e10vq

United States Securities and Exchange Commission

Washington, D.C. 20549

Form 10-Q

(Mark One)


þ		Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2006, or


o		Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to .

Commission file number: 0-22594

Alliance Semiconductor Corporation

(Exact name of Registrant as Specified in Its Charter)


Delaware		77-0057842

(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)

2900 Lakeside Drive
Santa Clara, California 95054-2831
(Address of principal executive offices, including zip code)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated o Accelerated filer þ Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of October 18, 2006, there were 32,621,965 shares of Registrant’s Common Stock outstanding.

Part I — Financial Information

Item 1. Financial Statements

Alliance Semiconductor Corporation

Condensed Consolidated Balance Sheets

(in thousands)
(unaudited)


	September 30, 2006			March 31, 2006
ASSETS

Current assets:
Cash and cash equivalents	$	45,211		$	49,718
Short-term investments		5,646			7,792
Accounts receivable, net		135			2,653
Receivable from sale of securities		4,276			759
Other current assets		2,247			1,138
Deferred tax assets		1,598			2,121
Assets held for sale		25,034			12,286

Total current assets		84,147			76,467


Property and equipment, net		17			33
Investment in Tower Semiconductor (excluding short-term portion)		7,231			9,228
Alliance and Solar Ventures and other investments		—			23,147
Other assets		658			786

Total assets	$	92,053		$	109,661


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,377		$	3,525
Accrued liabilities		480			4,546
Income tax payable		34,552			34,528
Deferred income tax liabilities		—			2,717
Liabilities related to assets held for sale		4,779			—

Total current liabilities		41,188			45,316


Deferred Tax Liabilities		1,598			2,121
Other liabilities		—			45

Total liabilities	$	42,786		$	47,482


Commitments and contingencies (Notes 8 and 12)
Minority interest in subsidiary companies		—			295
Stockholders’ equity:
Common stock (40,777 shares issued and 32,622 shares outstanding September 30, and 43,755 shares issued and 35,584 shares outstanding March 31, 2006)		408			438
Additional paid-in capital		192,661			201,622
Treasury stock (8,171 shares at cost September 30, 2006 and March 31, 2006, respectively)		(68,576	)		(68,576	)
Accumulated deficit		(75,598	)		(70,286	)
Accumulated other comprehensive income/(loss)		372			(1,314	)

Total stockholders’ equity		49,267			61,884

Total liabilities and stockholders’ equity	$	92,053		$	109,661

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

Alliance Semiconductor Corporation

Condensed Consolidated Statements of Operations

(in thousands, except per share amounts)
(unaudited)


	Three months ended						Six months ended
	September 30,						September 30,
	2006			2005			2006			2005
Gain/(Loss) on sale of marketable securities	$	(19	)	$	4,645		$	1,044		$	6,686
Interest income		829			7			1,473			14
General and administrative expense		(1,352	)		(2,446	)		(3,637	)		(4,602	)

Income/(Loss) from continuing operations		(542	)		2,206			(1,120	)		2,098
Discontinued operations:
Memory products:
Loss on Sale		(279	)		—			(2,199	)		—
Operations, net of zero and $590 income tax for 2006 and 2005, respectively		(457	)		(2,346	)		(1,468	)		(4,091	)

Net loss on Memory products		(736	)		(2,346	)		(3,667	)		(4,091	)
Non-memory products:
Gain/(Loss) on Sale		(463	)		—			5,922			—
Operations, net of zero and $1,142 income tax for 2006 and 2005, respectively		(868	)		(4,540	)		(1,189	)		(8,629	)

Net gain/(loss) on Non-memory products		(1,331	)		(4,540	)		4,733			(8,629	)
Venture investments, net of zero and $1,487 income tax for 2006 and 2005, respectively		(3,227	)		(5,912	)		(5,257	)		(10,769	)

Loss from discontinued operations		(5,294	)		(12,798	)		(4,191	)		(23,489	)

Loss before income tax		(5,836	)		(10,592	)		(5,311	)		(21,391	)
Provision (benefit) for income tax		—			(2,480	)		—			(2,394	)

Net loss	$	(5,836	)	$	(8,112	)	$	(5,311	)	$	(18,997	)


Net Profit (loss) per share — Basic and Diluted:
Continuing operations	$	(0.02	)	$	0.13		$	(0.03	)	$	0.13
Discontinued operations	$	(0.15	)	$	(0.36	)	$	(0.12	)	$	(0.66	)
Net Profit (loss)	$	(0.16	)	$	(0.23	)	$	(0.15	)	$	(0.53	)

Weighted average number of common shares:
Basic and Diluted		35,520			35,582			35,552			35,575

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

ALLIANCE SEMICONDUCTOR CORPORATION

Condensed Consolidated Statements of Cash Flows

(in thousands)
(unaudited)


	Six months ended
	September 30,
	2006			2005
Cash flows from operating activities:
Net loss		($5,311	)		($18,997	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		133			1,675
Minority interest in subsidiary companies, net of tax		(66	)		155
Equity in loss of investees		5,664			8,095
Gain on investments		(2,305	)		(5,891	)
Proceeds of short term securities in conjunction with sale of an investee of Solar Venture Partners		—			(717	)
Gain on sale of business units		(3,685	)		—
Other		(81	)		—
Write-down of marketable securities and venture investments		475			400
Provision for income tax		—			1,284
Changes in assets and liabilities:
Accounts receivable		2,158			(828	)
Inventory		(243	)		756
Related party receivables		(14	)		45
Receivable from sale of securities		(2,993	)		—
Receivable from sale of business units		(524	)		—
Assets held for sale		271			—
Other assets		(1,663	)		(542	)
Accounts payable		(1,503	)		1,009
Accrued liabilities and other long-term obligations		(3,963	)		245
Income tax payable		24			90
Liabilities related to assets held for sale		934			—

Net cash used in operating activities		(12,692	)		(13,221	)


Cash flows from investing activities:
Purchase of property and equipment		—			(295	)
Proceeds from sale of business units		14,207			—
Proceeds from sale of available-for-sale securities		6,718			21,930
Sale of fixed assets		186			—
Purchase of Alliance Ventures and other investments		(4,052	)		(5,338	)
Undistributed venture investment proceeds		(3,601	)		—
Disposition of Alliance Ventures and other investments		—			208
Proceeds from sale of Alliance Ventures and other investments		3,718			—

Net cash provided by investing activities		17,176			16,505


Cash flows from financing activities:
Net proceeds from exercise of stock options		—			71
Repurchase of common stock		(8,991	)		—

Net cash provided by (used in) financing activities		(8,991	)		71


Net increase/(decrease) in cash and cash equivalents		(4,507	)		3,355
Cash and cash equivalents at beginning of the period		49,718			2,397

Cash and cash equivalents at end of the period	$	45,211		$	5,752


Supplemental disclosure of cash flow information:
Cash paid (refunded) for taxes, net	$	1,351		$	53

Cash paid for interest	$	—		$	—

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

ALLIANCE SEMICONDUCTOR CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 1. Basis of Presentation

The accompanying unaudited consolidated financial statements of Alliance Semiconductor Corporation and its subsidiaries (the “Company”, “we”, “us”, “ours” or “Alliance”) have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted in accordance with such rules and regulations. In the opinion of management, the unaudited interim consolidated financial statements reflect all adjustments, consisting only of normal recurring items, which in the opinion of management are necessary to present fairly the consolidated financial position of us and our consolidated results of operations and cash flows.

The year-end condensed consolidated balance sheet data was derived from audited financial statements. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2006, filed with the Securities and Exchange Commission on August 9, 2006.

For purposes of presentation, we have indicated the first six months of the fiscal years 2007 and 2006 as ending on September 30; whereas, in fact, we accounted for our fiscal quarter during fiscal 2006 on the Saturday nearest the end of September, or September 24, 2005. The financial results for the second quarter of fiscal 2007 and 2006 were reported on a 13-week quarter. Certain prior year amounts have been reclassified to conform to current presentations.

The results of operations for the six months ended September 30, 2006 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2007, or any future period and we make no representations related thereto.

Note 2. Stock-Based Compensation

At September 30, 2006, we had options outstanding under three stock-based compensation plans: The 2002 Stock Option Plan, the 1996 Employee Stock Purchase Plan and the 1993 Director’s Stock Option Plan. Commencing in 2003, no further shares were issuable pursuant to the 1993 Director’s Stock Option Plan. Share-based compensation recognized in 2006 as a result of the adoption of SFAS No. 123(R) is calculated using the Black-Scholes option pricing model for estimating fair value of options granted under the company’s equity incentive plans. Pro forma disclosures according to the original provisions of SFAS No. 123 for periods prior to the adoption of SFAS No. 123(R) use the Black-Scholes option pricing model for estimating fair value of options granted under the company’s equity incentive plans. Under the 2002 Stock Option Plan, 1993 Director’s Stock Option Plan and 1996 Employee Stock Purchase Plan, our pro forma net loss and pro forma net loss per share for the six months ended September 30, 2006 and 2005 would have been as follows (in thousands, except per share data):


	Three months ended						Six months ended
	September 30,						September 30,
	2006			2005			2006			2005
Net loss, as reported	$	(5,836	)	$	(8,112	)	$	(5,311	)	$	(18,997	)
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(31	)		(551	)		(129	)		(1,173	)

Pro forma net loss:	$	(5,867	)	$	(8,663	)	$	(5,440	)	$	(20,170	)


Loss per share:
Basic and diluted – as reported		(0.16	)		(0.23	)		(0.15	)		(0.53	)
Basic and diluted – pro forma		(0.17	)		(0.24	)		(0.15	)		(0.57	)
Number of shares — as reported		35,520			35,582			35,552			35,575
Number of shares — pro forma		35,520			35,582			35,552			35,575

The calculated expense for the six months ended September 30, 2006 was not material and therefore not recorded. The weighted average estimated fair value at the date of grant, as defined by SFAS 123, for options granted in the six months ended September 30,

2006 and 2005 was zero and $1.54, 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 our 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.

