UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


______________________________________





Form 10-K/A


Amendment No. 1





xANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the fiscal year ended September 30, 2012





OR


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





For the transition period from                 to





Commission file number 1-31614


______________________________________











VITESSE SEMICONDUCTOR CORPORATION


(Exact name of registrant as specified in its charter)


Delaware77-0138960(State or other jurisdiction ofincorporation or organization)(I.R.S. EmployerIdentification No.)





741 Calle Plano


Camarillo, California 93012


(Address of principal executive offices)(zip code)





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


______________________________________





Securities registered pursuant to Section 12(b) of the Act:


Title of each className of each exchange on which registeredCommon Stock, $0.01 par valueNASDAQ Global Market


Securities registered pursuant to Section 12(g) of the Act: None


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


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


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




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


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


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer.


Large accelerated fileroAccelerated filerxNon-accelerated filero(Do not check if smaller reporting company)Smaller reporting companyo


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


As of March 31, 2012, the aggregate market value of the voting and non-voting common equity held by non-affiliates was $71,163,660, based on the closing price on that date.  As of April 11, 2013 , there were outstanding 37,456,389 shares of the registrant’s Common Stock, $0.01 par value.


Documents Incorporated By Reference


Portions of the issuer's Proxy Statement for its 2013 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report.








EXPLANATORY NOTE


We are filing this Amendment on Form 10-K/A (this “Amendment”) of Vitesse Semiconductor Corporation (“we,” “our,” “us,” or the “Company”) to re-file the certifications included as Exhibits 31.1, 31.2 and 32.1 (the “Exhibits”) of the previously filed Annual Report on Form 10-K for the year ended September 30, 2012, filed with the Securities and Exchange Commission on December 4, 2012 (the “Original Filing”), to identify the correct periodic report in the Exhibits.  This Amendment also provides an updated list of exhibits in Part IV of the Original Filing.


Except as described above, no other changes have been made to the Original Filing. The Original Filing continues to speak as of the date of the Original Filing, and we have not updated the disclosures contained therein to reflect any events which occurred at a date subsequent to the filing of the Original Filing. Accordingly, this Amendment should be read in conjunction with our filings with the Securities and Exchange Commission subsequent to the filing of the Original Filing.













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VITESSE SEMICONDUCTOR CORPORATION


2012 ANNUAL REPORT ON FORM 10-K


TABLE OF CONTENTS





PART I4Item 1.Business4Item 1A.Risk Factors19Item 1B.Unresolved Staff Comments31Item 2.Properties31Item 3.Legal Proceedings31Item 4.Mine Safety Disclosures31PART II32Item 5.Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities32Item 6.Selected Financial Data34Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations36Item 7A.Quantitative and Qualitative Disclosures about Market Risk57Item 8.Financial Statements and Supplementary Data58Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure86Item 9A.Controls and Procedures86Item 9B.Other Information88PART III88Item 10.Directors, Executive Officers and Corporate Governance88Item 11.Executive Compensation88Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters88Item 13.Certain Relationships and Related Transactions and Director Independence88Item 14.Principal Accounting Fees and Services88PART IV88Item 15.Exhibits and Financial Statement Schedules88Signatures91





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PART I





SPECIAL NOTE REGARDING FORWARD‐LOOKING STATEMENTS


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


ITEM 1. BUSINESS





Overview


Vitesse Semiconductor Corporation (“we,” “us,” “Vitesse,” “our” or the “Company”) is a leading supplier of high-performance integrated circuits (“ICs”) that are used primarily by manufacturers of networking systems for Carrier and Enterprise networking applications.  Vitesse designs, develops and markets a diverse portfolio of high-performance, low-power and cost-competitive networking and connectivity IC solutions.  For more than 25 years, Vitesse has been a leader in the adoption of new technologies in Carrier and Enterprise networking.


Our customers include leading networking original equipment manufacturers (“OEMs”) and original design manufacturers (“ODMs”) worldwide such as Accton, Alcatel-Lucent,  Ciena, Cisco Systems, Dell, IBM, Ericsson, Fiberhome, Hewlett-Packard, Hitachi, Huawei Technologies, Juniper Networks, Meraki, Nokia Siemens Networks, Tellabs, ZTE, and ZyXel.  As of September 30, 2012, we operated domestic design centers at our headquarters and in Austin, Texas and four international design centers in Denmark, Germany, India, and Taiwan.


Vitesse was incorporated in the state of Delaware in 1987.  Our headquarters are located at 741 Calle Plano, Camarillo, California, and our phone number is (805) 388-3700.  Our common stock trades on the NASDAQ Global Market under the ticker symbol VTSS.


Industry Background


In the past decade, the communications industry has experienced dramatic growth in traffic on public and private communications networks, including those used by long-distance and local exchange service providers, as well as specialized networks, such as those used by Internet service providers.  The growth in traffic has been driven by rapid adoption of data-intensive applications such as Internet access, Internet Protocol (“IP”) video conferencing and telepresence, IP Television, expansion and upgrades in wireless networks driven by the bandwidth needs of smartphones, cloud storage, cloud computing, and software-as-a-service by Enterprises.


The most notable shift in the communications industry has been the migration from wireline to wireless communication as mobile devices are quickly surpassing wired computers for consumer use.  Enterprises are also increasingly adopting mobile phone and tablet devices.  According to the Worldwide Mobile Industry Handbook, there will be 8.5 billion mobile subscribers worldwide by 2016, and Cisco's Visual Networking Index predicts mobile data traffic to increase 26-fold over a five-year span.


We expect the pace of growth in bandwidth demand and the deployment of related support services to continue to accelerate well into the future.  As a result, telecommunications service providers (“Carriers”) and Enterprises need to accelerate the evolution of their networks to support such new services and increased bandwidth demands, while concurrently limiting capital expenditures and minimizing increases to power requirements.


To address these challenges, Carriers and Enterprises have initiated deployment of equipment capable of handling and transporting the various types of data-based traffic required more efficiently.  Communications providers are also upgrading infrastructure to serve the variety of unique communications standards and protocols that deliver and process data.  Increasingly, new applications and services are created and delivered using packet-based Ethernet networking technologies.  Networks using packet-based technology are often referred to as “Carrier Ethernet” in Carrier networks and “Converged Enhanced Ethernet” in Enterprise networks.


