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

FORM 10-K
ANNUAL REPORT

(Mark One)ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended September 30, 2008ORo

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


Commission file number 0-19654

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

Delaware(State or other jurisdiction of
incorporation or organization)

77-0138960(I.R.S. Employer
Identification No.)741 Calle Plano
Camarillo, California(Address of principal executive offices)

93012(Zip Code)


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

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

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

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

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

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

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

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

Large accelerated filer o

Accelerated filer ý

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

Smaller reporting company o


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

As of March 31, 2008, the aggregate market value of the voting and non-voting common equity held by non-affiliates was
$110,615,635, based on the closing price on that date. As of December 26, 2008 there were 226,205,580 shares of the registrant's $0.01 par value common stock outstanding.



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VITESSE SEMICONDUCTOR CORPORATION

2008 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS



PART I.Item 1.

Business


1Item 1A.

Risk Factors


16Item 1B.

Unresolved Staff Comments


28Item 2.

Properties


28Item 3.

Legal Proceedings


28Item 4.

Submission of Matters to a Vote of Security Holders


30PART II.Item 5.

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


31Item 6.

Selected Financial Data


32Item 7.

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


34Item 7A.

Quantitative and Qualitative Disclosures About Market Risk


71Item 8.

Financial Statements and Supplementary Data


72Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure


112Item 9A.

Controls and Procedures


113PART III.Item 10.

Directors, Executive Officers and Corporate Governance


119Item 11.

Executive Compensation


119Item 12.

Security Ownership of Certain Beneficial Owners and Management


119Item 13.

Certain Relationships, Related Transactions, and Director Independence


119Item 14.

Principal Accountant Fees and Services


119PART IV.Item 15.

Exhibits and Financial Statement Schedules


119Signatures


123


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PART I

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

The Business section and other parts of this Annual Report on Form 10-K (this "Annual
Report") contain forward-looking statements that involve risks and uncertainties. Many of the forward-looking statements are located in "Management's Discussion and Analysis of Financial Condition and
Results of Operations." Forward-looking statements provide current expectations of future events based on certain assumptions and include any statements that do not directly relate to any historical
or current fact. Forward-looking statements can also be identified by words such as "anticipates," "believes," "estimates," "expects," "intends," "plans," "predicts," and similar terms. Forward-
looking statements are not guarantees of future performance and the Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might
cause such differences include, but are not limited to, those discussed in the subsection entitled "Risk Factors" under
Part I, Item 1A of this Annual Report. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by
law.

ITEM 1.    BUSINESS

Overview

Vitesse is a leading supplier of high-performance integrated circuits ("ICs") that are utilized primarily by manufacturers
of networking systems for Carrier, Enterprise, and Storage communications applications. Vitesse designs, develops, and markets a diverse portfolio of high-performance,
cost-competitive semiconductor products. For more than 20 years, Vitesse has led the transition of new technologies in communications networks.

Our
end-user customers include leading communications and enterprise original equipment manufacturers ("OEMs") such as Alcatel-Lucent, Ciena Corporation, Cisco
Systems, Inc., Ericsson, Fujitsu Limited, HP, Hitachi Ltd., Huawei Technologies Co., Ltd., IBM, NEC Corporation, Nortel Networks Corporation, Nokia Siemens
Networks B.V., Tellabs, Inc., and ZTE Corporation. With respect to these end-user customers, we engage in distribution and sales efforts directly and/or indirectly through
distributors. Sales to distributors account for approximately 76% of our revenues.

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

We
have a worldwide presence. As of September 30, 2008, we operated four domestic design centers in the United States in California, Massachusetts, Oregon, and Texas, and four
international design centers in Denmark, Germany, India, and Taiwan.

Industry BackgroundCommunications Industry

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

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

Carrier Networking

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

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

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

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

The
new data-handling capabilities of the network enabled by EoS and Carrier Ethernet allow Carriers to more readily deploy new, revenue-generating,
high-bandwidth services such as VoIP, IPTV, high-speed Internet, and business-class Ethernet services to homes and businesses. To deliver these services, they are deploying new
access networks and new gateway devices in the office and home that are capable of delivering and terminating these various services. While these networks will be deployed over a variety of physical
layer alternatives such as DSL, fiber, and wireless, increasingly, they will migrate to using Ethernet as the common communication protocol.

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Enterprise Networking

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

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

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

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

Storage Networking

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

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

More
recently, there has been further migration of the Storage Networks to new protocols based on Ethernet and "Enhanced Ethernet" technologies. One example of this is Fibre Channel over
Ethernet ("FCoE"). We believe that, like Carrier and Enterprise Networking, Storage Networking will evolve over time to deploy more networks based on Ethernet technology. We continue to supply

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products
to the Storage market based on our capabilities in Ethernet switching, Ethernet physical layer signaling, signal integrity and crosspoint switch products.

Increasing Demands for Next-Generation Networking Integrated Circuits

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









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Strategy

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

Target Growing Markets

We target high-growth areas in the communications infrastructure market in both Carrier and Enterprise Networks to provide
solutions that adhere to the major networking protocols and perform common networking functions required by the most widely deployed networking equipment. For Carrier and Enterprise Networks, we focus
on the high-performance markets at 1 Gbps and 10 Gbps and above speeds, which are expected to be the fastest growing market segments.

Focus and Specialization

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



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Leverage Technology into New Applications

The markets for semiconductor devices periodically experience technology shifts caused by, among other things, increased speeds or
changing protocols. Our strategy is to use our 20 years of design experience to introduce innovative products in these markets that solve our customers' business problems and gain market share
through our customers' adoption of our products. Our advanced technology and IP developments, are focused on three areas:

Advanced
packet processing technologies for Ethernet networking:    We have created unique packet processing technologies for our ethernet MACs and switches that will become
increasingly important as networks become dominated by Ethernet.

Signal
Integrity:    We provide world-class signal integrity solutions for a broad variety of applications from 100Mbs to over 10Gbs, including latest-generation electronic
dispersion compensation ("EDC") and our patented V-Scope signal visualization technology.

Lowest-power
PHY technology:    We have recently received a Frost and Sullivan award for our industry-leading low-power ActiPHY and
PerfectReach Copper PHY technology and we are extending the same proprietary low-power techniques to our optical PHYs, serializer/deserializer ("SerDes"), PMD, and crosspoint
devices.

In
several markets, we are beginning to leverage these key technology advantages and intellectual property ("IP") into licensing opportunities with third parties. In areas such as
Gigabit Ethernet Copper PHYs, high-speed signaling, and signal integrity, our basic mixed-signal complementary metal-oxide-semiconductor ("CMOS") technology has application in many markets
other than those in which we participate. We anticipate being able to exploit our many years of technology development by providing this technology to systems suppliers and other semiconductor
suppliers in the form of intellectual property via licensing arrangements. We believe we are in a unique position to supply such IP to other IC vendors as we are either the technology or
low-power leader for such IP, or such IP is only available from IC vendors that are competing in the same markets as the companies looking for such IP. As a smaller, more focused and
specialized IC vendor, we are less likely to compete with those companies.

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

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

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

Engage the Right People for Success

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

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Products

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

Ethernet Transceivers, Switches, and MACs

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

Our
SimpliPHY Ethernet transceivers provide low power operation, and we have recently introduced further power savings features such as ActiPHY and
PerfectReach that provide energy savings of up to 80% in any network infrastructure device or consumer premise equipment. We have recently received a Frost and Sullivan award for our
industry-leading low-power Copper PHY technology. These power saving features are also included in our SparX and G-RocX switch/router products with
integrated Ethernet transceivers. For timing-sensitive applications, such as wireless aggregation networks, we also offer Ethernet transceivers with advanced synchronization capabilities.

Our
Enterprise switch product line addresses Gigabit Ethernet applications in the LAN. This family of triple-speed (10/100/1000 Mbps) Layer 2 and Layer 3 switches are
available in port counts ranging from 5 to 48. These switches are targeted at desktop, workgroup, and LAN infrastructure boxes and enable these systems to migrate to Gigabit Ethernet speeds in a
cost-effective manner. In 2005, we started shipping 5-port and 8-port integrated ICs that combine the transceiver and switch functions. We have shipped over
50 million Gigabit Ethernet ports to date.

Our
Ethernet switch products provide a high-level of integration leading to a significant reduction in part count and reduced BOM cost. Switches and routers with integrated
Ethernet transceivers also provide all the energy-efficient ActiPHY and PerfectReach features we introduced on our standalone Ethernet transceivers.

Ethernet
MACs provide addressing and channel control mechanisms that make it possible for several network nodes to communicate within a multipoint network. Our MAC products are designed
for use in Enterprise-class modular Ethernet switch platforms as well as in Ethernet-over-SONET/SDH and Ethernet-over-OTN systems used in access, metro,
and long-haul Carrier Networking systems. The Vitesse family of Ethernet MACs enables system OEMs to focus on the value-add of the packet processing function by
simplifying the Ethernet system interface design.

Our
Ethernet MACs provide single-chip solutions for both 1 Gbps and 10 Gbps applications, reducing software development costs for 1 Gbps and
10 Gbps applications. They also provide support for intelligent oversubscription, allowing OEMs to efficiently and securely manage bandwidth and bandwidth usage. Our MACs incorporate
industry-standard XAUI/XAUI+ and SPI-4.2 interfaces for connection to a wide variety of ICs, such as packet processors, traffic managers, switch fabrics, and transport mappers. We are a
leading supplier of 1 Gbps and 10 Gbps Ethernet and Carrier Ethernet MACs in the industry.

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Transport Processing

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

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

Framers
are devices that take incoming data traffic from the physical layer ("PHY") and process the framing information used for transporting data. Mappers convert data from one protocol
to another. Forward Error Correction ("FEC") is used in Optical Transport Networks ("OTN") for ensuring reliable data transmission. We offer a complete line of these products that, today, operate at
speeds up to 10 Gbps, principally for next-generation systems targeted at the core and metro segments of the Carrier networks.

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

A
switch receives data from a line card and routes the data to its proper destination. We supply a family of Time Slot Interchange ("TSI") switches for use in SONET/SDH equipment. We
have various TSI switches in our product portfolio that provide aggregate bandwidth up to 1.5 Tbps. Our switches provide higher bandwidth and lower power than competitive solutions. We also
provide switch fabric
chip sets for a variety of packet backplane applications. These fabric solutions allow total system interface bandwidths from 20 Gbps to 160 Gbps and higher.

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

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

The
Physical Layer Device ("PHY") converts high-speed analog signals from the PMD to low-speed digital signals. It includes the high-speed analog
functions of clock and data recovery ("CDR"), multiplexing ("MUX"), and demultiplexing ("DMUX"). The CDR recovers the clock and retimes the signal to synchronize it with the overall system clock,
while the MUX/DMUX converts low-speed parallel data into higher speed serial data and vice versa. We have incorporated many industry leading features into these products such as integrated
equalization, signal visualization

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technology,
VScope, and EDC. These technologies dramatically improve signal integrity transmission and reception for applications at 6 Gbps and above, particularly for protocols
such as 10 Gbps Ethernet and 8 Gbps Fibre Channel systems. We develop our products in low-cost, CMOS and high-performance Silicon Germanium ("SiGe") silicon
process technologies depending on the technology requirements of the product and application. We offer a broad line of PHY products for the SONET, Fibre Channel, and Ethernet markets at speeds ranging
from 155 Mbps to 12.5 Gbps.

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

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

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

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

Our
signal integrity PHY and PMD products provide leading-edge performance and low-power features for 10 Gbps applications such as the emerging SFP+ 10G
pluggable transceiver industry standard, as well as superior signal integrity features including EDC that allow propagation over longer distances in multi-mode and single-mode
fiber applications, copper cabling, as well as new and legacy backplanes. Our crosspoints, retimers, and signal conditioners provide best-in-class signal integrity improvements
for a wide variety of applications in Carrier, Enterprise, data center, and high-definition video applications, within systems as well as connecting between them.

Intellectual Property ("IP") Licensing

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

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

Customers

We market and sell our semiconductor products directly to leading original electronic manufacturers ("OEMs") and original design
manufacturers ("ODMs") as well as through third-party electronic component distributors and manufacturing service providers. Sales to distributors accounted

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for
approximately 76.0%, 78.0%, and 84.0% of our net revenues for fiscal 2008, 2007, and 2006, respectively. For fiscal 2008, distributors Nu Horizons Electronics, Corp., including their subsidiary
Titan Supply Chain Services and Weikeng Industrial Co. Ltd. accounted for 48.8% and 9.2%, respectively, of our net revenues. IBM accounted for 11.3% of net revenues. For fiscal 2007,
distributors Nu Horizons Electronics, Corp., including their subsidiary Titan Supply Chain Services and Weikeng Industrial Co. Ltd. accounted for 50.1% and 7.1%, respectively, of our net
revenues. For fiscal 2006, distributors Nu Horizons Electronics, Corp., including their subsidiary Titan Supply Chain Services and Jaco Electronics accounted for 55.1% and 7.6%, respectively, of our
net revenues.

Our
top OEM customers for fiscal year 2008 were Alcatel-Lucent, IBM, HP, Huawei Technologies Co., Ltd., and ZTE Corporation. Our sales to these customers accounted for a
total of approximately 34.4% of our fiscal year 2008 net revenues. Our top five OEM customers for fiscal year 2007 were EMC Corporation, IBM, HP, Huawei Technologies Co., Ltd., and ZTE
Corporation. They accounted for approximately 31.0% of our net revenues for fiscal 2007. In fiscal year 2006, our top customers were Huawei, EMC, IBM, Alcatel-Lucent, and Nortel which collectively
totaled 28.0% of our total net revenue at that time.

Our
customer base is widely dispersed geographically. Sales to customers located outside the United States have historically accounted for a significant percentage of our revenue and we
anticipate that such sales will continue to be a significant percentage of our revenue. International sales constituted 49%, 48% and 46% of our net revenue in fiscal 2008, 2007 and 2006, respectively.
Note 9Significant Customers, Concentration of Credit Risk, Segment Reporting, and Geographic Information in the accompanying financial statements provides more specific data on
revenue by geographic area.

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

Manufacturing and Operations

Wafer Fabrication

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

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

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

Because
wafer fabrication for a great majority of our products is outsourced, we depend on third-party wafer foundries to allocate a portion of their manufacturing capacity sufficient to
meet our needs and to produce products of acceptable quality in a timely manner. There are significant risks associated with our reliance on third-party wafer foundries,
including:



These
and other risks associated with our reliance on third-party wafer foundries could materially and adversely affect our business, financial condition, and results of operations. For
example, the third-party foundries that manufacture our wafers have, from time-to-time, experienced manufacturing defects and reductions in manufacturing yields. In addition,
disruptions and shortages in wafer foundry capacity may impair our ability to meet our customers' needs and negatively impact our operating results. Our third-party wafer foundries fabricate products
for other companies and, in certain cases, manufacture products of their own design. Historically, there have been periods in which there has been a worldwide shortage of foundry capacity for the
production of high-performance ICs such as ours. We do not have long-term agreements with any of our third-party foundries, but, instead, subcontract our manufacturing
requirements on a purchase order basis. As a result, although we believe that we currently have access to adequate foundry capacity to support our sales levels, it is possible that the capacity we
will need in the future may not be available to us on acceptable terms, if at all.

Probe, Assembly and Final Test

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

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

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

As
with wafer fabrication, worldwide assembly and test capacity is limited and we are dependent on our suppliers to provide enough capacity in the correct mix to address all of our
requirements. We

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do
not have long-term agreements with any of our assembly or test subcontractors, but instead we subcontract our manufacturing requirements on a purchase order basis. As a result, it is
possible that the capacity we will need in the future may not be available to us on acceptable terms, if at all, and we could experience shortages or assembly problems in the future. The availability
of assembly services from these subcontractors could be materially and adversely affected in the event a subcontractor experiences financial difficulties or suffers any damage to its facilities.

Many
of our products have very long life cycles, often exceeding 10 years or more. These life cycles may be longer than what is typically supported by wafer and/or assembly
manufacturers. Accordingly, we are sometimes subjected to End-of-Life ("EOL") notices on certain material and/or products provided by these subcontract manufacturers. This may
impact our ability to continue to support certain products, forcing us to EOL our products if we cannot obtain a replacement source of material. This may impact revenue and/or require us to incur
additional costs to provide alternative sources for these materials.

Engineering, Research and Development

The market for our products is characterized by continually evolving industry standards, rapid advancements in process technologies,
and increasing levels of functional integration. We believe that our future success will depend largely on our ability to continue to improve our products and our process technologies, to develop new
technologies, and to adopt emerging industry standards. Our product development efforts are focused on designing new products for the high-performance communications infrastructure markets
based on understanding the evolving needs of our customers. We have a dedicated team of engineers who follow industry standards development, technology changes, and the product directions of our
customers in an effort to provide forward-looking guidance to the development teams in the form of a "Product Roadmap." We work closely with our customers to co-specify and/or
co-develop products. We refer to these early adoption customers as "alpha-site customers." Occasionally, our relationships with our alpha-site customers will
involve non-recurring development charges or commitments to purchase products. We had no long-term purchase agreements at September 30, 2008 and 2007.

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

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

Our
engineering, research and development expenses in fiscal 2008, 2007, and 2006 were $50.0 million, $47.2 million, and $66.4 million, respectively.

Competition

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

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

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

In
the communications networking market, which includes our Carrier and Enterprise Networking markets, our competitors include Applied Micro Circuits Corporation, Broadcom Corporation,
Gennum Corporation, LSI Corporation, Marvell Technology Group Ltd., Maxim Integrated Products, Inc., Mindspeed Technologies, Inc., PMC-Sierra, Inc., and
TranSwitch Corporation. In the signal integrity market our competitors include Gennum Corporation, National Semiconductor Corporation, Mindspeed Technologies, Inc., Maxim Integrated
Products, Inc., and PMC-Sierra, Inc. Over the next few years, we expect additional competitors, some of whom may have greater financial and other resources, to enter the
market with new products. In addition, we are aware of smaller, privately-held companies that focus on specific portions of our range of products. These companies, individually and
collectively, represent future competition for design wins and subsequent product sales.

Sales and Customer Support

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

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

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

Information
regarding financial data by geographic segment is set forth in Part II, Item 8 of this Form 10-K and in Note 9Significant
Customers, Concentration of Credit Risk, Segment Reporting, and Geographic Information in the accompanying financial statements.

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Intellectual Property

We rely on a combination of patent, copyright, trademark, and trade secret protections, as well as confidentiality agreements and other
methods, to protect our proprietary technologies and processes. For example, we enter into confidentiality agreements with our employees, consultants, and business partners, and control access to and
distribution of our proprietary information. As of September 30, 2008, we had 93 U.S. patents, 14 foreign patents, and 18 patent applications pending in the U.S. We are preparing to file
several more patent applications.

The
semiconductor industry is characterized by vigorous pursuit and protection of intellectual property rights. As is common in the industry, from time-to-time
third parties have asserted patent, copyright, trademark, and other intellectual property rights to technologies that are important to our business and have demanded that we license their patents and
technology. To date, none of these claims has resulted in the commencement of any litigation against us, nor have we believed that it was necessary to license any of the rights referred to in such
claims. We expect, however, that we will continue to receive such claims in the future, and any litigation to determine their validity, regardless of their merit or resolution, could be costly and
divert the efforts and attention of our management and technical personnel. We cannot assure you that we would prevail in such disputes given the complex technical issues and inherent uncertainties in
intellectual property litigation. If such litigation were to result in an adverse ruling, we could be required to:



Cyclicality

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

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

Backlog

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

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Environmental Management

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

Employees

As of September 30, 2008, we had 502 employees, including more than 230 in engineering and R&D, with the balance of employees,
listed in population size order, in operations, marketing and sales, and finance and administration. Our ability to attract and retain qualified personnel is essential to our continued success. None
of our employees is represented by a collective bargaining agreement, nor have we ever experienced a work stoppage. We believe our employee relations are good.

Available Information

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

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

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

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

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ITEM 1A.    RISK FACTORS

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



Risks Relating to Our Liquidity, Financing Arrangements, and Capital Commitments

We have not been able to renegotiate the terms of our 1.5% Convertible Subordinated Debentures Due 2024 ("2024 Debentures"), or raise the capital necessary to repurchase
some or all of the 2024 Debentures, and consequently the audit opinion we have received with respect to our financial statements for the fiscal year ended September 30, 2008 includes an
uncertainty regarding our ability to continue as a going concern and may limit our ability to access certain types of financing, or may prevent us from obtaining financing on acceptable terms.

The holders of our 2024 Debentures have the right, on October 1, 2009, to require us to repurchase some or all of the 2024
Debentures at a price equal to 113.76% (the "premium put") of the principal amount of the 2024 Debentures. If all of the holders of the 2024 Debentures exercise their repurchase rights, the total
repurchase price would be $110.0 million. We are working to either renegotiate the terms of, or refinance some or all of the 2024 Debentures. However, to date, we have not been able to
renegotiate those terms or to raise the capital necessary to repurchase or refinance some or all of the 2024 Debentures. Consequently, the audit opinion issued by our independent registered public
accounting firm with respect to our audited financial statements for the fiscal year ended September 30, 2008 contains an uncertainty regarding our ability to continue as a going concern.

Such
a "going concern" uncertainty indicates that there is substantial doubt as to our ability to continue as a going concern due to the risk that we may not have sufficient cash and
liquid assets to cover our operating capital requirements for the next twelve-month period and the October 1, 2009 repurchase of the 2024 Debentures. If sufficient cash cannot be obtained we
would have to substantially alter our operations, or we may be forced to discontinue operations. A going concern uncertainty may limit our ability to access certain types of financing, or may prevent
us from obtaining financing on acceptable terms.

If required, our ability to repurchase our debentures with cash may be limited and failure to repurchase the debentures would constitute an event of default.

If we fail to renegotiate with the holders of the 2024 Debentures or to raise the capital necessary to repurchase some or all of the
2024 Debentures, our business, financial condition and results of operations will likely be materially and adversely affected.

On
October 1, 2009, the holders of the 2024 Debentures have the right to require us to repurchase some or all of the 2024 Debentures at a price equal to 113.76% of the principal
amount of the 2024 Debentures to be purchased. The increase in the repurchase right would result in an additional payment of $13.3 million on the $96.7 million aggregate principal amount
of the 2024 Debentures outstanding. We cannot assure that we will have sufficient financial resources or will be able to arrange financing to pay the repurchase price of any 2024 Debentures tendered
for repurchase.

Our
ability to repurchase the 2024 Debentures in such event may be limited by law, by the indenture associated with the 2024 Debentures, by the terms of other agreements relating to our
senior debt, and by such indebtedness and agreements as may be entered into, replaced, supplemented, or amended from time-to-time. We may be required to refinance our debt in
order to make such

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payments.
We may not have the financial ability to repurchase the 2024 Debentures if payment of our debt is accelerated. If we fail to repurchase the 2024 Debentures as required by the indenture, it
would constitute an event of default which, in turn, may also constitute an event of default under our other debt obligations.

We have received an audit opinion expressing an uncertainty about on our ability to continue as a going concern.

The audit report issued by our independent registered public accounting firm on our audited financial statements for the fiscal year
ended September 30, 2008 contains an uncertainty regarding our ability to continue as a going concern. This concern is largely due to the right of the holders, exercisable on October 1,
2009, of the 2024 Debentures to require us to repurchase some or all of the 2024 Debentures at a price equal to 113.76% of the principal amount of the 2024 Debentures.

This
uncertainty indicates there is substantial doubt as to our ability to continue as a going concern due to the risk that we may not have sufficient cash and liquid assets at
September 30, 2008 to cover our operating capital requirements for the next twelve-month period, including the potential requirement to repurchase some or all of the 2024 Debentures, and if
sufficient cash cannot be obtained we would have to substantially alter our operations, or we may be forced to discontinue operations. A going concern uncertainty may limit our ability to access
certain types of financing, or may prevent us from obtaining financing on acceptable terms.

There
can be no assurance that our independent registered public accounting firm will not continue to express substantial doubt about our ability to continue as a going concern in their
opinion in the future. In addition, if we fail to renegotiate with the holders of the 2024 Debentures or to raise the capital necessary to repurchase some or all of the 2024 Debentures, our business,
financial condition and results of operations will be materially and adversely affected.

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

Following a substantial downturn that started in late 2000 and continued for many years, market conditions for our products began to
improve modestly in 2005 and have generally continued to improve through 2008. During this time, our overall revenues have increased, but tend to be volatile during certain periods. During these
periods, our revenues have not been sufficient to cover our operating expenses. Due to general economic conditions and slowdowns in purchases of networking equipment, it has become increasingly
difficult for us to predict the purchasing activities of our customers and we expect that our operating results will fluctuate substantially in the future; we anticipate future losses from operations.
Future fluctuations in operating results may also be caused by a number of factors, many of which are outside our control. Additional factors that could affect our future operating results include the
following:



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

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

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

The cyclical nature of and volatility in the semiconductor industry could adversely impact our revenue and results of operations.

We operate primarily in the semiconductor industry, which is cyclical and subject to rapid change and evolving industry standards. From
time-to-time, the semiconductor industry has experienced significant downturns. These downturns are characterized by decreases in product demand, excess customer inventories,
and accelerated erosion of prices. These factors could cause substantial fluctuations in our revenue and in our results of operations.

Our operating results may be adversely impacted by worldwide political and economic uncertainties and specific conditions in the markets we address.

In the recent past, general worldwide economic conditions have experienced a downturn due to slower economic activity, concerns about
inflation and deflation, increased energy costs, decreased consumer confidence, reduced corporate profits and capital spending, and adverse business conditions. These conditions make it extremely
difficult for our customers, our vendors, and us to accurately forecast and plan future business activities, and could cause U.S. and foreign businesses to slow spending on our products, which would
delay and lengthen sales cycles. We cannot predict the timing, strength, or duration of any economic slowdown or subsequent economic recovery, worldwide, or in the semiconductor industry. If the
economy or markets in which we operate do not remain at their present levels, our business, financial condition, and results of operations will likely be materially and adversely affected.

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

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

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

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

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

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

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

Sales to customers located outside the U.S. have historically accounted for a significant percentage of our revenue and we anticipate
that such sales will continue to be a significant percentage of our revenue. International sales constituted 49%, 48%, and 46% of our net revenue in fiscal 2008, 2007, and 2006 respectively.
Development and customer support operations located outside the U.S. have historically accounted for a significant percentage of our operating expenses and we anticipate that such operations will
continue to be a significant percentage of our expenses. International sales and operations involve a variety of risks and uncertainties, including risks related to:



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

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Risks Relating to Our Business

Recent changes in our management may cause uncertainty in, or be disruptive to, our general business operations and the implementation of our business strategy.

