Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



Form 10-Q

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended June 30, 2008ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
from                             to


Commission file number 0-19654



VITESSE SEMICONDUCTOR CORPORATION(Exact name of Registrant as specified in its charter)

Delaware

77-0138960(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)


741 Calle Plano
Camarillo, California 93012(Address of principal executive offices, including zip code)

Registrant's
telephone number, including area code:(805) 388-3700



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 ý    No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer ý

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company 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 ý

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

As
of December 26, 2008 there were 226,205,580 shares of the registrant's $0.01 par value common stock outstanding.



---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2008

TABLE OF CONTENTS



PART I. FINANCIAL INFORMATIONItem 1.

Financial StatementsUnaudited Condensed Consolidated Balance Sheets as of June 30, 2008 and September 30, 2007


3Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2008 and 2007


4Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2008 and 2007


5Notes to Unaudited Condensed Consolidated Financial Statements


6Item 2.

Management's Discussion and Analysis of Finanacial Condition and Results of Operations


29Item 3.

Quantitative and Qualitative Disclosure About Market Risk


56Item 4.

Controls and Procedures


57PART II. OTHER INFORMATIONItem 1.

Legal Proceedings


60Item 1A.

Risk Factors


60Item 2.

Unregistered Sales of Equity and Use of Proceeds


72Item 3.

Defaults Upon Senior Securities


72Item 4.

Submission of Matters to a Vote by Shareholders


72Item 5.

Other Information


72Item 6.

Exhibits and Reports on Form 8-K


72


2

---





Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1:    FINANCIAL STATEMENTS

VITESSE SEMICONDUCTOR CORPORATION        UNAUDITED CONSOLIDATED BALANCE SHEETS

June 30,
2008

September 30,
2007(in thousands,
except share data)ASSETSCurrent assets:Cash and cash equivalents

$
33,710

$
25,976Short-term investments





7,600Accounts receivable


5,611


7,146Inventory


40,534


33,728Assets held for sale





35,472Restricted cash


591


2,147Prepaid expenses and other current assets


4,148


6,188Total current assets


84,594


118,257Property, plant and equipment, net


11,323


9,286Goodwill


191,418


191,418Other intangible assets, net


1,223


3,295Other assets


3,766


5,092$
292,324

$
327,348LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITYCurrent liabilities:Accounts payable

$
19,407

$
14,988Accrued expenses and other current liabilities


19,604


25,785Liabilities held for sale





372Deferred revenue


12,562


21,825Total current liabilities


51,573


62,970Other long-term liabilities


1,607


1,728Long-term debt, net of discount of $624 and $1,551 at June 30, 2008 and September 30, 2007, respectively


29,376


58,418Convertible subordinated debt


96,700


96,700Total liabilities


179,256


219,816Minority interest


1,117


1,289Commitments and contingenciesShareholders' equity:Preferred stock, $0.01 par value. 10,000,000 shares authorized; none outstanding





Common stock, $.01 par value. 500,000,000 shares authorized; 223,555,580 shares outstanding at June 30, 2008 and September 30, 2007,
respectively


2,240


2,240Additional paid-in-capital


1,744,140


1,741,048Accumulated other comprehensive income





3,739Accumulated deficit


(1,634,429
)

(1,640,784
)Total shareholders' equity


111,951


106,243$
292,324

$
327,348


See
accompanying notes to consolidated financial statements.

3

---





Table of Contents

VITESSE SEMICONDUCTOR CORPORATION        UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

Three months ended
June 30,

Nine months ended
June 30,2008

2007

2008

2007(in thousands, except
per share data)

(in thousands, except
per share data)Revenues

$
55,041

$
56,001

$
163,176

$
164,536Costs and expenses:Cost of revenues


27,965


31,496


79,977


86,471Engineering, research and development


12,458


11,333


37,584


35,688Selling, general and administrative including gain on sale of fixed assets of $3,200 for the nine months ended June 30, 2008


14,570


9,240


37,758


30,924Accounting remediation & reconstruction expense & litigation costs


2,067


3,446


8,813


11,366Amortization of intangible assets


310


1,585


2,204


5,351Costs and expenses


57,370


57,100


166,336


169,800Loss from operations


(2,329
)

(1,099
)

(3,160
)

(5,264
)Other income (expense):Interest expense, net


(1,112
)

(1,135
)

(2,706
)

(1,598
)Loss on extinguishment of debt











(1,977
)Other income (expense), net


3,513


(264
)

4,236


1,254Other income (expense), net


2,401


(1,399
)

1,530


(2,321
)Income tax (benefit) expense


3


49


(546
)

202Minority interest in earnings of consolidated subsidiary


(660
)




(660
)

Loss from continuing operations before discontinued operations


(591
)

(2,547
)

(1,744
)

(7,787
)Discontinued operationsIncome (loss) from discontinued operations, net of tax of $978 and gain on sale of $21,500 for the nine months ended June 30, 2008


1,703


(4,487
)

8,101


(11,863
)Net income (loss)

$
1,112

$
(7,034
)
$
6,357

$
(19,650
)Basic and diluted income (loss) per share:Continuing operations

$
0.00

$
(0.01
)
$
(0.01
)
$
(0.04
)Discontinued operations


0.01


(0.02
)

0.04


(0.05
)Net income (loss) per share

$
0.01

$
(0.03
)
$
0.03

$
(0.09
)Weighted average shares outstanding:Basic and diluted


223,556


223,556


223,556


223,556


See
accompanying notes to consolidated financial statements.

4

---





Table of Contents

VITESSE SEMICONDUCTOR CORPORATION        UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine months ended
June 30,2008

2007(in thousands)Cash flows from operating activities:Net income (loss)

$
6,357

$
(19,650
)Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:Depreciation and amortization


4,324


8,303Share-based compensation


3,091


5,835Allowance for doubtful accounts





249Allowance for sales return reserve


(60
)

(5
)Loss on extinguishment of debt





1,977Capitalization of interest to principal





4,612Amortization of debt issuance costs and debt discounts


565


669Gain on sale of Storage Products business


(21,509
)

Gain on disposal of fixed assets


(3,152
)

Realized gain on investments


(3,372
)

Forgiveness of interest


(497
)

Minority interest in earnings of consolidated subsidary


660


Change in operating assets and liabilities:Accounts receivable


1,595


(5,048
)Inventory


(7,835
)

19,735Restricted cash


1,556


195Prepaids and other current assets


2,391


(2,183
)Accounts payable


4,419


(13,654
)Accrued expenses and other liabilities


(6,457
)

(1,456
)Deferred Revenue


(9,264
)

(214
)Net cash used in operating activities


(27,188
)

(635
)Cash flows from investing activities:Proceeds from sale of investments


6,073


Purchase of investments





(139
)Restricted cash


(10
)

728Disposal of fixed assets


3,207


Sale of Storage Products business


62,845


Transaction costs for Storage Products business


(1,636
)

Capital expenditures


(4,290
)

(622
)Purchase of intangibles





(540
)Net cash provided by (used in) investing activities


66,189


(573
)Cash flows from financing activities:Repayment of debt


(59,471
)

Proceeds from debt


29,250


Debt issuance costs


(1,046
)

(313
)Repayment of capital lease obligations





(2,868
)Net cash used in financing activities


(31,267
)

(3,181
)Net increase (decrease) in cash


7,734


(4,389
)Cash and cash equivalents at beginning of period


25,976


25,312Cash and cash equivalents at end of period

$
33,710

$
20,923


5

---





Table of Contents

VITESSE SEMICONDUCTOR CORPORATION        NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS        June 30, 2008

Note 1. The Company and its Significant Accounting Policies

Description of Business

Vitesse is a leading supplier of high-performance integrated circuits ("ICs") that are utilized primarily by manufacturers
of networking systems for Carrier, Enterprise and Storage communications applications. Vitesse designs, develops and markets a diverse portfolio of high-performance,
cost-competitive semiconductor products. For more than 20 years, Vitesse has led the transition of new technologies in communications networks.

Our
customers include leading communications and enterprise original equipment manufacturers ("OEMs") such as Alcatel Lucent, Ciena Corporation, Cisco Systems, Inc.,
Telefonaktiebolaget LM
Ericsson, Fujitsu Limited, Hewlett-Packard Co., Hitachi, Ltd., Huawei Technologies Co., Ltd., H3C Technologies Co., Limited, Nortel Networks Corp., Nokia Siemens
Networks B.V., Tellabs, Inc., and ZTE Corporation.

We
have a worldwide presence. As of September 30, 2008, we operated four domestic design centers in the U.S., in California, Oregon, Massachusetts, and Texas, and four
international design centers in Taiwan, Denmark, Germany, and India.

Vitesse
was incorporated in the State of Delaware in 1987. Our principal offices are located at 741 Calle Plano, Camarillo, California, and our phone number is
(805) 388-3700. Our stock trades on the Pink Sheets under the ticker symbol VTSS.PK.

Fiscal Periods

Company's fiscal year is October 1 through September 30. References made to the third quarters of fiscal 2008 and fiscal
2007 relate to the quarters ended June 30, 2008 and 2007, respectively.

Basis of Presentation and Going Concern Uncertainty

The interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States for interim financial information and with the instructions to Securities and Exchange Commission ("SEC") Form 10-Q and Article 10 of SEC
Regulation S-X. They do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Therefore, these
financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended September 30, 2007, included in our Annual Report on
Form 10-K filed with the SEC on September 30, 2008.

The
condensed consolidated financial statements included herein are unaudited; however, they contain all normal recurring accruals and adjustments that, in the opinion of management, are
necessary to present fairly our consolidated financial position at June 30, 2008 and September 30, 2007, and the consolidated results of our operations for the three and nine months
ended June 30, 2008 and 2007, and our consolidated cash flows for the nine months ended June 30, 2008 and 2007. The results of operations for the three and nine months ended
June 30, 2008 are not necessarily indicative of the results to be expected for future quarters or the full year.

The
Company has incurred net losses historically and has used cash in operating activities, and has an accumulated deficit of $1.6 billion as of June 30, 2008. The Company
also has significant contractual obligations related to its debt for the fiscal year 2009 and beyond. Management believes we have

6

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2008

Note 1. The Company and its Significant Accounting Policies (Continued)

sufficient
resources to fund our normal operations over the next 12 months, through at least September 30, 2009. However, holders of our 1.5% Convertible Subordinated Debentures due 2024
("2024 Debentures") have the right to require us to repurchase the 2024 Debentures on October 1 of 2009, 2014, and 2019. In accordance with the November 3, 2006 amendment to the 2024
Debentures, the October 1, 2009 repurchase right was increased from 100% to 113.76% of the principal amount of the 2024 Debentures to be purchased. The increase in the repurchase right would
result in an additional payment of $13.3 million on the $96.7 million outstanding 2024 Debentures. Holders also have the option, subject to certain conditions, to require the Company to
repurchase any 2024 Debentures held by such holder in the event of a fundamental change, at a price equal to 100% of the principal amount of the 2024 Debentures plus accrued and unpaid interest plus,
under certain circumstances, a make-whole premium. (See Debt Note).

The
Company is actively seeking various alternatives to refinance the debt. We are working to either renegotiate the terms of, or refinance some or all of, the 2024 Debentures. However,
to date, we have not been able to renegotiate those terms or to raise the capital necessary to repurchase or refinance some or all of the 2024 Debentures. We can make no assurance at this time that
such financing will be completed as contemplated or under terms acceptable to the Company or its existing shareholders. Failure to generate additional revenues, raise additional capital or manage
discretionary spending could have a material adverse effect on the Company's ability to continue as a going concern and to achieve its intended business objectives. Accordingly, there is substantial
doubt about our ability to continue as a going concern. The accompanying financial statements have been prepared on the basis of the Company continuing as a going concern. No adjustments have been
made to carrying value of the assets and liabilities that might result from the outcome of this uncertainty.

Use of Estimates

The preparation of financial statements in accordance with United States generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes to the financial statements. We regularly evaluate
estimates and assumptions related to revenue recognition, allowances for doubtful accounts, sales returns and allowances, warranty reserves, inventory reserves, share-based compensation, goodwill and
purchased intangible asset valuations and useful lives, and deferred income tax asset valuation allowances. These estimates and assumptions are based on current facts, historical experience and
various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. The actual results we experience
may differ materially and adversely from our original estimates. To the extent there are material differences between the estimates and the actual results, our future results of operations will be
affected.

Foreign Currency Translation

The functional currency of our foreign subsidiaries is the United States dollar, however our foreign subsidiaries transact in local
currencies. Consequently, assets and liabilities are translated into United States dollars at the exchange rate on the balance sheet date. Revenues and expenses are translated at

7

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2008

Note 1. The Company and its Significant Accounting Policies (Continued)

the
average exchange rate prevailing during the period. Foreign currency transaction gains and losses are included in results of operations.

Concentrations of Risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash equivalents,
short-term and long-term investments and accounts receivable. Cash equivalents consist of demand deposits and money market funds maintained with several financial institutions.
Deposits held with banks have exceeded the amount of insurance provided on such deposits. The Company maintains its cash in commercial accounts with high-credit quality financial
institutions. Although the financial institutions are considered creditworthy, balances with any one financial institution may exceed the Federal Deposit Insurance Corporation ("FDIC") limit of
$100,000. At June 30, 2008, the Company's cash balance exceeded the deposit insurance limits provided by the FDIC by $35,819,552. Cash balances held in foreign bank accounts are not insured by
the FDIC, and at June 30, 2008 these balances totaled $163,412. At June 30, 2008, the Company's foreign subsidiaries reflected $465,547 of cash on their financial statements, which is
not insured by the FDIC.

The
Company believes that the credit risk in its accounts receivable is mitigated by the Company's credit evaluation process and maintaining an allowance for anticipated losses. For the
quarter ended June 30, 2008 and 2007, one customer accounted for more than 10% of our revenues. Total sales to this customer were 11.8% and 10.4% for the quarters ended June 30, 2008 and
June 30, 2007, respectively.

The
Company currently purchases wafers from a limited number of vendors. Additionally since we do not maintain manufacturing facilities, we depend upon close relationships with contract
manufacturers to assemble our products. We believe there are available to the Company other vendors who can provide the same quality wafers at competitive prices and other contract manufacturers that
can provide comparable services at competitive prices. We anticipate the continued use of a limited number of vendors and contract manufacturers in the near future.

Advertising Costs

Advertising costs are expensed as incurred. Advertising expenses for the quarters ended June 30, 2008 and 2007 were $58,600 and
$39,800, respectively.

Accumulated Other Comprehensive Income

The Company reports accumulated comprehensive income in its consolidated balance sheet. Accumulated other comprehensive income consists
of unrealized gains and losses on certain investments in equity securities in accordance with Statements of Financial Accounting Standards ("SFAS") 115,"Accounting for Certain
Investments in Debt and Equity Securities."

Contingencies

We assess our exposure to loss contingencies, including environmental, legal, and income tax matters, and provide an accrual for an
exposure if it is judged to be probable and reasonably estimable.

8

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2008

Note 1. The Company and its Significant Accounting Policies (Continued)

If
the actual loss from a loss contingency differs from management's estimates, results of operations could be adjusted upward or downward.

Warranty

The Company generally warrants its products against defects for one year from date of shipment. The sales reserve allowance includes a
provision for products under warranty, which is recorded against revenue when products are shipped. At each reporting period, the Company adjusts its reserve for warranty claims based on its actual
warranty claims experience as a percentage of revenue for the proceeding 12 months after shipment and also considers the impact of known operational issues that may have a greater impact than
historical trends.

Revenue Recognition

In accordance with SEC Staff Accounting Bulletin ("SAB") 101,"Revenue Recognition in Financial
Statements"("SAB 101"), as well as SAB No. 104,"Revenue Recognition"("SAB 104"), we recognize product
revenue when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred; (iii) the price to the customer is fixed or
determinable; and (iv) collection of the sales price is reasonably assured. Delivery occurs when goods are shipped and title and risk of loss transfer to the customer, in accordance with the
terms specified in the arrangement with the customer. Revenue recognition is deferred in all instances where the earnings process is incomplete. With a few minor exceptions, we recognize revenue on
goods shipped directly to customers at the time of shipping, as that is when title passes to the customer and all revenue recognition criteria specified above are met.

Vitesse
has a distribution network through which it sells most of its products. The Company recognizes revenue on a sell-through basis for all products sold through
distributors, utilizing information provided by the distributors. These distributors maintain inventory balances, which are carried on the books of Vitesse, and are given business terms to return a
portion of inventory and receive credits for changes in selling prices to end customers and inventory obsolescence. At the time Vitesse ships inventory to the distributors, the magnitude of future
returns and price adjustments is not known. Therefore, revenue recognition for shipments to distributors does not occur until the distributors sell inventory to end customers, and is therefore shown
as deferred revenue. Vitesse personnel are often involved in the sales from the distributors to end customers.

Revenues
from development contracts are recognized upon attainment of specific milestones established under customer contracts. Revenues from products deliverable under development
contracts, including design tools and prototype products, are recognized upon delivery. Costs related to development contracts are expensed as incurred.

We
record a reserve for estimated sales returns and allowances in the same period as the related revenues are recognized. Sales returns typically occur for quality related issues and
allowances are based on specific criteria such as rebate agreements. We base these estimates on our historical experience or the specific identification of an event necessitating a reserve. To the
extent actual sales returns or allowances differ from our estimates, our operations may be affected. As of June 30, 2008 and September 30, 2007, our sales return reserve was $83,000 and
$143,000, respectively.

9

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2008

Note 1. The Company and its Significant Accounting Policies (Continued)

We
also maintain an allowance for doubtful accounts for estimated losses resulting from customers' inability to meet their financial obligations to us. We evaluate the collectability of
accounts receivable based on a combination of factors. Management reviews accounts receivable on a monthly basis to determine if any receivables will potentially be uncollected. The Company includes
any accounts receivable balances that are determined to be uncollectible in the overall allowance for doubtful accounts using the specific identification method. After all attempts to collect a
receivable have failed, the receivable is written off against the allowance. Management believes the allowance for doubtful accounts as of June 30, 2008 and September 30, 2007, is
adequate. However, if the financial condition of any customer were to deteriorate, resulting in an impairment of its ability to make payments, additional allowances could be required.

On
December 28, 2007, the Company entered into an arrangement to license intellectual property to a third-party. The contract is a perpetual, nonexclusive,
non-transferable, irrevocable license for specified intellectual property. As part of the contract, we were granted a perpetual, nonexclusive, non-transferable, irrevocable
license to improvements to the technology made by the licensee, subject to certain limitations. Under the agreement, Vitesse will receive $15.0 million in license fees and royalties for the
rights to certain products and technology. Of the fees plus royalty payments, $10.0 million were received upon delivery and acceptance of the licensed technology. The remaining
$5.0 million will be received upon the earlier of licensee's first commercial sale using the intellectual property or the one-year anniversary of the agreement. For a period of
seven years from the effective date of the contract, licensee will pay royalties on a per unit basis, on each commercial sale incorporating the licensed products. Royalties will be accounted for when
received.

In
accordance with Staff Accounting Bulletin No. 104, "Selected Revenue Recognition Issues" ("SAB 104"), in the licensing of technology and other intangibles, delivery does
not occur for revenue recognition purposes until the license term begins. Revenues should be recognized in a manner consistent with the nature of the transaction and related earnings process. Based on
management's analysis of the license terms, and pursuant to the guidance in SAB 104, revenue related to the licensing of the intellectual property was deferred until final acceptance of the
contracted deliverables were received from the licensee. Confirmation of the deliverables was received in September 2008 and we recognized $10.0 million in revenue. In addition to the license
fees discussed above, we expect to develop a royalty stream as a result of this contract.

Sales Returns, Pricing Adjustments and Allowance for Doubtful Accounts

We record reductions to revenue for estimated product returns and pricing adjustments, such as competitive pricing programs and
rebates, in the same period that the related revenue is recorded. The amount of these reductions is based on historical sales returns, analysis of credit memo data, specific criteria included in
rebate agreements, and other factors known at the time. Additional reductions to revenue would result if actual product returns or pricing adjustments exceed our estimates. We also maintain an
allowance for doubtful accounts for estimated losses resulting from customers' inability to meet their financial obligations to us. We evaluate the collectability of accounts receivable on a monthly
basis based on a combination of factors, including whether any receivables will potentially be uncollectible. The Company includes any accounts receivable balances that are determined to be
uncollectible in the overall allowance for doubtful accounts using the specific identification method.

10

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2008

Note 1. The Company and its Significant Accounting Policies (Continued)

After
all attempts to collect a receivable have failed, the receivable is written off against the allowance. Management believes the allowance for doubtful accounts as of June 30, 2008 and
September 30, 2007, is adequate. However, if the financial condition of any customer were to deteriorate, resulting in an impairment of its ability to make payments, additional allowances could
be required.

Cash and Cash Equivalents

Cash and cash equivalents include highly liquid investments with original maturities of three months or less at the time of
acquisition. Due to their liquidity and their remaining time to maturity, the fair value of these investments approximates their carrying value.

Investments

Our available-for-sale marketable securities consist of investments in publicly-traded companies. In accordance
with the Financial Accounting Standards Board's ("FASB") Statement on Financial Accounting Standards ("SFAS") No. 115,"Accounting for Certain Investments in Debt and
Equity Securities,"("SFAS 115") these securities are recorded at fair value, with unrealized gains and losses included as a separate component of shareholders' equity.
Upon sale or liquidation, realized gains and losses are included in the
consolidated statements of operations. The Company classifies all available-for-sale securities as current assets in the accompanying balance sheets because the Company has the
ability and intent to sell these securities as necessary to meet its liquidity requirements.