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In light of the growing demand to deploy the new packet-based network technologies, Carrier and Enterprise markets are forecasted to see significant growth and investment in the near future.  Substantial portions of the Carrier and Enterprise networks will be re-built based on these new technologies over the next five to 10 years.  We develop applicable IC solutions and target customers and platforms that sell into these high-growth networking markets.  In many cases, we have been at the forefront of leading Ethernet technology development and integration in Carrier and Enterprise networks, often being the first IC supplier to innovate, ahead of the standards.


Carrier Networking


The telecommunications service provider Carrier network, which includes networks delivering voice, data and video communication services to business, residential and mobile customers, has grown dramatically into a complex combination of interconnected networks.


Since the 1990s, the Synchronous Optical Network (“SONET/SDH”) had been the standard network transport protocol for Carrier networks throughout the world.  But, SONET/SDH was designed to carry voice and fixed circuit traffic.  New networks communicate using the packet-based IP implemented with Ethernet technology, which allows them to more readily scale in terms of services, bandwidth and capability, while offering lower power consumption and acquisition and operation costs.


To accelerate the deployment of packet-based IP networks, the industry has developed standards that will upgrade traditional Ethernet to “Carrier Ethernet.”  It is, in effect, an adaptation of Ethernet to provide similar operational features and functions, such as reliability, manageability, network timing synchronization and scalability, which have traditionally been provided by telecom protocols such as SONET/SDH.  As Carrier Ethernet standards evolve, networks based on Ethernet technology will gradually replace legacy telecommunications networks.  The transition to Carrier Ethernet, which is in its infancy, will be driven by access and edge networks, particularly Mobile Access networks for 3G and 4G/LTE deployments.  We are focused on developing IC solutions for these high-growth networks, collectively called the “IP Edge.”


The most dynamic segment of this market is Mobile Access, driven by new build-outs for 4G/LTE services.  Initially, 4G/LTE requirements will be served from traditional macro base stations upgraded for 4G/LTE.  But, as consumers buy more 4G/LTE-ready mobile devices, wireless small base stations, often called small cells or pico-cells, will be used to expand capacity and coverage in dense urban areas.  Packet timing and synchronization become more important in small cell deployments due to satellite visibility and overlapping coverage.  We lead the industry in developing new technology for timing within packet-based Ethernet networks, specifically for mobile base stations, small cells, and fiber and microwave backhaul.


Enterprise Networking


Enterprise networks include equipment deployed in businesses, offices and homes for voice, data and video communications.  Enterprise networks range from large, complex networks for financial institutions, retailers and other large businesses, to LANs for the home and small office.  Typical categories are large enterprise, data center switching, small-medium enterprise (“SME”), small-medium business (“SMB”) and small office/home office (“SOHO”).  Networks generally include equipment such as routers, switches and wired and wireless gateways and connect computers to servers, servers to storage systems and LANs to public Carrier networks.


Similar to Carrier networks, Enterprise networks and data centers are undergoing an evolution to provide more bandwidth, reliability, interoperability, and scalability.  The advent of cloud computing provides another important growth trend.  Cloud computing will increasingly move Enterprise applications and data into secure hosted applications in the cloud, where they can be securely accessed from multiple locations, multiple devices and multiple technologies.  Cloud computing will increase the need for Enterprises and data centers to provide high-bandwidth, high-reliability networks to interconnect elements of the cloud.  We are strategically addressing Enterprise networking with our low-power SME Ethernet switching solutions and our IP Edge solutions to provide managed and secure access to the cloud, as well as leveraging our high-speed connectivity product line to provide reliable high-speed connectivity between computing and storage devices in large data center switches and servers.


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Strategy


Our goal is to be a leading supplier of high-performance ICs for the global communications infrastructure markets, primarily for IP Edge Carrier networking and Enterprise networking markets.  In order to attain this goal, our strategy is composed of the following elements:


Target Large and Growing Markets


We target high-growth areas in the communications infrastructure market to provide solutions for the major networking protocols that perform common networking functions required by the most widely deployed networking equipment.


Overall, we estimate the total addressable market for our IC solutions to approach $2.1 billion by 2016 with a compound annual growth rate (“CAGR”) of approximately 17%.


We have focused our research and development (“R&D”) on networking markets that are at the beginning of a major investment cycle.  By identifying technology disruptions and solving specific customer problems, we can take advantage of market transitions and increase our market share.


The Carrier networking equipment market is expected to grow rapidly as a result of the increased bandwidth generated from the deployment of new wired and wireless applications.  Deployment of new 4G/LTE networks, including macro and small cell base stations and backhaul equipment will be the drivers for growth in mobile access.  In addition, the emerging trend toward Enterprise cloud computing will drive demand for significantly more bandwidth and complexity into Carrier networks.


Based on industry market projections and internal market growth estimates, our new portfolio of low-power, Carrier Ethernet switch engine and physical layer (“PHY”) products for this segment and our other products currently in development are expected to address an IC market that is growing at an estimated annual rate of 28%, approaching $700 million by 2016.  In addition, we address Carrier networking with our Transport processing product line consisting of both mature products and our new Ethernet-optimized Optical Transport Network (“OTN”) PHYs, which add $200 million to the potential market we can serve.


The Enterprise networking market is driven by the rapid transition to Gigabit Ethernet and 10 Gigabit Ethernet, convergence of data center protocols to Ethernet, and government initiatives worldwide to reduce power consumption in networking equipment.  Our new SME switch and PHY products introduced in 2012 and 2011, as well as our devices currently in development, address substantially larger segments of the Enterprise networking market than our prior generation of products. Based on industry market projections and our internal market growth estimates, we expect the market that can be addressed by our products in this segment will approach $510 million by 2016.


In addition to our switching and PHY products developed specifically for Carrier and Enterprise applications, we develop a number of products that address high-speed signaling and connectivity issues in a broad variety of systems.  As bandwidth requirements continue to accelerate, more systems require solutions for high-speed signal integrity problems within and between high-capacity computing and communications systems.  Our products address a need to transport signals at ever increasing speeds across fiber, cable and copper backplane applications.  We estimate the addressable market for our devices to be on the order of $300 million by 2016.


New products in development in adjacent market segments make up the remaining portion of the $2.1 billion addressable market for our IC solutions.


