<PAGE>

================================================================================

                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549

                                   Form 10-Q

        [X]     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                         For the quarterly period ended
                                 June 30, 2001

                                       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

--------------------------------------------------------------------------------


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

--------------------------------------------------------------------------------


              Delaware                             77-0138960
   (State or other jurisdiction of             (I.R.S. Employer
    incorporation or organization)              Identification No.)

                                741 Calle Plano
                              Camarillo, CA  93012
                    (Address of principal executive offices)
                                 (805) 388-3700
              (Registrant's telephone number, including area code)

                              -------------------


     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  [_].

     As of July 31, 2001, there were 190,498,739 shares of $0.01 par value
common stock outstanding.

================================================================================

<PAGE>

                       VITESSE SEMICONDUCTOR CORPORATION

                               TABLE OF CONTENTS
                               -----------------


PART I      FINANCIAL INFORMATION                                    Page Number

   Item 1   Financial Statements:

            Condensed Consolidated Balance Sheets as of June 30, 2001         2
            (unaudited) and September 30, 2000

            Unaudited Condensed Consolidated Statements of Operations for     3
            the three months ended June 30, 2001, June 30, 2000, and
            March 31, 2001, and the nine months ended June 30, 2001
            and June 30, 2000

            Unaudited Condensed Consolidated Statements of Cash Flows for     4
            the nine months ended June 30, 2001 and June 30, 2000

            Notes to Unaudited Condensed Consolidated Financial Statements    6

   Item 2   Management's Discussion and Analysis of                           9
            Financial Condition and Results of Operations

   Item 3   Quantitative and Qualitative Disclosure About Market Risk        21

PART II     OTHER INFORMATION

   Item 2   Changes in Securities                                            22

   Item 6   Exhibits and Reports on Form 8-K                                 22

                                       1
<PAGE>

                                     PART I
                             FINANCIAL INFORMATION

                       VITESSE SEMICONDUCTOR CORPORATION
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                       (in thousands, except share data)
<TABLE>
<CAPTION>

                                                              June 30, 2001  Sept. 30, 2000
                                                              -------------  --------------
<S>                                                            <C>           <C>
                                                               (Unaudited)
                                     ASSETS

Current assets:
 Cash and cash equivalents                                     $   83,883    $  257,081
 Short-term investments                                           370,123       442,475
 Accounts receivable, net                                         113,160       113,172
 Inventories, net                                                  43,022        43,715
 Prepaid expenses and other current assets                         38,340         6,969
 Deferred tax assets, net                                          13,730        13,730
                                                               ----------    ----------
  Total current assets                                            662,258       877,142
                                                               ----------    ----------

Long-term investments                                             353,793       278,758
Property and equipment, net                                       239,425       141,874
Restricted long-term deposits                                      98,171        75,804
Intangible assets, net                                            470,784       452,895
Deferred tax assets, net                                          106,796        43,506
Other assets                                                       46,722        31,087
                                                               ----------    ----------
                                                               $1,977,949    $1,901,066
                                                               ==========    ==========

                      LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
 Current portion of long-term debt                             $       --    $    4,227
 Accounts payable                                                  33,740        21,813
 Accrued expenses and other current liabilities                    49,208        34,944
 Accrued interest payable                                           7,708         1,280
 Income taxes payable                                                 363         8,307
                                                               ----------    ----------
     Total current liabilities                                     91,019        70,571
                                                               ----------    ----------

Long-term debt                                                        896         3,587
Convertible subordinated debt                                     655,640       720,000

Minority interest                                                   6,295         1,506
Shareholders' equity:
 Common stock, $.01 par value.  Authorized 500,000,000
  shares; issued and outstanding 188,028,496 and
  180,049,153 shares on June 30, 2001 and Sept. 30, 2000,
  respectively                                                      1,863         1,801
 Additional paid-in capital                                     1,224,979       998,537
 Deferred compensation                                            (74,075)      (18,958)
 Retained earnings                                                 71,332       124,022
                                                               ----------    ----------
     Total shareholders' equity                                 1,224,099     1,105,402
                                                               ----------    ----------
                                                               $1,977,949    $1,901,066
                                                               ==========    ==========
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

                                       2
<PAGE>

                       VITESSE SEMICONDUCTOR CORPORATION
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (Unaudited)
                     (in thousands, except per share data)
<TABLE>
<CAPTION>

                                                            Three Months Ended                         Nine Months Ended
                                             ------------------------------------------------   -------------------------------
                                             June 30, 2001    June 30, 2000    Mar. 31, 2001    June 30, 2001    June 30, 2000
                                             --------------   --------------   --------------   --------------   --------------
<S>                                          <C>              <C>              <C>              <C>              <C>

Revenues                                         $  60,138         $114,090         $121,757         $346,961         $303,679

Costs and expenses:
 Cost of revenues                                   81,052           38,747           46,004          179,403          105,697
 Engineering, research and development              37,158           23,873           38,101          108,924           65,426
 Selling, general and administrative                23,786           13,120           18,259           59,710           36,402
 Restructuring costs                                25,415                -                -           25,415                -
 Purchased in-process research and
  development                                            -                -                -                -           45,614
 Amortization of goodwill                           20,523           19,157           20,893           61,750           19,877
                                                 ---------         --------         --------         --------         --------
  Total costs and expenses                         187,934           94,897          123,257          435,202          273,016
                                                 ---------         --------         --------         --------         --------

Income (loss) from operations                     (127,796)          19,193           (1,500)         (88,241)          30,663

Interest income                                     11,372           15,480           13,712           40,496           23,591
Interest expense                                    (7,795)          (8,207)          (8,388)         (24,488)          (9,841)
Other expense                                       (1,145)               -             (654)          (1,799)               -
                                                 ---------         --------         --------         --------         --------

Income (loss) before income taxes
 and extraordinary item                           (125,364)          26,466            3,170          (74,032)          44,413
Income tax expense (benefit)                       (48,767)          13,182           14,394          (14,313)          28,113
                                                 ---------         --------         --------         --------         --------
Income (loss) before extraordinary gain            (76,597)          13,284          (11,224)         (59,719)          16,300
Extraordinary gain on extinguishment
 of debt, net of tax                                 7,029                -                -            7,029                -
                                                 ---------         --------         --------         --------         --------

