<PAGE>

                                                                    Exhibit 13.1

It is a pleasure to report to you that fiscal 1999 was our most successful year.

In addition to achieving record financial results, we also executed on our
strategy of developing the intellectual property, product portfolio and advanced
process technology needed to become a dominant supplier of high-performance
integrated circuits for the Internet driven communications market.

Specific highlights for 1999 were:

 .  Revenue exceeded $281 million, a 59% increase over the $177 million recorded
   in 1998 as our traditional strength in telecom transmission systems was
   supplemented by very strong growth in the datacom wide area, local area and
   storage area networks.

 .  We successfully ramped up our 6" wafer fabrication facility, enabling us to
   better address our capacity constraints.

 .  Gross margins improved from 60% in 1998 to 63% in 1999, the result of
   increased fab utilization in Colorado Springs and yield improvements.

 .  Operating income grew to $93 million from $50 million in 1998, an 86%
   increase.

 .  Diluted earnings per share grew to $0.42 from $0.31 in 1998, a 35% increase
   despite a 120% increase in the effective tax rate.
<PAGE>

Communications Over the last five years, Vitesse has become one of the leading
suppliers of high-performance integrated circuits used in SONET/SDH, WDM and
DWDM optical communication systems. In particular, we have developed a dominant
position in 2.5Gb/s (gigabit per second) systems that move massive amounts of
data over long distances. While our initial thrust was on long-distance
transmission systems, we have more recently focused our resources on datacom
networking applications such as Gigabit Ethernet, Internet Protocol, Fibre
Channel Storage Networks, ATM and backplanes. Our results in 1998 and 1999 have
validated this strategy. This year we began a major program to dramatically
expand our served markets by developing products that provide the switching and
processing capabilities needed by these same communications systems. We believe
that as the volume and performance of these systems increases, the original
equipment manufacturers ("OEMs") will look to their integrated circuit suppliers
to provide complete chip solutions for major portions of the hardware.

Time to market and cost will not permit the use of many custom circuits designed
by the OEM's engineers. As a result, we have initiated a strategy to provide
"reference designs" which includes physical layer, switching layer and
processing layer circuits. This strategy benefits both our customers and
Vitesse. Our customers receive complete hardware solutions for a portion of
their products, which reduces time to market and enables them to concentrate on
applications and software features. By providing a complete solution, Vitesse
becomes more strategic to the OEM and builds a defensible barrier against
competitors who only offer a single circuit or a partial solution.
<PAGE>

During 1999 we continued to build barriers to competition by introducing over 50
new standard communications products. These include a number of products
developed using state-of-the-art CMOS (silicon) technology that provides an
excellent complement to our GaAs (Gallium Arsenide) proprietary technology.
Significant among the new products are:

   The VSC8122, a multi-rate clock and data recovery IC that can operate at
   varying data rates from 155Mbps to 2.5Gb/s for use in SONET/SDH and Gigabit
   Ethernet systems.

   The VSC8141, a multi-rate transceiver with an integrated clock generator for
   SONET/SDH and Gigabit Ethernet applications.

   The VSC9110, a SONET/SDH to ATM framing device that can be used in equipment
   interconnecting ATM switches over public or private SONET networks; and the
   VSC9112 which adds a Packet over SONET (POS) mode to the VSC9110.

   The VSC880, a 16x16 serial crosspoint switch, which in conjunction with its
   companion backplane transceiver device, the VSC870, forms the building blocks
   of a synchronous high-performance switching system with an aggregate
   bandwidth of 32Gb/s.

   The VSC834, VSC835 and VSC836, a family of asynchronous crosspoint switches
   designed to carry broadband data streams up to 2.5Gb/s.
<PAGE>

   The VSC9210, the industry's first 2.5Gb/s SONET/SDH Forward Error Correction
   Encoder/Decoder IC.

   The VSC7216, a quad 8-bit parallel-to-serial and serial-to-parallel
   transceiver chip used for high bandwidth interconnection in both Fibre
   Channel and Gigabit Ethernet solutions.

A key element of our strategy is to complement our existing intellectual
property base by adding design and architectural expertise through acquisitions.
In 1999 we completed three acquisitions, each of which has enhanced our design
expertise and has greatly improved our capability in communications processors
and system management.

In November 1998, we completed the acquisition of Vermont Scientific
Technologies ("VTEK"), a provider of integrated design services to companies in
the telecommunications industry. This acquisition added considerable value to
our design capabilities in the SONET overhead processing area.

In January 1999, we acquired Serano Systems Corporation, a leader in enclosure
and platform management solutions for Fibre Channel and SCSI server and storage
systems. The acquisition of Serano will enable us to solidify our leadership in
the Fibre Channel SAN area by providing complete solutions for that market.

In July 1999, we acquired XaQti Corporation, a leading edge supplier of Active-
Flow Processors which drive the Internet. This acquisition positions Vitesse as
a major player in high-end switching and processing and provides our customers
with complete Layer 3 switch solutions.

As a result of these acquisitions, we have begun to develop several new products
including network processors, framers and pointer processors which we expect to
introduce in fiscal 2000.

Test Equipment Our automatic test equipment (ATE) business grew in 1999 but at a
slower rate than in 1998. We accomplished this growth by continuing to gain
market share at the expense of bipolar silicon by offering products with higher
speed, higher levels of integration, lower cost, and the ability to combine
logic, SRAM and analog functions. Moreover, trends in new memory standards
(RAMBUS) and greater performance requirements for mixed signal testers have
opened up new applications for Vitesse products.

While we anticipate that our ATE business will continue to grow, we do not
expect it to grow at the rapid pace of the past two years. To expand our
opportunities we have introduced our first standard products in ATE. These
products are designed for applications that may not require the higher
performance provided by
<PAGE>

custom designs and which cannot afford the longer design cycles and higher
costs associated with custom solutions.

Technology There is no single technology that can meet the requirements of the
broad range of products that our customers require. We believe the key is to
utilize widely available "foundry" technologies such as CMOS and Silicon-
Germanium ("Si-Ge") where appropriate, and a proprietary technology likeH-GaAs
which can provide superior performance or the lower cost of an internal
manufacturing facility. Since our inception, we have continued to mature our
technology to the point that our internal manufacturing cost structure is
significantly lower than that of purchased wafers from any silicon bipolar
(i.e., ECL or Si-Ge) foundry. Over the last two years our process development
team has ramped up our production technologies in our new Class 1 fab and has
developed our next generation process, H-GaAs V. This process is the first to
take advantage of the state-of-the-art equipment installed in the new facility
and is optimized to provide the lower power and lowest cost for 10Gb/s circuits.

Summary In 1999, we continued to solidify our position in all of our established
markets. We also began to see the results of our initiative to provide more
complete solutions to customers by expanding our product offerings. We have
enhanced our system and design expertise through internal growth and
acquisitions. We believe that we have selected markets with tremendous growth
potential and have put in place the infrastructure to exploit this growth.

Moreover, our employees remain committed to making Vitesse the dominant suppli
er of high-performance circuits for communications and instrumentation. We
greatly appreciate your support and remain fully committed to making Vitesse an
outstanding company and an outstanding investment.


Louis R. Tomasetta
President
Chief Executive Officer
<PAGE>

five-year selected financial data

<TABLE>
<CAPTION>
                                                                      Years Ended September 30,
                                                       1999             1998           1997           1996          1995
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>              <C>            <C>            <C>           <C>
(in thousands except per share amounts)

Operating Results
  Revenues                                             $  281,534       $ 176,885      $ 105,413      $ 66,046      $  42,882
  Income from operations                                   93,142          50,194         25,133        13,112          2,788
  Net income                                               69,880          50,500         29,517        12,320          1,507
  Net income per share - basic                               0.46            0.34           0.21          0.12           0.02
  Net income per share - diluted                             0.42            0.31           0.19          0.10           0.01

Balance Sheet
  Cash and short-term investments                         189,157         168,573        158,461        53,035          6,315
  Working capital                                         282,022         225,025        179,564        70,606         17,889
  Total assets                                            522,893         381,008        295,994       101,071         42,111
  Long-term debt, less current portion                        725             701            322         1,166          5,518
  Total shareholders' equity                              486,688         351,289        267,807        88,053         25,000
</TABLE>
<PAGE>

quarterly results and stock market data [unaudited]

<TABLE>
<CAPTION>
                                                             First          Second         Third          Fourth       Total
                                                            Quarter         Quarter       Quarter         Quarter      Year
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>             <C>           <C>             <C>          <C>
(in thousands except stock price and per share amounts)