Focus on Networks in Transformation


Ethernet networking is the dominant networking technology for today's IP traffic, deployed in both Carrier and Enterprise networks.  Our focus within Carrier networks is the rapidly growing IP Edge.  Major components of the IP Edge are Mobile Access and Ethernet Business Services.  For Enterprise networks, our focus is on SME-managed solutions, primarily with low power consumption and security.  Our high-speed Connectivity Solutions solve signal integrity problems in both Carrier and Enterprise networks, and cross over into multiple adjacent markets such as video and storage.


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Carrier Networks


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|• | Mobile Access:  With the explosion of data and video traffic from smartphones and tablet devices for both personal and business use, concurrent with the introduction of 4G/LTE networks worldwide, the IP Edge is dominated by Mobile Access.  Mobile Access networks, 4G/LTE networks in particular, are fast transitioning from obsolete E1/T1 networks to all-IP/Ethernet networks that enable the delivery of services rather than just connectivity.  These networks deploy a completely new Mobile Access architecture that requires very sophisticated packet-processing technology and very accurate synchronization and timing technology.  Networks will become more distributed, with small cell base stations and backhaul being the primary growth drivers.  Our new Ethernet switch engines have been developed to provide better packet processing capability than complex and expensive network processors, at half the cost and half the power.  We also have best-in-class solutions to address the Mobile Access network timing with our VeriTimeTM Synchronous Ethernet (“SyncE”) and SynchroPHYTM and VeriTime switch-based timing solutions.  Our VeriTimeTM technology with 1588v2 packet-based timing meets the needs of current and future 4G/LTE deployments.  Our switch engine and SynchroPHY solutions offer low power, critical for LTE deployments including small cells attached to buildings and small structures, such as light posts and traffic signals.

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|• | Ethernet Business Services:  We specialize in transitioning access, metro, and core Carrier networks to deliver new Ethernet-based services over a variety of network transport technologies such as native Carrier Ethernet, Packet Transport Networks (“PTN”), Ethernet-over-SONET/SDH (“EoS”), and OTN.  Our customers provide equipment to enable the transition to high-bandwidth Ethernet-based business services required to deliver best-in-class audio/video experience for telepresence and high-performance cloud-based services, better quality-of-service (“QoS”) operations, administration and maintenance (“OAM”), and security.  In 2012, we introduced our ServalTM Switch Engine, which we believe is ideally suited to provide complete Metro Ethernet Forums Carrier Ethernet 2.0 (“MEF CE 2.0”) features required for Ethernet Business Service deployment within a very low-cost and low power solution.

Enterprise Networks


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|• | Green SME Ethernet Solutions:  Networks are transitioning from fast Ethernet desktops and network attachments to Gigabit Ethernet and 10 Gigabit Ethernet (and higher speeds in data centers) with highly integrated, low-power designs.  The need to deploy “Green Networks” has led to the Energy Efficient Ethernet (“EEE”) standard that significantly reduces power consumption in Ethernet networks.  We are a leading provider of EEE compliant PHY and switching products for Enterprise and consumer networking.  We also specialize in supporting the convergence of multiple Enterprise networks for data, storage, audio, and video onto a common Ethernet-based networking infrastructure supported by our superior network timing solutions.

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|• | Cloud-based Enterprise Networking Solutions:  As businesses migrate toward Enterprise cloud services, cloud-managed Enterprise networking, security and storage solutions are a new and fast growing business segment.  We provide Gigabit Ethernet switches that are optimized in features and power specifically for cloud-based management and services.

Carrier, Enterprise, and Data Center Networks


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|• | Connectivity Solutions:  In both the Carrier and Enterprise markets, and in some closely adjacent markets, we develop products to solve high-speed signaling issues arising from ever-increasing signal speeds over copper traces on boards, across connectors, backplanes, and copper cables, as well as optical fiber, particularly at speeds of 10 Gigabit and above.  Our FlexEQTM adaptive equalization technology reduces the cost of transmission by allowing signals to travel farther, faster and error-free over copper and fiber.

Develop and Leverage Differentiating Technology in Market Leading Products


We use our 25 years of design expertise to introduce innovative products that solve our customers' design challenges.  Our advanced technology and intellectual property developments will seek to exploit major technology trends and disruptions within networking equipment including:


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|• | A dramatic shift towards IP “packet networking” from “circuit networking” requiring deployment of new systems based on Ethernet technologies, rather than the older SONET/SDH technologies.This shift will provide high-growth opportunities for silicon solutions that address new systems developed with Carrier Ethernet and Converged Ethernet technologies.  We have created unique packet-processing technologies that we view as critical as networks become dominated by Ethernet-based data and video traffic.  Our solutions target the segments of the network that we believe will transition most quickly, including the IP Edge and Mobile Access.

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|• | Growing demand for higher bandwidth and higher capacity networks, particularly for mobile applications.The mobile access market is going through a major technology disruption as existing networks are unable to accommodate the rising growth in mobile traffic.  Our new Carrier Ethernet switch engines and carrier-class Gigabit Ethernet SynchroPHY and 10 Gigabit Ethernet PHYs and 10 Gigabit Ethernet SynchroPHY OTN PHY simplify the implementation of the multi-platform 3G and 4G/LTE network equipment.  Our revolutionary new low-power Serval switch engine addresses power-constrained deployments such as small cell and pico-cell implementations as well as Network Interface Devices (NID) for enterprise access to cloud services.  Our switch engines are typically half the cost and half the power compared to other solutions such as network processors or Field Programmable Gate Arrays (“FPGAs”).

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|• | Increasing requirements for synchronization in all types of networks, particularly Mobile Access.Many networks, in particular Mobile networks, need to be synchronized to highly accurate timing sources in order to operate.  With the migration to packet-based networks, new techniques for timing synchronization have been developed to satisfy the demands of mobile access, especially for 4G/LTE and LTE-Advanced deployments.  Our patented VeriTime technology provides innovative and unique timing features in both our switch engines and SynchroPHY products.  Accurate packet network timing is also required in Industrial Ethernet applications and for audio/video Ethernet applications.

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|• | A move to systems solutions from IC solutions.With higher levels of integration and more systems in the Carrier IP Edge and Enterprise SME markets using our switch engines and SynchroPHY timing PHYs, our software solutions will play a significant role.  Many of our IP Edge target systems are using SynchroPHY timing PHYs and Carrier Ethernet Switch Engines for the first time, so this is an opportunity to establish a software beachhead in these market segments and expand from there.

