Use these links to rapidly review the document
TABLE OF CONTENTS

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q


ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, ~~2009~~2010
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission file number 0-19654

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


Delaware (State or other jurisdiction of incorporation or organization)		77-0138960 (I.R.S. Employer Identification No.)
741 Calle Plano Camarillo, California 93012 (Address of principal executive offices, including zip code)

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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


Large accelerated filer o		Accelerated filer ý		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of August ~~4, 2009~~5, 2010 there were ~~230,905,580~~23,986,531 shares of the registrant's $0.01 par value common stock outstanding.

Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

(UNAUDITED) QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, ~~2009~~2010

TABLE OF CONTENTS


	PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Unaudited Consolidated Balance Sheets as of June 30, ~~2009~~2010 and September 30, ~~2008~~2009	3
	Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended June 30, ~~2009~~2010 and ~~2008~~2009	4
	Unaudited Consolidated Statement of Shareholders' Deficit and Comprehensive Loss for the Nine Months Ended June 30, 2010	5
	Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended June 30, ~~2009~~2010 and ~~2008~~2009	56
	Notes to Unaudited Consolidated Financial Statements	67
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	3421
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	5933
Item 4.	Controls and Procedures	6034
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	6235
Item 1A.	Risk Factors	6235
Item 2.	Unregistered Sales of Equity and Use of Proceeds	7335
Item 3.	Defaults Upon Senior Securities	7335
Item 4.	~~Submission of Matters to a Vote by Shareholders~~Reserved	7335
Item 5.	Other Information	7335
Item 6.	Exhibits and Reports on Form 8-K	7436

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

VITESSE SEMICONDUCTOR CORPORATION

UNAUDITED CONSOLIDATED BALANCE SHEETS

June 30,
2009 September 30,
2008

(in thousands, except share data)

ASSETS

Current assets:

Cash and cash equivalents
$ 51,422 $ 36,722

Accounts receivable, net
14,898 6,307

Inventory
23,936 37,466

Assets held for sale
— 3,164

Restricted cash
395 592

Prepaid expenses and other current assets
4,345 4,011

Total current assets
94,996 88,262
Property, plant and equipment, net
7,419 8,084
Goodwill
— 191,418
Other intangible assets, net
1,833 913
Other assets
3,388 3,600

$ 107,636 $ 292,277

LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS'
(DEFICIT) EQUITY

Current liabilities:

Accounts payable
$ 16,980 $ 16,101

Accrued expenses and other current liabilities
9,825 20,242

Derivative liability
4,636 —

Deferred revenue
640 2,721

Current portion of debt, net of discount of $437 at June 30, 2009
29,563 —

Convertible subordinated debt
96,710 —

Total current liabilities
158,354 39,064
Other long-term liabilities:
1,703 1,564
Long-term debt, net of discount of $577 at September 30, 2008
44 29,423
Convertible subordinated debt
— 96,700

Total liabilities
160,101 166,751

Minority interest
166 165
Commitments and contingencies

Shareholders' (deficit) equity:

Preferred stock, $0.01 par value. 10,000,000 shares authorized; none outstanding
— —

Common stock, $0.01 par value. 500,000,000 shares authorized; 230,905,580 shares outstanding at June 30, 2009 and 226,205,580 at September 30, 2008
2,314 2,267

Additional paid-in-capital
1,753,846 1,747,324

Accumulated deficit
(1,808,791 ) (1,624,230 )

Total shareholders' (deficit) equity
(52,631 ) 125,361

$ 107,636 $ 292,277

			June 30, 2010			September 30, 2009

			(in thousands, except share data)
ASSETS
Current assets:
	Cash and cash equivalents		$	38,621		$	57,544
	Accounts receivable, net			13,265			15,074
	Inventory			24,241			18,809
	Restricted cash			391			398
	Prepaid expenses and other current assets			4,604			4,956

		Total current assets		81,122			96,781
Property, plant and equipment, net				8,015			7,874
Other intangible assets, net				1,046			1,541
Other assets				3,845			3,077

			$	94,028		$	109,273

LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
	Accounts payable		$	14,916		$	11,191
	Accrued expenses and other current liabilities			15,542			14,182
	Derivative liability			—			12,209
	Deferred revenue			4,720			4,566
	Current portion of debt and capital leases			10			5,236
	Convertible subordinated debt			—			10,000

		Total current liabilities		35,188			57,384
Other long-term liabilities				1,796			1,810
Long-term debt, net of discount				25,689			24,652
Derivative liability				29,216			—
Convertible subordinated debt				38,606			86,700

		Total liabilities		130,495			170,546

Commitments and contingencies
Shareholders' deficit:
	Preferred stock—Series B, $0.01 par value, 10,000,000 shares authorized; 219,111 and no shares outstanding at June 30, 2010 and September 30, 2010, respectively			2			—
	Common stock, $0.01 par value, 250,000,000 shares authorized; 23,819,521 and 11,544,803 shares outstanding at June 30, 2010 and September 30, 2009, respectively			238			115
	Additional paid-in-capital			1,816,373			1,756,797
	Accumulated deficit			(1,853,162	)		(1,818,271	)

		Total Vitesse Semiconductor Corporation shareholders' deficit		(36,549	)		(61,359	)
	Noncontrolling interest			82			86

		Total shareholders' deficit		(36,467	)		(61,273	)

			$	94,028		$	109,273

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

Three months ended June 30, Nine months ended June 30,

2009 2008 2009 2008

(in thousands, except per share data)
(in thousands, except per share data)

Product revenues
$ 36,356 $ 55,041 $ 115,743 $ 163,176
Intellectual property revenues
8,250 — 13,250 —

Net revenues
44,606 55,041 128,993 163,176
Costs and expenses:

Cost of revenues
17,282 27,965 57,957 79,977

Engineering, research and development
11,200 12,458 33,720 37,584

Selling, general and administrative (including gain on sale of fixed assets of $3.2 million for the nine months ended June 30, 2008 and a gain on the sale of building of $2.9 million for the nine months ended June 30, 2009)
11,412 14,570 31,761 37,758

Accounting remediation & reconstruction expense & litigation costs
(13,206 ) 2,067 (9,742 ) 8,813

Goodwill impairment
— — 191,418 —

Amortization of intangible assets
362 310 1,068 2,204

Costs and expenses
27,050 57,370 306,182 166,336

Income (loss) from operations
17,556 (2,329 ) (177,189 ) (3,160 )
Other (expense) income:

Interest expense, net
(5,804 ) (1,112 ) (8,104 ) (2,706 )

Other (expense) income, net
(38 ) 3,513 58 4,236

Other (expense) income, net
(5,842 ) 2,401 (8,046 ) 1,530
Income tax (benefit) expense
(696 ) 3 (600 ) (546 )
Minority interests in earnings of consolidated subsidiary
— (660 ) 1 (660 )

Income (loss) from continuing operations before discontinued operations
12,410 (591 ) (184,634 ) (1,744 )
Discontinued operations

Income from discontinued operations, net of tax of $901 and $997 and gain on sale of $21,509 for the three and nine months ended June 30, 2008, respectively
71 1,703 71 8,101

Net income (loss)
$ 12,481 $ 1,112 $ (184,563 ) $ 6,357

Income (Loss) per Share

Income (loss) per share (basic and diluted):

Continuing operations
$ 0.05 $ 0.00 $ (0.81 ) $ (0.01 )

Discontinued operations
0.00 0.01 0.00 0.04

Net income (loss) per share
$ 0.05 $ 0.01 $ (0.81 ) $ 0.03

Weighted average shares outstanding:

Basic
230,906 223,556 229,098 223,556

Diluted
231,735 223,556 229,098 223,556

				Three months ended June 30,						Nine months ended June 30,

				2010			2009			2010			2009
				(in thousands, except per share data)						(in thousands, except per share data)
Product revenues				$	37,533		$	36,356		$	122,805		$	115,743
Intellectual property revenues					—			8,250			290			13,250

		Net revenues			37,533			44,606			123,095			128,993
Costs and expenses:
		Cost of revenues			15,702			17,282			54,167			57,957
		Engineering, research and development			13,674			11,200			37,909			33,720
		Selling, general and administrative (net of a gain on the sale of building of $2.9 million for the nine months ended June 30, 2009)			8,669			11,412			28,281			31,761
		Accounting remediation & reconstruction expense & litigation costs			—			(13,206	)		73			(9,742	)
		Goodwill impairment			—			—			—			191,418
		Amortization of intangible assets			182			362			613			1,068

			Costs and expenses		38,227			27,050			121,043			306,182

Income (loss) from operations					(694	)		17,556			2,052			(177,189	)
Other income (expense):
		Interest income (expense), net (including the change in derivative liability valuation of $32.8 million and ($5.9) million for the three and nine months ended June 30, 2010, respectively, and ($4.6) million for the three and nine months ended June 30, 2009)			30,275			(5,804	)		(12,896	)		(8,104	)
		Gain (loss) on extinguishment of debt			265			—			(21,311	)		—
		Other income (expense), net			(61	)		(38	)		44			58

			Other income (expense), net		30,479			(5,842	)		(34,163	)		(8,046	)
Income (loss) before income tax expense (benefit)					29,785			11,714			(32,111	)		(185,235	)
	Income tax (benefit) expense				(3,244	)		(696	)		2,781			(600	)

Net income (loss) from continuing operations					33,029			12,410			(34,892	)		(184,635	)
	Income from discontinued operations, net				—			71			—			71

Net income (loss)					33,029			12,481			(34,892	)		(184,564	)

		Net loss attributable to noncontrolling interest			—			—			(1	)		(1	)
		Fair value adjustment of Preferred Stock—Series B			—			—			126			—

Net income (loss) available to common shareholders				$	33,029		$	12,481		$	(35,017	)	$	(184,563	)

Net income per preferred share
Net income				$	6.92		$	—		$	—		$	—
Preferred shares outstanding					219			—			—			—
Net income (loss) per common share—basic
		Continuing operations		$	1.38		$	1.07		$	(1.74	)	$	(16.12	)
Net income (loss)				$	1.38		$	1.08		$	(1.74	)	$	(16.11	)
Net (loss) income per common share—diluted
		Continuing operations		$	0.96		$	1.07		$	(1.74	)	$	(16.12	)
Net income (loss)				$	0.99		$	1.08		$	(1.74	)	$	(16.11	)
Weighted average common shares outstanding:
Basic					22,780			11,545			20,105			11,455
Diluted					34,544			11,587			20,105			11,455

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT AND
COMPREHENSIVE LOSS

																		Total Vitesse Semiconductor Corporation Shareholders' Deficit

		Preferred Stock						Common Stock
		Preferred Stock						Common Stock				Additional Paid-in-Capital			Accumulated Deficit						Noncontrolling Interest			Total Shareholders' Deficit
(In thousands, except share data)		Shares			Amount			Shares		Amount		Additional Paid-in-Capital			Accumulated Deficit						Noncontrolling Interest			Total Shareholders' Deficit
	Balance at September 30, 2009		—		$	—			11,544,803	$	115	$	1,756,797		$	(1,818,271	)	$	(61,359	)	$	86		$	(61,273	)

Net loss			—			—			—		—		—			(34,891	)		(34,891	)		(1	)		(34,892	)
Compensation expense related to stock options and awards			—			—			—		—		1,724			—			1,724			—			1,724
Conversion of Series B Preferred Shares			(551,675	)		(6	)		2,758,377		28		(22	)		—			—			—			—
Conversion of 8% Debentures									869,531		9		6,004						6,013						6,013
Debt restructuring costs			—			—			—		—		(1,050	)		—			(1,050	)		—			(1,050	)
Tax expense on debt transaction			—			—			—		—		512			—			512			—			512
Shares issued pursuant to debt restructuring			770,786			8			8,646,810		86		52,408			—			52,502			—			52,502
Distribution to minority interest holders			—			—			—		—		—			—						(3	)		(3	)

Balance at June 30, 2010			219,111		$	2			23,819,521	$	238	$	1,816,373		$	(1,853,162	)	$	(36,549	)	$	82		$	(36,467	)

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine months ended June 30,

2009 2008

(in thousands)

Cash flows from operating activities:

Net (loss) income
$ (184,563 ) $ 6,357
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:

Depreciation and amortization
3,260 4,324

Share-based compensation
2,381 3,091

Fair value adjustment to premium put
4,636 —

Impairment of goodwill
191,418 —

Allowance for sales return reserve
(37 ) (60 )

Amortization of debt issuance costs and debt discounts
566 565

Gain on sale of Storage Products business
— (21,509 )

(Loss) gain on disposal of fixed assets
7 (3,152 )

Gain on sale of Colorado building
(2,924 ) —

Forgiveness of interest
— (497 )

Minority interest in earnings of consolidated subsidary
— 660

Realized gain on investments
— (3,372 )
Change in operating assets and liabilities:

Accounts receivable
(8,554 ) 1,595

Inventory
13,530 (7,835 )

Restricted cash
197 1,556

Prepaids and other current assets
(566 ) 2,391

Accounts payable
880 4,419

Accrued expenses and other liabilities
(5,898 ) (6,457 )

Deferred revenue
(2,082 ) (9,264 )

Net cash provided by (used in) operating activities
12,251 (27,188 )

Cash flows from investing activities:

Proceeds from sale of investments
— 6,073

Restricted cash
17 (10 )

Proceeds from sale of Colorado building
6,500 —

Transaction costs for sale of Colorado building
(547 ) —

Disposal of fixed assets
— 3,207

Sale of Storage Products business
— 62,845

Transaction costs for sale of Storage Products business
— (1,636 )

Capital expenditures
(1,540 ) (4,290 )

Distribution to minority partners for sale of investments
1 —

Purchase of intangibles
(1,982 ) —

Net cash provided by investing activities
2,449 66,189

Cash flows from financing activities:

Repayment of debt
— (59,471 )

Proceeds from debt
— 29,250

Debt issuance costs
— (1,046 )

Net cash used in financing activities
— (31,267 )

Net increase in cash
14,700 7,734
Cash and cash equivalents at beginning of period
36,722 25,976

Cash and cash equivalents at end of period
$ 51,422 $ 33,710

				Nine months ended June 30,

				2010			2009
				(in thousands)
Cash flows from operating activities:
Net loss				$	(34,892	)	$	(184,564	)
Adjustments to reconcile net loss to net cash provided by operating activities:
	Depreciation and amortization				2,615			3,260
	Share-based compensation				1,724			2,381
	Change in market value of embedded derivative liability				5,860			4,636
	Gain on conversion of debt				(265	)		—
	Loss on extinguishment of debt				20,765			—
	Impairment of goodwill				—			191,418
	Capitalization of interest				937			—
	Amortization of debt issuance costs				605			566
	Amortization of debt discount				1,311			—
	Gain on sale of Colorado building				—			(2,924	)
	Other				511			(29	)
Change in operating assets and liabilities:
	Accounts receivable				1,809			(8,554	)
	Inventory				(5,432	)		13,530
	Restricted cash				7			197
	Prepaids and other current assets				259			(566	)
	Accounts payable				3,725			880
	Accrued expenses and other liabilities				1,346			(5,898	)
	Deferred revenue				154			(2,082	)

		Net cash provided by operating activities			1,039			12,251

Cash flows from investing activities:
	Proceeds from sale of Colorado building				—			6,500
	Transaction costs for sale of Colorado building				—			(547	)
	Capital expenditures				(2,150	)		(1,540	)
	Purchase of intangible assets				(111	)		(1,982	)
	Other				(3	)		18

			Net cash (used in) provided by investing activities		(2,264	)		2,449

Cash flows from financing activities:
	Payment of convertible debentures				(10,000	)		—
	Payment of senior debt				(5,000	)		—
	Debt issuance costs				(1,365	)		—
	Equity issuance costs				(1,050	)		—
	Prepayment fee on senior debt				(50	)		—
	Payment of capital lease obligations				(233	)		—

			Net cash used in financing activities		(17,698	)		—

Net (decrease) increase in cash					(18,923	)		14,700
Cash and cash equivalents at beginning of period					57,544			36,722

Cash and cash equivalents at end of period				$	38,621		$	51,422

Cash paid during the year for:
	Interest			$	4,155		$	3,402
	Income taxes			$	643		$	2,352
Supplemental disclosure of non-cash transactions:
Non-cash investing and financing activities:
	Issuance of 2014 convertible debentures			$	40,343		$	—
	Common stock issued in exchange for 2024 debentures			$	36,317		$	—
	Preferred stock—Series B issued in exchange for 2024 debentures			$	16,187		$	—
	Compound embedded derivative issued in exchange for 2024 debentures			$	27,925		$	—
	Common stock issued in exchange for 2014 debentures			$	6,013		$	—
	Common stock issued in exchange for Preferred Stock Series B			$	27,584		$	—

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, ~~2009~~2010

Note 1. The Company and its Significant Accounting Policies

Description of Business

Vitesse Semiconductor Corporation ("~~Vitesse"~~Vitesse," the "Company," "us" or ~~the "Company"~~"we") is a leading worldwide supplier of high-performance integrated circuits ("ICs") that are utilized primarily by manufacturers of networking systems for ~~Carrier, Enterprise~~carrier, enterprise and ~~Storage~~storage communications applications. Vitesse designs, develops and markets a diverse portfolio of high-performance, cost-competitive semiconductor products. For more than 25 years, Vitesse has led the transition of new technologies in communications networks.

Our customers include leading communications and enterprise original equipment manufacturers ("OEMs") such as Alcatel Lucent, Ciena Corporation, Cisco Systems, Inc., IBM, Telefonaktiebolaget LM Ericsson, Fujitsu Limited, Hewlett- Packard Co., Hitachi, Ltd., Huawei Technologies Co., Ltd., H3C Technologies Co., Limited, Nortel Networks Corp., Nokia Siemens Networks B.V., Tellabs, Inc., and ZTE Corporation.

We have a worldwide presence. As of June 30, 2009, we operated four domestic design centers in the U.S., in California, Oregon, Massachusetts, and Texas, and four international design centers in Taiwan, Denmark, Germany, and India.

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

~~Fiscal Periods~~

~~The Company's fiscal year is October 1 through September 30. References made to the third quarters of fiscal 2009 and fiscal 2008 relate to the quarters ended June 30, 2009 and 2008, respectively.~~

Basis of Presentation ~~and Going Concern Uncertainty~~

The interim unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Securities and Exchange Commission ("SEC") Form 10-Q and Article 10 of SEC Regulation S-X. They do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Therefore, these financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended September 30, ~~2008,~~2009, included in our Annual Report on Form 10-K filed with the SEC on December ~~31, 2008.~~14, 2009.

The consolidated financial statements included herein are unaudited; however, they contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly our consolidated financial position at June 30, ~~2009~~2010 and September 30, ~~2008, and~~2009, the consolidated results of our operations for the three and nine months ended June 30, ~~2009~~2010 and ~~2008 and~~2009, our consolidated cash flows for the nine months ended June 30, 2010 and 2009 and ~~2008.~~the changes in our shareholders' equity/deficit and comprehensive loss for the nine months ended June 30, 2010. The results of operations for the three and nine months ended June 30, ~~2009~~2010 are not necessarily indicative of the results to be expected for future quarters or the full year.

Immediately prior to the one-for-20 reverse stock split on June 30, 2010, there were five billion shares of common stock authorized and 476,399,949 common shares issued and outstanding. Subsequent to the reverse stock split, there were 250 million common shares authorized, 23,819,521 common shares issued and outstanding. The Company ~~has incurred net losses historically~~did not issue fractional shares in connection with the reverse stock split and ~~has used~~stockholders otherwise entitled to receive fractional shares received cash in ~~operating activities,~~lieu of fractional shares. All share and ~~has an accumulated deficit~~per share amounts have been retroactively adjusted to reflect the reverse stock split. There was no net effect on total shareholders' equity as a result of ~~$1.8 billion as of June 30, 2009. The Company also has significant contractual obligations related to its debt for~~ the ~~fiscal year 2009 and beyond. Management believes we have~~reverse stock split.

Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, ~~2009~~

~~Note 1. The Company and its Significant Accounting Policies (Continued)~~

sufficient resources to fund our normal operations over the next three months, through at least September 30, 2009. However, holders of our 1.5% Convertible Subordinated Debentures due 2024 (the "2024 Debentures") have the right to require us to repurchase the 2024 Debentures on October 1, 2009 for 113.76% of the principal amount of the 2024 Debentures to be purchased. This 2009 repurchase right would result in an additional payment of $13.3 million on the $96.7 million outstanding 2024 Debentures. We currently do not have the resources to repay the principal amount and related premium if the 2024 Debentures were put to the Company for repayment on October 1, 2009.

We are working to either renegotiate the terms of or find a means to repay the 2024 Debentures. However, to date, we have not been able to renegotiate those terms or find a source of financing to repurchase or refinance the 2024 Debentures. If we have insufficient cash to repurchase all of the 2024 Debentures tendered for repurchase, our failure to repurchase such 2024 Debentures would likely result in an event of default under the 2024 Debentures and cause an event of default under our $30 million secured debt agreement, which in turn would likely result in an acceleration of that debt as well. In November 2008, our Board of Directors formed a Strategic Development Committee (the "SDC") for the purpose of exploring strategic alternatives. In December 2008, we hired a financial advisor to assist the SDC with its efforts and in 2009 we hired an additional financial advisor to advise and assist the SDC with potential strategies for restructuring the terms of the 2024 Debentures. The SDC is continuing to explore strategic alternatives for repayment of the 2024 Debentures and strategies for restructuring the terms of the 2024 Debentures. There can be no assurance that we will be successful in raising additional capital, entering into any strategic transaction or renegotiating or settling all or any part of the 2024 Debentures prior to October 1, 2009. If we are unable to renegotiate or settle the 2024 Debentures, our business, financial condition and results of operations will likely be materially and adversely affected, as a result of these circumstances there exists significant uncertainty about the Company's ability to continue as a going concern. The accompanying financial statements have been prepared on the basis of the Company continuing as a going concern. No adjustments have been made to carrying value of the assets and liabilities that might result from the outcome of this uncertainty.

~~Subsequent Events~~

~~In May 2009, the FASB issued FAS No. 165, "~~~~Subsequent Events,"~~which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. We have considered subsequent events for recognition or disclosure through August 10, 2009, the date of issuance, in preparing the consolidated financial statements and notes thereto (See—Subsequent Events).

~~Use of Estimates~~

The preparation of financial statements in accordance with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes to the financial statements. We regularly evaluate estimates and assumptions related to revenue recognition, allowances for doubtful accounts, sales returns and allowances, warranty reserves, inventory reserves, share-based

~~Table of Contents~~

~~VITESSE SEMICONDUCTOR CORPORATION~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~June 30, 2009~~

~~Note 1. The Company and its Significant Accounting Policies (Continued)~~

compensation, premium put, goodwill and purchased intangible asset valuations and useful lives, and deferred income tax asset valuation allowances. These estimates and assumptions are based on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The actual results we experience may differ materially and adversely from our original estimates. To the extent there are material differences between the estimates and the actual results, our future results of operations will be affected.

~~Foreign Currency Translation~~

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

~~Concentrations of Risk~~

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash equivalents, short-term and long-term investments and accounts receivable. Cash equivalents consist of demand deposits and money market funds maintained with several financial institutions. Deposits held with banks have exceeded the amount of insurance provided on such deposits. The Company maintains its cash in commercial accounts with high-credit quality financial institutions. Although the financial institutions are considered creditworthy, balances with any one financial institution may exceed the Federal Deposit Insurance Corporation (the "FDIC") limit of $250,000. At June 30, 2009, the Company's cash balance exceeded the deposit insurance limits provided by the FDIC by $52,590,278. Cash balances held in foreign bank accounts are not insured by the FDIC, and at June 30, 2009 these balances totaled $224,880. At June 30, 2009, the Company's foreign subsidiaries reflected $645,255, of cash on their financial statements, which is not insured by the FDIC.

The Company believes that the credit risk in its accounts receivable is mitigated by the Company's credit evaluation process and maintaining an allowance for anticipated losses. For the quarter ended June 30, 2009, one customer accounted for more than 10% of our net revenues. Total sales to this customer were 13.5% and 8.9% for the three months ended June 30, 2009 and June 30, 2008, respectively. For the nine months ended June 30, 2009 and June 30, 2008, sales to this customer were 12.2% and 7.8%, respectively.

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

~~Table of Contents~~

~~VITESSE SEMICONDUCTOR CORPORATION~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~June 30, 2009~~2010

Note 1. The Company and its Significant Accounting Policies (Continued)

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

~~Contingencies~~Reclassifications

~~We assess~~Certain reclassifications have been made to prior-year amounts and related footnotes to conform to current-year presentation.

Correction of Error

During the first quarter of 2010, we identified an error in our ~~exposure to loss contingencies, including environmental, legal,~~financial statements as of September 30, 2009 and ~~income tax matters,~~for the quarter and ~~provide~~year then ended. This error was the result of an ~~accrual for an exposure if it is judged to be probable~~operational change that was not appropriately reflected in our inventory costing and ~~reasonably estimable. If~~accounting processes. In accordance with Accounting Standards Codification ("ASC") Topic 250, "Accounting Changes and Error Corrections," originally issued as SAB No. 99"Materiality" and SAB No. 108"Considering the ~~actual loss~~Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements," management evaluated the materiality of the error from a ~~loss contingency differs from management's estimates,~~qualitative and quantitative perspective and concluded that the error was not material to any prior periods. Further, we evaluated the materiality of the error on the results of operations ~~could be adjusted upward or downward.~~

~~Warranty~~

The Company generally warrants its products against defects for one year from date of shipment. The sales reserve allowance includes a provision for products under warranty, which is recorded against revenue when products are shipped. At each reporting period, the Company adjusts its reserve for warranty claims based on its actual warranty claims experience as a percentage of revenue for the ~~proceeding 12 months after shipment and also considers the impact of known operational issues that may have a greater impact than historical trends.~~

~~Revenue Recognition~~

~~In accordance with SEC Staff Accounting Bulletin ("SAB") 101, "~~~~Revenue Recognition in Financial Statements~~~~" ("SAB 101"),~~first quarter as well as ~~SAB No. 104, "~~~~Revenue Recognition~~~~" ("SAB 104"), we recognize product revenue when~~ the ~~following fundamental criteria are met: (i) persuasive evidence~~expected results of ~~an arrangement exists; (ii) delivery has occurred; (iii)~~operations for the ~~price~~full year and concluded that the error in the first quarter was quantitatively significant to the ~~customer is fixed~~first quarter financial statements but was not anticipated to be material to the full year or ~~determinable; and (iv) collection~~the trend of financial results. Accordingly, we corrected the error in the first quarter. The effects of the ~~sales price is reasonably assured. Delivery occurs when goods are shipped and title and risk of loss transfer~~adjustment to correct the ~~customer, in accordance with the terms specified in the arrangement with the customer. Revenue recognition is deferred in all instances where the earnings process is incomplete.~~

~~Vitesse has a distribution network through which it sells most of its products. The Company recognizes revenue~~error on a sell-through basis for all products sold through distributors, utilizing information provided by the distributors. These distributors maintained inventory balances of $4.9 million and $9.6 million as of June 30, 2009 and September 30, 2008, respectively, which are carried on the books of Vitesse, and are given business terms to return a portion of inventory and receive credits for changes in selling prices to end customers and inventory obsolescence. At the time Vitesse ships inventory to the distributors, the magnitude of future returns and price adjustments is not known. Therefore, revenue recognition for shipments to distributors does not occur until the distributors sell inventory to end customers, and the payments received from distributors for inventory shipped to them, in advancespecific line items of the ~~sale of that inventory to an end-user is, therefore, shown as deferred revenue. Vitesse personnel are often involved in the sales from the distributors to end customers.~~

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

~~At June 30, 2009, approximately 2.8% of our inventory is consigned and located with a single customer. Consistent with our revenue recognition policy, we recognize revenue when the customer~~

~~Table of Contents~~

~~VITESSE SEMICONDUCTOR CORPORATION~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~June 30, 2009~~

~~Note 1. The Company and its Significant Accounting Policies (Continued)~~

~~pulls the inventory for use, that is when title passes to the customer and all revenue recognition criteria specified above are met.~~

In accordance with SAB 104 in the licensing of technology and other intangibles, delivery does not occur for revenue recognition purposes until the license term begins. Revenues should be recognized in a manner consistent with the nature of the transaction and related earnings process. Based on management's analysis of the license terms, and pursuant to the guidance in SAB 104, revenue related to the licensing of the intellectual property ("IP") is deferred until delivery has occurred and final acceptance of the contracted deliverables was received from the licensee.

