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

FORM 10-K
ANNUAL REPORT

(Mark One)ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended September 30, 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(Address of principal executive offices)

93012(Zip Code)


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

Securities
registered pursuant to Section 12(b) of the Act: NONE

Securities
registered pursuant to Section 12(g) of the Act: Common Stock, Par Value $0.01

Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. YES o    NO ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. YES o    NO ý

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this
chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" 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

As of March 31, 2009, the aggregate market value of the voting and non-voting common equity held by non-affiliates was $54,169,320,
based on the closing price on that date. As of December 11, 2009 there were 403,841,802 shares of the registrant's $0.01 par value common stock outstanding.



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VITESSE SEMICONDUCTOR CORPORATION

2009 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS



PART I.Item 1.

Business


1Item 1A.

Risk Factors


18Item 1B.

Unresolved Staff Comments


28Item 2.

Properties


28Item 3.

Legal Proceedings


28Item 4.

Submission of Matters to a Vote of Security Holders


30PART II.Item 5.

Market for Company's Common Stock and Related Condition and Results of Operations


31Item 6.

Selected Financial Data


33Item 7.

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


34Item 7A.

Quantitative and Qualitative Disclosures About Market Risk


73Item 8.

Financial Statements and Supplementary Data


73Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure


121Item 9A.

Controls and Procedures


122PART III.Item 10.

Directors, Executive Officers and Corporate Governance


127Item 11.

Executive Compensation


127Item 12.

Security Ownership of Certain Beneficial Owners and Management


127Item 13.

Certain Relationships, Related Transactions, and Director Independence


127Item 14.

Principal Accountant Fees and Services


127PART IV.Item 15.

Exhibits and Financial Statement Schedules


127Signatures


132


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PART I

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

The Business section and other parts of this Annual Report on Form 10-K (this "Annual
Report") contain forward-looking statements that involve risks and uncertainties. Many of the forward-looking statements are located in "Management's Discussion and Analysis of Financial Condition and
Results of Operations." Forward-looking statements provide current expectations of future events based on certain assumptions and include any statements that do not directly relate to any historical
or current fact. Forward-looking statements can also be identified by words such as "anticipates," "believes," "estimates," "expects," "intends," "plans," "predicts," and similar terms.
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.

ITEM 1.    BUSINESS

Overview

Vitesse Semiconductor Corporation ("Vitesse" or the "Company") is a leading provider of advanced 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 September 30, 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.

Industry BackgroundCommunications Industry

The past decade experienced dramatic growth in traffic in public and private communications networks, such as those used by
long-distance and local
exchange service providers, as well as specialized networks, such as those used by Internet service providers. This growth has been driven by rapid adoption of data-intensive applications
such as Internet access, e-commerce, e-mail, Voice-over-Internet-Protocol ("VoIP"), video conferencing, Internet Protocol Television ("IPTV"), and the
movement of large blocks of stored data across networks. We expect the pace of this growth in bandwidth and the related deployment of new services to continue in the future. As a result, telecom
service providers and Enterprises are facing the need to evolve their networks to support these new services. In addition, the growth of the Internet has created the need to manage, move, and store
increasing amounts of mission-critical information. This has led to increasing demand for data storage systems and changes in the way companies are interconnecting these systems.

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To
address these challenges, communications service providers (i.e., Carriers) and Enterprises have begun to deploy equipment that is capable of more efficiently handling and
transporting the various types of traffic required by these new services. They are also upgrading their infrastructure to serve the variety of unique communications standards and protocols that
deliver and process data. Increasingly, these new applications and services are delivered using Ethernet and Internet Protocol technologies.

Carrier Networking

The telecommunications service provider Carrier network, which includes networks delivering voice and data communication services to
business customers as well as voice, data, and video services to residential customers ("triple play"), has grown dramatically into a complex combination of interconnected networks. These networks are
often classified into groups such as Wide Area Networks ("WANs"), Metropolitan Area Networks ("MANs"), Multi-Service Access Networks ("MSANs"), and Radio Access Networks ("RANs") for wireless
communication services. These evolving networks must deliver more bandwidth, and increasingly, data-based capabilities to provide improved average revenue per user ("ARPU"). These
requirements are forcing service providers to make substantial capital investments to significantly expand their network coverage and upgrade their service offerings.

Since
the 1990's, the Synchronous Optical Network ("SONET/SDH") has been the standard network transport protocol for high-speed transmission of communication over optical
fiber throughout the world. Originally developed for the voice network prior to the advent of the Internet, SONET/SDH networks are limited in their ability to provide low-cost, flexible
transport of data-based services such as Internet traffic and video.

Over
the last several years, in an effort to address the demand for new data-based services, service providers have started to deploy next-generation SONET/SDH
networks using an enhanced Ethernet-over-SONET/SDH ("EoS") based technology. These next-generation SONET/SDH networks enable Ethernet, the primary protocol used in
Local Area Networks ("LANs"), to be embedded inside the SONET/SDH protocol, so they can be efficiently transported over Wide Area Carrier Networks. EoS has become a major technology driver in Carrier
networks by providing a simple evolutionary path for service providers to enable more Ethernet-based data services while extending their existing investment in SONET/SDH infrastructure. The transition
from SONET/SDH to next-generation SONET/SDH networks started several years ago and we expect it to continue for at least the next five years as Carriers slowly evolve their installed base
of SONET/SDH in Carrier networks.

With
exponential increases in data traffic over the last several years, data has become the dominant traffic over all networks. To address this need, the industry is developing new
standards that will enable the deployment of Ethernet-based technologies deeper into the network. Broadly, Ethernet technology upgraded to meet the requirements of Carrier networks is being called
"Carrier Ethernet." It is, in effect, an adaptation of Ethernet to provide the same features and functions, such as reliability, manageability and scalability, which have traditionally been provided
by "telecom" protocols such as SONET/SDH. As these standards evolve, networks based on Carrier Ethernet technology will soon augment and eventually replace legacy telecom-based networks. This
transition is in its infancy starting with residential access and will quickly expand into wireless access networks. This transition is expected to continue for at least the next 10 years.

The
new data-handling capabilities of the network enabled by EoS and Carrier Ethernet allow Carriers to more readily deploy new, revenue-generating,
high-bandwidth services such as VoIP, IPTV, high-speed Internet, and business-class Ethernet services to homes and businesses. To deliver these services, they are deploying new
access networks and new gateway devices in the office and home that are capable of delivering and terminating these various services. These networks will be deployed over a variety of physical layer
alternatives such as DSL and fiber. In addition, wireless networks are migrating from 2G to 3G and eventually to 4G technologies to provide the capability to handle more

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and
more data and video. The growth of these wireless networks, and the wired networks that interconnect them, is expected to continue at double digit rates into the foreseeable future. Increasingly,
all these networks will migrate to using Ethernet as the common communication protocol.

Enterprise Networking

Enterprise networks include equipment that is deployed in businesses, offices, and homes for voice, data, and video communications.
These networks range from large, complex networks for financial institutions, retailers, and other large businesses, to LANs for the home and small office. Typical categories are large enterprise,
data center switching, small-medium enterprise ("SME"), small-medium business ("SMB"), and small office home office ("SOHO"). The networks generally include equipment such as routers and switches as
well as products such as wired and wireless gateways. These networks provide the following connections: computers-to-servers, servers-to-storage
systems, and LANs-to-public Carrier networks.

From
a speed perspective, most present-day Enterprise networks, particularly LANs, use Ethernet operating at speeds of 10 Mbps or 100 Mbps ("Fast Ethernet") with uplinks or
trunks running at 1 Gbps ("Gigabit Ethernet") or 10 Gbps ("10 Gigabit Ethernet"). Only recently has Gigabit Ethernet started to appear on the desktop. In order to support the migration of
desktop computers to these higher data rates, LAN backbones and servers increasingly employ Gigabit Ethernet and 10 Gigabit Ethernet standards. We, therefore, expect to see a proliferation of higher
performance equipment within the Enterprise that will not only address higher bandwidth demands, but will also be capable of providing routing functionality handling different types of traffic.

Similar
to Carrier networks, Enterprise networks are going through an evolution to provide more bandwidth, reliability, interoperability, and scalability. Ethernet-based networks, which
are already widely deployed in LANs, are becoming more prevalent in other enterprise applications such as data center switching. Enterprises are paring down their multiple networks (phone, LAN, video
conferencing, wireless, and remote mirroring/backup) to a common switched IP/Ethernet-based infrastructure. Ethernet technology is being upgraded to meet these new requirements and is generally being
referred to as "Converged Ethernet." Converged Ethernet requires better Quality-of-Service ("QoS") features than traditional data-only LANs, advanced separation
between the different services, as well as advanced classification and access control capabilities for enhanced security.

In
the data center, there is a similar trend towards Converged Ethernet. The proliferation of the Internet and the resulting need to manage, move, and store increasing amounts of
mission-critical data has led to a growing demand for storage systems and their connection to servers, LANs, and WANs. While today's LANs, Storage Area Networks ("SANs"), and Server Clustering can
sometimes use three separate networks based on Ethernet for LAN, Fibre Channel for SAN, and InfiniBand for the server clustering, in the future these multiple networks are expected to converge into a
common infrastructure to reduce capital and operating costs.

Another
important trend is the emergence of cloud computing. Although in its infancy, cloud computing will increasingly move Enterprise applications and data into secure hosted
applications and
data "in the cloud," where it can be securely accessed from multiple locations, multiple devices, and multiple technologies. Cloud computing will increase the need for Enterprises and datacenters to
be able to provide high-bandwidth, high reliability networks to interconnect elements of "the cloud." We expect that this will lead to a unification of Enterprise and Carrier Networking
requirements, centered around the concept of "Converged Ethernet."

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Storage Networking

The proliferation of the Internet and the resulting need to manage, move, and store increasing amounts of mission-critical data has led
to increasing demand for storage systems. It has also resulted in changes in the way companies are connecting these systems using specialized networks called SANs.

The
evolution of SANs, which require networking at high speeds over long distances, has driven the adoption of Fibre Channel, a practical and expandable standard that enables
high-speed data transfer among workstations, mainframes, data storage devices, and other peripherals. Another important emerging protocol in the storage market is Serial Attached SCSI
("SAS"). SAS is expected to expand the market for lower-cost storage networks that do not require the performance or robustness that Fibre Channel offers.

More
recently, there has been further migration of the Storage Networks to new protocols based on Ethernet and "Enhanced Ethernet" technologies. One example of this is Fibre Channel over
Ethernet ("FCoE"). This is another example of the trend towards "Converged Ethernet." We believe that, like Carrier and Enterprise Networking, Storage Networking will evolve over time to deploy more
networks based on Ethernet technology. We continue to supply products to the Storage market based on our capabilities in Ethernet switching, Ethernet physical layer signaling, signal integrity and
crosspoint switch products.

Increasing Demands for Next-Generation Networking Integrated Circuits

We believe that the market for communications infrastructure equipment, both Carrier Networking and Enterprise Networking, will benefit
from several significant trends that will provide attractive growth opportunities for us, based on our strategy to enable the transition to Ethernet and the transition to higher speeds over existing
infrastructure and media:









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Strategy

Our objective is to be a leading supplier of high-performance ICs for the global communications infrastructure markets,
primarily Carrier Networking and Enterprise Networking markets. In order to attain this goal, our corporate strategy encompasses the following elements:

Target Growing Markets

We target high-growth areas in the communications infrastructure market in both Carrier and Enterprise Networks to provide
solutions that adhere to the major networking protocols and perform common networking functions required by the most widely deployed networking equipment.

In
Access Networks we are targeting Carrier Wireless and Microwave Backhaul, as well as Base Station equipment, which are undergoing a rapid transition from traditional telecom protocols
to Carrier Ethernet. This transition is driven by increasing data and video bandwidth requirement from 3G and future 4G and LTE wireless deployments. These deployments are expected to start in the
immediate timeframe (2010 and 2011). As our customers develop new equipment for these deployments we will be able to serve these markets with our telecom-optimized Gigabit Copper PHYs, our EoS
Mappers, Carrier Ethernet MACs, and our next-generation Carrier Ethernet Switches. These products incorporate advanced Operations, Administration, and Maintenance ("OAM"), Service
Provisioning, and Network Timing features that are important for this new market segment.

In
MANs and WANs we are targeting Carrier equipment providing Ethernet services and connectivity over SONET/SDH as well as future converged Packet Optical Transport networks. This is

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consistent
with our vision that Optical Transport will evolve to Packet and OTN/FEC Processing over time, leading to significant synergies with our Carrier Ethernet Packet Processing as well as
OTN/FEC Processing Intellectual Property and expertise. We expect this market to grow rapidly as a consequence of the increased bandwidth being generated from new wired and wireless applications being
deployed to customers, as well as the emerging trend towards Enterprise cloud computing that will drive significantly more bandwidth into MANs and WANs.

We
are targeting SME/SMB Local Area Networks with our highly integrated, low-power Gigabit PHYs and Switches. In large Enterprise and datacenter networks, we are targeting
the fast-growing 10-Gigabit Ethernet market with our 10G Ethernet MACs, PHYs and SFP+ LRM-compliant EDC devices, as well as with our signal integrity products.
These products enable customers to upgrade their system interconnect and backplane speeds from 1-3 Gbps to 6-11 Gbps to increase the capacity of large datacenter switches,
blade servers, and storage systems. These markets are expected to grow faster than the overall market as ever larger datacenters are being built by large Enterprises as well as content and search
providers. We expect this market to benefit from future cloud computing applications.

Our
signal integrity products target a wide variety of markets segments in both Carrier and Enterprise networks. These include markets such as SONET/DH and Ethernet transport, backplane
applications in datacenter servers and storage systems, and production video systems for both standard and high-definition broadcast television.

Focus and Specialization

We specialize in Ethernet Networkingthe dominant networking protocol in both Carrier and Enterprise Networks today. The
trend to Carrier and Converged Ethernet, where multiple services and networks are converged on a common Ethernet Networking infrastructure, is widely expected to accelerate in the next few years. In
our key markets we are focused on:



Leverage Technology into New Applications

The markets for semiconductor devices periodically experience technology shifts caused by, among other things, increased speeds or
changing protocols. Our strategy is to use our 25 years of design experience to introduce innovative products in these markets that solve our customers' business

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problems
and gain market share through our customers' adoption of our products. Our advanced technology and intellectual property ("IP") developments are focused on:



Maintain and Build Solid Relationships with Tier 1 Customers and OEM Leaders in Networking

Our major customers are savvy buyers, who have carefully investigated our ability to serve them with products and technology reliably,
on a continuous basis, over the long-term. One of our highest priorities has been to preserve existing business while expanding our customer base through new programs. The key to this
strategy is demonstrating the right technology and product solutions, as well as solving specific business or technology challenges. We must also assure customers of the progress on our stated
initiatives.

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A key element of our strategy is to work closely with our customers' product managers and systems design teams, as well as business unit and corporate management
teams. We believe that these relationships enable us to better understand our customers' business and technology needs and enable us to develop solutions to problems that result in design wins for
existing and new systems.

Engage the Right People for Success

Close attention has been given to the people within our organization to ensure we have the right people for success and that our costs
and resources are aligned with our opportunities. At our core, we are a technology company. Our technology comes from the minds of our employees. We endeavor to hire the best and brightest and give
them an environment from which they can be successful. We have also made important changes to our Board membership and are taking steps to improve our Corporate Governance practices.

Products

We develop and manufacture a wide variety of products that are primarily marketed to Carrier and Enterprise communication networking
and data center infrastructure OEMs. While many of our products are targeted at specific markets, some of them find applications in multiple types of communications equipment across all of our
focus markets. Our products fall into the following broad categories.

Transport Processing

Our goal is to address the needs of Carrier and Enterprise network providers as they undergo a migration to new Ethernet networks that
provide increased bandwidth and lower cost. We will do this by providing a complete family of transport processing functions that enable this smooth migration from today's networks to future networks
based on Ethernet.

Transport
processing products include Framers, Mappers, Network Processors, and Switches. Our product line includes devices supporting data rates up to 10 Gbps, which are used in a
variety of Add-Drop-Multiplexers ("ADMs"), Multi-Service Provisioning Platforms ("MSPPs"), core switching and Reconfigurable Optical
Add-Drop-Multiplexers ("ROADMs"), Dense Wavelength-Division Multiplexing ("DWDM") systems, and core and edge routers. These processing functions evolve as the requirements of
the networks migrate from a variety of protocols toward Ethernet as the standard networking protocol.

Framers
are devices that take incoming data traffic from the physical layer ("PHY") and process the framing information used for transporting data. Mappers convert data from one protocol
to another. Forward Error Correction ("FEC") is used in Optical Transport Networks ("OTN") for ensuring reliable data transmission. We offer a complete line Framers and Mappers for SONET/SDH, Ethernet
over SONET ("EoS"), and OTN applications. Our latest-generation products, and new products in development, integrate increasing amounts of Ethernet packet processing technology. These products operate
at speeds up to 10 Gbps, and are targeted principally for next-generation systems in the Core and Metro segments of the Carrier networks.

Network
Processors are software-programmable microprocessors that are optimized for networking and communications functions such as classification, filtering, policing, grooming,
forwarding, and routing. While we continue to sell and support these products, we no longer invest in the development of Network Processing Units ("NPUs") or traffic management products, and they are
therefore considered "non-core" products.

A
switch receives data from a line card and routes the data to its proper destination. We supply a family of Time Slot Interchange ("TSI") switches for use in SONET/SDH equipment. We
have various

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TSI
switches in our product portfolio that provide aggregate bandwidth up to 1.5 Tbps. Our switches provide higher bandwidth and lower power than competitive solutions. We also provide switch fabric
chip sets for a variety of packet backplane applications. These Switch Fabric solutions allow total system interface bandwidths from 20 Gbps to 160 Gbps and higher.

Ethernet Switches, MACs, and Transceivers

Our Ethernet switch product line addresses Gigabit Ethernet applications in the Enterprise LAN. This family of triple-speed
(10/100/1000 Mbps) Layer-2 and Layer-3 switches are available in port counts ranging from 5 to 48. These switches are targeted at desktop, workgroup, and LAN infrastructure
boxes and enable these systems to migrate to Gigabit Ethernet speeds in a cost-effective manner. In 2005, we started shipping 5-port and 8-port integrated ICs that
combine the transceiver and switch functions. We have shipped over 100 million Gigabit Ethernet ports to date. Our Ethernet switch products provide a high-level of integration
leading to a significant reduction in part count and reduced BOM cost for our customers. Switches and routers with integrated Ethernet transceivers also provide all the energy-efficient
ActiPHY and PerfectReach features we introduced on our standalone Ethernet transceivers. In 2008, we began to see applications for our Ethernet switch product line within
Carrier Networking applications. Our latest-generation of switches for "stackable" applications incorporates a variety of functions that enable improved QoS and security functions within these types
of networks. We have targeted these applications for our next-generation products that will include additional features to enable true Carrier Ethernet networking. We expect to see a broad
range of applications in Customer Premise equipment ("CPE"), Access Network equipment, and Metro Network equipment.

Ethernet
MACs provide addressing and channel control mechanisms that make it possible for several network nodes to communicate within a multipoint network. Our MAC products are designed
for use in Enterprise-class modular Ethernet switch platforms as well as in Ethernet over SONET/SDH and Ethernet-over-OTN systems used in access, metro, and
long-haul Carrier Networking systems. Our family of Ethernet MACs enables system OEMs to focus on the value-add of the packet processing function by simplifying the
Ethernet system interface design. Our Ethernet MACs provide single-chip solutions for both 1 Gbps and 10 Gbps applications, reducing software development costs for 1 Gbps and 10 Gbps
applications. They also provide support for intelligent oversubscription, allowing OEMs to efficiently and securely manage bandwidth and bandwidth usage. Our MACs incorporate industry-standard
XAUI/XAUI+ and SPI-4.2 interfaces for connection to a wide variety of ICs, such as
packet processors, traffic managers, switch fabrics, and transport mappers. We are a leading supplier of 1 Gbps and 10 Gbps Ethernet and Carrier Ethernet MACs in the industry.

Ethernet
transceivers ("Copper PHYs") allow transmission of 10/100/1000 BASE-T data over Category 5 copper cable and fiber optic cabling. This technology is widely
deployed in applications ranging from Carrier and Enterprise Networking to home electronics and personal computing. We offer a broad range of products in this category including single, quad, and
octal devices that offer a combination of low power, reduced bill of material ("BOM") cost, and a high-level of integration that eliminates hundreds of passive components from the printed
circuit board.

Our
SimpliPHY Ethernet transceivers provide low power operation. We have recently introduced further power savings features such as ActiPHY and
PerfectReach that provide energy savings of up to 80% in any network infrastructure device or CPE. This technology has been recognized with a Frost and Sullivan industry award. These
power saving features are also included in our SparX and G-RocX switch and router products with integrated Ethernet transceivers. For timing-sensitive
applications, such as Wireless Aggregation networks, we also offer Ethernet transceivers with advanced synchronization capabilities.

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Physical Media Devices, Physical Layer Devices, and Signal Integrity Devices

The Physical Media Device ("PMD") serves as the actual physical connection to the fiber optic cable by converting the incoming optical
signal into an electric signal. Similarly, for data flowing in the opposite direction, the PMD converts electric signals into optical signals. We offer laser drivers, trans-impedance amplifiers and
post-amplifiers operating at speeds ranging from 1.25 Gbps to 12.5 Gbps. These products are currently being used in a variety of applications from Carrier Long-haul and metro
networks to Enterprise Gigabit Ethernet and 10-Gigabit Ethernet networks including Storage networks and systems. We also develop products for application in Passive Optical Networks
("PON") that enable Fiber-to-the-Home ("FTTH") deployments. Typically, we sell these products to optical module manufacturers who service the equipment
manufacturers, or directly to OEMs who build discrete board-based solutions.

The
Physical Layer Device ("PHY") converts high-speed analog signals from the PMD to low-speed digital signals. It includes the high-speed analog
functions of
clock and data recovery ("CDR"), multiplexing ("MUX"), and demultiplexing ("DMUX"). The CDR recovers the clock and retimes the signal to synchronize it with the overall system clock, while the
MUX/DMUX converts low-speed parallel data into higher speed serial data and vice versa. We have incorporated many industry leading features into these products such as integrated
equalization waveform viewing, VScope, and EDC. These technologies dramatically improve signal integrity transmission and reception for applications at 6 Gbps and above, particularly for
protocols such as 10 Gbps Ethernet and 8 Gbps Fibre Channel systems. We develop our products in low-cost, CMOS and high-performance Silicon Germanium ("SiGe") silicon process
technologies depending on the technology requirements of the product and application. We offer a broad line of PHY products for the SONET/SDH, Fibre Channel, and Ethernet markets at speeds ranging
from 155 Mbps to 12.5 Gbps.

Other
signal integrity products include Crosspoint Switches, Repeaters and Retimer Signal Conditioners and Backplane Transceivers with integrated signal equalization and
pre-emphasis technology that enable the reception and transmission of high-speed signals across system backplanes, long traces of printed circuit boards, and through copper
cables at speeds from 155 Mbps up to 11 Gbps. Once a niche technology for very high-speed switching systems, these products are becoming more main-stream as systems continue to
increase in speed and density. They now have very broad applications across systems in Carrier and Enterprise Networking as well as Storage and high-definition television ("HDTV")
applications.

Our
Crosspoint Switch family provides asynchronous, unblocked switching matrices from 4x4 to 144x144 matrices with performance up to 11 Gbps. This range of speeds and package form
factors enable a wide variety of solutions for SONET/SDH blade servers, and Gigabit Ethernet, Fibre Channels, routers, switching, and HDTV video equipment.

Our
Repeater and Retimer Signal Conditioner ICs support data rates from 155 Mbps to 11.3 Gbps for applications, including SONET/SDH, Gigabit Ethernet, Fibre Channel, and Fast Ethernet,
with per IC channel counts ranging from two to 12.

Our
Backplane Transceivers with integrated signal processing and transcoding provide transmission of 5 Gbps to 11 Gbps signals. We provide SerDes with support for dual XGMII to dual
XAUI, or single XGMII to dual (redundant) XAUI with working and protection channels.

Our
Signal Integrity PHY and PMD products provide leading-edge performance and low-power features for 10 Gbps applications such as the emerging SFP+ 10G pluggable
transceiver industry standard, as well as superior signal integrity features including EDC that allow propagation over longer distances in multi-mode and single-mode fiber
applications, copper cabling, as well as new and legacy backplanes. Our Crosspoints, Repeater/Retimers, and Signal Conditioners provide best-in-class signal

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integrity
improvements for a wide variety of applications in Carrier, Enterprise, data center, and high-definition video applications, within systems as well as connecting between them.

Intellectual Property ("IP") Licensing

In 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 nano-meter ("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 intellectual property 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 IP, 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.

