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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended March 31, 2005



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from
 to



Commission file number 0-19654



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VITESSE SEMICONDUCTOR CORPORATION

(Exact name of registrant as specified in its charter)



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|                                                              |  |                                    
|------------------------------------------------------------- |  | -----------------------------------
|Delaware                                                      |  | 77-0138960                         
|(State or other jurisdiction ofincorporation or organization) |  | (I.R.S. EmployerIdentification No.)



741 Calle Plano
Camarillo, CA 93012

(Address of principal executive offices)



(805) 388-3700

(Registrants telephone number, including area code)



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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 and (2) has been subject to such filing requirements for the past 90 days: Yes x    No ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act):
Yes x    No ̈



As of April 29, 2005, there were 218,238,143 shares of the registrants $0.01 par value common stock outstanding.



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##### Table of Contents



VITESSE SEMICONDUCTOR
CORPORATION



TABLE OF CONTENTS



|               |  |                       |  |                                                                                                                                                                                    |  |           
|-------------- |  | --------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------
|               |  |                       |  |                                                                                                                                                                                    |  | PageNumber
|PART I         |  | FINANCIAL INFORMATION |  |                                                                                                                                                                                   
|               |  |                       | 
|               |  | Item 1                |  | Financial Statements:                                                                                                                                                              |  |           
|               |  |                       | 
|               |  |                       |  | Unaudited Condensed Consolidated Balance Sheets as of March 31, 2005 and September 30, 2004                                                                                        |  | 3         
|               |  |                       | 
|               |  |                       |  | Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2005 and March 31, 2004, and the six months ended March 31, 2005 and March 31, 2004 |  | 4         
|               |  |                       | 
|               |  |                       |  | Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2005 and March 31, 2004                                                               |  | 5         
|               |  |                       | 
|               |  |                       |  | Notes to Unaudited Condensed Consolidated Financial Statements                                                                                                                     |  | 6         
|               |  |                       | 
|               |  | Item 2                |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                                              |  | 12        
|               |  |                       | 
|               |  | Item 3                |  | Quantitative and Qualitative Disclosure About Market Risk                                                                                                                          |  | 25        
|               |  |                       | 
|               |  | Item 4                |  | Controls and Procedures                                                                                                                                                            |  | 25        
|               |  |                      
|PART II        |  | OTHER INFORMATION     |  |                                                                                                                                                                                   
|               |  |                       | 
|               |  | Item 4                |  | Submission of Matters to a Vote of Security Holders                                                                                                                                |  | 26        
|               |  |                       | 
|               |  | Item 6                |  | Exhibits and Reports on Form 8-K                                                                                                                                                   |  | 26        
|               |  |                      
|SIGNATURE      |  |                       |  | 27                                                                                                                                                                                
|               | 
|CERTIFICATIONS |  |                      



2



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##### Table of Contents



PART I



FINANCIAL INFORMATION

VITESSE SEMICONDUCTOR CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)



|                                                                                                                                                                              |  |                |            |   |                    |   |            |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ---------- | - | ------------------ | - | ---------- | -
|                                                                                                                                                                              |  | March 31, 2005 |            |   | September 30, 2004 |  
|ASSETS                                                                                                                                                                        |  |                |            |   |                    |   |            |  
|Current assets:                                                                                                                                                               |  |                |            |   |                    |   |            |  
|Cash and cash equivalents                                                                                                                                                     |  | $              | 31,940     |   |                    | $ | 20,865     |  
|Short-term investments (principally marketable securities)                                                                                                                    |  |                | 2,123      |   |                    |   | 162,260    |  
|Accounts receivable, net of allowances of $1,707 and $1,632 as of March 31, 2005 and September 30, 2004, respectively                                                         |  |                | 38,977     |   |                    |   | 36,447     |  
|Inventories, net                                                                                                                                                              |  |                | 40,845     |   |                    |   | 41,162     |  
|Restricted cash                                                                                                                                                               |  |                | 814        |   |                    |   | 6,600      |  
|Current portion of restricted deposits                                                                                                                                        |  |                |           |   |                    |   | 48,217     |  
|Prepaid expenses and other current assets                                                                                                                                     |  |                | 8,953      |   |                    |   | 9,524      |  
|                                                                                                                                                                              |  |                |            |   |                    |   |            |  
|Total current assets                                                                                                                                                          |  |                | 123,652    |   |                    |   | 325,075    |  
|                                                                                                                                                                              |  |                |            |   |                    |   |            |  
|Property and equipment, net                                                                                                                                                   |  |                | 113,869    |   |                    |   | 74,403     |  
|Goodwill, net                                                                                                                                                                 |  |                | 223,581    |   |                    |   | 218,880    |  
|Other intangible assets, net                                                                                                                                                  |  |                | 19,501     |   |                    |   | 24,212     |  
|Other assets                                                                                                                                                                  |  |                | 10,866     |   |                    |   | 16,448     |  
|                                                                                                                                                                              |  |                |            |   |                    |   |            |  
|                                                                                                                                                                              |  | $              | 491,469    |   |                    | $ | 659,018    |  
|                                                                                                                                                                              |  |                |            |   |                    |   |            |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                          |  |                |            |   |                    |   |            |  
|Current liabilities:                                                                                                                                                          |  |                |            |   |                    |   |            |  
|Current portion of long-term debt and capital leases                                                                                                                          |  | $              | 5,919      |   |                    | $ | 2,003      |  
|Current portion of convertible subordinated debt, due 2005, including premium of $529                                                                                         |  |                |           |   |                    |   | 132,746    |  
|Current portion of accrued restructuring                                                                                                                                      |  |                | 4,223      |   |                    |   | 12,311     |  
|Accounts payable                                                                                                                                                              |  |                | 18,319     |   |                    |   | 17,789     |  
|Accrued expenses and other current liabilities                                                                                                                                |  |                | 14,890     |   |                    |   | 17,363     |  
|Deferred revenue                                                                                                                                                              |  |                | 6,019      |   |                    |   | 6,869      |  
|Income taxes payable                                                                                                                                                          |  |                | 1,798      |   |                    |   | 1,511      |  
|                                                                                                                                                                              |  |                |            |   |                    |   |            |  
|Total current liabilities                                                                                                                                                     |  |                | 51,168     |   |                    |   | 190,592    |  
|                                                                                                                                                                              |  |                |            |   |                    |   |            |  
|Long-term accrued restructuring                                                                                                                                               |  |                | 163        |   |                    |   | 1,242      |  
|Deferred gain on derivative instrument                                                                                                                                        |  |                | 4,319      |   |                    |   | 4,319      |  
|Other long-term liabilities                                                                                                                                                   |  |                | 1,146      |   |                    |   | 1,146      |  
|Long-term debt and capital leases                                                                                                                                             |  |                | 5,546      |   |                    |   |           |  
|Convertible subordinated debt, due October 2024                                                                                                                               |  |                | 96,700     |   |                    |   | 90,000     |  
|Minority interest                                                                                                                                                             |  |                | 780        |   |                    |   | 1,481      |  
|Shareholders equity:                                                                                                                                                         |  |                |            |   |                    |   |            |  
|Common stock, $.01 par value. Authorized 500,000,000 shares; issued and outstanding 216,257,647 and 212,885,307 shares on March 31, 2005 and
September 30, 2004, respectively |  |                | 2,180      |   |                    |   | 2,146      |  
|Additional paid-in capital                                                                                                                                                    |  |                | 1,447,554  |   |                    |   | 1,441,490  |  
|Unearned compensation                                                                                                                                                         |  |                | (340       | ) |                    |   | (1,764     | )
|Accumulated other comprehensive (loss)                                                                                                                                        |  |                | (1         | ) |                    |   | (1         | )
|Accumulated deficit                                                                                                                                                           |  |                | (1,117,746 | ) |                    |   | (1,071,633 | )
|                                                                                                                                                                              |  |                |            |   |                    |   |            |  
|Total shareholders equity                                                                                                                                                    |  |                | 331,647    |   |                    |   | 370,238    |  
|                                                                                                                                                                              |  |                |            |   |                    |   |            |  
|                                                                                                                                                                              |  | $              | 491,469    |   |                    | $ | 659,018    |  
|                                                                                                                                                                              |  |                |            |   |                    |   |            |  



See accompanying Notes
to Unaudited Condensed Consolidated Financial Statements.



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VITESSE SEMICONDUCTOR CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)



|                                          |  |                    |         |   |                  |   |         |               |  |   |               |   |  |   |         |  
|----------------------------------------- |  | ------------------ | ------- | - | ---------------- | - | ------- | ------------- |  | - | ------------- | - |  | - | ------- | -
|                                          |  | Three Months Ended |         |   | Six Months Ended |  
|                                          |  | March 31,2005      |         |   | March 31,2004    |   |         | March 31,2005 |  |   | March 31,2004 |  
|Revenues                                  |  | $                  | 47,158  |   |                  | $ | 56,034  |               |  | $ | 91,617        |   |  | $ | 106,346 |  
|Costs and expenses:                       |  |                    |         |   |                  |   |         |               |  |   |               |   |  |   |         |  
|Cost of revenues                          |  |                    | 21,114  |   |                  |   | 19,535  |               |  |   | 41,312        |   |  |   | 37,404  |  
|Engineering, research and development     |  |                    | 27,058  |   |                  |   | 29,349  |               |  |   | 51,932        |   |  |   | 55,302  |  
|Selling, general and administrative       |  |                    | 12,263  |   |                  |   | 11,441  |               |  |   | 24,090        |   |  |   | 23,466  |  
|Restructuring costs                       |  |                    | 10,410  |   |                  |   | 196     |               |  |   | 10,410        |   |  |   | 282     |  
|Employee stock purchase plan compensation |  |                    | (941    | ) |                  |   | 10,338  |               |  |   | 527           |   |  |   | 10,338  |  
|Amortization of intangible assets         |  |                    | 2,335   |   |                  |   | 1,737   |               |  |   | 4,712         |   |  |   | 3,555   |  
|                                          |  |                    |         |   |                  |   |         |               |  |   |               |   |  |   |         |  
|Total costs and expenses                  |  |                    | 72,239  |   |                  |   | 72,596  |               |  |   | 132,983       |   |  |   | 130,347 |  
|                                          |  |                    |         |   |                  |   |         |               |  |   |               |   |  |   |         |  
|Loss, before other income (expense), net  |  |                    | (25,081 | ) |                  |   | (16,562 | )             |  |   | (41,366       | ) |  |   | (24,001 | )
|Interest income                           |  |                    | 257     |   |                  |   | 508     |               |  |   | 897           |   |  |   | 1,315   |  
|Interest expense                          |  |                    | (540    | ) |                  |   | (2,044  | )             |  |   | (2,110        | ) |  |   | (4,152  | )
|Other income (expense)                    |  |                    | (3,445  | ) |                  |   | 770     |               |  |   | (3,187        | ) |  |   | 1,910   |  
|                                          |  |                    |         |   |                  |   |         |               |  |   |               |   |  |   |         |  
|Other income (expense), net               |  |                    | (3,728  | ) |                  |   | (766    | )             |  |   | (4,400        | ) |  |   | (927    | )
|                                          |  |                    |         |   |                  |   |         |               |  |   |               |   |  |   |         |  
|Loss, before income taxes                 |  |                    | (28,809 | ) |                  |   | (17,328 | )             |  |   | (45,766       | ) |  |   | (24,928 | )
|Income tax expense                        |  |                    | 89      |   |                  |   | 123     |               |  |   | 347           |   |  |   | 473     |  
|                                          |  |                    |         |   |                  |   |         |               |  |   |               |   |  |   |         |  
|Net loss                                  |  | $                  | (28,898 | ) |                  | $ | (17,451 | )             |  | $ | (46,113       | ) |  | $ | (25,401 | )
|                                          |  |                    |         |   |                  |   |         |               |  |   |               |   |  |   |         |  
|Net loss per share  basic and diluted    |  | $                  | (0.13   | ) |                  | $ | (0.08   | )             |  | $ | (0.22         | ) |  | $ | (0.12   | )
|                                          |  |                    |         |   |                  |   |         |               |  |   |               |   |  |   |         |  
|Shares used in per share computations:    |  |                    |         |   |                  |   |         |               |  |   |               |   |  |   |         |  
|Basic and diluted                         |  |                    | 215,408 |   |                  |   | 215,652 |               |  |   | 214,468       |   |  |   | 214,675 |  
|                                          |  |                    |         |   |                  |   |         |               |  |   |               |   |  |   |         |  



See accompanying Notes
to Unaudited Condensed Consolidated Financial Statements.