For
our investments in equity securities of privately-held companies where quoted market prices are not available, the cost method, combined with other intrinsic information,
is used to assess the fair value of the investment. If the carrying value is below the fair value of an investment at the end of any period, the investment is considered for impairment. Investments
are considered to be impaired when a decline in fair value is judged to be other-than-temporary. Once a decline in fair value is determined to be
other-than-temporary, an impairment charge is recorded and a new cost basis in the investment is established. Our investment in the equity securities of a
privately-held company was $248,000 as of June 30, 2008 and September 30, 2007.

Financial Instruments

SFAS No. 107,"Disclosures about Fair Value of Financial Instruments"("SFAS 107"), defines fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties.

Our
financial instruments include cash equivalents, short-term investments, restricted deposits, accounts receivable, long-term investments, accounts payable and
accrued expenses. These financial instruments are stated at their carrying values, which are reasonable estimates of their fair values.

Additionally,
our financial instruments include our 1.5% Convertible Subordinated Debentures ("2024 Debentures") and a $30 million senior note with Whitebox VSC, LTD.
("Whitebox") (see Note 7Debt). We have estimated the approximate fair value of the 2024 Debentures using recent price quotes and trading information regarding shares of our common
stock into which the debentures are convertible. The fair value of the 2024 debentures was estimated to be $34.5 million and $40.0 million, as of June 30, 2008 and 2007,
respectively.

11

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2008

Note 1. The Company and its Significant Accounting Policies (Continued)

We
completed a second Consent Solicitation of the holders of the 2024 Debentures where we agreed to increase the repurchase price with respect to the October 1, 2009, repurchase
right from 100% to 113.76% of the principal amount of the Debentures to be purchased (the 'premium put'). We have estimated the approximate fair value of the premium put as the difference between the
estimated value of the debentures with and without the premium put feature. The premium put was estimated to have no fair value as of June 30, 2008 and 2007.

The
senior note with Whitebox is stated at carrying value, net of unamortized debt discount, which is a reasonable estimate of fair value.

Inventory

Inventory is stated at the lower of cost or market (net realizable value). Costs associated with the development of a new product are
charged to engineering, research and development expense as incurred, until the product is proven through testing and acceptance by the customer. At each balance sheet date, the Company evaluates its
ending inventory for excess quantities and obsolescence. This evaluation includes analyses of sales levels by product and projections of future demand. Inventory is shown net of reserves of
$40.5 million and $33.7 million at June 30, 2008 and September 30, 2007, respectively.

Property, Plant and Equipment

Property, plant and equipment are carried at cost. Depreciation and amortization are provided using the straight-line
method over the assets' estimated remaining useful lives, ranging from three to five years, except for leasehold improvements, which are stated at cost and amortized over the shorter of the term of
the related lease or their estimated useful lives. Depreciation and amortization costs from continuing operations were $0.8 million and $0.7 million for the quarters ended
June 30, 2008 and 2007, respectively. Depreciation and amortization costs from discontinued operations were $0.0 million and $0.2 million for the quarters ended June 30,
2008 and 2007, respectively.

Goodwill and Other Intangible Assets

Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible
and intangible assets acquired. We perform a two-step process on an annual basis, or more frequently if necessary, to determine: (i) whether the fair value of the relevant reporting
unit exceeds carrying value; and (ii) to measure the amount of an impairment loss, if any. We will complete this process in the fourth quarter of fiscal 2008 or sooner, if necessary, and
determine if there is an impairment. Intangible assets, other than goodwill, are amortized over their useful lives unless these lives are determined to be indefinite. Other intangible assets are
carried at cost less accumulated amortization. Amortization is computed over the useful lives of the respective assets, generally two to 10 years.

Income Taxes

We account for income taxes pursuant to the provisions of SFAS No. 109,"Accounting for Income
Taxes"("SFAS 109"). Under the asset and liability method of SFAS 109, deferred tax assets and

12

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2008

Note 1. The Company and its Significant Accounting Policies (Continued)

liabilities
are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. We assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is
not likely, we establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, it must include an expense within the tax provision in the
statement of operations. The Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"), an
interpretation of SFAS No. 109, on October 1, 2007 and assessed the impact of FIN 48 on its financial statements and determined that no adjustment to retained earnings is
necessary.

Research and Development Costs

Research and development costs are expensed when incurred. Manufacturing costs associated with the development of a new fabrication
process or a new product are
expensed until such times as these processes or products are proven through final testing and initial acceptance by the customer.

Computation of Net Income (Loss) per Share

In accordance with SFAS 128,"Earnings per Share,"basic net income and loss per
share is computed by dividing net income or loss by the weighted average number of common shares outstanding during the period. The weighted average number of shares used to calculate diluted income
per share is inclusive of common stock equivalents from unexercised stock options.

For
periods in which the Company reports a net loss, diluted loss per share is calculated using only the weighted average number of shares outstanding during each of the periods, as the
inclusion of any common stock equivalents would be anti-dilutive.

Long-Lived Assets

The Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to
future undiscounted operating cash flows expected to be generated by the asset, or fair market value. Assets held for sale are recorded at the lesser of fair value less costs to sell or carrying
value. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. There
were no impairment charges for the quarters ended June 30, 2008 and 2007.

Short-Term Investments

Investments in two limited partnerships, Vitesse Venture Fund, L.P. and Vitesse Venture Fund II, L.P. are
consolidated in the accompanying consolidated financial statements in accordance with SFAS No. 94"Consolidation of All Majority-Owned
Subsidiaries,"("SFAS 94"). The Company has recorded a liability for the limited partners' investments in the joint ventures under the caption "minority interest" in the
accompanying consolidated balance sheets.

13

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2008

Note 1. The Company and its Significant Accounting Policies (Continued)

Share-Based Compensation

The Company has in effect several stock plans under which incentive and non-qualified stock options have been granted to
employees, contractors, and directors. These plans include the 2001 Stock Incentive Plan, the 1991 Stock Option Plan, the 1991 Directors' Stock Option Plan, and the 1999 International Stock Option
Plan. The Company also had an employee stock purchase plan for all eligible employees. Beginning in fiscal year 2006, the Company adopted SFAS No. 123R
("SFAS 123R") "Share-Based Payments,"which requires all share-based payments to employees, including grants of employee stock options and
employee stock purchase rights, to be recognized in the financial statements based on their respective grant date fair values and does not allow the previously permitted pro forma
disclosure-only method as an alternative to financial statement recognition. SFAS 123R supersedes Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees,"("APB 25") and related interpretations and amends SFAS No. 95, "Statement of Cash Flows."SFAS 123R also requires the benefits of tax deductions in excess of recognized
compensation cost be reported as a
financing cash flow, rather than operating cash flow, as required under previous literature.

The
Company adopted SFAS 123R effective October 1, 2005, using the modified-prospective transition method of recognition of compensation expense related to share-based
payments. Under this transition method, compensation expense recognized during the periods ended June 30, 2008 and 2007 included: (i) compensation expense for all share-based awards
granted prior to, but not yet vested, as of September 30, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123; and
(ii) compensation expense for all share-based awards granted subsequent to September 30, 2005, based on the grant date fair value estimated in accordance with the provisions of
SFAS 123R. The Company's consolidated statements of operations for the periods ended June 30, 2008 and 2007 reflect the impact of adopting SFAS 123R.

SFAS 123R
requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award
that is ultimately expected to vest is recognized as expense ratably over the requisite service periods. The Company has estimated the fair value of each award as of the date of grant or assumption
using the Black-Scholes option pricing model, which was developed for use in estimating the value of traded options that have no vesting restrictions and that are freely transferable. The
Black-Scholes model considers, among other factors, the expected life of the award and the expected volatility of the Company's stock price. Although the Black-Scholes model meets the requirements of
SFAS 123R, the fair values generated by the model may not be indicative of the actual fair values of the Company's awards, as it does not consider other factors important to those share-based
payment awards, such as continued employment, periodic vesting requirements, and limited transferability.

On
November 10, 2005, the FASB issued FASB Staff Position No. FAS 123R-3,"Transition Election Related to Accounting for Tax Effects of
Share-based Payment Awards,"("SFAS 123R-3"). The Company has elected to adopt the alternative transition method provided in SFAS 123R-3
for calculating the tax effects of share-based compensation pursuant to SFAS 123R. The alternative transition method includes a simplified method to establish the beginning balance of the
additional paid-in-capital pool ("APIC pool") related to the tax effects of employee share-based compensation expense, and to determine the subsequent impact on the APIC pool
and consolidated statements of cash flows of the tax effects of

14

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2008

Note 1. The Company and its Significant Accounting Policies (Continued)

employee
share-based compensation awards that were outstanding at the Company's adoption of SFAS 123R.

In
conjunction with the adoption of SFAS 123R, we elected to recognize compensation expense for all share-based payment awards granted after September 30, 2005 on a
straight-line basis over the requisite service period for the entire award. The amount of compensation cost recognized through the end of each reporting period is equal to the portion of
the grant-date value of the awards that have vested, or for partially vested awards, the value of the portion of the award that is ultimately expected to vest for which the requisite
services have been provided.

Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 48, "Accounting for Uncertainty in Income
Taxes"an interpretation of FASB Statement No. 109 ("FIN 48"), which clarifies the
accounting for uncertainty in tax positions. This Interpretation requires that we recognize the impact of a tax position in our financial statements, if that position is more likely than not to be
sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006, with the cumulative effect
of the change in accounting principle recorded as an adjustment to opening retained earnings. Management adopted this pronouncement in the current financial statements beginning with October 1,
2007.

In
September 2006, the FASB issued SFAS No. 157,"Fair Value Measurement"("SFAS 157") which defines fair value, establishes
a framework for measuring fair value and expands disclosures regarding assets and liabilities measured at fair value. We will be required to adopt SFAS 157 in the first quarter of fiscal 2009
and do not expect that the adoption will have a material impact on our financial condition or results of operations.

In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities"
("SFAS 159"). The statement permits entities to choose to measure many financial instruments and certain other items at fair value that are currently not required to be measured at fair value.
We are not required to adopt SFAS 159 and do not expect that the adoption would have a material impact on our financial condition or results of operations.

In
June 2007, the FASB ratified Emerging Issues Task Force consensus on EITF Issue No. 07-3,"Accounting for Non-refundable
Advanced Payments for Goods or Services to be used in Future Research and Development Activities" ("EITF 07-3").EITF 07-3 requires that
these payments be deferred, capitalized, and expensed as goods are delivered or as the related services are performed. We will be required to adopt EITF 07-3 in the first quarter of
fiscal 2009 and do not expect that the adoption will have a material impact on our financial condition or results of operations.

In
December 2007, the FASB issued SFAS No. 141R,"Business Combinations,"("SFAS 141R"). SFAS 141R establishes
principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any
non-controlling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what
information to disclose to enable users of financial statements to evaluate the nature and financial effects of the

15

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2008

Note 1. The Company and its Significant Accounting Policies (Continued)

business
combination. SFAS 141R is effective for financial statements issued for fiscal years beginning after December 15, 2008. We will be required to adopt the statement in the first
quarter of fiscal 2009 and will account for and disclose all business combinations effected after the adoption in accordance with SFAS 141R.

In
March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activitiesan Amendment of FASB Statement
No. 133" ("SFAS 161") This Statement requires enhanced disclosures about an entity's derivative and hedging activities and is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008. We do not expect that the adoption will have a material impact on our financial condition or results of
operations.

In
May 2008, the FASB issued FSP APB 14-1,"Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including
Partial Cash Settlement)"("APB 14-1"). APB 14-1 will require us to separately account for the liability and equity components of a
convertible debt security by measuring the fair value of a similar nonconvertible debt security when interest cost is recognized in subsequent periods. APB 14-1 will require us to
retroactively separate the liability and equity components of such debt in our consolidated balance sheets on a fair value basis. APB 14-1 is applicable
to our $96.7 million 2024 Debentures which allow for settlement in cash. APB 14-1 will be effective for fiscal years beginning after December 15, 2008, and we are
required to adopt the FSP in our first quarter of fiscal 2010. APB 14-1 does not permit early adoption. We are currently evaluating the impact that the adoption of
APB 14-1 will have on our consolidated financial statements.

Note 2. Supplemental Financial Information

Inventory

The following table presents the details of the Company's inventory:

June 30,
2008

September 30,
2007(in thousands)Inventory:Raw materials

$
4,007

$
4,567Work-in-process


14,530


11,773Finished goods


21,997


17,388Total

$
40,534

$
33,728


16

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2008

Note 2. Supplemental Financial Information (Continued)

Property, Plant and Equipment

The following table presents the details of the Company's property, plant and equipment:

June 30,
2008

September 30,
2007(in thousands)Property, Plant and Equipment:Machinery and equipment

$
88,443

$
106,586Furniture and fixtures


794


2,064Computer equipment


11,102


24,102Leasehold improvements


5,763


10,145Land


1,630


1,630Buildings


2,024


2,024Construction in progress


687


110,443


146,551Less: Accumulated depreciation and amortization


(99,120
)

(137,265
)Total

$
11,323

$
9,286


Accrued Expenses and Other Current Liabilities

The following table presents the details of the Company's accrued expenses and other current liabilities:

June 30, 2008

September 30, 2007(in thousands)Accrued Expenses and Other Current Liabilities:Accrued legal fees and settlements

$
6,996

$
7,666Accrued wages, commissions and benefits


5,089


4,526Accrued vacation


2,790


2,673Accrued software license agreements


331


1,987Accrued expenses


1,640


1,294Accrued commissions


169


828Miscellaneous taxes


356


299Interest payable


901


3,531Customer prepayments and deposits


143


1,507Other


1,189


1,474Total

$
19,604

$
25,785


17

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2008

Note 2. Supplemental Financial Information (Continued)

Revenues by Product Markets

The following table presents revenues by product markets:

Three Months Ended
June 30,

Nine Months Ended
June 30,2008

2007

2008

2007(in thousands)Carrier Networking Products

$
22,596

$
24,055

$
68,051

$
63,817Enterprise Networking Products


19,841


22,019


56,702


57,150Non-Core Products


12,604


9,927


38,423


43,569Total Net Revenues

$
55,041

$
56,001

$
163,176

$
164,536


Revenues by Geographic Area

The following table presents revenues by geographic area:

Three Months Ended
June 30,

Nine Months Ended
June 30,2008

2007

2008

2007(in thousands)North America(1)

$
25,545

$
27,189

$
78,961

$
85,326Asia Pacific


23,167


21,948


65,574


55,612Europe


6,329


6,864


18,641


23,598Total Net Revenues

$
55,041

$
56,001

$
163,176

$
164,536






The
Company believes a substantial portion of the product sold to original equipment manufacturers ("OEMs") and third-party manufacturing service providers in the Asia Pacific region are
ultimately shipped to end-markets in North America and Europe.

18

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2008

Note 2. Supplemental Financial Information (Continued)

Computation of Net Income (Loss) per Share

The following table presents the computation of net income and net loss per share:

Three Months Ended June 30,

Nine Months Ended June 30,2008

2007

2008

2007(in thousands, except per share data)Loss from continuing operations

$
(591
)
$
(2,547
)
$
(1,744
)
$
(7,787
)Gain (loss) on discontinued Storage Products, net


1,703


(4,487
)

8,101


(11,863
)Net income (loss)

$
1,112

$
(7,034
)
$
6,357

$
(19,650
)Weighted average number of sharesbasic and diluted


223,556


223,556


223,556


223,556Income (loss) per sharebasic and diluted:Continuing operations

$
0.00

$
(0.01
)
$
(0.01
)
$
(0.04
)Discontinued operations


0.01


(0.02
)

0.04


(0.05
)Net Income (loss)

$
0.01

$
(0.03
)
$
0.03

$
(0.09
)


The
weighted average potential common shares excluded from the diluted computation are as follows:

Three Months Ended June 30,

Nine Months Ended June 30,2008

2007

2008

2007(in thousands)Outstanding stock options


19,562


23,468


20,599


26,710Outstanding warrants


150


150


150


86Convertible subordinated debt


37,981


37,981


37,981


37,98157,693


61,599


58,730


64,777


Note 3. Goodwill

We account for goodwill and other intangible assets in accordance with SFAS No. 142,"Accounting for Goodwill and Other Intangible
Assets."We evaluate these assets, including purchased intangible assets deemed to have indefinite lives, on an annual basis in the fourth quarter or, more frequently, if we
believe indicators of impairment exist. Factors we consider important that could trigger an impairment review include significant underperformance to historical or projected operating results,
substantial changes in our business strategy, and significant negative industry or economic trends. If such indicators are present, we compare the fair value of the goodwill of our only reporting unit
to its carrying value. For other intangible assets and long-lived assets, in accordance with SFAS No. 144 we determine whether the sum of the estimated undiscounted cash flows
attributable to each asset in question is less than its carrying value. If less, we recognize an impairment loss based on the excess of the carrying amount of the assets over their respective fair
values. Fair value of goodwill is determined by using a valuation model based on a market approach. Fair value of other intangible assets is determined by undiscounted future cash flows, appraisals or
other methods. Fair value of long-lived

19

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2008

Note 3. Goodwill (Continued)

assets
is determined based on market value. If the long-lived asset determined to be impaired is to be held and used, we recognize an impairment charge to the extent the fair value
attributable to the asset is less than the asset's carrying value. The fair value of the long-lived asset then becomes the asset's new carrying value, which we amortize over the remaining
estimated useful life of the asset.

Carrying
value of goodwill for the quarters ended June 30, 2008 and September 30, 2007 was $191.4 million. No other activity or adjustments to goodwill occurred for
the quarters ended June 30, 2008 and September 30, 2007.

Other Intangible Assets

Other intangible assets consist primarily of existing technologies, customer relationships, and covenants
"not-to-compete" acquired in business combinations. Acquired intangibles are amortized on a straight-line basis over the respective estimated useful lives of the
assets. The carrying value of intangible assets at June 30, 2008 and September 30, 2007 was $1.2 million and $3.3 million, respectively.

Note 4. Discontinued Operations and Assets Held for Sale

On October 29, 2007, the Company completed its sale of a portion of the Storage Products business to Maxim Integrated Products, Inc. ("Maxim") for $62.8 million,
with a gain on the sale of approximately $21.5 million, plus a potential earn-out based on the business meeting certain criteria, as detailed in the agreement. Maxim acquired the
Company's SAS, SATA expander product markets, enclosure and baseboard management devices, and certain other assets of the Storage Product business. Assets sold include inventory, property &
equipment, goodwill and intangible assets of $35.5 million. As part of the sale, Maxim assumed a liability for employees' accrued vacation of $300,000. Debt issuance costs related to the debt
with Tennenbaum Capital Partners ("TCP") of $3.5 million were included in the calculation of the gain on the sale. The gain was reduced by costs of completing the sale in the amount of
$1.6 million.

In
accordance with EITF Issue 87-24,"Allocation of Interest to Discontinued Operations"("EITF Issue 87-24"), we have allocated to discontinued operations interest expense associated with debt instruments that were required to be repaid upon the sale of Storage
Product business. For the nine months ended June 30, 2008, interest expense of approximately $16.9 million was included in discontinued operations. Interest expense included a
"make-whole" payment of $16.4 million, and interest expense and amortization of deferred financing fees of $500,000. For the three and nine months ended June 30, 2007,
interest and amortization of deferred financing fees were $2.6 million and $7.5 million, respectively.

20

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2008

Note 4. Discontinued Operations and Assets Held for Sale (Continued)

We recorded amounts in discontinued operations in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). Accordingly, we have reported the results of operations and financial position of the Storage Product business in discontinued operations within
the Company's statements of operations and as assets and liabilities held for sale in the Company's balance sheet as of September 30, 2007.

Note 5. Debt

On September 22, 2004, the Company issued $90.0 million in aggregate principal amount of its 1.5% Convertible Subordinated 2024 Debentures ("2024 Debentures") to qualified
institutional buyers in reliance on Rule 144A under the Securities Act of 1933 ("the Securities Act"). Net proceeds received by the Company, after costs of issuance, were approximately
$86.9 million. On October 15, 2004, the Company issued an additional $6.7 million in aggregate principal amount of its 2024 Debentures to qualified institutional buyers in
reliance on Rule 144A under the Securities Act. Net proceeds received by the Company from the October issuance, after costs of issuance, were approximately $6.5 million.

The
2024 Debentures are unsecured obligations and are subordinated in right of payment to all of the Company's existing and future senior indebtedness. Interest is payable in arrears
semiannually on October 1 and April 1 of each year, beginning April 1, 2005. On August 15, 2006, the Company received notification from the Trustee under the Indenture,
dated as of September 22, 2004, relating to the Company's 2024 Debentures. The Trustee alleged compliance deficiencies under the Indenture relating to the Company's failure to file with the
Securities and Exchange Commission and the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2006. Although the Company did not believe there were
compliance deficiencies under the Indenture, and that an Event of Default did not occur, the Company negotiated with the holders of a majority of the 2024 Debentures to reach a resolution to the
dispute. On September 24, 2007, the Company entered into a Second Supplemental Indenture amending Section 1.1 of the Indenture related to the "Interest Rate"; Section 4.1(d) of
the Indenture related to "Default" or "Event of Default"; and Section 4.2 of the Indenture related to "Acceleration of Maturity." As part of the amendment, the Company agreed to increase the
interest payable for the period starting April 1, 2007, through, but not including October 1, 2007, by $20 per $1,000 principal amount of the 2024 Debentures. On October 1, 2007,
the Company included an additional $1.9 million payment with the semiannual payment of interest due.

