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UNITED STATESSECURITIES 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 June 30, 2003

OR

| | o | 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(State or other jurisdiction of incorporation or organization) |  | 77-0138960(I.R.S. Employer 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 Section13 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  o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act):

Yes  x No  o

As of July 31, 2003, there were 207,595,071 shares of $0.01 par value common stock outstanding.

,

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VITESSE SEMICONDUCTOR CORPORATION

TABLE OF CONTENTS



|       |  |                       |  |                                                                                                                                                                                                | PageNumber
|------ |  | --------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------
|       |  |                       |  |                                                                                                                                                                                                |           
|PARTI  |  | FINANCIAL INFORMATION | 
|       |  |                       |  |                                                                                                                                                                                                |           
|       |  | Item 1                |  | Financial Statements:                                                                                                                                                                          |           
|       |  |                       |  |                                                                                                                                                                                                |           
|       |  |                       |  | Unaudited Condensed Consolidated Balance Sheets
as of June 30, 2003 and September 30, 2002                                                                                                     | 3         
|       |  |                       |  |                                                                                                                                                                                                |           
|       |  |                       |  | Unaudited Condensed Consolidated Statements of Operationsfor the three months ended June 30, 2003, June 30, 2002 and March 31, 2003, and the nine months ended June 30, 2003 and June 30,
2002 | 4         
|       |  |                       |  |                                                                                                                                                                                                |           
|       |  |                       |  | Unaudited Condensed Consolidated Statements of Cash Flowsfor the nine months ended June 30, 2003 and June 30, 2002                                                                             | 5         
|       |  |                       |  |                                                                                                                                                                                                |           
|       |  |                       |  | Notes to Unaudited Condensed Consolidated Financial Statements                                                                                                                                 | 7         
|       |  |                       |  |                                                                                                                                                                                                |           
|       |  | Item 2                |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                                                          | 13        
|       |  |                       |  |                                                                                                                                                                                                |           
|       |  | Item 3                |  | Quantitative and Qualitative Disclosure About Market Risk                                                                                                                                      | 25        
|       |  |                       |  |                                                                                                                                                                                                |           
|       |  | Item 4                |  | Controls and Procedures                                                                                                                                                                        | 26        
|       |  |                       |  |                                                                                                                                                                                                |           
|PARTII |  | OTHER INFORMATION     | 
|       |  |                       |  |                                                                                                                                                                                                |           
|       |  | Item 2                |  | Changes in Securities                                                                                                                                                                          | 27        
|       |  |                       |  |                                                                                                                                                                                                |           
|       |  | Item 6                |  | Exhibits and Reports on Form 8-K                                                                                                                                                               | 27        



|SIGNATURE      | 28
|-------------- | --
|               |   
|CERTIFICATIONS |   

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PART IFINANCIAL INFORMATIONVITESSE SEMICONDUCTOR
CORPORATIONUNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS(in thousands, except share data)



|                                                                                                                                                                             |  | June30,2003 |            | September30,2002 |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ---------- | ---------------- | -
|                                                                                                                                                                             |  |             |            |                  |  
|ASSETS                                                                                                                                                                       |  |             |            |                  |  
|Current assets:                                                                                                                                                              |  |             |            |                  |  
|Cash and cash equivalents                                                                                                                                                    |  | $           | 47,073     |                  | $
|Short-term investments (principally marketable securities)                                                                                                                   |  |             | 175,938    |                  |  
|Accounts receivable, net                                                                                                                                                     |  |             | 36,203     |                  |  
|Inventories, net                                                                                                                                                             |  |             | 23,397     |                  |  
|Prepaid expenses and other current assets                                                                                                                                    |  |             | 8,749      |                  |  
|Assets held for sale                                                                                                                                                         |  |             | 7,561      |                  |  
|                                                                                                                                                                             |  |             |            |                  |  
|Total current assets                                                                                                                                                         |  |             | 298,921    |                  |  
|                                                                                                                                                                             |  |             |            |                  |  
|Property and equipment, net                                                                                                                                                  |  |             | 95,884     |                  |  
|Restricted long-term deposits                                                                                                                                                |  |             | 57,101     |                  |  
|Goodwill, net                                                                                                                                                                |  |             | 170,995    |                  |  
|Other intangible assets, net                                                                                                                                                 |  |             | 7,154      |                  |  
|Other assets                                                                                                                                                                 |  |             | 30,095     |                  |  
|                                                                                                                                                                             |  |             |            |                  |  
|                                                                                                                                                                             |  | $           | 660,150    |                  | $
|                                                                                                                                                                             |  |             |            |                  |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                         |  |             |            |                  |  
|Current liabilities:                                                                                                                                                         |  |             |            |                  |  
|Current portion of convertible subordinated debt                                                                                                                             |  | $           |           |                  | $
|Current portion of accrued restructuring                                                                                                                                     |  |             | 15,539     |                  |  
|Current portion of deferred gain on derivative instruments                                                                                                                   |  |             | 3,851      |                  |  
|Accounts payable                                                                                                                                                             |  |             | 16,820     |                  |  
|Accrued expenses and other current liabilities                                                                                                                               |  |             | 21,645     |                  |  
|Income taxes payable                                                                                                                                                         |  |             | 1,077      |                  |  
|Liabilities held for sale                                                                                                                                                    |  |             | 1,561      |                  |  
|                                                                                                                                                                             |  |             |            |                  |  
|Total current liabilities                                                                                                                                                    |  |             | 60,493     |                  |  
|                                                                                                                                                                             |  |             |            |                  |  
|Long-term accrued restructuring                                                                                                                                              |  |             | 9,255      |                  |  
|Deferred gain on derivative instruments                                                                                                                                      |  |             | 6,926      |                  |  
|Other long-term liabilities                                                                                                                                                  |  |             | 5,640      |                  |  
|Convertible subordinated debt                                                                                                                                                |  |             | 195,145    |                  |  
|Minority interest                                                                                                                                                            |  |             | 4,631      |                  |  
|Shareholders equity:                                                                                                                                                        |  |             |            |                  |  
|Common stock, $.01 par value. Authorized 500,000,000 shares; issued and outstanding 204,673,669 and 200,158,511 shares on June 30, 2003
and September 30, 2002, respectively |  |             | 2,059      |                  |  
|Additional paid-in capital                                                                                                                                                   |  |             | 1,406,629  |                  |  
|Deferred compensation                                                                                                                                                        |  |             | (28,092    | )                |  
|Accumulated other comprehensive income                                                                                                                                       |  |             | 31         |                  |  
|Accumulated deficit                                                                                                                                                          |  |             | (1,002,567 | )                |  
|                                                                                                                                                                             |  |             |            |                  |  
|Total shareholders equity                                                                                                                                                   |  |             | 378,060    |                  |  
|                                                                                                                                                                             |  |             |            |                  |  
|                                                                                                                                                                             |  | $           | 660,150    |                  | $
|                                                                                                                                                                             |  |             |            |                  |  

See accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.

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VITESSE SEMICONDUCTOR CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)(in thousands, except per share data)



|                                                      |  | Three Months Ended |         | Nine Months Ended |  
|----------------------------------------------------- |  | ------------------ | ------- | ----------------- | -
|                                                      |  |                    |         |                   |  
|                                                      |  | June 30,2003       |         | June 30,2002      |  
|                                                      |  |                    |         |                   |  
|Revenues                                              |  | $                  | 39,738  |                   | $
|Costs and expenses:                                   |  |                    |         |                   |  
|Cost of revenues                                      |  |                    | 23,312  |                   |  
|Engineering, research and development                 |  |                    | 27,170  |                   |  
|Selling, general and administrative                   |  |                    | 13,366  |                   |  
|Restructuring charge                                  |  |                    | 49,083  |                   |  
|Goodwill and intangible assets impairment charge      |  |                    |        |                   |  
|Amortization of intangible assets                     |  |                    | 881     |                   |  
|                                                      |  |                    |         |                   |  
|Total costs and expenses                              |  |                    | 113,812 |                   |  
|                                                      |  |                    |         |                   |  
|Loss from operations, before other income             |  |                    | (74,074 | )                 |  
|Interest income                                       |  |                    | 993     |                   |  
|Interest expense                                      |  |                    | (1,849  | )                 |  
|Gain on extinguishment of debt                        |  |                    |        |                   |  
|Other income                                          |  |                    | 673     |                   |  
|                                                      |  |                    |         |                   |  
|Other income (expense), net                           |  |                    | (183    | )                 |  
|                                                      |  |                    |         |                   |  
|Loss from continuing operations before income taxes   |  |                    | (74,257 | )                 |  
|Income tax expense                                    |  |                    | 8,004   |                   |  
|                                                      |  |                    |         |                   |  
|Loss from continuing operations                       |  |                    | (82,261 | )                 |  
|Loss from discontinued operations, net of tax benefit |  |                    | (12,732 | )                 |  
|                                                      |  |                    |         |                   |  
|Net loss                                              |  | $                  | (94,993 | )                 | $
|                                                      |  |                    |         |                   |  
|Net loss per share  basic and diluted:               |  |                    |         |                   |  
|Continuing operations  basic and diluted             |  | $                  | (0.41   | )                 | $
|Discontinued operations  basic and diluted           |  |                    | (0.06   | )                 |  
|                                                      |  |                    |         |                   |  
|Net loss per share - basic and diluted                |  | $                  | (0.47   | )                 | $
|                                                      |  |                    |         |                   |  
|Shares used in per share computations:                |  |                    |         |                   |  
|Basic and diluted                                     |  |                    | 203,704 |                   |  
|                                                      |  |                    |         |                   |  

See accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.

