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power requirements. To address these challenges, communications service providers (i.e., Carriers) and Enterprises have begun to

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deploy equipment that is capable of more efficiently handling and transporting the various types of data-based traffic required by these new services. TheyCommunication providers are also upgrading their infrastructure to serve the variety of unique communications standards and protocols that deliver and process data. Increasingly, these new applications and services are created and delivered using Ethernet and Internet Protocol networking technologies.

Carrier Networking

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

        Since the 1990's, the Synchronous Optical Network ("SONET/SDH") has been the standard network transport protocol for high-speed transmission of communication over optical fiberCarrier Networks throughout the world. Originally developed for the voice network prior to the advent of the Internet, SONET/SDH networks are limited in their ability to provide low-cost, flexible transport of data-based services such as Internet traffic and video. With exponential increases in data traffic, "Internet Protocol" has become the dominant traffic over all communications networks. As a result, Carriers, who have a large installed base of equipment that uses SONET technology, must find ways to evolve this installed base to more efficiently deal with Ethernet traffic.

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

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

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

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and moregrowing data and video. The growth of these wireless networks, and the wired backhaul networks that interconnect them, is expected to continue at double digitdouble-digit rates into the foreseeable future. Increasingly, allAll these networks willare expected to migrate to using EthernetInternet Protocol as the common communication protocol.protocol and Carrier Ethernet as the underlying networking technology.

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Enterprise Networking

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

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

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

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

        Another important trend is the emergenceadvent of cloud computing.computing provides another important growth trend. Although in its infancy, cloud computing will increasingly move Enterprise applications and data into secure hosted applications and data "in the cloud," where itthey can be securely accessed from multiple locations, multiple devices, and multiple technologies. Cloud computing will increase the need for Enterprises and datacenters to be abledata centers to provide high-bandwidth, high reliabilityhigh-reliability networks to interconnect elements of "the cloud.the "cloud." We expectThe Company expects that thisthe need to interconnect will lead to a unification of Enterprise and Carrier Networking requirements, centered aroundon the concept of "Converged Ethernet.Ethernet,"

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Storage Networking

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

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

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

Increasing Demands for Next-Generation Networking"Next-Generation Networking" Integrated Circuits

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

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Growing demand for higher-bandwidth, higher-capacity networks.

A dramatic shift towards "packet networking" from "circuit networking", requiring deployment of new systems based on Ethernet technologies.The emergence ofCompany believes the requirements to deploy networks to service new data-intensive applications such as video-on-demand ("VoD"), IPTV, and wireless services including data and video, will spur demand for communications network systems based primarily on Ethernet technologies. This demand will provide high-growth opportunities for silicon solutions that address these new systems developed with Carrier Ethernet and Converged Ethernet technologies.



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Growing demand for higher-bandwidth, higher-capacity networks.  The emergence of applications such as VoD, IPTV, next-generation wireless services including data and video, as well as data



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centers and cloud computing are expected to create substantial growth in the volume of traffic growthpassing through the communications infrastructure. This is expected togrowth will drive the deployment of additional equipment to meet capacity needs as well as new networks with new capabilities to simplify and reduce costs. This deployment of new equipment involves increasing the data rate at which signals are transmitted over fiber connections, backplanes, connectors, and cables. The Company believes that this growth will result in an increased demand for its products.

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A dramatic shift towards Ethernet for all types of networking.

The requirements to deploy networks to service these new data intensive applications will spur demand for systems that augment and evolve, rather than replace, existing equipment in the infrastructure. These networks will move from systems based on a variety of protocols to systems based primarily on Ethernet technologies. This will provide high-growth opportunities for silicon solutions that address these new systems based on so-called Carrier Ethernet and Converged Ethernet technologies. We expect these trends to occur in Carrier, Enterprise, and Storage Networking.

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Increasing complexity of integrated circuits ("ICs")ICs for communications applications and a related trend for OEMs to purchase rather than manufacture these ICs.

We believe  The Company believes OEMs are increasingly focusing their efforts on providing superior software and services as a means of differentiating themselves from their competition. This increased focus, in conjunction with rising costs of developing custom Application Specific Integrated Circuits ("ASIC") and maintaining the associated component design teams, has led OEMs to work with companies such as Vitesse to develop merchant applications specific standard productsApplications Specific Standard Products ("ASSPs") that can be flexibly used within their systems. As a result of this trend away from customer-specificcustomer specific ASIC developments, we believe that the availableCompany believes the market for ourits products will increase in the future.




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Service providers and Enterprises are driven to provide more bandwidth, (i.e., more data at higher speeds). To do this, they must increase the speed at which their networks operate. This trend is seen across nearly all communication markets that we address, in particular:

The majority of the WANs are deployed at speeds of 10 Gbps. New technology is being developed to increase these speeds to 40 Gbps and even 100 Gbps. These higher speeds must be deployable over existing installed fiber, and also must be more cost effective to deploy than 10 Gbps networks in order to reduce the cost-per-Gbps. The industry is focusing on Ethernet over Optical Transport Network ("OTN") and Forward Error Correction ("FEC") coding as the WAN transport technology of choice for these higher speeds.

There are also increased traffic demands in the data center driven by rapidly increasing Internet traffic, the proliferation of web-based personal and business applications, and the requirements for geographically redundant data centers to support business continuity and disaster recovery ("BC/DR"). These data center networks are increasingly based on Ethernet technology, and will transition from 1 Gbps to 10 Gbps, and then to 40 Gbps in the near future. We expect these trends to drive additional business for our Ethernet Media Access Controllers ("MACs"), Switches and PHYs.

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Present-dayThe transition of Local Area Networks from "Fast Ethernet" to "Gigabit Ethernet."  LANs now use the Ethernet transmission protocol operating at speeds of 10 Mbps or 100 Mbps (Fast Ethernet). Only recently has Gigabit Ethernet started to appear on the desktop. In order to support the migration of desktop computers to these higher data rates, LAN backbones and servers are increasingly employingdeploying the Gigabit Ethernet and 10 Gigabit Ethernet standards.



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Our customers often face the task of upgrading systems to higher capacity to address higher bandwidth demands. This involves increasing the data rate at which signals are transmitted over existing legacy backplanes, connectors, and cables. We believe that this will result in a significant increase in demand for our Ethernet as well as Electronic Dispersion Compensation ("EDC") physical layer and signal integrity products.

Strategy

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

Target Growing Markets

        We targetThe Company targets high-growth areas in the communications infrastructure market in both Carrier and Enterprise Networks to provide solutions that adhere tofor the major networking protocols andthat perform common networking functions required by the most widely deployed networking equipment. Within the networking market, the Company is addressing the two largest and fastest growing segments—Carrier Networking and Enterprise Networking.

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

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




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consistent with our vision that Optical Transport will evolve to Packet and OTN/FEC Processing over time, leading to significant synergies with our Carrier Ethernet Packet Processing as well as OTN/FEC Processing Intellectual Property and expertise. We expect this market to grow rapidly as a consequence of the increased bandwidth being generated from new wired and wireless applications being deployed to customers, as well as the emerging trend towardstoward Enterprise cloud computing that will drive significantly more bandwidth into MANsCarrier Networks. Based on industry market projections and WANs.the Company's internal market growth estimates, the Company expects the market that can be addressed, with its products in this segment, to increase at an annual rate of approximately 30%, approaching $500 million in 2014 as the Company continues to deploy new products for this market.

        We are targeting SME/SMB Local Area Networks with our highly integrated, low-powerThe Enterprise Networking market is driven by the speed transition to Gigabit PHYsEthernet and Switches. In large Enterprise and datacenter networks, we are targeting the fast-growing 10-Gigabit10 Gigabit Ethernet, market with our 10Gconvergence of data center protocols to Ethernet, MACs, PHYs and SFP+ LRM-compliant EDC devices, as well as government initiatives worldwide to reduce power consumption in networking equipment. Based on industry market projections and the Company's internal market growth estimates, the Company expects the market that can be addressed, with our signal integrity products. Theseits products enable customers to upgrade their system interconnect and backplane speeds from 1-3 Gbps to 6-11 Gbps to increasein this segment, will approach $400 million in 2014. The products the capacity of large datacenter switches, blade servers, and storage systems. These markets are expected to grow faster than the overall market as ever larger datacenters are being built by large EnterprisesCompany introduced in 2010 as well as content and search providers. We expect thisthe devices currently in development address substantially larger segments of the Enterprise Networking market to benefit from future cloud computing applications.

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




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Focus and Specialization

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

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Carrier Networks—we specializethe Company specializes in transitioning access, metro, and core Carrier networksNetworks to deliver new Ethernet-based services over a variety of network transport technologies such as native Carrier Ethernet, Ethernet over SONET/SDH,EoS, as well as Ethernet over Wavelength division multiplex ("WDM")/Ethernet-over-Wavelength Division Multiplex/Optical transport network ("OTN"). We are,Transport Network and Packet Transport Networks. The Company is therefore uniquelywell positioned to enable Carrier OEMs and their service provider customers to deliver Ethernet-based services globally over all their networks, thus preserving their investment in their installed base.base;



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Enterprise and Data Center Networks—we specializethe Company specializes in supporting the transition from 10/100-MegabitFast Ethernet desktops and network attachments to Gigabit Ethernet and 10-Gigabit10 Gigabit Ethernet (and higher speeds in data centers) with highly integrated, low-power designs. WeThe Company also specializespecializes in supporting the convergence of multiple Enterprise networksNetworks for data, voice, storage, and video onto a common, Ethernet-based networking infrastructure.Networking infrastructure; and



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High-speed Physical Layer communication and Signal Integrity—Connectivity Solutions—in both the Carrier and Enterprise markets, and in some closely adjacent markets, we developthe Company develops products to address high-speed signaling issues arising from ever-increasing signal speeds over copper traces on boards, across connectors and backplanes, copper cables, as well as multi-mode and single modeoptical fiber. These signal integrity issues are expected to gain more importance as Carrier, as well as Enterprise and data center networking equipment manufacturers scale line card and systems capacity to higher speeds.

Leverage Technology Leadership into New Applications

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




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problems and gain market share through ourthe customers' adoption of ourits products. OurThe Company's advanced technology and intellectual property ("IP") developments are focused on:

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Advanced packet processing technologies for Ethernet networking:    We haveNetworking:    the Company has created unique packet processingpacket-processing technologies for our Ethernet MACs and Switches that will become increasingly importantare critical as networks become dominated by Ethernet.Ethernet-based data and video traffic. These technologies allow carriersenable Carriers to build packet networks based on Ethernet networks that have the same or better Quality-of-Service ("QoS"),quality of service, availability, manageability, security, and network timing characteristics as their current networks that are based on legacy technologies.technologies;



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Signal Integrity:    We provide world-class signal integrity solutions for a broad variety of applications from 100Mbps to over 10Gbps, including latest-generation EDC that enables transmission of very-high speed signals over fiber, copper cables"Green Networking" and backplanes. These include products for 10 Gbps SFP+ Enterprise and data center applications, 10 Gbps single-mode XFP applications for WDM networks, as well as for backplane applications for 2/4/8Gbps FibreChannel, 10Gbps InfiniBand, and 10Gbps KR Ethernet. We are also leveraging our patented V-Scope™ waveform viewing technology into most of our signal integrity products.



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Lowest-power PHY technology:    We havelow power:    the Company has been at the forefront of the Energy Efficient Ethernet standardization effort and have been ahead ofis leading the industry with pre-standardin the application of power-saving techniques for networking. The Company was the first to introduce low-power EcoEthernet™ Copper PHY technology, also known as:as ActiPHY™ and PerfectReach™. Our next-generation 65nm Copper PHYs will be fully standards-compliant with the 802.3az Energy-Efficient Ethernet standard and set new benchmarks for power and performance. We apply the same low-power benchmarks to all our optical PHYs and SerDes.;



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Forward Error Correction (FEC) Codes:    We have developed industry-leading FEC codes that will allow longer distance transmission with better quality in Packet Optical Transport systems. These advanced codes and technologies are becoming more important asConnectivity Solutions:    the speedsCompany provides world-class connectivity solutions for a broad variety of transmission in networks increaseapplications from today's100 Mbps to 10 Gbps to tomorrow's 40 Gbps and 100 Gbps.above. The Company's high-performance, mixed-signal, CMOS technology provides superior signaling capabilities at the lowest power and cost; and



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InIntellectual Property Licensing:    in several markets, we arethe Company is beginning to leverage these key technology advantages and IPtechnology cores into licensing opportunities with third parties. In areas such as Gigabit Ethernet Copper PHYs, high-speed signaling,parties for use in adjacent or similar markets to Carrier and signal integrity, our basic mixed-signal complementary metal-oxide-semiconductor ("CMOS") technology has application in many markets other than those in which we participate. We anticipate being able to exploit our many years of technology development by providing this technology to systems suppliers and other non-competing semiconductor suppliers in the form of intellectual property via licensing arrangements. We believe we are in a unique position to supply such IP to other IC vendors as we are either the technology or low-power leader for such IP, or such IP is only available from IC vendorsEnterprise Networking equipment that are competing in the same markets as the companies looking for such IP. As a smaller, more focused and specialized IC vendor, we are less likely todo not directly compete with those companies.the Company's customer base.




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

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




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A key element of ourthe Company's strategy is to work closely with ourits customers' product managers and systems design teams, as well as business unit and corporate management teams. We believeThe Company believes that these relationships enable us to better understand ourunderstanding of its customers' business and technology needs and enable usthe Company to develop solutions to problems that result inaddress the customers' design winsissues and provide customers' with differentiated feature sets for existing and newtheir systems.

Engage the Right People for Success

        CloseThe Company has given close attention has been given to ensuring that the people within our organization to ensure we haveCompany has the right people in its organization for success and that ourits costs and resources are aligned with ourits opportunities. At ourits core, we arethe Company is a technology company. OurCompany. The Company's technology comes from the minds of ourits employees. We endeavorThe Company endeavors to hire the best and brightest and give them an environment fromin which they can be successful. WeThe Company has have also made important changesadded new members to ourits Board membership and are taking steps to improve our Corporate Governance practices.of Directors ("Board".)