Fiscal Year 1999
      Revenues                                              $ 60,708        $  66,937     $  73,262       $  80,627    $  281,534
      Net income                                              14,604           15,518        18,112          21,646        69,880
      Net income per share - diluted (A)                        0.08             0.09          0.11            0.13          0.42
      Common stock price range (B):
        High                                                   24.47            26.20         33.78           48.38         48.38
        Low                                                     9.03            21.81         21.19           28.81          9.03

Fiscal Year 1998
      Revenues                                              $ 35,013        $  40,695     $  46,587       $  54,590    $  176,885
      Net income                                              10,000           11,468        13,242          15,790        50,500
      Net income per share - diluted (A)                        0.06             0.07          0.08            0.10          0.31
      Common stock price range (B):
        High                                                   13.03            12.72         15.44           18.16         18.16
        Low                                                     8.22             9.30         11.56           11.69          8.22

Fiscal Year 1997
      Revenues                                              $ 21,841        $  24,617     $  27,859       $  31,096    $  105,413
      Net income                                               5,418            6,944         8,182           8,973        29,517
      Net income per share - diluted (A)                        0.04             0.04          0.05            0.06          0.19
      Common stock price range (B):
        High                                                    8.30             9.15          9.25           13.47         13.47
        Low                                                     5.21             5.63          6.88            8.04          5.21
</TABLE>

(A)  Net income per share computations for each quarter are independent and may
     not add to the net income per share computation for the year.

(B)  The Company's common stock is traded on the Nasdaq National Market System
     under the symbol VTSS. At September 30, 1999, there were approximately 914
     shareholders of record. Common stock prices are closing prices as reported
     on the Nasdaq National Market System. All share and per share data for all
     periods presented have been adjusted to reflect a 2 for 1 stock split of
     the common stock that was effected on October 20, 1999, a 2 for 1 stock
     split of the common stock that was effected on May 26, 1998, and a 3 for 2
     stock split of the common stock that was effected on February 28, 1997. The
     Company has never paid cash dividends and has no present plans to do so.
     The Company's bank line of credit agreement and synthetic lease agreements
     prohibit the payment of dividends without the banks' consent. See Notes 5
     and 11 of Notes to Consolidated Financial Statements.
<PAGE>

management's discussion and analysis of
          financial condition and results of operations

The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included elsewhere in this Annual Report. As more
fully described in Note 2 of the Consolidated Financial Statements, the
Company's acquisitions of Serano Systems Corporation ("Serano") on January 21,
1999 and XaQti Corporation ("XaQti") on July 16, 1999 were accounted for under
the pooling-of-interests method, and accordingly, all periods presented have
been restated to include the accounts and results of operations of Serano and
XaQti. The information set forth in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" below includes "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 as
amended and Section 21E of the Exchange Act that involve risks and uncertainties
including statements regarding research and development expense, profitability
and the ability to use net operating loss carryforwards and tax credits,
liquidity and capital resources and Year 2000 readiness. Factors that
realistically could cause results to differ materially from those projected in
the forward-looking statements are set forth in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Factors
Affecting Future Operating Results."

Overview

The Company is a leading supplier of high-performance integrated circuits
("ICs") targeted at systems manufacturers in the communications and automatic
test equipment ("ATE") markets. As a result of the deployment of communications
standards such as SONET/SDH, IP, ATM, Fibre Channel and Gigabit Ethernet as well
as other advances, there has been growing demand for high-performance ICs to
meet the increasingly rigorous standards of the communications industries. The
requirements for high-performance ICs in the ATE industry have also become more
stringent in order to meet testing requirements of increasingly faster and more
complex ICs. In fiscal 1999, sales of communications and ATE products
represented 81% and 19%, respectively, of the Company's total revenues.

The Company has focused its sales efforts on a relatively small number of
systems manufacturers who require high-performance ICs. Sales to the Company's
10 largest customers represented approximately 66%, 69% and 77% of total
revenues in fiscal 1999, 1998 and 1997, respectively.
<PAGE>

As of September 30, 1999, the Company had $52.8 million and $23.0 million of
federal and state net operating loss carryforwards, respectively, which will be
recoverable only if future taxable income is sufficient to utilize such tax loss
carryforwards. Based on historical results of operations, estimated future
taxable income and other factors, management believes that it is more likely
than not that the tax benefits associated with such loss carryforwards will be
realized, and therefore the Company eliminated the valuation allowance for all
deductible differences in fiscal 1998. See Note 8 of Notes to Consolidated
Financial Statements.

Results of Operations

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

<TABLE>
<CAPTION>
                                                Years Ended September 30,
                                          1999            1998            1997
------------------------------------------------------------------------------
<S>                                      <C>             <C>             <C>
Revenues                                 100.0%          100.0%          100.0%
                                         -------------------------------------

Costs and expenses:
  Cost of revenues                        37.0            39.6            43.2
  Engineering, research and development   17.5            18.7            18.1
  Selling, general and administrative     12.4            13.3            14.9
                                         -------------------------------------
    Total costs and expenses              66.9            71.6            76.2
                                         -------------------------------------
Income from operations                    33.1            28.4            23.8
Other income, net                          3.8             5.3             7.6
                                         -------------------------------------
Income before income taxes                36.9            33.7            31.4
Income taxes                              12.1             5.1             3.4
                                         -------------------------------------
Net income                                24.8%           28.6%           28.0%
                                         =====================================
</TABLE>
<PAGE>

Year Ended September 30, 1999, as Compared to Year Ended September 30, 1998

Revenues Revenues in fiscal 1999 were $281.5 million, a 59% increase over the
$176.9 million recorded in fiscal 1998. The increase in total revenues was due
to a unit growth in shipments of existing products, as well as the introduction
of new products to customers in the communications and ATE markets.

Cost of Revenues Cost of revenues as a percentage of total revenues in fiscal
1999 was 37.0% compared to 39.6% in fiscal 1998. The decrease in cost of
revenues as a percentage of total revenues resulted primarily from a reduction
in per unit costs associated with increased utilization of the Company's
Colorado Springs wafer fabrication facility, as well as improved manufacturing
yields at both the Colorado Springs and Camarillo wafer fabrication facilities.

Engineering, Research and Development Engineering, research and development
expenses were $49.2 million in fiscal 1999 compared to $33.0 million in fiscal
1998. The increase was principally due to increased headcount and higher costs
to support the Company's continuing efforts to develop new products. The
Company's engineering, research and development costs are expensed as incurred.
The Company intends to continue to increase the dollar amount of engineering,
research and development expenses in the future. As a percentage of total
revenues, engineering, research and development expenses were 17.5% in fiscal
1999 and 18.7% in fiscal 1998.

Selling, General and Administrative Selling, general and administrative expenses
were $35.0 million in fiscal 1999 compared to $23.6 million in fiscal 1998. The
increase was principally due to increased headcount, higher commissions earned
by sales representatives resulting from increased sales, and increased
advertising costs. As a percentage of total revenues, selling, general and
administrative expenses declined to 12.4% in fiscal 1999 from 13.3% in fiscal
1998 primarily as a result of the Company's revenues growing faster than these
expenses.

Other Income, Net Other income consists of interest income, net of interest and
other expenses. Other income increased to $10.7 million in fiscal 1999 from $9.4
million in fiscal 1998 due to a higher average cash, short-term investments and
long-term deposit balances in fiscal 1999 as compared to fiscal 1998 resulting
primarily from positive cash flow and profitability.

Income Taxes The Company recorded a provision for income taxes in the amount of
$34.0 million in fiscal 1999 and $9.1 million in fiscal 1998, representing an
effective tax rate of 33% and 15%, respectively. The increase in the effective
tax rate is due to the full utilization in prior years of available net
operating loss carryforwards. The Company expects the effective tax rate to
approximate 33% in fiscal 2000.

Net Operating Loss Carryforwards As of September 30, 1999, the Company had
federal net operating loss carryforwards of approximately $52.8 million, state
net operating loss carryforwards of approximately $23.0 million and federal and
state research and development tax credits of approximately $5.7 million and
$2.7 million, respectively. The Company accounts for income taxes pursuant to
the provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS No. 109).
<PAGE>

Year Ended September 30, 1998, as Compared to Year Ended September 30, 1997

Revenues Revenues in fiscal 1998 were $176.9 million, a 68% increase over the
$105.4 million recorded in fiscal 1997. The increase in revenues was due to an
increase in production revenues as a result of shipments to customers in the
communications and ATE markets.