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VITESSE SEMICONDUCTOR CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)(in thousands)



|                                                                            |  | Nine Months Ended |         
|--------------------------------------------------------------------------- |  | ----------------- | --------
|                                                                            |  |                   |         
|                                                                            |  | June 30, 2003     |         
|                                                                            |  |                   |         
|Cash flows from operating activities:                                       |  |                   |         
|Net loss from continuing operations                                         |  | $                 | (110,746
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                   |         
|Depreciation and amortization                                               |  |                   | 26,255  
|Amortization of debt issue costs                                            |  |                   | 841     
|Amortization of deferred compensation                                       |  |                   | 16,464  
|Other compensation expense                                                  |  |                   | 86      
|Impairment of goodwill and intangible assets                                |  |                   |        
|Impairment of other long-term investments                                   |  |                   | 76      
|Property and equipment write off                                            |  |                   | 39,346  
|Inventory write off                                                         |  |                   | 6,808   
|Prepaid maintenance write off                                               |  |                   | 8,732   
|Assets held for sale write down                                             |  |                   | 17,260  
|Gain on extinguishment of debt                                              |  |                   | (16,550 
|Gain on derivative instruments                                              |  |                   | (1,964  
|Deferred tax assets, net                                                    |  |                   |        
|Change in assets and liabilities:                                           |  |                   |         
|(Increase) decrease in:                                                     |  |                   |         
|Accounts receivable, net                                                    |  |                   | 963     
|Inventories, net                                                            |  |                   | (5,160  
|Prepaid expenses and other current assets                                   |  |                   | (667    
|Other assets                                                                |  |                   | 2,009   
|Increase (decrease) in:                                                     |  |                   |         
|Accounts payable                                                            |  |                   | 7,108   
|Accrued expenses and other current liabilities                              |  |                   | 1,800   
|Accrued restructuring                                                       |  |                   | (6,946  
|Deferred gain on derivative instrument                                      |  |                   | 3,850   
|Income taxes payable                                                        |  |                   | (46     
|                                                                            |  |                   |         
|Net cash used in operating activities                                       |  |                   | (10,481 
|                                                                            |  |                   |         
|Cash flows from investing activities:                                       |  |                   |         
|Purchases of investments                                                    |  |                   | (375,197
|Proceeds from sale of investments                                           |  |                   | 399,310 
|Capital expenditures                                                        |  |                   | (11,337 
|Restricted long-term deposits                                               |  |                   | 366     
|Business acquisition, net of cash acquired                                  |  |                   | (1,556  
|                                                                            |  |                   |         
|Net cash provided by investing activities                                   |  |                   | 11,586  
|                                                                            |  |                   |         
|Cash flows from financing activities:                                       |  |                   |         
|Repurchase of convertible subordinated debt                                 |  |                   | (51,052 
|Capital contributions by minority interest limited partners                 |  |                   |        
|Distribution to Venture Fund partners from sale of investments              |  |                   |        
|Proceeds from issuance of common stock, net                                 |  |                   | 3,920   
|                                                                            |  |                   |         
|Net cash used in financing activities                                       |  |                   | (47,132 
|                                                                            |  |                   |         
|Increase (decrease) in cash and cash equivalents                            |  |                   | (46,027 
|Cash used in discontinued operations                                        |  |                   | (16,868 
|                                                                            |  |                   |         
|Net increase (decrease) in cash and cash equivalents                        |  |                   | (62,895 
|                                                                            |  |                   |         
|Cash and cash equivalents at beginning of period                            |  |                   | 109,968 
|                                                                            |  |                   |         
|Cash and cash equivalents at end of period                                  |  | $                 | 47,073  
|                                                                            |  |                   |         
|Supplemental disclosures of cash flow information:                          |  |                   |         
|Cash paid during the period for:                                            |  |                   |         
|Interest                                                                    |  | $                 | 2,747   
|                                                                            |  |                   |         
|Income taxes                                                                |  | $                 | 190     
|                                                                            |  |                   |         

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|Supplemental disclosures of non-cash transactions:                                |  |   |        |  |   |       | 
|--------------------------------------------------------------------------------- |  | - | ------ |  | - | ----- | 
|Acquisition of equipment under operating leases                                   |  | $ | 28,738 |  | $ |      | 
|Common stock issued in business acquisition                                       |  | $ | 2,230  |  | $ |      | 
|Stock options issued in business acquisition                                      |  | $ | 2,025  |  | $ |      | 
|Minority interest limited partners share of impaired other long-term investments |  | $ | 23     |  | $ |      | 
|Cancellation of stock options                                                     |  | $ |       |  | $ | 1,439 | 
|Reversal of acquisition costs                                                     |  | $ |       |  | $ | 1,073 | 

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 2002 Annual Report. Footnotes and other disclosures which would substantially duplicate the disclosures in the Companys audited financial statements for fiscal year 2002 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.

In
the third quarter of fiscal 2003, the Company decided to discontinue its line of optical module products due to continued depressed levels of demand for these products. The Company is currently evaluating its options for this product line, including
the sale to a third party of the related assets and operations, which is probable. In the unlikely event that the Company is unsuccessful in entering into a sale transaction, it plans to cease operations of the optical module business and to
terminate the related employees prior to September 30, 2003. In accordance with generally accepted accounting principles (GAAP), the balance sheet reflects assets and liabilities held for sale and the statements of operations and cash
flows reflect the results of the optical module business as discontinued operations for all periods presented.

Cash Equivalents and Investments

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Investments with maturities over
three months and up to one year are considered short-term investments and investments with maturities over one year are considered long-term investments. Cash equivalents and investments are principally comprised of money market accounts, commercial
paper rated A-1/P-1 and obligations of the U.S. government and its agencies. Under Statement of Financial Accounting Standards No. 115,Accounting for Certain Investments in Debt and Equity Securities,
the Company classifies its securities included under investments as available-for-sale or held-to-maturity at the time of purchase and re-evaluates such designation as of each balance sheet date. Investments classified as held-to-maturity securities
are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. All maturities of debt securities classified as held-to-maturity are within three years. Marketable securities not classified as held-to-maturity
are classified as available-for-sale and reported at fair value. Unrealized gains and losses on these investments, net of any related tax effect, are included in equity as a separate component of shareholders equity. As of June 30, 2003, all
investments were classified as available-for-sale.

Derivative Instruments and Hedging Activities

The Company utilizes interest rate swap agreements to manage interest rate exposures in accordance with SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities(SFAS No. 133),and SFAS No. 138,Accounting for Certain Derivative Instruments and Certain Hedging Activitiesan Amendment of SFAS No. 133.The Company records all derivatives on the balance sheet at fair value.

Computation of Net Loss per Share

Stock options and other convertible securities exercisable for 50,227,610, 42,233,306 and 53,469,568, shares that were outstanding at June 30, 2003 and 2002, and March 31, 2003,
respectively, were not included in the computation of diluted net loss per share, as the effect of their inclusion would be antidilutive. The antidilutive common stock equivalents consist of employee stock options, convertible subordinated
debentures that are convertible into the Companys common stock at a conversion price of $112.19, and consideration for a business acquisition that is payable in stock or cash at the Companys option.

Reclassifications

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

| | Note 2. | Restructuring Costs and Other Special Charges
| | ------- | ---------------------------------------------

Restructuring Cost

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During the quarter ended June 30, 2003 the Company implemented a restructuring plan that includes the closure of the 6-inch Gallium Arsenide
(GaAs) wafer fabrication facility in Colorado Springs by the end of September 2003. The estimated cost of the closure of the manufacturing facility is approximately $48.7 million and is comprised of severance packages for the manufacturing
workforce, the write down of certain manufacturing assets which were deemed to be impaired, the write off prepaid maintenance for non-transferable maintenance contracts associated with the related fixed assets, and the write down of the Colorado
Springs building. Restructuring costs of $48.7 million were recognized in the quarter ended June 30, 2003.

In fiscal 2001 and 2002, the Company implemented
several restructuring plans as a result of the decrease in demand for its products, a shift in the semiconductor process technology and the need to align its cost structure with significantly reduced revenue levels. These restructuring plans
included the termination of certain product lines, curtailment of certain research and development projects, a resulting workforce reduction, and the consolidation of excess facilities. In connection with these restructuring plans, the Company also
wrote down certain fixed assets that were deemed to be impaired, and accrued costs associated with non-cancelable equipment and software contracts. Restructuring costs of $212.5 million and $3.7 million were recognized in fiscal 2002 and 2001,
respectively. The Company incurred an additional charge of $0.4 million and $0.3 million in the quarters ended June 30, 2003 and March 31, 2003, respectively, relating to the restructuring plans implemented in fiscal 2001 and 2002.