ProductsProduct Overview

        We developThe Company has developed and manufacturemanufactured a wide variety of new products that are primarily marketed to Carrier and Enterprise communication networkingNetworking and data center infrastructure OEMs. While many of ourthe Company's products are targeted at specific markets, some of them find applications in multiple types of communications equipment across all of ourits focus markets. OurIn fiscal year 2010 the Company achieved an ambitious goal of introducing 30 new products to market. A list of selected new product introductions in fiscal year 2010 can be found on the Company's website at www.vitesse.com. The information on the Company's website is not incorporated by reference into and is not made a part of this report. The Company's products fall into the following broad categories.categories:

Transport Processing Product Line

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

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

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




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

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




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TSI switches in ourits product portfolio that provide aggregate bandwidth up to 1.5 Tbps. OurThe Company's switches provide higher bandwidth and lower power than competitive solutions. WeThe Company also provideprovides switch fabric chip sets for a variety of packet backplane applications. These Switch Fabricswitch fabric solutions allow total system interface bandwidths from 20 GbpsGigabits Per Second ("Gbps") to 160 Gbps and higher.

Ethernet Switches, MACs, and TransceiversSwitching Product Line

        OurThe Company's Ethernet switch product line addresses Gigabit Ethernet applications in Carrier and Enterprise markets. This product line consists of Ethernet switches, Ethernet Media Access Controllers ("MACS"), and Ethernet transceivers ("Copper PHYs").

        In Enterprise applications, the Enterprise LAN. This family of triple-speed (10/100/1000 Mbps) Layer-2 and Layer-3 switches are available in port counts ranging from 5 to 48. TheseCompany's Ethernet switches are targeted at desktop, workgroup, and LAN infrastructure boxes and enable these systems to migrate to Gigabit Ethernet speeds in a cost-effective manner. In 2005, we started shipping 5-port and 8-port integrated ICs that combine the transceiver and switch functions. We haveThe Company has shipped over 100175 million Gigabit Ethernet ports to date. Ourdate into Enterprise applications. The Company's Ethernet switch products provide a high-level of integration, leading to a significant reduction in part count and reduced BOMmaterial cost for ourits customers. Switches and routers with integrated Ethernet transceivers also provide all the energy-efficient ActiPHY™ and PerfectReach™ features we introduced on our standalone Ethernet transceivers. In 2008, wethe Company began to see applications for ourits Ethernet switch product line within Carrier Networking applications. Our latest-generation ofThe Company's latest generation switches for "stackable" applications incorporates a variety of functions that enable improved QoS and security functions within these types of networks. We have targetedtarget these applications for our next-generation products that will includewith additional features to enable true Carrier Ethernet networking. We expect to seeNetworking. The Company sees a broad range of applications in Customer Premisecustomer premise equipment, ("CPE"), Access Networkaccess network equipment, wireless base station, wireless backhaul equipment, and Metro Networkmetro network equipment.

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

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

        Ourintegration. The Company's SimpliPHY™ Ethernet transceivers provide industry-leading low -power operation generally (20%-30% lower power operation. We havethan any of the Company's competitors). This technology has been recognized with a Frost and Sullivan industry award. The Company has recently introduced furtheradditional power savings-saving features such as ActiPHY™ and PerfectReach™ that provide energy savings of up to 80% in any network infrastructure device or CPE. This technology has been recognized with a Frost and Sullivan industry award.. These power savingpower-saving features are also included in ourthe Company's E-StaX™ and SparX™ and G-RocX™ switch and router products with integrated Ethernet transceivers. For timing-sensitive applications, such as Wireless Aggregation networks, we also offer Ethernet transceivers with advanced synchronization capabilities.




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Physical Media Devices, Physical Layer Devices, and Signal Integrity DevicesConnectivity Product Line

        The Company's connectivity product line includes mixed-signal physical layer devices for connection of systems via optical fiber, copper cable, or backplanes. These devices are deployed across a very wide range of application and markets. Connectivity product lines include Physical Media DeviceDevices ("PMD"PMDs") serves as the actual physical connection, Physical Layer Devices ("PHYs"), crosspoint switches, and signal integrity devices.

        A PMD is a mixed signal device that connects an electrical signal to the fiber optic cable by converting the incomingan optical signal into an electric signal. Similarly, for data flowing in the opposite direction, the PMD converts electric signals into optical signals. We offercomponent. The Company offers laser drivers, trans-impedancetransimpedance amplifiers and post-amplifiers operating at speeds ranging from 1.25 Gbps to 12.514 Gbps. These products are currently being used in a variety of




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applications from Carrier Long-haullong-haul and metro networks to Enterprise Gigabit Ethernet and 10-Gigabit10 Gigabit Ethernet networks including Storagestorage networks and systems. WeThe Company also developdevelops products for application in Passive Optical Networks ("PON") that enable Fiber-to-the-Home ("FTTH") deployments. Typically, we sellthe Company sells these products to optical module manufacturers who service the equipment manufacturers, or directly to OEMs who build discrete board-based solutions.

        The Physical Layer Device ("PHY")A PHY converts high-speed analog signals from the PMD to low-speed digital signals. It includes the high-speed analog functions of clocksignals in fiber optic, copper cable, and data recovery ("CDR"), multiplexing ("MUX"), and demultiplexing ("DMUX").backplane applications. The CDR recovers the clock and retimes the signal to synchronize it with the overall system clock, while the MUX/DMUX converts low-speed parallel data into higher speed serial data and vice versa. We haveCompany has incorporated many industry leadingindustry-leading features into theseits PHY products such as VScope™, an integrated equalization waveform viewing VScope™technology and FlexEQ™, an adaptive equalization and EDC.Electronic Dispersion Compensation technology. These technologies dramatically improve signal integrity transmission and reception for applications at 6 Gbps and above, particularly for protocols such as 10 Gbps Ethernet and 8 Gbps Fibre Channel systems. We develop ourabove. The Company develops its products in low-cost CMOS and high-performance Silicon Germanium ("SiGe") silicon process technologies depending on the technology requirements of the product and application. We offerThe Company offers a broad line of PHY products for the SONET/SDH, Fibre Channel, and Ethernet markets at speeds ranging from 155 Mbps to 12.514 Gbps.

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

        Our Crosspoint SwitchThe Company's crosspoint switch family provides asynchronous, unblocked switching matrices from 4x4 to 144x144 matrices with industry-leading performance up to 11 Gbps. This range of speeds and package form factors enable a wide variety of solutions for SONET/SDH switching, blade servers and Gigabit Ethernet, Fibre Channels,data center switches, high-density routers, switching, and HDTV video equipment. Once a niche technology for very high-speed switching systems, crosspoint switches are becoming more main stream as systems continue to increase in speed and density. Crosspoint switches now have very broad applications across systems in Carrier and Enterprise Networking as well as storage and HDTV applications.

        Our RepeaterThe Company provides a broad portfolio of devices for generic signal integrity applications. These devices include repeater and Retimer Signal Conditionerre-timer ICs that support data rates from 155 Mbps to 11.314 Gbps for applications,protocols, including SONET/SDH, Gigabit Ethernet, Fibre Channel, and Fast Ethernet, with per IC channel counts ranging from two to 12.

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

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




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

        In 2010, the Company achieved its goal of introducing 30 new products:

Carrier Ethernet Switch Engines and MACs for Carrier metro aggregation, wired and wireless access, and wireless backhaul applications:

•

Jaguar Switch Engine Family:  VSC7460/7462/7464/7466. This completely new high-density switch engine architecture brings full Carrier Ethernet features such as network timing, management and trafficking traditionally used in older circuit-based TDM telecom networks to modern packet-based Ethernet networks.



•

Caracal Switch Engine Family:  VSC7428/7429. A smaller, more compact version of the Jaguar Carrier Ethernet Switch family, this family offers the highest level of switch integration in the industry. The same rich Carrier Ethernet feature set is targeted for smaller, more cost conscious equipment such as mobile backhaul, access routers and PON which need migration paths from legacy T1/E1 PDH protocols to packet-based protocols of emerging 3G and 4G wireless networks.

Enterprise Ethernet Switches for SME/SMB network applications:

•

SparX-III Switch Engine Family:  VSC7420/7421/7422/7424/7425/7426/7427. This new Layer 2 Enterprise switch engine architecture provides the industry's only 2-chip implementation of a 25-port Gigabit Ethernet switch. It includes Vitesse's EcoEthernet™ 2.0 power management architecture for green energy efficiency to meet IEEE802.3az standards. Its low latency




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characteristics improve network performance in time sensitive applications such as gaming, IPTV, and VoIP.

EcoEthernet™ 2.0 Energy Efficient Ethernet (EEE) Optical and Copper PHYs:

•

SimpliPHY Transceivers:  VSC851/VSC86622. The Company again set the standard for technology in Gigabit Ethernet Copper PHYs with the introduction of the industry's first and only 12-port device. The newest members of this family offer unprecedented energy efficiency via the Company's unique EcoEthernet™ 2.0 power management architecture. Breakthrough power dissipation of 370 mW per port for 1000 Base-T copper and 150mW per port for fiber are achieved through the use such features as ActiPHY™, automatic link power down, and PerfectReach™, intelligent cable algorithm. These PHYs also meet IEEE802.3az specification for EEE idle power savings.



•

High-density, high-speed PHYs for 10G/40G/100G backplane, line card, optical fiber and copper cable:  VSC8486/VSC8238/VSC8247/VSC8248/VSC8484/VSC8488/VSC711. A complete family of single, dual, and quad channel transceivers and CDRs for 10 Gigabit Ethernet and above applications in SONET, Ethernet, and Fiber Channel systems. All include advanced signal integrity technologies such as VScope and FlexEQ.



•

High-speed, high-port count crosspoint switches with advanced FlexEQ technology:  VSC3340/VSC3340-31/VSC3316/VSC3308/VSC3144-11. These products add to a versatile product portfolio for high-performance switching applications. These products scale up to 144 ports with speeds up to 11Gbps.

Intellectual Property ("IP") Licensing

        In 2008, wethe Company began to leverage ourits substantial IP portfolio by entering into licensing opportunitieslicenses with third parties. We offerThe Company offers a variety of IPtechnology "cores" for license and design services in deep submicron, 130 nano-meter130-nanometer ("nm") and 65 nm,65-nm and 40-nm process technologies. To date, ourthe Company's primary focus has been ourits Gigabit Ethernet Coppercopper PHY and switch technologies as well as high-speed PHYscores. In 2010 the Company announced the availability of licenses for its enhanced forward error correction ("eFEC") technology for implementation in ASICs, Systems-On-a-Chip ("SOCs") and signal integrity "cores."Field Programmable Gate Arrays ("FPGAs".)

        We anticipateThe Company anticipates being able to exploit ourits many years of technology development, as well as its track record of high-quality products, by providinglicensing this technology to systems suppliers and other non-competing semiconductor suppliers in the form of intellectual property via licensing arrangements. We believe we aresuppliers. The Company believes it is in a unique position to supply such IPtechnology to other IC vendors as we are either the technology orCompany is an innovation and low-power leader for such IP, or such IPthis technology. Such technology is only available from IC vendors that are competing in the same markets as the companies looking for such IP. As a smaller, more focusedthe technology. In many cases the Company can also leverage these IP partnerships towards accelerating its own product developments and specialized IC vendor, we are less likely to compete with those companies.its process node roadmaps.

Customers

        We marketThe Company markets and sell oursells its semiconductor products directly to leading OEMs and original design manufacturers, ("ODMs") as well as through third-party electronic component distributors and manufacturing service providers. Sales to distributors accounted for approximately 63.0%50.4%, 76.0%63.0%, and 78.0%76.0% of ourthe Company's net revenues for fiscal years 2010, 2009, 2008, and 2007,2008, respectively. For fiscal 2009, distributorsyear 2010, distributor Nu Horizons Electronics Corp. (including its subsidiary, Titan Supply Chain Services), Weikeng Industrial Co. Ltd. and direct customer Huawei Technologies Co.accounted for 23.9% and 13.3%, Ltd.respectively, of the Company's net revenues. For fiscal year 2009, Nu Horizons Electronics and Huawei Technologies accounted for 36.0%, 7.5%, and 12.0%, respectively, of ourthe Company's net revenues. For fiscal year 2008, distributors Nu Horizons




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Electronics Corp. (including its subsidiary Titan Supply Chain Services), Weikeng Industrial Co. Ltd. and direct customer IBM accounted for 48.8%, 9.2% and 11.3%, respectively, of our net revenues. For fiscal 2007, distributors Nu Horizons Electronics, Corp. (including its subsidiary Titan Supply Chain Services), Weikeng Industrial Co. Ltd. and direct customer IBM accounted for 50.1%, 7.1% and 11.0%, respectively, of ourthe Company's net revenues.

        OurThe Company's top OEM customers for fiscal yearyears 2010, 2009 and 2008 were Alcatel-Lucent, IBM, HP,Cisco, Huawei Technologies, Co., Ltd.,Nokia Siemens, and ZTE Corporation. OurZTE. The Company's sales to these customers accounted for a total of approximately 32.4%, 37.5%, and 34.4% of ourthe Company's fiscal year 2010, 2009 and 2008 net revenues, respectively. Our top five OEM customers for fiscal year 2007 were EMC Corporation, IBM, HP, Huawei Technologies Co., Ltd., and ZTE Corporation. They accounted for approximately 31.0% of our net revenues for fiscal 2007.

        OurThe Company's customer base is widely dispersed geographically. Sales to customers located outside the United StatesNorth America have historically accounted for a significant percentage of ourthe Company's revenue. We anticipateThe Company anticipates that such sales will continue to be a significant percentage of ourthe Company's revenue. International sales constituted 59%60%, 59% and 49% and 48% of ourthe Company's net revenue in fiscal years 2010, 2009 2008 and 2007,2008, respectively. Note 10—8—Significant Customers, Concentration of Credit Risk, Segment Reporting, and Geographic Information in the accompanying financial statements provides more specific data on revenue by geographic area.

