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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



(Mark One)



|x |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ------------------------------------------------------------------------------------



For the fiscal year ended September 30, 2003



or



| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ----------------------------------------------------------------------------------------



For the transition period from
                     to



Commission file number 000-19654



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VITESSE SEMICONDUCTOR CORPORATION

(Exact name of registrant as specified in
its charter)



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|Delaware                                                    |  | No. 77-0138960                      
|----------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction incorporation or organization) |  | (I.R.S. Employer Identification No.)



741 Calle Plano,
Camarillo, CA 93012

(Address of principal executive offices)



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, $0.01 par value



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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  x    No ̈



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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.    x



The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing sale price of the common stock on
September 30, 2003 as reported on the Nasdaq National Market, was approximately $1,364,498,181. Shares of common stock held by each officer and director and by each person who owns 5% or more of the outstanding common stock have been excluded in
that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.



As of December 1, 2003, the registrant had outstanding 215,322,283 shares of common stock.



DOCUMENTS INCORPORATED BY REFERENCE



Definitive Proxy Statement relating to the Companys Annual Meeting of Stockholders to be held on January 26, 2004
(incorporated into Part III hereof).



Registration Statement
on Form S-1 effective December 10, 1991 (incorporated into Part IV hereof).

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VITESSE SEMICONDUCTOR CORPORATION



2003 ANNUAL REPORT ON FORM 10-K



INDEX



|               |  |                                                                                       |  | Page
|-------------- |  | ------------------------------------------------------------------------------------- |  | ----
|               |  | PART I.                                                                               |  |     
|               |  |                                                                                      
|Item 1.        |  | Business                                                                              |  | 1   
|               |  |                                                                                      
|Item 2.        |  | Properties                                                                            |  | 16  
|               |  |                                                                                      
|Item 3.        |  | Legal Proceedings                                                                     |  | 17  
|               |  |                                                                                      
|Item 4.        |  | Submission of Matters to a Vote of Security Holders                                   |  | 17  
|               |  |                                                                                      
|               |  | PART II.                                                                              |  |     
|               |  |                                                                                      
|Item 5.        |  | Market for Companys Common Stock and Related Stockholder Matters                     |  | 19  
|               |  |                                                                                      
|Item 6.        |  | Selected Financial Data                                                               |  | 19  
|               |  |                                                                                      
|Item 7.        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 20  
|               |  |                                                                                      
|Item 7a.       |  | Quantitative and Qualitative Disclosures about Market Risks                           |  | 34  
|               |  |                                                                                      
|Item 8.        |  | Financial Statements and Supplementary Data                                           |  | 36  
|               |  |                                                                                      
|Item 9.        |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  | 64  
|               |  |                                                                                      
|Item 9A.       |  | Controls and Procedures                                                               |  | 64  
|               |  |                                                                                      
|               |  | PART III.                                                                             |  |     
|               |  |                                                                                      
|Item 10.       |  | Directors and Executive Officers of the Registrant                                    |  | 65  
|               |  |                                                                                      
|Item 11.       |  | Executive Compensation                                                                |  | 65  
|               |  |                                                                                      
|Item 12.       |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 65  
|               |  |                                                                                      
|Item 13.       |  | Certain Relationships and Related Transactions                                        |  | 65  
|               |  |                                                                                      
|Item 14.       |  | Principal Accounting Fees and Services                                                |  | 65  
|               |  |                                                                                      
|               |  | PART IV.                                                                              |  |     
|               |  |                                                                                      
|Item 15.       |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                       |  | 66  
|               | 
|Signatures     |  | 69                                                                                   
|               | 
|Certifications |  | 70                                                                                   



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FORWARD-LOOKING STATEMENTS



This report contains forward-looking statements that involve risks and uncertainties. These statements relate to our
future plans, objectives, expectations and intentions. These statements may be identified by the use of words such as expects, anticipates, intends, plans and similar expressions. Our actual results
could differ materially from those discussed in these statements. Factors that could contribute to these differences include those discussed under Risk Factors, Managements Discussion and Analysis of Financial Condition and
Results of Operations, and elsewhere in this report. The cautionary statements made in this report should be read as being applicable to all forward-looking statements wherever they appear in this report.



PART I



Item 1.Business



Vitesse Semiconductor Corporation (Vitesse or the Company) 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 Internet address is www.vitesse.com. Our SEC filings are available through our website. Our common stock trades on the Nasdaq National Market
under the symbol VTSS.



We are a leading supplier
of high-performance integrated circuits (ICs) principally targeted at systems manufacturers in the communications and storage industries. Over the past few years, the proliferation of the Internet and the rapid growth in volume of data
being sent over local and wide area networks placed a tremendous strain on the communications infrastructure. The resulting demand for increased bandwidth created a need for both faster as well as more expansive networks. There has also been a
growing trend by systems companies towards the outsourcing of IC design and manufacture to suppliers such as Vitesse. Additionally, due to increasing needs for moving, managing and storing mission-critical data, the market for storage equipment has
been growing significantly. Since the end of 2000, the communications industry has experienced a severe downturn due to the overbuilding of the communications infrastructure and excess inventories, among other reasons. In spite of these recent
adverse conditions, we believe that the long-term prospects for the communications market remain strong. Our customers include leading communications and storage original equipment manufacturers (OEMs) such Alcatel, Cisco, EMC, Fujitsu,
Hewlett Packard, Huawei, IBM, LSI Logic, Lucent, McData, Nortel, Siemens, Sun Microsystems, and Tellabs.



Background



Communications Market



Over the past decade
there has been a dramatic growth in traffic on both public communications networks, such as those used by long-distance and local exchange carriers, and specialized networks, such as those used by Internet service providers. This has been driven by
rapid growth of data-intensive applications such as Internet access, e-commerce, e-mail, video conferencing and the movement of large blocks of stored data across networks. These applications in turn spurred demand for high-speed interconnectivity
between wide area networks (WANs), metropolitan area networks (MANs) and local area networks (LANs). Faced with this demand for bandwidth, communications service providers were forced to upgrade their
infrastructure to provide high-speed data services to customers in addition to providing standard telephone services. At the same time, the abundance of capital available in the private and public markets in the late 1990s and 2000 and perceptions
of exponential projected growth in network traffic accelerated the build-out of the communications infrastructure, leading to a significant increase in capital spending on networking equipment.



During this period of rapid expansion, our customers began increasing orders
for semiconductor devices in anticipation of continued growth in demand for communications equipment. With device manufacturers such as



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Vitesse running at full capacity at that time, OEMs often ordered more devices than necessary in an effort to secure component deliveries. This resulted in a
significant increase in inventory levels across the entire supply chain.



At the end of 2000, business conditions changed suddenly. As the supply of capital started to slow down and the overall economy began to weaken, many carriers and enterprises, faced with extreme financial hardship,
either scaled back their expenditures or in some cases, ceased operations. Additionally, as it became evident that the infrastructure had been built out in excess of true end-user demand, capital spending on networking equipment across the industry
dropped sharply. As a result of this widespread market downturn, we experienced a significant decline in sales of our products, which was further exacerbated by the high inventory levels at our customers. In response to the decreased demand for our
products and the continuing disruption in our industry, we implemented a series of restructuring plans during fiscal 2001, 2002 and 2003. These restructuring plans, which included the sale of our optical module business, the closure of our Colorado
Springs wafer fabrication facility (fab) and other facilities, the termination of employees, cancellation of certain development projects and the write-down of certain assets, have significantly lowered our operating costs going forward.
For a detailed description of these restructuring plans see Restructuring Costs in the Managements Discussion and Analysis section and Note 5 to the Consolidated Financial Statements of this report.



Despite the adverse conditions that have affected our business, we believe
that the long-term prospects for the communications market and for Vitesse remain strong for several reasons.



First, the demand for additional bandwidth continues to grow, driven primarily by increased traffic on the Internet, as more households and enterprises
increase their utilization of the Internet. The emergence of new data-intensive applications such as video-on-demand, next-generation wireless services, and virtual data centers is expected to drive additional traffic through the communications
infrastructure. We further believe that the build-out of the infrastructure in developing countries will lead to increased demand for communications equipment.



Second, even as carriers and service providers are faced with capital spending constraints, in order to remain competitive they will need to upgrade
their existing networks to not only offer additional services that their customers are demanding but to do so more efficiently and at a lower cost. We believe this trend will spur demand for systems that augment rather than replace existing
equipment in the infrastructure, particularly in the metro/access environment.



Third, some MANs are experiencing traffic bottlenecks due to a lack of prior investment in equipment servicing the MAN as well as the interface between the MAN and the WAN. We believe this represents an opportunity
for OEMs to supply equipment to carriers who wish to mitigate any bottlenecks.



Fourth, OEMs are focusing their efforts on providing superior software and services as a means of differentiating themselves from their competition. This, in conjunction with rising costs of maintaining component
design teams and developing custom integrated circuits, has led to OEMs outsourcing their IC development efforts to companies such as Vitesse. The reductions in workforce that many OEMs have recently implemented have accelerated this trend. As a
result of this outsourcing trend, even though capital expenditures for communications equipment have declined significantly since 2000 and are not expected to increase in the near term, we believe that the available market for our products has
increased.



Finally, over the past five years, through a
combination of acquisitions and internal development efforts, we have expanded our product line beyond our traditional products that served the market for long-haul optical transport. Specifically, we have enhanced our product offerings that serve
the storage, enterprise and metro markets. We believe that these markets will recover faster from the current downturn than will the long-haul transport market.



Infrastructure improvements to networks have most prominently included a dramatic increase in the deployment of fiber optic technology to replace
conventional copper wire. Optical fiber offers substantially



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greater capacity, is less error-prone and is easier to administer than copper wire. SONET (Synchronous Optical Network) in the United States and Japan and
the equivalent SDH (Synchronous Digital Hierarchy) in the rest of the world are the primary standards for high-speed transmission of communications over optical fiber. By standardizing interoperability among different vendors equipment, the
SONET/SDH standards facilitate high levels of data integrity, improved network reliability and reduced maintenance and other operations costs.



The demand for system bandwidth was initially addressed by a technique called wavelength division multiplexing (WDM). WDM is a technique that
allows several optical signals, each of a different wavelength, to be transmitted simultaneously on a single optical fiber. The adoption of WDM has enabled system operators to significantly increase system bandwidth without the significant delay and
expense of having to deploy additional fiber cables. While WDM increases the bandwidth carried by each optical fiber, it does not reduce the number of electronic components required. Instead, WDM has accelerated the growth of SONET/SDH deployment by
eliminating fiber installation as a growth limiter. More recently, service providers are trying to address the demand for additional bandwidth by employing next-generation SONET systems that make more efficient use of the existing infrastructure.



Various protocols are being utilized today on top of the SONET
optical base to ensure that routing and switching of information occurs accurately, including Asynchronous Transfer Mode (ATM) and Internet Protocol (IP). ATM is based on fixed-size packets called cells, and is designed to
efficiently integrate voice, data and video and easily scale bandwidth. IP is a packet-based protocol that is generally accepted as the industry standard for LAN data transfer and is increasingly being used in MANs and WANs as well. Both ATM and IP
packet switching network technologies are being deployed over optical networks based on the complementary SONET/SDH standards, known as ATM over SONET and Packet over SONET (POS). Fiber optic transmission systems that adhere to the
SONET/SDH and ATM standards use data transmission rates of 155 Megabits per second (Mb/s), 622 Mb/s, 2.5 Gigabits per second (Gb/s) or 10 Gb/s today, with 40 Gb/s in development. Additionally, new protocols such as
multi-protocol label switching (MPLS) have emerged that are better suited for data traffic while providing for the low latency and quality of service needs of voice and video traffic. We are also seeing the emergence of Ethernet being
transported directly on SONET (Ethernet over SONET or EoS), which eliminates an additional layer of overhead from a SONET signal. We believe that EoS is replacing POS as the protocol in next-generation SONET equipment.



Most present-day LANs use the Ethernet transmission protocol, which operates
at speeds of 10 Mb/s, 100 Mb/s (Fast Ethernet), 1 Gb/s (Gigabit Ethernet) or 10 Gb/s. Most desktop connections today support either 10 Mb/s or 100 Mb/s data rates, though Gigabit Ethernet is beginning to appear on the desktop. In order 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 standard. We therefore expect to see a proliferation of higher performance switches in the LAN
that will not only address higher bandwidth demands, but will also be capable of providing routing functionality handling different types of traffic.



Storage Market



The proliferation of the Internet and the resulting need to manage, move and store increasing amounts of mission-critical data has led to significant
changes in the way that organizations are interconnecting storage systems. Previously, most storage devices were individually connected to servers in a topology termed Direct Attached Storage. However, as the volume of data that needs to be stored
has increased, the server capacity and access speed limitations of Direct Attached Storage have become problematic. As a result, companies have moved toward the use of architectures such as Network Attached Storage (NAS) and Storage Area
Networks (SANs). In a NAS system, individual storage devices can be connected to a network and thereby be made available to various servers on the network. In a SAN, multiple servers on a network are connected to a centralized pool of
disk storage. This shift in topology has spawned the need to connect high-performance computers, peripheral equipment, storage devices and networks at very high speeds. While earlier storage networks used a standard interface protocol known as small
computer systems interface, or SCSI, newer SANs,



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which require networking at high speeds over long distances, have increasingly used Fibre Channel, a practical, inexpensive, yet 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 ten years ago.



Another protocol emerging in the storage market is Serial ATA, or SATA. SATA
is the evolution of the ATA interface that is used in most computers and disk drives today from a parallel bus to a serial bus architecture. SATA is expected to enable the market for lower-cost storage networks that do not require the performance or
robustness that a Fibre Channel network offers. We believe that this will result in an overall increase in the market for SANs as these systems become more affordable. Through our acquisition of APT Technologies, Inc. (APT) in January
2003, we have enhanced our efforts in developing products that address the SATA protocol.



Strategy



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



Target Growing Markets



We target emerging high-growth areas in the communications infrastructure
such as products delivering services based on SONET/SDH, ATM, IP, MPLS, Fibre Channel and Gigabit Ethernet, which typically require ICs that are capable of high-bandwidth data transmission. We strive to provide solutions that adhere to the major
networking protocols and perform common networking functions required by the most widely deployed communications equipment.



Leverage Technology into New Applications



We have had many years of experience designing and developing products for the high-performance communications market. Over this time frame we have
acquired considerable analog, digital and mixed-signal design experience and have also developed significant amounts of core circuitry. Our strategy is to take these core skills and standard building blocks and leverage them into products that
address new applications in new markets.



Provide Complete
Solutions



To be a leader in our market segment, we must
not only address the current needs of our customers, but also be aware of how these requirements are evolving. Over the past few years we recognized a trend among our customers to rely on standard products that they could purchase from component
suppliers to meet a majority of their semiconductor needs. Accordingly, our objective is to evolve from being the supplier of solely the highest-speed physical layer ICs to being the supplier of all of the critical high-performance components in our
customers systems. These components range from the analog electronics used in the conversion between optical and electrical signals to our legacy physical layer products to framers, processors and switches. We believe that this complete
solution strategy results in better interoperability and provides our customers with cost-effective and faster time-to-market solutions. It also enables us to build defensible barriers against competitors who offer only a partial or single circuit
solution. Additionally, we continually strive to integrate multiple functions on a single chip, thereby reducing device cost and improving performance.



Establish Close Relationships with Customers Engineering Management



One of the key elements of our strategy is to work closely with our customers systems design teams. We believe that
these relationships enable us to better understand the customers needs and win designs for existing and new systems.



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Products



We have a wide variety of products that are primarily sold into four areas of the communications infrastructure: storage, enterprise, metro and long-haul.
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:



Physical Media Devices



The physical media device (PMD) serves as the actual physical
connection to the fiber optic cable and is responsible for 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. Some of the
PMDs that we offer are laser drivers, transimpedance amplifiers and post amplifiers operating at speeds ranging from 1.25 Gb/s to 40 Gb/s.



Physical Layer Devices



The physical layer (PHY) devices perform various functions, such as converting high-speed analog signals from the PMD to digital signals,
clock and data regeneration (CDR) and multiplexing/demultiplexing (MUX/DMUX). The CDR cleans and re-times 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 offer a broad line of PHY products for the SONET, ATM, IP, Fibre Channel and Gigabit Ethernet markets at the 622 Mb/s, 1.0 Gb/s, 1.25 Gb/s, 2.5 Gb/s and 10 Gb/s data rates.



Framing, Mapping and Other Overhead Processing Functions



Framers are devices that take incoming data traffic from the PHY and
process the framing information used for transporting data. Mappers convert data from one protocol to another. Some of the other critical functions in a communications system include forward error correction, performance monitoring and pointer
processing. We offer a complete line of these products that operate at speeds up to 10 Gb/s, principally for next-generation SONET systems targeted at the metro market. One such product is the VSC9118, a 10 Gb/s multi-service mapper with a feature
called virtual concatenation, which enables a system to more effectively and efficiently transmit LAN-based protocols such as Ethernet, Fibre Channel, Enterprise System Connection (ESCON) and digital video over the existing,
well-established public network infrastructure.



Network
Processors and Traffic Managers



A network processor is a
software-programmable microprocessor that is optimized for networking and communications functions such as classification, filtering, policing, grooming, forwarding and routing. Traffic management ICs reside on a line card between the network
processor and the switch fabric and perform the policing, queuing and buffering functions. We offer a family of network processors that is designed to deliver programmable high-performance deep-packet processing solutions at speeds up to 2.5 Gb/s.
We also offer a traffic manager targeted at packet processing solutions within multi-service and ATM core switches, digital cross connects and high-speed routers.



Switches



The switch fabric is responsible for receiving data from a line card and routing it to its proper destination. As in the case of the network processor,
this is a function that is primarily served by internally developed and manufactured application-specific IC solutions today. However, OEMs have increasingly begun to outsource the switch fabric to semiconductor suppliers such as ourselves. One of
our current switch fabric solutions is GigaStream, which integrates advanced queuing and scheduling, a serial crossbar and multiple channels of high-speed serial link technology in a two-component fabric chip set. GigaStreams flexible
architecture allows systems designers to scale system bandwidth up to 80 Gb/s. This chip set is ideally suited for access, edge and



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metro area routers and multiservice switches at data rates up to 2.5 Gb/s. We are also sampling the TeraStream switch fabric, a two-component chipset that
supports 2.5 Gb/s and 10 Gb/s port speeds with a maximum aggregate user bandwidth of 160 Gb/s.



We also supply a family of time slot interchange (TSI) and crosspoint switches for use in SONET and WDM equipment in the MAN. With the recent introduction by OEMs of next-generation SONET equipment, the
demand for TSI switches has increased considerably. We have various TSI switches in our product portfolio that provide aggregate bandwidth up to 340 Gb/s. The crosspoint switches are available in a broad range of sizes from 2x2 to 144x144 matrices,
with serial interface rates of up to 6.5 Gb/s.



Enterprise
LAN products



Through our acquisition of Exbit Technology
(Exbit) in fiscal 2001, we have expanded our product line to include switches and Media Access Controllers (MACs) that address Gigabit Ethernet applications in the LAN. We currently offer a family of triple speed (10/100/1000
Mb/s) Layer 2 and Layer 3 switches available in port counts ranging from 8 to 24. 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.



Our MAC products are designed for use in modular
Ethernet switch platforms in the LAN as well as in emerging Ethernet-over-SONET systems in the metro/access market when used in conjunction with our SONET mappers.



Storage and Serial Backplane Products



We supply a number of different products for the enterprise storage and serial backplane markets. Our products target
various systems such as host bus adaptors, switches, servers, hubs, disk arrays and RAID (Redundant Array of Inexpensive Disks) subsystems using Fibre Channel, SCSI and Serial ATA interfaces. Our offerings consist of physical layer devices such as
serialisers and deserialisers (SerDes), transceivers and port bypass circuits, as well as more integrated products such as switches and enclosure management controllers.



Our family of SerDes and transceiver products offers a wide range of performance and cost-effective solutions that are ideal
for high-bandwidth interconnections between buses, backplanes, or other subsystems using standards such as Fibre Channel, Gigabit Ethernet and InfiniBand, a new high-performance data transfer specification. These products are available in single and
quad channel configurations and provide data transfer rates from 1 Gb/s to 20 Gb/s.



Our port bypass circuit products are typically used in disk arrays and hubs, where high-speed serial signals need to be routinely steered around drives on a Fibre Channel loop in order to provide redundancy. Our
products enable designers of disk arrays and RAID systems to integrate more ports and disk drives while maintaining consistently high signal quality using fewer components.



Enclosure management controllers are designed to monitor various physical characteristics of a storage system such as fan
speed and temperature, and to dynamically perform diagnostics, disconnect disk drives or report status to the host without interrupting data flow to other resources within the enclosure. We offer a complete family of these products that support
Fibre Channel and SCSI protocols and that interface seamlessly with our other storage products.



We also offer a variety of Fibre Channel, crosspoint and fabric switches that can be used in embedded applications such as disk arrays and RAID
subsystems, as well as in standalone fabric and director class switches.



Additionally, we have products, both in production and in development, that address the emerging SATA market targeted at storage systems as well as servers.



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Manufacturing



Wafer Fabrication



The majority of our products make use of the state of the art CMOS technology with feature sizes down to 0.13 microns. Through fiscal 2003, we
manufactured a portion of our IC products, including Gallium Arsenide (GaAs) and Indium Phosphide (InP) products, at our two fabs in Camarillo, California, and Colorado Springs, Colorado. In the third quarter of fiscal 2003,
we decided to close our Colorado Springs fab and cease all future manufacturing of GaAs products. We expect this fab to be completely shut down in fiscal 2004. The Camarillo fab is expected to continue in a very limited capacity through at least
fiscal 2004 but is not expected to generate any meaningful revenue or incur any material cost during this period.



Wafer fabrication for the great majority of our products is outsourced to third-party silicon foundries such as IBM, LSI Logic, Taiwan Semiconductor
Manufacturing Corporation and United Microelectronics Corporation. Outsourcing our wafer manufacturing requirements enables us to eliminate the high costs of owning, operating and upgrading fabs and to focus our resources on design and test
applications where we believe we have greater competitive advantages. The typical time required for our third-party foundries to produce wafers from a finished product specification is about 8-16 weeks. After fabrication, the wafers must be probed
to separate usable and unusable die. We perform all of our wafer probing internally using advanced probers and testers.



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



| |  |  | The lack of assured wafer supply, the potential for wafer shortages and possible increases in wafer prices;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | Limited control over delivery schedules, manufacturing yields, production costs and product quality; and
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | The unavailability of, or delays in obtaining, access to key process technologies.
| | - |  | ----------------------------------------------------------------------------------



These and other risks associated with our reliance on third-party 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 foundry capacity may impair our ability to meet our customers needs and negatively impact our operating results. Our third-party 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.



IC Assembly and Test



We outsource our IC packaging to multiple assembly subcontractors in the United States and Asia. Following assembly, the packaged parts are returned to us for final testing prior to shipment to customers. For final test we utilize advanced
automated testers as well as high-performance bench test equipment.



Engineering, Research and Development



The
market for our products is characterized by continually evolving industry standards, rapid changes 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



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designing new products for the high-performance communications and storage markets based on understanding the evolving needs of our customers. 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, cores and standard blocks that can be
reused in multiple products, thereby reducing design cycle time and increasing first-time design correctness.



Our engineering, research and development expenses in fiscal 2003, 2002 and 2001, excluding the amortization of deferred stock-based compensation and
purchased in-process research and development (IPR&D), were $84.3 million, $119.4 million and $133.0 million, respectively.



