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



Form 10-Q

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended December 31, 2009ORo

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


Commission file number 0-19654



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

Delaware(State or other jurisdiction of
incorporation or organization)

77-0138960(I.R.S. Employer
Identification No.)


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

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



Indicate
by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes ý    No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes o    No o

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

Large accelerated filer o

Accelerated filer ý

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

Smaller reporting company o


Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes o    No ý

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of February 5, 2010 there
were 403,841,802 shares of the registrant's $0.01 par value common stock outstanding.



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VITESSE SEMICONDUCTOR CORPORATION        QUARTERLY REPORT ON FORM 10-Q  FOR THE THREE MONTHS ENDED DECEMBER 31, 2009

TABLE OF CONTENTS



PART I. FINANCIAL INFORMATIONItem 1.

Financial StatementsUnaudited Consolidated Balance Sheets as of December 31, 2009 and September 30, 2009

3Unaudited Consolidated Statements of Operations for the Three Months Ended December 31, 2009 and
2008

4Unaudited Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2009 and 2008

5Notes to Unaudited Consolidated Financial Statements

6Item 2.

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

38Item 3.

Quantitative and Qualitative Disclosures About Market Risk

59Item 4.

Controls and Procedures

59PART II. OTHER INFORMATIONItem 1.

Legal Proceedings

61Item 1A.

Risk Factors

61Item 2.

Unregistered Sales of Equity and Use of Proceeds

71Item 3.

Defaults Upon Senior Securities

71Item 4.

Submission of Matters to a Vote by Shareholders

71Item 5.

Other Information

72Item 6.

Exhibits and Reports on Form 8-K

72


2

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PART I. FINANCIAL INFORMATION

ITEM 1:    FINANCIAL STATEMENTS



VITESSE SEMICONDUCTOR CORPORATION        UNAUDITED CONSOLIDATED BALANCE SHEETS

December 31,
2009

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

$
35,588

$
57,544Accounts receivable, net


12,781


11,369Inventory


19,393


18,809Restricted cash


401


398Prepaid expenses and other current assets


5,952


4,956Total current assets


74,115


93,076Property, plant and equipment, net


7,937


7,874Other intangible assets, net


1,295


1,541Other assets


4,286


3,077$
87,633

$
105,568LIABILITIES AND SHAREHOLDERS' DEFICITCurrent liabilities:Accounts payable

$
14,438

$
14,191Accrued expenses and other current liabilities


12,217


10,887Derivative liability


35,052


12,209Deferred revenue


851


1,156Current portion of debt and capital leases


162


5,236Convertible subordinated debt





10,000Total current liabilities


62,720


53,679Other long-term liabilities


1,814


1,810Long-term debt, net of discount


24,948


24,652Convertible subordinated debt


40,638


86,700Total liabilities


130,120


166,841Preferred stockSeries B, $0.01 par value. 44,533 shares outstanding at December 31, 2009


1,113


Commitments and contingenciesShareholders' deficit:Preferred stockSeries B, $0.01 par value. 10,000,000 shares authorized; 726,253 shares outstanding at December 31, 2009


7


Common stock, $0.01 par value. 500,000,000 shares authorized; 403,841,802 and 230,905,580 shares outstanding at December 31, 2009 and
September 30, 2009, respectively


4,043


2,314Additional paid-in-capital


1,804,397


1,754,598Accumulated deficit


(1,852,133
)

(1,818,271
)Noncontrolling interest


86


86Total shareholders' deficit


(43,600
)

(61,273
)$
87,633

$
105,568


See accompanying notes to consolidated financial statements.

3

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VITESSE SEMICONDUCTOR CORPORATION        UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

Three months ended
December 31,2009

2008(in thousands,
except per share data)Product revenues

$
41,611

$
44,810Intellectual property revenues


40


5,000Revenues


41,651


49,810Costs and expenses:Cost of revenues


19,103


22,447Engineering, research and development


11,959


11,581Selling, general and administrative (including gain on sale of building of $2.9 million in fiscal 2009)


10,529


10,419Accounting remediation & reconstruction expense & litigation costs


73


1,949Goodwill impairment





191,418Amortization of intangible assets


249


319Costs and expenses


41,913


238,133Loss from operations


(262
)

(188,323
)Other (expense) income :Interest expense, net


(10,220
)

(1,130
)Loss on extinguishment of debt


(21,576
)

Other income, net


76


144Other income (expense), net


(31,720
)

(986
)Loss before income tax expense and noncontrolling interest in earnings of consolidated subsidiary


(31,982
)

(189,309
)Income tax expense


1,878


650Net loss


(33,860
)

(189,959
)Less: net loss attributable to noncontrolling interest





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


126


Net loss available to common shareholders

$
(33,986
)
$
(189,958
)Net loss per common sharebasic and dilutedNet loss per share

$
(0.10
)
$
(0.84
)Weighted average shares outstanding:Basic and diluted


347,450


226,206


4

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VITESSE SEMICONDUCTOR CORPORATION        UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

Three months ended
December 31,2009

2008(in thousands)Cash flows from operating activities:Net loss

$
(33,860
)
$
(189,958
)Adjustments to reconcile net loss to net cash (used in) provided by operating activities:Depreciation and amortization


883


1,075Share-based compensation


679


866Change in market value of embedded derivative liability


8,224


Allowance for sales return reserve


99


(18
)Loss on extinguishment of debt


20,765


Impairment of goodwill





191,418Capitalization of interest


297


Amortization of debt issuance costs


189


191Amortization of debt discount


344


Loss on disposal of fixed assets





7Gain on sale of Colorado building





(2,924
)Other


512


Change in operating assets and liabilities:Accounts receivable


(1,511
)

1,268Inventory


(584
)

3,666Restricted cash


(3
)

(2
)Prepaids and other current assets


(1,031
)

292Accounts payable


246


(3,831
)Accrued expenses and other liabilities


1,339


(2,694
)Deferred Revenue


(305
)

6,325Net cash (used in) provided by operating activities


(3,717
)

5,681Cash flows from investing activities:Restricted cash





(3
)Proceeds from sale of Colorado building





6,500Transaction costs for sale of Colorado building





(547
)Capital expenditures


(700
)

(946
)Net cash (used in) provided by investing activities


(700
)

5,004Cash flows from financing activities:Equity issuance costs


(1,050
)

Payment of convertible debentures


(10,000
)

Payment of senior debt


(5,000
)

Debt issuance costs


(1,365
)

Prepayment fee on Senior debt


(50
)

Payment of capital lease obligations


(74
)

Net cash used in financing activities


(17,539
)

Net (decrease) increase in cash


(21,956
)

10,685Cash and cash equivalents at beginning of period


57,544


36,722Cash and cash equivalents at end of period

$
35,588

$
47,407Non-cash financing activities:Issuance of 2014 convertible debentures

$
40,343

$
Common stock issued in exchange for 2024 debentures

$
36,317

$
Preferred StockSeries B issued in exchange for 2024 Debentures

$
16,187

$
Compound embedded derivative issued in exchange for 2024 Debentures

$
27,925

$



See accompanying notes to consolidated financial statements.

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VITESSE SEMICONDUCTOR CORPORATION        NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS        December 31, 2009

Note 1. The Company and its Significant Accounting Policies

Description of Business

Vitesse Semiconductor Corporation ("Vitesse" or the "Company") is a leading supplier of high-performance integrated
circuits ("ICs") that are utilized primarily by manufacturers of networking systems for Carrier, Enterprise and Storage communications applications. Vitesse designs, develops and markets a diverse
portfolio of high-performance, cost-competitive semiconductor products. For more than 25 years, Vitesse has led the transition of new technologies in communications
networks.

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

We
have a worldwide presence. As of December 31, 2009, we operated four domestic design centers in the U.S., in California, Oregon, Massachusetts, and Texas, and four
international design centers in Taiwan, Denmark, Germany, and India.

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

Fiscal Periods

The Company's fiscal year is October 1 through September 30. References made to the first quarters of fiscal 2010 and
fiscal 2009 relate to the quarters ended December 31, 2009 and 2008, respectively.

Basis of Presentation

The interim unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and with the instructions to Securities and Exchange Commission ("SEC") Form 10-Q and Article 10 of SEC
Regulation S-X. They do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Therefore, these
financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended September 30, 2009, included in our Annual Report on
Form 10-K filed with the SEC on December 14, 2009.

The
consolidated financial statements included herein are unaudited; however, they contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary
to present fairly our consolidated financial position at December 31, 2009 and September 30, 2009, and the consolidated results of our operations and our consolidated cash flows for the
three months ended December 31, 2009 and 2008. The results of operations for the three months ended December 31, 2009 are not necessarily indicative of the results to be expected for
future quarters or the full year.

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009

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

Reclassifications

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

Correction of error

During the first quarter of fiscal 2010, we identified an error in our financial statements as of September 30, 2009 and for the
quarter and year then ended. This error was the result of an operational change that was not appropriately reflected in our inventory costing and accounting processes. In accordance with ASC 250
Accounting Changes and Error Corrections, originally issued as SAB No. 99"Materiality"and SAB No. 108 "Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements,"management evaluated the
materiality of the error from a qualitative and quantitative perspective and concluded that the error was not material to any prior periods. Further, we evaluated the materiality of the error on the
results of operations for the current quarter as well as the expected results of operations for the full fiscal year and concluded that the error in the current period is quantitatively significant to
the first quarter financial statements but is not anticipated to be material to the full fiscal year or the trend of financial results. Accordingly, we corrected the error in the current period. The
impact of the adjustment to correct the error to the specific line items of the financial statements for the three months ended December 31, 2009 was as follows:

Three Months
Ended
December 31,
2009Decrease in cost of sales

$
934Decrease in loss from operations


934Decrease in net loss


934Net loss per sharebasic and diluted

$



Subsequent Events

In May 2009, the Financial Accounting Standards B Board (FASB) issued Accounting Standards Codification (ASC 855), which establishes
general standards of accounting for and disclosure of events that occur after the balance sheet date, but before financial statements are issued. We have considered subsequent events for recognition
or disclosure through February 9, 2010, the date of issuance, in preparing the consolidated financial statements and notes thereto.

Use of Estimates

The preparation of financial statements in accordance with United States generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes to the financial statements. We regularly evaluate
estimates and assumptions related to revenue recognition, allowances for doubtful accounts, sales returns and allowances, warranty reserves, inventory reserves, share-based compensation, the valuation
of embedded derivatives, goodwill and purchased intangible asset

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009

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

valuations
and useful lives, and deferred income tax asset valuation allowances. These estimates and assumptions are based on current facts, historical experience and various other factors that we
believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other
sources. The actual results we experience may differ materially and adversely from our original estimates. To the extent there are material differences between the estimates and the actual results,
our future results of operations will be affected.

Foreign Currency Translation

The functional currency of our foreign subsidiaries is the United States dollar, however our foreign subsidiaries transact in local
currencies. Consequently, assets and liabilities are translated into United States dollars at the exchange rate on the balance sheet date. Revenues and expenses are translated at the average exchange
rate prevailing during the period. Foreign currency transaction gains and losses are included in results of operations.

Concentrations of Risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash equivalents
and accounts receivable. Cash equivalents consist of demand deposits and money market funds maintained with several financial institutions. Deposits held with banks have exceeded the amount of
insurance provided on such deposits. The Company maintains its cash in commercial accounts with high-credit quality financial institutions. Although the financial institutions are
considered creditworthy, balances
with any one financial institution may exceed the Federal Deposit Insurance Corporation (the "FDIC") limit of $250,000. At December 31, 2009, the Company's cash balance exceeded the deposit
insurance limits provided by the FDIC by $37,021,925. Cash balances held in foreign bank accounts are also not insured by the FDIC, and at December 31, 2009 these balances totaled $208,800. At
December 31, 2009, the Company's foreign subsidiaries reflected $785,017, of cash on their financial statements, which is also not insured by the FDIC.

The
Company believes that the credit risk in its accounts receivable is mitigated by the Company's credit evaluation process and maintaining an allowance for anticipated losses. For the
year ended December 31, 2009, one customer accounted for more than 10.0% of our net revenues. Total sales to this customer were 11.0% of net revenues for both quarters ended December 31,
2009 and December 31, 2008. No other customer accounted for more than 10% of our net revenues.

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

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009

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

Contingencies

We assess our exposure to loss contingencies, including environmental, legal, and income tax matters, and provide an accrual for an
exposure if it is judged to be probable and reasonably estimable. If the actual loss from a loss contingency differs from management's estimates, results of operations could be adjusted upward or
downward.

Warranty

The Company generally warrants its products against defects for one year from date of shipment. The sales reserve allowance includes a
provision for products under warranty,
which is recorded against revenue when products are shipped. At each reporting period, the Company adjusts its reserve for warranty claims based on its actual warranty claims experience as a
percentage of revenue for the preceding 12 months after shipment and also considers the impact of known operational issues that may have a greater impact than historical trends. Historically,
our warranty returns have not been material.

Revenue Recognition

In accordance with SEC Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial
Statements" or SAB 101, as amended by SAB No. 104, "Revision of Topic 13"or ASC 605, we recognize product revenue
when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred; (iii) the price to the customer is fixed or
determinable; and (iv) collection of the sales price is reasonably assured. Delivery occurs when goods are shipped and title and risk of loss transfer to the customer, in accordance with the
terms specified in the arrangement with the customer. Revenue recognition is deferred in all instances where the earnings process is incomplete.

Vitesse
has a distribution network through which it sells approximately half of its products. The Company recognizes revenue on a sell-through basis for all products sold
through distributors, utilizing information provided by the distributors. These distributors maintained inventory balances of $4.4 million and $3.6 million as of December 31, 2009
and September 30, 2009, respectively, which are carried on the books of Vitesse, and are given business terms to return a portion of inventory and receive credits for changes in selling prices
to end customers and inventory obsolescence. At the time Vitesse ships inventory to the distributors, the magnitude of future returns and price adjustments is not known. Therefore, revenue recognition
for shipments to distributors does not occur until the distributors sell inventory to end customers. The payments received from distributors for inventory shipped to them in advance of the sale of
that inventory to an end-user are, therefore, shown as deferred revenue. Vitesse personnel are often involved in the sales from the distributors to end customers, providing both field
engineering and application engineering support prior to the sale. Our product sales do not include service elements aside from the standard product warranty.

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

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009

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

Approximately
3.6% and 2.2% of our inventory is consigned and located with two customers at December 31, 2009 and at September 30, 2009, respectively. Consistent with our
revenue recognition policy, we recognize revenue when the customer pulls the inventory for use, that is when title passes to the customer and all revenue recognition criteria specified above are met.

In
accordance with ASC 605, when licensing technology and other intangibles, delivery is not deemed to occur for revenue recognition purposes until the license term begins. Revenues are
recognized in a manner consistent with the nature of the transaction and related earnings process. Based on management's analysis of the license terms, and pursuant to the guidance in ASC 605, revenue
related to the licensing of intellectual property ("IP") is deferred until delivery has occurred and final acceptance of the contracted deliverables is received from the licensee.

On
December 28, 2007, the Company entered into an arrangement to license IP to a third-party. The contract is a perpetual, nonexclusive, non-transferable, irrevocable
license for specified IP. As part of the contract, we were granted a perpetual, nonexclusive, non-transferable, irrevocable license to improvements to the technology made by the licensee,
subject to certain limitations. Under the agreement, Vitesse received $15.0 million in license fees and royalties for the rights to certain products and technology. Of the fees and royalty
payments, $10.0 million in fees was received upon delivery and acceptance of the licensed technology. The remaining $5.0 million of fees was received upon the one-year
anniversary of the agreement in the first quarter of 2009. For a period of seven years from the effective date of the contract, licensee will pay royalties on a per unit basis, on each commercial sale
incorporating the licensed products. Royalties will be accounted for when received. No royalties were received or recognized for the three months ended December 31, 2009.

Sales Returns, Pricing Adjustments and Allowance for Doubtful Accounts

We record reductions to revenue for estimated product returns and pricing adjustments, such as rebates, in the same period that the
related revenue is recorded. The amount of these reductions is based on historical sales returns, analysis of credit memo data, specific criteria included in rebate agreements, and other factors known
at the time. Additional reductions to revenue would result if actual product returns or pricing adjustments exceed our estimates. We currently do not have any existing or on-going rebate
programs or policies. We also maintain an allowance for doubtful accounts for estimated losses resulting from customers' inability to meet their financial obligations to us. We evaluate the
collectability of accounts receivable on a monthly basis using a combination of factors, including whether any receivables will potentially be uncollectible. The Company includes any accounts
receivable balances that are determined to be uncollectible in the overall allowance for doubtful accounts using the specific identification method. After all attempts to collect a receivable have
failed, the receivable is written off against the allowance. Management believes the allowance for doubtful accounts as of December 31, 2009 and September 30, 2009, is adequate. However,
if the financial condition of any customer were to deteriorate, resulting in an impairment of its ability to make payments, additional allowances could be required. We record a reserve for estimated
sales returns in the same period as the related revenues are recognized. Sales
returns typically occur for quality related issues. We base these estimates on our historical experience or the specific identification of an event necessitating a reserve. To the extent actual sales
returns or allowances differ from our estimates, our results of operations may be affected. As of December 31, 2009 and September 30, 2009, our sales return reserve was $118,000 and
$19,000, respectively.

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009

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

Cash and Cash Equivalents

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

Financial Instruments

ASC 825 defines fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction
between willing parties.

Our
financial instruments include cash equivalents, restricted deposits, accounts receivable, accounts payable and accrued expenses. Restricted deposits are interest-bearing Certificates
of Deposit ("CD") collateralizing Letters of Credit ("LOC") and other commitments. Interest earned on the CD's accrues to the Company. As of December 31, 2009 and September 30, 2009, the
Company had approximately $1.9 and $2.0 million, respectively, in CD's. The CD's will renew annually for the duration of the underlying LOC or commitment. The Company is subject to penalties
for early withdrawal of the funds in any of the CD's, including forfeiture of interest earned for the period. These financial instruments are stated at their carrying values, which are reasonable
estimates of their fair values.

