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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, 2010ORo

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(State or other jurisdiction of
incorporation or organization)

77-0138960(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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes o    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 definition 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 August 5, 2010 there
were 23,986,531 shares of the registrant's $0.01 par value common stock outstanding.



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Table of Contents



VITESSE SEMICONDUCTOR CORPORATION        (UNAUDITED) QUARTERLY REPORT ON FORM 10-Q  FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2010

TABLE OF CONTENTS



PART I. FINANCIAL INFORMATIONItem 1.

Financial Statements

3Unaudited Consolidated Balance Sheets as of June 30, 2010 and September 30, 2009

3Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2010 and 2009

4Unaudited Consolidated Statement of Shareholders' Deficit and Comprehensive Loss for the Nine Months Ended June 30, 2010

5Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2010 and 2009

6Notes to Unaudited Consolidated Financial Statements

7Item 2.

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

21Item 3.

Quantitative and Qualitative Disclosure About Market Risk

33Item 4.

Controls and Procedures

34PART II. OTHER INFORMATIONItem 1.

Legal Proceedings

35Item 1A.

Risk Factors

35Item 2.

Unregistered Sales of Equity and Use of Proceeds

35Item 3.

Defaults Upon Senior Securities

35Item 4.

Reserved

35Item 5.

Other Information

35Item 6.

Exhibits and Reports on Form 8-K

36


2

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Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1:    FINANCIAL STATEMENTS



VITESSE SEMICONDUCTOR CORPORATION        UNAUDITED CONSOLIDATED BALANCE SHEETS

June 30,
2010

September 30,
2009(in thousands, except
share data)ASSETSCurrent assets:Cash and cash equivalents

$
38,621

$
57,544Accounts receivable, net


13,265


15,074Inventory


24,241


18,809Restricted cash


391


398Prepaid expenses and other current assets


4,604


4,956Total current assets


81,122


96,781Property, plant and equipment, net


8,015


7,874Other intangible assets, net


1,046


1,541Other assets


3,845


3,077$
94,028

$
109,273LIABILITIES AND SHAREHOLDERS' DEFICITCurrent liabilities:Accounts payable

$
14,916

$
11,191Accrued expenses and other current liabilities


15,542


14,182Derivative liability





12,209Deferred revenue


4,720


4,566Current portion of debt and capital leases


10


5,236Convertible subordinated debt





10,000Total current liabilities


35,188


57,384Other long-term liabilities


1,796


1,810Long-term debt, net of discount


25,689


24,652Derivative liability


29,216


Convertible subordinated debt


38,606


86,700Total liabilities


130,495


170,546Commitments and contingenciesShareholders' deficit:Preferred stockSeries B, $0.01 par value, 10,000,000 shares authorized; 219,111 and no shares outstanding at June 30, 2010 and
September 30, 2010, respectively


2


Common stock, $0.01 par value, 250,000,000 shares authorized; 23,819,521 and 11,544,803 shares outstanding at June 30, 2010 and September 30,
2009, respectively


238


115Additional paid-in-capital


1,816,373


1,756,797Accumulated deficit


(1,853,162
)

(1,818,271
)Total Vitesse Semiconductor Corporation shareholders' deficit


(36,549
)

(61,359
)Noncontrolling interest


82


86Total shareholders' deficit


(36,467
)

(61,273
)$
94,028

$
109,273


See accompanying notes to unaudited consolidated financial statements.

3

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VITESSE SEMICONDUCTOR CORPORATION        UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

Three months ended
June 30,

Nine months ended
June 30,2010

2009

2010

2009(in thousands, except
per share data)

(in thousands, except
per share data)Product revenues

$
37,533

$
36,356

$
122,805

$
115,743Intellectual property revenues





8,250


290


13,250Net revenues


37,533


44,606


123,095


128,993Costs and expenses:Cost of revenues


15,702


17,282


54,167


57,957Engineering, research and development


13,674


11,200


37,909


33,720Selling, general and administrative (net of a gain on the sale of building of $2.9 million for the nine months ended June 30, 2009)


8,669


11,412


28,281


31,761Accounting remediation & reconstruction expense & litigation costs





(13,206
)

73


(9,742
)Goodwill impairment











191,418Amortization of intangible assets


182


362


613


1,068Costs and expenses


38,227


27,050


121,043


306,182Income (loss) from operations


(694
)

17,556


2,052


(177,189
)Other income (expense):Interest income (expense), net (including the change in derivative liability valuation of $32.8 million and ($5.9) million for the three and nine months
ended June 30, 2010, respectively, and ($4.6) million for the three and nine months ended June 30, 2009)


30,275


(5,804
)

(12,896
)

(8,104
)Gain (loss) on extinguishment of debt


265





(21,311
)

Other income (expense), net


(61
)

(38
)

44


58Other income (expense), net


30,479


(5,842
)

(34,163
)

(8,046
)Income (loss) before income tax expense (benefit)


29,785


11,714


(32,111
)

(185,235
)Income tax (benefit) expense


(3,244
)

(696
)

2,781


(600
)Net income (loss) from continuing operations


33,029


12,410


(34,892
)

(184,635
)Income from discontinued operations, net





71





71Net income (loss)


33,029


12,481


(34,892
)

(184,564
)Net loss attributable to noncontrolling interest








(1
)

(1
)Fair value adjustment of Preferred StockSeries B








126


Net income (loss) available to common shareholders

$
33,029

$
12,481

$
(35,017
)
$
(184,563
)Net income per preferred shareNet income

$
6.92

$


$


$
Preferred shares outstanding


219








Net income (loss) per common sharebasicContinuing operations

$
1.38

$
1.07

$
(1.74
)
$
(16.12
)Net income (loss)

$
1.38

$
1.08

$
(1.74
)
$
(16.11
)Net (loss) income per common sharedilutedContinuing operations

$
0.96

$
1.07

$
(1.74
)
$
(16.12
)Net income (loss)

$
0.99

$
1.08

$
(1.74
)
$
(16.11
)Weighted average common shares outstanding:Basic


22,780


11,545


20,105


11,455Diluted


34,544


11,587


20,105


11,455


See accompanying notes to unaudited consolidated financial statements.

4

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VITESSE SEMICONDUCTOR CORPORATION        UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT AND  COMPREHENSIVE LOSS

Total Vitesse
Semiconductor
Corporation
Shareholders'
DeficitPreferred Stock

Common StockAdditional
Paid-in-Capital

Accumulated
Deficit

Noncontrolling
Interest

Total
Shareholders'
Deficit(In thousands,
except share data)

Shares

Amount

Shares

AmountBalance at September 30, 2009




$



11,544,803

$
115

$
1,756,797

$
(1,818,271
)
$
(61,359
)
$
86

$
(61,273
)Net loss

















(34,891
)

(34,891
)

(1
)

(34,892
)Compensation expense related to stock options and awards














1,724





1,724





1,724Conversion of Series B Preferred Shares


(551,675
)

(6
)

2,758,377


28


(22
)










Conversion of 8% Debentures








869,531


9


6,004





6,013





6,013Debt restructuring costs














(1,050
)




(1,050
)




(1,050
)Tax expense on debt transaction














512





512





512Shares issued pursuant to debt restructuring


770,786


8


8,646,810


86


52,408





52,502





52,502Distribution to minority interest holders























(3
)

(3
)Balance at June 30, 2010


219,111

$
2


23,819,521

$
238

$
1,816,373

$
(1,853,162
)
$
(36,549
)
$
82

$
(36,467
)


See accompanying notes to unaudited consolidated financial statements.

5

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VITESSE SEMICONDUCTOR CORPORATION        UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine months ended
June 30,2010

2009(in thousands)Cash flows from operating activities:Net loss

$
(34,892
)
$
(184,564
)Adjustments to reconcile net loss to net cash provided by operating activities:Depreciation and amortization


2,615


3,260Share-based compensation


1,724


2,381Change in market value of embedded derivative liability


5,860


4,636Gain on conversion of debt


(265
)

Loss on extinguishment of debt


20,765


Impairment of goodwill





191,418Capitalization of interest


937


Amortization of debt issuance costs


605


566Amortization of debt discount


1,311


Gain on sale of Colorado building





(2,924
)Other


511


(29
)Change in operating assets and liabilities:Accounts receivable


1,809


(8,554
)Inventory


(5,432
)

13,530Restricted cash


7


197Prepaids and other current assets


259


(566
)Accounts payable


3,725


880Accrued expenses and other liabilities


1,346


(5,898
)Deferred revenue


154


(2,082
)Net cash provided by operating activities


1,039


12,251Cash flows from investing activities:Proceeds from sale of Colorado building





6,500Transaction costs for sale of Colorado building





(547
)Capital expenditures


(2,150
)

(1,540
)Purchase of intangible assets


(111
)

(1,982
)Other


(3
)

18Net cash (used in) provided by investing activities


(2,264
)

2,449Cash flows from financing activities:Payment of convertible debentures


(10,000
)

Payment of senior debt


(5,000
)

Debt issuance costs


(1,365
)

Equity issuance costs


(1,050
)

Prepayment fee on senior debt


(50
)

Payment of capital lease obligations


(233
)

Net cash used in financing activities


(17,698
)

Net (decrease) increase in cash


(18,923
)

14,700Cash and cash equivalents at beginning of period


57,544


36,722Cash and cash equivalents at end of period

$
38,621

$
51,422Cash paid during the year for:Interest

$
4,155

$
3,402Income taxes

$
643

$
2,352Supplemental disclosure of non-cash transactions:Non-cash investing and financing activities:Issuance of 2014 convertible debentures

$
40,343

$
Common stock issued in exchange for 2024 debentures

$
36,317

$
Preferred stockSeries B issued in exchange for 2024 debentures

$
16,187

$
Compound embedded derivative issued in exchange for 2024 debentures

$
27,925

$
Common stock issued in exchange for 2014 debentures

$
6,013

$
Common stock issued in exchange for Preferred Stock Series B

$
27,584

$



See accompanying notes to unaudited consolidated financial statements.