Competition



The markets for our products are intensely 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 to offset the rapid price erosion that characterizes our industry. We may not be able to develop new products at competitive pricing and performance
levels. Even if we are able to do so, we may not complete a new product and introduce it to market in a timely manner. Our customers may substitute use of our products in their next-generation equipment with those of current or future competitors.
In the storage and enterprise markets, we principally compete against Agilent, Broadcom, Emulex, Marvell, PMC Sierra and Qlogic, while in the long-haul and metro markets, our competitors include Agere Systems, Applied Micro Circuits Corporation,
Mindspeed and PMC Sierra. We also compete with the internal IC design units of systems companies such as Cisco. 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 for design wins and
subsequent product sales.



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



Competition is particularly strong in the market for communications ICs, in part due to the markets 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 Vitesse might have otherwise won.



Sales and Customer Support



We sell our products principally through direct sales force to systems
manufacturers. Because of the significant engineering support required in connection with the sale of high-performance ICs, we provide our customers with field engineering support as well as engineering support from our headquarters. Our sales cycle
is typically lengthy and requires the continued participation of salespersons, field engineers, engineers based at our headquarters and senior management.



We augment this direct sales approach with domestic and foreign distributors that work under the direction of our sales force and service smaller accounts
purchasing application specific standard products.



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



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



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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. We have been awarded 47
U.S. patents and 3 European patents for various aspects of design and process innovations used in the design and manufacture of our products. We have 123 patent applications pending in the U.S. and 3 patent applications pending in Europe and are
preparing to file several more patent applications. We believe that patents are of less significance in our industry than such factors as technical expertise, innovative skills and the abilities of our personnel.



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 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:



| |  |  | Pay substantial damages;
| | - |  | ------------------------



| |  |  | Discontinue the use of infringing technology, including ceasing the manufacture, use or sale of infringing products;
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | Expend significant resources to develop non-infringing technology; or
| | - |  | ---------------------------------------------------------------------



| |  |  | License technology from the party claiming infringement, which license may not be available on commercially reasonable terms.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



Backlog



Vitesses 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 representative of actual sales for any succeeding period, and we therefore
do not believe that backlog is a good indicator of future revenue.



Environmental Matters



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 design 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 design and
manufacturing processes. If we fail to comply with these regulations, we could be subject to fines or be required to suspend or cease our operations. In addition, these regulations may restrict our ability to expand operations at our present
locations or require us to incur significant compliance-related expenses.



Employees



As of September 30, 2003, we had
797 employees, including 486 in engineering, research and development, 118 in marketing and sales, 137 in operations and 56 in 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 any work stoppage. We believe our employee relations are good.



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Risk Factors



We Have Experienced Continuing Losses From Operations Since March 31, 2001, and We Expect That Our Operating Results Will Fluctuate in The Future



We have experienced continuing losses from operations
since our quarterly revenues peaked in the quarter ended December 31, 2000. While our revenues have improved slightly since the fourth quarter of fiscal 2002, they are still not sufficient to cover our operating expenses, and we anticipate future
losses from operations as a result. Moreover, in fiscal 2001, 2002 and 2003 our operating results were materially and adversely affected by inventory write-downs, restructuring charges and impairment charges. We may be required to take additional
similar charges in the future, which could have a material and adverse effect on our operating results. Due to general economic conditions and slowdowns in purchases of networking equipment, it has become increasingly difficult for us to predict the
purchasing activities of our customers and we expect that our operating results will fluctuate substantially in the future. Future fluctuations in operating results may also be caused by a number of factors, many of which are outside our control.
Additional factors that could affect our future operating results include the following:



| |  |  | The loss of major customers;
| | - |  | ----------------------------



| |  |  | Variations, delays or cancellations of orders and shipments of our products;
| | - |  | ----------------------------------------------------------------------------



| |  |  | Increased competition from current and future competitors;
| | - |  | ----------------------------------------------------------



| |  |  | Reduction in the selling prices of our products;
| | - |  | ------------------------------------------------



| |  |  | Significant changes in the type and mix of products being sold;
| | - |  | ---------------------------------------------------------------



| |  |  | Delays in introducing new products;
| | - |  | -----------------------------------



| |  |  | Design changes made by our customers;
| | - |  | -------------------------------------



| |  |  | Failure by third-party foundries to manufacture and ship products on time;
| | - |  | --------------------------------------------------------------------------



| |  |  | Changes in third-party foundries manufacturing capacity, utilization of their capacity and manufacturing yields;
| | - |  | -----------------------------------------------------------------------------------------------------------------



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



| |  |  | Changes in our or our customers inventory levels;
| | - |  | --------------------------------------------------



| |  |  | Expenses or operational disruptions resulting from acquisitions; and
| | - |  | --------------------------------------------------------------------



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



For example, high levels of inventory at our customers contributed to a significant decline in sales of our products in fiscal 2001 and 2002. In addition, we recently
decided to discontinue our line of optical module products and sell certain assets of that business, as a result of which our fiscal 2003 statements of operations and cash flows reflect losses from discontinued operations associated with that
business.



We implemented significant restructuring programs
and cost reductions in fiscal 2001, 2002 and 2003, and we cannot assure that we will not undertake further such actions in the future. In addition, in the past we have recorded significant new product development costs because our policy is to
expense these costs at the time that they are incurred. We may incur these types of expenses in the future. These additional expenses may have a material and adverse effect on our results in future periods. The occurrence of any of the
above-mentioned factors could have a material adverse effect on our business and on our financial results.



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The Market Price for Our Common Stock Has Been Volatile and Future Volatility Could Cause the Value of
Your Investment in Our Company to Fluctuate



Our stock
price has recently experienced significant volatility. In particular, our stock price declined significantly following announcements made by us and other semiconductor suppliers in fiscal 2001 and 2002 of reduced revenue expectations and of a
general slowdown in the technology sector, particularly the optical networking equipment sector. While our revenues have improved slightly since the fourth quarter of fiscal 2002, we expect that uncertainty regarding demand for our products will
cause our stock price to continue to be volatile. In addition, the value of your investment could decline due to the impact of any of the following factors, among others, upon the market price of our common stock:



| |  |  | Additional changes in financial analysts estimates of our revenues and operating results;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | Our failure to meet financial analysts performance expectations; and
| | - |  | ---------------------------------------------------------------------



| |  |  | Changes in market valuations of other companies in the semiconductor or networking industries.
| | - |  | ----------------------------------------------------------------------------------------------



In addition, many of the risks described elsewhere in this section could materially and adversely affect our stock price, as
discussed in those risk factors. U.S. financial markets have recently experienced substantial price and volume volatility. Fluctuations such as these have affected and are likely to continue to affect the market price of our common stock.



In the past, securities class action litigation has often been
instituted against companies following periods of volatility and decline in the market price of such companies securities. If instituted against us, regardless of the outcome, such litigation could result in substantial costs and diversion of
our managements attention and resources and have a material adverse effect on our business, financial condition and results of operations. We could be required to pay substantial damages, including punitive damages, if we were to lose such a
lawsuit.



If We are Unable to Develop and Introduce New
Products Successfully or to Achieve Market Acceptance of Our New Products, Our Operating Results Would be Adversely Affected



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



| |  |  | Accurately predict market requirements and evolving industry standards;
| | - |  | -----------------------------------------------------------------------



| |  |  | Accurately define new products;
| | - |  | -------------------------------



| |  |  | Timely complete and introduce new products;
| | - |  | -------------------------------------------



| |  |  | Timely qualify and obtain industry interoperability certification of our products and our customers products into which our products will be incorporated;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Work with our foundry subcontractors to achieve high manufacturing yields; and
| | - |  | ------------------------------------------------------------------------------



| |  |  | Gain market acceptance of our products and our customers products.
| | - |  | -------------------------------------------------------------------



If we are not able to develop and introduce new products successfully, our business, financial condition and results of operations will be materially and
adversely affected. Our success will also depend on the ability of our customers to successfully develop new products and enhance existing products for the communications and storage markets. The communications and storage 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 business, financial condition and results of operations will be materially
and adversely affected.



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



We intend to continue focusing our sales efforts on a small number of
customers in the communications and storage markets that require high-performance integrated circuits. Some of these customers are also our competitors. For the year ended September 30, 2003, one customer, EMC Corporation, accounted for greater than
10% of total 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.



We Depend on Third-party Foundries and Other Suppliers to Manufacture Substantially All of Our Current Products



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



| |  |  | The lack of assured wafer supply, the potential for wafer shortages and possible increases in wafer prices;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | Limited control over delivery schedules, manufacturing yields, production costs and product quality; and
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | The unavailability of, or delays in obtaining, access to key process technologies.
| | - |  | ----------------------------------------------------------------------------------



These and other risks associated with our reliance on third-party 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
foundry capacity may impair our ability to meet our customers needs and negatively impact our operating results. Our third-party 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.



In addition to third-party foundries, we also depend on third-party subcontractors in the U.S. and Asia for the assembly and packaging of our products. As with our 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 material adverse effect on our customer relationships, business and financial results.



If We Do Not Achieve Satisfactory Manufacturing Yields or Quality, Our
Business will be Harmed



The fabrication of integrated
circuits 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 are responsible for low yields when these wafers are probed.



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



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inventory, yields below our estimates can require us to lower the value of inventory that is already 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 business and operating results.



Acquisitions May Be Difficult to Integrate, Disrupt Our Business, Dilute Stockholder Value or Divert the Attention of Our Management



Within the last several years we have made a series of acquisitions,
including a number of significant acquisitions. Our management frequently evaluates available strategic opportunities, and as a result we may pursue additional acquisitions of complementary products, technologies or businesses in the future. If we
fail to achieve the financial and strategic benefits of past and future acquisitions, however, including our recent acquisitions of Multilink Technology Corporation (Multilink) and APT, our business and operating results will be
materially and adversely affected. In undertaking future acquisitions, we may:



| |  |  | Issue stock that would dilute the ownership of our then-existing stockholders;
| | - |  | ------------------------------------------------------------------------------



| |  |  | Reduce the cash available to fund operations;
| | - |  | ---------------------------------------------



| |  |  | Incur debt; or
| | - |  | --------------



| |  |  | Assume other liabilities.
| | - |  | -------------------------



For example, in connection with our acquisition of Versatile Optical Networks, Inc. (Versatile) in July 2001, we issued approximately 8.8 million shares of our common stock. In August 2003 we subsequently
sold certain assets of this business at a loss, requiring us to recognize losses from discontinued operations on our fiscal 2003 statements of operations and cash flows. Acquisitions also involve numerous other risks after they are completed,
including:



| |  |  | Difficulties in integrating the acquired operations, technologies, products and personnel with ours;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | Failure to achieve targeted synergies;
| | - |  | --------------------------------------



| |  |  | Amortization expenses relating to intangible assets;
| | - |  | ----------------------------------------------------



| |  |  | Unanticipated costs and liabilities, including charges for the impairment of the value of acquired assets;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | Diversion of managements attention from the day-to-day operations of our core business;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | Adverse effects on our existing business relationships with suppliers and customers or those of the acquired organization;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | Difficulties in entering markets in which we have no or limited prior experience; and
| | - |  | -------------------------------------------------------------------------------------



| |  |  | Potential loss of key employees, particularly those of the acquired organizations.
| | - |  | ----------------------------------------------------------------------------------



For example, in fiscal 2002 we recorded impairment charges of $398.9 million associated with goodwill and other intangible assets related to
past acquisitions. As of September 30, 2003, and after accounting for these impairment charges, we had an aggregate of $194.8 million of goodwill and other intangible assets on our balance sheet. These assets may have to be further written down to
the extent they are deemed to be impaired in the future and any such write-downs would adversely affect our results.



Our Industry is Highly Competitive



The markets for our products are intensely competitive and subject to rapid technological advancement in design technologies, wafer-manufacturing
techniques, process tools and alternate networking technologies. We must identify and capture future market opportunities to offset the rapid price erosion that characterizes our



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industry. We may not be able to develop new products at competitive pricing and performance levels. Even if we are able to do so, we may not complete a new
product and introduce it to market in a timely manner. Our customers may substitute use of our products in their next generation equipment with those of current or future competitors. In the storage and enterprise markets, we principally compete
against Agilent, Broadcom, Emulex, Marvell, PMC Sierra and QLogic while in the long haul and metro markets, our competitors include Agere Systems, Applied Micro Circuits Corporation, Mindspeed and PMC Sierra. We also compete with internal IC design
units of systems companies such as Cisco. Over the next few years, we expect additional competitors, some of which may have greater financial and other resources, to enter the market with new products. In addition, we are aware of venture-backed
companies that focus on specific portions of our product line. These companies, individually and collectively, represent future competition for design wins and subsequent product sales.



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



Competition is particularly strong in the market for communications ICs, in
part due to the markets growth rate, which attracts larger competitors, and in part due to the number of smaller companies focused on this area. These companies, individually and collectively, represent strong competition for many design wins
and subsequent product sales. Larger competitors in our market have acquired both mature and early stage companies with advanced technologies. These acquisitions could enhance the ability of larger competitors to obtain new business that Vitesse
might have otherwise won.



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 30%, 24% and 23% of our total revenue in fiscal 2003, 2002 and 2001, respectively. International sales involve a variety of risks and uncertainties, including
risks related to:



| |  |  | Reliance on strategic alliance partners;
| | - |  | ----------------------------------------



| |  |  | Compliance with changing foreign regulatory requirements and tax laws;
| | - |  | ----------------------------------------------------------------------



| |  |  | Difficulties in staffing and managing foreign operations;
| | - |  | ---------------------------------------------------------



| |  |  | Reduced protection for intellectual property rights in some countries;
| | - |  | ----------------------------------------------------------------------



| |  |  | Longer payment cycles to collect accounts receivable in some countries;
| | - |  | -----------------------------------------------------------------------



| |  |  | Political and economic instability;
| | - |  | -----------------------------------



| |  |  | Economic downturns in international markets.
| | - |  | --------------------------------------------



| |  |  | Changing restrictions imposed by U.S. export laws; and
| | - |  | ------------------------------------------------------



| |  |  | Competition from U.S. based companies that have firmly established significant international operations.
| | - |  | --------------------------------------------------------------------------------------------------------



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



We Must Keep Pace with Rapid Technological Change and Evolving Industry Standards



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



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and increasing demand for higher levels of integration and smaller process geometries. We believe that our success to a large extent depends on our ability
to adapt to these changes, to continue to improve our product technologies and to develop new products and technologies in order 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.



Our Business is Subject to
Environmental Regulations



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 design 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 design and manufacturing
processes. If we fail to comply with these regulations, we could be subject to fines or be required to suspend or cease our operations. In addition, these regulations may restrict our ability to expand operations at our present locations or require
us to incur significant compliance-related expenses.



Our
Failure to Manage Changes to Our Operations Infrastructure May Adversely Affect Us



Prior to fiscal 2001 we experienced a period of rapid growth and expanded our operations infrastructure accordingly. More recently, we implemented a series of restructuring plans in fiscal 2001, 2002 and 2003 that
reduced this infrastructure. Throughout this period we have also made a number of acquisitions. These changes have placed, and continue to place, a significant strain on our personnel, systems and other resources. Unless we manage these changes
effectively, we may encounter challenges in executing our business, which could have a material adverse effect on our business and financial results. Our recent restructuring efforts, in particular, may disrupt our operations and adversely affect
our ability to respond rapidly to any renewed growth opportunities.



We are Dependent on Key Personnel



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



If We are Not Successful in Protecting Our Intellectual Property Rights, it May Harm Our Ability to Compete



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. We have been issued 47 U.S. patents and 3 European patents and have a number of pending patent applications. However, despite our efforts to protect our intellectual property, we cannot
assure you that:



| |  |  | The steps we take to prevent misappropriation or infringement of our intellectual property will be successful;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | Any existing or future patents will not be challenged, invalidated or circumvented;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | Any pending patent applications or future applications will be approved;
| | - |  | ------------------------------------------------------------------------



| |  |  | Others will not independently develop similar products or processes to ours or design around our patents; or
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | Any of the measures described above would provide meaningful protection.
| | - |  | ------------------------------------------------------------------------



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A failure by us to meaningfully protect our intellectual property could have a material adverse effect on our business,
financial condition, operating results and ability to compete. In addition, effective patent, copyright, trademark and trade secret protection may be unavailable or limited in certain countries.



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 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:



| |  |  | Pay substantial damages;
| | - |  | ------------------------



| |  |  | Discontinue the use of infringing technology, including ceasing the manufacture, use or sale of infringing products;
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | Expend significant resources to develop non-infringing technology; or
| | - |  | ---------------------------------------------------------------------



| |  |  | License technology from the party claiming infringement, which license may not be available on commercially reasonable terms.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



Our Ability to Repurchase Our Debentures, If Required, with Cash, upon a
Change of Control May Be Limited



In certain circumstances
involving a change of control or the termination of public trading of our common stock, holders of our 4% convertible subordinated debentures may require us to repurchase some or all of the debentures. We cannot assure that we will have sufficient
financial resources at such time or will be able to arrange financing to pay the repurchase price of the debentures.



Our ability to repurchase the debentures in such event may be limited by law, by the indenture associated with the 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 payments. We may not have the
financial ability to repurchase the debentures if payment of our debt is accelerated.



Item 2.Properties



Our executive offices and principal research and development and fabrication facility is located in Camarillo, California, and is being leased under a
noncancellable operating lease that expires in 2009. The total space occupied in this building is approximately 111,000 square feet. Upon expiration of the lease in November 2002, we purchased our second wafer fabrication facility in Colorado
Springs, Colorado. This facility includes a 10,000 square foot clean room for wafer fabrication and a product development center. We lease an additional 43,000 square feet in Camarillo for product development. In March 2001, we purchased an
additional facility, located in Camarillo, for product development. This building is approximately 52,000 square feet. We also lease space for 13 other product development centers in California, Colorado, Denmark, Germany, Massachusetts, Minnesota,
New Jersey, Oregon, and Texas and 15 sales and field application support offices (6 in the United States, 1 in Canada, 5 in Europe, 2 in China and 1 in Japan). As of September 30, 2003, we own space of approximately 156,000 square feet and lease
space of approximately 440,000 square feet.



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Item 3.Legal Proceedings



We are currently involved in several legal proceedings; however, we believe that resolution of these matters, if resolved against us, would not have a
material and adverse effect on us.



Item 4.Submission of Matters to a Vote of Security Holders



No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.



Executive Officers of the Registrant



The executive officers of the Company are as follows:



|Name                |  | Age |  | Position                                             
|------------------- |  | --- |  | -----------------------------------------------------
|Louis Tomasetta     |  | 55  |  | President and Chief Executive Officer, Director      
|Ira Deyhimy         |  | 63  |  | Vice President, Strategy Development                 
|Christopher Gardner |  | 43  |  | Vice President, General Manager of Transport Division
|Eugene Hovanec      |  | 51  |  | Vice President, Finance & Chief Financial Officer    
|Yatin Mody          |  | 40  |  | Vice President, Finance                              
|Richard Riker       |  | 48  |  | Vice President, Sales and Marketing                  



Louis Tomasetta, a
co-founder of the Company, has been President, Chief Executive Officer and a Director since the Companys inception in February 1987. From 1984 to 1987, he served as President of the integrated circuits division of Vitesse Electronics
Corporation. Prior to that he was the director of the Advanced Technology Implementation department at Rockwell International Corporation. Dr. Tomasetta has over 30 years experience in the management and development of semiconductor-based
businesses, products, and technology. Dr Tomasetta received his B.S., M.S., and Ph.D. degrees in electrical engineering from the Massachusetts Institute of Technology.



Ira Deyhimy, a co-founder of the Company, was Vice President of Product Development since the Companys inception in
February 1987 and became Vice President, Strategy Development in fiscal 2001. From 1984 to 1987, he was Vice President, Engineering at Vitesse Electronics Corporation. Prior to that, Mr. Deyhimy was manager of Integrated Circuit Engineering at
Rockwell International Corporation. Mr. Deyhimy has over 30 years experience in semiconductor-based technology. Mr. Deyhimy holds a B.S. degree in physics from the University of California at Los Angeles and a M.S. degree in physics from the
California State University at Northridge.



Christopher Gardner
joined Vitesse in 1986, became Director of ASIC Products in 1992, Vice President and General Manager of ATE Products in 1996, and was appointed Vice President and General Manager of the Telecom Division in 1999. Mr. Gardner served as Vice President
and Chief Operating Officer from November 2000 to June 2002. In June 2002, Mr. Gardner became Vice President and General Manager of the Transport Division. Prior to joining Vitesse, he was a member of the technical staff at AT&T Bell
Laboratories, which later became part of Lucent Technologies. Mr. Gardner received his B.S.E.E. from Cornell University and his M.S.E.E. from the University of California at Berkeley.



Eugene Hovanec joined the Company as Vice President, Finance and Chief Financial Officer in December 1993. From 1989 to
1993, Mr. Hovanec served as Vice President, Finance & Administration, and Chief Financial Officer at Digital Sound Corporation. Prior to that, from 1984 to 1989, he served as Vice President and Controller at Micropolis Corporation. Mr. Hovanec
holds a Bachelor of Business Administration degree from Pace University, New York. Mr. Hovanec also serves as a director of Interlink Electronics, Inc.



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Yatin Mody joined the Company in March 1992 as Manager of Budgeting and Cost Accounting, became
Controller in August 1993, Vice President and Controller in November 1998, and Vice President, Finance in July 2002. Prior to that, Mr. Mody was at Deloitte and Touche, most recently as a manager. Mr. Mody holds a Bachelor of Technology degree in
electrical engineering from the Indian Institute of Technology, Madras and an M.B.A degree from the University of California at Los Angeles.



Richard Riker joined Vitesse in June 2001 as Vice President, Sales and Marketing. He has over 21 years of experience in the semiconductor industry and
related fields. From 2000 to 2001, Mr. Riker was Vice President, Sales and Business Development at Stargen. From 1994 to 2000, Mr. Riker was Director of Sales at Intel and Vice President Worldwide Sales, Digital Semiconductors, a business unit of
Digital Equipment Corporation. Mr. Riker holds a B.S.E.E. from California State University at Long Beach and an M.B.A. from Pepperdine University.



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PART II



Item 5.Market for Companys Common Stock and Related Stockholder Matters



Our common stock is traded in the Nasdaq National Market System under the symbol VTSS. Our common stock has been trading on the Nasdaq National Market
since December 11, 1991. The table below presents the quarterly high and low closing prices on the Nasdaq National Market during the past two fiscal years.



|Fiscal Year Ended September 30, 2002 |  | High |       | Low
|------------------------------------ |  | ---- | ----- | ---
|First Quarter                        |  | $    | 14.84 |    
|Second Quarter                       |  |      | 14.16 |    
|Third Quarter                        |  |      | 10.23 |    
|Fourth Quarter                       |  |      | 3.41  |    
|                                     |  |     
|Fiscal Year Ended September 30, 2003 |  |      |       |    
|First Quarter                        |  | $    | 3.32  |    
|Second Quarter                       |  |      | 2.81  |    
|Third Quarter                        |  |      | 5.62  |    
|Fourth Quarter                       |  |      | 7.38  |    



As of September 30,
2003, there were 2,169 shareholders of record. We have never paid cash dividends and presently intend to retain any future earnings for business development. Further, our bank line of credit agreement and certain of our lease agreements prohibit the
payment of dividends without the consent of the bank and the lessors, respectively.



Information regarding our equity compensation plans is set forth under the caption Equity Compensation Plan Information in our Proxy Statement for the 2004 Annual Meeting of Shareholders.