Since April 2006, we have replaced our Chief Executive Officer, Chief Financial Officer, and most of our accounting and financial
staff, as well as several Vice President level positions reporting to the CEO. In addition, most of the members of our Board of Directors have resigned and new directors have been appointed. These
changes in our management and Board of Directors have been and may continue to be disruptive to our business and during the transition period there have been and may continue to be uncertainty with
our customers, investors, vendors, employees, and others concerning our future direction and performance. Our future success will depend, to a significant extent, on the ability of our management team
to work together effectively. The loss of any member of our senior management or other key personnel could harm our ability to implement our business strategy and respond to the rapidly changing
market conditions in which we operate. Moreover, our success will depend on our ability to attract, hire and retain senior management and other key personnel and on the abilities of the new management
personnel to function effectively going forward, both individually and as a group.

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

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



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

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

Product introductions as well as future roadmap products are based on our expectations regarding market demand and direction. If our
expectations regarding market demand and direction are incorrect, the rate of development or acceptance of our current and next-generation solutions do not meet market demand and customer
expectation, the sales of our legacy or current Carrier and Enterprise Networking and Storage Products decline more rapidly than we anticipate, or if the rate of decline continues to exceed the rate
of growth of our new products, it could negatively affect demand for our products, consolidated revenues, and profitability.

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

We focus our sales efforts on a small number of customers in the Carrier and Enterprise Networking and Storage markets that require
high-performance ICs and intend to continue doing so in the future. Some of these customers are also our competitors. Our top 10 customers typically account for approximately half of our
revenue. In fiscal 2008, distributor Nu Horizons Electronics, Corp., and its subsidiary Titan Supply Chain Services accounted for 48.8% of our net revenues, IBM accounted for 11.3% of our net
revenues, and Weikeng Industrial Co. Ltd., accounted for 9.2% of our net revenues. In fiscal 2007, distributor Nu Horizons Electronics, Corp., and its subsidiary Titan Supply Chain
Services accounted for 50.1% of our net revenues, IBM accounted for 11.0% of our net revenues, and Weikeng Industrial Co. Ltd., accounted for 7.1% of our net revenues. For fiscal 2006,
distributor Nu Horizon Electronics, Corp., including their subsidiary Titan Supply Chain Services, collectively accounted for 55.1% of net revenues. If any of our major customers were to delay orders
of our products or stop buying our products, our business and financial condition would be severely affected. Additionally, if any of our customers are impacted by consolidation, experience financial
difficulty, including filing for bankruptcy protection, or are impacted by adverse economic conditions that would delay networking infrastructure upgrades, build-outs or new installations,
this could result in decreased competition for our products and downward pressure on our prices.

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

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

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

Wafer fabrication for our products is outsourced to third-party silicon wafer foundry subcontractors such as Taiwan Semiconductor
Manufacturing Corporation ("TSMC"), Chartered Semiconductor Manufacturing, IBM, LSI Logic and United Microelectronics Corporation. As a result, we depend on third-party wafer foundries to allocate a
portion of their manufacturing capacity sufficient to meet our

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needs
and to produce products of acceptable quality in a timely manner. There are significant risks associated with our reliance on third-party foundries, including:



These
and other risks associated with our reliance on third-party wafer foundries could materially and adversely affect our revenues, cash flows, and relationships with our customers.
For example, the third-party foundries that manufacture our wafers have from time-to-time experienced manufacturing defects and reductions in manufacturing yields. In addition,
disruptions and shortages in wafer foundry capacity may impair our ability to meet our customers' needs and negatively impact our operating results. Our third-party wafer foundries fabricate products
for other companies and, in certain cases, manufacture products of their own design. Historically, there have been periods when there have been worldwide shortages of wafer foundry capacity for the
production of high-performance integrated circuits such as ours. Instead of having long-term agreements with any of our third-party foundries we subcontract our manufacturing
requirements on a purchase order basis. As a result, it is possible that the capacity we will need in the future may not be available to us on acceptable terms, if at all.

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

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

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

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

In
the past, we have experienced difficulties in achieving acceptable probe and/or final test yields on some of our products, particularly with new products, which frequently involve new
manufacturing processes and smaller geometry features than previous generations. Maintaining high numbers of good die per wafer is critical to our operating results, as decreased yields can result in
higher unit costs, shipment delays, and increased expenses associated with resolving yield problems. Because we also use

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estimated
yields to value work-in-process inventory, yields below our estimates may require us to increase the value of inventory and related reserves reflected on our
financial statements. In addition, defects in our existing or new products may require us to incur significant warranty, support and repair costs, and could divert the attention of our engineering
personnel away from the development of new products. As a result, poor manufacturing yields, defects or other performance problems with our products could adversely affect our ability to provide
competitively priced products.

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

Our success depends in part upon our ability to retain key employees. In some of the fields in which we operate, there are only a
limited number of people in the job market who possess the requisite skills. We have experienced difficulties in hiring and retaining sufficient numbers of qualified engineers in parts of our
business. The loss of services of any key personnel or the inability to hire new personnel with the requisite skills could restrict our abilities to develop new and enhance existing products in a
timely matter, to sell products to customers, or to manage our business effectively.

On
June 28, 2006, the Company's common stock was delisted from the NASDAQ National Market. Until recently, except for certain very limited circumstances, the Company did not grant
stock options to newly hired or current employees. On October 13, 2008, we granted stock options and restricted stock units to current employees. Since our competitors utilize stock option
grants as a significant employee benefit, our inability to offer stock options has hindered our efforts to attract and retain key employees.

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

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

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

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

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

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We and our employees face potential federal tax and other liabilities in connection with our past option grant practices.

In reviewing past stock option grants, Vitesse determined that various stock options were granted with exercise prices that were less
than the fair market value of Vitesse's common stock on the date of grant. These grants raise potential tax issues involving Internal Revenue Code Sections 162(m) and 409A, as well as
income tax and employment tax withholding obligations. The issue was voluntarily disclosed to the IRS and we are in the process of working out resolutions to the various issues.

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

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

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

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

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

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

We rely on a combination of patent, copyright, trademark, and trade secret protections, as well as confidentiality agreements and other
methods, to protect our proprietary technologies and processes. For example, we enter into confidentiality agreements with our employees, consultants, and business partners, and control access to and
distribution of our proprietary information. As of September 30, 2008, we had 93 U.S. patents, 14 foreign patents, and 18 patent applications pending in the U.S. and are preparing to file
several more patent applications.

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



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

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

The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights. As is common in the
industry, from time-to-time, third parties have asserted patent, copyright, trademark, and other intellectual property rights to technologies that are important to our business
and have demanded that we license their patents and technology. To date, none of these claims has resulted in the commencement of any litigation against us, nor have we believed that it is necessary
to license any of the rights referred to in such claims. We expect, however, that we will continue to receive such claims in the future, and any litigation to determine their validity, regardless of
their merit or resolution, could be costly and divert the efforts and attention of our management and technical personnel. We have begun to find opportunities to license our intellectual property.
While this may provide a substantial business opportunity for the Company, it may also increase the potential for others to initiate claims against us. We cannot assure that we would prevail in such
disputes given the complex technical issues and inherent uncertainties in intellectual property litigation. If such litigation were to result in an adverse ruling we could be required
to:



We have a shareholder rights plan designed to discourage hostile takeovers which may prevent shareholders from realizing a takeover premium on their shares of Vitesse common
stock.

Vitesse has a shareholder rights plan intended to preserve the long-term value of Vitesse to our shareholders by
discouraging a hostile takeover. Under the shareholder rights plan, each outstanding share of our common stock has an associated preferred stock purchase right. The rights are exercisable only if a
person or group acquires 15% or more of our outstanding common stock. The dilutive effect of the rights on the acquiring person or group is intended to encourage such person or group to negotiate with
our Board of Directors prior to attempting a takeover. If our Board of Directors believes a proposed acquisition of Vitesse is in the best interests of Vitesse and its shareholders, our Board of
Directors may amend the shareholder rights plan or redeem the rights for a nominal amount in order to permit the acquisition to be completed without interference from the plan. However, by
discouraging hostile takeovers the shareholder rights plan may prevent shareholders from realizing a takeover premium on their shares of Vitesse common stock.

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

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

Following the Company's determination that the Management Report on Internal Control over Financial Reporting as of
September 30, 2005, and the Audit Report of KPMG, LLP, the Company's former independent registered public accounting firm, relating to the effectiveness of the Company's internal
controls over financial reporting and management's assessment, thereof, as of September 30, 2005, both of which reports are included in the Company's Annual Report
on Form 10-K for the year ended September 30, 2005, should not be relied upon. See the Company's Annual Report on Form 10-K for the year ended
September 30, 2007 for more detailed historical information.

Management's
evaluation of the design and operating effectiveness of our internal control over financial reporting identified material weaknesses resulting from design and operating
deficiencies in the internal control system, including that we did not maintain: (i) an effective control environment; or (ii) effective controls over the period-end process,
including controls with respect to the review, supervision, and monitoring of accounting operations.

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

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



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

We have not been able to restate or provide our financial statements for periods prior to September 30, 2005, which limits the ability to evaluate our historical
financial performance to estimate future performance.

In April 2006, we announced that our then published financial statements should no longer be relied upon. As discussed in greater
detail on page 38, our Board of Directors appointed a Special Committee consisting of independent directors to conduct an investigation of possible backdating of stock options. The
investigation determined that members of our former senior management backdated

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and
manipulated the grant date of options over a number of years and subsequently attempted to create and alter documents in order to conceal these practices. The investigation also found evidence of
a number of improper accounting practices. As a result of these improper accounting practices and evaluation of the financial records and controls in place prior to September 30, 2005, current
management concluded that it cannot rely on historical balances or on the testing performed by its former auditors, supporting accounting documents are poor and do not exist for many transactions, and
key internal accounting controls were overridden by prior management or did not exist. As a result, current management has been unable to prepare any financial statements for any period prior to
September 30, 2005. Thus, there is limited historical financial information on which investors can rely upon while evaluating our financial performance.

Since we have been unable to provide audited financial information for the year ended September 30, 2005, or for prior periods, we are not in compliance with our
current reporting obligations under the Securities Exchange Act of 1934.

As discussed above, we have not been able to restate or provide financial statements for any period prior to October 1, 2005.
Until the filing of the Forms 10-Q and Form 10-K for 2008 we were unable to comply with the financial statement requirements for an Annual Report on
Form 10-K under the Exchange Act. Our failure to comply fully with our reporting requirements under the Exchange Act could result in the SEC deregistering our common stock under the
Exchange Act and/or imposing civil penalties on us.

Our
failure to comply fully with our reporting requirements under the Exchange Act precluded us from registering any offer or sale of our securities with the SEC. In addition, we will
not be eligible to use a "short form" registration statement on Form S-3 until we have been current and timely in our periodic reporting obligations for 12 months, which
could increase the cost of raising capital through the issuance and sale of equity. Furthermore, requirements under the Exchange Act regarding the information that must be provided to shareholders in
connection with an annual meeting of shareholders may preclude us from taking certain actions intended to increase the attractiveness of our common stock and facilitate relisting on a national
exchange, as discussed below.

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

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

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

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ITEM 1B.    UNRESOLVED STAFF COMMENTS

None

ITEM 2.    PROPERTIES

Our executive offices and principal R&D facility is located in Camarillo, California and is leased pursuant to a
non-cancellable operating lease that was scheduled to expire in January 2009. In September 2008, the company extended the term of this lease through January 31, 2014 with an annual
base rent of $1.2 million. The total space occupied in this building is approximately 111,000 square feet. In March 2001, we purchased an additional 58,000 square foot facility located in
Camarillo for product development which was sold and leased back. We also owned a 107,000 square foot facility in Colorado Springs, Colorado, which was the site of our wafer fabrication facility until
its closure in 2004, and was used as a design center until 2007. We sold this facility in December 2008 (See Note 13Subsequent Events). We also lease space in 18 additional
locations that include domestic and international offices in California, Denmark, Germany, India, Massachusetts, Oregon, and Texas. Our sales and field support offices are located in the United
States, Canada, Europe, China, Japan, Germany, and Taiwan. As of September 30, 2008, we owned space of approximately 107,000 square feet and leased space of approximately 271,000 square feet.
The Company's current space is sufficient to accommodate current operations.

ITEM 3.    LEGAL PROCEEDINGS

We and certain current or former directors and officers of Vitesse were named in multiple shareholder derivative and securities class
actions. These actions were filed starting in April 2006 and are based on allegations of stock option backdating and accounting manipulations. We also have received a grand jury subpoena from the
United States Attorney's Office and have been notified that the SEC is conducting an investigation of Vitesse.

The Derivative and Securities Class Actions

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

On
August 11, 2008, the Court granted final approval of settlements in the federal and state derivative actions filed on behalf of Vitesse against certain current or former
directors and officers of Vitesse, and nominally against Vitesse alleging claims for breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets, unjust enrichment,
constructive trust, rescission, accounting manipulations, and violations of California Corporations Code §§25402 and 25403. As part of the settlement of the federal and state
derivative actions, three former executives of Vitesse, Messrs. Tomasetta, Hovanec, and Mody, released the Company from all rights to future indemnification and costs of defense in the related
SEC and Department of Justice investigations. Vitesse retains the right to continue its state court action against KPMG, LLP, its former independent registered public accounting firm. Vitesse will
also contribute 4,700,000 shares of Vitesse common stock, with a fair

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market
value of $4.2 million to cover the attorneys' fees and expenses of the derivative plaintiffs' counsel, and has adopted certain Corporate Governance measures. The Court entered final
judgment implementing all of the above referenced terms and the case is concluded in all respects, except that the Court referred to a retired Federal District Court Judge (serving as a "Special
Master") the sole issue of determining whether the derivative plaintiffs' counsel are entitled to the full 4,700,000 shares as their legal fees.

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

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

The Dupuy Action

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

Notification of Default under Indenture relating to Subordinated Debentures

On August 15, 2006, the Company received notification from the Trustee under the Indenture relating to the Company's 1.5%
Convertible Subordinated Debentures due 2024 alleging compliance deficiencies under the Indenture relating to the Company's failure to file, with the Securities and Exchange Commission and the
Trustee, the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2006. The Trustee issued the Company a Notice of Default and Attempted to accelerate
payment on the Debentures. Although the Company did not believe there were compliance deficiencies under the Indenture, and that an Event of Default did not occur, the Company negotiated a resolution
to the dispute with the holders of a majority of the Debentures that, among other things, rescinded and annulled the previous asserted acceleration of the Debentures and asserted Events of Default.
The Company entered into a Second Supplemental Indenture that increased the interest payable on October 1, 2007 by $20.00 per $1,000 principal amount of the Debentures.

The DOJ Subpoena and SEC Investigation

In May 2006, we received a grand jury subpoena from the office of the United States Attorney for the Southern District of New York
requesting documents from 1999 through the present. We have also been notified by the Division of Enforcement of the SEC that it is conducting an investigation of Vitesse. The Division of Enforcement
has requested documents from January 1, 1995, through the present. Vitesse has cooperated with both government agencies in their investigations, which are still on-going.

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KPMG Lawsuit

On June 13, 2007, we filed a lawsuit in the Superior Court for the County of Los Angeles against our former independent
registered public accounting firm KPMG, LLP ("KPMG") alleging KPMG failed to properly provide auditing and other services during the time period 1994 to 2000. The complaint seeks damages in
excess of $100 million resulting from KPMG's audit failures. As of the date of filing this Annual Report, the case is pending.

Potential Payroll Tax Liabilities Related to Backdating of Stock Options

As of September 30, 2008, we have accrued a $1.9 million liability for payroll taxes, penalties and interest related to
exercises of backdated stock options during the calendar years 2004 through 2006. During this period, certain non-qualified stock options were improperly classified and treated as
incentive stock options for tax purposes. On October 5, 2007, we informed the Internal Revenue Service ("IRS") of these potential payroll tax liabilities resulting from changes in measurement
dates for stock options. No formal settlement negotiations have taken place, however we have received requests from the IRS for information relating to the potential payroll tax liabilities that were
identified as a result of our stock-option review. We are working with the IRS to provide the requested information in an effort to settle these potential liabilities.

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

None.

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PART II

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

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

Fiscal Year Ended 2008

High

Low

CloseOctober 1 through December 31, 2007

$
1.16

$
0.80

$
0.87January 1 through March 31, 2008


0.94


0.61


0.67April 1 through June 30, 2008


0.74


0.61


0.64July 1 through September 30, 2008


0.94


0.49


0.54Fiscal Year Ended 2007October 1 through December 31, 2006

$
1.38

$
0.84

$
0.87January 1 through March 31, 2007


1.15


0.74


1.12April 1 through June 30, 2007


1.40


1.04


1.15July 1 through September 30, 2007


1.25


0.95


0.96


As
of September 30, 2008, we had 1,498 shareholders of record. Because many of our shares are held by brokers or other institutions on behalf of shareholders, we are unable to
state the total number of beneficial owners of our common stock.

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

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Five-Year Stock Performance Graph

The following performance graph compares the cumulative total shareholder return on our common stock with the NASDAQ Stock
Market-U.S. Index and the NASDAQ Electronics Components Index from market close on the last trading day in September 2003 through the last trading day in September 2008. The graph is based
on the assumption that $100 was invested in each of our common stock, the NASDAQ Stock Market-U.S. Index and the NASDAQ Electronic Components Index on the last trading day in September
2003.

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

COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN
AMONG VITESSE SEMICONDUCTOR CORP.,
NASDAQ MARKET INDEX (U.S.) AND NASDAQ INDUSTRY GROUP INDEX

GRAPHIC

ASSUMES $100 INVESTED ON SEPTEMBER 30, 2003
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING SEPTEMBER 30, 2008

ITEM 6.    SELECTED FINANCIAL DATA

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

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

As of and for the years ended
September 30,2008

2007

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

$
218,536

$
221,948

$
203,289Licensing revenues


10,000





Revenues


228,536


221,948


203,289Income (loss) from operations


8,378


(1,799
)

(50,094
)Income (loss) from continuing operations


7,510


(4,825
)

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


9,044


(16,822
)

(15,282
)Net income (loss)


16,554


(21,647
)

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

$
0.03

$
(0.02
)
$
(0.23
)Discontinued operations


0.04


(0.08
)

(0.07
)Net income (loss) per share

$
0.07

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


223,614


223,556


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

$
36,722

$
33,576

$
28,653Working capital


49,198


55,287


14,431Total assets


292,277


327,348


352,199Long-term debt


126,123


155,118


146,752Total shareholders' equity


125,361


106,243


117,810


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

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

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

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



Overview

Over the last 10 years, the proliferation of the Internet and the rapid growth in the volume of data being sent over LANs and
WANs has placed a tremendous strain on the existing communications infrastructure. Communication service providers have sought to increase their revenues by delivering a growing range of data services
to their customers in a cost-effective manner. The resulting demand for increased bandwidth and services has created a need for faster, larger, and more complex networks. Additionally, due
to increasing needs for moving, managing, and storing mission-critical data, the market for storage equipment has been growing significantly.

We
are a leading supplier of high-performance ICs principally targeted at systems manufacturers in the communications and storage industries. Within the communications
industry, our products address Carrier and Enterprise networking where they enable data to be transmitted at high-speeds and processed and switched under a variety of protocols. In
storage, our products address primarily Enterprise-class storage systems and blade servers using Fibre Channel protocols. Our customers include leading communications and storage OEMs.

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In
recent years, we have focused our product development and marketing efforts on products that leverage the convergence of Carrier and Enterprise networking onto IP-based
networks. These Next- Generation Networks share the requirements of high reliability, scalability, interoperability, and low cost. Increasingly, these networks will be delivered based on
Ethernet technology. We believe that products in this emerging technology area represent the best opportunity for us to provide differentiation in the market.

Options Backdating and Accounting Irregularities

Chronology of Events

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

April 2006

Vitesse's Board of Directors appointed a Special Committee of independent directors to conduct an internal investigation relating to past stock option grants, the timing of such grants, and related accounting and
documentation for stock option grants from January 1, 2005 to April 2006. The results of this review are discussed below at "The Special CommitteeFindings and Recommended Actions."Due to their involvement with the stock option grant process, the Board of Directors placed Louis R. Tomasetta, Chief Executive Officer, Eugene F. Hovanec, Executive Vice President and former Chief Financial Officer,
and Yatin Mody, Chief Financial Officer and former Controller, on administrative leave, ultimately terminating them in May of 2006.The Board of Directors determined that the following should not be relied upon:

Vitesse's previously reported financial statements for the three months ended December 31, 2005, and the three years ended September 30, 2005, and possibly earlier periods;

The Management Report on Internal Control over Financial Reporting as of September 30, 2005, which was included in the Company's Annual Report on Form 10-K for the year ended September 30, 2005;
and

The Auditor's Report of KPMG, LLP, the Company's former independent registered public accounting firm, relating to the effectiveness of the Company's internal controls over financial reporting and management's
assessment thereof as of September 30, 2005, which was included in the Company's Annual Report on Form 10-K for the year ended September 30, 2005.May 2006

Vitesse received a grand jury subpoena from the office of the United States Attorney for the Southern District of New York requesting documents from 1999 through the present relating to the granting of stock
options.Vitesse received notification from the SEC's Division of Enforcement that it was conducting an investigation of Vitesse. That notification included a request for documents from January 1, 1995, through the present
relating to the grant of stock options.


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June 2006

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

Vitesse received an acceleration notice from the Trustee under the Indenture for $96.7 million. Negotiations to resolve the dispute continued with a majority of the holders of the 2024 Debentures, who agreed to
instruct the Trustee to forbear from taking any further action with respect to the 2024 Debentures for a period of 14 days.September 2006

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

Rescinded and annulled the previous asserted acceleration of the 2024 Debentures and any Events of Default asserted in connection with that asserted acceleration;

Provided that our failure to file required reports with the SEC would not be a Default or Event of Default under the Indenture prior to the earlier of (A) the date on which we have filed all our required reports
with the SEC for a period of 12 consecutive months and (B) December 31, 2012; and

Increased the interest payable at the October 1, 2007 interest payment date by $20.00 per $1,000 principal amount of the 2024 Debentures.November 2006

We completed a second Consent Solicitation of the holders of Vitesse's 2024 Debentures resulting in the following:

The holders of the Debentures and the Trustee under the Indenture agreed that, for 18 months after effectiveness of the amendments the Trustee would forbear from taking any action to exercise any rights or
remedies that relate to the filing of reports required under the Exchange Act;

The Company agreed not to repay the Debentures pursuant to the purported acceleration request sent by the Trustee to the Company during the last six months of the forbearance period;

The Company and the holders of the Debentures agreed to amend the Indenture to decrease the conversion price of the Debentures permanently from $3.92 per share of Vitesse's common stock to $2.546 per share of
Vitesse's common stock, subject to further adjustment as set forth in the Indenture; and

The Company agreed to increase the repurchase price with respect to the October 1, 2009 repurchase right from 100% to 113.76% of the principal amount of the Debentures to be purchased, plus accrued and unpaid
interest (the October 1, 2014 and October 1, 2019 repurchase rights would not be changed).December 2006

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


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June 2007

The Board of Directors engaged BDO Seidman, LLP as Vitesse's independent registered public accountants.Vitesse sued KPMG, LLP for malpractice, seeking damages in excess of $100 million.July 2007

The Board of Directors announced a new policy for soliciting recommendations from shareholders to identify director candidates and the Company reiterated that it was precluded by SEC regulations from calling an annual
meeting of shareholders to elect directors until it could comply with the federal proxy rules that require the Company to provide audited financial statements to its shareholders prior to such a meeting.October 2007

Vitesse entered into a proposed settlement of all federal securities class action claims that were filed against the Company and all related federal and state shareholder derivative actions relating to allegations of
stock option backdating and accounting manipulations. The proposed settlement is discussed in more detail under "Legal Proceedings."April 2008

The District Court approved the settlement of the consolidated securities class actions filed against Vitesse and certain current or former directors and officers of Vitesse alleging violations of §§10(b) and
20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder on behalf of a class of purchasers of Vitesse common stock. The settlement is discussed in more detail under "Legal Proceedings."August 2008

The District Court granted final approval of settlements in the federal and state derivative actions filed on behalf of Vitesse against certain current or former directors and officers of Vitesse, and nominally against
Vitesse alleging breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets, unjust enrichment, constructive trust, rescission, accounting manipulations, and violations of California Corporations Code §§25402
and 25403. The settlement is discussed in more detail under "Legal Proceedings."September 2008

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

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


The Special CommitteeFindings and Recommended Actions

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

Stock Options

The Special Committee found that:



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

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

Revenue Recognition and Inventory

As part of its investigation into the Company's option practices, the Special Committee found evidence of the following improper
accounting practices:



Moreover,
the Special Committee found evidence that certain officers and employees prepared and altered documents and our financial records in an attempt to conceal some of these
practices from our

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Board
of Directors and our then independent public accountants, KPMG, LLP. All of the employees identified by the Special Committee as having been aware of, and involved with, these accounting
issues are no longer employed by us. In addition, in its report the Special Committee directed management to undertake the necessary steps to remediate the shortcomings in its accounting environment.

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

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

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



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

The
Company's additional key option-related findings are summarized below.

Pre-IPO Stock Option Grant Findings

Fair market value strike prices were supported by insufficient anecdotal evidence. As part of the review, the Company employed two
different methodologies in estimating the fair market value of the Company's common stock on the grant dates including: (i) analysis of pre-IPO financing; and (ii) analysis
of competitors (industry multiples analysis). Other errors noted included apparent clerical errors in recording grant dates.

Inappropriate Accounting for Grant Modifications

Several grant agreements were modified by the Company. These modifications involved regrants, rehires, repricings, grants to
non-employees, extensions of exercise windows, accelerated vesting, and changes in status. The modifications triggered variable accounting, however, such accounting treatment

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was
not applied by the Company at the time of the modification. The effects of variable accounting for these modifications have been included in the Company's restated accumulated deficit at the
beginning of the year ended September 30, 2006.

Inappropriate Reflection of the Measurement Date and Option Pricing

Several grants were found to have measurement dates that differed from the grant date reflected in the Company's accounting records as
determined under APB 25,"Accounting for Stock Issued to Employees."In many cases, the difference between the grant date and the measurement
date resulted in intrinsic value for the grants that was not recognized and recorded by the Company at the time of the grant. The granting of options with exercise prices that were lower than the fair
market value of the stock on the actual measurement dates did not satisfy the fair market pricing requirement in the Company's stock option plans and was inconsistent with the Company's disclosures in
its SEC filings, which stated that in all cases the exercise price of Company options would be equal to the fair market value of the stock on the date of the grant.

The
relationship between the stated exercise price of options and the fair market value of the Company's stock on the date of the identifiable approval actions varied from grant to
grant. In some cases, the exercise price of grants reflected the fair market value of the underlying shares on the date of documented approval action. In other cases, the exercise prices reflected the
fair market value of the underlying shares on a date either prior or subsequent to any such documented approval action and the exercise price was lower than the fair market value on the date of any
such action. In some cases, the use of such grant dates, lower exercise price, and other available evidence supported a finding that the recorded grant dates and corresponding exercise prices were
selected with the benefit of hindsight.