On December 28, 2007, the Company entered into an arrangement to license IP to a third-party. The contract is a perpetual, nonexclusive, non-transferable, irrevocable license for specified IP. As part of the contract, we were granted a perpetual, nonexclusive, non-transferable, irrevocable license to improvements to the technology made by the licensee, subject to certain limitations. Under the agreement, Vitesse received $15.0 million in license fees and royalties for the rights to certain products and technology. Of the fees and royalty payments, $10.0 million in fees was received upon delivery and acceptance of the licensed technology. The remaining $5.0 million of fees was received upon the one-year anniversary of the agreement. For a period of seven years from the effective date of the contract, licensee will pay royalties on a per unit basis, on each commercial sale incorporating the licensed products. Royalties will be accounted for when received. No royalties were received or recognizedfinancial statements for the nine months ended June 30, ~~2009.~~

On June 30, 2009, the Company entered into a Sale and Purchase Agreement (the "Agreement") and completed the sale, assignment and transfer of certain patents (the "Vitesse Patents") from its IP portfolio for consideration of IP revenue of $8.25 million, payment was due and received on July 15, 2009. The Company incurred $1.8 million in brokers fees related to the sale. The Company recorded the broker's fees in selling, general and administrative expense. The Vitesse Patents relate to the Company's non-core business, specifically its network processing products. Under the Agreement, the Company shall retain a non-exclusive, revocable, non-assignable, non-divisible, worldwide, fully-paid-up, royalty-free, perpetual right and license to the Vitesse Patents for the full life of such Vitesse Patents.

~~Sales Returns, Pricing Adjustments and Allowance for Doubtful Accounts~~2010 were as follows:

We record reductions to revenue for estimated product returns and pricing adjustments, such as rebates, in the same period that the related revenue is recorded. The amount of these reductions is based on historical sales returns, analysis of credit memo data, specific criteria included in rebate agreements, and other factors known at the time. Additional reductions to revenue would result if actual product returns or pricing adjustments exceed our estimates. We currently do not have any existing or on-going rebate programs or policies. We also maintain an allowance for doubtful accounts for estimated losses resulting from customers' inability to meet their financial obligations to us. We evaluate the collectability of accounts receivable on a monthly basis using a combination of factors, including whether any receivables will potentially be uncollectible. The Company includes any accounts receivable balances that are determined to be uncollectible in the overall allowance for doubtful accounts using the specific identification method. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Management believes the allowance for doubtful accounts as of June 30, 2009 and September 30, 2008, is adequate. However, if the financial condition

~~Table of Contents~~

~~VITESSE SEMICONDUCTOR CORPORATION~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~June 30, 2009~~

~~Note 1. The Company and its Significant Accounting Policies (Continued)~~

of any customer were to deteriorate, resulting in an impairment of its ability to make payments, additional allowances could be required. We record a reserve for estimated sales returns and allowances in the same period as the related revenues are recognized. Sales returns typically occur for quality related issues and allowances are based on specific criteria such as rebate agreements. We base these estimates on our historical experience or the specific identification of an event necessitating a reserve. To the extent actual sales returns or allowances differ from our estimates, our operations may be affected. As of June 30, 2009 and September 30, 2008, our sales return reserve was $16,000 and $54,000, respectively.

~~Cash and Cash Equivalents~~

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

~~Investments~~

We have an investment in the equity securities of a privately-held company where the quoted market price is not readily available. We use the cost method, combined with other intrinsic information, to assess the fair value of the investment. If the carrying value is below the fair value of an investment at the end of any period, the investment is considered for impairment. Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis in the investment is established. Our investment in the equity securities of a privately-held company was $248,000 as of June 30, 2009 and September 30, 2008.

~~Financial Instruments~~

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

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

Additionally, our financial instruments include our 2024 Debentures and a $30 million senior note with Whitebox VSC, LTD. ("Whitebox") (See Note 5—Debt). We have estimated the fair value of the 2024 Debentures using a convertible bond valuation model within a lattice framework. The valuation model combined expected cash outflows with market-based assumptions regarding risk-adjusted yields, stock price volatility, and recent price quotes and trading information regarding shares of our common stock into which the debentures are convertible. The estimated fair value of the 2024 Debentures was $47.6 million and $36.5 million, as of June 30, 2009 and September 30, 2008, respectively.

Additionally, we have identified a derivative embedded in the 2024 Debentures that is bifurcated and accounted for at fair value. We refer to this embedded derivative as the premium put (See Note 5—Debt for further discussion of the accounting and the basis for valuation). The fair value of

	Nine Months Ended June 30, 2010 (unaudited)

Decrease in cost of sales	$	934
Increase in income from operations		934
Decrease in net income		934
Net loss per share—basic and diluted	$	(0.05	)

~~Table of Contents~~

~~VITESSE SEMICONDUCTOR CORPORATION~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~June 30, 2009~~

~~Note 1. The Company and its Significant Accounting Policies (Continued)~~

~~the premium put was determined to be $4.6 million as of June 30, 2009 and no fair value as of September 30, 2008.~~

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

~~Inventory~~

~~Inventory is stated at~~adjustment to correct the ~~lower of cost or market (net realizable value). Costs associated with~~error had no impact on the development of a new product are charged to engineering, research and development expense as incurred, until the product is proven through testing and acceptance by the customer. At each balance sheet date, the Company evaluates its ending inventory for excess quantities and obsolescence. This evaluation includes analyses of sales levels by product and projections of future demand. Inventory is shown net of reserves of $23.9 million and $37.5 million at June 30, 2009 and September 30, 2008, respectively.

~~Property, Plant and Equipment~~

~~Property, plant and equipment are carried at cost. Depreciation and amortization are provided using the straight-line method over the assets' remaining estimated useful lives, ranging from~~ three to five years, except for leasehold improvements, which are stated at cost and amortized over the shorter of the term of the related lease or their estimated useful lives. Depreciation and amortization costs from continuing operations were $1.1 million for both quarters ended June 30, 2009 and 2008, and $3.3 million and $4.3 million for the nine months ended June 30, ~~2009~~2010. The net loss per share—basic and ~~2008, respectively.~~

~~Goodwill and Other Intangible Assets~~

Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. We performed a two-step process at December 31, 2008diluted was adjusted to determine: (i) whether the fair value of the Company exceeds the carrying value; and (ii) to measure the amount of an impairment loss. In the first step, we identified changes in key factors indicating an impairment of the value ofreflect our goodwill. Notable indicators were significantly depressed market conditions and industry trends, market capitalization below book value of equity and some downward revisions to our forecasts due to current economic conditions. Continually changing market conditions make it difficult to project how long the current economic downturn may last. Declining market values have negatively impacted our asset and equity valuations, which are a component of our goodwill impairment tests. Upon completion of the first step of the impairment test for the quarter ended December 31, 2008, we determined that additional impairment analysis was required by SFAS No. 142 "~~Accounting for Goodwill and Other Intangible Assets~~" ("SFAS 142"). The second step of the goodwill impairment test compared the implied fair value of our Company's goodwill with the carrying amount of that goodwill. Since the carrying amount of goodwill exceeded the implied fair value of that goodwill, an impairment loss was recognized in an amount equal to that excess. The implied fair value of goodwill was determined in the same manner as the amount of goodwill recognized in a business combination. The fair value was determined through an analysis of: (i) the market capitalization; (ii) comparable public company valuations; and (iii) the future cash flows expected to be generated by the Company. The calculated fair value was then allocated to individual

~~Table of Contents~~

~~VITESSE SEMICONDUCTOR CORPORATION~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

June 30, ~~2009~~2010 one-for-20 reverse stock split.

~~Note 1. The Company and its Significant Accounting Policies (Continued)~~

assets and liabilities (including any unrecognized intangible assets) as if the Company had been acquired in a business combination and the fair value of the Company was the purchase price paid to acquire the Company. In performing this allocation, the fair values of the assets and liabilities of the Company were calculated using generally accepted valuation methodologies, including analysis of: (i) the future cash flows expected to be generated; (ii) the estimated market value; or (iii) the estimated cost to replace. Any variance in the assumptions used to value the assets and liabilities could have had a significant impact on the estimated fair value of the assets and liabilities and, consequently, the amount of identified goodwill impairment. As a result of the additional analyses performed, we recorded an impairment charge to fully write off our goodwill balance of $191.4 million for the quarter ended December 31, 2008.

Intangible assets, other than goodwill, are amortized over their useful lives unless these lives are determined to be indefinite. Other intangible assets are carried at cost less accumulated amortization. Amortization is computed over the useful lives of the respective assets, generally two to ten years.

~~Income Taxes~~

~~We account for income taxes pursuant to the provisions of SFAS No. 109, "~~~~Accounting for Income Taxes~~" ("SFAS 109"). Under the asset and liability method of SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. We assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the statement of operations. The Company adopted the provisions of the Financial Accounting Standards Board ("FASB") Interpretation No. 48, "~~Accounting for Uncertainty in Income Taxes~~" ("FIN 48"), and an interpretation of SFAS 109, on October 1, 2007 and assessed the impact of FIN 48 on its financial statements and determined that no adjustment to retained earnings was necessary.

~~Research and Development Costs~~

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

Computation of Net Income (Loss) per Share

In accordance with ASC Topic 260 "Earnings Per Share" ("ASC 260") originally issued as SFAS 128, "Earnings per Share," ~~("SFAS 128"),~~ basic net income and loss per share is computed by dividing net income or loss available to common shareholders by the ~~weighted average~~weighted-average number of common shares outstanding during the period.

For periods in which we report income from continuing operations, the weighted average number of shares used to calculate diluted income per share is inclusive of common stock equivalents from unexercised stock options, restricted stock units, warrants, convertible preferred stock and convertible debentures. Unexercised stock options, restricted stock units and warrants are considered to be ~~common stock equivalents if, using the treasury~~

Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, ~~2009~~2010

Note 1. The Company and its Significant Accounting Policies (Continued)

common stock equivalents if, using the treasury stock method, they are determined to be dilutive. The dilutive effect of the convertible preferred stock and convertible debentures is determined using the if-converted method.

For the quarter ended June 30, 2009, the potential common shares excluded from the diluted earnings per share computation were determined to be anti-dilutive in accordance with SFAS 128. Under the treasury stock method, due to the decreasing fair market value of the Company's common stock, none of its stock options or warrants was considered to be dilutive for the quarter ended June 30, 2009. Using the if-converted method, the Company determined that the convertible debentures did not have a dilutive effect on earnings for the quarter.

~~For the~~ nine months ended June 30, 2010 and 2009, the Company recorded a loss from continuing operations and in accordance with ~~SFAS 128,~~ASC 260, all outstanding potential common shares were excluded from the diluted ~~earnings~~loss per share ~~computation, as their inclusion would be anti-dilutive.~~

computation. For periods in which the Company reports a loss from continuing operations, diluted loss per share is calculated using only the ~~weighted average~~weighted-average number of shares outstanding during each of the periods, as the inclusion of any common stock equivalents would be anti-dilutive.

~~Long-Lived Assets~~

~~The Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that~~ For the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted operating cash flows expected to be generated by the asset, or fair market value. Assets held for sale are recorded at the lesser of fair value less costs to sell or carrying value. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. As required by SFAS No. 144, "~~Accounting for the Impairment or Disposal of Long-Lived Assets~~~~" ("SFAS 144")~~three months ended June 30, 2010 , we ~~verified our long-lived assets were not impaired as of~~recorded income from continuing operations and accordingly included common stock equivalents from the ~~time of the goodwill impairment. There were no impairment charges~~convertible debentures, convertible preferred stock, stock options and restricted stock units in the diluted earnings per share calculation. For the three ~~and nine~~ months ended June 30, 2009, we recorded income from continuing operations and ~~2008.~~

~~Short-Term Investments~~

~~Investments in two limited partnerships, Vitesse Venture Fund, L.P. and Vitesse Venture Fund II, L.P. are consolidated~~accordingly included common stock equivalents from restricted stock units in the ~~accompanying consolidated~~diluted earnings per share calculation.

Our shares of Series B Preferred Stock are participating securities. Holders of these shares are entitled to receive, when, as and if dividends are declared by the Board on the common stock, dividends in an amount equal to 10% of par value per share of the Series B Preferred Stock plus the amount of dividends that would have been payable on the shares of common stock into which the Series B Preferred Stock could be converted on an if-converted basis. Accordingly, we used the two-class method, as prescribed by ASC 260, in determining the earnings for each class of stock.

Financial Instruments

ASC Topic 825, "Financial Instruments," defines fair value of a financial ~~statements~~instrument as the amount at which the instrument could be exchanged in ~~accordance with SFAS No. 94 "~~~~Consolidation~~a current transaction between willing parties. Our financial instruments include cash equivalents, restricted cash, accounts receivable, accounts payable, accrued expenses and various debt instruments. These financial instruments are stated at their carrying values, which are estimates of ~~All Majority-Owned Subsidiaries," ("SFAS 94"). The Company has recorded a liability~~their fair values because of their nearness to cash settlement or the comparability of their terms to the terms we could obtain, for ~~the limited partners' investments~~similar instruments, in the ~~joint ventures under~~current market.

Restricted cash consists of interest-bearing certificates of deposit ("CDs") collateralizing letters of credit and other commitments. As of June 30, 2010 and September 30, 2009, the ~~caption "minority interest"~~Company had approximately $1.8 million and $2.0 million, respectively, in CDs.

Our senior term loan is stated at carrying value of $25.0 million as of June 30, 2010 and $30.0 million as of September 30, 2009, which are estimates of its fair value.

We estimate the ~~accompanying consolidated balance sheets.~~

~~Share-Based Compensation~~

fair values of the 2014 Debentures and embedded derivatives using a convertible bond valuation model within a lattice framework. These valuations are determined using Level 3 inputs. The ~~Company has in effect several~~valuation model combines expected cash outflows with market-based assumptions regarding risk-adjusted yields, stock ~~plans under~~price volatility, recent price quotes and trading information of the Company's common stock into which ~~incentive and non-qualified stock options have been granted to employees, contractors and directors. These plans include~~ the ~~2001 Stock Incentive Plan (the "2001 Plan"),~~2014 Debentures are convertible. The fair value of the ~~1991 Stock Option Plan,~~2014 Debentures includes the ~~1991 Directors' Stock Option Plan, and~~face value of the ~~1999 International Stock Option Plan. SFAS 123R "~~~~Share-Based Payments~~~~," ("SFAS 123R"), requires all share-based payments to employees, including grants~~debentures plus the discount, which is amortized as interest expense over the life of ~~employee stock options and~~the debentures. The fair value of the 2014 Debentures was $44.3 million as of June 30, 2010.

Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, ~~2009~~2010

Note 1. The Company and its Significant Accounting Policies (Continued)

~~employee stock purchase rights, to be recognized in~~On October 30, 2009, the ~~financial statements based on their respective grant~~ date ~~fair values. SFAS 123R also requires the benefits~~ of ~~tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than operating cash flow, as required under previous literature.~~

~~SFAS 123R requires companies to estimate~~issuance, the fair value of ~~share-based payment awards on~~ the ~~date~~bifurcated compound derivative was $28.0 million. As of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense ratably over the requisite service periods. The Company has estimatedJune 30, 2010, the fair value of ~~each award~~the bifurcated compound derivative was $29.2 million. The change in fair value is reflected as an increase of interest expense in the ~~date~~Statement of ~~grant or assumption using~~Operations for the ~~Black-Scholes option pricing model, which was developed for use in estimating~~nine month period ended June 30, 2010.

The Company will continue to mark the ~~value of traded options that have no vesting restrictions and that are freely transferable. The Black-Scholes model considers, among other factors,~~bifurcated compound derivative to market due to the ~~expected life of the award and the expected volatility of~~conversion price not being indexed to the Company's ~~stock price. Although~~own stock. Specifically, the ~~Black-Scholes model meets~~feature requiring the ~~requirements of SFAS 123R, the fair values generated~~Company to redeem foregone interest upon conversion by the ~~model may~~holder causes the exercise price not to be ~~indicative of the actual fair values of~~indexed to the Company's ~~awards, as it does not consider other factors important to those share-based payment awards, such as continued employment, periodic vesting requirements, and limited transferability.~~

~~In conjunction with~~own stock. The change in the adoption of SFAS 123R, we elected to recognize compensation expense for all share-based awards granted after September 30, 2005 on a straight-line basis over the requisite service period for the entire award. The amount of compensation cost recognized through the end of each reporting period is equal to the portion of the grant-datefair value of the ~~awards that have vested, or for partially vested awards,~~bifurcated compound derivative is primarily related to the change in price of the underlying common stock. The change in value of the ~~portion~~bifurcated compound derivative is a non-cash item; further, the Company can elect to settle the embedded derivative in either cash or common shares. As of June 30, 2010, the Company has enough common shares to settle all of its potential conversion obligations. The Company intends to settle this obligation in common shares should it be exercised by its holders. As the Company intends to, and has the ability to, satisfy the obligations with equity securities, in accordance with ASC Topic 470 Debt ("ASC 470"), the Company has reclassified the liability as a long-term liability on its Consolidated Balance Sheet as of June 30, 2010.

As of September 30, 2009, the fair value of our 2024 Debentures was the face value of $96.7 million. The fair value of the ~~award that is ultimately expected to vest for which the requisite services have been provided.~~related embedded derivative as of September 30, 2009 was $12.2 million.

Recent Accounting Pronouncements

~~In December 2007, the FASB issued SFAS No. 141R, "~~~~Business Combinations~~," ("SFAS 141R"). SFAS 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for financial statements issued for fiscal years beginning after December 15, 2008. Accordingly, SFAS 141R is applicable to the Company's accounting for business combinations closing on or after October 1, 2009. We expect SFAS 141R will have an impact on our consolidated financial statements, but the nature and magnitude of the specific effects will depend upon the nature, terms and size of the acquisitions we consummate after the effective date of October 1, 2009.

~~In April 2009, the FASB issued FSP No. 141R-1, "~~~~Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies~~," (FSP 141R-1). FSP 141R-1 amends the provisions in Statement 141R for the initial recognition and measurement, subsequent measurement and accounting, and disclosures for assets and liabilities arising from contingencies in business combinations. The FSP eliminates the distinction between contractual and non-contractual contingencies, including the initial recognition and measurement criteria in Statement 141R and instead carries forward most of the provisions in SFAS 141 for acquired contingencies. FSP 141R-1 is effective

~~Table of Contents~~

~~VITESSE SEMICONDUCTOR CORPORATION~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~June 30, 2009~~

~~Note 1. The Company and its Significant Accounting Policies (Continued)~~

for contingent assets and contingent liabilities acquired in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We expect FSP 141R-1 will have an impact on our consolidated financial statements, but the nature and magnitude of the specific effects will depend upon the nature, term and size of the acquired contingencies.

~~In December 2007, the FASB issued SFAS No. 160, "~~~~Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51~~" ("SFAS 160"). SFAS 160 addresses the accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent's ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 is effective for fiscal years beginning after December 15, 2008. We do not ~~anticipate~~believe that there are any recent accounting pronouncements issued by the ~~adoption~~FASB (including its Emerging Issues Task Force), the American Institute of ~~SFAS 160 will~~Certified Public Accountants or the SEC that would have a material impact on ~~our~~the Company's present or future consolidated financial statements.

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

~~In May 2008, the FASB issued FASB Staff Position APB 14-1, "~~~~Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion~~ (~~Including Partial Cash Settlement~~)" ("APB 14-1"). APB 14-1 requires us to separately account for the liability and equity components of a convertible debt security by measuring the fair value of a similar nonconvertible debt security when interest cost is recognized in subsequent periods. APB 14-1 requires us to retroactively separate the liability and equity components of such debt in our consolidated balance sheets on a fair value basis. APB 14-1 is effective for fiscal years beginning after December 15, 2008. We are currently evaluating the impact that APB 14-1 will have on our financial statements.

~~In June 2008, the FASB ratified Emerging Issues Task Force ("EITF") Issue No. 07-5, "~~~~Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an Entity's Own Stock~~" ("EITF 07-5"). EITF 07-5 provides that an entity should use a two step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument's contingent exercise and the instrument's settlement provisions. EITF 07-5 clarifies the impact of foreign currency denominated strike prices and market-based employee stock option valuation instruments on the evaluation. EITF 07-5 is effective for the financial statements issued for fiscal years and interim periods within those fiscal years, beginning after December 15, 2008 and will be applied to outstanding instruments as of the beginning of the fiscal year in which it is adopted. Upon adoption, a cumulative effect adjustment will be recorded, if necessary, based on amounts that would have been recognized if this guidance had been applied from the issuance date of the affected instruments. We are currently determining the impact that EITF 07-05 will have on our financial statements, if any.

~~Table of Contents~~

~~VITESSE SEMICONDUCTOR CORPORATION~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~June 30, 2009~~

~~Note 1. The Company and its Significant Accounting Policies (Continued)~~

~~In April 2009 the FASB issued three related Staff Positions: (i) FSP 157-4, "~~~~Determining Fair Value When the Volume and Level of Activity for the Asset or Liability have Significantly Decreased and Identifying Transactions That Are Not Orderly~~~~," ("FSP 157-4"), (ii) SFAS 115-2 and SFAS 124-2, "~~~~Recognition and Presentation of Other-Than-Temporary Impairments~~~~," ("FSP 115-2") and ("FSP 124-2"), and (iii) SFAS 107-1 and APB 28-1, "~~~~Interim Disclosures about Fair Value of Financial Instruments~~," ("FSP 107") and ("APB 28-1"), which will be effective for interim and annual periods ending after June 15, 2009. FSP 157-4 provides guidance on how to determine the fair value of assets and liabilities under SFAS 157 in the current economic environment and reemphasizes that the objective of a fair value measurement remains an exit price. If we were to conclude that there has been a significant decrease in the volume and level of activity of the asset or liability in relation to normal market activities, quoted market values may not be representative of fair value and we may conclude that a change in valuation technique or the use of multiple valuation techniques may be appropriate. FSP 115-2 and FSP 124-2 modify the requirements for recognizing other-than-temporarily impaired debt securities and revise the existing impairment model for such securities, by modifying the current intent and ability indicator in determining whether a debt security is other-than-temporarily impaired. FSP 107 and APB 28-1 enhance the disclosure of instruments under the scope of SFAS 157 for both interim and annual periods. The adoption of this statement did not have an impact on our results of operation, financial position or cash flow.

~~In May 2009, the FASB issued FAS No. 165, "~~~~Subsequent Events~~," ("FAS 165"). The purpose of FAS 165 is to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. FAS 165 is effective for interim and annual periods ending after June 15, 2009. We adopted this statement for our quarter ended June 30, 2009, and the adoption did not have an impact on our results of operations, financial position or cash flows.

~~In June 2009, the FASB issued FAS No. 168, "~~~~The FASB Accounting Standards Codification and Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162~~" ("FAS 168"). FAS 168 establishes the FASB Standards Accounting Codification ("Codification") as the source of authoritative U.S. GAAP recognized by the FASB to be applied to nongovernmental entities and rules and interpretive releases of the SEC as authoritative GAAP for SEC registrants. The Codification will supersede all the existing non-SEC accounting and reporting standards upon its effective date and subsequently, the FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. FAS 168 also replaces FASB Statement No. 162, "~~The Hierarchy of Generally Accepted Accounting Principles~~" given that once in effect, the Codification will carry the same level of authority. The Company does not anticipate that the adoption of this statement will have a material impact on its consolidated financial statement footnote disclosures. FAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009, which will be our year ending September 30, 2009. The adoption of this statement is not expected to have a material impact on our results of operations, financial position or cash flows.

~~Table of Contents~~

~~VITESSE SEMICONDUCTOR CORPORATION~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~June 30, 2009~~

Note 2. Supplemental Financial Information

Inventory

The following table presents the ~~details~~principal components of the Company's inventory:

June 30,
2009 September 30,
2008

(in thousands)

Inventory:

Raw materials
$ 1,713 $ 3,067
Work-in-process
9,218 13,926
Finished goods
13,005 20,473

Total
$ 23,936 $ 37,466

~~Property, Plant and Equipment~~

~~The following table presents the details of the Company's property, plant and equipment:~~

June 30,
2009 September 30,
2008

(in thousands)

Property, Plant and Equipment:

Machinery and equipment
$ 90,010 $ 90,493
Furniture and fixtures
766 678
Computer equipment
9,834 8,942
Leasehold improvements
5,703 5,692
Construction in progress
77 1,027

106,390 106,832
Less: Accumulated depreciation and amortization
(98,971 ) (98,748 )

Total
$ 7,419 $ 8,084

		June 30, 2010 (unaudited)		September 30, 2009

		(in thousands)
Inventory:
Raw materials		$	3,591	$	1,411
Work-in-process			8,915		8,335
Finished goods			11,735		9,063

	Total	$	24,241	$	18,809

Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, ~~2009~~2010

Note 2. Supplemental Financial Information (Continued)

~~Accrued Expenses and Other Current Liabilities~~

~~The following table presents the details of the Company's accrued expenses and other current liabilities:~~

June 30,
2009 September 30,
2008

(in thousands)

Accrued Expenses and Other Current Liabilities:

Accrued legal fees and settlements
$ 142 $ 4,588
Accrued wages, commissions and benefits
2,808 6,203
Accrued vacation
2,801 2,720
Accrued software license agreements
1,996 326
Accrued income taxes
362 2,598
Accrued expenses
227 1,675
Accrued commissions
57 89
Miscellaneous taxes
163 353
Interest payable
901 1,270
Customer prepayments and deposits
143 143
Other
225 277

Total
$ 9,825 $ 20,242

~~Net~~ Revenues by Product Markets

The following table presents ~~net~~revenues from the Company's product markets:

	Three Months Ended June 30,				Nine Months Ended June 30,

	2010 (unaudited)		2009 (unaudited)		2010 (unaudited)		2009 (unaudited)
	(in thousands)
Carrier Networking Products	$	14,983	$	16,689	$	51,341	$	51,582
Enterprise Networking Products		18,725		14,960		56,655		43,987
Non-Core Products		3,825		4,707		14,809		20,174

Net Product Revenues	$	37,533	$	36,356	$	122,805	$	115,743

Revenues from Intellectual Property

The following table presents revenues from intellectual property:

	Three Months Ended June 30,				Nine Months Ended June 30,

	2010 (unaudited)		2009 (unaudited)		2010 (unaudited)		2009 (unaudited)
	(in thousands)
Licensing Revenues	$	—	$	8,250	$	290	$	13,250

Revenues by Geographic Area

The following table presents revenues by ~~product markets:~~geographic area:

Three Months Ended June 30, Nine Months Ended June 30,

2009 2008 2009 2008

(in thousands)

Carrier Networking Products
$ 16,689 $ 22,596 $ 51,582 $ 68,051
Enterprise Networking Products
14,960 19,841 43,987 56,702
Non-Core Products
4,707 12,604 20,174 38,423

Total Product Net Revenues
$ 36,356 $ 55,041 $ 115,743 $ 163,176

		Three Months Ended June 30,				Nine Months Ended June 30,

		2010 (unaudited)		2009 (unaudited)		2010 (unaudited)		2009 (unaudited)
		(in thousands)
North America(1)		$	13,908	$	20,448	$	48,961	$	60,341
Asia Pacific			18,053		20,507		55,014		49,534
Europe			5,572		3,651		19,120		19,118

	Total Net Revenues	$	37,533	$	44,606	$	123,095	$	128,993

(1): North America includes the United States, Canada and Mexico

Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, ~~2009~~

~~Note 2. Supplemental Financial Information (Continued)~~

~~Intellectual Property Revenues~~

~~The following table presents intellectual property revenues by licensing:~~

Three
Months
Ended
June 30, Nine
Months
Ended
June 30,

2009 2008 2009 2008

(in thousands)

Intellectual Property Revenues
$ 8,250 $ — $ 13,250 $ —

~~Net Revenues by Geographic Area~~

~~The following table presents net product revenues by geographic area:~~

Three Months Ended June 30, Nine Months Ended June 30,

2009 2008 2009 2008

(in thousands)

North America(1)
$ 12,198 $ 25,545 $ 47,091 $ 78,961
Asia Pacific
20,507 23,167 49,534 65,574
Europe
3,651 6,329 19,118 18,641

Total Net Revenues
$ 36,356 $ 55,041 $ 115,743 $ 163,176

~~(1)~~: ~~North America includes USA, Canada and Mexico~~

The Company believes a substantial portion of the product sold to original equipment manufacturers ("OEMs") and third-party manufacturing service providers in the Asia Pacific region are ultimately shipped to end-markets in North America and Europe.