Item 6.Selected Financial Data



The selected financial data presented below was derived from the consolidated financial statements of the Company and should be read in conjunction with
the audited consolidated financial statements, the notes thereto and the other financial data included therein.



|                                                              |  | As of and for the years ended September 30,
|------------------------------------------------------------- |  | -------------------------------------------
|                                                              |  | 2003                                       
|                                                              |  | (in thousands except per share amounts)    
|Statement of operations data:                                 |  |                                            
|Revenues                                                      |  | $                                          
|Income (loss) from operations                                 |  |                                            
|Income (loss) from continuing operations                      |  |                                            
|Net income (loss)                                             |  |                                            
|Income (loss) from continuing operations per sharebasic      |  |                                            
|Income (loss) from continuing operations per sharediluted(1) |  |                                            
|Net income (loss) per sharebasic                             |  |                                            
|Net income (loss) per sharediluted(1)                        |  |                                            
|Shares used in per-share calculationbasic                    |  |                                            
|Shares used in per-share calculationdiluted(1)               |  |                                            
|                                                              |  |                                            
|Balance sheet data:                                           |  |                                            
|Cash and short-term investments                               |  | $                                          
|Working capital, net                                          |  |                                            
|Total assets                                                  |  |                                            
|Long-term debt, less current portion                          |  |                                            
|Total shareholders equity                                    |  |                                            



With the adoption of
SFAS No. 142, effective October 1, 2001, the Company ceased amortizing goodwill.



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Note 1: Diluted net income per share is computed using the weighted-average number of common shares and
dilutive potential common shares outstanding during the period. Diluted net loss per share is computed using the weighted-average number of common shares and excludes dilutive potential common shares, as their effect is antidilutive. The dilutive
potential common shares that were antidilutive for fiscal 2003 totaled approximately 49.7 million shares.



Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations



The following discussion of the financial condition and results of operations of Vitesse should be read in conjunction with
the Consolidated Financial Statements and Notes thereto included elsewhere in this report.



Overview



We are a
leading supplier of high-performance integrated circuits, principally targeted at systems manufacturers in the communications and storage industries. Our customers include leading communications and storage OEMs such as Alcatel, Cisco, EMC, Fujitsu,
Hewlett Packard, Huawei, IBM, LSI Logic, Lucent, McData, Nortel, Siemens, Sun Microsystems, and Tellabs. Over the past few years, the proliferation of the Internet and the rapid growth in volume of data being sent over local and wide area networks
has placed a tremendous strain on the communications infrastructure. The resulting demand for increased bandwidth created a need for both faster as well as more expansive networks. There has also been a growing trend by systems companies towards the
outsourcing of IC design and manufacture to suppliers such as Vitesse. Additionally, due to increasing needs for moving, managing and storing mission-critical data, the market for storage equipment has been growing significantly.



In the late 1990s and 2000, perceptions of exponential projected growth in
network traffic accelerated the build-out of the communications infrastructure, leading to a significant increase in capital spending on communications and networking equipment. During this period, our customers began increasing orders for our
products in anticipation of continued growth in demand for their products. At the end of fiscal 2000, however, business conditions changed suddenly. As credit tightened and the economy slipped into a recession, many carriers and service providers,
faced with financial hardship, either scaled back their expenditures or in some cases, ceased operations. Additionally, as it became evident that the infrastructure had been built out in excess of true end-user demand, capital spending on networking
equipment across the industry dropped sharply, and our customers began consuming a portion of the excess inventories of our components that they had accumulated in previous years rather than placing new orders with us. As part of this widespread
market downturn, we experienced a significant decline in sales. In response to these arduous conditions, we implemented various restructuring plans during fiscal 2001, 2002 and 2003 as detailed below.



In spite of the difficult environment confronting the communications industry
today, we believe that the long-term prospects for the global communications and storage markets in which we participate remain strong.



Significant Events During Our Last Three Fiscal Years



Since the end of 2000, our industry has experienced a widespread and severe downturn. As a result of this downturn, we experienced a significant decline
in sales of our products, which was further exacerbated by the high inventory levels at our customers. In response to the decreased demand for our products and the continuing disruption in our industry, we implemented a series of restructuring
programs and other significant changes to our business during fiscal 2001, 2002 and 2003. These changes included the closure of our Colorado Springs fab and other facilities, the termination of employees, the cancellation of certain development
projects and the write-down of certain assets, and have significantly lowered our operating costs going forward. In addition to our restructuring programs, within the last the fiscal years we have made a number of acquisitions and have sold our
optical module business.



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Restructuring Programs and Charges



Due to the prolonged downturn in our industry, we announced a number of restructuring programs in fiscal 2003, 2002 and
2001. A summary of each program is as follows:



| |  |  | The June 2003 restructuring program focused on the planned closure of our Colorado Springs, Colorado wafer fabrication facility. This restructuring plan included the termination of
the manufacturing workforce associated with that facility, the write-down of certain manufacturing assets that were deemed to be impaired and the write-off of related prepaid maintenance for non-transferable maintenance contracts totaling $27.4
million, as well as the write-down of the Colorado Springs facility itself in the amount of $23.8 million. Payments related to the workforce reduction are estimated to be approximately $1.4 million and are expected to be completed by March 2004. As
a result of implementing this restructuring plan, we recorded total charges of $52.6 million during fiscal 2003.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The June 2002 restructuring program consisted of a workforce reduction of 183 people, consolidation of excess facilities of $4.6 million, an asset impairment charge of $107.2
million and contract settlement costs of $34.2 million. Payments for workforce reduction were approximately $3.4 million and were completed during the quarter ended June 30, 2003. Payments related to the consolidation of excess facilities are
expected to be completed by March 2004. The accrual for contract settlement costs is expected to be fully utilized by March 2005. The program resulted in total charges of $148.3 million during fiscal 2002 and $1.1 million in fiscal 2003.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The November 2001 restructuring program consisted of a workforce reduction of 130 people, consolidation of excess facilities of $0.4 million and an asset impairment charge of $63.2
million. Payments for workforce reduction were approximately $0.7 million and were completed during the quarter ended March 31, 2002. Payments related to consolidation of excess facilities were completed during the quarter ended June 30, 2003. The
program resulted in total charges of $64.3 million during fiscal 2002.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The June 2001 restructuring program consisted of a 12% workforce reduction and consolidation of excess facilities of $1.7 million. Charges for workforce reduction were approximately
$2.0 million and payments will be completed in March 2005. Payments related to the consolidation of facilities were completed in the quarter ended September 30, 2003. The program resulted in total charges of $3.7 million during fiscal 2001 and $0.3
million during fiscal 2003.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



|                                                   |  | Workforce Reduction |        |   | Excess Facilities |   |        | Contract Settlement Costs |  |   | Impairment of Assets |   |  | Building impairment |          |   | Total |  
|-------------------------------------------------- |  | ------------------- | ------ | - | ----------------- | - | ------ | ------------------------- |  | - | -------------------- | - |  | ------------------- | -------- | - | ----- | -
|Initial charge relating to June 2001 restructuring |  | $                   | 2,007  |   |                   | $ | 1,734  |                           |  | $ |                     |   |  | $                   |         |   |       | $
|Cash payments                                      |  |                     | (778   | ) |                   |   | (28    | )                         |  |   |                     |   |  |                     |         |   |       |  
|                                                   |  |                     |        |   |                   |   |        |                           |  |   |                      |   |  |                     |          |   |       |  
|Balance at September 30, 2001                      |  |                     | 1,229  |   |                   |   | 1,706  |                           |  |   |                     |   |  |                     |         |   |       |  
|                                                   |  |                     |        |   |                   |   |        |                           |  |   |                      |   |  |                     |          |   |       |  
|Charged to expense                                 |  |                     | 4,058  |   |                   |   | 3,855  |                           |  |   | 34,221               |   |  |                     | 170,363  |   |       |  
|Non cash amounts                                   |  |                     |       |   |                   |   | (172   | )                         |  |   |                     |   |  |                     | (170,363 | ) |       |  
|Cash payments                                      |  |                     | (3,709 | ) |                   |   | (1,985 | )                         |  |   | (2,714               | ) |  |                     |         |   |       |  
|                                                   |  |                     |        |   |                   |   |        |                           |  |   |                      |   |  |                     |          |   |       |  
|Balance at September 30, 2002                      |  |                     | 1,578  |   |                   |   | 3,404  |                           |  |   | 31,507               |   |  |                     |         |   |       |  
|                                                   |  |                     |        |   |                   |   |        |                           |  |   |                      |   |  |                     |          |   |       |  
|Charged to expense                                 |  |                     | 1,419  |   |                   |   | 1,390  |                           |  |   |                     |   |  |                     | 27,447   |   |       |  
|Non cash amounts                                   |  |                     |       |   |                   |   |       |                           |  |   |                     |   |  |                     | (27,447  | ) |       |  
|Cash payments                                      |  |                     | (1,646 | ) |                   |   | (2,081 | )                         |  |   | (10,867              | ) |  |                     |         |   |       |  
|Add Multilink accrued restructuring                |  |                     |        |   |                   |   | 3,219  |                           |  |   |                      |   |  |                     |          |   |       |  
|                                                   |  |                     |        |   |                   |   |        |                           |  |   |                      |   |  |                     |          |   |       |  
|Balance at September 30, 2003                      |  | $                   | 1,351  |   |                   | $ | 5,932  |                           |  | $ | 20,640               |   |  | $                   |         |   |       | $
|                                                   |  |                     |        |   |                   |   |        |                           |  |   |                      |   |  |                     |          |   |       |  



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In connection with the acquisition of Multilink, we assumed accrued restructuring costs of $3.2 million
related to excess facilities charges.



Workforce reduction
includes the cost of severance and related benefits of employees affected by the restructuring plans. The excess facilities charges include lease termination payments, non-cancelable lease costs and write off of leasehold improvements and office
equipment related to these leases. Contract settlements costs represent future purchase commitments related to unused licenses of non-cancelable software contracts, and the residual value guaranteed under certain equipment operating leases. The
impairment of assets charge includes the write-down of the Colorado Springs facility manufacturing equipment and prepaid maintenance contracts associated with that equipment. The charge was determined based on the held and used classification under
Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, (SFAS 144). Under this classification, when a decision has been made to abandon an asset group, all of the
long-lived assets and certain identifiable intangibles in that asset group to be disposed of are tested for impairment. The charges for the Colorado Springs facility also includes impairment of the owned land and building based on the held and used
classification under SFAS 144. The Colorado Springs manufacturing facility will cease production during fiscal 2004. Following the cessation of production, however, certain portions of the building could be used as office space. As such, we obtained
fair value information for comparable commercial property in the Colorado Springs area. Based on an estimated fair value, we recorded an impairment charge to write down the land and building accordingly. The adjusted value of the long-lived assets
will then be depreciated over the remaining estimated useful life.



Other Write-Offs and Special Charges



During
the quarter ended June 30, 2003, we wrote off $6.8 million of GaAs inventory. As a result of our planned closure of the GaAs fabrication facility in Colorado Springs and the decision to exit the GaAs manufacturing process, we notified customers and
requested final forecasts and purchase orders from these customers. Based on the customers responses, and required commitments to purchase the inventory in the near future, we determined that we had excess GaAs inventory on hand. As a result,
we recorded a charge of $6.8 million, which is included in cost of revenues in fiscal 2003. During fiscal 2003 we also recorded a charge of $5.2 million to write down various equity investments held by the two Vitesse Venture Funds to the estimated
fair market value, which is included in Other Expenses in the statement of operations for fiscal 2003.



In fiscal 2002, we also wrote off $30.5 million of excess and obsolete inventories. The continued industry downturn resulted in a decreased demand for our
products and a significant reduction in sales forecasts established at the end of fiscal 2001 and the beginning of 2002. As a result, we recorded a charge of $30.5 million in accordance with our inventory reserve methodology, which was included in
cost of revenues in fiscal 2002. Also, during the fourth quarter of fiscal 2002, we recorded a charge of $5.0 million to write down various equity investments held by the two Vitesse Venture Funds to the estimated fair market value, which is
included in Other Expenses in the statement of operations for fiscal 2002.



Acquisitions and Discontinuations of Operations



We acquired Multilink in August 2003 in exchange for approximately 4.4 million shares of common stock valued at $23.3 million, the assumption of stock options and warrants to purchase approximately 2.0 million shares
of common stock valued at $8.4 million, and acquisition-related expenditures of $0.5 million. In connection with the acquisition, we recorded an IPR&D charge of $2.0 million, goodwill of $13.0 million and other intangible assets of $7.0 million
that will be amortized over 4 years. Through this transaction, we acquired an experienced team of system, mixed signal and digital design engineers that has successfully developed products for OC-192 transport, Forward Error Correction, 10 Gigabit
Ethernet and high speed backplanes, as well as a family of products that is already in production.



In the third quarter of fiscal 2003, we also decided to discontinue our line of optical module products due to continued depressed levels of demand for
these products. In August 2003, we entered into an agreement to sell



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certain assets of our optical module business to Avanex Corporation (Avanex) for shares of Avanex common stock valued at approximately $6.6
million. In accordance with generally accepted accounting principles (GAAP), our September 30, 2003 balance sheet reflects assets and liabilities held for sale and our fiscal 2003 statements of operations and cash flows reflect the
results of the optical module business as discontinued operations for all periods presented.



In addition to the Multilink transaction we completed in August 2003, we have also made several other significant acquisitions since the beginning of fiscal 2001, including our acquisition of Versatile in July 2001
for approximately 8.8 million shares of our common stock and our acquisition of Exbit in June 2001 for approximately 2.7 million shares of our common stock and certain additional contingent consideration relating to the achievement of performance
and retention goals. We also made a number of smaller acquisitions during this period, including our acquisition of APT in January 2003 for approximately $10.0 to $14.4 million, depending on the performance of the acquired business. While we
frequently evaluate potential acquisition of business, products or technologies that we believe will contribute to our strategy, we do not currently have any binding commitments with respect to any additional material acquisitions.



Results of Operations



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



|                                                                      |  | Year ended September 30, |   
|--------------------------------------------------------------------- |  | ------------------------ | --
|                                                                      |  | 2003                     |   
|Revenues                                                              |  | 100                      | % 
|                                                                      |  |                          |   
|Costs and expenses:                                                   |  |                          |   
|Cost of revenues                                                      |  | 46.8                     |   
|Engineering, research and development                                 |  | 70.4                     |   
|Selling, general, and administrative                                  |  | 34.5                     |   
|Restructuring costs                                                   |  | 34.6                     |   
|Purchased in-process research and development                         |  | 2.0                      |   
|Goodwill and intangible assets impairment charge                      |  |                         |   
|Amortization of goodwill and intangibles                              |  | 3.2                      |   
|                                                                      |  |                          |   
|Total costs and expenses                                              |  | 191.5                    |   
|                                                                      |  |                          |   
|Loss from operations                                                  |  | (91.5                    | ) 
|Other income, net                                                     |  | 7.6                      |   
|                                                                      |  |                          |   
|Loss from continuing operations before income taxes                   |  | (83.9                    | ) 
|Income tax expense (benefit)                                          |  | 0.0                      |   
|                                                                      |  |                          |   
|Loss from continuing operations                                       |  | (83.9                    | ) 
|Loss from discontinued operations, net of tax benefit for fiscal 2001 |  | (23.0                    | ) 
|                                                                      |  |                          |   
|Net loss                                                              |  | (106.9                   | )%
|                                                                      |  |                          |   



Year Ended September 30, 2003, as
Compared to Year Ended September 30, 2002



Revenues



Revenues in fiscal 2003 were $156.4 million, an increase of 3.1% from the
$151.7 million recorded in fiscal 2002. The relatively small increase in revenues was the result of market conditions and customer demand continuing to remain flat in the first half of fiscal 2003 compared to fiscal 2002, followed by modest growth
in the second half of fiscal 2003.



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Revenues from storage and enterprise products were $82.9 million and $35.8 million in fiscal 2003,
respectively, compared with $58.1 million and $30.0 million, respectively, in fiscal 2002. The increase in revenues in fiscal 2003 from these products is due to our continuing emphasis on these markets through the introduction of new products and
enhanced marketing efforts.



Revenues from products targeting
the metro market were $19.4 million in fiscal 2003 compared to $21.3 million in fiscal 2002. The relatively small decline in metro revenues was the result of a sequential quarterly decline in orders for older products targeting this market during
fiscal 2002, offset by sequential quarterly growth in demand for new products during fiscal 2003.



Revenues from our legacy products, which include long-haul telecommunications products and ASICs for the Automatic Test Equipment (ATE) and military
markets were $18.3 million in fiscal 2003 and $42.3 million fiscal 2002. The decrease in revenues generated from these products was primarily due to a significant reduction in orders from telecommunications customers as a result of the overbuilding
of the long haul communications infrastructure which began in fiscal 2001 and has continued through fiscal 2003 as well as our reduced emphasis on markets outside communications and storage.



It is customary for product prices in the semiconductor industry to decline
over time. Most of these price decreases are negotiated in advance and are usually based on increased volumes or the passage of time. In fiscal 2003 and 2002, we did not experience abnormal price decreases for the majority of our products.



Since fiscal 2001, many of our customers have restructured
operations, cut product development efforts, reduced excess component inventories and divested parts of their operations as a result of their clients fluctuating capital expenditure levels. We believe that even though the business environment
of the markets in which we participate has shown modest signs of improvement, the pattern of revenues for fiscal 2004 may be volatile as a result of fluctuating customer demand forecasts and inventory levels.



Cost of Revenues



Our cost of revenues was $73.2 million in fiscal 2003 compared to $110.2 million in fiscal 2002. As a percentage of total
revenues, cost of revenues was 46.8% in fiscal 2003 and 72.6% in fiscal 2002. The decrease in cost of revenues as a percentage of total revenues in fiscal 2003 compared to fiscal 2002 was a result of inventory write-offs, increased revenues and our
continued efforts to decrease fixed costs and improve manufacturing yields for mature semiconductor products. During the quarter ended June 30, 2003 we implemented a restructuring plan that included the closure of our 6-inch GaAs wafer fabrication
facility in Colorado Springs and the exit of the GaAs manufacturing process in fiscal 2004. As a result we notified customers and requested final forecasts and purchase orders from these customers. Based on the customers responses and
commitments to purchase the inventory in the near future, we determined that we had excess GaAs inventory on hand and recorded a charge of $6.8 million that is included in cost of revenues in fiscal 2003. In the year ended September 30, 2002, we
wrote off $30.5 million of excess and obsolete inventories as a result of an industry-wide reduction in capital spending and the resulting decrease in demand for our products. Excluding the inventory write-offs, cost of revenues in fiscal 2003 and
2002 would have been $66.4 million, or 42.4% of revenues, and $79.6 million, or 52.5% of revenues, respectively. We anticipate that cost of revenues as a percentage of revenues will decline in the first quarter of fiscal 2004 as the complete impact
of our cost reduction measures takes effect. Thereafter, cost of revenues as a percentage of revenues may fluctuate based primarily on the demand for our products and the relative mix of the products that we sell.



Engineering, Research and Development



Engineering, research and development expenses were $110.1 million in fiscal
2003 compared to $147.3 million in fiscal 2002. As a percentage of total revenues, engineering, research and development expenses were 70.4% in fiscal 2003 and 97.1% fiscal 2002. The decrease in both absolute dollars and as a percentage of



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revenues from fiscal 2002 was principally due to the inclusion of restructuring charges in the first and third quarters of fiscal 2002 and the resulting cost
reductions from such restructurings plans in fiscal 2003. Our engineering, research and development costs are expensed as incurred.



Selling, General and Administrative



Selling, general and administrative expenses (SG&A) were $54.0 million in fiscal 2003, compared to $68.2 million in fiscal 2002. As a
percentage of total revenues, SG&A expenses were 34.5% in fiscal 2003, compared to 44.9% in fiscal 2002. The decrease in both absolute dollars and as a percentage of revenues from the prior year was primarily due to our efforts to streamline our
cost structure.



Restructuring Costs



Restructuring costs were $54.0 million in fiscal 2003, compared to $210.0
million in fiscal 2002. See further discussion in Overview.



In-Process Research and Development (IPR&D)



Purchased in-process research and development charges were $3.0 million in fiscal 2003. These charges related to the acquisition of APT and Multilink of $1.0 million and $2.0 million, respectively. There were no
IPR&D charges in fiscal 2002 or 2001.



The related
purchased IPR&D for each of the above mentioned transactions represents the present value of the estimated after-tax cash flows expected to be generated by the purchased technology that, at the acquisition dates, had not yet reached
technological feasibility. The cash flow projections for revenues were based on estimated of relevant market sizes and growth factors, expected industry trends, the anticipated nature and timing of our new product introductions and that of our
competitors, individual product sales cycles and the estimated life of each products underlying technology. Estimated operating expenses and income taxes were deducted from estimated revenue projections to arrive at estimated after-tax cash
flows. Projected operating expenses include cost of goods sold, marketing and selling expenses, general and administrative expenses, and research and development, including estimated costs to maintain the products once they have been introduced into
the market and are generating revenue.



Amortization of Goodwill and
Intangible Assets



We elected to adopt Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets(SFAS 142), effective the beginning of fiscal 2002. In accordance with SFAS 142, we ceased amortizing goodwill as of October 1, 2001. There was no
transitional impairment of goodwill upon adoption of SFAS 142.



Amortization of other intangible assets was $5.1 million in fiscal 2003, as compared to $5.2 million in fiscal 2002. The decrease in amortization expense is the result of the sale of our optical modules business, which enabled us to cease
amortizing certain intangible assets. This was offset by an increase in other intangible assets acquired in our current year acquisitions.



Other Income, Net



Other income consists of interest income, interest expense, gain on extinguishment of debt and other expenses. Interest income was $4.6 million in fiscal
2003 compared to $16.7 million in fiscal 2002. The decrease in interest income of $12.1 million from fiscal 2002 was the result of lower cash balances and short-term and long-term investments held throughout the period as well as a significant
decline in interest rates earned on our cash and investment balances. The decrease in cash and investment balances was primarily the result of the repurchase of our convertible subordinated debentures in the quarters ended December 31, 2001,
September 30, 2002 and December 31, 2002, as well as a fixed operating cash outflow in a period of reduced revenues.



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Interest expense was $7.2 million in fiscal 2003 compared to $14.0 million in fiscal 2002. The decrease
in interest expense of $6.8 million from fiscal 2002 was primarily the result of several interest rate swap agreements entered into during fiscal 2003 that significantly lowered interest expense relative to fiscal 2002, as well as the reduction in
outstanding principal amount of our convertible subordinated debentures that resulted from our repurchases of those instruments.



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



In fiscal 2003, we recorded a
charge of $5.2 million to write down certain equity investments held by the two Vitesse Venture Funds to the estimated fair market value. This was offset by the amortization of deferred gains of $2.8 million related to the termination of certain
interest rate swap agreements. We will amortize the gains over the remaining life of the convertible subordinated debentures due March 2005. For additional information regarding our interest rate swap agreements, see Note 8 Derivative
Instruments and Hedging Activities of the Notes to the Consolidated Financial Statements.



Income Tax Expense (Benefit)



For the year ended September 30, 2003, the total effective income tax rate was 0%. In fiscal 2003 and 2002, no deferred tax benefit was allocated to discontinued operations.



Loss from Discontinued Operations



Loss from discontinued operations was $36.0 million in the year ended September 30, 2003, which was comprised of revenues of $11.5 million, loss from
operations of $17.9 million, and a loss on disposal of $18.1 million. Loss from discontinued operations was $33.8 million in the year ended September 30, 2002, which was comprised of revenues of $10.6 million, and a loss from operations of
$33.6 million, which included a $6.6 million restructuring charge.



Year Ended September 30, 2002, as Compared to Year Ended September 30, 2001



Revenues



Revenues in
fiscal 2002 were $151.7 million, a decline of 60% from the $383.9 million recorded in fiscal 2001. The decrease in revenues in 2002 was a result of continued adverse market conditions and the reduction in demand from our customers that began in
fiscal 2001.