The following assumptions were used to estimate the fair value for stock options on the grant date:


	Three months ended						Six months ended
	September 30,						September 30,
	2006			2005			2006			2005
Expected life	5.2 years			5 years			5.2 years			5 years
Risk-free interest rate		4.4%-4.7	%		3.9	%		4.4%-4.7	%		3.8	%
Volatility		57.92	%		40.5	%		57.92	%		52.2	%
Dividend yield		0.0	%		0.0	%		0.0	%		0.0	%

Note 3. Balance Sheet Components

Short-term Investments

Short-term investments are accounted for in accordance with Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS 115”). Management determines the appropriate categorization of investment securities at the time of purchase and reevaluates such designation as of each balance sheet date. Management has the ability and intent, if necessary, to liquidate any non-restricted investments in order to meet our liquidity needs within the normal operating cycle. At September 30, 2006 and March 31, 2006, equity securities with no restrictions on sale or that have restrictions that expire within the next year, are designated as available-for-sale in accordance with SFAS 115 and reported at fair market value with the related unrealized gains and losses, net of taxes, included in stockholders’ equity. Realized gains and losses and declines in value of securities judged to be other than temporary, are included in interest and other income, net. The fair value of the Company’s investments is based on quoted market prices. Realized gains and losses are computed using the specific identification method.

Short-term investments include the following at September 30, 2006 and March 31, 2006 (in thousands):


	September 30, 2006						March 31, 2006
Company	Shares		Adj Cost Basis		Market Value		Shares		Adj Cost Basis		Market Value
Tower Semiconductor Debentures (1)			$	713	$	713			$	3,852	$	3,852
Tower Semiconductor		3,379		4,933	$	4,933		3,078		3,940		3,940

Total			$	5,646	$	5,646			$	7,792	$	7,792


(1)		Convertible to Tower ordinary shares at $1.10 per share, 488,182 share equivalents at September 30, 2006, 3,009,818 share equivalents at March 31,2006

Long-term Investments

Investments that are restricted are classified as long-term investments in the non-current asset section of the balance sheet. If the investment is salable under market rules and can otherwise be classified as a marketable security, then the investment will be accounted for as an “available-for-sale” marketable security in accordance with SFAS 115. Currently, the Company owns approximately 5.0 million shares of Tower common stock that are carried as long-term investments because they are available for sale but subject to Rule 144 limitations on sale within the next twelve months. As a result, these shares are carried at market.

At September 30, 2006 and March 31, 2006, long-term investments were as follows (in thousands):


	September 30, 2006				March 31, 2006
	Number of		Adjusted		Number of		Adjusted
	Shares		Cost Basis		Shares		Cost Basis
Tower Semiconductor Ltd. Shares		4,952		7,231		7,209		9,228
Alliance Ventures’ investments (1)		—		20,975		—		22,079
Solar Venture Partners, LP’s investments (1)		—		1,067		—		1,068

Total			$	29,273			$	32,375


(1)		Alliance and Solar Ventures’ investments are classified in Assets Held for Sale (see Item 2. “Disposition of Alliance and Solar Venture Investments”).

Assets Held for Sale

At September 30, 2006 and March 31, 2006, assets held for sale included the following:


Assets held for sale:	September 30, 2006		March 31, 2006
Alliance Ventures’ investments	$	20,975	$	—
Deferred tax assets		2,717		2,717
Solar Venture Partners		1,067		—
Property and equipment, net		274		2,709
Related party receivables		1		71
Inventory		—		6,410
Intangible assets		—		379

Total current assets held for sale	$	25,034	$	12,286

During the quarter ended September 30, 2006, all assets held for sale other than Alliance and Solar Ventures’ investments were sold (see Item 2. “Disposition of Operating Business Units”).

Inventory

At September 30, 2006 and March 31, 2006, inventory was as follows (in thousands):


	September 30, 2006		March 31, 2006
Work in process	$	—	$	3,974
Finished goods		—		2,436

Total	$	—	$	6,410

All inventories were sold during the quarter ended September 30, 2006 (see Item 2. “Disposition of Operating Business Units”).

Intangible Assets

The amortization of intangible assets was $616,000 for the six months ended September 30, 2005. All intangible assets were sold pursuant to the sale of our operating business units during the quarter ended September 30, 2006 (see Item 2. “Disposition of Operating Business Units”).

Liabilities Related to Assets Held for Sale and Discontinued Operations

At September 30, 2006 and March 31, 2006, liabilities related to assets held for sale and discontinued operations were as follows:


Liabilities related to assets held for sale:	September 30, 2006		March 31, 2006
Deferred tax liabilities on assets held for sale	$	2,717		—
CAD tools purchase commitments		256		—
Deferred proceeds from business unit sale		524		—
Allowance for product returns		497		—
Minority interest in subsidiary		361		—
Shared backlog from business unit sale		222		—
Collections related to discontinued operations		202		—

Total liabilities related to assets held for sale	$	4,779	$	—

Accumulated Other Comprehensive Income

At September 30, 2006 and March 31, 2006, the accumulated other comprehensive income was as follows (in thousands):


	Unrealized						Net Unrealized
September 30, 2006	Gain/(Loss)			Tax Effect			Gain/(Loss)
Tower Semiconductor Ltd. Ordinary Shares		(691	)		1,105			414
Tower Semiconductor Ltd. Debentures		176			(218	)		(42	)

	$	(515	)	$	887		$	372


	Unrealized						Net Unrealized
March 31, 2006	Gain/(Loss)			Tax Effect			Gain/(Loss)
Tower Semiconductor Ltd. Ordinary Shares		(2,742	)		1,105			(1,637	)
Tower Semiconductor Ltd. Debentures		541			(218	)		323

	$	(2,201	)	$	887		$	(1,314	)

Note 4. Investment in Tower Semiconductor, Ltd.

At September 30, 2006, we owned 8,331,157 ordinary shares of Tower Semiconductor Ltd. (“Tower”), of which 3,378,744 were classified as short-term and 4,952,413 classified as long-term, and $0.7 million Tower Debentures which are convertible into 488,182 Tower ordinary shares. These shares and debentures are accounted for as available-for-sale marketable securities in accordance with SFAS 115. At September 30, 2006 and 2005, a portion of our investment in Tower shares was classified as long-term due to trading and other restrictions.

Until January 20, 2006 a substantial portion of our Tower shares were subject to restriction on sale, but we are now able to sell, transfer or dispose of our Tower shares in accordance with Rule 144 or another applicable exemption from the Securities Act of 1933, as amended. We hold 9.9% of Tower shares, which limits our ability to sell shares to 1% of the outstanding shares of Tower stock in any three month period under Rule 144.

During the quarter ended September 30, 2006 we sold 1,698,193 Tower ordinary shares for $2.4 million, and recorded a loss of approximately $0.3 million.

As of September 30, 2006, we held $9.7 million of wafer credits acquired as part of the original Tower Share Purchase Agreement. During the second quarter of fiscal 2003 we wrote off a portion of our investment in wafer credits with Tower and recorded a pretax, operating loss of approximately $9.5 million. We had determined at that time that the value of these credits would not be realized given our sales forecast of the products to be manufactured by Tower for us. During the Quarter ended June 30, 2006, we wrote off the balance of $0.2 million of the carrying value of the wafer credits, as we have now disposed of the activities that would enable us to further convert wafer credits to shares or loans.

Irrespective of our carrying value of Tower wafer credits, through December 2006, we still have the option to convert a portion of our prepaid wafer credits to Tower ordinary shares as opposed to using the credits to offset the cost of actual wafer purchases. The credits that would have been used against quarterly wafer purchases from Tower’s Fab 2 during that two-year period can be converted into Tower ordinary shares based on the average price per Tower share during the last 15 trading days of each quarter. The credits that would have been used against wafer purchases but are not converted to shares will accrue interest quarterly at the three-month LIBOR rate plus 2.5%. Interest will be paid the following quarter and reimbursement of these unutilized wafer credits will not occur until December 2007.

In January 2001, we committed to exercise approximately 15.6% of our rights to purchase $1.0 million principal amount of convertible debentures of Tower pursuant to its $50 million rights offering, subject to certain conditions. The debentures are convertible into Tower ordinary shares at a conversion rate of one ordinary share per each $1.10 amount of outstanding principal of the debentures, subject to certain adjustments, and bear interest at LIBOR plus 2.5% until repaid at maturity on December 31, 2007. In the quarter ending December 31, 2005, we exercised those rights and exercised our remaining rights to purchase $3.3 million principal amount of registered Tower convertible debentures, which can be converted to 3,009,818 Tower ordinary shares. We elected to convert those debentures and commenced selling the underlying ordinary shares in May 2006. During the quarter ended September 30, 2006 we sold 401,006 of those shares, for a gain of approximately $85,000, leaving us with debentures convertible into 488,182 shares at September 30, 2006.

As part of a September 2002 Tower rights offering, the Company received 794,995 ordinary shares of Tower as well as warrants to purchase 357,747 ordinary shares of Tower. Each whole warrant entitles the holder to purchase one ordinary share at an exercise price of $7.50 per share through October 31, 2006.

Our investment in Tower is subject to inherent risks, including those associated with certain Israeli regulatory requirements, political unrest, financing difficulties and litigation matters which could harm our business and financial condition. Tower’s ordinary shares have historically experienced periods of significant decrease in market value and fluctuations in market value. For example, the price of Tower shares declined by 17%, during fiscal 2006 to $1.28, resulting in mark to market write downs of $2.9 million in 2006, but during the six months ended September 30, 2006 Tower share prices have since risen to the $1.40 range. Given this volatility, there can be no assurance that our investment in Tower shares and wafer credits will not decline further in value.

Mel Keating, our President and CEO, is a director of Tower.

Note 5. Private Equity Investments

Alliance Venture Management, LLC

In October 1999, we formed Alliance Venture Management LLC (“Alliance Venture Management”), a California limited liability company, to manage and act as the general partner in the investment funds we intended to form. Alliance Venture Management did not directly invest in the investment funds with us, but the original agreement was drafted to allocate to it (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 designed to provide incentives to the individuals who participated in the management of the investment funds, including N. Damodar Reddy, a former member of our Board of Directors and our former Chairman, Chief Executive Officer and President, and C.N. Reddy, our Executive Vice President for Investments and a member of our Board of Directors. We took the position that this agreement did not reflect the actual agreements, or that those agreements were modified by the course of dealing, and replaced Alliance Venture Management as general partner in May 2006 (as more fully discussed below).