Customers

We market and sell our semiconductor products directly to leading OEMs and original design manufacturers ("ODMs") as well as
through third-party electronic component distributors and manufacturing service providers. Sales to distributors accounted for approximately 63.0%, 76.0%, and 78.0% of our net revenues for fiscal
2009, 2008, and 2007, respectively. For fiscal 2009, distributors Nu Horizons Electronics, Corp. (including its subsidiary Titan Supply Chain Services), Weikeng Industrial Co. Ltd. and
direct customer Huawei Technologies Co., Ltd. accounted for 36.0%, 7.5%, and 12.0%, respectively, of our net revenues. For fiscal 2008, distributors
Nu Horizons Electronics, Corp. (including its subsidiary Titan Supply Chain Services), Weikeng Industrial Co. Ltd. and direct customer IBM accounted for 48.8%, 9.2% and 11.3%,
respectively, of our net revenues. For fiscal 2007, distributors Nu Horizons Electronics, Corp. (including its subsidiary Titan Supply Chain Services), Weikeng Industrial Co. Ltd. and
direct customer IBM accounted for 50.1%, 7.1% and 11.0%, respectively, of our net revenues.

Our
top OEM customers for fiscal year 2009 and 2008 were Alcatel-Lucent, IBM, HP, Huawei Technologies Co., Ltd., and ZTE Corporation. Our sales to these customers accounted
for a total of approximately 37.5% and 34.4% of our fiscal year 2009 and 2008 net revenues, respectively. Our top five OEM customers for fiscal year 2007 were EMC Corporation, IBM, HP, Huawei
Technologies Co., Ltd., and ZTE Corporation. They accounted for approximately 31.0% of our net revenues for fiscal 2007.

Our
customer base is widely dispersed geographically. Sales to customers located outside the United States have historically accounted for a significant percentage of our revenue. We
anticipate that such sales will continue to be a significant percentage of our revenue. International sales constituted 59%, 49% and 48% of our net revenue in fiscal 2009, 2008 and 2007, respectively.
Note 10Significant Customers, Concentration of Credit Risk, Segment Reporting, and Geographic Information in the accompanying financial statements provides more specific data on
revenue by geographic area.

Future
sales of our technology products will be based on, among other elements, continued expansion of our product line, the acceptance of our products, our customer service levels,
expansion into additional domestic and international markets, and our ability to maintain a competitive position against other technology providers who are producing similar products.

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Manufacturing and Operations

Wafer Fabrication

Our products make use of the state-of-the-art CMOS technology with feature sizes down to 65 nm as
well as other technologies such as SiGe. As a fabless semiconductor company, wafer fabrication for our products is outsourced to third-party silicon wafer foundries such as Taiwan Semiconductor
Manufacturing Corporation ("TSMC"), Chartered Semiconductor Manufacturing, IBM, LSI Logic and United Microelectronics Corporation. Outsourcing our wafer manufacturing requirements enables us to
eliminate the high costs of owning, operating, and upgrading fabrication facilities, and focuses our resources on design and test applications where we believe we have greater competitive advantages.

Limitation
of any of our five independent foundry subcontractors to provide the necessary capacity or output for our products could result in significant production delays and could
materially and adversely affect our business, financial condition, and results of operations. While we currently believe we have adequate capacity to support our current sales levels, we continue to
work with our existing foundries to obtain more production capacity, and we intend to qualify new foundries to provide additional production capacity if required. It is possible that from
time-to-time adequate foundry capacity may not be available on acceptable terms, if at all. In the event a foundry experiences financial difficulties or suffers any damage to
or destruction of its facilities, or in the event of any other disruption of foundry capacity, we may not be able to qualify alternative manufacturing sources for existing or new products in a timely
manner.

Through
fiscal 2007, we manufactured a portion of our IC products, including Gallium Arsenide ("GaAs") and Indium Phosphide ("InP") products, at our fabrication ("fab") operations in
Camarillo, California. At the end of September 2007, we closed our Camarillo fab operations and ceased manufacturing products with our GaAs process technology. The severance and related costs
associated with the fab closure was approximately $0.5 million. These costs were captured as part of research and development ("R&D") in the income statement at September 30, 2007. The
fab assets with a zero book value at September 30, 2007, were ultimately sold for $2.5 million in February 2008.

Because
wafer fabrication for a great majority of our products is outsourced, 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 wafer foundries,
including:



These
and other risks associated with our reliance on third-party wafer foundries could materially and adversely affect our business, financial condition, and results of operations. For
example, the third-party foundries that manufacture our wafers have, from time-to-time, experienced manufacturing defects and reductions in manufacturing yields. In addition,
disruptions and shortages in wafer foundry 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 foundry capacity for the
production of high-performance ICs such as ours. We do not have long-term agreements with any of our third-party foundries, but, instead, subcontract our manufacturing
requirements on a purchase order basis. As a result, although we believe that we currently have access to adequate foundry capacity to support our sales levels, it is

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possible
that the capacity we will need in the future may not be available to us on acceptable terms, if at all.

Probe, Assembly and Final Test

Completed wafers are "probed" to determine which of the die on the wafer meet functional and performance specifications. This step in
the manufacturing process determines the "yield" of good die per wafer for wafer probe. We support the majority of our products from our in-house probe and test facility in Camarillo,
California. We outsource some of our higher volume products. In most cases where we outsource, we maintain the capability to probe and test these wafers at our own facilities. We, and our
subcontractors, utilize advanced automated testers as well as high-performance bench test equipment.

Probed
die are "assembled" into packages. We outsource our IC packaging to multiple assembly subcontractors in Asia and the United States. Following assembly, the packaged products are
returned to us for final testing prior to shipment to customers.

Following
assembly, packaged products go through "final test" where they are tested in packaged form to ensure that they meet all functional, performance, and quality requirements. This
step in the process determines the "final yield" that will include any yield loss in the assembly process. For final test, we support the majority of our products from our in-house test
facility in Camarillo, California.

As
with wafer fabrication, worldwide assembly and test capacity is limited and we are dependent on our suppliers to provide enough capacity in the correct mix to address all of our
requirements. We do not have long-term agreements with any of our assembly or test subcontractors, but instead we 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, and we could experience shortages or assembly problems in the future. The
availability of assembly services from these subcontractors could be materially and adversely affected in the event a subcontractor experiences financial difficulties or suffers any damage to its
facilities.

In
2009, we began the process of preparing to move a substantial amount of our probe and test facility to an offshore subcontractor. We are doing this to reduce our manufacturing cycle
times to better address customer requirements, to increase inventory turns, and to reduce our overall fixed cost of probe and test. We expect to be able to transition to an outsourced model over a
nine month period and complete this transition by the end of fiscal 2010.

Many
of our products have very long life cycles, often exceeding 10 years or more. These life cycles may be longer than what is typically supported by wafer and/or assembly
manufacturers. Accordingly, we are sometimes subjected to End-of-Life ("EOL") notices on certain material and/or products provided by these subcontract
manufacturers. 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.

Engineering, Research and Development

The market for our products is characterized by continually evolving industry standards, rapid advancements in process technologies,
and increasing levels of functional integration. We believe that our future success will depend largely on our ability to continue to improve our products and our process technologies, to develop new
technologies, and to adopt emerging industry standards. Our product development efforts are focused on designing new products for the high-performance communications infrastructure markets
based on understanding the evolving needs of our customers. We have a dedicated team of engineers who follow industry standards development, technology

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changes,
and the product directions of our customers in an effort to provide forward-looking guidance to the development teams in the form of a "Product Roadmap." We work closely with our customers to
co-specify and/or co-develop products. We refer to these early adoption customers as "alpha-site customers." Occasionally, our relationships with our
alpha-site customers will involve non-recurring development charges or commitments to purchase products. Our customers had no long-term purchase agreements with us
at September 30, 2009 and 2008.

We
are expending considerable design efforts to increase the speed and complexity and to reduce the power dissipation of our products and to create new, value-added functionality. We
have, and will continue to develop, common IP cores and standard blocks that can be reused in multiple products, thereby reducing design cycle time and increasing first-time design
correctness.

We
have significant research, engineering, and product development resources located in four design centers in the United States combined with four international design centers in Asia
and Europe. To continue to improve the cost efficiency of our development organization, we have expanded our capabilities in low-cost regions such as Taiwan and India. Many of our design
centers are located in areas of strong technical talent pools and/or in areas where there are strong concentrations of our customers.

Our
engineering, research and development expenses in fiscal 2009, 2008, and 2007 were $45.7 million, $50.0 million and $47.2 million, respectively.

Competition

The markets for our products are highly competitive and subject to rapid technological advancement in design technology, wafer
manufacturing techniques, and alternate networking technologies. We must identify and capture future market opportunities by developing and deploying value-added products to offset the rapid price
erosion that characterizes our industry.

We
typically face competition at the "design stage," where customers evaluate alternative design approaches in the development of their systems. Our customers typically evaluate our
products along with our competition and make a selection based on a variety of factors including features, functionality, availability, and pricing. They then "design-in" the product by
developing their system in conjunction with the various components. They invest substantial resources in systems, hardware, and software designs that, in many cases, are dependent on the ICs that they
have selected. We use the term "design win" to classify a design where we have strong indication from the customer that they have selected our device in preference to our competitor. In many cases,
when the complex hardware and software is developed to be dependent on our IC, we are "single-sourced," that is, we are the only supplier selected for the available opportunity. Once we have "won" a
single-sourced design it is often difficult for our competitors to replace us until the next "design stage." Because of shortened product life and design-in cycles in many of our
customers' products, particularly in low-end Enterprise applications, our competitors have increasingly frequent opportunities to supplant our products in next-generation
systems.

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 due 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 may have otherwise won.

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In the Communications Networking market, which includes our Carrier and Enterprise Networking markets, our competitors include Applied Micro Circuits Corporation,
Broadcom Corporation, EZChip Semiconductor Inc., Gennum Corporation, LSI Corporation, Marvell Technology Group Ltd., Maxim Integrated Products, Inc., Mindspeed
Technologies, Inc., PMC-Sierra, Inc., and TranSwitch Corporation. In the Signal Integrity market our competitors include Gennum Corporation, National Semiconductor
Corporation, Mindspeed Technologies, Inc., Maxim Integrated Products, Inc., Netlogic Inc. and PMC-Sierra, Inc. Over the next few years, we expect additional
competitors, some of whom 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 for design wins and subsequent product sales.

Sales and Customer Support

We have worldwide sales, marketing, and application support organizations. Our direct sales force is responsible for servicing our
Tier 1 and Tier 2 customer requirements. We rely on distributors to service our Tier 3 customers and for order fulfillment for some Tier 1 and Tier 2 customers.
Because of the significant engineering support required in connection with the sale of high-performance ICs, we provide our customers with both field engineering and application
engineering support prior to the sale. These sales support services, which are provided
by our field engineering and application engineering personnel, are utilized in the sales process in order to educate customers and develop and close sales. Our sales cycle is typically lengthy, often
six to 12 months or more, and requires the continued participation of salespeople, field engineers, application engineers, and senior management.

The
steps in the typical sales cycle of Vitesse's product are as follows:

Prior to the Sale of Product



Prior to the Order Being Placed



Once
the order is placed, the customer is provided a standard product warranty, and no further sales support services are provided.

Our
sales headquarters is located in Camarillo, California. We have additional sales and field application support offices in the United States, Canada, China, Europe, Japan, and Taiwan.

We
generally warrant our products against defects in materials and workmanship for a minimum period of one year.

Information
regarding financial data by geographic segment is set forth in Part II, Item 8 of this Form 10-K and in
Note 10Significant Customers, Concentration of Credit Risk, Segment Reporting, and Geographic Information in the accompanying financial statements.

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Intellectual Property

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 September 30, 2009, we had 87 U.S. patents, 15 foreign patents, and 27 patent applications pending in the U.S. We are preparing to file
several more patent applications.

The
semiconductor industry is characterized by vigorous pursuit and protection 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 have resulted in the commencement of any litigation against us, nor have we
believed that it was 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 cannot assure you that we would prevail in
such disputes given the complex technical issues and inherent uncertainties in intellectual property litigation. If such litigation were to result in an adverse ruling, we could be required
to:



Cyclicality

The semiconductor industry is highly cyclical and is characterized by constant and rapid technological change, rapid product
obsolescence, price erosion, evolving technical standards, short product life cycles, and wide fluctuations in product supply and demand. From time-to-time, these and other
factors, together with changes in general economic conditions, cause significant upturns and downturns in the industry and within our business.

In
addition, our operating results are subject to substantial quarterly and annual fluctuations due to a number of factors, such as demand for network infrastructure equipment, the
timing of receipts, reduction or cancellation of significant orders, fluctuations in the levels of component inventories held by our customers and channel partners, the gain or loss of significant
customers, market acceptance of our products and our customers' products, our ability to develop, introduce, and market new products and technologies on a timely basis, the availability and cost of
products from our suppliers, new
product and technology introductions by competitors, intellectual property disputes, and the timing and extent of product development costs.

Backlog

Our sales are made primarily pursuant to standard purchase orders for delivery of products. Quantities of our products to be delivered
and delivery schedules are frequently revised to reflect changes in customer needs. For these reasons, our backlog, as of any particular date, is not necessarily representative of actual sales for any
succeeding period. We, therefore, do not believe that backlog alone is a reliable indicator of future revenue levels.

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Environmental Management

We monitor the environmental impact of our products. Due to environmental concerns, the need for lead-free solutions in
electronic components and systems is receiving increasing attention within the semiconductor industry and many companies are moving toward becoming compliant with the Restriction of Hazardous
Substances Directive ("RoHS"), the European legislation that restricts the use of a number of substances, including lead, effective July 2006. We believe that our products are compliant with the RoHS
directive. Additionally, some of our subcontractors may be required to register processing materials as required by the Registration, Evaluation, Authorization and Restriction of Chemicals ("REACH")
European Union Regulation, EC/2006/1907. There are other international environmental directives, regulations and initiatives that are currently evolving in the electronic industry, such as the
halogen-free initiative, which may also impact material suppliers and processing subcontractors. We believe our parts will be compliant and that materials will be available to meet these
emerging regulations. However, it is possible that unanticipated supply shortages or delays may occur as a result of these environmental factors.

Employees

As of September 30, 2009, we had 476 employees, including 238 in engineering and R&D, with the balance of employees, listed in
population size order, in operations, marketing and sales, and finance and administration. Our ability to attract and retain qualified personnel is essential to our continued success. None of our
employees are represented by a collective bargaining agreement, nor have we ever experienced a work stoppage. We believe our employee relations are good.

Available Information

We file annual, quarterly, and special reports, as well as proxy statements and other information with the SEC. Any document that we
file with the SEC may be read or copied at the SEC's public reference room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for information on the public reference room. Our SEC filings are also available at the SEC's website at http://www.sec.govand through our website athttp://www.vitesse.com. The information on our website is
not incorporated by reference into and is not made a part of this report.

We,
through our Board of Directors, have adopted a Code of Ethics and Business Conduct ("the Code") designed to reflect requirements of the Sarbanes-Oxley Act of 2002 and other
applicable laws, rules and regulations. The Code applies to all of the Company's directors, officers and employees. We have also adopted a Code of Business Conduct and Ethics for Members of the Board
of Directors and a Code of Ethics for the CEO and Senior Financial Officers (hereinafter collectively "the Codes"). Any amendments to the Codes will be posted promptly on our website.

We,
through our Board of Directors, also have adopted Corporate Governance Guidelines ("the Guidelines"). The Guidelines set forth the responsibilities and standards under which the
major Board committees and management shall function. The Codes, the Guidelines, and the charters of the Audit, Nominating and Corporate Governance, and Compensation committees are posted on the
Investors' section of our website under "Corporate Governance" and are available free of charge by calling us at (800) 848-3773 or (805) 388-3700 or by writing
to:

Vitesse
Semiconductor Corporation
Attn: Corporate Secretary
741 Calle Plano
Camarillo, CA 93012

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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 Liquidity and Financing Arrangements

We could incur significant interest penalties and cash demands associated with our 8.0% Convertible Second Lien Debentures Due 2014 which could cause us to file for
bankruptcy if our shareholders do not approve an increase in our authorized shares.

On October 30, 2009, we closed a debt restructuring transaction with our major creditors pursuant to which we issued
approximately $50.0 million of new 8.0% Convertible Second Lien Debentures Due 2014 (the "2014 Notes"). The 2014 Notes are convertible into shares of common stock at a conversion price of
$0.225 per share (equivalent to an initial conversion price of approximately 4,444 shares per $1,000 principal amount of 2014 Notes), subject to customary adjustments. 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. We currently do not have sufficient authorized shares to
permit full conversion of the 2014 Notes. The holders of the 2014 Notes have the right to receive 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 maximum number of additional shares of common stock
issuable upon conversion following a change of control event would be approximately 125 million shares if the change of control event occurred on or about November 15, 2009 and our
common stock price was $0.16 per share. We will be holding a special meeting of our shareholder on January 7, 2010 to approve an amendment to our certificate of incorporation to increase the
number of authorized shares of common stock to permit the conversion of the 2014 Notes and to provide additional shares of common stock for general corporate purposes. Under the terms of the indenture
governing the 2014 Notes, if we do not receive shareholder approval of an increase in our authorized shares of common stock on or prior to February 15, 2010, we will be obligated to pay
$500,000 per month in additional interest until stockholder approval of this increase is obtained. If we are obligated to pay this additional interest, it will have a significant negative impact on
our cash position and our results of operations. In addition, if we are unable to obtain this stockholder approval prior to February 15, 2011, the holders of the 2014 Notes will have the right
to convert the 2014 Notes into cash. Should the holder(s) require the Company to repurchase the securities for cash, the repurchase price would be equal to (i) the as-converted
amount of the shares that would have been issued to the holder had the increase in authorized shares occurred and the holder(s) had exercised its conversion option plus (ii) the
Make-Whole Amount that would have been applicable if the holder(s) had exercised its conversion right or assuming the repurchase of all of the 2014 Notes, $58.0 million. We do not
believe that we will have sufficient cash by February 15, 2011 to permit a cash conversion of the 2014 Notes. If we have insufficient cash to convert all of 2014 Notes submitted for conversion,
we would be in default under the terms of the 2014 Notes, which would give the holders the of the 2014 the rights to accelerate the maturity of the Notes and could jeopardize our ability to continue
as a going concern.

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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.

Risks Relating to Our Business

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

For the twelve months ended September 30, 2009, the Company had a net loss of $194.0 million, primarily due to an
impairment charge to fully write off a goodwill balance of $191.4 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 substantially 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. Additional factors that could affect our future operating results include the following:



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

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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 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.

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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%, 49%, and 48% of our net revenue in fiscal 2009, 2008, and 2007 respectively.
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:



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

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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 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

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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 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, and in some cases, 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

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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 that may impact our ability to continue to support certain
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 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.

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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.

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.

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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 September 30, 2009, we had 87 U.S. patents and 15 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 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:



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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.

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

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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.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

None

ITEM 2.    PROPERTIES

Our executive offices and principal R&D facility is located in Camarillo, California and is leased pursuant to a
non-cancellable operating lease. In September 2008, the Company extended the term of this lease through January 31, 2014 with an annual base rent of $1.2 million. The total
space occupied in this building is approximately 111,000 square feet. We also lease an additional 58,000 square foot facility in Camarillo for product development pursuant to a
sale-leaseback agreement. We also owned a 107,000 square foot facility in Colorado Springs, Colorado, which was the site of our wafer fabrication facility until its closure in 2004, and
was used as a design center until 2007. We sold this facility in December 2008 (See Note 3Discontinued Operations and Assets Held for Sale in the accompanying consolidated
financial statements). We also lease space in 18 additional locations that include domestic and international offices in California, Denmark, Germany, India, Massachusetts, Oregon, and Texas. Our
sales and field support offices are located in the United States, Canada, Europe, China, Japan, Germany, and Taiwan. As of September 30, 2009, we leased space of approximately 287,000 square
feet. The Company's current space is sufficient to accommodate current operations.

ITEM 3.    LEGAL PROCEEDINGS

As of September 30, 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,

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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 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 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.

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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.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

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PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

On June 28, 2006, the Company's stock was delisted from the NASDAQ National Market due to failure to provide timely regulatory
filings as a result of the improprieties discussed below under the caption "Options Backdating and Accounting Irregularities." The Company's stock has been subsequently traded in the Pink Sheets
electronic quotation system under the symbol VTSS.PK. Prior to June 28, 2006, our stock was traded on the NASDAQ National Market under the symbol VTSS. The following table sets forth the high,
low, and closing prices of our common stock, as reported on the respective trading systems, for the periods shown. We can provide no assurance that we will be successful in relisting the Company's
securities on a national securities exchange.

High

Low

CloseFiscal Year Ended 2009October 1 through December 31, 2008

$
0.58

$
0.09

$
0.36January 1 through March 31, 2009


0.48


0.21


0.32April 1 through June 30, 2009


0.45


0.24


0.29July 1 through September 30, 2009


0.45


0.25


0.37Fiscal Year Ended 2008October 1 through December 31, 2007

$
1.16

$
0.80

$
0.87January 1 through March 31, 2008


0.94


0.61


0.67April 1 through June 30, 2008


0.74


0.61


0.64July 1 through September 30, 2008


0.94


0.49


0.54


As
of September 30, 2009, we had 1,501 shareholders of record. Because many of our shares are held by brokers or other institutions on behalf of shareholders, we are unable to
state the total number of beneficial owners of our common stock.

We
have never paid cash dividends and presently intend to retain any future earnings for business development. Further, our existing loan agreements limit the payment of dividends
without the consent of the lender.

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Five-Year Stock Performance Graph

The following performance graph compares the cumulative total shareholder return on our common stock with the NASDAQ Stock
Market-U.S. Index and the NASDAQ Electronics Components Index from market close on the last trading day in September 2003 through the last trading day in September 2009. The graph is based
on the assumption that $100 was invested in each of our common stock, the NASDAQ Stock Market-U.S. Index and the NASDAQ Electronic Components Index on the last trading day in September
2004.

The
stock price performance graph depicted below shall not be deemed incorporated by reference by any general statement incorporating by reference this Report into any filing under the
Securities Act of 1933 (the "Securities Act"), or under the Exchange Act. The stock price performance on this graph is not necessarily an indicator of future price performance.

COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN
AMONG VITESSE SEMICONDUCTOR CORPORATION,
THE NASDAQ STOCK MARET (U.S.) INDEX AND
THE NASDAQ ELECTRONIC COMPONENTS

GRAPHIC

ASSUMES
$100 INVESTED ON OCT. 1, 2004
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDED SEPT. 30, 2009

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ITEM 6.    SELECTED FINANCIAL DATA

In fiscal year 2008, we completed a voluntary review of our historical stock option grant practices and other accounting practices. The
review was initiated by the Special Committee appointed by the Board of Directors (as discussed in the Overview section "Options Backdating and Accounting Irregularities") and was conducted by our
Audit Committee, comprised solely of independent directors, with the assistance of legal counsel and outside consultants. Accounting errors and irregularities prior to fiscal 2006 involved improper
revenue recognition, unrecorded transactions, misapplied credits, and altered or non-existent supporting documentation. Based on the findings of this review, we have adjusted our
historical financial statements to record
additional non-cash share-based compensation and related expenses, adjustments to revenue and cost of revenue resulting from the correction of improper revenue recognition, as well as
other adjustments. The table below includes selected consolidated financial data for the four years in the period ended September 30, 2009. Consolidated financial data is not available for
periods prior to October 1, 2005.

The
selected consolidated financial data presented below should be read in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements in this Annual Report on Form 10-K. Our consolidated selected financial data have been derived from our audited consolidated
financial statements.

As of and for the years ended September 30,2009

2008

2007

2006(in thousands, except per share data)Statement of Operations Data:Product revenues

$
154,927

$
218,536

$
221,948

$
203,289Intellectual property revenues


13,250


10,000





Net revenues


168,177


228,536


221,948


203,289(Loss) income from operations


(179,005
)

8,378


(1,799
)

(50,094
)(Loss) income from continuing operations


(194,112
)

7,510


(4,825
)

(52,003
)Gain (loss) from discontinued operations


71


9,044


(16,822
)

(15,282
)Net (loss) income


(194,041
)

16,554


(21,647
)

(67,285
)Net (loss) income per share:Basic and diluted:Continuing operations

$
(0.85
)
$
0.03

$
(0.02
)
$
(0.23
)Discontinued operations


0.00


0.04


(0.08
)

(0.07
)Net (loss) income per share

$
(0.85
)
$
0.07

$
(0.10
)
$
(0.30
)Weighted average shares outstanding:Basic and diluted


229,554


223,614


223,556


222,137Balance Sheet Data:Cash and short-term investments

$
57,544

$
36,722

$
33,576

$
28,653Working capital


39,397


49,198


55,287


14,431Total assets


105,568


292,277


327,348


352,199Long-term debt


111,352


126,123


155,118


146,752Total shareholders' (deficit) equity


(61,359
)

125,361


106,243


117,810


On
October 29, 2007, the Company completed its sale of a portion of its Storage Products business, as discussed in Note 3Discontinued Operations and Assets
Held for Sale in the accompanying consolidated financial statements. We have reported the results of operations and financial position of the Storage Products business in discontinued operations
within the Company's statements of operations and as assets and liabilities held for sale in the Company's balance sheet as of September 30, 2007. For the year ended September 30, 2008,
we have reported the results of

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operations
of the Storage Products business, along with the gain recognized on the sale, in gain (loss) from discontinued operations within the Company's statement of operations.