~~Table of Contents~~

~~VITESSE SEMICONDUCTOR CORPORATION~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~June 30, 2009~~2010

Note 2. Supplemental Financial Information (Continued)

Computation of Net Income (Loss) per Share

The following table presents the computation of income ~~and loss~~(loss) per share:

Three Months Ended June 30, Nine Months Ended June 30,

2009 2008 2009 2008

(in thousands, except per share data)
(in thousands, except
per share data)

Income (loss) from continuing operations
$ 12,410 $ (591 ) $ (184,634 ) $ (1,744 )
Income from discontinued operations
71 1,703 71 8,101

Net income (loss)
$ 12,481 $ 1,112 $ (184,563 ) $ 6,357

Weighted average number of shares (basic)
230,906 223,556 229,098 223,556

Effect of dilutive common stock equivalents from restricted stock units
830 — — —

Weighted average number of shares (diluted)
231,735 223,556 229,098 223,556
Income (loss) per share (basic and diluted):

Continuing operations
$ 0.05 $ 0.00 $ (0.81 ) $ (0.01 )

Discontinued operations
0.00 0.01 0.00 0.04

Net income (loss)
$ 0.05 $ 0.01 $ (0.81 ) $ 0.03

			Three Months Ended June 30,				Nine Months Ended June 30,

			2010 (unaudited)		2009 (unaudited)		2010 (unaudited)			2009 (unaudited)
			(in thousands, except per share data)
Net income (loss) from continuing operations			$	33,029	$	12,410	$	(34,892	)	$	(184,635	)
	Income from discontinued operations, net			—		71		—			71

Net income (loss)				33,029		12,481		(34,892	)		(184,564	)

	Net loss attributable to noncontrolling interest			—		—		(1	)		(1	)
	Fair value adjustment of Preferred Stock—Series B			—		—		126			—

Net income (loss) available to common shareholders				33,029		12,481		(35,017	)		(184,563	)

	Impact of assumed conversion of 2014 Debentures:
		Interest on 2014 Debentures, net of tax		1,161		—		—			—

Net income (loss) available to common shareholders plus assumed conversions			$	34,190	$	12,481	$	(35,017	)	$	(184,563	)

Allocation of undistributed earnings to preferred stock				1,516		—		—			—
Preferred Stock—Series B				219		—		—			—
Net income per preferred share			$	6.92	$	—	$	—		$	—
Allocation of undistributed earnings to common stock—basic
Net income from continuing operations			$	31,513	$	—	$	—		$	—
	Income from discontinued operations, net			—		—		—			—

Net income				31,513		—		—			—

Weighted average number of shares—basic				22,780		11,545		20,105			11,455
	Effect of dilutive common stock equivalents from:
		Outstanding stock options		149		—		—			—
		Outstanding restriced stock units		187		42		—			—
		Convertible preferred stock		1,096		—		—			—
		2014 Convertible debentures		10,332		—		—			—

	Weighted average number of shares—diluted			34,544		11,587		20,105			11,455
Net income (loss) per common share
Basic:
Net income (loss) from continuing operations			$	1.38	$	1.07	$	(1.74	)	$	(16.12	)
	Income from discontinued operations, net			—		0.01		—			0.01

Net income (loss)				1.38		1.08		(1.74	)		(16.11	)

	Fair value adjustment of Preferred Stock—Series B			—		—		—			—

Net income (loss) available to common shareholders			$	1.38	$	1.08	$	(1.74	)	$	(16.11	)

Diluted:
Net income (loss) from continuing operations			$	0.96	$	1.07	$	(1.74	)	$	(16.12	)
	Income from discontinued operations, net			—		0.01		—			0.01
Net income (loss)				0.96		1.08		(1.74	)		(16.11	)
	Fair value adjustment of Preferred Stock—Series B			—		—		—			—

Net income (loss) available to common shareholders				0.96		1.08		(1.74	)		(16.11	)

	Impact of assumed conversion of 2014 Debentures:
		Interest on 2014 Debentures, net of tax		0.03		—		—			—

Net income available to common shareholders plus assumed conversions			$	0.99	$	1.08	$	—		$	—

~~For the three months ended~~ Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2009, the Company used the treasury stock method to determine the dilutive effect of outstanding stock options, restricted stock units and warrants. Due to the decreasing fair market value of the Company's common stock, none of its stock options or warrants was considered to be dilutive for that period. Using the if-converted method, the Company determined that the convertible debentures did not have a dilutive effect on earnings for the quarter.2010

Note 2. Supplemental Financial Information (Continued)

For the ~~nine months~~nine-month periods ended June 30, ~~2009~~2010 and ~~the three and nine months ended June 30, 2008,~~2009, the Company ~~reported~~recorded a loss from ~~operations.~~continuing operations and in accordance with ASC 260, all outstanding potential common shares were excluded from the diluted loss per share computation. For periods in which the Company reports a loss from continuing operations, diluted loss per share is calculated using only the weighted average number of shares outstanding during each of the periods, as the inclusion of any common stock equivalents would be anti-dilutive. For the three months ended June 30, 2010, we recorded income from continuing operations and accordingly included common stock equivalents from the convertible debentures, convertible preferred stock, stock options and restricted stock units in the diluted earnings per share calculation. For the three months ended June 30, 2009, we recorded income from continuing operations and accordingly included common stock equivalents from restricted stock units in the diluted earnings per share calculation.

Under the two-class method of determining earnings for each class of stock, we consider the dividend rights and participation rights in undistributed earnings for each class. For the three months ended June 30, 2010, the dividend rights on the outstanding preferred shares are not material to the calculation and are therefore not considered in determining earnings and losses per preferred share. The allocation of undistributed earnings to preferred shares is equal to the amount of earnings per common share that would be distributed on an if-converted basis.

The potential common shares excluded from the diluted income (loss) per share computation are as follows:

	Three Months Ended June 30,				Nine Months Ended June 30,

	2010 (unaudited)		2009 (unaudited)		2010 (unaudited)		2009 (unaudited)
	(in thousands)
Outstanding stock options		951		1,080		1,015		1,082
Outstanding restricted stock units		28		—		96		18
Outstanding warrants		8		8		8		8
Convertible preferred stock		—		—		1,096		—
2014 Convertible debentures		—		—		10,332		—
2024 Convertible debentures		—		1,899		—		1,899

Total potential common shares excluded from calculation		987		2,987		12,547		3,007

Note 3. Debt

As of September 30, 2009, we had outstanding a $30.0 million senior secured term loan with Whitebox VSC, Ltd. (the "Senior Term Loan") and $96.7 million in aggregate principal amount of 1.5% Convertible Subordinated Debentures due 2024 (the "2024 Debentures). Effective October 16, 2009, the Company entered into an agreement to amend the Senior Term Loan with Whitebox. Pursuant to the amendment to the Senior Term Loan, the Company repaid $5.0 million of the original $30.0 million and agreed to an interest rate increase on the remaining $25.0 million outstanding. In

Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, ~~2009~~2010

Note ~~2. Supplemental Financial Information~~3. Debt (Continued)

accordance with ASC 470, this transaction was accounted for as a debt modification whereby fees of $0.5 million incurred pursuant to the modification were expensed as incurred.

The ~~income and loss per share calculations do not include~~Company also entered into a Debt Conversion Agreement (the "Conversion Agreement") with the ~~effect~~beneficial owners of more than 96.7% of the ~~following weighted average potential~~2024 Debentures (the "Noteholders"). Pursuant to the Conversion Agreement, the Noteholders agreed to exchange their 2024 Debentures for a combination of $6.4 million in cash, 8,646,811 shares of common ~~shares:~~

Three Months Ended
June 30, Nine Months Ended
June 30,

2009 2008 2009 2008

(in thousands)
(in thousands)

Outstanding stock options
21,605 19,562 21,638 20,599
Outstanding restricted stock units
— — 351 —
Outstanding warrants
150 150 150 150
Convertible debentures
37,981 37,981 37,981 37,981

Total potential common shares excluded from calculation
59,736 57,693 60,120 58,730

~~Note 3. Goodwill~~stock, and $50.0 million in newly issued 8.00% Convertible Second Lien Debentures Due 2014 (the "2014 Debentures") convertible into 11,109,556 shares of common stock. 770,785 shares of Series B Preferred Stock were also issued to certain Noteholders. The Conversion Agreement was consummated on October 30, 2009. The Company also paid $3.6 million in cash to 3.3% of the holders of the 2024 Debentures who declined to participate in the Conversion Agreement.

~~We account for goodwill and other intangible assets in~~In accordance with ~~SFAS 142. We evaluate these~~ASC 470, this transaction was accounted for as a debt extinguishment, pursuant to which the Company recognized a $21.6 million loss. The loss on the extinguishment of debt was calculated as the difference between the aggregate fair values of the new instruments, including the compound embedded derivative associated with the 2014 Debentures, totaling $130.8 million, plus $0.8 million in additional amounts and fees paid to the creditors, compared to the net carrying values of the 2024 Debentures and related premium put derivative of $96.7 million and $13.3 million, respectively.

In connection with the debt exchange and the debt modification, the Company incurred third-party costs of approximately $2.9 million that were allocated to the underlying financial instruments issued based on the relative fair value of each instrument. Of the total fees incurred, $0.5 million was allocated to the modification of the Senior Term Loan and expensed as incurred, $1.0 million was allocated to the issuance of the common and preferred shares and charged against additional paid-in capital, and $1.4 million was allocated to the issuance of the 2014 Debentures and was capitalized in other assets ~~including purchased intangible assets deemed~~as debt issuance costs, to ~~have indefinite lives, on an annual basis~~be amortized as interest expense over the term of the loan. Unamortized debt issuance costs as of June 30, 2010 were $1.1 million.

On May 14, 2010, the Company received a Conversion Notice from one of the Noteholders 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 ~~fourth quarter or, more frequently, if we believe indicators~~Indenture) in shares of ~~impairment exist. Factors we consider important that could trigger an impairment review include significant underperformance~~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.

In accordance with ASC 470, this conversion was accounted for as a debt extinguishment due to ~~historical or projected operating results, substantial changes~~the bifurcation of the compound embedded derivative. The Company recognized a gain of $0.3 million in ~~our business strategy and significant negative industry or economic trends. If such indicators are present, we compare~~the accompanying financial statements. The gain on the extinguishment of debt was calculated as the difference between the fair value of the ~~goodwill to its carrying value. Fair~~shares of common stock issued and the recorded value of ~~goodwill is determined by using~~the debt extinguished, which included a ~~valuation model based on an analysis of: (i) the Company's market capitalization; (ii) comparable public company valuations (a market approach);~~pro rata share of 1) debt issue costs; 2) debt discount; and (iii) the future cash flows expected to be generated by the Company (an income approach). Fair value of other intangible assets is determined by discounted future cash flows, appraisals or other methods. Carrying value of goodwill as of June 30, 2009 and September 30, 2008 was $0 and $191.4 million, respectively. No activity or adjustments to goodwill except for the impairment charge for the quarter ended December 31, 2008 occurred for the periods ended June 30, 2009 and September 30, 2008.

~~Other Intangible Assets~~

Other intangible assets consist primarily of existing technologies, customer relationships and covenants "not-to-compete" acquired in past business combinations. Acquired intangibles are amortized on a straight-line basis over the respective estimated useful lives of the assets. The carrying value of intangible assets at June 30, 2009 and September 30, 2008 was $1.8 million and $0.9 million, respectively. For other intangible assets and long-lived assets, in accordance with SFAS 144, we determine whether the sum of the estimated undiscounted cash flows attributable to each asset in question is less than its carrying value. If less, we recognize an impairment loss based on the excess of the carrying amount of the assets over their respective fair values. Fair value of long-lived assets is determined based on market value. If the long-lived asset determined to be impaired is to be held and used, we recognize an impairment charge to the extent the fair value attributable to the asset is less than the asset's carrying value. The3) fair value of the ~~long-lived asset then becomes~~embedded derivative on the ~~asset's new carrying value, which we amortize over the remaining estimated useful life~~date of the ~~asset.~~conversion.

The Company has relied on the Noteholders' representation in the Conversion Notice that the Noteholder would not own more than 9.99% of the outstanding common stock of the Company after

Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, ~~2009~~2010

Note 3. Debt (Continued)

the conversion of the debentures and payment of the Make-Whole Amount in shares of the Company's common stock.

Note 4. ~~Discontinued Operations and Assets Held for Sale~~Fair Value Measurements

~~On October 29, 2007,~~Assets and liabilities measured at fair value on a recurring basis include the ~~Company completed its sale of~~following at June 30, 2010 and September 30, 2009 (in thousands):

	Fair Value Measurements Using

	Level 1		Level 2		Level 3		Total
June 30, 2010 (unaudited)
Derivative liability—premium put	$	—	$	—	$	—	$	—
Derivative liability—compound embedded derivative		—		—		29,216		29,216
September 30, 2009
Derivative liability—premium put	$	—	$	—	$	12,209	$	12,209
Derivative liability—compound embedded derivative		—		—		—		—

The following table provides a ~~portion~~reconciliation of the ~~Storage Products business to Maxim Integrated Products, Inc. ("Maxim")~~beginning and ending balances for ~~$62.8 million, with a gain on~~ the sale of approximately $21.5 million, plus a potential earn-out based on the business meeting certain criteria, as detailed in the agreement. Maxim acquired the Company's SAS/SATA expander product markets, enclosurederivative liability—premium put and baseboard management devices, and certain other assets of the Storage Product business. Assets sold include inventory, property and equipment, goodwill and intangible assets of $35.5 million. As part of the sale, Maxim assumed aderivative liability—embedded compound derivative liability ~~for employees' accrued vacation of $300,000.~~measured at fair value using significant unobservable inputs (Level 3) (in thousands):

		Derivative liability—premium put related to 2024 Debentures			Compund Embedded Derivative related to 2014 Debentures

Balance at September 30, 2009		$	12,209		$	—
	Transfers in and /or out of Level 3		—			27,925
	Total losses included in earnings		1,096			1,291
	Settlement		(13,305	)		—

Balance at June 30, 2010 (unaudited)		$	—		$	29,216

The ~~gain was reduced by costs of completing the sale in the amount of $1.6 million.~~

~~Debt issuance costs related to the Tennenbaum Capital Partners ("TCP") debt of $3.5 million were~~compound embedded derivative liability, which is included in long term liabilities, represents the ~~calculation of the gain on the sale pursuant to the accounting guidance in EITF Issue 87-24, "~~~~Allocation of Interest to Discontinued Operations~~~~" ("EITF 87-24") which requires any costs related to financing that must be paid off~~value associated with the proceeds of the sale of specific assets to be included in the determination of the gain or loss on sale. In accordance with EITF 87-24 we have allocated to discontinued operations interest expense associated with debt instruments that were required to be repaid upon the sale of the Storage Product business. Pursuant to an amendment to the debt agreement with TCP, we were required to pay the debt to TCP from the Storage Products division sale proceeds. Accordingly, for the nine months ended June 30, 2008, interest expense of approximately $16.9 million was included in discontinued operations. The interest expense included a "make-whole" payment of $16.4 million and interest expense and amortization of deferred financing fees of $0.5 million.

We recorded amounts in discontinued operations in accordance with SFAS 144. Accordingly, we reported the results of operations of the Storage Products business in discontinued operations within the Company's statement of operations for the nine months ended June 30, 2008. The sale of the Storage Products division closed on October 29, 2007.

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

~~Note 5. Debt~~

During 2004, the Company issued $96.7 million in aggregate principal amount of its 2024 Debentures to qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933 (the "Securities Act"). The 2024 Debentures are unsecured obligations and are subordinated in right of payment to all of the Company's existing and future senior indebtedness. Interest is payable in arrears semiannually on October 1 and April 1 of each year, beginning April 1, 2005. On August 15, 2006, the Company received notification from the Trustee under the Indenture, dated as of September 22, 2004, relating to the Company's 2024 Debentures. The Trustee alleged compliance deficiencies under the Indenture relating to the Company's failure to file with the Securities and Exchange Commission the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2006. Although the Company did not believe there were compliance deficiencies under the Indenture, and that an Event of

~~Table of Contents~~

~~VITESSE SEMICONDUCTOR CORPORATION~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~June 30, 2009~~

~~Note 5. Debt (Continued)~~

Default did not occur, the Company negotiated with the holders of a majority of the 2024 Debentures to reach a resolution to the dispute. On September 24, 2007, the Company entered into a Second Supplemental Indenture amending Section 1.1 of the Indenture related to the "Interest Rate"; Section 4.1(d) of the Indenture related to "Default" or "Event of Default"; and Section 4.2 of the Indenture related to "Acceleration of Maturity." As part of the amendment, the Company agreed to increase the interest payable for the period starting April 1, 2007, through, but not including October 1, 2007, by $20 per $1,000 principal amount of the 2024 Debentures. On October 1, 2007, the Company included an additional $1.9 million payment with the semiannual payment of interest due.

~~On October 23, 2006, the Company solicited consents from~~ the holders of the ~~2024~~2014 Debentures ~~that, if received, would provide: (i)~~associated with the ~~holders~~equity conversion feature and a "make-whole" feature of the ~~2024 Debentures~~2014 Debentures.

There is no current observable market for this type of derivative and, the Trustee under the Indenture would agree that, for 18 months after the date the proposed amendments are effective, the Trustee would forbear from taking any action to exercise any rights or remedies that relate to the filing of reports required under the Exchange Act; (ii) the Company would agree not to repay the 2024 Debentures pursuant to the purported acceleration request sent by the Trustee to the Company during the last six months of the forbearance period; (iii) the indenture for the 2024 Debentures would be amended so that the conversion price of the 2024 Debentures would be decreased permanently from $3.92 per share of common stock to $2.546 per share of common stock, subject to further adjustment as ~~set forth in~~such, we determined the indenture; and (iv) the repurchase price with respect to the October 1, 2009, repurchase right was increased from 100% to 113.76% of the principal amount of the 2024 Debentures to be purchased, plus accrued and unpaid interest (the October 1, 2014 and October 1, 2019 repurchase rights would not be changed). The consents were received and the amendments became effective November 3, 2006.

~~In accordance with SFAS No. 133, "~~~~Accounting for Derivative Instruments and Hedging Activities~~" ("SFAS 133"), embedded derivatives must be bifurcated from the underlying debt instrument and valued as a separate financial instrument. Our 1.5% Convertible Subordinated Debentures due 2024 (the "2024 Debentures") includes a repurchase right for 113.76% of the principal amount of the 2024 Debentures on October 1, 2009 (the "premium put") that we have identified as an embedded derivative requiring bifurcation and accounting at fair value because the economic and risk characteristics of the premium put meet the criteria for separate accounting as set forth in SFAS 133. We estimate the approximate fair value of the ~~premium put as the difference between the estimated value of the 2024 Debentures~~embedded derivative using a lattice-based convertible bond valuation model that combined expected cash outflows with ~~and without the premium put feature.~~market-based assumptions. The fair value of the ~~2024~~2014 Debentures ~~both with and~~ without the embedded ~~premium put~~compound derivative feature was also estimated using a convertible bond valuation model within a lattice framework. The convertible bond valuation model combined expected cash outflows with market-based assumptions regarding risk-adjusted yields, stock price volatility and recent price quotes and trading information regarding shares of our common stock into which the ~~2024~~2014 Debentures are convertible. ~~Our analysis is premised on~~The Company will mark the ~~assumption that~~embedded derivative to market due to the holder would act in a manner that maximizes the potential return, or "payoff", at any given point in time. Included in this premise is the assumption that the holder would compare the potential return associated with each available alternative, including, as specified in the terms of the contract, holding the debt instrument, exercising an equity conversion ~~option, or exercising a put option. As a component of this, we incorporated a market participant consideration as~~price not being indexed to the Company's ~~capacity~~own stock. The change in the fair value of the bifurcated compound embedded derivative is primarily related to ~~fulfill~~ the ~~contractual obligations associated with each alternative, including~~change in price of the underlying common stock. At the Company's ~~ability to fulfill any~~option it can settle the embedded derivative in either cash ~~settlement obligation associated with exercise of the put option. Based on our analysis, we determined~~or

Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, ~~2009~~2010

Note ~~5. Debt~~4. Fair Value Measurements (Continued)

common shares. As of June 30, 2010, the Company has enough common shares to settle the entire obligation in shares. The Company intends to settle this obligation in common shares. As the Company intends to, and has the ability to, satisfy the obligations with equity securities, in accordance with ASC 470, the Company has reclassified the liability as a long-term liability on its Consolidated Balance Sheet as of June 30, 2010. The change in fair value of the compound embedded derivative liability is recorded in interest expense.

The valuation methodologies used by the Company as described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although management believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of ~~the premium put is most sensitive to the estimated amount of funds available for settlement of the liability on October 1, 2009. More specifically,~~certain financial instruments could result in a different fair value ofmeasurement at the premium put is positively correlated to the estimated amount of cash proceeds expected to be received at exercise. Should the premium put have value, any gain or loss on the fair value of the premium put will be reflected in current earnings. The result of our valuation analysis was that premium put was estimated to have $4.6 million fair value as of June 30, 2009 and no fair value as of September 30, 2008. The primary driver of the change in fair value between these dates was an increase in the amount of funds available for cash settlement between the measurement dates.reporting date.

Note 5. Income Taxes

The modification of the conversion feature discussed above resulted in an increase in the initial conversion rate to approximately 392.773 shares of common stock per $1,000 principal amount of the 2024 Debentures from approximately 255.102 shares of common stock per $1,000 principal amount of the debentures. Upon conversion, the Company will have the option to deliver cash in lieu of shares of its common stock or a combination of cash and shares of common stock. The Company may redeem the 2024 Debentures after October 1, 2007 if its stock price is at least 170% of the conversion price, or approximately $4.32 per share,provision for 20 trading days within any consecutive 30-day trading period, and may also redeem the 2024 Debentures beginning October 1, 2009, without being subject to such condition. Holders of the 2024 Debentures have the right to require the Company to repurchase the 2024 Debentures on October 1 of 2009, 2014, and 2019. The Company has recorded the principal amount of the 2024 Debenturesincome taxes as a ~~current liability.~~

~~In accordance with the November 3, 2006 amendments to the 2024 Debentures, the October 1, 2009 repurchase right~~percentage of income from continuing operations before income taxes was increased from 100% to 113.76% of the principal amount of the 2024 Debentures to be purchased. The increase in the repurchase right would result in an additional payment of $13.3 million on the $96.7 million outstanding 2024 Debentures. Holders also have the option, subject to certain conditions, to require the Company to repurchase any 2024 Debentures held by such holder in the event of a fundamental change, at a price equal to 100% of the principal amount of the 2024 Debentures plus accrued and unpaid interest plus, under certain circumstances, a make-whole premium. For the three months ended June 30, 2009 and 2008, interest expense relating to the 2024 Debentures was $0.4 million. For8.84% for the nine months ended June 30, 2010 compared to 5.84% for the comparable period in the prior year. For the year ending September 30, 2010, the Company's estimated effective tax rate is 8.84%. The Company's effective tax rate is primarily impacted by continuing operating losses.

At October 1, 2009, the Company had net deferred tax assets of $422.1 million before considering the effect of the valuation allowance. These deferred tax assets were primarily composed of net operating loss ("NOL") carryforwards, research and ~~2008, interest expense relating~~development credits, tangible and intangible assets recovery, and other accruals and reserves. Due to uncertainties surrounding the Company's ability to generate future taxable income to utilize the deferred tax assets, management had recorded a full valuation allowance against the deferred tax assets.

Effective October 16, 2009, the Company entered into a Debt Conversion Agreement (the "Conversion Agreement") with the beneficial owners of more than 96.7% of the 2024 Debentures ~~was $1.1 million. Outstanding~~(the "Noteholders") whereby the Noteholders agreed to exchange their 2024 Debentures ~~were $96.7 million at June~~for a combination of cash, shares of common stock, the 2014 Debentures and, in some cases, shares of Series B Preferred Stock. The Conversion Agreement was consummated on October 30, 2009 (the "Closing Date"). (See Note 3—Debt in the accompanying unaudited financial statements).

The Federal Tax Reform Act of 1986, and similar state laws, contains provisions that may limit the net operating loss and tax credits carry-forwards to be used in any given year upon the occurrence of certain events, including a significant change in ownership interests. Under IRC Section 382 and 383 rules, a change in ownership can occur whenever there is a shift in ownership by more than fifty percentage points by one or more five-percent shareholders within a three-year period. When a change of ownership is triggered, the NOLs and credits may be impaired.

We performed a study to evaluate the status of net operating losses. Based on that study, we believe that, as a result of the Conversion Agreement discussed above, the Company experienced an "ownership change" as defined for U.S. federal income tax purposes as of October 30, 2009 that will trigger an impairment of the use of our NOLs and credits as of the fiscal year ended September 30, ~~2008.~~

On October 29, 2007, we completed a $30.0 million financing with Whitebox, net of $0.8 million of debt discount. The loan has a four-year term. Unamortized debt discount as of June 30, 2009 and September 30, 2008 was approximately $0.4 million and $0.6 million, respectively. In connection with securing the debt, the Company paid approximately $2.3 million in fees that are recorded as debt issuance costs in Other Assets on the accompanying balance sheets. These fees are being amortized as interest expense over the term of the loan. Unamortized debt issuance costs as of June 30, 2009 and September 30, 2008 were approximately $1.3 million and $1.8 million, respectively. The annual interest rate on the unpaid principal is the greater of 8.5% or LIBOR plus 4% during the interest period ending on the interest date. The loan is secured by substantially all of our assets. The Company and Whitebox also entered into a Senior Unsecured Convertible Note Purchase Agreement that gives Whitebox the right, until the third anniversary of the initial funding, to purchase convertible notes in an aggregate principal amount of up to $30.0 million, which we would use to repay amounts outstanding

Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, ~~2009~~2010

Note 5. ~~Debt (Continued)~~

under the loan. These convertible notes, if issued, would be convertible into the common stock of Vitesse at a conversion price of $2.00 per share, subject to adjustment. At June 30, 2009 and September 30, 2008, the effective interest rate on the loan was 10.6485% and 11.082%, respectively. For the three and nine months ended June 30, 2009, interest expense was $0.6 million and $1.9 million, respectively. The agreement contains various restrictive covenants. As of June 30, 2009, we were in compliance with the terms of the covenants. According to the terms of the Whitebox Agreement, under certain circumstances, repayment of the 2024 Debentures would require that the Company to immediately pay to Whitebox the lesser of (A) the aggregate principal amount of the outstanding Whitebox debt, including accrued and unpaid interest and (B) 25% of the aggregate amount of the 2024 Debentures redeemed. Prior to June 30, 2009, the Company was pursuing alternatives to refinance or raise funds to pay the convertible subordinated debt that in management's judgment met the terms in the Whitebox debt agreement that did not require payment of the Whitebox debt simultaneously with the payment of the convertible subordinated debt. As of June 30, 2009, management has concluded that the alternatives currently being pursued to generate funds to pay the convertible subordinated debt would not meet the terms in the Whitebox debt agreement and accordingly has classified the Whitebox debt as current based on the anticipation that payment of all or a portion of the convertible subordinated debt pursuant to the premium put would require simultaneous payment of all or a portion of the Whitebox debt.