In November 1999, we formed Alliance Ventures I, LP (“Alliance Ventures I”) and Alliance Ventures II, LP (“Alliance Ventures II”), both California limited partnerships. As the sole limited partner, we own 100% of the limited partnership interests in each partnership. Until May 2006, Alliance Venture Management acted as the general partner of these partnerships and the agreements were drafted to provide a management fee of 15% based upon realized investment gains from these partnerships for its managerial efforts.

At its 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 were allocated 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 were allocated 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 again were allocated a management fee of 15% of investment gains realized by Alliance Ventures IV and Alliance Ventures V, respectively, calculated on an annual basis.

Now that Alliance Venture Management has been replaced as general partner, it will no longer have a claim to such fees on future gains. While we own 100% of the common units in Alliance Venture Management, we did not hold any Series A, B, C, D and E member units (“Preferred Member Units”) and did not participate in the management fees generated by the management of the investment funds. N. Damodar Reddy and C.N. Reddy each hold 48,000 Preferred Member Units of the 162,152 total Preferred Member Units outstanding and the 172,152 total member Units outstanding. From August 2000 to October 2003, they received fees and other distributions of $7.0 million.

Alliance Venture Management was awarded 0.5% of the total fund commitment of Alliance Ventures I, II, III, IV and V (collectively, “Alliance Ventures”) as a management fee. As a result of the replacement of Alliance Venture Management as the general partner, we no longer incur commitment fees, and none have been recognized in the second quarter of fiscal 2007. In fiscal 2006, we incurred $875,000 of commitment fees. This amount was offset by expense incurred by us on behalf of Alliance Venture Management of approximately $853,000 (including salaries and benefits, rent, travel and entertainment, legal expenses, and taxes), with the remaining amount being income to Alliance Venture Management. The compensation used to offset management fees included compensation to N. Damodar Reddy, V.R. Ranganath, and C.N. Reddy. We offset against this fee certain expenses incurred for the compensation of Alliance Venture management executives, who were paid directly by us for their services to Alliance Venture Management. No distribution of general partner interest in the form of cash or marketable securities was made to the partners of Alliance Venture Management during fiscal 2007 thus far, fiscal 2006, fiscal 2005 or fiscal 2004.

On May 3, 2006, the Company, in its capacity as the only limited partner, replaced the general partner (Alliance Venture Management) of each of the Alliance Ventures limited partnerships, designating ALSC Venture Management LLC as the new general partner. Alliance has reached an agreement in principle with Alliance Venture Management and V.R. Ranganath whereby Mr. Ranganath, who was previously a member of and involved in the management of Alliance Venture Management, will continue to participate in managing the partnerships as an employee of ALSC Venture Management, LLC, though funding decisions of ALSC Venture Management will require approval of our Board of Directors. Mr. Ranganath’s compensation will be paid through management fees to the new general partner. We also agreed not to seek a refund of prior management fees and other compensation, and Alliance Venture Management agreed not to dispute our actions.

After Alliance Ventures I was formed, we contributed all of our then current investments, except UMC, Chartered Semiconductor Manufacturing Pte. Ltd. (“Chartered”), and Broadcom Corporation, to Alliance Ventures I. During the six months ended September 30, 2006, Alliance Ventures III, the focus of which is investing in emerging companies in the networking and communications market areas, invested $2.4 million in six companies; Alliance Ventures IV, the focus of which is investing in emerging companies in the semiconductor market, invested $0.2 million in one company; and Alliance Ventures V, the focus of which is investing in emerging companies in the networking and communications markets, invested $2.3 million in four companies. During the quarter ended September 30, 2006 we invested approximately $2.8 million in Alliance Ventures investee companies compared to approximately $2.2 million in the second quarter of fiscal 2006. We do not intend to invest in any new companies through Alliance Ventures, although we have in the past and likely will in the future make follow-on investments in existing investee companies.

On March 31, 2006 Alliance Ventures II and V entered into an agreement to sell their interest in Vianeta Communications for $3.2 million in cash and stock, which was executed and completed in April of 2006 resulting in a net gain of $1.1 million.

In the quarter ended September 30, 2006 and 2005, we recorded write-downs in Alliance Ventures investee companies of zero and approximately $0.4 million, respectively. Also, several of the Alliance Ventures investments are accounted for under the equity method due to our ability to exercise significant influence on the operations of investees resulting from the ownership interest and/or the representation on the Board of Directors of certain investees. The total equity in net losses of Alliance Ventures investee companies was approximately $3.0 million and $3.6 million in the quarters ended September 30, 2006 and 2005, respectively.

The individual Alliance Ventures funds generally invested 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 that decrease in value or fail. Most of these startup companies fail and the investors lose their entire investment. Successful investing relies on the skill of the investment managers, but also on market and other factors outside the control of the managers. In the past, the market for these types of investments has been successful and many venture capital funds have been profitable. While we have been successful in certain of our past investments, we cannot be certain as to any future or continued success. It is possible there will be a downturn in the success of these types of investments in the future, resulting in the loss of most or all the money we have invested in them.

During the Quarter ended June 30, 2006 we entered into a plan for disposal of the Alliance Ventures funds, and accordingly the assets of Alliance Ventures have been classified as assets held for sale and the results of its operations reported a loss from discontinued operations. The Company previously had retained Needham and Company to advise it regarding the Alliance Ventures funds, and asked Needham to assist management in determining whether a buyer for all or a portion of Alliance Ventures exists at a price attractive to the Company. The Company will consider the results of Needham’s efforts in deciding what to do in connection with the funds. The Company anticipates that any offers it receives for Alliance Ventures will be at values that differ from the values at which the investments are carried on the books of the Company.

N. Damodar Reddy and C.N. Reddy have formed private venture funds, Galaxy Venture Partners, L.L.C., Galaxy Venture Partners II, L.L.C. and Galaxy Venture Partners III, L.L.C. (collectively, “Galaxy Venture Partners”), which have invested in 26 of the 40 total companies invested in by Alliance Ventures. Multiple Alliance Ventures funds may invest in the same investee companies. See “Note 13 to Consolidated Financial Statements.”

Investment in Solar Venture Partners, LP

Through September 30, 2006, we have invested $12.5 million in Solar Venture Partners, LP (“Solar”), a venture capital partnership that focuses on investing in early stage companies in the areas of networking, telecommunications, wireless, software infrastructure enabling efficiencies of the Web and e-commerce, semiconductors for emerging markets, and design automation. As of September 30, 2006, we held approximately a 73.3% interest in Solar.

Due to our majority interest in Solar, we account for Solar under the consolidation method. Some of the investments Solar has made are accounted for under the equity method due to our ability to exercise significant influence on the operations of the investees resulting from ownership interest and/or board representation. In the second quarter of fiscal 2007 and 2006, we recorded net losses in the equity of investees of approximately $81,000 and $77,000, respectively. During the quarter ended September 30, 2006 we entered into a plan for disposal of the Solar funds, and accordingly the assets of Solar have been classified as assets held for sale and the results of its operations reported a loss from discontinued operations.

During the first quarter of fiscal 2007, Solar sold its interest in Vianeta Communications for $0.5 million and recorded a net gain of $0.3 million. $239,000 of the proceeds from that sale were reinvested in Cavium Networks. During the quarter ended September 30, 2005, NetScaler Inc., one of Solar’s investee companies, was sold to Citrix Systems, Inc. for cash and stock. As a result of this transaction, we received approximately 31,000 unrestricted shares of Citrix Systems, Inc. common stock and $412,000 in cash and recorded a net gain of $895,000. Another of Solar’s investee companies, JP Mobile, Inc. was also sold in the quarter ended September 30, 2005, for net proceeds of zero and a loss of $100,000.

There were no write-downs of Solar Venture Partners investments in the second quarter or first half of fiscal 2007 or 2006.

C.N. Reddy is a general partner of Solar and participates in running its daily operations. Furthermore, N. Damodar Reddy, V.R. Ranganath, and C.N. Reddy have also invested in Solar. Solar has invested in 17 of the 40 total companies in which Alliance Ventures funds have invested. See “Note 14 to the Consolidated Financial Statements.”

Note 6. Comprehensive Income/(Loss)

The following are the components of comprehensive income/(loss) (in thousands):


	Three months ended
	September 30, 2006			September 30, 2005
Net loss	$	(5,836	)	$	(8,112	)
Unrealized gain/(loss) on marketable securities		683			(14,809	)
Deferred tax		—			(687	)

Comprehensive loss	$	(5,153	)	$	(23,608	)


	Six months ended
	September 30, 2006			September 30, 2005
Net loss	$	(5,311	)	$	(18,997	)
Unrealized gain on marketable securities		1,686			1,228
Deferred tax		—			(1,284	)

Comprehensive loss	$	(3,625	)	$	(19,053	)

As discussed in Note 3, Balance Sheet Components, accumulated other comprehensive income consists of the accumulated unrealized gains and losses on available-for-sale investments, net of tax.

Note 7. Net Income/(Loss) Per Share

Basic income/(loss) per share is computed by dividing net income/(loss) available to common stockholders (numerator) by the weighted average number of common shares outstanding (denominator) during the period. Diluted income/(loss) per share gives effect to all potentially dilutive common shares outstanding during the period including stock options, using the treasury stock method. In computing diluted income/(loss) per share, the average stock price for the period is used in determining the number of shares assumed to be purchased from the proceeds obtained upon exercise of stock options.

