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VITESSE SEMICONDUCTOR CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT AND COMPREHENSIVE LOSS

See accompanying notes to consolidated financial statements.

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VITESSE SEMICONDUCTOR CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to consolidated financial statements.

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

DecemberMarch 31, 20092010

Note 1. The Company and its Significant Accounting Policies

Description of Business

        Vitesse Semiconductor Corporation ("Vitesse" or the "Company") is a leading worldwide supplier of high-performance integrated circuits ("ICs") that are utilized primarily by manufacturers of networking systems for Carrier, Enterprisecarrier, enterprise and Storagestorage 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 December 31, 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 SheetsOTCQB marketplace under the ticker symbol VTSS.PK.

Fiscal Periods

        The Company's fiscal year is October 1 through September 30. References made to the first quarters of fiscal 2010 and fiscal 2009 relate to the quarters ended December 31, 2009 and 2008, respectively.VTSS.

Basis of Presentation

        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, 2009, included in our Annual Report on Form 10-K filed with the SEC on December 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 DecemberMarch 31, 20092010 and September 30, 2009, and the consolidated results of our operations for the three and six months ended March 31, 2010 and 2009, our consolidated cash flows for the threesix months ended DecemberMarch 31, 2010 and 2009 and 2008.the changes in our shareholders' equity (deficit) for the six months ended March 31, 2009. The results of operations for the three and six months ended DecemberMarch 31, 20092010 are not necessarily indicative of the results to be expected for future quarters or the full year.

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009

Note 1.        The Company and its Significant Accounting Policies (Continued)Company's fiscal year is October 1 through September 30.

Reclassifications

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

Correction of errorError

        During the first quarter of fiscal 2010, we identified an error in our financial statements as of September 30, 2009 and for the quarter and year then ended. This error was the result of an operational change that was not appropriately reflected in our inventory costing and accounting processes. In accordance with ASCAccounting Standards Codification ("ASC") Topic 250, Accounting"Accounting Changes and Error Corrections," originally issued as SAB No. 99"Materiality" and SAB No. 108"Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2010

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

Financial Statements," management evaluated the materiality of the error from a 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 for the currentfirst quarter as well as the expected results of operations for the full fiscal year and concluded that the error in the current period isfirst quarter was quantitatively significant to the first quarter financial statements but iswas not anticipated to be material to the full fiscal year or the trend of financial results. Accordingly, we corrected the error in the current period.first quarter. The impacteffects of the adjustment to correct the error to theon specific line items of the financial statements for the threesix months ended DecemberMarch 31, 2009 was2010 were as follows:

Subsequent Events

        In May 2009, the Financial Accounting Standards B Board (FASB) issued Accounting Standards Codification (ASC 855), 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 February 9, 2010, the date of issuance, in preparing the consolidated financial statements and notes thereto.

Use of Estimates

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

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009

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

valuations and useful lives, and deferred income tax asset valuation allowances. These estimates and assumptions are basederror had no impact 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 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 December 31, 2009, the Company's cash balance exceeded the deposit insurance limits provided by the FDIC by $37,021,925. Cash balances held in foreign bank accounts are also not insured by the FDIC, and at December 31, 2009 these balances totaled $208,800. At December 31, 2009, the Company's foreign subsidiaries reflected $785,017, of cash on their financial statements, which is also 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 year ended December 31, 2009, one customer accounted for more than 10.0% of our net revenues. Total sales to this customer were 11.0% of net revenues for both quarters ended December 31, 2009 and December 31, 2008. No other customer accounted for more than 10% of our net revenues.

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

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009

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

Contingencies

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

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 preceding 12 months after shipment and also considers the impact of known operational issues that may have a greater impact than historical trends. Historically, our warranty returns have not been material.

Revenue Recognition

        In accordance with SEC Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements" or SAB 101, as amended by SAB No. 104, "Revision of Topic 13" or ASC 605, 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.

        Vitesse has a distribution network through which it sells approximately half of its products. The Company recognizes revenue on a sell-through basis for all products sold through distributors, utilizing information provided by the distributors. These distributors maintained inventory balances of $4.4 million and $3.6 million as of December 31, 2009 and September 30, 2009, 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. The payments received from distributors for inventory shipped to them in advance of the sale of that inventory to an end-user are, therefore, shown as deferred revenue. Vitesse personnel are often involved in the sales from the distributors to end customers, providing both field engineering and application engineering support prior to the sale. Our product sales do not include service elements aside from the standard product warranty.

        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.

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009

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

        Approximately 3.6% and 2.2% of our inventory is consigned and located with two customers at December 31, 2009 and at September 30, 2009, respectively. Consistent with our revenue recognition policy, we recognize revenue when the customer 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 ASC 605, when licensing technology and other intangibles, delivery is not deemed to occur for revenue recognition purposes until the license term begins. Revenues are 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 ASC 605, revenue related to the licensing of intellectual property ("IP") is deferred until delivery has occurred and final acceptance of the contracted deliverables is 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 in the first quarter of 2009. 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 for the three months ended DecemberMarch 31, 2009.

Sales Returns, Pricing Adjustments and Allowance for Doubtful Accounts

        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 December 31, 2009 and September 30, 2009, is adequate. However, if the financial condition of any customer were to deteriorate, resulting in an impairment of its ability to make payments, additional allowances could be required. We record a reserve for estimated sales returns in the same period as the related revenues are recognized. Sales returns typically occur for quality related issues. 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 results of operations may be affected. As of December 31, 2009 and September 30, 2009, our sales return reserve was $118,000 and $19,000, respectively.

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009

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

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.