Revenues from storage and enterprise products
were $58.1 million and $30.0 million in fiscal 2002, respectively, compared with $81.0 million and $52.0 million, respectively, in fiscal 2001. The decrease in revenues from these products in fiscal 2002 was primarily due to reduced capital spending
on enterprise networking equipment as a result of weakening overall economic conditions in 2001 and 2002 and due to excess inventories of these products in our customers channels. Revenues from enterprise and storage products in 2002 were not
as severely impacted as those from other areas of communications as enterprise and storage networks did not undergo the same level of over expansion as long haul networks did.



Revenues from products targeting the metro market were $21.3 million in fiscal 2002 compared to $40.0 million in fiscal
2001. The decline in metro revenues was the result of a significant reduction in orders from customers as a result of the overbuilding of the communications infrastructure, and due to the continued presence of excess inventories of these products in
our customers channels.



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Revenues from our legacy products, which include long-haul telecommunications products and ASICs for the
ATE and military markets were $42.3 million in fiscal 2002 and $210.9 million in fiscal 2001. The decrease in revenues generated from these products was primarily due to a significant reduction in orders from telecommunications customers as a result
of the overbuilding of the long haul communications infrastructure which began in fiscal 2001 and has continued through fiscal 2002, the presence of excess inventories of these products in our customers channels as well as our reduced emphasis
on markets outside communications and storage.



Cost of Revenues



Our cost of revenues was $110.2 million in fiscal 2002
compared to $201.6 million in fiscal 2001. As a percentage of total revenues, cost of revenues was 72.6% in fiscal 2002 compared to 52.5% in fiscal 2001. Continued industry-wide reductions in capital spending and the resulting decrease in demand for
our products in fiscal years 2002 and 2001 resulted in significant downward adjustments to our sales forecasts. As a result, for fiscal 2002 and 2001 we recorded charges of $30.5 million and $50.6 million, respectively, for the write-off of excess
and obsolete inventories in accordance with our inventory reserve methodology. Excluding the inventory write-offs, cost of revenues in fiscal 2002 and 2001 would have been $79.6 million, or 52.5% of revenues, and $150.9 million, or 39.3% of
revenues, respectively. The increase in cost of revenues as a percentage of total revenues, exclusive of write-offs, from fiscal 2001 to fiscal 2002 was the result of significantly lower quarterly revenues on a base of relatively fixed manufacturing
costs, as well as the introduction of new products that had lower yields when first released. This increase was partially offset by decreases in cost of revenues resulting from our transition from using our own fabrication facilities to relying on
third-party foundries. There was also a slight improvement in our cost of revenues on a quarter-over-quarter basis during fiscal 2002 as a result of our efforts to decrease fixed costs and improve manufacturing yields for mature products.



Engineering, Research and Development



Engineering, research and development expenses were $147.3 million in fiscal
2002 compared to $150.7 million in fiscal 2001. As a percentage of total revenues, engineering, research and development expenses were 97.1% in fiscal 2002 and 39.3% fiscal 2001. The decrease in absolute dollars from the prior year was principally
due to the reclassification of $23.0 million of our fiscal 2002 optical module division expenses to loss from discontinued operations compared to only $5.0 million in fiscal 2001. Including the abovementioned expenses, engineering, research and
development expenses increased principally due to higher headcount from acquisitions completed in fiscal 2001 of approximately 240 employees, amortization of deferred stock compensation and higher costs to support our continuing efforts to develop
new products. This increase was partially offset by the expense reductions associated with the restructuring plans announced in the first and third quarters of fiscal 2002.



Selling, General and Administrative



Selling, general and administrative expenses were $68.2 million in fiscal 2002, compared to $86.4 million in fiscal 2001. As a percentage of total
revenues, SG&A expenses were 44.9 % in fiscal 2002, compared to 22.5% in fiscal 2001. Excluding charges of $3.0 million and $14.1 million recorded in fiscal 2002 and fiscal 2001, respectively, the decrease in absolute dollars from the prior year
was primarily due to our efforts to streamline our cost structure. The $3.0 million charge recorded in fiscal 2002 was to increase the reserve for doubtful accounts.



Restructuring Costs



Restructuring costs were $210.0 million in fiscal 2002, compared to $3.7 million in fiscal 2001. See further discussion in Overview.



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Goodwill and Intangible Assets Impairment Charge



As a result of industry conditions, and our significant restructuring charge discussed above, we determined that there were
indicators of impairment to the carrying value of our goodwill and purchased intangibles. During the third quarter of fiscal 2002, we performed a review of the value of our goodwill in accordance with SFAS 142. Based on our review, we recorded a
charge of $398.9 million to write down the value of goodwill and other intangible assets during the quarter ended June 30, 2002.



Amortization of Goodwill and Intangible Assets



Amortization of other intangible assets was $5.2 million in fiscal 2002, compared to amortization of goodwill and other intangible assets of $86.5 million
in fiscal 2001. The decrease in amortization was primarily due to the adoption of SFAS 142 as of October 1, 2001.



Other Income, Net



Other income consists of interest income, interest expense, gain on extinguishment of debt and other expenses. Interest income was $16.7 million in fiscal
2002 compared to $48.7 million in fiscal 2001. The decrease in interest income of $32.0 million from the prior year was the result of lower cash balances and short-term and long-term investments held throughout the year as well as a significant
decline in interest rates earned on our cash balances. The decrease in cash balances was primarily the result of the repurchase of our convertible subordinated debentures in the quarters ended September 30, 2002 and December 31, 2001, as well as a
fixed operating cash outflow in a period of reduced revenues.



Interest expense was $14.0 million in fiscal 2002 compared to $31.8 million in fiscal 2001. The decrease in interest expense of $17.8 million from the prior year was primarily the result of two interest rate swap agreements entered into
during fiscal 2002 that significantly reduced interest expense relative to fiscal 2001, as well as the reduction in outstanding principal amount of our convertible subordinated debentures that resulted from our repurchases of those instruments.



In fiscal 2002, we purchased $273.4 million aggregate
principal amount of our 4% convertible subordinated debentures due March 2005 at prevailing market prices, for an aggregate of approximately $203.1 million in cash. As a result, we recorded a gain on extinguishment of debt of approximately $66.3
million, net of a portion of debt issue costs of $4.0 million.



In fiscal 2002, we also recorded a charge of $5.0 million to write down an equity investment held by the two Vitesse Venture Funds to the estimated fair market value. Further, in the quarter ended September 30, 2002, we recorded a deferred
gain of $9.3 million related to the termination of certain interest rate swap agreements. We will amortize the gain over the remaining life of the convertible subordinated debentures due March 2005. As a result, a gain of $0.4 million was recognized
in the year ended September 30, 2002. For additional information regarding our interest rate swap agreements, see Note 8 Derivative Instruments and Hedging Activities of the Notes to the Consolidated Financial Statements.



Income Tax Expense (Benefit)



Our annual income tax expense for fiscal 2002 was $126.1 million compared to
a tax benefit of $13.7 million in fiscal 2001. The increase in tax expense for fiscal 2002 was due principally to a net tax charge of $126.2 million recorded during the quarter ended June 30, 2002. This charge consisted of an increase to the
valuation allowance of $145.8 million, partially offset by the reversal of income taxes payable of $19.6 million, resulting in an income tax receivable of $5.2 million at June 30, 2002. We conduct continuing evaluations of whether it is more
likely than not that our deferred tax assets will be realized, including consideration of projections of future taxable income and the reversal of temporary differences. The increase to the valuation allowance in the quarter ended June 30,
2002 resulted from a determination at the time that it was not more likely than not that all of our deferred tax assets would be realized.



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Loss from Discontinued Operations



Loss from discontinued operations was $33.8 million in fiscal 2002, which was comprised of revenues of $10.6 million, and a
loss from operations of $33.6 million, which included a $6.6 million restructuring charge. Loss from discontinued operations, net of tax benefit, was $3.9 million in fiscal 2001, which was comprised of revenues from discontinued operations of $0.2
million, loss from operations of $6.3 million and a tax benefit of $2.4 million.



Liquidity and Capital Resources



Off-Balance Sheet
Arrangements



We have entered into several agreements to
lease equipment. All of these leases have initial terms of three to five years and options to renew for an additional one to three years. We have the option to purchase the equipment at the end of each initial lease term, and at the end of each
renewal period for the lessors original cost, which is not less than the fair market value at each option date. If we elect not to purchase the equipment at the end of each of the leases, we would guarantee a residual value to the lessors
equal to 80% to 84% of the lessors cost of the equipment equal to $71.4 million. As of September 30, 2003, the lessors had advanced a total of $14.3 million under these leases, and held $57.1 million as cash collateral, which amount is
included in restricted long-term deposits.



Operating Activities



We generated $0.5 million of cash in operating activities
during fiscal 2003. Although we had a net loss from continuing operations of $131.2 million during this period, this amount reflected an aggregate of $129.0 million of non-cash items, including write-offs of property and equipment, prepaid
maintenance and inventory, a write-down of assets held for sale, depreciation and amortization and amortization of deferred compensation expense, partially offset by gain on extinguishment of debt and amortization of gains on derivative instruments.
In addition to the net impact of non-cash items, our operating activities for fiscal 2003 also reflect an increase in inventory and a decrease in accrued restructuring. These were offset in part by decreases in accounts receivable, prepaid expenses
and other current assets and non-current assets as well as increases in accounts payable, accrued expenses and other current liabilities and income taxes payable.



We used $76.8 million in operating activities in fiscal 2002. Although we had a net loss from continuing operations of
$849.7 million during this period, this amount included $801.1 million of non-cash items resulting primarily from impairment of goodwill and intangible assets of $398.9 million, property and equipment write-off of $135.2 million, and a change in
deferred tax assets, net, of $139.1 million. It also included depreciation and amortization, inventory write-offs, prepaid maintenance write-offs, accrued restructuring and amortization of deferred compensation expense, partially offset by gain on
extinguishment of debt. In addition to the net impact of non-cash items, our operating activities for fiscal 2002 also reflected an increase in inventory and prepaid expenses and other current assets and a decrease in accounts payable, accrued
expenses and other current liabilities, accrued restructuring and incomes taxes payable. These were offset in part by decreases in accounts receivable and other assets.



We used $6.2 million in operating activities in fiscal 2001. Although we had a net loss from continuing operations of $108.0
million during this period, this amount included $186.4 million of non-cash items resulting primarily from depreciation and amortization of $136.8 million. It also included impairment of goodwill and intangible assets, inventory write-offs, an
increase in equity associated with tax benefits from the exercise of stock options and amortization of deferred compensation expense, partially offset by gain on extinguishment of debt and a change in deferred tax assets. In addition to the net
impact of non-cash items, our operating activities for fiscal 2001 also reflected an increase in inventory, prepaid expenses and other current assets and other assets and a decrease in accounts payable, accrued expenses and other current
liabilities, accrued restructuring and incomes taxes payable. These were offset in part by a decrease in accounts receivable.



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Investing Activities



We generated $11.0 million and $315.0 million and used $33.9 million in investing activities during fiscal 2003, 2002 and 2001, respectively. The cash
generated by investing activities during fiscal 2003 was principally due to the proceeds from the sale of $625.2 million in available-for-sale debt and equity securities and cash acquired in our current acquisitions, net of cash paid, of $16.1
million. This was offset by the purchases of $611.7 million in similar securities and $19.1 million in capital expenditures.



The cash generated by investing activities during fiscal 2002 was due to the maturity of investments of $1,199.6 million in held to maturity debt and
equity securities, offset by purchases of $817.9 million in similar securities, $62.2 million for capital expenditures and $4.6 million for payments of collateral on an equipment lease recorded in restricted long-term deposits.



The cash used in investing activities during fiscal 2001 was primarily due to
purchases of $2,158.8 million in held to maturity debt and equity securities, capital expenditures of $148.2 million, investments in restricted long term deposits of $12.2 million and payment for the purchase of companies, net of cash acquired, of
$12.9 million, offset by the maturity of investments of $2,298.2 million in held to maturity debt and equity securities.



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



Financing Activities



In fiscal 2003 we used $40.3 million in financing
activities, including the purchase of $68.6 million carrying value of our convertible subordinated debentures for $51.1 million and the repayment of debt obligations of $0.2 million. This was offset by proceeds of $7.6 million received from the
issuance and sale of common stock pursuant to our stock option and stock purchase plans, proceeds of $3.3 million of deferred gain on derivative instrument and proceeds of $0.1 million received from the limited partners of the Vitesse Venture Funds.
The limited partners are officers and employees of our company and represent an insignificant portion of the investments in the Vitesse Venture Funds.



In fiscal 2002 we used $186.8 million in financing activities, including the purchase of $273.4 million carrying value of our convertible subordinated
debentures for $203.1 million and the repayment of $0.5 million to Vitesse Venture Fund partners for the sale of investments. This was offset by proceeds of $7.4 million received from the issuance and sale of common stock pursuant to our stock
option and stock purchase plans, proceeds of $9.3 million of deferred gain on derivative instrument, and proceeds of $0.1 million received from the limited partners of the Vitesse Venture Funds.



In fiscal 2001, we used $123.8 million of cash from financing activities,
including the purchase of $182.9 million carrying value of our convertible subordinated debentures for $148.7 million and the repayment of debt obligations of $11.3 million. This was offset by proceeds of $31.5 million received from the issuance and
sale of common stock pursuant to our stock option and stock purchase plans and proceeds of $4.8 million received from the limited partners of the Vitesse Venture Funds.



We used $33.0 million, $33.7 million and $1.9 million in discontinued operations in fiscal 2003, 2002 and 2001,
respectively.



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We believe that our cash and cash equivalents, short-term investments, cash flow from operations and
revolving line of credit agreement are adequate to finance our planned growth and operating needs for the next 12 months. See discussion on the revolving line of credit in Note 7 of the Notes to Consolidated Financial Statements.



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. On an ongoing basis, we evaluate our estimates, including those related to our allowance for doubtful accounts and sales returns, inventory reserves, goodwill and purchased intangible asset valuations, asset impairments and income taxes. We
base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
Actual results may differ from these estimates under different assumptions or conditions.



We believe the following critical accounting policies, among others, affect the significant judgments and estimates we use in the preparation of our consolidated financial statements:



Allowance for Doubtful Accounts, Sales Returns Reserve and Revenue
Recognition



We evaluate the collectibility of our
accounts receivable based on a combination of factors. At September 30, 2003, we maintained an allowance for doubtful accounts and sales returns reserve of approximately 7.2% of gross accounts receivable. In circumstances where we are aware of a
specific customers inability to meet its financial obligations to us, we record a specific allowance to reduce the net receivable to the amount we reasonably believe will be collected. For all other customers, we record allowances for doubtful
accounts based on the length of time the receivables are past due, the prevailing business environment and our historical experience. If the financial condition of our customers were to deteriorate or if economic conditions were to worsen,
additional allowances may be required in the future.



We
recognize product revenue when persuasive evidence of an arrangement exists, the sales price is fixed, products are shipped to customers, which is when title and risk of loss transfers to the customers, and collectibility is reasonably assured.
Revenue from development contracts is recognized upon attainment of specific milestones established under the customer contracts. Revenue from products deliverable under development contracts, including design tools and prototype products, is
recognized upon delivery. We record a provision for estimated sales returns in the same period as the related revenues are recorded. We base these estimates on historical sales returns and other known factors. Actual returns could be different from
our estimates and current provisions for sales returns and allowances, resulting in future charges to earnings.



At September 30, 2003, our allowance for doubtful accounts and sales returns was $2.7 million or 7.2% of gross receivables, compared to $14.8 million or
28.5% of gross receivables as of September 30, 2002. The decrease in the reserve as a percentage of gross receivables from prior year is the result of writing off accounts against the allowance for doubtful accounts and sales returns reserve.



Inventory Valuation



At each balance sheet date, we evaluate our ending inventories for excess
quantities and obsolescence. This evaluation includes analyses of sales levels by product and projections of future demand. If inventories on hand are in excess of forecasted demand, we provide appropriate reserves for such excess inventory. If we
have previously recorded the value of such inventory determined to be in excess of projected demand, or if we determine that inventory is obsolete, we write off these inventories in the period the determination is made. Due



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to reduced capital spending by our customers and the resulting reduction in demand for our products, we wrote off $30.5 million of excess and obsolete
inventory during fiscal 2002. Due to our planned exit from the GaAs manufacturing process in connection with the closure of our Colorado Springs, Colorado fab, we wrote off $6.8 million of excess and obsolete inventory in the quarter ended June 30,
2003. Remaining inventory balances are adjusted to approximate the lower of our standard manufacturing cost or market value. If future demand or market conditions are less favorable than our projections, additional inventory write-downs may be
required, and would be reflected in cost of revenues in the period the revision is made.



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



We perform goodwill impairment tests on an annual basis and on an interim basis if an event or circumstance indicates that it is more likely than not that
impairment has occurred. We assess the impairment of other amortizable intangible assets and long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important that
could trigger an impairment review include significant underperformance to historical or projected operating results, substantial changes in our business strategy and significant negative industry or economic trends. If such indicators are present,
we evaluate the fair value of the goodwill of our one reporting unit to its carrying value. For other intangible assets and long-lived assets we determine whether the sum of the estimated undiscounted cash flows attributable to the assets in
question is less than their carrying value. If less, we recognize an impairment loss based on the excess of the carrying amount of the assets over their respective fair values. Fair value of goodwill is determined by using a valuation model based on
an income and market approach. Fair value of other intangible assets and long-lived assets is determined by discounted future cash flows, appraisals or other methods. If the long-lived asset determined to be impaired is to be held and used, we
recognize an impairment charge to the extent the present value of anticipated net cash flows attributable to the asset are less than the assets carrying value. The fair value of the long-lived asset then becomes the assets new carrying
value, which we depreciate over the remaining estimated useful life of the asset. See Note 3 Goodwill and Other Intangible Assets, Note 4 Discontinued Operations See Note 5 Restructuring Costs and Other Special
Charges of the Notes to the Consolidated Financial Statements for additional information.



During the quarter ended June 30, 2003 we recorded a charge of $27.4 million for the write-down of certain manufacturing equipment used in our Colorado
Springs fab and prepaid maintenance contracts associated with that equipment, as well as $23.7 million for the write-down of the Colorado Springs land and building. During the quarter ended June 30, 2002, we recorded goodwill and other intangible
asset impairments of $396.0 million and $2.9 million, respectively, totaling $398.9 million. We also recorded a charge of $169.2 million during fiscal 2002 for the write-down of certain excess manufacturing equipment. To the extent we determine
there are indicators of impairment in future periods, additional write-downs may be required.



Accounting for Income Taxes



As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves us estimating our actual current tax exposure
together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our
consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent
we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the statement of operations. As of September 30, 2003 all tax benefits are subject to a 100% valuation allowance.



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Impact of Recent Accounting Pronouncements



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



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



In November 2002, the FASB issued Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others(FIN 45), which addresses the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. The disclosure requirements are
effective for interim and annual financial statements ending after December 15, 2002. The Company generally warrants its products against defects in materials and workmanship for a period of one year. The amount accrued for such warranty is
insignificant.



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



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



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



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



Item 7A.Quantitative and Qualitative Disclosures about Market Risks



Cash Equivalents, Short-term and Long-term Investments



Cash equivalents and investments are principally composed of money market accounts, commercial paper rated A-1/P-1 and obligations of the U.S. government
and its agencies. Our investments are made in accordance with an investment policy approved by the Board of Directors. Maturities of these instruments are less than 30 months with the majority being within one year. We classify these securities as
held-to-maturity or available-for-sale depending on our investment intention. Held-to-maturity investments are recorded at amortized cost, while available-for-sale investments are recorded at fair value. We did not have any held-to-maturity
investments at September 30, 2003.



Investments in fixed-rate,
interest-earning instruments carry a degree of interest rate and credit rating risk. Fixed-rate securities may have their fair market value adversely impacted because of changes in interest rates and credit ratings. Due in part to these factors, our
future investment income may fall short of expectations because of changes in interest rates or we may suffer losses in principal if we were to sell securities that have declined in market value because of changes in interest rates. 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.



Based on a sensitivity analysis performed on the financial instruments held as of September 30, 2003, an immediate 10% change in interest rates is not
expected to have a material effect on our near-term financial condition or results of operations.



Debt



In the normal
course of business, our operations are exposed to risks associated with fluctuations in interest rates. We address this risk through controlled risk management that includes the use of derivative financial instruments to economically hedge or reduce
these exposures. We do not enter into financial instruments for trading or speculative purposes. The fair value of our debt is sensitive to fluctuations in the general level of the U.S. interest rates.



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We have from time to time managed our interest expense by entering into interest rate swap agreements
under which we exchange an obligation to make fixed debt payments for an obligation to make floating rate payments that we anticipate will be lower. As U.S. interest rates change, the impact on the fair value of our debt is offset by the inverse
change in fair value and cash flows on our interest rate swap hedges. To ensure the adequacy and effectiveness of our interest rate hedge positions, we continually monitor our interest rate swap positions, in conjunction with our underlying interest
rate exposure, from an accounting and economic perspective.



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



In the year ended September 30, 2003, we entered into several interest rate swap agreements to reduce the impact of interest rate changes on the fair
value of our long-term debt. The swap agreements allowed us to swap long-term borrowings at fixed rates into variable rates that are anticipated to be lower than fixed rates available to us. As a result, the swaps effectively converted our
fixed-rate debt to variable-rate debt and qualified for fair value hedge accounting treatment. Since these interest rate swap agreements qualified as a fair value hedge under SFAS No. 133, changes in the fair value of the swap agreement were
recorded as interest expense and matched by changes in the designated, hedged fixed-rate debt to the extent that such changes were effective and as long as the hedge requirements were met. Periodic interest payments and receipts on both the debt and
the swap agreement are recorded as components of interest expense in the accompanying consolidated statements of operations, as a result of which we report interest expense at the hedge-effected interest rate. Gains realized on termination of
interest rate swap agreements are being recognized in operations over the remaining term of the respective long-term debt.



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Item 8.Financial Statements and Supplementary Data



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                                             |  | Page
|---------------------------------------------------------------------------------------------------------------------------- |  | ----
|Independent Auditors Report                                                                                                 |  | 37  
|Consolidated Financial Statements:                                                                                           |  |     
|Consolidated Balance Sheets at September 30, 2003 and 2002                                                                   |  | 38  
|Consolidated Statements of Operations for the Years Ended September 30, 2003, 2002 and 2001                                  |  | 39  
|Consolidated Statements of Shareholders Equity and Comprehensive Loss for the Years Ended September 30, 2003, 2002 and 2001 |  | 40  
|Consolidated Statements of Cash Flows for the Years Ended September 30, 2003, 2002 and 2001                                  |  | 41  
|Notes to Consolidated Financial Statements                                                                                   |  | 42  
|Schedule for each of the three years in the period ended September 30, 2003, included in Item 15(a):                         |  |     
|II Valuation and Qualifying Accounts                                                                                         |  | 68  



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INDEPENDENT AUDITORS REPORT



THE BOARD OF DIRECTORS AND SHAREHOLDERS

VITESSE SEMICONDUCTOR CORPORATION:



We have audited the accompanying consolidated financial statements of Vitesse
Semiconductor Corporation and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based
on our audits.



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



In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Vitesse
Semiconductor Corporation and subsidiaries as of September 30, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 2003 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.