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




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Manufacturing and Operations

Wafer Fabrication

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

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

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

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

•

The lack of assured wafer supply and the potential for wafer shortages;



•

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



•

Unavailability of or delays in obtaining, access to key fabrication process technologies.

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




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

Probe, Assembly and Final Test

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

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

        Following assembly, packaged products go through "final test"testing" where they are tested in packaged form to ensure that they meet all functional, performance, and quality requirements. This step in the process determines the "final yield" thatand will include any yield loss in the assembly process. For final test, we support

        In 2010, the Company transitioned the majority of ourits probe and final testing facility from its internal operations in California to an outsource model with an offshore manufacturer. Today, the Company outsources the majority of its probe and test functions. The Company outsourced its test operations to reduce its manufacturing cycle times to better address customer requirements, to increase inventory turns, and to reduce its overall fixed cost of probe and testing. In most cases, the Company maintains the capability to probe and test products from our in-housein small volumes at its own facilities. The Company, and its subcontractors, utilize advanced automated testers as well as high-performance bench test facility in Camarillo, California.equipment.




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        As with wafer fabrication, worldwide assembly and test capacity is limited and we arethe Company is dependent on ourits suppliers to provide enough capacity in the correct mix to address all of ourits requirements. WeThe master service agreements with the Company's assembly subcontractors have provisions requiring them to maintain inventory stocks based on forecast, but do not have long-term agreements withinclude any of our assembly or test subcontractors, but instead we subcontract our manufacturing requirements on a purchase order basis.guaranteed capacity agreement clauses. As a result, it is possible that the capacity wethe Company will need in the future may not be available to us on acceptable terms, if at all, and wethe Company could experience shortages or assembly problems in the future. As part of the Company's test outsourcing agreement, Vitesse consigned testing equipment to its test subcontractor. The availability of assembly and test services from these subcontractors could be materially and adversely affected in the event a subcontractor experiences financial difficulties or suffers any damage to its facilities.

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

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

Engineering, Research and Development

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




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changes, and the product directions of ourits customers in an effort to provide forward-looking guidance to the development teams in the form of a "Product Roadmap." We workThe Company works closely with ourits customers to co-specify and/or co-develop products. We referThe Company refers to these early adoption customers as "alpha-site customers." Occasionally, ourthe Company's relationships with ourits alpha-site customers will involve non-recurring development charges or commitments to purchase products. OurThe Company's customers had no long-term purchase agreements with us atthe Company as of September 30, 2010, 2009 and 2008.

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

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

        OurThe Company's engineering, research and development expenses in fiscal years 2010, 2009, and 2008 and 2007 were $51.1 million, $45.7 million and $50.0 million, respectively. The Company has continued to invest a substantial portion of its revenue in research and $47.2 million, respectively.development. The Company has increased the percentage of its staff involved in R&D from 37% in 2008 to 42% in 2009 to 47% in 2010.




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Competition

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

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

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




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        In the Communications Networkingcommunications networking market, which includes ourthe Company's Carrier and Enterprise Networking markets, ourthe Company's competitors include Applied Micro Circuits, Corporation, Broadcom, Corporation, EZChip Semiconductor, Inc., Gennum, Corporation, LSI, Corporation, Marvell Technology Group, Ltd., Maxim Integrated Products, Inc., Mindspeed Technologies, Inc., PMC-Sierra, Inc., and TranSwitch Corporation.TranSwitch. In the Signal Integritysignal integrity market, ourthe Company's competitors include Gennum, Corporation, National Semiconductor Corporation, Mindspeed Technologies, Inc., Maxim Integrated Products, Inc.,National Semiconductor, Netlogic, Inc. and PMC-Sierra, Inc.PMC-Sierra. Over the next few years, we expectthe Company expects additional competitors, some of whom may have greater financial and other resources than the Company has, to enter the market with new products. In addition, we arethe Company is aware of smaller, privately-heldprivately held companies that focus on specific portions of oursubsets within the Company's range of products. These companies, individually and collectively, represent future competition for design wins and subsequent product sales.

Sales and Customer Support

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




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

Prior to the Sale of Product

•

Vitesse field applications engineers work with the customer in order to design Vitesse products into their systems.



•

Applicable Vitesse product capabilities and performance are demonstrated to the customer via evaluation boards and/or evaluation systems.



•

Product samples are provided to the customer and the Vitesse field applications engineers assist in bringing the product to a working level in the customer's lab.

Prior to the Order Being Placed

•

Extensive testing is performed in the customer's lab to determine the viability and performance of the Vitesse product in addressing the customer's needs.

        Once the order is placed, the customer is provided a standard product warranty, and no further sales support services are provided. The Company will generally warrant the Company's products against defects in materials and workmanship for a period of one year.

        OurThe Company's sales headquarters isare located in Camarillo, California. We haveThe Company has additional sales and field application support offices in the United States, Canada, China, Europe, Japan, India, and Taiwan.

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

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




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Intellectual Property

        We relyThe Company relies on a combination of patent, copyright, trademark, and trade secret protections, as well as confidentiality agreements and other methods, to protect ourits proprietary technologies and processes. For example, we enterthe Company enters into confidentiality agreements with ourits employees, consultants, and business partners, and controlcontrols access to and distribution of ourits proprietary information. As of September 30, 2009, we2010, the Company had 8789 U.S. patents, 1520 foreign patents, and 2718 patent applications pending in the U.S. We areThe Company is preparing to file several moreadditional patent applications.

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

•

Pay substantial damages;



•

Discontinue the use of infringing technology, which includes ceasing the manufacture, use, or sale of infringing products;



•

Expend significant resources to develop non-infringing technology; and



•

License technology, if available, from the party claiming infringement.

Cyclicality

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

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




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Backlog

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




Table        The Company's accounting policy uses the "sell-through" model. The "sell-through" model recognizes revenue only upon shipment of Contentsthe merchandise from its distributor to the final customer. Because the Company uses the "sell-through" methodology it may have variability in its revenue from quarter to quarter as customers have substantial flexibility to reschedule backlog with most of the Company's channel partners as part of the terms and conditions of sale.

Environmental Management

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

Employees

        As of September 30, 2009, weNovember 15, 2010, the Company had 476467 employees, including 238219 in engineering and R&D, with the balance of employees, listed in population size order, in operations, marketing and sales, and finance and administration. OurThe Company's ability to attract and retain qualified personnel is essential to ourits continued success. None of ourthe Company's employees areis represented by a collective bargaining agreement, nor have wehas it ever experienced a work stoppage. We believe ourThe Company believes its employee relations are good.

Available Information

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

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

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

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




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ITEM 1A.    RISK FACTORS


        You should carefully consider the risks described below before investing in ourthe Company's securities. We haveThe Company has organized ourits risks into the following categories:

•

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



•

Risks Relating to OurThe Company's Business; and



•

Risks Relating to our Current and Prior Financial Statements and Related Matters.an Investment in the Company.

Risks Relating to Our Liquidity and Financing Arrangements

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

        On October 30, 2009, we closed a debt restructuring transaction with our major creditors pursuant to which we issued approximately $50.0 million of new 8.0% Convertible Second Lien Debentures Due 2014 (the "2014 Notes"). The 2014 Notes are convertible into shares of common stock at a conversion price of $0.225 per share (equivalent to an initial conversion price of approximately 4,444 shares per $1,000 principal amount of 2014 Notes), subject to customary adjustments. Full conversion of the currently outstanding principal amount of the 2014 Notes would result in the issuance of approximately 222.2 million shares of common Stock. We currently do not have sufficient authorized shares to permit full conversion of the 2014 Notes. The holders of the 2014 Notes have the right to receive additional shares of common stock upon conversion in connection with certain change of control events, depending upon the timing of the change of control event and the trading price of our common stock at the time of such change of control event. The maximum number of additional shares of common stock issuable upon conversion following a change of control event would be approximately 125 million shares if the change of control event occurred on or about November 15, 2009 and our common stock price was $0.16 per share. We will be holding a special meeting of our shareholder on January 7, 2010 to approve an amendment to our certificate of incorporation to increase the number of authorized shares of common stock to permit the conversion of the 2014 Notes and to provide additional shares of common stock for general corporate purposes. Under the terms of the indenture governing the 2014 Notes, if we do not receive shareholder approval of an increase in our authorized shares of common stock on or prior to February 15, 2010, we will be obligated to pay $500,000 per month in additional interest until stockholder approval of this increase is obtained. If we are obligated to pay this additional interest, it will have a significant negative impact on our cash position and our results of operations. In addition, if we are unable to obtain this stockholder approval prior to February 15, 2011, the holders of the 2014 Notes will have the right to convert the 2014 Notes into cash. Should the holder(s) require the Company to repurchase the securities for cash, the repurchase price would be equal to (i) the as-converted amount of the shares that would have been issued to the holder had the increase in authorized shares occurred and the holder(s) had exercised its conversion option plus (ii) the Make-Whole Amount that would have been applicable if the holder(s) had exercised its conversion right or assuming the repurchase of all of the 2014 Notes, $58.0 million. We do not believe that we will have sufficient cash by February 15, 2011 to permit a cash conversion of the 2014 Notes. If we have insufficient cash to convert all of 2014 Notes submitted for conversion, we would be in default under the terms of the 2014 Notes, which would give the holders the of the 2014 the rights to accelerate the maturity of the Notes and could jeopardize our ability to continue as a going concern.




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

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

Risks Relating to OurCompany's Business

We haveThe Company has experienced losses from operations and we anticipateit anticipates future losses from operations.

        For the twelve monthsyear ended September 30, 2009,2010, the Company had a net loss of $194.0$20.1 million, primarily due to an impairment charge to fully write offinterest expense and a goodwill balanceloss on extinguishment of $191.4 million.debt. There can be no assurance that wethe Company will not have operating losses in future periods. Due to general economic conditions and slowdowns in purchases of networking equipment, it has become increasinglycontinues to be difficult for usthe Company to predict the purchasing activities of ourthe Company's customers. We expectThe Company expects that ourits operating results will fluctuate substantially in the future; we anticipatefuture and the Company anticipates future losses from operations. Future fluctuations in operating results may also be caused by a number of factors, many of which are outside our control. Additional factors that could affect our future operating results includethe Company's control, including, but not limited to, the following:

•

Thethe loss of major customers;



•

Variations, delaystiming, scheduling or cancellationscancellation of significant customer orders and shipments of our products;shipments;



•

Increasedincreased competition from current and future competitors;



•

Reductionsreductions in the selling prices of ourthe Company's products;



•

Significantsignificant changes in the type and mix of products being sold;



•

Delaysdelays in introducing new products;



•

Designdesign changes made by ourthe Company's customers;



•

Failurefailure by third-party foundries and other subcontractors to manufacture and ship products on time;



•

Changeschanges in third-party foundries' and other subcontractors' manufacturing capacity, utilization of their capacity and manufacturing yields;



•

Variationsvariations in product development costs;



•

Changeschanges in ourthe Company's or ourthe Company's customers' inventory levels;



•

Expenses or operational disruptions resulting from acquisitions; and



•

Salessales or closures of discontinued operations.

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

If the Company is unable to accurately predict its future sales and to appropriately budget for its expenses, its operating results could be materially and adversely affected.

        The rapidly changing natures of the markets in which the Company sells its products limit its ability to accurately forecast quarterly and annual sales. The Company's sales cycle is often lengthy, particularly for larger transactions. As a result, the Company devotes substantial time and effort and incurs significant upfront expense in its sales efforts without any assurance that its efforts will result in a customer purchase. Therefore, it often is difficult to predict when, or even if, the Company will make a sale with a potential customer. Additionally, the Company makes investment decisions and budgets its




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If we are unable to accurately predict our futureexpense levels based primarily on sales and to appropriately budget for our expenses, our operating results could suffer.

        The rapidly changing natureforecasts. Because a substantial portion of the markets in which we sell our products limit our ability to accurately forecast quarterly and annual sales. Additionally, because many of ourCompany's expenses are fixed in the short-termshort term or are incurred in advance of anticipated sales, wethe Company may not be able to decrease ourits expenses in a timely manner to offset any shortfall of sales. The Company's operating results will be adversely affected if revenues fall below its expectations in a particular quarter, which could cause the price of its common stock to decline significantly.

OurThe Company's quarterly revenues and operating results have fluctuated in the past and may fluctuate and be difficult to predict in the future, and such fluctuations could adversely affect its stock price.

        The Company's quarterly revenues and operating results have fluctuated significantly in the past and the Company believes they may continue to do so. As a result, you should not rely on the results of any one quarter or fiscal period as an indication of future performance and period-to-period comparisons of the Company's revenues and operating results may not be meaningful.

        Fluctuations in the Company's quarterly operating results could result in decreases in its stock price. The Company's quarterly operating results may fluctuate as a result of a variety of factors, including, among others, those described elsewhere in this section and those listed below, many of which are outside of the Company's control.

•

fluctuations in demand for network infrastructure equipment;



•

the timing of receipt, reduction or cancellation of significant orders;



•

fluctuations in the levels of component inventories held by the Company's customers and channel partners;



•

the gain or loss of significant customers;



•

market acceptance of the Company's products and the Company's customers' products;



•

the Company's ability to develop, introduce and market new products and technologies on a timely basis;



•

the availability and cost of products from the Company's suppliers;



•

new product and technology introductions by competitors;



•

intellectual property disputes; and



•

the timing and extent of product development costs.

The Company's operating results may be adversely impacted by worldwide politicaleconomic conditions and economic uncertainties and specific conditions in the markets we address,it addresses, including the cyclical nature of and volatility in the semiconductor industry. As a result, the market price of ourthe Company's common stock may decline.

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




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




The short life cycles of some of ourthe Company's products may leave usit with obsolete or excess inventories, which could have an adverse impact on ourits operating profit and net income.income results.