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



|                         |  | WorkforceReduction |   | ExcessFacilities |   | ContractSettlementCosts |   | Impairmentof Assets |   | Buildingimpairment |   | Total   |  
|------------------------ |  | ------------------ | - | ---------------- | - | ----------------------- | - | ------------------- | - | ------------------ | - | ------- | -
|                         |  |                    |   |                  |   |                         |   |                     |   |                    |   |         |  
|Balance at Sept 30, 2002 |  | 1,578              |   | 2,442            |   | 31,507                  |   |                    |   |                   |   | 35,527  |  
|Charged to expense       |  | 963                |   | 378              |   |                        |   | 27,447              |   | 20,631             |   | 49,419  |  
|Non cash amounts         |  |                   |   |                 |   |                        |   | (27,447             | ) | (20,631            | ) | (48,078 | )
|Cash payments            |  | (1,151             | ) | (1,184           | ) | (9,739                  | ) |                    |   |                   |   | (12,074 | )
|                         |  |                    |   |                  |   |                         |   |                     |   |                    |   |         |  
|Balance at June 30, 2003 |  | 1,390              |   | 1,636            |   | 21,768                  |   |                    |   |                   |   | 24,794  |  
|                         |  |                    |   |                  |   |                         |   |                     |   |                    |   |         |  

Workforce reduction included the cost of severance and related benefits of employees
affected by the restructuring plans. During the quarters ended June 30, 2003 and March 31, 2003 the Company recorded charges of $0.7 million and $0.3 million, respectively. The Company expects to complete the severance and fringe benefits payouts by
March 2005.

The excess facilities charges included lease termination payments, non-cancelable lease costs and write off of leasehold improvements and office
equipment related to these leases. During the quarter ended June 30, 2003 the Company incurred an additional charge of $0.4 million as a result of changes in estimates of sublease income related to such excess facilities. These costs will be paid
over the respective lease terms through February 2004.

Contract settlements costs represent future purchase commitments related to unused licenses of
non-cancelable software contracts, and the residual value guaranteed under certain equipment operating leases. The Company calculated the number of design software licenses that it would not be using but was contractually obligated for, and accrued
for such costs. The accrual will be fully utilized by March 2005. In the case of equipment under operating leases, the Company identified the underlying equipment that was not being used. For this equipment the Company determined the estimated fair
market value, and compared this amount to the guaranteed residual value. The Company recorded the charge for the difference between the estimated fair market value and the guaranteed residual value.

The impairment of assets charge includes the write down of the Colorado Springs facility manufacturing equipment and prepaid maintenance contracts associated with that equipment. During the quarter ended
June 30, 2003 the Company recorded an impairment of assets charge of $27.4 million. The charge was determined based on the held and used classification under SFAS No. 144,Accounting for the Impairment or Disposal of
Long-Lived Assets. Under this classification, when a decision has been made to abandon an asset group, all of the long-lived assets and certain identifiable intangibles in that asset group to be disposed of are tested for
impairment. As a result, the Company recorded an impairment charge to write the assets down to their estimated fair market value, which resulted in a charge of $18.7 million. For the respective prepaid maintenance, the Company recorded a charge of
$8.7 million for the estimated net book value at September 30, 2003, as the Company will no longer be utilizing these assets after September 30, 2003, and because such prepaid maintenance cannot be resold or transferred.

The charges for the Colorado Springs facility also includes impairment of the owned land and building and were also tested for impairment based on the held and used classification
under SFAS No. 144. The manufacturing facility will cease production

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as of September 30, 2003. Certain portions of the building could be used as office space. As such, the Company obtained fair value information for comparable
commercial property in the Colorado Springs area. Based on an estimated fair value, the Company recorded an impairment charge of $20.6 million to write down the land and building accordingly. The adjusted value of the long-lived assets will then be
depreciated over the remaining estimated useful life.

The restructuring accrual for the discontinued operations is included on the consolidated balance sheet in
liabilities held for sale as discussed in Note 3.

Other Special Charges

During the quarter ended June 30, 2003, the Company also wrote off $6.8 million of GaAs inventory. As a result of the planned closure of the GaAs fabrication facility in Colorado Springs and as a result of the decision to exit the GaAs
manufacturing process, the Company notified customers and requested final forecasts and purchase orders from these customers. Based on the customers responses, and required commitment to purchase the inventory in the near future, the Company
determined that it has excess GaAs inventory on hand. As a result, the Company recorded a charge of $6.8 million, which is included in cost of revenues in the quarter ended June 30, 2003.

| | Note 3. | Discontinued Operations
| | ------- | -----------------------

In the third quarter of fiscal 2003, the Company decided to discontinue its line of
optical module products due to continued depressed levels of demand for these products. The Companys consolidated financial statements for all periods presented have been adjusted to reflect the operations of the optical module business as
discontinued operations in accordance with SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets(SFAS No. 144).

Summarized financial information for the optical module business is as follows (in thousands):



|Assets held for sale were comprised of the following: |  |             |       |                  |  
|----------------------------------------------------- |  | ----------- | ----- | ---------------- | -
|                                                      |  | June30,2003 |       | September30,2002 |  
|                                                      |  |             |       |                  |  
|Cash and cash equivalents                             |  | $           |      |                  | $
|Inventories, net                                      |  |             | 3,703 |                  |  
|Prepaid expenses and other current assets             |  |             | 105   |                  |  
|Property and equipment, net                           |  |             | 3,505 |                  |  
|Other intangible assets, net                          |  |             |      |                  |  
|Other assets                                          |  |             | 248   |                  |  
|                                                      |  |             |       |                  |  
|Assets held for sale                                  |  | $           | 7,561 |                  | $
|                                                      |  |             |       |                  |  

Liabilities held for sale were comprised of the following



|                                      |  | June30,2003 |       | September30,2002 |  
|------------------------------------- |  | ----------- | ----- | ---------------- | -
|                                      |  |             |       |                  |  
|Accounts payable and accrued expenses |  |             | 549   |                  |  
|Long term debt                        |  |             | 1,012 |                  |  
|                                      |  |             |       |                  |  
|Liabilities held for sale             |  | $           | 1,561 |                  | $
|                                      |  |             |       |                  |  

Selected operating results were as follows:



|                                                                      |  | Three months ended |         | Nine months ended |  
|--------------------------------------------------------------------- |  | ------------------ | ------- | ----------------- | -
|                                                                      |  |                    |         |                   |  
|                                                                      |  | June 30,2003       |         | June 30,2002      |  
|                                                                      |  |                    |         |                   |  
|Loss from operations of discontinued operations                       |  | $                  | (3,476  | )                 | $
|Loss from impairment of long lived assets and other intangible assets |  |                    | (17,260 | )                 |  
|Income tax benefit                                                    |  |                    | 8,004   |                   |  
|                                                                      |  |                    |         |                   |  
|Loss from discontinued operations                                     |  | $                  | (12,732 | )                 | $

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##### Table of Contents

| | Note 4. | Purchase Accounting Business Combination
| | ------- | ----------------------------------------

On January 31, 2003, the Company acquired all of the equity interests
of APT Technologies, Inc. (APT) in exchange for an aggregate of approximately $10.0 to $14.4 million in cash and stock and the assumption of stock options. As June 30, 2003, approximately $3.7 million was paid in cash and stock, and the
remaining $6.3 to $10.7 million of consideration will be paid in cash and/or stock between July 2003 and June 2007, and will be determined in part based on the future results of the acquired business. The consideration was preliminarily allocated
based on the fair values of the tangible assets and liabilities acquired, including deferred compensation of $0.9 million, with the excess consideration of $14.9 million recorded as goodwill. The Company is in the process of obtaining all of the
necessary information to finalize the allocation between goodwill and other intangible assets. The operations of APT are included from the date of acquisition. Pro forma results of operations have not been presented because the effects of this
acquisition were not material.