KPMG LLP

Los Angeles, California

October 23, 2003



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VITESSE SEMICONDUCTOR CORPORATION



CONSOLIDATED BALANCE SHEETS



September 30,
2003 and 2002



|                                                                                                                                                                    |  | September 30,                     |           
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------- | ----------
|                                                                                                                                                                    |  | 2003                              |           
|                                                                                                                                                                    |  | (in thousands, except share data) |           
|ASSETS                                                                                                                                                              |  |                                   |           
|Current assets:                                                                                                                                                     |  |                                   |           
|Cash and cash equivalents                                                                                                                                           |  | $                                 | 48,119    
|Short-term investments                                                                                                                                              |  |                                   | 186,455   
|Accounts receivable, net of allowances of $2,729 and $14,788 in 2003 and 2002, respectively                                                                         |  |                                   | 35,171    
|Inventories, net                                                                                                                                                    |  |                                   | 24,851    
|Prepaid expenses and other current assets                                                                                                                           |  |                                   | 4,457     
|Assets held for sale                                                                                                                                                |  |                                   |          
|                                                                                                                                                                    |  |                                   |           
|Total current assets                                                                                                                                                |  |                                   | 299,053   
|                                                                                                                                                                    |  |                                   |           
|Property and equipment, net                                                                                                                                         |  |                                   | 92,541    
|Restricted long-term deposits                                                                                                                                       |  |                                   | 57,101    
|Goodwill, net                                                                                                                                                       |  |                                   | 175,539   
|Other intangible assets, net                                                                                                                                        |  |                                   | 19,246    
|Other assets                                                                                                                                                        |  |                                   | 22,264    
|                                                                                                                                                                    |  |                                   |           
|                                                                                                                                                                    |  | $                                 | 665,744   
|                                                                                                                                                                    |  |                                   |           
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                |  |                                   |           
|Current liabilities:                                                                                                                                                |  |                                   |           
|Current portion of convertible subordinated debt                                                                                                                    |  | $                                 |          
|Current portion of long-term debt                                                                                                                                   |  |                                   | 3,175     
|Current portion of deferred gain                                                                                                                                    |  |                                   | 3,522     
|Current portion of accrued restructuring                                                                                                                            |  |                                   | 17,290    
|Accounts payable                                                                                                                                                    |  |                                   | 11,553    
|Accrued expenses and other current liabilities                                                                                                                      |  |                                   | 22,936    
|Income taxes payable                                                                                                                                                |  |                                   | 1,913     
|Liabilities held for sale                                                                                                                                           |  |                                   |          
|                                                                                                                                                                    |  |                                   |           
|Total current liabilities                                                                                                                                           |  |                                   | 60,389    
|                                                                                                                                                                    |  |                                   |           
|Long-term accrued restructuring                                                                                                                                     |  |                                   | 10,633    
|Deferred gain on derivative instrument                                                                                                                              |  |                                   | 5,808     
|Long-term debt                                                                                                                                                      |  |                                   | 1,847     
|Other long-term liabilities                                                                                                                                         |  |                                   | 4,237     
|Convertible subordinated debt, including premium of $587 at September 30, 2003                                                                                      |  |                                   | 195,732   
|Minority interest                                                                                                                                                   |  |                                   | 1,590     
|                                                                                                                                                                    |  |                                  
|Commitments and contingencies                                                                                                                                       |  |                                   |           
|                                                                                                                                                                    |  |                                  
|Shareholders equity:                                                                                                                                               |  |                                   |           
|Preferred stock, $.01 par value. Authorized 10,000,000 shares; none issued or outstanding                                                                           |  |                                   |          
|Common stock, $.01 par value. Authorized 500,000,000 shares; issued and outstanding 212,870,231 and 200,158,511 shares at
September 30, 2003 and 2002, respectively |  |                                   | 2,141     
|Additional paid-in-capital                                                                                                                                          |  |                                   | 1,443,373 
|Unearned compensation                                                                                                                                               |  |                                   | (21,440   
|Accumulated other comprehensive income                                                                                                                              |  |                                   | 2         
|Accumulated deficit                                                                                                                                                 |  |                                   | (1,038,568
|                                                                                                                                                                    |  |                                   |           
|Total shareholders equity                                                                                                                                          |  |                                   | 385,508   
|                                                                                                                                                                    |  |                                   |           
|                                                                                                                                                                    |  | $                                 | 665,744   
|                                                                                                                                                                    |  |                                   |           



See accompanying notes
to consolidated financial statements.



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VITESSE SEMICONDUCTOR CORPORATION



CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                                                                                                   |  | Years ended September 30,               |         
|---------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------- | --------
|                                                                                                                                   |  | 2003                                    |         
|                                                                                                                                   |  | (in thousands except per share amounts) |         
|Revenues                                                                                                                           |  | $                                       | 156,371 
|Costs and expenses:                                                                                                                |  |                                         |         
|Cost of revenues                                                                                                                   |  |                                         | 73,163  
|Engineering, research and development                                                                                              |  |                                         | 110,145 
|Selling, general and administrative                                                                                                |  |                                         | 54,020  
|Restructuring costs                                                                                                                |  |                                         | 54,030  
|Purchased in-process research and development                                                                                      |  |                                         | 3,000   
|Goodwill impairment (includes $2.9 million and $1.4 million of intangible assets impairment in fiscal 2002 and 2001,
respectively) |  |                                         |        
|Amortization of intangible assets (and goodwill in 2001)                                                                           |  |                                         | 5,051   
|                                                                                                                                   |  |                                         |         
|Total costs and expenses                                                                                                           |  |                                         | 299,409 
|                                                                                                                                   |  |                                         |         
|Loss from operations                                                                                                               |  |                                         | (143,038
|                                                                                                                                   |  |                                         |         
|Interest income                                                                                                                    |  |                                         | 4,580   
|Interest expense                                                                                                                   |  |                                         | (7,194  
|Gain on extinguishment of debt                                                                                                     |  |                                         | 16,550  
|Other expense                                                                                                                      |  |                                         | (2,017  
|                                                                                                                                   |  |                                         |         
|Other income, net                                                                                                                  |  |                                         | 11,919  
|                                                                                                                                   |  |                                         |         
|Loss from continuing operations before income taxes                                                                                |  |                                         | (131,119
|Income tax expense (benefit)                                                                                                       |  |                                         | 60      
|                                                                                                                                   |  |                                         |         
|Loss from continuing operations                                                                                                    |  |                                         | (131,179
|Loss from discontinued operations, net of tax benefit for fiscal 2001                                                              |  |                                         | (36,010 
|                                                                                                                                   |  |                                         |         
|Net loss                                                                                                                           |  | $                                       | (167,189
|                                                                                                                                   |  |                                         |         
|Net loss per sharebasic and diluted:                                                                                              |  |                                         |         
|Continuing operationsbasic and diluted                                                                                            |  | $                                       | (0.64   
|Discontinued operationsbasic and diluted                                                                                          |  |                                         | (0.18   
|                                                                                                                                   |  |                                         |         
|Net loss per sharebasic and diluted                                                                                               |  | $                                       | (0.82   
|                                                                                                                                   |  |                                         |         
|Shares used in per share computations:                                                                                             |  |                                         |         
|Basic and diluted                                                                                                                  |  |                                         | 203,801 



See accompanying notes
to consolidated financial statements.



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VITESSE SEMICONDUCTOR CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE LOSS



Years ended September 30, 2003, 2002 and 2001



|                                                             |  | Common Stock                      |  | AdditionalPaid-inCapital |       |  | UnearnedCompensation |           |   | AccumulatedOtherComprehensiveIncome |   |         | RetainedEarnings(AccumulatedDeficit) |  |   | TotalShareholdersEquity |  
|------------------------------------------------------------ |  | --------------------------------- |  | ------------------------ | ----- |  | -------------------- | --------- | - | ----------------------------------- | - | ------- | ------------------------------------ |  | - | ------------------------ | -
|                                                             |  | Shares                            |  | Amount                   |       |  |                      |           |  
|                                                             |  | (in thousands, except share data) | 
|Balance, September 30, 2000                                  |  | 180,049,153                       |  | $                        | 1,801 |  | $                    | 998,537   |   |                                     | $ | (18,958 | )                                    |  | $ |                         |  
|Net loss and comprehensive loss                              |  |                                   |  |                          |       |  |                      |           |   |                                     |   |         |                                      |  |   |                          |  
|Exercise of stock options                                    |  | 3,909,899                         |  |                          | 38    |  |                      | 25,868    |   |                                     |   |        |                                      |  |   |                         |  
|Shares issued under Employee Stock Purchase Plan             |  | 167,598                           |  |                          | 2     |  |                      | 5,574     |   |                                     |   |        |                                      |  |   |                         |  
|Stock issued in purchase transactions and employee retention |  | 13,313,671                        |  |                          | 133   |  |                      | 268,650   |   |                                     |   | (43,777 | )                                    |  |   |                         |  
|Stock options issued in purchase transaction                 |  |                                  |  |                          |      |  |                      | 46,511    |   |                                     |   | (37,371 | )                                    |  |   |                         |  
|Tax benefit of disqualifying dispositions of options         |  |                                  |  |                          |      |  |                      | 53,199    |   |                                     |   |        |                                      |  |   |                         |  
|Reversal of unearned compensation related to terminations    |  |                                  |  |                          |      |  |                      | (1,873    | ) |                                     |   | 1,873   |                                      |  |   |                         |  
|Amortization of unearned compensation                        |  |                                  |  |                          |      |  |                      |          |   |                                     |   | 16,651  |                                      |  |   |                         |  
|                                                             |  |                                   |  |                          |       |  |                      |           |   |                                     |   |         |                                      |  |   |                          |  
|Balance, September 30, 2001                                  |  | 197,440,321                       |  |                          | 1,974 |  |                      | 1,396,466 |   |                                     |   | (81,582 | )                                    |  |   |                         |  
|Net loss                                                     |  |                                  |  |                          |      |  |                      |          |   |                                     |   |        |                                      |  |   |                         |  
|Change in net unrealized gains on investments                |  |                                  |  |                          |      |  |                      |          |   |                                     |   |        |                                      |  |   | 252                      |  
|                                                             |  |                                   |  |                          |       |  |                      |           |   |                                     |   |         |                                      |  |   |                          |  
|Comprehensive loss                                           |  |                                   |  |                          |       |  |                      |           |   |                                     |   |         |                                      |  |   |                          |  
|                                                             |  |                                   |  |                          |       |  |                      |           |   |                                     |   |         |                                      |  |   |                          |  
|Exercise of stock options                                    |  | 939,318                           |  |                          | 10    |  |                      | 1,340     |   |                                     |   |        |                                      |  |   |                         |  
|Shares issued under Employee Stock Purchase Plan             |  | 1,778,872                         |  |                          | 18    |  |                      | 6,068     |   |                                     |   |        |                                      |  |   |                         |  
|Vesting of restricted shares issued in purchase transaction  |  |                                  |  |                          | 7     |  |                      | (7        | ) |                                     |   |        |                                      |  |   |                         |  
|Reversal of unearned compensation related to terminations    |  |                                  |  |                          |      |  |                      | (3,613    | ) |                                     |   | 3,613   |                                      |  |   |                         |  
|Amortization of unearned compensation                        |  |                                  |  |                          |      |  |                      |          |   |                                     |   | 29,538  |                                      |  |   |                         |  
|                                                             |  |                                   |  |                          |       |  |                      |           |   |                                     |   |         |                                      |  |   |                          |  
|Balance, September 30, 2002                                  |  | 200,158,511                       |  | $                        | 2,009 |  | $                    | 1,400,254 |   |                                     | $ | (48,431 | )                                    |  | $ | 252                      |  
|Net loss                                                     |  |                                  |  |                          |      |  |                      |          |   |                                     |   |        |                                      |  |   |                         |  
|Change in net unrealized gains on investments                |  |                                  |  |                          |      |  |                      |          |   |                                     |   |        |                                      |  |   | (250                     | )
|                                                             |  |                                   |  |                          |       |  |                      |           |   |                                     |   |         |                                      |  |   |                          |  
|Comprehensive loss                                           |  |                                   |  |                          |       |  |                      |           |   |                                     |   |         |                                      |  |   |                          |  
|                                                             |  |                                   |  |                          |       |  |                      |           |   |                                     |   |         |                                      |  |   |                          |  
|Exercise of stock options                                    |  | 3,061,747                         |  |                          | 31    |  |                      | 2,057     |   |                                     |   |        |                                      |  |   |                         |  
|Shares issued under Employee Stock Purchase Plan             |  | 3,130,284                         |  |                          | 31    |  |                      | 5,477     |   |                                     |   |        |                                      |  |   |                         |  
|Stock issued in purchase transactions                        |  | 5,530,229                         |  |                          | 56    |  |                      | 26,944    |   |                                     |   |         |                                      |  |   |                         |  
|Vesting of restricted shares issued in purchase transaction  |  |                                  |  |                          | 4     |  |                      | (4        | ) |                                     |   |        |                                      |  |   |                         |  
|Vesting of earnout shares issued in purchase transaction     |  | 989,460                           |  |                          | 10    |  |                      | 2,859     |   |                                     |   | (2,653  | )                                    |  |   |                         |  
|Stock options issued in purchase transaction                 |  |                                  |  |                          |      |  |                      | 11,343    |   |                                     |   | (2,681  | )                                    |  |   |                         |  
|Compensation related to discontinued operations              |  |                                  |  |                          |      |  |                      | 113       |   |                                     |   |        |                                      |  |   |                         |  
|Reversal of unearned compensation related to terminations    |  |                                  |  |                          |      |  |                      | (5,670    | ) |                                     |   | 5,670   |                                      |  |   |                         |  
|Amortization of unearned compensation                        |  |                                  |  |                          |      |  |                      |          |   |                                     |   | 26,655  |                                      |  |   |                         |  
|                                                             |  |                                   |  |                          |       |  |                      |           |   |                                     |   |         |                                      |  |   |                          |  
|Balance, September 30, 2003                                  |  | 212,870,231                       |  | $                        | 2,141 |  | $                    | 1,443,373 |   |                                     | $ | (21,440 | )                                    |  | $ | 2                        |  
|                                                             |  |                                   |  |                          |       |  |                      |           |   |                                     |   |         |                                      |  |   |                          |  



See accompanying notes
to consolidated financial statements.



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VITESSE SEMICONDUCTOR CORPORATION



CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                  |  | Years ended September 30, |         
|--------------------------------------------------------------------------------- |  | ------------------------- | --------
|                                                                                  |  | 2003                      |         
|                                                                                  |  | (in thousands)            |         
|Cash flows from operating activities:                                             |  |                           |         
|Net loss from continuing operations                                               |  | $                         | (131,179
|Adjustments to reconcile net loss to net cash used in operating activities:       |  |                           |         
|Depreciation and amortization                                                     |  |                           | 36,628  
|Property and equipment impairment                                                 |  |                           | 42,489  
|Impairment of goodwill and intangible assets                                      |  |                           |        
|Impairment of other long-term investments                                         |  |                           | 5,237   
|Inventory impairment                                                              |  |                           | 6,808   
|Assets held for sale write down                                                   |  |                           | 17,260  
|Prepaid maintenance impairment                                                    |  |                           | 8,731   
|Accrued restructuring                                                             |  |                           | 2,809   
|Gain on derivative instruments                                                    |  |                           | (2,857  
|Amortization of debt issue costs and debt discount                                |  |                           | 1,119   
|Amortization of deferred compensation                                             |  |                           | 24,063  
|Other compensation expense                                                        |  |                           | 285     
|Purchased in-process research and development                                     |  |                           | 3,000   
|Gain on extinguishments of debt                                                   |  |                           | (16,550 
|Increase in equity associated with tax benefit from exercise of stock options     |  |                           |        
|Deferred tax assets, net                                                          |  |                           |        
|                                                                                  |  |                           |         
|Changes in assets and liabilities:                                                |  |                           |         
|(Increase) decrease in, net of effects of acquisitions:                           |  |                           |         
|Accounts receivable, net                                                          |  |                           | 2,066   
|Inventories, net                                                                  |  |                           | (5,430  
|Prepaid expenses and other current assets                                         |  |                           | 3,625   
|Other assets                                                                      |  |                           | 2,314   
|Increase (decrease) in, net of effects of acquisitions:                           |  |                           |         
|Accounts payable                                                                  |  |                           | 4,174   
|Accrued expenses and other current liabilities                                    |  |                           | 4,334   
|Accrued restructuring                                                             |  |                           | (9,226  
|Income taxes payable                                                              |  |                           | 790     
|                                                                                  |  |                           |         
|Net cash provided by (used in) operating activities                               |  |                           | 490     
|                                                                                  |  |                           |         
|Cash flows from investing activities:                                             |  |                           |         
|Purchases of investments                                                          |  |                           | (611,663
|Proceeds from sale of investments                                                 |  |                           | 625,230 
|Capital expenditures                                                              |  |                           | (19,103 
|Restricted long-term deposits                                                     |  |                           | 366     
|Payment for purchase of companies, net of cash acquired                           |  |                           | 16,125  
|                                                                                  |  |                           |         
|Net cash provided by (used in) investing activities                               |  |                           | 10,955  
|                                                                                  |  |                           |         
|Cash flows from financing activities:                                             |  |                           |         
|Principal payments under long-term debt and capital leases                        |  |                           | (198    
|Repurchase of convertible subordinated debt                                       |  |                           | (51,052 
|Deferred gain on derivative instrument                                            |  |                           | 3,284   
|Distribution to minority interest limited partners from sale of investments       |  |                           |        
|Capital contributions by minority interest limited partners                       |  |                           | 75      
|Proceeds from issuance of common stock, net                                       |  |                           | 7,596   
|                                                                                  |  |                           |         
|Net cash used in financing activities                                             |  |                           | (40,295 
|                                                                                  |  |                           |         
|Increase (decrease) in cash and cash equivalents                                  |  | $                         | (28,850 
|Cash used in discontinued operations                                              |  |                           | (32,999 
|                                                                                  |  |                           |         
|Net increase (decrease) in cash and cash equivalents                              |  |                           | (61,849 
|                                                                                  |  |                           |         
|Cash and cash equivalents at beginning of year                                    |  |                           | 109,968 
|Cash and cash equivalents at end of year                                          |  | $                         | 48,119  
|                                                                                  |  |                           |         
|Supplemental disclosures of cash flow information:                                |  |                           |         
|Cash paid during the year for:                                                    |  |                           |         
|Interest                                                                          |  | $                         | 6,075   
|Income taxes                                                                      |  | $                         | 371     
|                                                                                  |  |                           |         
|Supplemental disclosures of non-cash transactions:                                |  |                           |         
|Issuance of stock in purchase transactions                                        |  | $                         | 27,217  
|Issuance of stock options in purchase transactions                                |  | $                         | 8,662   
|Minority interest limited partners share of impaired other long-term investments |  | $                         | 3,139   
|Acquisition of equipment under operating lease                                    |  | $                         | 28,738  
|Reversal of accrued acquisition costs                                             |  |                           |        
|Cancellation of stock options                                                     |  |                           |        

See accompanying notes to consolidated financial statements



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VITESSE SEMICONDUCTOR CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1THE
COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES



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



Basis of Presentation.    The consolidated financial statements include the accounts of Vitesse Semiconductor Corporation and its wholly owned subsidiaries and its majority-controlled joint ventures (collectively,
the Company). Minority interest represents the limited partners proportionate share of the equity of Vitesse Venture Fund, L.P. and Vitesse Venture Fund II, L.P. The Vitesse Venture Fund, L.P. and Vitesse Venture Fund II, L.P are
partnerships that were formed to make equity investments in privately held technology companies. The Company is a general partner in each of the two partnerships. The assets include long-term investments in such privately held companies, and minor
amounts of cash and cash equivalents. The minority interest impact is reflected in minority interest in (income) loss of the joint venture and is the limited partners share of the majority-controlled joint venture operations. All significant
intercompany accounts and transactions have been eliminated in consolidation.



In the third quarter of fiscal 2003, the Company decided to discontinue its line of optical module products due to continued depressed levels of demand for these products. On August 22, 2003, the Company entered into
an agreement to sell certain assets of its optical module business to Avanex Corporation. In accordance with generally accepted accounting principles, the balance sheet reflects assets and liabilities held for sale and the statements of operations
and cash flows reflect the results of the optical module business as discontinued operations for all periods presented.



Revenue Recognition.    Production revenue is recognized when persuasive evidence of an arrangement exists, the sales price is
fixed, products are shipped to customers, which is when title and risk of loss transfers to the customer, and collectibility is reasonably assured. Revenue from development contracts is recognized upon attainment of specific milestones established
under customer contracts. Such revenue is insignificant. 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. The Company accrues for sales returns and other allowances based on a review of specific accounts and historical experience. Certain of the Companys production revenue are made to a major distributor under an agreement allowing
for price protection and right of return on products unsold. Accordingly, the Company defers recognition of revenue on such products until the products are sold by the distributor to the end user.



Cash Equivalents and Investments.    The Company
considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Investments with maturities over three months and up to one year are considered short-term investments and investments with maturities
over one year are considered long-term investments. Cash equivalents and investments are principally comprised of money market accounts, commercial paper rated A-1/P-1 and obligations of the U.S. government and its agencies. The Company classifies
its securities included under investments as available-for-sale or held-to-maturity at the time of purchase and re-evaluates such designation as of each balance sheet date. Investments classified as held-to-maturity securities are recorded at
amortized cost, adjusted for the amortization or accretion of premiums or discounts. All maturities of debt securities classified as held-to-maturity are within three years. Marketable securities not classified as held-to-maturity are classified as
available-for-sale and reported at fair value. Unrealized gains and losses on these investments, net of any related tax effect, are included in equity as a separate component of shareholders equity.



In fiscal 2002 and 2003, the Company purchased $273.4 million and $68.6
million, respectively, aggregate principal amount of its 4% convertible subordinated debentures due March 2005 at prevailing market prices, for



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VITESSE SEMICONDUCTOR CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



an aggregate of approximately $203.1 million and $51.1 million, respectively. Due to the significant increase in cash outflow, it was necessary that the
Company liquidate certain investments. As a result, as of September 30, 2002 and 2003, all investments were classified as available-for-sale, and thus, the Company reported an unrealized gain (loss) of $0.3 and ($0.3) million, respectively, as a
separate component of shareholders equity. The reclassification adjustments are immaterial.



Inventories.    Inventories are stated at the lower of cost (determined by the first-in, first-out method) or market (net
realizable value). Costs associated with the 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. The Company records
write-downs for excess and obsolete inventories determined primarily by comparing future demand forecasts to quantities on-hand and on-order. Inventories are shown net of write-downs of $1.2 million and $8.6 million at September 30, 2003 and 2002,
respectively.



Depreciation and
Amortization.    Property and equipment are stated at cost less accumulated depreciation and are depreciated on a straight-line basis over the estimated useful lives of the assets. Such lives vary from 3 to 5 years.



Goodwill and Other Intangible
Assets.    In July 2001, the FASB issued SFAS No. 141, Business Combinations(SFAS 141), and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001, and that certain intangible assets acquired in a business combination be recognized as assets apart from goodwill. SFAS 142 requires goodwill to be tested for impairment
under certain circumstances, and written down when impaired, rather than being amortized as previous standards required. Furthermore, SFAS 142 requires intangible assets, other than goodwill, to be amortized over their useful lives unless these
lives are determined to be indefinite. Other intangible assets are carried at cost less accumulated amortization. Amortization is computed over the useful lives of the respective assets, generally two to ten years. The goodwill impairment charge of
$22.9 million for fiscal 2001 was recorded in accordance with SFAS No. 121. The charge was measured as the amount by which the carrying amount exceeded fair value.



Income Taxes.    The Company accounts for income taxes pursuant to the provisions of SFAS No.
109. Under the asset and liability method of Statement No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit carryforwards. The Company must assess the likelihood that its deferred tax assets will be recovered from future taxable income and to the extent the Company believes that
recovery is not likely, the Company must establish a valuation allowance. To the extent the Company establishes a valuation allowance or increases this allowance in a period, it must include an expense within the tax provision in the statement of
operations. As of September 30, 2003, all tax benefits are subject to a 100% valuation allowance.