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VITESSE SEMICONDUCTOR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

UNAUDITED

(in thousands)



|                                                                                  |  |                  |          |   |               |   |          |  
|--------------------------------------------------------------------------------- |  | ---------------- | -------- | - | ------------- | - | -------- | -
|                                                                                  |  | Six Months Ended |         
|                                                                                  |  | March 31,2005    |          |   | March 31,2004 |  
|Cash flows from operating activities:                                             |  |                  |          |   |               |   |          |  
|Net loss                                                                          |  | $                | (46,113  | ) |               | $ | (25,401  | )
|Adjustments to reconcile net loss to net cash used in operating activities:       |  |                  |          |   |               |   |          |  
|Depreciation and amortization                                                     |  |                  | 19,052   |   |               |   | 19,287   |  
|Amortization of debt issue costs                                                  |  |                  | 330      |   |               |   | 556      |  
|Amortization of deferred compensation                                             |  |                  | 1,318    |   |               |   | 11,418   |  
|Other compensation expense                                                        |  |                  | 1,220    |   |               |   | 11,186   |  
|Gain on derivative instruments                                                    |  |                  | (840     | ) |               |   | (1,783   | )
|Impairment of fixed assets                                                        |  |                  | 1,141    |   |               |   |         |  
|Restructuring charge                                                              |  |                  | 10,409   |   |               |   |         |  
|Impairment of other long-term investments                                         |  |                  | 2,844    |   |               |   | 119      |  
|Change in operating assets and liabilities:                                       |  |                  |          |   |               |   |          |  
|Accounts receivable, net                                                          |  |                  | (2,530   | ) |               |   | (3,350   | )
|Inventories, net                                                                  |  |                  | 317      |   |               |   | (5,585   | )
|Prepaid expenses and other current assets                                         |  |                  |         |   |               |   | (2,543   | )
|Other assets                                                                      |  |                  | 1,773    |   |               |   | 574      |  
|Accounts payable                                                                  |  |                  | 530      |   |               |   | 1,783    |  
|Accrued expenses and other current liabilities                                    |  |                  | (765     | ) |               |   | (4,459   | )
|Accrued restructuring                                                             |  |                  | (3,490   | ) |               |   | (4,877   | )
|Income taxes payable                                                              |  |                  | 287      |   |               |   | 601      |  
|                                                                                  |  |                  |          |   |               |   |          |  
|Net cash used in operating activities                                             |  |                  | (14,517  | ) |               |   | (2,474   | )
|                                                                                  |  |                  |          |   |               |   |          |  
|Cash flows from investing activities:                                             |  |                  |          |   |               |   |          |  
|Purchases of investments                                                          |  |                  | (92,275  | ) |               |   | (386,522 | )
|Proceeds from sale of investments                                                 |  |                  | 252,412  |   |               |   | 451,831  |  
|Capital expenditures                                                              |  |                  | (14,141  | ) |               |   | (6,985   | )
|Capital contributions by minority interest limited partners                       |  |                  | 121      |   |               |   | 141      |  
|Distribution to Venture Fund partners from sale of investments                    |  |                  |         |   |               |   | (68      | )
|Restricted cash                                                                   |  |                  |         |   |               |   | (6,600   | )
|Purchase of business, net of cash acquired                                        |  |                  | (1,464   | ) |               |   | (59,183  | )
|                                                                                  |  |                  |          |   |               |   |          |  
|Net cash provided by (used) in investing activities                               |  |                  | 144,653  |   |               |   | (7,386   | )
|                                                                                  |  |                  |          |   |               |   |          |  
|Cash flows from financing activities:                                             |  |                  |          |   |               |   |          |  
|Principal payments under convertible subordinated debt and long-term debt         |  |                  | (121,455 | ) |               |   | (1,713   | )
|Proceeds from issuance of long-term debt                                          |  |                  | 9,800    |   |               |   |         |  
|Repurchase of convertible subordinated debt                                       |  |                  | (12,370  | ) |               |   |         |  
|Proceeds from issuance of common stock, net                                       |  |                  | 4,964    |   |               |   | 6,824    |  
|                                                                                  |  |                  |          |   |               |   |          |  
|Net cash provided by (used) in financing activities                               |  |                  | (119,061 | ) |               |   | 5,111    |  
|                                                                                  |  |                  |          |   |               |   |          |  
|Increase (decrease) in cash and cash equivalents                                  |  |                  | 11,075   |   |               |   | (4,749   | )
|Cash and cash equivalents at beginning of period                                  |  |                  | 20,865   |   |               |   | 48,119   |  
|                                                                                  |  |                  |          |   |               |   |          |  
|Cash and cash equivalents at end of period                                        |  | $                | 31,940   |   |               | $ | 43,370   |  
|                                                                                  |  |                  |          |   |               |   |          |  
|Supplemental disclosures of cash flow information:                                |  |                  |          |   |               |   |          |  
|Cash paid during the period for:                                                  |  |                  |          |   |               |   |          |  
|Interest                                                                          |  | $                | 912      |   |               | $ | 3,546    |  
|                                                                                  |  |                  |          |   |               |   |          |  
|Income taxes                                                                      |  | $                | 60       |   |               | $ | 144      |  
|                                                                                  |  |                  |          |   |               |   |          |  
|Supplemental disclosures of non-cash transactions:                                |  |                  |          |   |               |   |          |  
|Acquisition of equipment (Note 5)                                                 |  | $                | 48,217   |   |               | $ | 8,884    |  
|Write down of equipment (Note 5)                                                  |  | $                | 7,378    |   |               | $ | 5,812    |  
|Issuance of stock in business acquisition                                         |  | $                |         |   |               | $ | 2,727    |  
|Minority interest limited partners share of impaired other long-term investments |  | $                | 736      |   |               | $ | 36       |  
|Additional liabilities assumed in business acquisition                            |  | $                |         |   |               | $ | 160      |  



See accompanying Notes
to Unaudited Condensed Consolidated Financial Statements.



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VITESSE SEMICONDUCTOR CORPORATION



NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



Note 1. Basis of Presentation and Significant Accounting Policies



The accompanying condensed consolidated financial statements are unaudited and include the accounts of Vitesse Semiconductor Corporation and its subsidiaries (the Company). All intercompany accounts and
transactions have been eliminated. In managements opinion, all adjustments (consisting only of normal recurring accruals) which are necessary for a fair presentation of financial condition and results of operations are reflected in the
attached interim financial statements. This report should be read in conjunction with the audited financial statements presented in the 2004 Annual Report on Form 10-K. Footnotes and other disclosures which would substantially duplicate the
disclosures in the Companys audited financial statements for fiscal year 2004 contained in the Annual Report have been omitted. The interim financial information herein is not necessarily representative of the results to be expected for any
subsequent period.



Revenue Recognition



Production revenue is recognized when persuasive evidence of an arrangement
exists, the sales price is fixed, products are shipped to customers, which is when title and risk of loss transfers to the customer, and collectibility is reasonably assured. Revenue from development contracts is recognized upon attainment of
specific milestones established under customer contracts. Such revenue is insignificant. Revenue from products deliverable under development contracts, including design tools and prototype products, is recognized upon delivery. Costs related to
development contracts are expensed as incurred. The Company records a provision for estimated sales returns in the same period as the related revenues are recorded. These estimates are based on historical sales returns and other known factors.
Actual returns could be different from these estimates and current provisions for sales returns and allowances, resulting in future charges to earnings. Certain of the Companys production revenue is from sales to a major distributor under an
agreement allowing for price protection and right of return on products unsold. Accordingly, the Company defers recognition of revenue on such products until the products are sold by the distributor to the end user.



Inventories



Inventories are stated at the lower of cost or market (net realizable
value). Costs associated with development of a new product are charged to engineering, research and development expense as incurred until the product is proven through testing and acceptance by the customer. At each balance sheet date, the Company
evaluates its ending inventories for excess quantities and obsolescence. This evaluation includes analyses of sales levels by product and projections of future demand. If inventories on hand are in excess of forecasted demand, the Company provides
appropriate reserves for such excess inventory. If the determination is made that inventory is obsolete, these inventories are written off in the period the determination is made. Inventories are shown net of reserves of $4.0 million and $6.1
million at March 31, 2005 and September 30, 2004, respectively.



Computation of Net Income (Loss) per Share



Basic net loss per share is computed using the weighted-average number of common shares outstanding during the period.Diluted net loss per share is computed using the weighted-average number of common shares and excludes
certain dilutive potential common shares outstanding, as their effect is antidilutive. Dilutive potential common shares consist of employee stock options, convertible subordinated debentures that are convertible into the Companys common stock
at conversion prices of $112.19 and $3.92, and consideration for a business acquisition that is payable in stock or cash at the Companys option.



Because the Company incurred losses in the quarters ended March 31, 2005, and March 31, 2004, the effect of dilutive securities totaling 83,200,217 and
51,134,674 equivalent shares, respectively, has been excluded in net loss per share, as their impact would be antidilutive.



Accounting for Stock Based Compensation



In December 2002, the FASB issued SFAS No. 148, Accounting for Stock Based CompensationTransition and Disclosure(SFAS 148). SFAS
No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation(SFAS 123), to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results.



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##### Table of Contents

The Company applies the intrinsic-value-based method of accounting prescribed by Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations including FASB Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, an interpretation of
APB Opinion No. 25, issued in March 2000, to account for its stock-based awards for employees. For options granted to employees, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded
the exercise price. SFAS No. 123 established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply
the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS No. 123.



The following table illustrates the effect on net loss if the fair-value based method had been applied to all outstanding and unvested awards in each
period (in thousands, except per share amounts):



|                                                                                                           |  |                    |         |   |                  |   |         |               |  |   |               |   |  |   |         |  
|---------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ---------------- | - | ------- | ------------- |  | - | ------------- | - |  | - | ------- | -
|                                                                                                           |  | Three months ended |         |   | Six months ended |  
|                                                                                                           |  | March 31,2005      |         |   | March 31,2004    |   |         | March 31,2005 |  |   | March 31,2004 |  
|Net loss as reported                                                                                       |  | $                  | (28,898 | ) |                  | $ | (17,451 | )             |  | $ | (46,113       | ) |  | $ | (25,401 | )
|Add: Stock-based employee compensation expense included in reported net loss                               |  | $                  | 396     |   |                  | $ | 16,072  |               |  | $ | 2,538         |   |  | $ | 21,756  |  
|Deduct: Stock-based employee compensation expense determined under fair value based methods for all awards |  | $                  | (8,453  | ) |                  | $ | (30,259 | )             |  | $ | (19,940       | ) |  | $ | (49,438 | )
|Adjusted net loss                                                                                          |  | $                  | (36,955 | ) |                  | $ | (31,638 | )             |  | $ | (60,977       | ) |  | $ | (53,083 | )
|Net loss per share as reported  basic and diluted                                                         |  | $                  | (0.13   | ) |                  | $ | (0.08   | )             |  | $ | (0.22         | ) |  | $ | (0.12   | )
|Adjusted net loss per share  basic and diluted                                                            |  | $                  | (0.17   | ) |                  | $ | (0.15   | )             |  | $ | (0.28         | ) |  | $ | (0.25   | )



The Company has an
employee stock purchase plan for all eligible employees. In accordance with EITF 97-12, Accounting for Increased Share Authorizations in an IRS Section 423 Employee Stock Purchase Plan under APB Opinion No. 25,the Company is required to
account for certain shares to be issued under the plan through January 31, 2005 using the variable method of accounting with corresponding stock-based compensation expense recorded for the difference between the fair value of the stock at the end of
the six month purchase interval and the offering period purchase prices. Therefore, the Company recorded stock-based employee compensation expense of ($0.9) million and $0.5 million during the three and six month periods ended March 31, 2005 related
to the employee stock purchase plan for the six-month interval ending January 31, 2005 with a purchase price of $1.76. The corresponding stock-based compensation expense is recognized in accordance with FASB Interpretation No. 28, Accounting for
Stock Appreciation Rights and Other Variable Stock Option or Award Plans.