Net income (loss)                                $ (69,568)        $ 13,284         $(11,224)        $(52,690)        $ 16,300
                                                 =========         ========         ========         ========         ========

Basic and diluted extraordinary gain
 per share                                       $    0.04         $      -         $      -         $   0.04         $      -
                                                 =========         ========         ========         ========         ========

Net income (loss) per share
 Basic                                           $   (0.38)        $   0.07         $  (0.06)        $  (0.29)        $   0.09
                                                 =========         ========         ========         ========         ========
 Diluted                                         $   (0.38)        $   0.07         $  (0.06)        $  (0.29)        $   0.09
                                                 =========         ========         ========         ========         ========

Shares used in per share computations:
 Basic                                             184,474          179,107          182,150          182,442          174,657
                                                 =========         ========         ========         ========         ========
 Diluted                                           184,474          192,567          182,150          182,442          188,589
                                                 =========         ========         ========         ========         ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.

                                       3
<PAGE>

                       VITESSE SEMICONDUCTOR CORPORATION
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (Unaudited)
                                 (in thousands)
<TABLE>
<CAPTION>
                                                                       Nine Months Ended
                                                               -------------------------------
                                                                June 30, 2001    June 30, 2000
                                                               --------------   --------------
<S>                                                            <C>              <C>
Cash flows from operating activities:
Net income (loss)                                                 $ (52,690)       $  16,300
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
 Depreciation and amortization                                       98,614            42,329
 Impairment of goodwill and intangible assets                         22,871               --
 Inventory write off                                                  41,146               --
 Amortization of debt issue costs and debt discount                    2,864            1,263
 Amortization of deferred compensation                                 9,593            2,406
 Purchased in-process research and development                            --           45,614
 Extraordinary gain on extinguishment of debt                         (7,029)              --
 Increase in equity associated with tax benefit from
   exercise of stock options                                          52,463           51,875
 Change in assets and liabilities:
  (Increase) decrease in, net of effects of acquisitions:
     Accounts receivable, net                                             12          (31,287)
     Inventories, net                                                (40,453)         (10,601)
     Prepaid expenses and other current assets                       (30,871)          (2,053)
     Deferred tax assets, net                                        (63,290)         (18,679)
     Other assets                                                    (18,794)            (549)
  Increase (decrease) in, net of effects of acquisitions:
     Accounts payable                                                 11,124           (5,782)
     Accrued expenses and other current liabilities                    6,092          (17,811)
     Accrued interest payable                                          6,428            8,467
     Income taxes payable                                            (12,359)          (5,517)
                                                                ------------      -----------
       Net cash provided by operating activities                      25,721           75,975
                                                                ------------      -----------
Cash flows from investing activities:
 Investments, net                                                     (2,683)        (496,680)
 Capital expenditures                                               (133,495)         (57,092)
 Restricted long-term deposits                                       (22,367)          (8,574)
 Payment for purchase of companies, net of cash acquired             (11,481)          (8,326)
                                                                ------------      -----------
       Net cash used in investing activities                        (170,026)        (570,672)
                                                                ------------      -----------
</TABLE>

    See accompanying Notes to Condensed Consolidated Financial Statements.

                                       4
<PAGE>

                       VITESSE SEMICONDUCTOR CORPORATION
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (Unaudited)
                                 (in thousands)
<TABLE>
<CAPTION>

                                                                         Nine Months Ended
                                                                  -------------------------------
                                                                  June 30, 2001    June 30, 2000
                                                                  --------------   --------------
<S>                                                               <C>              <C>

Cash flows from financing activities:
 Principal payments under long-term debt and capital leases              (9,759)          (4,897)
 Repurchase of convertible subordinated debt                            (51,650)              --
 Cash paid for debt issue costs                                              --          (18,000)
 Capital contributions by minority interest limited partners              4,789            1,506
 Proceeds from issuance of convertible subordinated debt and
     term debt                                                               --          725,000
 Elimination of duplicate period of pooled companies                         --            1,464
 Proceeds from issuance of common stock, net                             27,727           22,092
                                                                      ---------         --------
     Net cash provided by (used in) financing activities                (28,893)         727,165
                                                                      ---------         --------
     Net increase (decrease) in cash and cash equivalents              (173,198)         232,468
Cash and cash equivalents at beginning of period                        257,081           89,941
                                                                      ---------         --------
Cash and cash equivalents at end of period                            $  83,883         $322,409
                                                                      =========         ========

Supplemental disclosures of cash flow information:

Cash paid during the period for:
     Interest                                                         $  15,062         $    224
                                                                      =========         ========
     Income taxes                                                     $   8,717         $    367
                                                                      =========         ========

Supplemental disclosures of non-cash transactions:

  Issuance of stock options in purchase transaction                   $   5,415         $ 52,146
                                                                      =========         ========
  Issuance of common stock in purchase transaction                    $  76,189         $422,542
                                                                      =========         ========
</TABLE>

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

                                       5
<PAGE>

                       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 2000 Annual Report.  Footnotes
and other disclosures which would substantially duplicate the disclosures in the
Company's audited financial statements for fiscal year 2000 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.

   Computation of Net Income (Loss) per Share

   The reconciliation of shares used to calculate basic and diluted income
(loss) per share consists of the following (in thousands):


<TABLE>
<CAPTION>
                                                               Three Months Ended                        Nine Months Ended
                                               --------------------------------------------------  -----------------------------
                                                 June 30, 2001       June  30,2000    Mar.31,2001  June 30, 20001  June 30, 2000
                                               ------------------  -----------------  -----------  --------------  -------------
<S>                                            <C>                 <C>                <C>          <C>             <C>
Shares used in basic per share computations -
  weighted average shares outstanding                 184,474            179,107         182,150       182,442         174,657
Net effect of dilutive common share
 equivalents based on treasury stock method                --             13,460              --            --          13,932
                                                      -------            -------         -------       -------         -------
Shares used in diluted per share computation          184,474            192,567         182,150       182,442         188,589
                                                      =======            =======         =======       =======         =======
</TABLE>

   Stock options and other convertible securities exercisable for 14,305,052,
6,494,467, and 16,584,160, shares that were outstanding at June 30, 2001 and
2000, and March 31, 2001, respectively, were not included in the computation of
diluted net income per share, as the effect of their inclusion would be
antidilutive. These securities consist primarily of the convertible subordinated
debentures that are convertible into the Company's common stock at a conversion
price of $112.19.