        The life cycles of some of ourthe Company's products depend heavily upon the life cycles of the end products for which ourits products are designed. Products with short life cycles require usthe Company to manage production and inventory levels closely. We cannot assure you thatWrite-offs of obsolete or excess inventories which may resultresulting from unanticipated changes in the estimated total demand for ourthe Company's products and/or the estimated life cycles of the end products for which ourits products are designed will not result in significant charges that willmay negatively affect ourits operating profit and net income.income results.




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

        OurA portion of the Company's sales is realized through independent resellers and distributors that are not under its control. These independent sales organizations generally represent product lines offered by several companies and thus could reduce their sales efforts applied to the Company's products or terminate their representation of the Company. The Company's revenues could be adversely affected if ourits relationships with resellers or distributors were to deteriorate or if the financial condition of theseone or more significant resellers or distributors were to decline.

        In addition, as ourthe Company's business grows, there may be an increased reliance on indirect channels of distribution. There can be no assurance that wethe Company will be successful in maintaining or expanding these indirect channels of distribution. This uncertainty could result in the loss of certain sales opportunities. Furthermore, the reliance on indirect channels of distribution may reduce visibility with respect to future business, thereby, making it more difficult to accurately forecast orders.

        The Company's accounting policy uses the "sell-through" model. The "sell-through" model recognizes revenue only upon shipment of the merchandise from its distributor to the final customer. Because the Company uses the "sell-through" methodology it may have variability in its revenue from quarter to quarter as customers have substantial flexibility to reschedule backlog with most of its channel partners as part of their terms and conditions of sale.

Order or shipment cancellations or deferrals could cause our revenue to decline or fluctuate.unplanned inventory growth resulting in excess inventory, which may adversely affect the Company's operating results.

        We sell,The Company sells, and expectexpects to continue selling, a significant number of products pursuant to purchase orders that customers may cancel or defer on short notice without incurring a significant penalty. Cancellations or deferrals could cause us to hold excess inventory, which could adversely affect our results of operations. If a customer cancels or defers product shipments or refuses to accept shipped products, wethe Company may incur unanticipated reductions or delays in recognizing revenue. If a customer does not payrevenues and be required to hold excess inventory. Holding excess inventory could reduce the Company's profit margins by reducing sales prices or requiring inventory write-downs or write-offs for products in a timely manner, we could incur significant charges against income, which could materially and adversely affect our revenue and cash flows.excess or obsolete inventory.

OurThe Company's international sales and operations subject usit to risks that could adversely affect our revenueits revenues and operating results.

        Sales to customers located outside North America account for a significant percentage of the U.S.Company's revenues. International sales constituted 60%, 59% and 49% of the Company's net revenue in fiscal year 2010, 2009 and 2008, respectively. Development and customer support operations located outside North America have historically accounted for a significant percentage of our revenue and we anticipate that such sales will continue to be a significant percentage of our revenue. International sales constituted 59%, 49%, and 48% of our net revenue in fiscal 2009, 2008, and 2007 respectively. Development and customer support operations located outside the U.S. have historically accounted for a significant percentage of ourCompany's operating expenses and we anticipateit anticipates that such operations will continue to be aaccount for significant percentage of ourits expenses. International sales and operations involve a variety of risks and uncertainties, including risks related to:

•

Reliancereliance on strategic alliance partners;




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•

Compliancecompliance with changing foreign regulatory requirements and tax laws;



•

Difficultiesdifficulties in staffing and managing foreign operations;



•

Reducedreduced protection for intellectual property rights in some countries;



•

Longerlonger payment cycles to collect accounts receivable in some countries;



•

Politicalpolitical and economic instability;



•

Economiceconomic downturns in international markets;



•

Currencycurrency risks;



•

Changingchanging restrictions imposed by U.S.United States export laws;laws, including increasing restrictions based on security concerns; and



•

Competitioncompetition from U.S.-based companies based in North America that have established significant international operations.

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




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If we arethe Company is unable to develop and introduce new products successfully or to achieve market acceptance of ourits new products, ourits revenues and operating incomeresults will be adversely affected.

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

•

Accuratelyaccurately predict market requirements and evolving industry standards;



•

Accuratelyaccurately define new products;



•

Completecomplete and introduce new products in a cost-effective and timely manner;



•

Qualifyqualify and obtain industry interoperability certification of ourthe Company's products and ourthe Company's customers' products into which ourthe Company's products will be incorporated;



•

Workwork with ourthe Company's wafer foundry, assembly, and probe and test subcontractors to achieve high manufacturing yields;



•

convince leading communications equipment manufacturers to select these products; and



•

Gaingain market acceptance of ourthe Company's products and ourthe Company's customers' products.

        If we arethe Company is not able to develop and introduce new products successfully ourand in a timely manner, its revenues and operating incomeresults will be materially and adversely affected. In particular, our revenue growth and profitability could be impacted by substantial delays in introducing new

Demand for the Company's products is dependent on demand for its customers' products. Our

        The Company's success will also depend on the ability of ourits customers to successfully develop new products and enhance existing products for the Carrier and Enterprise Networking and Storage markets. These markets may not develop in the manner or in the time periods that ourthe Company's customers anticipate. If they do not, or if ourthe Company's customers' products do not gain widespread acceptance in these markets, ourits revenues and operating incomeresults may be materially and adversely affected.




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Demand for ourthe Company's products may be negatively affected if ourits expectations regarding market demand for particular products are not accurate.

        Product introductions as well as plans for future roadmap products are based on ourthe Company's expectations regarding market demand and direction. If ourthe Company's expectations regarding market demand and direction are incorrect, the rate of development or acceptance of ourits current and next-generation solutions do not meet market demand and customer expectation, the sales of ourits legacy or current Carrier and Enterprise Networking and Storage Productsstorage products decline more rapidly than we anticipate,the Company anticipates, or if the rate of decline continues to exceed the rate of growth of ourits new products, it could negatively affect demand for our products, consolidatedits revenues and profitability.operating results could be materially and adversely affected.

        The Company's ability to accurately forecast customer demand may also be impaired by the delays inherent in its lengthy sales cycle. After the Company has developed and delivered a product to a customer, its customers need time to test, evaluate and adopt its products and additional time to begin production of the equipment that incorporates its products. Due to this lengthy cycle, the Company may experience significant delays from the time the Company increases its operating expenses and makes investments in inventory until the time that the Company generates revenues from these products. It is possible that the Company may never generate any revenues from these products after incurring such expenditures. Even if a customer selects the Company's product to incorporate into their equipment or devices, the Company has no assurance that the customer will ultimately bring its product to market or that such effort by the Company's customer will be successful. If the Company incurs significant research and development expenses, marketing expenses, and investments in inventory in the future that the Company is not able to recover its operating results could be adversely affected.

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

        We focus ourThe Company focuses its sales efforts on a small number of customers in the Carrier and Enterprise Networking and Storagestorage markets that require high-performance ICs and intendICs. The Company intends to continue doing so in the future. Some of these customers are also ourthe Company's competitors. If any of ourthe Company's major customers were to delay orders of ourthe Company's products or stop buying ourthe Company's products, ourthe Company's business and financial condition would be severely affected. Additionally, if any of ourthe Company's customers are impacted by consolidation, experience financial difficulty, including filing for bankruptcy protection, or are impacted by adverse economic




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conditions that would delay networking infrastructure upgrades, build-outs or new installations, thisthe Company could also result inexperience increased competition for ourits products and downward pressure on the pricing for ourof its products.

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

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

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

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

•

Lacklack of assured wafer supply, the potential for wafer shortages, and possible increase in wafer prices;



•

Limitedlimited control over delivery schedules, manufacturing yields, product costs, and product quality; and



•

Unavailabilityunavailability of, or delays in, obtaining access to key process technologies.




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        These and other risks associated with ourthe Company's reliance on third-party wafer foundries could materially and adversely affect ourits revenues, cash flows, operating results, and relationships with ourits customers. For example, the third-party foundries that manufacture our wafers have from time to time experienced manufacturing defects and reductions in manufacturing yields. In addition, disruptions and shortages in wafer foundry capacity may impair our ability to meet our customers' needs and negatively impact our operating results. Our

        The Company's third-party wafer foundries fabricate products for other companies and, in certain cases, manufacture products of their own design. Historically, there have been periods in which there has been a worldwide shortage of wafer foundry capacity for the production of high-performance integrated circuitsICs such as ours.the Company's. Instead of having long-term agreements with any of ourthe Company's third-party foundries, we instead subcontract ourit subcontracts its manufacturing requirements on a purchase order basis. As a result, it is possible that the capacity wethe Company will need in the future may not be available to usit on acceptable terms, if at all.

        A significant portion of the Company's manufacturing operations are located in Asia. These areas are subject to natural disasters such as earthquakes, tsunamis and floods. A significant natural disaster or other catastrophic event could significantly disrupt the Company's foundries' production capabilities and could result in the Company experiencing a significant delay in delivery or substantial shortage of wafers and possibly in higher wafer prices. Any supply disruption or business interruption could materially and adversely affect the Company's business, financial condition and results of operations.

        If any of the Company's foundries do not have adequate available capacity for it for any reason, the Company may encounter supply delays or disruptions, and it may need to qualify an alternative foundry. The Company's current foundries need to have new manufacturing processes qualified if there is a disruption in an existing process. The Company typically requires several months to qualify a new foundry or process before it can begin shipping products from the new foundry. If the Company cannot accomplish this qualification in a timely manner, it may experience a significant interruption in supply of the affected products.

In addition to third-party wafer foundries, wethe Company also dependdepends on third-party subcontractors in Asia and the United States for the assembly, and in some cases, wafer probe and package testing of ourits products. As with ourthe wafer foundries, any difficulty in obtaining parts or services from these subcontractors could affect ourits ability to meet scheduled product deliveries to customers, which could in turn have a materiallymaterial adverse effect on ourthe Company's customer relationships, revenues, and cash flows.operating results.

        These third-party subcontractors purchase materials used in the assembly process based on ourthe Company's forecast. In




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the event we failthe Company fails to meet ourits obligations by placing purchase orders that are inconsistent with ourits forecast, wethe Company may be required to pay compensation for material forecasted, but not ordered. This obligation may have an adverse effect on revenues, operating results, and cash flows.

        Finally, we are subjectAs with wafer fabrication, worldwide assembly and testing capacity is limited and the Company is dependent on its suppliers to occasionalprovide enough capacity in the correct mix to address all of its requirements. The master service agreements with the Company's assembly subcontractors have provisions for the subcontractors to maintain inventory stocks based on forecast, but do not include any guaranteed capacity agreement clauses. As a result, it is possible that the capacity the Company will need in the future may not be available to it on acceptable terms, if at all, and the Company could experience shortages or assembly problems in the future. As part of the Company's test outsourcing agreement, it consigned testing equipment to its test subcontractor. The availability of assembly and test services from these subcontractors could be materially and adversely affected in the event a subcontractor experiences financial difficulties or suffers any damage to its facilities.

        Many of the Company's products have very long life cycles, often exceeding ten years or more. These life cycles may be longer than what is typically supported by wafer and/or assembly manufacturers. Accordingly, the Company is sometimes subjected to end-of-life ("EOL") notices on certain materialmaterials and/or products thatprovided by these manufacturers. This longer life cycle may impact our ability to continue to support certain products. This may impact ourthe Company's ability to continue to support certain products, forcing usit to EOL ourcease offering these products if we




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it cannot obtain a replacement source of material. This longer life cycle may impact revenuerevenues and/or require usthe Company to incur additional costs to provideobtain alternative sources for these materials.

If we dothe Company does not achieve satisfactory manufacturing yields or quality, ourits business will be harmed because of increases in ourits business expenses.

        The fabrication of ICs is a highly-complexhighly complex and technically-demandingtechnically 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 consumingtime-consuming and expensive to correct once detected. Even though we procurethe Company procures substantially all of ourits wafers from third-party foundries, wethe Company may be responsible for low yields when these wafers are tested against ourits quality control standards. In addition, defects in the Company's existing or new products may require the Company to incur significant warranty, support and repair costs, and could divert the attention of the Company's engineering personnel away from the development of new products.

        In the past, we havethe Company has experienced difficulties in achieving acceptable probe and/or final test yields on some of ourits products, particularly with new products, which frequently involve new manufacturing processes and smaller geometry features than previous generations. Maintaining high numbers of good die per wafer is critical to our operating results, as decreasedDecreased yields can result in higher unit costs, shipment delays, and increased expenses associated with resolving yield problems. Because wethe Company also use estimatedestimates yields to value work-in-process inventory, yields below ourits estimates may require usit to increase the value of inventory and related reserves reflected on ourits 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, poorPoor manufacturing yields, defects or other performance problems with ourthe Company's products could adversely affect ourits ability to provide competitively priced products.products and its operating results.

We must attractDefects, errors, or failures in the Company's products could result in higher costs than it expects and retain key employees in a highly competitive environment.could harm its reputation and adversely affect its revenues and level of customer satisfaction.

        Our success depends in part upon our abilityDue to retain key employees. In somethe highly complex nature of the fields in which we operate, there are only a limited numberCompany's products, on occasion an undetected defect, error, or failure may occur when one of peopleits products is deployed in the job market who possessfield. The occurrence of defects, errors, or failures in the requisite skills. We have experienced difficultyCompany's products could result in hiringcancellation of orders, product returns, and retaining sufficient numbers of qualified engineers in parts of our business. Thethe loss of, servicesor delay in, market acceptance of any key personnelits IC solutions. The Company's customers could, in turn, bring legal actions against it, resulting in the diversion of its resources, legal expenses and judgments, fines or other penalties, or losses. Any of these occurrences could adversely affect the inability to hire new personnel with the requisite skills could restrict our ability to develop new products or enhance existing products in a timely matter, to sell products to customers, or to manage ourCompany's business, effectively.results of operations, and financial condition.

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

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




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        WeThe Company typically facefaces competition at the design stage, where customers evaluate alternative design approaches that require ICs. OurThe Company's competitors have increasingly frequent opportunities to supplant ourits products in next-generation systems because of shortened product life and design cycles in many of ourits customers' products. The Company's customers may substitute use of the Company's products in their next-generation equipment with those of current or future competitors.