On
October 23, 2006, the Company solicited consents from the holders of the 2024 Debentures that, if received, would provide: i) the holders of the 2024 Debentures and the
Trustee under the Indenture would agree that, for 18 months after the date the proposed amendments are effective, the Trustee would forbear from taking any action to exercise any rights or
remedies that relate to the filing of reports required under the Exchange Act; ii) the Company would agree not to repay the 2024 Debentures pursuant to the purported acceleration request sent
by the Trustee to the Company during the last six months of the forbearance period; iii) the indenture for the 2024 Debentures would be amended so that the conversion price of the 2024
Debentures would be decreased permanently from $3.92 per share of common stock to $2.546 per share of common stock, subject to further adjustment as set forth in the indenture; and iv) the
repurchase price with respect to the October 1, 2009, repurchase right was be increased from 100% to 113.76% of the principal amount of the 2024 Debentures to be purchased, plus accrued and
unpaid interest (the October 1, 2014 and October 1,

21

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2008

Note 5. Debt (Continued)

2019
repurchase rights would not be changed). The consents were received and the amendments became effective November 3, 2006.

In
accordance with SFAS No. 133,"Accounting for Derivative Instruments and Hedging Activities"("SFAS 133"), the change in
the repurchase price of the October 1, 2009 repurchase right created an embedded derivative (the "premium put") that must be bifurcated from the underlying debt instrument and valued as a
separate financial instrument. Any gain or loss on the fair value of the premium put is reflected in current earnings. The premium put was estimated to have no fair value as of September 30,
2008 and 2007, principally as a result of the Company's current credit-worthiness and lack of liquidity to satisfy the premium put. Regardless of the accounting valuation assigned to the premium put,
should the 2024 Debenture holders exercise their right and put their bonds to the Company on October 1, 2009, the Company will record an obligation for the total amount of the put at that date.

The
modification of the conversion feature discussed above resulted in an increase in the initial conversion rate to approximately 392,773 shares of common stock per $1,000 principal
amount of the 2024 Debentures from approximately 255,102 shares of common stock per $1,000 principal amount of the debenture. Upon conversion, the Company will have the option to deliver cash in lieu
of shares of its common stock or a combination of cash and shares of common stock. The Company may redeem the 2024 Debentures after October 1, 2007 if its stock price is at least 170% of the
conversion price, or approximately $4.32 per share, for 20 trading days within any consecutive 30-day trading period, and may also redeem the 2024 Debentures beginning October 1,
2009, without being subject to such condition. In addition, holders of the 2024 Debentures have the right to require the Company to repurchase the 2024 Debentures on October 1 of 2009, 2014,
and 2019. In accordance with the November 3, 2006 amendments to the 2024 Debentures, the October 1, 2009 repurchase right was increased from 100% to 113.76% of the principal amount of
the 2024 Debentures to be purchased. The increase in the repurchase right would result in an additional payment of $13.3 million on the $96.7 million outstanding 2024 Debentures. Holders
also have the option, subject to certain conditions, to require the Company to repurchase any 2024 Debentures held by such holder in the event of a fundamental change, at a price equal to 100% of the
principal amount of the 2024 Debentures plus accrued and unpaid interest plus, under certain circumstances, a make-whole premium. For the three months ended June 30, 2008 and 2007,
interest expense relating to the debentures was $0.4 million and $1.3 million, respectively. For the six months ended June 30, 2008 and 2007, interest
expense relating to the debentures was $0.7 million and $1.7 million, respectively. Outstanding 2024 Debentures were $96.7 million at June 30, 2008 and September 30,
2007.

In
May 2008, the FASB issued FSP APB 14-1,"Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including
Partial Cash Settlement)"("APB 14-1"). APB 14-1 will require us to separately account for the liability and equity components of a
convertible debt security by measuring the fair value of a similar nonconvertible debt security when interest cost is recognized in subsequent periods. APB 14-1 will require us to
retroactively separate the liability and equity components of such debt in our consolidated balance sheets on a fair value basis. APB 14-1 is applicable to our $96.7 million
2024 Debentures which allow for settlement in cash. APB 14-1 will be effective for fiscal years beginning after December 15, 2008, and we are required to adopt the FSP in our
first quarter of fiscal 2010. APB 14-1 does not permit early adoption. We are currently evaluating the impact that the adoption of APB 14-1 will have on our
consolidated financial statements.

22

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2008

Note 5. Debt (Continued)

On
September 30, 2007, other long-term debt consisted of a $52.0 million loan and approximately $8.0 million of paid-in-kind
interest with Tennenbaum Capital Partners ("TCP"). On October 29, 2007, the proceeds from the sale of the Storage Product assets, $62.8 million, and $15.0 million of new financing
were used to pay off the TCP loan including all accrued interest. The aggregate amount of the loan payoff to TCP was $76.0 million, of which approximately $16.4 million pertained to the
make-whole premium. A portion of the financing received from Whitebox VSC, Ltd. (discussed below) was used to retire the debt with TCP.

Concurrent
with the payoff of the TCP loan, we completed a $30.0 million financing with Whitebox VSC, Ltd ("Whitebox"), net of $0.8 million of debt discount. The
loan has a four-year term, with an option to borrow up to an additional $15.0 million. Unamortized debt discount as of June 30, 2008 was approximately $0.6 million. In
connection with securing the debt, the Company paid approximately $2.3 million in fees that are recorded as debt issuance costs in Other Assets. These fees are being amortized as interest
expense over the term of the loan. Unamortized debt issuance costs as of June 30, 2008 were approximately $1.9 million. The annual interest rate on the unpaid principal is the greater of
either 8.5% or LIBOR plus 4% during the interest period ending on the interest date. The loan is secured by substantially all of our assets. The Company and Whitebox also entered into a Senior
Unsecured Convertible Note Purchase Agreement that gives Whitebox the right, until the third anniversary of the initial funding, to purchase convertible notes in an aggregate principal amount of up to
$45.0 million, which we would use to repay amounts outstanding under the loan. These convertible notes, if issued, would be convertible into the common stock of Vitesse at a conversion price of
$2.00 per share, subject to adjustment. At June 30, 2008, the effective interest rate on the loan was 11.0959%. For the three months ended and nine months ended June 30, 2008, interest
expense was $0.6 million and $1.8 million, respectively. The agreement contains various restrictive covenants, including a requirement to provide copies of all financial and other
reports filed with the Securities and Exchange Commission.

Note 6. Income Taxes

The provision for income taxes as a percentage of income from continuing operations before income taxes was 16.6% for the three months ended June 30, 2008. The Company's effective
tax rate benefitted from the utilization of Net Operating Loss carryforwards and the reversal of the related valuation reserve previously recorded. The Company's tax expense related to discontinued
operations for the quarter ended June 30, 2008 was approximately $1.0 million.

At
October 1, 2007 the Company had net deferred tax assets of $470.4 million before valuation reserve. These deferred tax assets are primarily composed of federal and state
tax net operating loss ("NOL") carryforwards; timing differences relating to tangible and intangible assets recovery; and research and development credits. Due to uncertainties
surrounding the Company's ability to generate future taxable income, there is a full valuation allowance against the deferred tax assets.

Additionally,
there is potential that an ownership change could occur that would impair the usage of the NOL's and credits in future taxable periods. An ownership change
occurs whenever there is a shift in ownership by more than fifty percentage points by one or more five-percent shareholders within a three year period. Based on our current analysis of
shareholders we believe that an ownership change has not occurred. Accordingly, we have not presented any amounts as an uncertain tax position under

23

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2008

Note 6. Income Taxes (Continued)

FIN 48.
Any carryforwards that will expire prior to utilization will be removed from deferred tax assets with a corresponding reduction in the valuation allowance.

Effective
October 1, 2007, we adopted the provisions of FASB Interpretation No. 48, "Accounting for Uncertainty in Income TaxesAn
interpretation of SFAS No. 109 (FIN 48)". FIN 48
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. Due to significant
net operating loss, the cumulative effect of applying this interpretation has no impact in retained earnings.

The
total amount of gross unrecognized tax benefits was approximately $29.3 million as of October 1, 2007 and June 30, 2008. Included in the balance as of
June 30, 2008, there were no unrecognized tax benefits that, if recognized, would impact the effective tax rate.

A
reconciliation of the beginning and ending amount of unrecognized tax benefit is as follows:

Balance as of October 1, 2007

$
(29,297,000
)Gross increasestax positions in prior period


Gross decreasestax positions in prior period


Gross increasescurrent-period tax positions


Decreases relating to settlements


Reductions as a result of a lapse of statute of limitations


Balance as of June 30, 2008


(29,297,000
)


The
Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. As of June 30, 2008, there was no material interest or penalties
were accrued due to significant net operating loss.

The
Company is subject to taxation in the US and various state and foreign jurisdictions. The Company currently is under examination by the Internal Revenue Service for the tax years
ended September 30, 2004 through September 30, 2006. Effectively, all the Company's tax years in which a tax net operating loss is carried forward to the present are subject to
examination by the federal, state, and foreign tax authorities. Therefore, the Company cannot estimate the range of unrecognized tax benefits that may significant change within the next twelve months.

Note 7. Shareholders' Equity

Preferred Stock

The Company is authorized to issue up to 10,000,000 shares of nonvoting convertible preferred stock, with a par value of $0.01 per
share, of which 500,000 were reserved for issuance under the Rights Plan, described below, and none were outstanding as of December 31, 2007 and September 30, 2007.

Rights Plan

Vitesse has a shareholder rights plan intended to preserve the long-term value of Vitesse to our shareholders by
discouraging a hostile takeover. Under the shareholder rights plan, each outstanding share of our common stock has an associated preferred stock purchase right. The rights are exercisable only if a
person or group acquires 15% or more of our outstanding common stock. If the rights become

24

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2008

Note 7. Shareholders' Equity (Continued)

exercisable,
the rights would allow their holders (other than the acquiring person or group) to purchase fractional shares of our preferred stock, to purchase the number of shares of common stock of
Vitesse having a market value of twice the exercise price of the right, or to purchase the number of shares of common stock of the company acquiring us having a market value of twice the exercise
price of the right. The dilutive effect of the rights on the acquiring person or group is intended to encourage such
person or group to negotiate with our Board of Directors prior to attempting a takeover. If our Board of Directors believes a proposed acquisition of Vitesse is in the best interests of Vitesse and
its shareholders, our Board of Directors may amend the shareowner rights plan or redeem the rights for a nominal amount in order to permit the acquisition to be completed without interference from the
plan.

Common Stock

The Company is authorized to issue up to 500,000,000 shares of common stock, with a par value of $0.01 per share, of which 223,555,580
shares were outstanding as of June 30, 2008 and September 30, 2007.

Share-based Compensation Plans

The Company has in effect several share-based plans under which non-qualified and incentive stock options have been granted
to employees, consultants, and outside directors. Options generally vest over four years and have contractual lives of 10 years.

On
January 23, 2001, the Company's shareholders approved the adoption of the 2001 Plan, which replaced the 1991 Plan that expired in August 2001 and the 1991 Directors' Stock
Option Plan that expired in January 2002. Pursuant to the 2001 Plan, the number of shares reserved for issuance automatically increases by a number of shares equal to the lesser of: (i) 4% of
the Company's common stock outstanding at the end of each fiscal year and (ii) 17.5 million shares. Under all stock option plans, a total of 83,074,606 shares of common stock have been
reserved for issuance and 59,293,700 shares remained available for future grants as of June 30, 2008.

The
following tables summarize compensation costs related to the Company's share-based compensation plans (in thousands) for the period ended June 30:

Three Months Ended June 30,2008

2007Cost of revenues

$
203

$
322Research and development


282


564Selling, general and administrative


362


517Share-based compensation expense related to continuing operations


847


1,403Share-based compensation expense related to discontinued operations





326Total share-based compensation expense

$
847

$
1,729


25

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2008

Note 7. Shareholders' Equity (Continued)



Nine Months Ended June 30,2008

2007Cost of revenues

$
690

$
965Research and development


1,016


1,854Selling, general and administrative


1,685


1,928Share-based compensation expense related to continuing operations


3,391


4,747Share-based compensation expense related to discontinued operations


(284
)

1,088Total share-based compensation expense

$
3,107

$
5,835


In
addition to the share-based compensation expense related to the Company's plans, we recorded $176,000 of share-based compensation expense in the second quarter of 2007 related to
warrants issued to Alvarez & Marsal to purchase 150,000 shares of common stock. This amount is included in the accrued liability section of the balance sheet.

Note 8. Legal Proceedings

We and certain current or former directors and officers of Vitesse were named in multiple shareholder derivative and securities class actions. These actions were filed starting in April
2006 and are based on allegations of stock option backdating and accounting manipulations. We also have received a grand jury subpoena from the United States Attorney's Office and have been notified
that the SEC is conducting an investigation of Vitesse.

The Derivative and Securities Class Actions

On April 7, 2008, the District Court approved the settlement in the consolidated securities class actions filed against Vitesse
and certain current or former directors and officers of Vitesse alleging violations of §§10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated
thereunder on behalf of a class of purchasers of Vitesse common stock. The settlement of the consolidated securities class actions included a cash payment to the settlement fund of
$10.2 million: $8.75 million to be paid by Vitesse's directors' and officers' liability insurers and a total of $1.45 million to be paid by Louis R. Tomasetta and
Eugene F. Hovanec, two of the former executives of Vitesse. The same two former executives also will contributed all shares of Vitesse common stock that they own, totaling 1,272,669 shares. In
addition, on September 22, 2008, Vitesse contributed 2,650,000 shares with a fair market value of $2.4 million representing the fair market value of the shares on April 7, 2008 of
Vitesse common stock, but no cash, to the settlement fund.

On
August 11, 2008, the Court granted final approval of settlements in the federal and state derivative actions filed on behalf of Vitesse against certain current or former
directors and officers of Vitesse, and nominally against Vitesse alleging claims for breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets, unjust enrichment,
constructive trust, rescission, accounting manipulations, and violations of California Corporations Code §§25402 and 25403. As part of the settlement of the federal and state
derivative actions, three former executives of Vitesse, Messrs. Tomasetta, Hovanec, and Mody, released the Company from all rights to future indemnification

26

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2008

Note 8. Legal Proceedings (Continued)

and
costs of defense in the related SEC and Department of Justice investigations. Vitesse retains the right to continue its state court action against KPMG, LLP, its former independent registered
public accounting firm. Vitesse has also contributed 4,700,000 shares of Vitesse common stock, with a fair market value of $4.2 million to cover the attorneys' fees and expenses of the
derivative plaintiffs' counsel, and has adopted certain Corporate Governance measures. The Court entered final judgment implementing all of the above referenced terms and the case is concluded in all
respects, except that the Court referred to a retired Federal District Court Judge (serving as a "Special Master") the sole issue of determining whether the derivative plaintiffs' counsel are entitled
to the full 4,700,000 shares as their legal fees.

The
Corporate Governance measures include implementing certain policies, procedures, and guidelines relating to stock option grants and compensation decisions, incorporating greater
shareholder participation in the procedures for nominating independent directors, adopting additional standards of director independence, adding a "lead independent director," and incorporating
additional accounting policies, procedures, and guidelines to be incorporated as part of these measures.

In
addition, under the final and proposed agreements, the Company and certain current and former officers and Directors of the Company who were named as defendants were dismissed from
the lawsuits and have obtained releases from the class and derivative plaintiffs.

The Dupuy Action

On April 10, 2007, an individual shareholder of Vitesse, Jamison John Dupuy, filed a complaint in the Superior Court of
California, County of Ventura, against Vitesse and three of its former officers (Case No. CIV 247776). Mr. Dupuy's complaint included causes of action for fraud, deceit and concealment, and
violation of California Corporations Code §§ 25400 et seq. Vitesse filed an answer, asserting numerous affirmative defenses. On March 3, 2008, Mr. Dupuy
filed an amended complaint that named six new defendants, all former employees, and included new causes of action for negligent misrepresentation and violations of California Corporations Code
§ 1507. On April 4, 2008, after mediation before a retired United States District Judge for the Central District of California, the parties entered into a confidential
settlement agreement and the plaintiff filed a dismissal of the action. The Company has recorded a liability for this settlement and the related expense is reflected in the accompanying financial
statements.

Notification of Default under Indenture relating to Subordinated Debentures

On August 15, 2006, the Company received notification from the Trustee under the Indenture relating to the Company's 1.5%
Convertible Subordinated Debentures due 2024 alleging compliance deficiencies under the Indenture relating to the Company's failure to file, with the Securities and Exchange Commission and the
Trustee, the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2006. The Trustee issued the Company a Notice of Default and Attempted to accelerate
payment on the Debentures. Although the Company did not believe there were compliance deficiencies under the Indenture, and that an Event of Default did not occur, the Company negotiated a resolution
to the dispute with the holders of a majority of the Debentures that, among other things, rescinded and annulled the previous asserted acceleration of the Debentures and asserted Events of Default.
The Company entered into a Second Supplemental Indenture that increased the interest payable on October 1, 2007 by $20.00 per $1,000 principal amount of the Debentures.

27

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2008

Note 8. Legal Proceedings (Continued)

The DOJ Subpoena and SEC Investigation

In May 2006, we received a grand jury subpoena from the office of the United States Attorney for the Southern District of New York
requesting documents from 1999 through the present. We have also been notified by the Division of Enforcement of the SEC that it is conducting an investigation of Vitesse. The Division of Enforcement
has requested documents from January 1, 1995, through the present. Vitesse has cooperated with both government agencies in their investigations, which are still on-going.

KPMG Lawsuit

On June 13, 2007, we filed a lawsuit in the Superior Court for the County of Los Angeles against our former independent
registered public accounting firm KPMG, LLP ("KPMG") alleging KPMG failed to properly provide auditing and other services during the time period 1994 to 2000. The Complaint seeks damages in
excess of $100 million resulting from KPMG's audit failures. As of the date of filing this Annual Report, the case is pending.

Potential Payroll Tax Liabilities Related to Backdating of Stock Options

As of June 30, 2008, we have accrued a $1.9 million liability for payroll taxes, penalties and interest related to
exercises of backdated stock options during the calendar years 2004 through 2006. During this period, certain non-qualified stock options were improperly classified and treated as
incentive stock options for tax purposes. On October 5, 2007, we informed the Internal Revenue Service ("IRS") of these potential payroll tax liabilities resulting from changes in measurement
dates for stock options. No formal settlement negotiations have taken place, however we have received requests from the IRS for information relating to the potential payroll tax liabilities that were
identified as a result of our stock-option review. We are working with the IRS to provide the requested information in an effort to settle these potential liabilities.

28

---





Table of Contents

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

Cautionary Statement

You should read the following discussion and analysis in conjunction with our Unaudited Consolidated Financial
Statements and the related Notes thereto contained in Part I, Item 1 of this Report. The information contained in this Quarterly Report on Form 10-Q is not a complete
description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this Report and in our
Annual Report on Form 10-K for the year ended September 30, 2007, which discusses our business in greater detail, filed with the Securities and Exchange Commission, or
SEC.

The section entitled "Risk Factors" contained in Part II, Item 1A of this Report, and similar discussions in our other SEC filings, describe some of
the important risk factors that may affect our business, financial condition, results of operations and/or liquidity. You should carefully consider those risks, in addition to the other information in
this Report and in our other filings with the SEC, before deciding to purchase, hold or sell our common stock.

This Quarterly Report contains forward-looking statements that involve risks and uncertainties. We use words such as "anticipates", "believes", "plans",
"expects", "future", "intends", "may", "should", "estimates", "predicts", "potential", "continue", "becoming", "transitioning" and similar expressions to identify such forward-looking statements. Our
forward-looking statements include statements as to our business outlook, revenues, margins, expenses, tax provision, capital resources sufficiency, capital expenditures, interest income, cash
commitments and expenses. Forward-looking statements are not guarantees of future performance and the Company's actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in the subsection entitled "Risk Factors" under Part I, Item 1A of
this Annual Report. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.

Overview

Over the last ten years, the proliferation of the Internet and the rapid growth in the volume of data being sent over Local Area
Network ("LANs") and Wide Area Network ("WANs") has placed a tremendous strain on the existing communications infrastructure. Communication service providers have sought to increase their revenues by
delivering a growing range of data services to their customers in a cost-effective manner. The resulting demand for increased bandwidth and services has created a need for faster, larger,
and more complex networks. Additionally, due to increasing needs for moving, managing, and storing mission-critical data, the market for storage equipment has been growing significantly.

We
are a leading supplier of high-performance ICs principally targeted at systems manufacturers in the communications and storage industries. Within the communications
industry, our products address Carrier and Enterprise networking, where they enable data to be transmitted at high-speeds and processed and switched under a variety of protocols. In
Storage, our products address primarily enterprise class storage systems and blade-servers using Fibre Channel and Serial Attached SCSI ("SAS")/ Serial Attached ATA ("SATA") protocols. Our customers
include leading communications and storage OEMs.

In
recent years, we have focused our product development and marketing efforts on products that leverage the convergence of Carrier and Enterprise Networking onto IP-based
networks. These Next-Generation Networks share the requirements of high reliability, scalability, interoperability, and low cost. Increasingly, these networks will be delivered based on
Ethernet technology. We believe that

29

---



Table of Contents

products
in this emerging technology area represent the best opportunity for us to provide differentiation in the market.

Options Backdating and Accounting Irregularities

Chronology of Events

The following is a chronological listing of events that have occurred since April 2006, including, but not limited to, activities
related to errors and irregularities in the disclosure of, and accounting for, stock options granted by the Company to its employees and the Board.

