to incur a loss in
any of these matters, such loss should not have a material effect on its
business, financial condition, cash flows or results of operations. Product Warranties Alliance estimates its warranty costs based on historical warranty claim
experience and applies this estimate to the revenue stream for products under
warranty. Included in Alliances sales reserve are costs for limited
warranties and extended warranty coverage. Future costs for warranties
applicable to revenue recognized in the current period are charged to the
Companys sales reserve. The sales reserve is reviewed quarterly to verify
that it properly reflects the remaining obligations based on the anticipated
expenditures over the balance of the obligation period. Adjustments are made
when actual claim experience differs from estimates. Warranty costs have
historically been insignificant. Balance at April 1, 2003
    
    $
    1,682Accruals for warranties issued during the year
    
    
    1,885Settlements on warranty claims made during the year
    
    
    (2,052
    )Balance at March 31, 2004
    
    $
    1,515
 Note 11. Benefit for Income Taxes The benefit for income taxes is comprised of the following: Year Ended March 31,2004
    
    2003
    
    2002(in thousands)Current:Federal
    
    $
    (3,475
    )
    
    $
    (17,644
    )
    
    $
    14,114State
    
    
    4
    
    
    
    (326
    )
    
    
    2,137Foreign
    
    
    
    
    
    
    
    
    
    
    (3,471
    )
    
    
    (17,970
    )
    
    
    16,251Deferred:Federal
    
    
    (7,212
    )
    
    
    (34,475
    )
    
    
    (143,170
    )State
    
    
    (1,771
    )
    
    
    (3,474
    )
    
    
    (20,904
    )Valuation allowance
    
    
    (1,629
    )
    
    
    38,806
    
    
    
    (10,612
    )
    
    
    857
    
    
    
    (164,074
    )Total benefit
    
    $
    (14,083
    )
    
    $
    (17,113
    )
    
    $
    (147,823
    )
 In addition, a net deferred income tax benefit of $375,000, $1.8 million
and $287,000 was recorded in minority interest in subsidiary companies in
fiscal years 2004, 2003 and 2002, respectively. F-25




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Net deferred tax liabilities comprise the following: March 31,2004
    
    2003(in thousands)Alliance Venture investments
    
    $
    27,945
    
    
    $
    26,722Inventory reserves
    
    
    6,453
    
    
    
    14,537Investment in Tower
    
    
    10,170
    
    
    
    14,189Accrued expenses and reserves
    
    
    767
    
    
    
    1,383Other
    
    
    2,837
    
    
    
    1,796Gross deferred tax assets
    
    
    48,172
    
    
    
    58,627Valuation allowance
    
    
    (37,177
    )
    
    
    (38,806
    )Net deferred tax assets
    
    
    10,995
    
    
    
    19,821Investment in UMC
    
    
    (46,577
    )
    
    
    (42,258
    )Investment in Adaptec
    
    
    (292
    )
    
    
    (517
    )Investment in Vitesse
    
    
    (209
    )
    
    
    (31
    )Fixed assets
    
    
    (855
    )
    
    
    (855
    )Deferred tax liabilities
    
    
    (47,933
    )
    
    
    (43,661
    )Net deferred tax liabilities
    
    $
    (36,938
    )
    
    $
    (23,840
    )
 The benefit for income taxes differs from the amount obtained by applying
the U.S. federal statutory rate to income before income taxes as follows: Year Ended March 31,2004
    
    2003
    
    2002(in thousands, except percentages)Federal statutory rate
    
    
    35
    %
    
    
    35
    %
    
    
    35
    %Tax at federal statutory rate
    
    $
    (11,966
    )
    
    $
    (44,270
    )
    
    $
    (136,895
    )State taxes, net of federal benefit
    
    
    (1,771
    )
    
    
    (5,904
    )
    
    
    (8,358
    )Change in valuation allowance
    
    
    (1,629
    )
    
    
    38,806
    
    
    
    Other, net
    
    
    1,283
    
    
    
    (5,745
    )
    
    
    (2,570
    )Total
    
    $
    (14,083
    )
    
    $
    (17,113
    )
    