On
October 1, 2009, the Trustee of the 1.5% Convertible Subordinated Debentures due 2024 (the "2024 Debentures") provided a written notice to the Company that holders representing
$95.7 million of the principal amount of the 2024 Debentures had exercised their repurchase rights under the Indenture. Pursuant to the written notice, the Company was required to deposit the
repurchase price of $108.9 million with the Trustee as soon as practicable. As the Company had insufficient cash to repurchase the entire amount tendered for repurchase it could not fulfill its
legal responsibility to
repurchase the debt which constituted an event of default under both the Indenture and the $30.0 million financing with Whitebox (the "Senior Secured Loan Agreement," or "Senior Term Loan").
Accordingly, management of the Company completed a series of transactions, described below, with its Lenders to restructure the Senior Term Loan and 2024 Debentures.

On
October 16, 2009, the Company and Whitebox (the "Senior Lender") amended the terms of the Senior Secured Loan Agreement to allow the Company to pay down $5.0 million of
the principal amount of its Senior Term Loan and amend the terms of the Senior Term Loan. Accordingly, the balance of the Senior Term Loan as of December 31, 2009 is the principal amount to be
repaid of $25.0 million, which is the $30.0 million dollar original principal balance less the principal payment of $5.0 million.

In
addition, effective October 16, 2009, the Company entered into a Debt Conversion Agreement (the "Conversion Agreement") with the beneficial owners of more than 96.7% of the
2024 Debentures (the "Noteholders") whereby the Noteholders agreed to exchange their 2024 Debentures for a combination of cash, shares of common stock, 8.0% Convertible Second Lien Debentures Due 2014
(the "2014 Debentures") and, in some cases, shares of Series B Preferred Stock. The Conversion Agreement was consummated on October 30, 2009.

We
have estimated the fair value of the 2014 Debentures using a convertible bond valuation model within a lattice framework (Level 3). The valuation model combined expected cash
outflows with

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009

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

market-based
assumptions regarding risk-adjusted yields, stock price volatility, and recent price quotes and trading information regarding shares of our common stock into which the
debentures are convertible. The estimated fair value of the 2014 Debentures was $76.3 million as of December 31, 2009.

Inventory

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

Property, Plant and Equipment

Property, plant and equipment are carried at cost. Depreciation and amortization are provided using the straight-line
method over the assets' remaining estimated useful lives, ranging from three to five years, except for leasehold improvements, which are amortized over the shorter of the term of the related lease or
their estimated useful lives. Depreciation and amortization costs were $0.6 million and $0.8 million for the three months ended December 31, 2009 and 2008, respectively.

Goodwill and Other Intangible Assets

We recorded goodwill when the purchase price paid for past acquisitions exceeded the estimated fair value of the net identified
tangible and intangible assets acquired. At December 31, 2008, we performed a two-step process to determine: (i) whether the fair value of the Company exceeds its carrying
value; and (ii) to measure the amount of an impairment loss, if any. We were prompted to complete the first step of the evaluation because we identified changes in key factors indicating an
impairment of the value of our goodwill. Notable indicators were significantly depressed market conditions and industry trends, a market capitalization below the book value of our equity and downward
revisions to our forecasts due to then current economic conditions. Upon completion of the first step of the impairment test for the quarter ended December 31, 2008, we determined the carrying
value of the Company exceeded its fair value and that an additional impairment analysis was required by ASC 350. Accordingly, we performed the second step of the goodwill impairment test which
compared the implied fair value of our Company's goodwill with the carrying amount of that goodwill. Any excess of the carrying amount of goodwill above the implied fair value of that goodwill would
result in an impairment loss was recognized in an amount equal to that excess. We determined the implied fair value of goodwill was determined in the same manner as the amount of goodwill would be
determined in a purchase business combination. The fair value was determined through an analysis of: (i) the market capitalization; (ii) comparable public company valuations; and
(iii) the future cash flows expected to be generated by the Company. This calculated fair value was then allocated to individual assets and liabilities of the Company (including any
unrecognized intangible assets) as if the Company had been acquired in a business combination and the fair value of the Company was the purchase price paid to acquire the Company. In performing this
allocation, the fair values of the assets and liabilities of the Company were calculated using generally accepted valuation methodologies, including analysis of: (i) the future cash flows
expected to be generated; (ii) the estimated market value; or (iii) the

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Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009

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

estimated
cost to replace. Any variance in the assumptions used to value the assets and liabilities could have had a significant impact on the estimated fair value of the assets and liabilities and,
consequently, the amount of identified goodwill impairment. As a result of the step two impairment analysis, we
recorded an impairment charge to fully write off our goodwill balance of $191.4 million for the quarter ended December 31, 2008.

Intangible
assets are amortized over their useful lives unless these lives are determined to be indefinite. Other intangible assets are carried at cost less accumulated amortization.
Amortization is computed over the useful lives of the respective assets, generally two to ten years.

Income Taxes

We account for income taxes pursuant to the provisions of ASC 740. Under the asset and liability method of ASC 740, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax
basis and operating loss and tax credit carryforwards. We assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is
not likely, we establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the
statement of operations. The Company adopted the provisions of ASC 740; originally issued as the Financial Accounting Standards Board ("FASB") Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes," an interpretation of SFAS 109, on October 1, 2007 and assessed the impact of ASC 740 on its
financial statements and determined that no adjustment to retained earnings was necessary.

Research and Development Costs

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

Computation of Net Loss per Share

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

For
periods in which we report income from operations, the weighted average number of shares used to calculate diluted income per share is inclusive of common stock equivalents from
unexercised stock options, restricted stock units, warrants, convertible preferred stock and convertible debentures. Unexercised stock options, restricted stock units and warrants are considered to be
common stock equivalents if, using the treasury stock method, they are determined to be dilutive. The dilutive effect of the convertible preferred stock and convertible debentures is determined using
the if-converted method.

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Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009

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

For the quarters ended December 31, 2009 and 2008, the Company recorded a loss from operations and in accordance with ASC 260, all outstanding potential common shares were
excluded from the diluted earnings per share computation. For periods in which the Company reports a loss from operations, diluted loss per share is calculated using only the weighted average number
of shares outstanding during each of the periods, as the inclusion of any common stock equivalents would be anti-dilutive.

Long-Lived Assets

The Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to
future undiscounted operating cash flows expected to be generated by the asset, or fair market value. Assets held for sale are recorded at the lesser of fair value less costs to sell or carrying
value. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. As
required by ASC 360, we verified our long-lived assets were not impaired as of the time of the goodwill impairment. There were no impairment charges in the three months ended
December 31, 2009 and 2008.

Share-Based Compensation

The Company has in effect several stock plans under which incentive and non-qualified stock options have been granted to
employees, contractors and directors. These plans include the 2001 Stock Incentive Plan (the "2001 Plan"), the 1991 Stock Option Plan, the 1991 Directors' Stock Option Plan, and the 1999 International
Stock Option Plan. ASC 718 requires all share-based payments to employees, including grants of employee stock options and employee stock purchase rights, to be recognized in the financial statements
based on their respective grant date fair values. ASC 718 also requires the benefits of tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than
operating cash flow, as required under previous literature.

ASC
718 requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is
ultimately expected to vest is recognized as expense ratably over the requisite service periods. The Company has estimated the fair value of each award as of the date of grant using the Black-Scholes
option pricing model, which was developed for use in estimating the value of traded options that have no vesting restrictions and that are freely transferable. The Black-Scholes model considers, among
other factors, the expected life of the award and the expected volatility of the Company's stock price. Although the Black-Scholes
model meets the requirements of ASC 718, the fair values generated by the model may not be indicative of the actual fair values of the Company's awards, as it does not consider other factors important
to those share-based payment awards, such as continued employment, periodic vesting requirements, and limited transferability.

Upon
adoption of ASC 718, we elected to recognize compensation expense for all share-based awards granted after September 30, 2005 on a straight-line basis over the
requisite service period for the entire award. The amount of compensation cost recognized through the end of each reporting

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Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009

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

period
is equal to the portion of the grant-date value of the awards that have vested, or for partially vested awards, the value of the portion of the award that is ultimately expected to
vest for which the requisite services have been provided.

Recent Accounting Pronouncements

In June 2009, the FASB issued ASC Topic 105 Generally Accepted Accounting Principles ("ASC 105"); originally issued as SFAS
No. 168 "The FASB Accounting Standards Codification and Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement
No. 162." ASC 105 establishes the FASB Standards Accounting Codification ("Codification") as the source of authoritative U.S. GAAP recognized by the FASB to be
applied to nongovernmental entities and rules and interpretive releases of the SEC as authoritative GAAP for SEC registrants. The Codification will supersede all the existing non-SEC
accounting and reporting standards upon its effective date and subsequently, the FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force
Abstracts. ASC 105 also replaces FASB Statement No. 162, "The Hierarchy of Generally Accepted Accounting Principles," given that once in effect,
the Codification will carry the same level of authority. ASC 105 is effective for financial statements issued for interim and annual periods ending after September 15, 2009, which includes our
fiscal year ended September 30, 2009. The adoption of this statement did not have a material impact on our results of operations, financial position or cash flows.

In
December 2007, the FASB issued ASC Topic 805 Business Combinations ("ASC 805"); originally issued as SFAS No. 141R,"Business
Combinations."ASC 805 establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed and any non-controlling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business
combination and determines what information to disclose to enable users of financial statements to evaluate the nature and financial effects of the business combination. ASC 805 is effective for
financial statements issued for fiscal years beginning after December 15, 2008. Accordingly, ASC 805 is applicable to the Company's accounting for business combinations closing on or after
October 1, 2009. We expect ASC 805 will have an impact on our consolidated financial statements, but the nature and magnitude of the specific effects will depend upon the nature, terms and size
of the acquisitions we consummate after the effective date of October 1, 2009. The adoption of this statement did not have a material impact on our results of operations, financial position or
cash flows during the quarter ended December 31, 2009.

In
December 2007, the FASB issued ASC Topic 810 Consolidation ("ASC 810"); originally issued as SFAS No. 160,"Non-controlling Interests in
Consolidated Financial Statementsan amendment of ARB No. 51."ASC 810 addresses the accounting and reporting standards for ownership interests in
subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the non-controlling interest, changes in a parent's ownership
interest, and the valuation of retained non-controlling equity investments when a subsidiary is deconsolidated. We adopted ASC 810 for our quarter ended December 31, 2009. The
adoption of this statement had an immaterial impact on our results of operations, financial position or cash flow.

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Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009

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

In
May 2008, the FASB issued ASC Topic 470 Debt ("ASC 470"); originally issued as FASB Staff Position APB 14-1, "Accounting for Convertible
Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)." ASC 470 requires us to separately account for the liability and equity
components of a convertible debt security by measuring the fair value of a similar nonconvertible debt security when interest cost is recognized in subsequent periods. ASC 470 requires us to
retroactively separate the liability and equity components of such debt in our consolidated balance sheets on a fair value basis. ASC 470 is effective for fiscal years and interim periods
within those fiscal years beginning after December 15, 2008. The adoption of this statement did not have an impact on our results of operations, financial position or cash flows during the
quarter ended December 31, 2009.

In
June 2008, the FASB ratified ASC Topic 815 Derivatives and Hedging ("ASC 815"); originally issued as Emerging Issues Task Force ("EITF") Issue No. 07-5,
"Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an Entity's Own Stock." ASC 815 provides that an entity should use a two step
approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument's contingent exercise and the instrument's
settlement provisions. ASC 815 clarifies the impact of foreign currency denominated strike prices and market-based employee stock option valuation instruments on the evaluation. ASC 815 is
effective for the financial statements issued for fiscal years and interim periods within those fiscal years beginning after December 15, 2008. The adoption of this statement did not have an
impact on our results of operations, financial position or cash flows during the quarter ended December 31, 2009.

Other
recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants or the SEC did not or are not
believed by management to have a material impact on the Company's present or future consolidated financial statements.

Note 2. Supplemental Financial Information

Inventory

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

December 31,
2009

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

$
1,775

$
1,411Work-in-process


6,610


8,335Finished goods


11,008


9,063Total

$
19,393

$
18,809


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Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009

Note 2. Supplemental Financial Information (Continued)

Property, Plant and Equipment

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

December 31,
2009

September 30,
2009(in thousands)Property, Plant and Equipment:Machinery and equipment

$
91,281

$
90,884Furniture and fixtures


767


769Computer equipment


10,065


10,018Leasehold improvements


5,645


5,657Construction in progress


109


76107,867


107,404Less: Accumulated depreciation and amortization


99,930


99,530Total

$
7,937

$
7,874


Accrued Expenses and Other Current Liabilities

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

December 31,
2009

September 30,
2009(in thousands)Accrued Expenses and Other Current Liabilities:Accrued legal fees and settlements

$
147

$
139Accrued wages, commissions and benefits


3,978


3,586Accrued vacation


2,609


2,813Accrued software license agreements


1,849


1,535Accrued income taxes


1,644


351Accrued subsequent payments


111


490Accrued commissions


137


118Miscellaneous taxes


329


197Interest payable


1,047


1,271Customer prepayments and deposits


143


149Other


223


238Total

$
12,217

$
10,887


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Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009

Note 2. Supplemental Financial Information (Continued)

Revenues by Product Markets

The following table presents revenues from product markets:

December 31,2009

2008

Change(in thousands)

$

%Carrier Networking Products

$
19,188

$
18,853

$
335


1.8
%Enterprise Networking Products


18,117


15,946


2,171


13.6
%Non-Core Products


4,306


10,011


(5,705
)

(57.0
)%Product Revenues

$
41,611

$
44,810

$
(3,199
)

(7.1
)%


Revenues from Intellectual Property

The following table presents revenues from intellectual property:

December 31,2009

2008(in thousands)Intellectual property revenues

$
40

$
5,000


Revenues by Geographic Area

The following table presents revenues by geographic area:

Three Months Ended
December 31,2009

2008(in thousands)North America(1)

$
17,755

$
24,822Asia Pacific


18,388


19,865Europe


5,508


5,123Total Net Revenues

$
41,651

$
49,810


(1)North
America includes USA, Canada and Mexico


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

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Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009

Note 2. Supplemental Financial Information (Continued)

Computation of Net Loss per Share

The following table presents the computation of loss per share:

December 31,2009

2008(in thousands,
except per share data)Net loss

$
(33,860
)
$
(189,959
)Less: net loss attributable to noncontrolling interest

$


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


126


Net loss available to common shareholders

$
(33,986
)
$
(189,958
)Weighted average number of sharesbasic and diluted


347,450


226,206Loss per sharebasic and dilutedNet loss

$
(0.10
)
$
(0.84
)Less: net loss attributable to noncontrolling interest





Fair value adjustment of Preferred StockSeries B





Net loss available to common shareholders

$
(0.10
)
$
(0.84
)


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

December 31,2009

2008(in thousands)Outstanding stock options


20,491


21,361Outstanding restriced stock units


2,325


2,364Outstanding warrants


150


150Convertible preferred stock


77,079


2014 Convertible debentures


222,191


2024 Convertible debentures





37,981Total potential common shares excluded from calculation


322,236


61,856


Note 3. Other Intangible Assets

Other intangible assets consist primarily of existing technologies and intellectual property. Acquired intangibles are amortized on a straight-line basis over the respective
estimated useful lives of the assets. The carrying value of intangible assets at December 31, 2009 and September 30, 2009 was $1.3 million and $1.5 million, respectively.
For other intangible assets and long-lived assets, in accordance with ASC 360, we determine whether the sum of the estimated undiscounted cash flows attributable to each asset in question
is less than its carrying value. If less, we recognize an impairment loss based on the excess of the carrying amount of the assets over their respective fair values. Fair value of
long-lived assets is determined based on market value. If the long-lived asset determined to be

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009

Note 3. Other Intangible Assets (Continued)

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

Note 4. Debt

During 2004, the Company issued $96.7 million in aggregate principal amount of its 1.5% Convertible Subordinated Debentures due 2024 (the "2024 Debentures"). The 2024 Debentures
were unsecured obligations and were subordinated in right of payment to all of the Company's existing and future senior indebtedness. Interest was payable in arrears semiannually on October 1
and April 1 of each year, beginning April 1, 2005. On August 15, 2006, the Company received notification from the Trustee under the Indenture, dated as of September 22,
2004, relating to the Company's 2024 Debentures. The Trustee alleged compliance deficiencies under the Indenture relating to the Company's failure to file with the Securities and Exchange Commission
the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2006. Although the Company did not believe there were compliance deficiencies under the Indenture,
and that an Event of Default did not occur, the Company negotiated with the holders of a majority of the 2024 Debentures to reach a resolution to the dispute. On September 24, 2007, the Company
entered into a Second Supplemental Indenture amending certain sections of the indenture. As part of the amendment, the Company agreed to increase the interest payable for the period starting
April 1, 2007, through, but not including October 1, 2007, by $20 per $1,000 principal amount of the 2024 Debentures. Further, effective November 3, 2006, the following amendments
became effective: (i) for 18 months after the date the amendments were effective, the Trustee would forbear from taking any action to exercise any rights or remedies that relate to the
filing of reports required under the Exchange Act; (ii) the Company would agree not to repay the 2024 Debentures pursuant to the purported acceleration request sent by the Trustee to the
Company during the last six months of the forbearance period; (iii) the indenture for the 2024 Debentures would be amended so that the conversion price of the 2024 Debentures would be decreased
permanently from $3.92 per share of common stock to $2.546 per share of common stock, subject to further adjustment as set forth in the indenture; and (iv) the repurchase price with respect to
the October 1, 2009, repurchase right was increased from 100% to 113.76% of the principal amount of the 2024 Debentures to be purchased, plus accrued and unpaid interest (the October 1,
2014 and October 1, 2019 repurchase rights would not be changed).

The
modification of the conversion feature discussed above resulted in an increase in the initial conversion rate to approximately 392.773 shares of common stock per $1,000 principal
amount of the 2024 Debentures from approximately 255.102 shares of common stock per $1,000 principal amount of the debentures. Upon conversion, the Company had the option to deliver cash in lieu of
shares of its common stock or a combination of cash and shares of common stock. The Company could have redeemed the 2024 Debentures after October 1, 2007 if its stock price is at least 170% of
the conversion price, or approximately $4.32 per share, for 20 trading days within any consecutive
30-day trading period, and could have redeemed the 2024 Debentures beginning October 1, 2009, without being subject to such condition. Holders of the 2024 Debentures had the right
to require the Company to repurchase the 2024 Debentures on October 1 of 2009, 2014, and 2019.