April 2006

Vitesse's Board of Directors appointed a Special Committee of independent directors to conduct an internal investigation relating to past stock option grants, the timing of such grants, and related accounting and
documentation for stock option grants from January 1, 2005 to April 2006. The results of this review are discussed below at "The Special CommitteeFindings and Recommended Actions."Due to their involvement with the stock option grant process, the Board of Directors placed Louis R. Tomasetta, Chief Executive Officer, Eugene F. Hovanec, Executive Vice President and former Chief Financial Officer,
and Yatin Mody, Chief Financial Officer and former Controller, on administrative leave, ultimately terminating them in May of 2006.The Board of Directors determined that the following should not be relied upon:

Vitesse's previously reported financial statements for the three months ended December 31, 2005, and the three years ended September 30, 2005, and possibly earlier periods;

The Management Report on Internal Control over Financial Reporting as of September 30, 2005, which was included in the Company's Annual Report on Form 10-K for the year ended September 30, 2005;
and

The Auditor's Report of KPMG, LLP, the Company's former independent registered public accounting firm, relating to the effectiveness of the Company's internal controls over financial reporting and management's
assessment thereof as of September 30, 2005, which was included in the Company's Annual Report on Form 10-K for the year ended September 30, 2005.May 2006

Vitesse received a grand jury subpoena from the office of the United States Attorney for the Southern District of New York requesting documents from 1999 through the present relating to the granting of stock
options.Vitesse received notification from the SEC's Division of Enforcement that it was conducting an investigation of Vitesse. That notification included a request for documents relating to stock options granted from
January 1, 1995 through the date of the request.June 2006

Vitesse received a letter from the Trustee under the Indenture for Vitesse's 1.5% Convertible Subordinated Debentures due 2024 ("2024 Debentures") alleging that absent a cure, an event of default would occur within
60 days as a result of Vitesse's failure to file its Quarterly Report on Form 10-Q for the quarter ended March 31, 2006.


30

---



Table of Contents

Vitesse's common stock was delisted from the NASDAQ National Market, due to the length of time that would be necessary for Vitesse to become fully compliant with applicable listing requirements.August 2006

Vitesse received an acceleration notice from the Trustee under the Indenture for $96.7 million. Negotiations to resolve the dispute continued with a majority of the holders of the 2024 Debentures, who agreed to
instruct the Trustee to forbear from taking any further action with respect to the 2024 Debentures for a period of 14 days.September 2006

We completed a Consent Solicitation with respect to the 2024 Debentures. In the Consent Solicitation, the holders of a majority of the 2024 Debentures consented to amendments to the Indenture governing the 2024
Debentures that:

Rescinded and annulled the previous asserted acceleration of the 2024 Debentures and any Events of Default asserted in connection with that asserted acceleration;

Provided that our failure to file required reports with the SEC would not be a Default or Event of Default under the Indenture prior to the earlier of (A) the date on which we have filed all our required reports
with the SEC for a period of 12 consecutive months and (B) December 31, 2012; and

Increased the interest payable at the October 1, 2007, interest payment date by $20.00 per $1,000 principal amount of the 2024 Debentures.November 2006

We completed a second Consent Solicitation of the holders of Vitesse's 2024 Debentures resulting in the following:

The holders of the Debentures and the Trustee under the Indenture agreed that, for 18 months after effectiveness of the amendments the Trustee would forbear from taking any action to exercise any rights or
remedies that relate to the filing of reports required under the Exchange Act;

The Company agreed not to repay the Debentures pursuant to the purported acceleration request sent by the Trustee to the Company during the last six months of the forbearance period;

The Company and the holders of the Debentures agreed to amend the Indenture to decrease the conversion price of the Debentures permanently from $3.92 per share of Vitesse's common stock to $2.546 per share of
Vitesse's common stock, subject to further adjustment as set forth in the Indenture; and

The Company agreed to increase the repurchase price with respect to the October 1, 2009, repurchase right from 100% to 113.76% of the principal amount of the Debentures to be purchased, plus accrued and unpaid
interest (the October 1, 2014 and October 1, 2019 repurchase rights would not be changed).December 2006

The Company announced that the Special Committee had completed its review and presented details of its finding in a Financial Release and Form 8-K filing. These results are discussed in detail below under "The
Special CommitteeFindings and Recommended Actions."June 2007

The Board of Directors engaged BDO Seidman, LLP as Vitesse's independent registered public accountants.Vitesse sued KPMG, LLP for malpractice, seeking damages in excess of $100 million.


31

---



Table of Contents

July 2007

The Board of Directors announced a new policy for soliciting recommendations from shareholders to identify director candidates and the Company reiterated that it was precluded by SEC regulations from calling an annual
meeting of shareholders to elect directors until it could comply with the federal proxy rules that require the Company to provide audited financial statements to its shareholders prior to such a meeting.October 2007

Vitesse entered into a proposed settlement of all federal securities class action claims that were filed against the Company and all related federal and state shareholder derivative actions relating to allegations of
stock option backdating and accounting manipulations. The proposed settlement is discussed in more detail under "Legal Proceedings".April 2008

The District Court approved the settlement of the consolidated securities class actions filed against Vitesse and certain current or former directors and officers of Vitesse alleging violations of §§10(b) and
20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder on behalf of a class of purchasers of Vitesse common stock. The settlement is discussed in more detail under "Legal Proceedings."August 2008

The District Court granted final approval of settlements in the federal and state derivative actions filed on behalf of Vitesse against certain current or former directors and officers of Vitesse, and nominally against
Vitesse alleging breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets, unjust enrichment, constructive trust, rescission, accounting manipulations, and violations of California Corporations Code §§25402
and 25403. The settlement is discussed in more detail under "Legal Proceedings."September 2008

Vitesse completed and filed its Annual Report on Form 10-K containing audited financial statements for the years ending September 30, 2006 and 2007.December 2008

Vitesse completed and filed its periodic reports on Form 10-Q for the periods ended December 31, 2007, March 31, 2008 and June 30, 2008 and its annual report on Form 10-K for the fiscal year
ended September 30, 2008.


The Special CommitteeFindings and Recommended Actions

In December 2006, the Special Committee completed its investigation and released its report to the public in a Financial Release and
Form 8-K. The Special Committee found that members of prior management utilized improper accounting practices primarily related to revenue recognition and inventory, and prepared or
altered financial records. Based on the review of the Special Committee, our management determined that it would likely be unable to prepare and publish audited financial statements for its fiscal
years ended September 30, 2005 and prior periods, but would be able to do so for periods, thereafter, upon reconstruction of the beginning account balances for the year ended
September 30, 2006. The Special Committee's findings are discussed in more detail below.

Stock Options

The Special Committee found that:



32

---



Table of Contents



The
Special Committee did not find any evidence that members of the Board of Directors, other than Mr. Tomasetta, the Compensation Committee, or remaining members of senior
management were aware of improper practices related to stock options. The Special Committee also did not find evidence that members of the Board of Directors, other than Mr. Tomasetta, profited
from such practices, although, the Special Committee did identify a single option grant to members of the Board of Directors in 1996, which appeared to be inadvertent, that had the effect of
increasing the profit to some members of the Board of Directors upon exercise by approximately $18,000 each. In December 2006, all of the members of the Board of Directors who received the 1996 grant,
other than Mr. Tomasetta, voluntarily agreed to remit such amount to the Company. Finally, the Special Committee instructed management to finalize a review of all stock options granted from the
inception of the Company's issuance of options and the related historical measurement dates to determine the appropriate amount to be reflected as a restatement of accumulated deficit.

All
members of the senior management team that were found to have been involved in the backdating and document integrity issues are no longer with the Company and included Louis R.
Tomasetta, the Company's former Chief Executive Officer, Yatin Mody, the Company's former Chief Financial Officer, and Eugene F. Hovanec, the Company's former Executive Vice President.

Revenue Recognition and Inventory

As part of its investigation into the Company's option practices, the Special Committee found evidence of the following improper
accounting practices:



Moreover,
the Special Committee found evidence that certain officers and employees prepared and altered documents and our financial records in an attempt to conceal some of these
practices from our Board of Directors and our then independent public accountants, KPMG, LLP. All of the employees

33

---



Table of Contents

identified
by the Special Committee as having been aware of, and involved with, these accounting issues are no longer employed by us. In addition, in its report the Special Committee directed
management to undertake the necessary steps to remediate the shortcomings in its accounting environment.

Review of All Options Issued by the Company through September 30, 2007

At the direction of the Special Committee and, subsequently, the Audit Committee, the Company's new senior management team, assisted by
its consultants, undertook a comprehensive review of every option issued by the Company from its initial option issuance in 1987 through the year ended September 30, 2007 ("Options Grant
Period"). During the Options Grant Period the Company granted stock options pursuant to employee stock option plans and director stock option plans to acquire approximately 146.1 million shares
of Vitesse common stock. Such plans at all relevant times provided for option grants to be approved by the Board of Directors, a designated committee of non-employee directors, or in the
case of the director stock option plans,
by the Board of Directors. Approximately 14,680 stock option grants were awarded during the Options Grant Period with 566 recorded grant dates. The Company reviewed all stock options granted during
the Options Grant Period, including option grants to the Company's directors, officers, and employees (including grants to new employees, grants awarded in connection with Company acquisitions, and
grants made as individual or group performance awards). The Company's review of the prior stock option granting practices included a comprehensive examination of available relevant physical and
electronic documents as well as interviews with relevant personnel.

The
Company's review focused on determining the amount of accounting charges and extent of adjustment to periods prior to September 30, 2005 that would be required
to:



Due
to its review, the Company identified approximately $268.8 million of unrecorded additional compensation related expenses. This unrecorded additional compensation related
expense was due to the difference between the fair market value of the common stock on the appropriate measurement date and the stated exercise price as well as modifications made to the original
grants during the Option Grant Period. This was reflected as an adjustment to the beginning accumulated deficit balance as of October 1, 2005.

The
Company's additional key option-related findings are summarized below.

Pre-IPO Stock Option Grant Findings

Fair market value strike prices were supported by insufficient anecdotal evidence. As part of the review, the Company employed two
different methodologies in estimating the fair market value of the Company's common stock on the grant dates including: (i) analysis of
pre-IPO financing; and (ii) analysis of competitors (industry multiples analysis). Other errors noted included apparent clerical errors in recording grant dates.

Inappropriate Accounting for Grant Modifications

Several grant agreements were modified by the Company. These modifications involved regrants, rehires, repricings, grants to
non-employees, extensions of exercise windows, accelerated vestings, and changes in status. The modifications triggered variable accounting; however, such accounting treatment was not
applied by the Company at the time of the modification. The effects of these modifications

34

---



Table of Contents

were
included in the Company's restated accumulated deficit amount at the beginning of the year ended September 30, 2006. Modifications of grants were accounted for using variable accounting in
preparation of restated balances used in preparation of the financial statements for the years ended September 30, 2007 and 2006.

Inappropriate Reflection of the Measurement Date and Option Pricing

Several grants were found to have measurement dates that differed from the grant date reflected in the Company's accounting records as
determined under APB 25,"Accounting for Stock Issued to Employees."In many cases, the difference between the grant date and the measurement
date resulted in increased intrinsic value for the grants that was not recognized and recorded by the Company at the time of the grant. The granting of options with exercise prices that were lower
than the fair market value of the stock on the actual measurement dates did not satisfy the fair market pricing requirement in the Company's stock option plans and was inconsistent with the Company's
disclosures in its SEC filings, which stated that in all cases the exercise price of Company options would be equal to the fair market value of the stock on the date of the grant.

The
relationship between the stated exercise price of options and the fair market value of the Company's stock on the date of the identifiable approval actions varied from grant to
grant. In some cases, the exercise price of grants reflected the fair market value of the underlying shares on the date of any documented approval action. In other cases, the exercise prices reflected
the fair market value of the underlying shares on a date either prior or subsequent to any such documented approval action and the exercise price was lower than the fair market value on the date of
any such action. In some cases, the use of such grant dates, lower exercise price, and other available evidence supported a
finding that the recorded grant dates and corresponding exercise prices were selected with the benefit of hindsight.

Grant Approvals

During the Company's review of option grants, many option grants were found to have not been approved in complete compliance with the
Company's stock option plans. The Company found some instances where there was no formal evidence of approval of option grants or modifications by the Board of Directors or Compensation Committee that
was called for under applicable Company policy. The Company also noted that there were instances where option agreements were signed without being dated by either the Company's management or the
individual receiving the grant or there were other inadequacies in documentation to reflect adequate formal approval. As part of its review, the Company obtained evidence to support approval where
there were shortfalls in formalized documentation.

Internal Controls

As noted above, the Company's historical administration of its options program demonstrated certain shortfalls relating to proper
adherence to plan requirements, corporate recordkeeping, documentation, and proper accounting treatment for transactions. The Company has implemented, and is in the process of implementing, procedures
and controls to strengthen the Company's controls relating to its recording and reporting of stock option transactions.

Restatement Methodologies

As of October 1, 2005, the Company adopted Statement on Financial Accounting Standards ("SFAS") 123(R), "Share-Based Payment,"using
the modified-prospective-transition method. Under this transition method, compensation expense is to be recognized for all
share-based compensation awards granted following the date of adoption as well as for all unvested awards existing on the date of adoption. Prior to October 1, 2005, the Company accounted for
share-based compensation awards using

35

---



Table of Contents

the
intrinsic method in accordance with APB 25, as allowed under SFAS 123,"Accounting for Stock-Based Compensation"("SFAS 123").
Under the intrinsic value method, no share-based compensation expense is recognized if the exercise price of the stock option was at least equal to the fair market value of the common stock on the
"measurement date." APB 25 defines the measurement date as the first date on which both the number of shares that an individual grant recipient is entitled to receive and the option or purchase
price, if any, are known.

In
light of the findings of the Special Committee and analysis performed by the Company, the Company determined that historic measurement dates could not be relied upon and that it was
necessary for the Company to remeasure all stock option awards and record the relevant charges in accordance with APB 25. In doing so, the Company utilized or considered several sources of
information including, but not limited to: (i) meeting minutes of the Board and committees thereof as well as related materials; (ii) the dates on which stock option grants were entered
into the Company's stock option database; (iii) other correspondence reflecting grant approval actions; and (iv) individual stock option agreements and related materials.

As
a result of the problems identified above, the Company undertook a project with the help of its consultants to reflect the appropriate measurement dates and related fair market value
information in its accounting records. As a result of this analysis, the Company recognized an additional $268.8 million in compensation related expenses, before taxes, related to fiscal years
prior to and including the year ended September 30, 2005. In addition to the compensation expense resulting from the correction of option measurement dates, the Company recognized expense for
payroll taxes, interest, and penalties related to the historical underreporting of employees' gains on the exercise of misdated options. It is the Company's intent to pay the employee payroll taxes
and related interest and penalties resulting from the misdating of stock options. Accordingly, the Company has recorded an additional expense and related liability for these amounts, totaling
$1.6 million through September 30, 2005. These amounts are reflected in the financial statements for the year ended September 30, 2006 as an adjustment to beginning retained
earnings.

As
a result of the investigation as described above, we recorded an additional charge for cumulative compensation expense of approximately $268.8 million to our accumulated
deficit balance as of
October 1, 2005. Total cumulative expense for share-based compensation, including originally recorded compensation expense was $320.7 million through September 30, 2005.

Remedial Actions of the Company

The Company's management, Board of Directors, Audit Committee, and other relevant governing committees and bodies are committed to the
ongoing review, implementation, and enhancement of the Company's procedures and controls as a result of the aforementioned findings. The Company is currently continuing its assessment of a wide range
of possible procedural enhancements and remedial actions as a result of the findings of the Special Committee, the Company's consultants, and current management.

While
the Company has not completed its considerations for all such actions, procedural improvements and enhancements include but are not limited to the
following:



36

---



Table of Contents



We
have incurred substantial expenses for legal, accounting, tax, and other professional services in connection with the Special Committee investigation and related findings, the
Company's internal review of historical financial statements, internal and external investigations and inquiries, related litigation, and renegotiations of our debt arrangements due to violations of
our covenants and other filing requirements. These expenses totaled $2.1 million and $8.9 million for the three and nine months ended June 30, 2008, respectively.

Our Business Product Lines

Beginning in 2008, Vitesse generated revenues from three markets: Carrier Networking, Enterprise Networking, and Non-Core.
These revenue streams reflect the major trends in our product lines and how they map into our customer base.

Carrier Networking

The telecommunications Carrier network, which includes networks delivering voice and data services, has grown dramatically to a complex
combination of networks. These networks are often

37

---



Table of Contents

classified
into groups such as WANs Metropolitan Area Networks ("MANs"), Multi-Service Access Networks ("MSANs"), and Radio Access Networks ("RANs"). Each of these types of networks has their own set
of technical and operational challenges. These evolving networks must deliver more bandwidth and provide increasing data-based capabilities to provide "quadruple play" services that
integrate voice, data, and video traffic over both wired and wireless networks. To address this problem, Carriers are increasingly trying to map Ethernet services and connectivity more efficiently
into their existing networks. They may even replace their legacy network with new all-IP/Ethernet-based networks. Broadly, Ethernet technology upgraded to meet these requirements is being
referred to as "Carrier Ethernet." It is, in effect, an adaptation of Ethernet to provide the same features and functions that have traditionally been provided by "telecom" protocols such as
Synchronous Optical Network ("SONET/SDH"), Plesiochronous Digital Hierarchy ("PDH"), etc. Because of the complexity of the Carrier networks, products sold into these applications have long design
cycles, typically two to four years from design start to production, and long life cycles, typically five to ten years or more.

Vitesse
provides a variety of products into Carrier networking applications. These generally include: (i) Ethernet-over-SONET mappers, SONET framers and
switches; (ii) Optoelectronic physical media devices ("PMDs") and physical layer devices ("PHYs") such as transceivers and Clock and Data Recovery ("CDRs"); (iii) Signal Integrity
Products including backplane transceivers, CDRs, and crosspoints switches; (iv) Ethernet Media access controllers ("Maces") and switches; (v) GbE Cu PHYs; and
(vi) Next-Generation Optical Transport Network ("OTN") mappers.

Enterprise Networking

Enterprise Networks generally include equipment dedicated to the communication of voice and data services within large enterprise
organizations. An Enterprise Network will typically be comprised of one or more LANs, computer systems including workstations and servers, as well as one or more Service Access Networks ("SANs").
Enterprise Networks will also typically include broadband connections to Carrier Networks for the broader communication of voice and/or data outside of the enterprise. Enterprise Networks are often
classified into groups depending on their size and complexity. Typical categories are large Enterprise, data center switching, small-medium enterprise ("SME"), Small Medium Business ("SMB"), and small
office home office ("SOHO"). Similar to Carrier Networks, Enterprise Networks are going through an evolution to provide more bandwidth, (i.e. more data at higher speeds) and more reliability,
interoperability, and scalability. Ethernet-based networks, which are already widely deployed in LANs,are becoming more prevalent in other enterprise applications such as data center switching and
SANs. Enterprises are paring down their multiple networks (telephone, LAN, video conferencing, wireless, and remote mirroring/backup) to a common switched IP/Ethernet-based infrastructure. Ethernet
technology that is being upgraded to meet these new requirements is generally referred to as "Converged Enhanced Ethernet." In addition, Enterprise Networks are migrating from fast 100 Mbps Ethernet
to Gigabit Ethernet and from Gigabit Ethernet to 10 Gigabit Ethernet. This transition is still in the early stages and expected to accelerate over the next several years. The complexities of products
within the Enterprise Networks varies dramatically based on the product application. Products at the "low-end" of the network, in SOHO, SME, and low-end SME applications
typically have fast design cycles on the order of six to 12 months and short life cycles, on the order of two to four years.

Products
sold into applications at the "high-end" of Enterprise such as data center switching and high-end SME have longer design cycles, typically one to two
years from design start to production and long life cycles, typically three to five years or more. Vitesse provides a variety of products into Enterprise Networking applications. These generally
include: (i) Ethernet MACs, switches, and routers; (ii) GbE Cu PHYs; (iii) Integrated Cu PHY and switch products; and (iv) Signal Integrity products including backplane
transceivers, CDRs, and crosspoint switches.

38

---



Table of Contents

Non-Core

Products that do not substantially sell into the Carrier or Enterprise Networking markets or require little or no current or future
investment have been classified as Non-Core products. Today, these products include legacy products from our Fibre Channel storage products line, our Raid-on-Chip
processor line, our network processor product line, and our packet-based fabric switch product line.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of net revenue and expenses during the reporting period. We
regularly evaluate our estimates and assumptions related to revenue recognition, allowance for doubtful accounts, sales returns, inventory valuation, goodwill and purchased intangible asset
valuations, share-based compensation expense, and income taxes. We base our estimates and assumptions on current facts, historical experience, and on various other factors that we believe to be
reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenues, costs, and expenses that
are not apparent from other sources. The actual results experienced by us may differ materially and adversely from our estimates. To the extent there are material differences between our estimates and
the actual results, our future results of operations will be affected.

We
believe the following are either: (i) critical accounting policies that require us to make significant judgments and estimates in the preparation of our consolidated financial
statements; or (ii) other key accounting policies that generally do not require us to make estimates or judgments but may be difficult or subjective.