    $
    (147,823
    )
 The tax benefit associated with the exercises of non-qualified stock
options and disqualifying dispositions of incentive stock options reduced taxes
currently payable by $402,000 in fiscal 2002. No reduction was reflected for
fiscal years 2004 and 2003. In January 2004 and April 2003, the Company received tax refunds from the
Internal Revenue Service totaling $17.1 million and $15.2 million,
respectively. These refunds related to losses incurred in fiscal years 2003
and 2002 carried back to fiscal years 2001 and 2000. As a multinational corporation, the Company conducts its business in several
countries and is subject to taxation in several jurisdictions. The taxation of
the Companys business is subject to the application of multiple and sometimes
conflicting tax laws and regulations as well as multinational tax conventions.
The application of tax laws and regulations is subject to legal and factual
interpretation, judgment and uncertainty. Tax laws themselves are subject to
change as a result of changes in fiscal policy, changes in legislation,
evolution of regulation and court rulings. Consequently, taxing authorities may
impose tax assessments or judgments against the Company that could materially
impact its tax liability and/or its effective income tax rate. In December 2003, the Internal Revenue Service (IRS) began an annual audit
of the tax years ended March 31, 1999 through March 31, 2002. The Company
believes that the ultimate resolution of the IRS audits will not have a
material adverse impact on its consolidated financial statements. Note 12. Stock Option Plans 1992 Stock Option Plan In April 1992, the Company adopted the 1992 Stock Option Plan for issuance
of common stock to employees and consultants of the Company. At March 31,
2002, 13,000,000 shares of the Companys Common Stock was reserved under the
1992 Stock Option Plan for issuance. In April 2002, the 2002 Stock Option Plan
(the Plan) was adopted to replace the expired 1992 Stock Option Plan. The
Board of Directors may terminate the Plan at any time at its discretion. Incentive stock options may not be granted at less than 100 percent of the
fair value of the Companys common stock at the date of grant and the option
term may not exceed 10 years. Options granted vest over a period of 5 years.
For holders of more than 10 percent of the total combined voting power of all
classes of the Companys stock, options may not be granted at less than 110
percent of the current market price of the common stock at the date of grant
and the option term may not exceed five years. Directors Stock Option Plan On September 30, 1993, the Company adopted its 1993 Directors Stock
Option Plan (Directors Plan), under which 900,000 shares of common stock
have been reserved for issuance. The Directors Plan provides for the automatic
grant to each non-employee director of the Company (but excluding persons on
the Companys Board of Directors in November 1993) of an option to purchase F-26




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##### Table of Contents



22,500 shares of common stock on the date of such directors election to
the Companys Board of Directors. Thereafter, such director will receive an
automatic annual grant of an option to purchase 11,250 shares of common stock
on the date of each annual meeting of the Companys stockholders at which such
director is re-elected. The maximum number of shares that may be issued to any
one director under this plan is 90,000. Such options will vest ratably over
four years from their respective dates of grant. No options were granted in
fiscal 2004 under the Directors Plan. The Directors Plan has expired and
while shares are available under this plan, no additional shares will be
granted pursuant to this plan. The following table summarizes grant and stock option activity under all
stock option plans for fiscal years 2004, 2003 and 2002: Options
    
    Options OutstandingAvailable for Grant
    
    Shares
    
    Weighted Average PricesBalance at March 31, 2001
    
    
    4,720,687
    
    
    
    2,374,362
    
    
    $
    11.11Options granted
    
    
    (1,151,500
    )
    
    
    1,151,500
    
    
    $
    11.81Options canceled
    
    
    852,050
    
    
    
    (852,050
    )
    
    $
    14.68Options exercised
    
    
    
    
    
    
    (193,325
    )
    
    $
    5.25Balance at March 31, 2002
    
    
    4,421,237
    
    
    
    2,480,487
    
    
    $
    10.66Options granted
    
    
    (649,000
    )
    
    
    649,000
    
    
    $
    6.36Options canceled
    
    
    549,040
    
    
    
    (549,040
    )
    
    $
    12.81Options exercised
    
    
    
    
    
    
    (20,585
    )
    
    $
    2.81Balance at March 31, 2003
    
    
    4,321,277
    
    
    
    2,559,862
    
    
    $
    9.16Options granted
    
    
    (1,823,900
    )
    
    
    1,823,900
    
    
    $
    6.03Options canceled
    
    
    539,250
    
    
    
    (539,250
    )
    
    $
    9.79Options exercised
    
    
    
    
    
    
    (152,230
    )
    
    $
    3.08Balance at March 31, 2004
    
    
    3,036,627
    
    
    
    3,692,282
    
    
    $
    7.76
 As of March 31, 2004, options to purchase 1,104,557 shares of common stock
were exercisable. The weighted average estimated fair value at the date of grant, as defined
by SFAS 123, for options granted in fiscal 2004, 2003 and 2002 was $2.97, $4.54
and $7.38, respectively. The estimated fair value at the date of grant was
calculated using the Black-Scholes model. This model, as well as other
currently accepted option valuation models, was developed to estimate the fair
value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Companys stock option
awards. These models also require subjective assumptions, including future
stock price volatility and expected time to exercise, which greatly affect the
calculated values. Significant option groups outstanding at March 31, 2004, and
related weighted average exercise price and contractual life information, are
as follows: Outstanding and Exercisable by Price Range Number
    