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


	Three months ended						Six months ended
	September 30, 2006			September 30, 2005			September 30, 2006			September 30, 2005
Net loss	$	(5,836	)	$	(8,112	)	$	(5,311	)	$	(18,997	)

Shares used to compute basic net loss per share		35,520			35,582			35,552			35,575


Common stock equivalents		—			—			—			—

Shares used to compute diluted net loss per share		35,520			35,582			35,552			35,575

Net loss per share: Basic and diluted	$	(0.16	)	$	(0.23	)	$	(0.15	)	$	(0.53	)

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


	Three months ended				Six months ended
	September 30,				September 30,
	2006		2005		2006		2005
Weighted stock options outstanding		812		3,001		2,416		3,185

Note 8. Commitments and Contingencies

We apply the disclosure provisions of FASB Interpretation No.45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” to our agreements that contain guarantee or indemnification clauses. These disclosure provisions expand those required by SFAS 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

We are a party to a variety of agreements, including those related to the recent sales of our business units, pursuant to which we 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 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

Up to the sale of our operating units we estimated our warranty costs based on historical warranty claim experience and applied this estimate to the revenue stream for products under warranty. Included in our sales reserves were costs for limited warranties and extended warranty coverage. Future costs for warranties applicable to revenue recognized in the current period are charged to our sales reserve. The sales reserve was reviewed quarterly to verify that it properly reflected the remaining obligations based on anticipated expenditures over the balance of the obligation period. Adjustments are made when actual claims differs from estimates. Changes in the warranty sales reserve for the six months ended September 30, 2006 and 2005 were as follows (in thousands):


	Three months ended
	September 30,
	2006		2005
Beginning Balance	$	738	$	532
Accruals for warranties issued during the year		—		215
Settlements on warranty claims made during the year		—		(215	)

Ending balance	$	738	$	532


	Six months ended
	September 30,
	2006		2005
Beginning Balance	$	738	$	948
Accruals for warranties issued during the year		—		215
Settlements on warranty claims made during the year		—		(631	)

Ending balance	$	738	$	532

Note 9. Income Tax

In the first half of fiscal 2007 we have only provided for Income Tax on the operations of our foreign subsidiaries, which are reflected in Discontinued Operations, and have not recognized any federal or state tax benefits from our losses in Continuing Operations and Discontinued Operations as we are not certain that we will have income in the future to use such benefits. For the first six months of fiscal 2006, we recorded income tax expense of $1.4 million on pre-tax profits from continuing operations before minority interest in consolidated subsidiaries. The statutory rate differs from the effective rate as a result of losses taken on non-operating, investing activities for which tax benefits are not recognized.

Separately, we are currently subject to an audit by the Internal Revenue Service with respect to fiscal tax years 1999 through 2002. See Item 2, Management’s Discussion and analysis of Financial Condition and Results of Operations —Provision (Benefit) for Income Tax.

Note 10. Recently Issued Accounting Standards

In December 2004, the FASB issued SFAS No. 123R “Share Based Payment” (“SFAS 123R”), which will be effective for the first annual reporting period beginning after June 15, 2005, and is required to be adopted by Alliance in the first quarter of fiscal 2007. The new standard will require us to record compensation expense for stock options using a fair value method. On March 29, 2005, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 107 (“SAB 107”), which provides the Staff’s views regarding interactions between SFAS 123R and certain SEC rules and regulations and provides interpretations of the valuation of share-based payments for public companies.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs — An Amendment of ARB No. 43, Chapter 4” (“SFAS 151”). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” (“ARB 43”) to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle facility expense, excessive spoilage, double freight, and rehandling costs be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal” as stated in ARB 43. Additionally, SFAS 151 requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for fiscal periods beginning after June 15, 2005. The adoption of SFAS 151 is not expected to have a material impact on our consolidated financial condition, results of operations or cash flows.

In June 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 requires recognition of tax benefits that satisfy a greater than 50% probability threshold. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN No. 48 is effective for us beginning July 1, 2007. We are currently assessing the potential impact that the adoption of FIN No. 48 will have on our financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. This statement is effective for us beginning July 1, 2008. We are currently assessing the potential impact that the adoption of SFAS No. 157 will have on our financial statements.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Current Year Misstatements. SAB No. 108 requires analysis of misstatements using both an income statement (rollover) approach and a balance sheet (iron curtain) approach in assessing materiality and provides for a one-time cumulative effect transition adjustment. SAB No. 108 is effective for our fiscal year 2007 annual financial statements. We are currently assessing the potential impact that the adoption of SAB No. 108 will have on our financial statements; the impact is not expected to be material.

Note 11. Legal Matters

Balla Matter

In July 1998, we learned that a default judgment was entered against us in Canada, in the amount of approximately $170 million, in a case filed in 1985 captioned Prabhakara Chowdary Balla and TritTek Research Ltd. v. Fitch Research Corporation, et al., British Columbia Supreme Court No. 85-2805 (Victoria Registry). As we had previously not participated in the case, we believed that we never were properly served with process in this action, and that the Canadian court lacked jurisdiction over us in this matter. In addition to jurisdictional and procedural arguments, we also believed we may have had grounds to argue that the claims against us should be deemed discharged by our bankruptcy in 1991. In February 1999, the court set aside the default judgment against us. In

April 1999, the plaintiffs were granted leave by the Court to appeal this judgment. Oral arguments were made before the Court of Appeal in June 2000. In July 2000, the Court of Appeals remitted the question of whether the default judgment should be set aside to the lower Court to allow the parties to take depositions regarding the issue of service of process.

The plaintiffs appealed the setting aside of the damages assessment against us to the Supreme Court of Canada. In June 2001, the Supreme Court of Canada refused to hear the appeal of the setting aside of the default judgment against us.

From September 27-29, 2004, the British Columbia Supreme Court heard Mr. Balla’s application to have the 1985 service deemed effective. In November 2004, the court issued a declaration that Mr. Balla had complied with the order for substituted service and thus had affected service of the original pleadings on the Company, but also held that this did not mean that service was “cured” for all purposes. The Company was granted leave to appeal this decision to the British Columbia Court of Appeal. On September 12, 2005, the British Columbia Supreme Court heard Mr. Balla’s application to have service deemed effective for the purpose of upholding the default judgment. On October 14, 2005 the British Columbia Supreme Court held that the plaintiffs had provided sufficient notice of the action to the Company prior to November 20, 1986 to constitute effective service. Our request seeking leave to appeal the ruling to the British Columbia Court of Appeal was denied.

We brought a motion for a declaration that the British Columbia courts have no jurisdiction over us in this matter. A motion by Mr. Balla seeking to seize property by reinstating the 1998 judgment was also argued. On February 22, 2006 the court ruled it does have jurisdiction, but refused to reinstate the 1998 judgment against us, and the Court of Appeal refused to reconstitute the appellate panel to revisit its prior ruling. This left both the issues of jurisdiction and the trial court’s refusal to reinstate the damages assessment on appeal.

In addition to jurisdictional and procedural arguments, we filed a motion asking the bankruptcy court to enjoin Mr. Balla from proceeding further in the British Columbia Court on the theory that the claims against us should be deemed discharged by our bankruptcy in 1991. The bankruptcy court granted our motion to reopen the bankruptcy for purposes of our filing an adversary proceeding on the disclosure issue.

Additionally, on March 24, 2006, the Company filed a complaint for declaratory relief in the Los Angeles Superior Court seeking a court ruling that, pursuant to the California Uniform Foreign Money-Judgment’s Recognition Act, California Code of Civil Procedure section 1713 et seq., any award of damages made in the Canadian litigation is unenforceable in California due to Canada’s lack of jurisdiction over the Company.

On July 13, 2006, during mediation between the parties, we entered into a settlement agreement with Mr. Balla and TritTek Research Ltd. that resolved the plaintiff’s twenty-one year old lawsuit against us. Pursuant to the settlement agreement, we paid the plaintiffs $3.5 million in cash in exchange for a full release of all proceedings related to this matter.

Tower Semiconductor Ltd. Class Action

In July 2003, we were named as a defendant in a putative class action lawsuit filed in the United States District Court for the Southern District of New York against Tower, certain of Tower’s directors (including N. Damodar Reddy), and certain of Tower’s shareholders (including us). The lawsuit alleges that a proxy solicitation by Tower seeking approval from the Tower shareholders for a restructuring of a financing agreement between Tower and certain investors (including us) contained false and misleading statements and/or omitted material information in violations of Section 14(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 14a-9 promulgated thereunder, and also alleges that certain defendants (including N. Damodar Reddy and us) 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. On January 30, 2004, all the defendants, including us, filed motions to dismiss the complaint for failure to state a claim upon which relief can be granted. On August 19, 2004, Judge Kimba Wood granted defendants’ motions and dismissed the complaint in its entirety with prejudice. On September 29, 2004, plaintiffs appealed the dismissal to the United States Court of Appeals for the Second Circuit. On June 1, 2006, the Second Circuit issued a ruling affirming the dismissal. Plaintiffs had until August 31, 2006 to petition the United States Supreme Court for a writ of certiorari, which they did not do, so the dismissal is final.

Accrual for Potential Losses

From time to time, we are subject to various claims and legal proceedings. If management believes that a loss arising from these matters is probable and can reasonably be estimated, we would record the amount of the loss, or the minimum estimated liability when

the loss is estimated using a range, and no point within the range is more probable than another. As additional information becomes available, any potential liability related to these matters is assessed and the estimates are revised, if necessary. Based upon consultation with the outside counsel handling our defense in the legal proceedings listed above, and an analysis of potential results, we have accrued sufficient amounts for potential losses related to these proceedings. Based on currently available information, management believes that the ultimate outcome of these matters, individually and in the aggregate, will not have a material adverse effect on the Company’s financial position, cash flows or overall trends in results of operations. However, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. An unfavorable ruling could include monetary damages or an injunction prohibiting us from selling one or more products. If an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on the results of operations of the period in which the ruling occurs, or future periods.

Note 12. Investment Company Act of 1940

We believe that we could be viewed as holding a larger portion of our 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 the Act. In August 2000, we applied to the SEC for an order under Section 3(b)(2) of the Act confirming our non-investment-company status. In March 2002, the staff of the SEC informed us that the staff could not support the granting of the requested exemption. Since that time, we have been working to resolve our status under the Act. We cannot be certain the SEC will agree that we are not currently deemed to be an unregistered investment company in violation of the Act. If the SEC takes the view that we have been operating and continue to operate as an unregistered investment company in violation of the Act, and does not provide us with a sufficient period to either register as an investment company or divest ourselves of investment securities and/or acquire non-investment securities, we may be subject to significant potential penalties.