   Reclassifications

   Where necessary, prior periods' information has been reclassified to conform
to the current period condensed consolidated financial statement presentation.

                                       6
<PAGE>

Note 2.  Restructuring Costs and Other Special Charges

   Restructuring costs - In the third quarter of fiscal 2001, the Company
announced a restructuring plan as a result of the decreased demand for its
products and to align its cost structure with the current business environment.
This restructuring plan included a workforce reduction, consolidation of excess
facilities and goodwill and intangible assets deemed impaired.  The summary of
restructuring costs are outlined as follows:

<TABLE>
<CAPTION>
                              Total           Noncash           Cash           Balance at
                              Charge          Charges         Payments       June 30, 2001
------------------------------------------------------------------------------------------
<S>                          <C>              <C>             <C>            <C>
Workforce reduction            776                             (776)                 --
Consolidation of
 excess facilities            1,768                                               1,768
Impairment of goodwill
 & intangible assets         22,871           (22,871)                               --
------------------------------------------------------------------------------------------
               Total         25,415           (22,871)         (776)              1,768
</TABLE>

   The Company reduced its workforce by 165 employees, primarily within the
Company's manufacturing and research and development operations, in May 2001 and
recorded a charge of approximately $0.8 million, primarily related to severance
and fringe benefits.  The termination of these employees was completed in the
current quarter.  The consolidation of excess facilities resulted in a charge of
$1.7 million, net of estimated sub-lease income of $1.4 million, which
represents lease terminations, non-cancelable lease costs and write off of
leasehold improvements and equipment and will paid over the respective lease
terms through October 2003.

   The Company also restructured certain of its operations and realigned
resources to focus on high growth markets and revenue opportunities.  As a
result, the Company recorded a charge related to the impairment of goodwill and
intangible assets in connection with the acquisitions of Vermont Scientific
Technologies ("VTEK") and Kalman, Saffran and Associates ("KSA") of $22.9
million.  This charge was measured as the amount by which the carrying amount
exceeded the future undiscounted operating cash flows expected to be generated
by these assets.


Note 3.  Purchase Accounting Business Combinations

   On June 8, 2001, the Company acquired all of the equity interests of Exbit
Technology A/S ("Exbit") in exchange for 2,736,315 shares of common stock valued
at $70.1 million, the assumption of stock options to purchase 80,000 shares of
common stock valued at $1.5 million, net of deferred compensation of $1.3
million, and a nominal cash consideration. The Company also recorded deferred
stock-based compensation of $43.8 million for 1,709,365 shares of the Company's
common stock that will be released to the employees of Exbit monthly over a
three year period, on a proportional basis, based on their continued employment
with the Company. Exbit develops high-speed ethernet chip-sets for the
communications and networking industry. The consideration for the transaction
was allocated based on the fair values of the tangible and intangible assets and
liabilities acquired, including

                                       7
<PAGE>

identifiable intangible assets of $13.2 million, with the excess consideration
of $65.9 million recorded as goodwill. These intangible assets will be amortized
over their estimated useful lives ranging from 3 to 6 years. The transaction is
being accounted for as a purchase, and accordingly, the operations of Exbit are
included from the date of acquisition.

   In connection with the acquisition of Exbit, the Company issued into escrow
2.4 million shares of its common stock for release to former Exbit shareholders
upon the attainment of certain future internal performance goals.  Such
additional consideration, if earned, will be allocated to goodwill and amortized
over the remaining useful life of goodwill.

     During the first and second quarters of fiscal 2001, the Company acquired
all of the equity interests of FirstPass, Inc. ("FirstPass") and ht-
Mikroelektronik GmbH ("ht-Mikro") for an aggregate of $41.1 million, paid in
common stock issued, stock options assumed and cash.  The consideration for both
transactions was allocated based on the fair values of the tangible and
intangible assets and liabilities acquired, including deferred compensation of
$19.0 million, identifiable intangible assets of $5.9 million, with the excess
consideration of $16.0 million recorded as goodwill.  These intangible assets
will be amortized over their estimated useful lives ranging from 5 to 7 years.
The transactions are being accounted for as purchases, and accordingly, the
operations of First Pass and ht-Mikro are included from the date of acquisition.

   Pro forma results of operations, for the above mentioned transactions, have
not been presented because the effects of these acquisitions were not material
on either an individual or an aggregate basis.

Note 4.  Inventories, net

   Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>

                                        June 30, 2001   Sept. 30, 2000
                                        -------------   --------------
<S>                                     <C>             <C>
Raw materials                              $ 4,670          $ 4,184
Work in process and finished goods          38,352           39,531
                                           -------          -------
                                           $43,022          $43,715
                                           =======          =======
</TABLE>

   During the third quarter of fiscal 2001, the Company wrote off $50.6 million
of excess and obsolete inventories (of this amount, $41.6 million had not been
reserved in previous quarters).  The continued industry-wide reduction in
capital spending and the resulting decrease in demand for the Company's
products, prompted the review of current inventory levels versus the Company's
current sales forecast.  As a result, the Company recorded a charge, in
accordance with the Company's inventory reserve methodology, which was
appropriately included in the costs of revenues in the current quarter.

Note 5.  Debt

   In April and June, 2001, the Company purchased $64.4 million principal amount
of its 4% convertible subordinated debentures due March 2005 at prevailing
market prices, for an aggregate of approximately $51.7 million.  As a result,
the Company recorded an extraordinary gain on early extinguishment of debt of
approximately $7.0 million, net of income taxes of $4.4

                                       8
<PAGE>

million and a proportion of debt issuance costs of $1.3 million, in the quarter
ended June 30, 2001.