    
    
    
    
    
    
    Number VestedOutstanding as
    
    Weighted
    
    Weighted
    
    and
    
    Weightedof
    
    Average
    
    Average
    
    Exercisable
    
    AverageRange of
    
    March 31,
    
    Remaining
    
    Exercise
    
    as of March 31,
    
    ExerciseExercise Prices
    
    2004
    
    Contractual Life
    
    Price
    
    2004
    
    Price$
    2.3130 
    $
    4.0400
    
    
    
    422,350
    
    
    
    3.23
    
    
    $
    3.42
    
    
    
    193,300
    
    
    $
    2.97$
    4.0600 
    $
    4.3400
    
    
    
    555,000
    
    
    
    5.20
    
    
    $
    4.30
    
    
    
    300
    
    
    $
    4.16$
    4.3900 
    $
    5.5000
    
    
    
    324,800
    
    
    
    4.47
    
    
    $
    4.96
    
    
    
    109,725
    
    
    $
    5.34$
    5.6400 
    $
    6.8500
    
    
    
    657,500
    
    
    
    5.69
    
    
    $
    6.81
    
    
    
    3,150
    
    
    $
    6.51$
    7.0000 
    $
    8.3700
    
    
    
    444,882
    
    
    
    5.41
    
    
    $
    8.06
    
    
    
    185,682
    
    
    $
    7.89$
    8.4400 
    $
    11.1880
    
    
    
    614,120
    
    
    
    3.37
    
    
    $
    10.39
    
    
    
    279,746
    
    
    $
    11.00$
    11.3125 
    $
    13.0200
    
    
    
    613,380
    
    
    
    2.89
    
    
    $
    12.41
    
    
    
    294,804
    
    
    $
    12.36$
    13.3800 
    $
    25.7500
    
    
    
    56,250
    
    
    
    2.30
    
    
    $
    18.83
    
    
    
    35,450
    
    
    $
    18.79$
    26.6880 
    $
    26.6880
    
    
    
    1,000
    
    
    
    2.30
    
    
    $
    26.69
    
    
    
    600
    
    
    $
    26.69$
    27.2500 
    $
    27.2500
    
    
    
    3,000
    
    
    
    2.21
    
    
    $
    27.25
    
    
    
    1,800
    
    
    $
    27.25$
    2.3130 
    $
    27.2500
    
    
    
    3,692,282
    
    
    
    4.29
    
    
    $
    7.76
    
    
    
    1,104,557
    
    
    $
    9.14
 F-27




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The following assumptions are used to estimate the fair value for stock
options on the grant date: 2004
    
    2003
    
    2002Expected life
    
    5.00 years
    
    5.00 years
    
    5.00 yearsRisk-free interest rate
    
    
    3.0
    %
    
    
    2.9
    %
    
    
    4.9
    %Volatility
    
    
    74.4
    %
    
    
    83.8
    %
    
    
    87.6
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
 Employee Stock Purchase Plan In September 1996, the Company and its stockholders approved an Employee
Stock Purchase Plan (ESPP), which allows eligible employees of the Company
and its designated subsidiaries to purchase shares of common stock through
payroll deductions. The ESPP consists of a series of 12-month offering periods
composed of two consecutive 6-month purchase periods. The purchase price per
share is 85% of the fair market value of the common stock, at the date of
commencement of the offering period, or at the last day of the respective
6-month purchase period, whichever is lower. Purchases are limited to 10% of
an eligible employees compensation, subject to a maximum annual employee
contribution and limited to a $25,000 fair market value. Of the 750,000 shares
of common stock authorized under the ESPP, 124,774, 144,822 and 48,550, shares
were issued during fiscal 2004, 2003 and 2002, respectively. At March 31,
2004, there were 212,433 shares available under the ESPP. Compensation costs (included in pro forma net income (loss) and pro forma
net income (loss) per share amounts) for the grant date fair value, as defined
by SFAS 123, of the purchase rights granted under the ESPP, were calculated
using the Black-Scholes model. The following weighted average assumptions are
included in the estimated grant date fair value calculations for rights to
purchase stock under the ESPP: 2004
    