~~Note 6. Income Taxes~~

The provision for income taxes as a percentage of income from continuing operations before income taxes was (5.84%) for the nine months ended June 30, 2009 compared to 16.6% for the comparable period in the prior year. For the year ending September 30, 2009, the Company's estimated effective tax rate is (5.84%). The Company's effective tax rate for fiscal 2009 is primarily impacted by the $191.4 million goodwill impairment recorded during the first quarter of 2009.

At October 1, 2008, the Company had net deferred tax assets of $441.5 million before considering the effect of the valuation allowance. These deferred tax assets are primarily composed of net operating loss ("NOL") carryforwards. The following table details the amount and expiration of the federal net operating loss carryforwards included in the deferred tax asset (in thousands):

Gross Amount Amount without Limitation Year of expiration
Federal net operating loss carryforwards
$ 147,561 $ 105,896 2020-2021
337,040 206,258 2022-2023
111,240 71,147 2024-2025
50,908 50,908 2026-2027

Total federal net operating loss carryforwards
$ 646,749 $ 434,209

~~We have available federal research and development tax credit carryforwards of approximately $13.8 million, net of a FIN 48 allowance. The following table details the amount and expiration of the~~

~~Table of Contents~~

~~VITESSE SEMICONDUCTOR CORPORATION~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~June 30, 2009~~

~~Note 6.~~ Income Taxes (Continued)

~~federal~~2010. As a result of the ownership change, the Company only has approximately $55.7 million of NOLs that can be used in future tax years and is subject to an annual limitation of $3.1 million in utilizing its NOLs. The NOLs will expire in fiscal year 2030. Also, due to the ownership change, the research and development credits have been limited as to usage such that the Company does not anticipate being able to use any of its research and development credits existing as of October 30, 2009 in future tax ~~credit carryforwards included in the deferred tax asset (in thousands):~~

Amount Year of expiration
Federal research and development credit carryforwards
$ 2,029 2008-2012
5,497 2013-2019
4,400 2020-2021
1,848 2022-2025

Total federal research and development credit carryforwards
$ 13,774

Timing differences included in the net deferred tax assets relate primarily to tangible and intangible assets recovery, other accruals and reserves. Due to uncertainties surrounding the Company's ability to generate future taxable income to utilize the deferred tax assets, management has recorded a full valuation allowance against the deferred tax assets.years.

ASC Topic 740 Income Taxes ("ASC 740"), originally issued as FIN 48,"Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109," prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Due to significant net operating losses, the cumulative effect of applying this interpretation ~~has~~upon adoption on October 1, 2009, had no impact on retained earnings.

~~The~~As a result of the adoption of ASC 740, the total amount of gross unrecognized tax benefits, ~~decreased~~for the nine-months ended June 30, 2010, increased by ~~$70,000~~$344,000 for potential federal and state tax liabilities. ~~Included in the balance of unrecognized tax benefits of $29.2 million, as of June 30, 2009, there were no unrecognized tax benefits that,~~These amounts, if recognized, would impact the effective tax rate.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. As of June 30, ~~2009,~~2010, no material interest or penalties were accrued due to ~~the existence of~~ significant net operating ~~losses which would offset any potential tax liabilities.~~

In the event of a change in control of the ownership of the Company, the ability of the Company to use the NOL's and credits in future taxable periods may be impaired. A change in control occurs whenever there is a shift in ownership by more than fifty percentage points by one or more five-percent shareholders within a three year period. Based on our current analysis of changes in shareholder ownership, we believe that an ownership change has not occurred. Accordingly, we have not presented any amount as an uncertain tax position under FIN 48. Any carryforwards that will expire prior to utilization will be removed from the deferred tax assets with a corresponding reduction in the valuation allowance.losses.

The Company is subject to taxation in the US and various state and foreign jurisdictions. The Company recently ~~concluded~~completed an examination by the Internal Revenue Service for the tax years ended September 30, 2004 through September 30, 2006. The audit resulted in an adjustment that reduced the Company's federal NOL carryforwards. Effectively, all of the Company's tax years in which a tax ~~NOL has been~~net operating loss is carried forward to the present are subject to examination by the federal, state, and foreign tax authorities. Therefore, the Company cannot estimate the range of unrecognized tax benefits that may significantly change within the next twelve ~~months because of the Internal Revenue Service examination.~~months.

~~Table of Contents~~

~~VITESSE SEMICONDUCTOR CORPORATION~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~June 30, 2009~~

Note 7.6. Shareholders' Equity

Preferred Stock

The Company is authorized to issue up to 10,000,000 shares of ~~non-voting convertible~~ preferred stock, ~~with a~~ par value of $0.01 per share, of which ~~500,000 were reserved for issuance under the Rights Plan, described below, and none were outstanding~~800,000 shares have been designated as ~~of June 30, 2009 and September 30, 2008.~~

~~Rights Plan~~

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

~~Common~~Series B Participating Non-Cumulative Convertible Preferred Stock,

~~The Company is authorized to issue up to 500,000,000 shares of common stock, with a~~ par value of $0.01 per share ("Series B Preferred Stock"). As of ~~which 230,905,580~~June 30, 2010, 219,111 shares ~~and 226,205,580~~of Series B Preferred Stock that are convertible into common stock on a five-to-one basis were outstanding. No preferred shares were outstanding as of September 30, 2009.

The Company did not have sufficient authorized common shares for the conversion of all 770,786 shares of Series B Preferred Stock outstanding as of December 31, 2009. In accordance with ASC Topic 480 "Distinguishing Liabilities from Equity" ("ASC 480"), we classified 44,533 shares of Series B Preferred Stock as temporary equity in the mezzanine section of the balance sheet as of December 31, 2009. These shares were measured at $5.00 per share the fair value of the common stock they would have been converted into on that date. Upon our shareholders' approval of an increase in authorized common stock to a total of 250,000,000 shares on January 7, 2010, we had sufficient authorized common shares for the conversion of all preferred shares outstanding, and thus, all such shares are classified as permanent equity.

Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, ~~2009~~2010

Note 6. Shareholders' Equity (Continued)

During the quarter ended June 30, 2010, 541,675 preferred shares were converted to 2,708,377 shares of common stock. The conversion rate for the shares of Series B Preferred Stock was adjusted to five-to-one from 100-to-one as a result of the June 30, 2010 one-for-20 reverse stock split.

Common Stock

As of June 30, 2010 and September 30, ~~2008,~~2009 the Company was authorized to issue up to 250,000,000 and 25,000,000 shares of common stock, par value of $0.01 per share, respectively. On October 30, 2009, in connection with our debt restructuring, we issued 8,646,811 shares of common stock. As of June 30, 2010 and September 30, 2009, 23,819,521 shares and 11,544,803 shares of common stock, were outstanding, respectively.

On January 7, 2010, the Company's stockholders approved an amendment to the Company's Amended and Restated Certificate of Incorporation to affect a reverse stock split of the Company's common stock at a reverse split ratio between one-for-20 and one-for-50, to be selected by the Board of Directors. On May 17, 2010, the Company announced its plans to complete a one-for-20 reverse stock split of its common stock, to take effect on June 30, 2010. All share and per share amounts have been retroactively adjusted to reflect the reverse stock split. There was no net effect on total shareholders' equity as a result of the reverse stock split.

~~Share-Based Compensation~~Stock Option Plans

The Company has ~~in effect~~ several share-based plans that have expired, but under which ~~non-qualified and incentive~~ stock options ~~and~~are still outstanding. In February 2010, our board of directors approved our new plan, the 2010 Vitesse Semiconductor Corporation Incentive Plan (the "2010 Incentive Plan"). On May 11, 2010, the stockholders approved the 2010 Incentive Plan. The 2010 Incentive Plan permits the grant of stock options, stock appreciation rights, stock awards, restricted stock ~~awards have been granted to employees, consultants~~ and ~~outside directors. Options generally vest over three or four years~~stock units, and ~~have contractual lives of 10 years. Restricted~~other stock ~~awards generally vest over three or four years.~~

~~On January 23, 2001,~~and cash-based awards. The 2010 Incentive Plan replaced the ~~Company's shareholders approved the adoption of the~~Vitesse Semiconductor Corporation 2001 Stock Incentive Plan (the "2001 Plan"), which replaced the 1991 Stock Option Plan (the "1991 Plan") that expired in August 2001 and the 1991 Directors' Stock Option Plan that expired in January 2002. The 2001 Plan provides for the grant to employees of incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, and for the grant to employees, consultants and directors of non-qualified stock options and certain share-based awards as determined by the Board of Directors or the Compensation Committee of the Board of Directors. The 2001 Plan was amended in September 2008 to, among other things; simplify the criteria for determining the grant price of options granted under the plan.Plan.

Under all stock option plans, a total of ~~82,091,418~~5,159,814 shares of common stock, have been reserved for issuance and ~~52,532,437~~2,746,566 shares, remained available for future ~~grants~~grant as of June 30, ~~2009.~~2010. The following

Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, ~~2009~~2010

Note 7.6. Shareholders' Equity (Continued)

~~The following~~ table summarizes compensation costs related to the Company's share-based compensation plans (in thousands):

	Three Months Ended June 30,				Nine Months Ended June 30,

	2010 (unaudited)		2009 (unaudited)		2010 (unaudited)		2009 (unaudited)
	(in thousands)
Cost of revenues	$	100	$	169	$	326	$	528
Engineering, research and development		183		242		587		678
Selling, general and administrative		314		386		811		1,175

Total share-based compensation expense	$	597	$	797	$	1,724	$	2,381

Stock Options

Activity under all stock option plans for ~~the periods ended June 30:~~

Three Months Ended June 30, Nine Months
Ended
June 30,

2009 2008 2009 2008
Cost of revenues
$ 169 $ 203 $ 528 $ 690
Research and development
242 282 678 1,016
Selling, general and administrative
386 362 1,175 1,685

Share-based compensation expense related to continuing operations
797 847 2,381 3,391
Share-based compensation expense related to discontinued operations
— — — (284 )

Total share-based compensation expense
$ 797 $ 847 $ 2,381 $ 3,107

~~In addition to the share-based compensation expense related to the Company's plans, we recorded $16,000 of share-based compensation expense during~~ the nine months ended June 30, ~~2008 related to the employee~~2010 was as follows:

			Weighted average exercise price			Aggregate intrinsic value

Options outstanding, September 30, 2009	1,061,816		$	109.32
Granted	544,449			5.19
Cancelled or expired	(129,653	)		292.49

Options outstanding, June 30, 2010 (unaudited)	1,476,612			54.85	6.35	$	11,110

Options exercisable, June 30, 2010 (unaudited)	828,021		$	93.20	3.97	$	—

Restricted Stock Units

A summary of restricted stock ~~appreciation rights. Pursuant to SFAS 123R, the stock appreciation rights are considered liability awards and as such, these amounts are accrued in the liability section of the balance sheet.~~

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

~~The fair values of the Company's stock options granted in the periods~~nine months ended June 30, ~~2009 and 2008 were calculated for expense recognition using an estimated forfeiture rate, assuming no expected dividend, and using the following weighted average assumptions:~~2010 is as follows:

Nine Months Ended June 30,

2009 2008
Expected life (in years)
5.50-5.91 4.68
Expected volatility
65.0%-84.6% 66.2 %
Risk-free interest rate
1.79%-3.25% 4.1 %
Weighted-average estimated fair value
$ 0.23 $ 0.58

The Company's determination of the fair value of stock option awards is affected by assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the Company's expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors. The fair value of employee stock options is determined in accordance with SFAS 123R and SAB 107, using an option-pricing model, however, that

			Weighted Average Grant-Date Fair Value per Share

Restricted stock units outstanding, September 30, 2009	171,907		$	7.05
Awarded	574,550			5.43
Released	—
Forfeited	(14,589	)		6.16

Restricted stock units outstanding, June 30, 2010 (unaudited)	731,868		$	5.80

Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, ~~2009~~2010

~~Note 7. Shareholders' Equity (Continued)~~

~~value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction, or actually realized by the employee upon exercise.~~

~~Activity under all stock option plans during the nine-month period ended June 30, 2009 was as follows:~~

Shares Weighted average exercise price Weighted average remaining contractual life (in years) Aggregate intrinsic value
Options outstanding, September 30, 2008
18,273,632 $ 7.02 4.86 $ 212
Granted
4,666,630 0.37
Cancelled or expired
(1,425,660 ) 8.22

Options outstanding, June 30, 2009
21,514,602 5.49 5.36 —

Options exercisable, June 30, 2009
15,290,868 $ 7.30 4.08 $ —

~~Restricted Stock Units~~

In September 2008, the Company also amended its 2001 Plan to clarify procedures for the issuance of Restricted Stock Units ("RSUs"). The first grant of RSUs following the amendment occurred on October 13, 2008. The grants vest over a three year period with 50% vesting one year plus one day from the date of grant and 25% vesting on the second and third anniversaries of the date of grant.

~~On January 16, 2009, the Company issued RSUs in connection with the tender offer discussed below. These grants vest one year plus one day from the date of grant.~~

~~A summary of RSU activity during the nine-month period ended June 30, 2009 is as follows:~~



~~Restricted stock outstanding, September 30, 2008~~	—
~~Awarded~~	~~3,609,233~~
~~Forfeited~~	~~(156,605~~	)

~~Restricted stock outstanding, June 30, 2009~~	~~3,452,628~~

~~Tender Offer~~

On December 1, 2008, Vitesse commenced a tender offer on Schedule TO (the "Offer") to amend Eligible Options (as defined below) that had been granted under the 1991 Plan and the 2001 Plan (together, the "Plans"). An option to purchase Vitesse common stock was eligible for the Offer (an "Eligible Option") only if each of the following conditions was met:

•: ~~The option was granted under the Plans;~~
•: ~~The option had an original exercise price per share that was less than the fair market value per share of the common stock underlying the option on the date the grant was actually finalized;~~

~~Table of Contents~~

~~VITESSE SEMICONDUCTOR CORPORATION~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~June 30, 2009~~

~~Note 7. Shareholders' Equity (Continued)~~

•: ~~The option was not vested as of December 31, 2004 (if only a portion of an option was not vested as of December 31, 2004, the unvested portion of the option may be an "eligible option"); and~~
•: ~~The option was outstanding as of December 30, 2008.~~

Vitesse undertook the Offer solely to avert the severe and, in Vitesse's view, unintended tax consequences to its option holders imposed by Section 409A of the Internal Revenue Code of 1986 and similar state laws on some of its current employee stock option holders. Vitesse determined that certain stock options were erroneously assigned grant dates other than the actual date of finalization of those grants. As a result, the exercise prices of those stock options were lower than they would have been if the options had been dated when the grants were actually finalized. Therefore, those options may have subjected option holders to adverse tax consequences under Section 409A of the Internal Revenue Code of 1986 if the fair market value of the shares were to exceed the exercise price for such shares at the end of any calendar year in which the option would have been exercisable or at the time of exercise.

These tax consequences include ordinary income tax on the spread between the exercise price and the value of the underlying shares (even if the option was not exercised), an additional 20% federal tax, and potential interest charges. In addition, some states, including California, impose an additional 20% state tax. In order to avoid these significant adverse tax consequences, Vitesse completed the Offer on December 31, 2008.

~~The Offer was accepted by all current employee holders of Eligible Options.~~

In connection with the Offer, the Company amended the eligible options and granted restricted stock to all holders of the eligible options. In accordance with SFAS 123R, the tender offer constituted a modification of the tendered options in combination with an inducement to accept the modification in the form of a grant of RSU's. The Company recorded compensation expense as a result of the modification of the options and the grant of the inducement award equal to the change in the fair value of the original options immediately before the modification and that fair value of the modified options combined the inducement award immediately after the modification. Option fair values were determined using the Black-Scholes valuation model and the fair value of the restricted stock was equal to the market price of the Company's stock on the date of modification.

The amount of compensation cost related to the modified options and restricted stock that is recognized through the end of each reporting period is equal to the incremental fair value of the portion of the aggregate awards that have vested, or for partially vested awards, value of the portion of the awards that is ultimately expected to vest, for which the requisite services have been provided.

Note 8.7. Legal Proceedings

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

~~Table of Contents~~

~~VITESSE SEMICONDUCTOR CORPORATION~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~June 30, 2009~~

~~Note 8. Legal Proceedings (Continued)~~

~~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 §§10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder on behalf of a class of purchasers of Vitesse common stock. The settlement of the consolidated securities class actions included a cash payment to the settlement fund of $10.2 million: $8.75 million to be paid by Vitesse's directors' and officers' liability insurers and a total 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, totaling 1,272,669 shares. 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~~legal proceedings in the ~~federal~~ordinary course of business, including actions against us 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, gross mismanagement, waste of corporate assets, unjust enrichment, constructive trust, rescission, accounting manipulations, and violations of California Corporations Code §§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 all rights to future indemnification and costs of defense 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.matter described below.

~~The Dupuy Action~~

On April 10, 2007, an individual shareholder of Vitesse, Jamison John Dupuy, filed a complaint in the Superior Court of California, County of Ventura, against Vitesse and three of its former officers (Case No. CIV 247776). Mr. Dupuy's complaint included causes of action for fraud, deceit and concealment, and violation of California Corporations Code §§ 25400 et seq. Vitesse filed an answer, asserting numerous affirmative defenses. On March 3, 2008, Mr. Dupuy filed an amended complaint that named six new defendants, all former employees, and included new causes of action for negligent

~~Table of Contents~~

~~VITESSE SEMICONDUCTOR CORPORATION~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~June 30, 2009~~

~~Note 8. Legal Proceedings (Continued)~~

misrepresentation and violations of California Corporations Code § 1507. On April 4, 2008, after mediation before a retired United States District Judge for the Central District of California, the parties entered into a confidential settlement agreement and the plaintiff filed a dismissal of the action. The Company settled this lawsuit in the third quarter of 2008.

The DOJ Subpoena and SEC Investigation

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

~~KPMG Lawsuit~~

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

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

~~Potential Payroll Tax Liabilities Related to Backdating of Stock Options~~

On June 29, 2009, the Company obtained final determination from the Internal Revenue Service ("IRS") regarding a settlement of payroll taxes, penalties and interest related to the exercise of backdated stock options during the calendar years 2004 through 2006. During that period, certain non-qualified stock options were improperly classified and treated as incentive stock options for tax purposes, resulting in underpayment of payroll taxes. The Company agreed to pay approximately $900,000 in full satisfaction of the federal income tax liabilities and remitted payment in July 2009.SEC.

Table of Contents

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement

You should read the following discussion and analysis in conjunction with our Unaudited Consolidated Financial Statements and the related Notes thereto contained in Part I, Item 1 of this Report. The information contained in this Quarterly Report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this Report, ~~and~~as well as in our Annual Report on Form 10-K for the year ended September 30, ~~2008, which discusses our business in greater detail, filed with the Securities and Exchange Commission, or SEC.~~

The section entitled "Risk Factors" contained in Part II, Item 1A of this Report, and similar discussions in our other SEC filings, describe some of the important risk factors that may affect our business, financial condition, results of operations and/or liquidity. You should carefully consider those risks, in addition to the other information in this Report2009 and in our other filings with the SEC, ~~before deciding to purchase, hold or sell~~which discuss our ~~common stock.~~business in greater detail.

This Quarterly Report contains forward-looking statements that involve risks and uncertainties. We use words such as "anticipates," "believes," "plans," "expects," "future," "intends," "may," "should," "estimates," "predicts," "potential," "continue," "becoming," "transitioning" and similar expressions to identify such forward-looking statements. Our forward-looking statements include statements as to our business outlook, revenues, margins, expenses, tax provision, capital resources sufficiency, capital expenditures, interest income, cash commitments and expenses. Forward-looking statements are not guarantees of future performance and the Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those ~~discussed~~referenced in the subsection entitled "Risk Factors" ~~under~~in Part I,II, Item 1A of this ~~Annual Report.~~Report, and similar discussions in our other SEC filings. You should carefully consider those risks, in addition to the other information in this Report and in our other filings with the SEC, before deciding to purchase, hold or sell our common stock. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.

Overview

~~Over the last ten years, the worldwide proliferation~~We design, develop and market a diverse portfolio of ~~the Internet~~high-performance, cost-competitive semiconductor solutions for carrier and ~~the rapid growth~~enterprise networks worldwide. We believe that engineering excellence and dedicated customer service distinguish Vitesse as an industry leader in ~~the volume of data being sent over Local Area Networks ("LANs")~~high-performance Ethernet LAN, WAN, and Wide Area Networks ("WANs") has placed a tremendous strain on the existing communications infrastructure. Communication service providers have sought to increase their revenues by delivering a growing range of data services to their customers in a cost-effective manner. The resulting demandRAN, Ethernet-over-SONET/SDH, optical transport (OTN), and best-in-class signal integrity, physical layer, and connectivity products for ~~increased bandwidth~~Ethernet, SONET, Fibre Channel, Serial Attached SCSI, InfiniBand(r), video, 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.PCI Express applications.

We are a leading supplier of high-performance integrated circuits ("ICs") principally targeted at systems manufacturers in the communications and storage industries. Within the communications industry, our products address ~~Carrier~~carrier and ~~Enterprise~~enterprise networking, where they enable data to be transmitted at high-speeds and processed and switched under a variety of protocols.

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

~~Table of Contents~~

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

In the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2008, the Company provided a chronological listing of events that occurred between April 2006 and December 2008, 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 of Directors. A number of these events contributed directly to the delayed filing of the prior years' Annual Reports with the SEC.

The Company filed its Annual Report on Form 10-K for the fiscal year ended September 30, 2008 on December 31, 2008, and has been current since such date with respect to its Exchange Act reporting obligations.

~~Fiscal 2009 Actions~~

On January 26, 2009, the Company reduced the base salaries of its named executive officers, effective February 1, 2009, as follows: (i) Mr. Gardner—20% reduction; (ii) Mr. Yonker—10% reduction; (iii) Mr. Green—10% reduction; and (iv) Mr. 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 shall remain effective through the end of the Company's 2009 fiscal year.

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

~~Our Business Product Lines~~

Beginning in 2008, Vitesse classified product revenues into three markets: Carrier Networking, Enterprise Networking and Non-Core. These classifications reflect the major trends in our product lines and how they map into our customer base. In addition, we have an IP revenue stream that was introduced in the last quarter of 2008 and continued with the sale of certain patents in the third quarter of 2009.

~~Carrier Networking~~

The telecommunications Carrier Global Network, which includes networks delivering voice and data services, has grown dramatically to a complex combination of networks. These networks are often classified into groups such as Wide Area Networks ("WANs"), Metropolitan Area Networks ("MANs"), Multi-Service Access Networks ("MSANs"), and Radio Access Networks ("RANs"). Each of these types of networks has their own set of technical and operational challenges. These evolving networks must deliver more bandwidth and provide increasing data-based capabilities to provide "quadruple play" services that integrate voice, data and video traffic over both wired and wireless networks. ~~To address~~Increasingly, these networks will be delivered based on Ethernet technology to provide these services at lower cost. We believe that products in this ~~problem, Carriers are increasingly trying~~emerging technology area represent the best opportunity for us to ~~map Ethernet services~~provide differentiation in the market.

Debt Restructuring

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

Table of Contents

connectivity more efficiently into their existing networks. They may even replace their legacy network with new all-IP/Ethernet-based networks. Broadly, Ethernet technology upgraded to meet these requirements is being referred tothe 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 "Carrier Ethernet." It is, in effect, an adaptation of Ethernet to provide the same features and functions that have traditionally been provided by "telecom" protocols such as Synchronous Optical Network ("SONET/SDH"), Plesiochronous Digital Hierarchy ("PDH"), etc. Becausepart of the ~~complexity~~debt restructuring transactions.

Under the terms of the ~~Carrier networks, products sold into these applications have long design cycles, typically two~~debt restructuring transactions, Vitesse:

•: Paid $3.6 million in cash to ~~four years from design start to production, and long life cycles, typically five to ten years or more.~~
Vitesse provides a variety of products into Carrier networking applications. These generally include: (i) Ethernet-over-SONET mappers, SONET framers and switches; (ii) Optoelectronic physical media devices ("PMDs") and physical layer devices ("PHYs") such as transceivers and Clock and Data Recovery ("CDR"); (iii) Signal Integrity Products including backplane transceivers, CDR, and crosspoint switches; (iv) Ethernet Media access controllers ("EMACs") and switches; (v) GbE Cu PHYs; and (vi) Next-Generation Optical Transport Network ("OTN") mappers.
~~Enterprise Networking~~
~~Enterprise Networks generally include equipment dedicated~~satisfy its obligations to the ~~communication~~holders of voice and data services within large enterprise organizations. An Enterprise Network will typically be comprised of one or more LANs computer systems including workstations and servers, as well as one or more Service Access Networks ("SANs"). Enterprise Networks will also typically include broadband connections2024 Debentures who did not participate in the transaction.
•: Paid $6.4 million in cash consideration to ~~Carrier Networks for~~ the ~~broader communication of voice and/or data outside~~holders of the ~~enterprise. Enterprise Networks are often classified into groups depending on their size~~2024 Debentures who participated in the transaction.
•: Issued $50.0 million in aggregate principal amount of the 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 ~~complexity. Typical categories are large Enterprise, data center switching, small-medium enterprise ("SME"), small medium business ("SMB"),~~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 that is subordinated to the security of 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 ~~small office home office ("SOHO"). Similar~~ to ~~Carrier Networks, Enterprise Networks are going through~~some of those holders, an ~~evolution to provide more bandwidth, (i.e. more data at higher speeds) and more reliability, interoperability, and scalability. Ethernet-based networks,~~aggregate of 771,000 shares of a new Series B Preferred Stock, which are ~~already widely deployed in LANs, are becoming more prevalent in other enterprise applications such as data center switching~~convertible into common stock on a five-to-one basis and ~~SANs. Enterprises are paring down their multiple networks (telephone, LAN, video conferencing, wireless,~~have a dividend preference relative to the common stock. The Series B Preferred Stock and ~~remote mirroring/backup) to a common switched IP/Ethernet-based infrastructure. Ethernet technology~~the 2014 Debentures include restrictions on conversion that ~~is being upgraded to meet~~prohibit holders of these ~~new requirements is generally referred to as "Converged Enhanced Ethernet." In addition, Enterprise Networks are migrating~~securities from ~~fast 100 Mbps Ethernet to Gigabit Ethernet and from Gigabit Ethernet to 10 Gigabit Ethernet. This transition is still~~converting them if it would result in the ~~early stages and expected to accelerate over the next several years. The complexity~~holder beneficially owning more than 9.99% of products within the Enterprise Networks varies dramatically based on the product application. Products at the "low-end" of the network, in SOHO, SME, and low-end SME applications typically have fast design cycles in the order of six to 12 months and short life cycles, in the order of two to four years. Products sold into applications at the "high-end" of Enterprise such as data center switching and high-end SME have longer design cycles, typically one to two years from design start to production and long life cycles, typically three to five years or more. Vitesse provides a variety of products into Enterprise Networking applications. These generally include: (i) Ethernet MACs, switches, and routers; (ii) GbE Cu PHYs; (iii) Integrated Cu PHY and switch products; and (iv) Signal Integrity products including backplane transceivers, CDRs and crosspoint switches.
Vitesse's outstanding common stock.