During
the quarter ended December 31, 2008, we identified changes in key factors indicating a possible impairment of the value of our goodwill. 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.

ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The discussion and analysis set forth below in this Item 7 reflects the adoption of policies and procedures and adjustments
relating to the review of our historical financial statements. These adjustments include the recording of additional non-cash share-based compensation expense, additional payroll tax
related expenses resulting from the exercise of backdated options through fiscal 2006, adjustments to revenue and cost of revenue due to corrections of our revenue recognition procedures, and certain
other adjustments. For this reason, the data set forth in this Item 7 may not be comparable to discussions and data in our Annual Reports on Form 10-K filed for the years
ended September 30, 2005 and prior, as discussed under the caption "Option Backdating and Accounting Irregularities." All dollar amounts are presented in thousands unless otherwise noted.

Management's
discussion and analysis of financial condition and results of operations ("MD&A") is provided as a supplement to the accompanying consolidated financial statements and
footnotes to help provide an understanding of our financial condition, changes in our financial condition, and results of our operations. The MD&A is organized as follows:



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 services to their customers in a cost-effective manner. The resulting demand for increased bandwidth and services has created a need for
faster, larger and more complex networks. Additionally, due to increasing needs for moving, managing and storing mission-critical data, the market for storage equipment has been growing significantly.

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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 share the requirements of high reliability, scalability, interoperability and low cost. Increasingly, these networks will be delivered based on
Ethernet technology. We believe that products in this emerging technology area represent the best opportunity for us to provide differentiation in the market.

In
Storage, our products address primarily Enterprise-class storage systems and blade-servers using Fibre Channel and Serial Attached SCSI ("SAS")/Serial Attached ATA ("SATA") protocols.
Our customers include leading communications and storage OEMs. On October 29, 2007, the Company completed its sale of a portion of the Storage Products business to Maxim Integrated
Products, Inc. ("Maxim"). Maxim acquired the Company's SAS/SATA expander product, enclosure and baseboard management devices and certain other assets of the Storage Product business.

Debt Restructuring

In October 2009, Vitesse completed its debt restructuring transactions. The debt restructuring agreements call for the conversion of
96.7% of the Company's approximately $110 million aggregate principal amount of 1.5% Convertible Subordinated Debentures due 2024 into a combination of cash, equity securities, and secured
convertible debentures. With respect to the remaining 3.3% of those convertible debentures, the Company is settling its obligations in cash. Additionally, Vitesse has made cash payment of
approximately $5 million of its $30 million senior secured loan, the terms of which had been amended to facilitate the debt restructuring. In order to authorize additional shares of
common stock necessary to permit the conversion of the equity securities issued in the restructuring, we will be holding a special meeting of our shareholders on January 7, 2010 to approve an
amendment to our certificate of incorporation.

Options Backdating and Accounting Irregularities

The following is a description of some significant events that have occurred since April 2006, including, but not limited to,
activities related to errors and irregularities in the disclosure of, and accounting for, stock options granted by the Company to its employees and the Board. A number of these events contributed
directly to the delayed and/or restated filing of the prior years' Annual Reports with the SEC.

Chronology of Events

In April 2006, Vitesse's Board of Directors appointed a Special Committee of independent directors to conduct an internal investigation
relating to past stock option grants, the timing of such grants, and related accounting and documentation for stock option grants from January 1, 2005 to April 2006. The results of this review
are discussed below at "The Special CommitteeFindings and Recommended Actions."

The
Board of Directors determined that the following should not be relied upon:



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In
May 2006, both the office of the United States Attorney for the Southern District of New York and the SEC's Division of Enforcement commenced investigations into Vitesse's practices
relating to the grant of stock options. While the investigation by the United States Attorney is still ongoing, the staff of the Division of Enforcement has agreed to recommend a settlement to the
Commission. Details of this settlement are discussed below at "Item 5. Legal ProceduresThe DOJ Subpoena and the SEC Investigation."

In
June 2006, Vitesse's common stock was delisted from the NASDAQ National Market, due to the length of time that would be necessary for Vitesse to become fully compliant with applicable
listing requirements. Later that same month Vitesse received a letter from the Trustee under the Indenture for Vitesse's 1.5% Convertible Subordinated Debentures due 2024 ("2024 Debentures") alleging
that absent a cure, an event of default would occur within 60 days as a result of Vitesse's failure to file its Quarterly Report on Form 10-Q for the quarter ended
March 31, 2006.

In
August 2006, Vitesse received an acceleration notice from the Trustee under the Indenture for $96.7 million.

In
September 2006, Vitesse completed a Consent Solicitation with respect to the 2024 Debentures. In the Consent Solicitation, the holders of a majority of the 2024 Debentures consented
to amendments to the Indenture governing the 2024 Debentures that:



In
November 2006, Vitesse completed a second Consent Solicitation of the holders of Vitesse's 2024 Debentures resulting in the following:



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In
December 2006, the Company announced that the Special Committee had completed its review and presented details of its finding in a Financial Release and Form 8-K
filing. These results are discussed in detail below under "The Special CommitteeFindings and Recommended Actions."

In
June 2007, the Board of Directors engaged BDO Seidman, LLP as Vitesse's independent registered public accountants.

In
October 2007, Vitesse entered into a proposed settlement of all federal securities class action claims that were filed against the Company and all related federal and state
shareholder derivative actions relating to allegations of stock option backdating and accounting manipulations. The proposed settlement is discussed in more detail under "Legal Proceedings."

In
April 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 is discussed in more detail under "Legal Proceedings."

In
August 2008, the District 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 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. The settlement is discussed in more detail under "Legal Proceedings."

In
September 2008, Vitesse completed and filed its Annual Report on Form 10-K containing audited financial statements for the years ending September 30, 2006
and 2007.

In
December 2008, Vitesse completed and filed its periodic reports on Form 10-Q for the periods ended December 31, 2007, March 31, 2008 and
June 30, 2008 and its annual report on Form 10-K for the fiscal year ended September 30, 2008.

On
June 15, 2009, Vitesse announced that it had reached a settlement of its lawsuit against KPMG, its former auditors, for malpractice; pursuant to which, KPMG agreed to pay the
Company $22.5 million. The final settlement is discussed in more detail under "Legal Proceedings."

The Special CommitteeFindings and Recommended Actions

In December 2006, the Special Committee completed its investigation and released its report to the public in a Financial Release and
Form 8-K. The Special Committee found that members of prior management utilized improper accounting practices primarily related to revenue recognition and inventory, and prepared or
altered financial records. Based on the review of the Special Committee, our management determined that it would likely be unable to prepare and publish audited financial statements for its fiscal
year ended September 30, 2005 and prior periods, but would be able to do so for periods thereafter, upon reconstruction of the beginning account balances for the year ended September 30,
2006. The Special Committee's findings are discussed in more detail below.

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Stock Options

The Special Committee found that:



The
Special Committee did not find any evidence that members of the Board of Directors, other than Mr. Tomasetta, the Compensation Committee, or remaining members of senior
management were aware of improper practices related to stock options. The Special Committee also did not find evidence that members of the Board of Directors, other than Mr. Tomasetta, profited
from such practices, although, the Special Committee did identify a single option grant to members of the Board of Directors in 1996, which appeared to be inadvertent, that had the effect of
increasing the profit to some members of the Board of Directors upon exercise by approximately $18,000 each. In December 2006, all of the members of the Board of Directors who received the 1996 grant,
other than Mr. Tomasetta, voluntarily agreed to remit such amount to the Company. Finally, the Special Committee instructed management to finalize a review of all stock options granted from the
inception of the Company's issuance of options and the related historical measurement dates to determine the appropriate amount to be reflected as a restatement of accumulated deficit.

All
members of the senior management team that were found to have been involved in the backdating and document integrity issues are no longer with the Company and included Louis R.
Tomasetta, the Company's former Chief Executive Officer, Yatin Mody, the Company's former Chief Financial Officer, and Eugene F. Hovanec, the Company's former Executive Vice President.

Revenue Recognition and Inventory

As part of its investigation into the Company's option practices, the Special Committee found evidence of improper accounting
practices. Moreover, the Special Committee found evidence that certain officers and employees prepared and altered documents and our financial records in an attempt to conceal some of these practices
from our Board of Directors and our then independent public accountants, KPMG, LLP. All of the employees identified by the Special Committee as having been aware of, and involved with, these
accounting issues are no longer employed by us. In
addition, in its report the Special Committee directed management to undertake the necessary steps to remediate the shortcomings in its accounting environment.

Review of All Options Issued by the Company through September 30, 2007

At the direction of the Special Committee and, subsequently, the Audit Committee, the Company's new senior management team, assisted by
its consultants, undertook a comprehensive review of every option issued by the Company from its initial option issuance in 1987 through the year ended September 30, 2007 ("Options Grant
Period"). During the Options Grant Period the Company granted stock options pursuant to employee stock option plans and director stock option plans to acquire approximately 146.1 million shares
of Vitesse common stock. Such plans at all relevant times provided for option grants to be approved by the Board of Directors, a designated committee of non-employee directors, or in the
case of the director stock option plans, by the Board of Directors. Approximately 14,680 stock option grants were awarded during the Options Grant Period with 566 recorded grant dates. The Company
reviewed all stock options granted during the Options Grant Period, including option grants to the Company's directors, officers, and employees (including grants to new employees,

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grants
awarded in connection with Company acquisitions, and grants made as individual or group performance awards). The Company's review of the prior stock option granting practices included a
comprehensive examination of available relevant physical and electronic documents as well as interviews with relevant personnel.

The
Company's review focused on determining the amount of accounting charges and extent of adjustment to periods prior to September 30, 2005 that would be required
to:



Due
to its review, the Company identified approximately $268.8 million of unrecorded additional compensation related expenses. This unrecorded additional compensation related
expense was due to the difference between the fair market value of the common stock on the appropriate measurement date and the stated exercise price as well as modifications made to the original
grants during the Option Grant Period. This was reflected as an adjustment to the beginning accumulated deficit balance as of October 1, 2005.

The
following is a summary of the Company's additional key option related findings:



Restatement Methodologies

As of October 1, 2005, the Company adopted Accounting Standard Codification ("ASC") Topic 718 CompensationStock
Compensation ("ASC 718"); originally issued as Statement of Financial Accounting Standards ("SFAS") 123(R),"Share Based Payment,"using the
modified prospective transition method. Under this transition method, compensation expense is to be recognized for all share based compensation awards granted following the date of adoption as well as
for all unvested awards existing on the date of adoption. Prior to October 1, 2005, the Company accounted for share based compensation awards using the intrinsic method in accordance with
APB 25, as allowed under ASC 718. Under the intrinsic value method, no share based compensation expense is recognized if the exercise price of the stock option was at least equal to the
fair market value of the common stock on the "measurement date." APB 25 defines the measurement date as the first date on which both the number of shares that an individual grant recipient is
entitled to receive and the option or purchase price, if any, are known.

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In
light of the findings of the Special Committee and analysis performed by the Company, the Company determined that historic measurement dates could not be relied upon and that it was
necessary for the Company to remeasure all stock option awards and record the relevant charges in accordance with APB 25. In doing so, the Company utilized or considered several sources of
information including, but not limited to: (i) meeting minutes of the Board and committees thereof as well as related materials; (ii) the dates on which stock option grants were entered
into the Company's stock option database; (iii) other correspondence reflecting grant approval actions; and (iv) individual stock option agreements and related materials.

As
a result of the problems identified above, the Company undertook a project with the help of its consultants to reflect the appropriate measurement dates and related intrinsic value
information in its accounting records. As a result of this analysis, the Company recognized an additional $268.8 million in compensation related expenses, before taxes, related to fiscal years
prior to and including the year ended September 30, 2005. In addition to the compensation expense resulting from the correction of option measurement dates, the Company recognized expense for
payroll taxes, interest, and penalties related to the historical underreporting of employees' gains on the exercise of misdated options. The Company's settled the employee payroll taxes and related
interest and penalties resulting from the misdating of stock options in the third quarter of fiscal 2009 in the amount of $0.9 million.

As
a result of the investigation described above, we recorded an additional charge for cumulative compensation expense of approximately $268.8 million to our accumulated deficit
balance as of October 1, 2005.

Remedial Actions of the Company

The Company's management, Board of Directors, Audit Committee, and other relevant governing committees and bodies are committed to the
ongoing review, implementation, and enhancement of the Company's procedures and controls as a result of the aforementioned findings. The Company is currently continuing its assessment of a wide range
of possible procedural enhancements and remedial actions as a result of the findings of the Special Committee, the Company's consultants, and current management.

While
the Company has not completed its considerations for all such actions, procedural improvements and enhancements include but are not limited to the
following:



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We
have incurred substantial expenses for legal, accounting, tax, and other professional services in connection with the Special Committee investigation and related findings, the
Company's internal review of historical financial statements, internal and external investigations and inquiries, related litigation, and renegotiations of our debt arrangements due to violations of
our covenants and other filing requirements. These expenses totaled $4.1 million and $10.8 million for the years ended September 30, 2009 and 2008, respectively. Similar expenses
incurred through September 30, 2007 were in excess of $30.1 million.

Industry Trends and Characteristics that Affect Our Business

In order to achieve sustained, increasing profitability, we must achieve a combination of revenue growth, increases in margins, and
reductions in operating expenses. We continue to focus on improving each of these components of our financial model. In 2009, we faced particularly strong challenges due to the very poor market
environment for semiconductors. Our customers took aggressive actions to reduce orders and adjust inventories. As a result we saw sequential declines of our product revenues in both the first quarter
ended December 31, 2008 and in the second quarter ended March 31, 2009. Overall, product revenue declined from $218.5 million in fiscal 2008 to $154.9 million in fiscal
2009, a decline of 29.1%. Our core business, Carrier and Enterprise networking, had a smaller proportional decline, from $169.5 million in fiscal 2008 to $129.4 million in fiscal 2009, a
decline of 23.7%. In addition, our non-core product revenues continued to decline from $49.1 million in fiscal 2008 to $25.6 million in fiscal 2009, a decrease of 47.9%. In
response, we reduced overall operating expenses from $220.2 million in fiscal 2008 to $155.8 million in fiscal 2009 a decrease of 29.2%. This was done by implementing a variety of
aggressive cost-cutting measures including reduction in workforce of approximately 12%, reduction in salaries for almost all employees, and improved efficiencies in operations. We saw
improving economic trends in the second half of the year that allowed us to show sequential revenue growth in third and fourth quarter of fiscal 2009.

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Due
to the depressed market conditions, many of our major customers and the industry in general, have been going through substantial consolidations, increasing the unpredictability of
these end markets. In spite of these difficult business conditions, we believe that the long-term prospects for the markets that we participate in remain strong. We believe we are
investing in the fastest growing segments of these markets.

Our
ability to achieve sustained revenue growth will depend on several factors including increasing demand from our end markets, our ability to capture and maintain market share in
growing markets, the rate at which these new markets ramp into production, and the continuing trend by systems companies to outsource the designing and manufacturing of ICs to companies such as ours.

Our
future revenue opportunities will, in part, be determined by our ability to participate and capture new "design wins" within our major customer base. This depends in large part on
our ability to develop, deploy, and sell these products in a timely manner with features that compete effectively against the competitors in our markets.

The
majority of our sales effort is very early in the development of our customers' systems, where we compete for market share based on selection of our components over our competitors.
Once selected for a "design win," we have a high probability of holding the majority market share for this product. Many of our large customers have their own internal design teams, which causes us to
compete against these teams when our customers make a "make vs. buy" decision. The trend in the industry has been, and continues to be, to outsource more designs to companies such as ours. While we
expect this trend to continue, we view this "internal" design effort as a significant competitive threat. The "design win" is a critical milestone in the path to generating revenue, as our products,
and our customers' products, are highly complex and typically require many years of development, testing, and qualification before they reach full production. As a result, it may be difficult to
forecast the potential revenue from new and existing products at the time we begin our development efforts or achieve our "design wins." In fiscal 2009, we attained our internal design win goals set
at the beginning of the year.

Our
ability to improve margins depends upon several factors, including our ability to continue to reduce our cost of revenues, including our wafer, assembly, and test costs, our ability
to improve manufacturing yields, our ability to continue to migrate our products to next-generation process nodes, and our ability to reduce average selling price ("ASP") erosion. As a
fabless semiconductor company, we outsource a substantial amount of our manufacturing, including 100% of our wafer and package assembly fabrication. As such, we must manage our supply chain
efficiently to ensure competitive materials pricing and effective lead-times for the materials that we purchase. The semiconductor industry in which we compete is highly cyclical.
Typically, in periods of strong demand in the semiconductor industry, we may experience longer lead times, difficulties in obtaining capacity and/or meeting commitments to our required deliveries. In
addition, we are subject to occasional supply chain issues such as EOL notices on certain material and/or products that may impact our ability to continue to support certain products that may impact
revenue and/or require us to incur additional costs to provide alternative sources. While 100% of our wafer fab and assembly is outsourced, today, we perform 'wafer probe' and 'final test' at our
in-house test facility in Camarillo, California. In 2009, we began a process to move the large majority of this facility to an outsourced test operation in Asia. We expect this process to
take 9-12 months to
complete, at the end of which the majority of our products will be tested in Asia at an outsourced test facility. This production model has substantial advantages in terms of lower fixed cost, reduced
cycle times, and lower inventory levels.

Improving
product yields is critical to maintaining and improving our cost of revenues. We have a team of engineers focused on yield improvements. Yields are affected by a variety of
factors including design quality, wafer fabrication, assembly and test processes and controls, product volumes, and life cycles. We work closely with all our manufacturing subcontractors to improve
product manufacturability and yields. We manufacture a wide variety of products, some at low volumes, which likely limits our

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ability
to improve yields on some products. Cost of revenues is also impacted by the ASP of our products, which is primarily determined by competitive factors within the specific markets we serve.
Average margins vary widely within the markets we serve, with the Carrier Networking market having the highest average margins and the Enterprise Networking market having the lowest average margins.
We endeavor to increase margins by providing products that have substantial added value relative to our competition.

We
continue to focus on improving our operational efficiencies. We reduced our operating expenditures from $220.2 million in fiscal 2008 to $155.8 million in fiscal 2009.
We continue to focus on research and development ("R&D") and selling, general and administrative costs ("SG&A") that are the major elements of operating expense. To remain competitive, we must
efficiently deploy our R&D resources into markets that will provide our future revenue growth. Our R&D costs were reduced from $50.0 million in fiscal 2008 to $45.6 million in fiscal
2009 through several cost reduction efforts including closing of our InP fabrication facility in Camarillo, California, and a substantial reduction in the costs of our CAD tools used to execute our
designs. We believe that the majority of our R&D cost reductions have been in areas outside our strategic focus and were achieved through leveraging design efficiencies derived from standardization on
Ethernet-based products. In fact, we increased our headcount in R&D by 6 people or 2.5% from fiscal 2008 to fiscal 2009. A large part of this growth is in our Hyderabad, India design center where we
can more efficiently execute product verification and validation. Our India design center has been re-targeted from storage products onto products for Carrier and Enterprise Networking
applications. We continue to focus our R&D efforts and to seek opportunities to more efficiently deploy our R&D resources into larger, growing markets. In 2007, we created a Strategy and Technology
Office to better identify and exploit emerging opportunities in the marketplace.

It
is critical that we efficiently deploy our capital. We have continued to improve the critical operational metrics of the company, reducing cycle times, reducing total inventory, and
reducing the ratio of slow-moving and obsolete inventory. In 2009, we continued our solid progress in this area. We reduced inventory levels from $37.5 million in fiscal 2008 to
$18.8 million in fiscal 2009; increasing inventory turns from 2.8 to 4.2. We expect our move to an offshore testing facility to help us further reduce inventory levels and increase inventory
turns.

As
is common in the industry, we sell semiconductor products directly to OEMs and also use a number of distributors and logistics providers to sell products indirectly to our customer
base. These channel partners enable us to provide improved customer support and local inventory to our highly distributed customer base. Our direct gross shipments to customers were
$63.0 million or 40.7% of total product revenue in fiscal 2009 compared with $55.3 million or 25.3% of total product revenue in fiscal 2008. Our indirect gross channel shipments were
$105.1 million in fiscal 2009 and $175.6 million in fiscal 2008.

In
2009, we accelerated our plans to move more of our business to a direct model. By the fourth quarter of fiscal 2009 we shipped 49.3% of our product direct to customers. We expect to
continue to transition to more direct shipments. Our accounting policy is to include all distributor channel inventory on our balance sheet as part of the "sell-through" model. The
"sell-through" model recognizes revenue upon shipment of the merchandise from our distributor to the final customer. For fiscal 2009, distributors Nu Horizons Electronics, Corp. (including
its subsidiary Titan Supply Chain Services), Weikeng Industrial Co. Ltd. and direct customer Huawei Technologies Co., Ltd. accounted for 36.0%, 7.5%, and 12.0%,
respectively, of our net revenues. For fiscal 2008, distributors Nu Horizons Electronics, Corp. (including its subsidiary Titan Supply Chain Services), Weikeng Industrial Co. Ltd. and
direct customer IBM accounted for 48.8%, 9.2% and 11.3%, respectively, of our net revenues. For fiscal 2007, distributors Nu Horizons Electronics, Corp. (including its subsidiary Titan Supply Chain
Services), Weikeng Industrial Co. Ltd. and direct customer IBM accounted for 50.1%, 7.1% and 11.0%, respectively, of our net revenues.

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Our
sales are distributed geographically across the world. In 2009, 36% of our sales were to North America, 52% to Asia, and 12% to Europe. In 2008, 51% of our sales were to North
America, 38% to Asia, and 11% to Europe. In 2007, 52% of our sales were to North America, 34% to Asia, and 14% to Europe.

Implementation of Our Strategy

During the last three years, Vitesse accelerated a comprehensive strategic transformation that began in 2001 following the general
decline of the telecommunications industry after the bursting of the "Internet Bubble." We have invested heavily to enter new markets, develop new products, and penetrate new customers in an effort to
diversify the Company and provide new opportunities for growth. During the last three years we have:



We
continue to strengthen our business with a focus on improving operational performance and execution, creating efficiencies in our R&D efforts, and identifying critical emerging growth
opportunities that can be addressed with our available resources. Our efforts in operations include reduction in materials costs and cycle times, improved product yields, implementation of programs
such as lean manufacturing, and an increased emphasis on the importance of our customers. These efforts are producing results, as we received multiple supplier awards during the year, including
"Supplier of the Year" from our largest customer, Huawei Technologies Co., Ltd.

We
are improving the efficiency of our R&D primarily by focusing our resources on two large, but independent markets: Carrier Networking and Enterprise Networking. Both of these markets
rely increasingly on Ethernet technology to deploy next-generation networks and services, which allows us to maximize the impact of our R&D budget. We believe our focus on the growth of
Ethernet technology in Carrier and Enterprise networks is beginning to pay dividends. New products introduced in 2009 and next-generation products to be released in 2010 will substantially
expand our served markets, allowing us to compete in large, new markets with high growth profiles.

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Fiscal 2009 Actions

On January 26, 2009, the Company reduced the base salaries of its named executive officers, effective February 1, 2009,
as follows: (i) Mr. Christopher R. Gardner20% reduction; (ii) Mr. Richard C. Yonker10% reduction;
(iii) Mr. Michael B. Green10% reduction; and (iv) Mr. Martin Nuss10% reduction. Also effective February 1, 2009, the Company
suspended all matching contributions for its named executive officers in connection with the Company's 401(k) plan. In addition, there were reduced wages and benefits to substantially all other
employees of the Company. These actions remained effective through the end of the Company's 2009 fiscal year. On October 1, 2009, the salaries of the Company's employees other than
Mssrs. Gardner, Yonker, Green and Nuss were reinstated to the same levels as in effect prior to the reduction. On October 12, 2009, the Compensation Committee of the Company's Board of
Directors reinstated the annual base salaries of Mssrs. Gardner, Yonker, Green and Nuss to the same level as in effect prior to the reduction. Such reinstatement was effective on a retroactive basis
to October 1, 2009.