In the event the SEC takes the view that we have been operating and continue to operate as an unregistered investment company in violation of the Act, we would be required either to register as a closed-end investment company under the Act, or, in the alternative, to divest ourselves of sufficient investment securities and/or to acquire sufficient non-investment assets so as not to be regarded as an investment company under the Act.

If we elect to register as a closed-end investment company under the Act, a number of significant requirements will be imposed upon us. They include, but not be limited to, a requirement that at least 40% of our 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 us in view of the competitive circumstances in which we seek to attract and retain qualified employees); and broad prohibitions on affiliate transactions, such as the compensation arrangements applicable to the management of Alliance Venture Management, or AVM, many kinds of incentive compensation arrangements for management employees and joint investment by persons who control us in entities in which we are also investing (which could require us to abandon or significantly restructure our management arrangements, particularly with respect to our investment activities). While we could apply for individual exemptions from these restrictions, there could be no guarantee that such exemptions would be granted, or granted on terms that we would deem practical. Additionally, we would be required to report our financial results in a different form from that currently used by us, which would have the effect of reversing the order of our Statement of Operations by requiring that we report our investment income and the results of our investment activities, instead of our operations, as our primary sources of revenue.

If we elect to divest ourselves of sufficient investment securities and/or to acquire sufficient non-investment assets so as not to be regarded as an investment company under the Act, we would need to ensure that the value of investment securities (excluding the value of U.S. Government securities and securities of certain majority-owned subsidiaries) does not exceed forty percent (40%) of our total assets (excluding the value of U.S. Government securities and cash items) on an unconsolidated basis.

Note 13. Related Party Transactions

N. Damodar Reddy, a former officer and director of the Company, is a director and investor in Infobrain, Inc. (“Infobrain”), an entity which provided the following services to us: 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 our business processes. We paid Infobrain approximately $139,700 during fiscal year 2006 prior to canceling the contract, $55,000 for the full year of fiscal year 2005, and $290,000 in fiscal 2004. According to Mr. Reddy, he is not involved in the operations of Infobrain. Infobrain advises us that Mr. Reddy owns 10.6%, and members of his family own an additional 6.1% of Infobrain, and that Infobrain is indebted to Mr. Reddy for $30,000.

In October 1999, we formed Alliance Venture Management to manage and act as the general partner in the investment funds we intended to form. Alliance Venture Management did not directly invest in the investment funds with us, but the original agreement was drafted to allocate to it (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 designed to provide incentives to the individuals who participated in the management of the investment funds, including N. Damodar Reddy, a former member of our Board of Directors and our former Chairman, Chief Executive Officer and President, and C.N. Reddy, our Executive Vice President for Investments and a member of our Board of Directors. We took the position that this agreement did not reflect the actual agreements, or that those agreements were modified by the course of dealing, and replaced Alliance Venture Management as general partner in May 2006 (as more fully discussed below).

In November 1999, we formed Alliance Ventures I and Alliance Ventures II. As the sole limited partner, we own 100% of the limited partnership interests in each partnership. Until May 2006, Alliance Venture Management acted as the general partner of these partnerships and the agreements were drafted to provide a management fee of 15% based upon realized investment gains from these partnerships for its managerial efforts.

At its 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 were allocated 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, the management agreement for Alliance Venture Management was amended to create Series C member units, which were allocated a management fee of 16% of investment gains realized by Alliance Ventures III. In January 2001, upon the creation of Alliance Ventures IV and Alliance Ventures V, the management agreement for Alliance Venture Management was amended to create Series D and E member units, which again were allocated a management fee of 15% of investment gains realized by Alliance Ventures IV and Alliance Ventures V, respectively, calculated on an annual basis.

Now that Alliance Venture Management has been replaced as general partner, it will no longer have a claim to such fees on future gains. While we own 100% of the common units in Alliance Venture Management, we did not hold any Preferred Member Units and did not participate in the management fees generated by the management of the investment funds. N. Damodar Reddy and C.N. Reddy each hold 48,000 Preferred Member Units of the 162,152 total Preferred Member Units outstanding and the 172,152 total member Units outstanding. From August 2000 to October 2003, they, together with V.R. Ranganath, received fees and other distributions of $7.0 million.

Alliance Venture Management was awarded 0.5% of the total fund commitment of Alliance Ventures I, II, III, IV and V (collectively, “Alliance Ventures”) as a management fee. In fiscal 2006, we incurred $875,000 of commitment fees. This amount was offset by expense incurred by us on behalf of Alliance Venture Management of approximately $853,000 (including salaries and benefits, rent, travel and entertainment, legal expenses, and taxes), with the remaining amount being income to Alliance Venture Management. The compensation used to offset management fees include compensation to N. Damodar Reddy, V.R. Ranganath, and C.N. Reddy. We offset against this fee certain expenses incurred for the compensation of Alliance Venture management executives, who were paid directly by us for their services to Alliance Venture Management. No distribution of general partner interest in the form of cash or marketable securities was made to the partners of Alliance Venture Management during fiscal 2006, fiscal 2005 or fiscal 2004.

After Alliance Ventures I was formed, we contributed all of our then current investments, except UMC, Chartered, and Broadcom Corporation, to Alliance Ventures I. During the six months ending September 30, 2006, Alliance Ventures III, the focus of which is investing in emerging companies in the networking and communications market areas, invested $2.4 million in six companies; Alliance Ventures IV, the focus of which is investing in emerging companies in the semiconductor market, has invested $0.2 million in one company; and Alliance Ventures V, the focus of which is investing in emerging companies in the networking and communications markets, has invested $2.3 million in four companies. During the quarter ended September 30, 2006, we invested approximately $2.8 million in Alliance Ventures investee companies, compared to approximately $2.2 million in the second quarter of fiscal 2006. We do not intend to invest in any new companies through Alliance Ventures, although we have in the past and likely will in the future make follow-on investments in existing investee companies.

Through September 30, 2006 we have invested $12.5 million in Solar Venture Partners, LP (“Solar”), a venture capital partnership that focuses on investing in early stage companies in the areas of networking, telecommunications, wireless, software infrastructure enabling efficiencies of the Internet and e-commerce, semiconductors for emerging markets and design automation. As of September 30, 2006, we held a 73.3% interest in Solar. C.N. Reddy is a general partner of Solar and participates in running its daily operations. Furthermore, N. Damodar Reddy, V.R. Ranganath, and C.N. Reddy have also invested in Solar. Solar has invested in 17 of the 40 total companies in which Alliance Ventures funds have invested.

In the first quarter of fiscal 2007 Solar sold its interest in Vianeta Communications for cash and stock, resulting in gross proceeds of $0.5 million and a net gain of $0.3 million.

As of September 30, 2006 our related party receivables have all been sold with the operating business units.

Note 14. Segment Reporting

In March 2006 the Company entered into a plan to dispose of its operating business units, which has resulted in the sale of substantially all of the assets and certain of the liabilities of its Systems Solutions business unit, Analog and Mixed Signal business unit, and Memory business unit. Accordingly, we show any untransferred assets of these operating units as Assets Held for Sale as of September 30, 2006, and their operating results and gain/loss on disposal are reported as Discontinued Operations for the reporting period, in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment of Disposal of Long-Lived Assets” (“SFAS 144”). The sales described above have resulted in the cessation of operations during the reporting period, which makes segment reporting of their activities no longer relevant.

Note 15. Subsequent Events

Issuer Purchases of Equity Securities

On September 25, 2006 we announced the results of a modified “Dutch Auction” tender offer we initiated on August 25, 2006 which expired at 12:00 midnight, Eastern Time, on Friday, September 22, 2006. Approximately 2,978,394 shares were tendered, representing approximately 8.4% of the shares outstanding at the commencement of the Offer. We purchased all tendered shares of our common stock at a price of $3.00 per share, subject to confirmation by the depositary of the proper delivery of shares validly tendered and not withdrawn. In accordance with this, we paid the holders of the tendered shares $8,935,182 and retired those shares on September 28, 2006.

SRAM Class Actions

In October and November 2006, we and other companies in the semiconductor industry were named as defendants in a number of purported antitrust class action lawsuits filed in federal district courts in California and other states. The Company has been served in some but not all of these actions. The lawsuits purport to state claims on behalf of direct and indirect purchasers of SRAM products of a conspiracy between manufacturers of SRAM chips to fix or control the price of SRAM during the period January 1, 1998 through December 31, 2005. The Company intends to defend the actions vigorously and denies all allegations of wrongful activity.

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

Certain information contained in or incorporated by reference in the following Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Report contains forward-looking statements that involve risks and uncertainties. These statements relate to products, trends, liquidity and markets. These forward-looking statements are based on management’s estimates, projections and assumptions as of the date hereof and include the assumptions that underlie such statements. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate,” “potential,” or “continue,” the negative of these terms or other comparable terminology. 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, our ability to have cash resources for continued operations, fluctuations in the value of securities we own, selling prices of our products and our ability to increase sales of our analog and mixed signal and system solutions products and those described in the section entitled “Factors That May Affect Future Results”. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect our present expectations and analysis and are inherently susceptible to uncertainty and changes in circumstances. These forward-looking statements speak only as of the date of this Report. 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. The following information should be read in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Form 10-K for the fiscal year ended March 31, 2006 filed with the Securities and Exchange Commission on August 9, 2006.

OVERVIEW

Up to March 31, 2006 Alliance Semiconductor Corporation had been a worldwide provider of analog and mixed signal products, high-performance memory products and connectivity and networking solutions for the communications, computing, embedded, industrial and consumer markets. For several years, the Company had been operating at a loss, and during 2005 a group of shareholders sought management changes and ultimately reached agreement with the Company to install a new Board of Directors to refocus the Company on maximizing shareholder value. Among other things, the new Board thoroughly evaluated the Company’s operating business units to determine whether they were viable or could become so by strengthening the management team, reducing expenses or exploring other alternatives; or whether selling or closing down the operating business units would better maximize shareholder value.

Operational Diversification

Prior to 2002, the Company’s operations were focused solely on memory products. Beginning in 2002, the Company expanded its focus and began providing solutions for next-generation applications. This was a 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 attempted to modify 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.