Revenue Recognition, Sales Returns Reserve and Allowance for Doubtful Accounts

In accordance with SEC SAB No. 101,"Revenue Recognition in Financial
Statements", as well as SAB No. 104,"Revenue Recognition",we recognize product revenue when the following fundamental
criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has
occurred; (iii) the price to the customer is fixed or determinable; and (iv) collection of the sales price is reasonably assured. Delivery occurs when goods are shipped and title and
risk of loss transfer to the customer, in accordance with the terms specified in the arrangement with the customer. Revenue recognition is deferred in all instances where the earnings process is
incomplete. With a few minor exceptions, we recognize revenue on goods shipped directly to customers at the time of shipping, as that is when title passes to the customer and all revenue recognition
criteria specified above are met.

Vitesse
has a distribution network through which it sells most of its products. The Company recognizes revenue on a sell-through basis for all distributors, utilizing
information provided by the distributors. These distributors maintain inventory balances, which are carried on the books of Vitesse, and are given business terms to return a portion of inventory and
receive credits for changes in selling prices to end customers. At the time Vitesse ships inventory to the distributors, the magnitude of future returns and price adjustments is not known. Therefore,
revenue recognition for shipments to distributors does not occur until the distributors sell inventory to end customers and is therefore shown as deferred revenue. Vitesse personnel are often involved
with the sales from the distributors to end customers.

Revenues
from development contracts are recognized upon attainment of specific milestones established under customer contracts. Revenues from products deliverable under development
contracts, including design tools and prototype products, are recognized upon delivery. Costs related to development contracts are expensed as incurred.

39

---



Table of Contents

We record a reserve for estimated sales returns and allowances in the same period as the related revenues are recognized. Sales returns typically occur for
quality related issues and allowances are based on specific criteria such as rebate agreements. We base these estimates on our historical experience or the specific identification of an event
necessitating a reserve. To the extent actual sales returns or allowances differ from our estimates, our future results of operations may be affected.

We
also maintain an allowance for doubtful accounts for estimated losses resulting from customers' inability to meet their financial obligations to us. We evaluate the collectability of
accounts receivable based on a combination of factors. Management reviews accounts receivable on a monthly basis to determine if any receivables will potentially be uncollected. The Company includes
any accounts receivable balances that are determined to be uncollectible in the overall allowance for doubtful accounts using the specific identification method. After all attempts to collect a
receivable have failed, the receivable is written off against the allowance. Management believes the allowance for doubtful accounts as of June 30, 2008 and September 30, 2007, is
adequate. However, if the financial condition of any customer were to deteriorate, resulting in an impairment of its ability to make payments, additional allowances could be required.

On
December 28, 2007, the Company entered into an arrangement to license intellectual property to a third-party. The contract is a perpetual, nonexclusive,
non-transferable, irrevocable license for specified intellectual property. As part of the contract, we were granted a perpetual, nonexclusive, non-transferable, irrevocable
license to improvements to the technology made by the licensee, subject to certain limitations. Under the agreement, Vitesse will receive
$15.0 million in license fees plus royalties for the rights to certain products and technology. Of the fees and royalty payments, $10.0 million were received upon delivery and acceptance
of the licensed technology. The remaining $5.0 million will be received upon the earlier of licensee's first commercial sale using the intellectual property or the one-year
anniversary of the agreement. For a period of seven years from the effective date of the contract, licensee will pay royalties on a per unit basis, on each commercial sale incorporating the licensed
products. Royalties will be accounted for when received.

In
accordance with Staff Accounting Bulletin No. 104, "Selected Revenue Recognition Issues" ("SAB 104"), in the licensing of
technology and other intangibles, delivery does not occur for revenue recognition purposes until the license term begins. Revenues should be recognized in a manner consistent with the nature of the
transaction and related earnings process. Based on management's analysis of the license terms, and pursuant to the guidance in SAB 104, revenue related to the licensing of the intellectual
property was deferred until final acceptance of the contracted deliverables were received from the licensee. Confirmation of the deliverables was received in September 2008 and we recognized
$10.0 million in revenue. In addition to the license fees discussed above, we expect to develop a royalty stream as a result of this contract.

Inventory Valuation

Inventories are stated at the lower of cost or market (net realizable value). Costs associated with the development of a new product
are charged to engineering, research and development expense as incurred, until the product is proven through testing and acceptance by the customer. At each balance sheet date, the Company evaluates
its ending inventory for excess quantities and obsolescence. This evaluation includes analyses of sales levels by product and projections of future demand.

We
write down our inventory for estimated obsolete or unmarketable inventory in an amount equal to the difference between the cost of inventory and the estimated market value based upon
assumptions about future demand and market conditions. If actual market conditions are less favorable than our estimates, additional inventory write-downs may be required. In the event we experience
unanticipated demand and are able to sell a portion of the inventory we have previously written down, our gross margins will be favorably affected.

40

---



Table of Contents

Valuation of Goodwill, Purchased Intangible Assets, and Long-Lived Assets

Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the
net tangible and intangible assets acquired. The amounts and useful lives assigned to intangible assets acquired, other than goodwill, impact the amount and timing of future amortization, and the
amount assigned to in-process research & development is expensed immediately. The value of our intangible assets, including goodwill, could be impacted by future adverse changes
such as: (i) any future declines in our operating results; (ii) a decline in the valuation of technology company stocks, including the valuation of our common stock; (iii) a
significant slowdown in the worldwide economy or the semiconductor industry; or (iv) any failure to meet the performance projections included in our forecasts of future operating results.

We
account for goodwill and other intangible assets in accordance with the Statement of Financial Accounting Standards ("SFAS") No. 142,"Accounting for
Goodwill and Other Intangible Assets"("SFAS 142"). We evaluate these assets, including purchased intangible assets deemed to have indefinite lives, on an annual basis
in the fourth quarter, or more frequently, if we believe indicators of impairment exist or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider
important that could trigger an impairment review include significant underperformance to historical or projected operating results, substantial changes in our business strategy, and significant
negative industry or economic trends. If such indicators are present, we compare the fair value of the goodwill of our only reporting unit to its carrying value. For other intangible assets and
long-lived assets, in accordance with SFAS 144,"Accounting for the Impairment or Disposal of Long-Lived Assets"("SFAS 144"), we determine whether the sum of the estimated undiscounted cash flows attributable to each asset in question is less than its carrying value. If less, we recognize an impairment
loss based on the excess of the carrying amount of the assets over their respective fair values. Fair value of goodwill is determined by using a valuation model based on a market approach. Fair value
of other intangible assets is determined by undiscounted future cash flows, appraisals, or other methods. Fair value of long-lived assets is determined based on market value. If the
long-lived asset determined to be impaired is to be held and used, we recognize an impairment charge to the extent the fair value attributable to the asset is less than the asset's
carrying value. The fair value of the long-lived asset then becomes the asset's new carrying value, which we amortize over the remaining estimated useful life of the asset. These
approaches use significant estimates and assumptions, including projection and timing of future cash flows, discount rates reflecting the risk inherent in future cash flows, and long-term
growth rates. It is reasonably possible that the estimates and assumptions used to value these assets may be incorrect. If our actual results, or the estimates and assumptions used in future
impairment analyses, are lower than the original estimates and assumptions used to assess the recoverability of these assets, we could incur additional impairment charges.

Other
intangible assets, which consist primarily of technology and intellectual property, are amortized over their estimated useful lives. The remaining lives of these assets range from
one to two years.

Valuation of Repurchase Right on Subordinated Debentures

In accordance with SFAS No. 133,"Accounting for Derivative Instruments and Hedging
Activities"("SFAS 133"), embedded derivatives must be bifurcated from the underlying debt instrument and valued as a separate financial instrument. We completed a
second Consent Solicitation of the holders of our 1.5% Convertible Subordinated Debentures due 2024 ("2024 Debentures") where we agreed to increase the repurchase price with respect to the
October 1, 2009, repurchase right from 100% to 113.76% of the principal amount of the Debentures to be purchased (the 'premium put'). We estimate the approximate fair value of the premium put
as the difference between the estimated value of the debentures with and without the premium put feature. Any gain or loss on the fair value of the

41

---



Table of Contents

premium
put is reflected in current earnings. The premium put was estimated to have no fair value as of June 30, 2008 and 2007.

Accounting for Share-Based Compensation

Effective October 1, 2005, we adopted SFAS No. 123R"Share-Based
Payments,"("SFAS 123R"), which requires all share-based payments, including grants of stock options and employee stock purchase rights, to be recognized in our
financial statements based on their respective grant date fair values. Under this standard, the fair value of each employee stock option and employee stock purchase right is estimated on the date of
grant using an option-pricing model that meets certain requirements.

We
adopted SFAS 123R using the modified-prospective transition method of recognition of compensation expense related to share-based payments. Under this transition method,
compensation expense recognized during the periods ended June 30, 2008 and 2007 included: (i) compensation expense for all share-based awards granted prior to, but not yet vested, as of
September 30, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123; and (ii) compensation expense for all share-based awards
granted subsequent to September 30, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. The Company's consolidated statements of operations
for the periods ended June 30, 2008 and 2007, reflect the impact of adopting SFAS 123R.

SFAS 123R
requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award
that is ultimately expected
to vest is recognized as expense ratably over the requisite service periods. We have estimated the fair value of each award as of the date of grant or assumption using the Black-Scholes option pricing
model, which was developed for use in estimating the value of traded options that have no vesting restrictions and that are freely transferable. The Black-Scholes model considers, among other factors,
the expected life of the award and the expected volatility of the Company's stock price. Although the Black-Scholes model meets the requirements of SFAS 123R, the fair values generated by the
model may not be indicative of the actual fair values of our awards, as it does not consider other factors important to those share-based payment awards, such as continued employment, periodic vesting
requirements, and limited transferability. Because the share-based compensation expense recognized in the statements of operations for the periods ended June 30, 2008 and 2007 is based on
awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. Changes in forfeitures from the estimates made at grant date could result in more or less non-cash compensation expense in
comparable periods.

Assets and Liabilities of a Business Held for Sale

In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets,"we classified the assets and liabilities of a business as held for sale when management approves and commits to a formal plan of sale and it is probable that the sale
will be completed. The carrying value of the net assets of the business held for sale are then recorded at the lower of their carrying value or fair market value, less costs to sell. The Company
announced the sale of a portion of their Storage Products business on August 23, 2007, completing the sale on October 29, 2007. Assets of $35.5 million and liabilities of
$0.4 million, at September 30, 2007, have been classified as held for sale. There were no assets or liabilities classified as held for sale as of June 30, 2008.

On
September 15, 2008, we received an executed letter of intent from a third party to purchase the Colorado building. On October 8, 2008, we entered into an agreement with
a third-party to sell the Colorado land and building. The transaction closed on December 22, 2008. The gross sales price was $6.5 million. The facility was previously used for the
Storage Products business, which was discontinued

42

---



Table of Contents

and
sold on October 29, 2007 and has remained unused since. As a result, the net book value of $3.2 million has been reported as 'Asset Held for Sale' on the September 30, 2008
balance sheet. We will recognize a gain of approximately $2.9 million on this sale in the first quarter of fiscal 2009.

Income Taxes

The Company accounts for income taxes using SFAS No. 109,"Accounting for Income
Taxes"("SFAS 109"). Under SFAS 109, income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The
Company maintains a valuation allowance on the deferred tax assets for which it is more likely than not that the Company will not realize the benefits of these tax assets in future
tax periods. The valuation allowance is based on estimates of future taxable income by tax jurisdiction in which the Company operates, the number of years over which the deferred tax assets will be
recoverable, and scheduled reversals of deferred tax liabilities. FAS 123R allows the benefit related to deductible temporary differences attributable to nonqualified stock options to be
credited to additional paid-in-capital when realized.

In
assessing the realizability of deferred tax assets, management considers, on a periodic basis, whether it is more likely than not, that some portion or all of the deferred tax assets
will not be realized. As of June 30, 2008 and September 2007, management has placed a valuation allowance against all deferred tax assets based on its overall assessment of the risks and
uncertainties. Accordingly, management believes the current valuation allowance on deferred tax assets is sufficient and properly stated at June 30, 2008 and September 30, 2007.

Research and Development

Research and development expense consists primarily of salaries and related costs of employees engaged in research, design, and
development activities, including share-based compensation expense. Research and development expense also includes costs related to engineering design tools, masks and prototyping costs,
subcontracting costs, and facilities expenses.

Impact of Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 48, "Accounting for Uncertainty in Income
Taxes"an interpretation of FASB Statement No. 109 ("FIN 48"), which clarifies the
accounting for uncertainty in tax positions. This Interpretation requires that we recognize the impact of a tax position in our financial statements, if that position is more likely than not to be
sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006, with the cumulative effect
of the change in accounting principle recorded as an adjustment to opening retained earnings. Management adopted this pronouncement in the current year financial statements. The Company adopted the
provisions of Financial Accounting Standards Board Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"), an interpretation of SFAS No. 109, on
October 1, 2007 and assessed the impact of FIN 48 on its financial statements and determined that no adjustment to retained earnings is necessary.

43

---



Table of Contents

In
September 2006, the FASB issued SFAS No. 157,"Fair Value Measurement"("SFAS 157") which defines fair value, establishes
a framework for measuring fair value and expands disclosures regarding assets and liabilities measured at fair value. We will be required to adopt SFAS 157 in the first quarter of fiscal 2009.
The effect of adoption may have a material impact on our financial condition or results of operations. The ultimate effect is indeterminate because the results of any fair value measurements in
accordance with SFAS 157 will be dependent upon the facts and circumstances on the date of the valuation.

In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities"
("SFAS 159"). SFAS 159 allows companies to elect to measure certain assets and liabilities at fair value and is effective for fiscal years beginning after November 15, 2007. This
standard is not expected to have a material impact on our future consolidated financial statements.

In
June 2007, the FASB ratified Emerging Issues Task Force consensus on EITF Issue No. 07-3,"Accounting for Non-refundable
Advanced Payments for Goods or Services to be used in Future Research and Development Activities."EITF Issue No. 07-3 requires that these payments be
deferred and capitalized and expensed as goods are delivered or as the related services are performed. We will be required to adopt EITF 07-3 in the first quarter of fiscal 2009 and
do not expect that the adoption will have a material impact on our financial condition or results of operations.

In
December 2007, the FASB issued SFAS No. 141R,"Business Combinations,"("SFAS 141R"). SFAS 141R establishes
principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any
non-controlling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what
information to disclose to enable users of financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for financial statements issued
for fiscal years beginning after December 15, 2008. We will be required to adopt the statement in the first quarter of fiscal 2009 and will account for and disclose all business combinations
effected after the adoption in accordance with SFAS 141R.

In
March 2008, the FASB issued SFAS No. 161,"Disclosures about Derivative Instruments and Hedging Activitiesan Amendment of FASB Statement
No. 133."This Statement requires enhanced disclosures about an entity's derivative and hedging activities and is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008. We do not expect that the adoption will have a material impact on our financial condition or results of operations.

In
May 2008, the FASB issued FSP APB 14-1,"Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including
Partial Cash Settlement)"("APB 14-1"). APB 14-1 will require us to separately account for the liability and equity components of a
convertible debt security by measuring the fair value of a similar nonconvertible debt security when interest cost is recognized in subsequent periods. APB 14-1 will require us to
retroactively separate the liability and equity components of such debt in our consolidated balance sheets on a fair value basis. APB 14-1 is applicable to our $96.7 million
2024 Debentures which allows for settlement of the conversion in cash. APB 14-1 will be effective for fiscal years beginning after December 15, 2008, and we are required to
adopt the FSP in our first quarter of fiscal 2010. APB 14-1 does not permit early adoption. We are currently evaluating the impact that the adoption of APB 14-1
will have on our consolidated financial statements.

44

---



Table of Contents

Results of Operations for the Three and Nine Months Ended June 30, 2008 compared to the Three and Nine Months ended June 30,
2007.

The
following table sets forth certain consolidated statement of operations data expressed as a percentage of revenue for the periods indicated:

Three Months Ended June 30,

Nine Months Ended June 30,2008

2007

2008

2007Revenues


100.0
%

100.0
%

100.0
%

100.0
%Costs and expenses:Cost of revenues


50.8
%

56.2
%

49.0
%

52.6
%Engineering, research and development


22.6
%

20.2
%

23.0
%

21.7
%Selling, general and administrative


26.5
%

16.5
%

23.1
%

18.8
%Accounting remediation & reconstruction expense & litigation costs


3.8
%

6.2
%

5.4
%

6.9
%Amortization of intangible assets


0.6
%

2.8
%

1.4
%

3.3
%Costs and expenses


104.3
%

102.0
%

101.9
%

103.2
%Loss from operations


(4.2
)%

(2.0
)%

(1.9
)%

(3.2
)%Other income (expense):Interest expense, net


(2.0
)%

(2.0
)%

(1.7
)%

(1.0
)%Loss on extinguishment of debt


0.0
%

0.0
%

0.0
%

(1.2
)%Other income (expense), net


6.4
%

(0.5
)%

2.6
%

0.8
%Other income (expense), net


4.4
%

(2.5
)%

0.9
%

(1.4
)%Income tax expense


0.0
%

0.1
%

(0.3
)%

0.1
%Minority interests in earnings of consolidated subsidiary


(1.2
)%

0.0
%

(0.4
)%

0.0
%Loss from continuing operations before discontinued operations


(1.0
)%

(4.5
)%

(1.1
)%

(4.7
)%Discontinued operationsGain (loss) on discontinued Storage Products, net


3.1
%

(8.0
)%

5.0
%

(7.2
)%Net income (loss)


2.1
%

(12.6
)%

3.9
%

(11.9
)%


Net Revenues

We classify our IC products into three categories:



The
following tables summarize our net revenues for the periods ended June 30:

Three Months Ended
June 30, 2008

Three Months Ended
June 30, 2007Amount

% of Net
Revenues

Amount

% of Net
Revenues

Change

%
Change(in thousands, except percentages)Carrier Networking Products

$
22,596


41.1
%
$
24,055


43.0
%
$
(1,459
)

(6.1
)%Enterprise Networking Products


19,841


36.0
%

22,019


39.3
%

(2,178
)

(9.9
)%Non-Core Products


12,604


22.9
%

9,927


17.7
%

2,677


27.0
%Net Revenues

$
55,041


100.0
%
$
56,001


100.0
%
$
(960
)

(1.7
)%


45

---



Table of Contents

Nine Months Ended
June 30, 2008

Nine Months Ended
June 30, 2007Amount

% of Net
Revenues

Amount

% of Net
Revenues

Change

%
Change(in thousands, except percentages)Carrier Networking Products

$
68,051


41.7
%
$
63,817


38.8
%
$
4,234


6.6
%Enterprise Networking Products


56,702


34.7
%

57,150


34.7
%

(448
)

(0.8
)%Non-Core Products


38,423


23.5
%

43,569


26.5
%

(5,146
)

(11.8
)%Net Revenues

$
163,176


100.0
%
$
164,536


100.0
%
$
(1,360
)

(0.8
)%


Net
revenues for the third quarter of fiscal 2008 were $55.0 million compared to $56.0 million for the same period in fiscal 2007, a decrease of $1.0 million or
1.7%. Sales of our Carrier and Enterprise Networking Products decreased by $3.7 million compared to the third quarter of fiscal 2007. We
consider this decrease temporary and cyclical, based on the buying patterns of our customers. The decrease in sales of our core products was partially offset by a $2.7 million increase in our
non-core legacy storage product lines that saw stronger than anticipated demand.

For
the nine months ended June 30, 2008 and 2007, net revenues decreased from $164.5 million to $163.2 million, or 0.8%. This decrease of $1.4 million is due
to weaker demand for our Non-Core Products. Sales of Non-Core Products decreased $5.1 million or 11.8%, as these products are at or nearing their
end-of-life in markets that we have chosen to exit and in which we are not actively pursuing sales. Net revenues from core products increased $3.8 million for the nine
months ended June 30, 2008, compared to the same period in fiscal 2007. This increase was driven by a rise in sales of our Ethernet switch, optical PHY and Transport Processing product lines,
which are growing markets that we are actively targeting.

Cost of Revenues

Three Months Ended June 30

Change2008

2007

$

%(in thousands,
except percentages)Cost of revenues

$
27,965

$
31,496

$
(3,531
)

(11.2
)%Percent of net revenues


50.8
%

56.2
%




Nine Months Ended June 30

Change2008

2007

$

%(in thousands,
except percentages)Cost of revenues

$
79,977

$
86,471

$
(6,494
)

(7.5
)%Percent of net revenues


49.0
%

52.6
%


As
a fabless semiconductor company, we use third-parties (including TSMC, IBM, Chartered Amkor, ASAT, and ASE) for wafer fabrication and assembly services. Our cost of revenues consists
predominantly of: (i) purchased finished wafers; (ii) assembly services; and (iii) labor and overhead costs associated with product procurement and testing.

Our
cost of revenues decreased $3.5 million in the third quarter of fiscal 2008 compared to the same period in fiscal 2007. As a percentage of net revenues, our cost of revenues
was 50.8% in the third quarter of fiscal 2008 compared to 56.2% in the third quarter of fiscal 2007. Our cost of revenues was $79.7 million and $86.5 million for the nine months ended
June 30, 2008 and 2007, respectively. As a percentage of net revenues, cost of revenues was 49.0% for the nine months ended June 30, 2008

46

---



Table of Contents

compared
to 52.6% for the same period in fiscal 2007. These decreases are due to more favorable pricing of materials and improved product yields.

The
Company executed significant cost containment efforts throughout fiscal 2008 and fiscal 2007. Successful cost containment is primarily attributable to efforts to reduce the purchase
price of materials such as wafers and packages. This cost containment, in addition to improvements in the efficiency of operations, has resulted in improved product yields. As it is customary for
product prices in the semiconductor industry to decline over time, it is imperative that we continue to reduce our cost of revenues for mature products. We continue to focus our efforts on improving
operating efficiencies, including improving product yields and cycle times and reducing scrap.