As
of March 31, 2009, the Company eliminated 64 positions; approximately 12% of our total workforce. Of these 53 positions, or approximately 10% of the reductions in the
workforce, related to full-time employees; the remaining reductions related to temporary staffing. The Company did not incur any facilities costs related to workforce reductions. All
actions related to
workforce reductions through March 31, 2009 are complete and the Company does not have any additional reductions planned for the remainder of the fiscal year. A severance expense of
$0.5 million is included in our operating results for the twelve months ended September 30, 2009.

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, which includes networks delivering voice and data services, has grown dramatically to a
complex combination of networks. These networks are often classified into groups such as Wide Area Networks ("WANs"), Metropolitan Area Networks ("MANs"), Multi-Service Access Networks ("MSANs"), and
Radio Access Networks ("RANs"). Each of these types of networks has their own set of technical and operational challenges. 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 problem, Carriers are
increasingly trying to map Ethernet services and connectivity more efficiently into their existing networks. They may even replace their legacy network with new all-IP/Ethernet-based
networks. 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 "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

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Clock
and Data Recovery ("CDR"); (iii) Signal Integrity Products including Backplane Transceivers, CDR, and Crosspoint Switches; (iv) Ethernet Media Access Controllers ("EMACs") 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. 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"). 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. Ethernet-based networks, which are already widely deployed in LANs, are becoming more prevalent in other Enterprise applications such as data center switching and
SANs. Enterprises are paring down their multiple networks (telephone, LAN, video conferencing, wireless, and remote mirroring/backup) to a common switched IP/Ethernet-based infrastructure. Ethernet
technology that is being upgraded to meet these new requirements is generally referred to as "Converged Enhanced Ethernet." In addition, 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. The complexity of products
within the Enterprise Networks varies dramatically based on the product application. Products at the "low-end" of the network, in SOHO, SME, and 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 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 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

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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.

On
June 30, 2009, the Company completed the sale, assignment and transfer of certain patents (the "Vitesse Patents") from its intellectual property portfolio for consideration of
IP revenue of $8.25 million. Payment was due and received on July 15, 2009. The Company incurred $1.8 million in broker's fees related to the sale. The Company recorded the
broker's fees in selling, general and administrative expense. The Vitesse Patents relate to the Company's non-core business, specifically its Network Processing products.

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 most of its products. The Company recognizes revenue on a sell-through basis for all distributors, utilizing
information provided by the distributors. As of September 30, 2009, these distributors maintained inventory balances of $3.6 million, 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. 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

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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
September 30, 2009, approximately 2.2% 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, 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.

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 September 30, 2009 and 2008, 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 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

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useful
lives assigned to intangible assets acquired, other than goodwill, impact the amount and timing of future amortization, and the amount assigned to in-process research &
development is expensed immediately. 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, 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 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. 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

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amount
of goodwill recognized in a 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 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 IP, 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 1.5% Convertible Subordinated Debentures due 2024 (the "2024 Debentures") includes 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
contractual characteristics of the premium put meet the criteria for separate accounting as set forth in ASC 815. 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 is 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 is 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, fair value of the premium put is positively correlated to the estimated amount of cash proceeds and other securities expected to be received at exercise.
Should the premium put have value, any gain or loss on the fair value of the premium put will be reflected in current earnings. The

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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. Upon
exercise of the put option related to the 2024 Debentures on October 1, 2009 (See Note 14Subsequent Events), 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 fair value of the premium put is 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.

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 June 30, 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.

Assets and Liabilities of a Business Held for Sale

In accordance with ASC 360 we classify the assets and liabilities of a business as held for sale when management approves and
commits to a formal plan of sale and it is probable that the sale will be completed. The carrying value of the net assets of the business held for sale are then recorded at the lower of their carrying
value or fair market value, less costs to sell. On December 22, 2008, we closed the sale of the Colorado land and building to a third-party. The gross sales price was $6.5 million. The
facility, which was previously used for the Storage Products business, remained unused since the sale of that business on October 29, 2007. As a result, the net book value of
$3.2 million was reported as "Asset Held for Sale" on the September 30, 2008 balance sheet. We recognized a gain of approximately $2.9 million on this sale in the first quarter of
fiscal 2009.

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

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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 the provisions of the Financial Accounting Standards Board ("FASB") Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes" (ASC 740), and an interpretation of SFAS 109 (ASC 740), on October 1, 2007 and
assessed the impact of FIN 48 (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 September 30, 2008 and 2007, it may not
recognize a benefit arising from non-qualified stock options for those respective years.

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, 2008 and 2007, management has placed a valuation allowance against all deferred tax assets based on its overall assessment of the risks and
uncertainties. Accordingly, management believes the current valuation allowance on deferred tax assets is sufficient and properly stated at June 30, 2009 and September 30, 2008.

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. The Company does not anticipate that the adoption of this statement will have a material impact on its consolidated financial statement
footnote disclosures. 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 does not have a material impact on our results of operations, financial position or cash flows.

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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
April 2009 the FASB issued ASC Topic 805 Business Combinations ("ASC 805"); originally issued as FSP No. 141R-1,"Accounting for
Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies."ASC 805 amends the provisions in Statement 141R for the initial
recognition and measurement, subsequent measurement and accounting and disclosures for assets and liabilities arising from contingencies in business combinations. The FSP eliminates the distinction
between contractual and non-contractual contingencies, including the initial recognition and measurement criteria in Statement 141R and instead carries forward most of the
provisions in ASC 805 for acquired contingencies. ASC 805 is effective for contingent assets and contingent liabilities acquired in business combinations for which the acquisition date
is on or after the
beginning of the first annual reporting period beginning on or after December 15, 2008. 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, term and size of the acquired contingencies. 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. ASC 810 is effective for fiscal years beginning after
December 15, 2008. We do not anticipate that the adoption of ASC 810 will have a material impact on our financial statements.

In
March 2008, the FASB issued ASC Topic 815 Derivatives and Hedging ("ASC 815"); originally issued as SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activitiesan Amendment of FASB Statement No. 133." ASC 815 requires enhanced disclosures about an entity's derivative and
hedging activities and is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We adopted ASC 815 in the second quarter of
fiscal 2009. ASC 815 only required additional disclosure, the adoption did not impact our consolidated financial position, results of operations or cash flows.

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

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balance
sheets on a fair value basis. ASC 470 is effective for fiscal years beginning after December 15, 2008. We anticipate that ASC 470 will affect the accounting for our
convertible debt and we are currently evaluating the impact that it will have on our financial statements.

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 and will be applied to outstanding instruments as of the beginning of the fiscal year in which it is adopted. Upon adoption,
a cumulative effect adjustment will be recorded, if necessary, based on amounts that would have been recognized if this guidance had been applied from the issuance date of the affected instruments. We
are currently determining the impact that ASC 815 will have on our financial statements, if any.

In
April 2009 the FASB issued three related Staff Positions: (i) ASC Topic 820 Fair Value Measurements and Disclosures; originally issued as FSP 157-4, "Determining Fair Value When the Volume and Level of Activity for
the Asset or Liability have Significantly Decreased and Identifying Transactions That Are Not
Orderly,"(ii) ASC Topic 320 InvestmentsDebt and Equity Securities ("ASC 320") and ASC Topic 958-320
InvestmentsDebt and Equity Securities ("ASC 958-320"); originally issued as SFAS 124-2,"Recognition and Presentation of
Other-Than-Temporary Impairments,"and (iii) ASC Topic 825 Financial Instruments ("ASC 825") originally issued as
SFAS 107-1 and ASC Topic 270 Interim Reporting ("ASC 270"); originally issued as APB 28-1, "Interim Disclosures about Fair
Value of Financial Instruments," which will be effective for interim and annual periods ending after June 15, 2009. ASC 820 provides guidance on how to determine
the fair value of assets and liabilities under ASC 820 in the current economic environment and reemphasizes that the objective of a fair value measurement remains an exit price. If we were to
conclude that there has been a significant decrease in the volume and level of activity of the asset or liability in relation to normal market activities, quoted market values may not be
representative of fair value and we may conclude that a change in valuation technique or the use of multiple valuation techniques may be appropriate. ASC 320 and ASC 958-320
modify the requirements for recognizing other-than-temporarily impaired debt securities and revise the existing impairment model for such securities, by modifying the current
intent and ability indicator in determining whether a debt security is other-than-temporarily impaired. ASC 825 and ASC 270 enhance the disclosure of instruments
under the scope of ASC 820 for both interim and annual periods. We adopted this statement for our quarter ended June 30, 2009. The adoption of this statement did not have an impact on
our results of operation, financial position or cash flow.

In
May 2009, the FASB issued ASC Topic 855 Subsequent Events ("ASC 855"); originally issued as FAS No. 165,"Subsequent
Events."ASC 855 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are
issued. ASC 855 is effective for interim and annual periods ending after June 15, 2009. We adopted this statement for our quarter ended June 30, 2009, and the adoption did not have an
impact on our results of operations, financial position or cash flows. The Company has evaluated subsequent events through December 11, 2009, which coincides with the issuance of its financial
statements for the period ended September 30, 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

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by
management to have a material impact on the Company's present or future consolidated financial statements.

Results of Operations

The following table sets forth statements of operations data expressed as a percentage of net revenues for the fiscal years indicated:

Year Ended September 30,2009

2008

2007Net revenues


100.0
%

100.0
%

100.0
%Costs and expenses:Cost of revenues


46.6
%

46.5
%

51.3
%Engineering, research and development


27.2
%

21.9
%

21.3
%Selling, general and administrative


23.9
%

22.1
%

19.1
%Accounting remediation & reconstruction expense & litigation costs


(5.9
)%

4.7
%

6.1
%Goodwill impairment


113.8
%




Amortization of intangible assets


0.8
%

1.1
%

3.0
%Costs and expenses


206.4
%

96.3
%

100.8
%(Loss) income from operations


(106.4
)%

3.7
%

(0.8
)%Other (expense) income:Interest expense, net


(10.0
)%

(1.7
)%

(1.2
)%Loss on extinguishment of debt


0.0
%

0.0
%

(0.9
)%Other income, net


0.1
%

2.1
%

0.8
%Other (expense) income , net


(9.9
)%

0.4
%

(1.3
)%Income tax (benefit) expense


(0.9
)%

0.5
%

0.1
%Minority interest in loss (earnings) of consolidated subsidiary


0.0
%

(0.3
)%

0.0
%(Loss) income from continuing operations before discontinued operations


(115.4
)%

3.3
%

(2.2
)%Discontinued operationsIncome (loss) from discontinued operations, net of tax


0.0
%

4.0
%

(7.6
)%Net (loss) income


(115.4
)%

7.3
%

(9.8
)%


Fiscal Years Ended September 30, 2009 and 2008

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 LANs in SMB and SME
markets. Non-Core Products are those product lines where we have chosen to exit markets and no longer continue to invest.

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The
following table summarizes our product revenues. Our references to years are in the context of our fiscal years ended September 30:

September 30,

Change2009

2008

$

%(in thousands)Carrier Networking Products

$
69,020

$
92,952

$
(23,932
)

(25.7
)%Enterprise Networking Products


60,356


76,524


(16,168
)

(21.1
)%Non-Core Products


25,551


49,060


(23,509
)

(47.9
)%Product Revenues

$
154,927

$
218,536

$
(63,609
)

(29.1
)%


Product
revenues in fiscal 2009 were $154.9 million, a decrease of 29.1% from the $218.5 million recorded in fiscal 2008. The decrease is driven primarily by overall weaker
customer demand and inventory corrections that our customers have implemented in response to the severely depressed global economic environment.

Product
revenues from Carrier Networking Products were $69.0 million in fiscal 2009, compared with $93.0 million in fiscal 2008. The decrease of 25.7% is due to overall
weakness across the majority of product segments, particularly older optical physical layer and processing products. This was offset by relative strength from our Ethernet over SONET Mappers and
Gigabit Ethernet and 10 Gigabit Ethernet Physical Layer products.

Product
revenues from Enterprise Networking Products in fiscal 2009 were $60.4 million, a decrease of 21.1% from $76.5 million in fiscal 2008. The decrease was primarily
due overall weakness across all product segments.

Product
revenues from Non-Core Products were $25.6 million in fiscal 2009, compared with $49.1 million in fiscal 2008. The decrease of $23.5 million, or
47.9%, was primarily due to a strong decline in Raid-on-Chip Processor products. Our legacy Network Processor and Fiber Channel Physical Layer components also saw a substantial
decline of approximately 50%. We have chosen to exit these markets and are no longer making any additional investments in these products.

In
fiscal 2009, we shipped approximately $9.4 million in products that are now classified as end-of-life ("EOL"), compared to sales of
$22.1 million in EOL products in fiscal 2008. These products are older generation storage products, including our 2G Fibre Channel products and Enclosure Management products classified as
Non-Core products, certain older generation Ethernet Switch and MAC products classified as Enterprise products, and certain products originally manufactured in our Camarillo, California
GaAs fabrication facility classified as Carrier Networking products.

Licensing Revenues

September 30,

Change2009

2008

$

%(in thousands)Licensing revenues

$
13,250

$
10,000

$
3,250


32.5
%


Licensing
revenues were $13.3 million in fiscal 2009, compared with $10.0 million in fiscal 2008. For the year ended September 30, 2009, licensing revenues included
IP revenue of $8.3 million from the sale of patents from our IP portfolio and $5.0 million from an arrangement, entered into in the first quarter of 2008, to license IP to a third-party.
On December 28, 2007, the Company entered into an arrangement to license IP 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

56

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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 for the fiscal year ended September 30, 2009.

Cost of Revenues

September 30,

Change2009

2008

$

%(in thousands)Cost of Revenues

$
78,414

$
106,344

$
(27,930
)

(26.3
)%Percent of net revenues


46.6
%

46.5
%


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.

Our
cost of revenues was $78.4 million in fiscal 2009 compared to $106.3 million in fiscal 2008. As a percentage of net revenues, our cost of revenues was 46.6% in fiscal
2009 compared to 46.5% in fiscal 2008. Excluding intellectual property revenue, our cost of revenue for products was $78.4 million, or 50.6% of revenue in fiscal 2009 compared with
$106.3 million or 48.7% of revenue in fiscal 2008. The increase in the cost of revenues by 1.9% is attributable primarily to three factors:



As
it is customary in the semiconductor industry for product prices of maturing products to decline over time, it is imperative that we continue to reduce our cost of revenues. We
continued to focus our efforts on improving operating efficiencies, including improving product yields, reducing scrap, and improving cycle times.

In
fiscal 2009, our cost of revenues was impacted by substantially lower sales volumes. Under-utilization of our fixed sized manufacturing facilities, primarily our test manufacturing
facility, increased our cost of revenue as a percentage of net revenues in fiscal 2009 relative to fiscal 2008. During fiscal 2009, we took steps to reduce our fixed cost of manufacturing by
re-evaluating our testing procedures. In an effort to reduce costs and shorten manufacturing time, the Company has decided to eliminate test activities at the Camarillo, California
location. This will reduce headcount, maintenance, and facilities costs. We have begun planning to move a substantial portion of our test facility to a subcontractor in fiscal 2010 to further reduce
our fixed manufacturing costs. (See Note 14Subsequent Events in the accompanying consolidated financial statements).

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Engineering, Research and Development

September 30,

Change2009

2008

$

%(in thousands)Engineering, research and development

$
45,685

$
49,982

$
(4,297
)

(8.6
)%Percent of net revenues


27.2
%

21.9
%


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

Engineering,
research and development expenses for 2009 were $45.7 million, a decrease of $4.3 million or 8.6% from $50.0 million in 2008. The decrease in expenses
is primarily due to lower mask set expenditures of $1.4 million, lower employment costs of $1.2 million and lower facility costs of $1.3 million. Engineering activities
transferred to lower cost geographies accounted for the lower employment and facility costs.

Engineering,
research and development investment in 2009 as a percentage of net revenues increased to 27.2% from 21.9% in 2008. The continued commitment to engineering investment and the
engineering productivity improvement in 2009 despite the decrease in revenue, demonstrates the
Company's continued commitment to the design and development of future products as vital to maintaining a competitive edge for the Company and its customers. The Company closely monitors its
engineering expense in relationship to revenue expectations in future periods. We continue to concentrate our investments in areas that match our customers' requirements and market conditions.

Selling, General and Administrative

September 30,

Change2009

2008

$

%(in thousands)Selling, general and administrative

$
40,227

$
50,557

$
(10,330
)

(20.4
)%Percent of net revenues


23.9
%

22.1
%


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

SG&A
expense decreased by 20.4% or $10.3 million compared to the year ended September 30, 2008. As a percentage of net revenues, SG&A expense increased from 22.1% to 23.9%.
The reductions in costs were driven by a decrease in compensation-related charges of $2.7 million as a result of salary and head count reductions. Due to extensive cost-reduction
efforts, facilities, travel and supplies expenses decreased by a total of $2.0 million. Share-based compensation decreased by $0.6 million due to the vesting of a substantial number of
stock options during the first fiscal quarter of 2009, net of increases due to the issuance of new awards during the year. During the year, professional fees decreased by $3.2 million compared
to fiscal 2008 due to the transitioning of accounting and finance functions from contract employees to full-time staff.

During
the fourth quarter of fiscal 2009, we incurred $2.1 million in legal and professional fees related to the restructuring of our 2024 Debentures and our senior note with
Whitebox VSC, LTD.

During
fiscal 2009, upon the sale of certain intellectual property patents, we recognized $1.8 million in brokers fees related to the sale. Other sales related costs decreased by
$1.4 million

58

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during
the year due to lower operating results, resulting in a net increase in sales related costs of $0.4 million.

In
the third quarter of fiscal 2008, we recognized $0.4 million in bad debt from a customer that went out of business. In fiscal 2009, we did not recognize any specific
write-offs and collected receivables that had previously been written off in the amount of $0.2 million.

We
also recorded a $2.9 million credit to SG&A expense for the recovery of sales tax withheld by foreign authorities. At the time of the sales in fiscal 2008 and the first quarter
of 2009, we did not estimate that the recovery of these withholdings was likely and we recorded charges to SG&A expense in the amounts of $2.0 million in fiscal 2008 and $1.0 million in
the first quarter of 2009 The net change in SG&A expense related to these charges in 2008 and the subsequent recovery in 2009 was $3.9 million.

Additionally,
in fiscal 2009, we recognized a gain on the sale of our Colorado building of $2.9 million. In fiscal 2008, we recognized a gain on the sale of fixed assets of
$3.2 million, a difference and net increase to SG&A expense of $0.3 million.

Accounting Remediation and Reconstruction Expense and Litigation Costs

September 30,

Change2009

2008

$

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

$
(9,922
)
$
10,761

$
(20,683
)

(192.2
)%Percent of net revenues


(5.9
)%

4.7
%


Accounting
remediation and reconstruction expense and litigation costs consists 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 years ended September 30, 2009 and 2008, we recognized a net credit of $9.9 million and a charge of $10.8 million, respectively. As the remediation and
reconstruction work came to a completion during fiscal 2009, $6.7 million of the $20.7 million difference is the result of a decrease in professional fees.

We
reached a settlement with KPMG, our former independent registered public accounting firm in fiscal 2009. Pursuant to the settlement, KPMG agreed to pay us $22.5 million and
forgive all of our past indebtedness. During the third quarter, we recorded the settlement amount, net of fees and expenses, resulting in a net credit of $16.0 million.

In
June 2009, we reached a settlement with the IRS related to the exercise of backdated stock options. The settlement was less than we had previously estimated and accrued, and we
recorded a credit to accounting remediation and reconstruction expense and litigation costs of $1.0 million during fiscal 2009.

In
connection with our pending settlement with the SEC, as proposed by the staff of the Division of Enforcement, related to their investigation into the Company's historical stock option
practices and certain other accounting irregularities, we recorded a $3.0 million accrual during the third quarter of fiscal 2009.

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Goodwill Impairment

September 30,

Change2009

2008

$

%(in thousands)Goodwill impairment

$
191,418

$


$
191,418


100.0
%Percent of net revenues


113.8
%

0.0
%


During
the first quarter of fiscal 2009, 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 our impairment test, we 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 is determined in the same manner as the amount of goodwill recognized in a business combination.
The fair value was determined through an analysis of: (i) market capitalization; (ii) comparable public company valuations; and (iii) 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 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 in the first quarter of fiscal 2009. (See Note 3Goodwill in the accompanying consolidated financial statements).

Amortization of Intangible Assets

September 30,

Change2009

2008

$

%(in thousands)Amortization of intangible assets

$
1,360

$
2,514

$
(1,154
)

(45.9
)%Percent of net revenues


0.8
%

1.1
%


Amortization
of intangible assets was $1.4 million in fiscal 2009, compared to $2.5 million in fiscal 2008. The decrease from 2008 to 2009 is primarily due to intangible
assets related to our prior acquisition of Cicada Semiconductor Corporation becoming fully amortized during fiscal 2008 and our prior acquisitions of Vermont Scientific Technologies and Adaptec
becoming fully amortized during fiscal 2009.

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Interest Expense, net

September 30,

Change2009

2008

$

%(in thousands)Interest expense, net

$
16,862

$
3,868

$
12,994


335.9
%Percent of net revenues


10.0
%

1.7
%


Interest
expense, net of interest income, increased by $13.0 million to $16.9 million for fiscal 2009. During the year ended September 30, 2009, we recorded a fair
value adjustment to the premium put on the 2024 Debentures of $12.2 million. We did not record a fair value adjustment during fiscal 2008. The primary driver of the change in fair value from
September 30, 2008 to September 30, 2009 was an increase in the amount of funds available for cash settlement between the measurement dates.

Interest
expense on outstanding debt was $4.8 million for the year ended September 30, 2009, an increase of $0.2 million from fiscal 2008. In October 2007, in
connection with the sale of the Storage Products business, the Company replaced its debt to Tennenbaum Capital Partners ("TCP") with a note to Whitebox VSC, Ltd. ("Whitebox"). Interest expense
of approximately $0.7 million incurred on the TCP debt in fiscal 2008 was recorded as a component of discontinued operations. Interest on the debt with Whitebox is included in interest expense.
For fiscal 2009, twelve months of interest was incurred on the Whitebox debt compared to eleven months of interest incurred on the debt during fiscal 2008. Interest expense on the subordinated 2024
Debentures for fiscal 2009 was consistent with fiscal 2008.

Although
the Company maintained higher average cash balances, significant declines in interest rates earned on deposit accounts from fiscal 2008 to fiscal 2009 reduced the amount of
interest income included in net interest expense by approximately $0.6 million.

Other Income, net

September 30,

Change2009

2008

$

%(in thousands)Other income, net

$
223

$
4,882

$
(4,659
)

(95.4
)%Percent of net revenues


0.1
%

2.1
%


Other
income, net of other expense, was $0.2 million in fiscal 2009 compared to $4.9 million in fiscal 2008. This decrease is primarily due to the sale of
available-for-sale securities held by Vitesse and its subsidiaries in the third quarter of 2008. We also recognized income related to the settlement of a breach of contract
lawsuit and a gain on sale of scrap material in the first quarter of 2008. We did not record similar transactions in fiscal 2009.

Income Tax (Benefit) Expense

September 30,

Change2009

2008

$

%(in thousands)Income tax (benefit) expense

$
(1,451
)
$
1,222

$
(2,673
)

(218.8
)%Percent of net revenues


(0.9
)%

0.5
%


Income
tax expense represents state and foreign income tax expense not eligible for offset by loss carry forwards.

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Minority Interest in Earnings of Consolidated Subsidiary

September 30,

Change2009

2008

$

%(in thousands)Minority interest in (loss) earnings of consolidated subsidiary

$
(81
)
$
660

$
(741
)

112.2
%Percent of net revenues


(0.0
)%

0.3
%


We
record a minority 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"), representing the limited partners' interest in the Funds' operating income and expenses. A minority interest in the income of our consolidated joint venture was recorded in the third quarter
of fiscal 2008, representing the limited partners' interest in the Funds' gain on the sale of available-for-sale securities. The limited partners' portion of the gain totaled
$0.7 million. In the fourth quarter fiscal 2009, the Funds recorded an impairment charge to write off an investment that was determined to have an other-than-temporary
impairment. We recorded a minority interest charge of $0.1 million for the limited partners' portion of the impairment.

Income and Gain on the Sale of Discontinued Storage Products

September 30,

Change2009

2008

$

%(in thousands)Gain on Discontinued Storage Products business, net of tax

$
71

$
9,044

$
(8,973
)

(99.2
)%Percent of net revenues


0.0
%

4.0
%


On
October 29, 2007, the Company completed its sale of a portion of the Storage Products business to Maxim Integrated Products, Inc. ("Maxim") for $62.8 million,
with a gain on the sale of approximately $21.5 million, plus a potential earn-out based on the business meeting certain criteria, as detailed in the agreement. Maxim acquired the
Company's SAS/SATA Expander Product Markets, enclosure and baseboard management devices and certain other assets of the Storage Product business. Assets sold included inventory, property &
equipment, goodwill and intangible assets of $35.5 million. As part of the sale, Maxim assumed a liability for employees' accrued vacation of $0.3 million. The gain was reduced by costs
of completing the sale in the amount of $1.6 million.