Financial Instruments

        ASC 825 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, restricted deposits, accounts receivable, accounts payable and accrued expenses. Restricted deposits are interest-bearing Certificates of Deposit ("CD") collateralizing Letters of Credit ("LOC") and other commitments. Interest earned on the CD's accrues to the Company. As of December 31, 2009 and September 30, 2009, the Company had approximately $1.9 and $2.0 million, respectively, in CD's. The CD's will renew annually for the duration of the underlying LOC or commitment. The Company is subject to penalties for early withdrawal of the funds in any of the CD's, including forfeiture of interest earned for the period. These financial instruments are stated at their carrying values, which are reasonable estimates of their fair values.

        On October 1, 2009, the Trustee of the 1.5% Convertible Subordinated Debentures due 2024 (the "2024 Debentures") provided a written notice to the Company that holders representing $95.7 million of the principal amount of the 2024 Debentures had exercised their repurchase rights under the Indenture. Pursuant to the written notice, the Company was required to deposit the repurchase price of $108.9 million with the Trustee as soon as practicable. As the Company had insufficient cash to repurchase the entire amount tendered for repurchase it could not fulfill its legal responsibility to repurchase the debt which constituted an event of default under both the Indenture and the $30.0 million financing with Whitebox (the "Senior Secured Loan Agreement," or "Senior Term Loan"). Accordingly, management of the Company completed a series of transactions, described below, with its Lenders to restructure the Senior Term Loan and 2024 Debentures.

        On October 16, 2009, the Company and Whitebox (the "Senior Lender") amended the terms of the Senior Secured Loan Agreement to allow the Company to pay down $5.0 million of the principal amount of its Senior Term Loan and amend the terms of the Senior Term Loan. Accordingly, the balance of the Senior Term Loan as of December 31, 2009 is the principal amount to be repaid of $25.0 million, which is the $30.0 million dollar original principal balance less the principal payment of $5.0 million.

        In addition, 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 (the "Noteholders") whereby the Noteholders agreed to exchange their 2024 Debentures for a combination of cash, shares of common stock, 8.0% Convertible Second Lien Debentures Due 2014 (the "2014 Debentures") and, in some cases, shares of Series B Preferred Stock. The Conversion Agreement was consummated on October 30, 2009.

        We have estimated the fair value of the 2014 Debentures using a convertible bond valuation model within a lattice framework (Level 3). The valuation model combined expected cash outflows with

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009

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

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 2014 Debentures was $76.3 million as of December 31, 2009.

Inventory

        Inventory is 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.

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 amortized over the shorter of the term of the related lease or their estimated useful lives. Depreciation and amortization costs were $0.6 million and $0.8 million for the three months ended December 31, 2009 and 2008, respectively.

Goodwill and Other Intangible Assets

        We recorded goodwill when the purchase price paid for past acquisitions exceeded the estimated fair value of the net identified tangible and intangible assets acquired. At December 31, 2008, we performed a two-step process to determine: (i) whether the fair value of the Company exceeds its carrying value; and (ii) to measure the amount of an impairment loss, if any. We were prompted to complete the first step of the evaluation because we identified changes in key factors indicating an impairment of the value of our goodwill. Notable indicators were significantly depressed market conditions and industry trends, a market capitalization below the book value of our equity and downward revisions to our forecasts due to then current economic conditions. Upon completion of the first step of the impairment test for the quarter ended December 31, 2008, we determined the carrying value of the Company exceeded its fair value and that an additional impairment analysis was required by ASC 350. Accordingly, we performed the second step of the goodwill impairment test which compared the implied fair value of our Company's goodwill with the carrying amount of that goodwill. Any excess of the carrying amount of goodwill above the implied fair value of that goodwill would result in an impairment loss was recognized in an amount equal to that excess. We determined the implied fair value of goodwill was determined in the same manner as the amount of goodwill would be determined in a purchase 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. This calculated fair value was then allocated to individual assets and liabilities of the Company (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

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009

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

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 step two impairment analysis, 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 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 ASC 740. Under the asset and liability method of ASC 740, 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 ASC 740; originally issued as the Financial Accounting Standards Board ("FASB") Interpretation No. 48, "Accounting for Uncertainty in Income Taxes," an interpretation of SFAS 109, on October 1, 2007 and assessed the impact of ASC 740 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.2010.

Computation of Net Loss per Share

        In accordance with ASC Topic 260 Earnings"Earnings Per ShareShare" ("ASC 260"); originally issued as SFAS 128, "Earnings per Share," basic net income and loss per share is computed by dividing net income or loss available to common shareholders by the 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 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.

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009

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

        For the quartersthree and six months ended DecemberMarch 31, 20092010 and 2008,2009, the Company recorded a loss from continuing operations and in accordance with ASC 260, all outstanding potential common shares were excluded from the diluted earningsloss 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.

Long-Lived AssetsFinancial Instruments

        The Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted operating cash flows expected to be generated by the asset, or fair market value. Assets held for sale are recorded at the lesser of fair value less costs to sell or carrying value. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds theASC Topic 825, "Financial Instruments," defines fair value of a financial instrument as the assets. As required by ASC 360, we verified our long-lived assets were not impaired as ofamount at which the time of the goodwill impairment. There were no impairment chargesinstrument could be exchanged in the three months ended December 31, 2009 and 2008.

Share-Based Compensation

        The Company has in effect several stock plans under which incentive and non-qualified stock options have been granted to employees, contractors and directors. These plansa current transaction between willing parties. Our financial instruments include the 2001 Stock Incentive Plan (the "2001 Plan"), the 1991 Stock Option Plan, the 1991 Directors' Stock Option Plan, and the 1999 International Stock Option Plan. ASC 718 requires all share-based payments to employees, including grants of employee stock options and employee stock purchase rights, to be recognized in the financial statements based on their respective grant date fair values. ASC 718 also requires the benefits of tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than operatingequivalents, restricted cash, flow, as required under previous literature.