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009

Note 4. Debt (Continued)

In
accordance with the November 3, 2006 amendments to the 2024 Debentures, the October 1, 2009 repurchase right was increased from 100% to 113.76% of the principal amount
of the 2024 Debentures to be purchased. The increase in the repurchase right would result in an additional payment of $13.3 million on the $96.7 million outstanding 2024 Debentures.
Holders also had the option, subject to certain conditions, to require the Company to repurchase any 2024 Debentures held by such holder in the event of a fundamental change, at a price equal to 100%
of the principal amount of the 2024 Debentures plus accrued and unpaid interest plus, under certain circumstances, a make-whole premium. For the three months ended December 31, 2009
and 2008, interest expense relating to the 2024 Debentures was $0.1 million and $0.4 million, respectively. There were no outstanding 2024 Debentures at December 31, 2009 and as
of September 30, 2009 there was outstanding $96.7 million of the 2024 Debentures. See the discussion of the debt exchange, below, for an explanation of the settlement of the 2024
Debenture obligation.

In
accordance with ASC 815, embedded derivatives must be bifurcated from the underlying debt instrument and valued as a separate financial instrument. The 2024 Debentures included a
repurchase right for 113.76% of the principal amount of the 2024 Debentures on October 1, 2009 (the "premium put" or "derivative liability") that we have identified as an embedded derivative
requiring bifurcation and accounting at fair value because the economic and risk characteristics of the premium put meet the criteria for separate accounting as set forth in ASC 815. Should the
premium put have value, any gain or loss on the fair value of the premium put will be reflected in current earnings. We estimated the approximate fair value of the premium put as the difference
between the estimated value of the 2024 Debentures with and without the premium put feature. The fair value of the 2024 Debentures with the embedded premium put feature was estimated using a scenario
analysis that incorporated the investment and settlement alternatives available to the debt holders in connection with the premium put feature. The scenario analysis valuation model combined expected
cash outflows with market-based assumptions and an estimate of the probability of each scenario occurring. The fair value of the 2024 Debentures without the embedded premium put feature was estimated
using a convertible bond valuation model within a lattice framework. The convertible bond valuation model combined expected cash outflows with market-based assumptions regarding
risk-adjusted yields, stock price volatility, and recent price quotes and trading information regarding shares of our common stock into which the 2024 Debentures are convertible. Our
analysis was premised on the assumption that the holder would act in a manner that maximizes the potential return, or "payoff," at any given point in time. Included in this premise was the assumption
that the holder would compare the potential return associated with each available alternative, including, as specified in the terms of the contract, holding the debt instrument, exercising an equity
conversion option, or exercising a put option. As a component of this, we incorporated a market participant consideration as to the Company's capacity to fulfill the contractual obligations associated
with each alternative, including the Company's ability to fulfill any cash settlement obligation associated with exercise of the put option, as well as the Company's ability to refinance the
contractual obligation. Based on our analysis, we determined that the fair value of the premium put is most sensitive to the estimated amount of funds available for settlement of the liability on
October 1, 2009. More specifically, the fair value of the premium put was positively correlated to the estimated amount of cash proceeds and other securities expected to be received at
exercise. As a result of our valuation analysis the premium put was estimated to have a fair value of approximately $12.2 million as of September 30, 2009. Upon exercise of the put
option related to the 2024

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009

Note 4. Debt (Continued)

Debentures
on October 1, 2009 (see the discussion of the debt restructuring, below), the premium put fair value estimate became a contractual liability and was recorded at $13.3 million.
The fair value of the premium put at September 30, 2009 was measured using Level 3 inputs. The primary driver of the change in fair value between these dates was the exercise of the
premium put.

On
October 1, 2009, the Trustee of the 2024 Debentures provided a written notice to the Company that holders representing $95.7 million of the principal amount of the 2024
Debentures had exercised their repurchase rights under the Indenture. Pursuant to the written notice, the Company was required to deposit the repurchase price of $108.9 million with the Trustee
as soon as practicable. As the Company had insufficient cash to repurchase all of the 2024 Debentures tendered for repurchase it could not fulfill its legal responsibility to repurchase the debt,
which constituted an event of default under both the Indenture governing the 2024 Debentures and the Company's $30.0 million Senior Term Loan (as defined below). The Company subsequently
completed a series of transactions restructure the 2024 Debentures and Senior Term Loan.

As
of September 30, 2009, we had outstanding a $30.0 million senior secured term loan with Whitebox VSC, Ltd. (the "Senior Term Loan"). The loan has a
four-year term. As of December 30, 2009 and September 30, 2009, we had remaining debt issuance costs recorded as a debt discount in the amount of $0.4 for both periods and
debt issuance costs recorded as Other Assets, in the amount of $1.2 million and $1.0 million, respectively. These fees are being amortized as interest expense over the term of the loan.
The annual interest rate on the unpaid principal amount of the Senior Term Loan was the greater of 8.5% or LIBOR plus 4% during the interest period ending on the interest date. The Senior Term Loan is
secured by substantially all of our assets. In connection with entering into the Senior Term Loan, the Company and Whitebox also entered into a Senior Unsecured Convertible Note Purchase Agreement
that gives Whitebox the right, until the third anniversary of the initial funding, to purchase convertible notes in an aggregate principal amount of up to $30.0 million, which we would use to
repay amounts outstanding under the loan. These convertible notes, if issued, would be convertible into the common stock of Vitesse at a conversion price of $2.00 per share, subject to adjustment. The
terms of the Senior Unsecured Convertible Note Purchase Agreement was evaluated and it was determined to not be an embedded derivative as described in ASC 815; accordingly, it had no accounting impact
on the financial statements. According to the terms of the Senior Term Loan, under certain circumstances, repayment of the 2024 Debentures required the Company to immediately pay to Whitebox the
lesser of (A) the aggregate principal amount of the outstanding Senior Term Loan, including accrued and unpaid interest and (B) 25% of the aggregate amount of the 2024 Debentures
redeemed. Concurrent with the settlement of the Company's obligation of the 2024 Debentures (see the discussion, below), the Company amended the terms of the Senior Term Loan.

Effective
October 16, 2009, the Company entered into the an amendment of the Senior Term Loan to include a non-refundable prepayment fee equal to 1.0% of the aggregate
principal amount that is prepaid; an interest rate increase to 10.5% per annum in cash for the period from October 1, 2009 until October 16, 2009 paid as 8.5% per annum in cash, plus
2.0% payment-in-kind interest ("PIK"), plus an additional 0.3% PIK interest for every $1.0 million above $15.0 million of the senior term loan that is not paid
down by the Company for the period from October 17, 2009 until maturity or full payment of the Senior Term Loan . As part of the debt restructuring transactions, the Company paid
$5.0 million of the original $30.0 million principal balance of the Senior Term Loan. Subsequent to the

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009

Note 4. Debt (Continued)

$5.0 million
prepayment- of the Senior Term Loan, the Company has the ability to reduce the rate of interest by 0.3% for every $1.0 million of additional principal prepayment. Any future
proceeds of any sale or disposition of the Company's property is required to be used to reduce the principal balance of the note. The maturity date of the Senior Term Loan is unchanged.

Pursuant
to the guidance in ASC 470, the Company has determined that it has not received any concessions from Whitebox in connection with the amendment described above. As a result, the
amendment to the Senior Term Loan will not be accounted for as a troubled debt restructuring. Further, based upon guidance in ASC 470, management has determined that the amendment of the note terms is
properly accounted for as a debt modification. Accordingly, the amended Senior Term Loan was recorded at the principal amount to be repaid of $25.0 million, which is the $30.0 million
dollar original principal balance less the subsequent period principal payment of $5.0 million.

In
connection with the Amendment of the Senior Term Loan, the Company incurred $0.1 million in fees to Whitebox on the $5.0 million repayment of principal. These fees were
recorded as debt discount and netted against the debt on the December 31, 2009 balance sheet. Unamortized debt discount as of December 31, 2009 and September 30, 2009 was
approximately $0.4 million for both periods. At December 31, 2009 and September 30, 2009, the effective interest rate on the Senior Term Loan was 16.46% and 10.61%, respectively.
The effective interest rate on the Senior Term Loan for the 15-day period ended October 15, 2009 was 18.8384%. For the three months ended December 31, 2009 and 2008, interest
expense associated with the Senior Term Loan was $0.8 million and $0.7 million, respectively. The Agreement governing the Senior Term Loan contains various restrictive covenants. As of
December 31, 2009, we were in compliance with the terms of the covenants.

Concurrent
with the execution of the amendment of the Senior Term Loan, discussed above, the Company entered into a Debt Conversion Agreement (the "Conversion Agreement") with the
beneficial owners of more than 96.7% of the 2024 Debentures (the "Noteholders") whereby the Noteholders agreed to exchange their 2024 Debentures for a combination of cash, shares of common stock,
$50.0 million in newly issued 8.00% Convertible Second Lien Debentures Due 2014, (the "2014 Debentures") and, in some cases, shares of Series B Preferred Stock. The Conversion Agreement
was consummated on October 30, 2009 (the "Closing Date").

The
Company used $10.1 million of cash to repay a portion of the 2024 Debentures amounts due as follows: $3.6 million was used to settle the Company's obligations with
respect to the 2024 Debentures of holders that are not parties to the Conversion Agreement, $6.4 million was paid to parties to the Conversion Agreement in partial repayment of the 2024
Debentures and $0.1 million in accrued interest was paid to all beneficial owners of the 2024 Debentures as of October 30, 2009.

The
Company issued the following instruments in exchange for the $100.0 million in aggregate principal amount and premium of the 2024 Debentures remaining after the
$10 million cash settlement described above:



23

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Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009

Note 4. Debt (Continued)



On
October 30, 2009, the Noteholders exchanged approximately 50.0% of their 2024 Debentures (after the partial repurchase for cash described in above) for 172,936,222 shares of
common stock, and in some cases Series B Preferred Stock. Pursuant to the Conversion Agreement, the Noteholders were limited to ownership of 9.9% of the outstanding common stock ("Limit on
Ownership"). Accordingly, Noteholders received one share of Series B Preferred Stock for every 100 shares of common stock that they would have otherwise received in the debt conversion in
excess of the Limit on Ownership; this amount totaled 770,785 shares of Series B Preferred Stock. On the Closing Date, the fair value of the underlying common stock was $0.21 per share. In
connection with the debt exchange, the Company incurred third party costs of approximately $2.9 million that were allocated to the underlying financial instruments issued based on the relative
fair value of each instrument. Of the total fees incurred, $1.0 million will be charged against equity in connection with the issuance of the common and Series B Preferred Stock.

The
Company issued $50.0 million of 2014Debentures pursuant to the Conversion Agreement in partial satisfaction of the 2024 Debentures. The 2014 Debentures bear cash interest at
8.0% per annum beginning on October 30, 2009 and payable semiannually in arrears on April 1 and October 1 of each year, commencing April 1, 2010 and maturing on
October 30, 2014 unless earlier converted or repurchased. The 2014 Debentures are secured by second priority security interests on substantially all of the assets of the Company and its
subsidiaries. This second priority security interest is subordinated to the lien existing under the Senior Term Loan. The 2014 Debentures are convertible into shares of common stock at a conversion
price of $0.225 per share (equivalent to an initial conversion rate of approximately 4,444 shares per $1,000 principal amount of 2014 Debentures). Full conversion of the $50.0 million in
aggregate principal amount of the 2014 Debentures would result in the issuance of up to 222,191,111 shares of common stock. In connection with the new debentures, the Company paid approximately
$1.4 million in fees that are recorded as debt issuance costs in Other Assets on the accompanying December 31, 2009 balance sheet. These fees are being amortized as interest expense over
the term of the loan. Unamortized debt issuance costs as of December 31, 2009 associated with the 2014 Debentures were approximately $1.4 million. For the three months ended
December 31, 2009, interest expense associated with the 2014 Debentures was $0.7 million. The indenture governing the 2014 Debentures contains various restrictive covenants. As of
December 31, 2009, we were in compliance with the terms of the covenants.

The
Company evaluated the common stock, 2014 Debentures and Series B Preferred Stock issued in exchange for the 2024 Debentures pursuant to the guidance in ASC 470. The Company
determined that it has not received any concessions from the Noteholders pursuant to the Conversion Agreement and accordingly the transaction will not be accounted for as a troubled debt
restructuring. However, due to the significant change in the expected remaining cash flows, of the settled 2024 Debentures as compared to the new instruments issued, the Company will account for the
exchange of instruments in settlement for the 2024 Debentures pursuant to the Conversion Agreement as a debt extinguishment pursuant to the guidance in ASC 470.

24

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Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009

Note 4. Debt (Continued)

The
Company recorded the new instruments (i.e., the 2014 Debentures, common stock and Series B Preferred Stock) issued in extinguishment of the 2024 Debentures at fair
value and recognized a $21.6 million loss for the difference between the aggregate fair values of the new instruments plus additional amounts and fees paid to the creditors compared to the net
carrying value of the 2024 Debentures. For the purposes of calculating this loss on extinguishment, the net carrying amount of the 2024 Debentures include the $96.7 million amount of the 2024
Debentures and $13.3 million of the premium put derivative, recorded at fair value as required by ASC 470. Additionally, $0.8 million of fees paid to the Noteholders was included in the
measurement of the loss pursuant to ASC 470.

Management
evaluated the terms of the financial instruments issued pursuant to the Conversion Agreement and identified a compound embedded derivative associated with the 2014 Debentures.
Pursuant to ASC 815, embedded derivatives are required to be bifurcated from the host instrument and accounted for as a fair value instruments. Embedded derivatives are valued at each reporting
period, with the change in the fair value reflected in the results of operations. The bifurcated compound embedded derivative is comprised of the terms of the 2014 Debentures which provides for a
Make-Whole payment in certain circumstances and permits the Noteholders to demand redemption of the 2014 Debentures at a cash price equal to the 2014 Debentures on an
as-if-converted basis in the event that 50% or more of the Company's common stock is exchanged for, converted into, or acquired for consideration which is less than 90% of the
outstanding common stock. This redemption feature is in substance, a conversion settlement right where the holders could require the Company to settle in cash. The fair values of the 2014 Debentures
and embedded derivatives were determined using a convertible bond valuation model within a lattice framework. These valuations were determined using Level 3 inputs. The valuation model combined
expected cash outflows with market based assumptions regarding risk-adjusted yields, stock price volatility, recent price quotes and trading information of the Company's common stock into
which the 2014 Debentures are convertible. On October 30, 2009, the fair value of the bifurcated compound derivative was $28.0 million. The compound embedded derivative will be valued at
each reporting period, with the change in the fair value reflected in the Statement of Operations. At December 31, 2009, the fair value of the compound embedded derivative is
$35.1 million. The $7.1 million increase in the fair value is reflected as interest expense in the accompanying Statement of Operations.

The
Company recorded the 2014 Debentures at fair value, which was $40.3 million at the date of the transaction. The difference between the fair value and the face value of the
2014 Debentures, the discount, will be amortized as interest expense over the life of the 2014 Debentures, increasing the Company's effective rate of interest on the 2014 Debentures from the stated
rate of 8% per annum. The effective rate of interest will vary, decreasing over the life of the 2014 Debentures as the excess of the face value over the fair value of the notes is amortized. For the
three months ended December 31, 2009, interest expense related to the discount was $0.3 million. At December 31, 2009, the effective interest rate on the 2014 Debentures was
12.64%.

Immediately
prior to the Closing, 230,905,580 shares of common stock were outstanding, none of which were held by the Noteholders that are parties to the Conversion Agreement. After the
Closing, 403,841,802 shares of common stock were outstanding. Approximately 42.8%, or 172,936,222 of the common shares are held by the Noteholders that are parties to the Conversion Agreement. In
addition to the outstanding shares, there are outstanding instruments that allow for the issuance of common

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Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009

Note 4. Debt (Continued)

stock.
The Company has options and restricted stock units outstanding which, if converted, require the issuance of an additional 23.8 million shares of common stock. The Series B
Preferred Stock is convertible into 77.1 million shares of common stock. In aggregate, the exercise or conversion of these outstanding instruments when combined with the outstanding shares of
common stock after closing, requires the Company to have 504.7 million shares of common stock available for issuance.

As
of October 30, 2009, the Company had 500.0 million shares of common stock authorized. As a result, the Company did not have a sufficient amount of common stock
authorized to permit the conversion of all the instruments as described above. Accordingly, pursuant to ASC 815, the Company determined, based on a first-in, first-out (FIFO)
accounting policy based upon the issuance date of the instruments, that it did not have sufficient shares available for the conversion of all of the Series B Preferred Stock into shares of
common stock. As such, 47,030 shares of Series B Preferred Stock or $1.0 million was initially classified as mezzanine equity. At each subsequent balance sheet date, the Company will
adjust the carrying value of its Series B Preferred Stock classified in mezzanine equity up to its redemption amount until the Company has sufficient authorized shares. Subsequent to the close
of the transaction on October 30, 2009 and during the quarter ended December 31, 2009, options to purchase approximately 250,000 shares of the Company's common stock expired, making
those shares available for the potential conversion of shares of Series B Preferred Stock. As such, the Company reduced the number of shares of Series B Preferred Stock classified in
mezzanine equity by approximately 2,500 shares. As of December 31, 2009, the Company adjusted the carrying value of its Series B Preferred Stock in mezzanine equity by approximately
$0.1 million, reflecting the fair value of their common stock as of that date. On January 7, 2009, the Company's shareholders approved an increase in the number of shares common stock
authorized to 5.0 billion shares.

Prior
to the closing of the debt restructuring transactions on October 30, 2009, as discussed above, during fiscal year 2009 the Company had classified its obligations related to
the 2024 Debentures and the Senior Term Loan in short-term liabilities based on the exercise date of October 1, 2009 of the premium put option related to the 2024 Debentures.

After
the completion of debt restructuring transactions, the Company reclassified $111.3 million related to the portion of their obligations under the 2024 Debentures and the
Senior Term Loan, from short-term liabilities to long-term liabilities on its Consolidated Balance Sheet as of December 31, 2009.