    2003
    
    2002Expected life
    
    6 months
    
    6 months
    
    6 monthsRisk-free interest rate
    
    
    1.0
    %
    
    
    1.2
    %
    
    
    2.8
    %Volatility
    
    
    59.5
    %
    
    
    74.6
    %
    
    
    57.2
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
 The weighted average estimated grant date fair value, as defined by SFAS
123, of rights to purchase common stock under the ESPP granted in fiscal 2004,
2003 and 2002 was $1.11, $2.40 and $4.51, per share, respectively. Note 13. 401(k) Salary Savings Plan Effective May 1992, the Company adopted the Salary Savings Plan (the
Savings Plan) pursuant to Section 401(k) of the Internal Revenue Code (the
Code), whereby eligible employees may contribute up to 15% of their earnings,
not to exceed amounts allowed under the Code. Effective April 1999, the
Company agreed to match up to 50% of the first 6% of the employee contribution
to a maximum of two thousand dollars annually per employee. The Companys
matching contribution vests over five years. In fiscal 2004, 2003 and 2002,
the Company contributed approximately $143,500, $156,600 and $117,600,
respectively. Note 14. Legal Matters In July 1998, the Company learned that a default judgment was entered
against it in Canada, in the amount of approximately $170 million (USD), in a
case filed in 1985 captioned Prabhakara Chowdary Balla and TritTek Research
Ltd. v. Fitch Research Corporation, et al., British Columbia Supreme Court No.
85-2805 (Victoria Registry). The Company, which had previously not
participated in the case, believes that it never was properly served with
process in this action and that the Canadian court lacks jurisdiction over the
Company in this matter. In addition to jurisdictional and procedural arguments,
the Company also believes it may have grounds to argue that the claims against
the Company should be deemed discharged by the Companys bankruptcy in 1991.
In February 1999, the court set aside the default judgment against the Company.
In April 1999, the plaintiffs were granted leave by the Court to appeal this
judgment. Oral arguments were made before the Court of Appeals in June 2000. In
July 2000, the Court of Appeals instructed the lower Court to allow the parties
to take depositions regarding the issue of service of process. In September
2003, Mr. Balla took the deposition of N. Damodar Reddy, and the Companys
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 the Company. The plaintiffs appealed the setting aside of the default
judgment against the Company to the Canadian Supreme Court. In June 2001, the
Canadian Supreme Court refused to hear the appeal of the F-28




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##### Table of Contents



setting aside of the default judgment against the Company. The Company
believes the resolution of this matter will not have a material adverse
effect on its financial conditions and its results of operations. On December 3, 2002, the Company and its then Vice President of Sales were
sued in Santa Clara Superior Court by plaintiff SegTec Ltd., an Israeli company
and former sales representative of the Company. In its complaint, SegTec
alleges that the Company terminated an oral sales agreement (Agreement) and
had failed to pay commissions due to SegTec in an amount in excess of $750,000.
SegTec also alleges that the Companys termination of the Agreement was
without cause and that the Company has materially breached the Agreement, and
certain other matters, including misappropriation of trade secrets. Plaintiff
seeks compensatory, incidental, and consequential damages for the
aforementioned allegations, punitive damages for the fraud allegations
specifically, and payment for the value of services rendered. Plaintiff served
the complaint on the Company and its 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 commissions dispute. All remaining
causes of action unrelated to the commission 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, the
Company cannot determine what, if any, effect resolution of this matter will
have on its financial condition. On February 24, 2003, a stockholder of the Company filed a putative
derivative action entitled Fritsche v. Reddy, et al., and Alliance
Semiconductor Corporation (case no. CV 814996) in Santa Clara County Superior
Court. This action, purportedly brought on behalf of the Company, named as
defendants certain current and former officers and directors of the Company.
The Company was named as a nominal defendant. On December 2, 2003, the parties
entered into a formal stipulation of settlement which was subsequently approved
by the court on January 13, 2004. A Final Judgment and Order of Dismissal With
Prejudice was entered by the court on January 20, 2004. In July 2003, the Company was 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
shareholders (including the Company). The lawsuit alleges 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 the Company) 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 shareholders 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. The Company has reviewed a copy
of the complaint, believes it has meritorious defenses and intends to defend
vigorously against the claims asserted against it. Due to the early stage of
the litigation, the Company cannot determine what, if any, effect resolution of
this matter will have on its financial condition. In addition, the Company is party to various legal proceedings and claims,
either asserted or unasserted, which arise in the ordinary course of business.
While the outcome of these claims cannot be predicted with certainty, the
Company does not believe that the outcome of any of these or any of the above
mentioned legal matters will have a material adverse effect on the Companys
consolidated financial position, results of operations or cash flows. Note 15. Related Party Transactions N. Damodar Reddy, the Chairman of the Board, President and Chief Executive
Officer of the Company, is a director and investor in Infobrain, Inc.
(Infobrain) an entity which provides the following services to the Company:
intranet and internet web site development and support, migration of Oracle
applications from version 10.7 to 11i; MRP software design implementation and
training, automated entry of manufacturing data, and customized application
enhancements in support of the Companys business processes. The Company paid
Infobrain approximately $306,000 in fiscal 2003 and $290,000 during fiscal
2004. Mr. Reddy is not involved in the operations of Infobrain. In October 1999, the Company 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 the Company
intended to form. Alliance Venture Management does not directly invest in the
investment funds with the Company, 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 and C.N. Reddy. F-29