~~Non-Core~~

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

~~Table of Contents~~

~~Intellectual Property~~

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

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

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

Critical Accounting Policies ~~and Estimates~~

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

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

~~Revenue Recognition, Sales Returns Reserve and Allowance for Doubtful Accounts~~

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

~~Table of Contents~~

Vitesse has a distribution network through which it sells most of its products. The Company recognizes revenue on a sell-through basis for all distributors, utilizing information provided by the distributors. As of June 30, 2009, these distributors maintained inventory balances of $4.9 million, which are carried on the books of Vitesse, and are given business terms to return a portion of inventory and receive credits for changes in selling prices to end customers. At the time Vitesse ships inventory to the distributors, the magnitude of future returns and price adjustments is not known. Therefore, revenue recognition for shipments to distributors does not occur until the distributors sell inventory to end customers. Payments received from distributors for inventory shipped to them, in advance of the sale of that inventory to the end-user, are shown as deferred revenue. Vitesse personnel are often involved with the sales from the distributors to end customers.

At June 30, 2009, approximately 2.8% of our inventory is consigned and located with a single customer. Consistent with our revenue recognition policy, we recognize revenue when the customer pulls the inventory for use, as that is when title passes to the customer and all revenue recognition criteria specified above are met.

On December 28, 2007, the Company entered into an arrangement to license IP to a third-party. The contract is a perpetual, non-exclusive, non-transferable, irrevocable license for specified intellectual property. As part of the contract, we were granted a perpetual, non-exclusive, non-transferable, irrevocable license to improvements to the technology made by the licensee, subject to certain limitations. Under the agreement, Vitesse received $15.0 million in license fees and royaltiesForm 10-K for the ~~rights~~year ended September 30, 2009. There have been no significant changes to certain products and technology. Of the fees and royalty payments, $10.0 million in fees was received upon delivery and acceptance of the licensed technology. The remaining $5.0 million of fees was received upon the one-year anniversary of the agreement. For a period of seven years from the effective date of the contract, licensee will pay royalties on a per unit basis, on each commercial sale incorporating the licensed products. Royalties will be accounted for when received. No royalties were received or recognized forthese policies during the nine months ended June 30, ~~2009.~~

On June 30, 2009, the Company entered into a Sale and Purchase Agreement (the "Agreement") and completed the sale, assignment and transfers of certain patents (the "Vitesse Patents") from its intellectual property portfolio for consideration of IP revenue of $8.25 million with such payment due and received on July 15, 2009. The Company incurred $1.8 million in broker's fees related to the sale. The Company recorded the broker's fees in selling, general and administrative expense. The Vitesse Patents relate to the Company's non-core business, specifically its network processing products.

In accordance with SAB 104, in the licensing of technology and other intangibles, delivery does not occur for revenue recognition purposes until the license term begins. Revenues should be recognized in a manner consistent with the nature of the transaction and related earnings process. Pursuant to the guidance in SAB 104, revenue related to the licensing of intellectual property is deferred until final acceptance of the contracted deliverables. Any royalties related to the licensing will be recognized when received.

We record a reserve for estimated sales returns and allowances in the same period as the related revenues are recognized. Sales returns typically occur for quality related issues and allowances are based on specific criteria such as rebate agreements. We base these estimates on our historical experience or the specific identification of an event necessitating a reserve. To the extent actual sales returns or allowances differ from our estimates; our future results of operations may be affected.

~~Table of Contents~~

We also maintain an allowance for doubtful accounts for estimated losses resulting from customers' inability to meet their financial obligations to us. We evaluate the collectability of accounts receivable on a monthly basis based on a combination of factors. The Company includes any accounts receivable balances that are determined2010. These policies continue to be ~~uncollectible in the overall allowance for doubtful accounts using the specific identification method. After all attempts~~those that we believe are most important to ~~collect~~ a receivable have failed, the receivable is written off against the allowance. Management believes the allowance for doubtful accounts as of June 30, 2009 and September 30, 2008, is adequate. However, if the financial condition of any customer were to deteriorate, resulting in an impairment of itsreader's ability to ~~make payments, additional allowances could be required.~~

~~Inventory Valuation~~

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

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

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

Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible and intangible assets acquired. The amounts and useful lives assignedCompound Embedded Derivative related to intangible assets acquired, other than goodwill, impact the amount and timing of future amortization, and the amount assigned to in-process research & development is expensed immediately. The value of intangible assets, including goodwill, can be impacted by adverse changes such as declines in operating results, a decrease in stock value, changes in the worldwide economy or a specific industry or a failure to meet performance projections.

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

If such indicators are present, we compare the fair value of the goodwill to its carrying value. Fair value of goodwill is determined by considering the Company's market capitalization, discounted cash flows, and a market approach as of the valuation date. In considering the Company's market capitalization, an estimated premium to reflect the fair value on a control basis is applied. This premium is estimated based on an evaluation of control premiums identifiable in comparable transactions.

~~For other intangible assets and long-lived assets, in accordance with SFAS No. 144, "~~~~Accounting for the Impairment or Disposal of Long-Lived Assets~~~~" ("SFAS 144"), we determine whether the sum of the estimated undiscounted cash flows attributable to each asset in question is less than its carrying value.~~

~~Table of Contents~~

If less, we recognize an impairment loss based on the excess of the carrying amount of the assets over their respective fair values. Fair value of other intangible assets is determined by discounted future cash flows, appraisals, or other methods. Fair value of long-lived assets is determined based on market value. If the long-lived asset determined to be impaired is to be held and used, we recognize an impairment charge to the extent the fair value attributable to the asset is less than the asset's carrying value. The fair value of the long-lived asset then becomes the asset's new carrying value, which we amortize over the remaining estimated useful life of the asset.

These approaches use significant estimates and assumptions, including projection and timing of future cash flows, discount rates reflecting the risk inherent in future cash flows, and long-term growth rates. It is reasonably possible that the estimates and assumptions used to value these assets differ from future actual results. If our actual results, or the estimates and assumptions used in future impairment analyses, are lower than the original estimates and assumptions used to assess the recoverability of these assets, we could incur additional impairment charges.

During the quarter ended December 31, 2008, we identified changes in key factors indicating a possible impairment of the value of our goodwill. Notable indicators were significantly depressed market conditions and industry trends, market capitalization below book value of equity and some downward revisions to our forecasts due to current economic conditions. Continually changing market conditions make it difficult to project how long the current economic downturn may last. Declining market values have negatively impacted our valuations, which are a component of our goodwill impairment tests. Upon completion of the first step of the impairment test for the quarter ended December 31, 2008, we determined that additional impairment analysis was required by SFAS 142. The second step of the goodwill impairment test compared the implied fair value of our Company's goodwill with the carrying amount of that goodwill. Since the carrying amount of goodwill exceeded the implied fair value of that goodwill, an impairment loss was recognized in an amount equal to that excess. The implied fair value of goodwill was determined in the same manner as the amount of goodwill recognized in a business combination. The fair value was determined through an analysis of: (i) the market capitalization; (ii) comparable public company valuations; and (iii) the future cash flows expected to be generated by the Company. The calculated fair value was then allocated to individual assets and liabilities (including any unrecognized intangible assets) as if the Company had been acquired in a business combination and the fair value of the Company was the purchase price paid to acquire the Company. In performing this allocation, the fair values of the assets of the Company were calculated using generally accepted valuation methodologies, including analysis of: (i) the future cash flows expected to be generated; (ii) the estimated market value; or (iii) the estimated cost to replace. Any variance in the assumptions used to value the assets and liabilities could have had a significant impact on the estimated fair value of the assets and liabilities and consequently the amount of identified goodwill impairment. As a result of the additional analyses performed, we recorded an impairment charge to fully write-off our goodwill balance of $191.4 million for the quarter ended December 31, 2008.

Other intangible assets, which consist primarily of technology and IP, are amortized over their estimated useful lives. The remaining lives of these assets range from less than one year to three years. As required by SFAS 144, we verified our long-lived assets were not impaired as of the time of the goodwill impairment.

~~Valuation of Repurchase Right on~~ Subordinated Debentures

In accordance with ASC Topic 815 Derivatives and Hedging ("ASC 815"), originally issued as SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," ~~("SFAS 133"),~~ embedded derivatives must be bifurcated from the underlying debt instrument and valued as a separate financial instrument. ~~Our 1.5% Convertible Subordinated Debentures due 2024 (the "2024 Debentures") includes a repurchase right for 113.76%~~Management evaluated the terms and features of the ~~principal amount of the 2024~~8.00% Convertible Second Lien Debentures ~~on October 1, 2009~~Due 2014 (the ~~"premium put"~~"2014 Debentures") ~~that we have~~and identified as an embedded

~~Table of Contents~~

derivative (the "compound embedded derivative" or "derivative liability") requiring bifurcation and accounting at fair value because the economic and contractual characteristics of the ~~premium put~~compound derivative meet the criteria for ~~separate~~bifurcation and accounting for separately as set forth in ~~SFAS 133.~~ASC 815 due to the conversion price not being indexed to the Company's own stock. Any gain or loss on the fair value of the compound derivative will be reflected in current earnings. The embedded compound derivative is comprised of the conversion option and a make-whole payment for foregone interest if the holder converts the debenture early. We ~~estimate~~estimated the approximate fair value of the ~~premium put~~compound derivative as the difference between the estimated value of the ~~2024~~2014 Debentures with and without the ~~premium put feature.~~compound derivative features. The fair value of the ~~2024~~2014 Debentures ~~both with and without the embedded premium put feature,~~ was estimated using a convertible bond valuation model within a lattice framework. These valuations were determined using Level 3 inputs. The convertible bond valuation model combined expected cash outflows with market-based assumptions regarding risk-adjusted yields, stock price volatility and recent price quotes and trading information regarding shares of our common stock into which the ~~2024~~2014 Debentures are convertible. Our analysis iswas premised on the assumption that the holder would act in a manner that maximizes the potential return, or ~~"payoff",~~"payoff," at any given

Table of Contents

point in time. Included in this premise iswas the assumption that the holder would compare the potential return associated with each available alternative, including, as specified in the terms of the ~~contract,~~2014 Debentures, holding the debt instrument, exercising an equity conversion option, or exercising a put option. ~~As a component~~

On October 30, 2009, the date of this, we incorporated a market participant consideration as to the Company's capacity to fulfill the contractual obligations associated with each alternative, including the Company's ability to fulfill any cash settlement obligation associated with exercise of the put option. Based on our analysis, we determined thatissuance, the fair value of the ~~premium put is most sensitive to the estimated amount~~bifurcated compound derivative was $28.0 million. As of funds available for settlement of the liability on October 1, 2009. More specifically, fair value of the premium put is positively correlated to the estimated amount of cash proceeds expected to be received at exercise. Should the premium put have value, any gain or loss onJune 30, 2010, the fair value of the ~~premium put will~~bifurcated compound derivative was $29.2 million, with the change reflected as interest expense in the Statement of Operations for the nine-month period ended June 30, 2010. The change in the fair value of the bifurcated compound derivative is a non-cash item resulting from the increase in the market price of the underlying common stock. Should the holders convert the 2014 Debentures and receive the make-whole payment, settlement may be, ~~reflected~~at the Company's election, in ~~current earnings.~~shares of the Company's common stock. The ~~result of our valuation analysis was that premium put was estimated~~Company intends to ~~have $4.6 million fair value~~settle this obligation in common shares should it be exercised by its holders. As the Company intends to, and has the ability to, satisfy the obligations with equity securities, in accordance with ASC 470, the Company has reclassified the liability as a long-term liability on its Consolidated Balance Sheet as of June 30, 2009 and no fair value as of September 30, 2008. The primary driver of the change in fair value between these dates was an increase in the amount of funds available for cash settlement between the measurement dates.

~~Accounting for Share-Based Compensation~~

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

SFAS 123R requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense ratably over the requisite service periods. We have estimated the fair value of each award as of the date of grant or assumption using the Black-Scholes option pricing model, which was developed for use in estimating the value of traded options that have no vesting restrictions and that are freely transferable. The Black-Scholes model considers, among other factors, the expected life of the award and the expected volatility of the Company's stock price. Although the Black-Scholes model meets the requirements of SFAS 123R, the fair values generated by the model may not be indicative of the actual fair values of our awards, as it does not consider other factors important to those share-based payment awards, such as continued employment, periodic vesting requirements, and limited transferability. Because the share-based compensation expense recognized in the statements of operations for the periods ended June 30, 2009 and 2008 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Changes in forfeitures from the estimates made at grant date could result in more or less non-cash compensation expense in comparable periods.

~~Table of Contents~~

~~Assets and Liabilities of a Business Held for Sale~~

In accordance with SFAS 144 we classify the assets and liabilities of a business as held for sale when management approves and commits to a formal plan of sale and it is probable that the sale will be completed. The carrying value of the net assets of the business held for sale are then recorded at the lower of their carrying value or fair market value, less costs to sell. On December 22, 2008, we closed the sale of the Colorado land and building to a third-party. The gross sales price was $6.5 million. The facility, which was previously used for the Storage Products business, remained unused since the sale of that business on October 29, 2007. As a result, the net book value of $3.2 million was reported as 'Asset Held for Sale' on the September 30, 2008 balance sheet. We recognized a gain of approximately $2.9 million on this sale in the first quarter of fiscal 2009.

~~Income Taxes~~

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

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

In assessing the realizability of deferred tax assets, management considers, on a periodic basis, whether it is more likely than not, that some portion or all of the deferred tax assets will not be realized. As of September 30, 2008 and 2007, management has placed a valuation allowance against all deferred tax assets based on its overall assessment of the risks and uncertainties. Accordingly, management believes the current valuation allowance on deferred tax assets is sufficient and properly stated at June 30, 2009 and September 30, 2008.

~~Research and Development~~

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

~~Impact of Recent Accounting Pronouncements~~

~~Table of Contents~~

measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for financial statements issued for fiscal years beginning after December 15, 2008. Accordingly, SFAS 141R is applicable to the Company's accounting for business combinations closing on or after October 1, 2009. We expect SFAS 141R will have an impact on our consolidated financial statements, but the nature and magnitude of the specific effects will depend upon the nature, terms and size of the acquisitions we consummate after the effective date of October 1, 2009.

~~In April 2009 the FASB issued FSP No. 141R-1, "~~~~Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies~~," (FSP 141R-1). FSP 141R-1 amends the provisions in Statement 141R for the initial recognition and measurement, subsequent measurement and accounting and disclosures for assets and liabilities arising from contingencies in business combinations. The FSP eliminates the distinction between contractual and non-contractual contingencies, including the initial recognition and measurement criteria in Statement 141R and instead carries forward most of the provisions in SFAS 141 for acquired contingencies. FSP 141R-1 is effective for contingent assets and contingent liabilities acquired in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We expect FSP 141R-1 will have an impact on our consolidated financial statements, but the nature and magnitude of the specific effects will depend upon the nature, term and size of the acquired contingencies.

~~In December 2007, the FASB issued SFAS No. 160,~~~~"Non-controlling Interests in Consolidated Financial Statements—an amendment of ARB No. 51"~~ ("SFAS 160"). SFAS 160 addresses the accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the non-controlling interest, changes in a parent's ownership interest, and the valuation of retained non-controlling equity investments when a subsidiary is deconsolidated. SFAS 160 is effective for fiscal years beginning after December 15, 2008. We do not anticipate that the adoption of SFAS 160 will have a material impact on our financial statements.

~~In May 2008, the FASB issued FASB Staff Position APB 14-1, "~~~~Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)~~" ("APB 14-1"). APB 14-1 requires us to separately account for the liability and equity components of a convertible debt security by measuring the fair value of a similar nonconvertible debt security when interest cost is recognized in subsequent periods. APB 14-1 requires us to retroactively separate the liability and equity components of such debt in our consolidated balance sheets on a fair value basis. APB 14-1 is effective for fiscal years beginning after December 15, 2008. We are currently evaluating the impact that APB 14-1 will have on our financial statements.

~~Table of Contents~~

option valuation instruments on the evaluation. EITF 07-5 is effective for the financial statements issued for fiscal years and interim periods within those fiscal years, beginning after December 15, 2008 and will be applied to outstanding instruments as of the beginning of the fiscal year in which it is adopted. Upon adoption, a cumulative effect adjustment will be recorded, if necessary, based on amounts that would have been recognized if this guidance had been applied from the issuance date of the affected instruments. We are currently determining the impact that EITF 07-05 will have on our financial statements, if any.

~~Table of Contents~~2010.

Results of Operations for the Three and Nine Months Ended June 30, ~~2009~~2010 compared to the Three and Nine Months Ended June 30, ~~2008~~2009

The following table sets forth certain consolidated statement of operations data expressed as a percentage of net ~~revenues~~revenue for the periods indicated:

Three Months
Ended
June 30, Nine Months
Ended
June 30,

2009 2008 2009 2008
Net revenues
100.0 % 100.0 % 100.0 % 100.0 %
Cost and expenses:

Cost of revenues
38.7 % 50.8 % 44.9 % 49.0 %

Engineering, research and development
25.1 % 22.6 % 26.1 % 23.0 %

Selling, general and administrative
25.6 % 26.5 % 24.6 % 23.1 %

Accounting remediation & reconstruction expense & litigation costs
(29.6 )% 3.8 % (7.6 )% 5.4 %

Goodwill impairment
0.0 % 0.0 % 148.4 % 0.0 %

Amortization of intangible assets
0.8 % 0.6 % 0.8 % 1.4 %

Costs and expenses
60.6 % 104.3 % 237.2 % 101.9 %
Income (loss) from operations
39.4 % (4.2 )% (137.2 )% (1.9 )%
Other (expense) income:

Interest expense, net
(13.0 )% (2.0 )% (6.3 )% (1.7 )%
Other (expense) income, net
(0.1 )% 6.4 % 0.0 % 2.6 %

Other (expense) income, net
(13.1 )% 4.4 % (6.2 )% 0.9 %
Income tax (benefit) expense
(1.6 )% 0.0 % (0.5 )% (0.3 )%
Minority interests in earnings of consolidated subsidiary
0.0 % (1.2 )% 0.0 % (0.4 )%

Income (loss) from continuing operations before discontinued operations
27.9 % (1.0 )% (143.0 )% (1.1 )%
Discontinued operations

Income from discontinued operations
0.2 % 3.1 % 0.1 % 5.0 %

Net income (loss)
28.1 % 2.1 % (143.1 )% 3.9 %

				Three Months Ended June 30,						Nine Months Ended June 30,

				2010			2009			2010			2009
Net revenues					100.0	%		100.0	%		100.0	%		100.0	%
Cost and expenses:
		Cost of revenues			41.8	%		38.7	%		44.0	%		44.9	%
		Engineering, research and development			36.4	%		25.1	%		30.7	%		26.1	%
		Selling, general and administrative			23.1	%		25.6	%		23.0	%		24.6	%
		Accounting remediation & reconstruction expense & litigation costs			0.0	%		(29.6	)%		0.1	%		(7.5	)%
		Goodwill impairment			0.0	%		0.0	%		0.0	%		148.4	%
		Amortization of intangible assets			0.5	%		0.8	%		0.5	%		0.8	%

			Costs and expenses		101.8	%		60.6	%		98.3	%		237.3	%
Income (loss) from operations					(1.8	)%		39.4	%		1.7	%		(137.3	)%
Other income (expense):
Interest income (expense), net					80.7	%		(13.0	)%		(10.5	)%		(6.3	)%
Gain (loss) on extinguishment of debt					0.7	%		0.0	%		(17.3	)%		0.0	%
Other income (expense), net					(0.2	)%		(0.1	)%		0.0	%		0.0	%

			Other income (expense), net		81.2	%		(13.1	)%		(27.8	)%		(6.3	)%
Income (loss) before income tax expense (benefit)					79.4	%		26.3	%		(26.1	)%		(143.6	)%
Income tax expense (benefit)					(8.6	)%		(1.6	)%		2.3	%		(0.5	)%

Net income (loss) from continuing operations					88.0	%		27.9	%		(28.4	)%		(143.1	)%
	Income from discontinued operations, net				0.0	%		0.2	%		0.0	%		0.1	%

Net income (loss)					88.0	%		28.1	%		(28.4	)%		(143.0	)%
		Fair value adjustment of Preferred Stock—Series B			0.0	%		0.0	%		0.1	%		0.0	%

Net income (loss) available to common shareholders					88.0	%		28.1	%		(28.5	)%		(143.0	)%

Table of Contents

~~Net~~ Product Revenues

We classify our IC products into three categories: (i) Carrier Networking Products; (ii) Enterprise Networking Products; and (iii) Non-Core Products. The Carrier Networking Products line services core, metro and ~~metro WANs, also known as Carrier Networks. Our products are focused on enabling Ethernet data services to be deployed more broadly across these~~access networks. The Enterprise Networking Products line services the market for Ethernet switching and transmission within ~~LANs~~local area networks in ~~SMB~~small-medium business and ~~SME~~enterprise (SMB/SME) markets.

~~Table of Contents~~

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

Three Months Ended
June 30, 2009 Three Months Ended
June 30, 2008

Amount % of Net
Revenues Amount % of Net
Revenues Change %
Change

(in thousands, except percentages)

Carrier Networking Products
$ 16,689 45.9 % $ 22,596 41.1 % $ (5,907 ) (26.1 )%
Enterprise Networking Products
14,960 41.1 % 19,841 36.0 % (4,881 ) (24.6 )%
Non-Core Products
4,707 12.9 % 12,604 22.9 % (7,897 ) (62.7 )%

Net Product Revenues
$ 36,356 100.0 % $ 55,041 100.0 % $ (18,685 ) (33.9 )%

Nine Months Ended
June 30, 2009 Nine Months Ended
June 30, 2008

Amount % of Net
Revenues Amount % of Net
Revenues Change %
Change

(in thousands, except percentages)

Carrier Networking Products
$ 51,582 44.6 % $ 68,051 41.7 % $ (16,469 ) (24.2 )%
Enterprise Networking Products
43,987 38.0 % 56,702 34.7 % (12,715 ) (22.4 )%
Non-Core Products
20,174 17.4 % 38,423 23.5 % (18,249 ) (47.5 )%

Net Product Revenues
$ 115,743 100.0 % $ 163,176 100.0 % $ (47,433 ) (29.1 )%

Net product revenues for the third quarter of fiscal 2009 were $36.4 million compared to $55.0 million for the same period in fiscal 2008. This decrease of $18.7 million or 33.9% was driven primarily by overall weaker customer demand and inventory corrections that our customers have implemented in response to the severely depressed global economic environment. Carrier Networking was down $5.9 million or 26.1% due to a decline in both processing and physical layer products which was partially offset by growth in switching products. Enterprise Networking was down $4.9 million or 24.6% due to a decline in CuPhy and Ethernet switch product segments. Sales of Non-Core Products were down $7.9 million or 62.7% due to a strong decline in Raid-on-Chip Processor products, Network Processor Products and legacy physical layer components. Our Non-Core Products are product lines ~~that~~ have ~~had minimal on-going~~not received additional investment over the prior three years and as a result have generally been in decline. ~~We believe that these~~The following tables summarize our net product ~~lines are likely~~mix by product line.

	Three Months Ended June 30, 2010					Three Months Ended June 30, 2009

	Amount		% of Net Revenues			Amount		% of Net Revenues			Change			% Change
	(in thousands, except percentages)
Carrier Networking Products	$	14,983		39.9	%	$	16,689		45.9	%	$	(1,706	)		(10.2	)%
Enterprise Networking Products		18,725		49.9	%		14,960		41.1	%	$	3,765			25.2	%
Non-Core Products		3,825		10.2	%		4,707		13.0	%	$	(882	)		(18.7	)%

Net Product Revenues	$	37,533		100.0	%	$	36,356		100.0	%	$	1,177			3.2	%

	Nine Months Ended June 30, 2010					Nine Months Ended June 30, 2009

	Amount		% of Net Revenues			Amount		% of Net Revenues			Change			% Change
	(in thousands, except percentages)
Carrier Networking Products	$	51,341		41.8	%	$	51,582		44.6	%	$	(241	)		(0.5	)%
Enterprise Networking Products		56,655		46.1	%		43,987		38.0	%	$	12,668			28.8	%
Non-Core Products		14,809		12.1	%		20,174		17.4	%	$	(5,365	)		(26.6	)%

Net Product Revenues	$	122,805		100.0	%	$	115,743		100.0	%	$	7,062			6.1	%

Net product revenues for the third quarter of 2010 were $37.5 million compared to ~~be subject~~$36.4 million for the same period in 2009. This increase of $1.2 million, or 3.2%, was driven primarily by overall strengthening customer demand for our core products. Carrier Networking decreased by $1.7 million, or 10.2%. This decline was due to ~~more severe inventory control~~weakness at several customers in China as well as a decline in legacy SONET products at several customers. Enterprise Networking increased $3.8 million, or 25.2%, due to an increase in Ethernet PHY and ~~corrections by~~MAC products, our ~~customers.~~10GbE physical layer products, as well as strength in signal and connectivity products, including our crosspoint switch family. Sales of Non-Core Products were down $0.9 million, or 18.7%, due to a decline of our legacy Raid-on-Chip and NPU product lines.

~~For~~Net product revenues for the nine months ended June 30, 2010 and 2009 ~~and 2008, net product revenues decreased $47.4~~were $122.8 million compared to $115.7 million for the same period in 2009. This increase of $7.1 million, or ~~29.1%~~6.1%, was driven primarily by overall ~~weaker~~strengthening customer demand ~~and inventory corrections that~~for our ~~customers have implemented in response to the severely depressed global economic environment.~~core products. Carrier Networking was down ~~$16.5~~$0.2 million, or ~~24.2%~~0.5%. This decline was due to weakness at several customers in China as well as a decline in legacy SONET products at several customers. Enterprise Networking increased $12.7 million, or 28.8%, due to ~~a decline across both processing~~an increase in Ethernet PHY and MAC products, our 10GbE physical layer ~~product segments. Enterprise Networking was down $12.7 million or 22.4% due to a decline~~products, as well as strength in ~~CuPHY~~signal and ~~Ethernet~~connectivity products including our crosspoint switch ~~product segments.~~family. Sales of Non-Core Products were down ~~$18.2~~$5.4 million or ~~47.5%~~26.6% due to a ~~strong~~ decline inof our legacy Raid-on-Chip ~~processor products, network processor products~~ and ~~legacy physical layer components. These percentage decreases reflect a decline in order volume.~~NPU product lines.

Table of Contents

Intellectual Property Revenues

Three Months Ended
June 30, 2009 Three Months Ended
June 30, 2008

Amount % of
Licensing
Revenues Amount % of
Licensing
Revenues Change %
Change

(in thousands, except percentages)

Intellectual Property revenues
$ 8,250 100.0 % $ — 100.0 % $ 8,250 100.0 %

	Three Months Ended June 30, 2010					Three Months Ended June 30, 2009

	Amount		% of Net Revenues			Amount		% of Net Revenues			Change			% Change
	(in thousands, except percentages)
Licensing Revenues	$	—		0.0	%	$	8,250		18.5	%	$	(8,250	)		(100.0	)%

Nine Months Ended June 30, 2009 Nine Months Ended June 30, 2008

Amount % of
Licensing
Revenues Amount % of
Licensing
Revenues Change %
Change

(in thousands, except percentages)

Intellectual Property revenues
$ 13,250 100.0 % $ — 100.0 % $ 13,250 100.0 %

	Nine Months Ended June 30, 2010					Nine Months Ended June 30, 2009

	Amount		% of Net Revenues			Amount		% of Net Revenues			Change			% Change
	(in thousands, except percentages)
Licensing Revenues	$	290		0.2	%	$	13,250		10.3	%	$	(12,960	)		(97.8	)%

In 2008, we began to leverage our substantial intellectual property portfolio into licensing opportunities with third-parties. There were no intellectual property revenues in the third quarter of ~~2009, we entered into the Agreement to sell certain patents from our IP portfolio for consideration of~~2010 and intellectual property revenues were $8.3 million ~~with such payment due and received on July 15,~~in the third quarter of 2009. We ~~incurred $1.8~~recognized $0.3 million ~~in brokers fees related to the sale. We recorded the broker's fees in selling, general~~ and ~~administrative expense. The patents relate to our non-core business, specifically its network processing products.~~

~~For the nine months ended June 30, 2009, licensing revenues of~~ $13.3 million ~~included IP revenue of $8.3 million from the sale of patents from our IP portfolio and $5.0 million from an arrangement, entered into~~ in the first ~~quarter~~nine months of year 2010 and 2009, to license IP to a third-party. On December 28, 2007, the Company entered into an arrangement to license IP to a third-party. Specific deliverables to the licensee were defined in the agreement and required acceptance from the licensee. Under the agreement, Vitesse received $15.0 million in license fees for the rights to certain products and technology. Of the fees, $10.0 million was recognized upon delivery and acceptance of the licensed technology in the fourth quarter of 2008. The remaining $5.0 million was recognized upon the one-year anniversary of the agreement in the first quarter of 2009. No royalties were received or recognized for the quarter ended June 30, 2009.respectively.