Note 6.  Commitments and Contingencies

       The Company entered into a operating lease agreement for leased equipment
in August 1997, which included a guarantee of the residual value of the leased
equipment.  During the quarter ended June 30, 2001, it became probable that the
Company will make a payment under the residual guarantee provision.  The event
triggering the assessment was due to the significant decline in growth markets
and revenue opportunities that the Company experienced in the three months ended
June 30, 2001.  A third party appraisal quantified the decline in value of the
equipment to be $14.1 million.  Under the lease agreement, Vitesse is required
to make a payment for the residual guarantee equal to the amount that the
original cost exceeds the fair value of the equipment.  Accordingly, a liability
of $14.1 million has been recorded in accrued expenses and prepaid and other
current assets.  The amount recorded in prepaid and current assets is being
amortized over the remaining lease term as rent expense.  As of June 30, 2001,
the Company recorded a $6.1 amortization charge in selling, general and
administrative expenses.  The remaining balance will be amortized through
November 2001, which is the remaining lease term.


Note 7.  Subsequent Events

     In July 2001, the Company acquired all of the equity interests of Versatile
Optical Networks, Inc. ("Versatile") in exchange for approximately 8.8 million
shares of common stock and the assumption of stock options to purchase
approximately 1.1 million shares of common stock valued at approximately $167.1
million.  Versatile designs and manufactures optical and opto-electronic modules
to create integrated system and subsystem solutions for data and communications
networks.  The transaction will be accounted for using the purchase method of
accounting.


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", "Engineering, Research and Development Costs",
"Selling, General, and Administrative Expense", "Restructuring Costs",
"Amortization of Goodwill and Intangible Assets" and "Interest Income and
Interest Expense", 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."

                                       9
<PAGE>

Results of Operations

     Revenues

     Total revenues in the third quarter of fiscal 2001 were $60.1 million, a
decrease of 47.3% from the $114.1 million recorded in the third quarter of
fiscal 2000 and a decrease of 50.6% from the $121.8 million recorded in the
prior quarter.  For the nine months ended June 30, 2001, total revenues were
$347.0 million, a 14.3% increase over the $303.7 million recorded in the nine
months ended June 30, 2000.  The decrease in revenue in the third quarter of
fiscal 2001 from the prior quarter was due to continued adverse market
conditions and the reduction in demand from our communications and data storage
customers.  The increase in total fiscal 2001 revenues over fiscal 2000 revenues
was due to unit growth in shipments of existing products during the first half
of the fiscal year, as well as the introduction of new products to customers in
the communications markets.  Due to continuing adverse general market conditions
and weakening demand for our products, we currently expect that our revenues in
the quarter ending September 30, 2001 will be less than our revenues in the
quarter ended June 30, 2001 and that revenues for fiscal 2001 will be lower than
revenues for fiscal 2000.

     Cost of Revenues

     Cost of revenues as a percentage of total revenues in the third quarter of
fiscal 2001 was 134.8% compared to 34.0% in the third quarter of fiscal 2000 and
37.8% in the prior quarter.  The increase in cost of revenues as a percentage of
total revenues resulted primarily from the write off of excess and obsolete
inventory, lower quarterly revenues on a base of relatively fixed manufacturing
costs, and the introduction of new products which generally have lower yields
when first released.  In the third quarter of fiscal 2001, we wrote off $50.6
million of excess and obsolete inventories (of this amount, $41.6 million had
not been reserved in previous quarters).  The continued industry-wide reduction
in capital spending and the resulting decrease in demand for our products,
prompted the review of current inventory levels versus our current sales
forecast.  As a result, we recorded a charge, in accordance with the Company's
inventory reserve methodology.  Excluding the inventory write off, cost of
revenues in the third quarter of fiscal 2001 was $30.5 million, or 50.7% of
revenues.  The increase was slightly offset by improved manufacturing yields for
mature products during the third quarter of fiscal 2001.  We anticipate that the
costs of revenues as a percentage of total revenues will continue to be
adversely affected in the near term as a result of estimated lower quarterly
revenues and the significantly higher energy costs resulting from the energy
shortage facing the state of California.

     Engineering, Research and Development Costs

     Engineering, research and development expenses were $37.2 million in the
third quarter of fiscal 2001 compared to $23.9 million in the third quarter of
fiscal 2000 and $38.1 million in the prior quarter. For the nine months ended
June 30, 2001, engineering, research, and development costs were $108.9 million
compared to $65.4 million in the nine month period ended June 30, 2000.  The
increases year over year were principally due to increased headcount from recent
acquisitions of approximately 175 people, amortization of deferred stock
compensation and higher costs to support our continuing efforts to develop new
products.  As a percentage of total revenues, engineering, research and
development costs were 61.8% in the third quarter of fiscal 2001, 20.9% in the
third quarter of fiscal 2000, and 31.3% in the prior quarter. For the nine

                                       10
<PAGE>

months ended June 30, 2001, engineering, research and development costs as a
percentage of total revenues increased to 31.4% from 21.5%, in the comparable
period a year ago.  We expect these costs to increase in absolute dollars and as
a percentage of revenues in the quarter ending September 30, 2001, as a result
of continued efforts to develop new products and increased headcount related to
recent acquisitions and due to the anticipated decline in revenues as described
earlier. Our engineering, research and development costs are expensed as
incurred.

     Selling, General and Administrative Expenses

     Selling, general and administrative expenses (SG&A) were $23.8 million in
the third quarter of 2001, compared to $13.1 million in the third quarter of
2000 and $18.3 million in the prior quarter. For the nine months ended June 30,
2001, SG&A expenses were $59.7 million compared to $36.4 million in the same
period in fiscal 2000. The increase in SG&A expenses in absolute dollars was due
principally to the $6.1 million amortization charge recorded as a result of the
residual guarantee provision of our operating lease agreement. The increase in
SG&A expenses is also attributable to the increased compensation resulting from
recent acquisitions, and expansion of our worldwide sales and marketing
organizations. As a percentage of total revenues, SG&A expenses were 39.6% in
the third quarter of 2001, compared to 11.5% in the third quarter of 2000 and
15.0% in the prior quarter. For the nine months ended June 30, 2001, SG&A
expenses as a percentage of total revenues increased to 17.2% from 12.0%, in the
comparable period a year ago. We expect these costs to continue to increase in
absolute dollars and as a percentage of revenues, as a result of expected future
growth and due to the anticipated decline in revenues as described earlier.