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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 the Company owns 100% of
the common units in Alliance Venture Management, it does not hold any Preferred
Member Units and does not participate in the management fees generated by the
management of the investment funds. N. Damodar Reddy and C.N. Reddy, who are
directors of the Company and members of the Companys 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. In November 1999, the Company formed Alliance Ventures I, LP (Alliance
Ventures I) and Alliance Ventures II, LP (Alliance Ventures II), both
California limited partnerships. The Company, as the sole limited partner,
owns 100% of the 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, calculated on an annual basis. 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. Alliance Venture Management receives 15% - 16% of the realized gains of
the venture funds. No distribution of cash and/or marketable securities was
made to the partners of Alliance Venture Management during fiscal 2004 or
fiscal 2003. During fiscal 2002, the Company made distributions of cash and
marketable securities to the partners of Alliance Venture Management totaling
$5.2 million. Details of the distributions are as follows (in thousands): Market Value of
    
    Cash
    
    TotalOfficer/Employee
    
    Stock Distributed
    
    Distributed
    
    DistributionsN. Damodar Reddy
    
    $
    995
    
    
    $
    571
    
    
    $
    1,566C.N. Reddy
    
    
    995
    
    
    
    571
    
    
    
    1,566Non-executive employee
    
    
    1,175
    
    
    
    686
    
    
    
    1,861Former employee
    
    
    126
    
    
    
    76
    
    
    
    202Totals
    
    $
    3,291
    
    
    $
    1,904
    
    
    $
    5,195
 Annually, Alliance Venture Management earns 0.5% of the total fund
commitment of Alliance Ventures I, II, III, IV and V. During fiscal 2004, the
Company incurred $875,000 of commitment fees. This amount was offset by
expenses incurred by the Company on behalf of Alliance Venture Management of
approximately $870,000. Neither N. Damodar Reddy nor C.N. Reddy received any
commitment fees during fiscal 2004 or fiscal 2003. N. Damodar Reddy and C.N. Reddy have formed private venture funds, Galaxy
Venture Partners, L.L.C., Galaxy Venture Partners II, L.L.C. and Galaxy Venture
Partners III, L.L.C., which 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. The Company acquired Chip Engines in the fourth quarter of fiscal
2003. As part of this acquisition, the Company 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, the Company repaid the note in full including approximately
$22,000 of accrued interest. C.N. Reddy, an officer and director of the Company, is a general partner
of Solar, an investor in Solar and participates in running Solars daily
operations. Solar has invested in 17 of the 40 total companies in which
Alliance Venture Managements funds have invested. F-30




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On May 18, 1998, the Company provided loans to C.N. Reddy and N. Damodar
Reddy and one other director, Sanford Kane, aggregating $1.7 million. The
Reddys loans were used for the payment of taxes resulting from the gain on the
exercise of non-qualified stock options. The loan to Sanford Kane was used for
the exercise of stock options. Under these loans, both principal and accrued
interest were due on December 31, 1999, with accrued interest at rates ranging
from 5.50% to 5.58% per annum. The loan to Sanford Kane was repaid in full at
December 31, 1999. In 1999, 2000, and 2001, the loans to N. Damodar Reddy and
C.N. Reddy were extended such that they became due on December 31, 2002. The
loan to C.N. Reddy was repaid in full as of March 31, 2003 and the loan to N.
Damodar Reddy was repaid in full as of June 30, 2003. The related party receivable is $264,000 as of March 31, 2004 and is
related to loans to various employees, none of whom are officers of the
Company, including those in the Companys India design center. Note 16. Segment and Geographic Information The Company has one operating segment, which is to design, develop, and
market high-performance memory, analog and mixed signal, and system solutions
products. The following illustrates revenues by product line: Year Ended March 31,
    