Grant Approvals

During the Company's review of option grants, many option grants were found to have not been approved in accordance with the Company's
stock option plans. The Company found some instances where there was no formal evidence of approval of option grants or modifications by the Board of Directors or Compensation Committee that was
called for under the stock option plans. The Company also noted that there were instances where option agreements were signed without being dated by either the Company's management or the individual
receiving the grant or there were other inadequacies in documentation to reflect adequate formal approval. As part of its review, the Company obtained evidence to support approval where there were
shortfalls in formalized documentation.

Internal Controls

As noted above, the Company's historical administration of its options program demonstrated certain shortfalls relating to proper
adherence to plan requirements, corporate recordkeeping, documentation, and proper accounting treatment for transactions. The Company has implemented, and is in the process of implementing, procedures
and controls to strengthen the Company's controls relating to its recording and reporting of stock option transactions.

Restatement Methodologies

As of October 1, 2005, the Company adopted Statement on Financial Accounting Standards ("SFAS") 123(R), "Share-Based Payment,"using
the modified-prospective transition method. Under this transition method, compensation expense is to be recognized for all
share-based compensation awards granted following the date of adoption as well as for all unvested awards existing on the date of adoption. Prior to October 1, 2005, the Company accounted for
share-based compensation awards using the intrinsic method in accordance with APB 25, as allowed under SFAS 123,"Accounting for Stock-Based
Compensation"("SFAS 123"). Under the intrinsic value method, no share-based

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compensation
expense is recognized if the exercise price of the stock option was at least equal to the fair market value of the common stock on the "measurement date." APB 25 defines the
measurement
date as the first date on which both the number of shares that an individual grant recipient is entitled to receive and the option or purchase price, if any, are known.

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

As
a result of the problems identified above, the Company undertook a project with the help of its consultants to reflect the appropriate measurement dates and related intrinsic value
information in its accounting records. As a result of this analysis, the Company recognized an additional $268.8 million in compensation related expenses, before taxes, related to fiscal years
prior to and including the year ended September 30, 2005. In addition to the compensation expense resulting from the correction of option measurement dates, the Company recognized expense for
payroll taxes, interest, and penalties related to the historical underreporting of employees' gains on the exercise of misdated options. It is the Company's intent to pay the employee payroll taxes
and related interest and penalties resulting from the misdating of stock options. Accordingly, the Company has recorded an additional expense and related liability for these amounts, totaling
$1.9 million through September 30, 2008.

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

Remedial Actions of the Company

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

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



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

Industry Trends and Characteristics that Affect Our Business

In order to achieve sustained, increasing profitability, we must achieve a combination of revenue growth, increases in margins, and
reductions in operating expenses. Through fiscal 2008 and 2007, we focused on improving each of these components of our financial model. From
2007 to 2008 we increased revenue by 3.0%, including $10 million in license fees, reduced our costs of revenue in 2008 from 2007 by 6.5%, and also continued to reduce operating expenses, which
are down 1.6% from 2007 to 2008. We increased revenue in fiscal 2007 from fiscal 2006 by 9.2% and also reduced operating expenses, which were down 11.7% in 2007 from 2006.

Our
ability to achieve sustained revenue growth will depend on several factors including increasing demand from our end markets, our ability to capture and maintain market share in
growing markets,

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the
rate at which these new markets ramp into production, and the continuing trend by systems companies to outsource the designing and manufacturing of ICs to companies such as ours. Following a
substantial downturn that started in late 2000 and continued for many years, market conditions began to improve modestly in 2005, and generally, have continued to improve through 2008. During this
time, our revenues have been generally increasing, but tend to be volatile. Many of our major customers and the industry in general, have been going through substantial consolidations, increasing the
unpredictability of these end markets. In spite of these difficult business conditions, we believe that the long-term prospects for the markets that we participate in remain strong. Our
future revenue opportunities will, in part, be determined by our ability to participate and capture new "design wins" within our major customer base. This depends in large part on our ability to
develop, deploy, and sell these products in a timely manner with features that compete effectively against the competitors in our markets.

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

Our
ability to improve margins depends upon several factors, including our ability to continue to reduce our cost of revenues, including our wafer, assembly, and test costs, our ability
to improve manufacturing yields, our ability to continue to migrate our products to next-generation process nodes, and our ability to reduce average selling price ("ASP") erosion. We are a
fabless semiconductor company. We outsource a substantial amount of our manufacturing, including 100% of our wafer and package assembly fabrication. As such, we must manage our supply chain
efficiently to ensure competitive materials pricing and effective lead-times for the materials that we purchase. The semiconductor industry in which we compete is highly cyclical.
Typically, in periods of strong demand in the semiconductor industry, we may experience longer lead times, difficulties in obtaining capacity and/or meeting commitments to our required deliveries. In
addition, we are subject
to occasional supply chain issues such as EOL notices on certain material and/or products that may impact our ability to continue to support certain products that may impact revenue and/or require us
to incur additional costs to provide alternative sources.

Improving
product yields is critical to maintaining and improving our cost of revenues. We have a team of engineers focused on yield improvements. Yields are affected by a variety of
factors including design quality, wafer fabrication, assembly and test processes and controls, product volumes, and life cycles. We work closely with all our manufacturing subcontractors to improve
product manufacturability and yields. We manufacture a wide variety of products, some at low volumes, which likely limits our ability to improve yields on some products. Cost of revenues are also
impacted by the ASP of our products, which is primarily determined by competitive factors within the specific markets we serve. Average margins vary widely within the markets we serve, with the
Carrier Networking market having the highest average margins and the Enterprise Networking market having the lowest average margins. We endeavor to increase margins by providing products that have
substantial added value relative to our competition.

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Over
the last three years, we have focused on improving our operational efficiencies. We reduced our operating expenditures from $140.7 million in 2006 to $113.8 million in
2008. We continue to focus on research and development ("R&D") and selling, administrative and general costs ("SG&A") that are the major elements of operating expense. To remain competitive, we must
efficiently deploy our R&D resources into markets that will provide our future revenue growth. Our R&D costs were reduced from $66.4 million in 2006 to $50.0 million in 2008 through
several cost reduction efforts including closing of our InP fabrication facility in Camarillo, California, and a substantial reduction in the costs of our CAD tools used to execute our designs. We
believe that the majority of our R&D cost reductions have been in areas outside our strategic focus and were achieved through leveraging design efficiencies derived from standardization on
Ethernet-based products. In addition, we have begun to grow our Hyderabad, India, design center, where we can more efficiently execute product verification and validation. Our India design center has
been re-targeted from storage products onto products for Carrier and Enterprise Networking applications. We continue to focus our R&D efforts and to seek opportunities to more efficiently
deploy our R&D resources into larger, growing markets. In 2007, we created a Strategy and Technology Office to better identify and exploit emerging opportunities in the marketplace.

It
is critical that we efficiently deploy our capital. We have continued to improve the critical operational metrics of the company, reducing cycle times, reducing total inventory, and
reducing the ratio of slow-moving and obsolete inventory.

As
is common in the industry, we sell semiconductor products directly to OEMs and also use a number of distributors and logistics providers to sell products indirectly to our
customer base. These channel
partners enable us to provide improved customer support and local inventory to our highly distributed customer base. Our direct gross shipments to customers, before adjustments, were
$55.3 million in 2008, $54.2 million in 2007, and $34.6 million in 2006. Our indirect gross channel shipments, before adjustments, were $175.6 million in 2008,
$190.7 million in 2007, and $186.8 million in 2006. Our accounting policy is to include all distributor channel inventory on our balance sheet as part of the "sell-through"
model. The "sell-through" model recognizes revenue upon shipment of the merchandise from our distributor to the final customer. Our sales are distributed geographically across the world.
In 2008, 51% of our sales were to North America, 38% to Asia, and 11% to Europe. In 2007, 52% of our sales were to North America, 34% to Asia, and 14% to Europe. In 2006, 54% of our sales were to
North America, 33% to Asia, and 13% to Europe.

We
market and sell our semiconductor products directly to leading OEMs as well as through third-party electronic component distributors and manufacturing service providers. For
fiscal 2008, 2007, and 2006, distributors Nu Horizons Electronics, Corp., including their subsidiary Titan Supply Chain Services, accounted for 48.8%, 50.1%, and 55.1%, respectively, of our net
revenues. For fiscal 2008 and 2007, Weikeng Industrial Co. Ltd. accounted for 9.2% and 7.1%, respectively, of our net revenues. IBM was the only customer other than our distributor
channels that accounted for more than 10% of revenues in both fiscal year 2008 and 2007. No customers accounted for more than 10% of our revenues in fiscal year 2006.

Significant Events During Our Last Three Fiscal Years

A materially complete outline of the significant recent events with regard to the various legal, accounting, and regulatory issues that
the company has faced since the end of its September 30, 2005 fiscal year is located under "Business-Timeline of Events Since 2006" and should be read in conjunction with this section for a
complete update of the significant events at the Company during that time. This section outlines the significant business and financial events and trends within the last three years.

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Impact of Recent Events

Beginning April 18, 2006 and described in detail earlier in Item 7- Overview, the discovery of certain
accounting issues with respect to our historic
options grant practices precipitated a variety of challenges for the Company including:



While
these challenges had a significant impact on the Company, they have not deterred us from making the changes required to improve our financial performance, increasing the efficiency
of our operations, re-focusing our strategic direction, and rebuilding the morale and culture of Vitesse.

Our Operational Philosophy

We believe, first and foremost, that we must compete from a position of financial strength and stability. While we are a leader in many
of the markets we serve, we are a small semiconductor company, and thus we must find the appropriate balance between near-term operational performance and long-term growth
prospects that are enabled through investment in R&D. The strategic investments made in the last six years to transform the Company have been considerable. During much of this time, and until just
recently, Vitesse made several large acquisitions and spent well over 40% of revenue on R&D to fund this transformation. As a result, our operating performance has been poor. During the last two
years, our new management team has executed a transformation in the operating principles of the company. From 2006 through present we have taken specific actions to strengthen our financial position
in an effort to reach sustained profitable performance. We have:



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Our Strategy

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



We
continue to strengthen our business with a focus on improving operational performance and execution, creating efficiencies in our R&D efforts, and identifying critical emerging growth
opportunities that can be addressed with our available resources. Our efforts in operations include reduction in materials costs and cycle times, improved product yields, implementation of programs
such as lean manufacturing, and an increased emphasis on the importance of our customers. We are improving the efficiency of our R&D primarily by focusing our resources on two large, but independent
markets: Carrier Networking and Enterprise Networking. Both of these markets rely increasingly on Ethernet technology to deploy next-generation networks and services, which allows us to
maximize the impact of our R&D budget. We believe these focused efforts will provide us attractive opportunities to address emerging growth markets within these large traditional networking markets.

Our Business Product LinesHistorically

Historically, our products were primarily focused on networking and storage infrastructure equipment applications. In 2007 and 2006, we
classified revenues into three major product lines: Networking, Ethernet, and Storage. While we carry multiple product lines, the business operations are singularly deployed across all products.

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Networking Products

Networks are often classified into three broad categories called Carrier Networks, Enterprise Networks, and Storage Networks.
Historically, Vitesse has provided a very broad range of semiconductor solutions for a variety of these networking applications. Our customers build networking equipment for these networks that use
standard communication protocols such as SONET/SDH, ATM, Ethernet, Fibre Channel, SAS/SATA, and others. In recent years, our Networking Products group has focused on enabling Ethernet, the primary
protocol used in local LANs, to be deployed more broadly across a network. The first example of this is Ethernet being transported directly on the SONET/SDH protocol in Carrier Networks. EoS has
increasingly become the predominant protocol in next-generation SONET/SDH equipment. Products developed for EoS applications are finding applications in Enterprise and Storage Networks as
well. From a product development and application perspective, this evolution towards Ethernet-based technology is blurring the traditional lines between the three broad categories of the network. In
the future, it is anticipated that many applications within all these network categories will depend primarily on similar technologies all based on GbE, 10 GbE, and future higher-speed versions of
Ethernet. In Carrier Networks, these will increasingly be delivered over wavelength using data-optimized transport technologies such as OTN.

The
growth in the overall volume of data traffic has resulted in the need to handle increasing data rates within all networks. As an example, five years ago, data rates of 10 Gbps were
limited to long-haul Carrier Networks. Today, these data rates are being used in various applications within enterprises, such as in high-speed connections between servers and
in switching video signals. Further, new services such as VoIP, HDTV, and IPTV are driving bandwidth needs at the residential level, thereby, motivating service providers such as AT&T, Verizon, NTT,
and others to deploy high-speed, broadband services including DSL, cable, and FTTH. Because Vitesse develops products primarily for these high-speed applications, we anticipate
that these trends will significantly increase our future addressable market.

Vitesse
provides a variety of products into these applications. These generally include: (i) Ethernet-over-SONET Mappers, SONET Framers and Switches;
(ii) Optoelectronic Physical Media Devices and Physical Layer Devices such as transceivers and CDRs; (iii) Signal Integrity Products including backplane transceivers, CDRs, and
crosspoint switches; and (iv) Network Processors and Packet Switching Fabrics.

Ethernet Products

Ethernet has been the predominant transmission protocol technology in LANs for many years. Typically these networks operate at speeds
of 10 Mbps, 100 Mbps (Fast Ethernet), 1 Gbps (Gigabit Ethernet) or 10 Gigabit Ethernet. Most desktop computer connections today support either 10 Mbps or 100 Mbps data rates, though Gigabit Ethernet
is beginning to appear on the desktop. To support the migration of desktops to these higher data rates, LAN backbones and servers are increasingly employing the Gigabit Ethernet and 10 Gigabit
Ethernet standards. Industry observers also expect the transition to Gigabit Ethernet to continue to accelerate, which we believe would result in a significant increase in demand for related
components in that time frame.

In
addition, Ethernet technology is becoming more widely deployed into networks outside of the LAN. The low-cost and ease of maintenance provided by Ethernet-based networks
are driving adoption within broad elements of Carrier, Enterprise, and data center networking applications, which is expected to expand our addressable market for Ethernet products.

Vitesse
provides a variety of products into Ethernet applications. These generally include: Ethernet MACs, switches, and routers; GbE Cu PHYs; and Integrated Cu PHY and switch products.

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Storage Products

The growth of the Internet and the resulting need to manage, move, and store increasing amounts of mission-critical data has led to
increasing demand for storage systems and has also resulted in changes in the way companies are connecting these systems. These alternative topologies have resulted in the emergence of new and faster
protocols to meet the needs of the storage system manufacturers and their end customers. For example, while earlier SANs used a standard interface protocol known as SCSI, newer SANs, which require
networking at high-speeds over long distances, have used Fibre Channel, a practical, and expandable standard that enables high-speed data transfer among workstations, mainframes, data
storage devices, and other peripherals. We have been a leading provider of Fibre Channel-based ICs since the inception of this standard over 10 years ago. Recently, two other protocols emerging
in the storage market are SAS and SATA. These are the serial evolution of the SCSI and ATA interfaces, respectively, that are used in most computers and disk drives today. Both SAS and SATA are
expected to expand the market for lower-cost storage networks that do not require the performance or robustness that Fibre Channel offers. Further, SAS is expected to replace SCSI as the
primary protocol in connecting servers to storage devices as it significantly increases the data transfer rate between these devices.

Vitesse
has provided a variety of products into Storage applications. These generally included: (i) Fibre Channel physical layer components; (ii) SAS-SATA
expanders and enclosure management products; (iii) SAS Raid-on-Chip processors; and (iv) Signal Integrity products (protocol-agnostic PHYs, CDRs, and crosspoint,
switches).

In
August 2007, we announced that we were divesting substantial portions of our Storage Products business to focus on Ethernet networking for Carriers and Enterprises. Effective October
2007, Vitesse sold the majority of its products for SAS/SATA and enclosure management to Maxim, Inc. as part of this divestiture. We still provide the following products into Storage systems:
(i) Fibre Channel physical layer components; (ii) SAS Raid-on-Chip Processors; and (iii) Signal Integrity products.

Our Business Product Lines2008 Classifications

Beginning in 2008, Vitesse classified revenues into three markets: Carrier Networking, Enterprise Networking, and Non-Core.
The new classification of these revenue streams better reflect the major trends in our product lines and how they map into our customer base.

Carrier Networking

The telecommunications Carrier network, which includes networks delivering voice and data services, has grown dramatically to a complex
combination of networks. These networks are often classified into groups such as WANs, MANs, MSANs, and RANs. Each of these types of networks has its own set of technical and operational challenges.
These evolving networks must deliver more bandwidth and provide increasing data-based capabilities to provide "quadruple play" services that integrate voice, data, and video traffic over
both wired and wireless networks. To address this problem, Carriers are increasingly trying to map Ethernet services and connectivity more efficiently into their existing networks. They may even
replace their legacy network with new all-IP/Ethernet-based networks. Broadly, Ethernet technology upgraded to meet these requirements is being referred to as "Carrier Ethernet." It is, in
effect, an adaptation of Ethernet to provide the same features and functions that have traditionally been provided by "telecom" protocols such as SONET/SDH, Plesiochronous Digital Hierarchy ("PDH"),
etc. Because of the complexity of the Carrier networks, products sold into these applications have long design cycles, typically two to four years from design start to production, and long life
cycles, typically five to 10 years or more.

Vitesse
provides a variety of products into Carrier Networking applications. These generally include: (i) Ethernet-over-SONET mappers, SONET framers and
switches; (ii) Optoelectronic PMDs

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and
physical layer devices such as transceivers and CDRs; (iii) Signal Integrity Products including backplane transceivers, CDRs, and crosspoints switches; (iv) Ethernet MACs and
switches; (v) GbE Cu PHYs; and (vi) Next-generation OTN mappers.

Enterprise Networking

Enterprise Networks generally include equipment dedicated to the communication of voice and data services within large enterprise
organizations. An Enterprise Network will typically be comprised of one or more LANs, computer systems including workstations and servers, as well as one of more SANs. Enterprise Networks will also
typically include broadband connections to Carrier Networks for the broader communication of voice and/or data outside of the enterprise. Enterprise Networks are often classified into groups depending
on their size and complexity. Typical categories are large Enterprise, data center switching, SME, SMB, and SOHO. Similar to Carrier Networks, Enterprise Networks are going through an evolution to
provide more bandwidth, and more reliability, interoperability, and scalability. Ethernet-based networks, which are already widely deployed in LANs, are becoming more prevalent in other enterprise
applications such as data center switching
and SANs. Enterprises are paring down their multiple networks (telephone, LAN, video conferencing, wireless, and remote mirroring/backup) to a common switched IP/Ethernet-based infrastructure.
Ethernet technology that is being upgraded to meet these new requirements is generally being referred to as "Converged Enhanced Ethernet." In addition, Enterprise Networks are migrating from fast 100
Mbps Ethernet to Gigabit Ethernet and from Gigabit Ethernet to 10 Gigabit Ethernet. This transition is still in the early stages and expected to accelerate over the next several years. The complexity
of products within the Enterprise Networks varies dramatically based on the product application. Products at the "low-end" of the network, in SOHO, SME, and low-end SME
applications typically have fast design cycles on the order of six to 12 months and short life cycles, on the order of two to four years.

Products
sold into applications at the "high-end" of Enterprise such as data center switching and high-end SME have longer design cycles, typically one to two
years from design start to production, and long life cycles, typically three to five years or more. Vitesse provides a variety of products into Enterprise networking applications. These generally
include: (i) Ethernet MACs, switches, and routers; (ii) GbE Cu PHYs; (iii) Integrated Cu PHY and switch products; and (iv) Signal Integrity products including backplane
transceivers, CDRs, and crosspoint switches.

Non-Core

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

In
2006, we made the decision to close our Camarillo, California wafer manufacturing facility and to provide an EOL purchase to our customers using the GaAs and InP products manufactured
in the facility. The fab was closed in September 2007, after producing the EOL materials required to support our customers. The majority of the products being manufactured have since been replaced by
later-generation products manufactured by one of our wafer foundry suppliers.

In
conjunction with the sale of a portion of our Storage Products business to Maxim, we substantially reduced our investment in "SAS Raid-on-Chip" ("ROC")
products acquired from Adaptec by eliminating any future development efforts in these products. We terminated our Milpitas design team and re-deployed our Hyderabad, India, design team to
new products in Enterprise Networking. We continue to provide applications, sales, and manufacturing support to customers using our current generation ROC processor products.

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Intellectual Property

On December 28, 2007, the Company entered into an arrangement to license intellectual property to a third-party. The contract is
a perpetual, nonexclusive, non-transferable, irrevocable license for specified intellectual property. As part of the contract, we were granted a perpetual, nonexclusive,
non-transferable, irrevocable license to improvements to the technology made by the licensee, subject to certain limitations. Under the agreement, Vitesse will receive $15.0 million
in license fees and royalties for the rights to certain products and technology. Of the fees and royalty payments, $10.0 million were received upon delivery and acceptance of the licensed
technology. The remaining $5.0 million will be received upon the earlier of licensee's first commercial sale using the intellectual property or the one-year anniversary of the
agreement. For a period of seven years from the effective date of the contract, licensee will pay royalties on a per unit basis, on each commercial sale incorporating the licensed products. Royalties
will be accounted for when received.

Critical Accounting Policies and Estimates

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

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

Revenue Recognition, Sales Returns Reserve and Allowance for Doubtful Accounts

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

Vitesse
has a distribution network through which it sells most of its products. The Company recognizes revenue on a sell-through basis for all distributors, utilizing
information provided by the distributors. These distributors maintain inventory balances, which are carried on the books of Vitesse, and are given business terms to return a portion of inventory and
receive credits for changes in selling prices to end customers. At the time Vitesse ships inventory to the distributors, the magnitude of future returns and price adjustments is not known. Therefore,
revenue recognition for shipments to

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distributors
does not occur until the distributors sell inventory to end customers. Vitesse personnel are often involved with the sales from the distributors to end customers.

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

We
record a reserve for estimated sales returns and allowances in the same period as the related revenues are recognized. Sales returns typically occur for quality related issues and
allowances are based on specific criteria such as rebate agreements. We base these estimates on our historical experience or the specific identification of an event necessitating a reserve. To the
extent actual sales returns or allowances differ from our estimates, our future results of operations may be affected. As of September 30, 2008 and 2007, our sales return reserve was $54,000
and $140,000, respectively.

We
also maintain an allowance for doubtful accounts for estimated losses resulting from customers' inability to meet their financial obligations to us. We evaluate the collectability of
accounts receivable based on a combination of factors. Management reviews accounts receivable on a monthly basis to determine if any receivables will potentially be uncollected. The Company includes
any accounts receivable balances that are determined to be uncollectible in the overall allowance for doubtful accounts using the specific identification method. After all attempts to collect a
receivable have failed, the receivable is written off against the allowance. Management believes the allowance for doubtful accounts as of September 30, 2008 and 2007, is adequate. However, if
the financial condition of any customer were to deteriorate, resulting in an impairment of its ability to make payments, additional allowances could be required.

On
December 28, 2007, the Company entered into an arrangement to license intellectual property to a third-party. The contract is a perpetual, nonexclusive,
non-transferrable, irrevocable license for specified intellectual property. As part of the contract, we were granted a perpetual, nonexclusive, non-transferrable, irrevocable
license to improvements to the technology made by the licensee, subject to certain limitations. Under the agreement, Vitesse will receive $15.0 million in license fees plus royalties for the
rights to certain licensed products and core technology. Of the fees, $10.0 million were received upon delivery and acceptance of the licensed technology. Specific deliverables to the licensee
were defined in the agreement and required acceptance from the licensee before payment was made. The remaining $5.0 million will be received upon the earlier of licensee's first commercial sale
using the intellectual property or the one-year anniversary of the agreement. For a period of seven years from the effective date of the contract, licensee will pay royalties on a per unit
basis, on each commercial sale incorporating the licensed products. Royalties will be accounted for when received.

In
accordance with Staff Accounting Bulletin No. 104,"Selected Revenue Recognition Issues"("SAB 104"), in the licensing of
technology and other intangibles, delivery does not occur for revenue recognition purposes until the license term begins. Revenues should be recognized in a manner consistent with the nature of the
transaction and related earnings process. Based on management's analysis of the license terms, and pursuant to the guidance in SAB 104, revenue related to the licensing of the intellectual
property was deferred until final acceptance of the contracted deliverables were received from the licensee. Confirmation of the deliverables was received in September 2008 and we recognized
$10.0 million in revenue in the accompanying financial statements. In addition to the license fees and royalties discussed above, we expect to develop a royalty stream as a result of this
contract.

Inventory Valuation

Inventories are stated at the lower of cost or market (net realizable value). Costs associated with the development of a new product
are charged to engineering, research and development expense as incurred, until the product is proven through testing and acceptance by the customer. At each balance

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sheet
date, the Company evaluates its ending inventories for excess quantities and obsolescence. This evaluation includes analyses of sales levels by product and projections of future demand.

We
write down our inventory for estimated obsolete or unmarketable inventory in an amount equal to the difference between the cost of inventory and the estimated market value based upon
assumptions about future demand and market conditions. If actual market conditions are less favorable than our estimates, additional inventory write-downs may be required. In the event we experience
unanticipated demand and are able to sell a portion of the inventories we have previously written down, our gross margins will be favorably affected.

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

Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the
net tangible and intangible assets acquired. The amounts and useful lives assigned to intangible assets acquired, other than goodwill, impact the amount and timing of future amortization, and the
amount assigned to in-process R&D is expensed immediately. The value of our intangible assets, including goodwill, could be impacted by future adverse changes such as: (i) any
future declines in our operating results; (ii) a decline in the valuation of technology company stocks, including the valuation of our common stock; (iii) another significant slowdown in
the worldwide economy or the semiconductor industry; or (iv) any failure to meet the performance projections included in our forecasts of future operating results.

We
account for goodwill and other intangible assets in accordance with the Statement of Financial Accounting Standards ("SFAS") No. 142,"Accounting for
Goodwill and Other Intangible Assets"("SFAS 142"). We evaluate these assets, including purchased intangible assets deemed to have indefinite lives, on an annual basis
in the fourth quarter, or more frequently, if we believe indicators of impairment exist or changes in circumstances indicate that the carrying value may not be recoverable.
Factors we consider important that could trigger an impairment review include significant underperformance to historical or projected operating results, substantial changes in our business strategy,
and significant negative industry or economic trends. If such indicators are present, we compare the fair value of the goodwill of our only reporting unit to its carrying value.

For
other intangible assets and long-lived assets, in accordance with SFAS 144,"Accounting for the Impairment or Disposal of
Long-Lived Assets"("SFAS 144"), we determine whether the sum of the estimated undiscounted cash flows attributable to each asset in question is less than
its carrying value. If less, we recognize an impairment loss based on the excess of the carrying amount of the assets over their respective fair values.