Cost of Revenues

Three Months Ended June 30, Change

2009 2008 $ %

(in thousands, except percentages)

Cost of revenues
$ 17,282 $ 27,965 $ (10,683 ) (38.2 )%
Percent of net revenues
38.7 % 50.8 %

	Three Months Ended June 30,						Change

	2010			2009			$			%
	(in thousands, except percentages)
Cost of revenues	$	15,702		$	17,282		$	(1,580	)		(9.1	)%
Percent of net revenues		41.8	%		38.7	%

Nine Months Ended June 30, Change

2009 2008 $ %

(in thousands, except percentages)

Cost of revenues
$ 57,957 $ 79,977 $ (22,020 ) (27.5 )%
Percent of net revenues
44.9 % 49.0 %

	Nine Months Ended June 30,						Change

	2010			2009			$			%
	(in thousands, except percentages)
Cost of revenues	$	54,167		$	57,957		$	(3,790	)		(6.5	)%
Percent of net revenues		44.0	%		44.9	%

As a fabless semiconductor company, ~~we use third-parties (including TSMC, IBM, Chartered, Amkor, ASAT and ASE) for wafer fabrication and assembly services. Our~~our cost of revenues consists predominantly of: (i) purchased finished wafers; (ii) assembly services; and (iii) labor and overhead costs associated with product procurement and testing. There was no cost of revenues associated with intellectual property licensing revenues for any periods presented in this report.

Our cost of net revenues decreased from $17.3 million for the three months ended June 30, 2009 to $15.7 million for the same period in 2010 primarily due to improvements in product costs. As a percentage of net product revenues, our cost of net product revenues was 41.8% in the third quarter of 2010 compared with 47.5% in the third quarter of 2009. We made progress in transitioning our test manufacturing activities from our California facility to an outsource model in an offshore facility resulting in reduced costs of test. Additionally, on-going cost reduction efforts to reduce materials costs and improve product yields have been effective at lowering cost of revenue.

For the nine months ending June 30, 2010, our cost of net revenues decreased to $54.2 million from $58.0 million in the same period of 2009. As a percentage of net product revenues, our cost of

Table of Contents

costs associated with product procurement and testing. It is customary in the semiconductor industry for product prices to decline over time. Therefore, it is imperative that we continue to reduce our cost of revenues for mature products, by focusing our efforts on improving operating efficiencies, including reducing the price of purchased materials, improving product yields and cycle times and reducing scrap.

Our cost of revenues decreased from $28.0 million for the three months ended June 30, 2008 to $17.3 million for the same period in fiscal 2009, primarily due to a decline in product sales. As a percentage of net revenues our cost of revenues were 38.7% in the third quarter of fiscal 2009 compared with 50.8% in the third quarter of fiscal 2008, due to sales of IP that carry no cost of sales. Additionally, we have taken cost reduction efforts to re-size operations for lower product sales volume. As a percentage of product revenues, our cost of revenues were 47.5% in the third quarter of fiscal 2009, compared with 50.8% in the third quarter of 2008 due to ongoing efforts in yield improvement and general cost reduction.

Year-to-date through June 30, 2009, our cost of revenues decreased to $58.0 million from $80.0 million in the same period of fiscal 2008. As a percentage of net revenues, our cost of revenues were 44.9%was 44.1% for the nine months ended June 30, ~~2009~~2010 compared to ~~49.0%~~50.1% in the same period of ~~fiscal 2008.~~

~~There was no~~2009. Consistent with the three-month period described above, the decrease in cost of net revenues ~~associated with IP licensing revenues of $8.3 million and $13.3 million in the three and nine months ended June 30, 2009, respectively. As~~as a percentage of product revenues, ~~excluding IP revenue, cost of revenues were 47.5% and 50.1% in the three and nine months ended June 30, 2009, respectively,~~was due to ~~ongoing efforts in yield improvement~~reduced costs of tests due to our outsource model and ~~general cost reduction.~~reduced materials costs and improved product yields.

Engineering, Research and Development

Three Months Ended
June 30, Change

2009 2008 $ %

(in thousands, except percentages)

Engineering, research and development
$ 11,200 $ 12,458 $ (1,258 ) (10.1 )%
Percent of net revenues
25.1 % 22.6 %

	Three Months Ended June 30,						Change

	2010			2009			$		%
	(in thousands, except percentages)
Engineering, research and development	$	13,674		$	11,200		$	2,474		22.1	%
Percent of net revenues		36.4	%		25.1	%

Nine Months Ended
June 30, Change

2009 2008 $ %

(in thousands, except percentages)

Engineering, research and development
$ 33,720 $ 37,584 $ (3,864 ) (10.3 )%
Percent of net revenues
26.1 % 23.0 %

	Nine Months Ended June 30,						Change

	2010			2009			$		%
	(in thousands, except percentages)
Engineering, research and development	$	37,909		$	33,720		$	4,189		12.4	%
Percent of net revenues		30.7	%		26.1	%

We believe that continued investment in the design and development of future products is vital to maintaining a competitive edge. Engineering, research and development expenses consist primarily of salaries and related costs, including share-based compensation expense of employees engaged in research, design and development activities. Engineering, research and development also includes costs of mask sets, electronic design automation tools, software licensing contracts, subcontracting and fabrication costs, depreciation and amortization, and facilities expenses.

Engineering, research and development expenses decreased $1.3 million or 10.1% to $11.2 million in the third quarter of fiscal 2009 compared to $12.5 million in the third quarter of fiscal 2008. Engineering, research and development expenses decreased $3.9 million or 10.3% to $33.7 million for the nine months ended June 30, 2009, compared to $37.6 million in the nine months ended June 30, 2008. The decreases were due to continued cost control measures including more efficient utilization of mask sets, outside services and travel.

~~Table of Contents~~

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

In the third quarter of 2010, engineering, research and development expenses increased $2.5 million compared to the same periods of 2009. The increase is attributable to increased engineering tool costs of $1.5 million, primarily mask sets and labor costs of approximately $0.9 million due to increased headcount and the elimination of temporary salary reductions that were in effect in prior periods.

For the nine months ended June 30, 2010, engineering, research and development expenses increased $4.2 million, compared to the same periods of 2009. The increase is attributable to increased labor costs of approximately $2.3 million due to increased contract labor, increased headcount and the elimination of temporary salary reductions that were in effect in prior periods. There was also a $1.9 million increase in engineering tools.

Table of Contents

Selling, General and Administrative

Three Months Ended
June 30, Change

2009 2008 $ %

(in thousands, except percentages)

Selling, general and administrative
$ 11,412 $ 14,570 $ (3,158 ) (21.7 )%
Percent of net revenues
25.6 % 26.5 %

	Three Months Ended June 30,						Change

	2010			2009			$			%
	(in thousands, except percentages)
Selling, general and administrative	$	8,669		$	11,412		$	(2,743	)		(24.0	)%
Percent of net revenues		23.1	%		25.6	%

Nine Months Ended
June 30, Change

2009 2008 $ %

(in thousands, except percentages)

Selling, general and administrative
$ 31,761 $ 37,758 $ (5,997 ) (15.9 )%
Percent of net revenues
24.6 % 23.1 %

	Nine Months Ended June 30,						Change

	2010			2009			$			%
	(in thousands, except percentages)
Selling, general and administrative	$	28,281		$	31,761		$	(3,480	)		(11.0	)%
Percent of net revenues		23.0	%		24.6	%

Selling, general and administrative expense consists primarily of personnel-related expenses, including ~~share-based~~share based compensation expense, legal and other professional fees, facilities expenses, outside labor and communications expenses.

In the third quarter of ~~fiscal 2009,~~2010, selling, general and administrative expense decreased by ~~21.7% or $3.2~~$2.7 million ~~compared to~~from the third quarter of ~~fiscal 2008.~~2009. As a percentage of net revenues, selling, general and administrative expense decreased from ~~26.5%~~25.6% to ~~25.6%~~23.1%. The decrease is primarily due to a decrease in compensation-related expenses of $1.4 million as a result of salary reductions and head count reductions. The Company also realized a reduction in professional services charges of $2.1 million. Due to extensive cost-reduction efforts, facilities, travel and supplies expenses decreased by a total of $0.6 million from the third quarter of 2008. In the third quarter of fiscal 2008, we recognized bad debt from a customer that went out of business. In the same period of fiscal 2009, we did not recognize any bad debt, resulting in a decrease in selling, general and administrative expense of $0.4 million. During the quarter ended June 30, 2009, the Company incurred broker fees of $1.8 million ~~in brokers fees~~ related to the sale of certain intellectual property ~~patents. Other sales related costs~~patents that did not recur in 2010. Professional fees decreased by ~~$0.4~~$0.7 million ~~during~~compared to the same quarter of the prior year due to ~~lower operating results, resulting~~the Company's successful efforts to decrease legal and accounting fees. The remainder of the decrease is the continuing benefit of our cost reduction efforts in ~~a net increase in sales related costs of $1.4 million.~~the prior year.

~~Year to date through~~For the nine months ended June 30, ~~2009,~~2010, selling, general and administrative expense decreased by ~~15.9% or $6.0~~$3.5 million ~~compared to~~from the same period ~~last year.~~of 2009. As a percentage of net revenues, selling, general and administrative expense ~~increased~~decreased from ~~23.1%~~24.6% to ~~24.6%~~23.0%. The reductions in costs were driven primarily by a decrease in compensation-related charges of $2.4 million as a result of salary reductions and head count reductions. Due to extensive cost-reduction efforts, facilities, travel and supplies expenses decreased by a total of $1.9 million and share-based compensation decreased by $0.5 million due to the vesting of a substantial number of stock options during the first fiscal quarter of 2009. During the nine-month period professional fees decreased by $2.3 million compared to the same period in 2008. In the third quarter of fiscal 2008, we recognized bad debt from a customer that went out of business. In the same period of fiscal 2009, we did not recognize any bad debt, resulting in a decrease in selling, general and administrative expense of $0.4 million. During the period, the Company incurred $1.8 million in brokers fees related to the sale of certain intellectual property patents. Other sales

~~Table of Contents~~

~~related costs decreased by $0.5 million during the period due to lower operating results, resulting in a net increase in sales related costs of $1.3 million. Additionally, during the nine months~~ ended June 30, 2009, we recognized a gain on the sale of our Colorado building, ofwhich offset selling, general and administrative expense for that period by $2.9 million. The Company also recognized $1.8 million in broker fees related to the sale of certain intellectual property patents in the nine-month period ended June 30, 2009. We did not have any similar transactions in 2010. In the nine-month period ended June 30, 2010, professional fees decreased by $2.7 million compared to the same period of ~~fiscal 2008,~~the prior year due to the Company's successful efforts to decrease legal and accounting fees. Compensation related costs for the nine-months ended June 30, 2010 decreased by $1.6 million compared to the same period in 2009 as a result of headcount reductions. During the period, we ~~recognized~~succeeded in reducing facilities, travel and supplies expenses by a ~~gain~~total of $1.5 million due to our extensive cost-reduction efforts. During the nine-month period ended June 30, 2010, we incurred $1.0 million in non-capitalizable costs related to negotiating the restructuring of our debt, which was successfully completed on October 30, 2009. The remainder of the ~~sale~~decrease is the continuing benefit of ~~fixed assets~~our cost reduction efforts in the prior year.

Table of ~~$3.2 million, a difference of $0.3 million.~~Contents

Accounting Remediation & Reconstruction Expense & Litigation Costs

Three Months Ended
June 30, Change

2009 2008 $ %

(in thousands, except percentages)

Accounting remediation & reconstruction expense & litigation costs
$ (13,206 ) $ 2,067 $ (15,273 ) (738.9 )%
Percent of net revenues
(29.6 )% 3.8 %

	Three Months Ended June 30,						Change

	2010			2009			$		%
	(in thousands, except percentages)
Accounting remediation & reconstruction expense & litigation costs	$	—		$	(13,206	)	$	13,206		(100.0	)%
Percent of net revenues		0.0	%		(29.6	)%

Nine Months Ended June 30, Change

2009 2008 $ %

(in thousands, except percentages)

Accounting remediation & reconstruction expense & litigation costs
$ (9,742 ) $ 8,813 $ (18,555 ) (210.5 )%
Percent of net revenues
(7.6 )% 5.4 %

	Nine Months Ended June 30,						Change

	2010			2009			$		%
	(in thousands, except percentages)
Accounting remediation & reconstruction expense & litigation costs	$	73		$	(9,742	)	$	9,815		(100.7	)%
Percent of net revenues		0.1	%		(7.5	)%

Accounting remediation and reconstruction expense and litigation costs consisted of fees incurred to resolve certain legal issues, remediate control deficiencies, and transition accounting and reporting responsibilities to full-time staff, in addition to the completion or settlement of audits, investigations and lawsuits related to prior accounting periods. ~~For~~

We did not recognize any charges in the ~~three months ended June 30, 2009 and 2008, we recognized a net credit~~third quarter of ~~$13.2 million and a charge of $2.1 million, respectively. The credit balance of $13.2 million is primarily made up of the following:~~

2010. During the quarter ~~we reached a settlement with KPMG, our former public accounting firm, in which KPMG agreed to pay us $22.5 million and forgive all of our past indebtedness. For the three months~~ ended June 30, 2009, we recorded ~~the~~a settlement ~~amount, net of fees and expenses, resulting~~with KPMG which resulted in a net credit of $16.0 million.

~~During~~ We recorded a $3.0 million accrual due to the ~~three months ended June 30, 2009,~~proposed settlement by the staff of Division of Enforcement related to their investigation of the Company's historical stock option practices and certain other accounting irregularities. Lastly, we ~~also~~ reached a settlement with the IRS related to the exercise of backdated ~~stock options. As the settlement was less than we had previously estimated and accrued, we recorded~~options, which resulted in a credit of $0.7 ~~million during~~million.

For the ~~quarter.~~

~~In connection with our pending settlement with~~current year-to-date, these costs totaled $73,000, while for the SEC, as proposed by the staff of the Division of Enforcement related to the their investigation into the Company's historical stock option practices and certain other accounting irregularities, we recorded a $3.0 million accrual during the three monthsnine-months ended June 30, ~~2009.~~

~~Year-to-date,~~2009, we recognized a net credit of $9.7 million. During the 2009 period, we recorded a settlement with KPMG which resulted in a net credit of $16.0 million. We recorded costs of $4.0 million in fiscal 2009 and a charge of $8.8 million in fiscal 2008. In 2009 and 2008, we incurred fees in connection with the preparation and issuance of our 2006 and 2007 financial statements and the remediation of other issues related to the restatement of our September 30, 2005 balance sheet. Costs offor work performed on stock option accounting and inventory valuation, revision of our revenue recognition policies, and other legal and financial ~~issues were $4.1 million and $8.8 million for the nine months ended June 30, 2009 and 2008, respectively. For the nine months ended June 30, 2009, we~~issues. We recorded a ~~net credit~~$3.0 million accrual due to the proposed settlement by the SEC staff of ~~$16.0 million~~Division of Enforcement related to their investigation of the Company's historical stock option practices and certain other accounting irregularities. Lastly, we reached a settlement with the IRS related to the ~~settlement with KPMG, and~~exercise of backdated options, which resulted in a credit ~~adjustment~~ of $0.7 ~~million resulting from the IRS settlement for~~

~~Table of Contents~~

~~less than estimated. During the period, we also accrued $3.0 million in expenses related to the estimated pending fine from the SEC.~~

~~Accounting remediation and reconstruction costs are expected to decrease during the remainder of fiscal 2009 as we resolve certain legal issues.~~million.

Goodwill Impairment

Three Months Ended
June 30, Change

2009 2008 $ %

(in thousands, except percentages)

Goodwill Impairment
$ — $ — $ — 0.0 %
Percent of net revenues
0.0 % 0.0 %

Nine Months Ended
June 30, Change

2009 2008 $ %

(in thousands, except percentages)

Goodwill Impairment
$ 191,418 $ — $ 191,418 100.0 %
Percent of net revenues
148.4 % 0.0 %

	Nine Months Ended June 30,						Change

	2010			2009			$			%
	(in thousands, except percentages)
Goodwill Impairment	$	—		$	191,418		$	(191,418	)		100.0	%
Percent of net revenues		0.0	%		148.4	%

Table of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. The fair value was determined through an analysis of: (i) the market capitalization; (ii) comparable public company valuations; and (iii) the future cash flows expected to be generated by the Company. The calculated fair value is then allocated to individual assets and liabilities (including any unrecognized intangible assets) as if the Company had been acquired in a business combination and the fair value of the Company was the purchase price paid to acquire the Company. In performing this allocation, the fair values of the assets and liabilities of the Company were calculated using generally accepted valuation methodologies, including analysis of: (i) the future cash flows expected to be generated; (ii) the estimated market value; or (iii) the estimated cost to replace. Any variance in the assumptions used to value the assets and liabilities could have had a significant impact on the estimated fair value of the assets and liabilities and, consequently, the amount of identified goodwill impairment. As a Contents

result of the ~~additional analyses performed,~~analysis, we recorded an impairment charge to fully write off our goodwill balance of $191.4 million ~~for~~during the quarter ended December 31, 2008. ~~(See Note 3—Goodwill in the accompanying financial statements).~~

~~Table of Contents~~

Amortization of Intangible Assets

Three Months Ended
June 30, Change

2009 2008 $ %

(in thousands, except percentages)

Amortization of intangible assets
$ 362 $ 310 $ 52 16.8 %
Percent of net revenues
0.8 % 0.6 %

	Three Months Ended June 30,						Change

	2010			2009			$			%
	(in thousands, except percentages)
Amortization of intangible assets	$	182		$	362		$	(180	)		(49.7	)%
Percent of net revenues		0.5	%		0.8	%

Nine Months Ended
June 30, Change

2009 2008 $ %

(in thousands, except percentages)

Amortization of intangible assets
$ 1,068 $ 2,204 $ (1,136 ) (51.5 )%
Percent of net revenues
0.8 % 1.4 %

	Nine Months Ended June 30,						Change

	2010			2009			$			%
	(in thousands, except percentages)
Amortization of intangible assets	$	613		$	1,068		$	(455	)		(42.6	)%
Percent of net revenues		0.5	%		0.8	%

Amortization of intangible assets was $362,000 in the third quarter of fiscal 2009, compared to $310,000 for the same period in fiscal 2008. For the nine months ended June 30, 2009, amortization expense was $1.1 million compared to $2.2 million in the same period of fiscal 2008. The decrease in amortization expense is primarily due to intangible assets related to our prior acquisitions of ~~Cicada Semiconductor Corporation~~Adaptec and Infinera becoming fully amortized during ~~fiscal 2008.~~2009.

Interest Expense, net

Three Months Ended
June 30, Change

2009 2008 $ %

(in thousands, except percentages)

Interest expense, net
$ (5,804 ) $ (1,112 ) $ (4,692 ) 421.9 %
Percent of net revenues
(13.0 )% (2.0 )%

	Three Months Ended June 30,						Change

	2010			2009			$		%
	(in thousands, except percentages)
Interest income (expense), net	$	30,275		$	(5,804	)	$	36,079		(621.6	)%
Percent of net revenues		80.7	%		(13.0	)%

Nine Months Ended
June 30, Change

2009 2008 $ %

(in thousands, except percentages)

Interest expense, net
$ (8,104 ) $ (2,706 ) $ (5,398 ) 199.5 %
Percent of net revenues
(6.3 )% (1.7 )%

	Nine Months Ended June 30,						Change

	2010			2009			$			%
	(in thousands, except percentages)
Interest expense, net	$	(12,896	)	$	(8,104	)	$	(4,792	)		59.1	%
Percent of net revenues		(10.5	)%		(6.3	)%

~~Interest~~For the three and nine month periods ended June 30, 2010, interest expense, net of interest income, decreased by $36.1 million and increased by ~~$4.7~~$4.8 million, respectively, compared to ~~$5.8 million~~the same periods in ~~the third quarter of fiscal~~ 2009. For both periods, the ~~nine months ended June 30, 2009, we recorded~~changes relate primarily to the change in the fair value of the ~~premium put of $4.6~~derivative liability on the 2014 Debentures and ~~no fair value for the same period prior year. The primary driver of~~2024 Debentures (combined, "the Debentures"). Interest expense related to the change in the fair value between these dates was an increase in the amount of funds available for cash settlement between the measurement dates. In addition, interest expense was $3.5 million, an increase of $0.8 million from the same period in the prior year. In October 2007, in connection with the sale of the ~~Storage Products business,~~Debentures decreased $37.4 million and increased $1.2 million for the Company replaced its debt to Tennenbaum Capital Partners ("TCP") with a note to Whitebox VSC, Ltd. ("Whitebox"). Interest expense incurred on the TCP debt in fiscal 2008 was recorded as a component of discontinued operations.three and nine month periods ended June 30, 2010, respectively. Interest expense on the Debentures and our Senior Secured Debt, net of interest income, increased from 2009 to 2010 by $1.3 million and $3.5 million for the three and nine month periods ended June 30, 2010, respectively. The increase in interest expense is the result of the higher combined effective interest rate on indebtedness as a result of the debt ~~with Whitebox is~~exchange.

Table of Contents

Loss on Extinguishment of Debt

	Three Months Ended June 30,						Change

	2010			2009			$		%
	(in thousands, except percentages)
Gain on extinguishment of debt	$	265		$	—		$	265		100.0	%
Percent of net revenues		0.7	%		0.0	%

~~reflected~~

	Nine Months Ended June 30,						Change

	2010			2009			$			%
	(in thousands, except percentages)
Loss on extinguishment of debt	$	(21,311	)	$	—		$	(21,311	)		100.0	%
Percent of net revenues		(17.3	)%		0.0	%

Effective October 30, 2009, the Company finalized negotiations with the Noteholders of the 2024 Debentures to settle the obligations under the debentures, including all amounts owed under the derivative liability for the premium put option, with a combination of cash, shares of the Company's common stock, shares of the Company's Series B Preferred Stock and a new issuance of $50.0 million of convertible bonds (see Note 3—Debt in ~~interest expense.~~the accompanying unaudited consolidated financial statements). The Company recorded the new instruments issued in the extinguishment of the 2024 Debentures at fair value and recognized a $21.6 million loss for the difference between the fair values of the new instruments. For ~~fiscal 2009, nine~~the purposes of calculating this loss on extinguishment, the net carrying amount of the 2024 Debentures included the $96.7 million principal amount of the 2024 Debentures and $13.3 million of the premium put derivative, recorded at fair value. During the three months ~~interest expense was incurred~~ended June 30, 2010, the Company recognized a gain of $0.3 million on the ~~Whitebox debt compared to eight months~~conversion of ~~interest incurred on~~$3.5 million face value of 2014 Debentures and the ~~debt during~~associated "Make-Whole Amount" into shares of the ~~comparable period of 2008. Interest expense on~~Company's common stock (see Note 3—Debt in the subordinated 2024 Debentures for fiscal 2009 was consistent with fiscal 2008. Although the Company maintained higher average cash balances, significant declines in interest rates earned on deposit accounts from fiscal 2008 to fiscal 2009 reduced the amount of interest income included in net interest expense.accompanying unaudited consolidated financial statements).

Other Income (Expense), net

Three Months Ended
June 30, Change

2009 2008 $ %

(in thousands, except percentages)

Other income (expense), net
$ (38 ) $ 3,513 $ (3,551 ) (101.1 )%
Percent of net revenues
(0.1 )% 6.4 %

	Three Months Ended June 30,						Change

	2010			2009			$			%
	(in thousands, except percentages)
Other income (expense), net	$	(61	)	$	(38	)	$	(23	)		61	%
Percent of net revenues		(0.2	)%		(0.1	)%

Nine Months Ended
June 30, Change

2009 2008 $ %

(in thousands, except percentages)

Other income (expense), net
$ 58 $ 4,236 $ (4,178 ) (98.6 )%
Percent of net revenues
0.0 % 2.6 %

	Nine Months Ended June 30,						Change

	2010			2009			$			%
	(in thousands, except percentages)
Other income, net	$	44		$	58		$	(14	)		(24.1	)%
Percent of net revenues		0.0	%		0.0	%

~~Other income, net of other, expense was $38,000~~The change in ~~the third quarter of fiscal 2009 compared to~~ other income ~~net~~primarily relates to foreign exchange transactions.

Table of expense was $3.5 million in the third quarter of fiscal 2008. The decrease is due to recording gains on the sale of available-for-sale securities held by Vitesse and its subsidiaries in the third quarter of 2008, we did not record similar transactions for the three months ended 2009.

For the nine months ended June 30, 2009, other income, net of other expense, was $58,000 a decrease of $4.2 million from the same period of fiscal 2008. This decrease is primarily due to recording gains on the sale of available-for-sale securities held by Vitesse and its subsidiaries in the third quarter of 2008 with the remaining due to recording income related to the settlement of a breach of contract lawsuit and a gain on sale of scrap material in the first quarter of 2008, we did not record similar transactions for the nine months ended 2009.Contents

Income Tax (Benefit) Expense

Three Months Ended June 30, Change

2009 2008 $ %

(in thousands, except percentages)

Income tax (benefit) expense
$ (696 ) $ 3 $ (699 ) (23300.0 )%
Percent of net revenues
(1.56 )% 0.0 %

	Three Months Ended June 30,						Change

	2010			2009			$			%
	(in thousands, except percentages)
Income tax (benefit)	$	(3,244	)	$	(696	)	$	(2,548	)		366.1	%
Percent of net revenues		(8.6	)%		(1.6	)%

~~Table of Contents~~

Nine Months Ended June 30, Change

2009 2008 $ %

(in thousands, except percentages)

Income tax (benefit)
$ (600 ) $ (546 ) $ (54 ) 9.9 %
Percent of net revenues
(0.5 )% (0.3 )%

	Nine Months Ended June 30,						Change

	2010			2009			$		%
	(in thousands, except percentages)
Income tax expense (benefit)	$	2,781		$	(600	)	$	3,381		(563.5	)%
Percent of net revenues		2.3	%		(0.5	)%

Income tax benefit was $3.2 million for the third quarter of fiscal 2010 compared to income tax benefit of $0.7 million for the third quarter of fiscal 2009, ~~compared~~an increase in benefit of $2.5 million. The increase is primarily the result of changes to ~~income~~the Company's projected annual tax expense during the period and limitations on the Company's NOL carryforwards as a result of ~~$3,000~~an "ownership change" experienced for tax purposes on October 30, 2009. For the ~~third quarter of fiscal 2008. Income~~three months ended June 30, 2009, income tax benefit represents the impact of taxable losses for that period.