Use of Estimates



Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.



Note 2. Restructuring
Costs



January 2005 Restructuring Program



During the quarter ended March 31, 2005, in response to
changing market conditions, the Companys Board of Directors approved a plan to restructure the Company (the January 2005 Program). The restructuring included the cessation of certain development activities, the termination of employees, as
well as closure of two design centers that were focused primarily on areas that the Company has elected not to pursue. As a result of implementing this restructuring plan, the Company incurred a charge of $10.2 million in the quarter ended March 31,
2005. The January 2005 Program was comprised of the following components:



Workforce reduction The Company terminated 97 employees, which included 87 from research and development operations, 5 from manufacturing operations, 3 from sales and marketing and 2 from general and
administration functions. These employees were notified during January and March 2005. The total charge for workforce reduction was $1.0 million, with payments expected to be complete by June 2005.



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Contract Termination Costs  As a result of this restructuring program, the Company closed
its Richardson, Texas design center as of February 28, 2005 and its New Jersey design center as of March 31, 2005. The charge of $0.5 million was 100% of the estimated future obligations for those sites.



Impairment of Assets The impairment of assets charge of $8.7
million includes the write-down of certain excess fixed assets, including computer equipment and test equipment. The charge consisted of $2.5 million and $0.2 million to write off all of the excess fixed assets from the New Jersey design center and
Richardson design center, respectively, $4.7 million of tooling for cancelled programs, and $1.3 million of excess test equipment that was previously used to support engineering operations.



The Company has substantially completed the activities contemplated by
the January 2005 Program. The remaining severance payments are expected to be complete by May 2005. The Company has not disposed of the surplus leased facilities, but instead expects to continue to pay the remaining lease liabilities until the terms
are reached. The impaired assets are decommissioned and expected to remain idle for an indefinite period of time.



A combined summary of the restructuring programs is as follows (in thousands):



|                              |  |                    |       |   |                  |   |        |                          |  |   |                     |   |  |       |        |   |  |   |         |  
|----------------------------- |  | ------------------ | ----- | - | ---------------- | - | ------ | ------------------------ |  | - | ------------------- | - |  | ----- | ------ | - |  | - | ------- | -
|                              |  | WorkforceReduction |       |   | ExcessFacilities |   |        | ContractTerminationCosts |  |   | Impairment ofAssets |   |  | Total |       
|Balance at September 30, 2004 |  | $                  | 125   |   |                  | $ | 2,802  |                          |  | $ | 10,626              |   |  | $     |       |   |  | $ | 13,553  |  
|Charged to expense            |  |                    | 1,012 |   |                  |   | 689    |                          |  |   |                    |   |  |       | 8,709  |   |  |   | 10,410  |  
|Non cash amounts              |  |                    |      |   |                  |   |       |                          |  |   | (7,378              | ) |  |       | (8,709 | ) |  |   | (16,087 | )
|Cash payments                 |  |                    | (830  | ) |                  |   | (1,122 | )                        |  |   | (1,538              | ) |  |       |       |   |  |   | (3,490  | )
|                              |  |                    |       |   |                  |   |        |                          |  |   |                     |   |  |       |        |   |  |   |         |  
|Balance at March 31, 2005     |  | $                  | 307   |   |                  | $ | 2,369  |                          |  | $ | 1,710               |   |  | $     |       |   |  | $ | 4,386   |  
|                              |  |                    |       |   |                  |   |        |                          |  |   |                     |   |  |       |        |   |  |   |         |  



Included in the table
above is an additional charge of $0.2 million for an adjustment to sublease income estimates related to the fiscal 2003 restructuring program.



Note 3. Long-term Debt



On September 22, 2004 the Company issued $90.0 million in aggregate principal amount of its 1.5% Convertible Subordinated Debentures due 2024 (2024
Debentures), to qualified institutional buyers in reliance on Rule 144A under 1933 Securities Act. Net proceeds received by the Company, after costs of issuance, were approximately $86.9 million. On October 15, 2004 the Company issued an
additional $6.7 million in aggregate principal amount of its 2024 Debentures to qualified institutional buyers in reliance on Rule 144A under 1933 Securities Act. Net proceeds received by the Company from the October issuance, after costs of
issuance, were approximately $6.5 million. The 2024 Debentures are unsecured obligations and are subordinated in right of payment to all of the Companys existing and future senior indebtedness, including indebtedness under the Companys
amended senior credit facility. Interest is payable in arrears semiannually on October 1 and April 1 of each year, beginning April 1, 2005. The 2024 Debentures are convertible into shares of the Companys common stock at an initial conversion
price of $3.92 per share, subject to adjustment. This results in an initial conversion rate of approximately 255.1020 shares of common stock per $1,000 principal amount of the debentures. Upon conversion, the Company will have the option to deliver
cash in lieu of shares of its common stock or a combination of cash and shares of common stock. The Company may redeem the 2024 Debentures after October 1, 2007 if its stock price is at least 170% of the conversion price, or approximately $6.67 per
share, for 20 trading days within any 30 consecutive trading day period, and may also redeem the 2024 Debentures beginning October 1, 2009 without being subject to such condition. In addition, holders of the 2024 Debentures will have the right to
require the Company to repurchase the 2024 Debentures on October 1 of 2009, 2014 and 2019. Holders will also have the option, subject to certain conditions, to require the Company to repurchase any debentures held by such holder in the event of a
fundamental change, at a price equal to 100% of the principal amount of the notes plus accrued and unpaid interest plus, under certain circumstances, a make-whole premium. For the quarter ended March 31, 2005, interest expense relating to the
debentures was $0.4 million. At March 31, 2005, outstanding debentures were $96.7 million



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##### Table of Contents

Note 4. Purchase Accounting Business Combinations



On February 3, 2004, the Company acquired all of the equity interests of Cicada Semiconductor Corporation
(Cicada) in exchange for $65.5 million in cash. Cicada was a supplier of gigabit ethernet transceivers to developers of high-speed communications systems used in local area networks. Of the total purchase price, $6.6 million was being
held in an escrow fund until the first anniversary of the closing date of the acquisition, and was reported as restricted cash. Throughout the escrow period, the Company made certain claims against that escrow fund totaling approximately $0.6
million, which are still in dispute, and which together with approximately $0.2 million of other funds that remain in the escrow fund are included in restricted cash as of March 31, 2005. The remaining balance of $5.8 million was paid during the
current quarter, and therefore the goodwill associated with the Cicada acquisition increased by $5.8 million.



During the quarter ended June 30, 2004, the Company completed the purchase price allocation, which included net liabilities of $1.6 million. During the
quarter ended March 31, 2005 the Company determined that $1.3 million of liabilities recorded as part of the initial purchase price allocation should not have been recorded as liabilities of Vitesse. Therefore, the company reversed the liability and
recorded a reduction to goodwill in the amount of $1.3 million during the quarter ended March 31, 2005.



On January 26, 2005, the Company entered into an agreement with Adaptec, Inc, under the terms of which, the Company agreed to employ approximately 45
selected Adaptec employees, to license certain technology and intellectual property, and to purchase certain assets related to Adaptecs development of SAS RAID on Chip (SAS ROC) products. The Company expects to account for this as a business
combination in accordance with SFAS 141, Business Combinations. As of March 31, 2005, the Company had paid $1.3 million for certain fixed assets, and had recorded $0.2 million as goodwill associated with payment of legal fees. The Company is
in the process of obtaining the necessary information to perform the purchase price allocation.



Note 5. Purchased Equipment and Capital Lease Obligations



Prior to March 31, 2005, the Company was party to several lease agreements to lease equipment. All of these leases had initial terms of three to five
years and options to renew for an additional one to three years. The Company had the option to purchase the equipment at the end of the initial lease term, or the end of each renewal period for the lessors original cost. During the quarter
ended March 31, 2005, the Company elected to purchase the equipment. As a result, the Company recorded the assets at their cost of $38.9 million, less $5.9 million of accrued restructuring impairment related to those assets that was recorded in
fiscal 2002. In connection with the termination of the original leases, $31.1 million of restricted cash was returned to the Company, and subsequently used for payment of the equipment. The Company entered into a $7.8 million two -year capital lease
to pay for the remaining amounts owed under the purchase, which is included in capital lease liabilities as of March 31, 2005. Additionally, the Company financed the purchase of $3.3 million of test equipment which is also included in capital lease
liabilities as of March 31, 2005. Both leases include a bargain purchase option, and title transfers at the end of the lease term.



Note 6. Goodwill and Other Intangible Assets



The following table presents detail of the Companys goodwill (in thousands):



|                                                     |  |   |         |  
|---------------------------------------------------- |  | - | ------- | -
|Balance as of September 30, 2004                     |  | $ | 218,880 |  
|Goodwill acquired                                    |  |   | 164     |  
|Release of Cicada escrow                             |  |   | 5,787   |  
|Purchase price adjustment related to Cicada goodwill |  |   | (1,250  | )
|                                                     |  |   |         |  
|Balance as of March 31, 2005                         |  | $ | 223,581 |  
|                                                     |  |   |         |  



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The following table presents details of the Companys total other intangible assets (in thousands):



|                         |  |                     |        |                         |   |         |            |  |   |       
|------------------------ |  | ------------------- | ------ | ----------------------- | - | ------- | ---------- |  | - | ------
|                         |  | GrossCarryingAmount |        | AccumulatedAmortization |   |         | NetBalance
|March 31, 2005           |  |                     |        |                         |   |         |            |  |   |       
|Customer relationships   |  | $                   | 3,513  |                         | $ | (2,283  | )          |  | $ | 1,230 
|Technology               |  |                     | 37,165 |                         |   | (18,894 | )          |  |   | 18,271
|Covenants not to compete |  |                     | 4,000  |                         |   | (4,000  | )          |  |   |      
|                         |  |                     |        |                         |   |         |            |  |   |       
|Total                    |  | $                   | 44,678 |                         | $ | (25,177 | )          |  | $ | 19,501
|                         |  |                     |        |                         |   |         |            |  |   |       
|September 30, 2004       |  |                     |        |                         |   |         |            |  |   |       
|Customer relationships   |  | $                   | 3,513  |                         | $ | (1,879  | )          |  | $ | 1,634 
|Technology               |  |                     | 37,165 |                         |   | (14,587 | )          |  |   | 22,578
|Covenants not to compete |  |                     | 4,000  |                         |   | (4,000  | )          |  |   |      
|                         |  |                     |        |                         |   |         |            |  |   |       
|Total                    |  | $                   | 44,678 |                         | $ | (20,466 | )          |  | $ | 24,212
|                         |  |                     |        |                         |   |         |            |  |   |       



The estimated future
amortization expense of other intangible assets is as follows (in thousands):



|                         |  |        |       
|------------------------ |  | ------ | ------
|Fiscal year              |  | Amount
|Remainder of fiscal 2005 |  | $      | 4,593 
|2006                     |  |        | 7,817 
|2007                     |  |        | 5,754 
|2008                     |  |        | 1,332 
|Thereafter               |  |        | 5     
|                         |  |        |       
|Total                    |  | $      | 19,501
|                         |  |        |       



The Company is
required to perform annual goodwill impairment tests as of July 31, and between annual tests in certain circumstances. There was no impairment of goodwill during the six months ended March 31, 2004. Future goodwill impairment tests may result in
charges to earnings.