Fair
value of goodwill is determined by considering the Company's market capitalization, discounted cash flows, and a market approach as of the valuation date. In considering the
Company's market capitalization, an estimated premium to reflect the fair value on a control basis was applied. This premium was estimated based on an evaluation of control premiums identifiable in
comparable transactions. Market-based assumptions within the income and market approaches were used to estimate the fair value of our equity and the assets; discounted cash flows were used to value
debt. Fair value of other intangible assets is determined by undiscounted future cash flows, appraisals, or other methods. Fair value of long-lived assets is determined based on market
value. If the long-lived asset determined to be impaired is to be held and used, we recognize an impairment charge to the extent the fair value attributable to the asset is less than the
asset's carrying value. The fair value of the long-lived asset then becomes the asset's new carrying value, which we amortize over the remaining estimated useful life of the asset.

These
approaches use significant estimates and assumptions, including projection and timing of future cash flows, discount rates reflecting the risk inherent in future cash flows, and
long-term growth rates. It is reasonably possible that the estimates and assumptions used to value these assets may be

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incorrect.
If our actual results, or the estimates and assumptions used in future impairment analyses, are lower than the original estimates and assumptions used to assess the recoverability of these
assets, we could incur additional impairment charges.

Other
intangible assets, which consist primarily of technology and intellectual property, are amortized over their estimated useful lives. The remaining lives of these assets range from
one to two years.

Accounting for Share-Based Compensation

Effective October 1, 2005, we adopted SFAS No. 123R"Share-Based
Payments,"("SFAS 123R"), which requires all share-based payments, including grants of stock options and employee stock purchase rights, to be recognized in our
financial statements based on their respective grant date fair values. Under this standard, the fair value of each employee stock option and employee stock purchase right is estimated on the date of
grant using an option-pricing model that meets certain requirements.

We
adopted SFAS 123R using the modified-prospective transition method of recognition of compensation expense related to share-based payments. Under this transition method,
compensation expense recognized during the years ended September 30, 2008, 2007, and 2006 included: (i) compensation expense for all share-based awards granted prior to, but not yet
vested, as of September 30, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123; and (ii) compensation expense for all
share-based awards granted subsequent to September 30, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. The Company's consolidated
statements of operations for the years ended September 30, 2008, 2007, and 2006, reflect the impact of adopting SFAS 123R.

SFAS 123R
requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award
that is ultimately expected to vest is recognized as expense ratably over the requisite service periods. We have estimated the fair value of each award as of the date of grant or assumption using the
Black-Scholes option pricing model, which was developed for use in estimating the value of traded options that have no vesting restrictions and that are freely transferable. The Black-Scholes model
considers, among other factors, the expected life of the award and the expected volatility of the Company's stock price. Although the Black-Scholes model meets the requirements of SFAS 123R,
the fair values generated by the model may not be indicative of the actual fair values of our awards, as it does not consider other factors important to those share-based payment awards, such as
continued employment, periodic vesting requirements, and limited transferability. Because the share-based compensation expense recognized in the Statements of Operations for fiscal 2006 through 2008
is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those estimates. Changes in forfeitures from the estimates made at grant date could result in more or less non-cash compensation
expense in comparable periods.

Assets and Liabilities of a Business Held for Sale

In accordance with SFAS No. 144,"Accounting for the Impairment or Disposal of Long-Lived
Assets,"we classified the assets and liabilities of a business as held for sale when management approves and commits to a formal plan of sale and it is probable that the sale
will be completed. The carrying value of the net assets of the business held for sale are then recorded at the lower of their carrying value or fair market value, less costs to sell. As discussed in
Note 3Discontinued Operations and Assets Held for Sale in the accompanying financial statements, the Company announced the sale of a portion of its Storage Products business on
August 23, 2007, completing the sale on October 29, 2007. As of September 30, 2007, assets and liabilities of $35.5 million and $0.4 million, respectively, related
to

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our
Storage Products business were classified as held for sale. As of September 30, 2008, $3.2 million related to our Colorado building has been classified as held for sale.

On
September 15, 2008, we received an executed letter of intent from a third party to purchase the Colorado building. On October 8, 2008, we entered into an agreement with
a third-party to sell the Colorado land and building. The transaction closed on December 22, 2008. The gross sales price was $6.5 million. The facility was previously used for the
Storage Products business, which was discontinued and sold on October 29, 2007 and has remained unused since. As a result, the net book value of $3.2 million has been reported as 'Asset
Held for Sale' on the September 30, 2008 balance sheet. We will recognize a gain of approximately $2.9 million on this sale in the first quarter of fiscal 2009.

Income Taxes

The Company accounts for income taxes using SFAS No. 109,"Accounting for Income
Taxes"("SFAS 109"). Under SFAS 109, income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax
credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The
Company maintains a valuation allowance on the deferred tax assets for which it is more likely than not that the Company will not realize the benefits of these tax assets in future
tax periods. The valuation allowance is based on estimates of future taxable income by tax jurisdiction in which the Company operates, the number of years over which the deferred tax assets will be
recoverable, and scheduled reversals of deferred tax liabilities. FAS 123R allows the benefit related to deductible temporary differences attributable to nonqualified stock options to be
credited to additional paid-in-capital when realized. Because the Company is in a net operating loss position as of September 30, 2008 and 2007, it may not recognize a benefit for those
respective years.

In
assessing the realizability of deferred tax assets, management considers, on a periodic basis, whether it is more likely than not, that some portion or all of the deferred tax assets
will not be realized. As of September 30, 2008 and 2007, management has placed a valuation allowance against all deferred tax assets based on its overall assessment of the risks and
uncertainties. Accordingly, management believes the current valuation allowance on deferred tax assets is sufficient and properly stated at September 30, 2008 and 2007.

Research and Development

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

Valuation of Repurchase Right on Subordinated Debentures

In accordance with SFAS No. 133,"Accounting for Derivative Instruments and Hedging
Activities"("SFAS 133"), embedded derivatives must be bifurcated from the underlying debt instrument and valued as a separate financial instrument. We completed a
second Consent Solicitation of the holders of our 1.5% Convertible Subordinated Debentures due 2024 ("2024 Debentures") where we agreed to increase the repurchase price with respect to the
October 1, 2009, repurchase right from 100% to 113.76% of the principal amount of the Debentures to be purchased (the 'premium put'). We estimate

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the
approximate fair value of the premium put as the difference between the estimated value of the debentures with and without the premium put feature. Any gain or loss on the fair value of the
premium put is reflected in current earnings. The premium put was estimated to have no fair value as
of September 30, 2008 and 2007. Significant variables were considered in estimating the fair value of the premium put at each valuation date including: i) closing price of our stock;
ii) risk free rate curve data based on the U.S. Treasury curve; iii) volatility; iv) credit spread; and v) recovery amount payable in the event of exercise of the premium
put. Changes in one or more of these variables could create a change in the valuation of the premium put and result in expense in future periods.

Impact of Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 48, "Accounting for Uncertainty in Income
Taxes"an interpretation of FASB Statement No. 109 ("FIN 48"), which clarifies the
accounting for uncertainty in tax positions. This Interpretation requires that we recognize the impact of a tax position in our financial statements, if that position is more likely than not of being
sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006, with the cumulative effect
of the change in accounting principle recorded as an adjustment to opening retained earnings. Management adopted this pronouncement in the current year financial statements. The Company adopted the
provisions of Financial Accounting Standards Board Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"), an interpretation of SFAS No. 109, on
October 1, 2007 and assessed the impact of FIN 48 on its financial statements and determined that no adjustment to retained earnings is necessary.

In
September 2006, the FASB issued SFAS No. 157,"Fair Value Measurement"("SFAS 157") which defines fair value, establishes
a framework for measuring fair value and expands disclosures regarding assets and liabilities measured at fair value. We will be required to adopt SFAS 157 in the first quarter of fiscal 2009.
The effect of adoption may have a material impact on our financial condition or results of operations. The ultimate effect is indeterminate because the results of any fair value measurements in
accordance with SFAS 157 will be dependent upon the facts and circumstances on the date of the valuation.

In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities"
("SFAS 159"). SFAS 159 allows companies to elect to measure certain assets and liabilities at fair value and is effective for fiscal years beginning after November 15, 2007. This
standard is not expected to have a material impact on our future consolidated financial statements.

In
June 2007, the FASB ratified Emerging Issues Task Force consensus on EITF Issue No. 07-3,"Accounting for Non-refundable
Advanced Payments for Goods or Services to be used in Future Research and Development Activities."EITF Issue No. 07-3 requires that these payments be
deferred and capitalized and expensed as goods are delivered or as the related services are performed. We will be required to adopt EITF 07-3 in the first quarter of fiscal 2009 and
do not expect that the adoption will have a material impact on our financial condition or results of operations.

In
December 2007, the FASB issued SFAS No. 141R,"Business Combinations,"("SFAS 141R"). SFAS 141R establishes
principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any
non-controlling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what
information to disclose to enable users of financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for financial statements issued
for fiscal years beginning after December 15, 2008. We will be required to adopt the statement in the first quarter of fiscal 2009 and will account for and disclose all business combinations
effected after the adoption in accordance with SFAS 141R.

In
March 2008, the FASB issued SFAS No. 161,"Disclosures about Derivative Instruments and Hedging Activitiesan Amendment of FASB Statement
No. 133."This Statement requires enhanced disclosures about an entity's derivative and hedging activities and is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008. We do not expect that the adoption will have a material impact on our financial condition or results of operations.

55

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In May 2008, the FASB issued FSP APB 14-1,"Accounting for Convertible Debt Instruments That May Be Settled in Cash
upon Conversion (Including Partial Cash Settlement)"("APB 14-1"). APB 14-1 will require us to separately account for the liability and
equity components of a convertible debt security by measuring the fair value of a similar nonconvertible debt security when interest cost is recognized in subsequent periods.
APB 14-1 will require us to retroactively separate the liability and equity components of such debt in our consolidated balance sheets on a fair value basis.
APB 14-1 is applicable to our $96.7 million 2024 Debentures which allows for settlement of the conversion in cash. APB 14-1 will be effective for fiscal
years beginning after December 15, 2008, and we are required to adopt the FSP in our first quarter of fiscal 2010. APB 14-1 does not permit early adoption. We are currently
evaluating the impact that the adoption of APB 14-1 will have on our consolidated financial statements.

Results of Operations

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

Year Ended September 30,2008

2007

2006Revenues


100.0
%

100.0
%

100.0
%Cost of expenses:Cost of revenues


46.5
%

51.3
%

55.5
%Engineering, research and development


21.9
%

21.3
%

32.6
%Selling, general and administrative


22.1
%

19.1
%

23.9
%Accounting remediation & reconstruction expense & litigation costs


4.7
%

6.1
%

8.2
%Amortization of intangible assets


1.1
%

3.0
%

4.4
%Operating expenses


96.3
%

100.8
%

124.6
%Income (loss) from operations


3.7
%

(0.8
)%

(24.6
)%Other income (expense):Interest expense, net


(1.7
)%

(1.2
)%

(1.2
)%Loss on extinguishment of debt


0.0
%

(0.9
)%

0.0
%Other income, net


2.1
%

0.8
%

0.6
%Other income (expense), net


0.4
%

(1.3
)%

(0.6
)%Income tax expense


0.5
%

0.1
%

0.4
%Minority interest in earnings of consolidated subsidiary


(0.3
)%

0.0
%

0.0
%Income (loss) from continuing operations before discontinued operations


3.3
%

(2.2
)%

(25.6
)%Discontinued operationsGain (loss) from operations of discontinued Storage Products


4.0
%

(7.6
)%

(7.5
)%Net income (loss)


7.3
%

(9.8
)%

(33.1
)%


Fiscal Years Ended September 30, 2008 and 2007

Product Revenues

We classify our IC products into three categories: 1) Carrier Networking Products; 2) Enterprise Networking Products; and
3) Non-Core Products. The Networking Products line services core and metro WANs, also known as Carrier Networks. Our products are focused on enabling Ethernet data services to be
deployed more broadly across these networks. The Ethernet Networking Products line services the market for Ethernet switching and transmission within LANs in SMB and SME markets.

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

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

September 30,

Change2008

2007$%(in thousands)Carrier Networking Products

$
92,952

$
91,670

$
1,282


1.4
%Enterprise Networking Products


76,524


76,089


435


0.6
%Non-Core Products


49,060


54,189


(5,129
)

(9.5
)%Product Revenues

$
218,536

$
221,948

$
(3,412
)

(1.5
)%


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

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

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

Product
revenues from Non-Core Products were $49.1 million in fiscal 2008, compared with $54.2 million in fiscal 2007. The decrease of $5.1 million, or
9.5%, in revenues, was primarily due to weaker demand for our products that are at or nearing their end-of-life in markets that we have chosen to exit. Accordingly we are not
actively pursuing sales of these products.

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

Licensing Revenues

September 30,

Change2008

2007

$

%(in thousands)Licensing Revenues


10,000





10,000


100
%


Licensing
revenues were $10.0 million in fiscal 2008, compared with $0 in fiscal 2007. On December 28, 2007, the Company entered into an arrangement to license intellectual
property to a third-party. Specific deliverables to the licensee were defined in the agreement and required acceptance from the licensee. We received confirmation of the deliverables from the licensee
and recognized $10.0 million of licensing revenues in September 2008. In 2008, we began to leverage our substantial intellectual property ("IP") portfolio into licensing opportunities
with third parties. We offer a variety of IP "cores" and design services in deep submicron, 130 nm and 65 nm, process technologies. To date,

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our
primary focus has been our Gigabit Ethernet Cu PHY and switch technologies as well as high-speed PHYs and signal integrity "cores".

Cost of revenues

September 30,

Change2008

2007

$

%(in thousands)Cost of revenues

$
106,344

$
113,754

$
(7,410
)

(6.51
)%Percent of revenues


46.5
%

51.3
%


As
a fabless semiconductor company, we use third-parties (including TSMC, IBM, Chartered Amkor, ASAT, and ASE) for wafer fabrication and assembly services. Our cost of revenues consists
predominantly of: (i) purchased finished wafers; (ii) assembly services; and (iii) labor and overhead costs associated with product procurement and testing.

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

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

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



Engineering, Research and Development

September 30,

Change2008

2007

$

%(in thousands)Engineering, research and development

$
49,982

$
47,199

$
2,783


5.9
%Percent of revenues


21.9
%

21.3
%


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

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

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

Selling, General and Administrative

September 30,

Change2008

2007

$

%(in thousands)Selling, general and administrative

$
50,557

$
42,459

$
8,098


19.1
%Percent of revenues


22.1
%

19.1
%


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

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

Accounting Remediation and Reconstruction Expense and Litigation Costs

September 30,

Change2008

2007

$

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

$
10,761

$
13,558

$
(2,797
)

(20.6
)%Percent of revenues


4.7
%

6.1
%


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

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

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Amortization of Intangible Assets

September 30,

Change2008

2007

$

%(in thousands)Amortization of intangible assets

$
2,514

$
6,777

$
(4,263
)

(62.9
)%Percent of revenues


1.1
%

3.0
%


Amortization
of intangible assets was $2.5 million in fiscal 2008, compared to $6.8 million in fiscal 2007. The decrease from 2007 to 2008 is due to intangible assets
related to our prior acquisitions of Exbit Technology A/S, APT Technologies, Inc, and Multilink Technology Corporation becoming fully amortized during 2007. See Note 2Goodwill and
Other Intangible Assets of the Notes to the Consolidated Financial Statements for additional information. Due to a significant drop in our stock price in the first quarter of 2009 we expect to perform
an impairment analysis from which we may conclude a material amount of our goodwill is impaired and consequently some or all of it should be written-off in that quarter.

Interest Expense, net

September 30,

Change2008

2007

$

%(in thousands)Interest expense, net

$
3,868

$
2,580

$
1,288


49.9
%Percent of revenues


1.7
%

1.2
%


Interest
expense, net of interest income increased approximately $1.3 million to $3.9 million in 2008. In October 2007, in connection with the sale of the Storage Products
business, the Company replaced its debt to Tennenbaum Capital ("TCP") with a note to Whitebox VSC, Ltd. ("Whitebox"). Interest expense incurred on the TCP debt in fiscal 2007 and 2008 was
higher than the fiscal 2008 Whitebox interest expense, but all interest expense related to the TCP debt was recorded as a component of discontinued operations in fiscal 2007 and 2008, resulting in
$3.1 million higher net interest expense in fiscal 2008. This increase is offset by a decrease in interest on the subordinated 2024 Debentures. In the second half of fiscal 2007, we incurred an
additional 4% interest on the debentures in connection with the Second Supplemental Indenture dated September 24, 2007. As a result, interest expense related to the subordinated debentures
decreased by $1.9 million in fiscal 2008 compared to fiscal 2007.

Loss on Extinguishment of Debt

September 30,

Change2008

2007

$

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

$


$
1,977

$
(1,977
)

100.0
%Percent of revenues


0.0
%

0.9
%


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

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Table of Contents

Other Income, net

September 30,

Change2008

2007

$

%(in thousands)Other income

$
4,882

$
1,755

$
3,127


178.2
%Percent of revenues


2.1
%

0.8
%


Other
income, net of expense, was $4.9 million in fiscal 2008 compared to $1.8 million in fiscal 2007. Other income in fiscal 2008 was primarily related to gains on the
sale of available-for-sale securities held by Vitesse and its subsidiaries, $400,000 income from the settlement of a breach of contract lawsuit, a $524,000 gain on scrap
materials and gain on the sale of available for sale securities of $3.4 million. In fiscal 2007, other income primarily consisted of miscellaneous, non-recurring royalty payments
generated from the licensing of intellectual property to third parties.

Income Tax Expense

September 30,

Change2008

2007

$

%(in thousands)Income tax expense

$
1,222

$
224

$
998


445.5
%Percent of revenues


0.5
%

0.1
%


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

Minority Interest in Earnings of Consolidated Subsidiary

September 30,

Change2008

2007

$

%(in thousands,
except percentages)Minority interest in earnings of consolidated subsidiary

$
660

$


$
660


100.0
%Percent of net revenues


0.3
%

0.0
%


A
minority interest in the income of our consolidated joint venture, the Vitesse Venture Fund, L.P. ("the Fund"), was recorded in the third quarter of fiscal 2008, representing
the limited partners' interest in the Fund's gain on the sale of available-for-sale securities. The limited partners' portion of the gain totaled $660,000 for the year ended
September 30, 2008.

Gain (loss) on the sale of discontinued Storage Products

September 30,

Change2008

2007

$

%(in thousands)Income (loss) from operations of discontinued operations (including gain on sale of $21.5 million in 2008)

$
9,044

$
(16,822
)
$
25,866


(153.8
)%Percent of revenues


4.0
%

(7.6
)%


On
October 29, 2007, the Company completed its sale of a portion of its Storage Products business, as discussed in Note 3Discontinued Operations and Assets
Held for Sale in the accompanying financial statements, for $62.8 million, with a with a gain on the sale of approximately

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$21.5 million,
plus a potential earn-out based on the business meeting certain criteria, as detailed in the agreement. Assets sold include inventory, property & equipment,
goodwill and intangible assets of $35.5 million. As part of the sale, Maxim assumed a liability for employees' accrued vacation of $0.3 million. Debt issuance costs related to the debt
with TCP of $3.5 million were included in the calculation of the gain on the sale. The gain was reduced by costs of completing the sale in the amount of $1.6 million.

In
accordance with EITF Issue 87-24,"Allocation of Interest to Discontinued Operations"("EITF Issue 87-24"), we
have allocated to discontinued operations interest expense associated with debt instruments that were required to be repaid upon the sale of Storage Products. For the year ended September 30,
2008, interest expense of approximately $16.9 million was included in discontinued operations. Interest expense included a "make-whole" payment of $16.4 million, and interest
expense and amortization of deferred financing fees of $0.5 million. For the year ended September 30, 2007, interest and amortization of deferred financing fees was $10.2 million.

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

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

We
recorded amounts in discontinued operations in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). Accordingly, we have reported the results of operations and financial position of the Storage Products business in discontinued operations within
the Company's statements of operations and as assets and liabilities held for sale in the Company's balance sheet as of September 30, 2007.

Selected
operating results were as follows:

September 30,2008

2007(in thousands)Revenues

$
2,656

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


8,732


(4,601
)Provision for income taxes


1,222


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


9,044


(16,822
)Net income (loss)

$
16,554

$
(21,647
)


Fiscal Years Ended September 30, 2007 and 2006

Product Revenues

We classify our IC products into three categories: 1) Carrier Networking Products; 2) Enterprise Networking Products; and
3) Non-Core Products. The Networking Products line services core and metro WANs, also known as Carrier Networks. Our products are focused on enabling Ethernet data services to be
deployed more broadly across these networks. The Enterprise Networking Products line

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services
the market for Ethernet switching and transmission within LANs in SMB and SME markets. Non-Core Products are those product lines where we have chosen to exit markets and no longer continue to
invest. The following tables summarize our net product mix by product line.

The
following table summarizes our product revenues:

September 30,

Change2007

2006

$

%(in thousands)Carrier Networking Products

$
91,670

$
73,177

$
18,493


25.3
%Enterprise Networking Products


76,089


52,750


23,339


44.2
%Non-Core Products


54,189


77,362


(23,173
)

(30.0
)%Product Revenues

$
221,948

$
203,289

$
18,659


9.2
%


Product
revenues in fiscal year 2007 were $221.9 million, an increase of 9.2% from the $203.3 million recorded in fiscal year 2006. The revenue reported from
Non-Core Products excludes revenue generated from product lines sold to Maxim in October 2007.

Product
revenues from Carrier Networking Products were $91.7 million in fiscal 2007, compared with $73.2 million in fiscal 2006. The increase of 25.3% was primarily due to
strength in certain emerging markets in our optical PHY product line, as well as out Ethernet over SONET mappers and carrier-class Ethernet MACs.

Product
revenues from Enterprise Networking Products in fiscal 2007 were $76.1 million, an increase of 44.2%, compared with $52.8 million in fiscal 2006. This increase was
primarily due to strength in our Ethernet Switch and Cu PHY product lines as well as our signal integrity product lines selling into Enterprise Networking applications.

Product
revenues from Non-Core Products were $54.2 million in fiscal 2007, compared with $77.4 million in fiscal 2006. The decrease of $23.2 million, or
30.0%, in revenues, was primarily due to decreases in our legacy Fibre Channel and enclosure management product lines partially offset by
growth in our Raid-on-Chip product line which grew from $3.5 million in 2006 to $15.0 million in 2007.

During
fiscal 2007 we shipped approximately $34.9 million in revenue in products that are now classified as EOL compared with $35.6 million in fiscal 2006. These products
were older generation storage products including our 2G Fibre Channel products and enclosure management products classified as Non-Core products, certain older generation Ethernet switch and MAC
products classified as Enterprise products, and certain of our network processor ("NPU") products and older generation products manufactured in our Camarillo, California GaAs fabrication facility
classified as Carrier Networking products.

In
October 2007, we sold our SAS/SATA expander and enclosure management product lines to Maxim. As such, we reclassified the revenues and expenses from these product lines to
discontinued operations. See notes to the accompanying consolidated financial statements for further details.

Cost of revenues

September 30,

Change2007

2006

$

%(in thousands)Cost of revenues

$
113,754

$
112,740

$
1,014


0.9
%Percent of net revenues


51.3
%

55.5
%


63

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Table of Contents

As
a fabless semiconductor company, we use third-parties (including TSMC, IBM, Chartered Amkor, ASAT, and ASE,) for wafer fabrication and assembly services. Our cost of revenues consists
predominantly of: (i) purchased finished wafers; (ii) assembly services; and (iii) labor and overhead costs associated with product procurement and testing.

Our
cost of revenues was $113.8 million in fiscal 2007 compared to $112.7 million in fiscal 2006. As a percentage of net revenues, our cost of revenues was 51.3% in fiscal
2007 compared to 55.5% in fiscal 2006.

Substantial
portions of our revenue growth in 2007 and 2006 were from lower margin products in our Enterprise Networking product lines. This was the result of our focus in prior years to
diversify our business in areas outside the Carrier Networking markets. While products in these new markets provide good diversification and growth opportunities, they come at the higher overall cost
of revenue in these new markets. During 2007, revenue from these higher-cost of revenue products increased as a percentage of total revenue, while total cost of revenue remained consistent
with 2006, and total cost of revenue as a percentage of revenue decreased from 2006 to 2007. This is due to substantial cost containment efforts by the company. This cost containment is primarily
attributed to efforts to reduce the purchase price of materials such as wafers and packages, and improvements in the efficiency of operations including product yields. As it is customary for product
prices in the semiconductor industry to decline over time, it is imperative that we continue to reduce our cost of revenue. Our efforts continued to be focused on improving operating efficiencies,
including improving product yields, reducing scrap, and improving cycle times, as well as reducing our internal and external selling costs.

Engineering, Research and Development

September 30,

Change2007

2006

$

%(in thousands)Engineering, research and development

$
47,199

$
66,372

$
(19,173
)

(28.9
)%Percent of net revenues


21.3
%

32.6
%


Engineering,
research and development expenses consist primarily of salaries and related costs of employees engaged in research, design, and development activities, including share-based
compensation expense. Research and development also includes costs of mask sets, electronic design automation tools, subcontracting and fabrication costs, depreciation and amortization, and facilities
expenses. Research and development expenses for 2007 were $47.2 million, representing a decrease of $19.2 million or 28.9% from $66.4 million in 2006. Employee compensation
expenses (including the amortization of non-cash stock compensation) decreased by approximately $4.3 million. However, the primary decrease in R&D spending was caused by a
$14.9 million reduction of spending on equipment, mask spins, and outside consulting. We attribute this reduction to our strategic focus, including design efforts to develop cores and standard
blocks that can be reused in multiple products, thereby reducing design cycle time and increasing first-time design correctness.

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

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Table of Contents

Selling, General and Administrative

September 30,

Change2007

2006

$

%(in thousands)Selling, general and administrative

$
42,459

$
48,601

$
(6,142
)

(12.6
)%Percent of net revenues


19.1
%

23.9
%


Selling,
general and administrative expenses consist primarily of personnel-related expenses, including share-based compensation expense, recurring professional and legal fees, and
facilities expenses. Selling, general and administrative expenses were $42.5 million in fiscal 2007 compared to $48.6 million in fiscal 2006. The $6.1 million decrease in our SG&A
expenses for fiscal 2007, as compared to fiscal 2006, principally reflects a reduction of compensation expenses (including non-cash stock compensation) of $3.1 million, facilities
related expenses of $0.9 million, travel and entertainment expenses of $0.6 million, recurring tax preparation and audit fee expense of $0.5 million, and other stock,
investment/investor relation related costs of $0.4 million.

Accounting Remediation & Reconstruction Expense and Litigation Costs

September 30,

Change2007

2006

$

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

$
13,558

$
16,631

$
(3,073
)

(18.5
)%Percent of net revenues


6.1
%

8.2
%


Accounting
remediation and reconstruction expenses and litigation costs consist of costs incurred in connection with restructure and remediation efforts. During the fiscal years 2007 and
2006, we recognized expenses of $13.6 million and $16.6 million, respectively, related to work performed on stock option grants, revenue recognition policies, inventory valuation, and
other legal and financial issues. Of the expenses incurred in fiscal year 2007 and 2006, legal fees constituted $7.6 million and $5.2 million, respectively. Additionally, in fiscal year
2006, we recognized $6.6 million related to costs associated with shareholder class actions. Lastly, during fiscal 2007 and 2006 professional fees in connection with accounting remediation were
for $6.0 million and $4.1 million, respectively.