Cost of Revenues Cost of revenues as a percentage of total revenues in fiscal
1998 was 39.6% compared to 43.2% in fiscal 1997. The decrease in cost of
revenues as a percentage of total revenues resulted from a reduction in per unit
costs associated with increased production as well as increased manufacturing
yields at both the Camarillo and Colorado Springs manufacturing facilities.

Engineering, Research and Development Engineering, research and development
expenses were $33.0 million in fiscal 1998 compared to $19.1 million in fiscal
1997. The increase was principally due to increased headcount and higher costs
to support the Company's continuing efforts to develop new products. As a
percentage of total revenues, engineering, research and development expenses
increased to 18.7% in fiscal 1998 from 18.1% in fiscal 1997 due primarily to the
Company's inclusion of the results of XaQti Corporation, which did not begin
ramping research and development expenses until fiscal 1998.

Selling, General and Administrative Selling, general and administrative expenses
were $23.6 million in fiscal 1998 compared to $15.7 million in fiscal 1997. This
increase was principally due to increased headcount, salary increases, higher
commissions resulting from increased sales and increased advertising costs. As a
percentage of total revenues, selling, general and administrative expenses
declined to 13.3% in fiscal 1998 from 14.9% in fiscal 1996 primarily as a result
of the Company's revenues growing faster than these expenses.

Other Income, Net Other income consists of interest income, net of interest and
other expenses. Other income increased to $9.4 million in fiscal 1998 from $8.0
million in fiscal 1997 due to higher average cash, investments and long-term
deposit balances in fiscal 1998 as compared to fiscal 1997.

Income Taxes The Company recorded a provision for income taxes in the amount of
$9.1 million in fiscal 1998 and $3.7 million in fiscal 1997, representing an
effective tax rate of 15% and 11%, respectively.

Liquidity and Capital Resources

Operating Activities The Company generated $90.0 million, $45.0 million and
$52.1 million from operating activities in fiscal 1999, 1998 and 1997,
respectively. The increase in cash from operations was due to improved net
income before depreciation and amortization, and increases in income taxes
payable and other liabilities, which were partially offset by increases in
assets.


Investing Activities Capital expenditures, primarily for manufacturing and test
equipment, were $42.8 million, $30.9 million and $31.7 million in fiscal 1999,
1998 and 1997, respectively. Additionally, the Company invested $53.7 million,
$33.1 million and $58.5 million in held to maturity investments in fiscal 1999,
1998 and 1997, respectively. As discussed in Note 2, the Company also paid $13.0
million in cash for the acquisition of VTEK during fiscal 1999.
<PAGE>

As a result of increased demand for its products, the Company has been
increasing capacity at its Colorado Springs manufacturing facility. The majority
of the costs associated with increasing capacity were financed through various
operating lease transactions. See Note 11 of Notes to Consolidated Financial
Statements. The Company intends to continue investing in new manufacturing, test
and engineering equipment.

Financing Activities In fiscal 1999, the Company generated $23.1 million of cash
from financing activities consisting of $23.5 million of proceeds from the
issuance of common stock pursuant to the Company's stock option and stock
purchase plans, and $0.8 million from the elimination of duplicate period of
pooled companies, partially offset by $1.2 million in repayments of debt
obligations. In fiscal 1998, the Company generated $19.1 million of cash from
financing activities consisting of $18.8 million of proceeds from the issuance
and sale of common stock, and proceeds from the issuance of common stock
pursuant to the Company's stock option and stock purchase plans, $0.8 million
from proceeds of long-term debt partially offset by $0.4 million in repayments
of debt obligations.

The Company has an agreement with a bank for a revolving line of credit which
expires on January 15, 2000. The maximum amount available under the revolving
line of credit is $12.5 million. The interest rate on borrowings under this
revolving line of credit is equal to the bank's prime rate. See Note 5 of Notes
to Consolidated Financial Statements.

Management believes that the Company's cash and cash equivalents, short-term
investments, cash flow from operations and revolving line of credit agreement
are adequate to finance its planned growth and operating needs for the next 12
months.

Impact of Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
will require recognition of all derivatives as either assets or liabilities on
the balance sheet at fair value. The Company will adopt SFAS No. 133, as amended
by SFAS No. 137, in the first quarter of its fiscal year ending September 30,
2001. Management has not completed an evaluation of the effects this standard
will have on the Company's consolidated financial statements.

Year 2000 Readiness Disclosure

The "Year 2000 Problem" is the result of computer programs being written using
two digits rather than four to define the applicable year. Computer programs
that contain date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This can affect both information technology
("IT") and non-IT systems such as manufacturing equipment, as the latter may
contain date-sensitive embedded devices such as microcontrollers.
<PAGE>

We formed an internal task force to evaluate Year 2000 issues associated with
both our IT and non-IT systems. Many of these systems were already compliant. We
replaced or upgraded other systems that were identified as noncompliant. We have
completely evaluated all the manufacturing equipment for Year 2000 compliance,
and have completed our remediation and testing procedures. None of our products
are date-sensitive and will operate according to specifications through the Year
2000 and thereafter.

To date, we have not incurred incremental material costs associated with our
efforts to become Year 2000 compliant, as the majority of the costs have
occurred as a result of normal upgrade procedures. Furthermore, we believe that
future costs associated with these compliance efforts will not be material.

We may also be affected by the Year 2000 compliance of our suppliers and
customers. We have contacted critical and significant suppliers to determine
whether the products and services they provide are Year 2000 compliant or to
monitor their progress toward being fully compliant. Our business and results of
operations could experience material adverse effects if our key suppliers were
to experience a Year 2000 related problem that caused them to delay shipment of
critical components to us.

Based on our efforts to date, we do not believe that the Year 2000 Problem will
have a material impact on our business or financial results. The most reasonably
likely worst case would be minor delays in production and shipments. We have
developed a contingency plan detailing actions that will be taken in the event
that our compliance efforts fail to fully remediate any risk to our operations.
The information in this risk factor is "Year 2000 Readiness Disclosure" within
the meaning of the Year 2000 Information and Readiness Disclosure Act.

Factors That May Affect Future Operating Results

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

We intend to continue focusing our sales effort on a small number of customers
in the communications and test equipment markets that require high-performance
integrated circuits. Some of these customers are also our competitors. In fiscal
1999, our two largest customers accounted for 18% and 14% of our total revenues
and no other customers accounted for more than 10% of our total revenues. If any
of our major customers delays orders of our products or stops buying our
products, our business and financial condition would be severely affected.

Our Operating Results May Fluctuate

Our quarterly revenues and expenses may fluctuate in the future. These
variations may be due to a number of factors, many of which are outside our
control. Factors that could affect our future operating results include the
following:

 .    The loss of major customers
 .    Variations, delays or cancellations of orders and shipments of our products
 .    Reduction in the selling prices of our products
 .    Significant changes in the type and mix of products being sold
 .    Delays in introducing new products
 .    Design changes made by our customers
<PAGE>

 .    Our failure to manufacture and ship products on time
 .    Changes in manufacturing capacity, the utilization of this capacity and
     manufacturing yields
 .    Variations in product and process development costs; and
 .    Changes in inventory levels

In the past, we have recorded significant new product and process development
costs because our policy is to expense these costs at the time that they are
incurred. We may incur these types of expenses in the future. The occurrence of
any of the above factors could have a material adverse effect on our business
and on our financial results.

We Have Limited Manufacturing Capacity and We Depend on a New Production
Facility

During 1998, we started producing high-performance integrated circuits at our
new six-inch wafer fabrication factory in Colorado Springs, Colorado. This
facility includes a 10,000-square-foot Class I clean room with capacity for
future expansion to 15,000 square feet. We are faced with several risks in the
successful operation of this facility as well as in our overall production
operations. We had only produced finished four-inch wafers until 1998 and
therefore we have limited experience with the equipment and processes involved
in producing finished six-inch wafers. We do not have excess production capacity
at our Camarillo plant to offset failure of the new Colorado facility to meet
production goals. Further, some of our products have been qualified for
manufacture at only one of the two facilities. Consequently, our failure to
successfully operate the new facility could severely damage financial results.

We also must now effectively coordinate and manage two facilities. We have
limited experience in managing production facilities located at two different
sites, and our failure to successfully do so could have a material adverse
effect on our business and operating results.