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



Computation of Net Income (Loss) Per
Share.    Basic net loss per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted-average number of common and
dilutive common shares outstanding during the period. Diluted net loss per share is computed using the weighted-average number of commons shares and excludes



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VITESSE SEMICONDUCTOR CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



certain dilutive potential common shares outstanding, as their effect is antidilutive on loss from continuing operations. Dilutive potential common shares
consist of employee stock options, convertible subordinated debentures that are convertible into the Companys common stock at a conversion price $112.19, and consideration for a business acquisition that is payable in stock or cash at the
Companys option.



The reconciliation of shares used to
calculate basic and diluted loss per share consists of the following (in thousands):



|                                                                                |  | 2003    |  | 2002    |  | 2001   
|------------------------------------------------------------------------------- |  | ------- |  | ------- |  | -------
|Shares used in basic per share computationsweighted average shares outstanding |  | 203,801 |  | 198,608 |  | 185,853
|Net effect of dilutive common share equivalents based on treasury stock method  |  |        |  |        |  |       
|                                                                                |  |         |  |         |  |        
|Shares used in diluted per share computations                                   |  | 203,801 |  | 198,608 |  | 185,853
|                                                                                |  |         |  |         |  |        



Common stock
equivalents to purchase 49,678,788, 26,644,235, and 14,989,190 shares that were outstanding for fiscal years September 30, 2003, 2002 and 2001, respectively, were not included in the computation of diluted net income per share, as their effect would
have been antidilutive. The antidilutive common stock equivalents for fiscal years September 30, 2003, 2002 and 2001 consist primarily of employee stock options, convertible subordinated debentures that are convertible into the Companys common
stock at a conversion price of $112.19, and consideration for a business acquisition that is payable in stock or cash at the Companys option.



Financial Instruments.    The Financial Accounting Standards Boards Statement of Financial Accounting Standards 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. The
Companys carrying value of cash equivalents, short-term investments, restricted long-term deposits, accounts receivable, long-term investments, accounts payable and long-term debt approximates fair value because the instrument has a short-term
maturity or because the applicable interest rates are comparable to current investing or borrowing rates of those instruments. The fair value of the convertible subordinated debentures due March 2005 was $189.5 million as of September 30, 2003.



Derivatives.    The Company
utilizes interest rate swap agreements to manage interest rate exposures in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133),and SFAS No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activitiesan Amendment of SFAS No. 133.The Companys interest rate swap agreement is designated as a fair-value hedge. Accordingly, the changes in fair value of the derivative and the
underlying hedged item are recognized concurrently in earnings. Gains realized on the termination of interest rate swap agreements are being recognized in earnings over the remaining term of the respective long-term debt.



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. Assets held for sale are recorded at the lesser of fair value 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.



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VITESSE SEMICONDUCTOR CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Long-term Investments.    The Companys investments in the equity of
certain venture backed technology companies held by two Vitesse Venture Funds are accounted for under the cost method of accounting. The Company regularly reviews these investments to ensure they are stated at the lower of cost or fair market value.
When the Company determines that the fair market value is less than the carrying cost, a write down is recorded.



Employee Termination Benefits.    The Company recognizes employee termination benefits, when applicable, in accordance with
SFAS No. 112 Employers Accounting for Postemployment Benefits. Under SFAS No. 112, a liability for an ongoing termination benefit arrangement is recognized when it becomes probable that a liability has been incurred and the
amount of the liability can be estimated.



Accounting for
Stock Options.    In December 2002, the FASB issued SFAS No. 148, Accounting for Stock Based CompensationTransition and Disclosure (SFAS 148). SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based
Compensation(SFAS 123), to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.



The Company applies the intrinsic-value-based method of accounting prescribed
by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations including FASB Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion No. 25, issued in March 2000, to account for its stock-based awards for employees. For options granted to employees, compensation expense is recorded on the date of grant only if the current market
price of the underlying stock exceeded the exercise price. SFAS No. 123 established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the
Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS No. 123



The following tables illustrates the effect on net loss if the fair-value based method had been applied to all outstanding
and unvested awards in each period (in thousands, except per share amounts):



|                                                                                                           |  | 2003 |          |   | 2002 |   |          | 2001 | 
|---------------------------------------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | ---- | 
|Net loss as reported                                                                                       |  | $    | (167,189 | ) |      | $ | (883,526 | )    | 
|Add: Stock-based employee compensation expense included in reported net loss                               |  |      | 26,655   |   |      |   | 29,538   |      | 
|Deduct: Stock-based employee compensation expense determined under fair value based methods for all awards |  |      | (65,373  | ) |      |   | (90,761  | )    | 
|Adjusted net loss                                                                                          |  | $    | (205,907 | ) |      | $ | (944,749 | )    | 
|Net loss per share as reportedbasic and diluted                                                           |  |      | (0.82    | ) |      |   | (4.45    | )    | 
|Adjusted net loss per sharebasic and diluted                                                              |  | $    | (1.01    | ) |      | $ | (4.76    | )    | 



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



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



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VITESSE SEMICONDUCTOR CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 2BUSINESS COMBINATIONS



Purchase Accounting Business Combinations



During the three years ended September 30, 2003, the Company completed a number of purchase acquisitions. The Consolidated Financial Statements include
the operating results of each business from the date of acquisition. The consideration for each transaction has been allocated using external valuations based on the fair value of the tangible and intangible assets and liabilities acquired with the
difference recorded as goodwill. Amounts allocated to identifiable intangible assets and goodwill have been amortized over their estimated useful lives through September 30, 2001. With the adoption of SFAS 142, effective October 1, 2001, goodwill
and other intangible assets, principally workforce, remaining as of September 30, 2001, was assessed for impairment upon adoption. The Company reviews the impairment of goodwill annually and whenever events or changes in circumstances indicate that
the carrying value may not be recoverable.



In January 2003,
the Company acquired all of the equity interests of APT Technologies, Inc., in exchange for an aggregate of approximately $10.0 to $14.4 million in cash and stock and the assumption of stock options. As of September 30, 2003, approximately $5.1
million had been paid in cash and stock, with the remaining $4.9 to $9.3 million of consideration to be paid in cash and/or stock between October 2003 and June 2007, determined in part based on the future results of the acquired business. In
connection with the acquisition, the Company recorded an in-process research and development (IPR&D) charge of $1.0 million. The Company acquired APT Technologies to enable it to enter the emerging SATA market for enterprise storage.



In August 2003, the Company acquired all of the outstanding
equity interests of Multilink in exchange for approximately 4.4 million shares of common stock valued at $23.3 million, the assumption of stock options, and warrants to purchase approximately 2.0 million shares of common stock valued at $8.4
million, and acquisition related expenditures of $0.5 million. In connection with the acquisition, the Company recorded an IPR&D charge of $2.0 million. The Company acquired Multilink in order to gain access to an experienced team of system,
mixed signal and digital design engineers who have successfully developed products for OC-192 transport, Forward Error Correction, 10 Gigabit Ethernet and high speed backplanes, as well as to acquire a family of products that is already in
production.



The related purchased IPR&D for each of the
abovementioned transactions represents the present value of the estimated after-tax cash flows expected to be generated by the purchased technology, which, at the acquisition dates, had not yet reached technological feasibility. The cash flow
projections for revenues were based on estimated relevant market sizes and growth factors, expected industry trends, the anticipated nature and timing of new product introductions by the Company and it competitors, individual product sales cycles
and the estimated life of each products underlying technology. Estimated operating expenses and income taxes were deducted from estimated revenue projections to arrive at estimated after-tax cash flows. Projected operating expenses include
cost of goods sold, marketing and selling expenses, general and administrative expenses, and research and development, including estimated costs to maintain the products once they have been introduced into the market and are generating revenue.



In July 2001, the Company acquired all of the equity interests
of Versatile Optical Networks, Inc. (Versatile) in exchange for approximately 8.8 million shares of common stock valued at $148.8 million and the assumption of stock options to purchase approximately 1.1 million shares of common stock
valued at $18.3 million, and acquisition related expenditures of $2.5 million.



In June 2001, the Company acquired all of the equity interests of Exbit in exchange for 2.7 million shares of common stock valued at $70.1 million, the assumption of stock options to purchase 80,000 shares of common



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VITESSE SEMICONDUCTOR CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



stock valued at $1.5 million, and acquisition related expenditures of $5.5 million. The Company also recorded deferred compensation of $43.8 million for 1.7
million shares of the Companys common stock that will be released to the employees of Exbit monthly over a three-year period, on a proportional basis, based on their continued employment with the Company.



In connection with the acquisition of Exbit, the Company issued into escrow
2.4 million shares of its common stock for release to former Exbit shareholders upon the attainment of certain future internal performance goals through December 31, 2002. The Company issued approximately 1.0 million shares of common stock which
resulted in additional consideration of $0.2 million that was allocated to goodwill. In addition, in January 2003, the Company recorded additional deferred compensation of $2.6 million for 1.1 million escrow shares that will be released to the
employees of Exbit monthly over a one-year period, on a proportional basis, based on their continued employment with the Company.



During fiscal 2001, the Company acquired all of the equity interests of First Pass in exchange for 70,800 shares of common stock valued at $6.1 million,
the assumption of stock options to purchase 378,000 shares of common stock valued at $21.5 million, cash consideration of $0.8 million and acquisition related expenditures of $0.3 million. The Company also acquired all of the equity interests of
ht-Mikro in exchange for $10.0 million cash consideration, acquisition related costs of $0.3 million and the assumption of approximately 57,000 stock options valued at $2.7 million.



Pro forma results of operations for the above-mentioned transactions, except for Multilink, have not been presented because
the effects of these acquisitions were not material on either an individual or an aggregate basis.



Pro forma consolidated results of operations for the years ended September 30, 2003 and 2002 are summarized below to reflect the acquisition of Multilink
as if it had occurred on October 1, 2002 and 2001, respectively (in thousands):



|                                     |  | Years endedSeptember 30,
|------------------------------------ |  | ------------------------
|                                     |  | 2003                    
|Revenues                             |  | $                       
|Loss from continuing operations      |  |                         
|Net loss                             |  |                         
|Net loss per sharebasic and diluted |  | $                       



The pro forma
consolidated results of operations include the following nonrecurring items: IPR&D charges of $3.0 million and restructuring charges of $54.0 for the year ended September 30, 2003, and impairment of goodwill of $398.9 million, impairment of long
lived assets of $170.4 million and restructuring charges of $39.6 million for the year ended September 30, 2002.



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VITESSE SEMICONDUCTOR CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The total consideration, including acquisition costs, was allocated based on the estimated fair
values of the net assets acquired on the respective acquisition dates as follows:



|                                       |  | Multilink      |         |   | APT |   |        | Versatile |  |   | Exbit   |   |  | ht-Mikro |         |   | First Pass |   |        | Total | 
|-------------------------------------- |  | -------------- | ------- | - | --- | - | ------ | --------- |  | - | ------- | - |  | -------- | ------- | - | ---------- | - | ------ | ----- | 
|                                       |  | (in thousands) |        
|Tangible assets                        |  | $              | 21,470  |   |     | $ | 74     |           |  | $ | 12,067  |   |  | $        | 2,212   |   |            | $ | 506    |       | 
|Intangible assets:                     |  |                |         |   |     |   |        |           |  |   |         |   |  |          |         |   |            |   |        |       | 
|Assembled workforce                    |  |                |        |   |     |   |       |           |  |   |        |   |  |          | 1,200   |   |            |   | 1,800  |       | 
|Customer relationships                 |  |                | 2,000   |   |     |   | 500    |           |  |   |        |   |  |          |        |   |            |   |       |       | 
|Covenants not to compete               |  |                |        |   |     |   |       |           |  |   |        |   |  |          | 4,000   |   |            |   |       |       | 
|Goodwill                               |  |                | 13,030  |   |     |   | 7,118  |           |  |   | 126,679 |   |  |          | 65,927  |   |            |   | 8,912  |       | 
|Technology                             |  |                | 5,000   |   |     |   | 7,000  |           |  |   | 25,300  |   |  |          | 8,000   |   |            |   |       |       | 
|Unearned compensation                  |  |                | 1,749   |   |     |   | 931    |           |  |   | 14,566  |   |  |          | 3,971   |   |            |   | 2,376  |       | 
|Unearned compensation retention shares |  |                |        |   |     |   |       |           |  |   |        |   |  |          | 43,777  |   |            |   |       |       | 
|In process research and development    |  |                | 2,000   |   |     |   | 1,000  |           |  |   |        |   |  |          |        |   |            |   |       |       | 
|Liabilities Assumed                    |  |                | (13,580 | ) |     |   | (4,324 | )         |  |   | (9,005  | ) |  |          | (5,532  | ) |            |   | (627   | )     | 
|                                       |  |                |         |   |     |   |        |           |  |   |         |   |  |          |         |   |            |   |        |       | 
|                                       |  | $              | 31,669  |   |     | $ | 12,299 |           |  | $ | 169,607 |   |  | $        | 123,555 |   |            | $ | 12,967 |       | 
|                                       |  |                |         |   |     |   |        |           |  |   |         |   |  |          |         |   |            |   |        |       | 



For many of the
purchase acquisitions included in the table above the Company has issued unvested shares and assumed unvested options to continuing employees of each acquisition, with vesting to occur as compensation for future employment services with Vitesse.
Typically these shares or options vest ratably over a four-year period, as long as the employee option holder remains an employee of Vitesse. As a result, the Company has recorded unearned compensation based on the value of certain unvested shares
and options of the Company issued to effect each acquisition. The fair value of common shares that were issued to acquire Exbit and that were subject to certain vesting provisions based on continued employment was recorded as unearned
compensationretention shares. The intrinsic value of the unvested options issued to Firstpass, ht-Mikro, Exbit, Versatile, APT and Multilink was allocated to unearned compensation. Unearned compensation will be recognized as compensation
expense over the respective remaining future service period.



Additionally, the Company has issued vested options to employees of the acquired companies, in exchange for vested options in the acquired company. The vested options issued by Vitesse are recorded at a value calculated using the Black
Scholes option pricing model at the acquisition date, and included in the cost of the acquired company.



NOTE 3GOODWILL AND OTHER INTANGIBLE ASSETS



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



|                                                         |  | September 30, 2003 |         |   | September 30, 2002 |  
|-------------------------------------------------------- |  | ------------------ | ------- | - | ------------------ | -
|Gross carrying amount                                    |  | $                  | 156,005 |   |                    | $
|Goodwill acquired                                        |  |                    | 20,364  |   |                    |  
|Impairment of goodwill                                   |  |                    |        |   |                    |  
|Impairment of goodwill related to discontinued operation |  |                    | (830    | ) |                    |  
|                                                         |  |                    |         |   |                    |  
|Total goodwill                                           |  | $                  | 175,539 |   |                    | $
|                                                         |  |                    |         |   |                    |  



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VITESSE SEMICONDUCTOR CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



|                         |  | Gross Carrying Amount |        | Accumulated Amortization |   |         | Net Balance
|------------------------ |  | --------------------- | ------ | ------------------------ | - | ------- | -----------
|September 30, 2003       |  |                       |        |                          |   |         |            
|Customer relationships   |  | $                     | 3,313  |                          | $ | (1,036  | )          
|Technology               |  |                       | 23,465 |                          |   | (7,084  | )          
|Covenants not to compete |  |                       | 4,000  |                          |   | (3,412  | )          
|                         |  |                       |        |                          |   |         |            
|Total                    |  | $                     | 30,778 |                          | $ | (11,532 | )          
|                         |  |                       |        |                          |   |         |            
|September 30, 2002       |  |                       |        |                          |   |         |            
|Customer relationships   |  | $                     | 813    |                          | $ | (813    | )          
|Technology               |  |                       | 11,465 |                          |   | (3,587  | )          
|Covenants not to compete |  |                       | 4,000  |                          |   | (2,081  | )          
|                         |  |                       |        |                          |   |         |            
|Total                    |  | $                     | 16,278 |                          | $ | (6,481  | )          
|                         |  |                       |        |                          |   |         |            



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



|Fiscal Year |  | Amount
|----------- |  | ------
|2004        |  | $     
|2005        |  |       
|2006        |  |       
|2007        |  |       
|2008        |  |       
|Thereafter  |  |       
|            |  |       
|Total       |  | $     
|            |  |       



The following presents
the impact of SFAS 142 on net loss and net loss per share had the statement been in effect for fiscal 2001 (in thousands, except per share amounts):



|                                                 |  | Year Ended     |         
|------------------------------------------------ |  | -------------- | --------
|                                                 |  | Sept. 30, 2003 |         
|Reported net loss                                |  | $              | (167,189
|Adjustments:                                     |  |                |         
|Amortization of goodwill                         |  |                |        
|Amortization of workforce                        |  |                |        
|                                                 |  |                |         
|Adjusted net income (loss)                       |  | $              | (167,189
|                                                 |  |                |         
|Basic and diluted net loss per shareas reported |  | $              | (0.82   
|Basic and diluted net loss per shareadjusted    |  | $              | (0.82   



The Company only
operates within one reporting unit as defined by SFAS 142. Therefore, allocation of goodwill is not required.



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



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VITESSE SEMICONDUCTOR CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Company recognizes an impairment loss based on the excess of the carrying amount of the assets
over their respective fair values. Fair value of goodwill is determined by using a valuation model based on an income and market approach. Fair value of other intangible assets and long-lived assets is determined by discounted future cash flows,
appraisals or other methods. If the long-lived asset determined to be impaired is to be held and used, we recognize an impairment charge to the extent the present value of anticipated net cash flows attributable to the asset are less than the
assets carrying value. The fair value of the long-lived asset then becomes the assets new carrying value. In fiscal 2001, the Company recorded a charge of $22.9 million for the impairment of certain goodwill and intangible assets
associated with prior acquisitions.



NOTE 4DISCONTINUED OPERATIONS



In the third quarter of fiscal 2003, the Company decided
to discontinue its line of optical module products due to continued depressed levels of demand for these products. On August 22, 2003, the Company entered into an agreement to sell certain assets of its optical module business to Avanex. In
accordance with GAAP, the balance sheet reflects assets and liabilities held for sale and the statements of operations and cash flows reflect the results of the optical module business as discontinued operations for all periods presented.



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



Assets held for sale were comprised of
the following:



|                                          |  | September 30, 2003 |   | September 30, 2002
|----------------------------------------- |  | ------------------ | - | ------------------
|Cash and cash equivalents                 |  | $                  |  |                   
|Inventories, net                          |  |                    |  |                   
|Prepaid expenses and other current assets |  |                    |  |                   
|Property and equipment, net               |  |                    |  |                   
|Other intangible assets, net              |  |                    |  |                   
|Other assets                              |  |                    |  |                   
|                                          |  |                    |   |                   
|Assets held for sale                      |  | $                  |  |                   
|                                          |  |                    |   |                   



Liabilities held for sale were
comprised of the following:



|                                      |  | September 30, 2003 |   | September 30, 2002
|------------------------------------- |  | ------------------ | - | ------------------
|Accounts payable and accrued expenses |  | $                  |  |                   
|Long term debt                        |  |                    |  |                   
|                                      |  |                    |   |                   
|Liabilities held for sale             |  | $                  |  |                   
|                                      |  |                    |   |                   



Selected operating results were as
follows:



|                                                                      |  | Year ended     |        
|--------------------------------------------------------------------- |  | -------------- | -------
|                                                                      |  | Sept. 30, 2003 |        
|Loss from operations of discontinued operations                       |  | $              | (17,920
|Loss from impairment of long lived assets and other intangible assets |  |                | (17,260
|Allocated goodwill                                                    |  |                | (830   
|Income tax benefit                                                    |  |                |       
|                                                                      |  |                |        
|Loss from discontinued operations                                     |  | $              | (36,010
|                                                                      |  |                |        



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VITESSE SEMICONDUCTOR CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Loss from operations of discontinued operations includes restructuring charges of $2.5 million and
$4.1 million of intangible asset impairment in the year ended September 30, 2002, and stock-based compensation of $2.6 million, $3.4 million, and $0.8 million, in the years ended September 30, 2003, 2002, and 2001, respectively.



NOTE 5RESTRUCTURING COSTS AND OTHER SPECIAL CHARGES



Restructuring Charges



Due to the prolonged downturn in the industry, the Company announced various
restructuring plans between the quarters ended June 2001 and June 2003. A summary of each of the separate programs is as follows:



| |  |  | The June 2003 restructuring program included the closure of the Companys 6-inch GaAs wafer fabrication facility in Colorado Springs, Colorado. This restructuring plan included
the termination of the manufacturing workforce associated with that facility, the write-down of certain manufacturing assets that were deemed to be impaired and the write-off of related prepaid maintenance for non-transferable maintenance contracts
totaling $27.4 million, as well as the write-down of the Colorado Springs facility itself in the amount of $23.8 million. Payments related to the workforce reduction are estimated to be approximately $1.4 million and are expected to be completed by
March 2004. As a result of implementing this restructuring plan, the Company recorded total charges of $52.6 million during fiscal 2003.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The June 2002 restructuring program consisted of a workforce reduction of 183 people, consolidation of excess facilities of $4.6 million, an asset impairment charge of $107.2
million and contract settlement costs of $34.2 million. Payments for workforce reduction were approximately $3.4 million and were completed during the quarter ended June 30, 2003. Payments related to the consolidation of excess facilities are
expected to be completed by March 2004. The accrual for contract settlement costs is expected to be fully utilized by March 2005. The program resulted in total charges of $148.3 million during fiscal 2002 and $1.1 million in fiscal 2003.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The November 2001 restructuring program consisted of a workforce reduction of 130 people, consolidation of excess facilities of $0.4 million and an asset impairment charge of $63.2
million. Payments for workforce reduction were approximately $0.7 million and were completed during the quarter ended March 31, 2002. Payments related to consolidation of excess facilities were completed during the quarter ended June 30, 2003. The
program resulted in total charges of $64.3 million during fiscal 2002.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The June 2001 program consisted of a 12% workforce reduction and consolidation of excess facilities of $1.7 million. Charges for workforce reduction were approximately $2.0 million
and payments will be completed in March 2005. Payments related to the consolidation of facilities were completed in the quarter ended September 30, 2003. The program resulted in a total charge of $26.6 million during fiscal 2001, and $0.3 million
during fiscal 2003.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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VITESSE SEMICONDUCTOR CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



|                                                   |  | Workforce Reduction |        |   | Excess Facilities |   |        | Contract Settlement Costs |  |   | Impairment of Assets |   |  | Building impairment |          |   | Total |  
|-------------------------------------------------- |  | ------------------- | ------ | - | ----------------- | - | ------ | ------------------------- |  | - | -------------------- | - |  | ------------------- | -------- | - | ----- | -
|Initial charge relating to June 2001 restructuring |  | $                   | 2,007  |   |                   | $ | 1,734  |                           |  | $ |                     |   |  | $                   |         |   |       | $
|Cash payments                                      |  |                     | (778   | ) |                   |   | (28    | )                         |  |   |                     |   |  |                     |         |   |       |  
|                                                   |  |                     |        |   |                   |   |        |                           |  |   |                      |   |  |                     |          |   |       |  
|Balance at September 30, 2001                      |  |                     | 1,229  |   |                   |   | 1,706  |                           |  |   |                     |   |  |                     |         |   |       |  
|                                                   |  |                     |        |   |                   |   |        |                           |  |   |                      |   |  |                     |          |   |       |  
|Charged to expense                                 |  |                     | 4,058  |   |                   |   | 3,855  |                           |  |   | 34,221               |   |  |                     | 170,363  |   |       |  
|Non cash amounts                                   |  |                     |       |   |                   |   | (172   | )                         |  |   |                     |   |  |                     | (170,363 | ) |       |  
|Cash payments                                      |  |                     | (3,709 | ) |                   |   | (1,985 | )                         |  |   | (2,714               | ) |  |                     |         |   |       |  
|                                                   |  |                     |        |   |                   |   |        |                           |  |   |                      |   |  |                     |          |   |       |  
|Balance at September 30, 2002                      |  |                     | 1,578  |   |                   |   | 3,404  |                           |  |   | 31,507               |   |  |                     |         |   |       |  
|                                                   |  |                     |        |   |                   |   |        |                           |  |   |                      |   |  |                     |          |   |       |  
|Charged to expense                                 |  |                     | 1,419  |   |                   |   | 1,390  |                           |  |   |                     |   |  |                     | 27,447   |   |       |  
|Non cash amounts                                   |  |                     |       |   |                   |   |       |                           |  |   |                     |   |  |                     | (27,447  | ) |       |  
|Cash payments                                      |  |                     | (1,646 | ) |                   |   | (2,081 | )                         |  |   | (10,867              | ) |  |                     |         |   |       |  
|Multilink accrued restructuring                    |  |                     |        |   |                   |   | 3,219  |                           |  |   |                      |   |  |                     |          |   |       |  
|                                                   |  |                     |        |   |                   |   |        |                           |  |   |                      |   |  |                     |          |   |       |  
|Balance at September 30, 2003                      |  | $                   | 1,351  |   |                   | $ | 5,932  |                           |  | $ | 20,640               |   |  | $                   |         |   |       | $
|                                                   |  |                     |        |   |                   |   |        |                           |  |   |                      |   |  |                     |          |   |       |  



Workforce reduction
included the cost of severance and related benefits of employees affected by the restructuring plans. The workforce charge for fiscal 2001 and 2002 was determined based on EITF 94-3. The workforce charge for fiscal 2003 was determined based on SFAS
No. 112. The excess facilities charges included lease termination payments, non-cancelable lease costs and write off of leasehold improvements and office equipment related to these leases. Contract settlements costs represent future purchase
commitments related to unused licenses of non-cancelable software contracts, and the residual value guaranteed under certain equipment operating leases. The impairment of assets charge includes the write down of the Colorado Springs facility
manufacturing equipment and prepaid maintenance contracts associated with that equipment. The charge was determined based on the held and used classification under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
Under this classification, when a decision has been made to abandon an asset group, all of the long-lived assets and certain identifiable intangibles in that asset group to be disposed of are tested for impairment. The charges for the Colorado
Springs facility also includes impairment of the owned land and building and were also tested for impairment based on the held and used classification under SFAS No. 144. The manufacturing facility will cease production during fiscal 2004. Certain
portions of the building could be used as office space. As such, the Company obtained fair value information for comparable commercial property in the Colorado Springs area. Based on an estimated fair value, the Company recorded an impairment charge
to write down the land and building accordingly. The adjusted value of the long-lived assets will then be depreciated over the remaining estimated useful life.