     Restructuring Costs

     In the third quarter of fiscal 2001, we announced a restructuring plan as a
result of the decreased demand for our products and to align our cost structure
with the current business environment. This restructuring plan included a
reduction of our workforce by 12%, consolidation of excess facilities and
goodwill and intangible assets deemed impaired.  As a result of implementing the
restructuring plan, we incurred a charge of $25.4 million  in the third quarter
of fiscal 2001.

     Included in the restructuring charge were workforce reduction costs of $0.8
million, primarily related to severance and fringe benefits.  The termination of
these 165 employees was completed in the current quarter, primarily within our
manufacturing and research and development operations.  The consolidation of
excess facilities resulted in a charge of $1.7 million, net of estimated sub-
lease income of $1.4 million, which represents lease terminations, non-
cancelable lease costs and write off of leasehold improvements and equipment and
will paid over the respective lease terms through October 2003.

     We also restructured certain of our operations and realigned resources to
focus on high growth markets and revenue opportunities. As a result, we recorded
a charge related to the impairment of goodwill and intangible assets in
connection with the acquisitions of VTEK and KSA, of $22.9 million. This charge
was measured as the amount by which the carrying amount exceeded the future
undiscounted operating cash flows expected to be generated by these assets.

                                       11
<PAGE>

     Amortization of Goodwill and Intangible Assets

     Amortization of goodwill and identifiable intangible assets was $20.5
million in the third quarter of fiscal 2001 compared to $19.2 million in the
third quarter of fiscal 2000 and $20.9 million in the prior quarter. For the
nine months ended June 30, 2001, amortization of goodwill and identifiable
intangible assets was $61.8 million compared to $19.9 million in the same period
in fiscal 2000. Amortization of goodwill and identifiable intangible assets
primarily relates to the purchase of Orologic, Inc. ("Orologic") and other
acquisitions completed in fiscal 2000 and 2001. In connection with the
acquisition of Orologic, the Company recorded a second quarter fiscal 2000
charge of $45.6 million for the fair value of purchased in-process research and
development ("IPR&D"). As a result of the acquisitions of Exbit and Versatile,
amortization of goodwill and identifiable intangible assets will increase to
approximately $25.5 million in the quarter ending September 30, 2001.

     In July 2001, the Financial Accounting Board Standards proposals regarding
accounting for business acquisitions discussed below became effective.  As a
result, certain intangible assets, including goodwill, will be maintained on the
balance sheet rather than amortized, although they may eventually be written
down to extent they are deemed to be impaired.

     Interest Income and Interest Expense

     Interest income was $11.4 million in the third quarter of fiscal 2001
compared to $15.5 million in the third quarter of 2000 and $13.7 million in the
prior quarter.  For the nine months ended June 30, 2001, interest income was
$40.5 million compared to $23.6 million in the same period in fiscal 2000. The
year over year increase in interest income is due to higher average cash, short-
term investments, long-term investments and long-term deposit balances resulting
from proceeds received from the convertible debenture offering in March 2000.
The decrease in interest income of $2.3 million from the prior quarter is the
result of lower cash, short term and long term investments held throughout the
quarter, primarily as a result of the purchase of $64.4 million principal amount
of our convertible subordinated debentures for $51.7 million, combined with
lower interest rates paid on the Company's cash balances.  Interest expense was
$7.8 million in the third quarter of fiscal 2001 compared to $8.2 million in the
third quarter of fiscal 2000 and $8.4 million in the prior quarter.  The
decrease in interest expense of $0.6 million from the prior quarter is the
result of the lower principal amount of the convertible subordinated debentures
outstanding during the current quarter. For the nine months ended June 30, 2001,
interest expense was $24.5 million compared to $9.8 million in the same period
in fiscal 2000.  Increased interest expense relates to the debentures and
amortization of debt issuance costs.  As a result of the convertible debenture
offering, we expect to record additional interest expense of approximately $7.8
million per quarter in future periods, which may be reduced to the extent that
we may repurchase any additional convertible subordinated debentures.

     Other Expense

     For the quarter ended June 30, 2001, we recorded a charge of $1.1 million
to write down an equity investment held by the Vitesse Venture Fund to the
estimated fair market value. In the second quarter of fiscal 2001, we recorded a
loss on the sale of certain assets in the amount of $0.7 million.

                                       12
<PAGE>

   Income Tax Expense (Benefit)

   Our year to date effective income tax rate is (19.3%) as of June 30, 2001
compared to 63.3% for the same period in the prior year.  For the quarter ended
June 30, 2001, the effective income tax rate is (38.9%) compared to 49.8% for
the quarter ended June 30, 2000.  Excluding the effects of nondeductible
goodwill amortization and other permanent book to tax differences, the effective
income tax rate is approximately 33.0% for all periods presented.

   Extraordinary Gain on Extinguishment of Debt

   In April and June, 2001, we purchased $64.4 million principal amount of our
4% convertible subordinated debentures due March 2005 at prevailing market
prices, for aggregate of approximately $51.7 million.  As a result, we recorded
an extraordinary gain on early extinguishment of debt of approximately $7.0
million, net of income taxes of $4.4 million and a proportion of debt issue
costs of $1.3 million, in the quarter ended June 30, 2001.

Liquidity and Capital Resources

   Operating Activities

   We generated $25.7 million and $76.0 million from operating activities in the
nine months ended June 30, 2001 and 2000, respectively.  The decrease in cash
flow from operations was principally due to a decrease in profitability of $69.0
million, partially offset by an adjustment to non-cash items for depreciation
and amortization of $121.5 million.  For the remainder of fiscal 2001, we expect
that our profitability, compared to fiscal 2000, will be reduced due to the
continuing adverse market conditions.