6

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VITESSE SEMICONDUCTOR CORPORATION        NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS        June 30, 2010

Note 1. The Company and its Significant Accounting Policies

Description of Business

Vitesse Semiconductor Corporation ("Vitesse," the "Company," "us" or "we") is a leading worldwide 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 25 years, Vitesse has led the transition of
new technologies in communications networks.

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 OTCQB marketplace under the ticker symbol VTSS.

Basis of Presentation

The interim unaudited 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, 2009, included in our Annual Report on
Form 10-K filed with the SEC on December 14, 2009.

The
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, 2010 and September 30, 2009, the consolidated results of our operations for the three and nine months ended
June 30, 2010 and 2009, our consolidated cash flows for the nine months ended June 30, 2010 and 2009 and the changes in our shareholders' equity/deficit and comprehensive loss for the
nine months ended June 30, 2010. The results of operations for the three and nine months ended June 30, 2010 are not necessarily indicative of the results to be expected for future
quarters or the full year.

On
January 7, 2010, the Company's stockholders approved an amendment to the Company's Amended and Restated Certificate of Incorporation to affect a reverse stock split of the
Company's common stock at a reverse split ratio between one-for-20 and one-for-50, to be selected by the Board of Directors. On May 17, 2010, the
Company announced its plans to complete a one-for-20 reverse stock split of its common stock, to take effect on June 30, 2010.

Immediately
prior to the one-for-20 reverse stock split on June 30, 2010, there were five billion shares of common stock authorized and 476,399,949 common
shares issued and outstanding. Subsequent to the reverse stock split, there were 250 million common shares authorized, 23,819,521 common shares issued and outstanding. The Company did not issue
fractional shares in connection with the reverse stock split and stockholders otherwise entitled to receive fractional shares received cash in lieu of fractional shares. All share and per share
amounts have been retroactively adjusted to reflect the reverse stock split. There was no net effect on total shareholders' equity as a result of the reverse stock split.

7

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Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2010

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

The
Company's fiscal year is October 1 through September 30.

Reclassifications

Certain reclassifications have been made to prior-year amounts and related footnotes to conform to current-year
presentation.

Correction of Error

During the first quarter of 2010, we identified an error in our financial statements as of September 30, 2009 and for the
quarter and year then ended. This error was the result of an operational change that was not appropriately reflected in our inventory costing and accounting processes. In accordance with Accounting
Standards Codification ("ASC") Topic 250, "Accounting Changes and Error Corrections," originally issued as SAB No. 99"Materiality"and SAB
No. 108"Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,"management
evaluated the materiality of the error from a qualitative and quantitative perspective and concluded that the error was not material to any prior periods. Further, we evaluated the materiality of the
error on the results of operations for the first quarter as well as the expected results of operations for the full year and concluded that the error in the first quarter was quantitatively
significant to the first quarter financial statements but was not anticipated to be material to the full year or the trend of financial results. Accordingly, we corrected the error in the first
quarter. The effects of the adjustment to correct the error on specific line items of the financial statements for the nine months ended June 30, 2010 were as follows:

Nine Months Ended
June 30,
2010 (unaudited)Decrease in cost of sales

$
934Increase in income from operations


934Decrease in net income


934Net loss per sharebasic and diluted

$
(0.05
)


The
adjustment to correct the error had no impact on the three months ended June 30, 2010. The net loss per sharebasic and diluted was adjusted to reflect our
June 30, 2010 one-for-20 reverse stock split.

Computation of Net Income (Loss) per Share

In accordance with ASC Topic 260 "Earnings Per Share" ("ASC 260") originally issued as SFAS 128,
"Earnings per Share," basic net income and loss per share is computed by dividing net income or loss available to common shareholders by the
weighted-average number of common shares outstanding during the period.

For
periods in which we report income from continuing operations, the weighted average number of shares used to calculate diluted income per share is inclusive of common stock
equivalents from unexercised stock options, restricted stock units, warrants, convertible preferred stock and convertible debentures. Unexercised stock options, restricted stock units and warrants are
considered to be

8

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2010

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

common
stock equivalents if, using the treasury stock method, they are determined to be dilutive. The dilutive effect of the convertible preferred stock and convertible debentures is determined using
the if-converted method.

For
the nine months ended June 30, 2010 and 2009, the Company recorded a loss from continuing operations and in accordance with ASC 260, all outstanding potential common shares
were excluded from the diluted loss per share computation. For periods in which the Company reports a loss from continuing operations, 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. For the three months ended
June 30, 2010 , we recorded income from continuing operations and accordingly included common stock equivalents from the convertible debentures, convertible preferred stock, stock options and
restricted stock units in the diluted earnings per share calculation. For the three months ended June 30, 2009, we recorded income from continuing operations and accordingly included common
stock equivalents from restricted stock units in the diluted earnings per share calculation.

Our
shares of Series B Preferred Stock are participating securities. Holders of these shares are entitled to receive, when, as and if dividends are declared by the Board on the
common stock, dividends in an amount equal to 10% of par value per share of the Series B Preferred Stock plus the amount of dividends that would have been payable on the shares of common stock
into which the Series B Preferred Stock could be converted on an if-converted basis. Accordingly, we used the two-class method, as prescribed by ASC 260, in determining
the earnings for each class of stock.

Financial Instruments

ASC Topic 825, "Financial Instruments," 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, restricted cash, accounts receivable, accounts payable, accrued expenses and various
debt instruments. These financial instruments are stated at their carrying values, which are estimates of their fair values because of their nearness to cash settlement or the comparability of their
terms to the terms we could obtain, for similar instruments, in the current market.

Restricted
cash consists of interest-bearing certificates of deposit ("CDs") collateralizing letters of credit and other commitments. As of June 30, 2010 and September 30,
2009, the Company had approximately $1.8 million and $2.0 million, respectively, in CDs.

Our
senior term loan is stated at carrying value of $25.0 million as of June 30, 2010 and $30.0 million as of September 30, 2009, which are estimates of its
fair value.

We
estimate the fair values of the 2014 Debentures and embedded derivatives using a convertible bond valuation model within a lattice framework. These valuations are determined using
Level 3 inputs. The valuation model combines expected cash outflows with market-based assumptions regarding risk-adjusted yields, stock price volatility, recent price quotes and
trading information of the Company's common stock into which the 2014 Debentures are convertible. The fair value of the 2014 Debentures includes the face value of the debentures plus the discount,
which is amortized as interest expense over the life of the debentures. The fair value of the 2014 Debentures was $44.3 million as of June 30, 2010.

9

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Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2010

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

On
October 30, 2009, the date of issuance, the fair value of the bifurcated compound derivative was $28.0 million. As of June 30, 2010, the fair value of the bifurcated compound
derivative was $29.2 million. The change in fair value is reflected as an increase of interest expense in the Statement of Operations for the nine month period ended June 30, 2010.

The
Company will continue to mark the bifurcated compound derivative to market due to the conversion price not being indexed to the Company's own stock. Specifically, the feature
requiring the Company to redeem foregone interest upon conversion by the holder causes the exercise price not to be indexed to the Company's own stock. The change in the fair value of the bifurcated
compound derivative is primarily related to the change in price of the underlying common stock. The change in value of the bifurcated compound derivative is a non-cash item; further, the
Company can elect to settle the embedded derivative in either cash or common shares. As of June 30, 2010, the Company has enough common shares to settle all of its potential conversion
obligations. The Company intends to settle this obligation in common shares should it be exercised by its holders. As the Company intends to, and has the ability to, satisfy the obligations with
equity securities, in accordance with ASC Topic 470 Debt ("ASC 470"), the Company has reclassified the liability as a long-term liability on its Consolidated Balance Sheet as of
June 30, 2010.

As
of September 30, 2009, the fair value of our 2024 Debentures was the face value of $96.7 million. The fair value of the related embedded derivative as of
September 30, 2009 was $12.2 million.

Recent Accounting Pronouncements

We do not believe that there are any recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force),
the American Institute of Certified Public Accountants or the SEC that would have a material impact on the Company's present or future consolidated financial statements.