        ASC 718 requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense ratably over the requisite service periods. The Company has estimated the fair value of each award as of the date of grant 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 ASC 718, the fair values generated by the model may not be indicative of the actual fair values of the Company's awards, as it does not consider other factors important to those share-based payment awards, such as continued employment, periodic vesting requirements, and limited transferability.

        Upon adoption of ASC 718, 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 reportingaccounts receivable, accounts payable,

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DecemberMarch 31, 20092010

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

periodaccrued expenses and various debt instruments. These financial instruments are stated at their carrying values, which are estimates of their fair values.

        Restricted cash consists of interest-bearing certificates of deposit ("CD") collateralizing letters of credit and other commitments. As of March 31, 2010 and September 30, 2009, the Company had approximately $1.8 million and $2.0 million, respectively, in CD.

        Our senior term loan is equal tostated at carrying value of $25.0 million as of March 31, 2010 and $30.0 million as of September 30, 2009, which are estimates of its fair value.

        We estimate the portionfair values of the grant-date2014 Debentures and embedded derivatives using a convertible bond valuation model within a lattice framework. These valuations are determined using Level 3 inputs. The valuation model combines expected cash outflows with market based assumptions regarding risk-adjusted yields, stock price volatility, recent price quotes and trading information of the Company's common stock into which the 2014 Debentures are convertible. The fair value of the awards that have vested, or for partially vested awards,2014 Debentures includes the face value of the portiondebentures plus the discount, which is amortized as interest expense over the life of the award thatdebentures. The fair value of the 2014 Debentures was $43.6 million as of March 31, 2010. On October 30, 2009, the date of issuance, the fair value of the bifurcated compound derivative was $28.0 million. As of March 31, 2010, the fair value of the bifurcated compound derivative was $65.5 million, with the change of $37.5 million reflected as interest expense in the Statement of Operations for the six month period ended March 31, 2010. On January 7, 2010 shareholders of the Company authorized the issuance of a total of 5,000,000,000 shares of common stock, providing the Company with sufficient common shares to satisfy all potential conversion obligations. The Company will continue to mark the bifurcated compound derivative to market due to the conversion price not being indexed to the Company's own stock. Specifically, the feature requiring the Company to redeem foregone interest upon conversion by the holder feature causes the exercise price to not be indexed to the Company's own stock. The change in the fair value of the bifurcated compound derivative is ultimately expectedprimarily related to vest for which the requisite services have been provided.change in price of the underlying common stock. The change in value of the 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 March 31, 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 March 31, 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 related embedded derivative as of September 30, 2009 was $12.2 million.

Recent Accounting Pronouncements

        In June 2009, the FASB        We do not believe that there are any recent accounting pronouncements issued ASC Topic 105 Generally Accepted Accounting Principles ("ASC 105"); originally issued as SFAS No. 168 "The FASB Accounting Standards Codification and Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162." ASC 105 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(including 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. ASC 105 also replaces FASB Statement No. 162, "The HierarchyForce), the American Institute of Generally Accepted Accounting Principles," givenCertified Public Accountants or the SEC that once in effect, the Codification will carry the same level of authority. ASC 105 is effective for financial statements issued for interim and annual periods ending after September 15, 2009, which includes our fiscal year ended September 30, 2009. The adoption of this statement did notwould have a material impact on our results of operations, financial position or cash flows.

        In December 2007, the FASB issued ASC Topic 805 Business Combinations ("ASC 805"); originally issued as SFAS No. 141R,"Business Combinations." ASC 805 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. ASC 805 is effective for financial statements issued for fiscal years beginning after December 15, 2008. Accordingly, ASC 805 is applicable to the Company's accounting for business combinations closing onpresent or after October 1, 2009. We expect ASC 805 will have an impact on ourfuture 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. The adoption of this statement did not have a material impact on our results of operations, financial position or cash flows during the quarter ended December 31, 2009.

        In December 2007, the FASB issued ASC Topic 810 Consolidation ("ASC 810"); originally issued as SFAS No. 160,"Non-controlling Interests in Consolidated Financial Statements—an amendment of ARB No. 51." ASC 810 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. We adopted ASC 810 for our quarter ended December 31, 2009. The adoption of this statement had an immaterial impact on our results of operations, financial position or cash flow.statements.

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DecemberMarch 31, 20092010

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

        In May 2008, the FASB issued ASC Topic 470 Debt ("ASC 470"); originally issued as FASB Staff Position APB 14-1, "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)." ASC 470 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. ASC 470 requires us to retroactively separate the liability and equity components of such debt in our consolidated balance sheets on a fair value basis. ASC 470 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2008. The adoption of this statement did not have an impact on our results of operations, financial position or cash flows during the quarter ended December 31, 2009.

        In June 2008, the FASB ratified ASC Topic 815 Derivatives and Hedging ("ASC 815"); originally issued as 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." ASC 815 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. ASC 815 clarifies the impact of foreign currency denominated strike prices and market-based employee stock option valuation instruments on the evaluation. ASC 815 is effective for the financial statements issued for fiscal years and interim periods within those fiscal years beginning after December 15, 2008. The adoption of this statement did not have an impact on our results of operations, financial position or cash flows during the quarter ended December 31, 2009.

        Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants or the SEC did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.