In June 2003, the Company announced a definitive agreement to acquire all of the outstanding equity interests of Multilink
Technology Corporation (Multilink) in exchange for approximately 4.2 million shares of common stock and the assumption of stock options, and warrants to purchase approximately 1.5 million shares of common stock. The transaction is
subject to customary closing conditions, including the approval by Multilinks stockholders. The transaction is expected to close in August 2003.

| | Note 5. | Goodwill and Other Intangible Assets
| | ------- | ------------------------------------

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



|Balance as of September 30, 2002                  |  | $ | 156,005 | 
|------------------------------------------------- |  | - | ------- | 
|Goodwill acquired based on preliminary allocation |  |   | 14,990  | 
|                                                  |  |   |         | 
|Balance as of June 30, 2003                       |  | $ | 170,995 | 
|                                                  |  |   |         | 

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



|                         |  | GrossCarryingAmount |        | AccumulatedAmortization |   | NetBalance |  
|------------------------ |  | ------------------- | ------ | ----------------------- | - | ---------- | -
|                         |  |                     |        |                         |   |            |  
|June 30, 2003            |  |                     |        |                         |   |            |  
|Customer relationships   |  | $                   | 813    |                         | $ | (813       | )
|Technology               |  |                     | 11,465 |                         |   | (5,231     | )
|Covenants not to compete |  |                     | 4,000  |                         |   | (3,080     | )
|                         |  |                     |        |                         |   |            |  
|Total                    |  | $                   | 16,278 |                         | $ | (9,124     | )
|                         |  |                     |        |                         |   |            |  
|September 30, 2002       |  |                     |        |                         |   |            |  
|Customer relationships   |  | $                   | 813    |                         | $ | (813       | )
|Technology               |  |                     | 11,465 |                         |   | (3,587     | )
|Covenants not to compete |  |                     | 4,000  |                         |   | (2,081     | )
|                         |  |                     |        |                         |   |            |  
|Total                    |  | $                   | 16,278 |                         | $ | (6,481     | )
|                         |  |                     |        |                         |   |            |  

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



|Fiscal year |  | Amount |      
|----------- |  | ------ | -----
|            |  |        |      
|2003        |  | $      | 881  
|2004        |  |        | 2,778
|2005        |  |        | 2,192
|2006        |  |        | 894  
|2007        |  |        | 192  
|Thereafter  |  |        | 217  
|            |  |        |      
|Total       |  | $      | 7,154

The Company only operates within one reporting unit as
defined by SFAS No. 142,Goodwill and Other Intangible Assets(SFAS No. 142). Therefore, any allocation of goodwill is not required.

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##### Table of Contents

The Company is required to perform goodwill impairment tests on an annual basis and between annual tests in certain circumstances. In fiscal
2002, the Company recorded goodwill and other intangible asset impairment of $398.9 million. As of June 30, 2003, there was no additional impairment of goodwill. Future goodwill impairment tests may result in charges to earnings.

| | Note 6. | Inventories, net
| | ------- | ----------------

Inventories consist of the following (in thousands):



|                                   |  | June 30,2003 |        | September30,2002 |  
|---------------------------------- |  | ------------ | ------ | ---------------- | -
|                                   |  |              |        |                  |  
|Raw materials                      |  | $            | 3,277  |                  | $
|Work in process and finished goods |  |              | 20,120 |                  |  
|                                   |  |              |        |                  |  
|                                   |  | $            | 23,397 |                  | $
|                                   |  |              |        |                  |  

| | Note 7. | Debt
| | ------- | ----

During the first quarter of fiscal 2003, the Company purchased $68.6 million principal amount of its 4%
convertible subordinated debentures due March 2005 at prevailing market prices, for an aggregate amount of approximately $51.1 million. As a result, the Company recorded a gain on extinguishment of debt of approximately $16.5 million, net of
deferred debt issuance costs of $1.0 million. The Company did not purchase any of its subordinated debentures during the second and third quarters of fiscal 2003.

| | Note 8. | Derivative Instruments and Hedging Activities
| | ------- | ---------------------------------------------

In the nine months ended June 30, 2003, the Company entered into
several interest-rate related derivative instruments to manage its exposure on its debt instruments. The Company does not enter into derivative instruments for trading or speculative purposes.

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 the first half of fiscal 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. These swaps changed
the fixed-rate exposure on the debt to variable. 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.

Interest expense for the nine months ended June 30, 2003 includes a deminimus amount of net
losses representing fair value hedge ineffectiveness arising from slight differences between the fair value change in the interest rate swaps and the change in fair value of the hedged debt obligation.

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##### Table of Contents

As of June 30, 2003, the Company had terminated all of its interest rate swap agreements entered into since October 1, 2002. Based on these
terminations, the Company recorded a deferred gain of $3.9 million. The gain will be amortized over the remaining term of the convertible subordinated debentures due March 2005.

On July 1, 2003, the Company entered into an interest rate swap agreement to reduce its exposure to market risks from changing interest rates.

| | Note 9. | Accounting for Stock Options
| | ------- | ----------------------------

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock Based
Compensation  Transition and Disclosure (SFAS No. 148). SFAS No. 148 amends SFAS No. 123,Accounting for Stock-Based Compensation(SFAS No. 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.

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 fixed-plan stock options. Under this method, 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 data).



|                                                                                                           |  | Three months ended |          | Nine months ended |  
|---------------------------------------------------------------------------------------------------------- |  | ------------------ | -------- | ----------------- | -
|                                                                                                           |  |                    |          |                   |  
|                                                                                                           |  | June 30,2003       |          | June 30,2002      |  
|                                                                                                           |  |                    |          |                   |  
|Net loss as reported                                                                                       |  | $                  | (94,993  | )                 | $
|Add: Stock-based employee compensation expense included in reported net loss                               |  | $                  | 6,049    |                   | $
|Deduct: Stock based employee compensation expense determined under fair value based methods for all awards |  | $                  | (15,228  | )                 | $
|Adjusted net loss                                                                                          |  | $                  | (104,172 | )                 | $
|Net loss per share as reported  basic and diluted                                                         |  | $                  | (0.47    | )                 | $
|Adjusted net loss per share  basic and diluted                                                            |  | $                  | (0.51    | )                 | $

| | Note 10. | Significant Customers, Concentration of Credit Risk and Segment Information
| | -------- | ---------------------------------------------------------------------------

In the third quarter of fiscal 2003
two customers accounted for greater than 10% of total revenues. In the third quarter of fiscal 2002, no customer accounted for greater than 10% of total revenues.

The Company generally sells its products to customers engaged in the design and/or manufacture of communications and storage products. Substantially all the Companys trade accounts receivable are due from such sources.

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.

Revenues from telecommunications and data communications
products were $9.1 million and $30.6 million, respectively, in the third quarter of fiscal 2003, and $15.9 million and $23.0 million, respectively, in the third quarter of fiscal 2002. Revenues from telecommunications and data communications
products were $31.3 million and $82.3 million, respectively, in the nine months ended June 30, 2003, and $57.8 million and $58.3 million, respectively, in the nine months ended June 30, 2002.

Revenues within the United States accounted for 72% and 77% of total revenues in the third quarters of fiscal 2003 and 2002, respectively.

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| | 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, Restructuring Charge, 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.

Results of Operations

Revenues

Total revenues in the third quarter of fiscal 2003 were $39.7 million, a slight increase from the $38.9 million recorded in the third quarter of fiscal 2002 and an increase of 4.2%
from the $38.1 million recorded in the prior quarter. For the nine months ended June 30, 2003, total revenues were $113.6 million, a slight decrease from the $116.1 million recorded in the nine months ended June 30, 2002. Revenues have remained
relatively flat since the fourth quarter of fiscal 2001 due to continued adverse market conditions and the reduction in demand from our communications customers that began in fiscal 2001. During fiscal 2001, original equipment manufacturers,
(OEMs) (who account for a majority of our sales) started experiencing a sharp decline in demand from their customers for several reasons. First, many financially weak telecommunication carriers either ceased operations or consolidated
with other carriers, leading to a drop in demand for networking equipment. Second, due to excess fiber capacity in the telecommunications infrastructure, network service providers spent less on networking equipment that our customers sell and which
includes our products. Third, the weakening economy drove many enterprises to either cease operations or to curtail capital expenditures, resulting in lower demand for networking equipment addressed at the enterprise market. As the overall demand
for communications equipment declined, our customers began consuming a portion of the excess inventories of our components that they had accumulated in previous years rather than placing new orders with us.

Revenues from telecommunications products primarily targeted at the core and metro portions of the network were $9.1 million and $15.9 million in the third quarters of fiscal 2003 and 2002,
respectively. For the nine months ended June 30, 2003, revenues from telecommunications products were $31.3 million, a decrease from the $57.8 million recorded in the nine months ended June 30, 2002. The decrease in revenues generated from these
products was primarily due to a significant reduction in orders from telecommunications customers as a result of the overbuilding of the long haul networking infrastructure which began in fiscal 2001 and has continued through fiscal 2003.

Revenues from datacommunications products primarily targeted at enterprise and storage networks were $30.6 million and $23.0 million in the third
quarters of fiscal 2003 and 2002, respectively. For the nine months ended June 30, 2003, revenues from datacommunications products were $82.3 million, an increase from the $58.3 million recorded in the nine months ended June 30, 2002. The increase
in revenues in the 2003 period from these products is due to our continuing emphasis on these markets through the introduction of new products and enhanced marketing efforts.

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 fiscal
2003 and 2002, 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 the business environment of the
markets in which we participate continues to be difficult. We therefore expect the pattern of quarterly revenues to be volatile for the remainder of fiscal 2003 as a result of fluctuating customer demand forecasts and inventory levels.

