So - with the looks of a long term row developing, some thoughts:

1) LH will NOT get 380 slots into India. EK will probably beat them to it (given they know how to work Indian governments)

2) 9W/AI will get left out of a major alliance till this settles down.

3) Most importantly - the quiet gainer and first and probably only Indian airline to join a major alliance is going to be Kingfisher - who is all set to join oneworld. They changed RBD's from July 27th to cut over to oneworld systems (U for biz redemptions and X for eco redemptions)

At the end of the day - Dr. Mallya is having the last laugh, with Willie Walsh by his side...

At the moment you are correct. Before we go any further, lets agree not to use silly arguments such as use AI sucks Skyteam sucks, DL sucks. It leads to endless arguments and baseless accusations such as Yaatri wants AI to join Star Alliance, eventually leading to the thread being closed.
Lets leave it at AI is bad but LH is not perfect.
What remains to be seen is
Who blinks first between AI/GoI and Star Alliance
How badly AI/GoI want to be in Star Alliance

It was reported in What went wrong with Air India's entry into Star Alliance? that
.

The Ministry of Civil Aviation and AI officials had expectations entirely at odds with this.

AI still has the option of joining Skyteam. provided they are willing to accept, that for whatever reasons, they were not good enough in the eyes of member airlines of Star Alliance. The smart thing for AI would be to go for Skyteam. Frequent Flyers of member airlines of Star Alliance weren't going to give AI what it so desperately needs and wants.

1. If Skyteam picks 9W over AI and 9W gives up on Star Alliance, in case of retaliation by GoI and in view of the threat issued by GoI, "Only one airline (AI) in *A or none", AI, LH and Star Alliance are losers.
2. If GoI retliates by insisting on its threat "Only one airline (AI) in *A or none", and AI joins Skyteam, 9W, LH and Star Alliance would be losers.
   
3. If AI and 9W continue to wait hoping to be allowed into Star Alliance, AI, 9W and Star Alliance would be losers. AI, 9W and Star Alliance and Skyteam would be losers.
4. If AI joins Skyteam, 9W decides, reluctantly to join Skyteam, and GoI/AI allow that to happen to spite Star Alliance and LH, accompanied by retaliation against LH, LH and Star Alliance are losers yet again.
5. If AI quietly joins Skyteam and allows 9W to join Star Alliance, but retaliates against Star Alliance and LH, Star Alliance, LH and to some extent 9W would be losers.
6. If GoI gives in Star demand and lets 9W join in exchange for its own admission, Skyteam loses.
   

Star Alliance is the biggest loser in 5 scenarios above, LH in 4, 9W in 3, AI in 2 Skyteam is a loser in only two of the six scenarios.



IMHO here is the list of losers in order of biggest to least.
Star Alliance
Lufthansa
Jet Airways
Air India
Skyteam

Alliances are not as important an entity as airlines in my opinion, as a good alliance has bad airlines. In a losing situation Lufthansa is the biggest loser and DL the least, as LH stands to lose what it has, while DL just won't get what it doesn't have.

As to Mallya, he will have plenty of opportunities to open his big mouth and embarrass himself. BLR-SFO nonstop anyone? It doesn't even fly to NA yet.
Finally one little question. Is their a minor alliance?

its all good right now but with all its financial problems lets hope it doesn't go under in another year or so....

Unless of course the government of India throws a real tantrum and decides that no Indian carrier gets to join an alliance until AI has. They have said a number of times that they want AI to have the advantage of being 'first mover', it is not beyond the realms of possibility for them to decide to block IT at the last minute out of pure spite. Has OW announced an approximate date for IT's accession yet?

first quarter of 2012....

I am not sure where you got that information. AI can't be the first mover. IT has already taken that spot. GoI wanted AI to be the first and the only member of star alliance, for a period of time. IT's date might not have been announced, but there is no talk of subjecting IT to the kind of scrutiny Star Alliance reserved for AI.

I doubt it will be allowed to go under. It will continue to bleed if the current situation persists.
As we all know, there is little love for AI. AI has no loyal flyers, on the contrary there are people who would not fly AI under any circumstances. My position on AI has been quite clear, I would fly AI if I could earn status and redeemable miles.
Unless Skyteam puts AI on fast track, IT would be the first Indian carrier to join an alliance. AI is not likely to produce a whole bunch of loyal flyers in the next few months. But if it joins an alliance, chances of new flyers trying it are greater. Some of those, like I would, might like to fly it again if they can earn miles.

skyteam has a horribly poor network in India - but if as a result AF gets some of the slots LH might lose, I won't mind. They're a pretty good airline inflight (and much better food and wine than LH, naturellement) if you can stand CDG for a few hours.

Does it? I thought AF/KL were tied up with 9W for domestic flights. I know the old KL had a lot of tie-ups with 9W. 9W has a pretty decent domestic system. Of course, I have no clue about what, if any, ST miles one can accrue on them, but then again, the domestic routes aren't all that long (assuming ST pax connect in BOM, DEL, BLR), so they won't be missing out on much.

Poor as in, AF/KL used to fly to a lot more Indian cities than they currently do (like my home city MAA - where I was plat on AF till they withdrew the direct flight on a 343). They withdrew all those flights and replaced them with interline deals (not even codeshares, the airline will sell you tickets with those segments on IT / 9W flight codes).

When I'm flying long haul to the states or Europe, the last thing I want to do is to fly domestic to DEL or BOM and connect from there, just adds several wasted hours to my travel time.

I am not sure about other Skyteam carriers, but you can earn DL miles, (redeemable miles, not status miles) on 9W and IT. With the new terminal in DEL, connecting in DEL is much easier than it used to be, or is in BOM.

Skyteam airlines serve the fewest destinations since AF dropped services to MAA and KLM to HYD. Most people don't need to have more than one Indian city to a European hub with a nonstop. If the city one travels to/from is served, the number of different cities with a nonstop service to a European hub makes no difference to one. If non sop to Europe from multiple cities is important to you, LH id your best bet.

Nonstop to europe from my city (MAA) will do very well indeed. I dont particularly care about their connectivity to other cities.

You can also earn AF/KL miles on Jet and Kingfisher coded and operated flights. (These are not EQMs, of course.) Additionally, you get Business class check-in and extra baggage allowance if you hold status with AF/KL. If you fly on an AF/KL codeshare flight operated by Jet or Kingfisher you also earn EQMs and 50%, 75% or 100% bonus miles, depending on your status.

Agree on all points made. However I recall that at certain point there was some kind of agreement between 9W an IT regarding route consolidation and harmonization, plus some kind of internal code sharing (the details I don't recall now, perhaps someone can dig all the relevant informations). Given IT current bad shape, a merger with 9W could actually be a real possibility, and if this the case OW may well become the natural home for the new merged entity, and ending as the real winner in the indian market. I personally think GoI is well aware of SkyTeam image and placement as catcher of medium-lower segments of the market that they have slim chances to bag 9W.
Anyway the situation at the moment is so murky that anything can happen. I'm actually glad to see LH finally being on the receiving end for once, having failed with their usual perfected recipe of cajoling, arrogant behavior, chicanery and GoG unabashed support, political and financial alike.Good also to see GoI, albeit in their own twisted way, imposing some kind of strategic policy on air transport, and trying to enforce it against external demands.