In connection with the acquisition of Multilink, the Company recorded $3.2 million of accrued restructuring liabilities related to the consolidation of
excess facilities.



Other Special Charges



During the quarter ended June 30, 2003, the Company wrote off $6.8 million
of GaAs inventory. As a result of the planned closure of the GaAs fabrication facility in Colorado Springs and as a result of the decision to exit the GaAs manufacturing process, the Company notified customers and requested final forecasts and
purchase orders from these customers. Based on the customers responses, and required commitments to purchase the inventory in the near future, the Company determined that it had excess GaAs inventory on hand. As a result, the Company recorded
a charge of $6.8 million, which is included in cost of revenues in fiscal 2003. During the fourth quarter of fiscal 2003 the Company also recorded a charge of $5.2 million to write-down various equity



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VITESSE SEMICONDUCTOR CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



investments held by Vitesse Venture Fund to their estimated fair market value, which is included in Other Expenses in the statement of operations
for fiscal 2003.



In fiscal 2002, the Company also wrote off
$30.5 million of excess and obsolete inventories. The continued industry-downturn resulted in a decrease demand for the Companys products, and a significant reduction in sales forecasts established at the end of fiscal 2002 and the beginning
of 2002. As a result, the Company recorded a charge of $30.5 million in accordance with its inventory reserve methodology, which was included in cost of revenues in fiscal 2002. Also, in the fourth quarter of fiscal 2002, the Company recorded a
charge of $5.0 million to write-down various equity investments held by the two Vitesse Venture Funds to the estimated fair market value, which is included in Other Expenses in the statement of operations for fiscal 2002.



NOTE 6BALANCE SHEET DETAIL



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



|                                               |  | September 30,
|---------------------------------------------- |  | -------------
|                                               |  | 2003         
|Inventories, Net:                              |  |              
|Raw materials                                  |  | $            
|Work in process                                |  |              
|Finished goods                                 |  |              
|                                               |  |              
|Total                                          |  | $            
|                                               |  |              
|Property and Equipment, Stated at Cost:        |  |              
|Machinery and equipment                        |  | $            
|Furniture and fixtures                         |  |              
|Computer equipment                             |  |              
|Leasehold improvements                         |  |              
|Land                                           |  |              
|Buildings                                      |  |              
|                                               |  |              
|                                               |  |              
|Less accumulated depreciation and amortization |  |              
|                                               |  |              
|Total                                          |  | $            
|                                               |  |              



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VITESSE SEMICONDUCTOR CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Included in property and equipment are items not yet placed in service of $9.3 million and $36.4
million as of September 30, 2003 and 2002, respectively.



|Intangible Assets, Stated at Cost:                            |  |   |         |  |   |        
|------------------------------------------------------------- |  | - | ------- |  | - | -------
|Goodwill                                                      |  | $ | 175,539 |  | $ | 156,005
|Other identifiable intangible assets                          |  |   | 30,778  |  |   | 16,278 
|                                                              |  |   |         |  |   |        
|                                                              |  |   | 206,317 |  |   | 172,283
|Less accumulated amortization                                 |  |   | 11,532  |  |   | 6,481  
|                                                              |  |   |         |  |   |        
|Total                                                         |  | $ | 194,785 |  | $ | 165,802
|                                                              |  |   |         |  |   |        
|Other Assets:                                                 |  |   |         |  |   |        
|Debt issue costs                                              |  | $ | 1,623   |  | $ | 3,699  
|Long term prepaid maintenance                                 |  |   | 11,999  |  |   | 23,796 
|Cost basis investments in venture backed technology companies |  |   | 5,512   |  |   | 14,465 
|Other investments                                             |  |   | 1,555   |  |   | 350    
|Derivative asset                                              |  |   | 599     |  |   |       
|Long term deposits                                            |  |   | 976     |  |   | 421    
|                                                              |  |   |         |  |   |        
|Total                                                         |  | $ | 22,264  |  | $ | 42,731 
|                                                              |  |   |         |  |   |        
|Accrued Expenses and Other Current Liabilities:               |  |   |         |  |   |        
|Accrued vacation                                              |  | $ | 3,927   |  | $ | 3,659  
|Accrued salaries, wages and bonuses                           |  |   | 5,499   |  |   | 3,673  
|Deferred revenue                                              |  |   | 1,602   |  |   | 2,122  
|Other                                                         |  |   | 11,908  |  |   | 6,773  
|                                                              |  |   |         |  |   |        
|Total                                                         |  | $ | 22,936  |  | $ | 16,227 
|                                                              |  |   |         |  |   |        



NOTE 7DEBT



In March of fiscal 2000, the Company issued $720.0 million aggregate
principal amount of its 4% convertible subordinated debentures due March 2005. Net proceeds received by the Company, after costs of issuance, were approximately $702.0 million. Interest is payable in arrears semiannually on March 15 and September 15
of each year, beginning September 15, 2000. The debentures are convertible into the Companys common stock at approximately $112.19 per share, subject to certain adjustments. Since March 15, 2003, the notes may be redeemed at the Companys
option at specified redemption prices. For the years ended September 30, 2003 and 2002, interest expense relating to the debentures aggregated $5.6 million and $14.1 million, respectively. At September 30, 2003 and 2002, outstanding debentures were
$195.1 million and $263.7 million, respectively. As of September 30, 2003, the convertible subordinated debentures includes the fair value of interest rate swap of $0.6 million.



In fiscal 2002, the Company purchased $273.4 million aggregate principal amount of its debentures at prevailing market
prices, for an aggregate of approximately $203.1 million in cash. As a result, the Company recorded a gain on extinguishment of debt of approximately $66.3 million, net of a portion of debt issue costs of $4.0 million, in the year ended September
30, 2002.



In fiscal 2003, the Company purchased $68.6 million
principal amount of its debentures at prevailing market prices, for an aggregate amount of approximately $51.1 million. As a result, the Company recorded a gain on extinguishment of debt of approximately $16.5 million, net of deferred debt issuance
costs of $1.0 million, in the year ended September 30, 2003.



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VITESSE SEMICONDUCTOR CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Other long-term debt at September 30, 2003 and 2002 consists of the following (in thousands):



|                                                                                                                                        |  | September 30,
|--------------------------------------------------------------------------------------------------------------------------------------- |  | -------------
|                                                                                                                                        |  | 2003         
|Term loan, interest at 4.02% per annum and maturing April 2005                                                                          |  | $            
|Software and equipment financing, secured by equipment, interest ranging from 4.75% to 8.03% per annum and maturing through August
2005 |  |              
|                                                                                                                                        |  |              
|                                                                                                                                        |  |              
|Less current portion                                                                                                                    |  |              
|                                                                                                                                        |  |              
|                                                                                                                                        |  | $            
|                                                                                                                                        |  |              



In connection with the
acquisition of Multilink, the Company assumed a term loan of $2.1 million due April 30, 2005, bearing interest at 4.02% per annum. In addition, the Company also assumed $3.1 million of vendor financing for software and equipment purchases entered
into by Multilink during 2002 and 2001. These financing agreements bear interest ranging from 4.75% to 8.03% per annum and mature through August 23, 2005. The underlying assets collateralize the vendor financing.



The Company has a $12.5 million revolving line of credit agreement with a
bank, which expires in January 2004. The agreement provides for interest to be paid monthly at the banks prime rate (4.00% on September 30, 2003). The Company must adhere to certain requirements and provisions to be in compliance with the
terms of the agreement and is prohibited from paying dividends without the consent of the bank. As of September 30, 2003 and 2002, no amounts were outstanding under the line of credit.



Maturities of long-term debt subsequent to September 30, 2003 are as follows (in thousands):



|Years ending September 30: |  |   |        
|-------------------------- |  | - | -------
|2004                       |  | $ | 3,175  
|2005                       |  |   | 196,992
|2006                       |  |   |       
|2007                       |  |   |       
|2008                       |  |   |       
|                           |  |   |        
|                           |  | $ | 200,167
|                           |  |   |        



NOTE 8DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES



In fiscal 2002 and 2003, the
Company entered into several interest-rate related derivative instruments to manage its exposure on its debt instruments. The Company does not enter into derivative instruments for trading or speculative purposes.



By using derivative financial instruments to hedge exposures to changes in
interest rates, the Company exposes itself to credit risk and market risk. Credit risk is the risk of the counter-party failing to perform under the terms of the derivative contract when the contracts value is in the Companys favor. The
Company minimizes the credit risk in derivative instruments by entering into transactions with high-quality counterparties.



Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates. The market risk associated with the
interest rate contract is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.



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VITESSE SEMICONDUCTOR CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Company assesses interest rate risk by continually identifying and monitoring changes in interest
rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. The Company maintains risk management control systems to monitor interest rate risk attributable to both the Companys outstanding or
forecasted debt obligations as well as the Companys offsetting hedge positions. The risk management control systems involve the use of analytical techniques, including cash flow sensitivity analysis, to estimate the expected impact of changes
in interest rates on the Companys debt.



The Company uses
fixed debt to finance its operations. The debt obligation exposes the Company to variability in the fair value of debt due to changes in interest rates. Management believes it is prudent to limit the variability. To meet this objective, management
entered into interest rate swap agreements during fiscal 2002 and 2003 to manage fluctuations in debt resulting from interest rate risk and designated these agreements as hedging instruments in a fair value hedging relationship under SFAS No. 133.
These swaps changed the fixed-rate exposure on the debt to variable. Under the terms of the interest rate swaps, the Company receives fixed interest rate payments and makes variable interest rate payments, thereby managing the value of debt.



Changes in the fair value of the interest rate swaps
designated as hedging instruments that effectively offset the fair value variability associated with fixed-rate, long-term debt are reported in interest expense as a yield adjustment of the hedged debt.



Interest expense for the years ended September 30, 2002 and 2003 includes a
de minimus amount of net losses representing fair value hedge ineffectiveness arising from slight differences between the fair value change in the interest rate swaps and the change in fair value of the hedged debt obligation.



Since fiscal 2002, the Company has recorded deferred gains totaling $12.4
million as a result of the termination of certain interest rate swap agreements. These gains are amortized over the respective remaining term of the convertible subordinated debentures due March 2005. For the years ended September 30, 2003 and 2002,
the Company recognized gains of $2.8 million and $0.4 million, respectively.



As of September 30, 2003, the Company has one fixed to variable interest rate swap agreement with a notional value of approximately $195.0 million. The interest rate swap agreement was entered into on July 8, 2003 and
expires on March 15, 2005. The swap has been designated as a fair value hedge.



NOTE 9SHAREHOLDERS EQUITY



Employee Stock Purchase Plan.    The Company has an employee stock purchase plan for all eligible employees. During fiscal 2002, the shareholders approved an amendment to the plan to increase the number of shares
reserved for issuance under the plan from 7.5 million shares to 13.0 million shares of common stock, and to change the length of the offering periods from six months to twenty-four months. Under the plan, employees may purchase shares of the
Companys common stock at twenty-four month intervals at 85% of the lower of the fair market value at the beginning and end of each interval. Employees purchase such stock using payroll deductions and annual contributions which may not exceed
20% of their compensation, including commissions and overtime, but excluding bonuses. In fiscal 2003, 2002 and 2001, 3,130,284, 1,778,872 and 167,598 shares, respectively, were issued under the plan at average prices of $1.76, $3.42 and $33.27. At
September 30, 2003, 1,588,874 shares were reserved for future issuance.



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



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VITESSE SEMICONDUCTOR CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



On January 23, 2001, the Companys shareholders approved the adoption of the Companys 2001
Stock Incentive Plan (the 2001 Plan ) which replaced the 1991 Stock Option Plan which expired in August 2001 and the Directors Plan which 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 nonstatutory stock options for certain other stock-based awards as determined by the Board of
Directors or Compensation Committee.



Pursuant to the 2001
Plan, the number of shares reserved under the Plan automatically increases by a number of shares equal to 4.0% of the Companys common stock outstanding at the end of each fiscal year. Under all stock option plans, a total of 50,401,559 shares
of common stock have been reserved for issuance as of September 30, 2003 (which increased to 58,972,261 effective October 1, 2003 pursuant to the terms of the 2001 Plan) and 4,452,252 (which increased to 13,022,954 effective October 1, 2003 pursuant
to the terms of the 2001 Plan) remained available for future grant.



Activity under the employee stock option plans and Directors Plan for fiscal 2003, 2002 and 2001 is as follows:



|                                          |  | Number ofShares |   |  | Option Price PerShare |            | Aggregate |  
|----------------------------------------- |  | --------------- | - |  | --------------------- | ---------- | --------- | -
|                                          |  | (in thousands)  |  
|Options outstanding at September 30, 2000 |  | 23,624,104      |   |  | $                     | .0180.19  |           | $
|Options:                                  |  |                 |   |  |                       |            |           |  
|Granted                                   |  | 10,998,154      |   |  |                       | .2471.06  |           |  
|Exercised                                 |  | (3,909,899      | ) |  |                       | .0151.25  |           |  
|Canceled or expired                       |  | (1,318,803      | ) |  |                       | .0180.19  |           |  
|                                          |  |                 |   |  |                       |            |           |  
|Options outstanding at September 30, 2001 |  | 29,393,556      |   |  | $                     | .0180.19  |           | $
|Options:                                  |  |                 |   |  |                       |            |           |  
|Granted                                   |  | 16,384,825      |   |  |                       | 1.2612.43 |           |  
|Exercised                                 |  | (939,318        | ) |  |                       | .019.56   |           |  
|Canceled or expired                       |  | (3,839,304      | ) |  |                       | .0177.94  |           |  
|                                          |  |                 |   |  |                       |            |           |  
|Options outstanding at September 30, 2002 |  | 40,999,759      |   |  | $                     | .0180.19  |           | $
|Options:                                  |  |                 |   |  |                       |            |           |  
|Granted                                   |  | 14,728,068      |   |  |                       | .245.52   |           |  
|Exercised                                 |  | (3,061,747      | ) |  |                       | .017.27   |           |  
|Canceled or expired                       |  | (6,716,773      | ) |  |                       | .1880.19  |           |  
|                                          |  |                 |   |  |                       |            |           |  
|Options outstanding at September 30, 2003 |  | 45,949,307      |   |  | $                     | .0180.19  |           | $
|                                          |  |                 |   |  |                       |            |           |  



During fiscal 2003,
the Company recorded unearned compensation related to stock options granted to founders and employees of certain acquired companies of $5.3 million. Such amounts are being amortized over the related vesting period, generally four years. Amortization
of unearned compensation for the years ended September 30, 2003, 2002 and 2001 was $26.7 million, $29.5 million and $16.7 million, respectively.



The Company has, in connection with various acquisitions, assumed the stock option plans of each acquired company. The acquired companies granted the
options prior to the acquisition by Vitesse. These options were then converted into Vitesse options based on the acquisition conversion ratio. As a result, when reviewing the above, there are certain options that appear to have been granted at less
than fair market value, but which in fact represent grants given to employees of the acquired companies prior to their respective acquisitions by Vitesse. Other than the foregoing, all of the options grants made by Vitesse to employees and directors
are granted at fair



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VITESSE SEMICONDUCTOR CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



market value at the time of grant. A total of approximately 2.1 million shares of common stock have been issued under the assumed plans, and related options
are outstanding as of September 30, 2003 and are included in the preceding table.



The following table summarizes information regarding options outstanding and options exercisable at September 30, 2003:



|                         |  | Options
Outstanding             |  | Options
Exercisable                      
|------------------------ |  | ------------------------------- |  | -----------------------------------------
|Range of Exercise Prices |  | NumberOutstanding As of 9/30/03 |  | Weighted AverageRemainingContractual Life
|$  0.01$    5.63        |  | 15,612,975                      |  | 7.63                                     
|$  6.00$    7.27        |  | 11,559,951                      |  | 8.02                                     
|$  8.06$  17.44         |  | 13,548,686                      |  | 6.19                                     
|$17.88$209.36           |  | 5,227,695                       |  | 6.48                                     
|                         |  |                                 |  |                                          
|$  0.01$209.36          |  | 45,949,307                      |  | 7.18                                     



The Company accounts
for stock-based compensation in accordance with the intrinsic-value method prescribed by APB 25. Under APB 25, compensation is measured as the amount by which the market price of the underlying stock exceeds the exercise price of the option on the
date of grant; this compensation is amortized over the vesting period.



Pro forma information regarding net loss and net loss per share is required under SFAS 123 and has been determined as if the Company had accounted for its stock-based awards under the fair value method, instead of the guidelines provided by
APB 25. The fair value of awards was estimated at the date of grant using the Black-Scholes option pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. Option valuation models require the input of highly subjective assumptions, including expected life and stock price volatility. Because the Companys options have characteristics significantly different
from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in the opinion of management, the existing models do not necessarily provide a reliable single measure of the fair
value of its options.



The per share value of options granted
in connection with stock option plans and rights granted in connection with employee stock purchase plans reported below has been estimated at the date of grant with the following weighted average assumptions:



|                              |  | Stock Option Plan Shares |      |   | Employee Stock Purchase Plan Shares |  
|----------------------------- |  | ------------------------ | ---- | - | ----------------------------------- | -
|                              |  | 2003                     |      |   | 2002                                |  
|Average expected life (years) |  |                          | 4.98 |   |                                     |  
|Expected volatility           |  |                          | 1.01 |   |                                     |  
|Risk-free interest rate       |  |                          | 3.29 | % |                                     |  
|Dividends                     |  |                          |     |   |                                     |  
|Weighted average fair values  |  | $                        | 0.69 |   |                                     | $



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VITESSE SEMICONDUCTOR CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 10INCOME TAXES



Income tax expense (benefit) consists of the following (in thousands):



|                                                              |  | September 30, |    
|------------------------------------------------------------- |  | ------------- | ---
|                                                              |  | 2003          |    
|Income tax expense (benefit) from continuing operations:      |  |               |    
|Current:                                                      |  |               |    
|Federal                                                       |  | $             | (30
|State                                                         |  |               | (37
|Foreign                                                       |  |               | 127
|                                                              |  |               |    
|                                                              |  | $             | 60 
|Deferred:                                                     |  |               |    
|Federal                                                       |  | $             |   
|State                                                         |  |               |   
|Foreign                                                       |  |               |   
|                                                              |  |               |    
|                                                              |  | $             |   
|Total:                                                        |  |               |    
|Federal                                                       |  | $             | (30
|State                                                         |  |               | (37
|Foreign                                                       |  |               | 127
|                                                              |  |               |    
|Total income tax expense (benefit) from continuing operations |  | $             | 60 
|                                                              |  |               |    



For fiscal 2001, $46.0
million of Federal current tax expense and $7.2 million of State current tax expense was a charge in lieu of taxes attributable to tax benefit from employee stock options.



|                                                      |  | September 30, |  
|----------------------------------------------------- |  | ------------- | -
|                                                      |  | 2003          |  
|Income tax benefit from discontinued operations:      |  |               |  
|Current:                                              |  |               |  
|Federal                                               |  | $             | 
|State                                                 |  |               | 
|Foreign                                               |  |               | 
|                                                      |  |               |  
|                                                      |  | $             | 
|Deferred:                                             |  |               |  
|Federal                                               |  | $             | 
|State                                                 |  |               | 
|Foreign                                               |  |               | 
|                                                      |  |               |  
|                                                      |  | $             | 
|                                                      |  |               |  
|Total income tax benefit from discontinued operations |  | $             | 
|                                                      |  |               |  



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VITESSE SEMICONDUCTOR CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The actual income tax expense (benefit) differs from the expected tax expense (benefit) computed by
applying the federal corporate tax rate of 35% for the years ended September 30, 2003, 2002 and 2001, to loss from continuing operations as follows (in thousands):



|                                           |  | September 30, |        
|------------------------------------------ |  | ------------- | -------
|                                           |  | 2003          |        
|Expected tax benefit                       |  | $             | (45,944
|State income taxes, net of federal benefit |  |               | (4,244 
|Rate differential on foreign income taxes  |  |               | 4,209  
|Research and development credits           |  |               | (806   
|Goodwill                                   |  |               |       
|In-process research and development        |  |               | 1,050  
|Reversal of exposure reserve               |  |               |       
|Increase in valuation allowance            |  |               | 45,305 
|Other                                      |  |               | 490    
|                                           |  |               |        
|                                           |  | $             | 60     
|                                           |  |               |        



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



|                                            |  | September 30, |         
|------------------------------------------- |  | ------------- | --------
|                                            |  | 2003          |         
|Deferred tax assets:                        |  |               |         
|Net operating loss carryforwards            |  | $             | 197,992 
|Research and development tax credits        |  |               | 21,807  
|Allowances and reserves                     |  |               | 32,859  
|Deferred compensation                       |  |               | 13,379  
|Depreciation and amortization               |  |               | 85,819  
|Federal AMT and foreign tax credits         |  |               | 121     
|California manufacturers investment credit |  |               | 3,749   
|Other                                       |  |               | 10,094  
|                                            |  |               |         
|Gross deferred tax assets                   |  |               | 365,820 
|Less valuation allowance                    |  |               | (365,820
|                                            |  |               |         
|Deferred tax asset                          |  | $             |        
|                                            |  |               |         



In assessing the
realizability of deferred tax assets, management considered whether it is more likely than not that some portions or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent on the generation of
future taxable income during the periods in which those temporary differences become deductible. Based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are
deductible, management believes that it is not more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets. Accordingly, the Company has recorded a valuation allowance
against its entire net deferred tax asset during the year ended September 30, 2003.