Note 7. Inventories, net



Inventories consist of the following (in thousands):



|                                   |  |               |        |               |   |       
|---------------------------------- |  | ------------- | ------ | ------------- | - | ------
|                                   |  | March 31,2005 |        | Sept. 30,2004
|Raw materials                      |  | $             | 3,864  |               | $ | 9,049 
|Work in process and finished goods |  |               | 36,981 |               |   | 32,113
|                                   |  |               |        |               |   |       
|                                   |  | $             | 40,845 |               | $ | 41,162
|                                   |  |               |        |               |   |       



Note 8. Derivative Instruments and
Hedging Activities



In the first quarter of fiscal 2005,
an interest-rate related derivative instrument was in effect to manage the Companys exposure on its 4.0% Convertible Subordinated Debentures due 2005 (2005 Debentures). The Company does not enter into derivative instruments for
trading or speculative purposes.



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By using derivative financial instruments to hedge exposures to changes in interest rates, the Company
exposes itself to credit risk and market risk. Credit risk is the risk of the counter-party failing to perform under the terms of the derivative contract when the contracts value is in the Companys favor. The Company minimizes the credit
risk in derivative instruments by entering into transactions with high-quality counterparties.



Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates. The market risk associated with the interest rate contract is managed by establishing and
monitoring parameters that limit the types and degree of market risk that may be undertaken.



The Company assesses interest rate risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. The
Company maintains risk management control systems to monitor interest rate risk attributable to both the Companys outstanding or forecasted debt obligations as well as the Companys offsetting hedge positions. The risk management control
systems involve the use of analytical techniques, including cash flow sensitivity analysis, to estimate the expected impact of changes in interest rates on the Companys debt.



The Company uses fixed debt to finance its operations. The debt obligation exposes the Company to variability in the fair
value of debt due to changes in interest rates. Management believes it is prudent to limit the variability. To meet this objective, management entered into interest rate swap agreements during fiscal 2002 and 2003 to manage fluctuations in debt
resulting from interest rate risk and designated these agreements as hedging instruments in a fair value hedging relationship under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities(SFAS 133). These swaps
changed the fixed-rate exposure on the debt to variable-rate exposure. Under the terms of the interest rate swaps, the Company receives fixed interest rate payments and makes variable interest rate payments, thereby managing the value of debt.



Changes in the fair value of the interest rate swaps
designated as hedging instruments that effectively offset the fair value variability associated with fixed-rate, long-term debt are reported in interest expense as a yield adjustment of the hedged debt.



In the quarter ended December 31, 2004, the Company recorded a net loss on
the final termination of the swap agreement in conjunction with buying back the related 2005 Debentures totaling $0.6 million. Therefore, as of March 31, 2005, the Company did not have any interest rate swaps in place.



Note 9. Significant Customers, Concentration of Credit Risk and Segment Information



The Company generally sells its products to customers
engaged in the design and/or manufacture of high technology products either recently introduced or not yet introduced to the marketplace. Substantially all the Companys trade accounts receivable are due from such sources. In the first and
second quarters of fiscal 2005, one customer, EMC Corporation, accounted for greater than 10% of total revenues. In the quarter ended March 31, 2004, no customer accounted for greater than 10% of total revenues.



The Company has one reportable operating segment as defined by SFAS No. 131,
Disclosure about Segments of an Enterprise and Related Information. Substantially all long-lived assets are located in the United States.



The Company principally targets four markets within the communications and storage industries: storage, enterprise, metro and long-haul.



Within the storage industry the Company specifically addresses
enterprise-class mass storage systems, switches, servers and host bus adaptors, which are primarily based on the Fibre Channel and SAS protocols. Products in this area include physical layer devices such as serializers/deserializers (SerDes), port
bypass circuits, expanders, enclosure management controllers and fabric switches.



The Companys enterprise products target systems within LANs that are designed to deliver high speed interconnections between buses, backplanes, servers and switches using standards such as Gigabit Ethernet and
Fibre Channel. These systems include enterprise routers, switches and servers. Enterprise products include transceivers, SerDes, network processors, Ethernet switches and Media Access Controllers.



The Companys metro products are targeted at systems that comprise the
first span of the network that connects subscribers and businesses to the WAN. These systems, typically marketed by large communications equipment companies and sold to communications service providers, include add-drop multiplexers, digital cross
connects and carrier-class routers and switches. Products designed for this market include framers, mappers, fabric switches, TSI switches and physical layer devices.



The Companys long haul products are principally targeted at communications equipment within the core and edge of the
optical network that provide very high speed connections over long distances. Primary products sold into this market are physical layer devices and physical media devices that operate at speeds of 2.5 Gb/s or faster.



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Revenues from storage products were $14.3 million and $24.7 million in the second quarters of fiscal 2005
and 2004, respectively. Revenues from enterprise products were $13.4 million and $11.2 million in the second quarters of fiscal 2005 and 2004, respectively. Revenues from products targeting the metro market were $13.4 million in the second quarter
of fiscal 2005 and $11.4 million in the second quarter of fiscal 2004. Revenues from the Companys legacy products including those targeting the long-haul communications market and ASICs for the ATE and military markets were $6.1 million in the
second quarter of fiscal 2005 and $8.7 million in the second quarter of fiscal 2004.



Revenues within the United States accounted for 45% and 59% of total revenues in the second quarters of fiscal 2005 and 2004, respectively.



|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------



The information set forth in Managements Discussion and Analysis of Financial Condition and Results of
Operations below includes forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), in particular, in Results of OperationsRevenues,
Cost of Revenues, Interest Income and Interest Expense, Other Income, Liquidity and Capital Resources, and Impact of Recent Accounting Pronouncements, and is subject
to the safe harbor created by that section. Factors that management believes could cause results to differ materially from those projected in the forward looking statements are set forth below in Managements Discussion and Analysis of
Financial Condition and Results of Operations and Factors That May Affect Future Operating Results.



Overview



We are a leading supplier of high-performance integrated circuits, principally targeted at systems manufacturers in the communications and storage
industries. Within the communications industry, our products address the enterprise, metro and core segments of the communications network, where they enable data to be transmitted at high speeds and to be processed and switched under a variety of
protocols. In the storage industry our products enable storage devices to be networked efficiently. Our customers include leading communications and storage original equipment manufacturers (OEMs) such as Alcatel, Cisco, EMC, Fujitsu,
Hewlett Packard, Huawei, IBM, LSI Logic, Lucent, Nortel, Siemens, Sun Microsystems, and Tellabs.



Over the past few years, the proliferation of the Internet and the rapid growth in volume of data being sent over local and wide area networks has placed
a tremendous strain on the communications infrastructure. The resulting demand for increased bandwidth has created a need for both faster as well as more expansive networks. Further, communication service providers have sought to increase their
revenues by delivering a growing range of data services to their customers in a cost-effective manner. There has also been a growing trend by systems companies towards the outsourcing of IC design and manufacture to suppliers such as Vitesse.
Additionally, due to increasing needs for moving, managing and storing mission-critical data, the market for storage equipment has been growing significantly. Towards the end of 2000, the communications industry experienced a severe downturn due to
the overbuilding of the communications infrastructure and excess inventories, among other reasons. While market conditions improved modestly between the end of fiscal 2002 and the third quarter of fiscal 2004, our revenues declined in the fourth
quarter of 2004 and the first half of fiscal 2005 due to the presence of excess inventories and reduced spending in our end markets. In spite of these volatile business conditions, we believe that the long-term prospects for the markets that we
participate in remain strong.



Significant Events



January 2005 Restructuring Program



In January 2005, in response to changing market conditions, our Board of
Directors approved a plan to restructure Vitesse, which we refer to as the January 2005 Program. This restructuring plan included the cessation of certain development activities, the termination of employees, and the closure of two design centers
that were focused primarily on areas that we have elected not to pursue. As a result of implementing this restructuring plan, we incurred a charge of $10.2 million in the quarter ended March 31, 2005. The January 2005 Program was comprised of the
following components:



Workforce reduction We
terminated 97 employees, which included 87 from research and development operations, 5 from manufacturing operations, 3 from sales and marketing and 2 from general and administration functions. These employees were notified of their termination
during January and March 2005. The total charge for workforce reduction was $1.0 million, with payments expected to be complete by June 2005.



Contract Termination Costs As part of the January 2005 Program, we closed our Richardson, Texas design center as of February 28, 2005 and
our New Jersey design center as of March 31, 2005. We incurred a charge of $0.5 million in connection with these closures, which reflects 100% of the estimated future obligations for those sites.



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Impairment of Assets The impairment of assets charge of $8.7 million includes the
write-down of certain excess fixed assets, including computer equipment and test equipment. The charge consisted of $2.5 million and $0.2 million to write off all of the excess fixed assets from the New Jersey design center and Richardson design
center, respectively, $4.7 million of tooling for cancelled programs, and $1.3 million of excess test equipment that was previously used to support engineering operations.



We have substantially completed the activities contemplated by the January 2005 Program. The remaining severance
payments are expected to be complete by May 2005. We have not disposed of the surplus leased facilities, but instead expect to continue to pay the remaining lease liabilities until the terms are reached. The impaired assets are decommissioned and
expected to remain idle for an indefinite period of time.



A
combined summary of our restructuring programs is as follows (in thousands):



|                              |  |                    |       |   |                  |   |        |                          |  |   |                     |   |  |       |        |   |  |   |         |  
|----------------------------- |  | ------------------ | ----- | - | ---------------- | - | ------ | ------------------------ |  | - | ------------------- | - |  | ----- | ------ | - |  | - | ------- | -
|                              |  | WorkforceReduction |       |   | ExcessFacilities |   |        | ContractTerminationCosts |  |   | Impairment ofAssets |   |  | Total |       
|Balance at September 30, 2004 |  | $                  | 125   |   |                  | $ | 2,802  |                          |  | $ | 10,626              |   |  | $     |       |   |  | $ | 13,553  |  
|Charged to expense            |  |                    | 1,012 |   |                  |   | 689    |                          |  |   |                    |   |  |       | 8,709  |   |  |   | 10,410  |  
|Non cash amounts              |  |                    |      |   |                  |   |       |                          |  |   | (5,959              | ) |  |       | (8,709 | ) |  |   | (14,668 | )
|Cash payments                 |  |                    | (830  | ) |                  |   | (1,122 | )                        |  |   | (2,957              | ) |  |       |       |   |  |   | (4,909  | )
|                              |  |                    |       |   |                  |   |        |                          |  |   |                     |   |  |       |        |   |  |   |         |  
|Balance at March 31, 2005     |  | $                  | 307   |   |                  | $ | 2,369  |                          |  | $ | 1,710               |   |  | $     |       |   |  | $ | 4,386   |  
|                              |  |                    |       |   |                  |   |        |                          |  |   |                     |   |  |       |        |   |  |   |         |  



Included in the table
above is an additional charge of $0.2 million for an adjustment to sublease income estimates related to our fiscal 2003 restructuring program.