As
of September 30, 2009, the Company classified as short-term liabilities the $5.0 million cash prepayment of the Senior Term Loan to the $3.6 million
of cash to settle with the holders of the 2024 Debentures that were not parties to the Conversion Agreement, and $6.4 million of cash paid in partial repayment to the holders of the 2024
Debentures that are parties to the Conversion Agreement; and $12.2 million related to the fair value of the derivative liability arising from the premium put obligation on the 2024 Debentures.
This reclassification is in accordance with ASC 470.

Note 5. Fair Value Measurements

In September 2006, the FASB issued ASC 820 Fair Value Measurements and Disclosures ("ASC 820"); originally issued as Statement of Financial Accounting Standards No. 157, "Fair Value Measurements."ASC 820 applies to other accounting pronouncements that require or permit fair value measurements and does not require any
new fair value measurements.

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Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009

Note 5. Fair Value Measurements (Continued)

Effective
June 30, 2009, the Company adopted the provisions of ASC 820 for financial assets and liabilities, as well as for any other assets and liabilities that are carried at
fair value on a recurring basis. The adoption of this statement did not have an impact on our results of operation, financial position or cash flow, but required additional disclosures.

ASC
820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of
observable inputs and minimize
the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:

Level 1

Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and
volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, listed equities and U.S. government treasury securities.Level 2

Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments
that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and current market
and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable
data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category include non-exchange-traded derivatives such as over-the-counter forwards, options and repurchase agreements.Level 3

Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management's best estimate of fair
value from the perspective of a market participant. Level 3 instruments include those that may be more structured or otherwise tailored to customers' needs. At each balance sheet date, the Company performs an analysis of all instruments subject
to ASC 820 and includes in Level 3 all of those whose fair value is based on significant unobservable input.


Financial
instrument's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

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Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009

Note 5. Fair Value Measurements (Continued)

Assets and liabilities measured at fair value on a recurring basis include the following at December 31, 2009 and September 30, 2009 (in thousands):

Fair Value
Measurements UsingLevel 1

Level 2

Level 3

TotalQuarter ended December 31, 2009Derivative liabilitypremium put

$


$


$


$
Derivative liabilitycompound embedded derivative








35,052


35,052Year ended September 30, 2009Derivative liabilitypremium put

$


$


$
12,209

$
12,209Derivative liabilitycompound embedded derivative














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

Derivative liability
premium put
related to 2024 Debentures

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

$
12,209

$
Transfers in and /or out of Level 3





27,925Total losses included in earnings


1,096


7,127Settlement


(13,305
)

Balance at December 31, 2009

$


$
35,052


The
derivative liabilityembedded compound derivative liability, which is included within other current liabilities, represents the value associated with the right of the
holders of the 2014 Debentures associated with the equity conversion feature and the "make-whole" feature of the 2014 Debentures.

There
is no current observable market for this type of derivative and, as such, we determined the value of the embedded derivative using a lattice-based convertible bond valuation model
that combined expected cash outflows with market-based assumptions. The fair value of the 2014 Debentures without the embedded compound derivative feature was also estimated using a convertible bond
valuation model within a lattice framework. The convertible bond valuation model combined expected cash outflows with market-based assumptions regarding risk-adjusted yields, stock price
volatility and recent price quotes and trading information regarding shares of our common stock into which the 2014 Debentures are convertible.

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

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Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009

Note 6. Income Taxes

The provision for income taxes as a percentage of income from continuing operations before income taxes was (5.87%) for the three months ended December 31, 2009 compared to
(0.36%) for the comparable period in the prior year. For the year ending September 30, 2010, the Company's estimated effective tax rate is (5.87%). The Company's effective tax rate is primarily
impacted by continuing operating losses.

At
October 1, 2009, the Company had net deferred tax assets of $422.1 million before considering the effect of the valuation allowance. These deferred tax assets are
primarily composed of net operating loss ("NOL") carryforwards. The following table details the amount and expiration of the federal net operating loss carryforwards included in the
deferred tax asset (in thousands):

Gross
Amount

Amount without
Limitation

Year of expirationFederal net operating loss carryforwards

$
147,561

$
105,896

2020 - 2021337,040


206,258

2022 - 2023111,240


71,147

2024 - 202550,981


50,981

2026 - 202849,586


49,586

2029Total federal net operating loss carryforwards

$
696,408

$
483,868


We
have available federal research and development tax credit carryforwards of approximately $16.0 million, net of a FIN 48 allowance. The following table details the
amount and years of expiration of the federal research and development tax credit carryforwards included in the deferred tax asset (in thousands):

Amount

Year of expirationFederal research and development credit carryforwards

$
1,086

2010 - 20123,163

2013 - 20197,415

2020 - 20214,348

2022 - 2026Total federal research and development credit carryforwards

$
16,012


Timing
differences included in the net deferred tax assets relate primarily to tangible and intangible assets recovery, other accruals and reserves. Due to uncertainties surrounding the
Company's ability to generate future taxable income to utilize the deferred tax assets, management has recorded a full valuation allowance against the deferred tax assets.

FIN 48
prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a
tax return. Due to significant net operating losses, the cumulative effect of applying this interpretation has no impact on retained earnings.

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Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009

Note 6. Income Taxes (Continued)

The
total amount of gross unrecognized tax benefits increased by $29,000 for potential state tax liabilities. Included in the balance of unrecognized tax benefits of $26.2 million
as of December 31, 2009 there were no unrecognized tax benefits that, if recognized, would impact the effective tax rate.

Effective
October 16, 2009, the Company entered into a Debt Conversion Agreement (the "Conversion Agreement") with the beneficial owners of more than 96.7% of the 2024 Debentures
(the "Noteholders") whereby the Noteholders agreed to exchange their 2024 Debentures for a combination of cash, shares of common stock, the New Notes (as defined below) and, in some cases, shares of
Series B Preferred Stock. The Conversion Agreement was consummated on October 30, 2009 (the "Closing Date"). (See Note 4Debt).

The
Federal Tax Reform Act of 1986, and similar state laws, contains provisions that may limit the net operating loss carry forwards to be used in any given year upon the occurrence of
certain events, including a significant change in ownership interests. Under IRC Section 382 rules, a change in ownership can occur whenever there is a shift in ownership by more than fifty
percentage points by one or more five-percent shareholders within a three-year period. When a change of ownership is triggered, the NOLs may be impaired.

We
maintain a study to understand the status of net operating losses. Based on that study, we believe that, as a result of the conversion agreement discussed above, the Company
experienced an "ownership change" as defined for U.S. federal income tax purposes as of October 30, 2009 that will trigger an impairment of the use of our NOLs as of the fiscal year ended
September 30, 2010. As a result of the "ownership change", the Company could realize a permanent loss of a significant portion of its U.S. federal and state deferred tax assets and lose certain
built-in losses that have not been recognized for tax purposes. As of September 30, 2009, the Company's deferred tax asset was $422.1 million, which was fully reserved.

The
Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. As of December 31, 2009, no material interest or penalties were
accrued due to significant net operating losses.

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

Note 7. Shareholders' Equity

Preferred Stock

The Company is authorized to issue up to 10,000,000 shares of non-voting convertible preferred stock, with a par value of
$0.01 per share. As of December 31, 2009, 770,786 preferred shares were outstanding. No preferred shares were outstanding as of September 30, 2009.

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Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009

Note 7. Shareholders' Equity (Continued)

On
October 30, 2009, in connection with our debt restructuring, we issued 770,786 shares of Series B Preferred Stock pursuant to the terms of the Conversion Agreement. Each
share of the Series B Preferred Stock is convertible at the option of the holder at any time into 100 fully paid and non-assessable shares of common stock subject to the limitation
that a holder may not convert shares of Series B if the conversion of those shares would result in the holder beneficially owning more than 9.99% of our outstanding common stock. The
Series B Preferred Stock has no liquidation preference. Dividends on the Series B Preferred Stock are non-cumulative have a dividend preference and are equal to $0.001 per
share of Series B Preferred Stock, which amount is payable when, and if, dividends are declared and payable with respect to the common stock. Holders of the Series B Preferred Stock do
not have any voting rights or the right to elect any directors.

As
of December 31, 2009, the Company did not have sufficient authorized common shares for the conversion of all of the outstanding preferred stock. In accordance with ASC 480
Distinguishing Liabilities from Equity, ("ASC 480), originally issued as SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity," we have classified 44,533 Series B preferred shares as temporary equity in the mezzanine section of the balance sheet because the settlement in
cash is subject to the occurrence of uncertain events not solely within the Company's control. Our preferred stock for which we do have sufficient authorized shares is classified as stockholders'
equity.

Our
preferred stock for which we do not have sufficient authorized common shares were measured at the fair value of the common stock they would be converted into at December 31,
2009, which was $0.25 per share, with the change in fair value of $0.1 million from October 30, 2009 recorded to additional paid in capital during the quarter ended December 31,
2009. In accordance with ASC 480, originally issued as EITF D-98, "Classification and Measurement of Redeemable Securities" the change in
the fair value of these shares reduces our net loss available to common shareholders in the calculation of earnings per share.

Common Stock

As of December 31, 2009, the Company was authorized to issue up to 500,000,000 shares of common stock, with a par value of $0.01
per share. On October 30, 2009, in connection with our debt restructuring, we issued 172,936,222 shares of common stock. As of December 31, 2009 and September 30, 2009,
403,841,802 shares and 230,905,580 shares of common stock were outstanding, respectively. On January 7, 2010, the number of authorized shares of common stock was increased to 5,000,000,000 (See
Note 9Subsequent Events).

Stock Option Plans

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

On
January 23, 2001, the Company's shareholders approved the adoption of the 2001 Stock Incentive Plan ("2001 Plan"), which replaced the 1991 Plan that expired in August 2001 and
the 1991 Directors' Stock Option Plan that expired in January 2002. The 2001 Plan provides for the grant to

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Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009

Note 7. Shareholders' Equity (Continued)

employees
of incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, and for the grant to employees, consultants, and directors of
non-qualified stock options for certain share-based awards as determined by the Board of Directors or the Compensation Committee of the Board of Directors.

Prior
to the September 2008 amendment to the 2001 Plan, the number of shares reserved for issuance automatically increased by a number of shares equal to the lesser of: (i) 4% of
the Company's common stock outstanding at the end of each fiscal year and (ii) 17.5 million shares. Under all stock option plans, a total of 80,165,861 shares of common stock have been
reserved for issuance and 52,533,167 shares remained available for future grant as of December 31, 2009. In the future, any increase to the number of shares reserved for issuance under the 2001
Plan may only be achieved through amendment of the 2001 Plan. If the company is listed on a national securities exchange, such amendment may require stockholder approval.

The
following table summarizes compensation costs related to the Company's share-based compensation plans (in thousands) for the quarters ended December 31:

December 31,2009

2008Cost of revenues

$
146

$
206Engineering, research and development


247


228Selling, general and administrative


291


437Total share-based compensation expense


684


871


In
addition to the share-based compensation expense related to the Company's plans, we recorded $5,000 of share-based compensation expense in fiscal 2008 related to the employee stock
appreciation rights. These rights were cancelled in the first quarter of fiscal 2009, resulting in a credit to share-based compensation of $5,000. Pursuant to ASC 718, stock appreciation rights are
considered liability awards and as such, these amounts were accrued in the liability section of the balance sheet.

The
fair value of share-based awards is estimated at the date of grant using the Black-Scholes option valuation model. Expected volatility is based on the historical volatilities of the
Company's common stock. The risk-free interest rate is based on the U.S. Treasury constant maturity rate for the expected life of the stock option. The expected life of a stock award is
the period of time that the award is expected to be outstanding. Expected lives were estimated based upon historical exercise data. The Company has never paid cash dividends and intends to retain any
future earnings for business development.

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Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009

Note 7. Shareholders' Equity (Continued)

The
per share fair values of stock options granted in connection with stock incentive plans have been estimated using the following weighted average assumptions:

Three Months
Ended
December 31,2009

2008Expected life (in years)


5.56


5.88Expected volatility


88.8
%

65.0
%Risk-free interest rate


2.5
%

3.2
%


The
Company's determination of the fair value of share-based payment awards is affected by assumptions regarding a number of highly complex and subjective variables. These variables
include, but are not limited to; the Company's expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. The fair value of
employee stock options is determined in accordance with ASC 718 and SEC Staff Accounting Bulletin No. 107 ("SAB 107"), as amended by SAB No. 110, which provides supplemental
application guidance based on the views of the SEC, using an option-pricing model, however, that value may not be indicative of the fair value observed in a willing buyer/willing seller market
transaction, or actually realized by the employee upon exercise.

Activity
under all stock option plans during the three months ended December 31, 2009 was as follows:

Shares

Weighted
average
exercise price

Weighted
average
remaining
contractual life
(in years)

Aggregate
intrinsic valueOptions outstanding, September 30, 2009


21,249,683

$
5.47Granted(1)


192,000

$
0.21Exercised(2)


Cancelled or expired


(1,291,694
)
$
24.37Options outstanding, December 31, 2009


20,149,989

$
4.21


4.90

$
7,590Options exercisable, December 31, 2009


17,123,135

$
4.77


4.30

$



Restricted Stock Units

In September 2008, the Company also amended its 2001 Plan to clarify procedures for the issuance of Restricted Stock Units ("RSUs").
The first grant of RSUs following the amendment occurred on October 13, 2008. The grants vest over a three year period with 50% vesting one year plus one day from the date of grant and 25%
vesting on the second and third anniversaries of the date of grant, so long as the Vitesse common stock is listed on the NASDAQ Stock Market or such other national securities exchange as described in
Section 18 of the Securities Act or in Rule 146 promulgated thereunder. On January 16, 2009, the Company issued RSUs in connection with the tender offer discussed below. These
grants vest one year plus one day from the date of grant.

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009

Note 7. Shareholders' Equity (Continued)

A
summary of RSU activity during the three months ended December 31, 2009 is as follows:

Shares

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


3,443,253

$
0.35Awarded


Released


Forfeited


(60,313
)

0.34Restricted stock outstanding, December 31, 2009


3,382,940

$
0.35


Tender Offer

On December 1, 2008, Vitesse commenced a tender offer on Schedule TO (the "Offer") to amend Eligible Options (as defined
below) that had been granted under the 1991 Plan and the 2001 Plan (together, the "Plans"). An option to purchase Vitesse common stock was eligible for the Offer (an "Eligible Option") only if each of
the following conditions was met:



Vitesse
undertook the Offer solely to avert the severe and, in Vitesse's view, unintended tax consequences to its option holders imposed by Section 409A of the Internal Revenue
Code of 1986 and similar state laws on some of its current employee stock option holders. Vitesse determined that certain stock options were erroneously assigned grant dates other than the actual date
of finalization of those grants. As a result, the exercise prices of those stock options were lower than they would have been if the options had been dated when the grants were actually finalized.
Therefore, those options may have subjected option holders to adverse tax consequences under Section 409A of the Internal Revenue Code of 1986 if the fair market value of the shares were to
exceed the exercise price for such shares at the end of any calendar year in which the option would have been exercisable or at the time of exercise.

These
tax consequences include ordinary income tax on the spread between the exercise price and the value of the underlying shares (even if the option was not exercised), an additional
20% federal tax, and potential interest charges. In addition, some states, including California, impose an additional 20% state tax. In order to avoid these significant adverse tax consequences,
Vitesse completed the Offer on December 31, 2008.

The
Offer was accepted by all current employee holders of Eligible Options.

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009

Note 7. Shareholders' Equity (Continued)

In
connection with the Offer, the Company amended the Eligible Options and granted restricted stock to all holders of the Eligible Options. In accordance with ASC 718, the Offer
constituted a
modification of the tendered options in combination with an inducement to accept the modification in the form of a grant of RSUs. The Company recorded compensation expense as a result of the
modification of the options and the grant of the inducement award equal to the change in the fair value of the original options immediately before the modification and that fair value of the modified
options combined the inducement award immediately after the modification. Option fair values were determined using the Black-Scholes valuation model and the fair value of the restricted stock was
equal to the market price of the Company's stock on the date of modification.

The
amount of compensation cost related to the modified options and restricted stock that is recognized through the end of each reporting period is equal to the incremental fair value of
the portion of the aggregate awards that have vested, or for partially vested awards, value of the portion of the awards that is ultimately expected to vest, for which the requisite services have been
provided.

Note 8. Legal Proceedings

As of December 31, 2009, the end of the period covered by this report, we were subject to material pending legal proceedings, other than ordinary routine litigation incidental to
our business, to which we were a party or of which our property was the subject, as well as any such proceedings known to be contemplated by government authorities, as described below. In addition, we
were subject to certain material legal proceedings completed during the annual period covered by this report as described below.

The Derivative and Securities Class Actions

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

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

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009

Note 8. Legal Proceedings (Continued)

the
related SEC and Department of Justice investigations. Vitesse retained the right to continue its state court action against KPMG, LLP, its former independent registered public accounting
firm.

On
January 14, 2009, Vitesse contributed 4,700,000 shares of Vitesse common stock, with a fair market value of $4.2 million to cover the attorneys' fees and expenses of the
derivative plaintiffs' counsel. The Court entered final judgment implementing all of the above referenced terms and the case is concluded in all respects.

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

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

The Dupuy Action

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

The DOJ Subpoena and SEC Investigation

In May 2006, we received a grand jury subpoena from the office of the United States Attorney for the Southern District of New York
requesting documents from 1999 through the present. The Division of Enforcement of the SEC also conducted an investigation of Vitesse. The Division of Enforcement requested documents from
January 1, 1995 through the present. Vitesse has cooperated with both government agencies in their investigations. While the investigation by the United States Attorney is still
on-going, the staff of the Division of Enforcement of the SEC has agreed to recommend to the Commission, a proposed settlement which would conclude for the Company all matters arising from
the SEC investigation into historical stock option practices and certain other accounting irregularities. Under the proposed settlement, the Company would pay a $3.0 million civil penalty and
consent to the entry of a final judgment by a federal court permanently enjoining the Company from violations of the antifraud and other provisions of the federal securities laws. In connection with
the Company's settlement with the staff of the Division of Enforcement of the SEC, we recorded a $3.0 million expense related to the civil penalty payable to the SEC. The proposed settlement is
contingent on the

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009

Note 8. Legal Proceedings (Continued)

review
and approval of final documentation by the Company and the staff of the Division of Enforcement of the SEC, and is subject to final approval by the Commission.