Note 2. Supplemental Financial Information

Inventory

        The following table presents the detailsprincipal components of the Company's inventory:

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009

Note 2. Supplemental Financial Information (Continued)

Property, Plant and Equipment

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

Accrued Expenses and Other Current Liabilities

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

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009

Note 2. Supplemental Financial Information (Continued)

Revenues by Product Markets

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

Revenues from Intellectual Property

        The following table presents revenues from intellectual property:

Revenues by Geographic Area

        The following table presents revenues by geographic area:

        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.

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DecemberMarch 31, 20092010

Note 2. Supplemental Financial Information (Continued)

Revenues by Geographic Area

        The following table presents revenues by geographic area:

Computation of Net Loss per Share

        The following table presents the computation of loss per share:

        The weighted averageFor each of the quarters and six month periods ended March 31, 2010 and 2009, the Company recorded a loss from continuing operations and in accordance with ASC 260, all outstanding potential common shares were excluded from the diluted computation are as follows:

Note 3. Other Intangible Assets

        Other intangible assets consist primarily of existing technologies and intellectual property. Acquired intangibles are amortized on a straight-line basis overloss per share computation. For periods in which the respective estimated useful lives of the assets. The carrying value of intangible assets at December 31, 2009 and September 30, 2009 was $1.3 million and $1.5 million, respectively. For other intangible assets and long-lived assets, in accordance with ASC 360, 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

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DecemberMarch 31, 20092010

Note 3. Other Intangible Assets2. Supplemental Financial Information (Continued)

impairedCompany reports a loss from continuing operations, diluted loss per share is to be held and used, we recognize an impairment charge tocalculated using only the extent the fair value attributable to the asset is less than the asset's carrying value. The fair valueweighted average number of shares outstanding during each of the long-lived asset then becomesperiods, as the asset's new carrying value, which we amortize over the remaining estimated useful lifeinclusion of the asset.

Note 4. Debt

        During 2004, the Company issued $96.7 million in aggregate principal amount of its 1.5% Convertible Subordinated Debentures due 2024 (the "2024 Debentures"). The 2024 Debentures were unsecured obligations and were subordinated in right of payment to all of the Company's existing and future senior indebtedness. Interest was 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 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 certain sections of the indenture. 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. Further, effective November 3, 2006, the following amendments became effective: (i) for 18 months after the date the amendments were 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 Debenturescommon stock equivalents would be amended so that the conversion price of the 2024 Debentures would be decreased permanently from $3.92 per share of common stock to $2.546 per share of common stock, subject to further adjustment as set forth in the indenture; and (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).anti-dilutive.

        The modification ofweighted average potential common shares excluded from 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 had 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 could have redeemed the 2024 Debentures after October 1, 2007 if its stock price is at least 170% of the conversion price, or approximately $4.32diluted loss per share for 20 trading days within any consecutive 30-day trading period, and could have redeemed the 2024 Debentures beginning October 1, 2009, without being subject to such condition. Holders of the 2024 Debentures had the right to require the Company to repurchase the 2024 Debentures on October 1 of 2009, 2014, and 2019.computation are as follows:

Note 4.3. Debt (Continued)

        In accordance with the November 3, 2006 amendments to the 2024 Debentures, the October 1, 2009 repurchase right was increased from 100% to 113.76% of the principal amount of the 2024 Debentures to be purchased. The increase in the repurchase right would result in an additional payment of $13.3 million on the $96.7 million outstanding 2024 Debentures. Holders also had 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 December 31, 2009 and 2008, interest expense relating to the 2024 Debentures was $0.1 million and $0.4 million, respectively. There were no outstanding 2024 Debentures at December 31, 2009 and as of September 30, 2009 there was outstanding $96.7 million of the 2024 Debentures. See the discussion of the debt exchange, below, for an explanation of the settlement of the 2024 Debenture obligation.

        In accordance with ASC 815, embedded derivatives must be bifurcated from the underlying debt instrument and valued as a separate financial instrument. The 2024 Debentures included a repurchase right for 113.76% of the principal amount of the 2024 Debentures on October 1, 2009 (the "premium put" or "derivative liability") 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 ASC 815. Should the premium put have value, any gain or loss on the fair value of the premium put will be reflected in current earnings. We estimated the approximate fair value of the premium put as the difference between the estimated value of the 2024 Debentures with and without the premium put feature. The fair value of the 2024 Debentures with the embedded premium put feature was estimated using a scenario analysis that incorporated the investment and settlement alternatives available to the debt holders in connection with the premium put feature. The scenario analysis valuation model combined expected cash outflows with market-based assumptions and an estimate of the probability of each scenario occurring. The fair value of the 2024 Debentures without the embedded premium put feature was 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 Debentures are convertible. Our analysis was premised on the assumption that the holder would act in a manner that maximizes the potential return, or "payoff," at any given point in time. Included in this premise was 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 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, as well as the Company's ability to refinance the contractual obligation. Based on our analysis, we determined that 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, the fair value of the premium put was positively correlated to the estimated amount of cash proceeds and other securities expected to be received at exercise. As a result of our valuation analysis the premium put was estimated to have a fair value of approximately $12.2 million as of September 30, 2009. Upon exercise of the put option related to the 2024

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009

Note 4. Debt (Continued)

Debentures on October 1, 2009 (see the discussion of the debt restructuring, below), the premium put fair value estimate became a contractual liability and was recorded at $13.3 million. The fair value of the premium put at September 30, 2009 was measured using Level 3 inputs. The primary driver of the change in fair value between these dates was the exercise of the premium put.