Purchased Equipment and Capital Lease Obligations



Prior to March 31, 2005, we were party to several lease agreements to lease equipment. Each of these leases had an initial term of three to five years and
an option to renew for an additional one to three years. We had the option to purchase the equipment at the end of the initial lease term, or the end of each renewal period for the lessors original cost. During the quarter ended March 31,
2005, we elected to purchase the equipment. As a result, we recorded these assets at their cost of $38.9 million, less $5.9 million of accrued restructuring impairment related to those assets that was recorded in fiscal 2002. In connection with the
termination of the original leases, $31.1 million of restricted cash was returned to us, and was subsequently used for payment of the equipment. We entered into a $7.8 million two -year capital lease to pay for the remaining amounts owed under the
purchase, which is included in capital lease liabilities as of March 31, 2005. Additionally, we financed the purchase of $3.3 million of test equipment, which is also included in capital lease liabilities as of March 31, 2005. Both leases include a
bargain purchase option, and title transfers at the end of the lease term.



Results of Operations



Revenues



Revenues in the second quarter of fiscal 2005 were $47.2
million, a decrease of 15.8% from the $56.0 million recorded in the second quarter of fiscal 2004. For the six months ended March 31, 2005, revenues were $91.6 million, a decrease of 13.9% from the $106.3 million recorded in the six months ended
March 31, 2004. The decrease in revenues was due to an overall decline in demand from our customers, particularly in the storage area that began in the fourth quarter of fiscal 2004.



Revenues from storage products were $14.3 million in the second quarter of fiscal 2005, compared to $24.7 million in the
second quarter of fiscal 2004. The decrease in revenues was due to a sharp decline in demand from several customers that occurred since the fourth quarter of fiscal 2004 as a result of weaker enterprise spending and excess inventories at our
customers.



Revenues from enterprise products grew from $11.2
million in the second quarter of fiscal 2004 to $13.4 million in the second quarter of fiscal 2005. The increase is primarily due to our increased emphasis on products targeting the Ethernet market. In the second quarter of fiscal 2004 we acquired
Cicada Semiconductor Corporation whose products are principally targeted at customers in



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the enterprise LAN space. During fiscal 2004 and through the second quarter of fiscal 2005 we have brought a number of new products to market which have
resulted in increased enterprise revenues.



Revenues from
products targeting the metro market were $13.4 million in the second quarter of fiscal 2005 compared to $11.4 million in the second quarter of fiscal 2004. The increase in demand for our products that target the metro market stems from increasing
bandwidth requirements and the need by communications providers to provide end customers with a range of new services, including Voice Over IP, bandwidth-on-demand and remote storage, among others. This in turn has resulted in an increased demand
for equipment that enables these services, including ICs.



Revenues from our legacy products, which include long-haul telecommunications products and ASICs for Automatic Test Equipment (ATE) and military markets were $6.1 million in the second quarter of fiscal 2005, compared to $8.7 million in the
second quarter of fiscal 2004. The decrease was primarily due to larger last time buy orders we received from customers in the second quarter of fiscal 2004. We do not anticipate revenues from these products will grow significantly during fiscal
2005, as we do not believe that capital spending for long-haul communications equipment will increase for at least several years.



It is customary for product prices in the semiconductor industry to decline over time. Most of these price decreases are negotiated in advance and are
usually based on increased volumes or the passage of time. In the second quarters of fiscal 2005 and 2004, respectively we did not experience abnormal price decreases for the majority of our products.



Since fiscal 2001, many of our customers have restructured operations, cut
product development efforts, reduced excess component inventories and divested parts of their operations as a result of their clients fluctuating capital expenditure levels. We believe that even though the business environment of the markets
in which we participate has shown modest signs of improvement, our revenues will be volatile for the remainder of fiscal 2005 as a result of fluctuating customer demand forecasts and inventory levels.



Cost of Revenues



Our cost of revenues was $21.1 million in the second quarter of fiscal 2005
compared to $19.5 million in the second quarter of fiscal. As a percentage of total revenues, cost of revenues was 44.8% in the second quarter of fiscal 2005 and 34.9% in the second quarter of fiscal 2004. For the six months ended March 31, 2005,
cost of revenues was $41.3 million, or 45.1% as a percentage of total revenues, compared to $37.4 million, or 35.2% as a percentage of total revenues for the six months ended March 31, 2004. The increase in cost of revenues as a percentage of total
revenues in the second quarter of fiscal 2005 compared to the second quarter of fiscal 2004, and for the six months ended March 31, 2005 compared to the same period last year was a result of decreased revenues to absorb fixed manufacturing
overhead costs. In the future, cost of revenues as a percentage of revenues may fluctuate as a result of changes in demand for our products, the relative mix of products that we sell and other factors.



Engineering, Research and Development



Engineering, research and development expenses were $27.1 million in the
second quarter of fiscal 2005 compared to $29.3 million in the second quarter of fiscal 2004. For the six months ended March 31, 2005, engineering, research and development expenses were $51.9 million compared to $55.3 million in the six months
ended March 31, 2004. As a percentage of total revenues, engineering, research and development expenses were 57.4% in the second quarter of fiscal 2005 and 52.4% in the second quarter of fiscal 2004. For the six months ended March 31, 2005,
engineering, research and development expenses as a percentage of total revenues increased to 56.7% from 52.0% in the comparable period a year ago. The decrease in absolute dollars was primarily the result of decreased amortization of deferred and
other acquisition-related compensation expense of $5.1 million. These decreases were partially offset by the increase in costs related to the inclusion of a full quarter of the Cicada acquisition in fiscal 2005 of $1.2 million and an increase in
expensed design software of $1.7 million. The increases on a percentage basis are a result of the fact that our engineering, research and development costs remained relatively fixed, while our revenues declined. Our engineering, research and
development costs are expensed as incurred



Selling, General
and Administrative



Selling, general and administrative
expenses (SG&A) were $12.3 million in the second quarter of 2005, compared to $11.4 million in the second quarter of 2004. For the six months ended March 31, 2005, SG&A expenses were $24.1 million compared to $23.5 million, in
the comparable period a year ago. As a percentage of total revenues, SG&A expenses were 26.0% in second quarter of fiscal 2005, compared to 20.4% in the second quarter of fiscal 2004. For the six months ended March 31, 2005, SG&A expenses as
a percentage of total revenues increased to 26.3% from 22.1%, in the comparable period a year ago. The increase in absolute dollars from the three and six months ended March 31, 2004 was primarily due to increased expense for salaries, commissions,
legal and



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accounting fees. The increase on a percentage basis is a result of the fact that our general and administrative costs remained relatively fixed while our
revenues declined.



Employee Stock Purchase Plan
Compensation



We have an employee stock purchase plan for
all eligible employees. In the second quarter of fiscal 2005, we recorded stock-based compensation expense of ($0.9) million related to certain shares purchased under the plan for the purchase interval ended January 31.See Note 1 of the
Notes to our Unaudited Condensed Consolidated Financial Statements, Basis of Presentation and Significant Accounting Policies for further discussion.



Amortization of Intangible Assets



Amortization of other intangible assets was $2.3 million in the second quarter of fiscal 2005, compared to $1.7 million in
the second quarter of fiscal 2004. For the six months ended March 31, 2005, amortization of other intangible assets was $4.7 million compared to $3.6 million in the comparable period a year ago. The increase in amortization expense from the three
and six months ended March 31, 2005 was the result of an increase in other intangible assets acquired in our fiscal 2004 acquisition of Cicada Semiconductor.



Interest Income



Interest income was $0.3 million in the second quarter of fiscal 2005 compared to $0.5 million in the second quarter of fiscal 2004. For the six months
ended March 31, 2005, interest income was $0.9 million compared to $1.3 million in the comparable period a year ago. The decrease in interest income from the second quarter of fiscal 2004 and from the comparable period a year ago was the result of
lower cash balances and short-term and long-term investments held throughout the period. The decrease in cash and investment balances was primarily the result of the repurchase and redemption of our 2005 Debentures during the third quarter of fiscal
2004 and the first quarter of fiscal 2005, as well as a fixed operating cash outflow in a period of reduced revenues.



Interest Expense



Interest expense was $0.5 million in the second quarter of fiscal 2005 compared to $2.0 million in the second quarter of fiscal 2004. For the six months
ended March 31, 2005, interest expense was $2.1 million compared to $4.2 million in the comparable period a year ago. The decrease in interest expense of $1.5 million from the second quarter of fiscal 2004 and $2.1 million from the comparable period
a year ago, was primarily the result of the repurchase and redemption of $133.1 million of our 2005 Debentures, partially offset by the interest accrued on the $96.7 million principal amount outstanding of our 2024 Debentures.



Other Income (expense)



Other Income (expense) was ($3.4) million in the second quarter of fiscal
2005 and $0.8 million in the second quarter of fiscal 2004. For the six months ended March 31, 2005, other income was ($3.1) million compared to $1.9 million in the comparable period a year ago. For the three and six month periods ending March 31,
2005, other expense primarily consisted of a $1.1 million impairment charge on certain fixed assets that were deemed to be impaired during the review of fixed assets purchased as part of the lease buyout, and a $2.3 million write down of long-term
equity investments to estimated net realizable value. For the quarter and six month period ended March 31, 2004, other income consisted of amortization of deferred gains related to the termination of our interest rate swap agreements in fiscal 2003
and 2002. For additional information regarding our interest rate swap agreements, see Note 8 of the Notes to our Unaudited Condensed Consolidated Financial Statements, Derivative Instruments and Hedging Activities.



Income Tax Expense



For the second quarters of fiscal 2005 and fiscal 2004, our total effective
income tax rate was 0.8% and 1.9%, respectively.



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Liquidity and Capital Resources



At March 31, 2005, we had $34.1 million in cash, cash equivalents and short-term investments, which we refer to as cash and
investments. Cash and investments decreased by $149.0 million from $183.1 million as of September 30, 2004. This decrease was primarily due to the $133.8 million used to repurchase and redeem the 2005 Debentures, $14.1 million used in capital
expenditures, $1.5 million of cash paid for assets acquired from Adaptec and $14.5 million used by operating activities. The decrease in our cash and investments was offset by $6.5 million in proceeds from the issuance of our 2024 Debentures, net of
debt issue costs paid, $3.3 million in proceeds from equipment financing, $4.2 million in proceeds from stock issued pursuant to our employee stock purchase plan and $0.9 million in proceeds from issuance of stock pursuant to our stock option plan.



During the current quarter, we used $9.4 million of cash from
operating activities, primarily as a result of $47.2 million in receipts from customers, which were offset by $56.6 million in payments to vendors. Cash receipts from customers increased by $5.4 million from the $41.8 million in the prior quarter
due to increased revenues. Payments to employees and increased by $10.6 million from the $46.0 million in the prior quarter, primarily due to the timing of payments made for inventory receipts.



In October 2004, we issued $6.7 million in aggregate principal amount of our
2024 Debentures. We incurred $0.2 million of issuance costs, which primarily consisted of investment banking, legal, accounting and other professional fees. The net proceeds to us of this offering were approximately $6.5 million, bringing the
aggregate principal amount of our 2024 Debentures to $96.7 million and our total net proceeds to $93.4 million. In October and November 2004, we used $133.1 million to repurchase and redeem the remaining $132.2 million outstanding principal amount
of our 2005 Debentures.



During the six months ended March 31,
2005 we used $160.1 million in proceeds from the sale of investments to partially fund the $132.2 million repurchase and redemption of the remaining outstanding principal amount of our 2005 Debentures. We invested approximately $14.1 million in
capital equipment consisting of $4.3 million in the buyout of a lease for certain test equipment and $9.8 million in the purchase of other equipment and tooling.