KPMG Lawsuit

On June 13, 2007, the Company filed a lawsuit in the Superior Court for the County of Los Angeles against KMPG LLP
("KPMG"), its former independent registered public accounting firm, alleging that KPMG was negligent in auditing the Company's stock option grants and financial statements during the years 1994 to
2000. The Company later amended its Complaint to include the years 2001 to 2004.

On
June 15, 2009, the Company announced that it had reached a settlement with KPMG. Pursuant to this settlement, KPMG agreed to pay the Company $22.5 million and forgive
all past indebtedness. Additionally, the parties agreed to execute mutual general releases of all claims. In June 2009, the Company received full payment of the settlement amount, net of fees,
expenses and outstanding indebtedness. The Company recorded the net proceeds and the forgiveness of the debt, totaling $16.0 million, as a credit to accounting remediation and reconstruction
expense and litigation costs in the statement of operations in the accompanying consolidated financial statements.

Potential Payroll Tax Liabilities Related to Backdating of Stock Options

On June 29, 2009, the Company obtained final determination from the Internal Revenue Service ("IRS") regarding a settlement of
payroll taxes, penalties and interest related to the exercise of backdated stock options during the calendar years 2004 through 2006. During that period, certain non-qualified stock
options were improperly classified and treated as incentive stock options for tax purposes, resulting in underpayment of payroll taxes. The Company paid approximately $0.9 million in full
satisfaction of the federal income tax liabilities in July 2009.

Note 9. Subsequent Events

The Company held a special meeting of the shareholders on January 7, 2010 at which the shareholders approved the increase in the number of authorized shares of common stock from
500,000,000 to 5,000,000,000. This increase permits the conversion of the Company's 8.0% Convertible Second Lien Debentures Due 2014 into shares of common stock and provides available shares for other
general corporate purposes. In addition, the Company's shareholders also authorized the board of directors to affect a reverse stock-split when it is deemed appropriate. As of February 9, 2010,
the reverse stock-split has not been executed.

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

Cautionary Statement

You should read the following discussion and analysis in conjunction with our Unaudited Consolidated Financial
Statements and the related Notes thereto contained in Part I, Item 1 of this Report. The information contained in this Quarterly Report on Form 10-Q is not a complete
description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this Report and in our
Annual Report on Form 10-K for the year ended September 30, 2009, which discusses our business in greater detail, filed with the Securities and Exchange Commission
("SEC").

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

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

Overview

Over the last 10 years, the worldwide proliferation of the Internet and the rapid growth in the volume of data being sent over
Local Area Networks ("LANs") and Wide Area Networks ("WANs") has placed a tremendous strain on the existing communications infrastructure. Communication service providers have sought to increase their
revenues by delivering a growing range of data and video services to their customers in a cost-effective manner. In particular, the demand for mobile data services is growing dramatically.
The demand for increased bandwidth and services has created a need for faster, larger and more complex networks.

We
are a leading supplier of high-performance integrated circuits ("ICs") principally targeted at systems manufacturers in the communications and storage industries. Within
the communications industry, our products address Carrier and Enterprise networking, where they enable data to be transmitted at high-speeds and processed and switched under a variety of
protocols.

In
recent years, we have focused our product development and marketing efforts on products that leverage the convergence of Carrier and Enterprise networking onto IP-based
networks. These next-generation networks are ideal for data and video. Increasingly, these networks will be delivered based on Ethernet technology to provide these services at lower cost.
We believe that products in this emerging technology area represent the best opportunity for us to provide differentiation in the market.

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Our Business Product Lines

Beginning in 2008, Vitesse classified product revenues into three markets: Carrier Networking, Enterprise Networking and
Non-Core. These classifications reflect the major trends in our product lines and how they map into our customer base. In addition, we have an IP revenue stream that was introduced in the
last quarter of 2008 and continued with the sale of certain patents in the third quarter of 2009.

Carrier Networking

The global telecommunications Carrier Network also called the "Service Provider Network" includes networks delivering voice and data,
video and mobile services. It is a complex combination of networks often classified into groups such as Wide Area Networks ("WANs"), Metropolitan Area Networks ("MANs"), Multi-Service Access Networks
("MSANs"), and Radio Access Networks ("RANs"). These evolving networks must deliver more bandwidth and provide increasing data-based capabilities to provide "quadruple play" services that
integrate voice, data and video traffic over both wired and wireless networks. To address this need, Carriers are migrating to Ethernet as a preferred networking technology to provide these new
capabilities at low cost. Broadly, Ethernet technology upgraded to meet these requirements is being referred to as "Carrier Ethernet." It is, in effect, an adaptation of Ethernet to provide the same
features and functions that have traditionally been provided by legacy "telecom" protocols such as Synchronous Optical Network ("SONET/SDH"), Plesiochronous Digital Hierarchy ("PDH"), etc. Because of
the complexity of the Carrier Networks, products sold into these applications have long design cycles, typically two to four years from design start to production, and long life cycles, typically five
to 10 years or more.

Vitesse
provides a variety of products into Carrier networking applications. These generally include: (i) Ethernet-over-SONET Mappers, SONET/SDH Framers
and Switches; (ii) Optoelectronic Physical Media Devices ("PMDs") and Physical Layer Devices ("PHYs") such as Transceivers and Clock and Data Recovery ("CDR"); (iii) Signal Integrity
Products including Backplane Transceivers, CDR, and Crosspoint Switches; (iv) Ethernet Media Access Controllers ("MACs") and Switches; (v) Gigabit Ethernet Copper PHYs; and
(vi) Next-generation Optical Transport Network ("OTN") Mappers.

Enterprise Networking

Enterprise Networks generally include equipment dedicated to the communication of voice and data services within large Enterprise
organizations and datacenters. An Enterprise Network will typically be comprised of one or more LANs computer systems including workstations and servers, as well as one or more Service Access Networks
("SANs"). Enterprise Networks will also typically include broadband connections to Carrier Networks for the broader communication of voice and/or data outside of the Enterprise. Enterprise Networks
are often classified into groups depending on their size and complexity. Typical categories are large Enterprise, data center switching, small-medium Enterprise ("SME"), small-medium business ("SMB"),
and small office home office ("SOHO"). Today, these networks are widely based on Ethernet technology. Similar to Carrier Networks, Enterprise Networks are going through an evolution to provide more
bandwidth, (i.e. more data at higher speeds) and more reliability, interoperability, and scalability. Enterprise Networks are migrating from fast 100 Mbps Ethernet to Gigabit Ethernet and from
Gigabit Ethernet to 10 Gigabit Ethernet. This transition is still in the early stages and expected to accelerate over the next several years. To address the growing complexity, enterprises are paring
down their multiple networks (telephone, LAN, video conferencing, wireless, and remote mirroring/backup) to a common Ethernet-based infrastructure. Ethernet technology being upgraded to meet these new
requirements, and is generally referred to as "Converged Enhanced Ethernet." The complexity of products within the Enterprise Networks varies substantially based on the product application. Products
at the "low-end" of the network, in SOHO, SME, and

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low-end
SME applications typically have fast design cycles in the order of six to 12 months and short life cycles, in the order of two to four years. Products sold into applications
at the "high-end" of Enterprise such as data center switching and high-end SME have longer design cycles, typically one to two years from design start to production and long
life cycles, typically three to five years or more. Vitesse provides a variety of products into Enterprise Networking applications. These generally include: (i) Ethernet MACs, Switches, and
Routers; (ii) Gigabit Ethernet Copper PHYs; (iii) Integrated Copper PHY and Switch products; and (iv) Signal Integrity products including Backplane Transceivers, CDRs and
Crosspoint Switches.

Non-Core

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

Intellectual Property

In fiscal year 2008, we began to leverage our substantial IP portfolio into licensing opportunities with third-parties. We offer a
variety of IP "cores" and design services in deep submicron, 130 nanometer (nm) and 65 nm process technologies. To date, our primary focus has been our Gigabit Ethernet Copper PHY and switch
technologies as well as high-speed PHYs and signal integrity "cores."

We
anticipate being able to exploit our many years of technology development by providing this technology to systems suppliers and other, non-competing semiconductor
suppliers in the form of IP via licensing arrangements. We believe we are in a unique position to supply such IP to other IC vendors as we are either the technology or low-power leader for
such intellectual property, or such IP is only available from IC vendors that are competing in the same markets as the companies looking for such IP. As a smaller, more focused and specialized IC
vendor, we are less likely to compete with those companies.

Fiscal Year 2010 Actions

On October 1, 2009, the Trustee of the 2024 Debentures provided a written notice to the Company that holders representing
$95.7 million of the principal amount of the 2024 Debentures had exercised their repurchase rights under the Indenture. Pursuant to the written notice, the Company was required to deposit the
repurchase price of $108.9 million with the Trustee as soon as practicable. As the Company had insufficient cash to repurchase the entire amount of 1.5% Convertible Subordinated Debentures due
2024 (the "2024 Debentures") tendered for repurchase it could not fulfill its legal responsibility to repurchase the debt which constituted an event of default under both the Indenture and the
$30.0 million financing with Whitebox (the "Senior Secured Loan Agreement," or "Senior Term Loan"). Accordingly, management of the Company completed a series of transactions with its Lenders to
restructure the Senior Term Loan and 2024 Debentures.

In
October 2009, Vitesse completed its debt restructuring transactions. The debt restructuring agreements resulted in the conversion of 96.7% of the Company's approximately
$110 million aggregate principal amount of the 2024 Debentures into a combination of cash, equity securities, and secured convertible debentures. With respect to the remaining 3.3% of those
convertible debentures, the Company settled its obligations in cash. Additionally, Vitesse has made cash payment of approximately $5 million of its $30 million Senior Term Loan, the
terms of which had been amended to facilitate the debt restructuring (See Note 4Debt in the accompanying consolidated financial statements).

We
held a special meeting of the shareholders on January 7, 2010 at which the shareholders approved the increase in the number of authorized shares of common stock from
500,000,000 to

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5,000,000,000.
This increase permits the conversion of the Company's 8.0% Convertible Second Lien Debentures Due 2014 into shares of common stock and provides available shares for other general
corporate purposes. In addition, the Company's shareholders also authorized the board of directors to affect a reverse stock-split when it is deemed appropriate. As of February 9, 2010, the
reverse stock-split has not been executed.

In
an effort to reduce costs and shorten manufacturing time, the Company eliminated test activities at the Camarillo, California location and outsourced testing to a third-party
facility. This restructuring plan was approved during October 2009 with implementation efforts starting immediately and full transition of testing to the third-party expected by the third quarter of
the fiscal year ending September 30, 2010. This restructuring plan included the termination of approximately 50 employees. In connection with this restructuring, the Company recorded
restructuring charges of approximately $0.7 million in the first quarter for severance costs to be incurred during the fiscal year ended September 30, 2010. The Company will not incur
costs for impairment of fixed assets or facilities as part of the restructuring plan.

Critical Accounting Policies and Estimates

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

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

Revenue Recognition, Sales Returns Reserve and Allowance for Doubtful Accounts

In accordance ASC Topic 605 Revenue Recognition ("ASC 605"); originally issued as SEC Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements,"as codified by SAB 104, "Revenue Recognition,"
("SAB 104"), we recognize product revenue when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred;
(iii) the price to the customer is fixed or determinable; and (iv) collection of the sales price is reasonably assured. Delivery occurs when goods are shipped and title and risk of loss
transfer to the customer, in accordance with the terms specified in the arrangement with the customer. Revenue recognition is deferred in all instances where the earnings process is incomplete. We
recognize revenue on goods shipped directly to customers at the time of shipping, as that is when title passes to the customer and all revenue recognition criteria specified above are met.

Vitesse
has a distribution network through which it sells approximately half of its products.. The Company recognizes revenue on a sell-through basis for all distributors,
utilizing information provided by the distributors. As of December 31, 2009, these distributors maintained inventory balances of $4.4 million, which are carried on the books of Vitesse,
and are given business terms to return a

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portion
of inventory and receive credits for changes in selling prices to end customers. At the time Vitesse ships inventory to the distributors, the magnitude of future returns and price adjustments
is not known. Therefore, revenue recognition for shipments to distributors does not occur until the distributors sell inventory to end customers. Payments received from distributors for inventory
shipped to them, in advance of the sale of that inventory to the end-user, are shown as deferred revenue. Vitesse personnel are often involved with the sales from the distributors to end
customers.

At
December 31, 2009, approximately 3.6% of our inventory is consigned and located with two customers. Consistent with our revenue recognition policy, we recognize revenue when
the customer pulls the inventory for use, as that is when title passes to the customer and all revenue recognition criteria specified above are met.

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

In
accordance with ASC 605, when licensing technology and other intangibles, revenue is not recognized until the four criteria are met. It is our customary practice is to have written
licensing agreements with agreed upon pricing arrangements, signed by both the customer and us. Delivery of technology and other intangibles is not deemed to occur until the license term begins. We
only enter into these agreements if collection of sales price is reasonably assured. Revenues from the licensing of technology and other intangibles are recognized in a manner consistent with the
nature of the transaction and related earnings process. Based on management's analysis of the license terms, and pursuant to the guidance in ASC 605, revenue related to the licensing of IP is deferred
until delivery has occurred and final acceptance of the contracted deliverables is received from the licensee.

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

We
also maintain an allowance for doubtful accounts for estimated losses resulting from customers' inability to meet their financial obligations to us. We evaluate the collectability of
accounts receivable on a monthly basis based on a combination of factors. The Company includes any accounts receivable balances that are determined to be uncollectible in the overall allowance for
doubtful accounts using the specific identification method. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Management believes the
allowance for doubtful accounts as of December 31, 2009 and September 30, 2009, is adequate. However, if the financial condition of any customer were to deteriorate, resulting in an
impairment of its ability to make payments, additional allowances could be required.

Inventory Valuation

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

We
write down our inventory for estimated obsolete or unmarketable inventory in an amount equal to the difference between the cost of inventory and the estimated market value based upon
assumptions about future demand and market conditions. If actual market conditions are less favorable

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than
our estimates, additional inventory write-downs may be required. In the event we experience unanticipated demand and are able to sell a portion of the inventory we have previously written down,
our gross margins will be favorably affected.

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

Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the
net tangible and intangible assets acquired. The amounts and useful lives assigned to intangible assets acquired, other than goodwill, impact the amount and timing of future amortization. The value of
intangible assets, including goodwill, can be impacted by adverse changes such as declines in operating results, a decrease in stock value, changes in the worldwide economy or a specific industry or a
failure to meet performance projections.

We
account for goodwill and other intangible assets in accordance with ASC Topic 350 IntangiblesGoodwill and Other ("ASC 350"); originally issued as SFAS No. 142,
"Accounting for Goodwill and Other Intangible Assets." We evaluate these assets, including purchased intangible assets deemed to have indefinite lives,
on an annual basis in the fourth quarter for goodwill, or more frequently, if we believe indicators of impairment exist or changes in circumstances indicate that the carrying value may not be
recoverable. Factors we consider important that could trigger an impairment review include significant underperformance to historical or projected operating results, substantial changes in our
business strategy, and significant negative industry or economic trends.

If
such indicators are present, we compare the fair value of the goodwill to its carrying value. Fair value of goodwill is determined by considering the Company's market capitalization,
discounted cash flows, and a market approach as of the valuation date. In considering the Company's market capitalization, an estimated premium to reflect the fair value on a control basis is applied.
This premium is estimated based on an evaluation of control premiums identifiable in comparable transactions.

For
other intangible assets and long-lived assets, in accordance with ASC Topic 360 Property, Plant, and Equipment ("ASC 360"); originally issued as SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," we determine whether the sum of the estimated undiscounted cash flows
attributable to each asset in question is less than its carrying value. If less, we recognize an impairment loss based on the excess of the carrying amount of the assets over
their respective fair values. Fair value of other intangible assets is determined by discounted future cash flows, appraisals, or other methods. Fair value of long-lived assets is
determined based on market value. If the long-lived asset determined to be impaired is to be held and used, we recognize an impairment charge to the extent the fair value attributable to
the asset is less than the asset's carrying value. The fair value of the long-lived asset then becomes the asset's new carrying value, which we amortize over the remaining estimated useful
life of the asset.

These
approaches use significant estimates and assumptions, including projection and timing of future cash flows, discount rates reflecting the risk inherent in future cash flows, and
long-term growth rates. It is reasonably possible that the estimates and assumptions used to value these assets differ from future actual results. If our actual results, or the estimates
and assumptions used in future impairment analyses, are lower than the original estimates and assumptions used to assess the recoverability of these assets, we could incur additional impairment
charges.

During
the quarter ended December 31, 2008, we identified changes in key factors indicating a possible impairment of the value of our goodwill. Notable indicators were
significantly depressed market conditions and industry trends, market capitalization below book value of equity and some downward revisions to our forecasts due to current economic conditions. These
continually changing market conditions made it difficult to project how long the current economic downturn would last. Declining market values negatively impacted our valuations, which were a
component of our goodwill

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impairment
tests. Based on this information we completed the first step of our goodwill impairment test and determined that additional impairment analysis was required by ASC 350.

The
second step of the goodwill impairment test compared the implied fair value of our Company's goodwill with the carrying amount of that goodwill. Since the carrying amount of goodwill
exceeded the implied fair value of that goodwill, an impairment loss was recognized in an amount equal to that excess. The implied fair value of goodwill was determined in the same manner as the
amount of goodwill recognized in a purchase business combination. The fair value was determined through an analysis of: (i) the market capitalization; (ii) comparable public company
valuations; and (iii) the future cash flows expected to be generated by the Company. The calculated fair value was then allocated to individual assets and liabilities (including any
unrecognized intangible assets) as if the Company had been acquired in a purchase business combination and the fair value of the Company was the purchase price paid to acquire the Company. In
performing this allocation, the fair values of the assets of the Company were calculated using generally accepted valuation methodologies, including analysis of: (i) the future cash flows
expected to be generated; (ii) the estimated market value; or (iii) the estimated cost to replace. Any variance in the assumptions used to value the assets and liabilities could have had
a significant impact on the estimated fair value of the assets and liabilities and consequently the amount of identified goodwill impairment. As a result of the additional analyses performed, we
recorded an impairment charge to fully write-off our goodwill balance of $191.4 million for the quarter ended December 31, 2008.