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|• | A move towards “Green Networking” to reduce power dissipation in Carrier and Enterprise network elements.We continue to be ahead of the industry in deploying power-saving techniques for networking, and at the forefront of the EEE standardization effort.  We were the first to introduce low-power EcoEthernetTM Copper PHY technology, also known as ActiPHYTM and PerfectReachTM, which reduces power dissipation by more than 50% compared with traditional devices.

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|• | A trend to higher speeds requiring solutions for signal integrity challenges.We provide world-class connectivity solutions for a broad variety of applications from 100 Mbps to 10 Gbps and above.  Our high-performance, mixed-signal, CMOS technology provides superior signaling capabilities at the lowest power and cost.

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|• | The transition of LANs from Fast Ethernet to Gigabit Ethernet.LANs now use the Ethernet transmission protocol operating at speeds of 10 Mbps or 100 Mbps (Fast Ethernet).  Only recently has Gigabit Ethernet started to appear on the desktop.  In order to support the migration of desktop computers to these higher data rates, LAN backbones and servers are increasingly deploying the Gigabit Ethernet and 10 Gigabit Ethernet standards.

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|• | The need for companies to buy or license intellectual property rather than developing it internally.In several markets, we are leveraging our key technology advantages and technology cores into licensing opportunities with third parties for use in adjacent or similar markets to Carrier and Enterprise networking equipment that do not directly compete with our customer base, allowing us to serve a much larger market.  Over the past four years, we have had licensing arrangements with four of the top 20 semiconductor companies.

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|• | Increasing complexity of ICs for communications applications and a related trend for OEMs to purchase rather than manufacture these ICs.We believe OEMs are increasingly focusing their efforts on providing superior software and services as a means of differentiating themselves from their competition.  This increased focus, in conjunction with the rising costs of developing custom Application Specific Integrated Circuits (“ASICs”) and maintaining the associated component design teams, has led OEMs to work with companies such as ours to develop Application Specific Standard Products (“ASSPs”) that can be flexibly used within their systems.  As a result of this trend away from customer-specific ASIC developments, we believe the market for our products will increase in the future.

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License Intellectual Property


In 2008, we began to leverage our substantial intellectual property portfolio to generate revenue.  We offer a variety of technology “cores” for license and design services in process technologies.  To date, our primary focus has been our Gigabit Ethernet Copper PHY and switch cores.  In 2010, we also announced the availability of licenses for our enhanced forward error correction (“eFEC”) technology for implementation in ASICs, Systems-On-a-Chip (“SOCs”) and FPGAs.


We anticipate continued success licensing our technology to systems suppliers and non-competing semiconductor suppliers.  We believe our position as an innovator and low-power leader makes us a compelling supplier.  In many cases, we can also leverage intellectual property licensing partnerships to accelerate our partners' product developments and extend our process technology roadmaps.


Build Customer Relationships and Partnerships


Our customers are savvy buyers who carefully analyze and evaluate our ability to serve them reliably with products and technology, on a continuous basis, over the long term.  A key element of our strategy is to work closely with our customers' product managers and systems design teams, as well as business unit and corporate management teams.  These key relationships enable us to acquire a detailed understanding of our customers' business and technology needs.  Using this knowledge, we develop solutions to address our customers' design challenges and provide them with differentiated feature sets for their systems.


Our worldwide Sales, Marketing, and Application Support organizations work together to keep an open and ongoing dialog with our customers to highlight milestones and progress on our stated initiatives.  Our Sales team is responsible for servicing our Tier 1 and Tier 2 customer requirements.  We rely on distributors for our Tier 3 customers and for order fulfillment for some Tier 1 and Tier 2 customers.


Product Overview


We develop and manufacture a wide variety of innovative products that are marketed to Carrier and Enterprise networking, as well as data center infrastructure OEMs.  While many of our products are targeted at specific markets, many of them find applications in multiple types of networking equipment across all of our focus markets.  We introduced over 60 new products to the market over the last three years, focused on Ethernet technology that can be leveraged across large markets in Carrier and Enterprise networking.  A recent history of new product introductions can be found on our website at www.vitesse.com.  The information on our website is not incorporated by reference into, and is not made a part of, this report.


Our products fall into the following product lines:


Ethernet Switching Product Line


Our Ethernet Switching product line addresses Gigabit Ethernet and 10 Gigabit Ethernet applications in Carrier and Enterprise markets.  This product line consists of Carrier Ethernet switch engines, Enterprise Ethernet switches, Ethernet Media Access Controllers (“MACs”), and Ethernet transceivers (“Copper PHYs”).


Ethernet Switching Product LineEquipment Deploying our SolutionsVitesse SolutionsCarrier NetworkingCarrier Ethernet ProductsMobile Base Stations and Small CellsVeriTime Carrier Ethernet Switch EnginesCell Site Routers and GatewaysEthernet MACsIP Edge RoutersGigabit Ethernet Copper and Dual-Media PHYsMicrowave Mobile Backhaul SystemsSynchroPHY Gigabit Ethernet Copper and Dual-Media PHYs with VeriTimeCarrier Ethernet Switch/RoutersAggregation Switches and RoutersPacket Optical Transport SystemsEnterprise NetworkingEnterprise ProductsManaged Enterprise SwitchesSME Ethernet SwitchesStackable Enterprise SwitchesSME Ethernet Switches with integrated Copper PHYsSecurity AppliancesStackable Enterprise Ethernet SwitchesGaming ConsolesEthernet MACsIndustrial Ethernet SwitchesGigabit Ethernet Copper and Dual-Media PHYs


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Carrier Ethernet Switch Engines:


Carrier networks are transitioning to packet-based IP/Ethernet technologies.  Our latest generation switch engines target these applications with innovative features that enable true Carrier Ethernet networking.  These products combine the packet processing features typically seen in network processors, together with Layer 2 and Layer 3 Ethernet switch functions, our VeriTime timing and synchronization technology, and an on-board CPU into a single chip at substantially lower cost and lower power than competing discrete and integrated solutions.  Additionally, they meet MEF CE 2.0 requirements for mobile backhaul and mobile access equipment, providing forward compatibility for future value-add services.  Our new products include two major switch engine families, Jaguar and Caracal, created to address a broad range of applications in the access and edge of the networks.  In 2012, Serval, our third family of switch engine products was added to the products portfolio.  Serval is aimed specifically at applications including customer premise equipment (“CPE”), access network equipment, wireless base stations including small cells, and Mobile Access equipment including fiber and microwave wireless backhaul equipment.