Engineering, Research and Development

Three Months Ended June 30

Change2008

2007

$

%(in thousands, except percentages)Engineering, research and development

$
12,458

$
11,333

$
1,125


9.9
%Percent of net revenues


22.6
%

20.2
%




Nine Months Ended June 30

Change2008

2007

$

%(in thousands,
except percentages)Engineering, research and development

$
37,584

$
35,688

$
1,896


5.3
%Percent of net revenues


23.0
%

21.7
%


Engineering,
research and development expenses consist primarily of salaries and related costs, including share-based compensation expense of employees engaged in research, design, and
development activities. Research and development also includes costs of mask sets, electronic design automation tools, software licensing contracts, subcontracting and fabrication costs, depreciation
and amortization, and facilities expenses.

Engineering,
research and development expenses increased $1.1 million or 9.9% in the third quarter of fiscal 2008 compared to the third quarter of fiscal 2007. For the nine months
ended June 30, engineering, research and development expenses increased from $35.7 million in fiscal 2007 to $37.6 million in fiscal 2008. The increase in engineering, research
and development expenses is primarily due to increased headcount and related employment costs resulting from our engineering efforts in the development of new products.

We
believe that continued investment in the design and development of future products is vital to maintaining a competitive edge. We have closely monitored our known and forecasted
revenue, demand, and operating expense run rates. We continue to seek opportunities to focus our research and development activities and will continue to closely monitor both our costs and our revenue
expectations in future periods. We will continue to concentrate our spending in this area to meet our customer requirements and to respond to market conditions.

47

---



Table of Contents

Selling, General and Administrative

Three Months Ended June 30

Change2008

2007

$

%(in thousands,
except percentages)Selling, general and administrative

$
14,570

$
9,240

$
5,330


57.7
%Percent of net revenues


26.5
%

16.5
%




Nine Months Ended June 30

Change2008

2007

$

%(in thousands,
except percentages)Selling, general and administrative

$
37,758

$
30,924

$
6,834


22.1
%Percent of net revenues


23.1
%

18.8
%


Selling,
general and administrative expense consists primarily of personnel-related expenses, including share-based compensation expense, legal and other professional fees, facilities
expenses, outside labor and communications expenses.

Selling,
general and administrative expense for the three months ended June 30, 2008 was $14.6 million compared to $9.2 million for the same period in 2007. For the
nine months ended June, 30, 2008, selling, general and administrative expense was $37.8 million, up 22.1% from the same period in the prior year. The increases in selling, general and
administrative expense are primarily due to higher accounting fees paid to our auditors for services related to the auditing and issuing of our 2006 and 2007 financial statements. Audit fees are
considered recurring costs and are not included in the accounting remediation costs discussed below. We also experienced increases in bonus and commission expense as a result of improved operating
performance. These increased costs are partially offset by a $3.2 million gain on the sale of fixed assets.

Accounting Remediation & Reconstruction Expense & Litigation Costs

Three Months Ended June 30

Change2008

2007

$

%(in thousands,
except percentages)Accounting remediation & reconstruction expense & litigation costs

$
2,067

$
3,446

$
(1,379
)

(40.0
)%Percent of net revenues


3.8
%

6.2
%




Nine Months Ended June 30

Change2008

2007

$

%(in thousands, except percentages)Accounting remediation & reconstruction expense & litigation costs

$
8,813

$
11,366

$
(2,553
)

(22.5
)%Percent of net revenues


5.4
%

6.9
%


Accounting
remediation and reconstruction expenses and litigation costs consist of fees incurred in connection with the preparation and issuance of our 2006 and 2007 financial
statements. We recorded $2.1 million and $3.4 million in the third quarters of fiscal 2008 and fiscal 2007, respectively, related to work performed on stock option accounting, inventory
valuation, revision of our revenue recognition

48

---



Table of Contents

policies,
and other legal and financial issues. For the nine month period ended June 30, 2008, we recorded $8.8 million, down 22.5% from $11.4 million in the same period of 2007.

Accounting
remediation and reconstruction costs are expected to decrease significantly in fiscal 2009 as we resolve certain legal issues, complete and file all outstanding financial
reports, and transition accounting and reporting responsibilities to permanent staff.

Amortization of Intangible Assets

Three Months Ended
June 30

Change2008

2007

$

%(in thousands,
except percentages)Amortization of intangible assets

$
310

$
1,585

$
(1,275
)

(80.4
)%Percent of net revenues


0.6
%

2.8
%




Nine Months Ended
June 30

Change2008

2007

$

%(in thousands,
except percentages)Amortization of intangible assets

$
2,204

$
5,351

$
(3,147
)

(58.8
)%Percent of net revenues


1.4
%

3.3
%


Amortization
of intangible assets was $310,000 in the third quarter of fiscal 2008 compared to $1.6 million in the third quarter of fiscal 2007. For the nine months ended
June 30, 2008, amortization expense was $2.2 million compared to $5.4 million in the same period of fiscal 2007. The decrease in amortization expense is due to intangible assets
related to our prior acquisitions of APT, Multilink, and Cicada becoming fully amortized during fiscal 2007.

Interest Expense, net

Three Months Ended
June 30

Change2008

2007

$

%(in thousands,
except percentages)Interest expense, net

$
1,112

$
1,135

$
(23
)

(2.0
)%Percent of net revenues


2.0
%

2.0
%




Nine Months Ended
June 30

Change2008

2007

$

%(in thousands,
except percentages)Interest expense, net

$
2,706

$
1,598

$
1,108


69.3
%Percent of net revenues


1.7
%

1.0
%


Interest
expense, net of interest income, was $1.1 million for the quarters ended June 30, 2008 and 2007. For the nine months ended June 30, 2008, interest expense
was $2.7 million, an increase of $1.1 million from the same period in the prior year. In October 2007, in connection with the sale of the Storage Products business, the Company replaced
its debt to Tennenbaum Capital Partners ("TCP") with a note to Whitebox VSC, Ltd. ("Whitebox"). Interest expense incurred on the TCP debt in fiscal 2007 and 2008 was higher than the fiscal 2008
Whitebox interest expense, but all interest expense related to the TCP debt was recorded as a component of discontinued operations in fiscal 2007 and

49

---



Table of Contents

2008,
resulting in higher net interest expense in fiscal 2008. This increase is offset by a decrease in interest on the subordinated 2024 Debentures. In the second half of fiscal 2007, we incurred an
additional 4% interest on the debentures in connection with the Second Supplemental Indenture dated September 24, 2007. As a result, interest expense relating to the subordinated debentures
decreased by $967,000 in the third quarter of fiscal 2008, compared to the third quarter of fiscal 2007.

Loss on Extinguishment of Debt

Nine Months Ended
June 30

Change2008

2007

$

%(in thousands,
except percentages)Loss on extinguishment of debt

$


$
1,977

$
(1,977
)

100.0
%Percent of net revenues


0.0
%

1.2
%


In
connection with the amendment to the 2024 Debentures in the first quarter of fiscal 2007, (See Debt Note in the accompanying financial statements), the conversion price of the 2024
Debentures was permanently decreased from $3.92 to $2.546 per share of Common Stock, resulting in debt terms that were substantially different from the original debt terms. In accordance with
EITF 96-19 "Debtor's Accounting for a Modification or Exchange of Debt Instruments," the Company recognized a loss of $2.0 million on the extinguishment of debt in the first
quarter of fiscal 2007 as a result of the write-off of unamortized debt issuance costs. In addition, during the period, "Other Assets" was reduced by $2.0 million related to the
write-off.

Other Income, net

Three Months Ended
June 30

Change2008

2007

$

%(in thousands,
except percentages)Other income (expense), net

$
3,513

$
(264
)
$
3,777


(1430.68
)%Percent of net revenues


6.4
%

(0.5
)%




Nine Months Ended
June 30

Change2008

2007

$

%(in thousands,
except percentages)Other income, net

$
4,236

$
1,254

$
2,982


237.8
%Percent of net revenues


2.6
%

0.8
%


Other
income, net of expense, was $3.5 million in the third quarter of fiscal 2008 compared to net expense of $264,000 in the third quarter of fiscal 2007. For the nine months
ended June 30, 2008, other income was $4.2 million compared to $1.3 million in the same period in fiscal 2007. In the three and nine months ended June 30, 2008, other
income was primarily related to gains on the sale of available-for-sale securities held by Vitesse and its subsidiaries. In fiscal 2007, other income primarily consisted of
miscellaneous, non-recurring royalty payments generated from the licensing of intellectual property to third parties. Net expense in the third quarter of fiscal 2007 was recorded to adjust
estimated royalty income recorded in the first two quarters of fiscal 2007.

50

---





Table of Contents

Income Tax Expense

Three Months Ended
June 30

Change2008

2007

$

%(in thousands,
except percentages)Income tax (benefit) expense

$
3

$
49

$
(46
)

(93.9
)%Percent of net revenues


0
%

0.1
%




Nine Months Ended
June 30

Change2008

2007

$

%(in thousands,
except percentages)Income tax (benefit) expense

$
(546
)
$
202

$
(748
)

(370.3
)%Percent of net revenues


(0.3
)%

0.1
%


Income
tax expense for the third quarter of fiscal 2008 represents minimum federal, state, and foreign income tax on income not eligible for offset by loss carryforwards after the
allocation of income tax expense to discontinued operation. Income tax expense for the second quarter of fiscal 2008 reflects only minimum income tax expense.

Income
tax benefit was $0.5 million for the nine months ended June 30, 2008. The benefit reflects the impact of taxable losses for the period after the allocation of income
tax expense to discontinued operation. Net income tax expense represents minimum federal, state, and foreign income tax on income not eligible for offset by loss carryforwards. Income tax expense for
the nine months ended June 30, 2007 reflects only minimum income tax expense.

Minority Interest in Earnings of Consolidated Subsidiary

Three Months Ended
June 30

Change2008

2007

$

%(in thousands,
except percentages)Minority interest in earnings of consolidated subsidiary

$
(660
)
$


$
(660
)

100.0
%Percent of net revenues


(1.2
)%

0.0
%


Nine Months Ended
June 30

Change2008

2007

$

%(in thousands,
except percentages)Minority interest in earnings of consolidated subsidiary

$
(660
)
$


$
(660
)

100.0
%Percent of net revenues


(0.4
)%

0.0
%


A
minority interest in the income of our consolidated joint venture, the Vitesse Venture Fund, L.P. ("the Fund"), was recorded in the third quarter of fiscal 2008, representing
the limited partners' interest in the Fund's gain on the sale of available-for-sale securities. The limited partners' portion of the gain totaled $660,000 for the quarter and
nine months ended June 30, 2008.

51

---



Table of Contents

Gain (loss) on the sale of discontinued Storage Products

Three Months Ended
June 30

Change2007

2006

$

%(in thousands,
except percentages)Income (loss) from operations of discontinued operations

$
1,703

$
(4,487
)
$
6,190


(138.0
)%Percent of net revenues


3.1
%

(8.0
)%




Nine Months Ended June 30

Change2008

2007

$

%(in thousands,
except percentages)Loss from operations of discontinued operations

$
8,101

$
(11,863
)
$
19,964


(168.3
)%Percent of net revenues


5.0
%

(7.2
)%


On
October 29, 2007, the Company completed its sale of a portion of the Storage Products business to Maxim Integrated Products, Inc. ("Maxim") for $62.8million, with a gain
on the sale of approximately $21.5 million, plus a potential earn-out based on the business meeting certain criteria, as detailed in the agreement. Maxim acquired the Company's SAS,
SATA expander product markets, enclosure and baseboard management devices, and certain other assets of the Storage Product business. Assets sold include inventory, property & equipment,
goodwill and intangible assets of $35.5 million. As part of the sale, Maxim assumed a liability for employees' accrued vacation of $300,000. Debt issuance costs related to the debt with
Tennenbaum Capital Partners ("TCP") of $3.5 million were included in the calculation of the gain on the sale. The gain was reduced by costs of completing the sale in the amount of
$1.6 million.

In
accordance with EITF Issue 87-24,"Allocation of Interest to Discontinued Operations"("EITF Issue 87-24"), we have allocated to discontinued operations interest expense associated with debt instruments that were required to be repaid upon the sale of Storage
Product business. For the nine months ended June 30, 2008, interest expense of approximately $16.9 million was included in discontinued operations. Interest expense included a
"make-whole" payment of $16.4 million, and interest expense and amortization of deferred financing fees of $500,000. For the three and nine months ended June 30, 2007,
interest and amortization of deferred financing fees were $2.6 million and $7.5 million, respectively.

For
the three months ended June 30, 2008, results of discontinued operations increased $6.2 million, from a loss of $4.5 million in fiscal 2007 to income of
$1.7 million. For the quarter ended June 30, 2008, we recorded $1.7 million of income from the earn-out and residuals operations, compared with the loss on
discontinued operations of $4.5 million for the quarter ended June 30, 2007.

For
the nine months ended June 30, 2008 compared to June 30, 2007, the gain on discontinued operations increased $20.0 million, from a loss of $11.9 million,
to income of $8.1 million. The increase is the result of the gain on the sale of $21.5 million, offset by the loss on discontinued operations of $13.4 million, net of tax of
$1.0 million, compared with the loss on discontinued operations of $11.9 million for the nine month period ended June 30, 2007.

Results
of discontinued operations for the nine months ended June 30, 2008 compared to the same period in fiscal 2007 increased $8.8 million, from a loss of
$4.3 million to income of $4.5 million. This increase includes $3.1 million of income related to the earn-out, $1.4 million related to a final delivery of an
end-of-life product, and approximately $4.3 million as a result of the inclusion of only one month

52

---



Table of Contents

of
operations through the date of sale for the nine months ended June 30, 2008 compared to a full nine months of operations recorded in the period ended June 30, 2007.

We
recorded amounts in discontinued operations in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). Accordingly, we have reported the results of operations and financial position of the Storage Product business in discontinued operations within
the Company's statements of operations and as assets and liabilities held for sale in the Company's balance sheet as of September 30, 2007.

The
following table sets forth selected operating results:

Three Months Ended
June 30,2008

2007(in thousands)Revenues

$
73

$
3,790Income (loss) from continuing operations before income taxes


72


(2,498
)Provision for income taxes


3


49Minority interests in earnigns of consolidated subsidiary


(660
)

Income (loss) from discontinued operations, net of tax


1,703


(4,487
)Net income (loss)

$
1,112

$
(7,034
)




Nine Months Ended
June 30,2008

2007(in thousands)Revenues

$
2,656

$
14,394Loss from continuing operations before income taxes


(1,630
)

(7,585
)Provision for income taxes


(546
)

202Minority interests in earnigns of consolidated subsidiary


(660
)

Income (loss) from discontinued operations, net of tax


8,101


(11,863
)Net income (loss)

$
6,357

$
(19,650
)


Liquidity

Cash and cash equivalents increased to $33.7 million at June 30, 2008, from $26.0 million at September 30,
2007 as a result of the following:

Nine Months Ended
June 30,2008

2007(in thousands)Net cash used in operating activities

$
(27,188
)
$
(635
)Net cash provided by (used in) investing activities


66,189


(573
)Net cash used in financing activities


(31,267
)

(3,181
)Net increase (decrease) in cash and cash equivalents

$
7,734

$
(4,389
)Cash and cash equivalents at beginning of period


25,976


25,312Cash and cash equivalents at end of period

$
33,710

$
20,923


In
the nine months ended June 30, 2008, our operating activities used $27.2 million in cash. This was primarily the result of a $6.4 million net income from
continuing and discontinued operations,

53

---



Table of Contents

$20.0 million
in net non-cash operating expenses, which includes the gain on sale of the Storage Products business of approximately $21.5 million and $13.6 million net
cash used by changes in operating assets and liabilities. In the nine months ended June 30, 2007, our operating activities used $0.6 million in cash. This was primarily the result of
$19.7 million net loss, $21.6 million in non-cash operating expenses and $2.6 million in net cash used by changes in operating assets and liabilities.
Non-cash items included in net income in the nine months ended June 30, 2008 and 2007 included depreciation and amortization, share-based compensation expense, capitalization of
interest to principal, gain on sale of business unit, disposal of fixed assets, loss on extinguishment of debt and amortization of debt issuance costs.

Inventories
increased $6.8 million from $33.7 million at September 30, 2007 to $40.5 million at June 30, 2008, which comprised of an increase in
inventory of $7.8 million, offset by $1.0 million of inventory sold to Maxim. We invested in wafer die bank and finished goods inventory in order to improve our on-time
delivery and customer demand, particularly in our Ethernet product line. Our inventory levels will continue to be determined based upon the level of purchase orders we receive, our ability, and the
ability of our customers to manage inventory levels. Such considerations are balanced against the risk of obsolescence or potentially excess inventory levels. As a direct result of the increase in
inventory, accounts payable increased from $15.0 million to $19.4 million. In addition, accrued expenses decreased primarily as a result of an accrued interest payment of
$1.9 million, for the interest increase on the 2024 Debentures for the period April 1, 2007, through, but not including October 1, 2007; a $0.4 million final interest
payment on the TCP loan; and a payment of a liability of
approximately $1.5 million to the former shareholders of a company acquired in 2003. In addition, deferred revenue decreased by $9.3 million, primarily as a result of changes in net
distributor activities, offset by $6.0 million of cash received from the licensing of intellectual property.

Investing
activities provided cash of $66.2 million in the nine months ended June 30, 2008, which was primarily the result of the proceeds from the sale of Storage Products
business to Maxim for $62.8 million in cash in the first quarter of 2008.

Our
financing activities used $31.3 million in cash in the nine months ended June 30, 2008, which was primarily a result of the repayment of our $59.5 million debt
with TCP, offset by the proceeds received from Whitebox for $29.3 million. See Debt Note in the accompanying financial statements.

Management
believes we have sufficient resources to fund our normal operations over the next 12 months, through at least September 30, 2009. However, on October 1,
2009 the holders of our 2024 Debentures have the right to require us to repurchase the 2024 Debentures. In accordance with the November 3, 2006 amendment to the 2024 Debentures, the
October 1, 2009, repurchase right was increased from 100% to 113.76% of the principal amount of the 2024 Debentures to be purchased. The increase in the repurchase right would result in an
additional payment of $13.3 million on the $96.7 million outstanding 2024 Debentures. Holders also have the option, subject to certain conditions, to require the Company to repurchase
any 2024 Debentures held by such holder in the event of a fundamental change, at a price equal to 100% of the principal amount of the 2024 Debentures plus accrued and unpaid interest plus, under
certain circumstances, a make-whole premium. (See Debt Note in the accompanying financial statements).

The
Company is actively seeking various alternatives to refinance the debt. We are working to either renegotiate the terms of, or refinance some or all of, the 2024 Debentures. However,
to date, we have not been able to renegotiate those terms or to raise the capital necessary to repurchase or refinance some or all of the 2024 Debentures. We can make no assurance at this time that
such financing will be completed as contemplated or under terms acceptable to the Company or its existing shareholders. Failure to generate additional revenues, raise additional capital or manage
discretionary spending could have a material adverse effect on the Company's ability to continue as a going concern and to achieve its intended business objectives. Accordingly, there is a substantial
doubt about our

54

---



Table of Contents

ability
to continue as a going concern; no adjustments to the accompanying financial statements have been made to reflect this doubt. See "Risk Factors" below for further information with respect to
events and uncertainties that could harm our business, operating results, and financial condition.

Additionally,
we continue to incur substantial expense related to our restructure and remediation efforts. We anticipate we will incur these costs through at least the first quarter of
fiscal 2009, and to continue to have an adverse effect on operating results and liquidity.

Our
primary source of liquidity is cash generated from operations and our existing cash balances and marketable securities. As of June 30, 2008 and September 30, 2007, our
cash and cash equivalents totaled $33.7 million and $26.0 million, respectively.

On
October 29, 2007, the Company completed the sale of a portion of our Storage Products business to Maxim for $62.8 million, with a gain on the sale of approximately
$21.5 million. Concurrently with the sale of the Store Product business, we completed the funding of a $30.0 million loan from Whitebox VSC, Ltd. We used a portion of the proceeds
of the debt financing, as well as the proceeds from the sale of the Storage Products assets ($62.8million), to repay the Company's debt facility with TCP. The Whitebox VSC, Ltd. loan has a
four-year term, with an option to borrow up to an additional $15.0 million.

On
December 28, 2007, the Company entered into an arrangement to sell intellectual property to a third-party. The contract is a perpetual, non-exclusive, irrevocable
license for specified intellectual property. Under the agreement, Vitesse will receive $15.0 million in the form of a license fee and royalties for certain licensed products and core
technology. The license fee is paid over time, subject to certain milestones. We received $8.0 million in cash as of September 30, 2008.