       ��On October 1, 2009, the Trustee of the 2024 Debentures provided a written notice to the Company that holders representing $95.7 million of the principal amount of the 2024 Debentures had exercised their repurchase rights under the Indenture. Pursuant to the written notice, the Company was required to deposit the repurchase price of $108.9 million with the Trustee as soon as practicable. As the Company had insufficient cash to repurchase all of the 2024 Debentures tendered for repurchase it could not fulfill its legal responsibility to repurchase the debt, which constituted an event of default under both the Indenture governing the 2024 Debentures and the Company's $30.0 million Senior Term Loan (as defined below). The Company subsequently completed a series of transactions restructure the 2024 Debentures and Senior Term Loan.

        As of September 30, 2009, we had outstanding a $30.0 million senior secured term loan with Whitebox VSC, Ltd. (the "Senior Term Loan"). The loan has a four-year term. As of December 30, 2009 and September 30, 2009, we had remaining debt issuance costs recorded as a debt discount$96.7 million in the amount of $0.4 for both periods and debt issuance costs recorded as Other Assets, in the amount of $1.2 million and $1.0 million, respectively. These fees are being amortized as interest expense over the term of the loan. The annual interest rate on the unpaid principal amount of the Senior Term Loan was the greater of 8.5% or LIBOR plus 4% during the interest period ending on the interest date. The Senior Term Loan is secured by substantially all of our assets. In connection with entering into the Senior Term Loan, 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 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. The terms of the Senior Unsecured1.5% Convertible Note Purchase Agreement was evaluated and it was determined to not be an embedded derivative as described in ASC 815; accordingly, it had no accounting impact on the financial statements. According to the terms of the Senior Term Loan, under certain circumstances, repayment of theSubordinated Debentures due 2024 Debentures required the Company to immediately pay to Whitebox the lesser of (A) the aggregate principal amount of the outstanding Senior Term Loan, including accrued and unpaid interest and (B) 25% of the aggregate amount of the 2024 Debentures redeemed. Concurrent with the settlement of the Company's obligation of the 2024 Debentures (see the discussion, below), the Company amended the terms of the Senior Term Loan.

(the "2024 Debentures). Effective October 16, 2009, the Company entered into the an amendment ofagreement to amend the Senior Term Loan with Whitebox. Pursuant to include a non-refundable prepayment fee equalthe amendment to 1.0% of the aggregate principal amount that is prepaid; an interest rate increase to 10.5% per annum in cash for the period from October 1, 2009 until October 16, 2009 paid as 8.5% per annum in cash, plus 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 Senior Term Loan, . As part of the debt restructuring transactions, the Company paidrepaid $5.0 million of the original $30.0 million principal balanceand agreed to an interest rate increase on the remaining $25.0 million outstanding. In 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 Company also entered into a Debt Conversion Agreement (the "Conversion Agreement") with the beneficial owners of more than 96.7% of the Senior Term Loan. Subsequent2024 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, 172,936,222 shares of common stock, and $50.0 million in newly issued 8.00% Convertible Second Lien Debentures Due 2014 (the "2014 Debentures") convertible into 222,191,111 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.

        In accordance with 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

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DecemberMarch 31, 20092010

Note 4.3. Debt (Continued)

$5.00.8 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 ofin additional principal prepayment. Any future proceeds of any sale or disposition of the Company's property is required to be used to reduce the principal balance of the note. The maturity date of the Senior Term Loan is unchanged.

        Pursuantamounts and fees paid to the guidance in ASC 470, the Company has determined that it has not received any concessions from Whitebox in connection with the amendment described above. As a result, the amendmentcreditors, compared to the Senior Term Loan will not be accounted for as a troubled debt restructuring. Further, based upon guidance in ASC 470, management has determined that the amendment of the note terms is properly accounted for as a debt modification. Accordingly, the amended Senior Term Loan was recorded at the principal amount to be repaid of $25.0 million, which is the $30.0 million dollar original principal balance less the subsequent period principal payment of $5.0 million.

        In connection with the Amendment of the Senior Term Loan, the Company incurred $0.1 million in fees to Whitebox on the $5.0 million repayment of principal. These fees were recorded as debt discount and netted against the debt on the December 31, 2009 balance sheet. Unamortized debt discount as of December 31, 2009 and September 30, 2009 was approximately $0.4 million for both periods. At December 31, 2009 and September 30, 2009, the effective interest rate on the Senior Term Loan was 16.46% and 10.61%, respectively. The effective interest rate on the Senior Term Loan for the 15-day period ended October 15, 2009 was 18.8384%. For the three months ended December 31, 2009 and 2008, interest expense associated with the Senior Term Loan was $0.8 million and $0.7 million, respectively. The Agreement governing the Senior Term Loan contains various restrictive covenants. As of December 31, 2009, we were in compliance with the terms of the covenants.

        Concurrent with the execution of the amendment of the Senior Term Loan, discussed above, the Company entered into a Debt Conversion Agreement (the "Conversion Agreement") with the beneficial owners of more than 96.7% of the 2024 Debentures (the "Noteholders") whereby the Noteholders agreed to exchange their 2024 Debentures for a combination of cash, shares of common stock, $50.0 million in newly issued 8.00% Convertible Second Lien Debentures Due 2014, (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").

        The Company used $10.1 million of cash to repay a portion of the 2024 Debentures amounts due as follows: $3.6 million was used to settle the Company's obligations with respect to the 2024 Debentures of holders that are not parties to the Conversion Agreement, $6.4 million was paid to parties to the Conversion Agreement in partial repaymentnet carrying values of the 2024 Debentures and $0.1related premium put derivative of $96.7 million in accrued interest was paid to all beneficial owners of the 2024 Debentures as of October 30, 2009.and $13.3 million, respectively.