Income tax expense was $2.8 million for the ~~three~~nine months ended June 30, 2010 compared to income tax benefit of $0.6 million for the nine months ended June 30, 2009, ~~and adjustments to deferred~~an increase in expense of $3.4 million. The increase in expense is primarily the result of limitations on the Company's NOL carryforwards following the "ownership change" experienced for tax ~~assets and~~purposes on October 30, 2009, as a result of debt restructuring. Net income tax expense for the ~~related valuation allowance. For the three~~nine months ended June 30, ~~2008, income tax expense~~2009 represents minimum federal, state, and foreign income tax on income not eligible for offset by loss ~~carryforwards after~~carryforwards.

Liquidity and Capital Resources

Cash and cash equivalents decreased to $38.6 million at June 30, 2010, from $57.5 million at September 30, 2009, primarily as a result of the ~~allocation~~$5.0 million payment on the Senior Term Loan, repayment of ~~income tax expense~~a portion of the 2024 Debentures of $10.0 million and approximately $6.0 million in legal and other fees to ~~discontinued operations.~~complete the debt restructuring transaction.

	Nine Months Ended June 30,

	2010			2009
	(in thousands)
Net cash provided by operating activities	$	1,039		$	12,251
Net cash (used in) provided by investing activities		(2,264	)		2,449
Net cash used in financing activities		(17,698	)		—

Net (decrease) increase in cash and cash equivalents	$	(18,923	)	$	14,700
Cash and cash equivalents at beginning of period		57,544			36,722

Cash and cash equivalents at end of period	$	38,621		$	51,422

Table of Contents

~~Income tax benefit was $0.6~~In the nine months ended June 30, 2010, our operating activities provided $1.0 million in cash. Our net loss of $34.9 million for the nine months ended June 30, ~~2009 compared to income tax benefit~~2010 included non-cash charges of ~~$0.5~~$20.8 million for the ~~nine months ended June 30, 2008. Net income tax expense represents minimum federal, state, and foreign income tax~~loss on income not eligible for offset by loss carryforwards and adjustments to deferred tax assets and the related valuation allowance. Income tax benefit for the nine months ended June 30, 2008 reflects the impactextinguishment of ~~taxable losses for the period after the allocation of income tax expense to discontinued operations.~~

~~Minority Interest in Earnings of Consolidated Subsidiary~~

Three Months Ended June 30, Change

2009 2008 $ %

(in thousands, except percentages)

Minority interest in earnings of consolidated subsidiary
$ — $ (660 ) $ 660 (100.0 )%
Percent of net revenues
0.0 % (1.2 )%

Nine Months Ended June 30, Change

2009 2008 $ %

(in thousands, except percentages)

Minority interest in earnings of consolidated subsidiary
$ 1 $ (660 ) $ 661 (100.2 )%
Percent of net revenues
0.0 % (0.4 )%

~~A minority interest~~debt, $5.9 million in the ~~operations of our consolidated joint ventures, the Vitesse Venture Fund, L.P. and the Vitesse Venture Fund, L.P. II (together, "the Funds"), was recorded~~change in the first quarter of fiscal 2009, representing the limited partners' interest in the Funds' operating expenses, including licensing and bank fees. A minority interest in the income of our consolidated joint venture was recorded in the third quarter of fiscal 2008, representing the limited partners' interest in the Fund's gain on the sale of available-for-sale securities. The limited partners' portionmarket value of the ~~gain totaled $660,000 for the quarter and nine months ended June 30, 2008.~~

~~Table~~embedded derivative liability, $2.6 million of ~~Contents~~

~~Income and gain on the sale of discontinued Storage Products~~

Three Months Ended June 30, Change

2009 2008 $ %

(in thousands, except percentages)

Gain (loss) on discontinued Storage Products business, net
$ 71 $ 1,703 $ (1,632 ) (95.8 )%
Percent of net revenues
0.2 % 3.1 %

Nine Months Ended June 30, Change

2009 2008 $ %

(in thousands, except percentages)

Gain (loss) on discontinued Storage Products business, net
$ 71 $ 8,101 $ (8,030 ) (99.1 )%
Percent of net revenues
0.1 % 5.0 %

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

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

~~For the three~~ and ~~nine months ended June 30, 2009, income from discontinued operations was $71,000, which included $71,000 of income from the earn-out, net of tax.~~

~~For the three months ended June 30, 2008, income from discontinued operations was $1.7 million, which included~~ $1.7 million of income from the earn-out and residual operations, net of tax. For the nine months ended June 30, 2008, results of discontinued operations were comprised of the gain on the sale of $21.5 million, offset by the loss on discontinued operations of $13.4 million, net of tax of $1.0 million.

For the nine months ended June 30, 2008, we reported the results of operations of the Storage Products business as discontinued operations in the Company's statement of operations in accordance with SFAS 144.

~~Table of Contents~~

~~The following table sets forth selected operating results:~~

Three Months Ended June 30, Nine Months Ended June 30,

2009 2008 2009 2008

(in thousands)
(in thousands)

Net revenues
$ — $ 73 $ — $ 2,656

Income (loss) from continuing operations before income taxes
11,714 72 (185,235 ) (1,630 )
Provision for income tax benefit (expense)
(696 ) 3 (600 ) (546 )
Minority interests in earnings of consolidated subsidiary
— (660 ) 1 (660 )
Income from discontinued operations
71 1,703 71 8,101

Net income
$ 12,481 $ 1,112 $ (184,563 ) $ 6,357

~~Liquidity~~

~~Cash and cash equivalents increased to $51.4 million at June 30, 2009, from $36.7 million at September 30, 2008, as a result of the following:~~

Nine Months Ended June 30,

2009 2008

(in thousands)

Net cash provided by (used in) operating activities
$ 12,251 $ (27,188 )
Net cash provided by investing activities
2,449 66,189
Net cash used in financing activities
— (31,267 )

Net increase in cash and cash equivalents
$ 14,700 $ 7,734
Cash and cash equivalents at beginning of period
36,722 25,976

Cash and cash equivalents at end of period
$ 51,422 $ 33,710

share-based compensation. In the nine months ended June 30, 2009, our operating activities provided $12.3 million in cash. Our net loss of $184.6 million for the nine months ended June 30, 2009 included ~~$4.6 million of fair value adjustment to the premium put,~~ $3.3 million of depreciation and amortization, $2.4 million of ~~stock-based~~share-based compensation, and $191.4 million of goodwill impairment offset by the gain on sale of the Colorado building of $2.9 million. In the nine months ended June 30, 2008, our operating activities used $27.2 million in cash. This was primarily the result of a $6.4 million net income from continuing and discontinued operations, $20.0 million in net non-cash operating expenses, which includes the gain on sale of the Storage Products business of approximately $21.5 million and $13.6 million net cash used by changes in operating assets and liabilities.

Accounts receivable, ~~increased $8.6~~net of allowance for sales return, decreased $1.8 million from ~~$6.3~~$15.1 million at September 30, ~~2008~~2009 to ~~$14.9~~$13.3 million at June 30, ~~2009.~~2010. The ~~increase is~~decrease was primarily due to the ~~sale~~timing of ~~patents from~~sales to our ~~intellectual property portfolio for $8.25 million.~~end users via our distributor network and a small decrease in revenues compared to the three-months ended September 30, 2009. Inventories ~~decreased $13.5~~increased $5.4 million, from ~~$37.5~~$18.8 million at September 30, ~~2008~~2009 to ~~$23.9~~$24.2 million at June 30, ~~2009,~~2010, as ~~we reduced our inventory purchases to reflect the reduction in revenues and~~ our channel partners and distributors took action to ~~reduce~~increase their inventory in response to ~~current economic slowdown.~~stronger demand. We were able to respond quickly to the change in demand, ~~reducing~~increasing orders to our suppliers. ~~Our inventory levels will continue to be determined based upon the level~~

Investing activities used cash of purchase orders we receive, our ability and the ability of our customers to manage inventory levels. Such considerations are balanced against the risk of obsolescence or potentially excess inventory levels.

~~Table of Contents~~

~~Accrued expenses decreased by $5.9~~$2.3 million including reductions of accrued income taxes and accrued wages. The decrease is primarily due to finalizing the settlement of the derivative and employee lawsuits of approximately $4.5 million and reduction in ~~accrued wages resulting from resolution of the IRS audit on stock compensation for $1.6 million. Accrued income taxes decreased by $2.2 million primarily due to tax payments made during~~ the nine months ended June 30, ~~2009. In addition, deferred revenue decreased by $2.1 million as a result of the decline in distributor purchases.~~

2010 for capital expenditures. Investing activities provided cash of $2.4 million in the nine months ended June 30, 2009, which was primarily the result of the proceeds from the sale of the Colorado building for $6.0 million, net of commissions and transactions costs, partially offset by capital expenditures of approximately ~~$1.5~~$1.2 million and additions to intangibles of $2.0 million. ~~For~~

In the nine months ended June 30, 2008, investing activities provided cash of $66.2 million which was primarily the result of the proceeds from the sale of Storage Products business to Maxim for $62.8 million in cash in the first quarter of 2008.

~~We did not enter into any financing activities for the nine months ended June 30, 2009. In the first nine months of fiscal 2008,~~2010, our financing activities used ~~$31.3~~$17.7 million ~~in cash, which was~~ primarily ~~a result of the repayment of our $59.5 million debt with TCP, offset by the proceeds received from Whitebox for $29.3 million. (See Debt Note in the accompanying financial statements).~~

Our operating expenses for the nine months ended June 30, 2009 include expenses related to our restructuring and remediation efforts, which were offset by $13.8 million credit comprised of approximately $16.0 million net proceeds received in settlement with our prior accounting firm, $3.0 million expense relateddue to a fine from the SEC for past accounting irregularities and an adjustment of $0.7 million reduction in costs for settlement of an IRS audit. (See Item 2—Management's Discussion and Analysis of Financial Condition and Results of Operations). These remediation and restructuring costs are expected to continue to decrease during the remainder of fiscal 2009 as we resolve certain legal issues.

On December 28, 2007, the Company entered into an arrangement to sell intellectual property to a third-party. The contract is a perpetual, non-exclusive, irrevocable license for specified intellectual property. Under the agreement, Vitesse received $15.0 million in the form of a license fee and royalties for certain licensed products and core technology. The license fee is paid over time, subject to certain milestones. We received $8.0 million in cash ~~in fiscal 2008 and $4.0 million in the first quarter of 2009. The remaining amount was withheld for foreign taxes.~~

On December 22, 2008, we closed the sale of the Colorado land and building to a third-party. The gross sales price was $6.5 million and cash received after commissions and transaction costs was $6.0 million. The facility was previously used for the Storage Products business, which was discontinued and sold on October 29, 2007 and had remained unused since. As a result, the net book value of $3.2 million was reported as "Asset Held for Sale" on the September 30, 2008 balance sheet. We recognized a gain of approximately $2.9 million on this sale in the first quarter of fiscal 2009.

On June 30, 2009, the Company entered into the "Agreement" and consummated the sale, assignment and transfers of certain patents (the "Vitesse Patents") from its intellectual property portfolio for consideration of IP revenue of $8.25 million with such payment due and received in July, 2009. The Company incurred $1.8 million in brokers fees related to the sale. The Company recorded the broker's fees in selling, general and administrative expense. The Vitesse Patents relate to the Company's non-core business, specifically its network processing products. On July 14, 2009, we received full payment of ~~$8.25 million.~~

~~Management believes we have sufficient resources~~$10.0 million to ~~fund our normal operations through at least September 30, 2009. However, on October 1, 2009~~ the holders of ~~our~~ 2024 Debentures, ~~have the right~~$5.0 million to ~~require us to repurchase the 2024 Debentures for 113.76% of~~pay down the principal amount of the ~~2024~~Senior Term Loan, equity issuance costs of $1.1 million and debt issuance costs of $1.4 million. (See Note 3—Debt in the accompanying unaudited consolidated financial statements).

On October 30, 2009, we closed the debt restructuring transaction with our major creditors pursuant to which we issued approximately $50.0 million of 2014 Debentures ~~to be purchased, which results~~(See Note 3—Debt in ~~an additional payment of $13.3 million~~the accompanying unaudited consolidated financial statements). Annual interest payments on the 2014 Debentures will be $3.7 million annually, an increase of $2.2 million over the annual interest payments on the 2024 Debentures. The first interest payment on the 2014 Debentures was made on April 1, 2010.

Concurrent with the issue of the 2014 Debentures, the Company amended the terms of the Senior Term Loan Agreement. The amendment of the Senior Term Loan included a $5.0 million repayment of principal, a fee of 1.0% of the amount of repayments; and a change to the interest terms. The amended interest terms on the Senior Term Loan will not materially impact the amount of quarterly interest payments over the remaining life of the associated note, but additional interest expense accrued under a payment-in-kind interest ("PIK") provision will increase the final payment due on the Senior Term Loan at maturity in the fiscal year ending September 30, 2012 by approximately $2.6 million over the face value of the note.

We believe that our available cash will be adequate to finance our operating needs and meet our obligations for the next 12 months.

Special Meeting of Stockholders

At the special meeting of our stockholders on January 7, 2010, the stockholders approved an increase in the number of authorized shares of common stock from 25,000,000 to 250,000,000 . This increase permits the conversion of the 2014 Debentures into shares of common stock and provides additional available shares for other general corporate purposes. In addition, the Company's

Table of Contents

~~$96.7 million~~shareholders also authorized the board of ~~outstanding 2024 Debentures. According~~directors to ~~the terms~~effect a reverse stock-split when deemed appropriate. The reverse stock split was effected June 30, 2010. All share and per share amounts have been retroactively adjusted to reflect our one-for-20 reverse stock split. There will be no net effect on total shareholders' equity as a result of the Whitebox Agreement, under certain circumstances, repayment of the 2024 Debentures would require that the Company to immediately pay to Whitebox the lesser of (A) the aggregate principal amount of the outstanding Whitebox debt, including accrued and unpaid interest and (B) 25% of the aggregate amount of the 2024 Debentures redeemed. Prior to June 30, 2009, the Company was pursuing alternatives to refinance or raise funds to pay the convertible subordinated debt that in management's judgment met the terms in the Whitebox debt agreement that did not require payment of the Whitebox debt simultaneously with the payment of the convertible subordinated debt.reverse stock split.

Contractual Obligations

		Payment Obligations by Year

		<1 Year		1 - 3 Years		3 - 5 Years		>5 Years		Total
Convertible subordinated debt		$	—	$	—	$	46,500	$	—	$	46,500
Long term debt			—		25,000		—		—		25,000
Operating leases			3,405		6,244		3,017		199		12,865
Inventory and related purchase obligations			8,450		—		—		—		8,450
Software Licenses			7,059		9,425		3,200				19,684

	Total	$	18,914	$	40,669	$	52,717	$	199	$	112,499

As of June 30, ~~2009, management has concluded that~~2010, the alternatives currently being pursued to generate funds to pay the convertible subordinated debt would not meet the terms in the Whitebox debt agreement and accordingly has classified the Whitebox debt as current based on the anticipation that payment2014 Debentures, with a face value of all or a portion of the convertible subordinated debt pursuant to the premium put would require simultaneous payment of all or a portion of the Whitebox debt. Further, concern regarding our ability to refinance the debt has resulted in the reduction of our credit limit by one of our larger vendors and may result in additional reductions in our credit limits as long as there is uncertainty regarding our ability to refinance the debt. Although we remain current in our obligations to this and all other of our vendors, reductions in our credit limits by our vendors could significantly reduce our available cash balance.

We are working to either renegotiate the terms of or find a means to repay the 2024 Debentures. However, to date, we have not been able to renegotiate those terms or find a source of financing to repurchase or refinance the 2024 Debentures. If we have insufficient cash to repurchase all of the 2024 Debentures tendered for repurchase, our failure to repurchase such 2024 Debentures would likely result in an event of default under the 2024 Debentures and cause an event of default under our $30$46.5 million, secured debt agreement, which in turn would likely result in an acceleration of that debt as well. In November 2008, our Board of Directors formed a Strategic Development Committee (the "SDC") for the purpose of exploring strategic alternatives. In December 2008, we hired a financial advisor to assist the SDC with its efforts and in 2009 we hired an additional financial advisor to advise and assist the SDC with potential strategies for restructuring the terms of the 2024 Debentures. The SDC is continuing to explore strategic alternatives for repayment of the 2024 Debentures and strategies for restructuring the terms of the 2024 Debentures. There can be no assurance that we will be successful in raising additional capital, entering into any strategic transaction or renegotiating or settling all or any part of the 2024 Debentures prior to October 1, 2009. If we are unable to renegotiate or settle the 2024 Debentures, our business, financial condition and results of operations will likely be materially and adversely affected, as a result of these circumstances there exists significant uncertainty about the Company's ability to continue as a going concern. (See "Risk Factors" below for further information with respect to events and uncertainties that could harm our business, operating results, and financial condition.)

~~Long-Term Debt, Contingent Liabilities and Operating Leases~~

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

Payment Obligation by Year
(in thousands)

2010 2011 2012 2013 2014 Thereafter Total
Long-term debt
$ — $ — $ 30,000 $ — $ — $ — $ 30,000
Convertible subordinated debt
96,700 — — — — — 96,700
Operating leases
2,998 3,084 2,957 2,925 1,744 1,252 14,961
Inventory and related purchase obligations
7,749 — — — — — 7,749
Software licenses
6,648 5,173 42 — — — 11,863

Total
$ 114,095 $ 8,258 $ 32,999 $ 2,925 $ 1,744 $ 1,252 $ 161,273

~~Table of Contents~~

~~Currently, $96.7 million of the 2024 Debentures~~ are outstanding. Additionally, we have ~~$30.0~~$25.0 million in long-term debt under the Senior Term Loan. Payments with ~~Whitebox. Payments~~respect to ~~Whitebox~~the Senior Term Loan are interest only until the maturity date of October 29, 2011. Effective October 16, 2009, the Company entered into an amendment of the Senior Term Loan to include 2.0% payment-in-kind interest ("PIK"), plus an additional 0.3% PIK interest for every $1.0 million above $15.0 million of the senior term loan that is not paid down by the Company for the period from October 17, 2009 until maturity or full payment of the note. As part of the debt restructuring transactions, the Company paid $5.0 million of the original $30.0 million principal balance of the Senior Term Loan. Subsequent to the $5.0 million prepayment of the Senior Term Loan, the Company has the ability to reduce the rate of interest by 0.3% for every $1.0 million of additional principal prepayment. (See Note 5—3—Debt in the accompanying unaudited consolidated financial statements). According to the terms of the Whitebox Agreement, under certain circumstances, repayment of the 2024 Debentures would require that the Company to immediately pay to Whitebox the lesser of (A) the aggregate principal amount of the outstanding Whitebox debt, including accrued and unpaid interest and (B) 25% of the aggregate amount of the 2024 Debentures redeemed. Prior to June 30, 2009, the Company was pursuing alternatives to refinance or raise funds to pay the convertible subordinated debt that in management's judgment met the terms in the Whitebox debt agreement that did not require payment of the Whitebox debt simultaneously with the payment of the convertible subordinated debt. As of June 30, 2009, management has concluded that the alternatives currently being pursued to generate funds to pay the convertible subordinated debt would not meet the terms in the Whitebox debt agreement and accordingly has classified the Whitebox debt as current based on the anticipation that payment of all or a portion of the convertible subordinated debt pursuant to the premium put would require simultaneous payment of all or a portion of the Whitebox debt.

We lease facilities under non-cancellable operating leases that expire through 2015. Approximate minimum rental commitments under all non-cancellable operating leases as of June 30, ~~2009,~~2010, are included in the table above.

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

For purposes of the table above, obligations for the purchase of goods or services are defined as agreements that are enforceable and legally binding and that specify all significant terms. Our purchase orders are based on our current manufacturing needs and are typically fulfilled by our vendors within a relatively short ~~time horizon.~~time.

~~Subsequent Events~~

On July 8, 2009, Vincent Chan, Ph.D. resigned as a Director from the Company's Board of Directors. Dr. Chan was an independent Director who was elected to the Board in April 2000 and served on the Compensation, Nominating and Corporate Governance committees.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

~~Cash Equivalents and Investments~~

Our cash and cash equivalents are not subject to significant interest rate risk due to the short maturities of these instruments. As of June 30, 2009, the carrying value of our cash and cash equivalents approximated fair value because of the ready market for the cash instruments.

Our investment in the equity securities of a privately-held company is valued using the cost method. The value of this investment is subject to market fluctuations and other economic conditions which could cause the amount to be realized upon sale of the investment to differ from the current reported value.

Table of Contents

~~Foreign Currency Exchange Risk~~

We consider our direct exposure to foreign exchange rate fluctuations to be minimal. Currently, sales to customers and arrangements with third-party manufacturers provide for pricing and payment in United States dollars, and, therefore, are not subject to exchange rate fluctuations. Increases in the value of the United States' dollar relative to other currencies could make our products more expensive, which could negatively impact our ability to compete. Conversely, decreases in the value of the United States' dollar relative to other currencies could result in our suppliers raising their prices to continue doing business with us. The Company funds operations in international jurisdictions. All disbursements from these locations are made in the local currency of the foreign country. Fluctuations in the value of the United States' dollar relative to the currencies of these other countries could make the cost of operations in these other countries more expensive and negatively impact the Company's cash flows.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We evaluated the design and operating effectiveness of our disclosure controls and procedures as of June 30, ~~2009,~~2010, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, pursuant to Rule 13a-15(b) of the Exchange Act. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of June 30, ~~2009~~2010, our disclosure controls and procedures were not ~~effective;~~

~~In addition, management has identified~~effective because of the following material ~~weaknesses~~weakness in our internal control over financial reporting:

•: ~~The Company did not fully implement controls to help prevent or detect instances of intentional override or intervention of our controls or intentional misconduct by employees or management.~~
•: ~~We did not maintain sufficient policies and procedures over the administration and accounting for stock options.~~
•: ~~Our information systems lack sufficient controls limiting access to key applications and data.~~
•: ~~We did not maintain a sufficient segregation of duties to decrease the risk of inappropriate accounting.~~
•: ~~Account reconciliations of balance sheet accounts were not always properly and timely performed, and the reconciliations and their supporting documentation were not always consistently reviewed.~~
•: Effective controls to ensure the ~~completeness,~~ accuracy, valuation and timeliness of the financial accounting process ~~were not fully designed or implemented. Major weaknesses included controls over~~around inventory, ~~revenue recognition, and the recording of payroll.~~
•: ~~The major weakness in inventory included~~including a lack of accuracy and basis for valuation resulting in adjustments to the amount of cost of revenues and the carrying amount of inventory.
•: ~~We did not maintain a sufficient complement of personnel with an appropriate level of accounting knowledge, experience, and training in~~

Due to the ~~application of GAAP commensurate with our~~identified material weakness, management has also concluded that the Company's internal control over financial reporting ~~requirements and business environment.~~was not effective as of June 30, 2010.

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

Management, ~~is committed to remediating~~in coordination with the ~~material control weaknesses identified~~input, oversight and ~~implementing changes to the Company's internal control over financial reporting. During this fiscal year, we have continued to focus on~~support of our ~~internal controls and have taken steps~~Audit Committee, continues its ongoing efforts to strengthen ~~controls~~

~~Table of Contents~~

~~in response to the identified material weaknesses. Significant internal control and process improvements have been implemented to enhance effectiveness including:~~

•: ~~We have segregated accounting and reporting duties, including but not limited to the segregating of payroll accounting, cash accounts, and accounting reviews.~~
•: ~~We have increased~~ our internal controls over the month-end reporting process by requiring that all journal entries have supporting documentation and are reviewed, and balance sheet accounts are reviewed and reconciled monthly.
•: ~~We have hired more experienced staff in accounting and payroll, and have provided additional training to existing staff.~~
•: ~~We have made investments in accounting information system software and have implemented a new payroll system to ensure more timely and accurate reporting.~~
•: ~~We require routine, in depth analysis of inventory as well as timely transaction reporting and detail review of inventory stages and reserve levels.~~
•: ~~We have improved our revenue recognition process to ensure compliance with the SEC and GAAP reporting requirements.~~
•: We utilize a third party administrator for our share-based compensation transactions to ensure independence and accuracy. Company management reviews all share-based compensation transactions. Additionally, new procedures and approval policies require systematic authorization to ensure that all stock option transactions adhere to the Company's approved plans and stated policies and have appropriate supporting documentation.
•: ~~To ensure independent monitoring of our controls, we have outsourced our internal control test work.~~
•: We are developing specific accounting and finance policies and standardized processes in all critical accounting areas, including accounts receivable and inventory reserves, areas currently requiring subjective management judgment and discretion.

~~In addition to the continuing changes noted above, for the period ended June 30, 2009, we have made the following changes to our internal control over financial reporting:~~

•: ~~Increased controls around the physical count of inventory at onsite and offsite locations.~~
•: ~~Increased segregation of access to the Company's general ledger accounting system.~~
•: ~~Documented the Company's new accounting processes and controls.~~
•: ~~Provided training on the Company's reporting systems to accounting personnel.~~

As a result of the above actions, we believe our control environment and specifically controls over our financial reporting process, have improved substantially. We are currently conducting extensive assessments of the effectiveness of the remediated internal control over financial reporting and ~~will make~~to address the ~~determination as of the end of the fourth quarter if our controls are operating with level of effectiveness and sustainability to prevent a~~ material ~~error from occurring and not being detected in a timely manner.~~

weaknesses described above. We are investing in ongoing efforts to continuously improve the control environment and have committed considerable resources to the continuous improvement of the design, implementation, documentation, testing, and monitoring of our internal controls. In addition to improving the effectiveness and compliance with key controls, our remediation efforts involve ongoing business and accounting process improvements and the implementation of key system enhancements. The process and system enhancements are generally designed to simplify and standardize business practices and to improve timeliness and access to associated accounting data through increased systems automation appropriate limitations around IT access as well as timely testing of controls throughout the year. While we expect remedial actions to be essentially implemented in 2010, some actions may not be in place for a sufficient period of time to help us certify that material weaknesses have been fully remediated as of the end of 2010. We will continue to develop our remediation plans and implement additional measures during 2010 and possibly into 2011.

•: During the period ended June 30, 2010, the Company extensively expanded management review over key inventory metrics and transactions and increased controls over inventory cut-off as part of its remediation efforts with respect to the material weakness.

Inherent Limitation on the Effectiveness of Internal Controls

~~Please see further discussion~~The effectiveness of ~~our~~any system of internal control over financial reporting is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, ~~in Part II, Item 9A. Controls~~ and ~~Procedures in Form 10-K~~the inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting can only provide reasonable, not absolute, assurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the ~~Annual Report on Form 10-K~~risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for ~~the year ended September 30, 2008.~~our business, but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting.

Table of Contents

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information set forth under Note 7 of Notes to Unaudited Consolidated Financial Statements, included in Part I, Item 1 of this Report, is incorporated herein by reference. ~~For an additional discussion of certain risks associated with legal proceedings, see "Risk Factors" immediately below.~~

ITEM 1A. RISK FACTORS

~~You should carefully consider~~There have been no material changes to the ~~risks described below before investing~~risk factors disclosed in Part II, Item 1A of our Quarterly Report on Form 10-Q for the period ended December 31, 2009, which updated the risk factors disclosed in our ~~securities. We have organized our risks into the following categories:~~

•: ~~Risks Relating to Our Liquidity, Financing Arrangements, and Capital Commitments;~~
•: ~~Risks Relating to Our Business; and~~
•: ~~Risks Relating to our Current and Prior Financial Statements and Related Matters.~~

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

We have not been able to renegotiate the terms of our 1.5% Convertible Subordinated Debentures Due 2024 (the "2024 Debentures") or raise the capital necessary to repurchase some or all of the 2024 Debentures, consequently there is substantial risk that we may not be able to continue as a going concern.