Long-Term Debt, Contingent Liabilities and Operating Leases

The following table summarizes our significant contractual obligations as of June 30, 2008:

Payment Obligations by Year
(in thousands)2009

2010

2011

2012

2013

Thereafter

TotalLong-term debt

$


$


$


$
30,000

$


$


$
30,000Convertible subordinated debt

















96,700


96,700Operating leases


3,139


2,483


2,322


2,251


2,314


2,267


14,776Inventory and related purchase obligations


13,407


6,480














19,887Software licenses


7,869


6,351


5,117


42








19,379Total

$
24,415

$
15,314

$
7,439

$
32,293

$
2,314

$
98,967

$
180,742


Currently,
$96.7 million in the 2024 Debentures are outstanding. Additionally, we have $30.0 million in long-term debt with Whitebox. Payments to Whitebox are
interest only until the maturity date of October 29, 2011. (See Debt Note in the accompanying financial statements). Pursuant to amendments to the 2024 Debenture agreement, the repurchase price
of the debentures related to the October 1, 2009 repurchase right would be increased from 100% to 113.76% of the principal amount of the Debentures to be purchased (the 'premium put'). The
premium put is not included in the schedule of significant contractual obligations as of December 31, 2007. Additionally, we have $30.0 million in long-term debt with
Whitebox VSC, LTD. ("Whitebox") (See Note 7Debt). In October 2007, concurrent with the sale of a portion of the Storage Products business (See
Note 4Discontinued Operations and Assets Held for Sale), we completed our drawdown of the $30.0 million loan from Whitebox. We used a portion of the proceeds of the debt
financing, as well as the proceeds

55

---



Table of Contents

from
the sale of the Storage Products assets ($62.8 million), to repay the Company's debt facility with affiliates of TCP.

We
lease facilities under non-cancellable operating leases that expire through 2015. Approximate minimum rental commitments under all non-cancellable operating
leases as of June 30, 2008, are included in the table above.

Inventory
and related purchase obligations represent non-cancellable purchase commitments for wafers and substrate parts. Software license commitments represent
non-cancellable licenses of intellectual property from third-parties used in the development of the Company's products.

For
purposes of the table above, obligations for the purchase of goods or services are defined as agreements that are enforceable and legally binding and that specify all significant
terms. Our purchase orders are based on our current manufacturing needs and are typically fulfilled by our vendors within a relatively short time horizon.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and
rates. Our market risk exposure is primarily a result of fluctuations in foreign exchange rates and interest rates. We do not hold or issue financial instruments for trading purposes.

Cash Equivalents and Investments

Our cash and cash equivalents are not subject to significant interest rate risk due to the short maturities of these instruments. As of
June 30, 2008, the carrying value of our cash and cash equivalents approximated fair value because of the ready market for the cash instruments.

Our
investments have included available-for-sale securities in publicly-held companies. The value of our equity securities is based on quoted market
prices. Market prices of common equity securities, in general, are subject to fluctuations, which could cause the amount to be realized upon sale of the investments to differ significantly from the
current reported value.

Interest Rate Risk

Investments in fixed-rate, interest-earning instruments carry a degree of interest rate and credit rating risk.
Fixed-rate securities may have their fair market value adversely impacted because of changes in interest rates and credit ratings. Because of the nature of the issuers of the securities
that we invest in, we do not believe that we have any cash flow exposure arising from changes in credit ratings.

Foreign Currency Exchange Risk

We consider our direct exposure to foreign exchange rate fluctuations to be minimal. Currently, sales to customers and arrangements
with third-party manufacturers provide for pricing and payment in United States dollars, and, therefore, are not subject to exchange rate fluctuations. Increases in the value of the United States'
dollar relative to other currencies could make our products more expensive, which could negatively impact our ability to compete. Conversely, decreases in the value of the United States' dollar
relative to other currencies could result in our suppliers raising their prices to continue doing business with us. The Company funds operations in international jurisdictions. All disbursements from
these locations are made in the local currency of the foreign country. Fluctuations in the value of the United States dollar relative to the currencies of these other countries could make the cost of
operations in these other countries more expensive and negatively impact the Company's cash flows.

56

---



Table of Contents

ITEM 4.    CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We evaluated the design and operation of the effectiveness of our disclosure controls and procedures as of June 30, 2008, under
the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, pursuant to Rule 13a-15(b) of the Exchange Act.
Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, because of the material weaknesses in our internal control over financial reporting described below,
our disclosure controls and procedures as defined in Rule 13a-15(e) were not effective. The remedial measures undertaken by the Company to address the material weaknesses in
Vitesse's internal control over financial reporting are discussed below.

To
address the material weaknesses in our internal control over financial reporting described below, the Company performed additional manual procedures and analysis and other
post-closing procedures in order to prepare the unaudited consolidated financial statements included in this Quarterly Report. Notwithstanding the material weaknesses in our internal
control over financial reporting as of June 30, 2008, described below, we believe that the unaudited consolidated financial statements contained in this Quarterly Report present our financial
condition, results of operations, and cash flows as of the dates, and for the periods, presented in conformity with generally accepted accounting principles in the United States of America ("GAAP").

We
have continued to work diligently to remedy our accounting issues and improve our internal controls and procedures for financial reporting, as well as to ensure that we have qualified
personnel in place to address the aforementioned stock option and accounting irregularities and remediate the internal controls over financial reporting. Although the process of designing and
implementing new procedures to minimize the control deficiencies are important to the company, filing of the Forms 10-Q for the quarters ended December 31, 2007,
March 31, 2008 and June 30, 2008 as well as its Form 10-K for the fiscal year ended September 30, 2008 resulted in a delay in management's ability to adequately
design, implement and monitor new procedures to minimize the control deficiencies that led to the issues outlined below. As a result, our Chief Executive Officer and Chief Financial Officer have
concluded that there are still material weaknesses in our internal control over financial reporting as of June 30, 2008. Management identified the following key weaknesses:

Control
environmentWe did not maintain an effective control environment. Specifically:



57

---



Table of Contents



Changes in Our Internal Control Over Financial Reporting and Remediation of the Material Weaknesses

It is important to note that based on the additional procedures performed as part of the Company's ongoing remediation of its financial
controls, current management has concluded that important improvements were made to the control environment commencing in mid-2006, including: (i) an improved commitment to
competency manifested by the hiring of more experienced and senior finance and legal personnel; (ii) the development of additional financial policies and procedures that, when fully
implemented, will enhance independent judgment and review, including, as appropriate, segregation of duties and increased employee responsibility and accountability for the completeness of the
Company's disclosures; (iii) the establishment of processes and procedures to increase communications between the financial reporting and accounting functions and senior management, including
our Audit Committee; and (iv) instituting a formal Code of Business Conduct and Ethics and whistle-blower policy.

Management
is committed to remediating the material control weaknesses identified and implementing changes to the Company's internal control over financial reporting. Management, along
with our Board of Directors, has implemented, or is in the process of implementing the following changes to the Company's internal control over financial reporting:



58

---



Table of Contents



Additionally,
management is investing in ongoing efforts to continuously improve the control environment and has committed considerable resources to the continuous improvement of the
design, implementation, documentation, testing, and monitoring of our internal controls. Although we have not fully remediated the material weaknesses described above, we believe we have made
substantial progress.

Inherent Limitation on the Effectiveness of Internal Controls

The effectiveness of any system of internal control over financial reporting is subject to inherent limitations, including the exercise
of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, any system of internal control over
financial reporting can only provide reasonable, not absolute, assurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls
as necessary or appropriate for our business, but
cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting.

59

---





Table of Contents

PART II. OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

The information set forth under Note 7 of Notes to Unaudited Consolidated Financial Statements, included in Part I,
Item 1 of this Report, is incorporated herein by reference. For an additional discussion of certain risks associated with legal proceedings, see "Risk Factors" immediately below.

ITEM 1A.    RISK FACTORS

You should carefully consider the risks described below before investing in our securities. We have organized our risks into the
following categories:



Risks Relating to Our Liquidity; Financing Arrangements and Capital Commitments

We have not been able to renegotiate the terms of our 1.5% Convertible Subordinated Debentures ("2024 Debentures") or raise the capital necessary to repurchase some or all
of the 2024 Debentures, consequently the audit opinion we have received with respect to our financial statements for the fiscal year ended September 30, 2008, includes an uncertainty regarding
our ability to continue as a going concern and may limit our ability to access certain types of financing, or may prevent us from obtaining financing on acceptable terms.

The holders of our 2024 Debentures have the right, as of October 1, 2009, to require us to repurchase some or all of the 2024
Debentures at a price equal to 113.76% of the
principal amount of the 2024 Debentures. If all of the holders of the 2024 Debentures exercise their repurchase rights, the total repurchase price would be $110 million. We are working to
either renegotiate the terms of, or refinance some or all of, the 2024 Debentures. However, to date, we have not been able to renegotiate those terms or to raise the capital necessary to repurchase or
refinance some or all of the 2024 Debentures. Consequently, the audit opinion issued by our independent registered public accounting firm with respect to our audited financial statements for the
fiscal year ended September 30, 2008 contains a qualification regarding our ability to continue as a going concern.

Such
a "going concern" uncertainty indicates that there is substantial doubt as to our ability to continue as a going concern due to the risk that we may not have sufficient cash and
liquid assets at September 30, 2008, to cover our operating capital requirements for the next twelve-month period and the October 1, 2009 repurchase of the 2024 Debentures. If sufficient
cash cannot be obtained we would have to substantially alter our operations, or we may be forced to discontinue operations. A going concern uncertainty may limit our ability to access certain types of
financing, or may prevent us from obtaining financing on acceptable terms.

We have received an audit opinion expressing an uncertainty about our ability to continue as a going concern.

The audit report issued by our independent registered public accounting firm on our audited financial statements for the fiscal year
ended September 30, 2008 contains an uncertainty regarding our ability to continue as a going concern. This concern is largely due to the right of the holders, exercisable on October 1,
2009, of the 2024 Debentures to require us to repurchase some or all of the 2024 Debentures at a price equal to 113.76% of the principal amount of the 2024 Debentures.

60

---



Table of Contents

This
uncertainty indicates there is substantial doubt as to our ability to continue as a going concern due to the risk that we may not have sufficient cash and liquid assets at
September 30, 2008 to cover our operating capital requirements for the next twelve-month period, including the potential requirement to repurchase some or all of the 2024 Debentures, and if
sufficient cash cannot be obtained we would have to substantially alter our operations, or we may be forced to discontinue operations. A going concern uncertainty may limit our ability to access
certain types of financing, or may prevent us from obtaining financing on acceptable terms.

There
can be no assurance that our independent registered public accounting firm will not continue to express an uncertainty about our ability to continue as a going concern. In
addition, if we fail to renegotiate with the holders of the 2024 Debentures or to raise the capital necessary to repurchase some or all of the 2024 Debentures, our business, financial condition and
results of operations will likely be materially and adversely affected.

If required, our ability to repurchase our debentures with cash may be limited and failure to repurchase the debentures could constitute an event of default.

If we fail to renegotiate with the holders of the 2024 Debentures or to raise the capital necessary to repurchase some or all of the
2024 Debentures and the premium put, our business, financial condition and results of operations will likely be materially and adversely affected.

On
October 1, 2009, the holders of our 1.5% Convertible Subordinated Debentures Due 2024 ("2024 Debentures"), have the right to require us to repurchase some or all of the 2024
Debentures at a price equal to 113.76% of the principal amount of the 2024 Debentures to be purchased. The increase in the repurchase right would result in an additional payment of
$13.3 million on the $96.7 million aggregate principal amount of the 2024 Debentures is outstanding. We cannot assure that we will have sufficient financial resources or will be able to
arrange financing to pay the repurchase price of any 2024 Debentures tendered for repurchase.

Our
ability to repurchase the 2024 Debentures in such event may be limited by law, by the indenture associated with the 2024 Debentures, by the terms of other agreements relating to our
senior debt, and by such indebtedness and agreements as may be entered into, replaced, supplemented, or amended from time-to-time. We may be required to refinance our debt in
order to make such payments. We may not have the financial ability to repurchase the 2024 Debentures if payment of our debt is accelerated. If we fail to repurchase the 2024 Debentures as required by
the indenture, it would constitute an event of default which, in turn, may also constitute an event of default under our other debt obligations.

We have experienced continuing losses from operations and we anticipate future losses from operations.

Following a substantial downturn that started in late 2000 and continued for many years, market conditions for our products began to
improve modestly in 2005 and have generally continued to improve through 2008. During this time, our overall revenues have increased, but tend to be volatile during certain periods. During these
periods, our revenues have not been sufficient to cover our operating expenses. Due to general economic conditions and slowdowns in
purchases of networking equipment, it has become increasingly difficult for us to predict the purchasing activities of our customers and we expect that our operating results will fluctuate
substantially in the future; we anticipate future losses from operations. Future fluctuations in operating results may also be caused by a number of factors, many of which are outside our control.
Additional factors that could affect our future operating results include the following:



61

---



Table of Contents



In
order to achieve and sustain profitability, we must achieve a combination of substantial revenue growth and/or a reduction in operating expenses.

If we are unable to accurately predict our future sales and to appropriately budget for our expenses, our operating results could suffer.

The rapidly changing nature of the markets in which we sell our products limit our ability to accurately forecast quarterly and annual
sales. Additionally, because many of our expenses are fixed in the short-term or are incurred in advance of anticipated sales, we may not be able to decrease our expenses in a timely
manner to offset any shortfall of sales.

The cyclical nature of and volatility in the semiconductor industry could adversely impact our revenue and results of operations.

We operate primarily in the semiconductor industry, which is cyclical and subject to rapid change and evolving industry standards. From
time-to-time, the semiconductor industry has experienced significant downturns. These downturns are characterized by decreases in product demand, excess customer inventories,
and accelerated erosion of prices. These factors could cause substantial fluctuations in our revenue and in our results of operations.

Our operating results may be adversely impacted by worldwide political and economic uncertainties and specific conditions in the markets we address.

In the recent past, general worldwide economic conditions have experienced a downturn due to slower economic activity, concerns about
inflation and deflation, increased energy costs, decreased consumer confidence, reduced corporate profits and capital spending, and adverse business conditions. These conditions make it extremely
difficult for our customers, our vendors, and us to accurately forecast and plan future business activities, and could cause U.S. and foreign businesses to slow spending on our products, which would
delay and lengthen sales cycles. We cannot predict the timing, strength, or duration of any economic slowdown or subsequent economic recovery, worldwide, or in the semiconductor industry. If the
economy or markets in which we operate do not remain at their present levels, our business, financial condition, and results of operations will likely be materially and adversely affected.

62

---



Table of Contents

The short life cycles of some of our products may leave us with obsolete or excess inventories, which could have an adverse impact on our operating profit and net income.

The life cycles of some of our products depend heavily upon the life cycles of the end products into which our products are designed.
Products with short life cycles require us to manage production and inventory levels closely. We cannot assure you that obsolete or excess inventories, which may result from unanticipated changes in
the estimated total demand for our products and/or the estimated life cycles of the end products into which our products are designed, will not result in significant charges that will negatively
affect our operating profit and net income.

We have limited control over the indirect channels of distribution we utilize, which makes it difficult to accurately forecast orders and could result in the loss of certain
sales opportunities.

Our revenues could be adversely affected if our relationships with resellers or distributors were to deteriorate or if the financial
condition of these resellers or distributors were to decline. In addition, as our business grows, there may be an increased reliance on indirect channels of distribution. There can be no assurance
that we will be successful in maintaining or expanding these indirect channels of distribution. This could result in the loss of certain sales opportunities. Furthermore, the reliance on indirect
channels of distribution may reduce visibility with respect to future business, thereby, making it more difficult to accurately forecast orders.

Order or shipment cancellations or deferrals could cause our revenue to decline or fluctuate.

We sell, and expect to continue selling, a significant number of products pursuant to purchase orders that customers may cancel or
defer on short notice without incurring a significant penalty. Cancellations or deferrals could cause us to hold excess inventory, which could adversely affect our results of operations. If a customer
cancels or defers product shipments or refuses to accept shipped products, we may incur unanticipated reductions or delays in recognizing revenue. If
a customer does not pay for products in a timely manner, we could incur significant charges against income, which could materially and adversely affect our revenue and cash flows.

Our international sales and operations subject us to risks that could adversely affect our revenue and operating results.

Sales to customers located outside the U.S. have historically accounted for a significant percentage of our revenue and we anticipate
that such sales will continue to be a significant percentage of our revenue. International sales constituted 49%, 48%, and 46% of our net revenue in fiscal 2008, 2007, and 2006 respectively.
Development and customer support operations located outside the U.S. have historically accounted for a significant percentage of our operating expenses and we anticipate that such operations will
continue to be a significant percentage of our expenses. International sales and operations involve a variety of risks and uncertainties, including risks related to:



63

---



Table of Contents



Failure
to successfully address these risks and uncertainties could adversely affect our international sales, which could in turn, have a material and adverse effect on our results of
operations and financial condition.

Risks Relating to Our Business

Recent changes in our management may cause uncertainty in, or be disruptive to, our general business operations and the implementation of our business strategy.

Since April 2006, we have replaced our Chief Executive Officer, Chief Financial Officer, and most of our accounting and financial staff
as well as several Vice Presidential level positions reporting to the CEO. In addition, most of the members of our Board of Directors have resigned and new directors have been appointed. These changes
in our management and Board of Directors have been and may continue to be disruptive to our business, and, during the transition period, there have been and may continue to be uncertainty among
customers, investors, vendors, employees, and others concerning our future direction and performance. Our future success will depend, to a significant extent, on the ability of our management team to
work together effectively. The loss of any member of our senior management or other key personnel could harm our ability to implement our business strategy and respond to the rapidly changing market
conditions in which we operate. Moreover, our success will depend on our ability to attract, hire, and retain senior management and other key personnel and on the abilities of the new management
personnel to function effectively, both individually and as a group, going forward.

If we are unable to develop and introduce new products successfully or to achieve market acceptance of our new products, our revenues, and operating income will be adversely
affected.

Our future success will depend on our ability to develop new, high-performance ICs for existing and new markets, the
cost-effective and timely introduction of such products, and our ability to convince leading communications equipment manufacturers to select these products. Our financial results in the
past have been, and are expected in the future to continue to be, dependent on the introduction of a relatively small number of new products and the timely completion and delivery of those products to
customers. The development of new ICs is highly complex, and from time-to-time, we have experienced delays in completing the development and introduction of new products. Our
ability to develop and deliver new products successfully will depend on various factors, including our ability to:



If
we are not able to develop and introduce new products successfully, our revenues and operating income will be materially and adversely affected. In particular, our revenue growth and
profitability could be impacted by substantial delays in introducing new products. Our success will also depend on

64

---



Table of Contents

the
ability of our customers to successfully develop new products and enhance existing products for the Carrier and Enterprise Networking and Storage markets. These markets may not develop in the
manner or in the time periods that our customers anticipate. If they do not, or if our customers' products do not gain widespread acceptance in these markets, our revenues and operating income may be
materially and adversely affected.

Demand for our products may be negatively affected if our expectations regarding market demand for particular products are not accurate.

Product introductions as well as future roadmap products are based on our expectations regarding market demand and direction. If our
expectations regarding market demand and direction are incorrect, the rate of development or acceptance of our current and
next-generation solutions do not meet market demand and customer expectation, the sales of our legacy or current Carrier and Enterprise Networking and Storage Products decline more rapidly
than we anticipate, or if the rate of decline continues to exceed the rate of growth of our new products, it could negatively affect demand for our products, consolidated revenues, and profitability.

We are dependent on a small number of customers in a few industries for a significant amount of net revenues. A decrease in sales to, or the loss of, one or more significant
customers could adversely impact our revenues and results of operations.

We focus our sales efforts on a small number of customers in the Carrier and Enterprise Networking and Storage markets that require
high-performance ICs and intend to continue doing so in the future. Some of these customers are also our competitors. If any of our major customers were to delay orders of our products or
stop buying our products, our business and financial condition would be severely affected. Additionally, if any of our customers are impacted by consolidation, experience financial difficulty
including filing for bankruptcy protection, or are impacted by adverse economic conditions that would delay networking infrastructure upgrades, build-outs or new installations, this could
also result in increased competition for our products and downward pressure on the pricing for our products.

Defects, errors, or failures in our products could result in higher costs than we expect and could harm our reputation and adversely affect our revenues and level of
customer satisfaction.

Due to the highly complex nature of our products, on occasion an undetected defect, error, or failure may occur when one of our
products is deployed in the field. The occurrence of defects, errors, or failures in our products could result in cancellation of orders, product returns, and the loss of, or delay in, market
acceptance of our IC solutions. Our customers could, in turn, bring legal actions against us, resulting in the diversion of our resources, legal expenses and judgments, fines or other penalties, or
losses. Any of these occurrences could adversely affect our business, results of operations, and financial condition.

We depend on third-party wafer foundries and other suppliers and subcontract manufacturers to manufacture substantially all of our current products and any delays in
materials, packaging, or manufacturing capacity or failure to meet quality control requirements could have material adverse effects on our customer relationships, revenues, and cash flows.

Wafer fabrication for our products is outsourced to third-party silicon wafer foundry subcontractors such as Taiwan Semiconductor
Manufacturing Corporation ("TSMC"), Chartered Semiconductor Manufacturing, IBM, LSI Logic and United Microelectronics Corporation. As a result, we depend on third-party wafer foundries to allocate a
portion of their manufacturing capacity sufficient to meet our

65

---



Table of Contents

needs
and to produce products of acceptable quality in a timely manner. There are significant risks associated with our reliance on third-party foundries, including:



These
and other risks associated with our reliance on third-party wafer foundries could materially and adversely affect our revenues, cash flows, and relationships with our customers.
For example, the third-party foundries that manufacture our wafers have from time-to-time experienced manufacturing defects and reductions in manufacturing yields. In addition,
disruptions and shortages in wafer foundry capacity may impair our ability to meet our customers' needs and negatively impact our operating results. Our third-party wafer foundries fabricate products
for other companies and, in certain cases, manufacture products of their own design. Historically, there have been periods in which there has been a worldwide shortage of wafer foundry capacity for
the production of high-performance integrated circuits such as ours. Instead of having long-term agreements with any of our third-party foundries, we instead subcontract our
manufacturing requirements on a purchase order basis. As a result, it is possible that the capacity we will need in the future may not be available to us on acceptable terms, if at all.