Debt
issuance costs related to the TCP debt of $3.5 million were included in the calculation of the gain on the sale pursuant to the accounting guidance in ASC
Topic 205-20 Discontinued Operations ("ASC 205-20"); originally issued asEITF Issue 87-24,"Allocation of Interest to Discontinued Operations." ASC 205-20 which requires any costs related to financing that must be paid off
with the proceeds of the sale of specific assets to be included in the determination of the gain or loss on the sale. In accordance with ASC 205-20, we allocated to discontinued
operations interest expense associated with debt instruments that were
required to be repaid upon the sale of the Storage Product business. Pursuant to an amendment to the debt agreement with TCP we were required to pay the debt to TCP from the Storage Products division
sale proceeds. Accordingly, for the nine months ended June 30, 2008, interest expense of approximately $16.9 million was included in discontinued operations. Interest expense included a
"make-whole" payment of $16.4 million and interest expense and amortization of deferred financing fees of $0.5 million.

For
the year ended September 30, 2009, income from discontinued operations consisted solely of income from the earn-out, net of tax, in the amount of
$0.1 million.

For
the year ended September 30, 2008, income from discontinued operations was $9.0 million, which included $1.7 million of income from the earn-out and
residual operations, net of tax. For fiscal

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2008,
we reported the results of operations of the Storage Products business as discontinued operations in the Company's statement of operations in accordance with ASC 360.

The
following table sets forth selected operating results:

September 30,2009

2008(in thousands)Net revenues of discontinued operations

$


$
2,656(Loss) income from continuing operations before income taxes


(195,644
)

9,392Provision for income tax (benefit) expense


(1,451
)

1,222Minority interest in loss (earnings) of consolidated subsidiary


81


(660
)Income from discontinued operations, net of tax


71


9,044Net (loss) income

$
(194,041
)
$
16,554


Fiscal Years Ended September 30, 2008 and 2007

Product Revenues

We classify our IC products into three categories: 1) Carrier Networking Products; 2) Enterprise Networking Products; and
3) Non-Core Products. The Networking Products line services Core and Metro WANs, 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 LANs in SMB and SME markets.
Non-Core Products are those product 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.

The
following table summarizes our product revenues:

September 30,

Change2008

2007

$

%(in thousands)Carrier Networking Products

$
92,952

$
91,670

$
1,282


1.4
%Enterprise Networking Products


76,524


76,089


435


0.6
%Non-Core Products


49,060


54,189


(5,129
)

(9.5
)%Product Revenues

$
218,536

$
221,948

$
(3,412
)

(1.5
)%


Product
revenues in fiscal year 2008 were $218.5 million, a decrease of 1.5% from the $221.9 million recorded in fiscal year 2007. The revenues reported from the Storage
Products exclude revenues generated from product lines sold to Maxim in October 2007.

Product
revenues from Carrier Networking Products were $93.0 million in fiscal 2008, compared with $91.7 million in fiscal 2007. The increase of 1.4% was primarily due to
growth in Optical PHY and signal integrity product lines.

Product
revenues from Enterprise Networking Products in fiscal 2008 were $76.5 million, an increase of 0.6%, compared with $76.1 million in fiscal 2007. The increase was
primarily due to growth in our Ethernet switch and Cu PHY products, our signal integrity products. This was partially offset by a decrease in sales from our legacy packet switch product family.

Product
revenues from Non-Core Products were $49.1 million in fiscal 2008, compared with $54.2 million in fiscal 2007. The decrease of $5.1 million, or
9.5%, in revenues, was primarily due to

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Table of Contents

weaker
demand for our products that are at or nearing their end-of-life in markets that we have chosen to exit. Accordingly we are not actively pursuing sales of these
products.

In
fiscal 2008, we shipped approximately $22.1 million in products that are now classified as EOL compared with $34.9 million in fiscal 2007. These products were older
generation storage products including our 2G Fibre Channel products and Enclosure Management products classified as Non Core products, certain older generation Ethernet Switch and MAC products
classified as Enterprise products, and certain of our Network Processor ("NPU") products and older generation products manufactured in our Camarillo, California GaAs fabrication facility classified as
Carrier Networking products.

Licensing Revenues

September 30,

Change2008

2007

$

%(in thousands)Licensing revenues

$
10,000

$


$
10,000





Licensing
revenues were $10.0 million in fiscal 2008, compared with $0 in fiscal 2007. 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. We received confirmation of the deliverables from the licensee
and recognized $10.0 million of licensing revenues in September 2008. In 2008, we began to leverage our substantial intellectual property ("IP") portfolio into licensing opportunities with
third parties. We offer a variety of IP "cores" and design services in deep submicron, 130 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."

Cost of Revenues

September 30,

Change2008

2007

$

%(in thousands)Cost of Revenues

$
106,344

$
113,754

$
(7,410
)

(6.51
)%Percent of net revenues


46.5
%

51.3
%


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.

Our
cost of revenues was $106.3 million in fiscal 2008 compared to $113.8 million in fiscal 2007. As a percentage of net revenues, our cost of revenues was 46.5% in fiscal
2008 compared to 51.3% in fiscal 2007.

Substantial
portions of our revenue growth in 2008 were from lower margin products in our Enterprise Networking product lines. This was the result of our focus in prior years to
diversify our business in
areas outside the Carrier Networking markets. While products in these new markets provide good diversification and growth opportunities, they come at a higher overall cost of revenues in these new
markets.

During
2008, revenues from these higher cost products increased, while total cost of revenues improved compared to 2007 due to:



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Engineering, Research and Development

September 30,

Change2008

2007

$

%(in thousands)Engineering, research and development

$
49,982

$
47,199

$
2,783


5.9
%Percent of net revenues


21.9
%

21.3
%


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 for 2008 were $50.0 million, an increase of $2.8 million or 5.9% from $47.2 million in 2007. The increase in
engineering, research and development expenses is primarily due to increased headcount and related employment costs resulting from our engineering efforts in the development of new products.

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
revenues, 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.

Selling, General and Administrative

September 30,

Change2008

2007

$

%(in thousands)Selling, general and administrative

$
50,557

$
42,459

$
8,098


19.1
%Percent of net revenues


22.1
%

19.1
%


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

SG&A
expenses were $50.6 million in fiscal 2008 compared to $42.5 million in fiscal 2007. The $8.1 million increase in our SG&A expenses for fiscal 2008, is
primarily due to higher accounting fees paid to our auditors for services related to the auditing and issuing of our 2006 and 2007 financial statements. Audit fees are considered recurring costs and
are not included in the accounting remediation costs discussed below. We also experienced increases in bonus and commission expense as a result of improved operating performance and expense related to
the cost of outside labor to prepare our Colorado Springs facility for sale. These increased costs are partially offset by a $3.2 million gain on the sale of fixed assets.

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Table of Contents

Accounting Remediation & Reconstruction Expense and Litigation Costs

September 30,

Change2008

2007

$

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

$
10,761

$
13,558

$
(2,797
)

(20.6
)%Percent of net revenues


4.7
%

6.1
%


Accounting
remediation and reconstruction expense and litigation costs consist of fees incurred in connection with the preparation and issuance of our fiscal 2006 and fiscal 2007
financial statements. We recorded $10.8 million in 2008 and $13.6 million in 2007 related to work performed on stock option accounting and inventory valuation, revision of our revenue
recognition policies, and other legal and financial reporting issues. Of these costs, legal fees constituted $4.1 million and $7.6 million, respectively, and other professional and
accounting fees were $6.7 million and $6.0 million, respectively.

Accounting
remediation and reconstruction costs are expected to decrease significantly in fiscal 2009 as we resolve certain legal issues, complete and file all outstanding financial
reports, and transition accounting and reporting responsibilities to full-time staff.

Amortization of Intangible Assets

September 30,

Change2008

2007

$

%(in thousands)Amortization of intangible assets

$
2,514

$
6,777

$
(4,263
)

(62.9
)%Percent of net revenues


1.1
%

3.0
%


Amortization
of intangible assets was $2.5 million in fiscal 2008, compared to $6.8 million in fiscal 2007. The decrease from 2007 to 2008 is due to intangible assets
related to our prior acquisitions of Exbit Technology A/S, APT Technologies, Inc, and Multilink Technology Corporation becoming fully amortized during 2007. See Note 2Goodwill and
Other Intangible Assets in the accompanying consolidated financial statements for additional information.

Interest Expense, net

September 30,

Change2008

2007

$

%(in thousands)Interest expense, net

$
3,868

$
2,580

$
1,288


49.9
%Percent of net revenues


1.7
%

1.2
%


Interest
expense, net of interest income increased approximately $1.3 million to $3.9 million in 2008. In October 2007, in connection with the sale of the Storage Products
business, the Company replaced its debt to Tennenbaum Capital ("TCP") with a note to Whitebox VSC, Ltd. ("Whitebox"). Interest expense incurred on the TCP debt in fiscal 2007 and 2008 was
higher than the fiscal 2008 Whitebox interest expense, but all interest expense related to the TCP debt was recorded as a component of discontinued operations in fiscal 2007 and 2008, resulting in
$3.1 million higher net interest expense in fiscal 2008. This increase is offset by a decrease in interest on the subordinated 2024 Debentures. In the second half of fiscal 2007, we incurred an
additional 4% interest on the debentures in connection with the Second Supplemental Indenture dated September 24, 2007. As a result, interest expense related to the subordinated debentures
decreased by $1.9 million in fiscal 2008 compared to fiscal 2007. We did not record a fair value adjustment during the fiscal 2008.

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Loss on Extinguishment of Debt

September 30,

Change2008

2007

$

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

$


$
(1,977
)
$
1,977


100.0
%Percent of net revenues


0.0
%

(0.9
)%


In
connection with the amendment to the 2024 Debentures in the first quarter of fiscal 2007, (See Note 6Debt in the accompanying consolidated financial statements),
the conversion price of the 2024 Debentures was permanently decreased from $3.92 to $2.546 per share of common stock, resulting in debt terms that were substantially different from the original debt
terms. In accordance with 470 Debt ("ASC 470"); originally issued as EITF 96-19"Debtor's Accounting for a Modification or Exchange of Debt
Instruments,"the Company recognized a loss of $2.0 million on the extinguishment of debt in the first quarter of fiscal 2007 as a result of the write-off of
unamortized debt issuance costs.

Other Income, net

September 30,

Change2008

2007

$

%(in thousands)Other income, net

$
4,882

$
1,755

$
3,127


178.2
%Percent of net revenues


2.1
%

0.8
%


Other
income, net of expense, was $4.9 million in fiscal 2008 compared to $1.8 million in fiscal 2007. Other income in fiscal 2008 was primarily related to gains on the
sale of available-for-sale securities held by Vitesse and its subsidiaries of $3.4 million, $0.4 million income from the settlement of a breach of contract
lawsuit, a $0.5 million gain on scrap materials. In fiscal 2007, other income primarily consisted of miscellaneous, non-recurring royalty payments generated from the licensing of
intellectual property to third parties.

Income Tax Expense

September 30,

Change2008

2007

$

%(in thousands)Income tax expense

$
1,222

$
224

$
998


445.5
%Percent of net revenues


0.5
%

0.1
%


Income
tax expense represents state and foreign income tax expense not eligible for offset by loss carry forwards.

Minority Interest in Earnings of Consolidated Subsidiary

September 30,

Change2008

2007

$

%(in thousands)Minority interest in earnings of consolidated subsidiary

$
660

$


$
660


Percent of net revenues


0.3
%

0.0
%


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A minority interest in the income of our consolidated joint venture, the Vitesse Venture Fund, L.P. ("the Fund"), was recorded in the third quarter of
fiscal 2008, representing the limited partners' interest in the Fund's gain on the sale of available-for-sale securities. The limited partners' portion of the gain totaled
$0.7 million for the year ended September 30, 2008.

Income and Gain on the Sale of Discontinued Storage Products

September 30,

Change2008

2007

$

%(in thousands)Gain (loss) on Discontinued Storage Products business, net of tax

$
9,044

$
(16,822
)
$
25,866


153.8
%Percent of net revenues


4.0
%

(7.6
)%


On
October 29, 2007, the Company completed its sale of a portion of its Storage Products business, as discussed in Note 3Discontinued Operations and Assets
Held for Sale in the accompanying financial statements, for $62.8 million, with a with a gain on the sale of approximately $21.5 million, plus a potential earn-out based on
the business meeting certain criteria, as detailed in the agreement. Assets sold include inventory, property & equipment, goodwill and intangible assets of $35.5 million. As part of the
sale, Maxim assumed a liability for employees' accrued vacation of $0.3 million. Debt issuance costs related to the debt with TCP of $3.5 million were included in the calculation of the
gain on the sale. The gain was reduced by costs of completing the sale in the amount of $1.6 million.

In
accordance with ASC 205-20, we have allocated to discontinued operations interest expense associated with debt instruments that were required to be repaid upon the
sale of Storage Products. For the year ended September 30, 2008, interest expense of approximately $16.9 million was included in discontinued operations. Interest expense included a
"make-whole" payment of $16.4 million, and interest expense and amortization of deferred financing fees of $0.5 million. For the year ended September 30, 2007,
interest and amortization of deferred financing fees was $10.2 million.

For
the year ended September 30, 2008, results of discontinued operations increased $25.8 million, from a loss of $16.8 million in fiscal 2007 to income of
$9.0 million in fiscal 2008. The increase is the result of a gain on the sale of $21.5 million, offset by the loss on discontinued operations of $12.5 million, net of tax of
$0.9 million, compared with the loss on discontinued operations of $16.8 million for fiscal 2007.

Results
of discontinued operations for the year ended September 30, 2008 compared to the same period in fiscal 2007 increased $12.1 million, from a loss of
$6.6 million to income of $5.5 million. This increase includes $4.0 million of income related to the earn-out, $1.4 million related to the final delivery on an
end-of-life product, and approximately $6.7 million as a result of the inclusion of only one month of operations through the date of sale for the year ended
September 30, 2008 compared to a full year of operations recorded in the period ended September 30, 2007.

We
recorded amounts in discontinued operations in accordance ASC 360. Accordingly, we have reported the results of operations and financial position of the Storage Products business in
discontinued operations within the Company's statements of operations and as assets and liabilities held for sale in the Company's balance sheet as of September 30, 2007.

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Selected
operating results were as follows:

2008

2007(in thousands)Net revenues of discontinued operations

$
2,656

$
18,057Income (loss) from continuing operations before income taxes


8,732


(4,601
)Provision for income taxes


1,222


224Income (loss) from discontinued operations, net of tax


9,044


(16,822
)Net income (loss)

$
16,554

$
(21,647
)


Liquidity

Cash and cash equivalents increased to $57.5 million at September 30, 2009, from $36.7 million at
September 30, 2008, as a result of the following:

September 30,2009

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

$
19,197

$
(22,620
)Net cash provided by investing activities


1,649


65,588Net cash used in financing activities


(24
)

(32,222
)Net increase in cash and cash equivalents


20,822


10,746Cash and cash equivalents at beginning of year


36,722


25,976Cash and cash equivalents at end of year

$
57,544

$
36,722


In
2009, our operating activities provided $19.2 million in cash. Our net loss of $194.0 million included noncash charges of a $12.2 million fair value adjustment to
the premium put, $4.2 million of depreciation expense, $3.1 million of stock-based compensation expense, a $3.0 million accrual for our pending settlement with the SEC related to
past accounting irregularities and, a $1.0 million adjustment of our stock option backdating payroll tax liability due to our settlement with the IRS for less than estimated, and a
$191.4 million goodwill impairment charge, offset by a gain on the sale of the Colorado building of $2.9 million. Cash expenses for fiscal 2009 include $4.1 million in costs
related to our restructuring and remediation efforts and $2.1 million in legal and professional fees related to the restructuring of our 2024 Debentures and our senior note with Whitebox
VSC, Ltd. These costs were offset by a $16.0 million credit related to the settlement with our former independent registered public accounting firm (See
Item 2Management's Discussion and Analysis of Financial Condition and Results of Operations).

In
2008, our operating activities used $22.6 million in cash. This was primarily the result of $7.5 million of income from continuing operations and a $9.0 million
gain from discontinued operations, offset by $18.0 million in net non-cash operating expenses and $21.2 million provided by changes in operating assets and liabilities.

Accounts
receivable increased $5.0 million from $6.3 million at September 30, 2008 to $11.4 million at September 30, 2009. The increase is primarily
due to higher sales at the end of the fiscal year. Inventories decreased $18.7 million from $37.5 million at September 30, 2008 to $18.8 million at September 30,
2009, reflecting the decrease in our sales demand, and consequently our inventory purchases, and our channel partners and distributors taking action to reduce their inventory in response to the
current economic slowdown. We were able to respond quickly to the change in demand, reducing orders to our suppliers. Our inventory levels will continue to be determined based upon the level of
purchase orders we receive, and our ability and the ability of our customers to

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manage
inventory levels. Such considerations are balanced against the risk of obsolescence or potentially excess inventory levels.

Accrued
expenses decreased by $4.7 million, including reductions of accrued income taxes and accrued wages. The decrease is primarily due to $0.9 million paid to the IRS
upon the settlement of taxes related to backdated stock options. Accrued wages, including accrued bonuses and commissions were further reduced by $1.0 million due to headcount and salary
reductions and lower sales volume during the year. Accrued income taxes decreased by $2.4 million primarily due to tax payments made during fiscal 2009. In addition, deferred revenue decreased
by $1.4 million as a result of the decline in distributor purchases.

In
2008, cash used in operating activities was primarily related to a reduction in deferred revenue resulting from a change in payment terms on distributor activity. The Company
eliminated the option of its distributors to deduct 2% from invoice amounts if the distributors pay their invoice within 10 days of the invoice date. There was no change in revenue recognition
policy, but rather a change in terms and conditions of payment policy. Additionally, we used cash to increase our investment in wafer die bank and finished goods inventory in order to improve our
on-time delivery, particularly in our Ethernet product line. We also experienced a decrease in accrued expenses due to the timing of payments to our vendors and other service providers.
Cash used in operations was partially offset by a decrease in accounts receivable due to increased focus on cash management and collection efforts.

Investing
activities provided cash of $1.6 million in fiscal 2009, which was primarily the result of the proceeds from the sale of the Colorado building of $6.0 million,
net of commissions and transaction costs, partially offset by capital expenditures of $2.3 million and the purchase of to intangibles of $2.0 million. In 2008, our investing activities
provided $65.6 million primarily as a result of the sale of our Storage Products business.

In
2008, our financing activities used $32.2 million in cash, which was primarily a result of the repayment of our $59.5 million debt with TCP, offset by the proceeds
received from Whitebox for $29.3 million. (See Debt Note in the accompanying financial statements).

On
October 30, 2009, we closed a debt restructuring transaction with our major creditors pursuant to which we issued approximately $50.0 million of new 8.0% Convertible
Second Lien Debentures Due 2014 (the "2014 Notes") (See Note 6Debt in the accompanying consolidated financial statements). Under the terms of the indenture governing the 2014
Notes, if we do not receive shareholder approval of an increase in our authorized shares of common stock on or prior to February 15, 2010, we will be obligated to pay $500,000 per month in
additional interest until stockholder approval of this increase is obtained. If we are unable to obtain this stockholder approval prior to February 15, 2011, the holders of the 2014 Notes will
have the right to convert the 2014 Notes into cash. If we are obligated to pay this additional interest, it will have a significant negative impact on our cash position and our results of operations.
We believe that our available cash will be adequate to finance our operating needs and meet our obligations for the next 12 months; however, we do not believe that we will have sufficient cash
by February 15, 2011 to permit a cash conversion of the 2014 Notes. Annual interest payments on the 2014 Notes 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 notes is due April 1, 2010.

Concurrent
with the issue of the 2014 Notes, the Company amended the terms of the Senior Secured Loan Agreement (the "Amended Senior Secured Loan," the "Senior Secured Loan") with
Whitebox VSC, Ltd (See Note 14Subsequent Event in the accompanying consolidated financial statements). The amendment of the Senior Secured Loan Agreement included a
$5.0 million repayment of principal; a fee of 1% of the amount of repayments; and a change to the interest terms on the note. The amended interest terms on the Senior Secured Note 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

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Secured
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 restructure, 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 twelve months ended September 30, 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 call for the conversion of
96.7% of the Company's approximately $110 million aggregate principal amount of 1.5% Convertible Subordinated Debentures due 2024 into a combination of cash, equity securities, and secured
convertible debentures. With respect to the remaining 3.3% of those convertible debentures, the Company is settling its obligations in cash. Additionally, Vitesse has made cash payment of
approximately $5 million of its $30 million senior secured loan, the terms of which had been amended to facilitate the debt restructuring.

Under
the terms of the debt restructuring transaction, Vitesse is:



We
will be holding a special meeting of our shareholder on January 7, 2010 to approve an amendment to our certificate of incorporation to increase the number of authorized shares
of common

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stock
to permit the conversion of the 2014 Notes and to provide additional shares of common stock for general corporate purposes. Under the terms of the indenture governing the 2014 Notes, if we do
not receive shareholder approval of an increase in our authorized shares of common stock on or prior to February 15, 2010, we will be obligated to pay $500,000 per month in additional interest
until stockholder approval of this increase is obtained. If we are unable to obtain this stockholder approval prior to February 15, 2011, the holders of the 2014 Notes will have the right to
convert the 2014 Notes into cash. Should the holder(s) require the Company to repurchase the securities for cash, the repurchase price would be equal to (i) the as-converted amount
of the shares that would have been issued to the holder had the increase in authorized shares occurred and the holder(s) had exercised its conversion option plus (ii) the Make-Whole
Amount that would have been applicable if the holder(s) had exercised its conversion right, or assuming the repurchase of all of the 2014 Notes, $58.0 million. We do not believe that we will
have sufficient cash by February 15, 2011 to permit a cash conversion of the 2014 Notes. If we have insufficient cash to convert all of 2014 Notes submitted for conversion, we would be in
default under the terms of the 2014 Notes, which would give the holders the of the 2014 the rights to accelerate the maturity of the Notes.

Contractual Obligations

The following table summarizes our significant contractual obligations as of September 30, 2009:

Payment Obligations by Year<1 Year

1 - 3 Years

3 - 5 Years

>5 Years

TotalCurrent PortionWhitebox Debt

$
5,000

$
25,000

$


$


$
30,000Convertible subordinated debt


10,000


86,700








96,700Operating leases


3,050


6,089


4,717


1,266


15,122Software Licenses


6,426


8,563


6,400





21,389Inventory and related purchase obligations


15,517











15,517Total

$
39,993

$
126,352

$
11,117

$
1,266

$
178,728


As
of September 30, 2009, $96.7 million of the 2024 Debentures are outstanding. Additionally, we have $30.0 million in long-term debt with Whitebox.
Payments to Whitebox are interest only until the maturity date of October 29, 2011. (See Note 6Debt and Note 14Subsequent Events in the accompanying
consolidated financial statements). According to the terms of the Whitebox Agreement, under certain circumstances, repayment of the 2024 Debentures would require that the Company to immediately pay to
Whitebox the lesser of (A) the aggregate principal amount of the outstanding Whitebox debt, including accrued and unpaid interest and (B) 25% of the aggregate amount of the 2024
Debentures redeemed. As of September 30, 2009, the Company classified as short-term liabilities the $5.0 million in cash paid to the Senior Lender of the senior secured loan;
$10.0 million of cash used to pay down (a) $3.6 million to settle with the holders of the 2024 Debentures that are not parties to the Conversion Agreement and
(b) 6.4 million 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.

We
lease facilities under non-cancellable operating leases that expire through 2015. Approximate minimum rental commitments under all non-cancellable operating
leases as of September 30, 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.

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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 7A.    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
September 30, 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 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and supplementary data required by this item are included in Part IV, Item 15 of this Report.

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Index to Consolidated Financial Statements



PageReport of Independent Registered Public Accounting Firm

75Consolidated Financial Statements:Consolidated Balance Sheets at September 30, 2009 and 2008

76Consolidated Statements of Operations for the Years Ended September 30, 2009, 2008 and
2007

77Consolidated Statements of Shareholders' (Deficit) Equity and Comprehensive Income Loss for the Years Ended
September 30, 2009, 2008 and 2007

78Consolidated Statements of Cash Flows for the Years Ended September 30, 2009, 2008 and 2007

79Notes to Consolidated Financial Statements

80Schedule II Valuation and Qualifying Accounts

128


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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of Vitesse Semiconductor Corporation
Camarillo, California

We have audited the accompanying consolidated balance sheets of Vitesse Semiconductor Corporation (a Delaware corporation) as of
September 30, 2009 and 2008 and the related consolidated statements of operations, shareholders' (deficit) equity and comprehensive income (loss), and cash flows for each of the three years in
the period ended September 30, 2009. In connection with our audits of the financial statements, we have also audited the financial statement schedule listed in the index at Item 15(a).
These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on
our audits.