Other
intangible assets, which consist primarily of technology and purchased intellectual property, are amortized over their estimated useful lives. The remaining lives of these assets
range from less than one year to three years. As required by ASC 360 we verified our long-lived assets were not impaired as of the time of the goodwill impairment.

Valuation of Repurchase Right on Subordinated Debentures

In accordance with ASC Topic 815 Derivatives and Hedging ("ASC 815") originally issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," embedded derivatives must be bifurcated from the underlying debt instrument and valued
as a separate financial instrument. Our 2024 Debentures included a repurchase right for 113.76% of the principal amount of the 2024 Debentures on October 1, 2009 (the "premium put" or
"derivative liability") that we identified as an embedded derivative requiring bifurcation and accounting at fair value because the economic and contractual characteristics of the premium put meet the
criteria for separate accounting as set forth in ASC 815. Should the premium put have value, any gain or loss on the fair value of the premium put will be reflected in current earnings. We estimate
the approximate fair value of the premium put as the difference between the estimated value of the 2024 Debentures with and without the premium put feature. The fair value of the 2024 Debentures with
the embedded premium put feature was estimated using a scenario analysis that incorporated the investment and settlement alternatives available to the debt holders in connection with the premium put
feature. The scenario analysis valuation model combined expected cash outflows with market-based assumptions and an estimate of the probability of each scenario occurring. The fair value of the 2024
Debentures without the embedded premium put feature was estimated using a convertible bond valuation model within a lattice framework. The convertible bond valuation model combined expected cash
outflows with market-based assumptions regarding risk-adjusted yields, stock price volatility and recent price quotes and trading information regarding shares of our common stock into
which the 2024 Debentures are convertible. Our analysis was premised on the assumption that the holder would act in a manner that maximizes the potential return, or "payoff", at any given point in
time. Included in this premise was the assumption that the holder would compare the potential return associated with each available alternative, including, as specified in the terms of the contract,
holding the debt instrument, exercising an equity conversion option, or exercising a put option. As a component of this, we incorporated a market participant

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consideration
as to the Company's capacity to fulfill the contractual obligations associated with each alternative, including the Company's ability to fulfill any cash settlement obligation associated
with exercise of the put option, as well as the Company's ability to refinance the contractual obligation. Based on our analysis, we determined that the fair value of the premium put was most
sensitive to the estimated amount of funds available for settlement of the liability on October 1, 2009. More specifically, fair value of the premium put was positively correlated to the
estimated amount of cash proceeds and other securities expected to be received at exercise. The result of our valuation analysis was that premium put was estimated to have $12.2 million fair
value as of September 30, 2009 and no fair value as of September 30, 2008. The fair value of the premium put was measured using Level 3 inputs. The primary driver of the change in
fair value between these dates was an increase in the amount of funds, both cash and other securities, available for settlement between the measurement dates. Upon exercise of the put option related
to the 2024 Debentures on October 1, 2009, the liability associated with the
premium put was recorded at $13.3 million representing the contractual amount owed to the debenture holders upon exercise of the put. The premium put liability was included as a component of
the Conversion Agreement that was consummated on October 30, 2009. As a result, the premium put was no longer a liability as of the Company as of December 31, 2009.

Valuation of Compound Embedded Derivative related to Subordinated Debentures

In accordance with ASC Topic 815 Derivatives and Hedging ("ASC 815"), originally issued as SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", embedded derivatives must be bifurcated from the underlying debt instrument and valued
as a separate financial instrument. Management evaluated the terms and features of the 8.00% Convertible Second Lien Debentures Due 2014 (the "2014 Debentures") and identified an embedded derivative
(the "compound embedded derivative" or "derivative liability") requiring bifurcation and accounting at fair value because the economic and contractual characteristics of the compound derivative meet
the criteria for separate accounting as set forth in ASC 815. Should the compound derivative have value, any gain or loss on the fair value of the compound derivative will be reflected in current
earnings. The compound embedded derivative is comprised of the terms of the 2014 Debentures which provide for a Make-Whole payment in certain circumstances and permits the Noteholders to
demand redemption of the 2014 Debentures at a cash price equal to the 2014 Debentures on an as-if-converted basis in the event that 50% or more of the Company's common stock is
exchanged for, converted into, or acquired for consideration which is less than 90% of the outstanding common stock. This redemption feature is, in substance, a conversion settlement right where the
holders could require the Company to settle in cash. We estimated the approximate fair value of the compound derivative as the difference between the estimated value of the 2014 Debentures with and
without the compound derivative features. The fair value of the 2014 Debentures was estimated using a convertible bond valuation model within a lattice framework. These valuations were determined
using Level 3 inputs. The convertible bond valuation model combined expected cash outflows with market-based assumptions regarding risk-adjusted yields, stock price volatility and
recent price quotes and trading information regarding shares of our common stock into which the 2014 Debentures are convertible. Our analysis was premised on the assumption that the holder would act
in a manner that maximizes the potential return, or "payoff", at any given point in time. Included in this premise was the assumption that the holder would compare the potential return associated with
each available alternative, including, as specified in the terms of the contract, holding the debt instrument, exercising an equity conversion option, or exercising a put option. On October 30,
2009, the fair value of the bifurcated compound derivative was $28.0 million. The compound embedded derivative will be valued at each reporting period, with the change in the fair value
reflected in the Statement of Operations. At December 31, 2009, the fair value of the compound embedded derivative is $35.1 million. The $7.1 million increase in the fair value is
reflected as interest expense in the accompanying Statement of Operations.

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Accounting for Share-Based Compensation

ASC 718 requires all share-based payments, including grants of stock options and employee stock purchase rights, to be recognized in
our financial statements based on their respective grant date fair values. Under this standard, the fair value of each employee stock option and employee stock purchase right is estimated on the date
of grant using an option-pricing model that meets certain requirements.

ASC
718 requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is
ultimately expected to vest is recognized as expense ratably over the requisite service periods. We have estimated the fair value of each award as of the date of grant using the Black-Scholes option
pricing model, which was developed for use in estimating the value of traded options that have no vesting restrictions and that are freely transferable. The Black-Scholes model considers, among other
factors, the expected life of the award and the expected volatility of the Company's stock price. Although the Black-Scholes model meets the requirements of ASC 718, the fair values generated by the
model may not be indicative of the actual fair values of our awards, as it does not consider other factors important to those share-based payment awards, such as continued employment, periodic vesting
requirements, and limited transferability. Because the share-based compensation expense recognized in the statements of operations for the periods ended December 31, 2009 and 2008 is based on
awards ultimately expected
to vest, it has been reduced for estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ
from those estimates. Changes in forfeitures from the estimates made at grant date could result in more or less non-cash compensation expense in comparable periods.

Income Taxes

The Company accounts for income taxes using ASC Topic 740 Income Taxes ("ASC 740"); originally issued as SFAS No. 109,
"Accounting for Income Taxes." Under ASC 740, income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and
operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company adopted ASC 740 on October 1, 2007 and assessed the impact of ASC 740 on its financial statements and determined that no adjustment to retained earnings was necessary.

The
Company maintains a valuation allowance on the deferred tax assets for which it is more likely than not that the Company will not realize the benefits of these deferred tax assets in
future tax periods. The valuation allowance is based on estimates of future taxable income by tax jurisdiction in which the Company operates, the number of years over which the deferred tax assets
will be recoverable, and scheduled reversals of deferred tax liabilities. ASC 718 allows the benefit related to deductible temporary differences attributable to non-qualified stock options
to be credited to additional paid-in-capital when realized. Because the Company is in a net operating loss position as of the year ended September 30, 2009 and the
quarter ended December 31, 2009 it may not recognize a benefit arising from non-qualified stock options for those respective periods.

In
assessing the realizability of deferred tax assets, management considers, on a periodic basis, whether it is more likely than not, that some portion or all of the deferred tax assets
will not be realized. As of September 30, 2009 and December 31, 2009, management has placed a valuation allowance against all deferred tax assets based on its overall assessment of the
risks and uncertainties.

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Accordingly,
management believes the current valuation allowance on deferred tax assets is sufficient and properly stated at September 30, 2009 and December 31, 2009.

Research and Development

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

Impact of Recent Accounting Pronouncements

In June 2009, the FASB issued ASC Topic 105 Generally Accepted Accounting Principles ("ASC 105"); originally issued as SFAS
No. 168 "The FASB Accounting Standards Codification and Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement
No. 162." ASC 105 establishes the FASB Standards Accounting Codification ("Codification") as the source of authoritative U.S. GAAP recognized by the FASB to be
applied to nongovernmental entities and rules and interpretive releases of the SEC as authoritative GAAP for SEC registrants. The Codification will supersede all the existing non-SEC
accounting and reporting standards upon its effective date and subsequently, the FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force
Abstracts. ASC 105 also replaces FASB Statement No. 162, "The Hierarchy of Generally Accepted Accounting Principles," given that once in effect,
the Codification will carry the same level of authority. ASC 105 is effective for financial statements issued for interim and annual periods ending after September 15, 2009, which includes our
fiscal year ended September 30, 2009. The adoption of this statement did not have a material impact on our results of operations, financial position or cash flows.

In
December 2007, the FASB issued ASC Topic 805 Business Combinations ("ASC 805"); originally issued as SFAS No. 141R,"Business
Combinations."ASC 805 establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed and any non-controlling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business
combination and determines what information to disclose to enable users of financial statements to evaluate the nature and financial effects of the business combination. ASC 805 is effective for
financial statements issued for fiscal years beginning after December 15, 2008. Accordingly, ASC 805 is applicable to the Company's accounting for business combinations closing on or after
October 1, 2009. We expect ASC 805 will have an impact on our consolidated financial statements, but the nature and magnitude of the specific effects will depend upon the nature, terms and size
of the acquisitions we consummate after the effective date of October 1, 2009. The adoption of this statement did not have a material impact on our results of operations, financial position or
cash flows during the year ended September 30, 2009.

In
December 2007, the FASB issued ASC Topic 810 Consolidation ("ASC 810"); originally issued as SFAS No. 160,"Non-controlling Interests in
Consolidated Financial Statementsan amendment of ARB No. 51."ASC 810 addresses the accounting and reporting standards for ownership interests in
subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the non-controlling interest, changes in a parent's ownership
interest, and the valuation of retained non-controlling equity investments when a subsidiary is deconsolidated. We adopted ASC 810 for our quarter ended December 31, 2009. The
adoption of this statement did not have an impact on our results of operations, financial position or cash flow.

In
May 2008, the FASB issued ASC Topic 470 Debt ("ASC 470"); originally issued as FASB Staff Position APB 14-1, "Accounting for Convertible
Debt Instruments That May Be Settled in Cash upon

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Conversion (Including Partial Cash Settlement)." ASC 470 requires us to separately account for the liability and equity components of a convertible debt security by measuring
the fair value of a similar nonconvertible debt security when interest cost is recognized in subsequent periods. ASC 470 requires us to retroactively separate the liability and equity components of
such debt in our consolidated balance sheets on a fair value basis. ASC 470 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2008.
The adoption of this statement did not have an impact on our results of operations, financial position or cash flows during the quarter ended December 31, 2009.

In
June 2008, the FASB ratified ASC Topic 815 Derivatives and Hedging ("ASC 815"); originally issued as Emerging Issues Task Force ("EITF") Issue No. 07-5,
"Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an Entity's Own Stock." ASC 815 provides that an entity should use a two step
approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument's contingent exercise and the instrument's
settlement provisions. ASC 815 clarifies the impact of foreign currency denominated strike prices and market-based employee stock option valuation instruments on the evaluation. ASC 815 is
effective for the financial statements issued for fiscal years and interim periods within those fiscal years beginning after December 15, 2008. The adoption of this statement did not have an
impact on our results of operations, financial position or cash flows during the quarter ended December 31, 2009.

Other
recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants or the SEC did not or are not
believed by management to have a material impact on the Company's present or future consolidated financial statements.

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Results of Operations for the Three Months Ended December 31, 2009 compared to the Three Months Ended December 31, 2008

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

Three Months
Ended
December 31,2009

2008Revenues


100.0
%

100.0
%Costs and expenses:Cost of revenues


45.9
%

45.1
%Engineering, research and development


28.7
%

23.3
%Selling, general and administrative


25.3
%

20.9
%Accounting remediation & reconstruction expense & litigation costs


0.2
%

3.9
%Goodwill impairment


0.0
%

384.3
%Amortization of intangible assets


0.6
%

0.6
%Costs and expenses


100.7
%

478.1
%Loss from operations


(0.7
)%

(378.1
)%Other income (expense):Interest expense, net


(24.5
)%

(2.3
)%Loss on extinguishment of debt


(51.8
)%

0.0
%Other income, net


0.2
%

0.3
%Other income (expense), net


(76.1
)%

(2.0
)%Loss before income tax expense and minority interest in earnings of consolidated subsidiary


(76.8
)%

(380.1
)%Income tax expense


4.5
%

1.3
%Net loss


(81.3
)%

(381.4
)%Less: net loss attributable to noncontrolling interest


0.0
%

(0.0
)%Fair value adjustment of Preferred StockSeries B


0.3
%

0.0
%Net loss available to common shareholders


(81.6
)%

(381.4
)%


Product Revenues

We classify our IC products into three categories: (i) Carrier Networking Products; (ii) Enterprise Networking Products;
and (iii) Non-Core Products. The Carrier Networking Products line services core, metro, and access networks, also known as Carrier Networks. Our products are focused on enabling
Ethernet data services to be deployed more broadly across these networks. The Enterprise Networking Products line services the market for Ethernet switching and transmission within Local Area Networks
in Small-Medium-Business and Enterprise (SMB/SME) markets. Non-Core Products are those product

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lines
where we have chosen to exit markets and no longer continue to invest. The following tables summarize our net product mix by product line.

Three Months Ended
December 31, 2009

Three Months Ended
December 31, 2008Amount

% of Net
Revenues

Amount

% of Net
Revenues

Change

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

$
19,188


46.1
%
$
18,853


42.1
%
$
335


1.8
%Enterprise Networking Products


18,117


43.5
%

15,946


35.6
%

2,171


13.6
%Non-Core Products


4,306


10.4
%

10,011


22.3
%

(5,705
)

(57.0)
%Product Revenues

$
41,611


100.0
%
$
44,810


100.0
%
$
(3,199
)

(7.1)
%


Net
product revenues for the first quarter of fiscal 2010 were $41.6 million compared to $44.8 million for the same period in fiscal 2009. This decrease of
$3.2 million or 7.1% was driven primarily by overall weaker customer demand for our non-core products, primarily our Raid-on-Chip processor products as these
products ramp down towards end-of-life. Carrier Networking increased slightly to $0.3 million or 1.8%. Enterprise Networking increased $2.2 million or 13.6% due
to an increase in crosspoint switch and physical layer signal integrity product segments. Sales of Non-Core Products were down $5.7 million or 57.0% due to a strong decline in
Raid-on-Chip Processor products, Network Processor Products and legacy physical layer components. Our Non-Core Products are product lines that have had minimal
on-going investment over the prior three years and as a result have generally been in decline. We believe that these product lines are likely to be subject to more severe inventory control
and corrections by our customers.

Intellectual Property Revenues

December 31,2009

2008

Change(in thousands)

$

%Intellectual property revenues

$
40

$
5,000

$
(4,960
)




Intellectual
property revenues were $0.04 million and $5.0 million in the first quarter of 2010 and 2009, respectively. On December 28, 2007, the Company entered
into an arrangement to license intellectual property to a third-party. Specific deliverables to the licensee were defined in the agreement and required acceptance from the licensee. Under the
agreement, Vitesse received $15.0 million in license fees for the rights to certain products and technology. Of the fees, $10.0 million was recognized upon delivery and acceptance of the
licensed technology in the fourth quarter of 2008. The remaining $5.0 million was recognized upon the one-year anniversary of the agreement in the first quarter of 2009. No
royalties were received or recognized in the first quarter of 2010.

In
2008, we began to leverage our substantial intellectual property portfolio into licensing opportunities with third-parties. We offer a variety of IP "cores" and design services in
deep submicron, 130 nanometer (nm) and 65 nm, process technologies. To date, our primary focus in licensing our IP has been in our Gigabit Ethernet Cu PHY and switch technologies as well as
high-speed PHYs and signal integrity "cores."

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Cost of Revenues

December 31,2009

2008

Change(in thousands)

$

%Cost of revenues

$
19,103

$
22,447

$
(3,344
)

(14.9
)%Percent of net revenues


45.9
%

45.1
%


As
a fabless semiconductor company, we use third-parties (including TSMC, IBM, Chartered Amkor, ASAT, and ASE) for wafer fabrication and assembly services. Our cost of revenues consists
predominantly of: (i) purchased finished wafers; (ii) assembly services; and (iii) labor and overhead costs associated with product procurement and testing. It is customary in the
semiconductor industry for product prices to decline over time. Therefore, it is imperative that we continue to reduce our cost of revenues for mature products, by focusing our efforts on improving
operating efficiencies, including reducing the price of purchased materials, improving product yields and cycle times and reducing scrap.

Our
cost of revenues decreased from $22.4 million for the three months ended December 31, 2008 to $19.1 million for the same period in fiscal 2010, primarily due to
the correction of an error of $0.9 million which was identified in the first quarter of fiscal year 2010 and a reduction in product sales volume. As a percentage of net revenues, our cost of
revenues were 45.9% in the first quarter of fiscal 2010 compared with 45.1% in the first quarter of fiscal 2009, respectively. Excluding the correction of error, our cost of revenues were 48.1% in the
first quarter of fiscal 2010 compared with 45.1% in the first quarter of fiscal 2009. (See Note 1The Company and its Significant Accounting Policies).

There
was no cost of revenues associated with intellectual property licensing revenues of $0.04 million and $5.0 million in the quarters ended December 31, 2009 and
2008, respectively. As a percentage of sales, excluding IP revenue, cost of revenues were 45.9% in the first quarter of 2010 compared to 50.1% for the same period in 2009.

Engineering, Research and Development

December 31,2009

2008

Change(in thousands)

$

%Engineering, research and development

$
11,959

$
11,581

$
378


3.3
%Percent of net revenues


28.7
%

23.3
%


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

Engineering,
research and development expenses slightly increased $0.4 million or 3.3% in the first quarter of fiscal 2010 compared to the first quarter of fiscal 2009. The
increase is due to increase in compensation due to increased headcount associated with research and development.