We believe that our available cash, including our cash and investments, and the revolving line of credit facility of $25
million, will be adequate to finance our planned growth and operating needs for the next 12 months. However, we may not be able to generate cash or draw against our credit facility as expected, and our ability to do so may be adversely affected by
the risks discussed in Factors That May Affect Future Operating Results. If we are unable to generate sufficient cash flow to finance our planned growth and repayment of the debentures, we may need to raise additional funds. Depending on
market conditions, we may also elect or be required to raise additional capital in the form of common or preferred equity, debt or convertible securities for the purpose of providing additional capital to fund working capital needs or continued
growth of our existing business, or to refinance our convertible debentures. Any such financing activity will be dependent upon many factors, including our liquidity needs, market conditions and prevailing market terms, and we cannot assure you that
future external financing for us will be available on attractive terms or at all.



Off-Balance Sheet Arrangements



Our acquisition agreements with Cicada and APT obligate us to pay certain contingent cash consideration based on the continued employment of certain individuals and on the achievement of certain revenue milestones over the next four years.
Compensation for continued employment is being ratably accrued over the related period, and compensation for certain revenue milestones will be expensed when such milestones are achieved. As March 31, 2005, total cash contingent compensation that
could be paid under these acquisition agreements assuming all contingencies are met is $2.4 million.



We lease facilities and certain machinery and equipment under noncancellable operating leases that expire through 2009. Approximate minimum rental
commitments under all noncancellable operating leases as of March 31, 2005 are as follows (in thousands):



|                             |  |       |       |               |   |       |  |      |       |      |   |       |  |           |       |  |   |     |  |   |  
|---------------------------- |  | ----- | ----- | ------------- | - | ----- |  | ---- | ----- | ---- | - | ----- |  | --------- | ----- |  | - | --- |  | - | -
|                             |  | Total |       | Remaining2005 |   | 2006  |  | 2007 |       | 2008 |   | 2009  |  | After2009
|Operating Lease Obligations: |  |       |       |               |   |       |  |      |       |      |   |       |  |           |       |  |   |     |  |   |  
|Minimum Rental Payments      |  | $     | 7,911 |               | $ | 2,988 |  | $    | 1,864 |      | $ | 1,304 |  | $         | 1,316 |  | $ | 439 |  | $ | 



Critical Accounting Policies and
Estimates



The preparation of financial statements in
accordance with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenue
and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, including



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those related to our allowance for revenues, doubtful accounts and sales returns, inventory reserves, goodwill and purchased intangible asset valuations,
asset impairments and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying
values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.



We believe the following critical accounting policies, among others, affect the significant judgments and estimates we use in the preparation of our
consolidated financial statements:



Revenue Recognition,
Allowance for Doubtful Accounts and Sales Returns Reserve



We recognize product revenue when persuasive evidence of an arrangement exists, the sales price is fixed, products are shipped to customers, which is when title and risk of loss transfers to the customers, and collectibility is reasonably
assured. Revenue from development contracts is recognized upon attainment of specific milestones established under the customer contracts. Revenue from products deliverable under development contracts, including design tools and prototype products,
is recognized upon delivery. We record a provision for estimated sales returns in the same period as the related revenues are recorded. We base these estimates on historical sales returns and other known factors. Actual returns could be different
from our estimates and current provisions for sales returns and allowances, resulting in future charges to earnings. Certain of our production revenues are from sales to a major distributor under an agreement allowing for price protection and right
of return on products unsold. Accordingly, we defer recognition of revenue on such products until the products are sold by the distributor to the end user.



We evaluate the collectibility of our accounts receivable based on a combination of factors. In circumstances where we are aware of a specific
customers inability to meet its financial obligations to us, we record a specific allowance to reduce the net receivable to the amount we reasonably believe will be collected. For all other customers, we record allowances for doubtful accounts
based on the length of time the receivables are past due, the prevailing business environment and our historical experience. If the financial condition of our customers were to deteriorate or if economic conditions were to worsen, additional
allowances may be required in the future.



At March 31, 2005,
our allowance for doubtful accounts and sales returns was $1.7 million or 4.2% of gross receivables, compared to $1.6 million or 4.3% of gross receivables as of September 30, 2004.



Inventory Valuation



At each balance sheet date, we evaluate our ending inventories for excess quantities and obsolescence. This evaluation includes analyses of sales levels
by product and projections of future demand. If inventories on hand are in excess of forecasted demand, we provide appropriate reserves for such excess inventory. If we have previously recorded the value of such inventory determined to be in excess
of projected demand, or if we determine that inventory is obsolete, we write off these inventories in the period the determination is made. Remaining inventory balances are adjusted to approximate the lower of our actual manufacturing cost or market
value. If future demand or market conditions are less favorable than our projections, additional inventory write-downs may be required, and would be reflected in cost of revenues in the period the revision is made.



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



The purchase method of accounting
for acquisitions requires extensive estimates and judgments to allocate the purchase price to the fair value of net tangible and intangible assets acquired, including in-process research and development (IPR&D). Goodwill and tangible
assets deemed to have indefinite lives are not amortized, but are subject to annual impairment tests. The amounts and useful lives assigned to other intangible assets impact future amortization, and the amount assigned to IPR&D is expensed
immediately. Determining the fair values and useful lives of intangible assets especially requires the exercise of judgment. While there are a number of different generally accepted valuation methods to estimate the value of intangible assets
acquired, we primarily use the discounted cash flow method. This method requires significant management judgment to forecast the future operating results used in the analysis. In addition, other significant estimates are required such as residual
growth rates and discount factors. If the assumptions and estimates used to allocate the purchase price are not correct, future asset impairment charges could be required.



In accordance with SFAS 142, we perform the two-step goodwill impairment test on an annual basis and on an interim basis if
an event or circumstance indicates that it is more likely than not that impairment has occurred. We assess the impairment of other amortizable intangible assets and long-lived assets whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Factors we consider important that could trigger an impairment review include significant underperformance to historical or projected operating results, substantial changes in our business strategy and
significant negative industry or economic trends. If such indicators are present, we compare the fair value of the goodwill of our only reporting unit to its carrying value. For other intangible assets and long-lived assets we determine whether the
sum of the estimated undiscounted cash flows attributable to the each asset in question is less than its carrying value. If less, we recognize an impairment loss based on the excess of the carrying



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amount of the assets over their respective fair values. Fair value of goodwill is determined by using a valuation model based on a market approach. Fair
value of other intangible assets and long-lived assets is determined by undiscounted future cash flows, appraisals or other methods. If the long-lived asset determined to be impaired is to be held and used, we recognize an impairment charge to the
extent the present value of anticipated net cash flows attributable to the asset is less than the assets carrying value. The fair value of the long-lived asset then becomes the assets new carrying value, which we amortize over the
remaining estimated useful life of the asset. These approaches use significant estimates and assumptions, including projection and timing of future cash flows, discount rates reflecting the risk inherent in future cash flows and long-term growth
rates. It is reasonably possible that the estimates and assumptions used to value these assets may be incorrect. If our actual results, or the estimates and assumptions used in future impairment analyses are lower than the original estimates and
assumptions used to assess the recoverability of these assets, we could incur additional impairment charges. See Note 6Goodwill and Other Intangible Assets of the Notes to the Unaudited Condensed Consolidated Financial Statements
for additional information.



Accounting for Stock Based
Compensation



We account for stock based
compensation in accordance with the intrinsic-value-based method of accounting prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations including FASB Interpretation No. 44, Accounting for
Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25, issued in March 2000. For options granted to employees, compensation expense is recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price.



We have no
options granted to employees in which the market price of the underlying stock exceeded the exercise price on the date of grant.



In December 2002, the FASB issued SFAS No. 148, Accounting for Stock Based CompensationTransition and Disclosure.SFAS No. 148 amends SFAS
No. 123, Accounting for Stock-Based Compensation,to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amended the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We
elected not to change to the fair value based method of accounting for stock-based employee compensation, but as allowed by SFAS No. 148, we have elected to continue to apply the intrinsic-value-based method of accounting described above, and have
adopted only the disclosure requirements of SFAS No. 123.



We
have an employee stock purchase plan for all eligible employees. Under the plan, employees may purchase shares of the Companys common stock at six month intervals at 85% of the lower of the fair market value at the beginning of the twenty-four
month offering period and end of the six month purchase interval. Employees purchase such stock using payroll deductions and annual contributions which may not exceed 20% of their compensation, including commissions and overtime, but excluding
bonuses.



On January 26, 2004, the shareholders approved an
amendment to the plan to increase the number of shares reserved for issuance under the plan from 13.0 million shares to 21.5 million shares of common stock. Without the approved amendment, the Company did not have had sufficient shares available to
fulfill the six month purchase intervals. The portion of the shares approved which were used to fulfill six month purchase intervals through January 31, 2005 were considered compensatory and were recorded under the variable method of accounting in
accordance with EITF 97-12, Accounting for Increased Share Authorizations in an IRS Section 423 Employee Stock Purchase Plan under APB Opinion No. 25, as the stock price on January 26, 2004 did not meet the market discount criterion under APB
Opinion No. 25. Accordingly during the quarters ended March 31, 2005 and 2004, the Company recorded stock-based employee compensation expense of $(0.9) million and $2.0 million, respectively. As of March 31, 2005, no additional shares are
outstanding that are considered compensatory.



Accounting
for Income Taxes



As part of the process of preparing our
consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves us estimating our actual current tax exposure together with assessing temporary differences
resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. We must then assess the
likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this
allowance in a period, we must include an expense within the tax provision in the statement of operations. As of March 31, 2005 all tax benefits are subject to a 100% valuation allowance.



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Impact of Recent Accounting Pronouncements



During December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123R, Share-Based
Payment(SFAS 123R), which requires companies to measure and recognize compensation expense for all stock-based payments at fair value. Stock-based payments include stock option grants and certain transactions under other Company stock
plans. We will be required to adopt this statement in the first quarter of fiscal 2006. We are currently evaluating the impact that the adoption of SFAS 123R will have on our consolidated results of operations, consolidated financial position, and
consolidated cash flows, and expect that it will adversely affect our results of operations.



In November 2004, FASB issued SFAS No.151, Inventory Costs, an amendment of ARB 43, Chapter 4,(SFAS 151) which amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing. This
Statement is the result of a broader effort by the FASB working with the International Accounting Standards Board to reduce differences between U.S. and international accounting standards. SFAS151 eliminates the so abnormal criterion in
ARB No. 43 and companies will no longer be permitted to capitalize inventory costs on their balance sheets when the production defect rate varies significantly from the expected rate. It also makes clear that fixed overhead should be allocated based
on normal capacity. The provisions of this Statement are effective for inventory costs incurred during our first quarter of fiscal 2006. We are currently analyzing this statement and have not yet determined its impact on our consolidated
financial statements.