Enterprise Ethernet Switches:


In Enterprise applications, our Ethernet switches are targeted at desktop, workgroup and LAN infrastructure within SME and SMB markets and enable these systems to migrate to Gigabit Ethernet speeds in a cost-effective manner.  To date, we have shipped over 230 million Gigabit Ethernet ports into Enterprise applications.  Our Ethernet switch products provide a high-level of integration, leading to a significant reduction in part count, power consumption, and material cost for our customers.


Ethernet MACs:


Ethernet MACs provide addressing and channel control mechanisms that enable multiple network nodes to communicate within a multipoint network.  Our MAC products are designed for use in Enterprise class modular Ethernet switch platforms and EoS and OTN systems used in access, metro and long-haul Carrier networking systems.  Our Ethernet MACs reduce software development costs for both Gigabit Ethernet and 10 Gigabit Ethernet applications by providing single-chip solutions.


Gigabit Ethernet Copper and Dual-media Transceivers (PHYs):


Copper PHYs allow transmission of 10/100/1000 BASE-T data over Category 5 (“Cat5”) copper cable and fiber optic cabling.  This technology is widely deployed in personal computing, home electronics and LAN applications to Enterprise and data center applications, and more recently in Carrier networking applications.  We offer a broad range of products in this category, including single, quad and octal devices that offer a combination of low power, low cost and high integration.  Our SimpliPHYTM Copper PHYs provide industry-leading low-power operation generally using power saving features such as ActiPHY and PerfectReach and EEE technology that provide energy savings of up to 80%.


SynchroPHY Gigabit Ethernet Copper and Dual-media Transceivers (Phys) with our VeriTimeTM 1588v2 Packet timing and synchronization:


Our SynchroPHY Gigabit Ethernet PHY is a pin-compatible enhancement to our prior generation dual-media device, offering our VeriTime enhanced packet timing and synchronization technology.  It is the first device on the market supporting both IEEE standards 1588v2 and Y.1731, two critical technologies.  In 2012, we reported network performance results to the Telecommunication Standardization Sector, documenting VeriTime's < 10ns per hop accuracy over a nine-hop IEEE1588v2 Transparent Clock (TC) network, fulfilling TD-LTE and LTE-Advanced requirements in real-world tests today.


Connectivity Product Line


Our Connectivity product line includes mixed-signal physical layer devices for connection of systems via optical fiber, copper cable or backplanes.  These devices are deployed across a very wide range of applications and markets.  Connectivity product lines include Physical Media Devices (“PMDs”), PHYs, crosspoint switches, and signal integrity devices.


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Connectivity Product LineEquipment Deploying our SolutionsVitesse SolutionsCarrier NetworkingCarrier Ethernet ProductsMobile Base StationsPHYs:Cell Site Routers and Gateways1/10 Gigabit Ethernet PHYsincluding VeriTime-enabled SynchroPHY 1/10Gigabit Ethernet PHYsIP Edge Routers10G EDC PHY/CDRsEnterprise WAN Routers10G SONET/SDH-class PHYsCarrier Ethernet Switch/RoutersSignal Integrity Re-timersAggregation Switches and RoutersCrosspoint SwitchesMulti-Service PlatformsLaser DriversWDM Optical Transport SystemsTransimpedance AmplifiersPacket Optical Transport SystemsPost AmplifiersEnterprise NetworkingEnterprise ProductsData Center SwitchesPHYs:Core Routers and Switches1/10 Gigabit Ethernet PHYsBroadcast Video Routers10G EDC PHY/CDRsFibre Channel Switches & RoutersSignal Integrity DevicesBlade ServersCrosspoint SwitchesWDM Optical Transport SystemsLaser DriversPacket Optical Transport SystemsTransimpedance AmplifiersSFP and SFP+ Optical ModulesPost AmplifiersXFP ModulesPON Optical ModulesFibre Channel Optical Modules


PMD:


A PMD is a mixed signal device that connects an electrical signal to an optical component.  We offer laser drivers, transimpedance amplifiers and post-amplifiers operating at speeds ranging from 1.25 Gbps to 14 Gbps.  These products are currently being used in a variety of applications from Carrier long-haul and metro networks to Enterprise Gigabit Ethernet and 10 Gigabit Ethernet networks including storage networks and systems.  We also develop products for application in Passive Optical Networks (“PON”) that enable Fiber-to-the-Home (“FTTH”) deployments.  Typically, these products are sold to optical module manufacturers who service equipment manufacturers, or directly to OEMs, who build discrete board-based solutions.


PHYs:


A PHY converts high-speed analog signals to low-speed digital signals in fiber optic, copper cable and backplane applications. We incorporated many industry-leading proprietary features into our PHY products such as VScopeTM, an integrated equalization waveform viewing technology and FlexEQTM, an adaptive equalization and electronic dispersion compensation technology.  These technologies dramatically improve signal integrity transmission and reception for applications at 6 Gbps and above.  We offer a broad line of PHY products for the Ethernet, SONET/SDH and Fibre Channel markets at speeds ranging from 155 Mbps to 15 Gbps.


We introduced highly accurate IEEE 1588v2 packet timing and synchronization technology, called VeriTimeTM into our 1 and10 SynchroPHY Gigabit Ethernet transceivers allowing OEMs to upgrade their equipment with fully functional packet timing capabilities at low incremental cost and development effort.  Our 10 Gigabit Ethernet SynchroPHY is a pin-compatible enhancement to our prior generation device.  This device offers enhanced packet timing and synchronization technology supporting IEEE standards 1588v2 and Y.1731 and is the first device on the market to support both of these critical technologies.  We performed interoperability testing in a variety of forums that demonstrate that VeriTime is dramatically superior to our competition.


Crosspoint Switches:


Our crosspoint switches provide asynchronous, unblocked switching matrices from 4x4 to 144x144 with industry-leading performance up to 11 Gbps.  This range of speeds and package form factors enable a wide variety of solutions for SONET/SDH, switching, blade servers and data center switches, high-density routers and HDTV video equipment.