        Competition is particularly strong inIn the communications market, for communications ICs, in part, due towhich includes the market's historical growth rate, which attracts largerCompany's Carrier and Enterprise Network markets, competitors include Applied Micro Circuits, Broadcom, Marvell Technology Group, Maxim Integrated Products, Mindspeed Technologies, and in part, to the number of smaller companies focused on this area.PMC-Sierra. Larger competitors in our the Company's




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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 wethe Company might have otherwise won.

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

WeThe Company must keep pace with rapid technological change and evolving industry standards in order to grow ourits revenues and ourits business.

        We sellThe Company sells products in markets that are characterized by rapid technological changes in both product and process technologies, including evolving industry standards, frequent new product introductions, short product life cycles, and increasing demand for higher-levelshigher levels of integration and smaller process geometries. We believeThe Company believes that ourits success, to a large extent, depends on ourits ability to adapt to these changes, to continue to improve ourits product technologies, and to develop new products and technologies to maintain ourits competitive position. OurThe Company's failure to accomplish any of the abovethese objectives could have a negative impact on ourits business and financial results. If new industry standards emerge, ourthe Company's products or ourits customers' products could become unmarketable or obsolete, and wethe Company could lose market share. WeThe Company may also have to incur substantial unanticipated costs to comply with these new standards.

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

OurThe Company's operating results may be adversely impacted by worldwide political and economic conditions and uncertainties. As a result, the market price of its common stock may decline.

        Recent general worldwide economic conditions have included slower economic activity, an increase in bankruptcy filings, concerns about inflation and deflation, increased energy costs, decreased consumer confidence, reduced corporate profits and capital spending, adverse business conditions, liquidity concerns in the wired and wireless communications markets, international conflicts, terrorist and military activity, and the impact of natural disasters and public health emergencies. These conditions make it extremely difficult for the Company's customers, its vendors, and it to accurately forecast and plan future business activities, and these conditions have caused, and may continue to cause, United States and foreign businesses to slow spending on the Company's products and services, which delays and lengthens sales cycles. Although some economic conditions have improved in recent months, the Company cannot predict the timing, strength or duration of any slowdown or subsequent recovery in the worldwide economy, the semiconductor industry or the wired and wireless communications markets. If the economy or markets in which the Company operates do not return to historical levels, its business, financial condition and results of operations will likely be materially and adversely affected.

The Company's business is subject to environmental regulations that could increase ourits operating expenses.

        We areThe Company is 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 ourthe Company's designing and manufacturing processes. In some circumstances, these regulations may require usthe Company 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 designingthe Company's design and manufacturing processes. If we failthe Company fails to comply




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with these regulations, weit could be subject to fines or be required to suspend or cease ourits operations. In addition, these regulations may restrict ourthe Company's ability to expand operations at ourits present locations in the United States and worldwide or require usit to incur significant compliance-relatedcompliance related expenses.




Table        Laws and regulations have been enacted in several jurisdictions in which the Company sells its products, including various European Union, or EU, member countries. For example, the RoHS directive restricts the use of Contentscertain hazardous substances, including lead, used in the construction of component parts of electrical and electronic equipment. The Company believes that its products comply with the RoHS directive; however, if the Company fails to comply with these regulations in the future the Company may be forced to recall products and cease their manufacture and distribution, and the Company could be subject to civil or criminal penalties. The Company may incur increased manufacturing costs, and some products may be subject to production delays to comply with future legislation which implements this directive, but the Company cannot currently estimate the extent of such increased costs or production delays, if any. To the extent that any such cost increases or delays are substantial, the Company's operating results could be materially adversely affected. Also, the Company is aware that lead times for new, compliant components are longer and that older, non-compliant components are being discontinued at a fast pace. The Company or its customers may be impacted by shortages if parts that comply with the RoHS directive are not available.




        Similar legislation may be enacted in other countries or regions where the Company sells the Company's products. The Company will need to ensure that it complies with these laws and regulations as they are enacted, and that its subcontractors also comply with these laws and regulations. If the Company or its subcontractors fail to comply with the legislation, its customers may refuse or be unable to purchase its products, which could harm its business, operating results and financial condition. If the Company has to make significant capital expenditures to comply with environmental laws, or if it is subject to significant expenses in connection with a violation of these laws, its business, operating results and financial condition could be materially and adversely affected.

If we arethe Company is not successful in protecting ourits intellectual property rights, it may harm ourits ability to compete or maintain market share.share may be harmed.

        We relyThe Company relies on a combination of patent, copyright, trademark, and trade secret protections, as well as confidentiality agreements and other methods, to protect ourthe Company's proprietary technologies and processes. For example, we enterthe Company enters into confidentiality agreements with ourits employees, consultants, and business partners, and controlcontrols access to and distribution of ourthe Company's proprietary information. As of September 30, 2009, we2010, the Company had 8789 U.S. patents and 1520 foreign patents for various aspects of design and process innovations and havehas a number of pending U.S. and foreign patent applications.

        However, despite ourthe Company's efforts to protect ourits intellectual property, wethe Company cannot assure you that:

•

Steps we takesteps the Company takes to prevent misappropriation or infringement of ourits intellectual property will be successful;



•

Anyany existing or future patents will not be challenged, invalidated or circumvented;



•

Anyany pending patent applications or future applications will be approved;



•

Othersothers will not independently develop similar products or processes to oursthe Company's or design around ourthe Company's patents; or



•

Anyany of the measures described above will provide meaningful protection.




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

WeThe Company may be subject to claims of infringement of third-party intellectual property rights or demands that weit license third-party technology, which could result in significant expense and loss of ourits 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 ourthe Company's business and have demanded that wethe Company license their patents and technology. To date, none of these claims has resulted in the commencement of any litigation against us,the Company, nor have wehas the Company believed that it is necessary to license any of the rights referred to in such claims. We expect,The Company expects, however, that weit will continue to receive such claims in the future, and any litigation to determine their validity, regardless of theirits merit or resolution, could be costly and divert the efforts and attention of ourits management and technical personnel. We have begun to find opportunitiesThe Company's recent efforts to license ourits intellectual property. While this may provide a substantial business opportunity for the Company, itproperty to third parties may also increase the potential for others to initiate claims against us. Weit. The Company cannot assure that weit 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 wethe Company could be required to:

•

Paypay substantial damages;



•

Discontinuediscontinue the use of infringing technology, including ceasing the manufacture, use or sale of infringing products;



•

Expendexpend significant resources to develop non-infringing technology; or



•

Licenselicense technology from the party claiming infringement, which license may not be available on commercially reasonable terms.

        Litigation resulting in any of the above could materially and adversely affect the Company's business, financial condition and operating results.

The Company is subject to United States Customs and Export Regulations

        The Company is subject to United States Customs and Export Regulations, including United States International Traffic and Arms Regulations and similar laws, which collectively control import, export and sale of technologies by United States companies. Failure to comply with such regulations may result in civil and criminal enforcement, including monetary fines and possible injunctions against shipment of product, which could have a material adverse impact on its results of operations and financial condition.

Risks Relating to an Investment in The Company

The Company has significant debt in the form of its Senior Term Loan and 2014 Debentures.

        The Company has $25.0 million in original principal of its senior term loan with Whitebox VSC, Ltd. ("Whitebox"), plus $1.3 million of accrued payment-in-kind ("PIK") interest outstanding ("Senior Term Loan"). On October 29, 2011, the Company is obligated to repay the full remaining principal, amount of the notes, plus accrued PIK interest through that date. The Company has $46.5 million of its 8.00% Convertible Second Lien Debentures Due 2014 (the "2014 Debentures") outstanding. On October 29, 2014, the Company is obligated to repay the principal amount of the 2014 Debentures. The Company's debt could materially and adversely affect its ability to obtain financing for working capital, acquisitions or other purposes and could make it vulnerable to industry downturns and competitive pressures. The Company's ability to meet its debt service obligations will be dependent upon its future performance, which will be subject to financial, business and other factors affecting its operations, many of which are beyond its control. The Company believes that its existing sources of liquidity, along with cash expected to be generated from product sales, will be sufficient to fund its




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

Since 2006, we have had material weaknesses in our internal control over financial reporting and cannot provide assurance that additional material weaknesses will not be identified infinancing requirements for at least the future. If our internal control over financial reporting or disclosure control and procedures are not effective, there may be errors in our financial statements that could require a restatement or our filingsnext 12 months. However, this may not be timelythe case. If the Company incurs operating losses and investorsnegative cash flows in the future, the Company may lose confidenceneed to further reduce its operating costs or obtain alternate sources of financing, or both. The Company may need additional capital in our reported financial information, which could leadthe future and may not have access to a declineadditional sources of capital on favorable terms or at all. If the Company raises additional funds through the issuance of equity-based or debt securities, such securities may have rights, preferences or privileges senior to those of its common stock and its stockholders may experience dilution of their ownership interests.

The Company's stockholders will experience significant dilution in our stock price.connection with the conversion of its Series B Preferred Stock and its 2014 Debentures.

        Commencing in mid-2006, in order to rectify identified material weaknesses in our internal control over financial reporting,As of September 30, 2010, the Company began: (i) hiring more experienced and senior finance and legal personnel; (ii) developing additional financial policies and procedures; (iii) establishing processes and procedures to increase communications betweenhad 23,986,531 million shares of common stock outstanding. In connection with the financial reporting, accounting functions and senior management; and (iv) instituting a formal Code of Business Conduct and Ethics and whistle-blower policy.

        In addition,October 30, 2009 debt restructuring, the Company has implemented, or is currently implementingissued 771,000 shares of its Series B Preferred Stock convertible into an aggregate of 3,855,000 shares of its common stock and $50.0 million in aggregate principal amount of 2014 Debentures convertible into 11,109,556 shares of its common stock. As of September 30, 2010, the following:

•

EngagementCompany had outstanding 185,709 shares of third-party administrator for share-based compensation;



•

Enhancementits convertible Series B Preferred Stock and $46.5 million of Corporate Governance and oversight;



•

Development and implementation of several new policies and procedures to address key weaknesses; and



•

Development of specific accounting and finance policies and standardized processes in all critical accounting areas.

        While we are committed to the changes made to our internal control over financial reporting, and believe we have made progress towards resolving our material weaknesses, until sufficient time has passed as to evaluate the effectiveness2014 Debentures. Full conversion of the modifications of our internal control over financial reporting, we cannot assure you that there will not be errors in our financial statements that could require a restatement or delay in filings,currently outstanding Series B Preferred Stock and as a result investors may lose confidence in our reported financial information, which could lead to a decline in our stock price.

        In fact, management's most recent evaluationprincipal amount of the design and operating effectiveness of our internal control over financial reporting identified material weaknesses resulting from design and operating deficiencies2014 Debentures would result in the internal control system, including that we did not maintain: (i) sufficient controls in information systems limiting access to key applications and data; and (ii) effective controls over inventory, including lackissuance of accuracy and basis for valuation resulting in adjustments to the amount11,260,323 shares of costcommon stock. The conversion of revenuesits shares of Series B Preferred Stock and the carrying amountconversion of inventory. Management is committed to remediating these material weaknesses.its 2014 Debentures could have a significant dilutive impact on the ownership rights of its stockholders.

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

        As a result of ourthe Company's failure to comply fully with ourits reporting requirements under the Exchange Act, ourthe Company's common stock has been delisted from the NASDAQ National Market. WeThe Company currently areis quoted under the symbol VTSS.PK on the OTCQB Marketplace of the Pink Sheets,OTC Markets, Inc., an electronic quotation service for securities traded over-the-counter.over-the-counter by companies that are registered with, and reporting under the rules and regulations of, the Securities and Exchange Commission. As a result, there may be significantly less liquidity in the market for ourthe Company's common stock.

        The Company's stock is deemed to be a "penny stock" (generally, any equity security not listed on a national securities exchange or quoted on the NASDAQ Stock Market that has a market price of less than $5.00 per share, subject to certain exceptions) subject to the requirements of certain rules promulgated under the Securities Exchange Act of 1934, which require additional disclosure by broker-dealers in connection with any trade in the Company's stock. Many brokerage firms are reluctant to recommend low-priced stocks to their clients. Moreover, various regulations and policies restrict the ability of stockholders to borrow against or "margin" low-priced stocks, and declines in the stock price below certain levels may result in unexpected margin calls. Additionally, because brokers' commissions on low-priced stocks generally represent a higher percentage of the stock price than commissions on higher priced stocks, the current price of the common stock can result in an individual stockholder paying transaction costs that represent a higher percentage of total share value than would be the case if the Company's share price were higher. This factor may also limit the willingness of institutions to purchase the Company's common stock. Finally, the additional burdens imposed upon broker-dealers by these requirements could discourage broker-dealers from facilitating trades in the Company's common stock, which could severely limit the market liquidity of the stock and the ability of investors to trade the Company's common stock.

        In addition, ourthe Company's ability to raise additional capital through equity financing, and attract and retain personnel by means of equity compensation, may be impaired. Furthermore, we the Company




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may experience decreases in institutional and other investor demand, analyst coverage, market-makingmarket making activity, and information available concerning trading prices and volume, and fewer broker-dealers may be willing to execute trades with respect to ourthe Company's common stock. The delisting has decreased the attractiveness of our




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the Company's common stock and caused the trading volume of ourthe Company's common stock to decline significantly, which has resulted in a significant decline in the market price of ourits common stock.

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

The holders of the 2014 Debentures have significant influence over the Company and could act in a manner with which other stockholders may disagree or that is not necessarily in the interests of other stockholders.