   Investing Activities

   We used $170.0 million and $570.7 million in investing activities during the
nine months ended June 30, 2001 and 2000, respectively. The cash used in
investing activities in the first nine months of fiscal 2001 was primarily due
to capital expenditures of  $133.5 million and investments in restricted long
term deposits of $22.4 million. We intend to continue investing in
manufacturing, test and engineering equipment.   In addition, we paid aggregate
cash consideration of approximately $11.5 million in connection with the
purchase of First Pass and ht-Mikro and additional payments in connection with
the purchase of KSA in the nine months ended June 30, 2001.

   In December 2000, we entered into an operating lease transaction providing
for the financing of $40.0 million for the acquisition of certain test
equipment.  If at the end of the lease terms we do not purchase the equipment,
we would guarantee the residual value to the lessor equal to a specified
percentage of the lessor's cost of the equipment.  As of June 30, 2001, the
lessor had advanced a total of $31.0 million under these leases and held
approximately $8.0 million as cash collateral, which amount is included in
restricted long-term deposits.


                                       13
<PAGE>

   Financing Activities

   We used $28.9 million in financing activities for the nine months ended June
30, 2001 and generated $727.2 million from financing activities for the nine
months ended June 30, 2000.   Financing activities for the nine months ended
June 30, 2001, represent proceeds of $27.7 million received from the issuance
and sale of common stock pursuant to our stock option and stock purchase plans
and proceeds of $4.8 million received from the limited partners of the Vitesse
venture funds, offset by the purchase of $51.7 million carrying value of the
convertible subordinated debentures and the repayments of debt obligations of
$9.8 million. Financing activities for the nine months ended June 30, 2000,
represent proceeds, net of issuance costs, of $702 million received from the
convertible subordinated debenture offering, proceeds of $5.0 million received
from the issuance of term debt, proceeds of $22.1 million received from the
issuance and sale of common stock pursuant to our stock option and stock
purchase plans, proceeds of $1.5 million received from the limited partners of
the Vitesse venture funds, and $1.5 million from the elimination of duplicate
period of pooled companies, slightly offset by $4.9 million in repayments of
debt obligations.

   Management believes that our cash and cash equivalents, short-term
investments, and cash flow from operations are adequate to finance our planned
growth and operating needs for the next 12 months.


Impact of Recent Accounting Pronouncements

   In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities."  SFAS No. 133
requires recognition of all derivatives as either assets or liabilities on the
balance sheet at fair value.  The Company has adopted SFAS No. 133, as amended
by SFAS No. 137 and SFAS No. 138, in the first quarter of its fiscal year ending
September 30, 2001.  The adoption of this standard did not have a material
effect on the Company's consolidated financial statements.

   In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." SAB 101, as amended, summarizes certain SEC's views of applying
generally accepted accounting principles to revenue recognition in financial
statements. We do not expect SAB 101 to have a material effect on our operations
or financial position. We are required to adopt SAB 101 in the fourth quarter of
fiscal 2001.

   In July 2001, the FASB issued Statement No. 141, "Business Combinations", and
Statement No. 142, "Goodwill and Other Intangible Assets."  Statement 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001.  Statement 141 also
specifies criteria intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill, noting
that any purchase price allocable to an assembled workforce may not be accounted
for separately.  Statement 142 will require that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the

                                       14
<PAGE>

provisions of Statement 142. Statement 142 will also require that intangible
assets with definite useful lives be amortized over their respective estimated
useful lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of."

   The Company is required to adopt the provisions of Statement 141 immediately,
except with regard to business combinations initiated prior to July 1, 2001,
which it expects to account for using the pooling-of-interests method, and
Statement 142 effective October 1, 2002. Early adoption is permitted for
companies with fiscal years beginning after March 15, 2001. Furthermore, any
goodwill and any intangible asset determined to have an indefinite useful life
that are acquired in a purchase business combination completed after June 30,
2001 will not be amortized, but will continue to be evaluated for impairment in
accordance with the appropriate pre-Statement 142 accounting literature.
Goodwill and intangible assets acquired in business combinations completed
before July 1, 2001 will continue to be amortized prior to the adoption of
Statement 142.

   Statement 141 will require upon adoption of Statement 142, that the Company
evaluate its existing intangible assets and goodwill that were acquired in a
prior purchase business combination, and to make any necessary reclassifications
in order to conform with the new criteria in Statement 141 for recognition apart
from goodwill.  Upon adoption of Statement 142, the Company will be required to
reassess the useful lives and residual values of all intangible assets acquired
in purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption.  In addition,
to the extent an intangible asset is identified as having an indefinite useful
life, the Company will be required to test the intangible asset for impairment
in accordance with the provisions of Statement 142 within the first interim
period.  Any impairment loss will be measured as of the date of adoption and
recognized as the cumulative effect of a change in accounting principle in the
first interim period.

   In connection with the transitional goodwill impairment evaluation, Statement
142 will require the Company to perform an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption.  To accomplish
this the Company must identify its reporting units and determine the carrying
value of each reporting unit by assigning the assets and liabilities, including
the existing goodwill and intangible assets, to those reporting units as of the
date of adoption.  The Company will then have up to six months from the date of
adoption to determine the fair value of each reporting unit and compare it to
the reporting unit's carrying amount.  To the extent a reporting unit's carrying
amount exceeds its fair value, an indication exists that the reporting unit's
goodwill may be impaired and the Company must perform the second step of the
transitional impairment test.  In the second step, the Company must compare the
implied fair value of the reporting unit's goodwill, determined by allocating
the reporting unit's fair value to all of it assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price allocation
in accordance with Statement 141, to its carrying amount, both of which would be
measured as of the date of adoption.   This second step is required to be
completed as soon as possible, but no later than the end of the year of
adoption.  Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company's statement of
earnings.

                                       15
<PAGE>

   And finally, any unamortized negative goodwill [and negative equity-method
goodwill] existing at the date Statement 142 is adopted must be written off as
the cumulative effect of a change in accounting principle.