There Are Risks Associated with Recent and Future Acquisitions

In fiscal 1999, we made three strategic acquisitions. These acquisitions may
result in the diversion of management's attention from the day-to-day operations
of the Company's business. Risks of making these acquisitions include
difficulties in the integration of acquired operations, products and
personnel. If we fail in our efforts to integrate recent and future
acquisitions, our business and operating results could be materially and
adversely affected. In addition, acquisitions we have made or will make could
result in dilutive issuances of equity securities, substantial debt, and
amortization expenses related to goodwill and other intangible assets. We do not
have any binding obligations with respect to any particular acquisition;
however, our management frequently evaluates strategic opportunities available.
In the future we may pursue additional acquisitions of complementary products,
technologies or businesses.
<PAGE>

Our Industry Is Highly Competitive

The high-performance semiconductor market is extremely competitive and is
characterized by rapid technological change, price erosion and increased
international competition. The communications and test equipment industries,
which are our primary target markets, are also becoming intensely competitive
because of deregulation and international competition. We compete directly or
indirectly with the following categories of companies:

 .    Gallium Arsenide fabrication operations of systems companies such as
     Conexant and Fujitsu
 .    Silicon high-performance integrated circuit manufacturers who use Emitter
     Coupled Logic ("ECL"), Bipolar Complementary Metal-Oxide-Semiconductor
     ("BiCMOS") or Complementary Metal-Oxide-Semiconductor ("CMOS") technologies
     such as Hewlett Packard, Fujitsu, Motorola, Lucent Technologies, Texas
     Instruments and Applied Micro Circuits Corporation
 .    Internal integrated circuit manufacturing units of systems companies such
     as Lucent Technologies, Siemens and Fujitsu

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

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

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

The market for our products is characterized by rapid changes in both product
and process technologies. We believe that our success to a large extent depends
on our ability to continue to improve our product and process technologies and
to develop new products and technologies in order to maintain our competitive
position. Further, we must adapt our products and processes to technological
changes and adopt emerging industry standards. Our failure to accomplish any of
the above could have a negative impact on our business and financial results.

We Are Dependent on Key Suppliers

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

Our Manufacturing Yields Are Subject to Fluctuation

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

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

Our Business Is Subject to Environmental Regulations

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

Our Failure to Manage Growth May Adversely Affect Us

The management of our growth requires qualified personnel, systems and other
resources. In particular, the continued operation of the new facility in
Colorado Springs and its integration with the Camarillo facility will require
significant management, technical and administrative resources. Additionally, we
have recently established several product design centers worldwide. Finally, we
acquired Vermont Scientific Technologies, Inc. ("VTEK") in November 1998, Serano
Systems Corporation ("Serano") in January 1999 and XaQti Corporation ("XaQti")
in July 1999, and have only limited experience in integrating the operations of
acquired businesses. Failure to manage our growth or to successfully integrate
new and future facilities or newly acquired businesses could have a material
adverse effect on our business and financial results.

We Are Dependent on Key Personnel

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

independent auditors' report


The Board of Directors and Shareholders
Vitesse Semiconductor Corporation:

We have audited the accompanying consolidated balance sheets of Vitesse
Semiconductor Corporation and subsidiaries as of September 30, 1999 and 1998,
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the years in the three-year period ended September 30,
1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
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 and subsidiaries as of September 30, 1999 and 1998 and
the results of their operations and their cash flows for each of the years in
the three-year period ended September 30, 1999 in conformity with generally
accepted accounting principles.



KPMG LLP
Los Angeles, California
October 14, 1999
<PAGE>

<TABLE>
<CAPTION>
consolidated balance sheets
September 30, 1999 and 1998                                                                  September 30,
(in thousands, except share data)                                                        1999            1998
------------------------------------------------------------------------------------------------------------------
<S>                                                                                    <C>            <C>
Assets
Current assets:
   Cash and cash equivalents                                                           $  81,912      $  76,963
   Short-term investments                                                                107,245         91,610
   Accounts receivable, net of allowances of $3,500 and $1,088
     in 1999 and 1998, respectively                                                       69,034         40,104
   Inventories, net                                                                       26,931         17,208
   Prepaid expenses                                                                        5,462          3,177
   Deferred tax assets, net                                                               26,918         24,981
                                                                                       ------------------------
     Total current assets                                                                317,502        254,043
                                                                                       ------------------------

Long-term investments                                                                     38,063              -
Property and equipment, net                                                               78,723         57,949
Restricted long-term deposits                                                             67,334         68,704
Intangible assets, net                                                                    14,609              -
Deferred tax assets, net                                                                   6,237              -
Other assets                                                                                 425            312
                                                                                       ------------------------
                                                                                       $ 522,893      $ 381,008
                                                                                       ------------------------
Liabilities And Shareholders' Equity
Current liabilities:
   Accounts payable                                                                    $  15,118      $  14,256
   Accrued expenses and other current liabilities                                         12,832         10,046
   Income taxes payable                                                                    5,517          4,199
   Current portion of long-term debt                                                       2,013            517
                                                                                       ------------------------
   Total current liabilities                                                              35,480         29,018
                                                                                       ------------------------
Long-term debt                                                                               725            701
Commitments and contingencies
Shareholders' equity:
   Preferred stock, $.01 par value. Authorized 10,000,000 shares; none issued
        or outstanding                                                                         -              -
   Common stock, $.01 par value. Authorized 250,000,000 shares; issued and
        outstanding 156,176,636 and 150,037,680 shares at September 30, 1999
        and 1998, respectively                                                             1,561          1,500
   Additional paid-in capital                                                            380,035        315,411
   Retained earnings                                                                     105,092         34,378
                                                                                       ------------------------
        Total shareholders' equity                                                       486,688        351,289
                                                                                       ------------------------
                                                                                       $ 522,893      $ 381,008
                                                                                       ========================
</TABLE>

See accompanying notes to consolidated financial statements.
<PAGE>

<TABLE>
<CAPTION>
consolidated statements of operations
Years ended September 30, 1999, 1998 and 1997                                             Years ended September 30,
(in thousands, except per share data)                                                1999           1998           1997
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>             <C>            <C>
Revenues                                                                          $  281,534      $ 176,885      $ 105,413
                                                                                  ----------------------------------------
Costs and expenses:
  Cost of revenues                                                                   104,156         70,041         45,513
  Engineering, research and development                                               49,187         33,012         19,108
  Selling, general and administrative                                                 35,049         23,638         15,659
                                                                                  ----------------------------------------
    Total costs and expenses                                                         188,392        126,691         80,280
                                                                                  ----------------------------------------
Income from operations                                                                93,142         50,194         25,133

Other income, net                                                                     10,748          9,385          8,036
                                                                                  ----------------------------------------
Income before income taxes                                                           103,890         59,579         33,169

Income taxes                                                                          34,010          9,079          3,652
                                                                                  ----------------------------------------
Net income                                                                        $   69,880      $  50,500      $  29,517
                                                                                  ========================================

Net income per share:

  Basic                                                                           $     0.46      $    0.34      $    0.21
  Diluted                                                                         $     0.42      $    0.31      $    0.19
                                                                                  ========================================
Shares used in per share computations:
  Basic                                                                              153,326        147,446        138,256
  Diluted                                                                            166,458        160,500        152,888
                                                                                  ========================================
</TABLE>

See accompanying notes to consolidated financial statements.
<PAGE>

consolidated statements of shareholders' equity
<TABLE>
<CAPTION>
                                                                                                       Retained
                                                                                   Additional          Earnings               Net
Years ended September 30, 1999, 1998 and 1997              Common Stock               Paid-in      (Accumulated     Shareholders'
(in thousands, except share data)                    Shares            Amount         Capital          Deficit)            Equity
---------------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>                 <C>          <C>             <C>              <C>
Balance, September 30, 1996                        116,912,312        $ 1,169      $  132,523      $   (45,639)        $   88,053
Exercise of stock options                            6,241,116             62           5,590                -              5,652
Shares issued under Employee
   Stock Purchase Plan                                 284,832              3           1,594                -              1,597
Issuance of common stock,
   net of expenses                                  21,808,492            218         124,374                -            124,592
Repurchase of common stock                             (40,634)             -              (1)               -                 (1)
Repurchase of fractional shares
   related to stock split                              (10,160)             -              (3)               -                 (3)
Tax benefit of disqualifying
   dispositions                                              -              -          18,400                -             18,400
Net income                                                   -              -               -           29,517             29,517
                                                  -------------------------------------------------------------------------------
Balance, September 30, 1997                        145,195,958          1,452         282,477          (16,122)           267,807
Exercise of stock options                            3,690,370             37           6,249                -              6,286
Shares issued under Employee
   Stock Purchase Plan                                 234,726              2           2,238                -              2,240
Issuance of common stock,
   net of expenses                                     916,626              9          10,251                -             10,260
Tax benefit of disqualifying
   dispositions                                              -              -          14,196                -             14,196
Net income                                                   -              -               -           50,500             50,500
                                                  -------------------------------------------------------------------------------
Balance, September 30, 1998                        150,037,680          1,500         315,411           34,378            351,289
Exercise of stock options                            5,895,378             59          19,806                -             19,865
Shares issued under Employee
   Stock Purchase Plan                                 196,740              2           3,538                -              3,540
Issuance of common stock,
   net of expenses                                      46,838              -              78                -                 78
Tax benefit of disqualifying
   dispositions                                              -              -          40,902                -             40,902
Stock options issued in
   purchase transaction                                      -              -             300                -                300
Elimination of duplicate period
   of pooled companies                                       -              -               -              834                834
Net income                                                   -              -               -           69,880             69,880
                                                  -------------------------------------------------------------------------------
Balance, September 30, 1999                        156,176,636        $ 1,561      $  380,035      $   105,092         $  486,688
                                                  ===============================================================================
</TABLE>