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

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Selling, General and Administrative

December 31,2009

2008

Change(in thousands)

$

%Selling, general and administrative

$
10,529

$
10,419

$
110


1.1
%Percent of net revenues


25.3
%

20.9
%


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

In
the first quarter of fiscal 2010, selling, general and administrative expense was consistent with the first quarter of fiscal 2009. As a percentage of net revenues, selling, general
and administrative expense increased from 20.9% to 25.3%. During the quarter ended December 31, 2009, we incurred $0.9 million in non-capitalizable costs related to
negotiating the restructuring of our debt, which was successfully completed on October 30, 2009. In the first quarter of fiscal 2009, we recognized a gain on the sale of our Colorado building,
which offset selling, general and administrative expense for that period by $2.9 million. We did not have any similar transactions in the first quarter of fiscal 2010. In the first quarter of
fiscal 2010, we succeeded in reducing facilities, travel and supplies expenses by a total of $1.7 million due to our extensive cost reduction efforts. During the quarter, professional fees
decreased by $1.2 million compared to the same quarter of the prior year due to the transitioning of accounting and finance functions from contract employees to full-time staff.
Compensation related costs for the first quarter of fiscal 2010 decreased by $0.5 million compared to the same period in fiscal
2009 as a result of head count reductions during fiscal 2009. Sales related costs decreased by $0.3 million during the quarter due to lower operating results.

Accounting Remediation & Reconstruction Expense & Litigation Costs

December 31,2009

2008

Change(in thousands)

$

%Accounting remediation & reconstruction expense & litigation costs

$
73

$
1,949

$
(1,876
)

(96.3
)%Percent of net revenues


0.2
%

3.9
%


Accounting
remediation and reconstruction expense and litigation costs consisted of fees incurred to resolve certain legal issues, remediate control deficiencies, and transition
accounting and reporting responsibilities to full-time staff, in addition to the settlement of audits, investigations and lawsuits related to prior accounting periods. For the three months
ended December 31, 2009 and 2008, we recognized charges of $0.1 million and $1.9 million, respectively. These costs consist primarily of legal fees related to accounting
remediation work. These costs have decreased significantly since we have resolved certain legal issues, completed and filed all outstanding financial reports and transitioned accounting and reporting
responsibilities to full-time staff.

Goodwill Impairment

December 31,2009

2008

Change(in thousands)

$

%Goodwill impairment

$


$
191,418

$
(191,418
)

100.0
%Percent of net revenues


0.0
%

384.3
%


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During
the quarter ended December 31, 2008, we identified changes in key factors indicating a possible impairment of the value of our goodwill. Notable indicators were
significantly depressed market conditions and industry trends, market capitalization below book value of equity and some downward revisions to our forecasts due to current economic conditions.
Continually changing market conditions make it difficult to project how long the current economic downturn may last. Declining market values have negatively impacted our valuations which are a
component of our goodwill impairment tests. Upon completion of the first step of the impairment test for the quarter ended December 31, 2008, we determined that additional impairment analysis
was required by ASC 350; originally issued as SFAS 142.
The second step of the goodwill impairment test compared the implied fair value of our Company's goodwill with the carrying amount of that goodwill. Since the carrying amount of goodwill exceeded the
implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill
recognized in a purchase business combination. The fair value was determined through an analysis of: (i) the market capitalization; (ii) comparable public company valuations; and
(iii) the future cash flows expected to be generated by the Company. The calculated fair value is then allocated to individual assets and liabilities (including any unrecognized intangible
assets) as if the Company had been acquired in a purchase business combination and the fair value of the Company was the purchase price paid to acquire the Company. In performing this allocation, the
fair values of the assets and liabilities of the Company were calculated using generally accepted valuation methodologies, including analysis of: (i) the future cash flows expected to be
generated; (ii) the estimated market value; or (iii) the estimated cost to replace. Any variance in the assumptions used to value the assets and liabilities could have had a significant
impact on the estimated fair value of the assets and liabilities and, consequently, the amount of identified goodwill impairment. As a result of the additional analyses performed, we recorded an
impairment charge to fully write off our goodwill balance of $191.4 million for the quarter ended December 31, 2008. (See Note 3Goodwill in the accompanying financial
statements).

Amortization of Intangible Assets

December 31,2009

2008

Change(in thousands)

$

%Amortization of intangible assets

$
249

$
319

$
(70
)

(21.9
)%Percent of net revenues


0.6
%

0.6
%


Amortization
of intangible assets was $0.2 million in the first quarter of fiscal 2010, compared to $0.3 million for the same period in fiscal 2009. The amortization is
primarily related to our intellectual property licenses.

Interest Expense, net

December 31,2009

2008

Change(in thousands)

$

%Interest expense, net

$
10,220

$
1,130

$
9,090


804.4
%Percent of net revenues


24.5
%

2.3
%


Interest
expense, net of interest income, increased by $9.1 million from the first quarter of fiscal 2009 to $10.2 million in the first quarter of fiscal 2010. Included in
the $10.2 million is the interest expense of $1.1 million which was recorded on October 1, 2009 to reflect the fair value of the derivative liabilitypremium put
associated with the 2024 Debentures at the date the put option was exercised as well as $7.1 million related to the increase in the fair value of the embedded derivatives on

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the
2014 Debentures. No comparable expense was incurred during the three month period ended December 31, 2008. Effective October 30, 2009, the Company finalized negotiations with the
holders of 96.7% of the 2024 Debentures to settle the obligation, including all amounts owed under the derivative liability for the premium put option, with a combination of cash; shares of the
Company's common stock; shares of the Company's Series B Preferred stock; and 2014 Debentures (see
Note 4Debt in the accompanying financial statements). Interest on the 2014 Debentures is 8.0% per annum. Interest expense for the three months ended December 31, 2009 was
$0.9 million for the 2014 Debentures and 2024 Debentures. Interest expense for the three months ended December 31, 2008 was $0.4 million for the 2024 Debentures. The Company
recorded the 2014 Debentures at fair value of $40.3 million; the $9.7 million discount from the face value of the 2014 Debentures is being amortized as interest expense over the life of
the debentures. Interest expense, related to the amortization of the discount on the 2014 Debentures, for the three months ended December 31, 2009 was $0.3 million with no expense for
the comparable period ended December 31, 2008. In connection with issuing the 2014 Debentures, the Company incurred approximately $1.4 million in fees that are capitalized as debt issue
costs and being amortized as interest expense over the life of the respective debt instrument. Additional interest expense, related to the amortization of the debt issue costs, of $0.1 million
was recognized for the three months ended December 31, 2009 compared to the comparable period ended December 31, 2009. Interest expense on the Company's senior secured debt was
comparable for the periods ended December 31, 2009 and 2008.

Loss on Extinguishment of Debt

December 31,

Change2009

2008

$

%(in thousands)Loss on extinguishment of debt

$
(21,576
)
$


$
(21,576
)

100.0
%Percent of net revenues


(51.8
)%

0.0
%


Effective
October 30, 2009, the Company finalized negotiations with the Noteholders of the 2024 Debentures to settle the obligation, including all amounts owed under the
derivative liability for the premium put option, with a combination of cash; shares of the Company's common stock; shares of the Company's Series B Preferred stock; and a new Indenture for
$50.0 million face value of convertible bonds (see Note 4Debt in the accompanying financial statements). The Company recorded the new instruments issued in extinguishment of
the 2024 Debentures at fair value and recognized $21.6 million loss for the difference between the fair values of the new instruments and approximately $0.8 million of fees paid to the
creditors compared to the net carrying value of the 2024 Debentures. For the purposes of calculating this loss on extinguishment, the net carrying amount of the 2024 Debentures includes the
$96.7 million amount of the 2024 Debentures and $13.3 million of the premium put derivative, recorded at fair value as required by ASC 470.

Other Income, net

December 31,2009

2008

Change(in thousands)

$

%Other income, net

$
76

$
144

$
(68
)
(47.2)%Percent of net revenues


0.2
%

0.3
%


Other
income, net was $0.1 in the first quarters of fiscal 2010 and 2009. Other income for the quarter ended December 31, 2009 consisted primarily of an insurance settlement
received for water damage at one of our subsidiaries. For the period ended December 31, 2008, we recognized other income related to a gain on foreign exchange transactions.

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Income Tax Expense (Benefit)

December 31,2009

2008

Change(in thousands)

$

%Income tax (benefit) expense

$
1,878

$
650

$
1,228

188.9%Percent of net revenues


4.5
%

1.3
%


Income
tax expense was $1.9 million for the first quarter of fiscal 2009 compared to expense of $0.7 million for the first quarter of fiscal 2008. Income tax expense
represents primarily income tax on income not eligible for offset by federal, state or foreign loss carryforwards. The Company will be subject to limitations on the amount of loss carryforwards that
can be utilized to offset taxable income as a result of a Change in Ownership (see Note 4Debt and Note 6Income Taxes in the accompanying financial statements).

Noncontrolling Interest in Loss of Consolidated Subsidiary

December 31,2009

2008

Change(in thousands)

$

%Noncontrolling interest in loss of consolidated subsidiary

$


$
(1
)
$
1


100.0
%Percent of net revenues


0.0
%

(0.0
)%


A
noncontrolling interest in the operations of our consolidated joint ventures, the Vitesse Venture Fund, L.P. and the Vitesse Venture Fund, L.P. II (together, "the
Funds"), was recorded in the first quarter of fiscal 2009, representing the limited partners' interest in the Funds' operating expenses, including licensing and bank fees.

Fair Value Adjustment of Preferred StockSeries B

December 31,2009

2008

Change(in thousands)

$

%Fair value adjustment of Preferred StockSeries B

$
126

$


$
126


0.0
%Percent of net revenues


0.3
%

0.0
%


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On October 30, 2009, in connection with our debt restructuring, we issued 770,786 shares of Series B Preferred Stock, convertible into 100 shares of
common stock per each share of preferred stock. At the date of issuance, the Company did not have sufficient authorized common shares for the conversion of all of the issued preferred stock. As such,
the fair value of the preferred stock that could not be settled upon conversion through the issuance of common shares was recorded as temporary equity on the balance sheet with the fair value included
as a component of the loss on the extinguishment of debt.

As
of December 31, 2009, there were 44,533 preferred shares for which we did not have sufficient authorized common shares to issue upon conversion of the preferred shares. These
preferred shares were recorded as temporary equity in the mezzanine section of the balance sheet. These shares were measured at the fair value of the common stock they would be converted into at
December 31, 2009, which was $0.25 per share, with the change in fair value of $0.1 million from October 30, 2009 recorded to additional paid in capital during the quarter ended
December 31, 2009. In accordance with ASC 480, Distinguishing Liabilities from Equity, originally issued as EITF D-98, "Classification and Measurement of
Redeemable Securities" the change in the fair value of these shares reduces our net loss available to common shareholders in the calculation of earnings per share.

Liquidity

Cash and cash equivalents decreased to $35.6 million at December 31, 2009, from $57.5 million at
September 30, 2009, primarily as a result of the pay-down of the Senior Secured Loan of $5.0 million, repayment of a portion of the 2024 Debentures of $10.0 million
and approximately $6.0 million in legal and other fees to complete the debt restructuring transaction.

December 31,2009

2008(in thousands)Net cash (used in) provided by operating activities

$
(3,717
)
$
5,681Net cash (used in) provided by investing activities


(700
)

5,004Net cash used in financing activities


(17,539
)

Net (decrease) increase in cash and cash equivalents


(21,956
)

10,685Cash and cash equivalents at beginning of year


57,544


36,722Cash and cash equivalents at end of year

$
35,588

$
47,407


In
the three months ended December 31, 2009, our operating activities used $3.7 million in cash. Our net loss of $33.9 million for the three months ended
December 31, 2009 included non-cash charges of $20.8, million for the loss on extinguishment, $8.2 million in the change in the market value of the embedded derivative
liability, $0.9 million of depreciation and $0.7 million of stock-based compensation.

In
the three months ended December 31, 2008, our operating activities provided $5.7 million in cash. Our net loss of $190.0 million for the three months ended
December 31, 2008 included non-cash charges of $1.1 million of depreciation, $0.8 million of stock-based compensation, and $191.4 million of goodwill impairment
offset by the gain on the sale of the Colorado building for $2.9 million.

Accounts
receivable, net of allowance for sales return, increased $1.5 million from $11.4 million at September 30, 2009 to $12.8 million at
December 31, 2009. The increase is primarily due to higher sales from new direct customers. Inventories increased $0.6 million from $18.8 million at September 30, 2009 to
$19.4 million at December 31, 2009, as our channel partners and distributors took action to reduce their inventory in response to weaker demand. We were able to respond quickly to the
change in demand, reducing orders to our suppliers. As a result of the increase in inventory, accounts payable

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slightly
increased from $14.2 million to $14.4 million due to more orders placed with of our top suppliers.

Investing
activities used cash of $0.7 million in the three months ended December 31, 2009 for capital expenditures. Investing activities provided cash of
$5.0 million in the three months ended December 31, 2008, which was primarily the result of the proceeds from the sale of the Colorado building for $6.0 million, net of
commissions and transactions costs, partially offset by capital expenditures of approximately $0.9 million.

In
the three months ended December 31, 2009, our financing activities used $17.5 million. This is primarily due to a cash payment of $10.0 million to the holders of
2024 Debentures, $5.0 million to pay down the principal amount of the Senior Term Loan, equity issuance costs of $1.1 million and debt issuance costs of $1.4 million. (See
Note 4Debt in the accompanying consolidated financial statements).

On
October 30, 2009, we closed the debt restructuring transaction with our major creditors pursuant to which we issued approximately $50.0 million of 2014 Debentures (See
Note 4Debt in the accompanying consolidated financial statements). We believe that our available cash will be adequate to finance our operating needs and meet our obligations for
the next 12 months. Annual interest payments on the 2014 Debentures will be $4.0 million annually, an increase of $2.5 million over the annual interest payments on the 2024
Debentures. The first interest payment on the 2014 Debentures is due April 1, 2010.

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

As
part of the debt restructuring transactions, on October 30, 2009, the Company paid $10.1 million to repay a portion of the 2024 Debentures. The Company also incurred
approximately $6.0 million in legal and other fees to complete the transaction.

On
December 28, 2007, the Company entered into an arrangement to license IP to a third-party. The contract is a perpetual, nonexclusive, non-transferable, irrevocable
license for specified IP. As part of the contract, we were granted a perpetual, nonexclusive, non-transferable, irrevocable license to improvements to the technology made by the licensee,
subject to certain limitations. Under the agreement, Vitesse received $15.0 million in license fees and royalties for the rights to certain products and technology. Of the fees and royalty
payments, $10.0 million in fees was received upon delivery and acceptance of the licensed technology. The remaining $5.0 million of fees was received upon the one-year
anniversary of the agreement. For a period of seven years from the effective date of the contract, licensee will pay royalties on a per unit basis, on each commercial sale incorporating the licensed
products. Royalties will be accounted for when received. No royalties were received or recognized for the 12 months ended September 30, 2009 or the three months ended December 31,
2009.

Capital Resources, including Long-Term Debt, Contingent Liabilities and Operating Leases

Debt Restructuring

In October 2009, Vitesse completed its debt restructuring transactions. The debt restructuring agreements resulted in the conversion of
96.7% of the Company's 2024 Debentures into a combination

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of
cash, common stock, Series B Preferred Stock and 2014 Debentures. With respect to the remaining 3.3% of the 2024 Debentures, the Company settled its obligations in cash. Additionally,
Vitesse repaid approximately $5.0 million of its $30.0 million Senior Term Loan, the terms of which were amended as part of the debt restructuring transactions.

Under
the terms of the debt restructuring transactions, Vitesse:



At
the special meeting of our stockholders on January 7, 2010, the stockholders approved an increase in the number of authorized shares of common stock from 500,000,000 to
5,000,000,000 shares to permit the conversion of the 2014 Notes Debentures and to provide additional shares of common stock. This increase permits the conversion of the 2014Debentures Due 2014 into
shares of common stock and provides available shares for other general corporate purposes. In addition, the Company's shareholders also authorized the board of directors to affect a reverse
stock-split when it is deemed appropriate. As of February 9, 2010, the reverse stock-split has not been executed.

Contractual Obligations

Payment Obligations by Year<1 Year

1 - 3 Years

3 - 5 Years

>5 Years

TotalConvertible subordinated debt

$


$


$
50,000

$


$
50,000Long term debt





25,000








25,000Operating leases


3,104


5,914


2,809


199


12,026Inventory and related purchase obligations


3,645











3,645Software Licenses


7,019


9,385


3,200





19,604Total

$
13,768

$
40,299

$
56,009

$
199

$
110,275


As
of December 31, 2009, 2014 Debentures, with a face value of $50.0 million, are outstanding. Additionally, we have $25.0 million in long-term debt
under the Senior Term Loan. Payments with respect to the Senior Term Loan are interest only until the maturity date of October 29, 2011. Effective October 16, 2009, Company entered into
the an amendment of the Senior Term Loan to include 2.0% payment-in-kind interest ("PIK"), plus an additional 0.3% PIK interest for every $1.0 million above
$15.0 million of the senior term loan that is not paid down by the Company for the period from

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October 17,
2009 until maturity or full payment of the note. As part of the debt restructuring transactions, the Company paid $5.0 million of the original $30.0 million principal
balance of the Senior Term Loan. Subsequent to the $5.0 million prepayment- of the Senior Term Loan, the Company has the ability to reduce the rate of interest by 0.3% for every
$1.0 million of additional principal prepayment. The Company is incurring PIK interest of 5.0% on the $25.0 million balance at the time of the amendment. Assuming no additional principal
payments prior to the maturity of the note, the Company will have an additional obligation of $2.7 million to the holders of the Senior Term Loan. (See Note 4Debt in the
accompanying consolidated financial statements).

We
lease facilities under non-cancellable operating leases that expire through 2015. Approximate minimum rental commitments under all non-cancellable operating
leases as of December 31, 2009, are included in the table above.

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

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

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Cash Equivalents and Investments

Our cash and cash equivalents are not subject to significant interest rate risk due to the short maturities of these instruments. As of
December 31, 2009, the carrying value of our cash and cash equivalents approximated fair value because of the ready market for the cash instruments.