        As of September 30, 2010, the holders of the 2014 Debentures owned approximately 51.9% of the Company's outstanding common stock and all of the Company's Series B Preferred Stock (convertible into 3.9% of the Company's common stock). These stockholders have significant influence over all matters submitted to the Company's stockholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of the Company's assets. For as long as these holders own the 2014 Debentures, they may have interests that are different from those of other stockholders who do not also own 2014 Debentures. For example, the holders of the 2014 Debentures may support proposals and actions with which other stockholders may disagree or which are not in their interests. In addition, their combined ownership of common stock, Series B Preferred Stock and 2014 Debentures could motivate them to support a sale of the Company at a price that is not attractive to many of the Company's stockholders. Furthermore, the concentration of ownership could delay or prevent a change in control of the Company or otherwise discourage a potential acquirer from attempting to obtain control of the Company, which in turn could reduce the price of the Company's common stock.

The Company had material weaknesses in internal control over financial reporting in the recent past and the Company cannot provide assurance that additional material weaknesses will not be identified in the future.

        The material weaknesses in internal control over financial reporting, previously referenced in the Company's quarterly and annual reports for fiscal years 2006 through 2009 and the Company's quarterly reports for fiscal 2010, have been remediated. The Company concluded that, as of September 30, 2010, the Company has remediated these material weaknesses as a result of the following remedial actions:

•

Increased IT controls to limit access to key applications and data;



•

Increased review controls over access to key applications and data;



•

Utilized outside experts to redesign and test processes, reviews, and controls; and



•

Expanded operational and finance management review over key inventory metrics and transactions and increased controls over inventory cut-off.

        The Company regularly reviews its system of internal control over financial reporting and makes changes to its processes and systems to improve controls and increase efficiency, while ensuring that the Company maintains an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes. However, the Company cannot provide assurance that additional material weaknesses will not be identified in the future. If the Company's internal control over financial reporting or disclosure control and procedures




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are not effective, there may be errors in the Company's financial statements that could require a restatement or delay the Company's filings and, as a result, investors may lose confidence in the Company's reported financial information, which could lead to a decline in the Company's stock price.

ITEM 1B.    UNRESOLVED STAFF COMMENTS


        None

ITEM 2.    PROPERTIES


        OurThe Company's executive offices and principal R&D facility is located in Camarillo, California and is leased pursuant to a non-cancellable operating lease. In September 2008, the Company extended the term of this lease through January 31, 2014 with an annual base rent of $1.2 million. The total space occupied in this building is approximately 111,000 square feet. WeThe Company also leaseleases an additional 58,000 square foot facility in Camarillo for product development, pursuant to a sale-leaseback agreement. We also owned a 107,000 square foot facility in Colorado Springs, Colorado,agreement, which was the site of our wafer fabrication facility until its closure in 2004, and was used as a design center until 2007. We sold this facility inis leased through December 20082015. (See Note 3—Discontinued Operations10-Commitments and Assets Held for SaleContingencies in the accompanying consolidated financial statements)Consolidated Financial Statements). WeThe Company also leaseleases space in 18 additional locations that include domestic and international offices in California, Denmark, Germany, India, Massachusetts, Oregon, and Texas. OurThe Company's sales and field support offices are located in the United States, Canada, Europe, China, Japan, Germany, India, and Taiwan. As of September 30, 2009, we2010, the Company leased total space of approximately 287,000282,000 square feet. The Company's current space is sufficient to accommodate current operations.

ITEM 3.    LEGAL PROCEEDINGS


        As of September 30, 2009, the end of the period covered by this report, we were subject to material pendingThe Company is involved in legal proceedings other than ordinary routine litigation incidental to our business, to which we were a party or of which our property was the subject, as well as any such proceedings known to be contemplated by government authorities, as described below. In addition, we were subject to certain material legal proceedings completed during the annual period covered by this report as described below.

The Derivative and Securities Class Actions

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

        On August 11, 2008, the Court granted final approval of settlements in the federalordinary course of business, including actions against it which assert or may assert claims or seek to impose fines and state derivative actions filed on behalf of Vitesse against certain current or former directors and officers of Vitesse, and nominally against Vitesse alleging claims for breach of fiduciary duty, abuse of control,




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gross mismanagement, waste of corporate assets, unjust enrichment, constructive trust, rescission, accounting manipulations, and violations of California Corporations Code Sections 25402 and 25403. As part ofpenalties in substantial amounts, such as the settlement of the federal and state derivative actions, the Company adopted certain Corporate Governance measures. Three former executives of Vitesse, Messrs. Tomasetta, Hovanec, and Mody, released the Company from its obligation to provide future indemnification and defense costs in the related SEC and Department of Justice investigations. Vitesse retained the right to continue its state court action against KPMG, LLP, its former independent registered public accounting firm.

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

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

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

The Dupuy Action

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

The DOJ Subpoena and SEC Investigation

        In May 2006, wethe Company received a grand jury subpoena from the office of the United States Attorney for the Southern District of New York requesting documents from 1999 through the present.1995 and later. The Division of Enforcement of the SEC also conducted an investigation of Vitesse. The Division of Enforcement requested documents from January 1, 1995 through the present.and later. Vitesse has cooperated with both government agencies in their investigations. While the investigation by the United States Attorney is still on-going,ongoing, the staff of the SEC's Division of Enforcement of the SEC has agreed to recommend to the Commission a proposed settlement whichthat would conclude for the Company all matters arising from the SEC investigation into historical stock option practices and certain other accounting irregularities. Under the proposed settlement, the Company would pay a $3.0 million civil penalty and consent to the entry of a final judgment by a federal court permanently enjoining the Company from violations of the antifraud and other provisions of the federal securities laws. In connection with the Company's proposed settlement with the staff of the Division of Enforcement, offor the SEC, wefiscal year ended September 30, 2009, the Company recorded a $3.0 million expense related to the civil penalty payable to the SEC. The proposed settlement is contingent on the review and approval of final documentation by the Company and the staff of the SEC's Division of Enforcement, of the SEC, and is subject to final approval by the Commission.




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KPMG Lawsuit

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

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

Potential Payroll Tax Liabilities Related to Backdating of Stock Options

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

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSREMOVED AND RESERVED


        None.




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PART II


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


        OnThe Company's common stock began trading on the OTCQB Marketplace of the Pink OTC Markets Inc. on June 28, 2006. Prior to June 28, 2006, the Company's stock was delisted from the NASDAQ National Market due to failure to provide timely regulatory filings as a result of the improprieties discussed below under the caption "Options Backdating and Accounting Irregularities." The Company's stock has been subsequently traded in the Pink Sheets electronic quotation system under the symbol VTSS.PK. Prior to June 28, 2006, our stock was traded on the NASDAQ National Market under the symbol VTSS. The following table sets forth the high and low and closing pricesbid quotations of ourthe Company's common stock, as reported on the respective trading systems,OTCQB Marketplace for the periods shown. We can provide no assurance that we will be successful in relistingshown (all prices have been adjusted for the Company's securitiesone-for-20 reverse stock split on a national securities exchange.June 30, 2010). Quotations from Pink OTC Markets Inc. reflect inter-dealer prices, without retail mark-up, markdown or commission, and may not necessarily represent actual transactions.

		High			Low			Close				High			Low
Fiscal Year Ended 2010
October 1 through December 31, 2009												$	7.40		$	4.00
January 1 through March 31, 2010													5.80			5.00
April 1 through June 30, 2010													8.80			5.80
July 1 through September 30, 2010													5.70			2.80
Fiscal Year Ended 2009
October 1 through December 31, 2008		$	0.58		$	0.09		$	0.36			$	11.60		$	1.80
January 1 through March 31, 2009			0.48			0.21			0.32				9.60			4.20
April 1 through June 30, 2009			0.45			0.24			0.29				9.00			4.80
July 1 through September 30, 2009			0.45			0.25			0.37				9.00			5.00
Fiscal Year Ended 2008
October 1 through December 31, 2007		$	1.16		$	0.80		$	0.87
January 1 through March 31, 2008			0.94			0.61			0.67
April 1 through June 30, 2008			0.74			0.61			0.64
July 1 through September 30, 2008			0.94			0.49			0.54

        As of September 30, 2009, weDecember 1, 2010, the Company had 1,501 shareholdersapproximately 1,300 stockholders of record. Because many of our shares are held by brokers or other institutions on behalf of shareholders, we are unable to state the totalThe number of beneficial ownersholders of our common stock.record does not include the number of persons whose stock is held in nominee or "street name" accounts through brokers.

        We haveThe Company has never paid cash dividends and presently intendintends to retain any future earnings for business development. Further, ourthe Company's existing loan agreements limit the payment of dividends without the consent of the lender.lenders.




Table        There have been no sales of Contentsunregistered securities during the year ended September 30, 2010. There were no shares withheld for taxes upon vesting of restricted stock or other stock repurchases.

Five-Year Stock Performance Graph

        The following performance graph compares the cumulative total shareholderstockholder return on ourthe Company's common stock with the NASDAQ Composite Index, the NASDAQ Stock Market-U.S. Index and the NASDAQ Electronics Components Index from market close on the last trading day in September 20032005 through the last trading day in September 2009.2010. The graph is based on the assumption that $100 was invested in each of ourthe Company's common stock, the NASDAQ Composite Index, the NASDAQ Stock Market-U.S. Index and the NASDAQ ElectronicElectronics Components Index on the last trading day in September 2004.2005.

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




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


COMPARISON OF CUMULATIVE TOTAL RETURN




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




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ITEM 6.    SELECTED FINANCIAL DATA


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

        The selected consolidated financial data presented below2010 and should be read in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statementsthe Company's Consolidated Financial Statements in this Annual Report on Form 10-K. OurThe Company's consolidated selected financial data have been derived from ourthe Company's audited consolidated financial statements.Consolidated Financial Statements.

				As of and for the years ended September 30,																As of and for the years ended September 30,
				2009			2008			2007			2006							2010			2009			2008			2007			2006
				(in thousands, except per share data)																			(in thousands, except per share data)
Statement of Operations Data:	Statement of Operations Data:															Statement of Operations Data:
Product revenues	Product revenues			$	154,927		$	218,536		$	221,948		$	203,289		Product revenues				$	165,633		$	154,927		$	218,536		$	221,948		$	203,289
Intellectual property revenues	Intellectual property revenues				13,250			10,000			—			—		Intellectual property revenues					357			13,250			10,000			—			—
	Net revenues				168,177			228,536			221,948			203,289			Net revenues				165,990			168,177			228,536			221,948			203,289
(Loss) income from operations					(179,005	)		8,378			(1,799	)		(50,094	)
(Loss) income from continuing operations					(194,112	)		7,510			(4,825	)		(52,003	)
Gain (loss) from discontinued operations					71			9,044			(16,822	)		(15,282	)
																Income (loss) from operations					3,991			(179,005	)		8,378			(1,799	)		(50,094	)
																Net (loss) income from continuing operations					(20,177	)		(194,193	)		8,170			(4,825	)		(52,003	)
Income (loss) from discontinued operations																Income (loss) from discontinued operations					121			71			9,044			(16,822	)		(15,282	)
Net (loss) income	Net (loss) income				(194,041	)		16,554			(21,647	)		(67,285	)	Net (loss) income				$	(20,056	)	$	(194,122	)	$	17,214		$	(21,647	)	$	(67,285	)
Net (loss) earnings attributable to noncontrolling interest																Net (loss) earnings attributable to noncontrolling interest					(1	)		(81	)		660			—			—
Fair value adjustment of Preferred Stock—Series B																Fair value adjustment of Preferred Stock—Series B					126			—			—			—			—
																Net (loss) income available to common stockholders				$	(20,181	)	$	(194,041	)	$	16,554		$	(21,647	)	$	(67,285	)
Net (loss) income per share:	Net (loss) income per share:															Net (loss) income per share:
Basic and diluted:
Basic and Diluted:																Basic and Diluted:
	Continuing operations			$	(0.85	)	$	0.03		$	(0.02	)	$	(0.23	)		Continuing operations			$	(0.96	)	$	(16.92	)	$	0.73		$	(0.43	)	$	(4.68	)
	Discontinued operations				0.00			0.04			(0.08	)		(0.07	)		Discontinued operations				0.01			0.01			0.81			(1.50	)		(1.38	)
		Net (loss) income per share		$	(0.85	)	$	0.07		$	(0.10	)	$	(0.30	)			Net (loss) income per share		$	(0.95	)	$	(16.91	)	$	1.54		$	(1.94	)	$	(6.06	)
																	Net (loss) earnings attributable to noncontrolling interest				(0.00	)		(0.01	)		0.06			—			—
																	Fair value adjustment of Preferred Stock—Series B				0.01			—			—			—			—
Net (loss) income available to common stockholders																Net (loss) income available to common stockholders				$	(0.96	)	$	(16.91	)	$	1.48		$	(1.94	)	$	(6.06	)
Weighted average shares outstanding:	Weighted average shares outstanding:															Weighted average shares outstanding:
	Basic and diluted				229,554			223,614			223,556			222,137			Basic and Diluted				21,074			11,478			11,181			11,178			11,107
Balance Sheet Data:	Balance Sheet Data:															Balance Sheet Data:
Cash and short-term investments	Cash and short-term investments			$	57,544		$	36,722		$	33,576		$	28,653		Cash and short-term investments				$	38,127		$	57,544		$	36,722		$	33,576		$	28,653
Working capital	Working capital				39,397			49,198			55,287			14,431		Working capital					48,037			39,397			49,198			55,287			14,431
Total assets	Total assets				105,568			292,277			327,348			352,199		Total assets					97,529			109,273			292,277			327,348			352,199
Long-term debt	Long-term debt				111,352			126,123			155,118			146,752		Long-term debt					80,571			111,352			126,123			155,118			146,752
Total shareholders' (deficit) equity					(61,359	)		125,361			106,243			117,810
Total stockholders' (deficit) equity																Total stockholders' (deficit) equity					(21,206	)		(61,273	)		125,361			106,243			117,810

        On October 29, 2007, the Company completed its sale of a portion of its Storage Products business, as discussed in Note 3—Discontinued Operations and Assets Held for Sale in the accompanying consolidated financial statements. We havebusiness. The Company reported the results of operations and financial position of the Storage Products business in discontinued operations within the Company's statements of operations and as




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assets and liabilities held for sale in the Company's balance sheet as of September 30, 2007. For the year ended September 30, 2008, we havethe Company reported the results of




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operations of the Storage Products business, along with the gain recognized on the sale, in gainincome (loss) from discontinued operations within the Company's statement of operations. For the year ended September 30, 2010, the Company reported revenue of $0.1 million, net of taxes of $0.2 million related to the final earn-out payments resulting from the sale of the Storage Products business.