See accompanying notes to consolidated financial statements.
<PAGE>

<TABLE>
<CAPTION>
consolidated statements of cash flows
Years ended September 30, 1999, 1998 and 1997                                           Years ended September 30,
(in thousands)                                                                      1999           1998           1997
------------------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>            <C>           <C>
Cash flows from operating activities:
Net income                                                                       $   69,880     $   50,500    $   29,517
  Adjustments to reconcile net income to net cash provided
     by operating activities:
        Depreciation and amortization                                                23,361         15,485         7,122
        Deferred tax assets                                                               -          4,011         3,600
  Changes in assets and liabilities, net of effects of acquisitions:
        Receivables, net                                                            (28,592)       (18,985)       (2,500)
        Inventories, net                                                             (9,723)        (5,377)       (1,872)
        Prepaid expenses                                                             (2,252)        (1,959)         (373)
        Other assets                                                                   (121)           160           197
        Accounts payable                                                                632         (5,722)       13,035
        Accrued expenses and other current liabilities                                2,786           (476)           13
        Income taxes payable                                                         34,046          7,375         3,355
                                                                                 ---------------------------------------
            Net cash provided by operating activities                                90,017         45,012        52,094
                                                                                 ---------------------------------------
Cash flows from investing activities:
  Investments                                                                       (53,698)       (33,124)      (58,486)
  Long-term deposits                                                                  1,370        (23,148)      (45,556)
  Capital expenditures                                                              (42,836)       (30,897)      (31,714)
  Payment for purchase of company                                                   (13,016)             -             -
                                                                                 ---------------------------------------
            Net cash used in investing activities                                  (108,180)       (87,169)     (135,756)
                                                                                 ---------------------------------------
Cash flows from financing activities:
  Principal payments under capital lease obligations and term loans                  (1,205)          (391)         (934)
  Proceeds from term loans                                                                -            750           461
  Repayments of short-term borrowings                                                     -              -          (761)
  Elimination of duplicate period of pooled companies                                   834              -             -
  Net proceeds from issuance of common stock                                         23,483         18,786       131,836
                                                                                 ---------------------------------------
            Net cash provided by financing activities                                23,112         19,145       130,602
                                                                                 ---------------------------------------
  Net increase (decrease) in cash and cash equivalents                                4,949        (23,012)       46,940
Cash and cash equivalents at beginning of year                                       76,963         99,975        53,035
                                                                                 ---------------------------------------
Cash and cash equivalents at end of year                                         $   81,912     $   76,963    $   99,975
                                                                                 =======================================

Supplemental disclosures of cash flow information
  Cash paid during the year for:
     Interest                                                                    $       11     $       85    $      165
                                                                                 =======================================
     Income taxes                                                                $    1,786     $    1,704    $      297
                                                                                 =======================================
</TABLE>
<PAGE>

<TABLE>
<S>                                                                              <C>            <C>           <C>
Supplemental disclosures of non-cash transactions:
     Issuance of stock options in purchase transaction                           $      300     $        -    $        -
                                                                                 =======================================
     Issuance of notes payable in purchase transaction                           $    2,725     $        -    $        -
                                                                                 =======================================
     Increase in equity associated with tax benefit
        from exercise of stock options                                           $   40,902     $   14,196    $   18,400
                                                                                 =======================================
</TABLE>

See accompanying notes to consolidated financial statements.
<PAGE>

notes to consolidated financial statements

Note 1 - The Company and Its Significant Accounting Policies

Description of Business  Vitesse Semiconductor Corporation was incorporated
under the laws of Delaware on February 3, 1987. Vitesse Semiconductor
Corporation is a leader in the design, development, manufacturing and marketing
of high-performance integrated circuits.

Principles of Consolidation  The consolidated financial statements include the
accounts of Vitesse Semiconductor Corporation and its wholly-owned subsidiaries
(collectively, the "Company"). As more fully described in Note 2, the Company's
acquisitions of Serano on January 21, 1999, and XaQti on July 16, 1999 were
accounted for under the pooling-of-interests method, and accordingly, all
periods prior to the acquisitions have been restated to include the accounts and
results of operations of Serano and XaQti for all periods presented. All
significant intercompany accounts and transactions have been eliminated in
consolidation.

Revenue Recognition  Production revenue is recognized when products are shipped
to customers. Revenue from development contracts is recognized upon attainment
of specific milestones established under customer contracts. Revenue from
products deliverable under development contracts, including design tools and
prototype products, is recognized upon delivery. Costs related to development
contracts are expensed as incurred.

Cash Equivalents and Investments  The Company considers all highly liquid
investments with original maturities of three months or less to be cash
equivalents. Cash equivalents and investments are principally composed of money
market accounts and obligations of the U.S. government and its agencies.
Pursuant to Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" (SFAS No. 115), the Company
classifies its securities included under investments as held-to-maturity
securities, which are recorded at amortized cost, adjusted for the amortization
or accretion of premiums or discounts. As of September 30, 1999 and 1998,
carrying value was substantially the same as market value.

Inventories  Inventories are stated at the lower of cost (determined by the
first-in, first-out method) or market (net realizable value). Costs associated
with the manufacture 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. Inventories are shown net of a valuation reserve of
$6.7 million and $4.2 million at September 30, 1999 and 1998, respectively.

Depreciation and Amortization  Property and equipment are stated at cost and
depreciated on a straight-line basis over the estimated useful lives of the
assets. Such lives vary from 3 to 5 years. Goodwill and other intangibles are
carried at cost less accumulated amortization, which is being provided on a
straight-line basis over the economic useful lives of the respective assets,
generally 5 to 15 years.
<PAGE>

Income Taxes  The Company accounts for income taxes pursuant to the provisions
of Financial Accounting Standards Board Statement No. 109. Under the asset and
liability method of Statement No. 109, 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.

Research and Development Costs  The Company charges all research and development
costs to expense when incurred. Manufacturing costs associated with the
development of a new fabrication process or a new product are expensed until
such times as these processes or products are proven through final testing and
initial acceptance by the customer.

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

<TABLE>
<CAPTION>
                                                           1999            1998            1997
-----------------------------------------------------------------------------------------------
<S>                                                     <C>             <C>             <C>
Shares used in basic per share computations -
        weighted average shares outstanding             153,326         147,446         138,256
Net effect of dilutive common share equivalents
        based on treasury stock method                   13,132          13,054          14,632
                                                        ---------------------------------------
Shares used in diluted per share computations           166,458         160,500         152,888
</TABLE>

Options to purchase 165,364, 53,490 and 123,672 shares that were outstanding at
September 30, 1999, 1998 and 1997, respectively, were not included in the
computation of diluted net income per share because the exercise price of these
options was greater than the average market price of the common shares, and
therefore, the effect would be antidilutive.

Financial Instruments  The Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments," defines fair value of a financial instrument as the
amount at which the instrument could be exchanged in a current transaction
between willing parties. The Company's carrying value of cash equivalents,
short-term investments, restricted long-term deposits, accounts receivable,
long-term investments, accounts payable and term loans approximates fair value
because the instrument has a short-term maturity or because the applicable
interest rates are comparable to current borrowing rates of those instruments.

Long-Lived Assets  In 1997, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of." This statement provides
guidelines for recognition of impairment of losses related to long-term assets.
The adoption of this new standard did not have a material effect on the
Company's financial statements.

Accounting for Stock Options  In October 1995, Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation," was issued. This
statement encourages, but does not require, a fair value based method of
accounting for employee stock options. The Company has elected to continue to
measure and to recognize compensation costs under APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and to adopt the disclosure-only
requirements of Statement No. 123.
<PAGE>

Comprehensive Income  On October 1, 1998 the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This
statement establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
The Company has no components of other comprehensive income. Therefore,
comprehensive income is the same as the reported net income.