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Signal Integrity Devices:


We provide a broad portfolio of devices for generic signal integrity applications including the high-speed transmission of signals over backplanes and copper cables.  These devices include repeater and re-timer ICs that support data rates from 155 Mbps to 15 Gbps for protocols, including, Gigabit Ethernet, Fibre Channel, Serial Attached SCSI and Serial Advanced Technology Attachment.  Our products are deployed in a wide variety of systems in Carrier, Enterprise, data center, and HD video applications, both within systems and connecting between systems.


Transport Processing Product Line


Our Transport Processing product line addresses the needs of Carrier network providers as they undergo a migration to new Ethernet packet-based networks that provide increased bandwidth and lower cost.  Transport processing products include a complete line of framers, mappers and switches for SONET/SDH, EoS, and OTN applications.  Latest generation products, as well as our new products in development, integrate increasing amounts of Ethernet packet processing technology.  These products operate at speeds up to 10 Gbps and are targeted principally for next-generation systems in the core and metro segments of the Carrier network.  Our latest generation of products includes our patented VeriTime timing and synchronization technology.


Transport Processing Product LineEquipment Deploying our SolutionsVitesse SolutionsSONET/SDH Optical Transport10G SONET/SDH Framers/MappersSONET/SDH Grooming Switches10G EoS Framers/MappersSONET/SDH Add Drop MultiplexorsSONET/SDH TSI SwitchesDWDM Optical Transport Systems10G OTN Framer/MappersCarrier Ethernet Switches and Routers10G OTNAggregation Switches and RoutersSynchroPHY 10G OTN PHYs with VeriTimeMulti-Service PlatformsDWDM Optical Transport SystemsPacket Optical Transport Systems


Framers/Mappers:


Framers are devices that take incoming data traffic from the PHY and process the framing information used for transporting data.  Mappers convert data from one protocol to another.  We offer a complete line of Framers and Mappers for SONET/SDH, EoS and OTN applications.  Our latest generation products, as well as our new products in development, integrate increasing amounts of Ethernet packet processing technology.  These products operate at speeds up to 10 Gbps, and are targeted principally for next-generation systems in the core and metro segments of the Carrier networks.


We also introduced the first SynchroPHY OTN mapper/PHY in the market with VeriTime.  We believe these capabilities will become important as switches and routers add OTN mapping capability to their interfaces to directly interwork with WDM Transport systems, yet also need the precise packet timing capabilities required for advanced Mobile Networks.


Switches:


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


Market Overview


We classify product revenues into three markets: (1) Carrier Networking; (2) Enterprise Networking; and (3) Non-Core.  These classifications reflect the major trends in our product lines and how they map into our customer base.  Additionally, we have an intellectual property revenue stream introduced in the last quarter of 2008.


Our ability to achieve sustained revenue growth depends on several factors including, increasing demand from our end markets; our ability to capture and maintain market share in growing markets; the rate at which these new markets ramp into


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production; and the continuing trend by systems companies to outsource the designing and manufacturing of ICs to companies such as ours.


Carrier Networking


The global telecommunications Carrier network, which includes networks delivering voice and data services, has grown dramatically into a complex combination of networks.  To address the technical and operational challenges created by the explosive growth of video bandwidth demand requirements, Carriers are increasingly trying to map Ethernet data services, particularly on mobile devices, for their users.  This growth has caused a huge dilemma for service providers who must deliver services to an expanding base of subscribers while simultaneously reducing costs.


To address these challenges, Carriers need to replace their legacy SONET/SDH networks with new all IP/Ethernet-based networks.  Broadly, Ethernet technology upgraded to meet these requirements is being referred to as “Carrier Ethernet.”  Carrier Ethernet networks for mobile networks increasingly also require accurate synchronization using packet-based timing based on the IEEE1588v2 protocol.  The upgrade is essentially an adaptation of Ethernet to provide the same features and functions that have traditionally been provided by telecom protocols such as SONET/SDH and Plesiochronous Digital Hierarchy (“PDH”).  Because of the complexity of the Carrier networks, products sold into these applications have long design cycles typically ranging from two to four years from design start to production, and have long life cycles, typically five to 10 years or more.


We provide a variety of products for Carrier networking applications, including products for the newly emerging Carrier Ethernet applications as well as for legacy SONET/SDH and EoS applications.  These products generally include:


Carrier Networking ProductsProduct LineVitesse SolutionsEthernet SwitchingCarrier Ethernet Switch EnginesEthernet MACsGigabit Ethernet Copper and Dual-Media PHYsSynchroPHY Gigabit Ethernet Copper and Dual-Media PHYs with VeriTImeConnectivity10 Gigabit Ethernet PHYsSynchroPHY 10 Gigabit Ethernet PHYs with VeriTime10G EDC PHY/CDRsSignal Integrity DevicesCrosspoint SwitchesLaser Driver, Transimpedance Amplifiers, Post AmplifiersTransport ProcessingSynchroPHY 10G OTN Mapper/PHYs with VeriTime10G SONET/SDH Framers/Mappers10G EoS Framers/MappersSONET TSI Switches10G OTN Framer/MappersSynchroPHY 10G OTN Mapper/PHYs with VeriTime


Enterprise Networking


Enterprise networks generally include equipment dedicated to the communication of voice and data services within large Enterprise organizations.  An Enterprise network is typically composed of one or more LANs interconnecting computer systems, including workstations and servers, as well as one or more Service Access Network (“SAN”).  Enterprise networks typically also include broadband connections to Carrier networks for the broader communication of voice and data outside of the Enterprise.  Enterprise networks are usually classified into groups depending on their size and complexity.  Categories are large Enterprise, data center switching, SME, SMB and SOHO.  The complexity of products within the Enterprise networks varies dramatically based on the market segment.  Products at the “low-end” of the network, in SOHO, SME and low-end SME applications, typically have fast design cycles on the order of six to 12 months and short life cycles, on the order of three to five years.  Products sold into applications at the “high-end” of Enterprise, such as data center switching have longer design cycles, typically one to two years from design start to production and long life cycles, typically three to seven years or more.