        During the quarter ended December 31, 2008, wethe Company identified changes in key factors indicating a possible impairment of the value of ourits goodwill. As a result of the additional analyses performed, wethe Company recorded an impairment charge to fully write-off ourits goodwill balance of $191.4 million for the quarter ended December 31, 2008.

        In October 2009, Vitesse completed a debt restructuring transaction. The debt restructuring resulted in the conversion of 96.7% of the Company's 2024 Debentures into a combination of cash, common stock, Series B Preferred Stock and 2014 Debentures. With respect to the remaining 3.3% of the 2024 Debentures, Vitesse settled its obligations in cash. Additionally, Vitesse repaid approximately $5.0 million of its $30.0 million Senior Term Loan, the terms of which were amended as part of the debt restructuring transactions. Under the terms of the debt restructuring transactions, Vitesse:

•

Paid $3.6 million in cash to satisfy its obligations to the holders of 2024 Debentures who did not participate in the transaction.



•

Paid $6.4 million in cash consideration to the holders of the 2024 Debentures who participated in the transaction.



•

Issued $50.0 million in aggregate principal amount of 2014 Debentures to the holders of the 2024 Debentures who participated in the transaction. The 2014 Debentures have a five-year term, an 8.0% annual interest rate and a conversion price of $4.50 per share. The indebtedness under these 2014 Debentures is secured by a second-priority security interest in substantially all of Vitesse's assets and is subordinated to the security interest for the Senior Term Loan.



•

Issued to the holders of the 2024 Debentures who participated in the exchange, 8,646,811 shares of common stock, and to some of those holders, an aggregate of 771,000 shares of a new Series B Preferred Stock, which are convertible into common stock on a five-to-one basis and have a dividend preference relative to the common stock. The Series B Preferred Stock and the 2014 Debentures include restrictions on conversion prohibiting holders of those securities from converting if it would result in the holder beneficially owning more than 9.99% of Vitesse's outstanding common stock.

        On May 14, 2010, the Company received a conversion notice from one of the holders of the 2014 Debentures of its intent to convert $3.5 million face amount of its holdings. The Company converted the principal amount of the submitted debentures into shares of common stock and elected to pay the "Make-Whole Amount" (as defined in the Indenture for the 2014 Debentures) in shares of common stock. 777,778 shares of the Company's common stock were issued on May 20, 2010 in settlement of the $3.5 million of debentures based on a conversion price of $4.50 per share. On June 7, 2010, 91,753 shares of common stock were issued in settlement of the Make-Whole Amount obligation.




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


        You should read the following discussion and analysis in conjunction with the Company's Consolidated Financial Statements and related Notes thereto included in Part II, Item 8 of this Report and the "Risk Factors" included in Part I, Item 1A of this Report, as well as other cautionary statements and risks described elsewhere in this Report, before deciding to purchase, hold or sell the Company's common stock.

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

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

•

Overview.  This section provides an introductory overview, including detailed description and timeline of the circumstances and events related to prior stock option grants and other improper accounting practices, including the findings of the Special Committee and context for the discussion and analysis that follows in the MD&A, including industry trends and characteristics, significant events, and a review of our business product lines.



•

Critical accounting policies and estimates.  This section discusses those accounting policies that are both considered important to our financial condition and operating results and require significant judgment and estimates on the part of management with their application.



•

Impact of recent accounting pronouncements.  This section discusses recent accounting pronouncements, their impact on our Company, and a brief description of the pronouncements.



•

Results of operations.  This section provides an analysis of our results of operations for the three fiscal years ended September 30, 2009, 2008 and 2007. Brief descriptions are provided of transactions and events that impact the comparability of the results being analyzed.



•

Financial condition and liquidity.  This section provides an analysis of our cash position and cash flows, as well as a discussion of our financing arrangements and financial commitments.

Overview

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




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

        In recent years, we havethe Company has focused ourits product development and marketing efforts on products that leverage the convergence of Carrier and Enterprise Networking onto IP-basedInternet Protocol based networks. These Next-Generation Networks"Next-Generation Networks" share the requirements of high reliability, scalability, interoperability and low cost. Increasingly, these networks will be delivered based on Ethernet technology. We believeThe Company believes that products in this emerging technology area represent the best opportunity for usthe Company to provide differentiation in the market.

        In Storage, our products address primarily Enterprise-class storage systems and blade-servers using Fibre Channel and Serial Attached SCSI ("SAS"Debt Restructuring

        Effective October 16, 2009, the Company entered into an agreement to amend the Senior Term Loan with Whitebox (the "Debt Modification")/Serial Attached ATA ("SATA") protocols. Our customers include leading communications and storage OEMs.. On October 29, 2007,2010, the Company completed its saleentered into a Debt Conversion Agreement (the "Conversion Agreement") with the beneficial owners of a portion of the Storage Products business to Maxim Integrated Products, Inc. ("Maxim"). Maxim acquired the Company's SAS/SATA expander product, enclosure and baseboard management devices and certain other assets of the Storage Product business.

Debt Restructuring

        In October 2009, Vitesse completed its debt restructuring transactions. The debt restructuring agreements call for the conversion ofmore than 96.7% of the Company's approximately $110 million aggregate principal amount of 1.5% Convertible Subordinated2024 Debentures due(the "Noteholders"). Pursuant to the Conversion Agreement, the Noteholders agreed to exchange their 2024 intoDebentures for a combination of cash, equity securities, and secured convertible debentures. With respect to the remaining 3.3% of those convertible debentures, the Company is settling its obligations in cash. Additionally, Vitesse has made cash payment of approximately $5 million of its $30 million senior secured loan, the terms of which had been amended to facilitate the debt restructuring. In order to authorize additional shares of common stock, necessary to permit the conversionand newly issued 2014 Debentures, convertible into shares of common stock (the "Debt Exchange"). Certain Noteholders received Series B Preferred Stock. The Debt Modification was completed on October 30, 2009. The treatment of the equity securities issuedDebt Modification and the Debt Exchange are described in Note 4—Debt in the restructuring, we will be holding a special meeting of our shareholders on January 7, 2010 to approve an amendment to our certificate of incorporation.accompanying Consolidated Financial Statements.

Options Backdating and Accounting Irregularities

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

Chronology of Events

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

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

•

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




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•

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



•

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

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

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

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

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

•

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



•

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



•

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

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

•

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



•

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



•

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




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•

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

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

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

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

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

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

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

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

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

The Special Committee—Findings and Recommended Actions

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




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Stock Options

        The Special Committee found that:

•

Members of the Company's former senior management team backdated and manipulated the grant dates of stock options granted by the Company over a number of years;



•

Such backdating and manipulation resulted in lower exercise prices for the stock options; and



•

Members of the former senior management team of the Company subsequently attempted to create or alter documents to conceal these practices from the Board of Directors, outside counsel, and the Special Committee.

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

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

Revenue Recognition and Inventory

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

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

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




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

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

•

Issue current financial statements that are in compliance with all applicable regulatory requirements, so that the Company could file any required curative disclosures with the SEC and re-establish its eligibility for listing on the NASDAQ National Market; and



•

Provide an informed basis for the Company's response to the identified issues, including appropriate corrective and remedial actions.

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

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

•

Fair market value strike prices were supported by insufficient anecdotal evidence.



•

Several grant agreements were modified by the Company, triggering variable accounting; however, such accounting treatment was not applied by the Company at the time of the modification.



•

Several grants were found to have measurement dates that differed from the grant date reflected in the Company's accounting records as determined under APB 25,"Accounting for Stock Issued to Employees," resulting in intrinsic value for the grants that was not recognized and recorded by the Company at the time of the grant.



•

Many option grants were found to have not been approved in accordance with the Company's stock option plans.



•

The Company's historical administration of its options program included certain shortfalls relating to proper adherence to plan requirements, corporate recordkeeping, documentation, and proper accounting treatment for transactions.

Restatement Methodologies

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




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

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

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

Remedial Actions of the Company

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

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

•

Louis R. Tomasetta, the Company's former Chief Executive Officer, Yatin Mody, the Company's former Chief Financial Officer, and Eugene F. Hovanec, the Company's former Executive Vice President, were immediately placed on administrative leave at the commencement of the review of the Special Committee and were terminated as officers and employees in May 2006;



•

Shortly after Louis R. Tomasetta was placed on administrative leave, the Board formed an Executive Committee of the Board comprised of all directors of the Company other than Mr. Tomasetta. Since that time, all Board action has been taken either by the Executive Committee or at meetings of the Board in which Mr. Tomasetta was provided notice but did not participate;



•

Several senior management changes have been made including the appointment of Christopher R. Gardner as Chief Executive Officer in May 2006, the appointment of Richard C. Yonker as Chief Financial Officer in December 2006, and the engagement of Alvarez & Marsal, LLC, specifically Shawn C.A. Hassel of that firm, in April 2006, as interim Chief Financial Officer until Mr. Yonker was appointed as Chief Financial Officer. In December 2006, Mr. Hassel was appointed Chief Restructuring Officer to assist Mr. Gardner with continued improvements to operations and to assist Mr. Yonker in the continued re-staffing of the Company's financial group and the implementation of remedial actions recommended by the




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Special Committee and management. In January 2007, Michael B. Green was appointed Vice President, General Counsel and Secretary of the Company;

•

The Company changed its revenue recognition methodology to use a "sell-through" methodology, under which revenue is not recognized until a sale is made to the ultimate customer, rather than a "sell-in" methodology, under which revenue is recognized when a sale is made to the Company's distributors;



•

The Special Committee instructed management to implement Corporate Governance changes at the Board, management, and employee levels to establish "best practices" aimed at preventing opportunities to manipulate revenues and other financial data;



•

There were several changes made to the Company's Board of Directors and its Committees. On December 14, 2006, Edward Rogas, Jr. was appointed Chairman of the Board and Chairman of the Audit Committee. In June 2007, Willow Shire was appointed Chairperson of the Nominating and Corporate Governance Committee and Compensation Committee;



•

Upgrades were made in stock option administration procedures and controls including amendment of the Company's stock option plan to reflect new requirements and procedures as well as enhancements requiring Compensation Committee approval of all options with very limited delegation of authority;



•

Improving training and monitoring of compliance with the Company's policies and procedures; and



•

Improving corporate recordkeeping, corporate risk assessment procedures, and evaluation of the internal risks of the Company.

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

Industry Trends and Characteristics that Affect Ourthe Company's Business

        In order to achieve sustained, increasing profitability, wethe Company must achieve a combination of revenue growth, increases in margins, and reductions incareful control of its operating expenses. We continueThe Company continues to focus on improving each of these components of ourits financial model.

        In 2009, we faced particularly strong challenges due tofiscal year 2010, the very poor market environment for semiconductors. Our customers took aggressive actions to reduce orders and adjust inventories. As a result we saw sequential declines of our product revenues in both the first quarter ended December 31, 2008 and in the second quarter ended March 31, 2009. Overall, product revenue declined from $218.5 million in fiscal 2008 to $154.9 million in fiscal 2009, a decline of 29.1%. Our core business, Carrier and Enterprise networking, had a smaller proportional decline,Networking markets showed improvements from $169.5 millionthe severely depressed conditions in fiscal 2008year 2009. While improved, market conditions have not yet returned to $129.4 millionthe strength seen prior to the recession. The recovery was generally stronger in fiscal 2009, a decline of 23.7%. In addition, our non-core product revenues continuedEnterprise segments than in Carrier segments, where demand has remained highly variable from quarter to decline from $49.1 million in fiscal 2008 to $25.6 million in fiscal 2009, a decrease of 47.9%. In response, we reduced overall operating expenses from $220.2 million in fiscal 2008 to $155.8 million in fiscal 2009 a decrease of 29.2%. This was done by implementing a variety of aggressive cost-cutting measures including reduction in workforce of approximately 12%, reduction in salaries for almost all employees, and improved efficiencies in operations. We saw improving economic trends in the second half of the year that allowed us to show sequential revenue growth in third and fourth quarter of fiscal 2009.




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quarter. During the year, the supply chain for semiconductor products, including wafer fabrication, assembly, and testing, experienced extended lead times and periodic shortages as the overall demand for consumer electronics recovered. Due to the depressedthese market conditions, many of ourthe Company's major customers and the industry in general, have been going through substantial consolidations,experienced increasing the unpredictability of these end markets.and variability in their business. In spite of these difficultcontinued challenging business conditions, we believethe Company believes that the long-term prospects for the markets that we participatethe Company participates in remain strong. We believe we are investing in the fastest growing segments of these markets.

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

        OurThe Company believes it is investing in the fastest growing segments of its target markets. The Company has invested in two major trends in networking:

1.

The migration of almost all networks to Ethernet-based technologies. This migration is happening now in Enterprise and Carrier Networks, and the Company anticipates further opportunities in cloud computing and smart grids in the future.



2.

The need for more bandwidth that will drive increasing speeds in the networks.

        The Company's new products address the two largest and fastest growing segments—Carrier Ethernet and Enterprise Networking. Many also serve the biggest market—Carrier Mobile Infrastructure—as that market starts to require Carrier Ethernet capabilities.

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

        In 2010, the Company set an aggressive goal to deploy 30 new products to the market. On September 29, 2010, the Company announced the VSC7111, an 11.5-Gbps quad-channel signal conditioner for PCIe Gen3 applications as the 30th new product released in fiscal year 2010, an increase of 260% from the average number of new products introduced over the prior three year period. The majorityincrease is a result of our sales effort isthe Company's focus on deploying its intellectual property into products based on Ethernet technology that can be leveraged across large markets in Enterprise and Carrier Networking. The Company's new product releases were focused in four growth product lines: 20 products in its Ethernet Switching and PHY product line, 10 products in its Connectivity product line.