Cost of Revenues

Cost of revenues as a percentage of total revenues in the third
quarter of fiscal 2003 was 58.7% compared to 100.7% in the third quarter of fiscal 2002 and 42.3% in the prior quarter. For the nine months ended June 30, 2003 cost of revenues as a percentage of total revenues was 49.0% compared to 80.1% for the
nine months ended June 30, 2002. During the quarter ended June 30, 2003 we implemented a restructuring plan that includes the closure of our 6-inch Gallium Arsenide (GaAs) wafer fabrication facility in Colorado Springs and the intent to exit the
GaAs manufacturing process by the end of September 2003. As a result we notified customers and requested final forecasts and purchase orders from these customers. Based on the customers responses, and required commitment to purchase the
inventory in the near future, we determined that we have excess GaAs

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inventory on hand. As a result, we recorded a charge of $6.8 million which is included in cost of revenues in the quarter ended and nine months ended June 30,
2003. In the quarter ended June 30, 2002, we wrote off $18.5 million of excess and obsolete inventories as a result of an industry-wide reduction in capital spending and the resulting decrease in demand for our products. Excluding the inventory
write offs, cost of revenues in the third quarter of fiscal 2003 and 2002 would have been $16.5 million, or 41.5% of revenues, and $20.7 million, or 53.1% of revenues, respectively, and $48.8 million or 42.9% of revenues, and $74.5 million or
64.2%of revenues for the nine months ended June 30, 2003 and 2002, respectively. The decrease in cost of revenues (exclusive of inventory write offs) as a percentage of total revenues from the third quarter of fiscal 2002 and the prior quarter, and
for the nine months ended June 30, 2003 compared to the same period last year is the result of our continued efforts to decrease fixed costs and improve manufacturing yields for mature semiconductor products. We anticipate that cost of revenues as a
percentage of total revenues will continue to fluctuate in the near term based primarily on the demand for our products.

Engineering, Research and Development
Costs

Engineering, research and development expenses were $27.2 million in the third quarter of fiscal 2003 compared to $36.5 million in the third quarter of
fiscal 2002 and $26.6 million in the prior quarter. For the nine months ended June 30, 2003, engineering, research and development expenses were $79.9 million compared to $112.5 million in the nine months ended June 30, 2002. As a percentage of
total revenues, engineering, research and development expenses were 68.4% in the third quarter of fiscal 2003, 93.9% in the third quarter of fiscal 2002 and 69.8% in the prior quarter. For the nine months ended June 30, 2003, engineering, research
and development expenses as a percentage of total revenues decreased to 70.4 % from 96.9%, in the comparable period a year ago. The decrease in both absolute dollars and as a percentage of revenues from the three and nine months ended June 30, 2002,
was principally due to the inclusion of restructuring charges in connection with the first and third quarters of fiscal 2002 and the resulting cost reductions from such plans in the current year periods. Our engineering, research and development
costs are expensed as incurred.

Selling, General and Administrative Expenses

Selling, general and administrative expenses (SG&A) were $13.4 million in the third quarter of 2003, compared to $19.1 million in the third quarter of 2002 and $13.7 million in the prior quarter. For the
nine months ended June 30, 2003, SG&A expenses were $41.1 million compared to $53.0 million, in the comparable period a year ago. As a percentage of total revenues, SG&A expenses were 33.6 % in third quarter of fiscal 2003, compared to 49.0%
in the third quarter of fiscal 2002 and 36.0% in the prior quarter. For the nine months ended June 30, 2003, SG&A expenses as a percentage of total revenues decreased to 36.2% from 45.6%, in the comparable period a year ago. The decrease in both
absolute dollars and as a percentage of revenues in the three and nine months ended June 30, 2002, was primarily due to our efforts to streamline our cost structure.

Restructuring Charge

During the quarter ended June 30, 2003, we implemented a restructuring plan that includes the closure of our 6-inch Gallium
Arsenide (GaAs) wafer fabrication facility in Colorado Springs by the end of September 2003. This restructuring plan includes severance packages for the manufacturing workforce, the write down of certain manufacturing assets which were deemed to be
impaired, the write off of prepaid maintenance for non-transferable maintenance contracts associated with the related fixed assets, and the write down of the Colorado Springs building. As a result of implementing this restructuring plan, we recorded
a charge of $48.7 million. Additionally, we incurred a charge of $0.4 million and $0.3 million in the quarters ended June 30, 2003 and March 31, 2003, respectively, relating to the restructuring plans implemented in fiscal 2001 and 2002.

In fiscal 2001 and 2002, we implemented several restructuring plans as a result of the decrease in demand for its products, a shift in the semiconductor process
technology and the need to align its cost structure with significantly reduced revenue levels. These restructuring plans included the termination of certain product lines, curtailment of certain research and development projects, a resulting
workforce reduction, and the consolidation of excess facilities. In connection with these restructuring plans, we also wrote down certain fixed assets which were deemed to be impaired, and accrued costs associated with non-cancelable equipment and
software contracts. We recorded restructuring costs of $142.4 million and $206.9 million in the three month and nine month periods ended June 30, 2002.



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##### Table of Contents

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



|                         |  | WorkforceReduction |   | ExcessFacilities |   | ContractSettlementCosts |   | Impairmentof Assets |   | Buildingimpairment |   | Total    |  
|------------------------ |  | ------------------ | - | ---------------- | - | ----------------------- | - | ------------------- | - | ------------------ | - | -------- | -
|                         |  |                    |   |                  |   |                         |   |                     |   |                    |   |          |  
|Balance at Sept 30, 2001 |  | 1,229              |   | 1,706            |   |                        |   |                    |   |                   |   | 2,935    |  
|Charged to expense       |  | 1,012              |   | 2,607            |   | 34,221                  |   | 169,115             |   |                   |   | 206,955  |  
|                         |  |                    |   |                  |   |                         |   |                     |   |                    |   |          |  
|Non cash amounts         |  |                   |   | (775             | ) |                        |   | (169,115            | ) |                   |   | (169,890 | )
|Cash payments            |  | (1,139             | ) | (1,016           | ) | (89                     | ) |                    |   |                   |   | (2,244   | )
|                         |  |                    |   |                  |   |                         |   |                     |   |                    |   |          |  
|Balance at June 30, 2002 |  | 1,102              |   | 2,522            |   | 34,132                  |   |                    |   |                   |   | 37,756   |  
|                         |  |                    |   |                  |   |                         |   |                     |   |                    |   |          |  
|Balance at Sept 30, 2002 |  | 1,578              |   | 2,442            |   | 31,507                  |   |                    |   |                   |   | 35,527   |  
|Charged to expense       |  | 963                |   | 378              |   |                        |   | 27,447              |   | 20,631             |   | 49,419   |  
|Non cash amounts         |  |                   |   |                 |   |                        |   | (27,447             | ) | (20,631            | ) | (48,078  | )
|Cash payments            |  | (1,151             | ) | (1,184           | ) | (9,739                  | ) |                    |   |                   |   | (12,074  | )
|                         |  |                    |   |                  |   |                         |   |                     |   |                    |   |          |  
|Balance at June 30, 2003 |  | 1,390              |   | 1,636            |   | 21,768                  |   |                    |   |                   |   | 24,794   |  
|                         |  |                    |   |                  |   |                         |   |                     |   |                    |   |          |  

Workforce reduction included the cost of severance and related benefits of employees
affected by the restructuring plans. We expect to complete the severance and fringe benefits payouts by March 2005.

The excess facilities charges included lease
termination payments, non-cancelable lease costs and write off of leasehold improvements and office equipment related to these leases. These costs will be paid over the respective lease terms through February 2004.

Contract settlements costs represent future purchase commitments related to unused licenses of non-cancelable software contracts, and the residual value guaranteed under certain
equipment operating leases. We calculated the number of design software licenses that it would not be using but was contractually obligated for, and accrued for such costs. The accrual will be fully utilized by March 2005. In the case of equipment
under operating leases, we identified the underlying equipment that was not being used. For this equipment we determined the estimated fair market value, and compared this amount to the guaranteed residual value. The Company recorded the charge for
the difference between the estimated fair market value and the guaranteed residual value.

The impairment of assets charge includes the write down of the Colorado
Springs facility manufacturing equipment and prepaid maintenance contracts associated with that equipment. During the quarter ended June 30, 2003 we recorded an impairment of assets charge of $27.4 million. The charge was determined based on the
held and used classification under SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets. Under this model, when a decision has been made to abandon an asset group, all of
long-lived assets and certain identifiable intangibles in that asset group to be disposed of are tested for impairment. As a result, we recorded an impairment charge to write the assets down to their estimated fair market value which resulted in a
charge of $18.7 million. For the respective prepaid maintenance, we recorded a charge of $8.7 million for the estimated net book value at September 30, 2003, as we will no longer be utilizing these assets after September 30, 2003, and because such
prepaid maintenance cannot be resold or transferred.

The charges for the Colorado Springs facility also includes impairment of the owned land and building and were
also tested for impairment based on the held and used classification under SFAS No. 144. The manufacturing facility will cease production as of September 30, 2003. Certain portions of the building could be used as office space. As such, we obtained
fair value information for comparable commercial property in the Colorado Springs area. Based on an estimated fair value, we recorded an impairment charge of $20.6 million to write down the land and building accordingly. The adjusted value of the
long-lived assets will be depreciated over the remaining estimated useful lives.