We
conducted our audits in accordance with the standards of the Public Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements and schedule. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Vitesse Semiconductor Corporation at
September 30, 2009 and 2008, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2009 in conformity with accounting
principles generally accepted in the United States of America.

Also,
in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material
respects, the information set forth therein.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Vitesse Semiconductor Corporation's internal control over
financial reporting as of September 30, 2009, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) and our report dated December 11, 2009 expressed an adverse opinion on the effectiveness of the Company's internal controls over financial reporting.

/s/
BDO Seidman, LLP

BDO
Seidman, LLP
Los Angeles, California
December 11, 2009

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VITESSE SEMICONDUCTOR CORPORATION

CONSOLIDATED BALANCE SHEETS

September 30,2009

2008(in thousands,
except share data)ASSETSCurrent assets:Cash and cash equivalents

$
57,544

$
36,722Accounts receivable, net


11,369


6,307Inventory


18,809


37,466Assets held for sale





3,164Restricted cash


398


592Prepaid expenses and other current assets


4,956


4,011Total current assets


93,076


88,262Property, plant and equipment, net


7,874


8,084Goodwill





191,418Other intangible assets, net


1,541


913Other assets


3,077


3,600$
105,568

$
292,277LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' (DEFICIT) EQUITYCurrent liabilities:Accounts payable

$
14,191

$
16,101Accrued expenses and other current liabilities


10,887


20,242Derivative liability


12,209


Deferred revenue


1,156


2,721Current portion of debt and capital leases


5,236


Convertible subordinated debt


10,000


Total current liabilities


53,679


39,064Other long-term liabilities


1,810


1,564Long-term debt, net of discount


24,652


29,423Convertible subordinated debt


86,700


96,700Total liabilities


166,841


166,751Minority interest


86


165Commitments and contingencies (See Note 12)Shareholders' (deficit) equity:Preferred stock, $0.01 par value. 10,000,000 shares authorized; none outstanding





Common stock, $.01 par value. 500,000,000 shares authorized; 230,905,580 and 226,205,580 shares outstanding at September 30, 2009 and 2008,
respectively


2,314


2,267Additional paid-in-capital


1,754,598


1,747,324Accumulated deficit


(1,818,271
)

(1,624,230
)Total shareholders' (deficit) equity


(61,359
)

125,361$
105,568

$
292,277


See
accompanying notes to consolidated financial statements.

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VITESSE SEMICONDUCTOR CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

Fiscal Year Ended September 30,2009

2008

2007(in thousands, except per share data)Product revenues

$
154,927

$
218,536

$
221,948Intellectual property revenues


13,250


10,000


Net revenues


168,177


228,536


221,948Costs and expenses:Cost of revenues


78,414


106,344


113,754Engineering, research and development


45,685


49,982


47,199Selling, general and administrative (including a gain on the sale of building of $2.9 million in 2009 and a gain on sale of fixed assets of
$3.2 million in 2008)


40,227


50,557


42,459Accounting remediation & reconstruction expense & litigation costs (including a $16.0 million gain on settlement of lawsuit in
2009)


(9,922
)

10,761


13,558Goodwill impairment


191,418





Amortization of intangible assets


1,360


2,514


6,777Costs and expenses


347,182


220,158


223,747(Loss) income from operations


(179,005
)

8,378


(1,799
)Other (expense) income:Interest expense, net


(16,862
)

(3,868
)

(2,580
)Loss on extinguishment of debt








(1,977
)Other income, net


223


4,882


1,755Other (expense) income, net


(16,639
)

1,014


(2,802
)Income tax (benefit) expense


(1,451
)

1,222


224Minority interest in loss (earnings) of consolidated subsidiary


81


(660
)

(Loss) income from continuing operations before discontinued operations


(194,112
)

7,510


(4,825
)Discontinued operationsIncome (loss) from discontinued operations, net of tax of $997 and gain on sale of $21,500 in 2008


71


9,044


(16,822
)Net (loss) income

$
(194,041
)
$
16,554

$
(21,647
)Basic and diluted (loss) income per share:Continuing operations

$
(0.85
)
$
0.03

$
(0.02
)Discontinued operations


0.00


0.04


(0.08
)Net (loss) income per share

$
(0.85
)
$
0.07

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


229,554


223,614


223,556


See
accompanying notes to consolidated financial statements.

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VITESSE SEMICONDUCTOR CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT)
EQUITY AND COMPREHENSIVE INCOME (LOSS)

Common Stock



Accumulated
Other
Comprehensive
Income (Loss)



Total
Shareholders'
Equity
(Deficit)Additional
Paid-in-
Capital

Accumulated
Deficit(In thousands, except share data)

Shares

AmountBalance at September 30, 2006


223,555,580

$
2,240

$
1,734,223

$
484

$
(1,619,137
)
$
117,810Comprehensive loss:Net loss














(21,647
)

(21,647
)Unrealized gain on investments











3,255





3,255Comprehensive loss

















(18,392
)Compensation expense related to stock options








6,825








6,825Balance at September 30, 2007


223,555,580

$
2,240

$
1,741,048

$
3,739

$
(1,640,784
)
$
106,243Net income














16,554


16,554Unrealized loss on investments











(1,028
)Reclassification of gain realized to net income











(2,711
)Change in unrealized gain on investments











(3,739
)




(3,739
)Comprehensive loss

















12,815Compensation expense related to stock options








3,891








3,891Shares issued pursuant to securities class-action settlement


2,650,000


27


2,385








2,412Balance at September 30, 2008


226,205,580

$
2,267

$
1,747,324

$


$
(1,624,230
)
$
125,361Net loss














(194,041
)

(194,041
)Compensation expense related to stock options








3,138








3,138Shares issued pursuant to derivative class-action settlement


4,700,000


47


4,136








4,183Balance at September 30, 2009


230,905,580

$
2,314

$
1,754,598

$


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


See accompanying notes to consolidated financial statements.

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VITESSE SEMICONDUCTOR CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

Fiscal Year Ended September 30,2009

2008

2007(in thousands)Cash flows from operating activities:Net (loss) income

$
(194,041
)
$
16,554

$
(21,647
)Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:Depreciation and amortization


4,158


5,380


10,660Share-based compensation


3,133


3,896


7,001Fair value adjustment to derivative liability


12,209





Impairment of goodwill


191,418





Allowance for doubtful accounts








249Allowance for sales return reserve


(35
)

(89
)

(28
)Loss on extinguishment of debt








1,977Non-cash interest expense








6,244Amortization of debt issuance costs and debt discounts


758


756


920Gain on sale of Storage Products business





(21,509
)

Gain on sale of Colorado Building


(2,924
)




(Loss)/gain on disposal of fixed assets


7


(3,225
)

Realized (loss) gain on investments


248


(3,372
)

129Forgiveness of interest





(497
)

Minority interest in (loss) earnings of consolidated subsidiary


(81
)

660


Change in operating assets and liabilities:Accounts receivable


(5,027
)

928


(3,087
)Inventory


18,657


(4,767
)

24,679Restricted cash


194


1,556


238Prepaids and other current assets


(1,256
)

2,552


(1,803
)Accounts payable


(1,910
)

1,113


(11,276
)Accrued expenses and other liabilities


(4,745
)

(3,452
)

403Deferred revenue


(1,566
)

(19,104
)

(8,881
)Net cash provided by (used in) operating activities


19,197


(22,620
)

5,778Cash flows from investing activities:Proceeds from sale of investments





6,073


Net purchase of short-term investments








(311
)Restricted cash


17


(13
)

716Disposal of fixed assets





3,280


Sale of Storage Products business





62,845


Transaction costs for sale of Storage Products business





(1,636
)

Sale of Colorado Building


6,500





Transaction costs on Sale of Building


(547
)




Capital expenditures


(2,340
)

(4,961
)

(879
)Purchase of intangibles


(1,981
)




(539
)Net cash provided by (used in) investing activities


1,649


65,588


(1,013
)Cash flows from financing activities:Repayment of debt





(59,471
)

Proceeds from debt





29,250


Debt issuance costs





(1,046
)

(1,233
)Repayment of capital lease obligations


(24
)




(2,868
)Distribution to minority interest holders





(955
)

Net cash used in financing activities


(24
)

(32,222
)

(4,101
)Net increase in cash


20,822


10,746


664Cash and cash equivalents at beginning of year


36,722


25,976


25,312Cash and cash equivalents at end of year

$
57,544

$
36,722

$
25,976Cash paid during the year for:Interest

$
4,054

$
23,499

$
4,773Income taxes

$
3,072

$
294

$
796Non-cash investing and financing activities:Shares issued pursuant to class-action settlement

$
4,183

$
2,412

$
Purchase of assets in exchange for future obligations

$
260

$


$



See accompanying notes to consolidated financial statements.

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Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

Vitesse
was incorporated under the laws 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.

Basis of Presentation

The accompanying consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC") and accounting principles generally accepted in the United States of America ("GAAP"). The Company's reporting currency is the United States dollar. As of
September 30, 2009, 2008 and 2007, our consolidated financial statements include the accounts of Vitesse and our subsidiaries. All intercompany accounts and transactions have been eliminated in
consolidation.

Subsequent Events

In May 2009, the FASB issued 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 December 11, 2009, the date of issuance, in
preparing the consolidated financial statements and notes thereto (See Note 14Subsequent Events).

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, premium put, goodwill and purchased intangible asset
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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (Continued)

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,
short-term and long-term investments 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 September 30, 2009, the Company's cash balance exceeded the deposit insurance limits provided by the FDIC by $60,673,694. Cash balances held in foreign bank accounts are also not
insured by the FDIC, and at September 30, 2009 these balances totaled $222,147. At September 30, 2009, the Company's foreign subsidiaries reflected $730,906, 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 September 30, 2009, one direct customer accounted for more than 10% of our net revenues. Total sales to this customer were 12.0%, 7.0% and 6.0% of net revenues for the twelve months
ended September 30, 2009, 2008 and,2007, respectively. No other direct 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.

Advertising Costs

Advertising costs are expensed as incurred. Advertising expenses for the years ended September 30, 2009, 2008, and 2007 were
$0.1 million, $0.2 million, and $0.1 million, respectively.

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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (Continued)

Shipping and Handling

In accordance with the ASC Topic 605-45-19 Shipping and Handling Fees and Costs
("ASC 605-45-19"); originally issued as Emerging Issues Task Force ("EITF") 00-10,"Accounting for Shipping and Handling Fees and
Costs,"the Company incurred shipping costs of $0.7 million, $1.0 million, and $1.0 million for fiscal years 2009, 2008, and 2007 that were included in
selling, general and administrative expense.

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 net revenue for the preceding 12 months 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 Staff Accounting Bulletin 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 most 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 $3.6 million and $9.6 million as of September 30, 2009 and
September 30, 2008, 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.

Approximately
2.2% and 0.93% of our inventory is consigned and located with two customers at September 30, 2009 and one customer at September 30, 2008, respectively.
Consistent with our revenue

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (Continued)

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. 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 twelve months ended September 30, 2009.

In
fiscal 2009, licensing revenues of $13.3 million included IP revenue of $8.3 million from the sale of patents from our IP portfolio and $5.0 million from an
arrangement, entered into in the first quarter of 2008, to license IP to a third-party. On June 30, 2009, the Company entered into a Sale and Purchase Agreement (the "Agreement") and completed
the sale, assignment and transfer of certain patents (the "Vitesse Patents") from its IP portfolio for consideration of IP revenue of $8.3 million, payment was received on July 15, 2009.
The Company incurred $1.8 million in brokers fees related to the sale. The Company recorded the broker's fees in selling, general and administrative expense. The Vitesse Patents relate to the
Company's non-core business, specifically its network processing products. Under the Agreement, the Company shall retain a non-exclusive, revocable, non-assignable,
non-divisible, worldwide, fully-paid-up, royalty-free, perpetual right and license to the Vitesse Patents for the full life of such Vitesse Patents.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (Continued)

accounts
as of September 30, 2009 and September 30, 2008, 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 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 operations may be affected. As of September 30, 2009 and
September 30, 2008, our sales return reserve was $19,000 and $54,000, respectively.

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, short-term investments, restricted deposits, accounts receivable, long-term investments, 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 September 30, 2009 and 2008, the Company had approximately $2.0 and $2.1 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.

Additionally,
our financial instruments include our 2024 Debentures and a $30 million senior note with Whitebox VSC, Ltd. ("Whitebox") (See Note 6Debt).
We have estimated the fair value of the 2024 Debentures using a convertible bond valuation model within a lattice framework (Level 3). The 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
debentures are convertible. The estimated fair value of the 2024 Debentures was $43.9 million and $36.5 million, as of September 30, 2009 and 2008, respectively.

Additionally,
we have identified a derivative embedded in the 2024 Debentures that is bifurcated and accounted for at fair value. We refer to this embedded derivative as the premium put
(See Note 6Debt for further discussion of the accounting and the basis for valuation). The fair value of the premium put was determined to be $12.2 million as of
September 30, 2009 and no fair value as of September 30, 2008.

The
senior note with Whitebox is stated at carrying value, net of unamortized debt discount, which is a reasonable estimate of fair value.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (Continued)

Inventories

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. Inventory was $18.8 million and
$37.5 million at September 30, 2009 and 2008, respectively.

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 stated at cost and amortized over the shorter of the term of
the related lease or their estimated useful lives. Depreciation and amortization costs from continuing operations were $2.8 million and 2.9 million for fiscal years 2009 and 2008,
respectively.

Goodwill and Other Intangible Assets

Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible
and intangible assets acquired. We performed a two-step process at December 31, 2008 to determine: (i) whether the fair value of the Company exceeds the carrying value; and
(ii) to measure the amount of an impairment loss. In the first step, 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, 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 asset and equity 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. 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 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
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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (Continued)

Intangible
assets, other than goodwill, 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 bases 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 time as these processes or products are proven through final testing and initial acceptance by the customer.

Computation of Net Income and 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 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 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 debentures is determined using the if-converted method.

For
the year ended September 30, 2009, 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.

For
the year ended September 30, 2008, potential common shares excluded from the diluted earnings per share computation were determined to be anti-dilutive in
accordance with ASC 260. Under the treasury stock method, due to the decreasing fair market value of the Company's common stock, none of its stock options or warrants was considered to be
dilutive for the year ended

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (Continued)

September 30,
2008. Using the if-converted method, the Company determined that the convertible debentures did not have a dilutive effect on earnings for the year.

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

September 30,2009

2008

2007(in thousands)Outstanding stock options


21,566


20,101


25,544Outstanding restricted stock units


611





Outstanding warrants


150


150


102Convertible debentures


37,981


37,981


37,981Total potential common shares excluded from calculation


60,308


58,232


63,627


The
computation for basic and diluted income and loss per share is as follows:

September 30,2009

2008

2007(in thousands, except per share data)(Loss) income from continuing operations

$
(194,112
)
$
7,510

$
(4,825
)Income (loss) from discontinued operations


71


9,044


(16,822
)Net (loss) income

$
(194,041
)
$
16,554

$
(21,647
)Weighted average number of sharesbasic and diluted


229,554


223,614


223,556(Loss) income per sharebasic and dilutedContinuing operations

$
(0.85
)
$
0.03

$
(0.02
)Discontinued operations


0.00


0.04


(0.08
)Net (loss) income

$
(0.85
)
$
0.07

$
(0.10
)


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 for the fiscal year 2009 and 2008.

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NOTE 1THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 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 does not have a material impact on our results of operations, financial position or cash flows.

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NOTE 1THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (Continued)

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
April 2009 the FASB issued ASC Topic 805 Business Combinations ("ASC 805"); originally issued as FSP No. 141R-1,"Accounting
for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies."ASC 805 amends the provisions in Statement 141R for the
initial recognition and measurement, subsequent measurement and accounting and disclosures for assets and liabilities arising from contingencies in business combinations. The FSP eliminates the
distinction between contractual and non-contractual contingencies, including the initial recognition and measurement criteria in Statement 141R and instead carries forward most of
the provisions in ASC 805 for acquired contingencies. ASC 805 is effective for contingent assets and contingent liabilities acquired in business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. 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, term and size of the acquired contingencies. 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. ASC 810 is effective for fiscal years beginning after
December 15, 2008. We do not anticipate that the adoption of ASC 810 will have a material impact on our financial statements.

In
March 2008, the FASB issued ASC Topic 815 Derivatives and Hedging ("ASC 815"); originally issued as SFAS No. 161, "Disclosures about
Derivative Instruments and Hedging Activitiesan Amendment of FASB Statement No. 133." ASC 815 requires enhanced disclosures about an entity's
derivative and hedging activities and is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We adopted ASC 815 in the
second quarter of fiscal 2009. ASC 815 only required additional disclosure, the adoption did not impact our consolidated financial position, results of operations or cash flows.

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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 beginning after December 15, 2008. We anticipate that ASC 470 will affect the accounting for our convertible debt and we are currently evaluating the impact that it will have on
our financial statements.

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
and will be applied to outstanding instruments as of the beginning of the fiscal year in which it is adopted. Upon adoption, a cumulative effect adjustment will be recorded, if necessary, based on
amounts that would have been recognized if this guidance had been applied from the issuance date of the affected instruments. We are currently determining the impact that ASC 815 will have on our
financial statements, if any.

In
April 2009 the FASB issued three related Staff Positions: (i) ASC Topic 820 Fair Value Measurements and Disclosures; originally issued as FSP 157-4, "Determining Fair Value When the Volume and Level of Activity for
the Asset or Liability have Significantly Decreased and Identifying Transactions That Are Not
Orderly,"(ii) ASC Topic 320 InvestmentsDebt and Equity Securities ("ASC 320") and ASC Topic 958-320
InvestmentsDebt and Equity Securities ("ASC 958-320"); originally issued as SFAS 124-2,"Recognition and Presentation of
Other-Than-Temporary Impairments,"and (iii) ASC Topic 825 Financial Instruments ("ASC 825") originally issued as
SFAS 107-1 and ASC Topic 270 Interim Reporting ("ASC 270"); originally issued as APB 28-1, "Interim
Disclosures about Fair Value of Financial Instruments," which will be effective for interim and annual periods ending after June 15, 2009. ASC 820 provides
guidance on how to determine the fair value of assets and liabilities under ASC 820 in the current economic environment and reemphasizes that the objective of a fair value measurement remains
an exit price. If we were to conclude that there has been a significant decrease in the volume and level of activity of the asset or liability in relation to normal market activities, quoted market
values may not be representative of fair value and we may conclude that a change in valuation technique or the use of multiple valuation techniques may be appropriate. ASC 320 and
ASC 958-320 modify the requirements for recognizing other-than-temporarily impaired debt securities and revise the existing impairment model for such
securities, by modifying the current intent and ability indicator in determining whether a debt security is other-than-temporarily impaired. ASC 825 and ASC 270
enhance the disclosure of instruments under the scope of ASC 820 for both interim and annual periods. We adopted this statement for our quarter ended June 30, 2009. The adoption of this
statement did not have an impact on our results of operation, financial position or cash flow.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (Continued)

In
May 2009, the FASB issued ASC Topic 855 Subsequent Events ("ASC 855"); originally issued as FAS No. 165,"Subsequent
Events."ASC 855 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are
issued. ASC 855 is effective for interim and annual periods ending after June 15, 2009. We adopted this statement for our quarter ended June 30, 2009, and the adoption did not
have an impact on our results of operations, financial position or cash flows. The Company has evaluated subsequent events through December 11, 2009, which coincides with the issuance of its
financial statements for the period ended September 30, 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GOODWILL AND OTHER INTANGIBLE ASSETS

We account for goodwill and other intangible assets in accordance with ASC 350. We evaluate these assets, including purchased intangible assets deemed to have indefinite lives, on an
annual basis in the fourth quarter or, more frequently, if we believe indicators of impairment exist. 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 using a valuation model based on an analysis of: (i) the Company's market capitalization;
(ii) comparable public company valuations (a market approach); and (iii) the future cash flows expected to be generated by the Company (an income approach). Fair value of other
intangible assets is determined by discounted future cash flows, appraisals or other methods. Carrying value of goodwill as of September 30, 2009 and September 30, 2008 was $0 and
$191.4 million, respectively. No activity or adjustments to goodwill except for the impairment charge for the quarter ended December 31, 2008 occurred for the years ended
September 30, 2009 and September 30, 2008.

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 September 30, 2009 and 2008 was $1.5 million and
$0.9 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 impaired is to be held and used, we recognize an
impairment charge to the extent the fair value attributable to the asset is less

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NOTE 2GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)

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.

Gross Carrying
Amount

Accumulated
Amortization

Net Carrying
AmountSeptember 30, 2009Technology

$
1,650

$
(1,581
)
$
69Intellectual property


3,485


(2,013
)

1,472Total

$
5,135

$
(3,594
)
$
1,541September 30, 2008Customer relationships

$
2,700

$
(2,700
)
$
Technology


40,350


(39,803
)

547Covenants not to compete


4,000


(4,000
)

Intellectual property


2,178


(1,812
)

366Total

$
49,228

$
(48,315
)
$
913


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

Fiscal Year2010

$
7792011


3152012


2112013


1422014


52Thereafter


42Total

$
1,541


NOTE 3DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE

On October 29, 2007, the Company completed its sale of a portion of the Storage Products business to Maxim Integrated Products, Inc. ("Maxim") for $62.8 million,
with a gain on the sale of approximately
$21.5 million, plus a potential earn-out based on the business meeting certain criteria, as detailed in the agreement. Maxim acquired the Company's SAS/SATA expander product
markets, enclosure and baseboard management devices, and certain other assets of the Storage Product business. Assets sold include inventory, property and equipment, goodwill and intangible assets of
$35.5 million. As part of the sale, Maxim assumed a liability for employees' accrued vacation of $0.3 million. The gain was reduced by costs of completing the sale in the amount of
$1.6 million.

Debt
issuance costs related to the Tennenbaum Capital Partners ("TCP") debt of $3.5 million were included in the calculation of the gain on the sale pursuant to the accounting
guidance in ASC 205 which requires any costs related to financing that must be paid off with the proceeds of the sale of specific assets to be included in the determination of the gain or loss on
sale. In accordance with ASC 205 we allocated interest expense associated with debt instruments that were required to be repaid upon the sale of the Storage Product business to discontinued
operations. Pursuant to an

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NOTE 3DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE (Continued)

amendment
to the debt agreement with TCP, we were required to pay the debt to TCP from the Storage Products division sale proceeds. Accordingly, for the year ended September 30, 2008, interest
expense of approximately $17.0 million was included in discontinued operations.

We
recorded amounts in discontinued operations in accordance with ASC 360. Accordingly, we reported the results of operations of the Storage Products business in discontinued
operations within the Company's statement of operations for the years ended September 30, 2009 and 2008. The sale of the Storage Products business closed on October 29, 2007.

On
December 22, 2008, we closed the sale of the Colorado land and building to a third-party. The gross sales price was $6.5 million. The facility was previously used for
the Storage Products business, which was discontinued and sold on October 29, 2007 and had remained unused from the time of the sale of the business. As a result, the net book value of
$3.2 million was reported as "Asset Held for Sale" on the September 30, 2008 balance sheet. We recognized a gain of approximately $2.9 million on this sale in the first quarter of
fiscal 2009.

Selected
operating results of discontinued operations were as follows:

September 30,2009

2008(in thousands)Net revenues of discontinued operations

$


$
2,656(Loss) income from continuing operations before income taxes


(195,644
)

9,392Provision for income tax (benefit) expense


(1,451
)

1,222Minority interest in loss (earnings) of consolidated subsidiary


81


(660
)Income from discontinued operations, net of tax


71


9,044Net (loss) income

$
(194,041
)
$
16,554


In
accordance with ASC 205, we have allocated interest expense to discontinued operations associated with debt instruments that were required to be paid upon the sale of Storage
Products business. Interest expense included in income (loss) from discontinued operations, which includes interest incurred and amortization expense of deferred financing fees for our former loan
totaled $17.0 million for fiscal year 2008 and none in fiscal year 2009.