Segment Reporting  On October 1, 1998 the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and
Related Information." This statement establishes standards for reporting
operating segment information in annual financial statements and interim reports
issued to stockholders. The Company operates in only one segment, as defined by
SFAS No. 131. Geographic information is included in Note 9.

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

Reclassifications and Restatements  Certain reclassifications have been made to
the prior year financial statements to conform to the current year presentation.

On September 15, 1999, the Company's Board of Directors announced a 2 for 1
stock split of common stock effected in the form of a stock dividend to
shareholders of record as of September 30, 1999. On April 22, 1998, the
Company's Board of Directors announced a 2 for 1 stock split of the common stock
effected in the form of a stock dividend to shareholders of record as of May 4,
1998. On January 29, 1997, the Company's Board of Directors announced a 3 for 2
stock split of the common stock effected in the form of a stock dividend to
shareholders of record as of February 12, 1997. Accordingly, historical share,
per share, stock option amounts and share prices have been restated to reflect
retroactively the stock splits.

Note 2 - Pooling-of-Interests Combinations

On January 21, 1999 the Company issued 655,256 shares of its common stock in
exchange for all of the outstanding shares of Serano, a provider of enclosure
platform management solutions for Fibre Channel and SCSI server and storage
subsystems.

On July 16, 1999 the Company issued 1,892,300 shares of its common stock in
exchange for all of the outstanding shares of XaQti, a provider of integrated
circuits for the data communication industry.

These acquisitions were accounted for as pooling-of-interests in fiscal 1999;
therefore, all prior periods presented have been restated.
<PAGE>

The results of operations previously reported by the separate enterprises, and
combined amounts presented in the accompanying consolidated financial
statements, are summarized below (in thousands):

<TABLE>
<CAPTION>
                                                   The Company                                            The Company
                                           Before Acquisitions          Serano              XaQti            Restated
---------------------------------------------------------------------------------------------------------------------
<S>                                        <C>                         <C>               <C>              <C>
Nine months ended June 30, 1999:
        Revenues                                     $ 200,086         $   346           $    475           $ 200,907
        Net income (loss)                               52,028            (135)            (3,659)             48,234
Three months ended December 31, 1998:
        Revenues                                     $  60,179         $   346           $    183           $  60,708
        Net income (loss)                               15,438            (135)              (699)             14,604
Year ended September 30, 1998:
        Revenues                                     $ 175,082         $ 1,329           $    474           $ 176,885
        Net income (loss)                               52,873            (273)            (2,100)             50,500
Year ended September 30, 1997:
        Revenues                                     $ 104,850         $   543           $     20           $ 105,413
        Net income (loss)                               32,888            (160)            (3,211)             29,517
</TABLE>

Additionally, there were significant other changes to shareholders' equity for
the separate entities for the periods before the combinations which include
XaQti's issuance of 801,666 shares of common stock for $9.0 million and Serano's
issuance of 117,786 shares of common stock for $1.2 million in 1998, and XaQti's
issuance of 610,332 shares of common stock for $6.1 million and Serano's
issuance of 498,160 shares of common stock for $0.3 million in 1997.

Certain reclassifications have been made to the financial statements of Serano
and XaQti to conform to the Company's financial presentation.

Prior to the combination, both Serano's and XaQti's fiscal years ended on
December 31. In recording the pooling-of-interests combination, Serano's
financial statements for the years ended December 31, 1998 and 1997 were
combined with the Company's financial statements for the years ended September
30, 1998 and 1997. Additionally, XaQti's financial statements for the years
ended December 31, 1998 and 1997 and the period from March 7, 1996 (inception)
through December 31, 1996, were combined with the Company's financial statements
for the years ended September 30, 1998, 1997 and 1996. For the year ended
September 30, 1999 the results of XaQti and Serano have been included herein,
resulting in a duplication of operations for the period from October 1, 1998 to
December 31, 1998. As a result, the Company has eliminated the related loss of
$834,000 from retained earnings for fiscal 1999.
<PAGE>

Purchase Accounting Business Combination
On November 25, 1998, the Company acquired all of the equity interests of
Vermont Scientific Technologies, Inc. ("VTEK") for $13.0 million cash and
approximately $2.7 million in notes payable. VTEK provides integrated circuit
design services primarily in the telecommunications industry. In conjunction
with the transaction, the Company recorded goodwill and other identifiable
intangibles amounting to $9.9 million and $5.9 million, respectively, with
useful lives ranging from 5 to 15 years. As of September 30, 1999, accumulated
amortization related to these intangibles was $1.2 million. The $2.7 million
note is payable in installments of $2.0 million in November 1999, and the
remaining balance in November 2000. The transaction is being accounted for as a
purchase. Accordingly, the operations of VTEK are included from the date of
acquisition. VTEK is not a significant subsidiary, and therefore pro forma data
is not presented herein.

Note 3 - Inventories

Inventories consist of the following:
                                                                September 30,
                                                              1999        1998
-------------------------------------------------------------------------------
                                                               (in thousands)
Raw materials                                               $ 5,168     $ 2,961
Work in process                                              17,372      10,561
Finished goods                                                4,391       3,686
                                                           --------------------
                                                           $ 26,931    $ 17,208
                                                           --------------------

Note 4 - Property and Equipment

Property and equipment, stated at cost, are summarized as follows:

                                                                September 30,
                                                              1999        1998
-------------------------------------------------------------------------------
                                                               (in thousands)
Machinery and equipment                                     $98,581     $71,358
Furniture and fixtures                                        2,161       1,557
Computer equipment                                           20,569      16,444
Leasehold improvements                                        7,156       6,880
Land                                                          1,039       1,039
                                                           --------------------
                                                            129,506      97,278
Less accumulated depreciation and amortization               50,783      39,329
                                                           --------------------
                                                            $78,723     $57,949
                                                           --------------------

Included in property and equipment are items not yet placed in service of $5.1
million as of September 30, 1999 and 1998.
<PAGE>

Note 5 - Revolving Line of Credit

The Company has a $12.5 million revolving line of credit agreement with a bank,
which expires in January 2000. The agreement provides for interest to be paid
monthly at the bank's prime rate (8.25% on September 30, 1999). The Company must
adhere to certain requirements and provisions to be in compliance with the terms
of the agreement and is prohibited from paying dividends without the consent of
the bank. As of September 30, 1999 and 1998, no amounts were outstanding under
the line of credit.

Note 6 - Accrued Expenses

Accrued expenses consist of the following:
                                                                September 30,
                                                               1999       1998
-------------------------------------------------------------------------------
                                                               (in thousands)
Accrued vacation                                             $ 1,811    $ 1,231
Accrued salaries, wages and bonuses                            8,329      3,868
Other                                                          2,692      4,947
                                                            -------------------
                                                             $12,832    $10,046
                                                            -------------------

Note 7 - Shareholders' Equity

Preferred Stock In fiscal 1991, the Board of Directors authorized 10,000,000
shares of undesignated preferred stock. The Company has no present plans to
issue any of this preferred stock.

Common Stock In 1999, the Company's shareholders approved an increase in the
number of authorized shares of common stock from 100,000,000 to 250,000,000. All
of following data has been restated for the effects of all stock splits.

Employee Stock Purchase Plan The Company has an employee stock purchase plan for
all eligible employees. Under the plan, employees may purchase shares of the
Company's common stock at six-month intervals at 85% of the lower of the fair
market value at the beginning and end of each interval. Employees purchase such
stock using payroll deductions and annual contributions which may not exceed 20%
of their compensation, including commissions and overtime, but excluding
bonuses. In fiscal 1999, 1998 and 1997, 196,740, 234,726 and 284,832 shares,
respectively, were issued under the plan at average prices of $17.99, $9.55 and
$5.61. At September 30, 1999, 1,345,414 shares were reserved for future
issuance.

Stock Option Plans The Company has in effect several stock-based plans under
which non-qualified and incentive stock options have been granted to employees.
Options generally vest and become exercisable at the rate of 25% per year. The
exercise price of all stock options must be at least equal to the fair market
values of the shares of common stock on the date of grant. The term of options
is generally 10 years.