Goodwill and Intangible Asset Impairment Charge

In the third quarter of fiscal 2002, we performed a review of the value of our goodwill in accordance with SFAS No. 142. Based on our review, we recorded a charge of $396.0 million to
write down the value of goodwill, and $2.9 million to write down the value of definite-lived intangible assets during the quarter ended June 30, 2002. During fiscal 2003, we have not recorded any additional impairment of goodwill.

Amortization of Intangible Assets

We elected to adopt SFAS No.142 effective the
beginning of fiscal 2002. In accordance with SFAS 142, we ceased amortizing goodwill as of October 1, 2001. There was no transitional impairment of goodwill upon adoption of Statement 142.

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Amortization of other intangible assets was $0.9 million in the third quarter of fiscal 2003 and the prior quarter, compared to $1.4 million
in the third quarter of fiscal 2002. For the nine months ended June 30, 2003, amortization of other intangible assets was $2.6 million compared to $4.3 million in the comparable period a year ago. The decrease in the amortization of other intangible
assets was due to the other intangible asset impairment charge of $2.9 million recorded in the quarter ended June 30, 2002, which reduced the carrying value of the assets and the associated amortization.

Interest Income and Interest Expense

Interest income was $1.0 million in the third quarter of fiscal 2003
compared to $3.9 million in the third quarter of fiscal 2002 and $1.2 million in the prior quarter. For the nine months ended June 30, 2003, interest income was $3.6 million compared to $13.9 million in the comparable period a year ago. The decrease
in interest income of $2.9 million from the third quarter of fiscal 2002 and $0.2 million from the prior quarter, and $10.3 million from the comparable nine month period a year ago was the result of lower cash balances and short term and long term
investments held throughout the period as well as a significant decline in interest rates paid on our cash and investment balances. The decrease in cash and investment balances was primarily the result of the repurchase of our convertible
subordinated debentures in the quarters ended December 31, 2001, September 30, 2002 and December 31, 2002, as well as a fixed operating cash outflow in a period of reduced revenues.

Interest expense was $1.8 million in the third quarter of fiscal 2003 compared to $3.2 million in the third quarter fiscal 2002 and $1.4 million in the prior quarter. For the nine months ended June 30, 2003, interest
expense was $5.1 million compared to $11.3 million in the comparable period a year ago. The decrease in interest expense of $1.4 million from the third quarter of fiscal 2002 and $6.2 million from the comparable nine month period a year ago was
primarily the result of several interest rate swap agreements entered into since October 1, 2002 which significantly relieved interest expense for the nine months ended June 30, 2003, and the result of lower principal amount of the convertible
subordinated debentures outstanding during fiscal 2003. Interest expense increased slightly from the prior quarter as a result of interest rate swap agreements being in effect for a longer duration of the prior quarter, which ultimately lowered the
average interest rate for the respective period. See further discussion below in Gain on Extinguishment of Debt.

As a result of the interest rate swap
agreements, we expect to record lower interest expense in future periods to the extent the variable rate is lower than the fixed rate of our debentures. However, if the adjustable rate is higher than the fixed rate of our debentures, our interest
expense would be higher. Interest expense could further decline to the extent that we repurchase any additional debentures. For additional information regarding the interest rate swap agreement, see Note 8 Derivative Instruments and Hedging
Activities.

Gain on Extinguishment of Debt

During the first
quarter of fiscal 2003, we purchased $68.6 million principal amount of our 4% convertible subordinated debentures due March 2005 at prevailing market prices, for an aggregate amount of approximately $51.1 million. As a result, we recorded a gain on
extinguishment of debt of approximately $16.6 million, net of a proportion of deferred debt issuance costs of $1.0 million, in the quarter ended December 31, 2002 and for the nine months ended June 30, 2003.

In October and November 2001, we purchased $83.3 million aggregate principal amount of our 4% convertible subordinated debentures due March 2005 at prevailing market prices, for an aggregate amount of
approximately $65.1 million. As a result, we recorded a gain on extinguishment of debt of approximately $17.1 million, net of a proportion of deferred debt issuance costs of $1.1 million, in the quarter ended December 31, 2001 and for the nine
months ended June 30, 2002.

Other Income

Other income for the three
month and nine month periods ended June 30, 2003 of $0.7 million and $2.3 million, respectively, consists principally of the amortization of deferred gains of $7.5 million related to the termination of our interest rate swap agreements in fiscal
2003 and 2002. We will amortize the gains over the remaining life of the convertible subordinated debentures due March 2005.

Loss from Discontinued Operations

In the third quarter of fiscal 2003, we decided to discontinue our line of optical module products due continued depressed levels of demand for these
products. We are currently evaluating our options for this product line, including the possible sale to a third party of the related assets and operations. In the event we are unsuccessful in entering into a sale transaction, we plan to cease
operations of the optical module business and to terminate the related employees prior to September 30, 2003. Therefore, the operations of the optical module business have been included as discontinued operations throughout this report.

Loss from discontinued operations, net of tax benefit, was $12.7 million in the quarter ended June 30, 2003, which was comprised of revenues of $3.4 million, loss
from operations of $3.5 million, an estimated loss on disposal of $17.2 million and a

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tax benefit of $8.0 million. Loss from discontinued operations, net of tax benefit, was $7.3 million in the quarter ended June 30, 2002, which was comprised
of revenues from discontinued operations of $4.1 million, loss from operations of $11.9 million, which included a $6.6 million restructuring charge, and a tax benefit of $4.6 million. Loss from discontinued operations in the quarter ended March 31,
2003 of $3.6 million, net of tax benefit, was comprised of revenues of $2.0 million, loss from operations of $5.8 million and a tax benefit of $2.2 million. For the nine months ended June 30, 2003 loss from discontinued operations, net of tax
benefit, was $20.4 million, which was comprised of revenues of $8.0 million, loss from operations of $16.1 million, an estimated loss on disposal of $17.2 million, and a tax benefit of $12.9 million. Loss from discontinued operations, net of tax
benefit, was $17.2 million for the nine months ended June 30, 2002, which was comprised of revenues of $8.1million, loss from operations of $28.0 million, and a tax benefit of $10.8 million.

Income Tax Expense

For the quarters ended June 30, 2003 and March 31, 2003 the total effective income tax rate was 0%. For
the quarters ended June 30, 2003, June 30, 2002 and March 31, 2003 a deferred tax benefit of $8.0 million, $4.6 million, and $2.3 million, respectively, was allocated to discontinued operations with an offsetting deferred tax expense allocated to
continuing operations. Additionally, for the quarter ended June 30, 2002, income tax expense consists of a $145.8 million increase in the deferred tax asset valuation allowance, partially offset by the reversal of income taxes payable of $19.6
million, resulting in an income tax receivable of $5.2 million. For the nine months ended June 30, 2003 and June 30, 2002, a deferred tax benefit of $12.9 million and $10.8 million, respectively, was allocated to discontinued operation with an
offsetting deferred tax expense allocated to continuing operations. Additionally, for the nine months ended June 30, 2002, income tax expense consists of a $145.8 million increase in the deferred tax asset valuation allowance, partially offset by
the reversal of income taxes payable of $19.6 million, resulting in an income tax receivable of $5.2 million. Management continually evaluates our deferred tax assets as to whether it is more likely than not that the deferred tax assets
will be realized. In the evaluation of the realizability of deferred tax assets we consider projections of future taxable income and the reversal of temporary differences. During the quarter ended June 30, 2002, management determined that it is not
more likely than not that all of the deferred tax assets would be realized. Accordingly a valuation reserve was recorded against the entire net deferred tax assets in the quarter and nine months ended June 30, 2002. All current tax
benefits being generated are subject to a 100% valuation allowance.

Liquidity and Capital Resources

Operating Activities

We used $10.5 million in operating activities in the nine months ended June 30, 2003. Although, we had
a net loss from continuing operations of $110.7 million for the nine months ended June 30, 2003, such amount included non-cash items aggregating $97.4 million resulting primarily from the write off of property and equipment, prepaid maintenance and
inventory, an assets held for sale write down, depreciation and amortization and amortization of deferred compensation expense, partially offest by gain on extinguishment of debt and amortization of gains on derivative instruments. In addition to
the net impact of non-cash items, our operating activities for the nine months ended June 30, 2003 also reflected an increase in inventory and the decrease in accrued restructuring. These were offset in part by decreases in accounts receivable and
other assets and increases in accounts payable, accrued expenses and other current liabilities and deferred gain on derivative instrument.

We used $78.0 million
in operating activities in the nine months ended June 30, 2002. Although, we had a net loss from continuing operations of $869.9 million for the nine months ended June 30, 2002, such amounts included non-cash items aggregating $774.8 million
resulting primarily from impairment of goodwill and intangible assets of $398.9 million, property and equipment write off of $135.2 million, and change in deferred tax assets, net, of $127.0 million. It also included depreciation and amortization,
inventory write off, prepaid maintenance write off and amortization of deferred compensation expense, partially offset by gain on extinguishment of debt. In addition to the net impact of non-cash items, our operating activities for the nine months
ended June 30, 2003, also reflected an increase in inventory and prepaid expenses and other current assets and a decrease in accounts payable. These were offset in part by decreases in accounts receivable and other assets and an increase in accrued
expenses and other current liabilities, accrued restructuring and income taxes payable.