NOTE 4ACCOUNTING REMEDIATION & RECONSTRUCTION EXPENSE, & LITIGATION COSTS

The Company has incurred substantial costs in connection with its restructuring and remediation efforts. During the year ended September 30, 2009 we recognized a net credit of
$9.9 million, consisting of $4.1 million in legal and professional fees related the remediation and litigation and a $3.0 million accrual for our pending settlement with the SEC
related to their investigation into the Company's historical stock option practices and certain other accounting irregularities. These costs were offset by a $16.0 million credit related to our
settlement with KPMG, our former public accounting firm pursuant to which KPMG agreed to pay us $22.5 million and forgive all of our past indebtedness and a $1.0 million credit related
to the settlement of and adjustment to our liability to the IRS related to prior management's stock option backdating practices. For the year ended September 30, 2008, we recognized
$10.8 million in legal and professional fees related to work performed in correcting and

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NOTE 4ACCOUNTING REMEDIATION & RECONSTRUCTION EXPENSE, & LITIGATION COSTS (Continued)

reporting
errors in our stock option grants, revenue recognition policies, inventory valuation, and other legal and financial issues.

NOTE 5BALANCE SHEET DETAIL

The following tables provide details of selected balance sheet items (in thousands):

September 30,2009

2008Inventory:Raw materials

$
1,411

$
3,067Work-in-process


8,335


13,926Finished goods


9,063


20,473Total

$
18,809

$
37,466Property, Plant and Equipment:Machinery and equipment

$
90,884

$
90,493Furniture and fixtures


769


678Computer equipment


10,018


8,942Leasehold improvements


5,657


5,692Construction In Progress


76


1,027107,404


106,832Less: Accumulated depreciation and amortization


99,530


98,748Total

$
7,874

$
8,084




September 30,2009

2008Other Assets:Debt issue costs

$
1,184

$
1,754Restricted cash


1,813


1,517Other


80


329Total

$
3,077

$
3,600Accrued Expenses and Other Current Liabilities:Accrued legal fees and settlements

$
139

$
4,588Accrued wages and benefits


3,586


6,203Accrued vacation


2,813


2,720Accrued software license agreements


1,535


326Accrued subsequent payments


490


1,675Accrued commissions


118


89Miscellaneous taxes


197


353Interest payable


1,271


1,270Customer prepayments and deposits


149


143Other


589


2,875Total

$
10,887

$
20,242


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NOTE 6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") to qualified
institutional buyers in reliance on Rule 144A under the Securities Act of 1933 (the "Securities Act"). The 2024 Debentures are unsecured obligations and are subordinated in right of payment to
all of the Company's existing and future senior indebtedness. Interest is 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
Section 1.1 of the Indenture related to the "Interest Rate"; Section 4.1(d) of the Indenture related to "Default" or "Event of Default"; and Section 4.2 of the Indenture related
to "Acceleration of Maturity." 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. On October 1, 2007, the Company included an additional $1.9 million payment with the semiannual payment of interest due.

On
October 23, 2006, the Company solicited consents from the holders of the 2024 Debentures that, if received, would provide: (i) the holders of the 2024 Debentures and the
Trustee under the Indenture would agree that, for 18 months after the date the proposed amendments are 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 consents were received and the amendments became effective November 3, 2006.

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 will have the option to deliver cash in lieu
of shares of its common stock or a combination of cash and shares of common stock. The Company may redeem the 2024 Debentures after October 1, 2007 if its stock price is at least 170% of the
conversion price, or approximately $4.32 per share, for 20 trading days within any consecutive 30-day trading period, and may also redeem the 2024 Debentures beginning October 1,
2009, without being subject to such condition. Holders of the 2024 Debentures have the right to require the Company to repurchase the 2024 Debentures on October 1 of 2009, 2014, and 2019.

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

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NOTE 6DEBT (Continued)

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
have 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. Interest expense relating to the 2024 Debentures was
$1.5 million, $1.5 million and $3.4 million for the fiscal years ended September 30, 2009, 2008 and 2007, respectively. Outstanding 2024 Debentures were
$96.7 million at September 30, 2009 and 2008.

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 include 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. 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 is 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 is 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, fair value of the premium put is positively correlated to the estimated amount of cash proceeds
and other securities expected to be received at exercise. Should the premium put have value, any gain or loss on the fair value of the premium put will be reflected in current earnings. As a result of
our valuation analysis the premium put was estimated to have a fair value of $12.2 million as of September 30, 2009 and no fair value as of September 30, 2008. Upon exercise of
the put option related to the 2024 Debentures on October 1, 2009 (See Note 14Subsequent Events), 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 fair value of the premium put is 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.

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NOTE 6DEBT (Continued)

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 and the $30.0 million financing with Whitebox. Accordingly, management of the Company
completed a series of transactions with its Lenders to restructure the 2024 Debentures and Senior Secured Debt (See Note 14Subsequent Events).

Other
long-term debt at September 30, 2009 and 2008 consists of the following (in thousands):

September 30,2009

2008Whitebox VSC, LTD., net of discount of $0.4 and $0.6 million at September 30, 2009 and 2008, respectively

$
24,610

$
29,423Capital lease liabilities


42


Total long-term debt

$
24,652

$
29,423Years ended September 30,2010




$
2011





112012





24,6212013





122014





8Thereafter





86,700$
111,352


As
of September 30, 2009, other long-term debt consisted of a $30.0 million loan with Whitebox VSC, Ltd. (Whitebox), net of $0.4 million of
unamortized debt discount. On October 29, 2007, we completed a $30.0 million financing with Whitebox, net of $0.8 million of debt discount. The loan has a four-year
term. Unamortized debt discount as of September 30, 2009 and 2008 was approximately $0.4 million and $0.6 million, respectively. In connection with securing the debt, the Company
paid approximately $2.3 million in fees that are recorded as debt issuance costs in Other Assets on the accompanying balance sheets. These fees are being amortized as interest expense over the
term of the loan. Unamortized debt issuance costs as of September 30, 2009 and 2008 were approximately $1.2 million and $1.8 million, respectively. The annual interest rate on the
unpaid principal is the greater of 8.5% or LIBOR plus 4% during the interest period ending on the interest date. The loan is secured by substantially all of our assets. 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 Senior Unsecured convertible Note Purchase Agreement is not an embedded derivative as described in ASC 815 and had
no accounting impact on the financial statements. At September 30, 2009 and 2008, the effective interest rate on the loan was 10.6128% and

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NOTE 6DEBT (Continued)

11.082%,
respectively. For the fiscal years ended September 30, 2009 and 2008, interest expense was $2.6 million and $2.4 million, respectively. The agreement contains various
restrictive covenants. As of September 30, 2009, we were in compliance with the terms of the covenants. According to the terms of the Whitebox Agreement, under certain circumstances, repayment
of the 2024 Debentures would require that the Company to immediately pay to Whitebox the lesser of (A) the aggregate principal amount of the outstanding Whitebox debt, including accrued and
unpaid interest and (B) 25% of the aggregate amount of the 2024 Debentures redeemed. The Company was pursuing alternatives to refinance or raise funds to pay the convertible subordinated debt
that, in management's judgment, met
the terms in the Whitebox debt agreement that did not require payment of the Whitebox debt simultaneously with the payment of the convertible subordinated debt.

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, $50.0 million in debentures under a new indenture
agreement (the "New Notes") and, in some cases, shares of Series B Preferred Stock. The Conversion Agreement was consummated on October 30, 2009 (the "Closing Date"). (See Note 14Subsequent
Events).

The
terms of the Whitebox note were amended 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 and to 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 payment of the original note. Subsequent to the $5.0 million pay-down of the Whitebox note, the Company has the ability to reduce the rate
of interest by 0.3% for every $1.0 million of additional prepayment. The maturity date of the note is still October 29, 2011.

The
Company issued $50.0 million of New Notes pursuant to the Conversion Agreement in partial satisfaction of the 2024 Debentures. The New Notes 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 New Notes 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 Secured Loan Agreement. The New Notes 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 New Notes). Full conversion of the $50.0 million in aggregate principal amount of
the New Notes would result in the issuance of up to 222,191,111 shares of common stock.

The
Company will initially record the New Notes at fair value. The difference between the fair value and the face value of the New Notes will be amortized as interest expense over the
life of the New Notes, increasing the Company's effective rate of interest on the New Notes from the stated rate of 8% per annum. The effective rate of interest will vary, decreasing over the life of
the New Notes as the excess of the face value over the fair value of the notes is amortized.

Prior
to the closing of the debt 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 Whitebox

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NOTE 6DEBT (Continued)

debt
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 such debt refinancing transactions, the Company has reclassified $111.3 million related to the portion of their obligations under the 2024 Debentures and
the senior secured note which are refinanced on a long-term basis, from short-term liabilities to long-term liabilities on its Consolidated Balance Sheet as of
September 30, 2009.

As
of September 30, 2009, the Company classified as short-term liabilities the $5.0 million in cash paid to the Senior Lender of the senior secured loan;
$10.0 million of cash used to pay $3.6 million to settle with the holders of the 2024 Debentures that are not parties to the Conversion Agreement and $6.4 million 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 7FAIR VALUE MEASUREMENTS

In September 2006, FASB issued FASB 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.

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 disclsoures.

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.


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NOTE 7FAIR VALUE MEASUREMENTS (Continued)

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.

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

Fair Value
Measurements UsingLevel 1

Level 2

Level 3

TotalDerivative liabilitypremium put

$


$


$
12,209

$
12,209


The
derivative liabilitypremium put liability, which is included within other current liabilities, represents the value associated with the right of the holders of the 2024
Debentures to require the Company to repurchase the debentures for 113.76% of the principal amount of the 2024 Debentures on October 1, 2009. There is no current observable market for this type
of derivative and, as such, we determined the value of the embedded derivative 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 7FAIR VALUE MEASUREMENTS (Continued)

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.

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

Derivative liability
premium putBalance at October 1, 2008

$
Total unrealized losses included in earnings


12,209Balance at September 30, 2009

$
12,209


NOTE 8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 and none were outstanding as of September 30, 2009 and 2008.

Common Stock

The Company is authorized to issue up to 500,000,000 shares of common stock, with a par value of $0.01 per share, of which 230,905,580
shares and 226,205,580 shares were outstanding as of September 30, 2009 and 2008, respectively.

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 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 82,065,918 shares of common stock have been
reserved for issuance and

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NOTE 8SHAREHOLDERS' EQUITY (Continued)

52,781,231
shares remained available for future grant as of September 30, 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 for the years ended September 30:

September 30,2009

2008

2007Cost of revenues

$
689

$
801

$
1,287Engineering, research and development


940


1,322


2,402Selling, general and administrative


1,504


2,057


1,805Share-based compensation expense related to continuing operations


3,133


4,180


5,494Share-based compensation expense related to discontinued operations





(284
)

1,331Total share-based compensation expense

$
3,133

$
3,896

$
6,825


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 and $176,000 of share-based compensation expense in fiscal 2007 related to warrants issued to Alvarez and Marsal to purchase 150,000 shares of common stock. 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 and stock warrants 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. The per share fair values of stock options granted in connection with stock incentive plans have been estimated using the following weighted average
assumptions:

Employee Stock Option Plans2009

2008

2007Expected life (in years)


5.86


4.68


4.68Expected volatility:Weighted-average


66.7
%

66.0
%

81.1
%Range


65% - 85.1
%

65.2% - 66.4
%

69.6% - 85.4
%Expected dividend








Risk-free interest rate


1.8% - 3.2
%

2.3% - 4.2


4.6% - 4.9
%Weighted-average estimated value

$
0.23

$
0.54

$
0.59


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 8SHAREHOLDERS' EQUITY (Continued)

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 in 2009, 2008 and 2007 are set forth below:

Shares

Weighted
average
exercise price

Weighted
average
remaining
contractual life
(in years)

Aggregate
intrinsic valueOptions outstanding, September 30, 2006


35,294,699

$
8.08


6.18

$
644,446Granted(1)


450,000

$
0.95Exercised(2)


Cancelled or expired


(11,862,338
)
$
9.75Options outstanding, September 30, 2007


23,882,361

$
7.11


5.61

$
363,933Granted(1)


350,000

$
0.95Exercised(2)


Cancelled or expired


(5,958,729
)
$
7.84Options outstanding, September 30, 2008


18,273,632

$
7.02


4.86

$
212Granted


4,718,130

$
0.37Exercised(2)


Cancelled or expired


(1,742,079
)
$
7.90Options outstanding, September 30, 2009


21,249,683

$
5.47


5.12

$
2,000Options exercisable, September 30, 2009


15,107,749

$
7.27


3.84

$



(1)The
grants reported in 2007 and 2008 were to newly elected or hired Board members or executives only.(2)No
options were exercised during the periods covered by this report.


The
aggregate intrinsic values in the preceding table for the options outstanding represent the total pretax intrinsic value, based on the Company's closing stock prices of $0.37, $0.54,
and $0.96, as of September 30, 2009, 2008, and 2007, respectively, which would have been received by the option holders had those option holders exercised their
in-the-money options as of those dates. There were no in-the-money stock options that were exercisable as of September 30, 2009. As of
September 30, 2009, 15,107,749 outstanding stock options were exercisable and the weighted-average exercise price of those options was $7.27. As of September 30, 2009, there was
$3.4 million of unrecognized share-based compensation expense related to non-vested stock options. The weighted-average period over which the unearned share-based compensation is
expected to be recognized is approximately 0.7 years. An estimated forfeiture rate of 5.96% has been applied to all unvested options and restricted stock

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NOTE 8SHAREHOLDERS' EQUITY (Continued)

outstanding
as of September 30, 2009. Future share-based compensation expense and unearned share-based compensation will increase to the extent that we grant additional equity awards. The
weighted average fair value at the date of grant of options granted in 2009, 2008 and 2007 was $0.23, $0.54, and $0.59, respectively.

The
following table provides additional information in regards to options outstanding as of September 30, 2009:

Range of Exercise Prices

Options
Outstanding

Weighted
Average
Remaining
Contractual
Life (Years)

Weighted
Average
Exercise Price

Options
Exercisable

Weighted
Average
Exercise Price$  0.36 - $  0.83




6,441,718


7.29

$
0.51


1,924,594

$
0.820.86 -     3.18




8,055,464


5.78


2.53


6,513,899


2.623.19 -   17.44




5,501,485


2.65


8.99


5,481,340


8.9818.85 -   78.75




1,251,016


0.58


34.41


1,187,916


35.24$  0.36 - $78.75




21,249,683


5.12

$
5.47


15,107,749

$
7.27


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.

A
summary of RSU activity for the year ended September 30, 2009 is as follows:

Shares

Weighted
Average Grant-
Date Fair Value
per ShareRestricted stock outstanding, September 30, 2008




$
Awarded


3,609,233


0.35Vested


Forfeited


(165,980
)

0.36Restricted stock outstanding, September 30, 2009


3,443,253

$
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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 8SHAREHOLDERS' EQUITY (Continued)

(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.

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.

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NOTE 9INCOME TAXES

The components of (loss) income from continuing operations before provision for income taxes for the years ended September 30, 2009, 2008 and 2007 were as follows (amounts in
thousands):

September 30,2009

2008

2007(Loss) income before income taxes:Domestic

$
(183,571
)
$
38,860

$
20,991Foreign


(11,921
)

(30,128
)

(25,592
)$
(195,492
)
$
8,732

$
(4,601
)


Income
tax (benefit) expense consists of the following for the years ended September 30, 2009, 2008 and 2007 (in thousands):

September 30,2009

2008

2007Income tax (benefit) expense:Current:Federal

$
(1,675
)
$
849

$
State


(103
)

239


Foreign


327


134


224Total Current

$
(1,451
)
$
1,222

$
224Deferred:Federal

$


$


$
State








Foreign








Total Current

$


$


$
Total:Federal

$
(1,675
)
$
849

$
State


(103
)

239


Foreign


327


134


224Total Current

$
(1,451
)
$
1,222

$
224


Income
tax (benefit) expense amounted to $(1.4) million, $1.2 million, and $0.2 million for the years ended September 30, 2009, 2008 and 2007, respectively. A
reconciliation of the (benefit) provision

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9INCOME TAXES (Continued)

for
income tax expense by applying the statutory U.S. federal income tax rate to income is as follows (in thousands):

September 30,2009

2008

2007Federal income tax (benefit) provision at statutory rate

$
(68,422
)
$
2,581

$
(1,610
)State tax provision, net of federal benefit


362


239


171Foreign taxes


327


134


191Goodwill impairment


65,792





Nondeductible expenses


714


30


240Change in valuation allowance


(224
)

(1,762
)

1,232Income tax (benefit) provision

$
(1,451
)
$
1,222

$
224


Deferred
tax assets and liabilities are recognized for future tax consequences between the carrying amounts of assets and liabilities and their respective tax bases using enacted tax
rates in effect for the year in which the differences are expected to reverse. Significant deferred tax assets and liabilities consist of the following (in thousands):

September 30,2009

2008

2007Deferred tax assets:Net operating loss carryforward

$
301,106

$
283,226

$
319,321Research and development tax credits


23,066


20,689


21,926Alternative Minimum Tax credit


179


1,901


Research and development IRC 59(e) capitalization


11,640


14,721


18,061Stock options


26,959


31,298


36,570Fixed assets and intangible property


34,295


48,044


38,613Inventory


4,979


9,214


9,610Allowances and reserves


10,172


3,893


3,934State taxes


959


566


501Other


8,746


27,982


21,886Total deferred tax assets


422,101


441,534


470,422Valuation allowance


(422,101
)

(441,534
)

(470,422
)Net deferred tax assets

$


$


$



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9INCOME TAXES (Continued)

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 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


The
provision for income taxes as a percentage of income from continuing operations before income taxes was 0.74% for the year ended September 30, 2009. The
Company's effective tax rate for fiscal 2009 is primarily impacted by the $191.4 million goodwill impairment recorded during the first quarter of 2009 and benefited from the utilization of Net
Operating Loss carryforwards and the reversal of the related valuation reserve previously recorded. There was no tax expense related to discontinued operations for the year ended September 30,
2009 and approximately $1.0 million for the year ended September 30, 2008.

Because
we have consistently experienced net tax losses, we have placed a valuation allowance against our otherwise recognizable deferred tax assets. We have a net operating loss carry
forward of
approximately $696.0 million, $588.0 million, and $253.0 million for federal, state, and foreign income tax purposes at September 30, 2009, respectively, which can be
carried forward to offset future taxable income. We have available federal and state research and development tax credit carry forwards of approximately $16.0 million and $10.9 million,
respectively and state alternative minimum tax credit carryforwards of approximately $0.1 million. Our federal net operating losses may be carried forward through 2029; state net operating
losses may be carried forward through 2019; foreign net operating losses have various carry forward provisions in several jurisdictions; and some federal, state, and foreign net operating losses may
have begun to expire in 2006.

Deferred
tax assets are primarily composed of federal and state tax net operating losses ("NOL") carryforwards; timing differences relating to tangible and intangible assets recovery;
and research and

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9INCOME TAXES (Continued)

development
credits. Due to uncertainties surrounding the Company's ability to generate future taxable income, there is a full valuation allowance against the deferred tax assets.

Additionally,
there is potential that an ownership change can occur that would impair the usage of the NOL's and credits in future taxable periods. An ownership change occurs 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. Based on our current analysis of shareholders we
believe that an ownership change has not occurred as of September 30, 2009. Accordingly, we have not presented any amounts as an uncertain tax position under FIN 48. Any carryforwards
that will expire prior to utilization will be removed from deferred tax assets with a corresponding reduction in the valuation allowance.

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 14Subsequent Events).

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. We maintain a study to understand the status of net operating losses. Based on that study, we believe that, as of
September 30, 2009 we have not undergone an Internal Revenue Code (IRC) Section 382 change of control that would trigger an impairment of the use of our NOLs as of the fiscal year ended
September 30, 2009. 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.

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. 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
total amount of gross unrecognized tax benefits was approximately $29.3 million as of October 1, 2007 and September 30, 2008. The total amount of gross
unrecognized tax benefits decreased by $3.0 million related to R&D credits and the potential state tax liabilities.

Included
in the balance of unrecognized tax benefits of $26.3 million as of September 30, 2009, there were no unrecognized tax benefits that, if recognized, would impact
the effective tax rate.

A
reconciliation of the beginning and ending amount of unrecognized tax benefit is as follows (in thousands):

Balance as of September 30, 2008

$
(29,297
)Gross increasestax positions in prior period


Gross decreasestax positions in prior period


Gross increasescurrent-period tax positions


3,009Decrease relating to settlements


Reductions as a result of a lapse of statue of limitations


Balance as of September 30, 2009

$
(26,288
)


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9INCOME TAXES (Continued)

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. As of September 30, 2009, there was no material interest or
penalties were accrued due to significant net operating loss.

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 10SIGNIFICANT CUSTOMERS, CONCENTRATION OF CREDIT RISK, SEGMENT REPORTING, AND GEOGRAPHIC INFORMATION

The Company's end customers generally are engaged in the design and/or manufacturing of technology products either recently introduced or not yet introduced to the marketplace. The
Company ships certain products to contract manufacturers of its end customers and through distributors. The allocation of revenues that follows is based on end customer, rather than contract
manufacturer or distributor. For fiscal 2009, distributors Nu Horizons Electronics, Corp. (including its subsidiary Titan Supply Chain Services), Weikeng Industrial Co. Ltd. and direct
customer Huawei Technologies Co., Ltd. accounted for 36.0%, 7.5%, and 12.0%, respectively, of our net revenues. For fiscal 2008, distributors Nu Horizons Electronics, Corp. (including its subsidiary
Titan Supply Chain Services), Weikeng Industrial Co. Ltd. and direct customer IBM accounted for 48.8%, 9.2% and 11.3%, respectively, of our net revenues. For fiscal 2007, distributors Nu
Horizons Electronics, Corp. (including its subsidiary Titan Supply Chain Services), Weikeng Industrial Co. Ltd. and direct customer IBM accounted for 50.1%, 7.1% and 11.0%, respectively,
of our net revenues.

Based
on direct shipments, net revenues to customers that exceeded 10% of total net revenues in any of the three years ended September 30, 2009 were as follows:

2009

2008

2007Nu Horizons Electronics Corp. (distributor)


22.6
%

22.8
%

21.3
%Titan Supply Chain Services (distributor)


13.4
%

26.0
%

28.8
%Huawei


12.0
%

*


*IBM


*


11.3
%

11.0
%


*Less
than 10% of total net revenues for period indicated.


The
Company has one reportable operating segment as defined by ASC Topic 280 Segment Reporting ("ASC 280"); originally issued as SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information." Substantially all long-lived assets are located in the United States.

The
Company principally targets two markets within the communications industry: Carrier Networking and Enterprise Networking systems.

Accordingly,
we classify our IC products into three categories: 1) Carrier Networking Products; 2) Enterprise Networking Products; and 3) Non-Core
Products. The Networking Products line services core and metro WANs, also known as Carrier Networks. Our products are focused on enabling

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 10SIGNIFICANT CUSTOMERS, CONCENTRATION OF CREDIT RISK, SEGMENT REPORTING, AND GEOGRAPHIC INFORMATION (Continued)

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 LANs in SMB and SME
markets. Non-Core Products are those product lines where we have chosen to exit markets and no longer continue to invest.

Revenues
are summarized by geographic area as follows (in thousands):

September 30,2009

2008

2007North America

$
69,717

$
116,191

$
115,696Asia Pacific


79,720


88,045


76,046Europe


18,740


24,300


30,206Total net revenues

$
168,177

$
228,536

$
221,948


(1)North
America includes USA, Canada and Mexico


Revenue
by geographic area is based upon where the design win for the work originated. North America revenue includes $13.3 million and $10 million of intellectual property
activity for fiscal years ended September 30, 2009 and 2008, respectively. The Company believes a substantial portion of the product sold to OEMs and third-party manufacturing service
providers in the Asia Pacific region are ultimately shipped to end-markets in North America and Europe.

Long-lived
assets (excluding goodwill and other intangible assets) by country (in thousands):

September 30,2009

2008USA

$
10,234

$
11,320Denmark


113


190Germany


604


174Total

$
10,951

$
11,684


NOTE 11RETIREMENT SAVINGS PLAN

The Company has a qualified retirement plan under the provisions of Section 401(k) of the Code covering substantially all employees. Participants in this plan may defer up to the
maximum annual amount allowable under IRS regulations. The contributions are fully vested and nonforfeitable at all times. From January 1, 2007 through February 1, 2009, the Company
matched 50% of the first 6% of employee contributions. The Company's 401(k) match totaled $0.3 million, $0.8 million and $0.6 million
for the years ended September 30, 2009, 2008, and 2007. In compliance with governing regulations, the Company also made contributions to the retirement savings plans of employees of its foreign
subsidiaries in the amounts of $0.3 million, $0.3 million and $0.2 million for the years ended September 30, 2009, 2008, and 2007.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 12COMMITMENTS AND CONTINGENCIES

The Company leases facilities under non-cancellable operating leases expiring at various dates through fiscal 2015. Rent expense under operating leases totaled
$3.9 million, $3.7 million, and $3.4 million for the years ended September 30, 2009, 2008, and 2007, respectively.