        The Company issued the following instruments in exchange for the $100.0 million in aggregate principal amount and premium of the 2024 Debentures remaining after the $10 million cash settlement described above:

•

172,936,222 shares of common stock and 770,785 shares of Series B Preferred Stock in satisfaction of $50.0 million of the outstanding obligation under the 2024 Debentures. Each share of Series B Preferred Stock is convertible into 100 shares of common stock for an aggregate of 77,078,565 shares of common stock. The Series B Preferred Stock is non-voting and

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009

Note 4. Debt (Continued)

has a dividend preference equal to $0.001 per share of Series B Preferred Stock, which is payable when, and if, dividends are declared and payable with respect to the common stock; and

•

$50.0 million aggregate principal amount of 2014 Debentures which are convertible into 222,191,111 shares of common stock.

        On October 30, 2009, the Noteholders exchanged approximately 50.0% of their 2024 Debentures (after the partial repurchase for cash described in above) for 172,936,222 shares of common stock, and in some cases Series B Preferred Stock. Pursuant to the Conversion Agreement, the Noteholders were limited to ownership of 9.9% of the outstanding common stock ("Limit on Ownership"). Accordingly, Noteholders received one share of Series B Preferred Stock for every 100 shares of common stock that they would have otherwise received in the debt conversion in excess of the Limit on Ownership; this amount totaled 770,785 shares of Series B Preferred Stock. On the Closing Date, the fair value of the underlying common stock was $0.21 per share.        In connection with the debt exchange and the debt modification, the Company incurred third partythird-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 will be charged against equity in connection withwas allocated to the issuance of the common and Series B Preferred Stock.

        The Company issued $50.0preferred shares and charged against additional paid-in capital, and $1.4 million of 2014Debentures pursuantwas allocated to the Conversion Agreement in partial satisfaction of the 2024 Debentures. The 2014 Debentures bear cash interest at 8.0% per annum beginning on October 30, 2009 and payable semiannually in arrears on April 1 and October 1 of each year, commencing April 1, 2010 and maturing on October 30, 2014 unless earlier converted or repurchased. The 2014 Debentures are secured by second priority security interests on substantially all of the assets of the Company and its subsidiaries. This second priority security interest is subordinated to the lien existing under the Senior Term Loan. The 2014 Debentures are convertible into shares of common stock at a conversion price of $0.225 per share (equivalent to an initial conversion rate of approximately 4,444 shares per $1,000 principal amount of 2014 Debentures). Full conversion of the $50.0 million in aggregate principal amountissuance of the 2014 Debentures would resultand was capitalized in the issuance of up to 222,191,111 shares of common stock. In connection with the new debentures, the Company paid approximately $1.4 million in fees that are recordedother assets as debt issuance costs, in Other Assets on the accompanying December 31, 2009 balance sheet. These fees are beingto be amortized as interest expense over the term of the loan. Unamortized debt issuance costs as of DecemberMarch 31, 2009 associated with the 2014 Debentures2010 were approximately $1.4$1.3 million. For the three months ended December 31, 2009, interest expense associated with the 2014 Debentures was $0.7 million. The indenture governing the 2014 Debentures contains various restrictive covenants. As of December 31, 2009, we were in compliance with the terms of the covenants.

        The Company evaluated the common stock, 2014 Debentures and Series B Preferred Stock issued in exchange for the 2024 Debentures pursuant to the guidance in ASC 470. The Company determined that it has not received any concessions from the Noteholders pursuant to the Conversion Agreement and accordingly the transaction will not be accounted for as a troubled debt restructuring. However, due to the significant change in the expected remaining cash flows, of the settled 2024 Debentures as compared to the new instruments issued, the Company will account for the exchange of instruments in settlement for the 2024 Debentures pursuant to the Conversion Agreement as a debt extinguishment pursuant to the guidance in ASC 470.

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009

Note 4. Debt (Continued)

        The Company recorded the new instruments (i.e., the 2014 Debentures, common stock and Series B Preferred Stock) issued in extinguishment of the 2024 Debentures at fair value and recognized a $21.6 million loss for the difference between the aggregate fair values of the new instruments plus additional amounts and fees paid to the creditors compared to the net carrying value of the 2024 Debentures. For the purposes of calculating this loss on extinguishment, the net carrying amount of the 2024 Debentures include the $96.7 million amount of the 2024 Debentures and $13.3 million of the premium put derivative, recorded at fair value as required by ASC 470. Additionally, $0.8 million of fees paid to the Noteholders was included in the measurement of the loss pursuant to ASC 470.

        Management evaluated the terms of the financial instruments issued pursuant to the Conversion Agreement and identified a compound embedded derivative associated with the 2014 Debentures. Pursuant to ASC 815, embedded derivatives are required to be bifurcated from the host instrument and accounted for as a fair value instruments. Embedded derivatives are valued at each reporting period, with the change in the fair value reflected in the results of operations. The bifurcated compound embedded derivative is comprised of the terms of the 2014 Debentures which provides for a Make-Whole payment in certain circumstances and permits the Noteholders to demand redemption of the 2014 Debentures at a cash price equal to the 2014 Debentures on an as-if-converted basis in the event that 50% or more of the Company's common stock is exchanged for, converted into, or acquired for consideration which is less than 90% of the outstanding common stock. This redemption feature is in substance, a conversion settlement right where the holders could require the Company to settle in cash. The fair values of the 2014 Debentures and embedded derivatives were determined using a convertible bond valuation model within a lattice framework. These valuations were determined using Level 3 inputs. The valuation model combined expected cash outflows with market based assumptions regarding risk-adjusted yields, stock price volatility, recent price quotes and trading information of the Company's common stock into which the 2014 Debentures are convertible. On October 30, 2009, the fair value of the bifurcated compound derivative was $28.0 million. The compound embedded derivative will be valued at each reporting period, with the change in the fair value reflected in the Statement of Operations. At December 31, 2009, the fair value of the compound embedded derivative is $35.1 million. The $7.1 million increase in the fair value is reflected as interest expense in the accompanying Statement of Operations.