Accounting
remediation and reconstruction costs are expected to decrease slightly in fiscal year 2008, followed by a significant decrease in fiscal year 2009 as we resolve certain legal
issues, complete and file all outstanding financial reports, and transition accounting and reporting responsibilities to permanent staff.

Amortization of Intangible Assets

September 30,

Change2007

2006

$

%(in thousands)Amortization of intangible assets

$
6,777

$
9,039

$
(2,262
)

(25.0
)%Percent of net revenues


3.0
%

4.4
%


Amortization
of intangible assets was $6.8 million in fiscal 2007, compared to $9.0 million in fiscal 2006. The decrease from 2006 to 2007 is due to intangible assets
related to our prior acquisitions of Exbit, APT, and Multilink becoming fully amortized during 2007.

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Table of Contents

Interest Expense, net

September 30,

Change2007

2006

$

%(in thousands)Interest expense, net

$
2,580

$
2,380

$
200


8.4
%Percent of net revenues


1.2
%

1.2
%


Interest
expense, net of interest income increased approximately $0.2 million to $2.6 million in 2007. In connection with the Second Supplemental Indenture dated
September 24, 2007, (see "Notification of Default under Indenture related to Subordinate Debentures" under Item 3Legal Proceedings), we incurred an additional 5% interest on
the subordinated debentures for the second half of fiscal 2007. Total interest expense on the debentures was $3.4 million in 2007 compared to $1.5 million in 2006. These increases to
interest expense were offset by a decrease in interest expense related to the termination of financing arrangements with Silicon Valley Bank.

Loss on Extinguishment of Debt

September 30,

Change2007

2006

$

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

$
1,977

$


$
1,977


100.0
%Percent of net revenues


0.9
%

0.0
%


Under
the terms of the amendment to the Company's 1.5% Convertible Subordinated Debentures due 2024 ("2024 Debentures") in the first quarter of fiscal 2007,the conversion price of the
2024 Debentures was permanently decreased from $3.92 to $2.546 per share of Common Stock, resulting in debt terms that were substantially different from the original debt terms. In accordance with
EITF 96-19"Debtor's Accounting for a Modification or Exchange of Debt Instruments,"the Company recognized a loss on the
extinguishment of debt resulting from the write-off of unamortized debt issuance costs related to the issuance of the debt. For the year-ended September 30, 2007, "Other
Assets" was reduced by approximately $2.0 million related to the write-off.

Other Income, net

September 30,

Change2007

2006

$

%(in thousands)Other income

$
1,755

$
1,251

$
504


40.3
%Percent of net revenues


0.8
%

0.6
%


Other
income was $1.8 million in fiscal 2007 and $1.3 million in fiscal 2006. Other income primarily consists of miscellaneous, non-recurring royalty payments.
The Company has generated non-core revenue from licensing intellectual property to third parties.

Income Tax Expense

September 30,

Change2007

2006

$

%(in thousands)Income tax expense

$
224

$
780

$
(556
)

(71.3
)%Percent of net revenues


0.1
%

0.4
%


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Income
tax expense was $1.2 million for the year ended September 30, 2008. The expense reflects the impact of taxable income from continuing operations for the period after
the allocation of income tax expense to discontinued operation. Income tax expense for the year ended September 30, 2007 represents minimum federal, state, and foreign income tax on income not
eligible for offset by loss carryforwards.

Loss from Operations of Discontinued Operations

September 30,

Change2007

2006

$

%(in thousands)Loss from operations of discontinued operations

$
(16,822
)
$
(15,282
)
$
(1,540
)

10.1
%Percent of net revenues


(7.6
)%

(7.5
)%


On
October 29, 2007, the Company completed its sale of a portion of its Storage Products business, as discussed in Note 3Discontinued Operations and Assets
Held for Sale in the accompanying financial statements, for $62.80 million in cash and $12 million of potential earn-out payments upon achieving certain commercial milestones
during fiscal year 2008.

Assets
of the Storage Products business totaling $35.5 million, including $31.3 million of net goodwill, have been classified as held for sale as of September 30,
2007. The Company determined the value of goodwill attributable to the portion of the business sold based on the relative sales price of the business sold to the estimated fair market value of the
Company at the time the sale commenced and allocated approximately 14% of the net carrying value of goodwill to the portion of the business sold. Results of the operations for the Storage Products
business for the years ended September 30, 2007 and 2006 have been reflected as discontinued operations in the accompanying consolidated financial statements. The financial results of these
discontinued operations are summarized below.

Selected
operating results were as follows:

September 30,2007

2006(in thousands)Revenues

$
18,057

$
16,755Income (loss) from continuing operations before income taxes


4,601


(51,223
)Provision for income taxes


224


780Income (loss) from discontinued operations


(16,822
)

(15,282
)Net income (loss)

$
(21,647
)
$
(67,285
)


In
accordance with EITF Issue 87-24,"Allocation of Interest to Discontinued Operations"(EITF
Issue 87-24), we have allocated interest expense to discontinued operations associated with debt instruments that were required to be paid upon the sale of our Storage Products
business. Interest expense included in income from discontinued operations, which includes interest incurred and amortization expense of deferred financing fees for our former loan, totaled
$10.2 million and $2.9 million for fiscal years 2007 and 2006, respectively.

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The
following assets have been segregated and included in assets of discontinued operations and other assets and liabilities held for sale, as appropriate, in the consolidated balance
sheet as of September 30, 2007.

September 30,
2007(in thousands)Inventory

$
2,217Property and equipment, net


582Goodwill & intangible assets


32,352Prepaid expenses


321Assets held for sale

$
35,472Accrued vacation


372Liabilities held for sale

$
372


Liquidity

Cash and cash equivalents increased to $36.7 million at September 30, 2008, from $26.0 million at
September 30, 2007, as a result of the following:

September 30,2008

2007(in thousands)Net cash (used in) provided by operating activities

$
(22,620
)
$
5,778Net cash provided by (used in) investing activities


65,588


(1,013
)Net cash used in financing activities


(32,222
)

(4,101
)Net increase in cash and cash equivalents


10,746


664Cash and cash equivalents at beginning of year


25,976


25,312Cash and cash equivalents at end of year

$
36,722

$
25,976


In
2008, our operating activities used $22.6 million in cash. This was primarily the result of $7.5 million of income from continuing operations and a $9.0 million
gain from discontinued operations, offset by $18.0 million in net non-cash operating expenses and $21.2 million provided by changes in operating assets and liabilities. In
2007, our operating activities provided $5.8 million in cash. This was primarily the result of a $21.6 million net loss from continuing and discontinued operations, offset by
$27.2 million in net non-cash operating expenses and $0.3 million provided by changes in operating assets and liabilities. Non-cash items included in net income
include depreciation and amortization, share-based compensation expense, capitalization of interest to principal, loss on extinguishment of debt, and amortization of debt issuance costs.

Cash
used in operating activities was primarily related to a reduction in deferred revenue resulting from a change in payment terms on distributor activity. Additionally, we used cash to
increase our investment in wafer die bank and finished goods inventory in order to improve our on-time delivery, particularly in our Ethernet product line. We also experienced a decrease
in accrued expenses due to the timing of payments to our vendors and other service providers. Cash used in operations was partially offset by a decrease in accounts receivable due to increased focus
on cash management and collection efforts.

In
2008, our investing activities provided $65.6 million primarily as a result of the sale of our Storage Products business.

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In
2008, we used $32.2 million in financing activities primarily as a result of the refinancing of our TCP debt with Whitebox in conjunction with the sale of the Storage Products
business in the first quarter.

Our
primary source of liquidity is cash generated from operations and our existing cash balances. As of September 30, 2008 and 2007, our cash and cash equivalents totaled
$36.7 million and $26.0 million, respectively.

We
incurred significant losses from operations for the years ended September 30, 2007 and 2006. Income from operations in 2008 was reduced by substantial expenses related to our
restructuring and remediation efforts (See Note 4Accounting Remediation & Reconstruction Expense & Litigation Costs in the accompanying financial statements). We
anticipate these efforts to remain at this level through the first quarter of fiscal year 2009 and decreasing during the second quarter of fiscal 2009 as we resolve certain legal issues, complete and
file all outstanding financial reports, and transition accounting and reporting responsibilities to permanent staff. Through the second quarter of fiscal 2009, we expect these costs to continue to
have an adverse effect on operating results and liquidity.

As
of September 30, 2008, we have accrued a $1.9 million liability for payroll taxes, penalties and interest related to exercises of backdated stock options during the
calendar years 2004 through 2006. During this period, certain non-qualified stock options were improperly classified and treated as incentive stock options for tax purposes. On
October 5, 2007, we informed the Internal Revenue Service ("IRS") of these potential payroll tax liabilities resulting from changes in measurement dates for stock options. No formal settlement
negotiations have taken place, however we have received requests from the IRS for information relating to the potential payroll tax liabilities that were identified as a result of our stock-option
review. We are working with the IRS to provide the requested information in an effort to settle these potential liabilities.

Holders
of our 2024 Debentures (See Note 6Debt in the accompanying financial statements) have the right to require us to repurchase the 2024 Debentures on
October 1 of 2009, 2014, and 2019. In accordance with the November 3, 2006 amendment to the debentures, the October 1, 2009, repurchase right only would be increased from 100% to
113.76% of the principal amount of the 2024 Debentures to be purchased. The increase in the repurchase right would result in an additional payment of $13.3 million on the $96.7 million
outstanding debentures. Holders also have the option, subject to certain conditions, to require the Company to repurchase any debentures held by such holder in the event of a fundamental change, at a
price equal to 100% of the principal amount of the debentures plus accrued and unpaid interest plus, under certain circumstances, a make-whole premium.

On
October 29, 2007, the Company completed the sale of a portion of our Storage Products business to Maxim for $62.8 million, with a gain on the sale of approximately
$21.5 million. Under the terms of the agreement, we may receive cash earn-out payments upon achieving certain commercial milestones over the period of our fiscal year 2008.
Concurrently, we completed the funding of a $30.0 million loan from Whitebox. We used a portion of the proceeds of the debt financing, as well as the proceeds from the sale of the Storage
Products assets ($62.8 million), to repay the Company's debt
facility with affiliates of TCP. The Whitebox loan has a four-year term, with an option to lend up to an additional $15.0 million.

On
December 28, 2007, the Company entered into an arrangement to license intellectual property to a third-party. The contract is a perpetual, nonexclusive,
non-transferable, irrevocable license for specified intellectual property. As part of the contract, we were granted a perpetual, nonexclusive, non-transferable, irrevocable
license to improvements to the technology made by the licensee, subject to certain limitations. Under the agreement, Vitesse will receive $15.0 million in license fees and royalties for the
rights to certain products and technology. Of the fees and royalty payments, $10.0 million were received upon delivery and acceptance of the licensed technology. The remaining
$5.0 million will be received upon the earlier of licensee's first commercial sale using the intellectual

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property
or the one-year anniversary of the agreement. For a period of seven years from the effective date of the contract, licensee will pay royalties on a per unit basis, on each
commercial sale incorporating the licensed products. Royalties will be accounted for when received.

We
believe that our available cash, including our existing cash and investments, will be adequate to finance our operating needs and meet our obligations for the next 12 months.
However, Holders of our 1.5% Convertible Subordinated Debentures due 2024 ("2024 Debentures") have the right to require us to repurchase the 2024 Debentures on October 1 of 2009, 2014, and
2019. In accordance with the November 3, 2006 amendment to the 2024 Debentures, the October 1, 2009 repurchases right was increased from 100% to 113.76% of the principal amount of the
2024 Debentures to be purchased. The increase in the repurchase right would result in an additional payment of $13.3 million on the $96.7 million outstanding 2024 Debentures. Holders
also have the option, subject to certain conditions, to require the Company to repurchase any 2024 Debentures held by such holder in the event of a fundamental change, at a price equal to 100% of the
principal amount of the 2024 Debentures plus accrued and unpaid interest plus, under certain circumstances, a make-whole premium. (See Debt Note in the accompanying financial statements).

The
Company is actively seeking various alternatives to refinance the debt. However, we can make no assurance at this time that such financing will be completed as contemplated or under
terms acceptable to the Company or its existing shareholders. Failure to generate additional revenues, raise additional capital or manage discretionary spending could have a material adverse effect on
the Company's ability to continue as a going concern and to achieve its intended business objectives. Accordingly, there is a substantial doubt about our ability to continue as a going concern; no
adjustments to the accompanying financial statements have been made to reflect this doubt. See "Risk Factors" below for further information with respect to events and uncertainties that could harm our
business, operating results, and financial condition.

Long-Term Debt, Contingent Liabilities and Operating Leases

The following table summarizes our significant contractual obligations as of September 30, 2008:

Payment Obligations by Year
(in thousands)

2009

2010

2011

2012

2013

Thereafter

TotalLong-term debt

$


$


$


$
30,000

$


$


$
30,000Convertible subordinated debt

















96,700


96,700Operating leases


3,139


2,483


2,322


2,251


2,314


2,267


14,776Inventory and related purchase obligations


13,407


6,480














19,887Software licenses


7,869


6,351


5,117


42








19,379Total

$
24,415

$
15,314

$
7,439

$
32,293

$
2,314

$
98,967

$
180,742


We
currently have $96.7 million in convertible subordinated debentures due 2024 that are paid 1.5% in interest per year. Payments to Whitebox are interest only until the maturity
date of October 29, 2011. Pursuant to amendments to the 2024 Debenture agreement, the repurchase price of the debentures related to the October 1, 2009 repurchase right would be
increased from 100% to 113.76% of the principal amount of the Debentures to be purchased (the 'premium put'). The premium put is a contingency and is not included in the schedule of significant
contractual obligations as of September 30, 2008. Additionally, we have $30.0 million in long-term debt with Whitebox VSC, LTD. ("Whitebox") (See
Note 6Debt in the accompanying financial statements). In October 2007, concurrent with the sale of a portion of the Storage Products business (See
Note 3Discontinued Operations and Assets Held for Sale in the accompanying financial statements), we completed our

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drawdown
of the $30.0 million loan from Whitebox. We used a portion of the proceeds of the debt financing, as well as the proceeds from the sale of the Storage Products assets
($62.8 million), to repay the Company's debt facility with affiliates of TCP.

We
lease facilities under non-cancellable operating leases that expire through 2015. Approximate minimum rental commitments under all non-cancellable operating
leases as of September 30, 2008, is included in the table above.

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

For
purposes of the table above, obligations for the purchase of goods or services are defined as agreements that are enforceable and legally binding and that specify all significant
terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Our purchase orders are based on our current
manufacturing needs and are typically fulfilled by our vendors within a relatively short time horizon. We have additional purchase orders (not included in the table above) that represent
authorizations to purchase rather than binding agreements. We do not have significant agreements for the purchase of inventories or other goods specifying minimum quantities or set prices that exceed
our expected requirements.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Cash Equivalents and Investments

Our cash and cash equivalents are not subject to significant interest rate risk due to the short maturities of these instruments. As of
September 30, 2008, the carrying value of our cash and cash equivalents approximated fair value because of the ready market for the cash instruments.

Our
investments have included available-for-sale securities in publicly held companies. The value of our equity securities is based on quoted market prices.
Market prices of common equity securities, in general, are subject to fluctuations, which could cause the amount to be realized upon sale of the investments to differ significantly from the current
reported value.

Interest Rate Risk

Investments in fixed-rate, interest-earning instruments carry a degree of interest rate and credit rating risk.
Fixed-rate securities may have their fair market value adversely impacted because of changes in interest rates and credit ratings. Due in part to these factors, our future investment
income may fall short of expectations because of changes in interest rates or we may suffer losses in principal if we were to sell securities that have declined in market value because of changes in
interest rates. Because of the nature of the issuers of the securities that we invest in, we do not believe that we have any cash flow exposure arising from changes in credit ratings.

Foreign Currency Exchange Risk

We consider our direct exposure to foreign exchange rate fluctuations to be minimal. Currently, sales to customers and arrangements
with third-party manufacturers provide for pricing and payment in United States dollars, and, therefore, are not subject to exchange rate fluctuations. Increases in the value of the United States'
dollar relative to other currencies could make our products more expensive,

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which
could negatively impact our ability to compete. Conversely, decreases in the value of the United States' dollar relative to other currencies could result in our suppliers raising their prices to
continue doing business with us. The Company funds operations in international jurisdictions. All disbursements from these locations are made in the local currency of the foreign country. Fluctuations
in the value of the United States dollar relative to the currencies of these other countries could make the cost of operations in these other countries more expensive and negatively impact the
Company's cash flows.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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Index to Consolidated Financial Statements



PageReport of Independent Registered Public Accounting Firm

74Consolidated Financial Statements:Consolidated Balance Sheets at September 30, 2008 and 2007

75Consolidated Statements of Operations for the Years Ended September 30,
2008, 2007 and 2006

76Consolidated Statements of Shareholders' Equity and Comprehensive Loss for the
Years Ended September 30, 2008, 2007 and 2006

77Consolidated Statements of Cash Flows for the Years Ended September 30,
2008, 2007 and 2006

78Notes to Consolidated Financial Statements

79Schedule II Valuation and Qualifying Accounts

120


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[REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM]

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

We have audited the accompanying consolidated balance sheets of Vitesse Semiconductor Corporation (a Delaware corporation) and
subsidiaries as of September 30, 2008 and 2007 and the related consolidated statements of operations, shareholders' equity and comprehensive loss, and cash flows for each of the three years in
the period ended September 30, 2008. In connection with our audits of the financial statements, we have also audited the financial statement schedule listed in the index at Item 15(a).
These consolidated financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedule. We believe that our audits provide a reasonable basis for our
opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Vitesse Semiconductor Corporation and its
subsidiaries as of September 30, 2008 and 2007, and the results of their operations and their cash flows for the three years in the period ended September 30, 2008, in conformity with
accounting principles generally accepted in the United States of America.

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

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Vitesse Semiconductor Corporation and subsidiaries' internal
control over financial reporting as of September 30, 2008, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO) and our report dated December 30, 2008 expressed an adverse opinion on the effectiveness of the Company's internal control over financial reporting.

The
accompanying consolidated financial statements have been prepared assuming that Vitesse Semiconductor Corporation will continue as a going concern. As discussed in Note One to the
consolidated financial statements, the Company is subject to an October 1, 2009 put on its convertible subordinated debt that would potentially require the Company to repay the principal amount
of the convertible subordinated debt plus a premium to the debt holders. The existence of this put feature raises substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to this matter is also described in Note One. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/
BDO Seidman, LLP

BDO
Seidman, LLP
Los Angeles, California
December 30, 2008

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VITESSE SEMICONDUCTOR CORPORATION        CONSOLIDATED BALANCE SHEETS

September 30,2008

2007(in thousands,
except share data)ASSETSCurrent assets:Cash and cash equivalents

$
36,722

$
25,976Short-term investments





7,600Accounts receivable, net


6,307


7,146Inventory


37,466


33,728Assets held for sale


3,164


35,472Restricted cash


592


2,147Prepaid expenses and other current assets


4,011


6,188Total current assets


88,262


118,257Property, plant and equipment, net


8,084


9,286Goodwill


191,418


191,418Other intangible assets, net


913


3,295Other assets


3,600


5,092$
292,277

$
327,348LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITYCurrent liabilities:Accounts payable


16,101

$
14,988Accrued expenses and other current liabilities


20,242


25,785Liabilities held for sale





372Deferred revenue


2,721


21,825Total current liabilities


39,064


62,970Other long-term liabilities


1,564


1,728Long-term debt, net of discount


29,423


58,418Convertible subordinated debt


96,700


96,700Total liabilities


166,751


219,816Minority interest


165


1,289Commitments and contingencies (See Note 12)Shareholders' equity:Preferred stock, $0.01 par value. 10,000,000 shares authorized; none outstanding





Common stock, $.01 par value. 500,000,000 shares authorized; 226,205,580 and 223,555,580 shares outstanding in 2008 and 2007, respectively


2,267


2,240Additional paid-in-capital


1,747,324


1,741,048Accumulated other comprehensive income





3,739Accumulated deficit


(1,624,230
)

(1,640,784
)Total shareholders' equity


125,361


106,243$
292,277

$
327,348


See
accompanying notes to consolidated financial statements.

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VITESSE SEMICONDUCTOR CORPORATION        CONSOLIDATED STATEMENTS OF OPERATIONS

Fiscal Year Ended September 30,2008

2007

2006(in thousands, except per share data)Product revenues

$
218,536

$
221,948

$
203,289Licensing revenues


10,000





Revenues


228,536


221,948


203,289Costs and expenses:Cost of revenues


106,344


113,754


112,740Engineering, research and development


49,982


47,199


66,372Selling, general and administrative (including gain on sale of fixed assets of $3.2 million in 2008)


50,557


42,459


48,601Accounting remediation & reconstruction expense & litigation costs


10,761


13,558


16,631Amortization of intangible assets


2,514


6,777


9,039Costs and expenses


220,158


223,747


253,383Income (loss) from operations


8,378


(1,799
)

(50,094
)Other income (expense):Interest expense, net


(3,868
)

(2,580
)

(2,380
)Loss on extinguishment of debt





(1,977
)

Other income, net


4,882


1,755


1,251Other income (expense), net


1,014


(2,802
)

(1,129
)Income tax expense


1,222


224


780Minority interest in earnings of consolidated subsidiary


(660
)




Income (loss) from continuing operations before discontinued operations


7,510


(4,825
)

(52,003
)Discontinued operationsIncome (loss) from operations of Storage Products business, net of tax (including gain on sale of $21.5 million in 2008)


9,044


(16,822
)

(15,282
)Net income (loss)

$
16,554

$
(21,647
)
$
(67,285
)Basic and diluted income (loss) per share:Continuing operations

$
0.03

$
(0.02
)
$
(0.23
)Discontinued operations


0.04


(0.08
)

(0.07
)Net income (loss) per share

$
0.07

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


223,614


223,556


222,137


See
accompanying notes to consolidated financial statements.

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VITESSE SEMICONDUCTOR CORPORATION        CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE LOSS

Common Stock



Accumulated
Other
Comprehensive
Income



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

Accumulated
Deficit(In thousands, except share data)

Shares

AmountBalance at September 30, 2005


220,099,966

$
2,203

$
1,719,587

$
312

$
(1,551,852
)
$
170,250Comprehensive loss:Net loss














(67,285
)

(67,285
)Unrealized gain on investments











172





172Comprehensive loss

















(67,113
)Compensation expense related to stock options








8,634








8,634Compensation expense related to Employee Stock Purchase Plan








558








558Stock options exercised


1,834,642


18


2,595








2,613Employee Stock Purchase Plan purchase


1,969,369


20


3,196








3,216Repurchase of shares


(348,397
)

(1
)

(347
)







(348
)Balance at September 30, 2006


223,555,580

$
2,240

$
1,734,223

$
484

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














(21,647
)

(21,647
)Unrealized gain on investments











3,255





3,255Comprehensive loss

















(18,392
)Compensation expense related to stock options








6,825








6,825Balance at September 30, 2007


223,555,580

$
2,240

$
1,741,048

$
3,739

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














16,554


16,554Unrealized loss on investments











(1,028
)

Reclassification of gain realized in net income











(2,711
)

Change in unrealized gain on investments











(3,739
)




(3,739
)Comprehensive loss

















14,026Compensation expense related to stock options








3,891








3,891Shares issued pursuant to class-action settlement


2,650,000


27


2,385








2,412Balance at September 30, 2008


226,205,580

$
2,267

$
1,747,324

$


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


See accompanying notes to consolidated financial statements.

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VITESSE SEMICONDUCTOR CORPORATION        CONSOLIDATED STATEMENTS OF CASH FLOWS

Fiscal Year Ended
September 30,2008

2007

2006(in thousands)Cash flows from operating activities:Net income (loss)

$
16,554

$
(21,647
)
$
(67,285
)Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:Depreciation and amortization


5,380


10,660


20,742Share-based compensation


3,891


7,001


9,192Allowance for doubtful accounts





249


42Allowance for sales return reserve


(89
)

(28
)

(65
)Loss on extinguishment of debt





1,976


Capitalization of interest to principal





6,244


1,724Amortization of debt issuance costs and debt discounts


756


920


1,087Gain on sale of Storage Products business


(21,509
)




Gain on disposal of fixed assets


(3,225
)




Realized (gain) loss on investments


(3,372
)

129


(19
)Forgiveness of interest


(497
)




Minority interest in earnings of consolidated subsidary


661





Change in operating assets and liabilities:Accounts receivable


928


(3,087
)

3,579Inventory


(4,767
)

24,680


(6,602
)Restricted cash


1,556


238


(1,334
)Prepaids and other current assets


2,552


(1,803
)

(710
)Accounts payable


1,113


(11,276
)

5,081Accrued expenses and other liabilities


(3,448
)

403


6,399Deferred revenue


(19,104
)

(8,881
)

(12,599
)Net cash (used in) provided by operating activities


(22,620
)

5,778


(40,768
)Cash flows from investing activities:Proceeds from sale of investments


6,073





7,870Net purchase of short-term investments





(311
)

(137
)Restricted cash


(13
)

716


(717
)Disposal of fixed assets


3,280





4,275Sale of Storage Products business


62,845





Transaction costs for sale of Storage Products business


(1,636
)




Capital expenditures


(4,961
)

(879
)

(5,036
)Distribution to minority partners








Purchase of intangibles





(539
)

(4,583
)Net cash provided by (used in) investing activities


65,588


(1,013
)

1,672Cash flows from financing activities:Proceeds from exercise of stock options & warrants








2,612Purchase of ESPP shares








3,215Repurchase of shares issued








(347
)Repayment of debt


(59,471
)




Proceeds from debt


29,250





49,915Debt issuance costs


(1,046
)

(1,233
)

(2,785
)Repayment of capital lease obligations





(2,868
)

(11,268
)Distribution to minority interest holders


(955
)




(64
)Net cash (used in) provided by financing activities


(32,222
)

(4,101
)

41,278Net increase in cash


10,746


664


2,182Cash and cash equivalents at beginning of year


25,976


25,312


23,130Cash and cash equivalents at end of year

$
36,722

$
25,976

$
25,312Cash paid during the year for:Interest

$
23,499

$
4,773

$
2,317Income taxes

$
294

$
796

$
349Noncash investing and financing activities:Reimbursement of tenant improvement costs

$


$


$
1,500Shares issued pursuant to class-action settlement

$
2,412

$


$



See accompanying notes to consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Vitesse Semiconductor Corporation ("Vitesse" or "the Company") was incorporated under the laws of Delaware on February 3, 1987.
Vitesse designs and markets a diverse portfolio of high-performance, cost-competitive semiconductor solutions for Carrier and Enterprise Networks worldwide. Engineering
excellence and dedicated customer service distinguish Vitesse as an industry leader in Gigabit Ethernet LAN, Ethernet-over-SONET, Fibre Channel, Optical Transport, and other
applications. Vitesse innovation empowers customers to deliver superior products for Enterprise, Access, Metro, and Core applications.