        The Ethernet Switch and PHY products allow the Company's customers to develop highly integrated, low power switches in SME and other Enterprise Networking applications, as well as wireless cell site routers, microwave backhaul equipment, and switching subsystems in Carrier Networking applications. The Company's new products in connectivity include new crosspoint switches and signal conditioners with data rates from 1 Gbps to 12 Gbps. These products have very earlybroad applications across a variety of markets, and again, re-affirm Vitesse's leadership in low-power connectivity solutions for telecom, data center, and video equipment. The Company believes that the developmentnew products introduced in fiscal year 2010 will substantially improve its ability to address the needs of our customers' systems, where we competeits customer base.

        The Company competes for market share based on its customers' selection of ourthe Company's components over our competitors.its competitors during the design phase of its customers' systems. The Company's ability to compete is dependent on the needs of its customers, how well its products address these needs, its corporate relationships, and a variety of other factors. Once selected for a "design win," we havethe




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Company has a high probability of holding the majority market share for this product. Many of ourthe Company's large customers have their own internal design teams, which causes usthe Company to compete against these teams when ourits customers makeconsider a "make vs. buy" decision. The trend in the industry has been, and continues to be, to outsource more designs to companies such as ours.Vitesse. While we expectthe Company expects this trend to continue, we view thisthe Company views these "internal" design effortefforts as a significant competitive threat. The "design win" is a critical milestone in the path to generating revenue, as ourthe Company's products, and ourthe Company's customers' products, are highly complex and typically require many years of development, testing, and qualification before they reach full production. As a result, it may be difficult to forecast the potential revenue from new and existing products at the time we begin ourthe Company begins its development efforts or achieve ourachieves its "design wins." In fiscal 2009, we attained our internal design win goals set at the beginning of the year.

        OurThe Company's ability to improve margins depends upon several factors, including ourthe Company's ability to continue to reduce ourits cost of revenues, including ourits wafer, assembly, and test costs, ourits ability to improve manufacturing yields, ourits ability to continue to migrate ourits products to next-generation process nodes, and ourits ability to reduce average selling price ("ASP") erosion. The Company has active programs in place to address each of these factors.

As a fabless semiconductor company, we outsource a substantial amountCompany, the Company outsources the majority of our manufacturing, including 100% of our wafer and package assembly fabrication.its manufacturing. As such, wethe Company must manage ourits supply chain efficiently to ensure competitive materials pricing and effective lead-times for the materials that we purchase.the Company purchases. The semiconductor industry in which we competethe Company competes is highly cyclical. Typically, in periods of strong demand in the semiconductor industry, wethe Company may experience longer lead times, difficulties in obtaining capacity and/or meeting commitments to ourfor its required deliveries. In addition, we are subject to occasional supply chain issues such as EOL notices on certain material and/or products that may impact our ability to continue to support certain products that may impact revenue and/or require us to incur additional costs to provide alternative sources. WhileToday, 100% of ourits wafer fabfabrication and assembly is outsourced, today, we performoutsourced. During 2010, the Company successfully moved 'wafer probe' and 'final test' at ourtesting' from its in-house test facility in Camarillo, California. In 2009, we began a process to move the large majority of this facilityCalifornia to an outsourced test operation in Asia. We expect this process to take 9-12 months to complete, at the end of which the majority of our products will be tested in Asia at an outsourced test facility.Asian subcontractor. This production model haswill provide the Company substantial advantages in terms of lower fixed cost, reduced cycle times, and lower inventory levels.

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




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its ability to improve yields on some products. Cost of revenues

        Gross margin is also impacted by the ASP of ourthe Company's products, which is primarily determined by competitive factors within the specific markets we serve.the Company serves. Average margins vary widely within the markets we serve,the Company serves, with the Carrier Networking market having the highest average margins and the Enterprise Networking market having the lowest average margins. We endeavorThe Company endeavors to increase margins by providing products that have substantial added value relative to ourits competition.

        We continueThe Company continues to focus on improving our operational efficiencies. We reduced ourhave tight control over its operating expenditures from $220.2 million in fiscal 2008 to $155.8 million in fiscal 2009. We continue to focus onexpenses. The Company considers cost of revenues, engineering, research and development ("R&D") and, selling, general and administrative costs ("SG&A") that areexpenses as operating expenses. The Company reduced overall operating expenses from $206.9 million in fiscal year 2008 to $164.3 million in fiscal year 2009 and to $161.1 million in fiscal year 2010. This reduction in spending was accomplished through implementing a variety of aggressive cost-cutting measures including reduction in workforce and improved efficiencies in operations. The Company reduced its overall headcount by 6% in 2010 while increasing its headcount in R&D. The Company continues to focus on R&D and SG&A as the major elements of operating expense.

        To remain competitive, wethe Company must efficiently deploy ourits R&D resources into markets that will provide ourits future revenue growth. OurThe Company's R&D costs were reducedincreased from $50.0$45.7 million in fiscal 2008




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year 2009 to $45.6$51.1 million in fiscal 2009 through several cost reduction efforts including closingyear 2010 as the result of our InP fabrication facility in Camarillo, California,its stated commitment to develop and a substantial reduction in the costs of our CAD tools used to execute our designs. We believe that the majority of ourrelease 30 new products. The Company's R&D cost reductions have beencosts decreased from $50.1 million in areas outside our strategic focus and were achieved through leveraging design efficiencies derived from standardization on Ethernet-based products. In fact, we increased our headcount in R&D by 6 people or 2.5% from fiscal year 2008 to $45.7 million in fiscal year 2009. The percentage of its total headcount that is attributed to R&D has steadily increased during the last three years from 37% in 2008 to 42% in 2009 to 47% in 2010. A large part of this growth is in ourits Hyderabad, India design center where wethe Company can more efficiently execute product verification and validation. OurThe Company's India design center has been re-targeted from storage products ontoto products for Carrier and Enterprise Networking applications. We continueThe Company continues to focus ourits R&D efforts and to seek opportunities to more efficiently deploy ourits R&D resources into larger, growing markets. In 2007, we created a Strategy

        The Company continues to reduce SG&A expenses. The Company's primary focus is on reducing legal, accounting and Technology Office to better identify and exploit emerging opportunities in the marketplace.

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

        As is common in the industry, we sellthe Company sells semiconductor products directly to OEMs and also useuses a number of distributors and logistics providers to sell products indirectly to ourits customer base. These channel partners enable usIn 2010, the Company continued its plans to provide improved customer support and local inventorymove more of its business to our highly distributed customer base. Oura direct model. The Company's direct gross shipments to customers were $63.0$82.5 million or 40.7%49.8% of total product revenue in fiscal 2009year 2010, compared with $55.3$49.8 million or 25.3% of total product revenue32.1% in fiscal 2008. Our indirect gross channel shipments were $105.1year 2009, and $45.3 million or 20.7% in fiscal 2009 and $175.6 million in fiscalyear 2008.

        In 2009, we accelerated our plans to move more of our business to a direct model. By the fourth quarter of fiscal 2009 we shipped 49.3% of our product direct to customers. We expect to continue to transition to more direct shipments. Our The Company's accounting policy is to include all distributor channel inventory on our balance sheet as part ofuses the "sell-through" model. The "sell-through" model recognizes revenue only upon shipment of the merchandise from ourits distributor to the final customer. ForBecause the Company uses the "sell-through" methodology the Company may have variability in its revenue from quarter to quarter as customers have substantial flexibility to reschedule backlog with most of the Company's channel partners as part of the terms and conditions of sale. In addition, the "sell-through" policy requires that the Company include all distributor channel inventory on its balance sheet as part of its reported inventory. The Company's indirect gross channel sales were $83.1 million, $105.1 million, and $173.2 million in fiscal year 2010, 2009, distributors Nu Horizons Electronics, Corp. (including its subsidiary Titan Supply Chain Services), Weikeng Industrial Co. Ltd. and direct customer Huawei Technologies Co., Ltd. accounted for 36.0%, 7.5%, and 12.0%, respectively, of our net revenues. For fiscal 2008, distributors Nu Horizons Electronics, Corp. (including its subsidiary Titan Supply Chain Services), Weikeng Industrial Co. Ltd. and direct customer IBM accounted for 48.8%, 9.2% and 11.3%, respectively, of our net revenues. For fiscal 2007, distributors Nu Horizons Electronics, Corp. (including its subsidiary Titan Supply Chain Services), Weikeng Industrial Co. Ltd. and direct customer IBM accounted for 50.1%, 7.1% and 11.0%, respectively, of our net revenues.




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        OurThe Company's sales are distributed geographically acrossaround the world. In 2009, 36%2010, 40.3% of ourthe Company's sales were to North America, 52%44.3% to Asia, and 12%15.4% to Europe. In 2008, 51%2009, 36.0% of ourthe Company's sales were to North America, 38%52.0% to Asia, and 11%12.0% to Europe. In 2007, 52%2008, 50.8% of ourthe Company's sales were to North America, 34%38.6% to Asia, and 14%10.6% to Europe.

        It is critical that the Company efficiently deploy its capital. Inventory levels increased to $27.3 million as of September 30, 2010, from $18.8 million as of September 30, 2009. Inventory increased as its channel partners and distributors took action to increase their inventory in response to stronger demand. The Company was able to respond quickly to the change in demand by increasing orders to its suppliers.

Implementation of Ourthe Company Strategy

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

•

Expanded its business in Europe and Asia, primarily in China, as the result of improved penetration into Tier 1 Networking OEMs. In 2010, its top customer was Huawei Technologies, the leading provider of Carrier Networking equipment in China.



•

Redeployed and focused its R&D resources on product developments primarily in the Carrier and Enterprise Networking markets; in 2009, despite challenging economic conditions, the Company continued to invest in R&D at a level necessary to drive future growth. In fiscal year 2010, the Company accelerated the deployment of a new generation of technology with 30 new products that will substantially advance its position in critical new markets.




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•

Transitioned to a fully outsourced manufacturing model by moving the majority of its California probe and test facility to an outsourced, offshore Asian test contractor, which was completed in 2010. This production model substantially reduced its fixed costs, reduced overall cost of test, and will allow the Company to reduce its manufacturing cycle times and better serve its growing customer base in Asia.



•

Divested portions of its Storage Products business that were not consistent with other areas of the Company whose products are based on Ethernet technology. The Company completed the sale of those portions to Maxim Integrated Products, Inc. ("Maxim"), on October 29, 2007, for $62.8 million plus earn-outs based on the business meeting certain criteria, as detailed in the agreement.



•

Exited the GaAs and InP product business and closed ourits Camarillo, California wafer fabrication facility. Fixed assets with a zero net book value were sold for $2.5 million, net of commissions, on February 27, 2008. In 2010, we are planning

        The Company is improving the efficiency of its R&D primarily by focusing its resources on two large, but independent markets: Carrier Networking and Enterprise Networking. Both of these markets rely increasingly on Ethernet technology to substantially reduce the remaining portion of our in-house manufacturing, our probedeploy next-generation networks and test facility, and move these operations to an outsourced, offshore facility.



•
Divested portions of our Storage Products business that were not consistent with other areas ofservices, which allows the Company whose products are based on Ethernet technology. We completedto maximize the saleimpact of those portions to Maxim Integrated Products, Inc. ("Maxim"), on October 29, 2007, for $62.8 million plus a potential earn-out basedits R&D budget. The Company believes its focus on the business meeting certain criteria, as detailed in the agreement.


•
Redeployed and focused our R&D resources on product developments primarilygrowth of Ethernet technology in Carrier and Enterprise Networking markets; In 2009, despite challenging economic conditions, we continuedNetworks is beginning to investpay dividends. New products released in R&D at a level necessary to drive future growth. In fiscal 2010 we will accelerate the deployment of a new generation of products that will substantially advance our positionexpand its served markets, allowing the Company to compete in critical newlarge, growing markets.


•
Expanded our business in Europe and Asia, primarily China, as the result of improved penetration into Tier 1 networking OEMs; In 2009, our top customer was Huawei Technologies Co., Ltd., the leading provider of Carrier networking equipment in China; and


•
Enhanced our top customer list to include new names such as IBM and HP in the Enterprise server, storage and networking markets and key Taiwanese ODMs in the Enterprise switch and router markets. In 2009, we continued to expand our customer list with new top 20 customers from Asia and Europe.

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

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

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Fiscal 20092010 Actions

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

        As of March 31, 2009,shorten manufacturing time, the Company eliminated 64 positions; approximately 12%test activities at the Camarillo, California location and outsourced testing to a third-party facility. This restructuring plan was approved in October 2009 with implementation efforts starting immediately and full transition of our total workforce. Of these 53 positions, or approximately 10%testing to the third-party completed during the third quarter of the reductionsfiscal year 2010. This restructuring plan included the termination of approximately 50 employees. In connection with this restructuring, the Company recorded restructuring charges of approximately $0.7 million in the workforce, relatedfirst quarter for severance costs to full-time employees;be incurred during the remaining reductions related to temporary staffing.fiscal year ended September 30, 2010. The Company did not incur anycosts for impairment of fixed assets or facilities costs related to workforce reductions. All actions related to workforce reductions through March 31, 2009 are complete and the Company does not have any additional reductions planned for the remainderas part of the fiscal year. A severance expense of $0.5 million is included in our operating results for the twelve months ended September 30, 2009.restructuring plan.

OurThe Company's Business Product Lines

        Beginning in 2008, Vitesse classified product revenues into three markets: Carrier Networking, Enterprise Networking and Non-Core. These classifications reflect the major trends in ourthe Company's product lines and how they map into ourits customer base. In addition, we havethe Company has an IP revenue stream that was introduced in the last quarter of 2008 and continued with the sale of certain patents in the third quarter of 2009.2008.

Carrier Networking

        The global telecommunications Carrier Network, which includes networks delivering voice and data services, has grown dramatically to a complex combination of networks. These networks are often