Note 2. Supplemental Financial Information

Inventory

The following table presents the principal components of the Company's inventory:

June 30,
2010 (unaudited)

September 30,
2009(in thousands)Inventory:Raw materials

$
3,591

$
1,411Work-in-process


8,915


8,335Finished goods


11,735


9,063Total

$
24,241

$
18,809


10

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2010

Note 2. Supplemental Financial Information (Continued)

Revenues by Product Markets

The following table presents revenues from the Company's product markets:

Three Months Ended
June 30,

Nine Months Ended
June 30,2010
(unaudited)

2009
(unaudited)

2010
(unaudited)

2009
(unaudited)(in thousands)Carrier Networking Products

$
14,983

$
16,689

$
51,341

$
51,582Enterprise Networking Products


18,725


14,960


56,655


43,987Non-Core Products


3,825


4,707


14,809


20,174Net Product Revenues

$
37,533

$
36,356

$
122,805

$
115,743


Revenues from Intellectual Property

The following table presents revenues from intellectual property:

Three Months Ended
June 30,

Nine Months Ended
June 30,2010
(unaudited)

2009
(unaudited)

2010
(unaudited)

2009
(unaudited)(in thousands)Licensing Revenues

$


$
8,250

$
290

$
13,250


Revenues by Geographic Area

The following table presents revenues by geographic area:

Three Months Ended
June 30,

Nine Months Ended
June 30,2010
(unaudited)

2009
(unaudited)

2010
(unaudited)

2009
(unaudited)(in thousands)North America(1)

$
13,908

$
20,448

$
48,961

$
60,341Asia Pacific


18,053


20,507


55,014


49,534Europe


5,572


3,651


19,120


19,118Total Net Revenues

$
37,533

$
44,606

$
123,095

$
128,993


(1)North
America includes the United States, Canada and Mexico


11

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Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2010

Note 2. Supplemental Financial Information (Continued)

Computation of Net Income (Loss) per Share

The following table presents the computation of income (loss) per share:

Three Months Ended
June 30,

Nine Months Ended
June 30,2010
(unaudited)

2009
(unaudited)

2010
(unaudited)

2009
(unaudited)(in thousands, except per share data)Net income (loss) from continuing operations

$
33,029

$
12,410

$
(34,892
)
$
(184,635
)Income from discontinued operations, net





71





71Net income (loss)


33,029


12,481


(34,892
)

(184,564
)Net loss attributable to noncontrolling interest








(1
)

(1
)Fair value adjustment of Preferred StockSeries B








126


Net income (loss) available to common shareholders


33,029


12,481


(35,017
)

(184,563
)Impact of assumed conversion of 2014 Debentures:Interest on 2014 Debentures, net of tax


1,161








Net income (loss) available to common shareholders plus assumed conversions

$
34,190

$
12,481

$
(35,017
)
$
(184,563
)Allocation of undistributed earnings to preferred stock


1,516








Preferred StockSeries B


219








Net income per preferred share

$
6.92

$


$


$
Allocation of undistributed earnings to common stockbasicNet income from continuing operations

$
31,513

$


$


$
Income from discontinued operations, net











Net income


31,513








Weighted average number of sharesbasic


22,780


11,545


20,105


11,455Effect of dilutive common stock equivalents from:Outstanding stock options


149








Outstanding restriced stock units


187


42





Convertible preferred stock


1,096








2014 Convertible debentures


10,332








Weighted average number of sharesdiluted


34,544


11,587


20,105


11,455Net income (loss) per common shareBasic:Net income (loss) from continuing operations

$
1.38

$
1.07

$
(1.74
)
$
(16.12
)Income from discontinued operations, net





0.01





0.01Net income (loss)


1.38


1.08


(1.74
)

(16.11
)Fair value adjustment of Preferred StockSeries B











Net income (loss) available to common shareholders

$
1.38

$
1.08

$
(1.74
)
$
(16.11
)Diluted:Net income (loss) from continuing operations

$
0.96

$
1.07

$
(1.74
)
$
(16.12
)Income from discontinued operations, net





0.01





0.01Net income (loss)


0.96


1.08


(1.74
)

(16.11
)Fair value adjustment of Preferred StockSeries B











Net income (loss) available to common shareholders


0.96


1.08


(1.74
)

(16.11
)Impact of assumed conversion of 2014 Debentures:Interest on 2014 Debentures, net of tax


0.03








Net income available to common shareholders plus assumed conversions

$
0.99

$
1.08

$


$



12

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Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2010

Note 2. Supplemental Financial Information (Continued)

For the nine-month periods ended June 30, 2010 and 2009, the Company recorded a loss from continuing operations and in
accordance with ASC 260, all outstanding potential common shares were excluded from the diluted loss per share computation. For periods in which the Company reports a loss from continuing
operations, 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. For the three months ended June 30, 2010, we recorded income from continuing operations and accordingly included common stock equivalents from the convertible
debentures, convertible preferred stock, stock options and restricted stock units in the diluted earnings per share calculation. For the three months ended June 30, 2009, we recorded income
from continuing operations and accordingly included common stock equivalents from restricted stock units in the diluted earnings per share calculation.

Under
the two-class method of determining earnings for each class of stock, we consider the dividend rights and participation rights in undistributed earnings for each class.
For the three months ended June 30, 2010, the dividend rights on the outstanding preferred shares are not material to the calculation and are therefore not considered in determining earnings
and losses per preferred share. The allocation of undistributed earnings to preferred shares is equal to the amount of earnings per common share that would be distributed on an
if-converted basis.

The
potential common shares excluded from the diluted income (loss) per share computation are as follows:

Three Months Ended
June 30,

Nine Months Ended
June 30,2010
(unaudited)

2009
(unaudited)

2010
(unaudited)

2009
(unaudited)(in thousands)Outstanding stock options


951


1,080


1,015


1,082Outstanding restricted stock units


28





96


18Outstanding warrants


8


8


8


8Convertible preferred stock








1,096


2014 Convertible debentures








10,332


2024 Convertible debentures





1,899





1,899Total potential common shares excluded from calculation


987


2,987


12,547


3,007


Note 3. Debt

As of September 30, 2009, we had outstanding a $30.0 million senior secured term loan with Whitebox VSC, Ltd. (the "Senior Term Loan") and $96.7 million in
aggregate principal amount of 1.5% Convertible Subordinated Debentures due 2024 (the "2024 Debentures). Effective October 16, 2009, the Company entered into an agreement to amend the Senior
Term Loan with Whitebox. Pursuant to the amendment to the Senior Term Loan, the Company repaid $5.0 million of the original $30.0 million and agreed to an interest rate increase on the
remaining $25.0 million outstanding. In

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Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2010

Note 3. Debt (Continued)

accordance
with ASC 470, this transaction was accounted for as a debt modification whereby fees of $0.5 million incurred pursuant to the modification were expensed as incurred.

The
Company also entered into a Debt Conversion Agreement (the "Conversion Agreement") with the beneficial owners of more than 96.7% of the 2024 Debentures (the "Noteholders"). Pursuant
to the Conversion Agreement, the Noteholders agreed to exchange their 2024 Debentures for a combination of $6.4 million in cash, 8,646,811 shares of common stock, and $50.0 million in
newly issued 8.00% Convertible Second Lien Debentures Due 2014 (the "2014 Debentures") convertible into 11,109,556 shares of common stock. 770,785 shares of Series B Preferred Stock were also
issued to certain Noteholders. The Conversion Agreement was consummated on October 30, 2009. The Company also paid $3.6 million in cash to 3.3% of the holders of the 2024 Debentures who
declined to participate in the Conversion Agreement.

In
accordance with ASC 470, this transaction was accounted for as a debt extinguishment, pursuant to which the Company recognized a $21.6 million loss. The loss on the
extinguishment of debt was calculated as the difference between the aggregate fair values of the new instruments, including the compound embedded derivative associated with the 2014 Debentures,
totaling $130.8 million, plus $0.8 million in additional amounts and fees paid to the creditors, compared to the net carrying values of the 2024 Debentures and related premium put
derivative of $96.7 million and $13.3 million, respectively.

In
connection with the debt exchange and the debt modification, the Company incurred third-party costs of approximately $2.9 million that were allocated to the underlying
financial instruments issued based on the relative fair value of each instrument. Of the total fees incurred, $0.5 million was allocated to the modification of the Senior Term Loan and expensed
as incurred, $1.0 million was allocated to the issuance of the common and preferred shares and charged against additional paid-in capital, and $1.4 million was allocated to
the issuance of the 2014 Debentures and was capitalized in other assets as debt issuance costs, to be amortized as interest expense over the term of the loan. Unamortized debt issuance costs as of
June 30, 2010 were $1.1 million.

On
May 14, 2010, the Company received a Conversion Notice from one of the Noteholders of the 2014 Debentures of its intent to convert $3.5 million face amount of its
holdings. The Company converted the principal amount of the submitted debentures into shares of common stock and elected to pay the "Make-Whole Amount" (as defined in the Indenture) in
shares of common stock. 777,778 shares of the Company's common stock were issued on May 20, 2010 in settlement of the $3.5 million of debentures based on a conversion price of $4.50 per
share. On June 7, 2010, 91,753 shares of common stock were issued in settlement of the Make-Whole Amount obligation.