        The Company recorded the 2014 Debentures at fair value, which was $40.3 million at the date of the transaction. The difference between the fair value and the face value of the 2014 Debentures, the discount, will be amortized as interest expense over the life of the 2014 Debentures, increasing the Company's effective rate of interest on the 2014 Debentures from the stated rate of 8% per annum. The effective rate of interest will vary, decreasing over the life of the 2014 Debentures as the excess of the face value over the fair value of the notes is amortized. For the three months ended December 31, 2009, interest expense related to the discount was $0.3 million. At December 31, 2009, the effective interest rate on the 2014 Debentures was 12.64%.

        Immediately prior to the Closing, 230,905,580 shares of common stock were outstanding, none of which were held by the Noteholders that are parties to the Conversion Agreement. After the Closing, 403,841,802 shares of common stock were outstanding. Approximately 42.8%, or 172,936,222 of the common shares are held by the Noteholders that are parties to the Conversion Agreement. In addition to the outstanding shares, there are outstanding instruments that allow for the issuance of common

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009

Note 4. Debt (Continued)

stock. The Company has options and restricted stock units outstanding which, if converted, require the issuance of an additional 23.8 million shares of common stock. The Series B Preferred Stock is convertible into 77.1 million shares of common stock. In aggregate, the exercise or conversion of these outstanding instruments when combined with the outstanding shares of common stock after closing, requires the Company to have 504.7 million shares of common stock available for issuance.

        As of October 30, 2009, the Company had 500.0 million shares of common stock authorized. As a result, the Company did not have a sufficient amount of common stock authorized to permit the conversion of all the instruments as described above. Accordingly, pursuant to ASC 815, the Company determined, based on a first-in, first-out (FIFO) accounting policy based upon the issuance date of the instruments, that it did not have sufficient shares available for the conversion of all of the Series B Preferred Stock into shares of common stock. As such, 47,030 shares of Series B Preferred Stock or $1.0 million was initially classified as mezzanine equity. At each subsequent balance sheet date, the Company will adjust the carrying value of its Series B Preferred Stock classified in mezzanine equity up to its redemption amount until the Company has sufficient authorized shares. Subsequent to the close of the transaction on October 30, 2009 and during the quarter ended December 31, 2009, options to purchase approximately 250,000 shares of the Company's common stock expired, making those shares available for the potential conversion of shares of Series B Preferred Stock. As such, the Company reduced the number of shares of Series B Preferred Stock classified in mezzanine equity by approximately 2,500 shares. As of December 31, 2009, the Company adjusted the carrying value of its Series B Preferred Stock in mezzanine equity by approximately $0.1 million, reflecting the fair value of their common stock as of that date. On January 7, 2009, the Company's shareholders approved an increase in the number of shares common stock authorized to 5.0 billion shares.

        Prior to the closing of the debt restructuring transactions on October 30, 2009, as discussed above, during fiscal year 2009 the Company had classified its obligations related to the 2024 Debentures and the Senior Term Loan in short-term liabilities based on the exercise date of October 1, 2009 of the premium put option related to the 2024 Debentures.

        After the completion of debt restructuring transactions, the Company reclassified $111.3 million related to the portion of their obligations under the 2024 Debentures and the Senior Term Loan, from short-term liabilities to long-term liabilities on its Consolidated Balance Sheet as of December 31, 2009.

        As of September 30, 2009, the Company classified as short-term liabilities the $5.0 million cash prepayment of the Senior Term Loan to the $3.6 million of cash to settle with the holders of the 2024 Debentures that were not parties to the Conversion Agreement, and $6.4 million of cash paid in partial repayment to the holders of the 2024 Debentures that are parties to the Conversion Agreement; and $12.2 million related to the fair value of the derivative liability arising from the premium put obligation on the 2024 Debentures. This reclassification is in accordance with ASC 470.

Note 5.4. Fair Value Measurements

        In September 2006, the FASB issued ASC 820 Fair Value Measurements and Disclosures ("ASC 820"); originally issued as Statement of Financial Accounting Standards No. 157,"Fair Value Measurements." ASC 820 applies to other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements.

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009

Note 5. Fair Value Measurements (Continued)

        Effective June 30, 2009, the Company adopted the provisions of ASC 820 for financial assets and liabilities, as well as for any other assets and liabilities that are carried at fair value on a recurring basis. The adoption of this statement did not have an impact on our results of operation, financial position or cash flow, but required additional disclosures.

        ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:

        Financial instrument's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009

Note 5. Fair Value Measurements (Continued)

        Assets and liabilities measured at fair value on a recurring basis include the following at DecemberMarch 31, 20092010 and September 30, 2009 (in thousands):

        The following table provides a reconciliation of the beginning and ending balances for the derivative liability—premium put and derivative liability—embedded compound derivative liability measured at fair value using significant unobservable inputs (Level 3) (in thousands):

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2010

Note 4. Fair Value Measurements (Continued)

        The derivative liability—compound embedded compound derivative liability, which is included within other currentin long term liabilities, represents the value associated with the right of the holders of the 2014 Debentures associated with the equity conversion feature and thea "make-whole" feature of the 2014 Debentures.