In August 1991, following shareholder approval, the Company adopted a stock
option plan for non-employee directors (the "Director's Plan"). Under the plan,
annually on January 1 each non-employee director will be granted a non-statutory
option to purchase 60,000 shares of common stock (except in the case of the
Chairman of the Board who shall receive an option to purchase 90,000 shares).
The options have a 10-year term and vest at the rate of 2% per month.
<PAGE>

Pursuant to the Company's 1991 Stock Options Plan, the number of shares reserved
under the Plan automatically increases by a number of shares equal to 3.5% of
the Company's common stock outstanding at the end of each fiscal year. Under all
stock option plans, a total of 21,830,174 shares of common stock have been
reserved for issuance as of September 30, 1999 (which increased to 27,296,356
effective October 1, 1999 pursuant to the terms of the 1991 Plan) and 930,516
(which increased to 6,396,698 effective October 1, 1999 pursuant to the terms of
the 1991 Plan) remained available for future grant.

Activity under the employee stock option plans and Director's Plan for fiscal
1999, 1998 and 1997 is as follows:

<TABLE>
<CAPTION>
                                            Number of         Option Price
                                               Shares   Per Share      Aggregate
----------------------------------------------------------------------------------
                                                                  (in thousands)
<S>                                       <C>           <C>               <C>
Options outstanding at September 30, 1996   19,581,014  $  .01 - 5.96     $ 24,537

Options:
  Granted                                    6,416,596   1.14 - 12.63       39,260
  Exercised                                 (6,241,116)    .01 - 7.04       (5,652)
  Canceled or expired                         (343,478)    .69 - 7.23       (1,025)
                                          ----------------------------------------
Options outstanding at September 30, 1997   19,413,016    .01 - 12.63       57,120

Options:
  Granted                                    6,603,636   1.14 - 15.63       62,142
  Exercised                                 (3,690,370)    .01 - 9.44       (6,285)
  Canceled or expired                         (660,350)   .75 - 14.10       (3,882)
                                          ----------------------------------------
Options outstanding at September 30, 1998   21,665,932    .03 - 15.63      109,095

Options:
  Granted                                    6,351,018   1.83 - 48.38       86,006
  Exercised                                 (6,080,452)   .03 - 15.63      (20,074)
  Canceled or expired                       (1,036,840)   .76 - 26.33       (9,250)
                                          ----------------------------------------
Options outstanding at September 30, 1999   20,899,658  $ .05 - 48.38     $165,777
                                          ----------------------------------------
</TABLE>

The Company has, in connection with the various acquisitions, assumed the stock
option plans of each acquired company. A total of approximately 281,000 shares
of common stock have been reserved for issuance under the assumed plans, and
related options are included in the preceding table. This includes approximately
60,000 stock options for VTEK which were estimated to have a fair value of
$300,000 and have been included in shareholders' equity.

The following table summarizes information regarding options outstanding and
options exercisable at
<PAGE>

September 30, 1999:

<TABLE>
<CAPTION>
                                    Options Outstanding                           Options Exercisable
-------------------------------------------------------------------------------------------------------
                                             Weighted
                            Number            Average         Weighted          Number         Weighted
Range of               Outstanding          Remaining          Average     Exercisable          Average
Exercise Prices      As of 9/30/99   Contractual Life   Exercise Price   As of 9/30/99   Exercise Price
-------------------------------------------------------------------------------------------------------
<S>                  <C>             <C>                <C>              <C>             <C>
$ 0.05 - $ 1.88          5,272,606               5.65           $ 1.40       2,864,674           $ 1.12
$ 1.96 - $ 9.03          8,362,688               8.18           $ 7.36       1,113,846           $ 5.58
$ 9.08 - $13.38          5,441,164               8.23           $ 9.70         883,199           $ 9.80
$13.47 - $48.38          1,823,200               9.43           $24.69          66,300           $20.48
-------------------------------------------------------------------------------------------------------
$ 0.05 - $48.38         20,899,658               7.66           $ 8.00       4,928,019           $ 3.94
</TABLE>
<PAGE>

The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation." The
Company used the Black-Scholes option pricing model to value stock options for
pro forma presentation. The assumptions used to estimate the value of options
granted under the various stock option plans and the shares under the Employee
Stock Purchase Plan are as follows:

<TABLE>
<CAPTION>
                                                                                              Employee
                                                  Stock Option                             Stock Purchase
                                                   Plan Shares                              Plan Shares
                                       1999           1998            1997         1999         1998          1997
-------------------------------------------------------------------------------------------------------------------
<S>                                   <C>         <C>               <C>          <C>       <C>              <C>
Average expected life (years)           5.40          5.39            5.45         0.50          0.50         0.50
Expected volatility                     0.57          0.51            0.55         0.57          0.51         0.55
Risk-free interest rate                 6.24%         4.40%           5.81%        5.26%         4.22%        5.50%
Dividends                                  -             -               -            -             -            -
Weighted average fair values          $ 7.93        $ 5.08          $ 3.54       $ 7.54        $ 4.03       $ 2.57
</TABLE>

SFAS No. 123 pro forma numbers are as follows (in thousands, except per-share
amounts):

<TABLE>
<CAPTION>
                                                              1999         1998       1997
--------------------------------------------------------------------------------------------
<S>                                                         <C>         <C>         <C>
Pro forma net income                                        $ 55,075    $ 40,500    $ 24,200
Pro forma net income per share:
    Basic                                                   $   0.36    $   0.28    $   0.18
    Diluted                                                 $   0.33    $   0.25    $   0.16
</TABLE>

The pro forma amounts reflect compensation expense related to 1999, 1998 and
1997 stock option grants and shares issued under the employees stock purchase
plan. Because the pro forma compensation cost for the stock option program is
recognized over the four-year vesting period, the foregoing pro forma reductions
in the Company's net income are not representative of the anticipated amounts in
future years.

Note 8 - Income Taxes

Income tax expense consists of the following:

<TABLE>
<CAPTION>
                                                                      September 30,
                                                             1999         1998        1997
--------------------------------------------------------------------------------------------
                                                                     (in thousands)
<S>                                                         <C>         <C>         <C>
Current:
   Federal                                                  $ 33,954    $  9,775    $      -
   State                                                       5,935       6,563         101
   Foreign                                                     2,295           -           -
                                                            --------------------------------
                                                            $ 42,184    $ 16,338    $    101
                                                            ================================
Deferred:
   Federal                                                  $ (4,756)   $ (4,445)   $  3,018
   State                                                      (3,418)     (2,814)        533
                                                            --------------------------------
                                                            $ (8,174)   $ (7,259)   $  3,551
                                                            ================================
Total:
   Federal                                                  $ 29,198    $  5,330    $  3,018
   State                                                       2,517       3,749         634
   Foreign                                                     2,295           -           -
                                                            --------------------------------
                                                            $ 34,010    $  9,079    $  3,652
                                                            ================================
</TABLE>
<PAGE>

The actual income tax expense differs from the expected tax expense computed by
applying the federal corporate tax rate of 35% for the years ended September 30,
1999, 1998 and 1997, to income before income taxes as follows:

<TABLE>
<CAPTION>
                                                                      September 30,
                                                             1999         1998        1997
--------------------------------------------------------------------------------------------
                                                                     (in thousands)
<S>                                                         <C>         <C>         <C>
Federal income taxes at statutory rate                      $ 36,362    $ 20,852    $ 11,609
State income taxes, net of federal benefit                     1,635       3,771       2,048
Rate differential on foreign income taxes                     (1,977)          -           -
Research & development credits                                (1,833)       (595)       (700)
Adjustment for deferred tax assets for
     enacted changes in tax laws and rates                         -           -        (479)
Reduction in valuation allowance (net of valuation
     allowance of $2,923 in 1998 credited to shareholders'
     equity)                                                       -     (15,524)     (8,826)
Other                                                           (177)        575           -
                                                            --------------------------------
                                                            $ 34,010    $  9,079    $  3,652
                                                            ================================
</TABLE>

The tax effects of temporary differences that give rise to a significant portion
of the deferred tax assets are summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                                            September 30,
                                                                          1999        1998
--------------------------------------------------------------------------------------------
<S>                                                                     <C>         <C>
Deferred tax assets:
  Net operating loss carryforwards                                      $ 19,579    $ 12,422
  Research & development tax credits                                       7,471       4,582
  Allowances and reserves                                                  7,166       4,256
  Accumulated depreciation & amortization                                      -         510
  Federal AMT and foreign tax credits                                        780         851
  Colorado enterprise zone incentive credits                               1,734           -
  California manufacturers' investment credit                              1,151       1,144
  State taxes                                                                 22         812
  Other                                                                      152         404
                                                                        --------------------
     Total gross deferred tax assets                                      38,055      24,981
  Less valuation allowance                                                     -           -
                                                                        --------------------
  Deferred tax assets                                                     38,055      24,981
                                                                        --------------------
  Deferred tax liabilities:
     Depreciation and amortization                                         4,900           -
                                                                        --------------------
  Net deferred tax asset                                                $ 33,155    $ 24,981
                                                                        ====================
</TABLE>

In assessing the realizability of deferred tax assets, management considered
whether it is more likely than not that some portions or all of the deferred tax
assets will be realized. The ultimate realization of deferred tax assets is
dependent on the generation of future taxable income during the periods in which
those temporary
<PAGE>

differences become deductible. Management considers the projected future taxable
income and tax-planning strategies in making this assessment. Based on the level
of historical taxable income and projections for future taxable income over the
periods in which the deferred tax assets are deductible, the Company has
eliminated the valuation allowance for all deductible differences. Management
believes that it is more likely than not that the results of future operations
will generate sufficient taxable income to realize the net deferred tax assets.