In
accordance with ASC 470, this conversion was accounted for as a debt extinguishment due to the bifurcation of the compound embedded derivative. The Company recognized a gain of
$0.3 million in the accompanying financial statements. The gain on the extinguishment of debt was calculated as the difference between the fair value of the shares of common stock issued and
the recorded value of the debt extinguished, which included a pro rata share of 1) debt issue costs; 2) debt discount; and 3) fair value of the embedded derivative on the date of
the conversion.

The
Company has relied on the Noteholders' representation in the Conversion Notice that the Noteholder would not own more than 9.99% of the outstanding common stock of the Company after

14

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Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2010

Note 3. Debt (Continued)

the
conversion of the debentures and payment of the Make-Whole Amount in shares of the Company's common stock.

Note 4. Fair Value Measurements

Assets and liabilities measured at fair value on a recurring basis include the following at June 30, 2010 and September 30, 2009 (in thousands):

Fair Value
Measurements UsingLevel 1

Level 2

Level 3

TotalJune 30, 2010 (unaudited)Derivative liabilitypremium put

$


$


$


$
Derivative liabilitycompound embedded derivative








29,216


29,216September 30, 2009Derivative liabilitypremium put

$


$


$
12,209

$
12,209Derivative liabilitycompound embedded derivative














The
following table provides a reconciliation of the beginning and ending balances for the derivative liabilitypremium put and derivative liabilityembedded
compound derivative liability measured at fair value using significant unobservable inputs (Level 3) (in thousands):

Derivative liabilitypremium
put related to 2024 Debentures

Compund Embedded Derivative
related to 2014 DebenturesBalance at September 30, 2009

$
12,209

$
Transfers in and /or out of Level 3





27,925Total losses included in earnings


1,096


1,291Settlement


(13,305
)

Balance at June 30, 2010 (unaudited)

$


$
29,216


The
compound embedded derivative liability, which is included in long term liabilities, represents the value associated with the right of the holders of the 2014 Debentures associated
with the equity conversion feature and a "make-whole" feature of the 2014 Debentures.

There
is no current observable market for this type of derivative and, as such, we determined the value of the embedded derivative using a lattice-based convertible bond valuation model
that combined expected cash outflows with market-based assumptions. The fair value of the 2014 Debentures without the embedded compound derivative feature was also estimated using a convertible bond
valuation model within a lattice framework. The convertible bond valuation model combined expected cash outflows with market-based assumptions regarding risk-adjusted yields, stock price
volatility and recent price quotes and trading information regarding shares of our common stock into which the 2014 Debentures are convertible. The Company will mark the embedded derivative to market
due to the conversion price not being indexed to the Company's own stock. The change in the fair value of the bifurcated compound embedded derivative is primarily related to the change in price of the
underlying common stock. At the Company's option it can settle the embedded derivative in either cash or

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Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2010

Note 4. Fair Value Measurements (Continued)

common
shares. As of June 30, 2010, the Company has enough common shares to settle the entire obligation in shares. The Company intends to settle this obligation in common shares. As the
Company intends to, and has the ability to, satisfy the obligations with equity securities, in accordance with ASC 470, the Company has reclassified the liability as a long-term
liability on its Consolidated Balance Sheet as of June 30, 2010. The change in fair value of the compound embedded derivative liability is recorded in interest expense.

The
valuation methodologies used by the Company as described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair
values. Furthermore, although management believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine
the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

Note 5. Income Taxes

The provision for income taxes as a percentage of income from continuing operations before income
taxes was 8.84% for the nine months ended June 30, 2010 compared to 5.84% for the comparable period in the prior year. For the year ending September 30, 2010, the Company's estimated
effective tax rate is 8.84%. The Company's effective tax rate is primarily impacted by continuing operating losses.

At
October 1, 2009, the Company had net deferred tax assets of $422.1 million before considering the effect of the valuation allowance. These deferred tax assets were
primarily composed of net operating loss ("NOL") carryforwards, research and development credits, tangible and intangible assets recovery, and other accruals and reserves. Due to
uncertainties surrounding the Company's ability to generate future taxable income to utilize the deferred tax assets, management had recorded a full valuation allowance against the deferred tax
assets.

Effective
October 16, 2009, the Company entered into a Debt Conversion Agreement (the "Conversion Agreement") with the beneficial owners of more than 96.7% of the 2024 Debentures
(the "Noteholders") whereby the Noteholders agreed to exchange their 2024 Debentures for a combination of cash, shares of common stock, the 2014 Debentures and, in some cases, shares of
Series B Preferred Stock. The Conversion Agreement was consummated on October 30, 2009 (the "Closing Date"). (See Note 3Debt in the accompanying unaudited financial
statements).

The
Federal Tax Reform Act of 1986, and similar state laws, contains provisions that may limit the net operating loss and tax credits carry-forwards to be used in any given year upon the
occurrence of certain events, including a significant change in ownership interests. Under IRC Section 382 and 383 rules, a change in ownership can occur 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. When a change of ownership is triggered, the NOLs and credits may be
impaired.

We
performed a study to evaluate the status of net operating losses. Based on that study, we believe that, as a result of the Conversion Agreement discussed above, the Company
experienced an "ownership change" as defined for U.S. federal income tax purposes as of October 30, 2009 that will trigger an impairment of the use of our NOLs and credits as of the fiscal year
ended September 30,

16

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Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2010

Note 5. Income Taxes (Continued)

2010.
As a result of the ownership change, the Company only has approximately $55.7 million of NOLs that can be used in future tax years and is subject to an annual limitation of
$3.1 million in utilizing its NOLs. The NOLs will expire in fiscal year 2030. Also, due to the ownership change, the research and development credits have been limited as to usage such that the
Company does not anticipate being able to use any of its research and development credits existing as of October 30, 2009 in future tax years.

ASC Topic
740 Income Taxes ("ASC 740"), originally issued as FIN 48,"Accounting for Uncertainty in Income TaxesAn
Interpretation of FASB Statement No. 109," 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 losses,
the cumulative effect of applying this interpretation upon adoption on October 1, 2009, had no impact on retained earnings.

As
a result of the adoption of ASC 740, the total amount of gross unrecognized tax benefits, for the nine-months ended June 30, 2010, increased by $344,000 for
potential federal and state tax liabilities. These amounts, if recognized, would impact the effective tax rate.

The
Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. As of June 30, 2010, no material interest or penalties were
accrued due to significant net operating losses.

The
Company is subject to taxation in the US and various state and foreign jurisdictions. The Company recently completed an examination by the Internal Revenue Service for the tax years
ended September 30, 2004 through September 30, 2006. The audit resulted in an adjustment that reduced the Company's federal NOL carryforwards. 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 significantly change within the next twelve months.

Note 6. Shareholders' Equity

Preferred Stock

The Company is authorized to issue up to 10,000,000 shares of preferred stock, par value of $0.01 per share, of which 800,000 shares
have been designated as Series B Participating Non-Cumulative Convertible Preferred Stock, par value of $0.01 per share ("Series B Preferred Stock"). As of June 30,
2010, 219,111 shares of Series B Preferred Stock that are convertible into common stock on a five-to-one basis were outstanding. No preferred shares were outstanding as
of September 30, 2009.

The
Company did not have sufficient authorized common shares for the conversion of all 770,786 shares of Series B Preferred Stock outstanding as of December 31, 2009. In
accordance with ASC Topic 480 "Distinguishing Liabilities from Equity" ("ASC 480"), we classified 44,533 shares of Series B Preferred Stock as temporary equity in the mezzanine section of the
balance sheet as of December 31, 2009. These shares were measured at $5.00 per share the fair value of the common stock they would have been converted into on that date. Upon our shareholders'
approval of an increase in authorized common stock to a total of 250,000,000 shares on January 7, 2010, we had sufficient authorized common shares for the conversion of all preferred shares
outstanding, and thus, all such shares are classified as permanent equity.

17

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Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2010

Note 6. Shareholders' Equity (Continued)

During the quarter ended June 30, 2010, 541,675 preferred shares were converted to 2,708,377 shares of common stock. The conversion rate for the shares of Series B
Preferred Stock was adjusted to five-to-one from 100-to-one as a result of the June 30, 2010 one-for-20 reverse stock
split.

Common Stock

As of June 30, 2010 and September 30, 2009 the Company was authorized to issue up to 250,000,000 and 25,000,000 shares of
common stock, par value of $0.01 per share, respectively. On October 30, 2009, in connection with our debt restructuring, we issued 8,646,811 shares of common stock. As of June 30, 2010
and September 30, 2009, 23,819,521 shares and 11,544,803 shares of common stock, were outstanding, respectively.