Factors That May Affect Future Operating Results



We Have Experienced Continuing Losses from Operations
Since March 31, 2001, and We Anticipate Future Losses from Operations



We have experienced continuing losses from operations since our revenues peaked in the quarter ended December 31, 2000. Although our revenues have fluctuated since that time, in recent periods they have not been
sufficient to cover our operating expenses, and we anticipate future losses from operations as a result. Moreover, in fiscal 2001, 2002 and 2003 our operating results were materially and adversely affected by inventory write-downs, restructuring
charges and impairment charges. We may be required to take additional similar charges in the future, which could have a material and adverse effect on our operating results. Due to general economic conditions and slowdowns in purchases of networking
equipment, it has become increasingly difficult for us to predict the purchasing activities of our customers and we expect that our operating results will fluctuate substantially in the future. Due to a slowdown in orders from our storage customers,
we have recorded declining total revenues in two of our three most recent quarters relative to the prior quarter. Future fluctuations in operating results may also be caused by a number of factors, many of which are outside our control. Additional
factors that could affect our future operating results include the following:



| |  |  | The loss of major customers;
| | - |  | ----------------------------



| |  |  | Variations, delays or cancellations of orders and shipments of our products;
| | - |  | ----------------------------------------------------------------------------



| |  |  | Increased competition from current and future competitors;
| | - |  | ----------------------------------------------------------



| |  |  | Reductions in the selling prices of our products;
| | - |  | -------------------------------------------------



| |  |  | Significant changes in the type and mix of products being sold;
| | - |  | ---------------------------------------------------------------



| |  |  | Delays in introducing new products;
| | - |  | -----------------------------------



| |  |  | Design changes made by our customers;
| | - |  | -------------------------------------



| |  |  | Failure by third-party foundries to manufacture and ship products on time;
| | - |  | --------------------------------------------------------------------------



| |  |  | Changes in third-party foundries manufacturing capacity, utilization of their capacity and manufacturing yields;
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | Variations in product development costs;
| | - |  | ----------------------------------------



| |  |  | Changes in our or our customers inventory levels;
| | - |  | --------------------------------------------------



| |  |  | Expenses or operational disruptions resulting from acquisitions; and
| | - |  | --------------------------------------------------------------------



| |  |  | Sale or closure of discontinued operations.
| | - |  | -------------------------------------------



For example, high levels of inventory at our customers contributed to a significant decline in sales of our products in fiscal 2001 and 2002. In addition,
in fiscal 2003 we decided to discontinue our line of optical module products and sell certain assets of that business, as a result of which our fiscal 2003 statements of operations and cash flows reflect losses from discontinued operations
associated with that business.



We implemented significant
restructuring programs and cost reductions in fiscal 2001, 2002, 2003, 2004 and 2005, and we cannot assure you that we will not undertake further such actions in the future. In addition, in the past we have recorded significant



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new product development costs because our policy is to expense these costs at the time that they are incurred. We may incur these types of expenses in the
future. These additional expenses may have a material and adverse effect on our operating results in future periods. The occurrence of any of the above-mentioned factors could have a material adverse effect on our business and on our financial
results.



If We Are Unable to Develop and Introduce New
Products Successfully or to Achieve Market Acceptance of Our New Products, Our Operating Results Will Be Adversely Affected



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



| |  |  | Accurately predict market requirements and evolving industry standards;
| | - |  | -----------------------------------------------------------------------



| |  |  | Accurately define new products;
| | - |  | -------------------------------



| |  |  | Timely complete and introduce new products;
| | - |  | -------------------------------------------



| |  |  | Timely qualify and obtain industry interoperability certification of our products and our customers products into which our products will be incorporated;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Work with our foundry subcontractors to achieve high manufacturing yields; and
| | - |  | ------------------------------------------------------------------------------



| |  |  | Gain market acceptance of our products and our customers products.
| | - |  | -------------------------------------------------------------------



If we are not able to develop and introduce new products successfully, our business, financial condition and results of operations will be materially and
adversely affected. Our success will also depend on the ability of our customers to successfully develop new products and enhance existing products for the communications and storage markets. The communications and storage markets may not develop in
the manner or in the time periods that our customers anticipate. If they do not, or if our customers products do not gain widespread acceptance in these markets, our business, financial condition and results of operations will be materially
and adversely affected.



We Are Dependent on a Small Number
of Customers in a Few Industries



We intend to continue
focusing our sales efforts on a small number of customers in the communications and storage markets that require high-performance integrated circuits. Some of these customers are also our competitors.If any of our major customers were to
delay orders of our products or stop buying our products, our business and financial condition would be severely affected.



We Depend on Third Party Foundries and Other Suppliers to Manufacture Substantially All of Our Current Products



Wafer fabrication for the majority of our products is outsourced to
third-party silicon foundries such as IBM, LSI Logic, Taiwan Semiconductor Manufacturing Corporation and United Microelectronics Corporation. As a result, we depend on third-party foundries to allocate a portion of their manufacturing capacity
sufficient to meet our needs and to produce products of acceptable quality in a timely manner. There are significant risks associated with our reliance on third-party foundries, including:



| |  |  | The lack of assured wafer supply, the potential for wafer shortages and possible increases in wafer prices;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | Limited control over delivery schedules, manufacturing yields, production costs and product quality; and
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | The unavailability of, or delays in obtaining, access to key process technologies.
| | - |  | ----------------------------------------------------------------------------------



These and other risks associated with our reliance on third-party foundries could materially and adversely affect our
business, financial condition and results of operations. For example, the third-party foundries that manufacture our wafers have from time to time experienced manufacturing defects and reductions in manufacturing yields. In addition, disruptions and
shortages in foundry capacity may impair our ability to meet our customers needs and negatively impact our operating results. Our third-party foundries fabricate products for other companies and, in certain cases, manufacture products of their
own design. Historically, there have been periods in which there has been a worldwide shortage of foundry capacity for the production of high-performance integrated circuits such as ours. We do not have long-term agreements with any of our
third-party foundries, but instead subcontract our manufacturing requirements on a purchase order basis. As a result, although we believe that we currently have access to adequate foundry capacity to



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support our sales levels, it is possible that the capacity we will need in the future may not be available to us on acceptable terms, if at all.



In addition to third-party foundries, we also depend on third-party
subcontractors in the U.S. and Asia for the assembly and packaging of our products. As with our foundries, any difficulty in obtaining parts or services from these subcontractors could affect our ability to meet scheduled product deliveries to
customers, which could in turn have a material adverse effect on our customer relationships, business and financial results.



If We Do Not Achieve Satisfactory Manufacturing Yields or Quality, Our Business Will Be Harmed



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



In
the past, we have experienced difficulties in achieving acceptable yields on some of our products, particularly with new products, which frequently involve newer manufacturing processes and smaller geometry features than previous generations.
Maintaining high numbers of shippable die per wafer is critical to our operating results, as decreased yields can result in higher per-unit costs, shipment delays and increased expenses associated with resolving yield problems. Because we also use
estimated yields to value work-in-process inventory, yields below our estimates can require us to lower the value of inventory that is already reflected on our financial statements. In addition, defects in our existing or new products may require us
to incur significant warranty, support and repair costs, and could divert the attention of our engineering personnel away from the development of new products. As a result, poor manufacturing yields, defects or other performance problems with our
products could adversely affect our business and operating results.



Acquisitions May Be Difficult to Integrate, Disrupt Our Business, Dilute Stockholder Value or Divert the Attention of Our Management



Within the last several years we have made a series of acquisitions, including a number of significant acquisitions. Our management frequently evaluates
available strategic opportunities, and as a result we may pursue additional acquisitions of complementary products, technologies or businesses in the future. If we fail to achieve the financial and strategic benefits of past and future acquisitions,
however, including our acquisitions of the Adaptec RAID on Chip (ROC) business, Cicada and Multilink, our business and operating results will be materially and adversely affected. In undertaking future acquisitions we may:



| |  |  | Issue stock that would dilute the ownership of our then-existing stockholders;
| | - |  | ------------------------------------------------------------------------------



| |  |  | Reduce the cash available to fund operations or meet other liquidity needs;
| | - |  | ---------------------------------------------------------------------------



| |  |  | Incur debt; or
| | - |  | --------------



| |  |  | Assume other liabilities.
| | - |  | -------------------------



For example, in connection with our acquisition of Versatile Optical Networks, Inc. in July 2001, we issued approximately 8.8 million shares of our common
stock. In August 2003, we subsequently sold certain assets of this business at a loss, requiring us to recognize losses from discontinued operations on our fiscal 2003 statements of operations and cash flows. Acquisitions also involve numerous other
risks after they are completed, including:



| |  |  | Difficulties in integrating the acquired operations, technologies, products and personnel with ours;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | Failure to achieve targeted synergies;
| | - |  | --------------------------------------



| |  |  | Amortization expenses and impairment charges relating to intangible assets;
| | - |  | ---------------------------------------------------------------------------



| |  |  | Unanticipated costs and liabilities, including charges for the impairment of the value of acquired assets;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | Diversion of managements attention from the day-to-day operations of our core business;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | Adverse effects on our existing business relationships with suppliers and customers or those of the acquired organization;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | Difficulties in entering markets in which we have no or limited prior experience; and
| | - |  | -------------------------------------------------------------------------------------



| |  |  | Potential loss of key employees, particularly those of the acquired organizations.
| | - |  | ----------------------------------------------------------------------------------



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For example, in fiscal 2002 we recorded impairment charges of $398.9 million associated with goodwill and
other intangible assets related to past acquisitions. As of March 31,2005, and after accounting for these impairment charges, we had an aggregate of $243.1 million of goodwill and other intangible assets on our balance sheet. As a result of our
purchase of Cicada, we recorded a third quarter fiscal 2004 charge of $3.7 million for the fair value of purchased IPR&D. Additionally, $42.9 million and $13.9 million was recorded as goodwill and identifiable intangible assets, respectively.
The identifiable intangible assets include customer relationships of $0.2 million and developed technology of $13.7 million, which will be amortized over their expected lives of 17 months to 48 months, respectively, increasing annual and quarterly
amortization expense by approximately $3.6 million and $0.9 million, respectively. These assets may be written down in the future to the extent they are deemed to be impaired and any such write-downs would adversely affect our results of operations.



Our Industry Is Highly Competitive



The markets for our products are intensely competitive and subject to rapid
technological advancement in design technologies, wafer-manufacturing techniques, process tools and alternate networking technologies. We must identify and capture future market opportunities to offset the rapid price erosion that characterizes our
industry. We may not be able to develop new products at competitive pricing and performance levels. Even if we are able to do so, we may not complete a new product and introduce it to market in a timely manner. Our customers may substitute use of
our products in their next generation equipment with those of current or future competitors. In the storage and enterprise markets, we principally compete against Agere Systems, Agilent, Broadcom, Emulex, LSI Logic, Marvell, PMC Sierra and QLogic;
in the long haul and metro markets, our competitors include Agere Systems, Applied Micro Circuits Corporation, Mindspeed and PMC Sierra. We also compete with internal IC design units of systems companies such as Cisco Systems. Over the next few
years, we expect additional competitors, some of which may have greater financial and other resources, to enter the market with new products. In addition, we are aware of venture-backed companies that focus on specific portions of our product line.
These companies, individually and collectively, represent future competition for design wins and subsequent product sales.



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



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



Our International Sales and Operations
Subject Us to Risks That Could Adversely Affect Our Revenue and Operating Results



Sales to customers located outside the U.S. have historically accounted for a significant percentage of our revenue and we anticipate that such sales will continue to be a significant percentage of our revenue.
International sales constituted 55% and 41% of our total revenue in the second fiscal quarters of 2005 and 2004, respectively. International sales involve a variety of risks and uncertainties, including risks related to:



| |  |  | Reliance on strategic alliance partners;
| | - |  | ----------------------------------------



| |  |  | Compliance with changing foreign regulatory requirements and tax laws;
| | - |  | ----------------------------------------------------------------------



| |  |  | Difficulties in staffing and managing foreign operations;
| | - |  | ---------------------------------------------------------



| |  |  | Reduced protection for intellectual property rights in some countries;
| | - |  | ----------------------------------------------------------------------



| |  |  | Longer payment cycles to collect accounts receivable in some countries;
| | - |  | -----------------------------------------------------------------------



| |  |  | Political and economic instability;
| | - |  | -----------------------------------



| |  |  | Economic downturns in international markets.
| | - |  | --------------------------------------------



| |  |  | Changing restrictions imposed by U.S. export laws; and
| | - |  | ------------------------------------------------------



| |  |  | Competition from U.S. based companies that have firmly established significant international operations.
| | - |  | --------------------------------------------------------------------------------------------------------



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



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We Must Keep Pace with Rapid Technological Change and Evolving Industry Standards



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



Our Business Is Subject to Environmental Regulations



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



Our Failure to Manage Changes to Our Operations Infrastructure May Adversely Affect Us



Prior to fiscal 2001 we experienced a period of rapid growth and expanded our operations infrastructure accordingly. More recently, we implemented a
series of restructuring plans in fiscal 2001, 2002, 2003, 2004 and 2005 that reduced this infrastructure. Throughout this period we have also made a number of acquisitions. These changes have placed, and continue to place, a significant strain on
our personnel, systems and other resources. Unless we manage these changes effectively, we may encounter challenges in executing our business, which could have a material adverse effect on our business and financial results. Our recent restructuring
efforts, in particular, may disrupt our operations and adversely affect our ability to respond rapidly to any renewed growth opportunities.