During fiscal 1999, the Company recognized tax benefits associated with employee
stock options aggregating $40.9 million. Such benefits have been recorded
directly to shareholders' equity.

The change in the valuation allowance for the year ended September 30, 1998 was
$18.4 million, of which $15.5 million reduced income tax expense for the year.
The remaining $2.9 million was credited to additional paid-in capital which was
the amount attributable to net operating losses created by the exercise of stock
options previously unrecognized.

As of September 30, 1999, the Company had net operating loss carryforwards for
federal and state income tax purposes of $52.8 million and $23.0 million,
respectively, which are available to offset future taxable income through 2019
and 2004, respectively. Additionally, the Company had research and development
tax credit carryforwards for federal and state income tax purposes of $5.7
million and $2.7 million, respectively, which are available to offset future
income taxes, if any, through 2019.

Note 9 -Significant Customers, Concentration of Credit Risk and Segment
Information In fiscal 1999, two customers accounted for 18% and 14% of total
revenues. In fiscal 1998, two customers accounted for 23% and 15% of total
revenues. In fiscal 1997, three customers accounted for 22%, 20% and 12% of
total revenues.

The Company generally sells its products to customers engaged in the design
and/or manufacture of high technology products either recently introduced or not
yet introduced to the marketplace. Substantially all the Company's trade
accounts receivable are due from such sources. The Company's major customers who
account for more than 10% of total revenues aggregated 16% and 41% of total
trade receivables at September 30, 1999 and 1998, respectively.

The Company has one reportable operating segment as defined by FAS No. 131.
Substantially all long-lived assets are located in the United States.

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

                                    1999       1998          1997
------------------------------------------------------------------
United States                    $ 188,929  $ 133,033    $  70,010
Japan                               46,292     13,603       24,102
France                              12,637      6,146        1,009
Other                               33,676     24,103       10,292
                                 ---------------------------------
                                 $ 281,534  $ 176,885    $ 105,413
                                 =================================

In fiscal 1999, 1998 and 1997 revenues for products in the communication and ATE
markets were $227.5 million and $54.0 million, $130.9 million and $46.0 million,
and $82.2 million and $23.2 million, respectively.
<PAGE>

Note 10 - Retirement Savings Plan

The Company has a qualified retirement plan under the provisions of Section
401(k) of the Internal Revenue 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. The Company does not make matching contributions under the plan.
<PAGE>

Note 11 - Commitments and Contingencies

The Company has entered into several agreements to lease land, a building and
equipment (collectively, the "property"). All of these leases have initial terms
of three to five years and options to renew for an additional one to three
years. The Company has the option to purchase the property at the end of each
initial lease term, and at the end of each renewal period for the lessor's
original cost, which is not less than the fair market value at each option date.
If the Company elects not to purchase the property at the end of each of the
leases, the Company would guarantee a residual value to the lessors equal to 84%
to 86% of the lessors' cost of the property equal to $70.4 million. As of
September 30, 1999, the lessors had advanced a total of $82.0 million under
these leases, and held $66.7 million as cash collateral, which amount is
included in restricted long-term deposits. Certain of these leases require the
Company to meet specific financial and other covenants, including restrictions
on the payment of cash dividends to its shareholders. As of September 30, 1999
the Company was in compliance with all covenants.

The Company also leases facilities and certain machinery and equipment under
noncancelable operating leases that expire through 2005.

Approximate minimum rental commitments under all noncancelable operating leases
as of September 30, 1999, are as follows (in thousands):

Year ending September 30:
------------------------------------------------------------------------------
2000                                                                  $  4,638
2001                                                                     4,090
2002                                                                     3,143
2003                                                                     1,249
2004                                                                     1,273
Thereafter                                                               1,328
                                                                      --------
Total minimum lease payments                                          $ 15,721
                                                                      ========

Rent expense totaled $4.6 million, $3.9 million and $2.4 million, for the years
ended September 30, 1999, 1998 and 1997, respectively.

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 will not have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.


Note 12 - Subsequent Event (unaudited)

In October 1999, the Company entered into an agreement to lease equipment. The
lease has an initial term of four years and an option to renew for an additional
year. The Company has the option to purchase the equipment at the end of the
initial lease term, and at the end of the renewal period for the lessor's
original cost, which is not less than the fair market value at each option date.
If the Company elects not to purchase the equipment at the end of the lease, the
Company would guarantee a residual value to the lessor equal to 85% of the
lessor's cost of the equipment, equal to $9.4 million.
<PAGE>

Directors*
James A. Cole
General Partner of Windward Ventures

Alex Daly
President and Chief Executive Officer,
Cygnus Solutions, Inc.

Pierre R. Lamond
Chairman of the Board,
Vitesse Semiconductor Corporation
General Partner of Sequoia Capital

John C. Lewis
Chairman of the Board,
Amdahl Corporation

Louis R. Tomasetta
President and Chief Executive Officer,
Vitesse Semiconductor Corporation

Executive Officers*
Louis R. Tomasetta
President and Chief Executive Officer, Director

Christopher R. Gardner
Vice President and General Manager,
Telecommunications Division

Eugene F. Hovanec
Vice President, Finance and Chief Financial Officer

Ken Jones
Vice President and General Manager, ATE Division

James Mikkelson
Vice President and Chief Technology Officer

Michael S. Millhollan
Vice President and General Manager,
Data Communications Division

Neil R. Rappaport
Vice President, Sales

Officers and Vice Presidents

Ian Burrows
Vice President, Fab 1 - Camarillo

Roy Carew
Vice President, Manufacturing Product Engineering

Robert Cutter
Vice President Manufacturing and General Manager,
Colorado Springs

Alak Deb
Vice President, Development - ANP Network
Processor Group

Ira Deyhimy
Vice President, Product Development

Jim Gramacki
Vice President, Telecom Operations

Patrick Jenkins
Vice President, Fab 2 - Colorado Springs

Jeanne Johnson
Vice President, Human Resources

Mike Logan
Vice President, North American Sales

Paul Matranga
Vice President, Quality

*Subject to Section 16 Reporting
<PAGE>

Officers and Vice Presidents (continued)

Jim McDonald
Vice President, Dallas Design Center

Ray Milano
Vice President, Opto/Analog Products

Yatin Mody*
Vice President and Controller

Samba Murthy
Vice President, Marketing - ANP Network Processor Group

Mike Powell
Vice President, ANP Network Processor Group

Bob Rumer
Vice President, Gigabit Products

Barry Sandefur
Vice President, Advanced Networking Products

Jeff Weigel
Vice President, Strategic Accounts

Mike Yeager
Vice President, Colorado Springs Design Center

Corporate Information

Stock Listing: Common stock traded on Nasdaq National Market System
Symbol: VTSS
Options: The Company's options are traded on the Chicago Board Option Exchange

General Counsel

Wilson, Sonsini, Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304-1050

Davis Polk & Wardwell
1875 Charleston Road
Mountain View, CA 94043

Independent Auditors

KPMG LLP
21700 Oxnard Street, Suite 1200
Woodland Hills, CA 91367

Transfer Agent and Registrar

BankBoston, N.A.
c/o EquiServe
P.O. Box 8040
Boston, MA 02266-8040

Form 10-K

The Company, upon written request, will provide without charge to each
shareholder a copy of its annual report on Securities and Exchange Commission
Form 10-K for the year ended September 30, 1999. Requests should be directed to:

     Vitesse Semiconductor Corporation
     Investor Relations
     741 Calle Plano
     Camarillo, CA 93012

Annual Meeting

The Vitesse Semiconductor Corporation annual meeting will be held on Tuesday,
January 25, 2000 at 10:30 a.m. at Westlake Village Inn, 32001 Agoura Road,
Westlake Village, California.