Fiscal Periods

The Company's fiscal year is October 1 through September 30.

Basis of Presentation and Going Concern Uncertainty

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

The
Company has incurred net losses historically and has used cash in operating activities, and has an accumulated deficit of $1.6 billion as of December 31, 2007. The
Company also has significant contractual obligations related to its debt for the fiscal year 2009 and beyond. Management believes we have sufficient resources to fund our normal operations over the
next 12 months, through at least September 30, 2009. However, holders of our 1.5% Convertible Subordinated Debentures due 2024 ("2024 Debentures") have the right to require us to
repurchase the 2024 Debentures on October 1 of 2009, 2014, and 2019. In accordance with the November 3, 2006 amendment to the 2024 Debentures, the October 1, 2009 repurchase right
was increased from 100% to 113.76% of the principal amount of the 2024 Debentures to be purchased. The increase in the repurchase right would result in an additional payment of $13.3 million on
the $96.7 million outstanding 2024 Debentures. Holders also have the option, subject to certain conditions, to require the Company to repurchase any 2024 Debentures held by such holder in the
event of a fundamental change, at a price equal to 100% of the principal amount of the 2024 Debentures plus accrued and unpaid interest plus, under certain circumstances, a make-whole
premium. (See Debt Note in the accompanying financial statements).

The
Company is actively seeking various alternatives to refinance the debt. However, we can make no assurance at this time that such financing will be completed as contemplated or under
terms acceptable to the Company or its existing shareholders. Failure to generate additional revenues, raise additional capital or manage discretionary spending could have a material adverse effect on
the Company's ability to continue as a going concern and to achieve its intended business objectives. Accordingly, there is substantial doubt about our ability to continue as a going concern.

The
accompanying financial statements have been prepared on the basis of the Company continuing as a going concern. No adjustments have been made to carrying value of the assets and
liabilities that might result from the outcome of this uncertainty.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

Use of Estimates

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and disclosures made in the accompanying notes to the financial statements. We regularly evaluate estimates and assumptions related to revenue recognition,
allowances for doubtful accounts, sales returns and allowances, warranty reserves, inventory reserves, share-based compensation, goodwill and purchased intangible asset valuations and useful life, and
deferred income tax asset valuation allowances. These estimates and assumptions are based on current facts, historical experience and various other factors that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The actual results we
experience may differ materially and adversely from our original estimates. To the extent there are material differences between the estimates and the actual results, our future results of operations
will be affected.

Foreign Currency Translation

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

Concentrations of Risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash equivalents,
short-term and long-term investmentsm and account receivables. Cash equivalents consist of demand deposits and money market funds maintained with several financial
institutions. Deposits held with banks have exceeded the amount of insurance provided on such deposits. The Company maintains its cash in commercial accounts with high-credit quality
financial institutions. Although the financial institutions are considered creditworthy, balances with any one financial institution may exceed the Federal Deposit Insurance Corporation ("FDIC") limit
of $100,000. At September 30, 2008, the Company's cash balance exceeded the deposit insurance limits provided by the FDIC by $38,065,877. Cash balances held in foreign bank accounts are not
insured by the FDIC, and at September 30, 2008 these balances totaled $183,249. At September 30, 2008, the Company's foreign subsidiaries reflected $760,740, of cash on their financial
statements, which is not insured by the FDIC.

The
Company believes that the credit risk in its accounts receivable is mitigated by the Company's credit evaluation process and maintaining an allowance for anticipated losses.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

Advertising Costs

Advertising costs are expensed as incurred. Advertising expenses for the years ended September 30, 2008, 2007, and 2006 were
$201,000, $130,000, and $163,000, respectively.

Accumulated Other Comprehensive Income (Loss)

The Company reports comprehensive income (loss) in its consolidated balance sheet and consolidated statement of shareholders' equity
and comprehensive loss. Accumulated other comprehensive income consists of unrealized gains and losses on certain investments in equity securities in accordance with SFAS 115, "Accounting for Certain Investments in Debt
and Equity Securities."As of September 30, 2008, the Company had sold all of its investments in the
equity securities of publicly-traded companies and had no unrealized gains or losses.

Contingencies

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

Shipping and Handling

In accordance with the Emerging Issues Task Force ("EITF") 00-10,"Accounting for Shipping and
Handling Fees and Costs,"the Company incurred shipping costs of $0.8 million, $0.8 million, and $1.9 million for fiscal years ending 2008, 2007, and 2006
that were included in selling, general and administrative expense.

Warranty

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

Revenue Recognition

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

Vitesse
has a distribution network through which it sells most of its products. The Company recognizes revenue on a sell-through basis for all distributors, utilizing
information provided by the distributors. These distributors maintain inventory balances, which are carried on the books of Vitesse, and are given business terms to return a portion of inventory and
receive credits for changes in selling prices to end customers. At the time Vitesse ships inventory to the distributors, the magnitude of future returns and price adjustments is not known. Therefore,
revenue recognition for shipments to distributors does not occur until the distributors sell inventory to end customers, and is therefore shown as deferred revenue. Vitesse personnel are often
involved in the sales from the distributors to end 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.

We
record a reserve for estimated sales returns and allowances in the same period as the related revenues are recognized. Sales returns typically occur for quality related issues and
allowances are based on specific criteria such as rebate agreements. We base these estimates on our historical experience or the specific identification of an event necessitating a reserve. To the
extent actual sales returns or allowances differ from our estimates, our future results of operations may be affected. As of September 30, 2008, 2007, and 2006 our sales return reserve was
$54,000, $100,000, and $200,000 respectively.

On
December 28, 2007, the Company entered into an arrangement to license intellectual property to a third-party. The contract is a perpetual, nonexclusive, non-transferable,
irrevocable license for specified intellectual property. As part of the contract, we were granted a perpetual, nonexclusive, non-transferable, irrevocable license to improvements to the technology
made by the licensee, subject to certain limitations. Under the agreement, Vitesse will receive $15.0 million in license fees and royalties for the rights to certain products and technology.
The remaining $5.0 million will be received upon the earlier of licensee's first commercial sale using the intellectual property or the one-year anniversary of the agreement. For a period of
seven years from the effective date of the contract, licensee will pay royalties on a per unit basis, on each commercial sale incorporating the licensed products. Royalties will be accounted for when
received.

Sales Returns, Pricing Adjustments and Allowance for Doubtful Accounts

We record reductions to revenue for estimated product returns and pricing adjustments, such as competitive pricing programs and
rebates, in the same period that the related revenue is recorded. The amount of these reductions is based on historical sales returns, analysis of credit memo data, specific criteria included in
rebate agreements, and other factors known at the time. Additional reductions to revenue would result if actual product returns or pricing adjustments exceed our estimates. We also maintain an
allowance for doubtful accounts for estimated losses resulting from customers' inability to meet their financial obligations to us. We evaluate the collectability of accounts receivable based on a
combination of factors. Management reviews accounts receivable on a monthly basis to determine if any receivables will potentially be uncollected. The Company includes any accounts receivable balances
that are determined to be uncollectible in the overall allowance for doubtful accounts using the specific identification method. After all attempts to collect a receivable have failed, the receivable
is written off against the allowance. Management believes the allowance for doubtful accounts as of September 30,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

2008
and 2007, is adequate. However, if the financial condition of any customer were to deteriorate, resulting in an impairment of its ability to make payments, additional allowances could be
required.

Cash and Cash Equivalents

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

Investments

As of September 30, 2007, our available-for-sale marketable securities consisted of investments in
publicly-traded companies. In accordance with the Financial Accounting Standards Board's ("FASB") Statement on Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities"("SFAS 115"), these securities were recorded at fair value, with unrealized
gains and losses included as a separate component of shareholders' equity. Upon sale or liquidation, realized gains and losses were included in the consolidated statements of operations.

The
following table reflects our available-for-sale investments in the common stock of publicly-held companies as of September 30, 2007. These
investments were sold as of September 30, 2008:

As of September 30,

Estimated
Fair Value

Gains in
Accumulated
Other
Comprehensive
Income

Losses in
Accumulated
Other
Comprehensive
Income2007

$
6,881

$
4,650

$
(911
)


For
our investments in equity securities of privately-held companies where quoted market prices are not available, the cost method, combined with other intrinsic information,
is used to assess the fair value of the investment. If the carrying value is below the fair value of an investment at the end of any period, the investment is considered for impairment. Investments
are considered to be impaired when a decline in fair value is judged to be other-than-temporary. Once a decline in fair value is determined to be
other-than-temporary, an impairment charge is recorded and a new cost basis in the investment is established. Our investment in the equity securities of a
privately-held company was $248,000 as of September 30, 2008 and 2007.

Financial Instruments

SFAS No. 107,"Disclosures about Fair Value of Financial Instruments"("SFAS 107"), defines fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties.

Our
financial instruments include cash equivalents, short-term investments, restricted deposits, accounts receivable, long-term investments, accounts payable and
accrued expenses. These financial instruments are stated at their carrying values, which are reasonable estimates of their fair values.

Additionally,
our financial instruments include our 1.5% Convertible Subordinated Debentures ("2024 Debentures") and a $30 million senior note with Whitebox VSC, LTD.
("Whitebox") (see Note 6Debt). We have estimated the approximate fair value of the 2024 Debentures a convertible bond valuation model within a lattice framework. The valuation
model combined expected cash

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

outflows
with market-based assumptions regarding risk-adjusted yields, stock price volatility, and using recent price quotes and trading information regarding shares of our common stock
into which the debentures are convertible. The fair value of the 2024 debentures was estimated to be $36.5 million and $40.0 million, as of September 30, 2008 and 2007,
respectively.

We
completed a second Consent Solicitation of the holders of the 2024 Debentures where we agreed to increase the repurchase price with respect to the October 1, 2009, repurchase
right from 100% to 113.76% of the principal amount of the Debentures to be purchased (the 'premium put'). We have estimated the approximate fair value of the premium put as the difference between the
estimated value of the debentures derived using the aforementioned lattice-based convertible bond valuation model with the premium put feature incorporated in the model as compared with the estimated
value of the debentures without the premium put feature incorporated in the model. The premium put was estimated to have no fair value as of September 30, 2008 and 2007.

The
senior note with Whitebox is stated at carrying value, net of unamortized debt discount, which is a reasonable estimate of fair value. We performed a test of the reasonableness of
the carrying value as compared with the estimated fair value using a lattice-based convertible bond valuation model incorporating market-based assumptions similar to the analysis performed for the
2024 Debentures.

Inventories

Inventories are stated at the lower of cost or market ("LCM") (net realizable value). Costs associated with the development of a new
product are charged to engineering, research and development expense as incurred, until the product is proven through testing and acceptance by the customer. At each balance sheet date, the Company
evaluates its ending inventories for excess quantities and obsolescence. This evaluation includes analyses of sales levels by product and projections of future demand. Inventories, net of reserves are
$37.5 million and $33.7 million at September 30, 2008 and 2007, respectively.

Property, Plant and Equipment

Property, plant and equipment are carried at cost. Depreciation and amortization are provided using the straight-line
method over the assets' estimated remaining useful lives, ranging from three to five years, except for leasehold improvements, which are stated at cost and amortized over the shorter of the term of
the related lease or their estimated useful life. Depreciation and amortization costs from continuing operations were $2.9 million, $2.9 million, and $9.5 million for fiscal years
2008, 2007, and 2006, respectively. Depreciation and amortization costs from discontinued operations were $0.0 million, $0.6 million, and $2.4 million for fiscal years 2008, 2007,
and 2006, respectively.

On
December 29, 2005, the Company entered into a sale-leaseback arrangement on a building in Camarillo, California, requiring $1.5 million of the sales proceeds
to be deposited into an escrow account for improvements to the building. Upon completion of the improvements, the Company capitalized the cost of the improvements and is recording amortization expense
in accordance with its fixed asset policy. The Company has a deferred lease incentive liability recorded to reflect the amount of the leasehold improvements and is amortizing the liability
straight-line basis over the term of the lease.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

Goodwill and Other Intangible Assets

Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible
and intangible assets acquired. We perform a two-step process on an annual basis, or more frequently if necessary, to determine: (i) whether the fair value of the relevant reporting
unit exceeds carrying value; and (ii) to measure the amount of an impairment loss, if any. We completed this process in the fourth quarter of fiscal 2008 and determined that there was no
impairment to goodwill. Intangible assets, other than goodwill, are amortized over their useful lives unless these lives are determined to be indefinite. Other intangible assets are carried at cost
less accumulated amortization. Amortization is computed over the useful lives of the respective assets, generally two to 10 years.

Income Taxes

We account for income taxes pursuant to the provisions of SFAS No. 109,"Accounting for Income
Taxes"(SFAS 109). Under the asset and liability method of SFAS 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 carry forwards. We
assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we establish a valuation allowance. To the
extent we establish a valuation allowance or increase this allowance in a period, it must include an expense within the tax provision in the statement of operations. The Company adopted the provisions
of Financial Accounting Standards Board Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"), an interpretation
of SFAS No. 109, on October 1, 2007. The Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, "Accounting for Uncertainty in Income Taxes"
("FIN 48"), an interpretation of SFAS No. 109, on October 1, 2007 and preliminarily assessed the impact of FIN 48 on its financial statements and determined that no
adjustment to retained earnings is necessary.

Research and Development Costs

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

Computation of Net Income and Loss per Share

In accordance with SFAS 128, "Earnings per Share,"basic net income and loss per
share are computed by dividing net income and loss by the weighted average number of common shares outstanding during the period.

Diluted
income and loss per share from continuing and discontinued operations and net income and loss per share is calculated using only the weighted-average number of common shares
outstanding during each of the periods, as the inclusion of any common stock equivalents would be anti-dilutive.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

September 30,2008

2007

2006(in thousands)Outstanding stock options


20,101


25,544


43,063Outstanding warrants


150


102


Convertible debentures


37,981


37,981


24,668Total potential common shares excluded from calculation


58,232


63,627


67,731


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

September 30,2008

2007

2006(in thousands, except per share data)Basic:Income (loss) from continuing operations

$
7,510

$
(4,825
)
$
(52,003
)Income (loss) from discontinued operations


9,044


(16,822
)

(15,282
)Net income (loss)

$
16,554

$
(21,647
)
$
(67,285
)Weighted average number of sharesbasic and diluted


223,614


223,556


222,137Income (loss) per sharebasic and dilutedContinuing operations

$
0.03

$
(0.02
)
$
(0.23
)Discontinued operations


0.04


(0.08
)

(0.07
)Net income (loss)

$
0.07

$
(0.10
)
$
(0.30
)


Long-Lived Assets

The Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to
future undiscounted operating cash flows expected to be generated by the asset, or fair market value. Assets held for sale are recorded at the lesser of fair value less costs to sell or carrying
value. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. There were no impairment charges for the fiscal years ended 2008, 2007, and 2006.

Short-Term Investments

Investments in two limited partnerships, Vitesse Venture Fund, L.P. and Vitesse Venture Fund II, L.P. are
consolidated in the accompanying consolidated financial statements in accordance with SFAS No. 94 "Consolidation of All Majority-Owned
Subsidiaries," ("SFAS 94"). The Company has recorded a liability for the limited partners' investments in the joint ventures under the caption "minority interest" in the
accompanying consolidated balance sheets.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

Share-Based Compensation

The Company has in effect several stock plans under which incentive and non-qualified stock options have been granted to
employees, contractors, and directors. These plans include the 2001 Stock Incentive Plan, the 1991 Stock Option Plan, the 1991 Directors' Stock Option Plan, and the 1999 International Stock Option
Plan, as discussed in Note 7Shareholders' Equity in the accompanying financial statements of Notes to Consolidated Financial Statements. The Company also had an employee stock
purchase plan for all eligible employees. Beginning in fiscal year 2006, the Company adopted SFAS No. 123R ("SFAS 123R")"Share-Based
Payments,"which requires all share-based payments to employees, including grants of employee stock options and employee stock purchase rights, to be recognized in the
financial statements based on their respective grant date fair values and does not allow the previously permitted pro forma disclosure-only method as an alternative to financial statement
recognition. SFAS 123R supersedes Accounting Principles Board ("APB") Opinion No. 25,"Accounting for Stock Issued to Employees"("APB 25"), and related interpretations and amends SFAS No. 95,"Statement of Cash Flows."SFAS 123R also requires the benefits of
tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than operating cash flow, as required under previous literature.

The
Company adopted SFAS 123R effective October 1, 2005, using the modified-prospective method of recognition of compensation expense related to share-based payments. Under
this transition method, compensation expense recognized during the years ended September 30, 2008, 2007, and 2006 included:
(i) compensation expense for all share-based awards granted prior to, but not yet vested, as of September 30, 2005, based on the grant date fair value estimated in accordance with the
original provisions of SFAS 123; and (ii) compensation expense for all share-based awards granted subsequent to September 30, 2005, based on the grant date fair value estimated in
accordance with the provisions of SFAS 123R. The Company's consolidated statements of operations for the years ended September 30, 2008, 2007, and 2006 reflect the impact of adopting
SFAS 123R.

SFAS 123R
requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award
that is ultimately expected to vest is recognized as expense ratably over the requisite service periods. The Company has estimated the fair value of each award as of the date of grant or assumption
using the Black-Scholes option pricing model, which was developed for use in estimating the value of traded options that have no vesting restrictions and that are freely transferable. The
Black-Scholes model considers, among other factors, the expected life of the award and the expected volatility of the Company's stock price. Although the Black-Scholes model meets the requirements of
SFAS 123R, the fair values generated by the model may not be indicative of the actual fair values of the Company's awards, as it does not consider other factors important to those share-based
payment awards, such as continued employment, periodic vesting requirements, and limited transferability.

On
November 10, 2005, the FASB issued FASB Staff Position No. FAS 123R-3,"Transition Election Related to Accounting for Tax Effects of
Share-based Payment Awards"("SFAS 123R-3"). The Company has elected to adopt the alternative transition method provided in SFAS 123R-3
for calculating the tax effects of share-based compensation pursuant to SFAS 123R. The alternative transition method includes a simplified method to establish the beginning balance of the
additional paid-in-capital pool ("APIC pool") related to the tax effects of employee share-based compensation expense, and to determine the subsequent impact on the APIC pool
and consolidated statements of cash flows of the tax effects of

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

employee
share-based compensation awards that were outstanding at the Company's adoption of SFAS 123R.

In
conjunction with the adoption of SFAS 123R, we elected to recognize compensation expense for all share-based payment awards granted after September 30, 2005 on a
straight-line basis over the requisite service period for the entire award. The amount of compensation cost recognized through the end of each reporting period is equal to the portion of
the grant-date value of the awards that have vested, or for partially vested awards, value of the portion of the award that is ultimately expected for which the requisite services have
been provided.

Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 48, "Accounting for Uncertainty in Income
Taxes"an interpretation of FASB Statement No. 109 ("FIN 48"), which clarifies the
accounting for uncertainty in tax positions. This Interpretation requires that we recognize the impact of a tax position in our financial statements, if that position is more likely than not to be
sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006, with the cumulative effect
of the change in accounting principle recorded as an adjustment to opening retained earnings. Management adopted this pronouncement in the current year financial statements. The Company adopted the
provisions of Financial Accounting Standards Board Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"), an
interpretation of SFAS No. 109, on October 1, 2007 and assessed the impact of FIN 48 on its financial statements and determined that no adjustment to retained earnings is
necessary.

In
September 2006, the FASB issued SFAS No. 157,"Fair Value Measurement"("SFAS 157") which defines fair value, establishes
a framework for measuring fair value and expands disclosures regarding assets and liabilities measured at fair value. We will be required to adopt SFAS 157 in the first quarter of fiscal 2009.
The effect of adoption may have a material impact on our financial condition or results of operations. The ultimate effect is indeterminate because the results of any fair value measurements in
accordance with SFA 157 will be dependent upon the facts and circumstances on the date of the valuation.

In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities"
("SFAS 159"). The statement permits entities to choose to measure many financial instruments and certain other items at fair value that are currently not required to be measured at fair value.
We are not required to adopt SFAS 159 and do not expect that the adoption would have a material impact on our financial condition or results of operations.

In
June 2007, the FASB ratified Emerging Issues Task Force consensus on EITF Issue No. 07-3,"Accounting for Non-refundable
Advanced Payments for Goods or Services to be used in Future Research and Development Activities" ("EITF 07-3").EITF 07-3 requires that
these payments be deferred, capitalized, and expensed as goods are delivered or as the related services are performed. We will be required to adopt EITF 07-3 in the first quarter of
fiscal 2009 and do not expect that the adoption will have a material impact on our financial condition or results of operations.

In
December 2007, the FASB issued SFAS No. 141R,"Business Combinations,"("SFAS 141R"). SFAS 141R establishes
principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any

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

non-controlling
interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what
information to disclose to enable users of financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for financial statements issued
for fiscal years beginning after December 15, 2008. We will be required to adopt the statement in the first quarter of fiscal 2009 and will account for and disclose all business combinations
effected after the adoption in accordance with SFAS 141R.

In
March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activitiesan Amendment of FASB Statement
No. 133" ("SFAS 161") This Statement requires enhanced disclosures about an entity's derivative and hedging activities and is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008. We do not expect that the adoption will have a material impact on our financial condition or results of
operations.

In
May 2008, the FASB issued FSP APB 14-1,"Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including
Partial Cash Settlement)"("APB 14-1"). APB 14-1 will require us to separately account for the liability and equity components of a
convertible debt security by measuring the fair value of a similar nonconvertible debt security when interest cost is recognized in subsequent periods. APB 14-1 will require us to
retroactively separate the liability and equity components of such debt in our consolidated balance sheets on a fair value basis. APB 14-1 is applicable to our $96.7 million
2024 Debentures which allows for settlement of the conversion in cash. APB 14-1 will be effective for fiscal years beginning after December 15, 2008, and we are required to
adopt the FSP in our first quarter of fiscal 2010. APB 14-1 does not permit early adoption. We are currently evaluating the impact that the adoption of APB 14-1
will have on our consolidated financial statements.

NOTE 2GOODWILL AND OTHER INTANGIBLE ASSETS

We account for goodwill and other intangible assets in accordance with SFAS No. 142,"Accounting for Goodwill and Other Intangible
Assets."We evaluate these assets, including purchased intangible assets deemed to have indefinite lives, on an annual basis in the fourth quarter or, more frequently, if we
believe indicators of impairment exist. Factors we consider important that could trigger an impairment review include significant underperformance to historical or projected operating results,
substantial changes in our business strategy, and significant negative industry or economic trends. If such indicators are present, we compare the fair value of the goodwill of our only reporting unit
to its carrying value.

For
other intangible assets and long-lived assets, in accordance with SFAS No. 144, we determine whether the sum of the estimated undiscounted cash flows attributable
to each asset in question is less than its carrying value. If less, we recognize an impairment loss based on the excess of the carrying amount of the assets over their respective fair values.

Fair
value of goodwill is determined by considering the Company's market capitalization, discounted cash flows, and a market approach as of the valuation date. In considering the
Company's market capitalization, an estimated premium to reflect the fair value on a control basis was applied. This premium was estimated based on an evaluation of control premiums identifiable in
comparable transactions. Market-based assumptions within the income and market approaches were used to estimate the fair value of our equity and the assets; discounted cash flows were used to value
debt. Fair value of other intangible assets is determined by undiscounted future cash flows, appraisals or other

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NOTE 2GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)

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

The
Company evaluated the carrying value of goodwill and determined that the fair values of the assets exceed carrying value. Accordingly, no impairment charges were necessary for the
years ended September 30, 2008, 2007, and 2006.

On
August 23, 2007, the Company announced the sale of a portion of the Storage Products business (See Note 3Discontinued Operations and Assets Held for Sale).
In accordance with EITF 98-3,"Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business,"the portion of the Storage Products business sold qualifies as a business and, in accordance with SFAS No. 142,"Goodwill and Other Intangible
Assets,"the Company allocated goodwill to the portion of the business sold. The Company determined the value of goodwill attributable to the portion of the business sold based
on the relative sales price of the business sold to the estimated fair market value of the Company, at the time the sale commenced. For the year ended September 30, 2007, $31.3 million
of net goodwill was included on the balance sheet in "Assets Held for Sale."

Carrying
value of goodwill for the years ended September 30, 2008 and 2007 was $191.4 million. No other activity or adjustments to goodwill occurred for the fiscal years
ended September 30, 2008 and September 30, 2007.

Due
to a significant drop in our stock price in the first quarter of 2009 we expect to perform an impairment analysis from which we may conclude a material amount of our goodwill is
impaired and consequently some or all of it should be written-off in that quarter.

Other Intangible Assets

Other intangible assets consist primarily of existing technologies, customer relationships, and covenants
"not-to-compete" acquired in business combinations. Acquired intangibles are amortized on a straight-line basis over the respective estimated useful lives of the
assets. The carrying value of intangible assets at September 30, 2008 and 2007 is set forth in the tables below. Accumulated

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NOTE 2GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)

amortization
of intangibles was $48.3 million and $45.9 million at September 30, 2008 and 2007, respectively.

Gross Carrying
Amount

Accumulated
Amortization

Net Carrying
AmountSeptember 30, 2008Customer relationships

$
2,700

$
(2,700
)
$
Technology


40,350


(39,803
)

547Covenants not to compete


4,000


(4,000
)

Intellectual property


2,178


(1,812
)

366Total

$
49,228

$
(48,315
)
$
913September 30, 2007Customer relationships

$
2,700

$
(2,700
)
$
Technology


40,350


(37,966
)

2,384Covenants not to compete


4,000


(4,000
)

Intellectual property


2,178


(1,267
)

911Total

$
49,228

$
(45,933
)
$
3,295


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

Fiscal Year2009

$
8442010


69Total

$
913


NOTE 3DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE

On August 23, 2007, we announced the sale of a portion of our Storage Products business to Maxim Integrated Products, Inc. ("Maxim") for $62.8 million in cash and
potential earn-out payments. Maxim acquired the Company's SAS/SATA expander products, enclosure and baseboard management devices, and certain other assets of the Storage Products business
("SPD"). On October 29, 2007, the Company completed its sale of a portion of the Storage Products business discussed above, with a gain on the sale of approximately $21.5 million. The
assets and liabilities of the SPD business of $35.5 million and $0.4 million, respectively, at September 30, 2007 have been classified as "assets held for sale" and "liabilities
held for sale" and its operations and cash flows for the years ended September 30, 2008 and 2007 have been reflected as discontinued operations in the accompanying consolidated financials.
Under the terms of the agreement, we have received cash earn-out payments of approximately $4.0 million upon achieving certain commercial milestones over the period of fiscal 2008.
No additional payments under the earn-out provisions are expected.