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We provide a variety of products into Enterprise networking applications.  These products generally include:


Enterprise Networking ProductsProduct LineVitesse SolutionsSwitchingSME Ethernet SwitchesSME Ethernet Switches with integrated Copper PHYsStackable Enterprise Ethernet SwitchesEthernet Media Access ControllersGigabit Ethernet Copper and Dual-Media PHYsConnectivity10 Gigabit Ethernet PHYs10G EDC PHY/CDRsSignal Integrity DevicesCrosspoint SwitchesLaser Driver, Transimpedance Amplifiers, Post Amplifiers


Non-Core


Products that do not substantially sell into the Carrier or Enterprise networking markets, or have no current or future investment, have been classified as Non-Core products.  Today, these products include legacy products from our Fibre Channel storage products line, our Raid-on-Chip processor line, our network processor product line, and our packet-based switch fabric product line.  Many of these non-core products have approached end-of-life status.  We have made no material R&D investments in these products in the last five years.


Customers


We market and sell our semiconductor products directly to leading OEMs and ODMs, and through third-party electronic component distributors and manufacturing service providers.  Sales to distributors accounted for approximately 47.5% , 42.0% and 50.4% , of our net revenues for fiscal years 2012, 2011 and 2010, respectively.  For fiscal year 2012, distributors Nu Horizons Electronics and WPG Holdings accounted for 13.5% and 10.7% , respectively, of our net revenues.  For fiscal year 2011, distributor Nu Horizons Electronics and direct customer Huawei Technologies accounted for 20.6% and 10.3% , respectively, of our net revenues.  For fiscal year 2010, distributor Nu Horizons Electronics and direct customer Huawei Technologies accounted for 23.9% and 13.3% , respectively, of our net revenues.


Our top five OEM customers for fiscal year 2012 were Alcatel-Lucent, Cisco, Ciena, Huawei Technologies, and ZTE.  Our sales to these customers accounted for approximately 27.5% of our fiscal year 2012 net revenues.  Our top five OEM customers for fiscal year 2011 were Alcatel-Lucent, Cisco, Huawei Technologies, Tellabs, and ZTE.  Our sales to these customers accounted for approximately 28.6% of our fiscal year 2011 net revenues.  Our top five OEM customers for fiscal year 2010 were Alcatel-Lucent, Cisco, Huawei Technologies, Nokia Siemens, and ZTE.  Our sales to these customers accounted for approximately 32.4% of our fiscal year 2010 net revenues.


Our customer base is widely dispersed geographically.  Sales to customers located outside the United States have historically accounted for a significant percentage of our revenue, a trend we expect to continue.  On a bill-to basis, international sales constituted 65.2% , 63.3% and 67.3% of our net revenues in fiscal years 2012, 2011 and 2010, respectively.  We believe a substantial portion of the products billed to OEMs and third-party manufacturing service providers in the Asia Pacific region are ultimately shipped to end-markets in the United States and Europe.  The “Significant Customers, Concentration of Credit Risk and Geographic Information” footnote in the accompanying consolidated financial statements provides more specific data on revenue by geographic area.


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


Manufacturing and Operations


Wafer Fabrication


Our products make use of the state-of-the-art complementary-symmetry metal-oxide-semiconductor (“CMOS”) technology and other semiconductor technologies, such as silicon-germanium (“SiGe”).  As a fabless semiconductor company, wafer


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fabrication for our products is outsourced to third-party silicon wafer foundries such as Taiwan Semiconductor Manufacturing Corporation (“TSMC”), GlobalFoundries, IBM, and TowerJazz Semiconductor.  Outsourcing our wafer manufacturing requirements enables us to eliminate the high costs of owning, operating and upgrading fabrication facilities and focuses our resources on design and test applications, where we believe we have greater competitive advantages.


Probe, Assembly and Final Test


The highest complexity wafers pass through wafer sort to determine which of the die on the wafer meet functional and performance specifications.  This step in the manufacturing process determines the yield of good die per wafer versus the scrap of non-functioning die.


Approved probed die are assembled into packages by our outsourced IC packaging subcontractors in Asia and the United States.  Following assembly, packaged products go through final testing in packaged form to ensure that they meet all functional, performance and quality requirements.  This step in the process determines the final yield.


In 2010, we transitioned the majority of our probe and final testing activities from our internal operations in California to an outsource model with an offshore manufacturer.  Today, we outsource the majority of our probe and test functions in order to reduce our manufacturing cycle times, better address customer requirements, increase inventory turns and reduce our overall fixed cost of probe and testing.  For most products we maintain the capability to probe and test products in small volumes at our own facilities.  Like our subcontractors, we use advanced automated testers and high-performance bench test equipment.


Engineering, Research and Development


The market for our products is characterized by continually evolving industry standards, rapid advancements in process technologies, and increasing levels of functional integration.  We believe that our future success will depend largely on our ability to continue to improve our products and our process technologies, to develop new technologies and to adopt emerging industry standards.  Our belief that Ethernet will be the dominant networking technology for both Carrier and Enterprise networks has allowed us to focus our internal development resources to launch over 60 new products in the past three years.


Vitesse has a dedicated team of engineers who integrate industry standards development, technology changes, and the product directions of our customers, in an effort to provide forward-looking guidance to the development teams in the form of a product roadmap.  We work closely with our customers to co-specify and/or co-develop products.  We refer to these early adoption customers as alpha-site customers.  Occasionally, our agreements with alpha-site customers will include non-recurring development charges (“NREs”) and/or product purchase commitments.


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


We have significant research, engineering and product development resources located in two design centers in the United States, combined with four international design centers in Asia and Europe.  Our engineering, research and development expenses in fiscal years 2012, 2011 and 2010 were $42.7 million , $53.0 million and $51.0 million , respectively.  To capitalize on software capability, co-locate development with customers, and continue to focus on our development organization, while improving profitability, we have expanded our capabilities in low-cost regions such as Taiwan and India.


Sales and Customer Support


In light of the significant engineering support required in connection with the sale of high-performance ICs, we provide our customers with both field engineering and application engineering support prior to the sale.  These sales support services, which are provided by our field engineering and application engineering personnel, are utilized in the sales process in order to educate customers and to develop and close sales.  As is common in the industry, our sales cycle is typically lengthy, often six to 12 months or more, and requires the continued participation of salespeople, field engineers, application engineers, and senior management.


The steps in the typical sales cycle of our product are as follows:


Design Opportunity Phase


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|• | Field applications engineers work with the customer to design our products into their systems.

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|• | Product capabilities and performance are demonstrated to the customer via evaluation boards and/or evaluation systems.