The holders of our 2024 Debentures have the right, as of October 1, 2009, to require us to repurchase some or all of the 2024 Debentures at a price equal to 113.76% of the principal amount of the 2024 Debentures. If all of the holders of the 2024 Debentures exercise their repurchase rights, the total repurchase price would be $110.0 million. We currently do not have the resources to repay the principal amount and related premium if the 2024 Debentures were put to the Company for repaymentAnnual Report on ~~October 1, 2009.~~

We are working to either renegotiate the terms of, or find a means to repay the 2024 Debentures. However, to date, we have not been able to renegotiate those terms or find a source of financing to repurchase or refinance some or all of the 2024 Debentures. If we have insufficient cash to repurchase all of the 2024 Debentures tendered for repurchase, our failure to repurchase such 2024 Debentures would likely result in an event of default under the 2024 Debentures and cause an event of default under our $30 million secured debt agreement, which in turn would likely result in an acceleration of that debt as well. In November 2008, our Board of Directors formed a Strategic Development Committee (the "SDC")Form 10-K for the purpose of exploring strategic alternatives. In December 2008, we hired a financial advisor to assist the SDC with its efforts and in 2009 we hired an additional financial advisor to advise and assist the SDC with potential strategies for restructuring the terms of the 2024 Debentures. The SDC is continuing to explore strategic alternatives for repayment of the 2024 Debentures and strategies for restructuring the terms of the 2024 Debentures. There can be no assurance that we will be successful in raising additional capital, entering into any strategic transaction or renegotiating or settling all or any part of the 2024 Debentures prior to October 1, 2009. If we are unable to renegotiate or settle the 2024 Debentures our business, financial condition and results of operations will likely be materially and adversely affected, as a result of these circumstances there exists significant uncertainty about the Company's ability to continue as a going concern.

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

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

~~Table of Contents~~

to time. We may be required to refinance our debt in order to make such payments. We may not have the financial ability to repurchase the 2024 Debentures if payment of our debt is accelerated. If we fail to repurchase the 2024 Debentures as required by the indenture, it would constitute an event of default that, in turn, may also constitute an event of default under our other debt obligations. We are unaware of any specific limitations to our ability to repurchase the debentures. Should we become aware of any specific limitations on our ability to repurchase the debentures, we will assess the impact of the limitations. We will also account for and disclose any impact to our financial statements as appropriate.

~~Any transaction to repurchase, refinance or renegotiate the terms of the 2024 Debentures may have a negative impact on shareholder equity value.~~

We have explored a number of types of transactions in order to repurchase, refinance or renegotiate the terms of the 2024 Debentures. If we are successful in negotiating a transaction that results in the repurchase, refinance or renegotiation of the terms of the 2024, there can be no assurance that such a transaction will not result in significant dilution to the existing stockholders or otherwise have an adverse effect on the value of the Company's common stock.

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

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

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

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

For the nine months ended June 30, 2009, the Company had a net loss of $185.4 million, primarily due to an impairment charge to fully write off a goodwill balance of $191.4 million. For the quarter ended June 30, 2009, the Company had a net income of $11.7 million. There can be no assurance that we will not have losses in future operating periods. Due to general economic conditions and slowdowns in purchases of networking equipment, it has become increasingly difficult for us to predict the purchasing activities of our customers and we expect that our operating results will fluctuate substantially in the future; we anticipate future losses from operations. Future fluctuations in operating results may also be caused by a number of factors, many of which are outside our control. Additional factors that could affect our future operating results include the following:

•: ~~The loss of major customers;~~
•: ~~Variations, delays or cancellations of orders and shipments of our products;~~
•: ~~Increased competition from current and future competitors;~~
•: ~~Reductions in the selling prices of our products;~~
•: ~~Significant changes in the type and mix of products being sold;~~
•: ~~Delays in introducing new products;~~

~~Table of Contents~~

•: ~~Design changes made by our customers;~~
•: ~~Failure by third-party foundries and other subcontractors to manufacture and ship products on time;~~
•: ~~Changes in third-party foundries' and other subcontractors' manufacturing capacity, utilization of their capacity and manufacturing yields;~~
•: ~~Variations in product development costs;~~
•: ~~Changes in our or our customers' inventory levels;~~
•: ~~Expenses or operational disruptions resulting from acquisitions; and~~
•: ~~Sales or closures of discontinued operations.~~

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

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

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

Our operating results may be adversely impacted by worldwide political and economic uncertainties and specific conditions in the markets we address, including the cyclical nature of and volatility in the semiconductor industry. As a result, the market price of our common stock may decline.

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

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

~~Table of Contents~~

~~adversely affected. Additionally, the combination of our lengthy sales cycle coupled with challenging macroeconomic conditions could have a negative impact on the results of our operations.~~

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

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

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

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

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

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

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

Sales to customers located outside the U.S. have historically accounted for a significant percentage of our revenue and we anticipate that such sales will continue to be a significant percentage of our revenue. International sales constituted 49% and 48% of our net revenue in fiscal 2008 and 2007, respectively, and 66% for the quarter ended June 30, 2009. Development and customer support operations located outside the U.S. have historically accounted for a significant percentage of our operating expenses and we anticipate that such operations will continue to be a significant percentage of our expenses. International sales and operations involve a variety of risks and uncertainties, including risks related to:

•: ~~Reliance on strategic alliance partners;~~
•: ~~Compliance with changing foreign regulatory requirements and tax laws;~~
•: ~~Difficulties in staffing and managing foreign operations;~~
•: ~~Reduced protection for intellectual property rights in some countries;~~
•: ~~Longer payment cycles to collect accounts receivable in some countries;~~
•: ~~Political and economic instability;~~

~~Table of Contents~~

•: ~~Economic downturns in international markets;~~
•: ~~Currency risks;~~
•: ~~Changing restrictions imposed by U.S. export laws; and~~
•: ~~Competition from U.S.-based companies that have established significant international operations.~~

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

~~Risks Relating to Our Business~~

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

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

•: ~~Accurately predict market requirements and evolving industry standards;~~
•: ~~Accurately define new products;~~
•: ~~Complete and introduce new products in a timely manner;~~
•: ~~Qualify and obtain industry interoperability certification of our products and our customers' products into which our products will be incorporated;~~
•: ~~Work with our wafer foundry, assembly, and probe and test subcontractors to achieve high manufacturing yields; and~~
•: ~~Gain market acceptance of our products and our customers' products.~~

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

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

Product introductions as well as future roadmap products are based on our expectations regarding market demand and direction. If our expectations regarding market demand and direction are incorrect, the rate of development or acceptance of our current and next-generation solutions do not meet market demand and customer expectation, the sales of our legacy or current Carrier and Enterprise Networking and Storage Products decline more rapidly than we anticipate, or if the rate of

~~Table of Contents~~

~~decline continues to exceed the rate of growth of our new products, it could negatively affect demand for our products, consolidated revenues, and profitability.~~

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

We focus our sales efforts on a small number of customers in the Carrier and Enterprise Networking and Storage markets that require high-performance ICs and intend to continue doing so in the future. Some of these customers are also our competitors. If any of our major customers were to delay orders of our products or stop buying our products, our business and financial condition would be severely affected. Additionally, if any of our customers are impacted by consolidation, experience financial difficulty including filing for bankruptcy protection, or are impacted by adverse economic conditions that would delay networking infrastructure upgrades, build-outs or new installations, this could also result in increased competition for our products and downward pressure on the pricing for our products.

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

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

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

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

•: ~~Lack of assured wafer supply, the potential for wafer shortages, and possible increase in wafer prices;~~
•: ~~Limited control over delivery schedules, manufacturing yields, product costs, and product quality; and~~
•: ~~Unavailability of, or delays in, obtaining access to key process technologies.~~

These and other risks associated with our reliance on third-party wafer foundries could materially and adversely affect our revenues, cash flows, and relationships with our customers. For example, the third-party foundries that manufacture our wafers have from time to time experienced manufacturing defects and reductions in manufacturing yields. In addition, disruptions and shortages in wafer foundry capacity may impair our ability to meet our customers' needs and negatively impact our operating results. Our third-party wafer foundries fabricate products for other companies and, in certain cases, manufacture products of their own design. Historically, there have been periods in which there has

~~Table of Contents~~

been a worldwide shortage of wafer foundry capacity for the production of high-performance integrated circuits such as ours. Instead of having long-term agreements with any of our third-party foundries, we instead subcontract our manufacturing requirements on a purchase order basis. As a result, it is possible that the capacity we will need in the future may not be available to us on acceptable terms, if at all.

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

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

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

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

In the past, we have experienced difficulties in achieving acceptable probe and/or final test yields on some of our products, particularly with new products, which frequently involve new manufacturing processes and smaller geometry features than previous generations. Maintaining high numbers of good die per wafer is critical to our operating results, as decreased yields can result in higher unit costs, shipment delays, and increased expenses associated with resolving yield problems. Because we also use estimated yields to value work-in-process inventory, yields below our estimates may require us to increase the value of inventory and related reserves reflected on our financial statements. In addition, defects in our existing or new products may require us to incur significant warranty, support and repair costs, and could divert the attention of our engineering personnel away from the development of new products. As a result, poor manufacturing yields, defects or other performance problems with our products could adversely affect our ability to provide competitively priced products.

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

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

~~Table of Contents~~

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

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

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

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

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

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

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

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

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

~~Table of Contents~~

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

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

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

We rely on a combination of patent, copyright, trademark, and trade secret protections, as well as confidentiality agreements and other methods, to protect our proprietary technologies and processes. For example, we enter into confidentiality agreements with our employees, consultants, and business partners, and control access to and distribution of our proprietary information. As of June 30, 2009, we had 88 U.S. patents and 14 foreign patents for various aspects of design and process innovations and have a number of pending U.S. and foreign patent applications.

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

•: ~~Steps we take to prevent misappropriation or infringement of our intellectual property will be successful;~~
•: ~~Any existing or future patents will not be challenged, invalidated or circumvented;~~
•: ~~Any pending patent applications or future applications will be approved;~~
•: ~~Others will not independently develop similar products or processes to ours or design around our patents; or~~
•: ~~Any of the measures described above 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.

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

The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights. As is common in the industry, from time to time, third parties have asserted patent, copyright, trademark, and other intellectual property rights to technologies that are important to our business and have demanded that we license their patents and technology. To date, none of these claims has resulted in the commencement of any litigation against us, nor have we believed that it is necessary to license any of the rights referred to in such claims. We expect, however, that we will continue to receive such claims in the future, and any litigation to determine their validity, regardless of their merit or resolution, could be costly and divert the efforts and attention of our management and technical personnel. We have begun to find opportunities to license our intellectual property. While this

~~Table of Contents~~

may provide a substantial business opportunity for the Company, it may also increase the potential for others to initiate claims against us. We cannot assure that we would prevail in such disputes given the complex technical issues and inherent uncertainties in intellectual property litigation. If such litigation were to result in an adverse ruling we could be required to:

•: ~~Pay substantial damages;~~
•: ~~Discontinue the use of infringing technology, including ceasing the manufacture, use or sale of infringing products;~~
•: ~~Expend significant resources to develop non-infringing technology; or~~
•: ~~License technology from the party claiming infringement, which license may not be available on commercially reasonable terms.~~

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

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

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

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

Management's evaluation of the design and operating effectiveness of our internal control over financial reporting identified material weaknesses resulting from design and operating deficiencies in the internal control system, including that we did not maintain: (i) an effective control environment, which includes controls over the administration of and accounting for stock options and access to our information systems, as well as adequate segregation of duties; or (ii) effective controls over the period-end process, including the review, supervision, and monitoring of the preparation of journal entries and account reconciliations, as well as the accounting for inventory, revenue recognition and payroll.

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

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

•: ~~Engagement of third-party administrator for share-based compensation;~~

~~Table of Contents~~

•: ~~Enhancement of Corporate Governance and oversight;~~
•: ~~Establishment of internal audit function;~~
•: ~~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 effectiveness of the modifications of our internal control over financial reporting, we cannot assure you that there will not be errors in our financial statements that could require a restatement or delay in filings, and as a result investors may lose confidence in our reported financial information, which could lead to a decline in our stock price.

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

In reviewing past stock option grants, Vitesse determined that various stock options were granted with exercise prices that were less than the fair market value of Vitesse's common stock on the date of grant. These grants raise potential tax issues involving Code Sections 162(m) and 409A as well as income tax and employment tax withholding obligations. The issue was voluntarily disclosed to the IRS. In December 2008, we completed a tender offer in accordance with Code Sections 162(m) and 409A, to remediate a portion of the federal tax liabilities. The parties are in the process of working out resolutions to the remaining issues. On June 29, 2009, the Company obtained final determination from the Internal Revenue Service ("IRS") covering a settlement of payroll taxes, penalties and interest related to the exercise of backdated stock options during the calendar years 2004 through 2006. The Company agreed to pay approximately $900,000 in full satisfaction of the federal income tax liabilities and remitted payment in July 2009.

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

In April 2006, we announced that our then published financial statements should no longer be relied upon. The investigation determined that members of our former senior management backdated and manipulated the grant date of options over a number of years and subsequently attempted to create and alter documents in order to conceal these practices. The investigation also found evidence of a number of improper accounting practices. As a result of these improper accounting practices and evaluation of the financial records and controls in place prior to September 30, 2005, current management concluded that it cannot rely on historical balances or on the testing performed by its former auditors, supporting accounting documents are poor and do not exist for many transactions, and key internal accounting controls were overridden by prior management or did not exist. As a result, current management has been unable to prepare any financial statements for any period prior to September 30, 2005. Thus, there is limited historical financial information on which investors can rely upon while evaluating our financial performance.

~~We are not eligible to use the "short form" registration statement on Form S-3, which could increase the cost of raising capital through the issuance and sale of our equity or debt.~~

We have not been both current and timely, for a period of 12 months, with respect to our Exchange Act reporting obligations. Until such time, we are ineligible to use the "short form" registration statement on Form S-3. Our inability to use Form S-3 could increase the cost of raising

~~Table of Contents~~

~~capital through the issuance and sale of our equity or debt and the terms of any offering transaction may not be as favorable as they would have been if were eligible to use Form S-3.~~

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

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

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

~~A change of control could result in a limitation on the use of our net operating loss carryforwards.~~

At October 1, 2008, we had net deferred tax assets of $441.5 million before considering the effect of the valuation allowance. These deferred tax assets are primarily composed of net operating loss ("NOL") carryforwards. Under Section 382 of the Internal Revenue Code of 1986, as amended, if we undergo an "ownership change" the amount of our pre-change operating losses that may be utilized to offset future taxable income will be subject to an annual limitation. An ownership change occurs if the percentage of stock of the Company that is owned by certain groups of less than 5% shareholders, all treated as a single shareholder for this purpose, increases by more than 50 percentage points over a three year period. The annual limitation may be increased in the event that we have overall "built-in" gains in our assets at the time of the ownership change.

Accordingly, we have not presented any amount as an uncertain tax position under FIN 48. Any carryforwards that will expire prior to utilization will be removed from the deferred tax assets with a corresponding reduction in the valuation allowance.

ITEM 2. UNREGISTERED SALES OF EQUITY AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. ~~SUBMISSION OF MATTERS TO A VOTE BY SHAREHOLDERS~~RESERVED

~~None.~~

ITEM 5. OTHER INFORMATION

None.

Table of Contents

ITEM 6. EXHIBITS

~~EXHIBITS~~


~~2.1~~3.1	*	Restated Certificate of Incorporation.
	~~Purchase and Sale Letter Agreement, dated October 29, 2007 between the Company and Maxim Integrated Products, Inc. (Incorporated~~
10.1	†	Vitesse Semiconductor Corporation 2010 Incentive Plan (incorporated by reference to ~~Exhibit 10.2 to~~Appendix A of the Company's ~~Form 8-K~~Definitive Proxy Statement on Schedule 14A filed ~~August 29, 2007)~~with the SEC on March 31, 2010).
~~3.1~~		~~Amended and Restated Certificate of Incorporation. (Incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2000 filed May 5, 2000).~~
~~3.2~~		~~Bylaws. (Incorporated by reference to Exhibit 3.2 to the Company's current report on Form 8-K filed on December 2, 2004).~~
~~4.1~~		Specimen of Registrant's Common Stock Certificate. (Incorporated by reference to the Company's Registration Statement on Form S-1 (File no. 33-43548), effective December 10, 1991 filed October 25, 1991).
~~4.2~~		Rights Agreement dated as of March 3, 2003 between Vitesse Semiconductor Corporation and EquiServe Trust Company, N.A., as Rights Agent. (Incorporated by reference to Exhibit 1 to the Form 8-A12(g) filed March 5, 2003).
~~4.3~~		~~Warrant Registration Rights Agreement, dated January 25, 2007. (Incorporated by reference to Exhibit 10.2 to the Company's Form 8-K filed January 31, 2007).~~
~~4.4~~		Indenture between Vitesse Semiconductor Corporation and U.S. Bank National Association, as Trustee (including form of 1.50% Convertible Subordinated Debentures due 2024), dated as of September 22, 2004. (Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed September 23, 2004).
~~4.5~~		First Supplemental Indenture, dated November 3, 2006 between the Company and U.S. Bank National Assoc. as Trustee. (Incorporated by reference to Exhibit 99 to the Company's Form 8-K filed November 9, 2006).
~~4.6~~		Second Supplemental Indenture, dated September 24, 2007 between the Company and U.S. Bank National Association. (Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed September 27, 2007).
~~4.7~~		Vitesse Semiconductor Corporation Amended and Restated 2001 Stock Incentive Plan as of September 15, 2008. (Incorporated by reference to Exhibit 4.3 to the Company's Form S-8 filed December 31, 2008).
~~4.8~~		Vitesse Semiconductor Corporation Fiscal Year 2008 Executive Bonus Plan, dated as of January 24, 2008 (Incorporated by reference to Exhibit 4.3 to the Company's form 10-K/A filed January 28, 2009) (portions of this exhibit have been omitted pursuant to a request for confidential treatment).
~~4.9~~		Vitesse Semiconductor Corporation Fiscal Year 2009 Executive Bonus Plan, dated as of January 16, 2009 (Incorporated by reference to Exhibit 4.9 to the Company's form 10-Q filed February 17, 2009) (portions of this exhibit have been omitted pursuant to a request for confidential treatment).
~~10.1~~		~~Letter Agreement between the Company and Michael Green dated January 2, 2007. (Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed January 31, 2007).~~

~~Table of Contents~~


10.2	*†	~~Employment Agreement between~~Automatic Equity Grant Program for Eligible Directors under the ~~Company and Richard Yonker dated February 20, 2009. (Incorporated by reference to Exhibit 10.2 to the Company's Form 8-K filed February 26, 2009).~~Vitesse Semiconductor Corporation 2010 Incentive Plan.
~~10.3~~		Amended and Restated Employment Agreement between the Company and Christopher Gardner dated February 25, 2009. (Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed February 26, 2009).
~~10.4~~31.1		~~Letter Agreement, dated October 26, 2007 between the Company and Dr. Martin C. Nuss (Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed November 20, 2007).~~
~~10.5~~		~~Change in Control Agreement between the Company and Michael Green dated February 25, 2009. (Incorporated by reference to Exhibit 10.3 to the Company's Form 8-K filed February 26, 2009).~~
~~10.6~~		~~Loan Agreement, dated August 23, 2007 between the Company and Whitebox VSC, Ltd. (Incorporated by reference to Exhibit 10.3 to the Company's Form 8-K filed August 29, 2007).~~
~~10.7~~		Senior Unsecured Convertible Note Purchase Agreement, dated August 23, 2007 between the Company and Whitebox VSC, Ltd. (Incorporated by reference to Exhibit 10.4 to the Company's Form 8-K filed August 29, 2007).
~~10.8~~		~~Term Note, dated October 29, 2007 between the Company and Whitebox VSC, Ltd. for $30 million. (Incorporated by reference to Exhibit 4.1 to the Company's Form 8-K filed October 31, 2007).~~
~~10.9~~		~~Form of Indemnity Agreement between the directors and the Company. (Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed August 22, 2007).~~
~~10.10~~		Intellectual Property, Assignment and License Agreement, dated October 29, 2007 between the Company and Maxim Integrated Products, Inc. (Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed October 31, 2007).
~~10.11~~	*	~~Sale and Purchase Agreement, dated June 30, 2009, between the Company and a third-party purchaser (portions of this exhibit have been omitted pursuant to a request for confidential treatment).~~
~~31.1~~	*	Rule13a-14(a)/302 SOX Certification of Chief Executive Officer.
~~31.2~~
31.2	*	Rule13a-14(a)/302 SOX Certification of Chief Financial Officer.
~~32.1~~
32.1	*	Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer.

*: Filed herewith.
†: Executive Compensation Plan or Agreement

Table of Contents

~~SIGNATURE~~SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


August ~~10, 2009~~9, 2010	VITESSE SEMICONDUCTOR CORPORATION
	By:	/s/ CHRISTOPHER R. GARDNER Christopher R. Gardner Chief Executive Officer
August ~~10, 2009~~9, 2010	VITESSE SEMICONDUCTOR CORPORATION
	By:	/s/ RICHARD C. YONKER Richard C. Yonker Chief Financial Officer (Principal Financial and Accounting Officer)

				June 30, 2009			September 30, 2008

				(in thousands, except share data)
			ASSETS
Current assets:
	Cash and cash equivalents			$	51,422		$	36,722
	Accounts receivable, net				14,898			6,307
	Inventory				23,936			37,466
	Assets held for sale				—			3,164
	Restricted cash				395			592
	Prepaid expenses and other current assets				4,345			4,011

		Total current assets			94,996			88,262
Property, plant and equipment, net					7,419			8,084
Goodwill					—			191,418
Other intangible assets, net					1,833			913
Other assets					3,388			3,600

				$	107,636		$	292,277

	LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities:
	Accounts payable			$	16,980		$	16,101
	Accrued expenses and other current liabilities				9,825			20,242
	Derivative liability				4,636			—
	Deferred revenue				640			2,721
	Current portion of debt, net of discount of $437 at June 30, 2009				29,563			—
	Convertible subordinated debt				96,710			—

		Total current liabilities			158,354			39,064
Other long-term liabilities:					1,703			1,564
Long-term debt, net of discount of $577 at September 30, 2008					44			29,423
Convertible subordinated debt					—			96,700

		Total liabilities			160,101			166,751

Minority interest					166			165
Commitments and contingencies
Shareholders' (deficit) equity:
	Preferred stock, $0.01 par value. 10,000,000 shares authorized; none outstanding				—			—
	Common stock, $0.01 par value. 500,000,000 shares authorized; 230,905,580 shares outstanding at June 30, 2009 and 226,205,580 at September 30, 2008				2,314			2,267
	Additional paid-in-capital				1,753,846			1,747,324
	Accumulated deficit				(1,808,791	)		(1,624,230	)

		Total shareholders' (deficit) equity			(52,631	)		125,361

				$	107,636		$	292,277

			Three months ended June 30,						Nine months ended June 30,

			2009			2008			2009			2008
			(in thousands, except per share data)						(in thousands, except per share data)
Product revenues			$	36,356		$	55,041		$	115,743		$	163,176
Intellectual property revenues				8,250			—			13,250			—

	Net revenues			44,606			55,041			128,993			163,176
Costs and expenses:
	Cost of revenues			17,282			27,965			57,957			79,977
	Engineering, research and development			11,200			12,458			33,720			37,584
	Selling, general and administrative (including gain on sale of fixed assets of $3.2 million for the nine months ended June 30, 2008 and a gain on the sale of building of $2.9 million for the nine months ended June 30, 2009)			11,412			14,570			31,761			37,758
	Accounting remediation & reconstruction expense & litigation costs			(13,206	)		2,067			(9,742	)		8,813
	Goodwill impairment			—			—			191,418			—
	Amortization of intangible assets			362			310			1,068			2,204

		Costs and expenses		27,050			57,370			306,182			166,336

Income (loss) from operations				17,556			(2,329	)		(177,189	)		(3,160	)
Other (expense) income:
	Interest expense, net			(5,804	)		(1,112	)		(8,104	)		(2,706	)
	Other (expense) income, net			(38	)		3,513			58			4,236

		Other (expense) income, net		(5,842	)		2,401			(8,046	)		1,530
Income tax (benefit) expense				(696	)		3			(600	)		(546	)
Minority interests in earnings of consolidated subsidiary				—			(660	)		1			(660	)

Income (loss) from continuing operations before discontinued operations				12,410			(591	)		(184,634	)		(1,744	)
Discontinued operations
	Income from discontinued operations, net of tax of $901 and $997 and gain on sale of $21,509 for the three and nine months ended June 30, 2008, respectively			71			1,703			71			8,101

Net income (loss)			$	12,481		$	1,112		$	(184,563	)	$	6,357

Income (Loss) per Share
Income (loss) per share (basic and diluted):
	Continuing operations		$	0.05		$	0.00		$	(0.81	)	$	(0.01	)
	Discontinued operations			0.00			0.01			0.00			0.04

		Net income (loss) per share	$	0.05		$	0.01		$	(0.81	)	$	0.03

Weighted average shares outstanding:
	Basic			230,906			223,556			229,098			223,556
	Diluted			231,735			223,556			229,098			223,556

		June 30, 2009			September 30, 2008

		(in thousands)
Property, Plant and Equipment:
Machinery and equipment		$	90,010		$	90,493
Furniture and fixtures			766			678
Computer equipment			9,834			8,942
Leasehold improvements			5,703			5,692
Construction in progress			77			1,027

			106,390			106,832
Less: Accumulated depreciation and amortization			(98,971	)		(98,748	)

	Total	$	7,419		$	8,084

		June 30, 2009		September 30, 2008

		(in thousands)
Accrued Expenses and Other Current Liabilities:
Accrued legal fees and settlements		$	142	$	4,588
Accrued wages, commissions and benefits			2,808		6,203
Accrued vacation			2,801		2,720
Accrued software license agreements			1,996		326
Accrued income taxes			362		2,598
Accrued expenses			227		1,675
Accrued commissions			57		89
Miscellaneous taxes			163		353
Interest payable			901		1,270
Customer prepayments and deposits			143		143
Other			225		277

	Total	$	9,825	$	20,242

	Gross Amount		Amount without Limitation

Federal net operating loss carryforwards	$	147,561	$	105,896	2020-2021
		337,040		206,258	2022-2023
		111,240		71,147	2024-2025
		50,908		50,908	2026-2027

Total federal net operating loss carryforwards	$	646,749	$	434,209

	Amount

Federal research and development credit carryforwards	$	2,029	2008-2012
		5,497	2013-2019
		4,400	2020-2021
		1,848	2022-2025

Total federal research and development credit carryforwards	$	13,774

	Nine Months Ended June 30,

	2009		2008
Expected life (in years)		5.50-5.91		4.68
Expected volatility		65.0%-84.6%		66.2	%
Risk-free interest rate		1.79%-3.25%		4.1	%
Weighted-average estimated fair value	$	0.23	$	0.58

			Weighted average exercise price			Aggregate intrinsic value

Options outstanding, September 30, 2008	18,273,632		$	7.02	4.86	$	212
Granted	4,666,630			0.37
Cancelled or expired	(1,425,660	)		8.22

Options outstanding, June 30, 2009	21,514,602			5.49	5.36		—

Options exercisable, June 30, 2009	15,290,868		$	7.30	4.08	$	—

	Three Months Ended June 30, 2009					Three Months Ended June 30, 2008

	Amount		% of Licensing Revenues			Amount		% of Licensing Revenues			Change		% Change
	(in thousands, except percentages)
Intellectual Property revenues	$	8,250		100.0	%	$	—		100.0	%	$	8,250		100.0	%

		Payment Obligation by Year (in thousands)

		2010		2011		2012		2013		2014		Thereafter		Total
Long-term debt		$	—	$	—	$	30,000	$	—	$	—	$	—	$	30,000
Convertible subordinated debt			96,700		—		—		—		—		—		96,700
Operating leases			2,998		3,084		2,957		2,925		1,744		1,252		14,961
Inventory and related purchase obligations			7,749		—		—		—		—		—		7,749
Software licenses			6,648		5,173		42		—		—		—		11,863

	Total	$	114,095	$	8,258	$	32,999	$	2,925	$	1,744	$	1,252	$	161,273