    Percentage Change2004
    
    2003
    
    2002
    
    2004 to 2003
    
    2003 to 2002(in thousands)SRAM
    
    $
    11,603
    
    
    $
    7,600
    
    
    $
    13,356
    
    
    
    53
    %
    
    
    (43
    )%DRAM
    
    
    6,257
    
    
    
    6,334
    
    
    
    12,786
    
    
    
    (1
    )%
    
    
    (51
    )%Analog and Mixed Signal
    
    
    4,316
    
    
    
    2,948
    
    
    
    160
    
    
    
    46
    %
    
    
    1,743
    %System Solutions
    
    
    4,495
    
    
    
    1,640
    
    
    
    
    
    
    
    174
    %
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    245
    
    
    
    
    
    
    
    (100
    )%Total net revenues
    
    $
    26,671
    
    
    $
    18,522
    
    
    $
    26,547
    
    
    
    44
    %
    
    
    (30
    )%
 The following illustrates revenues by geographic locations. Revenues are
attributed to countries based on the customers location. Year Ended March 31,2004
    
    2003
    
    2002(in thousands)United States of America
    
    $
    7,848
    
    
    $
    5,814
    
    
    $
    6,968Taiwan
    
    
    5,057
    
    
    
    1,904
    
    
    
    3,894Japan
    
    
    3,558
    
    
    
    2,257
    
    
    
    2,603Asia (except Taiwan and Japan)
    
    
    2,481
    
    
    
    3,740
    
    
    
    4,044Europe (except United Kingdom)
    
    
    5,504
    
    
    
    2,538
    
    
    
    3,735United Kingdom
    
    
    1,975
    
    
    
    1,690
    
    
    
    4,981Rest of world
    
    
    248
    
    
    
    579
    
    
    
    322Total net revenues
    
    $
    26,671
    
    
    $
    18,522
    
    
    $
    26,547
 F-31




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
FINANCIAL STATEMENT SCHEDULE To the Board of Directors and Stockholders
of Alliance Semiconductor Corporation: Our audits of the consolidated financial statements referred to in our
report dated June 10, 2004, appearing in this Annual Report on Form 10-K also
included an audit of the Financial Statement Schedule listed in Item 16(a)(2)
of this Form 10-K. In our opinion, this Financial Statement Schedule presents
fairly, in all material respects, the information set forth therein when read
in conjunction with the related consolidated financial statements. /s/ PricewaterhouseCoopers LLP San Jose, California
June 10, 2004 F-32




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##### Table of Contents



ALLIANCE SEMICONDUCTOR CORPORATIONSCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS
(in thousands) Balance at
    
    
    
    
    
    
    
    
    
    Balance atDescription
    
    Beginning of Period
    
    Additions
    
    Reductions
    
    End of PeriodYear ended March 31, 2004Allowance for doubtful accounts
    
    $
    99
    
    
    $
    26
    
    
    $
    
    
    
    $
    125Year ended March 31, 2003Allowance for doubtful accounts
    
    $
    86
    
    
    $
    50
    
    
    $
    (37
    )
    
    $
    99Year ended March 31, 2002Allowance for doubtful accounts
    
    $
    383
    
    
    $
    
    
    
    $
    (297
    )
    
    $
    86
 F-33




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##### Table of Contents



EXHIBIT INDEX ExhibitNumber
    
    Document Description3.01(A)
    
    Registrants Certificate of Incorporation3.02(A)
    
    Registrants Certificate of Elimination of Series A Preferred Stock3.03(F)
    
    Registrants Certificate of Amendment of Certificate of Incorporation3.04(A)
    
    Registrants Bylaws4.01(A)
    
    Specimen of Common Stock Certificate of Registrant10.01
    
    Registrants Stock Option Plan adopted by Registrant on April 7, 1992 and amended through September
19, 1996, and related documents (superceded by Exhibit 10.51)10.02(A)
    
    Registrants Directors Stock Option Plan adopted by Registrant on October 1, 1993 and related documents10.03(A)
    
    Form of Indemnity Agreement used between Registrant and certain of its officers and directors10.04(K)
    
    Form of Indemnity Agreement used between the Registrant and certain of its officers10.07*(I)
    
    Subscription Agreement dated February 17, 1995, by and among Registrant, Singapore Technology Pte.
Ltd. and Chartered Semiconductor Manufacturing Pte. Ltd.10.08*(I)
    
    Manufacturing Agreement dated February 17, 1995, between Registrant and Chartered Semiconductor
Manufacturing Pte. Ltd.10.09(D)
    
    Supplemental Subscription Agreement dated March 15, 1995, by and among Registrant, Singapore
Technology Pte. Ltd. and Chartered Semiconductor Manufacturing Pte. Ltd.10.10*(D)
    