On
January 7, 2010, the Company's stockholders approved an amendment to the Company's Amended and Restated Certificate of Incorporation to affect a reverse stock split of the
Company's common stock at a reverse split ratio between one-for-20 and one-for-50, to be selected by the Board of Directors. On May 17, 2010, the
Company announced its plans to complete a one-for-20 reverse stock split of its common stock, to take effect on June 30, 2010. All share and per share amounts have been
retroactively adjusted to reflect the reverse stock split. There was no net effect on total shareholders' equity as a result of the reverse stock split.

Immediately
prior to the one-for-20 reverse stock split on June 30, 2010, there were five billion shares of common stock authorized and 476,399,949 common
shares issued and outstanding. Subsequent to the reverse stock split, there were 250 million common shares authorized, 23,819,521 common shares issued and outstanding. The Company did not issue
fractional shares in connection with the reverse stock split and stockholders otherwise entitled to receive fractional shares received cash in lieu of fractional shares.

Stock Option Plans

The Company has several share-based plans that have expired, but under which stock options are still outstanding. In February 2010, our
board of directors approved our new plan, the 2010 Vitesse Semiconductor Corporation Incentive Plan (the "2010 Incentive Plan"). On May 11, 2010, the stockholders approved the 2010 Incentive
Plan. The 2010 Incentive Plan permits the grant of stock options, stock appreciation rights, stock awards, restricted stock and stock units, and
other stock and cash-based awards. The 2010 Incentive Plan replaced the Vitesse Semiconductor Corporation 2001 Stock Incentive Plan.

Under
all stock option plans, a total of 5,159,814 shares of common stock, have been reserved for issuance and 2,746,566 shares, remained available for future grant as of June 30,
2010. The following

18

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Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2010

Note 6. Shareholders' Equity (Continued)

table
summarizes compensation costs related to the Company's share-based compensation plans (in thousands):

Three Months Ended
June 30,

Nine Months Ended
June 30,2010
(unaudited)

2009
(unaudited)

2010
(unaudited)

2009
(unaudited)(in thousands)Cost of revenues

$
100

$
169

$
326

$
528Engineering, research and development


183


242


587


678Selling, general and administrative


314


386


811


1,175Total share-based compensation expense

$
597

$
797

$
1,724

$
2,381


Stock Options

Activity under all stock option plans for the nine months ended June 30, 2010 was as follows:

Shares

Weighted
average
exercise
price

Weighted
average
remaining
contractual life
(in years)

Aggregate
intrinsic
valueOptions outstanding, September 30, 2009


1,061,816

$
109.32Granted


544,449


5.19Cancelled or expired


(129,653
)

292.49Options outstanding, June 30, 2010 (unaudited)


1,476,612


54.85


6.35

$
11,110Options exercisable, June 30, 2010 (unaudited)


828,021

$
93.20


3.97

$



Restricted Stock Units

A summary of restricted stock unit activity for the nine months ended June 30, 2010 is as follows:

Shares

Weighted
Average
Grant-Date
Fair Value
per ShareRestricted stock units outstanding, September 30, 2009


171,907

$
7.05Awarded


574,550


5.43Released


Forfeited


(14,589
)

6.16Restricted stock units outstanding, June 30, 2010 (unaudited)


731,868

$
5.80


19

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Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2010

Note 7. Legal Proceedings

We are involved in legal proceedings in the ordinary course of business, including actions against us which assert or may assert claims or seek to impose fines and penalties in
substantial amounts, such as the matter described below.

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. The Division of Enforcement of the SEC also conducted an investigation of Vitesse. The Division of Enforcement requested documents from
January 1, 1995 through the present. Vitesse has cooperated with both government agencies in their investigations. While the investigation by the United States Attorney is still ongoing, the
staff of the SEC's Division of Enforcement has agreed to recommend to the SEC a proposed settlement that would conclude for the Company all matters arising from the SEC investigation into historical
stock option practices and certain other accounting irregularities. Under the proposed settlement, the Company would pay a $3.0 million civil penalty and consent to the entry of a final
judgment by a federal court permanently enjoining the Company from violations of the antifraud and other provisions of the federal securities laws. In connection with the Company's settlement with the
staff of the Division of Enforcement, we recorded a $3.0 million expense related to the civil penalty payable to the SEC. The proposed settlement is contingent on the review and approval of
final documentation by the Company and the staff of the SEC's Division of Enforcement, and is subject to final approval by the SEC.

20

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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, as well as
in our Annual Report on Form 10-K for the year ended September 30, 2009 and in our other filings with the SEC, which discuss our business in greater
detail.

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 referenced in the subsection entitled "Risk Factors" in Part II, Item 1A of
this Report, and similar discussions in our other SEC filings. 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. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by
law.

Overview

We design, develop and market a diverse portfolio of high-performance, cost-competitive semiconductor solutions
for carrier and enterprise networks worldwide. We believe that engineering excellence and dedicated customer service distinguish Vitesse as an industry leader in high-performance Ethernet
LAN, WAN, and RAN, Ethernet-over-SONET/SDH, optical transport (OTN), and best-in-class signal integrity, physical layer, and connectivity products for
Ethernet, SONET, Fibre Channel, Serial Attached SCSI, InfiniBand(r), video, and PCI Express applications.

We
are a leading supplier of high-performance integrated circuits ("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.

We
focus our product development and marketing efforts on products that leverage the convergence of carrier and enterprise networking onto IP-based networks. 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. Increasingly, these networks will be delivered based on Ethernet technology to provide these services at lower cost. We believe that products in this emerging technology area
represent the best opportunity for us to provide differentiation in the market.

Debt Restructuring

In October 2009, Vitesse completed a debt restructuring transaction. The debt restructuring resulted in the conversion of 96.7% of the
Company's 2024 Debentures into a combination of cash, common stock, Series B Preferred Stock and 2014 Debentures. With respect to the remaining 3.3% of

21

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Table of Contents

the
2024 Debentures, Vitesse settled its obligations in cash. Additionally, Vitesse repaid approximately $5.0 million of its $30.0 million Senior Term Loan, the terms of which were
amended as part of the debt restructuring transactions.

Under
the terms of the debt restructuring transactions, Vitesse:



Critical Accounting Policies

Our critical accounting policies are described in an Annual Report on Form 10-K for the year ended
September 30, 2009. There have been no significant changes to these policies during the nine months ended June 30, 2010. These policies continue to be those that we believe are most
important to a reader's ability to understand our financial results.

Valuation of Compound Embedded Derivative related to Subordinated Debentures

In accordance with ASC Topic 815 Derivatives and Hedging ("ASC 815"), originally issued as SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," embedded derivatives must be bifurcated from the underlying debt instrument and valued
as a separate financial instrument. Management evaluated the terms and features of the 8.00% Convertible Second Lien Debentures Due 2014 (the "2014 Debentures") and identified an embedded derivative
(the "compound embedded derivative" or "derivative liability") requiring bifurcation and accounting at fair value because the economic and contractual characteristics of the compound derivative meet
the criteria for bifurcation and accounting for separately as set forth in ASC 815 due to the conversion price not being indexed to the Company's own stock. Any gain or loss on the fair value of the
compound derivative will be reflected in current earnings. The embedded compound derivative is comprised of the conversion option and a make-whole payment for foregone interest if the
holder converts the debenture early. We estimated the approximate fair value of the compound derivative as the difference between the estimated value of the 2014 Debentures with and without the
compound derivative features. The fair value of the 2014 Debentures was estimated using a convertible bond valuation model within a lattice framework. These valuations were determined using
Level 3 inputs. The convertible bond valuation model combined expected cash outflows with market-based assumptions regarding risk-adjusted yields, stock price volatility and recent
price quotes and trading information regarding shares of our common stock into which the 2014 Debentures are convertible. Our analysis was premised on the assumption that the holder would act in a
manner that maximizes the potential return, or "payoff," at any given

22

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Table of Contents

point
in time. Included in this premise was the assumption that the holder would compare the potential return associated with each available alternative, including, as specified in the terms of the
2014 Debentures, holding the debt instrument, exercising an equity conversion option, or exercising a put option.

On
October 30, 2009, the date of issuance, the fair value of the bifurcated compound derivative was $28.0 million. As of June 30, 2010, the fair value of the
bifurcated compound derivative was $29.2 million, with the change reflected as interest expense in the Statement of Operations for the nine-month period ended June 30, 2010.
The change in the fair value of the bifurcated compound derivative is a non-cash item resulting from the increase in the market price of the underlying common stock. Should the holders
convert the 2014 Debentures and receive the make-whole payment, settlement may be, at the Company's election, in shares of the Company's common stock. The Company intends to settle this
obligation in common shares should it be exercised by its holders. As the Company intends to, and has the ability to, satisfy the obligations with equity securities, in accordance with ASC 470, the
Company has reclassified the liability as a long-term liability on its Consolidated Balance Sheet as of June 30, 2010.