We
recorded amounts in discontinued operations in accordance with SFAS No. 144,"Accounting for the Impairment or Disposal of Long-Lived
Assets"(SFAS 144). Accordingly, we have reported the results of operations and financial position of this in discontinued operations within the statements of

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

operations
and the balance sheets for all periods presented. See Note 2Goodwill and Other Intangible Assets.

Selected
operating results were as follows:

September 30,2008

2007(in thousands)Revenues

$
2,656

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


8,732


(4,601
)Provision for income taxes


1,222


224Income (loss) from discontinued operations


9,044


(16,822
)Net income (loss)

$
16,554

$
(21,647
)


In
accordance with EITF Issue 87-24, "Allocation of Interest to Discontinued Operations"(EITF Issue 87-24), we
have allocated interest expense to discontinued operations associated with debt instruments that were required to be paid upon the sale of SPD. Interest expense included in income (loss) from
discontinued operations, which includes interest incurred and amortization expense of deferred financing fees for our former loan, totaled $17.0 million and $10.2 million for fiscal
years 2008 and 2007, respectively.

The
following assets and liabilities have been segregated and included in assets and liabilities held for sale, as appropriate, in the consolidated balance sheet as of
September 30, 2007:

September 30,
2007(in thousands)Inventory

$
2,217Property and equipment, net


582Goodwill & intangible assets


32,352Prepaid expenses


321Assets held for sale

$
35,472Accrued vacation


372Liabilities held for sale

$
372


Results
of discontinued operations include share-based compensation expense. Fiscal 2008 included a reduction of expense of $0.3 million due to the cancellation of options in
conjunction with the termination of former Storage Products employees, while fiscal 2007 included $1.3 million in share-based compensation expense.

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

The Company incurred substantial costs in connection with restructuring and remediation efforts. During the fiscal years 2008, 2007, and 2006 we recognized expenses of
$10.8 million, $13.6 million, and $16.6 million, respectively, related to work performed on correcting and reporting errors in our stock option grants, revenue recognition
policies, inventory valuation, and other legal and financial issues. Of these costs, legal fees constituted $4.1 million, $7.6 million, and $11.8 million, respectively, and other
professional and accounting fees were $6.7 million, $6.0 million, and $4.1 million, respectively.

NOTE 5BALANCE SHEET DETAIL

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

September 30,2008

2007Inventory:Raw materials

$
3,067

$
4,567Work-in-process


13,926


11,773Finished goods


20,473


17,388Total

$
37,466

$
33,728Property, Plant and Equipment:Machinery and equipment

$
90,493

$
106,586Furniture and fixtures


678


2,064Computer equipment


8,942


24,102Leasehold improvements


5,692


10,145Land





1,630Buildings





2,024Construction In Progress


1,027


106,832


146,551Less: Accumulated depreciation and amortization


98,748


137,265Total

$
8,084

$
9,286


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NOTE 5BALANCE SHEET DETAIL (Continued)

September 30,2008

2007Other Assets:Debt issue costs

$
1,754

$
3,209Restricted cash


1,517


1,504Other


329


379Total

$
3,600

$
5,092Accrued Expenses and Other Current Liabilities:Accrued legal fees and settlements

$
4,588

$
7,666Accrued wages and benefits


6,203


4,206Accrued vacation


2,720


2,673Accrued software license agreements


326


1,987Accrued subsequent payments


1,675


1,294Accrued commissions


89


1,148Miscellaneous taxes


353


299Interest payable


1,270


3,531Customer prepayments and deposits


143


1,507Other


2,875


1,474Total

$
20,242

$
25,785


NOTE 6DEBT

On September 22, 2004, the Company issued $90.0 million in aggregate principal amount of its 1.5% Convertible Subordinated Debentures due 2024 ("2024 Debentures") to
qualified institutional buyers in
reliance on Rule 144A under the Securities Act of 1933 ("the Securities Act"). Net proceeds received by the Company, after costs of issuance, were approximately $86.9 million. On
October 15, 2004, the Company issued an additional $6.7 million in aggregate principal amount of its 2024 Debentures to qualified institutional buyers in reliance on Rule 144A
under the Securities Act. Net proceeds received by the Company from the October issuance, after costs of issuance, were approximately $6.5 million.

The
2024 Debentures are unsecured obligations and are subordinated in right of payment to all of the Company's existing and future senior indebtedness. Interest is payable in arrears
semiannually on October 1 and April 1 of each year, beginning April 1, 2005. On August 15, 2006, the Company received notification from the Trustee under the Indenture,
dated as of September 22, 2004, relating to the Company's 2024 Debentures. The Trustee alleged compliance deficiencies under the Indenture relating to the Company's failure to file with the
Securities and Exchange Commission and the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2006. If not cured within 60 days, the alleged
deficiencies would be an Event of Default and the Trustee could seek remedies as provided in the Indenture. Although the Company did not believe there were compliance deficiencies under the Indenture,
and that an Event of Default did not occur, the Company negotiated with the holders of a majority of the 2024 Debentures to reach a resolution to the dispute. On September 24, 2007, the Company
entered into a Second Supplemental Indenture amending Section 1.1 of the Indenture related to the "Interest Rate"; Section 4.1(d) of the Indenture related to "Default" or "Event of
Default"; and Section 4.2 of the Indenture related "Acceleration of Maturity." As part of the

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NOTE 6DEBT (Continued)

amendment,
the Company agreed to increase the interest payable for the period starting April 1, 2007, through, but not including October 1, 2007, by $20 per $1,000 principal amount of
the 2024 Debentures. On October 1, 2007, the Company included an additional $1.9 million payment with the semiannual payment of interest due.

On
October 23, 2006, the Company solicited consents from the holders of 2024 Debentures that, if received, would provide that: 1) the holders of the 2024 Debentures and the
Trustee under the Indenture would agree that, for 18 months after the date the proposed amendments are effective, the Trustee would forbear from taking any action to exercise any rights or
remedies that relate to the filing of reports required under the Exchange Act; 2) the Company would agree not to repay the 2024 Debentures pursuant to the purported acceleration request sent by
the Trustee to the Company during the last six months of the forbearance period; 3) the indenture for the 2024 Debentures would be amended so that the conversion price of the 2024 Debentures
would be decreased permanently from $3.92 per share of common stock to $2.546 per share of common stock, subject to further adjustment as set forth in the indenture; and 4) the repurchase price
with respect to the October 1, 2009 repurchase right was increased from 100% to 113.76% of the principal amount of the 2024 Debentures to be purchased, plus accrued and unpaid interest (the
October 1, 2014 and October 1, 2019 repurchase rights would not be changed). The consents were received and the amendments became effective November 3, 2006.

In
accordance with SFAS No. 133,"Accounting for Derivative Instruments and Hedging Activities"("SFAS 133"), the change in
the repurchase price of the October 1, 2009 repurchase right created an
embedded derivative (the "premium put") that must be bifurcated from the underlying debt instrument and valued as a separate financial instrument. Any gain or loss on the fair value of the premium put
is reflected in current earnings. The premium put was estimated to have no fair value as of September 30, 2008 and 2007, principally as a result of the Company's current credit-worthiness and
lack of liquidity to satisfy the premium put. Regardless of the accounting valuation assigned to the premium put, should the 2024 Debenture holders exercise their right and put their bonds to the
Company on October 1, 2009, the Company will record an obligation for the total amount of the put at that date.

The
modification of the conversion feature discussed above resulted in an increase in the initial conversion rate to approximately 392.773 shares of common stock per $1,000 principal
amount of the debentures from approximately 255.1020 shares of common stock per $1,000 principal amount of the debenture. The modification of the conversion feature on the 2024 Debentures resulted in
a debt instrument substantially different than the original debt instrument requiring that the unamortized portion of the fees incurred for the issuance of the debt be expensed in accordance with
EITF 96-19,"Debtor's Accounting for a Modification or Exchange of Debt Instruments."Approximately $2.0 million was
recognized as a loss on extinguishment of debt as of September 30, 2007.

Upon
conversion, the Company will have the option to deliver cash in lieu of shares of its common stock or a combination of cash and shares of common stock. The Company may redeem the
2024 Debentures after October 1, 2007, if its stock price is at least 170% of the conversion price, or approximately $4.32 per share, for 20 trading days within any consecutive
30-day trading period, and may also redeem the 2024 Debentures beginning October 1, 2009, without being subject to such condition. In addition, holders of the 2024 Debentures have
the right to require the Company to repurchase the 2024 Debentures on October 1 of 2009, 2014, and 2019. In accordance with the November 3, 2006 amendment to the debentures, the
October 1, 2009, repurchase right was increased from 100% to 113.76% of the principal amount of the 2024 Debentures to be purchased. The increase

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NOTE 6DEBT (Continued)

in
the repurchase right would result in an additional payment of $13.3 million on the $96.7 million outstanding debentures. Holders also have the option, subject to certain conditions,
to require the Company to repurchase any debentures held by such holder in the event of a fundamental change, at a price equal to 100% of the principal amount of the debentures plus accrued and unpaid
interest plus, under certain circumstances, a make-whole premium. For the years ended September 30, 2008 and 2007, interest expense relating to the debentures was
$1.5 million and $3.4 million, respectively. At September 30, 2007, outstanding debentures were $96.7 million.

In
May 2008, the FASB issued FSP APB 14-1,"Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including
Partial Cash Settlement)"("APB 14-1"). APB 14-1 will require us to separately account for the liability and equity components of a
convertible debt security by measuring the fair value of a similar nonconvertible debt security when interest cost is recognized in subsequent periods. APB 14-1 will require us to
retroactively separate the liability and equity components of such debt in our consolidated balance sheets on a fair value basis. APB 14-1 is applicable to our $96.7 million
2024 Debentures which allow for settlement in cash. APB 14-1 will be
effective for fiscal years beginning after December 15, 2008, and we are required to adopt the FSP in our first quarter of fiscal 2010. APB 14-1 does not permit early
adoption. We are currently evaluating the impact that the adoption of APB 14-1 will have on our consolidated financial statements.

Other
long-term debt at September 30, 2008 and 2007 consist of the following (in thousands):

September 30,2008

2007Whitebox VSC, LTD., net of discount of $0.6 million

$
29,423

$
Tennenbaum Capital Partners, net of discount of $1.5 million





50,450Paid-in-kind interest





7,968Total long-term debt

$
29,423

$
58,418Years ended September 30,2009




$
2010





2011





2012





30,0002013





Thereafter





96,700$
126,700


As
of September 30, 2008, other long-term debt consists of a $30.0 million loan with Whitebox VSC, LTD. (Whitebox) net of $0.6 million
unamortized debt discount. On October 29, 2007, concurrent with the sale of a portion of our Storage Products business, the Company entered into a $30 million financing agreement with
Whitebox due October 29, 2011. Loan proceeds were used to pay off a portion of existing TCP loans and for general corporate purposes. To secure the debt, the Company paid approximately
$2.3 million in fees that are recorded as debt issuance costs in Other Assets. These fees are being amortized as interest expense over the term of the loan. Unamortized debt issuance costs as
of September 30, 2008 were approximately $1.8 million. Interest on the unpaid principal, per annum, is the greater of (i) the sum of the LIBOR Rate for the quarterly interest
period plus 4%; or (ii) 8.5%. Interest is payable quarterly with the first interest payment due January 15, 2008.

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NOTE 6DEBT (Continued)

At
September 30, 2008, the effective interest rate was 11.082%. The loan is secured by substantially all of our assets. In connection with this loan agreement, the Company and Whitebox also
entered into a Senior Unsecured Convertible Note Purchase Agreement that gives Whitebox the right, until the third anniversary of the initial funding, to purchase convertible notes in an aggregate
principal amount of up to $45.0 million, which we would use to repay amounts outstanding under the loan. These convertible notes, if issued, would be convertible into the common stock of
Vitesse at a conversion price of $2.00 per share, subject to adjustment. As of September 30, 2008, no notes were issued to Whitebox. For the year ended September 30, 2008, interest
expense relating to the note was $3.1 million. The agreement contains various restrictive covenants. As of September 30, 2008, we were in compliance with terms of the covenants.

As
of September 30, 2007, other long-term debt consisted of a $52.0 million loan and $8.0 million of paid-in-kind interest with
TCP net of $1.6 million unamortized debt discount. On June 5, 2006, the Company entered into a $22.0 million financing agreement with TCP due July 15, 2010. This loan was
used to pay off existing Silicon Valley Bank loans, serve as collateral for certain letters of credit for vendors, and for general corporate purposes. On June 20, 2006, the Company executed the
option provided in the original loan and borrowed an additional $30.0 million from TCP, subject to the same terms and conditions as the June 5, 2006 agreement. As part of the additional
funding, Vitesse extended the terms of the debt to July 15, 2011. In connection with securing the debt, the Company paid approximately $2.7 million in fees that are recorded as debt
issuance costs in Other Assets. These fees are being amortized as interest expense over term of the loan. Unamortized debt issuance costs as of September 30, 2007, were approximately
$2.0 million. The loan terms included several provisions including a make-whole premium if the loan was repaid before the second anniversary of the closing date. Interest is
comprised of three components and is computed as follows: 1) LIBOR at two days prior to the interest period, rounded up to the nearest 1/16 percent, plus 4% per annum;
plus 2) 5% per annum payable-in-kind, which is added to the balance of the debt; plus 3) 4% per
annum optional cash interest paid quarterly or payable-in-kind interest at 150% of the cash interest rate with the payable-in-kind interest, if elected,
added to the balance of the debt. Interest is payable quarterly for the cash components with the payable-in-kind accrued until the end of the loan term. The Company elected the
payable-in-kind interest for the third component of interest expense for all periods from the start of the loan through April 1, 2007; the optional cash interest was
elected for the period ended October 1, 2007. At September 30, 2007, the interest rate was 17.882%. All real and personal property as well as a perfected security interest in
intellectual property, served as collateral for the loan (except for some specifically excluded assets). The agreement contains various restrictive covenants, including a requirement to provide copies
of all financial and other reports. As of September 30, 2007, we were not in compliance with the financial reporting covenants of our debt arrangement with TCP. As disclosed below, we settled
the TCP debt in full in 2008 from the combined proceeds of the SPD sale and the Whitebox debt financing. Accordingly, management concluded that the TCP debt is properly classified as
long-term debt as of September 30, 2007.

On
August 22, 2007, we executed a Letter Agreement ("Letter Agreement") with TCP and the Agent for TCP allowing for the sale of certain assets (the Transferred Assets) and
providing for repayment in full of all amounts outstanding on the loan. In the event that all outstanding amounts were not paid at the close of the sale of the Transferred Assets, the Letter Agreement
provided release of liens on the Transferred Assets upon payment of a specified portion of the debt along with warrants for TCP to acquire 2% of the Company's common stock at a pre-set
price, subject to adjustment. On October 10, 2007, the Company entered into Amendment No. 1 to the agreement (Amendment No. 1)

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NOTE 6DEBT (Continued)

with
TCP that, among other things, permitted the sale of certain assets of the Company according to the conditions, above, and included certain restrictions on the Company's financing activities. All
provisions of the Letter Agreement and Amendment No. 1 were contingent on the Company not repaying the balance of the TCP loan in full upon the closing of the sale of the Transferred Assets.
The provisions would not be operative if the closing of the sale of the Transferred Assets did not occur by November 20, 2007. On October 29, 2007, we settled all amounts outstanding
under the agreement, as discussed below.

On
October 29, 2007, the Company sold a portion of its Storage Products business. The proceeds from the sale of the Storage Products business' assets, $62.8 million, and a
portion of the financing received from Whitebox were used to pay off the TCP loan including all accrued interest. The aggregate amount of the loan payoff to TCP was approximately $76.0 million,
of which approximately $16.4 million pertained to the make-whole premium.

NOTE 7SHAREHOLDERS' EQUITY

Preferred Stock

The Company is authorized to issue up to 10,000,000 shares of nonvoting convertible preferred stock, with a par value of $0.01 per
share, of which 500,000 were reserved for issuance under the Rights Plan, described below, and none were outstanding as of September 30, 2008 and 2007.

Common Stock

The Company is authorized to issue up to 500,000,000 shares of common stock, with a par value of $0.01 per share, of which 226,205,580
and 223,555,580 shares were outstanding as of September 30, 2008 and 2007, respectively.

Rights Plan

Vitesse has a shareholder rights plan intended to preserve the long-term value of Vitesse to our shareholders by
discouraging a hostile takeover. Under the shareholder rights plan, each outstanding share of our common stock has an associated preferred
stock purchase right. The rights are exercisable only if a person or group acquires 15% or more of our outstanding common stock. If the rights become exercisable, the rights would allow their holders
(other than the acquiring person or group) to purchase fractional shares of our preferred stock, to purchase the number of shares of common stock of Vitesse having a market value of twice the exercise
price of the right, or to purchase the number of shares of common stock of the company acquiring us having a market value of twice the exercise price of the right. The dilutive effect of the rights on
the acquiring person or group is intended to encourage such person or group to negotiate with our Board of Directors prior to attempting a takeover. If our Board of Directors believes a proposed
acquisition of Vitesse is in the best interests of Vitesse and its shareholders, our Board of Directors may amend the shareholder rights plan or redeem the rights for a nominal amount in order to
permit the acquisition to be completed without interference from the plan.

Employee Stock Purchase Plan

The Company had a qualified employee stock purchase plan for all eligible employees. Under the plan, employees purchased shares of the
Company's common stock at six-month intervals at 85% of the lower of the fair market value at the beginning of the six-month offering period and the end of the

98

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 7SHAREHOLDERS' EQUITY (Continued)

six-month
purchase period. Employees purchased such stock using payroll deductions, which could not exceed 20% of their compensation. On January 24, 2006, the shareholders approved
an amendment to the plan to increase the number of shares reserved for issuance from 21.5 million shares to 33.5 million shares of common stock.

For
the year ended September 30, 2006, the Company recorded $557,513 of compensation expense related to the employee stock purchase plan, in accordance with SFAS No. 123R,
which is included in the total share-based compensation expense. In July 2006, the Company suspended the employee stock purchase plan, and therefore, recorded no related compensation expense for the
years ended September 30, 2008 and 2007.

In
fiscal 2006, the Company issued 1,969,369 shares under the plan at an average price of $1.63 per share. As of September 30, 2008 and 2007, there was no unrecognized
compensation cost related to the purchase plan.

Stock Option Plans

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

On
January 23, 2001, the Company's shareholders approved the adoption of the 2001 Stock Incentive Plan ("2001 Plan"), which replaced the 1991 Plan that expired in August 2001 and
the 1991 Directors' Stock Option Plan that expired in January 2002. The 2001 Plan provides for the grant to employees of incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended, and for the grant to employees, consultants, and directors of non-qualified stock options for certain share-based awards as determined by the
Board of Directors or the Compensation Committee of the Board of Directors. The 2001 Plan was amended in September 2008 to, among other things, simplify the criteria for determining the grant price of
options granted under the plan.

Prior
to the September 2008 amendment to the 2001 Plan, , the number of shares reserved for issuance automatically increased by a number of shares equal to the lesser of: (i) 4%
of the Company's common stock outstanding at the end of each fiscal year and (ii) 17.5 million shares. Under all stock option plans, a total of 82,882,456 shares of common stock have
been reserved for issuance and 60,016,560 shares remained available for future grant as of September 30, 2008.

The
following table summarizes compensation costs related to the Company's share-based compensation plans for the years ended September 30:

September 30,2008

2007

2006Cost of revenues

$
801

$
1,287

$
1,374Engineering, research and development


1,322


2,402


3,117Selling, general and administrative


2,057


1,805


2,989Share-based compensation expense related to continuing operations


4,180


5,494


7,480Share-based compensation expense related to discontinued operations


(284
)

1,331


1,712Total share-based compensation expense

$
3,896

$
6,825

$
9,192


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 7SHAREHOLDERS' EQUITY (Continued)

In
addition to the share-based compensation expense related to the Company's plans, we recorded $5,000 of share-based compensation expense in fiscal 2008 related to the employee stock
appreciation rights and $176,000 of share-based compensation expense in fiscal 2007 related to warrants issued to A&M to purchase 150,000 shares of common stock. Pursuant to SFAS 123R, the
stock appreciation rights and warrants are considered liability awards and as such, these amounts are accrued in the liability section of the balance sheet.

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

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

Employee Stock Option Plans

Employee Stock
Purchase Plan2008

2007

2006

2008

2007

2006Expected life (in years)


4.68


4.68


4.77

n/a
(1)
n/a
(1)

0.70Expected volatility:Weighted-average


66.0
%

81.1
%

84.3
%
n/a
(1)
n/a
(1)

53.0
%Range


65.2%-66.4
%

69.6%-85.4
%

57.0%-101.0
%
n/a
(1)
n/a
(1)

50.0%-58.0
%Expected dividend










n/a
(1)
n/a
(1)

Risk-free interest rate


2.3%-4.2


4.6%-4.9
%

3.3%-6.2
%
n/a
(1)
n/a
(1)

3.9%-4.5
%Weighted-average estimated value

$
0.54

$
0.59

$
1.64

n/a
(1)
n/a
(1)
$
0.74


---

The Company's determination of the fair value of share-based payment awards is affected by assumptions regarding a number of highly complex and
subjective variables. These variables include, but are not limited to; the Company's expected stock price volatility over the term of the awards, and actual and projected employee stock option
exercise behaviors. The fair value of employee stock options is determined in accordance with SFAS 123R and SEC Staff Accounting Bulletin No. 107 ("SAB 107"), using an
option-pricing model, however, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction, or actually realized by the employee upon exercise.

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Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 7SHAREHOLDERS' EQUITY (Continued)

Activity
under all stock option plans in 2008, 2007 and 2006 is set forth below:

Shares

Weighted
average
exercise price

Weighted
average
remaining
contractual life
(in years)

Aggregate
intrinsic valueOptions outstanding, September 30, 2005


55,033,897

$
8.62


6.54

$
7,238,873Granted


7,133,750

$
2.19Exercised


(1,834,642
)
$
1.38




$
1,892,577Cancelled or expired


(25,038,306
)
$
8.07Options outstanding, September 30, 2006


35,294,699

$
8.08


6.18

$
644,446Granted(1)


450,000

$
0.95Exercised(2)


Cancelled or expired


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


23,882,361

$
7.11


5.61

$
363,933Granted(1)


350,000

$
0.95Exercised(2)


Cancelled or expired


(5,957,229
)
$
7.85Options outstanding, September 30, 2008


18,275,132

$
6.76


4.86

$
212Options exercisable, September 30, 2008


14,538,192

$
7.88


4.32

$
212


---

The
aggregate intrinsic values in the preceding table for the options outstanding represent the total pretax intrinsic value, based on the Company's closing stock prices of $0.54, $0.96,
and $0.99, as of September 30, 2008, 2007, and 2006, respectively, which would have been received by the option holders had those option holders exercised their
in-the-money options as of those dates. The total number of in-the-money stock options exercisable as of September 30, 2008 was 1,319. As of
September 30, 2008, 14,538,192 outstanding stock options were exercisable and the weighted-average exercise price of those options was $6.76. As of September 30, 2008, there was
$3.4 million of unrecognized share-based compensation expense related to non-vested stock options. The weighted-average period over which the unearned share-based compensation is
expected to be recognized is approximately 0.8 years. Approximately 92.4% of the total unearned share-based compensation as of September 30, 2008 will be expensed by the beginning of
fiscal 2012. Future share-based compensation expense and unearned share-based compensation will increase to the extent that we grant additional equity awards. The weighted average fair value at the
date of grant of options granted in 2008, 2007 and 2006 was $0.54, $0.59, and $1.68, respectively.

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Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 7SHAREHOLDERS' EQUITY (Continued)

The following table provides additional information in regards to options outstanding as of September 30, 2008:

Range of Exercise Prices

Options
Outstanding

Weighted
Average
Remaining
Contractual
Life (Years)

Weighted
Average
Exercise Price

Options
Exercisable

Weighted
Average
Exercise Price$0.38 - $  2.40




5,708,888


6.37

$
1.48


3,662,339

$
1.352.42 -     2.77




4,660,400


6.16


2.59


3,091,278


2.602.85 -     9.03




5,168,637


3.50


6.86


5,118,043


6.889.13 -   80.19




2,737,207


2.09


24.67


2,666,532


24.87$0.38   $80.19




18,275,132


4.86

$
6.76


14,538,192

$
7.88


NOTE 8INCOME TAXES

September 30,2008

2007

2006Income (loss) before income taxes:Domestic

$
38,860

$
20,991

$
5,950Foreign


(30,128
)

(25,592
)

(57,173
)$
8,732

$
(4,601
)
$
(51,223
)


Income
tax expense (benefit) consists of the following for the years ended 2008, 2007 and 2006 (in thousands):

September 30,2008

2007

2006Federal income tax provision at statutory rate

$
2,581

$
(1,610
)
$
(17,928
)State taxes, net of federal benefit


239


171


8Foreign taxes


134


191


104Nondeductible expenses


30


240


246Change in valuation allowance


(1,762
)

1,232


18,350Income tax provision

$
1,222

$
224

$
780


Income
tax expense amounted to $1.2 million, $0.2 million, and $0.8 million for the years ended September 30, 2008, 2007 and 2006, respectively. A
reconciliation of the provision (benefit) for income

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 8INCOME TAXES (Continued)

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

September 30,2008

2007

2006Income tax expense (benefit):Current:Federal

$
849

$


$
State


239





Foreign


134


224


780Total Current

$
1,222

$
224

$
780Deferred:Federal

$


$


$
State








Foreign








Total Current

$


$


$
Total:Federal

$
849

$


$
State


239





Foreign


134


224


780Total Current

$
1,222

$
224

$
780


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

September 30,2008

2007Deferred tax assets:Net operating loss carryforward

$
283,226

$
319,321Research and development tax credits


20,689


21,926Alternative Minimum Tax credit


1,901


Research and development IRC 59(e) capitalization


14,721


18,061Stock options


31,298


36,570Fixed assets and intangible property


48,044


38,613Inventory


9,214


9,610Allowances and reserves


3,893


3,934State taxes


566


501Other


27,982


21,886Total deferred tax assets


441,534


470,422Valuation allowance


(441,534
)

(470,422
)Net deferred tax assets

$


$



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Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 8INCOME TAXES (Continued)

The
provision for income taxes as a percentage of income from continuing operations before income taxes was 16.6% for the year ended September 30, 2008. The Company's effective
tax rate benefited from the utilization of Net Operating Loss carryforwards and the reversal of the related valuation reserve previously recorded. The Company's tax expense related to discontinued
operations for the year ended September 30, 2008 was approximately $1.0 million.