    Supplemental Manufacturing Agreement dated March 15, 1995, between Registrant and Chartered
Semiconductor Manufacturing Pte. Ltd.10.11*(E)
    
    Foundry Venture Agreement dated July 8, 1995, by and among Registrant, S3 Incorporated and United
Microelectronics Corporation10.12*(E)
    
    Foundry Capacity Agreement dated July 8, 1995, by and among Registrant, Fabco, S3 Incorporated and
United Microelectronics Corporation10.13*(F)
    
    Foundry Venture Agreement dated September 29, 1995, between Registrant and United Microelectronics
Corporation10.14*(F)
    
    Foundry Capacity Agreement dated September 29, 1995, by and among Registrant, FabVen and United
Microelectronics Corporation10.15*(F)
    
    Written Assurances Re: Foundry Venture Agreement dated September 29, 1995 by and among Registrant,
FabVen and United Microelectronics Corporation10.16*(G)
    
    Letter Agreement dated June 26, 1996 by and among Registrant, S3 Incorporated and United
Microelectronics Corporation10.17(H)
    
    Stock Purchase Agreement dated as of June 30, 1996 by and among Registrant, S3 Incorporated, United
Microelectronics Corporation and United Semiconductor Corporation10.18*(H)
    
    Amendment to Fabco Foundry Capacity Agreement dated as of July 3, 1996 by and among Registrant, S3
Incorporated, United Microelectronics Corporation and United Semiconductor Corporation10.19(H)
    
    Side Letter dated July 11, 1996 by and among Registrant, S3 Incorporated, United Microelectronics
Corporation and United Semiconductor Corporation10.20(I)
    
    1996 Employee Stock Purchase Plan10.21(J)
    
    Letter Agreement dated December 23, 1996 by and among Registrant, S3 Incorporated, United
Microelectronics Corporation and United Semiconductor Corporation10.22(K)
    
    Trademark License Agreement dated as of October 17, 1996 between Registrant and Alliance Semiconductor
International Corporation, a Delaware corporation, as amended through May 31, 199710.23(K)
    
    Restated Amendment to FabCo Foundry Venture Agreement dated as of February 28, 1997 by and among
Registrant, S3 Incorporated, United Microelectronics Corporation and United Semiconductor Corporation10.24(K)
    
    Letter Agreement dated April 25, 1997 by and among Registrant, S3 Incorporated, United
Microelectronics Corporation and United Semiconductor Corporation




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ExhibitNumber
    
    Document Description10.25*(K)
    
    Restated DRAM Agreement dated as of February 28, 1996 between Registrant and United Microelectronics
Corporation10.26*(K)
    
    First Amendment to Restated DRAM Agreement dated as of March 26, 1996 between Registrant and United
Microelectronics Corporation10.27*(K)
    
    Second Amendment to Restated DRAM Agreement dated as of July 10, 1996 between Registrant and United
Microelectronics Corporation10.28(K)
    
    Promissory Note and Security Agreement dated March 28, 1997 between Registrant and Matrix Funding
Corporation10.29*(L)
    
    Sale and Transfer Agreement dated as of March 4, 199810.30(M)
    
    Alliance Venture Management, LLC Limited Liability Company Operating Agreement dated October 15, 199910.31(M)
    
    Alliance Venture Management, LLC Amended Limited Liability Company Operating Agreement dated February
28, 200010.32(M)
    
    Alliance Ventures I, LP Agreement of Limited Partnership dated November 12, 199910.33(M)
    
    Alliance Ventures II, LP Agreement of Limited Partnership dated November 12, 199910.34(M)
    
    Alliance Ventures III, LP Agreement of Limited Partnership dated February 28, 200010.35(N)
    
    Share Purchase Agreement, dated as of July 4, 2000, by and between SanDisk Corporation and Tower
Semiconductor Ltd.10.36(N)
    
    Additional Purchase Obligation Agreement, dated as of July 4, 2000, by and between SanDisk Corporation
and Tower Semiconductor Ltd.10.37(N)
    
    Registration Rights Agreement, dated as of January 18, 2001, by and between Tower Semiconductor Ltd.,
SanDisk Corporation, The Israel Corporation, Registrant, Macronix International Co., Ltd. and
QuickLogic Corporation.10.38(N)
    
    Consolidated Shareholders Agreement, dated as of January 18, 2001 by and among SanDisk Corporation,
The Israel Corporation, Registrant and Macronix International Co., Ltd.10.39(N)
    