Consolidated U. S. loss from continuing operations before taxes was ($131.3) million, ($721.4) million and $(146.6) million for the years ended September 30, 2003, 2002 and 2001, respectively. The corresponding



60



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##### Table of Contents

VITESSE SEMICONDUCTOR CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



income (loss) before taxes for non U. S. based operations was ($111.7) million, ($101.1) million and ($12.5) million for the years ended September 30, 2003,
2002, and 2001, respectively.



The Company has cumulative
losses from its foreign subsidiaries.



As of September 30,
2003, the Company had net operating loss carryforwards for federal, state and foreign income tax purposes of $478.0 million, $457.0 million, and $85.0 million, respectively, which are available to offset future taxable income. The federal and state
carryforward periods are through 2023 and 2013, respectively, while the foreign net operating loss carryforwards have various carryforward periods in several jurisdictions. Additionally the Company had research and development tax credit
carryforwards for federal and state income tax purposes of $16.5 million and $8.2 million, respectively, which are available to offset future income taxes, if any, through 2023. Included in gross deferred tax assets at September 30, 2003 are $30.0
million related to prior acquisitions which, when recognized through a reduction of the valuation allowance, will be recorded to goodwill, and $7.0 million related to tax benefit from stock options which, when recognized through a reduction of the
valuation allowance, will be recorded as additional paid in capital.



NOTE 11SIGNIFICANT CUSTOMERS, CONCENTRATION OF CREDIT RISK AND SEGMENT INFORMATION



In fiscal 2003, one customer, EMC Corporation, accounted for 16% of total revenues. In fiscal 2001 and fiscal 2002, no customer accounted for greater than
10% of total revenues and total trade receivables as of each year end.



The Company generally sells its products to customers engaged in the design and/or manufacture of high technology products either recently introduced or not yet introduced to the marketplace. Substantially all the Companys trade
accounts receivable are due from such sources. The one major customer who accounted for 16% of total revenues aggregated 17% of total trade receivables at September 30, 2003.



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



Revenues from storage products were $82.9 million, $58.1 million $81.0 million in fiscal 2003, 2002, and 2001, respectively. Revenues from enterprise
products were $35.8 million, $30.0 million and $52.0 million in fiscal 2003, 2002 and 2001, respectively. Revenues from products targeting the metro market were $19.4 million in fiscal 2003, $21.3 million in fiscal 2002 and $40.0 million in fiscal
2001. Revenues from the Companys legacy products including those targeting the long-haul communications market and ASICs for the ATE and military markets were $18.3 million in fiscal 2003, $42.3 million in fiscal 2002 and $210.9 million in
fiscal 2001.



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



|              |  | 2003 |         | 2002 |   | 2001   
|------------- |  | ---- | ------- | ---- | - | -------
|United States |  | $    | 109,782 |      | $ | 115,357
|Japan         |  |      | 18,416  |      |   | 14,285 
|Canada        |  |      | 3,509   |      |   | 8,214  
|Singapore     |  |      | 8,743   |      |   | 1,928  
|Other         |  |      | 15,921  |      |   | 11,954 
|              |  |      |         |      |   |        
|              |  | $    | 156,371 |      | $ | 151,738
|              |  |      |         |      |   |        





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VITESSE SEMICONDUCTOR CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 12RETIREMENT SAVINGS PLAN



The Company has a qualified retirement plan under the provisions of Section 401(k) of the Internal Revenue Code covering
substantially all employees. Participants in this plan may defer up to the maximum annual amount allowable under IRS regulations. The contributions are fully vested and nonforfeitable at all times. The Company does not make matching contributions
under the plan.



NOTE 13COMMITMENTS AND CONTINGENCIES



The Company has entered into several agreements to lease equipment. All
of these leases have initial terms of three to five years and options to renew for an additional one to three years. The Company has the option to purchase the equipment at the end of each initial lease term, and at the end of each renewal period
for the lessors original cost, which is not less than the fair market value at each option date. If the Company elects not to purchase the equipment at the end of each of the leases, the Company would guarantee a residual value to the lessors
equal to 80% to 84% of the lessors cost of the equipment equal to $71.4 million. As of September 30, 2003, the lessors had advanced a total of $14.3 million under these leases, and held $57.1 million as cash collateral, which amount is
included in restricted long-term deposits.



The Company also
leases facilities and certain machinery and equipment under noncancellable operating leases that expire through 2008.



Approximate minimum rental commitments under all noncancellable operating leases as of September 30, 2003 are as follows (in thousands):



|Year ending September 30:    |  |   |       
|---------------------------- |  | - | ------
|2004                         |  | $ | 4,019 
|2005                         |  |   | 3,488 
|2006                         |  |   | 2,082 
|2007                         |  |   | 1,497 
|2008                         |  |   | 1,550 
|Thereafter                   |  |   | 334   
|                             |  |   |       
|Total minimum lease payments |  | $ | 12,970
|                             |  |   |       



Rent expense totaled
$6.3 million, $7.1 million and $9.2 million for the years ended September 30, 2003, 2002 and 2001, respectively.



The Company is a party to various investigations, lawsuits and claims arising in the normal course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the Companys consolidated financial position, results of operations or liquidity.



The Company sells its products to its customers under contracts. Each contract contains the relevant terms of the contractual arrangement with the
customer, and generally includes certain provisions for indemnifying the customer against losses, expenses, and liabilities from damages that may be awarded against the customer in the event the Companys product is found to infringe upon
certain intellectual property rights of a third party. The contract generally limits the scope of and remedies for such indemnification obligations in a variety of industry-standard respects, including but not limited to, certain geography-based
scope limitations and a right to replace an 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 the contract. 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.



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##### Table of Contents

VITESSE SEMICONDUCTOR CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 14QUARTERLY FINANCIAL DATA (UNAUDITED)



Summarized unaudited quarterly financial data (in thousands, except per
share data) for fiscal 2003 and 2002 was as follows:



|                                                              |  | FirstQuarter |          |   | SecondQuarter(3) |   |         | ThirdQuarter(4) |  |   | FourthQuarter(5) |   |  | Total Year |        
|------------------------------------------------------------- |  | ------------ | -------- | - | ---------------- | - | ------- | --------------- |  | - | ---------------- | - |  | ---------- | -------
|Fiscal Year 2003(2):                                          |  |              |          |   |                  |   |         |                 |  |   |                  |   |  |            |        
|Revenues                                                      |  | $            | 35,710   |   |                  | $ | 38,132  |                 |  | $ | 39,738           |   |  | $          | 42,791 
|Gross profit                                                  |  |              | 19,534   |   |                  |   | 21,972  |                 |  |   | 16,426           |   |  |            | 25,276 
|Loss from operations                                          |  |              | (21,498  | ) |                  |   | (19,568 | )               |  |   | (74,074          | ) |  |            | (27,898
|Loss from continuing operations                               |  |              | (4,249   | ) |                  |   | (19,330 | )               |  |   | (74,257          | ) |  |            | (33,343
|Net loss                                                      |  |              | (11,049  | ) |                  |   | (25,146 | )               |  |   | (94,993          | ) |  |            | (36,001
|Loss from continuing operations per sharediluted(1)          |  |              | (0.03    | ) |                  |   | (0.11   | )               |  |   | (0.40            | ) |  |            | (0.16  
|Net loss per sharediluted(1)                                 |  |              | (0.06    | ) |                  |   | (0.12   | )               |  |   | (0.47            | ) |  |            | (0.17  
|Weighted average sharesdiluted                               |  |              | 200,250  |   |                  |   | 201,694 |                 |  |   | 203,704          |   |  |            | 208,722
|                                                              |  |              |          |   |                 
|Fiscal Year 2002(2):                                          |  |              | (6)      |   |                  |   |         |                 |  |   | (7)              |   |  |            | (8)    
|Revenues                                                      |  | $            | 38,164   |   |                  | $ | 39,083  |                 |  | $ | 38,881           |   |  | $          | 35,610 
|Gross profit (loss)                                           |  |              | 4,790    |   |                  |   | 18,603  |                 |  |   | (269             | ) |  |            | 18,459 
|Loss from operations                                          |  |              | (116,405 | ) |                  |   | (37,624 | )               |  |   | (598,471         | ) |  |            | (35,407
|Income (loss) from continuing operations                      |  |              | (98,500  | ) |                  |   | (36,627 | )               |  |   | (723,988         | ) |  |            | 9,404  
|Net income (loss)                                             |  |              | (106,882 | ) |                  |   | (44,401 | )               |  |   | (735,904         | ) |  |            | 3,661  
|Income (loss) from continuing operations per sharediluted(1) |  |              | (0.50    | ) |                  |   | (0.18   | )               |  |   | (3.65            | ) |  |            | 0.05   
|Net income (loss) per sharediluted(1)                        |  |              | (0.54    | ) |                  |   | (0.22   | )               |  |   | (3.71            | ) |  |            | 0.02   
|Weighted average sharesdiluted                               |  |              | 197,543  |   |                  |   | 198,043 |                 |  |   | 198,459          |   |  |            | 200,416

---

|(1) |  | Net income (loss) per share is computed independently for each of the quarters represented in accordance with SFAS No. 128. Therefore, the sum of the quarterly net income (loss) per
share may not equal the total computed for the fiscal year or any cumulative interim period.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | The Company has reclassified the results of operations of its line of optical module products to discontinued operations for all quarters presented.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Results include a $0.3 million restructuring charge in connection with workforce reduction and office closures.
|--- |  | ---------------------------------------------------------------------------------------------------------------

|(4) |  | Results include a $6.8 million charge for the write-off of excess and obsolete inventories, a $48.1 million charge for the impairment of fixed assets, and a $1.0 million
restructuring charge in connection with workforce reduction and office closures.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Results include a $3.1 million charge for the impairment of fixed assets, a $3.0 million charge for IPR&D, a $5.2 million charge for the impairment of other long-term
investments and a $1.5 million restructuring charge in connection with workforce reduction.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | Results include a $12.0 million charge for the write-off of excess and obsolete inventories, a $63.2 million charge for the impairment of fixed assets, and a $1.1 million
restructuring charge in connection with workforce reduction and office closures.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) |  | Results include a $17.2 million charge for the write-off of excess and obsolete inventories, a $107.2 million charge for the impairment of fixed assets, a $398.9 million charge for
the impairment of goodwill and intangible assets related to certain acquisitions, a net tax charge of $126.2 million relating to an increase to the valuation allowance, a $34.2 million charge for contract settlement costs, a $2.1 million
restructuring charge in connection with office closures and a $3.0 million charge related to an increase in the allowance for doubtful accounts.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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VITESSE SEMICONDUCTOR CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|(8) |  | Results include a $5.0 million charge for the impairment of other long-term investments and a $3.0 million restructuring charge in connection with workforce reduction.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure



None.



Item 9A.Controls and Procedures



Disclosure Controls and Procedures



Our Chief Executive Officer and our Chief Financial Officer, after evaluating the effectiveness of the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report, have concluded that our disclosure controls and procedures are effective and are designed to ensure that the information we are required to disclose
is recorded, processed, summarized and reported within the necessary time periods.



Internal Control over Financial Reporting



Our
Chief Executive Officer and our Chief Financial Officer have evaluated the changes to the Companys internal control over financial reporting that occurred during our fiscal quarter ended September 30, 2003, as required by paragraph (d) of
Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended, and have concluded that there were no such changes that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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##### Table of Contents

PART III



Item 10.Directors and Executive Officers of the Registrant



Information regarding our directors and executive officers is set forth under the caption Nominees for the Board of Directors in the
Companys Proxy Statement for the 2004 Annual Meeting of Shareholders, with respect to directors, and under the caption Executive Officers of the Registrant in Part 1 of this report, with respect to executive officers.



Information concerning compliance with Section 16(a) of the Securities
Exchange Act of 1934 is set forth under the caption Section 16(a) Beneficial Ownership Reporting Compliance in our Proxy Statement for the 2004 Annual Meeting of Shareholders.



Code of Business Conduct and Ethics



We have adopted a Code of Business Conduct and Ethics that applies to all of our directors, officers and employees, including our Chief Executive Officer,
our Chief Financial Officer and other senior financial officers. Our Code of Business Conduct and Ethics is posted on our website, www.vitesse.com, under the InvestorsCorporate Governance caption. We intend to disclose on
our website any amendment to, or waiver of, a provision of the Code of Business Conduct and Ethics that applies to our Chief Executive Officer, our Chief Financial Officer or our other senior financial officers.



Item 11.Executive Compensation



Information concerning executive compensation is set forth under the captions Compensation of Executive Officers and Director
Compensation in our Proxy Statement for the 2004 Annual Meeting of Shareholders.



Item 12.Security Ownership of Certain Beneficial Owners and Management



Information concerning security ownership of certain beneficial owners and management is set forth under the captions Principal Ownership of Vitesse
Semiconductor Corporation Common Stock and Equity Compensation Plan Information in our Proxy Statement for the 2004 Annual Meeting of Shareholders.



Item 13.Certain Relationships and Related Transactions



None.



Item 14.Principal Accounting Fees and Services



Information concerning principal accounting fees and services is set forth under the captions Audit Fees, Financial Information Systems
Design and Implementation Fees and All Other Fees in our Proxy Statement for the 2004 Annual Meeting of Shareholders.



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PART IV



Item 15.Exhibits, Financial Statement Schedules and Reports on Form 8-K



|(a)                                                                                  |  | The following documents are filed as part of this report:                                                                                                                                              |  |     
|------------------------------------------------------------------------------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----
|                                                                                     |  |                                                                                                                                                                                                       
|                                                                                     |  |                                                                                                                                                                                                        |  | Page
|1.                                                                                   |  | Financial Statements:                                                                                                                                                                                  |  |     
|                                                                                     |  |                                                                                                                                                                                                       
|                                                                                     |  | Independent Auditors Report                                                                                                                                                                           |  | 37  
|                                                                                     |  |                                                                                                                                                                                                       
|                                                                                     |  | Consolidated Balance Sheets as of September 30, 2003 and 2002                                                                                                                                          |  | 38  
|                                                                                     |  |                                                                                                                                                                                                       
|                                                                                     |  | Consolidated Statements of Operations for the years ended September 30, 2003, 2002 and 2001                                                                                                            |  | 39  
|                                                                                     |  |                                                                                                                                                                                                       
|                                                                                     |  | Consolidated Statements of Shareholders Equity and Comprehensive Loss for the years ended September 30, 2003, 2002 and
2001                                                                           |  | 40  
|                                                                                     |  |                                                                                                                                                                                                       
|                                                                                     |  | Consolidated Statements of Cash Flows for the years ended September 30, 2003, 2002 and 2001                                                                                                            |  | 41  
|                                                                                     |  |                                                                                                                                                                                                       
|                                                                                     |  | Notes to Consolidated Financial Statements                                                                                                                                                             |  | 42  
|                                                                                     |  |                                                                                                                                                                                                       
|2.                                                                                   |  | Consolidated Financial Statement Schedule:                                                                                                                                                             |  |     
|                                                                                     |  |                                                                                                                                                                                                       
|                                                                                     |  | For the three fiscal years ended September 30, 2003IIValuation and Qualifying Accounts                                                                                                               |  | 66  
|                                                                                     | 
|All other schedules are omitted because they are not applicable or are not required. |  |                                                                                                                                                                                                       
|                                                                                     |  |                                                                                                                                                                                                       
|3.                                                                                   |  | Exhibits:                                                                                                                                                                                              |  |     
|                                                                                     |  |                                                                                                                                                                                                       
|                                                                                     |  | See Item 15(c) below.                                                                                                                                                                                  |  |     
|                                                                                     |  |                                                                                                                                                                                                       
|(b)                                                                                  |  | Reports on Form 8-K                                                                                                                                                                                    |  |     
|                                                                                     |  |                                                                                                                                                                                                       
|                                                                                     |  | On July 22, 2003 we furnished a report on Form 8-K under item 12 disclosing that we announced our financial results for the quarter ended June 30, 2003 and attaching the
corresponding press release. |  |     
|                                                                                     | 
|(c)                                                                                  |  | Exhibits.    The following Exhibits are filed as part of, or incorporated by reference into, this Report:                                                                                             



---

|3.1(2)  |  | Certificate of Incorporation of Registrant, as amended to date.                                                                                                             
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        | 
|3.2(1)  |  | Bylaws of Registrant as amended to date.                                                                                                                                    
|        | 
|4.1(1)  |  | Specimen of Companys Common Stock Certificate.                                                                                                                             
|        | 
|4.2(2)  |  | Indenture, dated as of March 13, 2000, between the Company and State Street Bank and Trust Company of California, N.A., as
Trustee.                                         
|        | 
|4.3(2)  |  | Resale Registration Rights Agreement, dated as of March 13, 2000, between the Company and Lehman Brothers Inc., Goldman, Sachs
& Co. and Prudential Securities Incorporated.
|        | 
|10.1(1) |  | 1989 Stock Option Plan.                                                                                                                                                     
|        | 
|10.2(1) |  | 1991 Stock Option Plan.                                                                                                                                                     
|        | 
|10.3(1) |  | 1991 Employee Stock Purchase Plan.                                                                                                                                          
|        | 
|10.4(1) |  | 1991 Directors Stock Option Plan.                                                                                                                                          



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|        | 
|------- | 
|10.5(3) | 
|        | 
|23.1    | 
|        | 
|31.1    | 
|        | 
|31.2    | 
|        | 
|32.1    | 

---

|(1) |  | Incorporated by reference from the Companys registration statement on Form S-1 (File no. 33-43548), effective December 10, 1991.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Incorporated by reference from the Companys quarterly report on Form 10-Q for the period ended March 31, 2000.
|--- |  | ---------------------------------------------------------------------------------------------------------------

|(3) |  | Incorporated by reference from the Companys registration statement on Form S-8 (File no. 333-55466), effective February 13, 2001.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------



| | (d) |  | Financial Statement Schedules
| | --- |  | -----------------------------



See Item 15(a) above.



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VITESSE SEMICONDUCTOR CORPORATION



SCHEDULE IIValuation and Qualifying Accounts

Years ended September 30, 2003, 2002 and 2001

(in thousands)



|                                   |  | Balance atBeginningof Period |        | Charged toCosts andExpenses |   | Deductions/Write-offs |  | Balance at End ofPeriod
|---------------------------------- |  | ---------------------------- | ------ | --------------------------- | - | --------------------- |  | -----------------------
|Year ended September 30, 2003      |  |                              |        |                             |   |                       |  |                        
|Deducted from Inventories:         |  |                              |        |                             |   |                       |  |                        
|Reserve for obsolescence           |  | $                            | 8,588  |                             | $ |                      |  | $                      
|Deducted from Accounts Receivable: |  |                              |        |                             |   |                       |  |                        
|Allowance for doubtful accounts    |  |                              | 9,288  |                             |   | 1,922                 |  |                        
|Allowance for sales returns        |  |                              | 5,500  |                             |   | 300                   |  |                        
|Year ended September 30, 2002      |  |                              |        |                             |   |                       |  |                        
|Deducted from Inventories:         |  |                              |        |                             |   |                       |  |                        
|Reserve for obsolescence           |  | $                            | 8,588  |                             | $ | 30,533                |  | $                      
|Deducted from Accounts Receivable: |  |                              |        |                             |   |                       |  |                        
|Allowance for doubtful accounts    |  |                              | 13,697 |                             |   | 14,299                |  |                        
|Allowance for sales returns        |  |                              | 5,862  |                             |   | 5,035                 |  |                        
|Year ended September 30, 2001      |  |                              |        |                             |   |                       |  |                        
|Deducted from Inventories:         |  |                              |        |                             |   |                       |  |                        
|Reserve for obsolescence           |  | $                            | 12,657 |                             | $ | 46,531                |  | $                      
|Deducted from Accounts Receivable: |  |                              |        |                             |   |                       |  |                        
|Allowance for doubtful accounts    |  |                              | 6,901  |                             |   | 9,871                 |  |                        
|Allowance for sales returns        |  |                              | 3,224  |                             |   | 10,004                |  |                        



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SIGNATURES



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



VITESSE SEMICONDUCTOR CORPORATIONBy:

/s/    EUGENE F.
HOVANECEugene F. Hovanec Vice President, Finance & Chief Financial Officer




|Date: |  | December 16, 2003
|----- |  | -----------------



Pursuant to the requirements of the Securities 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 dates indicated.



|Signature                                   |  | Title                                                                                                              |  | Date             
|------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------ |  | -----------------
|                                            |  |                                                                                                                   
|/s/    LOUIS R.
TOMASETTALouis R.
Tomasetta |  | President and Chief Executive Officer (Principal Executive Officer)                                                |  | December 16, 2003
|                                            |  |                                                                                                                   
|/s/    EUGENE F.
HOVANECEugene F.
Hovanec   |  | Vice President, Finance and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |  | December 16, 2003
|                                            |  |                                                                                                                   
|/s/    VINCENT CHANVincent Chan             |  | Director                                                                                                           |  | December 16, 2003
|                                            |  |                                                                                                                   
|/s/    JAMES A. COLEJames A. Cole           |  | Director                                                                                                           |  | December 16, 2003
|                                            |  |                                                                                                                   
|/s/    ALEX DALYAlex Daly                   |  | Director                                                                                                           |  | December 16, 2003
|                                            |  |                                                                                                                   
|/s/    JOHN C. LEWISJohn C. Lewis           |  | Chairman of the Board of Directors                                                                                 |  | December 16, 2003



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CERTIFICATIONS



Certification of Chief
Executive Officer



I, Louis Tomasetta, certify that:



| | 1. |  | I have reviewed this annual report on Form 10-K of Vitesse Semiconductor Corporation (the registrant);
| | -- |  | --------------------------------------------------------------------------------------------------------



| | 2. |  | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) for the registrant and have:
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such evaluation; and
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants fourth fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants
auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions):
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and report financial information; and
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the Companys internal control over financial reporting.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date: December 16, 2003



|/s/    Louis R.
Tomasetta                                          
|-------------------------------------------------------------------
|President and Chief Executive Officer (Principal Executive Officer)



70



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##### Table of Contents

Certification of Chief Financial Officer



I, Eugene Hovanec, certify that:



| | 1. |  | I have reviewed this annual report on Form 10-K of Vitesse Semiconductor Corporation (the registrant);
| | -- |  | --------------------------------------------------------------------------------------------------------



| | 2. |  | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) for the registrant and have:
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such evaluation; and
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants fourth fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants
auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions):
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and report financial information; and
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the Companys internal control over financial reporting.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date: December 16, 2003



|/s/    Eugene F.
Hovanec                                                                                          
|------------------------------------------------------------------------------------------------------------------
|Vice President, Finance and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)



71



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##### Table of Contents

Certification Pursuant to 18 U.S.C. § 1350



The certification set forth below is being submitted in connection with this annual report on Form 10-K (the
report) for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the Exchange Act) and Section 1350 of Chapter 63 of Title 18 of the United States Code.



Louis R. Tomasetta, the Chief Executive Officer and Eugene F. Hovanec, the
Chief Financial Officer of Vitesse Semiconductor Corporation, each certifies that, to the best of his knowledge:



| | 1. |  | the report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and
| | -- |  | --------------------------------------------------------------------------------------------------



| | 2. |  | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Vitesse Semiconductor Corporation.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date: December 16, 2003



|/s/    Louis R.
Tomasetta                                                                                         
|------------------------------------------------------------------------------------------------------------------
|President and Chief Executive Officer (Principal Executive Officer)                                               
|                                                                                                                  
|/s/    Eugene F.
Hovanec                                                                                          
|Vice President, Finance and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)



72