Results of Operations for the Three and Nine Months Ended June 30, 2010 compared to the Three and Nine Months Ended June 30, 2009

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

Three Months
Ended
June 30,

Nine Months
Ended
June 30,2010

2009

2010

2009Net revenues


100.0
%

100.0
%

100.0
%

100.0
%Cost and expenses:Cost of revenues


41.8
%

38.7
%

44.0
%

44.9
%Engineering, research and development


36.4
%

25.1
%

30.7
%

26.1
%Selling, general and administrative


23.1
%

25.6
%

23.0
%

24.6
%Accounting remediation & reconstruction expense & litigation costs


0.0
%

(29.6
)%

0.1
%

(7.5
)%Goodwill impairment


0.0
%

0.0
%

0.0
%

148.4
%Amortization of intangible assets


0.5
%

0.8
%

0.5
%

0.8
%Costs and expenses


101.8
%

60.6
%

98.3
%

237.3
%Income (loss) from operations


(1.8
)%

39.4
%

1.7
%

(137.3
)%Other income (expense):Interest income (expense), net


80.7
%

(13.0
)%

(10.5
)%

(6.3
)%Gain (loss) on extinguishment of debt


0.7
%

0.0
%

(17.3
)%

0.0
%Other income (expense), net


(0.2
)%

(0.1
)%

0.0
%

0.0
%Other income (expense), net


81.2
%

(13.1
)%

(27.8
)%

(6.3
)%Income (loss) before income tax expense (benefit)


79.4
%

26.3
%

(26.1
)%

(143.6
)%Income tax expense (benefit)


(8.6
)%

(1.6
)%

2.3
%

(0.5
)%Net income (loss) from continuing operations


88.0
%

27.9
%

(28.4
)%

(143.1
)%Income from discontinued operations, net


0.0
%

0.2
%

0.0
%

0.1
%Net income (loss)


88.0
%

28.1
%

(28.4
)%

(143.0
)%Fair value adjustment of Preferred StockSeries B


0.0
%

0.0
%

0.1
%

0.0
%Net income (loss) available to common shareholders


88.0
%

28.1
%

(28.5
)%

(143.0
)%


23

---



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We classify our IC products into three categories: (i) Carrier Networking Products; (ii) Enterprise Networking Products;
and (iii) Non-Core Products. The Carrier Networking Products line services core, metro and access networks. The Enterprise Networking Products line services the market for Ethernet
switching and transmission within local area networks in small-medium business and enterprise (SMB/SME) markets. Our Non-Core Products are product lines have not received additional
investment over the prior three years and as a result have generally been in decline. The following tables summarize our net product mix by product line.

Three Months Ended
June 30, 2010

Three Months Ended
June 30, 2009Amount

% of Net
Revenues

Amount

% of Net
Revenues

Change

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

$
14,983


39.9
%
$
16,689


45.9
%
$
(1,706
)

(10.2
)%Enterprise Networking Products


18,725


49.9
%

14,960


41.1
%
$
3,765


25.2
%Non-Core Products


3,825


10.2
%

4,707


13.0
%
$
(882
)

(18.7
)%Net Product Revenues

$
37,533


100.0
%
$
36,356


100.0
%
$
1,177


3.2
%




Nine Months Ended
June 30, 2010

Nine Months Ended
June 30, 2009Amount

% of Net
Revenues

Amount

% of Net
Revenues

Change

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

$
51,341


41.8
%
$
51,582


44.6
%
$
(241
)

(0.5
)%Enterprise Networking Products


56,655


46.1
%

43,987


38.0
%
$
12,668


28.8
%Non-Core Products


14,809


12.1
%

20,174


17.4
%
$
(5,365
)

(26.6
)%Net Product Revenues

$
122,805


100.0
%
$
115,743


100.0
%
$
7,062


6.1
%


Net
product revenues for the third quarter of 2010 were $37.5 million compared to $36.4 million for the same period in 2009. This increase of $1.2 million, or 3.2%,
was driven primarily by overall strengthening customer demand for our core products. Carrier Networking decreased by $1.7 million, or 10.2%. This decline was due to weakness at several
customers in China as well as a decline in legacy SONET products at several customers. Enterprise Networking increased $3.8 million, or 25.2%, due to an increase in Ethernet PHY and MAC
products, our 10GbE physical layer products, as well as strength in signal and connectivity products, including our crosspoint switch family. Sales of Non-Core Products were down
$0.9 million, or 18.7%, due to a decline of our legacy Raid-on-Chip and NPU product lines.

Net
product revenues for the nine months ended June 30, 2010 and 2009 were $122.8 million compared to $115.7 million for the same period in 2009. This increase of
$7.1 million, or 6.1%, was driven primarily by overall strengthening customer demand for our core products. Carrier Networking was down $0.2 million, or 0.5%. This decline was due to
weakness at several customers in China as well as a decline in legacy SONET products at several customers. Enterprise Networking increased $12.7 million, or 28.8%, due to an increase in
Ethernet PHY and MAC products, our 10GbE physical layer products, as well as strength in signal and connectivity products including our crosspoint switch family. Sales of Non-Core Products
were down $5.4 million or 26.6% due to a decline of our legacy Raid-on-Chip and NPU product lines.

24

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Table of Contents

Intellectual Property Revenues

Three Months
Ended
June 30, 2010

Three Months
Ended
June 30, 2009Amount

% of Net
Revenues

Amount

% of Net
Revenues

Change

%
Change(in thousands, except percentages)Licensing Revenues

$



0.0
%
$
8,250


18.5
%
$
(8,250
)

(100.0
)%




Nine Months
Ended
June 30, 2010

Nine Months
Ended
June 30, 2009Amount

% of Net
Revenues

Amount

% of Net
Revenues

Change

%
Change(in thousands, except percentages)Licensing Revenues

$
290


0.2
%
$
13,250


10.3
%
$
(12,960
)

(97.8
)%


In
2008, we began to leverage our substantial intellectual property portfolio into licensing opportunities with third-parties. There were no intellectual property revenues in the third
quarter of 2010 and intellectual property revenues were $8.3 million in the third quarter of 2009. We recognized $0.3 million and $13.3 million in the first nine months of year
2010 and 2009, respectively.

Cost of Revenues

Three Months
Ended
June 30,

Change2010

2009

$

%(in thousands,
except percentages)Cost of revenues

$
15,702

$
17,282

$
(1,580
)

(9.1
)%Percent of net revenues


41.8
%

38.7
%




Nine Months
Ended
June 30,

Change2010

2009

$

%(in thousands,
except percentages)Cost of revenues

$
54,167

$
57,957

$
(3,790
)

(6.5
)%Percent of net revenues


44.0
%

44.9
%


As
a fabless semiconductor company, 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. There was no cost of revenues associated with intellectual property licensing revenues for any periods presented in this report.

Our
cost of net revenues decreased from $17.3 million for the three months ended June 30, 2009 to $15.7 million for the same period in 2010 primarily due to
improvements in product costs. As a percentage of net product revenues, our cost of net product revenues was 41.8% in the third quarter of 2010 compared with 47.5% in the third quarter of 2009. We
made progress in transitioning our test manufacturing activities from our California facility to an outsource model in an offshore facility resulting in reduced costs of test. Additionally,
on-going cost reduction efforts to reduce materials costs and improve product yields have been effective at lowering cost of revenue.

For
the nine months ending June 30, 2010, our cost of net revenues decreased to $54.2 million from $58.0 million in the same period of 2009. As a percentage of net
product revenues, our cost of

25

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net
revenues was 44.1% for the nine months ended June 30, 2010 compared to 50.1% in the same period of 2009. Consistent with the three-month period described above, the decrease in cost of net
revenues as a percentage of product revenues, was due to reduced costs of tests due to our outsource model and reduced materials costs and improved product yields.

Engineering, Research and Development

Three Months
Ended
June 30,

Change2010

2009

$

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

$
13,674

$
11,200

$
2,474


22.1
%Percent of net revenues


36.4
%

25.1
%




Nine Months
Ended
June 30,

Change2010

2009

$

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

$
37,909

$
33,720

$
4,189


12.4
%Percent of net revenues


30.7
%

26.1
%


We
believe that continued investment in the design and development of future products is vital to maintaining a competitive edge. 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. Engineering, 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. We will
continue to concentrate our spending in this area to meet our customer requirements and respond to market conditions.

In
the third quarter of 2010, engineering, research and development expenses increased $2.5 million compared to the same periods of 2009. The increase is attributable to increased
engineering tool costs of $1.5 million, primarily mask sets and labor costs of approximately $0.9 million due to increased headcount and the elimination of temporary salary reductions
that were in effect in prior periods.

For
the nine months ended June 30, 2010, engineering, research and development expenses increased $4.2 million, compared to the same periods of 2009. The increase is
attributable to increased labor costs
of approximately $2.3 million due to increased contract labor, increased headcount and the elimination of temporary salary reductions that were in effect in prior periods. There was also a
$1.9 million increase in engineering tools.

26

---



Table of Contents

Selling, General and Administrative

Three Months
Ended
June 30,

Change2010

2009

$

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

$
8,669

$
11,412

$
(2,743
)

(24.0
)%Percent of net revenues


23.1
%

25.6
%




Nine Months
Ended
June 30,

Change2010

2009

$

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

$
28,281

$
31,761

$
(3,480
)

(11.0
)%Percent of net revenues


23.0
%

24.6
%


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.