Investing Activities

We generated $11.6 million and $268.1 million in investing activities during the nine months ended June 30, 2003 and 2002, respectively. The cash generated by investing activities during the first nine
months of fiscal 2003 was principally due to the proceeds from the sale of$399.3 million in available-for-sale debt and equity securities, offset by the purchases of $375.2 million in similar
securities, $11.3 million in capital expenditures, and $1.6 million for the purchase of APT. The cash generated in investing activities during the first nine months of fiscal 2002 was due to the maturity of investments of $675.3 million in held to
maturity debt and equity securities, offset by purchases of $357.3 million in similar securities, $45.3 million for capital expenditures and $4.6 million for payments of collateral on an equipment lease recorded in restricted long-term
deposits.

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In addition, we had two non-cash transactions totaling $28.7 million in the nine months ended June 30, 2003. One transaction related to the
lease for the land and building for our wafer fabrication facility in Colorado Springs, Colorado which expired on October 30, 2002. We exercised our option to purchase the land and building for the lessors original cost, or $27.5 million. This
lease was fully cash-collateralized and included in restricted long-term deposits as of September 30, 2002. The other transaction related to several equipment leases which expired on January 31, 2003. We exercised our option to purchase the
equipment for the lessors original cost, or $6.3 million, of which $3.8 million had been previously written off in the restructuring plan implemented in the quarter ended June 30, 2002. These leases were 80% cash-collateralized and included in
restricted long-term deposits as of September 30, 2002.

Financing Activities

In the nine months ended June 30, 2003, we used $47.1 million in financing activities, including the purchase of $68.6 million carrying value of our convertible subordinated debentures for $51.1 million. This was
slightly offset by proceeds of $3.9 million received from the issuance and sale of common stock pursuant to our stock option and stock purchase plans.

In the nine
months ended June 30, 2002, we used $61.1 million in financing activities, including the purchase of $69.8 million carrying value of our convertible subordinated debentures for $65.1 million, and the repayment of $0.5 million to Vitesse Venture Fund
partners for the sale of investments. This was slightly offset by proceeds of $4.3 million received from the issuance and sale of common stock pursuant to our stock option and stock purchase plans and proceeds of $0.1 million received from the
limited partners of the Vitesse Venture Funds. The limited partners are officers and employees of our company and represent an insignificant portion of the investments in the Vitesse Venture Funds.

We used $16.9 million and $14.0 million from discontinued operations in the nine months ended June 30, 2003 and 2002, respectively.

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. In addition, we
believe that with the continued reduction in our operating costs and projected profitability for fiscal 2004, we will have sufficient cash to satisfy the outstanding convertible debt upon maturity in March 2005.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America 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 those related to our allowance for 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, involve significant judgments and estimates we use in the preparation of our consolidated financial statements:

Allowance for Doubtful Accounts, Sales Returns Reserve and Revenue Recognition

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 current 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.

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.



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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. Due to reduced capital spending by our customers and the resulting reduction in demand for our products, we wrote off $30.5 million of excess and obsolete inventory during fiscal 2002. Due to our planned exit from the GaAs
manufacturing process, we wrote off $6.8 million of excess and obsolete inventory in the quarter ended June 30, 2003. Remaining inventory balances are adjusted to approximate the lower of our standard 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

We perform goodwill impairment
tests 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 evaluate the fair value of the goodwill of our one 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 assets in question is less than their carrying value. If less, we recognize an impairment loss based on the excess of the carrying
amount of the assets over their respective fair values. Fair value of goodwill is determined by using a valuation model based on an income and market approach. Fair value of other intangible assets and long-lived assets is determined by discounted
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 are
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 depreciate over the remaining estimated useful life of the asset. See Note 2 Restructuring Costs and
Other Special Charges, Note 3 Discontinued Operations and Note 5 Goodwill and Other Intangible Assets of the Notes to the Unaudited Condensed Consolidated Financial Statements for additional information. During the
quarter ended June 30, 2003 we recorded a charge of $27.4 million for the write down of certain Colorado Springs manufacturing equipment and prepaid maintenance contracts associated with that equipment, and $20.6 million for the write down of the
Colorado Springs land and building. During the quarter ended June 30, 2002, we recorded goodwill and other intangible asset impairment of $396.0 million and $2.9 million, respectively, totaling $398.9 million. We also recorded a charge of $169.2
during the fiscal year ended September 30, 2002 for the write down of certain excess manufacturing equipment. To the extent we determine there are indicators of impairment in future periods, write-downs may be required.

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 June 30, 2003 all tax benefits are subject to a 100% valuation allowance.

Impact of Recent Accounting Pronouncements

In April 2003, the FASB issued Statement No. (SFAS) 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under FASB Statement No. 133,Accounting for Derivative Instruments and Hedging Activities.The changes in this Statement require that contracts with comparable
characteristics be accounted for similarly. In particular, this Statement (1) clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative discussed in paragraph 6(b) of Statement 133, (2)
clarifies when a derivative contains a financing component, (3) amends the definition of an underlying to conform it to language used in FASB Interpretation No. 45,Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others,and (4) amends certain other existing pronouncements. These changes will result in more consistent reporting of contracts as either derivatives or hybrid
instruments. SFAS 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. We believe the adoption of SFAS 149 will not have a material impact on our financial
statements.

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In June 2002, the FASB issued SFAS No. 146,Accounting for Costs Associated with Exit and Disposal
Activities(SFAS No. 146). SFAS No. 146 nullifies Emerging Issues Task Force (EITF) issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). Under EITF issue 94-3, a liability for an exit cost is recognized at the date of an entitys commitment to an exit plan. Under SFAS No. 146, the liabilities associated with an exit or
disposal activity will be measured at fair value and recognized when the liability is incurred and meets the definition of a liability in the FASBs conceptual framework. This statement is effective for exit or disposal activities initiated
after December 31, 2002. We believe the adoption of SFAS No. 146 will not have a material impact on our financial statements.

In November 2002, the FASB issued
Interpretation No. 45,Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others(FIN 45),which addresses the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. The disclosure requirements are effective for interim and annual
financial statements ending after December 15, 2002. We do not have any guarantees that require disclosure under FIN 45.

FIN 45 also requires the recognition of a
liability by a guarantor at the inception of certain guarantees. FIN 45 requires the guarantor to recognize a liability for the non-contingent component of a guarantee, which is the obligation to stand ready to perform in the event that specified
triggering events or conditions occur. The initial measurement of this liability is the fair value of the guarantee at inception. The recognition of the liability is required even if it is not probable that payments will be required under the
guarantee or if the guarantee was issued with a premium payment or as part of a transaction with multiple elements. The initial recognition and measurement provisions are effective for all guarantees within the scope of FIN 45 issued or modified
after December 31, 2002.

In February 2003, the FASB issued Interpretation No. 46,Consolidation of Variable Interest Entities(FIN 46), which addresses the consolidation by business enterprises of variable interest entities, which have one or both of the following characteristics: (1) the equity investment at risk is not sufficient to
permit the entity to finance its activities without additional financial support from other parties, or (2) the equity investors lack one or more of the following essential characteristics of a controlling financial interest: (a) the direct or
indirect ability to make decisions about the entitys activities through voting or similar rights, (b) the obligation to absorb the expected losses of the entity if they occur, or (c) the right to receive the expected residual returns of the
entity if they occur. FIN 46 will have a significant effect on existing practice because it requires existing variable interest entities to be consolidated if those entities do not effectively disburse risks among parties
involved.

In addition, FIN 46 contains detailed disclosure requirements. FIN 46 applies immediately to variable interest entities created after January 31,
2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a
variable interest that it acquired before February 1, 2003. This Interpretation may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for
one or more years with a cumulative-effect adjustment as of the beginning of the first year restated. We believe that FIN 46 will not have a material impact on our financial statements.

In November 2002, the FASBs Emerging Issues Task Force (EITF) issued EITF 00-21Revenue Arrangements with Multiple Deliverables(EITF 00-21). EITF 00-21
addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. Specifically, EITF 00-21 addresses how to determine whether an arrangement involving multiple deliverables
contains more than one unit of accounting. In applying EITF 00-21, separate contracts with the same entity or related parties that are entered into at or near the same time are presumed to have been negotiated as a package and should, therefore, be
evaluated as a single arrangement in considering whether there are one or more units of accounting. That presumption may be overcome if there is sufficient evidence to the contrary. EITF 00-21 also addresses how arrangement consideration should be
measured and allocated to the separate units of accounting in the arrangement. The guidance in this Issue is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. Alternatively, companies may elect to
report the change in accounting as a cumulative-effect adjustment. Early application of this consensus is permitted. We believe that EITF00-21 will not have a material impact on our financial statements.