The ASPs that we were able to command for our memory products were highly dependent on industry-wide production capacity and demand. In fiscal 2003 and much of fiscal 2004, we experienced rapid erosion in product pricing that was beyond our control and had a material adverse effect on our results of operations. In fiscal 2005, we continued to experience lackluster demand for our memory products, which led to additional inventory write-downs for certain memory products of approximately $9.3 million. While the Analog and Mixed Signal and System Solutions business units grew steadily, they were not able to produce results sufficient to support our business. Our net loss for the six months ended September 30, 2006 was $5.3 million, compared to $19.0 million for the six months ended September 30, 2005.

Disposition of Operating Business Units

Consistent with the new Board of Directors’ decision to evaluate whether to retain or dispose of the Company’s operating units, in March 2006 the Company entered into a plan to dispose of them, which has resulted in the sale of substantially all of the assets and certain of the liabilities of its Systems Solutions business unit, Analog and Mixed Signal business unit, and Memory business unit, with one party purchasing assets (and certain liabilities) relating to the Company’s synchronous memory business and one party purchasing the assets (and certain liabilities) of the Company’s asynchronous memory business. Accordingly, we showed the assets of these operating units as Assets Held for Sale as of the beginning of this reporting period, and their operating results are reported as Discontinued Operations for the reporting period, in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment of Disposal of Long-Lived Assets” (“SFAS 144”).

On May 8, 2006, the Company and its subsidiary Chip Engines (India) Private Limited (“Alliance India”) completed the sale of substantially all of the assets and certain of the liabilities owned by Alliance and Alliance India relating to Alliance’s Systems Solutions business unit for $5.8 million in cash. The sale was made pursuant to an asset purchase agreement dated April 18, 2006 with Tundra Semiconductor Corporation and its affiliates Tundra Acquisition Corporation, Inc. and Tundra Semiconductor (India) Private Limited. The assets sold include intellectual property, information technology, equipment, goodwill, inventories and certain contracts.
On June 13, 2006, the Company substantially completed the sale of the assets and certain of the liabilities owned by Alliance and its subsidiaries relating to Alliance’s Analog and Mixed Signal business unit. The sale was made pursuant to an asset purchase agreement dated May 1, 2006 with PulseCore Holdings (Cayman) Inc., an exempted company incorporated with limited liability under the laws of the Cayman Islands (“PulseCore”) and PulseCore Semiconductor Corporation, a Delaware corporation and indirectly wholly-owned subsidiary of PulseCore. Assets sold in the transaction include intellectual property, product rights, inventory, equipment, goodwill, customer lists, certain contracts and books and records. The aggregate purchase price for the transaction was $9.25 million, including certain assets located in Bangalore, India, that were transferred separately after the clearance of such assets from customs bonding.

In May and June of 2006, the Company consummated two separate asset purchase agreements for the sale of assets relating to its Memory business unit. On May 11, 2006, Alliance completed the sale of certain assets related to its Asynchronous Static Random Access Memory (“SRAM”) and Dynamic Random Access Memory (“DRAM”) products and devices, including intellectual property, other proprietary rights and inventory. On June 26, 2006, Alliance completed the sale of certain assets related to its Synchronous SRAM products and devices, including product rights, intellectual property, proprietary information and inventory.

Disposition of Alliance Venture Investments

INVESTMENTS

Tower Semiconductor Ltd.

At September 30, 2006, we owned 8,331,157 ordinary shares of Tower Semiconductor Ltd. (“Tower”), of which 3,378,744 were classified as short-term and 4,952,413, classified as long-term, and $0.7 million Tower Debentures which are convertible into 488,182 Tower ordinary shares. These shares are accounted for as available-for-sale marketable securities in accordance with SFAS 115. Although the price of Tower shares declined by 17% during fiscal 2006 to $1.28, resulting in mark to market write downs of $2.9 million in 2006, Tower share prices have since risen to the $1.40 range. At September 30, 2006 and 2005, a portion of our investment in Tower shares was classified as long-term due trading restrictions.

Until January 20, 2006 a substantial portion of our Tower share were subject to restriction on sale, but we are now able to sell, transfer or dispose of our Tower shares in accordance with Rule 144 or another applicable exemption from the Securities Act of 1933, as amended. We hold 9.9% of Tower shares, which means that Rule 144 generally limits our ability to sell more than 1% of the outstanding shares of Tower stock in any 3 month period.

During the quarter ended September 30, 2006 we sold 1,698,193 Tower ordinary shares for $2.4 million, and recorded a loss of approximately $0.3 million.

As of September 30, 2006, we held $9.7 million of wafer credits acquired as part of the original Tower Share Purchase Agreement. During the second quarter of fiscal 2003 we wrote off a portion of our investment in wafer credits with Tower and recorded a pretax, operating loss of approximately $9.5 million. We had determined at that time that the value of these credits would not be realized given our sales forecast of the products to be manufactured by Tower for us. During the Quarter ended September 30, 2006, we wrote off the balance of $0.2 million of the carrying value of the wafer credits, as we have now disposed of the activities that would enable us to further convert wafer credits to shares or loans.

In January 2001, we committed to exercise approximately 15.6% of our rights to purchase $1.0 million principal amount of convertible debentures of Tower pursuant to its $50 million rights offering, subject to certain conditions. The debentures are convertible into Tower ordinary shares at a conversion rate of one ordinary share per each $1.10 amount of outstanding principal of the debentures, subject to certain adjustments, and bear interest at LIBOR plus 2.5% until repaid at maturity on December 31, 2007. In the quarter ending December 31, 2005, we exercised those rights and exercised our remaining rights to purchase $3.3 million principal amount of registered Tower convertible debentures, which can be converted to 3,009,818 Tower ordinary shares. We elected to convert those debentures and commenced selling the underlying ordinary shares in May 2006. During the quarter ended September 30, 2006 we sold 401,006 of those shares, for a gain of $85,000, leaving us with debentures convertible into 488,182 shares at September 30, 2006.

Our investment in Tower is subject to inherent risks, including those associated with certain Israeli regulatory requirements, political unrest and financing difficulties, which could harm our business and financial condition. There can be no assurances that our investment in Tower shares and wafer credits will not decline further in value.

Investment Company Act of 1940

Because of the significant investments we have made in other businesses, we could be deemed an unregistered investment company in violation of the Investment Company Act of 1940. In August 2000, we applied to the SEC for an order under Section 3(b)(2) of the Act confirming our non-investment company status. In March 2002, the staff of the SEC informed us that they could not support the granting of the requested exemption. Since that time, we have been working to resolve our status under the Act, principally through divestment of certain strategic investments, including all of our UMC common stock. During the third quarter of fiscal 2005, we also liquidated our investments in Adaptec and Vitesse common stock. The SEC has asked us by letter dated February 22, 2006 to provide information about our efforts and plans to resolve this issue. We are working on a response to this request. If our board of directors decides to divest or close certain of our operating businesses, such a decision could require us to take additional steps to reduce our investments in securities. See Note 12 to the financial statements.

Gain on Investments

During the first six months of fiscal year 2007, we recorded a loss of $0.3 million due to the sale of 1,698,193 Tower ordinary shares, and a gain of $85,000 on the sale of 0.4 million Tower Debentures.

RESULTS OF (DISCONTINUED OPERATIONS)

Equity in Loss of Investees

As a result of our entry into a plan to dispose of Alliance Ventures, its results are reported under discontinued operations. Results for Solar Ventures are reported in continuing operations. Several investments made by Alliance Ventures and Solar are accounted for under the equity method due to their ability to exercise their influence on the operations of investees resulting primarily from ownership interest and/or board representation. Our proportionate share in the net losses of the equity investees of Alliance Ventures and Solar Ventures was approximately $5.6 million and $132,000, respectively for the six months ended September 30, 2006 and $7.9 million and $208,000, respectively for the comparable period in 2005. We took impairment writedowns on Alliance Ventures Investments of zero and approximately $0.4 million during the second quarter of fiscal 2007 and 2006, respectively. We have recorded a full valuation allowance on the deferred tax assets related to these equity losses due to our inability to forecast future liquidity events and the related realization of the tax benefits. As a majority of these investee companies are in the development stage, we expect that we will incur additional losses in future periods.

Other Expense, Net

Other expense, net represents interest income from short-term investments, foreign withholding tax, interest expense on short and long-term obligations, disposal of fixed assets and bank fees. In the first six months of fiscal 2007, other income, net prior to reclassification into discontinued operations was approximately $1.5 million compared to other expense, net of $345,000 in the first six months of fiscal 2006.

Provision (Benefit) for Income Tax

In the second quarter of fiscal 2007 we have only provided for Income Tax on the operations of our foreign subsidiaries, which are reflected in Discontinued Operations, and have not recognized any federal or state tax benefits from our losses in Continuing Operations and Discontinued Operations as we are not certain that we will have income in the future to use such benefits. For the first six months of fiscal 2007 and 2006, we recorded income tax expense of zero and $1.4 million, respectively, on pre-tax profits from continuing operations before minority interest in consolidated subsidiaries. The statutory rate differs from the effective rate as a result of losses taken on non-operating, investing activities for which tax benefits are not recognized.

On December 21, 2005 the Internal Revenue Service issued to the Company a Notice of Deficiency asserting that the Company was liable for additional taxes in the approximate amount of $26.8 million. The Company has filed a Petition in the United States Tax Court contesting the determination made by the IRS. Based upon the advice of counsel, the Company plans to vigorously contest the asserted liability. The Company previously conservatively estimated and reserved $35 million to cover the tax, penalty and interest which could be due should the IRS prevail in its determination.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2006, we had approximately $45.2 million in cash and cash equivalents, an increase of approximately $40.0 million from September 30, 2005 and approximately $43.0 million in working capital, an increase of approximately $9.2 million from $33.8 million at September 30, 2005. We had short-term investments in marketable securities whose fair value at September 30, 2006 was $5.6 million, a decrease of $63.6 million from $69.2 million at September 30, 2005.