In
the third quarter of 2010, selling, general and administrative expense decreased by $2.7 million from the third quarter of 2009. As a percentage of net revenues, selling,
general and administrative expense decreased from 25.6% to 23.1%. During the quarter ended June 30, 2009, the Company incurred broker fees of $1.8 million related to the sale of certain
intellectual property patents that did not recur in 2010. Professional fees decreased by $0.7 million compared to the same quarter of the prior year due to the Company's successful efforts to
decrease legal and accounting fees. The remainder of the decrease is the continuing benefit of our cost reduction efforts in the prior year.

For
the nine months ended June 30, 2010, selling, general and administrative expense decreased by $3.5 million from the same period of 2009. As a percentage of net
revenues, selling, general and administrative expense decreased from 24.6% to 23.0%. During the nine-month period
ended June 30, 2009, we recognized a gain on the sale of our Colorado building, which offset selling, general and administrative expense for that period by $2.9 million. The Company also
recognized $1.8 million in broker fees related to the sale of certain intellectual property patents in the nine-month period ended June 30, 2009. We did not have any similar
transactions in 2010. In the nine-month period ended June 30, 2010, professional fees decreased by $2.7 million compared to the same period of the prior year due to the
Company's successful efforts to decrease legal and accounting fees. Compensation related costs for the nine-months ended June 30, 2010 decreased by $1.6 million compared to
the same period in 2009 as a result of headcount reductions. During the period, we succeeded in reducing facilities, travel and supplies expenses by a total of $1.5 million due to our extensive
cost-reduction efforts. During the nine-month period ended June 30, 2010, we incurred $1.0 million in non-capitalizable costs related to negotiating
the restructuring of our debt, which was successfully completed on October 30, 2009. The remainder of the decrease is the continuing benefit of our cost reduction efforts in the prior year.

27

---



Table of Contents

Accounting Remediation & Reconstruction Expense & Litigation Costs

Three Months
Ended June 30,

Change2010

2009

$

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

$


$
(13,206
)
$
13,206


(100.0
)%Percent of net revenues


0.0
%

(29.6
)%




Nine Months
Ended June 30,

Change2010

2009

$

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

$
73

$
(9,742
)
$
9,815


(100.7
)%Percent of net revenues


0.1
%

(7.5
)%


Accounting
remediation and reconstruction expense and litigation costs consisted of fees incurred to resolve certain legal issues, remediate control deficiencies, and transition
accounting and reporting responsibilities to full-time staff, in addition to the completion or settlement of audits, investigations and lawsuits related to prior accounting periods.

We
did not recognize any charges in the third quarter of 2010. During the quarter ended June 30, 2009, we recorded a settlement with KPMG which resulted in a net credit of
$16.0 million. We recorded a $3.0 million accrual due to the proposed settlement by the staff of Division of Enforcement related to their investigation of the Company's historical stock
option practices and certain other accounting irregularities. Lastly, we reached a settlement with the IRS related to the exercise of backdated options, which resulted in a credit of
$0.7 million.

For
the current year-to-date, these costs totaled $73,000, while for the nine-months ended June 30, 2009, we recognized a net credit of
$9.7 million. During the 2009 period, we recorded a settlement with KPMG which resulted in a net credit of $16.0 million. We
recorded costs of $4.0 million for work performed on stock option accounting and inventory valuation, revision of our revenue recognition policies, and other legal and financial issues. We
recorded a $3.0 million accrual due to the proposed settlement by the SEC staff of Division of Enforcement related to their investigation of the Company's historical stock option practices and
certain other accounting irregularities. Lastly, we reached a settlement with the IRS related to the exercise of backdated options, which resulted in a credit of $0.7 million.

Goodwill Impairment

Nine Months
Ended June 30,

Change2010

2009

$

%(in thousands,
except percentages)Goodwill Impairment

$


$
191,418

$
(191,418
)

100.0
%Percent of net revenues


0.0
%

148.4
%


During
the quarter ended December 31, 2008, we performed an analysis of our goodwill and determined that the carrying amount of goodwill exceeded the implied fair value of that
goodwill. As a

28

---



Table of Contents

result
of the analysis, we recorded an impairment charge to fully write off our goodwill balance of $191.4 million during the quarter ended December 31, 2008.

Amortization of Intangible Assets

Three Months
Ended June 30,

Change2010

2009

$

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

$
182

$
362

$
(180
)

(49.7
)%Percent of net revenues


0.5
%

0.8
%




Nine Months
Ended June 30,

Change2010

2009

$

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

$
613

$
1,068

$
(455
)

(42.6
)%Percent of net revenues


0.5
%

0.8
%


The
decrease in amortization expense is primarily due to intangible assets related to our prior acquisitions of Adaptec and Infinera becoming fully amortized during 2009.

Interest Expense, net

Three Months
Ended June 30,

Change2010

2009

$

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

$
30,275

$
(5,804
)
$
36,079


(621.6
)%Percent of net revenues


80.7
%

(13.0
)%




Nine Months
Ended June 30,

Change2010

2009

$

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

$
(12,896
)
$
(8,104
)
$
(4,792
)

59.1
%Percent of net revenues


(10.5
)%

(6.3
)%


For
the three and nine month periods ended June 30, 2010, interest expense, net of interest income, decreased by $36.1 million and increased by $4.8 million,
respectively, compared to the same periods in 2009. For both periods, the changes relate primarily to the change in the fair value of the derivative liability on the 2014 Debentures and 2024
Debentures (combined, "the Debentures"). Interest expense related to the change in the fair value of the Debentures decreased $37.4 million and increased $1.2 million for the three and
nine month periods ended June 30, 2010, respectively. Interest expense on the Debentures and our Senior Secured Debt, net of interest income, increased from 2009 to 2010 by $1.3 million
and $3.5 million for the three and nine month periods ended June 30, 2010, respectively. The increase in interest expense is the result of the higher combined effective interest rate on
indebtedness as a result of the debt exchange.

29

---





Table of Contents

Loss on Extinguishment of Debt

Three Months
Ended June 30,

Change2010

2009

$

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

$
265

$


$
265


100.0
%Percent of net revenues


0.7
%

0.0
%




Nine Months
Ended June 30,

Change2010

2009

$

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

$
(21,311
)
$


$
(21,311
)

100.0
%Percent of net revenues


(17.3
)%

0.0
%


Effective
October 30, 2009, the Company finalized negotiations with the Noteholders of the 2024 Debentures to settle the obligations under the debentures, including all amounts
owed under the derivative liability for the premium put option, with a combination of cash, shares of the Company's common stock, shares of the Company's Series B Preferred Stock and a new
issuance of $50.0 million of convertible bonds (see Note 3Debt in the accompanying unaudited consolidated financial statements). The Company recorded the new instruments
issued in the extinguishment of the 2024 Debentures at fair value and recognized a $21.6 million loss for the difference between the fair values of the new instruments. For the purposes of
calculating this loss on extinguishment, the net carrying amount of the 2024 Debentures included the $96.7 million principal amount of the 2024 Debentures and $13.3 million of the
premium put derivative, recorded at fair value. During the three months ended June 30, 2010, the Company recognized a gain of $0.3 million on the conversion of $3.5 million face
value of 2014 Debentures and the associated "Make-Whole Amount" into shares of the Company's common stock (see Note 3Debt in the accompanying unaudited consolidated financial
statements).

Other Income (Expense), net

Three Months
Ended
June 30,

Change2010

2009

$

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

$
(61
)
$
(38
)
$
(23
)

61
%Percent of net revenues


(0.2
)%

(0.1
)%




Nine Months
Ended
June 30,

Change2010

2009

$

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

$
44

$
58

$
(14
)

(24.1
)%Percent of net revenues


0.0
%

0.0
%


The
change in other income primarily relates to foreign exchange transactions.

30

---



Table of Contents

Income Tax (Benefit) Expense

Three Months
Ended
June 30,

Change2010

2009

$

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

$
(3,244
)
$
(696
)
$
(2,548
)

366.1
%Percent of net revenues


(8.6
)%

(1.6
)%




Nine Months
Ended
June 30,

Change2010

2009

$

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

$
2,781

$
(600
)
$
3,381


(563.5
)%Percent of net revenues


2.3
%

(0.5
)%


Income
tax benefit was $3.2 million for the third quarter of fiscal 2010 compared to income tax benefit of $0.7 million for the third quarter of fiscal 2009, an increase in
benefit of $2.5 million. The increase is primarily the result of changes to the Company's projected annual tax expense during the period and limitations on the Company's NOL carryforwards as a
result of an "ownership change" experienced for tax purposes on October 30, 2009. For the three months ended June 30, 2009, income tax benefit represents the impact of taxable losses for
that period.