Because
we have consistently experienced net tax losses, we have placed a valuation allowance against our otherwise recognizable deferred tax assets. We have a net operating loss carry
forward of approximately $656 million, $560 million, and $241 million for federal, state, and foreign income tax purposes at September 30, 2008, respectively, which can be
carried forward to offset future taxable income. We have available federal and state research and development tax credit carry forwards of approximately $13.8 million and $10.6 million,
respectively, and federal and state alternative minimum tax credit carryforwards of approximately $1.9 million and $0.2 million, respectively. Our federal net operating losses may be
carried forward through 2028; state net operating losses may be carried forward through 2018; foreign net operating losses have various carry forward provisions in several jurisdictions; and some
federal, state, and foreign net operating losses may have begun to expire in 2006.

At
October 1, 2007 the Company had net deferred tax assets of $470.4 million before valuation reserve. These deferred tax assets are primarily composed of federal and state
tax net operating losses ("NOL") carryforwards; timing differences relating to tangible and intangible assets recovery; and research and development credits. Due to uncertainties
surrounding the Company's ability to generate future taxable income, there is a full valuation allowance against the deferred tax assets.

Additionally,
there is potential that an ownership change can occur that would impair the usage of the NOL's and credits in future taxable periods. An ownership change
occurs whenever there is a shift in ownership by more than fifty percentage points by one or more five-percent shareholders within a three year period. Based on our current analysis of
shareholders we believe that an ownership change has not occurred. Accordingly, we have not presented any amounts as an uncertain tax position under FIN 48. Any carryforwards that will expire
prior to utilization will be removed from deferred tax assets with a corresponding reduction in the valuation allowance.

The
total amount of gross unrecognized tax benefits was approximately $29.3 million as of October 1, 2007 and September 30, 2008. Included in the balance as of
September 30, 2008, there were no unrecognized tax benefits that, if recognized, would impact the effective tax rate.

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

Balance as of October 1, 2007

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


Gross decreasestax positions in prior period


Gross increasescurrent-period tax positions


Decreases relating to settlements


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


Balance as of September 30, 2008


(29,297
)


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Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 8INCOME TAXES (Continued)

The
Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. As of September 30, 2008, there was no material interest or
penalties were accrued due to significant net operating loss.

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

The
Federal Tax Reform Act of 1986, and similar state laws, contains provisions that may limit the net operating loss carry forwards to be used in any given year upon the occurrence of
certain events, including a significant change in ownership interests. We maintain a study to understand the status of net operating losses. Based on that study, we believe that we have not undergone
an Internal Revenue Code (IRC) Section 382 change of control that would trigger an impairment of the use of our NOLs. Under IRC Section 382 rules, a change in ownership can occur
whenever there is a shift in ownership by more than fifty percentage points by one or more five-percent shareholders within a three-year period. When a change of ownership is
triggered, the NOLs may be impaired.

NOTE 9SIGNIFICANT CUSTOMERS, CONCENTRATION OF CREDIT RISK, SEGMENT REPORTING, AND GEOGRAPHIC INFORMATION

The Company's end customers generally are engaged in the design and/or manufacturing of technology products either recently introduced or not yet introduced to the marketplace. The
Company ships certain products to contract manufacturers of its end customers and through distributors. The allocation of revenues that follows is based on end customer, rather than contract
manufacturer or distributor. For fiscal 2008, distributors Nu Horizons Electronics, Corp., in addition its subsidiary Titan Supply Chain Services, and Weikeng Industrial Co. Ltd.
accounted for 48.8% and 9.2%, respectively, of our net revenues, and IBM accounted for 11.3% of net revenues. For fiscal 2007, distributors Nu Horizons Electronics, Corp., including their subsidiary
Titan Supply Chain Services, and Weikeng Industrial Co. Ltd. accounted for 50.1% and 7.1%, respectively, of our net revenues, and IBM accounted for 11.0% of net revenues. For fiscal
2006, distributors Nu Horizons Electronics, Corp., including their subsidiary Titan Supply Chain Services accounted for 55.1% of our net revenues.

Based
on direct shipments, net revenues to customers that exceeded 10% of total net revenues in any of the two years ended September 30, 2008 were as follows:

2008

2007

2006Nu Horizons Electronics Corp. (distributor)


22.8
%

21.3
%

22.1
%Titan Supply Chain Services (distributor)


26.0
%

28.8
%

33.0
%IBM


11.3
%

11.0
%

*






The
Company has one reportable operating segment as defined by SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information." Substantially all long-lived assets are located in the United States.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9SIGNIFICANT CUSTOMERS, CONCENTRATION OF CREDIT RISK, SEGMENT REPORTING, AND GEOGRAPHIC INFORMATION (Continued)

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

Accordingly,
we classify our IC products into three categories: 1) Carrier Networking Products; 2) Enterprise Networking Products; and 3) Non-Core
Products. The Networking Products line services core and metro WANs, also known as Carrier Networks. Our products are focused on enabling Ethernet data services to be deployed more broadly across
these networks. The Enterprise Networking Products line services the market for Ethernet switching and transmission within LANs in SMB and SME markets. Non-Core Products are those product
lines where we have chosen to exit markets and no longer continue to invest.

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

September 30,2008

2007

2006North America(1)


116,191


115,696


109,724Asia Pacific


88,045


76,046


66,118Europe


24,300


30,206


27,447Total Net Revenues

$
228,536

$
221,948

$
203,289






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

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

September 30,2008

2007USA

$
11,319

$
12,441Denmark


190


308Germany


174


126Total

$
11,683

$
12,875


NOTE 10RETIREMENT SAVINGS PLAN

The Company has a qualified retirement plan under the provisions of Section 401(k) of the Code covering substantially all employees. Participants in this plan may defer up to the
maximum annual amount allowable under IRS regulations. The contributions are fully vested and nonforfeitable at all times. Starting January 1, 2007, the Company began to match 50% of the first
6% of employee contributions. The Company's 401(k) match totaled $800,000, $600,000, and zero for the years ended September 30, 2008, 2007, and 2006.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 11COMMITMENTS AND CONTINGENCIES

The Company leases facilities under non-cancellable operating leases expiring at various dates through fiscal 2015. Rent expense under operating leases totaled
$3.7 million, $3.4 million, and $3.5 million for the years ended September 30, 2008, 2007, and 2006, respectively.

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

Payment Obligations by Year2009

2010

2011

2012

2013

Thereafter

TotalOperating leases

$
3,139

$
2,483

$
2,322

$
2,251

$
2,314

$
2,267

$
14,776Software licenses


7,869


6,351


5,117


42








19,379Total

$
11,008

$
8,834

$
7,439

$
2,293

$
2,314

$
2,267

$
34,155


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

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

The
Company and certain current or former directors and officers of Vitesse are named in multiple shareholder derivative and securities class actions. These actions were filed starting
in April 2006 and are based on allegations of stock option backdating and accounting manipulations. A settlement has been reached in the class action suit and a proposed settlement has been reached in
the derivative suit against the Company, with both suits settled with distribution of Vitesse common stock. An expense has been accrued in the amount of $6.6 million in the accompanying
financial statements for the year ended September 30, 2006 to reflect the fair market value of the stock as of the date of the settlements. These settlements are non-cash settlements and
will not have a material adverse affect on the Company's liquidity. We also have received a grand jury subpoena from the United States Attorney's Office and have been notified that the SEC is
conducting an investigation of Vitesse.

The Derivative and Securities Class Actions

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

On
August 11, 2008, the Court granted final approval of settlements in the federal and state derivative actions filed on behalf of Vitesse against certain current or former
directors and officers of

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 11COMMITMENTS AND CONTINGENCIES (Continued)

Vitesse,
and nominally against Vitesse alleging claims for breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets, unjust enrichment, constructive trust,
rescission, accounting manipulations, and violations of California Corporations Code §§25402 and 25403. As part of the settlement of the federal and state derivative actions,
three former executives of Vitesse, Messrs. Tomasetta, Hovanec, and Mody, released the Company from all rights to future indemnification and costs of defense in the related SEC and Department
of Justice investigations. Vitesse retains the right to continue its state court action against KPMG LLP, its former independent registered accounting firm. Vitesse will also contribute
4,700,000 shares of Vitesse common stock, with a fair market value of $4.2 million to cover the attorneys' fees and expenses of the derivative plaintiffs' counsel, and has adopted certain
Corporate Governance measures. The Court entered final judgment implementing all of the above referenced terms and the case is concluded in all respects, except that the Court referred to a retired
Federal District Court Judge (serving as a "Special Master" ) the sole issue of determining whether the derivative plaintiffs' counsel are entitled to the full 4,700,000 shares as their legal fees.

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

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

The Dupuy Action

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

The
Company typically sells its products to its customers pursuant to the Company's standard sales agreement, which contains the relevant terms of the unique arrangement with the
customer, as well as certain provisions for indemnifying the customer against losses, liabilities, costs, and expenses resulting from a claim alleging that the Company's product infringes a
third-party's United States patent. The sales agreement generally limits the indemnification obligations in a variety of industry-standard respects, including, but not limited to: requiring that the
customer promptly notify the Company of the claim and provide the Company with assistance in the defense or settlement of the claim; and giving the Company the right to modify a product to make it
non-infringing, procure for customer the right to

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 11COMMITMENTS AND CONTINGENCIES (Continued)

continue
using an infringing or allegedly infringing product, or to replace the infringing or allegedly infringing product with a non-infringing product.

The
Company's management believes its internal development processes and other policies and practices limit the Company's exposure related to the indemnification provisions of its sales
agreement. For several reasons, including the lack of prior indemnification claims and the lack of a monetary liability limit for certain infringement cases under the contract, the maximum amount of
potential future payments, if any, related to such indemnification provisions cannot be determined and accordingly the Company has not recorded an accrual for any potential loss.

In
fiscal 2005, the Company received a Notice of Violation ("NOV") from the Air Pollution Control District "APCD" after the Company failed a source test. Following another failed source
test in fiscal 2006, the APCD issued a second NOV. The NOVs alerted the Company to potential penalties of $1,000 per day until a successful source test was achieved. As a consequence to repeated
non-compliance, the Company was also liable for criminal or civil penalties of up to $40,000 per day. Maximum exposure for fines and penalties at March 3, 2008 was estimated at
$7.5 million. After review with outside counsel, internal personnel contacted the APCD, and negotiated a $100,000 settlement. This liability was paid during the fiscal year ended
September 30, 2008.

In
May 2006, we received a grand jury subpoena from the office of the United States Attorney for the Southern District of New York requesting documents from 1999 through the present. We
have also been notified by the Division of Enforcement of the SEC that it is conducting an investigation of Vitesse. The Division of Enforcement has requested documents from January 1, 1995,
through the present. Vitesse has cooperated with both government agencies in their investigations, which are still on-going.

On
October 5, 2007, we informed the Internal Revenue Service ("IRS") of potential payroll tax liabilities resulting from changes in measurement dates for stock options. No formal
settlement negotiations have taken place, however we have received requests from IRS for information relating to the potential payroll tax liabilities that were identified as a result of our
stock-option review. We are working with the IRS to provide the requested information in an effort to settle these potential liabilities.

Potential Payroll Tax Liabilities Related to Backdating of Stock Options

As of September 30, 2008, we have accrued a $1.9 million liability for payroll taxes, penalties and interest related to
exercises of backdated stock options during the calendar years 2004 through 2006. During this period, certain non-qualified stock options were improperly classified and treated as
incentive stock options for tax purposes. On October 5, 2007, we informed the Internal Revenue Service ("IRS") of these potential payroll tax liabilities resulting from changes in measurement
dates for stock options. No formal settlement negotiations have taken place, however we have received requests from the IRS for information relating to the potential payroll tax liabilities that were
identified as a result of our stock-option review. We are working with the IRS to provide the requested information in an effort to settle these potential liabilities.

NOTE 12QUARTERLY FINANCIAL DATA (UNAUDITED)

The following tables set forth the consolidated statements of operations for each of our last eight quarters. This quarterly information is derived from unaudited interim financial
statements and has been prepared on the same basis as the annual Consolidated Financial Statements. In management's

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 12QUARTERLY FINANCIAL DATA (UNAUDITED) (Continued)

opinion,
this quarterly information reflects all adjustments necessary for fair presentation of the information for the periods presented. The operating results for any quarter are not necessarily
indicative of results for any future period.

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

Total
YearFiscal Year 2008:Product revenues

$
52,542

$
55,593

$
55,041

$
55,360

$
218,536Licensing revenues











10,000


10,000Revenues


52,542


55,593


55,041


65,360


228,536Cost of revenues


26,498


25,514


27,965


26,367


106,344Income (loss) from continuing operations before discontinued operations


(3,519
)

2,366


(591
)

9,254


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


4,978


1,420


1,703


943


9,044Net income

$
1,459

$
3,786

$
1,112

$
10,197

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


(0.02
)

0.01


0.00


0.04


0.03Discontinued operations


0.02


0.01


0.01


0.01


0.04Net income per share

$
0.00

$
0.02

$
0.01


0.05

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


(0.02
)

0.01


(0.00
)

0.04


0.03Discontinued operations


0.02


0.01


0.01


0.00


0.04Net income per share

$
0.00

$
0.02

$
0.01


0.04

$
0.07Weighted average shares outstanding:Basic


223,556


223,556


223,556


223,786


223,614Diluted


223,556


223,556


223,556


261,767


223,614Fiscal Year 2007:Revenues

$
57,614

$
50,921

$
56,001

$
57,412

$
221,948Cost of revenues


29,897


25,078


31,496


27,283


113,754Income (loss) from continuing operations before discontinued operations


(5,111
)

(129
)

(2,547
)

2,962


(4,825
)Discontinued operationsLoss from operations of Storage Products business, net of tax


(3,437
)

(3,939
)

(4,487
)

(4,959
)

(16,822
)Net loss

$
(8,548
)
$
(4,068
)
$
(7,034
)
$
(1,997
)
$
(21,647
)Basic and diluted income (loss) per share:Continuing operations


(0.02
)

(0.00
)

(0.01
)

0.01


(0.02
)Discontinued operations


(0.02
)

(0.02
)

(0.02
)

(0.02
)

(0.08
)Net loss per share

$
(0.04
)
$
(0.02
)
$
(0.03
)
$
(0.01
)
$
(0.10
)Weighted average shares outstanding:Basic and diluted


223,556


223,556


223,556


223,556


223,556


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 13SUBSEQUENT EVENTS

On September 15, 2008, we received an executed letter of intent from a third party to purchase the Colorado building. In the following month we entered into an agreement dated
October 8, 2008 with a third-party to sell the Colorado land and building. The transaction closed on December 22, 2008. The gross sales price was $6.5 million. The facility was
previously used for the Storage Products business, which was discontinued and sold on October 29, 2007 and has remained unused since. As a result, the net book value of $3.2 million has
been reported as 'Asset Held for Sale' on the September 30, 2008
balance sheet. We will recognize a gain of approximately $2.9 million on this sale in the first quarter of fiscal 2009.

Due
to a significant drop in our stock price in the first quarter of 2009, we expect to perform an impairment analysis from which we may conclude a material amount of our goodwill is
impaired and consequently some or all of it should be written-off in that quarter.

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

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



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



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



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

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

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

ITEM 9A.    CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We evaluated the design and operation of the effectiveness of our disclosure controls and procedures as of September 30, 2008,
under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, pursuant to Rule 13a-15(b) of the Exchange
Act. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, because of the material weaknesses in our internal controls over financial reporting described
below, our disclosure controls and procedures as defined in Rule 13a-15(e) were not effective. The remedial measures undertaken by the Company to address the material weaknesses in
internal control over financial reporting are discussed below.

To
address the material weaknesses in our internal control over financial reporting described below, the Company performed additional manual procedures and analysis and other
post-closing procedures in order to prepare the audited consolidated financial statements included in this Annual Report. Notwithstanding the material weaknesses in our internal control
over financial reporting as of September 30, 2008, described below, we believe that the audited consolidated financial statements contained in this Annual Report present our financial
condition, results of operations, and cash flows as of the dates, and for the periods presented, in conformity with generally accepted accounting principles in the United States of America ("GAAP").

Management's Report on Internal Control over Financial Reporting

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

A
Company's internal control over financial reporting includes policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
(iii) provide reasonable assurance

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regarding
prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material affect on the financial statements.

In
accordance with the internal control reporting requirements of the SEC, our management completed an assessment of the effectiveness of our internal control over financial reporting as
of September 30, 2008. In making this assessment, management used the criteria set forth in by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). The COSO framework
summarizes each of the components of a company's internal control system, including the: (i) control environment; (ii) risk assessment; (iii) information and communication; and
(iv) monitoring (collectively, the "entity-level controls"), as well as a company's control activities (process-level controls). Management's evaluation of the design and operating
effectiveness of our internal controls over financial reporting identified material weaknesses resulting from design and operating deficiencies in the internal control system. A "material weakness" is
a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or
interim financial statements will not be prevented or detected on a timely basis.

We
have continued to work diligently to remedy our accounting issues and improve our internal controls and procedures for financial reporting, as well as to ensure that we have qualified
personnel in place to address the aforementioned stock option and accounting irregularities and remediate the internal controls over financial reporting. Although the process of designing and
implementing new procedures to minimize the control deficiencies are important to the Company, filing of the Forms 10-Q for the quarters ended December 31, 2007,
March 31, 2008 and June 30, 2008 as well as its Form 10-K for the fiscal year ended September 30, 2008 resulted in a delay in management's efforts to adequately
design, implement and monitor new procedures to minimize the control deficiencies that led to the issues outlined below. As a result, our Chief Executive Officer and Chief Financial Officer have
concluded that there are still material weaknesses in our internal control over financial reporting as of September 30, 2008. Management identified the following material weaknesses:

Control
EnvironmentWe did not maintain an effective control environment. Specifically:



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Period-end
financial reporting processWe did not maintain effective controls over the period-end reporting process, including controls with respect
to the review, supervision, and monitoring of accounting operations. Specifically:



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

It is important to note that based on the additional procedures performed as part of the Company's ongoing remediation of its financial
controls, current management has concluded that important improvements were made to the control environment commencing in mid-2006, including: (i) an improved commitment to
competency manifested by the hiring of more experienced and senior finance and legal personnel; (ii) the development of additional financial policies and procedures that when fully implemented
will enhance independent judgment and review, including, as appropriate, segregation of duties and increased employee responsibility and accountability for the completeness of the Company's
disclosures; (iii) the establishment of processes and procedures to increase communications between the financial reporting and accounting functions and senior management, including our Audit
Committee; and (iv) instituting a formal Code of Business Conduct and Ethics and whistle-blower policy.

Management
is committed to remediating the material control weaknesses identified and implementing changes to the Company's internal control over financial reporting. Management, along
with our Board of Directors, has implemented, or is in the process of implementing the following changes to the Company's internal control over financial reporting:



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Additionally,
management is investing in ongoing efforts to continuously improve the control environment and has committed considerable resources to the continuous improvement of the
design, implementation, documentation, testing, and monitoring of our internal controls. Although we have not
fully remediated the material weaknesses described above, we believe we have made substantial progress.

Inherent Limitation on the Effectiveness of Internal Controls

The effectiveness of any system of internal control over financial reporting is subject to inherent limitations, including the exercise
of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, any system of internal control over
financial reporting can only provide reasonable, not absolute, assurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance

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with
the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure you that such
improvements will be sufficient to provide us with effective internal control over financial reporting.

Attestation Report of the Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm

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

We
have audited Vitesse Semiconductor Corporation and subsidiaries' (the "Company") internal control over financial reporting as of September 30, 2008, based on criteria
established inInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (the
COSO criteria). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Item 9A, Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's
internal control over financial reporting based on our audit.

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

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

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A
material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material
misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis.

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The
following material weaknesses have been identified and included in management's assessment as of September 30, 2008:



These
material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2008 financial statements, and this report does not
affect our report dated December 29, 2008 on those financial statements.

In
our opinion, Vitesse Semiconductor Corporation did not maintain, in all material respects, effective internal control over financial reporting as of September 30, 2008, based
on the COSO criteria.

We
do not express an opinion or any other form of assurance on management's statements referring to any corrective actions taken by the Company after the date of management's assessment.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Vitesse Semiconductor
Corporation as of September 30, 2008 and 2007, and the related consolidated statements of operations, shareholders' equity and comprehensive loss, and cash flows for each of the three years in
the period ended September 30, 2008 and our report dated December 29, 2008 expressed an unqualified opinion thereon with an explanatory paragraph regarding the Company's ability to
continue as a going concern.

/s/
BDO Seidman, LLP
Los Angeles, California
December 30, 2008

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PART III

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

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

ITEM 11.    EXECUTIVE COMPENSATION

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

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

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

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

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

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

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

PART IV

ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

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

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VITESSE SEMICONDUCTOR CORPORATION

SCHEDULE IIValuation and Qualifying Accounts

Years ended September 30, 2008, 2007 and 2006

(in thousands)

Balance at
Beginning of Year

Charged to
Other
Accounts

Deductions/
Write-offs

Balance at
End of YearYear ended September 30, 2008Deducted from accounts receivable:Allowance for doubtful accounts

$
253

$


$
(253
)
$
Allowance for sales reserve


142


(89
)




54Deducted from deferred tax assetValuation allowance


470,422


(15,224
)

(13,664
)

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


46


249


(42
)

253Allowance for sales reserve


170


(28
)




142Deducted from deferred tax assetValuation allowance


484,263


(13,841
)




470,422Year ended September 30, 2006Deducted from accounts receivable:Allowance for doubtful accounts


5


42


(1
)

46Allowance for sales reserve


235


(65
)




170Deducted from deferred tax assetValuation allowance


454,021


30,242





484,263


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Table of Contents

No.

Description3.1

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

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

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

Rights Agreement dated as of March 3, 2003 between Vitesse Semiconductor Corporation and EquiServe Trust Company, N.A.,
as Rights Agent. (Incorporated by reference to Exhibit 1 to the Form 8-A12(g) filed March 5, 2003.)10.1

Second Amended and Restated Loan and Security Agreement between the Company and Silicon Valley Bank, as amended March 2,
2006 (Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed May 18, 2006).10.2

Third Amended and Restated Loan and Security Agreement between the Company and Special Value Expansion Fund &
Obsidian, as amended June 7, 2006 (Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed June 12, 2006).10.3

Security Agreement between the Company and Obsidian, dated as of June 7, 2006. (Incorporated by reference to
Exhibit 10.2 to the Company's Form 8-K filed June 12, 2006).10.4

Fourth Amended and Restated Loan Security Agreement between the Company and Special Value Expansion Fund & Obsidian,
as amended June 20, 2006. (Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed June 26, 2006).10.5

Employment Agreement between the Company and Chris Gardner dated as of June 26, 2006. (Incorporated by reference to
Exhibit 10.1 to the Company's Form 8-K filed July 7, 2006).10.6

First Supplemental Indenture, dated November 3, 2006 between the Company and U.S. Bank National Assoc. as Trustee.
(Incorporated by reference to Exhibit 99 to the Company's Form 8-K filed November 9, 2006).10.7

Employment Agreement between the Company and Richard Yonker dated as of November 16, 2006. (Incorporated by reference to
Exhibit 99.A4 to the Company's Form 8-K filed December 20, 2006).10.8

Employment Agreement between the Company and Michael Green dated January 2, 2007. (Incorporated by reference to
Exhibit 10.1 to the Company's Form 8-K filed January 31, 2007).10.9

Warrant Registration Rights Agreement, dated January 25, 2007. (Incorporated by reference to Exhibit 10.2 to the
Company's Form 8-K filed January 31, 2007).10.10

Amended and Restated Employment Agreement between the Company and Richard Yonker dated June 26, 2007. (Incorporated by
reference to Exhibit 10.1 to the Company's Form 8-K filed June 29, 2007).10.11

Amended and Restated Employment Agreement between the Company and Christopher Gardner dated July 27, 2007. (Incorporated
by reference to Exhibit 10.1 to the Company's Form 8-K filed August 2, 2007).


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No.

Description10.12

2001 Stock Incentive Plan, Amended and Restated as of July 27, 2007. (Incorporated by reference to Exhibit 10.2 to the Company's
Form 8-K filed August 2, 2007)10.13

Form of Indemnity Agreement between the directors and the Company. (Incorporated by reference to Exhibit 10.1 to the
Company's Form 8-K filed August 22, 2007).10.14

Purchase and Sale Letter Agreement, dated August 22, 2007 between the Company and Maxim Integrated Products, Inc.
(Incorporated by reference to Exhibit 10.2 to the Company's Form 8-K filed August 29, 2007).10.15

Loan Agreement, dated August 23, 2007 between the Company and Whitebox VSC, Ltd. (Incorporated by reference to
Exhibit 10.3 to the Company's Form 8-K filed August 29, 2007).10.16

Senior Unsecured Convertible Note Purchase Agreement, dated August 23, 2007 between the Company and Whitebox VSC,
 Ltd. (Incorporated by reference to Exhibit 10.4 to the Company's Form 8-K filed August 29, 2007).10.17

Second Supplemental Indenture, dated September 24, 2007 between the Company and U.S. Bank National Association.
(Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed September 27, 2007).10.18

Term Note, dated October 29, 2007 between the Company and Whitebox VSC, Ltd. for $30 million. (Incorporated by
reference to Exhibit 4.1 to the Company's Form 8-K filed October 31, 2007).10.19

Intellectual Property, Assignment and License Agreement, dated October 29, 2007 between the Company and Maxim Integrated
Products, Inc. (Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed October 31, 2007).10.20

Letter Agreement, dated October 26, 2007 between the Company and Dr. Martin C. Nuss (Incorporated by reference to
Exhibit 10.1 to the Company's Form 8-K filed November 20, 2007).10.21

Indenture between Vitesse Semiconductor Corporation and U.S. Bank National Association, as Trustee (including form of 1.50%
Convertible Subordinated Debentures due 2024), dated as of September 22, 2004. (Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed September 23, 2004).21.1*

Subsidiaries of Vitesse Semiconductor, Inc.31.1*

Rule13a-14(a) / 302 SOX Certification of Chief Executive Officer.31.2*

Rule13a-14(a) / 302 SOX Certification of Chief Financial Officer.32.1*

Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer.99.1*

Consent of BDO Seidman, LLP


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SIGNATURES

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

VITESSE SEMICONDUCTOR CORPORATION(Registrant)Dated: December 30, 2008

By:

/s/ CHRISTOPHER R. GARDNER Chief Executive Officer


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

Dated: December 30, 2008

By:

/s/ CHRISTOPHER R. GARDNER Director and Chief Executive OfficerDated: December 30 2008

By:

/s/ RICHARD C. YONKER Chief Financial Officer
(Principal Financial and Accounting Officer)Dated: December 30, 2008

By:

/s/ GUY W. ADAMS DirectorDated: December 30, 2008

By:

/s/ VINCENT CHAN DirectorDated: December 30, 2008

By:

/s/ STEVEN P. HANSON DirectorDated: December 30, 2008

By:

/s/ ROBERT A. LUNDY DirectorDated: December 30, 2008

By:

/s/ EDWARD ROGAS, JR. DirectorDated: December 30, 2008

By:

/s/ WILLOW B. SHIRE Director


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