Factors That May Affect Future Operating Results

     We Have Recently Experienced a Decline in Revenues, and We Expect That Our
Operating Results Will Fluctuate in The Future Due to Reduced Demand in Our
Markets

     Our revenues and earnings (loss) per share (excluding acquisition related
and non-recurring charges) in the three months ended June 30, 2001 were
approximately 51% and 160 %, respectively, lower than our revenues and loss per
share in the prior quarter and approximately 64% and 124%, respectively, lower
than our revenues and earnings per share in the three months ended December 31,
2000.  In the three months ended June 30, 2001, our operating results were
materially adversely affected by the inventory write down, restructuring charges
and impairment charges.  If we are required to take additional charges such as
these in the future, the adverse affect on our operating results may again be
material.   Due to general economic conditions and slowdowns in purchases of
optical 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.  In particular, we
expect that our revenues and loss per share for the quarter ending September 30,
2001 will be lower than our revenues and earnings in the quarter ended June 30,
2001.  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
     . Reduction 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
     . Our failure to manufacture and ship products on time
     . Changes in manufacturing capacity, the utilization of this capacity and
       manufacturing yields
     . Variations in product and process development costs
     . Changes in inventory levels; and
     . Expenses or operational disruptions resulting from acquisitions

                                       16
<PAGE>

     In the quarter ended June 30, 2001, we implemented cost reductions,
including a reduction in work force of approximately 165 employees, to bring our
expenses into line with our reduced revenue expectations.  However, we cannot be
sure that these measures will be sufficient to offset lower revenues, and if
they are not, our earnings (losses) will be adversely affected.  In the past, we
have recorded significant new product and process 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 will
have a material and adverse effect on our earnings (losses) 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.

     The market price for our common stock has been volatile and future
volatility could cause the value of your investment in our company to decline.

     Our stock price has experienced significant volatility recently.  In
particular, our stock price declined significantly in the context of
announcements made by us and other semiconductor suppliers of reduced revenue
expectations and of a general slowdown in the technology sector, particularly
the optical networking equipment sector.  Given these general economic
conditions and the reduced demands for our products that we have experienced
recently, we expect that our stock price will 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
       earnings (losses);
     . Our failure to meet financial analysts performance expectations; and
     . Changes in market valuations of other companies in the semiconductor or
       fiber optic equipment 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.  The stock 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 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.

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

     We intend to continue focusing our sales effort on a small number of
customers in the communications and test equipment markets that require high-
performance integrated circuits. Some of these customers are also our
competitors. For the nine months ended June 30, 2001, no single customer
accounted for greater than 10% of total revenues.  If any of our major customers
delays orders of our products or stops buying our products, our business and
financial condition would be severely affected.

                                       17
<PAGE>

     We Depend on the Successful Operation of our Production Facilities

     During 1998, we started producing high-performance integrated circuits at
our new six-inch wafer fabrication factory in Colorado Springs, Colorado.  We
are faced with several risks in the successful operation of this facility as
well as in our overall production operations. We had only produced finished
four-inch wafers until 1998 and therefore we have limited experience with the
equipment and processes involved in producing finished six-inch wafers.
Further, some of our products have been qualified for manufacture at only one of
the two facilities. Consequently, our failure to successfully operate either
facility could severely damage our financial results.

     The successful operation of our Camarillo, California production facility
is also jeopardized by the recent and continuing energy shortage facing the
state of California.  We currently have available an uninterrupted power supply
that would allow us to successfully power down our production facility in the
event of a power black out.  However, this power supply is insufficient to allow
us to complete production of wafers in process in the event of a prolonged black
out, and as such, if we are affected by such a black out it could substantially
disrupt production. Any such disruptions could materially and adversely affect
our operating results.

     There Are Risks Associated with Recent and Future Acquisitions

     In fiscal 2000, we made two significant acquisitions. In March 2000, we
completed the acquisition of Orologic, in exchange for approximately 4.6 million
shares of our common stock.  In May 2000, we completed the acquisition SiTera
Inc. for approximately 14.7 million shares of our common stock.  In June 2001,
we acquired Exbit for up to approximately 6.9 million shares of our common
stock. In July 2001, we completed the acquisition of Versatile for approximately
8.8 million shares of our common stock.  Also since the beginning of fiscal
2000, we completed four smaller acquisitions for an aggregate of approximately
$61.7 million in approximately 0.8 million of common stock issued and stock
options assumed and approximately $44.6 million in cash.  These acquisitions may
result in the diversion of management's attention from the day-to-day operations
of the Company's business. Risks of making these acquisitions include
difficulties in the integration of acquired operations, products and personnel.
If we fail in our efforts to integrate recent and future acquisitions, our
business and operating results could be materially and adversely affected.

     In addition, acquisitions we make could result in dilutive issuances of
equity securities, substantial debt, and amortization expenses related to
intangible assets. In particular, in connection with our acquisition of
Orologic, we were required to record IPR&D charge of $45.6 million in the three
months ended March 31, 2000.  In addition, we expect to record additional
acquisition related expenses in the quarter ending September 30, 2001 in
connection with our acquisition of Versatile.  Further, under current accounting
rules, we expect to amortize an aggregate of approximately $640.1 million of
goodwill and other identifiable intangible assets in the quarter ending
September 30, 2001.  However, under the new Financial Accounting Standards Board
proposals that become effective on October 1, 2002, certain intangible assets,
including goodwill, will be maintained on the balance sheet rather than being
amortized, although they may eventually be written down to the extent they are
deemed to be impaired.  Our management frequently evaluates strategic
opportunities available. In the future we may pursue additional acquisitions of
complementary products, technologies or businesses.

                                       18
<PAGE>

     Our Industry Is Highly Competitive

     The high-performance semiconductor market is extremely competitive and is
characterized by rapid technological change, price erosion and increased
international competition.  We compete directly or indirectly with the following
categories of companies:

     . High-performance integrated circuit suppliers such as Agere Systems,
       Applied Micro Circuits Corporation, Broadcom, Conexant, Hewlett
       Packard, IBM, Intel, Motorola, and PMC Sierra

     . Internal integrated circuit development units of systems companies such
       as Cisco Systems, Fujitsu and Nortel Networks

     Our current and prospective competitors include many large companies that
have substantially greater marketing, financial, technical and manufacturing
resources than we do.