Income
tax expense was $2.8 million for the nine months ended June 30, 2010 compared to income tax benefit of $0.6 million for the nine months ended June 30,
2009, an increase in expense of $3.4 million. The increase in expense is primarily the result of limitations on the Company's NOL carryforwards following the "ownership change" experienced for
tax purposes on October 30, 2009, as a result of debt restructuring. Net income tax expense for the nine months ended June 30, 2009 represents minimum federal, state, and foreign income
tax on income not eligible for offset by loss carryforwards.

Liquidity and Capital Resources

Cash and cash equivalents decreased to $38.6 million at June 30, 2010, from $57.5 million at September 30,
2009, primarily as a result of the $5.0 million payment on the Senior Term Loan, repayment of a portion of the 2024 Debentures of $10.0 million and approximately $6.0 million in
legal and other fees to complete the debt restructuring transaction.

Nine Months Ended
June 30,2010

2009(in thousands)Net cash provided by operating activities

$
1,039

$
12,251Net cash (used in) provided by investing activities


(2,264
)

2,449Net cash used in financing activities


(17,698
)

Net (decrease) increase in cash and cash equivalents

$
(18,923
)
$
14,700Cash and cash equivalents at beginning of period


57,544


36,722Cash and cash equivalents at end of period

$
38,621

$
51,422


31

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Table of Contents

In
the nine months ended June 30, 2010, our operating activities provided $1.0 million in cash. Our net loss of $34.9 million for the nine months ended
June 30, 2010 included non-cash charges of $20.8 million for the loss on extinguishment of debt, $5.9 million in the change in the market value of the embedded
derivative liability, $2.6 million of depreciation and amortization, and $1.7 million of share-based compensation. In the nine months ended June 30, 2009, our operating activities
provided
$12.3 million in cash. Our net loss of $184.6 million for the nine months ended June 30, 2009 included $3.3 million of depreciation and amortization, $2.4 million of
share-based compensation, and $191.4 million of goodwill impairment offset by the gain on sale of the Colorado building of $2.9 million.

Accounts
receivable, net of allowance for sales return, decreased $1.8 million from $15.1 million at September 30, 2009 to $13.3 million at June 30,
2010. The decrease was primarily due to the timing of sales to our end users via our distributor network and a small decrease in revenues compared to the three-months ended September 30, 2009.
Inventories increased $5.4 million, from $18.8 million at September 30, 2009 to $24.2 million at June 30, 2010, as our channel partners and distributors took action
to increase their inventory in response to stronger demand. We were able to respond quickly to the change in demand, increasing orders to our suppliers.

Investing
activities used cash of $2.3 million in the nine months ended June 30, 2010 for capital expenditures. Investing activities provided cash of $2.4 million in
the nine months ended June 30, 2009, which was primarily the result of the proceeds from the sale of the Colorado building for $6.0 million, net of commissions and transactions costs,
partially offset by capital expenditures of approximately $1.2 million and additions to intangibles of $2.0 million.

In
the nine months ended June 30, 2010, our financing activities used $17.7 million primarily due to a cash payment of $10.0 million to the holders of 2024
Debentures, $5.0 million to pay down the principal amount of the Senior Term Loan, equity issuance costs of $1.1 million and debt issuance costs of $1.4 million. (See
Note 3Debt in the accompanying unaudited consolidated financial statements).

On
October 30, 2009, we closed the debt restructuring transaction with our major creditors pursuant to which we issued approximately $50.0 million of 2014 Debentures (See
Note 3Debt in the accompanying unaudited consolidated financial statements). Annual interest payments on the 2014 Debentures will be $3.7 million annually, an increase of
$2.2 million over the annual interest payments on the 2024 Debentures. The first interest payment on the 2014 Debentures was made on April 1, 2010.

Concurrent
with the issue of the 2014 Debentures, the Company amended the terms of the Senior Term Loan Agreement. The amendment of the Senior Term Loan included a $5.0 million
repayment of principal, a fee of 1.0% of the amount of repayments; and a change to the interest terms. The amended interest terms on the Senior Term Loan will not materially impact the amount of
quarterly interest payments over the remaining life of the associated note, but additional interest expense accrued under a payment-in-kind interest ("PIK") provision will
increase the final payment due on the Senior Term Loan at maturity in the fiscal year ending September 30, 2012 by approximately $2.6 million over the face value of the note.

We
believe that our available cash will be adequate to finance our operating needs and meet our obligations for the next 12 months.

Special Meeting of Stockholders

At the special meeting of our stockholders on January 7, 2010, the stockholders approved an increase in the number of authorized
shares of common stock from 25,000,000 to 250,000,000 . This increase permits the conversion of the 2014 Debentures into shares of common stock and provides additional available shares for other
general corporate purposes. In addition, the Company's

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shareholders
also authorized the board of directors to effect a reverse stock-split when deemed appropriate. The reverse stock split was effected June 30, 2010. All share and per share amounts
have been retroactively adjusted to reflect our one-for-20 reverse stock split. There will be no net effect on total shareholders' equity as a result of the reverse stock
split.

Contractual Obligations

Payment Obligations by Year<1 Year

1 - 3 Years

3 - 5 Years

>5 Years

TotalConvertible subordinated debt

$


$


$
46,500

$


$
46,500Long term debt





25,000








25,000Operating leases


3,405


6,244


3,017


199


12,865Inventory and related purchase obligations


8,450











8,450Software Licenses


7,059


9,425


3,200





19,684Total

$
18,914

$
40,669

$
52,717

$
199

$
112,499


As
of June 30, 2010, the 2014 Debentures, with a face value of $46.5 million, are outstanding. Additionally, we have $25.0 million in long-term debt
under the Senior Term Loan. Payments with respect to the Senior Term Loan are interest only until the maturity date of October 29, 2011. Effective October 16, 2009, the Company entered
into an amendment of the Senior Term Loan to include 2.0% payment-in-kind interest ("PIK"), plus an additional 0.3% PIK interest for every $1.0 million above
$15.0 million of the senior term loan that is not paid down by the Company for the period from October 17, 2009 until maturity or full payment of the note. As part of the debt
restructuring transactions, the Company paid $5.0 million of the original $30.0 million principal balance of the Senior Term Loan. Subsequent to the $5.0 million prepayment of the
Senior Term Loan, the Company has the ability to reduce the rate of interest by 0.3% for every $1.0 million of additional principal prepayment. (See Note 3Debt in the
accompanying unaudited consolidated financial statements).

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, 2010, 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.

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 and is not material to our financial position. We do not hold or issue financial
instruments for trading purposes.

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ITEM 4.    CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We evaluated the design and operating effectiveness of our disclosure controls and procedures as of June 30, 2010, 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 as of June 30, 2010, our disclosure controls and
procedures were not effective because of the following material weakness in our internal control over financial reporting:



Due
to the identified material weakness, management has also concluded that the Company's internal control over financial reporting was not effective as of June 30, 2010.

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

Management, in coordination with the input, oversight and support of our Audit Committee, continues its ongoing efforts to strengthen
our internal control over financial reporting and to address the material weaknesses described above. We are investing in ongoing efforts to continuously improve the control environment and have
committed considerable resources to the continuous improvement of the design, implementation, documentation, testing, and monitoring of our internal controls. In addition to improving the
effectiveness and compliance with key controls, our remediation efforts involve ongoing business and accounting process improvements and the implementation of key system enhancements. The process and
system enhancements are generally designed to simplify and standardize business practices and to improve timeliness and access to associated accounting data through increased systems automation
appropriate limitations around IT access as well as timely testing of controls throughout the year. While we expect remedial actions to be essentially implemented in 2010, some actions may not be in
place for a sufficient period of time to help us certify that material weaknesses have been fully remediated as of the end of 2010. We will continue to develop our remediation plans and implement
additional measures during 2010 and possibly into 2011.



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.

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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.

ITEM 1A.    RISK FACTORS

There have been no material changes to the risk factors disclosed in Part II, Item 1A of our Quarterly Report on
Form 10-Q for the period ended December 31, 2009, which updated the risk factors disclosed in our Annual Report on Form 10-K for the year ended
September 30, 2009.

ITEM 2.    UNREGISTERED SALES OF EQUITY AND USE OF PROCEEDS

None.

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.    RESERVED

ITEM 5.    OTHER INFORMATION

None.

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ITEM 6.    EXHIBITS

3.1
*
Restated Certificate of Incorporation.10.1

Vitesse Semiconductor Corporation 2010 Incentive Plan (incorporated by reference to Appendix A of the Company's Definitive Proxy Statement on Schedule 14A filed with the SEC on March 31, 2010).10.2
*
Automatic Equity Grant Program for Eligible Directors under the Vitesse Semiconductor Corporation 2010 Incentive Plan.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.


*Filed
herewith.Executive
Compensation Plan or Agreement


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SIGNATURES

Pursuant to the requirements 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.

August 9, 2010

VITESSE SEMICONDUCTOR CORPORATIONBy:

/s/ CHRISTOPHER R. GARDNER Christopher R. Gardner Chief Executive OfficerAugust 9, 2010

VITESSE SEMICONDUCTOR CORPORATIONBy:

/s/ RICHARD C. YONKER Richard C. Yonker Chief Financial Officer
(Principal Financial and Accounting Officer)


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