We Are Dependent on Key Personnel



Due to the specialized nature of our business, our success depends in part upon attracting and retaining the services of qualified managerial and
technical personnel. The competition for qualified personnel is intense. The loss of any of our key employees or the failure to hire additional skilled technical personnel could have a material adverse effect on our business and financial results.



If We Are Not Successful in Protecting Our Intellectual
Property Rights, It May Harm Our Ability to Compete



We
rely on a combination of patent, copyright, trademark and trade secret protections, as well as confidentiality agreements and other methods, to protect our proprietary technologies and processes. For example, we enter into confidentiality agreements
with our employees, consultants and business partners, and control access to and distribution of our proprietary information. We have been issued 65 U.S. patents and 4 foreign patents and have a number of pending patent applications. However,
despite our efforts to protect our intellectual property, we cannot assure you that:



| |  |  | The steps we take to prevent misappropriation or infringement of our intellectual property will be successful;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | Any existing or future patents will not be challenged, invalidated or circumvented;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | Any pending patent applications or future applications will be approved;
| | - |  | ------------------------------------------------------------------------



| |  |  | Others will not independently develop similar products or processes to ours or design around our patents; or
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | Any of the measures described above would provide meaningful protection.
| | - |  | ------------------------------------------------------------------------





A failure by us to meaningfully protect our intellectual property could have
a material adverse effect on our business, financial condition, operating results and ability to compete. In addition, effective patent, copyright, trademark and trade secret protection may be unavailable or limited in certain countries.



We May Be Subject to Claims of Infringement of Third-Party Intellectual
Property Rights or Demands That We License Third-Party Technology, Which Could Result in Significant Expense and Loss of Our Proprietary Rights



The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights. As is common in the industry, from time to
time third parties have asserted patent, copyright, trademark and other intellectual property rights to technologies that are important to our business and have demanded that we license their patents and technology. To date, none of these claims has
resulted in the commencement of any litigation against us nor have we believed that it is necessary to license any of the



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rights referred to in such claims. We expect, however, that we will continue to receive such claims in the future, and any litigation to determine their
validity, regardless of their merit or resolution, could be costly and divert the efforts and attention of our management and technical personnel. We cannot assure you that we would prevail in such disputes given the complex technical issues and
inherent uncertainties in intellectual property litigation. If such litigation were to result in an adverse ruling we could be required to:



| |  |  | Pay substantial damages;
| | - |  | ------------------------



| |  |  | Discontinue the use of infringing technology, including ceasing the manufacture, use or sale of infringing products;
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | Expend significant resources to develop non-infringing technology; or
| | - |  | ---------------------------------------------------------------------



| |  |  | License technology from the party claiming infringement, which license may not be available on commercially reasonable terms.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



A Recently Announced Change in the Accounting Treatment of Stock Options
Will Adversely Affect Our Results of Operations.



In
December 2004, the Financial Accounting Standards Board issued revised SFAS No. 123, Share-Based Payment, or SFAS 123R, which requires companies to expense employee stock options for financial reporting purposes. As a result, beginning in
October 2005, we will be required to value our employee stock option grants pursuant to an option valuation model, and then amortize that value against our reported earnings over the vesting period in effect for those options. We currently account
for stock-based awards to employees in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and have adopted the disclosure-only alternative of SFAS 123 and FAS 128, each of which has been
superseded by FAS 123R.Following the implementation of SFAS123R, our stock-based compensation expense will be charged directly against our reported earnings. We are currently evaluating the impact that the adoption of SFAS 123R will have on
our consolidated results of operations, consolidated financial position, and consolidated cash flows, and the change in accounting treatment, and we expect that the change in accounting treatment will materially and adversely affect our results of
operations.



The Market Price for Our Common Stock Has Been
Volatile and Future Volatility Could Cause the Value of Your Investment in Our Company to Fluctuate



Our stock price has recently experienced significant volatility. In particular, our stock price declined significantly during fiscal 2004 following
announcements made by us and other semiconductor suppliers of reduced revenue expectations and of a general slowdown in the technology sector. We expect that fluctuations in the demand for our products and our operating results will cause our stock
price to continue to be volatile. In addition, the value of your investment could decline due to the impact of any of the following factors, among others, upon the market price of our common stock:



| |  |  | Additional changes in financial analysts estimates of our revenues and operating results;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | Our failure to meet financial analysts performance expectations; and
| | - |  | ---------------------------------------------------------------------



| |  |  | Changes in market valuations of other companies in the semiconductor or networking industries.
| | - |  | ----------------------------------------------------------------------------------------------



In addition, many of the risks described elsewhere in this section could materially and adversely affect our stock price, as
discussed in those risk factors. U.S. financial markets have recently experienced substantial price and volume volatility. Fluctuations such as these have affected and are likely to continue to affect the market price of our common stock.



In the past, securities class action litigation has often been
instituted against companies following periods of volatility and decline in the market price of such companies securities. If instituted against us, regardless of the outcome, such litigation could result in substantial costs and diversion of
our managements attention and resources and have a material adverse effect on our business, financial condition and results of operations. We could be required to pay substantial damages, including punitive damages, if we were to lose such a
lawsuit.



Our Ability to Repurchase Our Debentures, If
Required, with Cash, upon a Change of Control May Be Limited



In certain circumstances involving a change of control or the termination of public trading of our common stock, holders of our 2024 Debentures may require us to repurchase some or all of the debentures. We cannot assure that we will have
sufficient financial resources at such time or will be able to arrange financing to pay the repurchase price of the debentures.



Our ability to repurchase the debentures in such event may be limited by law, by the indenture associated with the debentures, by the terms of other
agreements relating to our senior debt and by such indebtedness and agreements as may be entered into, replaced, supplemented or amended from time to time. We may be required to refinance our debt in order to make such payments. We may not have the
financial ability to repurchase the debentures if payment of our debt is accelerated. If we fail to repurchase the



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debentures as required by the indenture, it would constitute an event of default under the indenture governing the debentures which, in turn, may also
constitute an event of default under other of our obligations.



Our Operating Results May Fluctuate Significantly Due to the Embedded Derivative Associated with Our 1.5% Convertible Subordinated Debentures



In connection with the issuance of our 2024 Debentures, the requirement that we pay a make-whole premium in certain circumstances upon the occurrence
of a fundamental change constitutes an embedded derivative in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,the value of which we are required to mark-to-market each reporting period. Any
fluctuations in the value of this embedded derivative would generally be reflected as interest expense or income in our results of operations. As a result, there may be material fluctuations in our results of operations.



|Item 3. | Quantitative and Qualitative Disclosure About Market Risk
|------- | ---------------------------------------------------------



Cash Equivalents, Short-term and Long-term Investments



Cash equivalents and investments are principally composed of money market accounts, commercial paper rated A-1/P-1 and obligations of the U.S. government
and its agencies. Our investments are made in accordance with an investment policy approved by the Board of Directors. Maturities of these instruments are less than 30 months with the majority being within one year. We classify these securities as
held-to-maturity or available-for-sale depending on our investment intention. Held-to-maturity investments are recorded at amortized cost, while available-for-sale investments are recorded at fair value. We did not have any held-to-maturity
investments at March 31, 2005.



Investments in fixed-rate,
interest-earning instruments carry a degree of interest rate and credit rating risk. Fixed-rate securities may have their fair market value adversely impacted because of changes in interest rates and credit ratings. Due in part to these factors, our
future investment income may fall short of expectations because of changes in interest rates or we may suffer losses in principal if we were to sell securities that have declined in market value because of changes in interest rates. Because of the
nature of the issuers of the securities that we invest in, we do not believe that we have any cash flow exposure arising from changes in credit ratings.



Based on a sensitivity analysis performed on the financial instruments held as of March 31, 2005, an immediate 10% change in interest rates is not
expected to have a material effect on our near-term financial condition or results of operations.



Debt



In the normal
course of business, our operations are exposed to risks associated with fluctuations in interest rates. We address this risk through controlled risk management that includes the use of derivative financial instruments to economically hedge or reduce
these exposures. We do not enter into financial instruments for trading or speculative purposes. The fair value of our debt is sensitive to fluctuations in the general level of the U.S. interest rates. We have from time to time managed our interest
expense by entering into interest rate swap agreements under which we exchange an obligation to make fixed debt payments for an obligation to make floating rate payments that we anticipate will be lower. The gains and losses realized from interest
rate swaps are recorded in Interest expense in the accompanying consolidated statements of operations.



In October 2004, in connection with the redemption of our 2005 Debentures, we terminated our interest rate swap agreement with a notional value of $119.7
million for $0.6 million. Therefore, as of March 31, 2005, we did not have any interest rate swap agreements in place.



|Item 4. | Controls and Procedures
|------- | -----------------------



Disclosure Controls and Procedures



The Companys Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Companys disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report, have concluded that the Companys disclosure controls and procedures
are effective and are designed to ensure that the information it is required to disclose is recorded, processed, summarized and reported within the necessary time periods.



Internal Control over Financial Reporting



The Companys Chief Executive Officer and Chief Financial Officer have evaluated the changes to the Companys internal control over financial
reporting that occurred during the quarter ended March 31, 2005, as required by paragraph (d) of Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended, and have concluded that there were no such changes that materially
affected or are reasonably likely to materially affect the Companys internal control over financial reporting.



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PART II

OTHER INFORMATION



|Item 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------



On January 24, 2005, we held our regular Annual Meeting of Stockholders. The purpose of the meeting was to elect Directors to serve for the ensuing year,
and to ratify the appointment of KPMG LLP as our independent auditors for the 2005 fiscal year. The following individuals were elected to serve as Directors for the ensuing year:



|                   |  |             |  |              |  |           
|------------------ |  | ----------- |  | ------------ |  | ----------
|Name               |  | Votes for   |  | VotesAgainst |  | Withheld  
|Vincent Chan       |  | 177,569,072 |  |             |  | 11,916,166
|James A. Cole      |  | 177,333,537 |  |             |  | 12,151,701
|Alex Daly          |  | 177,103,344 |  |             |  | 12,381,894
|John C. Lewis      |  | 187,121,405 |  |             |  | 2,363,833 
|Louis R. Tomasetta |  | 187,436,665 |  |             |  | 2,048,573 



Additionally, the
following items were voted upon and approved by the shareholders:



|                                                                                                              |  |             |  |                    |  |         |  |         
|------------------------------------------------------------------------------------------------------------- |  | ----------- |  | ------------------ |  | ------- |  | --------
|                                                                                                              |  | Votes for   |  | Against orwithheld |  | Abstain |  | Non-vote
|Ratification of appointment of KPMG LLP as independent auditors for the fiscal year ending September 30, 2005 |  | 188,040,272 |  | 1,159,038          |  | 285,928 |  |        



|Item 6. | Exhibits
|------- | --------



|     |  |                                                                                                                             
|---- |  | ----------------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934
|     | 
|31.2 |  | Certification of Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934
|     | 
|32.1 |  | Certification Pursuant to 18 U.S.C Section §1350                                                                            



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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.



VITESSE SEMICONDUCTOR CORPORATIONBy:

/s/ YATIN MODYYatin Mody Vice President, Finance and Chief Financial Officer




May 9, 2005



27