During the first six months of fiscal 2007, cash used from operations was $12.7 million. This was primarily the result of a net loss of $5.3 million less non-cash items of $0.1 million, and changes in assets and liabilities of $7.5 million. During the first six months of fiscal 2006, cash used from operations was $13.2 million. This was primarily the result of a net loss of $19.0 million less non-cash items of $5.0 million and changes in assets and liabilities of $0.8 million.

During the first six months of fiscal 2007, investing activities provided cash of $17.2 million. This was primarily the result of proceeds from the sale of our business units of $14.2 million combined with sales of Tower ordinary shares and Tower Debentures for $6.7 million, sale of an Alliance Ventures investee company for $3.7 million and sale of fixed assets for $0.2 million, offset by additional investments in Alliance Ventures companies of $4.0 million and holding of undistributed cash in AVM and Solar of $3.6 million. During the first six months of fiscal 2006, investing activities provided cash of $16.5 million. This was primarily the result of sales of UMC Common Stock of $21.9 million and disposition of investments of $0.2 million offset by additional investments in Alliance Ventures companies of $5.3 million and capital purchases of $0.3 million.

During the first six months of fiscal 2007, cash used from financing activities was $9.0 million for the repurchase of common stock. In the first six months of fiscal 2006, financing activities provided $0.1 million from the exercise of stock options.

Management believes these sources of liquidity and financing will be sufficient to meet our projected working capital and other cash requirements for at least the next twelve months.

OFF-BALANCE SHEET ARRANGEMENTS

The following table summarizes our contractual obligations at September 30, 2006, and the effect such obligations are expected to have on our liquidity and cash flow in future periods:

Off-Balance Sheet Contractual Obligations
(in thousands)


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

Operating leases (1)	$	15	$	—	$	—	$	—	$	—
Commitment to invest in CAD tools (2)	$	256	$	—	$	—	$	—	$	—


TOTAL	$	271	$	—	$	—	$	—	$	—


(1)		Future payments related to operating leases are primarily related to facilities rents.

(2)		Future CAD tool commitments are payments related to CAD tool licenses under non-cancelable leases.

Operating leases have decreased substantially from the $779,000 and $134,000 reflected in our Form 10-K as of March 31, 2006 due to 1) rent for our former headquarters facility for the six months ended September 30, 2006, and 2) reflecting the cost of lease terminations at our overseas facilities in Loss from Discontinued Operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The entities in which we hold investments operate in markets that have experienced significant market price fluctuations during the six months ended September 30, 2006. These entities, in which we hold varying percentage interests, are in the development stage or operate and sell their products in various global markets; however, the majority of their sales are denominated in U.S. dollars, thus mitigating some of the foreign currency risk. We do not hold any derivative financial instruments for trading purposes at September 30, 2006.

INVESTMENT RISK

At September 30, 2006, we owned 8,331,157 ordinary shares of Tower Semiconductor Ltd. (“Tower”), of which 3,378,744 were classified as short-term and 4,952,513 classified as long-term, and $0.7 million Tower Debentures which are convertible into 488,182 Tower ordinary shares. These shares are accounted for as available-for-sale marketable securities in accordance with SFAS 115. Tower shares have been very volatile in the past: The price of Tower shares declined by 17% during fiscal 2006 to $1.28, resulting in mark to market write downs of $2.9 million in 2006, but Tower share prices have since risen to the $1.40 range. At September 30, 2006 and 2005, a portion of our investment in Tower shares was classified as long-term due trading and other restrictions.

Until January 20, 2006 a substantial portion of our Tower shares were subject to restriction on sale, but we are now able to sell, transfer or dispose of our Tower shares in accordance with Rule 144 or another applicable exemption from the Securities Act of 1933, as amended. We hold 9.9% of Tower shares, which generally limits our ability to sell no more than 1% of the outstanding shares of Tower stock in any 3 month period under Rule 144.

Short and long-term investments are subject to declines in the market as well as risk associated with the underlying investment. We periodically evaluate our investments in terms of credit risk since a substantial portion of our assets are now in the form of investments, not all of which are liquid.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.

Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Securities Exchange Act of 1934 (“Exchange Act”) Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this quarterly report as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15. Based upon that evaluation, our principal executive officer and principal financial officer concluded that as of September 30, 2006, our disclosure controls and procedures were still not effective because of the material weaknesses discussed below.

In light of the material weaknesses described below, we performed additional analysis and other post-closing procedures to ensure the consolidated financial statements were prepared in accordance with generally accepted accounting principles (“GAAP”). Accordingly, management believes the consolidated financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.

(b) Remediation of material weakness.

As discussed in Item 9A. Controls and Procedures-Management’s Report on Internal Control over Financial Reporting in our Form 10-K, as of March 31, 2006, the Company did not maintain a sufficient complement of permanent personnel with an appropriate level of accounting knowledge, experience and training in the implementation of the Sarbanes-Oxley Act of 2002 and the application of generally accepted accounting principles commensurate with the Company’s financial reporting requirements. The Company lacked sufficient permanent finance and accounting staff with adequate depth and skill in the application of generally accepted accounting principles with respect to: (i) external financial reporting and income taxes, and (ii) review procedures over the accounting for significant and unusual transactions and equity method investments. During the first three quarters of fiscal 2006, we lost most of the accounting staff who had knowledge of what had been done in the past, and did not maintain effective controls over the reconciliation of unmatched material receipts. We also did not have full awareness of what made up other prepaid assets.

The Company has taken several steps towards remediation of the material weaknesses described above. Specifically,

	1.		The Company has increased its staffing in the accounting department to improve the level of accounting expertise and capabilities of the accounting department personnel, however in anticipation of the change in its business discussed in this document, the Company has staffed those positions with temporary personnel for maximum flexibility.

	2.		The Company has enhanced its methods and expertise in accounting for equity method investments and income tax reporting.

	3.		The Company has installed, and is installing, new and additional policies and changed procedures to reduce the risk of misstatements of account balances or disclosures in future periods.

	4.		The changes in the business described in this report will materially and substantially reduce both the activity and complexity of the company’s books and records, eliminating many of the risks that have arisen from the significant deficiencies and material weaknesses described herein.

(c) Changes in internal control over financial reporting.

Other than the change discussed in (b) above, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II — Other Information

ITEM 1. LEGAL PROCEEDINGS.

Balla Matter

On July 13, 2006, during a mediation between the parties, we entered into a settlement agreement with Mr. Balla and TritTek Research Ltd. that resolved the plaintiff’s twenty-one year old lawsuit against us. Pursuant to the settlement agreement, we paid the plaintiffs $3.5 million in cash in exchange for a full release of all proceedings related to this matter.

Tower Semiconductor Ltd. Class Action

SRAM Class Actions

We are party to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these claims cannot be predicted with certainty, we do not believe that the outcome of any of these or any of the above mentioned legal matters would have a material adverse effect on our consolidated financial position, results of operations or cash flows.

ITEM 1A. RISK FACTORS

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

We may have difficulties meeting our cash needs.

We believe that our current cash, cash equivalents and short-term investments will be sufficient to fund our needs for at least the next twelve months. However, our business has used significant cash over the last several years, and the value of our short-term investments in marketable securities, especially our previous holdings in UMC and our current holdings in Tower, declined substantially in value. We have a limited ability to sell our Tower securities, and they may continue to decline in value in the future. In addition, we are currently the subject of an audit by the Internal Revenue Service with respect to fiscal and tax years 1999 through 2002. For those years under review we received tax refunds of approximately $32.3 million. At this stage of the audit, the IRS has informed us that there is a high likelihood that certain positions we have taken may be disallowed. We cannot determine at this stage what effect the resolution of this matter will have on our financial condition, including our liquidity. If our short-term investments in marketable securities continue to decrease in value or if there is an adverse determination with respect to the audit, we may have difficulties meeting our cash needs. In addition, our disposition of our operating business units, capital structure and expected future performance may impact our ability to raise capital. In the event we are not able to meet our cash needs and raise additional capital, our financial condition will be materially and adversely affected.

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

We have held, and continue to hold, significant investments in securities which we have limited ability to sell. These assets may decline in value as a result of factors beyond our control, which may adversely affect our financial condition. The shares we hold in Tower are unregistered, and our ability to transfer them was restricted until January 2006. Since then, we have been able to sell Tower stock, but only in limited amounts under Rule 144. Tower stock has been subject to significant fluctuations in value. For example, the price of Tower’s ordinary shares decreased by approximately 17% and 78% in fiscal 2006 and 2005, respectively, and the price of Tower’s ordinary shares may continue to decline in value in the future. Our investment in Tower is subject to inherent risks, including those associated with certain Israeli regulatory requirements, political unrest and financing difficulties, which could harm Tower’s business and financial condition. Further, through the Alliance Ventures 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 that decrease in value or fail. During the past several years, many of our venture investments experienced significant declines in market value. For example, in fiscal 2006 we wrote down one of our Alliance Ventures investments and recognized a pretax, non-operating loss of $1.1 million. We cannot be certain that our investment in these securities will not decline further in value. Further declines in our investments can have a material adverse effect on our financial condition.

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

In August 2000, we applied to the SEC for an order under Section 3(b)(2) of the Investment Company Act of 1940 confirming our noninvestment company status. In March 2002, the staff of the SEC informed us that the staff could not support the granting of the requested exemption. Since that time, we have been working to resolve our status under the Act. We cannot be certain that the SEC will agree that we are not currently deemed to be an unregistered investment company in violation of the Act. If the SEC takes the view that we have been operating and continue to operate as an unregistered investment company in violation of the Act, and does not

provide us with a sufficient period to either register as an investment company or divest ourselves of investment securities and/or acquire non-investment assets, we may be subject to significant potential penalties. In the absence of exemptions granted by the SEC (which are discretionary in nature and require the SEC to make certain findings), we would be required either to register as a closed-end investment company under the Act, or, in the alternative, to divest ourselves of sufficient investment securities and/or to acquire sufficient non-investment assets so as not to be regarded as an investment company under the Act. In an effort to comply with the Act, we have divested ourselves of certain securities, ceased acquiring interests in any new companies through Alliance Ventures and taken certain additional actions; nonetheless, we have no assurance that the SEC will grant us an exemption under the Act. In the event we are required to divest ourselves of sufficient investment securities, we may not be able to do so because of our limited ability to sell our investments. Even if we are able to sell our investments, our financial condition may be materially, adversely affected. If we are required to register as a closed-end investment company under the Act, our financial condition may be materially, adversely affected.