On
December 29, 2005, the Company entered into a sale-leaseback arrangement on a building in Camarillo, California. The Company is committed to lease the facility
through December 2015. The lease includes annual rent escalations. Rent expense related to the sale-leaseback of $0.7 million for the years 2010-2013;
$0.8 million for 2014; and $1.0 thereafter is included in the schedule below. The Company has a deferred lease incentive liability recorded to reflect the amount of the leasehold improvements
and is amortizing the liability on a straight-line basis over the term of the lease.

Future
minimum lease payments under non-cancellable operating leases that have remaining non-cancellable lease terms in excess of one year and software licenses
are as follows (in thousands):

Payment Obligations by Year2010

2011

2012

2013

2014

Thereafter

TotalOperating leases

$
3,050

$
3,108

$
2,981

$
2,949

$
1,768

$
1,266

$
15,122Software licenses


6,426


4,698


3,865


3,200


3,200





21,389Total

$
9,476

$
7,806

$
6,846

$
6,149

$
4,968

$
1,266

$
36,511


Software
license commitments represent non-cancellable licenses of intellectual property from third-parties used in the development of the Company's products.

The
Company is a party to various investigations, lawsuits, and claims arising in the normal course of business. In the opinion of management, the ultimate disposition of these matters
could have a material adverse affect on the Company's consolidated financial position, results of operations, and/or liquidity.

The
Company and certain current or former directors and officers of Vitesse were named in multiple shareholder derivative and securities class actions. These actions were filed starting
in April 2006 and were based on allegations of stock option backdating and accounting manipulations. Settlements have been reached in the class action suit and the derivative suit against the Company,
with both suits settled with distribution of Vitesse common stock. An expense was accrued in the amount of $6.6 million in the financial statements for the year ended September 30, 2006
to reflect the fair market value of the stock as of the date of the settlements. These settlements were non-cash settlements and did not have a material adverse affect on the Company's
liquidity. Final distribution of the Company's common stock in settlement of the lawsuits was made during the fiscal year ended September 30, 2009. No additional expense was recognized in the
financial statements for the period. We also have received a grand jury subpoena from the United States Attorney's Office and were notified that the SEC commenced an investigation of Vitesse. The
Company has reached a tentative settlement with the SEC in settlement of their investigation. An expense was accrued in the amount of $3.0 million in the accompanying financial statements for
the year ended September 30, 2009.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 12COMMITMENTS AND CONTINGENCIES (Continued)

behalf
of a class of purchasers of Vitesse common stock. The settlement of the consolidated securities class actions included a cash payment to the 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 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 12COMMITMENTS AND CONTINGENCIES (Continued)

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 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.

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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 13QUARTERLY FINANCIAL DATA (UNAUDITED)

The following tables set forth the consolidated statements of operations for each of our last eight quarters. This quarterly information is derived from unaudited interim financial
statements and has been prepared on the same basis as the annual Consolidated Financial Statements. In management's opinion, this quarterly information reflects all adjustments necessary for fair
presentation of the information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any future period.

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

Total
YearFiscal Year 2009:Product revenues

$
44,810

$
34,577

$
36,356

$
39,184

$
154,927Licensing revenues


5,000





8,250





13,250Net revenues


49,810


34,577


44,606


39,184


168,177Cost of revenues


22,447


18,228


17,282


20,457


78,414(Loss) income from continuing operations before discontinued operations


(189,958
)

(7,085
)

12,410


(9,479
)

(194,112
)Discontinued operationsIncome from operations of Storage Products business, net of tax








71





71Net (loss) income

$
(189,958
)
$
(7,085
)
$
12,481

$
(9,479
)
$
(194,041
)Basic and diluted (loss) income per share:Continuing operations


(0.84
)

(0.03
)

0.05


(0.04
)

(0.85
)Discontinued operations














Net (loss) income per share

$
(0.84
)
$
(0.03
)
$
0.05

$
(0.04
)
$
(0.85
)Weighted average shares outstanding:Basic


226,206


230,227


230,906


230,906


229,554Diluted


226,206


230,227


231,735


230,906


229,554Fiscal Year 2008:Product revenues

$
52,542

$
55,593

$
55,041

$
55,360

$
218,536Licensing revenues











10,000


10,000Net revenues


52,542


55,593


55,041


65,360


228,536Cost of revenues


26,498


25,514


27,965


26,367


106,344(Loss) income from continuing operations before discontinued operations


(3,519
)

2,366


(591
)

9,254


7,510Discontinued operationsIncome from operations of Storage Products business, net of tax (including gain on sale)


4,978


1,420


1,703


943


9,044Net income

$
1,459

$
3,786

$
1,112

$
10,197

$
16,554Basic (loss) income per share:Continuing operations


(0.02
)

0.01





0.04


0.03Discontinued operations


0.02


0.01


0.01


0.01


0.04Net income per share

$


$
0.02

$
0.01

$
0.05

$
0.07Diluted (loss) income per share:Continuing operations


(0.02
)

0.01





0.04


0.03Discontinued operations


0.02


0.01


0.01





0.04Net income per share

$


$
0.02

$
0.01

$
0.04

$
0.07Weighted average shares outstanding:Basic


223,556


223,556


223,556


223,786


223,614Diluted


223,556


223,556


223,556


261,767


223,614


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 14 SUBSEQUENT EVENTS

Debt Restructuring

Exercise of 2024 Debenture Repurchase Rights

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 Indenture 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. These
transactions and the accounting for these transactions are described below.

Amendment to the Senior Secured Loan Agreement

Effective October 16, 2009, the Company and Whitebox (the "Senior Lenders") amended the terms of the Senior Secured Loan
Agreement to allow the Company to enter into the "Debt Conversion Agreement" described below, pay down $5.0 million of the principal amount of its Senior Secured Loan and amend the terms of the
Senior Secured Loan.

The
terms of the Senior Secured Loan were amended (the "Amended Senior Secured Loan" or "Senior Secured Loan") as follows: the maturity date is October 2011; each prepayment of the
Senior Secured Loan requires the Company to pay a non-refundable prepayment fee equal to 1.0% of the aggregate principal amount that is prepaid; the interest rate was increased to 10.5%
per annum in cash for the period from October 1, 2009 until October 16, 2009 and to 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 payment. Further, subsequent to the $5.0 million pay-down of the Senior Secured Loan, the Company has the ability to reduce the rate of interest by 0.3% for every
$1.0 million of additional prepayment and 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 Senior Secured
Loan.

As
the Company consummated the debt restructuring described in this note before November 16, 2009 and satisfied certain other conditions, the senior lenders waived the defaults
discussed in "Exercise of 2024 Debenture Repurchase Rights" above.

Accounting For the Amended Senior Secured Loan

Pursuant to the guidance in ASC 470, the Company has determined that it has not received any concessions from the lender. As a result,
the amendment to the Senior Secured Loan will not be accounted for as a troubled debt restructuring ("TDR") but as a debt modification. Accordingly, the amended Senior Secured 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, fees of $0.1 million were paid to the lender which resulted in an increase in the debt discount to $0.5 million. Furthermore the debt issuance costs
incurred at the time of the original debt issuance of $1.2 million remain capitalized and the third party costs of approximately $0.6 million incurred as part of the amendment were
expensed. The debt

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 14 SUBSEQUENT EVENTS (Continued)

issuance
costs of $1.2 million and the debt discount of $0.5 million will be amortized as interest expenses over the term of the modified loan. The Senior Secured Loan will bear interest
at a rate pursuant to the amended terms.

Debt Conversion Agreement

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").

Cash Payments

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:



Issuance of Common Stock and Series B Preferred Stock

On October 30, 2009, the Noteholders exchanged approximately 50.0% of their 2024 Debentures (after the partial repurchase for
cash described in "Debt Conversion Agreement" 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 9.99% 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 restructuring transaction in excess of the Limit on Ownership; this amount totaled 770,785 shares of Series B Preferred Stock.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 14 SUBSEQUENT EVENTS (Continued)

Issuance of New Notes

As described above, the Company also issued $50.0 million of New Notes pursuant to the Conversion Agreement. The New Notes 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 New Notes 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 Secured Loan Agreement. The New Notes 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 New Notes). Full conversion of the $50.0 million in
aggregate principal amount of the New Notes would result in the issuance of up to 222,191,111 shares of common stock.

Accounting for the Debt Conversion

Initially, the Company evaluated the issuance of common stock, New Notes and Series B Preferred Stock 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 TDR. However, due to the significant change in the expected remaining cash flows, 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.

The
Company will initially record the new instruments (i.e., the New Notes, common stock and Series B Preferred Stock) issued in extinguishment of the 2024 Debentures at
fair value and recognize an $11.8 million loss for the difference between the 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 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. Additionally, $1.2 million of fees paid to the New Note lenders will be
included in the measurement of the loss pursuant to ASC 470. Third party costs of approximately $1.9 million will be capitalized and amortized as additional interest expense over the
term of the New Notes.

On
the Closing Date, the fair value of the underlying common stock was $0.21 per share. On that same date, the Company estimated the effective conversion price was $0.18 per common share
pursuant to the terms of the Series B Preferred Stock. Accordingly, pursuant to ASC470, the Company will recognize in additional paid in capital approximately $2.0 million of beneficial
conversion feature related
to the issuance of the Series B Preferred Stock. Since the Series B Preferred Stock is redeemable upon issuance, the resulting discount on the Series B Preferred Stock arising
from the beneficial conversion feature will be recognized immediately and reflected as a deemed dividend.

The
fair value of the New Notes was estimated to be $42.0 million, which is net of $22.5 million related to the fair value of bifurcated embedded derivatives. The
bifurcated embedded derivatives were identified pursuant to ASC 815 and arise from terms of the New Notes which give the Noteholders the right to demand redemption of the New Notes at a price equal to
the notes 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 is in

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 14 SUBSEQUENT EVENTS (Continued)

substance
a conversion settlement right where the holders could require the Company to settle in cash. The fair values of the New Notes and embedded derivatives were determined using a convertible
bond valuation model within a lattice framework Level 3). 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 New Notes are convertible.

Authorized Common Shares

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 which 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 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 instruments when combined with the outstanding shares of common stock after closing, requires the Company to have
504.8 million shares of common stock available for issuance.

The
Company currently has 500.0 million shares of common stock authorized. As a result, the Company will 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 has determined based on a first-in, first-out (FIFO) accounting policy
election based upon the issuance date of the instruments, it will not have sufficient shares for the conversion of all of the Series B Preferred Stock into shares of common stock. As such,
approximately 48,000 shares of Series B Preferred Stock or $0.8 million will be 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.

Tax Matters

As a result of the debt modifications and exchanges discussed above, the Company experienced an "ownership change" as defined for U.S.
federal income tax purposes. In the event of an "ownership change" under Section 382 of the Internal Revenue Code of 1986, as amended, 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.

Classification of Liabilities

Prior to the closing of the debt transactions on October 30, 2009, as discussed in Note 6, during fiscal year 2009 the
Company had classified its obligations related to the 2024 Debentures and senior secured 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 such debt refinancing transactions, the Company has reclassified $111.3 million related to the portion of their obligations under the 2024 Debentures and
the senior

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 14 SUBSEQUENT EVENTS (Continued)

secured
note which are refinanced on a long-term basis, from short-term liabilities to long-term liabilities on its Consolidated Balance Sheet as of
September 30, 2009.

On
its Consolidated Balance Sheet as of September 30, 2009, the Company classified as short-term liabilities the $5.0 million in cash paid to the Senior Lender
of senior secured loan: $10.0 million of cash used to pay $3.6 million to settle with the holders of the 2024 Debentures that are not parties to the Conversion Agreement and
$6.4 million 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.

Restructuring Costs

In an effort to reduce costs and shorten manufacturing time, the Company has decided to eliminate test activities at their Camarillo,
California location and outsource 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 will include the termination of approximately 50 employees. In
connection with this restructuring, the Company will record restructuring charges of approximately $0.7 million in the first quarter for severance costs to be incurred during the year ended
September 30, 2010. The Company will not incur costs for impairment of fixed assets or facilities as part of the restructuring plan.

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ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

On December 14, 2006, our Board of Directors and our Audit Committee dismissed KPMG, LLP as our independent registered
public accountants and disclosed such dismissal in a Form 8-K, while requesting that KPMG furnish Vitesse with a letter addressed to the Securities and Exchange Commission stating
whether it agrees with the statements made by Vitesse in the Form 8-K. In the Form 8-K, we also stated that from October 1, 2004, until the dismissal of
KPMG as Vitesse's independent public accountant on December 14, 2006:



By
letter dated January 2, 2007 from KPMG commenting on Vitesse's original filing of a Form 8-K regarding the dismissal of KPMG (the "KPMG Letter"), KPMG
informed Vitesse that it believes its audit procedures were impeded and its audit scope was restricted. KPMG has stated that, notwithstanding its requests, KPMG was not provided with sufficient access
to the conclusions reached by the Special Committee of Vitesse's Board of Directors, the report to the Special Committee of its investigating counsel, Munger Tolles & Olson LLP
("Munger"), and the documentation supporting that report, as evidenced by the following:



In
the KPMG Letter, KPMG also informed Vitesse that it believes that the following are reportable events, as they constitute matters that could have caused KPMG to be unwilling to rely
on management's representations or be associated with the Company's financial statements, but, due to
audit scope limitations asserted by KPMG above and the dismissal of KPMG, remained unresolved:



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Therefore,
the Company believes that it does have a disagreement with KPMG regarding auditing scope, which disagreement, if not resolved to the satisfaction of KPMG, would have caused it
to make a reference to the subject matter of the disagreement in connection with its report; and without being resolved, could have caused KPMG to be unwilling to rely on management's representations
or be associated with the Company's financial statements, which would be considered a "reportable event" identified in Item 304(a)(1)(v)(A) through (D) of Regulation S-K.

On
June 4, 2007, our Audit Committee engaged BDO Seidman, LLP, as our new independent registered public accounting firm. There are no disagreements between the BDO
Seidman, LLP, and the Company.

On
June 13, 2007, we filed a lawsuit against our former independent registered public accounting firm KPMG, LLP, alleging KPMG failed to properly provide auditing and other
services during the time period 1994 to 2000 and seeking damages in excess of $100 million.

On
June 15, 2009, the Company announced that it had reached a settlement with KPMG, pursuant to which 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.

ITEM 9A.    CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We evaluated the design and operating effectiveness of our disclosure controls and procedures as of September 30, 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 Act.
Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2009 our disclosure controls and procedures were not effective.

Management's Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining an adequate system of internal control over financial reporting, pursuant to
Rule 13a-15(c) of the Exchange Act. This system is intended to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with GAAP.

A
Company's internal control over financial reporting includes policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material affect on the
financial statements.

In
accordance with the internal control reporting requirements of the SEC, our management completed an assessment of the effectiveness of our internal control over financial reporting as
of September 30, 2009. In making this assessment, management used the criteria set forth in by the

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Committee
of Sponsoring Organizations of the Treadway Commission ("COSO"). The COSO framework summarizes each of the components of a company's internal control system, including the:
(i) control environment; (ii) risk assessment; (iii) information and communication; and (iv) monitoring (collectively, the "entity-level controls"), as well as a company's
control activities (process-level controls). Management's evaluation of the design and operating effectiveness of our internal controls over financial reporting identified material weaknesses
resulting from design and operating deficiencies in the internal control system. A "material weakness" is a deficiency, or a combination of deficiencies, in internal control over financial reporting,
such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis.

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 September 30, 2009.

BDO
Seidman, LLP, the independent registered public accounting firm that audited the consolidated financial statements included in this Annual Report on
Form 10-K, has issued an attestation report on our internal control over financial reporting as of September 30, 2009. A copy of this report is set forth below.

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

During the quarter ended September 30, 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 September 30, 2009, certain material weaknesses were remediated. The following changes to our internal control over financial
reporting were made during the quarter ended September 30, 2009:



During
our fourth quarter of fiscal 2009 we continued our ongoing remediation of financial controls, as well as completed the documentation of our controls process and implemented and

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completed
controls testing to allow management to determine the effectiveness of the controls developed and implemented in previous quarters of fiscal year 2009.

As
a result of the above actions, we believe our control environment and specifically controls over our financial reporting process, have improved substantially. 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, has identified the following measures 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. We began implementing certain of these measures prior to the filing of this Form 10-K. 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.

Inherent Limitation on the Effectiveness of Internal Controls

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

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Report of Independent Registered Public Accounting Firm

The
Board of Directors and Shareholders of Vitesse Semiconductor Corporation
Camarillo, California

We
have audited Vitesse Semiconductor Corporation's internal control over financial reporting as of September 30, 2009, based on criteria established in Internal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).
Vitesse Semiconductor Corporation's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Item 9A, Management's Report on
Internal Control Over Financial Reporting". Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, 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.

A
material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material
misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in
management's assessment as of September 30, 2009:



These
material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2009 financial statements, and this report does not
affect our report dated December 11, 2009 on those financial statements.

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In
our opinion, Vitesse Semiconductor, Corporation did not maintain, in all material respects, effective internal control over financial reporting as of September 30, 2009, based
on the COSO criteria.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Vitesse Semiconductor
Corporation as of September 30, 2009 and 2008, and the related consolidated statements of operations, shareholders' (deficit) equity and comprehensive income (loss), and cash flows for each of
the three years in the period ended September 30, 2009 and our report dated December 11, 2009 expressed an unqualified opinion thereon.

/s/ BDO Seidman, LLPLos Angeles, California
December 11, 2009


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PART III

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this item is incorporated by reference from the Company's Proxy Statement for the 2009 Annual Meeting of
Stockholders under the headings "Election of Directors," "Executive Officers," "Corporate Governance, Board Meetings and Committees," and "Section 16(a) Beneficial Ownership Reporting
Compliance."

ITEM 11.    EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference from the Company's Proxy Statement for the 2009 Annual Meeting of
Stockholders under the headings "Executive Compensation" and "Director Compensation," "Compensation Committee Interlocks and Insider Participation," and "Compensation Committee Report."

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item, if any, is incorporated by reference from the Company's Proxy Statement for the 2009 Annual
Meeting of Stockholders under the heading "Ownership of Certain Beneficial Owners and Management" and "Equity Compensation Plan Information."

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this item, if any, is incorporated by reference from the Company's Proxy Statement for the 2009 Annual
Meeting of Stockholders under the heading "Corporate Governance, Board Meetings and Committees" and "Transactions with Related Persons."

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is incorporated by reference from the Company's Proxy Statement for the 2009 Annual Meeting of
Stockholders under the heading "Audit Matters."

PART IV

ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

See
the financial statements and financial statement schedules listed in Item 8. Financial Statements and Supplementary Data.

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VITESSE SEMICONDUCTOR CORPORATION

SCHEDULE IIValuation and Qualifying Accounts

Years ended September 30, 2009, 2008 and 2007

(in thousands)

Balance at
Beginning
of Year

Charged to
Other
Accounts

Deductions/
Write-offs

Balance at
End of YearYear ended September 30, 2009Deducted from accounts receivable:Allowance for doubtful accounts

$


$


$


$
Allowance for sales reserve


53


(35
)




18Deducted from deferred tax assetValuation allowance


441,534


(224
)

(19,209
)

422,101Year ended September 30, 2008Deducted from accounts receivable:Allowance for doubtful accounts

$
253

$
(253
)
$


$
Allowance for sales reserve


142


(89
)




53Deducted from deferred tax assetValuation allowance


470,422


(15,224
)

(13,664
)

441,534Year ended September 30, 2007Deducted from accounts receivable:Allowance for doubtful accounts


46


249


(42
)

253Allowance for sales reserve


170


(28
)




142Deducted from deferred tax assetValuation allowance


484,263


(13,841
)




470,422


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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

Rights Agreement dated as of March 3, 2003 between Vitesse Semiconductor Corporation and EquiServe Trust Company, N.A., as Rights Agent. (Incorporated by reference to Exhibit 1 to the
Form 8-A12(g) filed March 5, 2003).4.3

Second Amendment to Rights Agreement, dated October 16, 2009, between the Company and EquiServe Trust Company, N.A., as Rights Agent (Incorporated by reference to Exhibit 4.2 to the Company's
Form 8-K filed October 20, 2009).4.4

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).4.5

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).4.6

Indenture between Vitesse Semiconductor Corporation and U.S. Bank National Association, as Trustee (including form of 1.50% Convertible Subordinated Debentures due 2024), dated as of September 22,
2004. (Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed September 23, 2004).4.7

First Supplemental Indenture, dated November 3, 2006 between the Company and U.S. Bank National Assoc. as Trustee. (Incorporated by reference to Exhibit 99 to the Company's Form 8-K filed
November 9, 2006).4.8

Second Supplemental Indenture, dated September 24, 2007 between the Company and U.S. Bank National Association. (Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed
September 27, 2007).4.9

Third Supplemental Indenture, dated October 16, 2009, by and between the Company and U.S. Bank National Association, as Trustee (Incorporated by reference to Exhibit 4.1 to the Company's
Form 8-K filed October 20, 2009).4.10

Guaranty, dated October 16, 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 1.5% Convertible Subordinated Debentures Due 2024 (Incorporated by reference to Exhibit 10.5 to the Company's Form 8-K filed October 20,
2009).4.11

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)..


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10.1

Letter Agreement between the Company and Michael Green dated January 2, 2007. (Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed January 31, 2007).10.2

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).10.3

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).10.4

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).10.5

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).10.6

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).10.7

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).10.8

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).10.9

Senior Unsecured Convertible Note Purchase Agreement, dated August 23, 2007 between the Company and Whitebox VSC, Ltd. (Incorporated by reference to Exhibit 10.4 to the Company's
Form 8-K filed August 29, 2007).10.10

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).10.11

Form of Forbearance Agreement, dated October 1, 2009, by and among the Company and beneficial owners of 1.5% Convertible Subordinated Debentures due 2024 (Incorporated by reference to
Exhibit 10.1 to the Company's Form 8-K filed October 6, 2009).10.12

Form of Forbearance Agreement, dated October 9, 2009, by and among the Company and beneficial owners of 1.5% Convertible Subordinated Debentures due 2024 (Incorporated by reference to
Exhibit 10.1 to the Company's Form 8-K filed October 14, 2009).10.13

Form of Forbearance Agreement, dated October 16, 2009, by and among the Company and beneficial owners of 1.5% Convertible Subordinated Debentures due 2024 (Incorporated by reference to
Exhibit 10.2 to the Company's Form 8-K filed October 20, 2009).10.14

Forbearance Agreement, dated October 1, 2009, between the Company and Whitebox VSC, Ltd. (Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed October 6,
2009).10.15

Second Forbearance Agreement, dated October 9, 2009, between the Company and Whitebox VSC, Ltd. (Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed
October 14, 2009).


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10.16

Third Forbearance Agreement, dated October 16, 2009, between the Company and Whitebox VSC Ltd. (Incorporated by reference to Exhibit 10.3 to the Company's Form 8-K filed October 20,
 2009).10.17

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).10.18

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).10.19

Form of 8.0% Convertible Second Lien Debentures Due 2014 (Incorporated by reference to Exhibit 4.1 to the Company's Form 8-K filed October 30, 2009).10.20

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).10.21

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).10.22

Vitesse Semiconductor Corporation Amended and Restated 2001 Stock Incentive Plan as of September 15, 2008. (Incorporated by reference to Exhibit 4.3 to the Company's Form S-8 filed
December 31, 2008).10.23

Vitesse Semiconductor Corporation Fiscal Year 2009 Executive Bonus Plan, dated as of January 16, 2009 (Incorporated by reference to Exhibit 4.9 to the Company's form 10-Q filed
February 17, 2009) (portions of this exhibit have been omitted pursuant to a request for confidential treatment).21.1
*
Subsidiaries of the Company.23.1
*
Consent of BDO Seidman, LLP, Independent Registered Public Accounting Firm.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.


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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.

VITESSE SEMICONDUCTOR CORPORATION(Registrant)Dated: December 11, 2009

By:

/s/ CHRISTOPHER R. GARDNER Chief Executive Officer


Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on
the date indicated.

Dated: December 11, 2009

By:

/s/ CHRISTOPHER R. GARDNER Director and Chief Executive OfficerDated: December 11, 2009

By:

/s/ RICHARD C. YONKER Chief Financial Officer
(Principal Financial and Accounting Officer)Dated: December 11, 2009

By:

/s/ STEVEN P. HANSON DirectorDated: December 11, 2009

By:

/s/ JAMES HUGAR DirectorDated: December 11, 2009

By:

/s/ G. GRANT LYON DirectorDated: December 11, 2009

By:

/s/ EDWARD ROGAS, JR. Director


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