     Competition in the markets that we serve is primarily based on
price/performance, product quality and the ability to deliver products in a
timely fashion. Product qualification is typically a lengthy process and some
prospective customers may be unwilling to invest the time or expense necessary
to qualify suppliers such as Vitesse. Prospective customers may also have
concerns about the relative advantages of our products compared to more familiar
silicon- based semiconductors. Further, customers may also be concerned about
relying on a relatively small company for a critical sole-sourced component. To
the extent we fail to overcome these challenges, there could be material and
adverse effects on our business and financial results.

     There is Risk Associated with Doing Business in Foreign Countries

     In fiscal 2000 and the first nine months of fiscal 2001, international
sales accounted for 24% and 26%, respectively, of our total revenues, and we
expect international sales to constitute a substantial portion of our total
revenues for the foreseeable future.  International sales involve a variety of
risks and uncertainties, including risks related to:

     . Reliance on strategic alliance partners
     . Compliance with foreign regulatory requirements
     . Variability of foreign economic conditions
     . 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.

     We Must Keep Pace with Product and Process Development and Technological
Change

     The market for our products is characterized by rapid changes in both
product and process technologies. We believe that our success to a large extent
depends on our ability to continue to improve our product and process
technologies and to develop new products and technologies in order to maintain
our competitive position. Further, we must adapt our products and processes to

                                       19
<PAGE>

technological changes and adopt emerging industry standards. Our failure to
accomplish any of the above could have a negative impact on our business and
financial results.

     We Are Dependent on Key Suppliers

     We manufacture our products using a variety of components procured from
third-party suppliers. All of our high-performance integrated circuits are
packaged by third parties. Other components and materials used in our
manufacturing process are available from only a limited number of sources.
Further, we are increasingly relying on third-party semiconductor foundries for
our supply of silicon based products.  Any difficulty in obtaining sole- or
limited-sourced parts or services from third parties could affect our ability to
meet scheduled product deliveries to customers. This in turn could have a
material adverse effect on our customer relationships, business and financial
results.

     Our Manufacturing Yields Are Subject to Fluctuation

     Semiconductor fabrication is a highly complex and precise process.  Defects
in masks, impurities in the materials used, contamination of the manufacturing
environment and equipment failures can cause a large percentage of wafers or die
to be rejected.  Manufacturing yields vary among products, depending on a
particular high-performance integrated circuit's complexity and on our
experience in manufacturing it. In the past, we have experienced difficulties in
achieving acceptable yields on some high-performance integrated circuits, which
has led to shipment delays. Our overall yields are lower than yields obtained in
a mature silicon process because we manufacture a large number of different
products in limited volume and our process technology is less developed. We
anticipate that many of our current and future products may never be produced in
volume.

     Since a majority of our manufacturing costs are relatively fixed,
maintaining a number of shippable die per wafer is critical to our operating
results.  Yield decreases can result in higher unit costs and may lead to
reduced gross profit and net income.  We use estimated yields for valuing work-
in-process inventory. If actual yields are material different than these
estimates, we may need to  revalue work-in-process inventory.  Consequently, if
any of our current or future products experience yield problems, our financial
results may be adversely affected.

     Our Business Is Subject to Environmental Regulations

     We are subject to various governmental regulations related to toxic,
volatile and other hazardous chemicals used in our manufacturing process. If we
fail to comply with these regulations, this failure  could result in the
imposition of fines or in the suspension or cessation of our operations.
Additionally, we may be restricted in our ability to expand operations at our
present locations or we may be required to incur significant expenses to comply
with these regulations.

     Our Failure to Manage Growth May Adversely Affect Us

     The management of our growth requires qualified personnel, systems and
other resources. We have recently established several product design centers
worldwide and have acquired Orologic in March 2000, SiTera in May 2000, Exbit in
June 2001, Versatile in July 2001 and completed seven other smaller acquisitions
since the fall of 1998. We have only limited experience in integrating the
operations of acquired businesses.  Failure to manage our growth or

                                       20
<PAGE>

to successfully integrate new and future facilities or newly acquired businesses
could have a material adverse effect on our business and financial results.

     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.

   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 the 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, 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
senior debt in order to make such payments.  We may not have the financial
ability to repurchase the debentures if payment of our senior debt is
accelerated.


Item 3.  Quantitative and Qualitative Disclosure About Market Risk

   At June 30, 2001, the Company's investment portfolio principally includes
marketable debt securities consisting of obligations of the U.S. government and
its agencies.  These securities sometimes have remaining terms in excess of one
year.  Consequently, such securities are subject to interest rate risk.  The
Company classifies these securities as held-to-maturity securities, which are
recorded at amortized cost, adjusted for the amortization or accretion of
premiums or discounts.

   At June 30, 2001, the Company's long-term debt consists of convertible
subordinated debentures with interest at a fixed rate of 4.00% per year.
Consequently, the Company does not have significant interest rate exposure on
its long-term debt.  However, the fair value of the convertible subordinated
debentures are subject to significant fluctuation due to changes in interest
rates and changes in the value of Vitesse common stock.

                                       21
<PAGE>

                                    PART II

                               OTHER INFORMATION

Item 2.        Changes in Securities

     (c) Recent Sales of Unregistered Securities

         Pursuant to the terms of the acquisition of Exbit on June 8, 2001,
         Vitesse issued approximately 2.7 million shares of common stock held by
         the former shareholders of Exbit. The securities were issued in
         reliance on the exemption from registration provided by Regulation S of
         the Securities Act, based on the facts that all of the former
         shareholders of Exbit were outside the United States, the agreements
         relating to the acquisition were entered into in Denmark, the former
         Exbit shareholders agreed to certain resale restrictions, and the lack
         of any advertisement or general solicitation in connection with the
         acquisition.


Item 6.  Exhibits & Reports on Form 8-K

     (a) Exhibits

         None.


     (b) Reports on Form 8-K

         None.

                                       22
<PAGE>

                                   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 CORPORATION


August 14, 2001              By: /s/Eugene F. Hovanec
                                 --------------------
                                 Eugene F. Hovanec
                                 Vice President, Finance and
                                 Chief Financial Officer

                                       23