    Alliance/Tower Joinder Agreement, dated August 29, 2000, by and between Registrant and Tower
Semiconductor Ltd.10.40(N)
    
    Alliance/TIC Joinder Agreement, dated August 29, 2000, by and between Registrant and The Israel
Corporation10.41(O)
    
    Alliance Venture Management, LLC Amended Limited Liability Company Operating Agreement dated January
23, 200110.42(O)
    
    Alliance Ventures IV, LP Agreement of Limited Partnership dated January 23, 200110.43(O)
    
    Alliance Ventures V, LP Agreement of Limited Partnership dated January 23, 200110.44(O)
    
    Loan Agreement dated May 17, 2001, by and between Registrant and Citibank, N.A.10.45(O)
    
    Share Pledge Agreement dated May 17, 2001, by and between Registrant and Citibank, N.A.10.50(P)
    
    Asset Purchase Agreement dated January 17, 2002 by and between Registrant and PulseCore, Inc.10.51(Q)
    
    Registrants 2002 Stock Option Plan10.55(S)
    
    Tower Semiconductor Agreement; Amendment No.3 to payment schedule of Series A-5 additional purchase
obligations, waiver of Series A-5 conditions, conversion of Series A-4 wafer credits and other
provisions, dated as of November 11, 200314.01
    
    Code of Ethics21.01
    
    Subsidiaries of Registrant23.01
    
    Consent of PricewaterhouseCoopers LLP (San Jose, California)31.01
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of the Companys Chief
Executive Officer31.02
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of the Companys Chief
Financial Officer32.01
    
    Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 of the Companys Chief Executive Officer




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ExhibitNumber
    
    Document Description32.02
    
    Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 of the Companys Chief Financial Officer
   
    
    Management contract or compensatory plan or arrangement required to be
filed as an Exhibit to this Form 10-K.*
    
    Confidential treatment has been granted with respect to certain portions
of this document.**
    
    Confidential treatment has been requested with respect to certain
portions of this document.(A)
    
    The document referred to is hereby incorporated by reference from
Registrants Registration Statement on Form SB-2 (File No. 33-69956-LA)
declared effective by the Commission on November 30, 1993.(C)
    
    The document referred to is hereby incorporated by reference from
Registrants Registration Statement on Form SB-2 (File No. 33-90346-LA)
declared effective by the Commission on March 28, 1995.(D)
    
    The document referred to is hereby incorporated by reference from
Registrants Current Report on Form 8-K filed with the Commission on April
28, 1995.(E)
    
    The document referred to is hereby incorporated by reference from
Registrants Current Report on Form 8-K filed with the Commission on July
24, 1995.(F)
    
    The document referred to is hereby incorporated by reference from
Registrants Current Report on Form 8-K filed with the Commission on
October 23, 1995.(G)
    
    The document referred to is hereby incorporated by reference from
Registrants Quarterly Report on Form 10-Q filed with the Commission on
August 13, 1996.(H)
    
    The document referred to is hereby incorporated by reference from
Registrants Quarterly Report on Form 10-Q filed with the Commission on
November 12, 1996.(I)
    
    The document referred to is hereby incorporated by reference from
Registrants Registration Statement on Form S-8 (File No. 333-13461) filed
with the Commission on October 4, 1996.(J)
    
    The document referred to is hereby incorporated by reference from
Registrants Quarterly Report on Form 10-Q filed with the Commission on
February 11, 1997.(K)
    
    The document referred to is hereby incorporated by reference from
Registrants Annual Report on Form 10-K filed with the Commission on June
27, 1997.(L)
    
    The document referred to is hereby incorporated by reference from
Registrants Current Report on Form 8-K filed with the Commission on March
19, 1998.(M)
    
    The document referred to is hereby incorporated by reference from
Registrants Annual Report on Form 10-K filed with the Commission on June
30, 2000.(N)
    
    The document referred to is hereby incorporated by reference from
Registrants Quarterly Report on Form 10-Q filed with the Commission on
February 13, 2000.(O)
    
    The document referred to is hereby incorporated by reference from
Registrants Annual Report on Form 10-K filed with the Commission on June
29, 2001.(P)
    
    The document referred to is filed hereby incorporated by reference from
Registrants Quarterly Report on Form 10-Q filed with the Commission on
February 12, 2002.




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##### Table of Contents



(Q)
    
    The document referred to is hereby incorporated by reference from
Registrants Annual Report on Form 10-K filed with the Commission on July
15, 2002.(S)
    
    The document referred to is hereby incorporated by reference from
Registrants Quarterly Report on Form 10-Q filed with the Commission on
February 10, 2004.