Factors That May Affect Future Operating Results

We have experienced continuing losses from operations since March 31, 2001, and we
expect that our operating results will fluctuate in the future due to reduced demand in our markets

Since our quarterly revenues peaked in the quarter ended
December 31, 2000, our revenues have declined substantially and we have experienced continuing losses from operations. While our revenues have improved slightly since the fourth quarter of fiscal 2001, they are still not sufficient to cover our
operating expenses. Further, in the quarter ended June 30, 2003 and in fiscal 2002 our operating results were materially and adversely affected by inventory write-downs, restructuring charges and

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impairment charges. If we are required to take additional charges such as these in the future, the adverse effect on our operating results may again be
material. 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. 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;
| | - | ---------------------------------------------------------------------------------------------

| |  | Unanticipated expenses arising from our closure of the Colorado Springs manufacturing facility;
| | - | -----------------------------------------------------------------------------------------------

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

| |  | Changes in inventory levels; and
| | - | --------------------------------

| |  | Expenses or operational disruptions resulting from acquisitions.
| | - | ----------------------------------------------------------------

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

In both the current quarter and in fiscal 2002, we implemented significant
cost reductions. We do not expect that these measures will be sufficient to offset lower revenues until fiscal 2004, if at all, and as such, we expect to incur a net loss for the remainder of fiscal 2003. In the past, we have recorded significant
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 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.

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 following 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 demand 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 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. 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.

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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.

If we are unable to develop and introduce new products successfully or to achieve market acceptance of our new products, our operating results would 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 quarterly 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;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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.

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 storage markets that
require high-performance integrated circuits. Some of these customers are also our competitors. For the quarter ended June 30, 2003, two customers 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.

There are risks associated with recent and future
acquisitions

Since the beginning of fiscal 2000, we have made five significant acquisitions:

| |  | In March 2000, we completed the acquisition of Orologic, Inc. (Orologic) in exchange for approximately 4.5 million shares of our common stock.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In May 2000, we completed the acquisition of SiTera Incorporated (SiTera) for approximately 14.7 million shares of our common stock.
| | - | --------------------------------------------------------------------------------------------------------------------------------------

| |  | In June 2001, we acquired Exbit Technology A/S (Exbit) for up to approximately 2.7 million shares of our common stock and may be required to issue an additional 1.3 million shares upon the
attainment of certain internal future retention and performance goals.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In July 2001, we completed the acquisition of Versatile Optical Networks, Inc. (Versatile) for approximately 8.8 million shares of our common stock.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In January 2003, we completed the acquisition of APT Technologies, Inc. for approximately $10.0 to $14.4 million, depending on the performance of the acquired business.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Also, during fiscal 2000 and fiscal 2001, we completed smaller acquisitions for an aggregate of approximately $61.7 million consisting of
approximately 0.8 million shares 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 our 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.

Our management frequently evaluates available strategic opportunities. In the future, we may pursue additional acquisitions of
complementary products, technologies or businesses. Acquisitions we make in the future, including the acquisition of Multilink, 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 an in-process research and development (IPR&D) charge of $45.6million in the three months ended March 31, 2000. In addition, under the
new SFAS No. 142, which we adopted as of October 1, 2001, certain intangible assets relating to acquired businesses, including goodwill, are maintained on the balance sheet rather than being amortized. These assets must be tested at least annually
for impairment, and in the year ended September 30, 2002, we recorded impairment charges of $398.9 million associated with goodwill and other intangible assets related to past acquisitions. As of June 30, 2003, and after accounting for these
impairment charges, we had an aggregate of $178.1 million of goodwill and other intangible assets on our balance sheet. As a result of our acquisition of Multilink, which we expect to complete in August 2003, we expect to incur additional
transaction expenses, IPR&D changes and other expenses, and to record additional goodwill and other intangible assets on our balance sheet. These assets may eventually be written down to the extent they are deemed to be impaired and any such
write-downs would adversely affect our results.

Our industry is highly competitive

The markets for our products are intensely competitive and subject to rapid technological advancement in design tools, 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. Our competitors include Agere, Applied Micro Circuits Corporation, Broadcom,
Conexant Systems, IBM, Intel, Infineon, Marvell, Maxim Integrated Products and PMC Sierra. We also compete with internal ASIC design units of systems companies such as Cisco and Nortel. 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 or collectively,
could represent future competition for many 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
customers products.

Competition is particularly strong in the market for optical networking chips, in part due to the markets past 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 Vitesse might have otherwise won.

There are risks associated with doing business in foreign countries

In third quarter of fiscal 2003,
international sales accounted for 28% 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.
| | - | --------------------------------------------------------------------------------------------------------

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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 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 technologies and to develop new products and technologies in order to maintain our competitive position. Further, we must adapt our products to 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.

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 adversely affect gross profit and net income. We use estimated yields for valuing work-in-process inventory. If actual yields are
materially 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.

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Our failure to manage growth of operations 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 completed several acquisitions since the fall of 1998. We have only limited
experience in integrating the operations of acquired businesses. Failure to manage our growth or 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 our 4% convertible subordinated 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 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.

| | 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 do not have any held-to-maturity investments at June 30,
2003.

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. Due to 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 June 30, 2003, an immediate 10 percent change in
interest rates is not expected to have a material effect on our near term financial condition or results of operations.

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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 manage exposure by entering into fixed to floating rate interest rate swaps. Therefore, changes in the US interest rate affect variable cash flows on the portion of the debt that was hedged by interest rate swaps. To ensure the adequacy
and effectiveness of our interest rate hedge positions, we continually monitor our interest rate swap positions, in conjunction with our underlying interest rate exposure, from an accounting and economic perspective.

However, given the uncertainty surrounding the economic correlation of interest rates and market prices, there can be no assurance that such programs will completely eliminate the
adverse financial impact resulting from unfavorable movements in interest rates. In addition, the timing of the accounting for recognition of gains and losses related to the mark-to-market instruments for any given period may not coincide with the
timing of the gains and losses related to the underlying economic exposures and, therefore, may adversely affect our consolidated operating results and financial position. The gains and losses realized from the interest rate swap are recorded in
Interest expense in the accompanying unaudited condensed consolidated statements of operations.

In the nine months ended June 30, 2003, we entered into
several interest rate swap agreements. We entered into the agreements to reduce the impact of interest rate changes on our long-term debt. The swap agreements allowed us to swap long-term borrowings at fixed rates into variable rates that are
anticipated to be lower than fixed rates available to us. As a result, the swaps effectively converted our fixed-rate debt to variable-rates and qualified for hedge accounting treatment. Since these interest rate swap agreements qualified as a fair
value hedge under SFAS No. 133, changes in the fair value of the swap agreement were recorded as interest expense and matched by changes in the designated, hedged fixed-rate debt to the extent that such changes were effective and as long as the
hedge requirements were met. We have terminated these interest rate swap agreements as of June 30, 2003. Periodic interest payments and receipts on both the debt and the swap agreement are recorded as components of interest expense in the
accompanying unaudited condensed consolidated statements of operations, resulting in reporting interest expense at the hedged interest rate.

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

| | (a) | Evaluation of Disclosure Controls and ProceduresThe Companys chief executive officer and chief financial officer performed an evaluation
of the Companys disclosure controls and procedures (as defined in Rule 13a-14(c) and Rule 15d-14(c) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on this evaluation, the
Companys chief executive officer and chief financial officer have concluded that our controls and procedures were adequate and designed to ensure that material information relating to us and our consolidated subsidiaries would be made known to
them by others within these entities.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | Changes in Internal Controls over financial reporting There were no changes in our internal controls over financial reporting identified in connection with the evaluation required by
paragraph (d) of Exchange Act Rule 13a-15 or Rule 15d-15 that occurred during the quarter ended June 30, 2003 or to our knowledge, in other factors that have materially affected or are reasonable likely to materially affect our internal controls
over financial reporting.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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PART II

OTHER INFORMATION

| | Item 2. | Changes in Securities
| | ------- | ---------------------

None.

| | Item 6. | Exhibits & Reports on Form 8-K
| | ------- | ------------------------------

(a)Exhibits

| | 31.1 | Certification of Chief Executive Officer pursuant to Section 302 (a) of the Sarbanes-Oxley Act of 2002
| | ---- | ------------------------------------------------------------------------------------------------------

| | 31.2 | Certification of Chief Financial Officer pursuant to Section 302 (a) of the Sarbanes-Oxley Act of 2002
| | ---- | ------------------------------------------------------------------------------------------------------

| | 32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C Section 1350
| | ---- | --------------------------------------------------------------------------

| | 32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C Section 1350
| | ---- | --------------------------------------------------------------------------

(b)Reports on Form 8-K

On April 22, 2003 we furnished a report on Form 8-K under
item 12 disclosing that we announced our financial results for the quarter ended March 31, 2003 and attaching the corresponding press release.

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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.



| |  | VITESSESEMICONDUCTORCORPORATION
| |  | -------------------------------
| |  | By:                            
| |  |                                
| |  |                                



August 11, 2003