        There is no current observable market for this type of derivative and, as such, we determined the value of the embedded derivative using a lattice-based convertible bond valuation model that combined expected cash outflows with market-based assumptions. The fair value of the 2014 Debentures without the embedded 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 2014 Debentures are convertible. On January 7, 2010 shareholders of the Company authorized the issuance of a total of 5,000,000,000 shares of common stock, providing the Company with sufficient common shares to satisfy potential conversion obligations. The Company will continue to mark the embedded derivative to market due to the conversion price not being indexed to the Company's own stock. The change in the fair value of the bifurcated compound embedded derivative is primarily related to the change in price of the underlying common stock. At the Company's option it can settle the embedded derivative in either cash or common shares. As of March 31, 2010, the Company has enough common shares to settle the entire obligation in shares. 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 470, the Company has reclassified the liability as a long-term liability on its Consolidated Balance Sheet as of March 31, 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 certain financial instruments could result in a different fair value measurement at the reporting date.

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009

Note 6.5. Income Taxes

        The provision for income taxes as a percentage of income from continuing operations before income taxes was (5.87%(9.73%) for the threesix months ended DecemberMarch 31, 20092010 compared to (0.36%(1.74%) for the comparable period in the prior year. For the year ending September 30, 2010, the Company's estimated effective tax rate is (5.87%(9.73%). 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 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):

        We have available federal research and development tax credit carryforwards of approximately $16.0 million, net of a FIN 48 allowance. The following table details the amount and years of expiration of the federal research and development tax credit carryforwards included in the deferred tax asset (in thousands):

        Timing differences included in the net deferred tax assets relate primarily tocredits, 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 hashad recorded a full valuation allowance against the deferred tax assets.

        FIN 48 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 no impact on retained earnings.

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DecemberMarch 31, 20092010

Note 6.5. Income Taxes (Continued)

        The total amount of gross unrecognized tax benefits increased by $29,000 for potential state tax liabilities. Included in the balance of unrecognized tax benefits of $26.2 million as of December 31, 2009 there were no unrecognized tax benefits that, if recognized, would impact the effective tax rate.

        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 (the "Noteholders") whereby the Noteholders agreed to exchange their 2024 Debentures for a combination of cash, shares of common stock, the New Notes (as defined below) and, in some cases, shares of Series B Preferred Stock. The Conversion Agreement was consummated on October 30, 2009 (the "Closing Date"). (See Note 4—3—Debt).

        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 maintainperformed a study to understandevaluate the status of net operating losses. Based on that study, we believe that, as a result of the conversion agreementConversion 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, 2010. As a result of the "ownership change",ownership change, the Company could realizeonly 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 the ownership change in future tax 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 permanent lossrecognition 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 portionnet operating losses, the cumulative effect of its U.S.applying this interpretation upon adoption on October 1, 2009, had no impact on retained earnings.

        The total amount of gross unrecognized tax benefits increased by $340,000 for potential federal and state deferred tax assets and lose certain built-in losses that have not beenliabilities. These amounts, if recognized, forwould impact the effective tax purposes. As of September 30, 2009, the Company's deferred tax asset was $422.1 million, which was fully reserved.rate.

        The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. As of DecemberMarch 31, 2009,2010, no material interest or penalties were accrued due to significant net operating losses.

        The Company is subject to taxation in the US and various state and foreign jurisdictions. The Company recently 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 the Company's tax years in which a tax net operating loss is carried forward to the present are subject to examination by the federal, state, and foreign tax authorities. Therefore, the Company cannot estimate the range of unrecognized tax benefits that may significantly change within the next twelve months.

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2010

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. As of DecemberMarch 31, 2009, 770,7862010, 760,786 preferred shares that are convertible into common stock on a 100:1 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 preferred shares outstanding as of December 31, 2009. In accordance with ASC Topic 480 "Distinguishing Liabilities from Equity" ("ASC 480"), we classified 44,533 Series B preferred shares as temporary equity in the mezzanine section of the balance sheet as of December 31, 2009. These shares were measured at $0.25 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 shares to a total of 5,000,000,000 shares of common stock 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.

        During the quarter ended March 31, 2010, 10,000 preferred shares were converted to 1,000,000 shares of common stock.

Common Stock

        As of March 31, 2010 and September 30, 2009 the Company was authorized to issue up to 5,000,000,000 and 500,000,000 shares of common stock, par value of $0.01 per share, respectively. On October 30, 2009, in connection with our debt restructuring, we issued 172,936,222 shares of common stock. As of March 31, 2010 and September 30, 2009, 404,841,802 shares and 230,905,580 shares of common stock were outstanding, respectively.

Stock Option Plans

        The Company has several share-based plans that have expired, but under which stock options are still outstanding. In February 2010, our board of directors approved a new plan, the 2010 Vitesse Semiconductor Corporation Incentive Plan (the "2010 Incentive Plan"). On May 11, 2010, the shareholders approved the 2010 Incentive Plan. The 2010 Incentive Plan permits the grant of stock options, stock appreciation rights, stock awards, restricted stock and stock units, and other stock or cash-based awards. It will replace the Vitesse Semiconductor Corporation 2001 Stock Incentive Plan.

        Under all stock option plans, a total of 80,097,525 shares of common stock have been reserved for issuance and 33,037,954 shares remained available for future grant as of March 31, 2010. The following

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DecemberMarch 31, 20092010

Note 7.6. Shareholders' Equity (Continued)

        On October 30, 2009, in connection with our debt restructuring, we issued 770,786 shares of Series B Preferred Stock pursuanttable summarizes compensation costs related to the terms of the Conversion Agreement. Each share of the Series B Preferred Company's share-based compensation plans (in thousands):

Stock is convertible at theOptions