In
addition to third-party wafer foundries, we also depend on third-party subcontractors in Asia and the United States for the assembly, and in some cases, wafer probe and package
testing of our products. As with our wafer foundries, any difficulty in obtaining parts or services from these subcontractors could affect our ability to meet scheduled product deliveries to
customers, which, could in turn, have a materially adverse affect on our customer relationships, revenues, and cash flows. These third-party subcontractors purchase materials used in the assembly
process based on our forecast. In the event we fail to meet our obligations by placing purchase orders that are inconsistent with our forecast, we may be required to pay compensation for material
forecasted, but not ordered. This may have an adverse affect on revenues, operating results, and cash flows.

Finally,
we are subject to occasional end-of-life ("EOL") notices on certain material and/or products that may impact our ability to continue to
support certain products. This may impact our ability to continue to support certain products, forcing us to EOL our products if we cannot obtain a replacement source of material. This may impact
revenue and/or require us to incur additional costs to provide alternative sources for these materials.

If we do not achieve satisfactory manufacturing yields or quality, our business will be harmed because of increases in our business expenses.

The fabrication of ICs is a highly-complex and technically-demanding process. Defects in designs, problems associated with transitions
to newer manufacturing processes, and the inadvertent use of defective or contaminated materials can result in unacceptable manufacturing yields and performance. These problems are frequently
difficult to detect in the early stages of the production process and can be time-consuming and expensive to correct once detected. Even though we procure substantially all of our wafers
from third-party foundries, we may be responsible for low yields when these wafers are tested against our quality control standards.

In
the past, we have experienced difficulties in achieving acceptable probe and/or final test yields on some of our products, particularly with new products, which frequently involve new
manufacturing processes and smaller geometry features than previous generations. Maintaining high numbers of good die per wafer is critical to our operating results, as decreased yields can result in
higher unit costs,

66

---



Table of Contents

shipment
delays, and increased expenses associated with resolving yield problems. Because we also use estimated yields to value work-in-process inventory, yields below our
estimates may require us to increase the value of inventory and related reserves reflected on our financial statements. In addition, defects in our existing or new products may require us to incur
significant warranty, support and repair costs, and could divert the attention of our engineering personnel away from the development of new products. As a result, poor manufacturing yields, defects
or other performance problems with our products could adversely affect our ability to provide competitively priced products.

We must attract and retain key employees in a highly competitive environment.

Our success depends in part upon our ability to retain key employees. In some of the fields in which we operate, there are only a
limited number of people in the job market who possess the requisite skills. We have experienced difficulty in hiring and retaining sufficient numbers of qualified engineers in parts of our business.
The loss of services of any key personnel or the inability to hire new personnel with the requisite skills could restrict our ability to develop new products or enhance existing products in a timely
matter, to sell products to customers, or to manage our business effectively.

On
June 28, 2006, the Company's common stock was delisted from the NASDAQ National Market. Until recently, except for certain, very limited circumstances, the Company has not
granted stock options to newly hired or current employees. On October 13, 2008, we granted stock options and restricted stock units to current employees. Since our competitors utilize stock
option grants as a significant employee benefit, our inability to offer stock options has hindered our efforts to attract and retain key employees.

We face significant emerging and existing competition and, therefore, may not be able to maintain our market share or may be negatively impacted by competitive pricing
practices.

The markets for our products are intensely competitive and subject to rapid technological advancement in design technology,
wafer-manufacturing techniques, and alternative networking technologies. We must identify and capture future market opportunities to offset the rapid price erosion that characterizes our industry. We
may not be able to develop new products at competitive pricing and performance levels. Even if we are able to do so, we may not complete a new product and introduce it to market in a timely manner.

We
typically face competition at the design stage, where customers evaluate alternative design approaches that require ICs. Our competitors have increasingly frequent opportunities to
supplant our
products in next-generation systems because of shortened product life and design cycles in many of our customers' products.

Competition
is particularly strong in the market for communications ICs, in part, due to the market's historical growth rate, which attracts larger competitors, and in part, to the
number of smaller companies focused on this area. Larger competitors in our market have acquired both mature and early stage companies with advanced technologies. These acquisitions could enhance the
ability of larger competitors to obtain new business that we might have otherwise won.

Our
customers may substitute use of our products in their next-generation equipment with those of current or future competitors. In the communications market, which includes
our Carrier and Enterprise Network markets, our competitors include Applied Micro Circuits Corporation, Broadcom Corporation, Marvell Technology Group Ltd., Maxim Integrated
Products, Inc., Mindspeed Technologies, Inc., and PMCSierra, Inc. Over the next few years, we expect additional competitors, some of which may have greater financial
and other resources, to enter the market with new products. In addition, we are aware of smaller privately-held companies that focus on specific portions of our range of products. These
companies, individually and collectively, represent future competition during the design stage and in subsequent product sales.

67

---



Table of Contents

We must keep pace with rapid technological change and evolving industry standards in order to grow our revenues and our business.

We sell products in markets that are characterized by rapid changes in both product and process technologies, including evolving
industry standards, frequent new product introductions, short product life cycles, and increasing demand for higher-levels of integration and smaller process geometries. We believe that our success,
to a large extent, depends on our ability to adapt to these changes, to continue to improve our product technologies, and to develop new products and technologies to maintain our competitive position.
Our failure to accomplish any of the above could have a negative impact on our business and financial results. If new industry standards emerge, our products or our customers' products could become
unmarketable or obsolete, and we could lose market share. We may also have to incur substantial unanticipated costs to comply with these new standards.

Development
costs for new product technologies continue to increase. We may incur substantially higher R&D costs for next-generation products, as these products are typically
more
complex and must be implemented in more advanced wafer fabrication processes and assembly technologies.

Our business is subject to environmental regulations that could increase our operating expenses.

We are subject to a variety of federal, state, and local environmental regulations relating to the use, storage, discharge, and
disposal of toxic, volatile, and other hazardous chemicals used in our designing and manufacturing processes. In some circumstances, these regulations may require us to fund remedial action regardless
of fault. Consequently, it is often difficult to estimate the future impact of environmental matters, including the potential liabilities associated with chemicals used in our designing and
manufacturing processes. If we fail to comply with these regulations, we could be subject to fines or be required to suspend or cease our operations. In addition, these regulations may restrict our
ability to expand operations at our present locations in the United States and worldwide or require us to incur significant compliance-related expenses.

If we are not successful in protecting our intellectual property rights, it may harm our ability to compete or maintain market share.

We rely on a combination of patent, copyright, trademark, and trade secret protections, as well as confidentiality agreements and other
methods, to protect our proprietary technologies and processes. For example, we enter into confidentiality agreements with our employees, consultants, and business partners, and control access to and
distribution of our proprietary information. As of June 30, 2008 we had 91 U.S. patents and 14 foreign patents for various aspects of design and process innovations used in the design and
manufacture of our products and have a number of pending U.S. and foreign patent applications.

However,
despite our efforts to protect our intellectual property, we cannot assure you that:



A
failure by us to meaningfully protect our intellectual property could have a materially adverse affect on our business, financial condition, operating results, and ability to compete,
including

68

---



Table of Contents

maintaining
our competitive position in the market. In addition, effective patent, copyright, trademark, and trade secret protection may be unavailable or limited in certain countries. We have begun
to find opportunities to license our intellectual property. While this may provide a substantial business opportunity for us, it may also increase the potential for others to misappropriate or
infringe upon our intellectual property.

We may be subject to claims of infringement of third-party intellectual property rights or demands that we license third-party technology, which could result in significant
expense and loss of our proprietary rights.

The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights. As is common in the
industry, from time-to-time, third parties have asserted patent, copyright, trademark, and other intellectual property rights to technologies that are important to our business
and have demanded that we license their patents and technology. To date, none of these claims has resulted in the commencement of any litigation against us, nor have we believed that it is necessary
to license any of the rights referred to in such claims. We expect, however, that we will continue to receive such claims
in the future, and any litigation to determine their validity, regardless of their merit or resolution, could be costly and divert the efforts and attention of our management and technical personnel.
We have begun to find opportunities to license our intellectual property. While this may provide a substantial business opportunity for the Company, it may also increase the potential for others to
initiate claims against us. We cannot assure that we would prevail in such disputes given the complex technical issues and inherent uncertainties in intellectual property litigation. If such
litigation were to result in an adverse ruling we could be required to:



We have a shareholder rights plan designed to discourage hostile takeovers and may prevent shareholders from realizing a takeover premium on their shares of Vitesse common
stock.

Vitesse has a shareholder rights plan intended to preserve the long-term value of Vitesse to our shareholders by
discouraging a hostile takeover. Under the shareholder rights plan, each outstanding share of our common stock has an associated preferred stock purchase right. The rights are exercisable only if a
person or group acquires 15% or more of our outstanding common stock. The dilutive effect of the rights on the acquiring person or group is intended to encourage such person or group to negotiate with
our Board of Directors prior to attempting a takeover. If our Board of Directors believes a proposed acquisition of Vitesse is in the best interests of Vitesse and its shareholders, our Board of
Directors may amend the shareowner rights plan or redeem the rights for a nominal amount in order to permit the acquisition to be completed without interference from the plan. However, by discouraging
hostile takeovers the shareholder rights plan may prevent shareholders from realizing a takeover premium on their shares of Vitesse common stock.

69

---



Table of Contents

Risks Relating to our Current and Prior Financial Statements and Related Matters

We have material weaknesses in our internal control over financial reporting and cannot provide assurance that additional material weaknesses will not be identified in the
future. If our internal control over financial reporting or disclosure control and procedures are not effective, there may be errors in our financial statements that could require a restatement or our
filings may not be timely and investors may lose confidence in our reported financial information, which could lead to a decline in our stock price.

Following the Company's determination that the Management Report on Internal Control over Financial Reporting as of
September 30, 2005, and the Report of KPMG, LLP, the Company's independent registered public accounting firm, relating to the effectiveness of the Company's internal control over
financial reporting and management's assessment, thereof, as of September 30, 2005, both of which reports are included in the Company's Annual Report on Form 10-K for the
year ended September 30, 2005, should not be relied upon, and the investigation into our internal control over financial reporting by the Special Committee, we cannot assure you that our
current financial reporting or disclosure controls are effective.

Management's
evaluation of the design and operating effectiveness of our internal control over financial reporting identified material weaknesses resulting from design and operating
deficiencies in the internal control system, including that we did not maintain: (i) an effective control environment, which includes controls over the administration of and accounting for
stock options and access to our information systems, as well as adequate segregation of duties; or (ii) effective controls over the period-end process, including the review,
supervision, and monitoring of the preparation of journal entries and account reconciliations, as well as the accounting for inventory, revenue recognition and payroll.

The
Company, commencing in mid-2006, in order to rectify these weaknesses began: (i) hiring more experienced and senior finance and legal personnel;
(ii) developing additional financial policies and procedures; (iii) establishing processes and procedures to increase communications between
the financial reporting, accounting functions and senior management; and (iv) instituting a formal Code of Business Conduct and Ethics and whistle-blower policy.

In
addition, the Company has implemented, or is currently implementing the following:



While
we are committed to the changes made to our internal control over financial reporting, and believe we have made progress towards resolving our material weaknesses, until sufficient
time has passed as to evaluate the effectiveness of the modifications of our internal control over financial reporting, we cannot assure you that there will not be errors in our financial statements
that could require a restatement or delay in filings, and as a result investors may lose confidence in our reported financial information, which could lead to a decline in our stock price.

70

---



Table of Contents

We and our employees face potential federal tax and other liabilities in connection with our past option grant practices.

In reviewing past stock option grants, Vitesse determined that various stock options were granted with exercise prices that were less
than the fair market value of Vitesse's common stock on the date of grant. These grants raise potential tax issues involving Code Sections 162(m) and 409A as well as income tax and employment
tax withholding obligations. The issue was voluntarily disclosed to the IRS and the parties are in the process of working out resolutions to the various issues.

We have not been able to restate or provide our financial statements for periods prior to September 30, 2005, which limits the ability to evaluate our historical
financial performance to estimate future performance.

In April 2006, we announced that our then published financial statements should no longer be relied upon. The investigation determined
that members of our former senior management backdated and manipulated the grant date of options over a number of years and subsequently attempted to create and alter documents in order to conceal
these practices. The investigation also found evidence of a number of improper accounting practices. As a result of these improper accounting practices and evaluation of the financial records and
controls in place prior to September 30, 2005, current management concluded that it cannot rely on historical balances or on the testing performed by its former auditors, supporting accounting
documents are poor and do not exist for many transactions, and key internal accounting controls were overridden by prior management or did not exist. As a result, current management has been unable to
prepare any financial statements for any period prior to September 30, 2005. Thus, there is limited historical financial information on which investors can rely upon while evaluating our
financial performance.

Since we have been unable to provide audited financial information for the year ended September 30, 2005, or for prior periods, we are not in compliance with our
current reporting obligations under the Securities Exchange Act of 1934.

As discussed above, we have not been able to restate or provide financial statements for any period prior to October 1, 2005.
Until the filings of the Form 10-Q for the periods ended December 31, 2007, March 31, 2008 and June 30, 2008 and its annual report on Form 10-K for the
fiscal year ended September 30, 2008 we were unable to comply with the financial statement requirements for an Annual Report on Form 10-K under the Exchange Act. Our failure
to comply fully with our reporting requirements under the Exchange Act could result in the SEC deregistering our common stock under the Exchange Act and/or imposing civil penalties on us.

Our
failure to comply fully with our reporting requirements under the Exchange Act precluded us from registering any offer or sale of our securities with the SEC. In addition, we will
not be eligible to use a "short form" registration statement on Form S-3 until we have been current and timely in our periodic reporting obligations for 12 months, which
could increase the cost of raising capital through the issuance and sale of equity. Furthermore, requirements under the Exchange Act regarding the information that must be provided to shareholders in
connection with an annual meeting of shareholders may preclude us from taking certain actions intended to increase the attractiveness of our common stock and facilitate relisting on a national
exchange, as discussed below.

The market price for our common stock has been volatile due, in part, to our delisting from the NASDAQ National Market in June 2006 and future volatility could cause the
value of investments in our Company to fluctuate.

As a result of our failure to comply fully with our reporting requirements under the Exchange Act, our common stock has been delisted
from the NASDAQ National Market. We currently are quoted

71

---



Table of Contents

under
the symbol VTSS.PK on the Pink Sheets, an electronic quotation service for securities traded over-the-counter. As a result, there may be significantly less liquidity in
the market for our common stock. In addition, our ability to raise additional capital through equity financing, and attract and retain personnel by means of equity compensation, may be impaired.
Furthermore, we may experience decreases in institutional and other investor demand, analyst coverage, market-making activity, and information available concerning trading prices and volume, and fewer
broker-dealers may be willing to execute trades with respect to our common stock. The delisting has decreased the attractiveness of our common stock and caused the trading volume of our common stock
to decline significantly, which has resulted in a significant decline in the market price of our common stock.

We
intend to seek to be relisted on a securities exchange when we become current in our SEC reporting. There can be no assurance whether we will satisfy the standards for listing on an
exchange or that an exchange will approve our listing. Nor can there be any assurance, at this time, when a relisting would occur. Continuing to be quoted only on Pink Sheets could result in continued
volatility in the trading price of our common stock and could cause its value to fluctuate.

ITEM 2.    UNREGISTERED SALES OF EQUITY AND USE OF PROCEEDS

None.

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE BY SHAREHOLDERS

None.

ITEM 5.    OTHER INFORMATION

None.

ITEM 6.    EXHIBITS

EXHIBITS

3.1

Amended and Restated Certificate of Incorporation. (Incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2000 filed May 5,
2000).3.2

Bylaws. (Incorporated by reference to Exhibit 3.2 to the Company's current report on Form 8-K filed on December 2, 2004).4.1

Specimen of Registrant's Common Stock Certificate. (Incorporated by reference to the Company's Registration Statement on Form S-1 (File no. 33-43548), effective December 10, 1991 filed October 25,
1991).4.2

Rights Agreement dated as of March 3, 2003 between Vitesse Semiconductor Corporation and EquiServe Trust Company, N.A., as Rights Agent. (Incorporated by reference to Exhibit 1 to the Form 8-A12(g)
filed March 5, 2003).10.1

Second Amended and Restated Loan and Security Agreement between the Company and Silicon Valley Bank, as amended March 2, 2006 (Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed
May 18, 2006).


72

---



Table of Contents

10.2

Third Amended and Restated Loan and Security Agreement between the Company and Special Value Expansion Fund & Obsidian, as amended June 7, 2006 (Incorporated by reference to Exhibit 10.1 to the
Company's Form 8-K filed June 12, 2006).10.3

Security Agreement between the Company and Obsidian, dated as of June 7, 2006. (Incorporated by reference to Exhibit 10.2 to the Company's Form 8-K filed June 12, 2006).10.4

Fourth Amended and Restated Loan Security Agreement between the Company and Special Value Expansion Fund & Obsidian, as amended June 20, 2006. (Incorporated by reference to Exhibit 10.1 to the
Company's Form 8-K filed June 26, 2006).10.5

Amendment No. 1, dated October 10, 2007, to the Fourth Amended and Restated Loan Security Agreement between the Company and Special Value Expansion Fund & Obsidian, as amended June 20, 2006.
(Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed October 15, 2007).10.6

Employment Agreement between the Company and Chris Gardner, dated as of June 26, 2006. (Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed July 7, 2006).10.7

First Supplemental Indenture, dated November 3, 2006 between the Company and U.S. Bank National Assoc. as Trustee. (Incorporated by reference to Exhibit 99 to the Company's Form 8-K filed
November 9, 2006).10.8

Employment Agreement between the Company and Richard Yonker dated as of November 16, 2006. (Incorporated by reference to Exhibit 99.A4 to the Company's Form 8-K filed December 20,
2006).10.9

Employment Agreement between the Company and Michael Green, dated January 2, 2007. (Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed January 31, 2007).10.10

Warrant Registration Rights Agreement, dated January 25, 2007. (Incorporated by reference to Exhibit 10.2 to the Company's Form 8-K filed January 31, 2007).10.11

Amended and Restated Employment Agreement between the Company and Richard Yonker, dated June 26, 2007. (Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed June 29,
2007).10.12

Amended and Restated Employment Agreement between the Company and Christopher Gardner, dated July 27, 2007. (Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed August 2,
2007).10.13

2001 Stock Incentive Plan, Amended and Restated as of July 27, 2007. (Incorporated by reference to Exhibit 10.2 to the Company's Form 8-K filed August 2, 2007)10.14

Form of Indemnity Agreement between the Directors and the Company. (Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed August 22, 2007).10.15

Purchase and Sale Letter Agreement, dated August 22, 2007 between the Company and Maxim Integrated Products, Inc. (Incorporated by reference to Exhibit 10.2 to the Company's Form 8-K filed
August 29, 2007).10.16

Loan Agreement, dated August 23, 2007 between the Company and Whitebox VSC, Ltd. (Incorporated by reference to Exhibit 10.3to the Company's Form 8-K filed August 29, 2007).10.17

Senior Unsecured Convertible Note Purchase Agreement, dated August 23, 2007 between the Company and Whitebox VSC, Ltd. (Incorporated by reference to Exhibit 10.4 to the Company's Form 8-K filed
August 29, 2007).


73

---



Table of Contents

10.18

Second Supplemental Indenture, dated September 24, 2007 between the Company and U.S. Bank National Association. (Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed September 27,
2007).10.19

Term Note, dated October 29, 2007 between the Company and Whitebox VSC, Ltd. for $30 million. (Incorporated by reference to Exhibit 4.1 to the Company's Form 8-K filed October 31,
2007).10.20

Intellectual Property, Assignment and License Agreement, dated October 29, 2007 between the Company and Maxim Integrated Products, Inc. (Incorporated by reference to Exhibit 10.1 to the Company's
Form 8-K filed October 31, 2007).10.21

Letter Agreement, dated October 26, 2007 between the Company and Dr. Martin C. Nuss (Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed November 20, 2007).10.22

Indenture between Vitesse Semiconductor Corporation and U.S. Bank National Association, as Trustee (including form of 1.50% Convertible Subordinated Debentures due 2024), dated as of September 22, 2004.
(Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed September 23, 2004).21.1*

Subsidiaries of Vitesse Semiconductor, Inc.31.1*

Rule13a-14(a)/302 SOX Certification of Chief Executive Officer.31.2*

Rule13a-14(a)/302 SOX Certification of Chief Financial Officer.32.1*

Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer.


---

74

---





Table of Contents

SIGNATURES

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

VITESSE SEMICONDUCTOR CORPORATION(Registrant)Dated: December 30, 2008

By:

/s/ CHRISTOPHER R. GARDNER Chief Executive Officer


Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on
the date indicated.

Dated: December 30, 2008

By:

/s/ CHRISTOPHER R. GARDNER Director and Chief Executive OfficerDated: December 30 2008

By:

/s/ RICHARD C. YONKER Chief Financial Officer
(Principal Financial and Accounting Officer)Dated: December 30, 2008

By:

/s/ GUY W. ADAMS DirectorDated: December 30, 2008

By:

/s/ VINCENT CHAN DirectorDated: December 30, 2008

By:

/s/ STEVEN P. HANSON DirectorDated: December 30, 2008

By:

/s/ ROBERT A. LUNDY DirectorDated: December 30, 2008

By:

/s/ EDWARD ROGAS, JR. DirectorDated: December 30, 2008

By:

/s/ WILLOW B. SHIRE Director


75

---