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

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to include an internal controls report of management’s assessment of the effectiveness of our internal controls as part of our Annual Report on Form 10-K. Our independent registered public accounting firm is required to attest to, and report on, our management’s assessment. Management has determined that our internal control over reporting was not effective as of March 31, 2006. In light of that fact, in fiscal 2006, our independent registered public accounting firm issued an adverse opinion on our internal control over financial reporting. We have dedicated significant resources to remediate the material weaknesses that have rendered our internal control ineffective. With the sale of our operating business units, a significant number of current controls no longer will be applicable, eliminating the risk from any inability to remediate weaknesses with respect to such controls. Nonetheless, there is no assurance that we will be able to remediate weaknesses with respect to controls that continue to be applicable. Even after we have remediated these weaknesses, in the course of future testing and documentation, certain deficiencies may be discovered that will require additional remediation, the costs of which could have a material adverse effect on our financial condition. Separately, our independent registered public accounting firm may not agree with our management’s assessment and may send us a deficiency notice that we are unable to remediate on a timely basis, or we may not be able to retain our independent registered public accounting firm with sufficient resources to attest to and report on our internal control. Moreover, if we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, our management may continue to conclude that we do not have effective internal controls over financial reporting in accordance with Section 404. In the future, if we are unable to assert that our internal control over financial reporting is effective, if our independent registered public accounting firm is unable to attest that our management’s report is fairly stated, if our independent registered public accounting firm is unable to express an opinion on our management’s evaluation or on the effectiveness of the internal controls, or if our independent registered public accounting firm expresses an adverse opinion on our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which in turn could have an adverse effect on our stock price. Additionally, any material weakness in internal control could result in a material misstatement in future financial statements.

Our financial condition is likely to fluctuate and failure to meet financial expectations for any period may cause our stock price to decline.

Our revenue has historically been, and will continue to be, subject to fluctuations due to a variety of factors, including general economic conditions. As discussed in the section entitled “Overview — Disposition of Operating Business Units” in Item 1 of Part I, we have sold each of our operating business units, and are in the process of exiting the semiconductor business that has characterized our company to date. As a result, we believe that period-to-period comparisons of our results of operations are not necessarily meaningful, and you should not rely on these comparisons as indications of future performance. These factors, together with the fact that our expense is primarily fixed and independent of revenue in any particular period, make it difficult for us to accurately predict our income and may cause it to be below market analysts’ expectations in some future quarters, which could cause the market price of our stock to decline significantly.

Our stock price may be volatile and could decline substantially.

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

	•		NASDAQ’s decision to delist our stock from the NASDAQ National Market on September 13, 2006;

	•		variations between our results and the published expectations of securities analysts;

	•		changes in financial estimates or investment recommendations by securities analysts following our business;

	•		announcements by us of significant transactions;

	•		the inclusion or exclusion of our stock in various indices or investment categories, especially as compared to the investment profiles of our stockholders at a given time;

	•		changes in economic and capital market conditions;

	•		changes in business regulatory conditions; and

	•		the trading volume of our common stock.

Delisting from NASDAQ may adversely affect the trading price and limit the liquidity of our common stock and cause the value of an investment in our company to substantially decrease.

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

Among other factors, in the past decreased consumer confidence and spending and reduced corporate profits and capital spending resulted in a downturn in the U.S. economy generally. The value of our marketable securities and Alliance Venture investments could be materially adversely affected if economic conditions were to deteriorate or worsen.

We may face significant expense as a result of ongoing obligations in connection with the disposition of our operating business units.

We are subject to certain ongoing obligations, including indemnification obligations, in connection with the disposition of our operating business units. Among other things, we are obligated to indemnify the purchasers of the assets of our operating business units against certain third party intellectual property claims. The semiconductor industry is characterized by frequent claims and litigation regarding patent and other intellectual property rights. We have from time to time received, and believe that the purchasers of the assets of our operating business units likely will in the future receive, notices alleging that our products, or the processes used to manufacture our products, infringe the intellectual property rights of third parties. In the event of litigation to determine the validity of any third-party claims, or claims against us for indemnification related to such third-party claims, such litigation, whether or not determined in favor of us could result in significant expense to us.

We have been named as one of many defendants in a class action suit alleging that we, in concert with the other defendants, conspired to fix prices for the sale of SRAM products. Although we have subsequently sold this business and feel we were a very small player in the worldwide market for SRAM products, we may incur significant legal costs and may not be able to be excused from this proceeding, which could result in additional significant expense.

Our income could be severely harmed by natural disasters or other disruptions.

Our corporate headquarters located in the San Francisco Bay area is near major earthquake faults, and we are subject to the risk of damage or disruption in the event of seismic activity. A number of Alliance Ventures and Solar Ventures portfolio companies face similar risks. Any future disruptions for any reason, including work stoppages, an outbreak of epidemic, fire, earthquakes, or other natural disasters could cause damages that could have a material adverse effect on our income.

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

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

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

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

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

In fiscal 2006 and 2005 we did not have sufficient permanent accounting staff with a level of financial reporting expertise commensurate with our financial reporting requirements. Accordingly, we need to enhance our existing finance staff and reduce our reliance on contractors and temporary personnel. During the first three quarters of fiscal 2006, we lost most of the accounting staff who had knowledge of what had been done in the past, and as a result, did not maintain effective controls over the reconciliation of unmatched material receipts. We also did not have full awareness of what made up other prepaid assets. These control deficiencies resulted in post-closing adjustments to the inventory purchase accrual and other prepaid assets.

Our future success will depend on our ability to attract and retain qualified management and finance personnel for which competition is intense globally. Additionally, limited human resources and untimely turnovers in staff may result in difficulties in implementing our policies and procedures including those related to our internal controls. We are not insured against the loss of any of our key employees, nor can we assure the successful recruitment of new and replacement personnel.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

Issuer Purchases of Equity Securities

Common stock repurchases in the fiscal quarter ended September 30, 2006 were as follows:

Maximum number of

Total number of

shares that may yet

shares purchased as

be purchased under

part of publicly

the plans or

Total number of

Average price paid

announced plans or

programs (in

Period

shares repurchased

per share

programs

millions)

July 1, 2006 - July 31, 2006

N/A

August 1, 2006 - August 31, 2006

N/A

September 1, 2006 - September 30, 2006

2,978,394

3.00


			Page
Part I		Financial Information
	Item 1.	Financial Statements:
		Condensed Consolidated Balance Sheets (unaudited) as of September 30, 2006 and March 31, 2006		3
		Condensed Consolidated Statements of Operations (unaudited) for the three and six months ended September 30, 2006 and 2005		4
		Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended September 30, 2006 and 2005		5
		Notes to Condensed Consolidated Financial Statements (unaudited)		6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
	Item 3.	Quantitative and Qualitative Disclosure About Market Risk		24
	Item 4.	Controls and Procedures		25
Part II		Other Information
	Item 1.	Legal Proceedings		25
	Item 1A.	Risk Factors		27
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		30
	Item 6.	Exhibits		31
Signature				32
EXHIBIT 10.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32


Exhibit No.		Description

10.1		Settlement Agreement by and among Alliance Semiconductor Corporation, Prabhakara Balla and Trit Tek Research Ltd. dated July 7, 2006.

31.1		Certificate of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a) dated November 9, 2006.

31.2		Certificate of Interim Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a) dated November 9, 2006.

32		Certificate of Chief Executive Officer and Interim Chief Financial Officer pursuant to section 18 U.S.C. section 1350 dated November 9, 2006.


	Alliance Semiconductor Corporation
November 9, 2006	By:	/s/ Melvin L. Keating
		Chief Executive Officer
		(Principal Executive Officer)


November 9, 2006	By:	/s/ Karl H Moeller, Jr
		Interim Chief Financial Officer
		(Principal Financial Officer)


Exhibit No.		Description

10.1		Settlement Agreement by and among Alliance Semiconductor Corporation, Prabhakara Balla and Trit Tek Research Ltd. dated July 7, 2006.

31.1		Certificate of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a) dated November 9, 2006.

31.2		Certificate of Interim Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a) dated November 9, 2006.

32		Certificate of Chief Executive Officer and Interim Chief Financial Officer pursuant to section 18 U.S.C. section 1350 dated November 9, 2006.


Prabha Balla and Trit Tek		)	CASE NO.
		)
	Plaintiff(s),	)	REF. NO. 1100047979
		)
vs.		)	SETTLEMENT AGREEMENT
		)
Alliance Semiconductor Corporation		)	[Enforceable as a stipulation under C.C.P. § 664.6]
		)
	Defendant(s)	)
		)

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Dated:	July 7, 2006


/s/ Wayne Terry

Wayne Terry
Mitchell, Silberberg & Knupp, LLP

		/s/ Prabha Balla

		Prabha Balla

		/s/ Prabha Balla

		Trit Tek Research


/s/ Christopher Hinkson

Christopher Hinkson
Harper, Grey & Easton

		/s/ Prabha Balla

		Prabha Balla

		/s/ Prabha Balla

		Trit Tek Research

/s/ Richard Attisha

Richard Attisha
Harper, Grey & Easton

		/s/ Prabha Balla

		Prabha Balla

		/s/ Prabha Balla

		Trit Tek Research

/s/ Peter M. Stone

Peter M. Stone, Esq.
Paul, Hastings, Janofsky & Walker LLP

		/s/ Melvin L. Keating

		Alliance Semiconductor Corporation

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

	c)		Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	c)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	d)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

	a)		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



November 9, 2006	By:	/s/ Melvin L. Keating
		Melvin L. Keating
		Chief Executive Officer (Principal Executive Officer)



November 9, 2006	By:	/s/ Karl H. Moeller, Jr.
		Karl H. Moeller, Jr.
		Interim Chief Financial Officer (Principal Financial Officer)

	(1)		The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

	(2)		The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.