Foreign Currency Exchange Risk

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

ITEM 4.    CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We evaluated the design and operating effectiveness of our disclosure controls and procedures as of December 31, 2009, under the
supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, pursuant to Rule 13a-15(b) of the Exchange

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Act.
Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of December 31, 2009 our disclosure controls and procedures were not effective.

Management
has identified the following material weaknesses in our internal control over financial reporting:



Due
to the identified material weaknesses, management has concluded that the Company's internal control over financial reporting was not effective as of December 31, 2009.

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

During the quarter ended December 31, 2009, no other changes to our internal control over financial reporting were identified,
that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting. Based on the procedures performed as part of the Company's ongoing remediation
of its financial controls, management has concluded that as of December 31, 2009, certain material weaknesses were remediated.

During
our first quarter of fiscal 2010 we continued our ongoing remediation of financial controls. We are investing in ongoing efforts to continuously improve the control environment
and have committed considerable resources to the continuous improvement of the design, implementation, documentation, testing, and monitoring of our internal controls.

Remediation Plans

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

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Inherent Limitation on the Effectiveness of Internal Controls

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

PART II. OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

The information set forth under Note 8 of Notes to Unaudited Consolidated Financial Statements, included in Part I,
Item 1 of this Report, is incorporated herein by reference. For an additional discussion of certain risks associated with legal proceedings, see "Risk Factors" immediately below.

ITEM 1A.    RISK FACTORS

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



Risks Relating to Our Business

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

For the three months ended December 31, 2009, the Company had a net loss of $33.9 million, primarily due to the loss on
extinguishment of debt charge to record the loss in the debt exchange of $21.6 million. There can be no assurance that we will not have operating losses in future periods. 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. We expect that our operating
results will fluctuate in the future; we anticipate future losses from operations. Future fluctuations in operating results may also be caused by a number of factors, many of which are outside our
control. During the past two fiscal years, our annual and quarterly total revenues, net income and cash flows have fluctuated significantly as a result of fluctuations in our sales and licensing of
IP. Sales and licenses of our IP have very little associated incremental expense, which means that our quarterly results may fluctuate significantly depending upon the amount of sales and licenses of
IP, if any, we realize in a quarter. Additional factors that could affect our future operating results include the following:



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

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

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

Our operating results may be adversely impacted by worldwide political and economic uncertainties and specific conditions in the markets we address, including the cyclical
nature of and volatility in the semiconductor industry. As a result, the market price of our common stock may decline.

We operate primarily in the semiconductor industry, which is cyclical and subject to rapid change and evolving industry standards. From
time to time, the semiconductor industry has experienced significant downturns. These downturns are characterized by decreases in product demand, excess customer inventories and accelerated erosion of
prices. These factors could cause substantial fluctuations in our revenue and in our results of operations. Any downturns in the semiconductor industry may be severe and prolonged and any failure of
the industry or wired and wireless communications markets to fully recover from downturns could seriously impact our revenue and harm our business, financial condition and results of operations. The
semiconductor industry also periodically experiences increased demand and production capacity constraints, which may affect our ability to ship products. Accordingly, our operating results may vary
significantly as a result of the general conditions in the semiconductor industry, which could cause large fluctuations in our stock price.

Additionally,
recently general worldwide economic conditions have experienced a significant downturn due to slower economic activity, an increase in bankruptcy filings, concerns about
inflation and deflation, increased energy costs, decreased consumer confidence, reduced corporate profits and capital spending, adverse business conditions and liquidity concerns in the wired and
wireless communications markets, recent international conflicts and terrorist and military activity, and the impact of natural disasters and public health emergencies. These conditions make it
extremely difficult for our customers, our vendors and us to accurately forecast and plan future business activities, and they could cause U.S. and foreign businesses to slow spending on our products
and services, which would delay and lengthen sales cycles. We cannot predict the timing, strength or duration of any slowdown or subsequent recovery in the worldwide economy, the semiconductor
industry or the wired and wireless communications markets. If the economy or markets in which we operate do not return to

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historical
levels, our business, financial condition and results of operations will likely be materially and adversely affected. Additionally, the combination of our lengthy sales cycle coupled with
challenging macroeconomic conditions could have a negative impact on the results of our operations.

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

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

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

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

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

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

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

Sales to customers located outside the U.S. have historically accounted for a significant percentage of our revenue and we anticipate
that such sales will continue to be a significant percentage of our revenue. International sales constituted 59% and 49% of our net revenue in fiscal 2009 and 2008, respectively, and 57% for the
quarter ended December 31, 2009. Development and customer support operations located outside the U.S. have historically accounted for a significant percentage of our operating expenses and we
anticipate that such operations will continue to be a significant percentage of our expenses. International sales and operations involve a variety of risks and uncertainties, including risks related
to:



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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.

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

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



If
we are not able to develop and introduce new products successfully, our revenues and operating income will be materially and adversely affected. In particular, our revenue growth and
profitability could be impacted by substantial delays in introducing new products. Our success will also depend on the ability of our customers to successfully develop new products and enhance
existing products for the carrier and enterprise networking and storage markets. These markets may not develop in the manner or in the time periods that our customers anticipate. If they do not, or if
our customers' products do not gain widespread acceptance in these markets, our revenues and operating income may be materially and adversely affected.

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

Product introductions as well as future roadmap products are based on our expectations regarding market demand and direction. If our
expectations regarding market demand and direction are incorrect, the rate of development or acceptance of our current and next-generation solutions do not

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meet
market demand and customer expectation, the sales of our legacy or current carrier and enterprise networking and storage products decline more rapidly than we anticipate, or if the rate of
decline continues to exceed the rate of growth of our new products, it could negatively affect demand for our products, consolidated revenues, and profitability.

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

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

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

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

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

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



These
and other risks associated with our reliance on third-party wafer foundries could materially and adversely affect our revenues, cash flows, and relationships with our customers.
For example, the third-party foundries that manufacture our wafers have from time to time experienced manufacturing defects and reductions in manufacturing yields. In addition, disruptions and
shortages in wafer foundry

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capacity
may impair our ability to meet our customers' needs and negatively impact our operating results. Our third-party wafer foundries fabricate products for other companies and, in certain cases,
manufacture products of their own design. Historically, there have been periods in which there has been a worldwide shortage of wafer foundry capacity for the production of
high-performance integrated circuits such as ours. Instead of having long-term agreements with any of our third-party foundries, we instead subcontract our manufacturing
requirements on a purchase order basis. As a result, it is possible that the capacity we will need in the future may not be available to us on acceptable terms, if at all.

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

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

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

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

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

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

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

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personnel
with the requisite skills could restrict our ability to develop new products or enhance existing products in a timely matter, to sell products to customers, or to manage our business
effectively.

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

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

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

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

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

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

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

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

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

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

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

We rely on a combination of patent, copyright, trademark, and trade secret protections, as well as confidentiality agreements and other
methods, to protect our proprietary
technologies and processes. For example, we enter into confidentiality agreements with our employees, consultants, and business partners, and control access to and distribution of our proprietary
information. As of December 31, 2009, we had 87 U.S. patents and 17 foreign patents for various aspects of design and process innovations and have a number of pending U.S. and foreign patent
applications.

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



A
failure by us to meaningfully protect our intellectual property could have a materially adverse effect on our business, financial condition, operating results, and ability to compete,
including maintaining our competitive position in the market. In addition, effective patent, copyright, trademark, and trade secret protection may be unavailable or limited in certain countries. We
have begun to find opportunities to license our intellectual property. While this may provide a substantial business opportunity for us, it may also increase the potential for others to misappropriate
or infringe upon our intellectual property.

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

The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights. As is common in the
industry, from time to time, third parties have asserted patent, copyright, trademark, and other intellectual property rights to technologies that are important to our business and have demanded that
we license their patents and technology. To date, none of these claims has resulted in the commencement of any litigation against us, nor have we believed that it is necessary to license any of the
rights referred to in such claims. We expect, however, that we will continue to receive such claims in the future, and any litigation to determine their validity, regardless of their merit or
resolution, could be costly and divert the efforts and attention of our management and technical personnel. We have begun to find opportunities to license our intellectual property. While this

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may
provide a substantial business opportunity for the Company, it may also increase the potential for others to initiate claims against us. We cannot assure that we would prevail in such disputes
given the complex technical issues and inherent uncertainties in intellectual property litigation. If such litigation were to result in an adverse ruling we could be required
to:



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

Since 2006, we have had material weaknesses in our internal control over financial reporting and cannot provide assurance that additional material weaknesses will not be
identified in the future. If our internal control over financial reporting or disclosure control and procedures are not effective, there may be errors in our financial statements that could require a
restatement or our filings may not be timely and investors may lose confidence in our reported financial information, which could lead to a decline in our stock price.

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

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



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

In
fact, management's most recent evaluation of the design and operating effectiveness of our internal control over financial reporting identified material weaknesses resulting from
design and operating deficiencies in the internal control system, including that we did not maintain: (i) sufficient controls in information systems limiting access to key applications and
data; and (ii) effective controls over inventory, including lack of accuracy and basis for valuation resulting in adjustments to the amount of cost of revenues and the carrying amount of
inventory. Management is committed to remediating these material weaknesses.

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Risks Relating to our Capital Structure

Our shareholders holding shares purchased prior to October 30, 2009 will experience significant dilution in connection with the conversion of our Series B
Preferred Stock and our 8.0% Convertible Second Lien Debentures Due 2014.

We currently have approximately 403.0 million shares of common stock outstanding. In connection with the October 30, 2009
debt restructuring transaction we issued approximately 771,000 shares of our Series B Preferred Stock that are convertible into an aggregate of approximately 77.1 million shares of our
common stock. In addition, full conversion of the currently outstanding principal amount of the 2014 Notes would result in the issuance of approximately 222.2 million shares of common stock.
The holders of the 2014 Notes have the right to receive a
maximum of approximately 125 million additional shares of common stock upon conversion in connection with certain change of control events, depending upon the timing of the change of control
event and the trading price of our common stock at the time of such change of control event. The conversion of our shares of Series B Preferred Stock and the conversion of our 2014 Notes could
have a significant dilutive impact on the ownership rights of our shareholders.

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

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

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

The former holders of our convertible subordinated debentures due 2024 continue to have significant influence over us and could act in a manner with which other stockholders
may disagree or that is not necessarily in the interests of other stockholders.

On October 30, 2009, the holders of the our 2024 Debentures exchanged their 2024 Debentures for shares of our common stock and
in some cases shares of Series B Preferred Stock as well as the 2014 Debentures. As a result, as of December 31, 2009 these holders owned approximately 42.8% of our outstanding common
stock and all of our Series B Preferred Stock. Even though these former debenture owners own less than a majority of our outstanding common stock, they have significant influence over all
matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets. For as long as these former
holders of the 2024 Debentures also own the 2014 Debentures, they may have interests that are different from those of other stockholders who do not simultaneously own 2014 Debentures. For

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example,
these former holders of the 2024 Debentures they may support proposals and actions with which other stockholders may disagree or which are not in their interests. In addition, their combined
ownership of common stock, Series B Preferred Stock and 2014 Debentures could motivate them to support a sale of the Company at a price that is not attractive to many of our shareholders.
Furthermore, the concentration of ownership could delay or prevent a change in control of us or otherwise discourage a potential acquirer from attempting to obtain control of us, which in turn could
reduce the price of our common stock.

Our certificate of incorporation and bylaws and Delaware law contain provisions that could discourage a third party from acquiring us and consequently decrease the market
value of an investment in our common stock.

Our certificate of incorporation and bylaws and Delaware corporate law each contain provisions that could delay, defer or prevent a
change in control of our company or changes in our management. Among other things, these provisions:



These
provisions could discourage proxy contests and make it more difficult for our stockholders to elect directors and take other corporate actions, which may prevent a change of
control or changes in our management that a stockholder might consider favorable. In addition, Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change in
control of us. Any delay or prevention of a change in control or change in management that stockholders might otherwise consider to be favorable could cause the market price of our common stock to
decline.

ITEM 2.    UNREGISTERED SALES OF EQUITY AND USE OF PROCEEDS

None.

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE BY SHAREHOLDERS

On January 7, 2010, Vitesse Semiconductor Corporation (the "Company") held a Special Meeting of Stockholders (the "Special
Meeting"). At the close of business on the November 10, 2009 record date, 403,841,802 shares of Common Stock were outstanding and entitled to vote. At the Special Meeting, 361,675,786 or 89.56%
of the outstanding shares of Common Stock entitled to vote were represented by proxy or in person. The following proposals were voted upon and approved by the stockholders.

Proposal
1Increase the number of authorized shares of the Company's common stock from 500,000,000 to 5,000,000,000

Votes For

Votes
Withheld

Abstentions

Broker
Non-Votes239,706,829

10,525,814

687,304

110,755,839


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Votes For

Votes
Withheld

Abstentions

Broker Non-Votes336,543,106

23,768,254

1,364,426




ITEM 5.    OTHER INFORMATION

None.

ITEM 6.    EXHIBITS

2.1

Purchase and Sale Letter Agreement, dated October 29, 2007 between the Company and Maxim Integrated Products, Inc. (Incorporated by reference to Exhibit 10.2 to the Company's Form 8-K filed
August 29, 2007).3.1

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

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

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

Warrant Registration Rights Agreement, dated January 25, 2007. (Incorporated by reference to Exhibit 10.2 to the Company's Form 8-K filed January 31, 2007).4.3

Certificate of Designation with respect to Series B Participating Convertible Non-Cumulative Preferred Stock (Incorporated by reference to Exhibit 4.3 to the Company's Form 8-K filed October 30,
2009).4.4

Indenture between the Company and U.S. Bank National Association, as Trustee, dated as of October 30, 2009 (Incorporated by reference to Exhibit 4.1 to the Company's Form 8-K filed October 30,
2009).4.5

Form of 8.0% Convertible Second Lien Debentures Due 2014 (included in Exhibit 4.4)4.6

Guaranty, dated October 30, 2009, executed by Vitesse Manufacturing & Development Corporation and Vitesse Semiconductor Sales Corporation in favor of U.S. Bank National Association, as Trustee, under the
Indenture dated September 22, 2004, governing the Company's 8.0% Convertible Second Lien Debentures Due 201410.1

Change in Control Agreement between the Company and Michael Green dated February 25, 2009. (Incorporated by reference to Exhibit 10.3 to the Company's Form 8-K filed February 26, 2009).10.2

Employment Agreement between the Company and Richard Yonker dated February 20, 2009. (Incorporated by reference to Exhibit 10.2 to the Company's Form 8-K filed February 26, 2009).10.3

Amended and Restated Employment Agreement between the Company and Christopher Gardner dated February 25, 2009. (Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed February 26,
 2009).


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10.4

Letter Agreement, dated October 26, 2007 between the Company and Dr. Martin C. Nuss (Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed November 20, 2007).10.5

Form of Indemnity Agreement between the directors and the Company. (Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed August 22, 2007).10.6

Loan Agreement, dated August 23, 2007 between the Company and Whitebox VSC, Ltd. (Incorporated by reference to Exhibit 10.3 to the Company's Form 8-K filed August 29, 2007).10.7

First Amendment to Loan Agreement, dated as of October 16, 2009, among Vitesse Semiconductor Corporation, the Lenders named therein and Whitebox VSC Ltd., as agent (Incorporated by reference to
Exhibit 10.4 to the Company's Form 8-K filed October 20, 2009).10.8

Term Note, dated October 29, 2007 between the Company and Whitebox VSC, Ltd. for $30 million. (Incorporated by reference to Exhibit 4.1 to the Company's Form 8-K filed October 31,
2007).10.9

Debt Conversion Agreement, dated October 16, 2009, by and among the Company and AQR Absolute Return Master Account, L.P., Aristeia Master, L.P., Aristeia Partners, L.P., CNH Master Account,
 L.P., Linden Capital L.P., Whitebox Advisors, LLC, Tonga Partners, L.P., Tonga Partners QP, L.P., Anegada Master Fund, LTD., Cuttyhunk Master Portfolio and ABN AMRO Bank N.V. (Incorporated by reference to
Exhibit 10.1 to the Company's Form 8-K filed October 20, 2009).10.10

Form of Lock-Up Agreement, dated October 16, 2009, by and among the Company and the beneficial owners of 1.5% Convertible Subordinated Debentures due 2024 (Incorporated by reference to Exhibit 10.6 to the
Company's Form 8-K filed October 20, 2009).10.11

Intellectual Property, Assignment and License Agreement, dated October 29, 2007 between the Company and Maxim Integrated Products, Inc. (Incorporated by reference to Exhibit 10.1 to the Company's
Form 8-K filed October 31, 2007).10.12

Sale and Purchase Agreement, dated June 30, 2009, between the Company and a third-party purchaser (portions of this exhibit have been omitted pursuant to a request for confidential treatment) (Incorporated by
reference to Exhibit 10.11 to the Company's Form 10-Q filed August 10, 2009).10.13

Vitesse Semiconductor Corporation Amended and Restated 2001 Stock Incentive Plan as of September 4, 2009 (Incorporated by reference to Exhibit 10.13 to the Company's Form 10-K/A filed January 28,
2010).10.14

Form of Notice of Grant of Stock Options and Option Agreement (Incorporated by reference to Exhibit 10.14 to the Company's Form 10-K/A filed January 28, 2010).10.15

Form of Notice of Grant of Restricted Stock Units and RSU Agreement (Incorporated by reference to Exhibit 10.15 to the Company's Form 10-K/A filed January 28, 2010).10.16
*
Vitesse Semiconductor Corporation Fiscal Year 2010 Executive Bonus Plan, dated as of January 7, 2010 (portions of this exhibit have been omitted pursuant to a request for confidential treatment).31.1
*
Rule13a-14(a) / 302 SOX Certification of Chief Executive Officer.31.2
*
Rule13a-14(a) / 302 SOX Certification of Chief Financial Officer.32.1
*
Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer.


*Filed
herewith.Executive
Compensation Plan or Agreement


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Executive Compensation Plan or AgreementSIGNATURE

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.

February 9, 2010

VITESSE SEMICONDUCTOR CORPORATIONBy:

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

VITESSE SEMICONDUCTOR CORPORATIONBy:

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


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