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

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

Design Win Phase


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|• | We use multiple elements to determine a design win.  These might include firm commitment from a customer's engineering and-or purchasing organizations, pre-production orders or other indications that we were selected over our competitors for use in the customer's system application.  In the great majority of cases, we are the sole-source supplier to our customers, and typically cannot be easily replaced once we have secured a design and it goes into production.

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|• | We support the customer with additional technical support as they go through system-level qualification and testing.  This support typically includes hardware and software development support.

Production Phase


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|• | Once the customer has completed system development and qualification efforts, they may move their product into the production phase.  Typically, it takes our customer from six to 24 months to go from design win to production.

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|• | Once the product is in production, the customer is provided a standard product warranty and minimal additional sales support.  Our products are generally warranted against defects in materials and workmanship for a period of one year.

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


Intellectual Property


As of September 30, 2012, we held 82 United States patents and 20 foreign patents and had 24 patent applications pending in the United States.  We are in the process of filing additional patent applications.  We also generally enter into confidentiality agreements with our employees, consultants and business partners, and typically control access to and distribution of our proprietary information.  Despite these precautions, it is possible that competitors or other unauthorized third parties may obtain and copy, use or disclose our technologies and processes, develop similar technology independently, or design around our patents.  As such, any rights granted under our patents may not provide us with meaningful protection.  In addition, we may not be able to successfully enforce our patents against infringing products in every jurisdiction.  See “Risk Factors” under Item 1A of this Report for further discussion of the risks associated with patents and intellectual property.


Competition


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


We compete for market share based on our customers' selection of our components over our competitors during the design phase of our customers' systems.  In addition, many of our large customers have their own internal design teams, which results in our competition against these teams when our customers consider a “make vs. buy” decision.  Our ability to compete is dependent on the needs of our customers, how well our products address those needs, our corporate relationships, and a variety of other factors.


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Competition is particularly strong in the market for communication ICs, in part due to the market's historical growth rate, which attracts larger competitors, and in part due to the number of smaller companies focused on this area.  The trend in the industry has been, and continues to be, to outsource more designs to companies such as ours. While we expect this trend to continue, we view internal design efforts by our customers as a significant competitive threat.  Larger competitors in our market have acquired both mature and early stage companies with advanced technologies.  These acquisitions could enhance the ability of larger competitors to obtain new business that we may have otherwise won.


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


Cyclicality


The semiconductor industry is highly cyclical and is characterized by constant and rapid technological change, rapid product obsolescence, price erosion, evolving technical standards, short product life cycles, and wide fluctuations in product supply and demand.  These factors and others, together with changes in general economic conditions, cause significant upturns and downturns in the industry and within our business.  In addition, our operating results are subject to substantial quarterly and annual fluctuations due to a number of factors, such as demand for network infrastructure equipment, the timing of receipt, reduction or cancellation of significant orders, fluctuations in the levels of component inventories held by our customers and channel partners, the gain or loss of significant customers, market acceptance of our products and our customers' products, our ability to develop, introduce, and market new products and technologies on a timely basis, the availability and cost of products from our suppliers, new product and technology introductions by competitors, intellectual property disputes and the timing and extent of product development costs.


Backlog


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


We generally use the “sell-through” model of accounting when using our distribution network.  The “sell-through” model recognizes revenue only upon shipment of the merchandise from our distributor to the final customer.  Because we use the “sell-through” methodology we may have variability in our revenue from quarter to quarter as customers have substantial flexibility to reschedule backlog with most of our channel partners as part of the terms and conditions of sale.


Environmental Management


We monitor the environmental impact of our products.  Due to environmental concerns, the need for lead-free solutions in electronic components and systems is receiving increasing attention within the semiconductor industry.  Many companies are moving toward becoming compliant with the Restriction of Hazardous Substances Directive (“RoHS”), the European legislation that restricts the use of a number of substances, including lead, effective July 2006.  We believe that our products are compliant with the RoHS directive.  Additionally, some of our subcontractors may be required to register processing materials as required by Registration, Evaluation, Authorization and Restriction of Chemicals (“REACH”) European Union Regulation, EC/2006/1907.


There are other international environmental directives, regulations, and initiatives that are currently evolving in the electronics industry, such as the halogen-free initiative, which may also impact material suppliers and processing sub-contractors.  We believe our parts will be compliant and that materials will be available to meet these emerging regulations.  However, it is possible that unanticipated supply shortages or delays may occur as a result of these environmental factors.


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Employees


As of October 31, 2012, we had 336 employees worldwide, including 174 in R&D, with the balance of employees, listed in population size order, in operations, marketing and sales, and finance and administration.  Our ability to attract and retain qualified personnel is essential to our continued success.  None of our employees are represented by a collective bargaining agreement, nor have we ever experienced a work stoppage.  We believe our employee relations are good.


Available Information


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


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ITEM 1A. RISK FACTORS


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


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|• | Risks Relating to Our Business; and

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|• | Risks Relating to an Investment in Our Common Stock or Debt.

Risks Relating to Our Business


We have experienced losses from operations and may experience future losses from operations.


For the year ended September 30, 2012, we had a net loss of $1.1 million , primarily due to interest expense that was partially offset by a gain from the change in the fair value of the compound embedded derivative.  Due to general economic conditions and slowdowns in purchases of networking equipment, it continues to be difficult for us to predict the purchasing activities of our customers.  We expect that our operating results will fluctuate substantially in the future and we may experience future losses from operations.  In order to achieve and sustain profitability, we must achieve a combination of substantial revenue growth and/or a reduction in operating expenses.


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


The rapidly changing natures of the markets in which we sell our products limit our ability to accurately forecast quarterly and annual sales.  Our sales cycle is often lengthy, particularly for larger transactions.  As a result, we devote substantial time and effort and incur significant upfront expense in our sales efforts without any assurance that our efforts will result in a customer purchase.  Therefore, it is often difficult to predict when, or even if, we will make a sale with a potential customer. Additionally, we make investment decisions and budget our expense levels based primarily on sales forecasts.  Because a substantial portion of our expenses are fixed in the short term or are incurred in advance of anticipated sales, we may not be able to decrease our expenses in a timely manner to offset any shortfall of sales.  Our operating results will be adversely affected if revenues fall below our expectations in a particular quarter, which could cause the price of our common stock to decline significantly.


Our quarterly revenues and operating results have fluctuated in the past and may fluctuate and be difficult to predict in the future, and such fluctuations could adversely affect our stock price.


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


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


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|• | Fluctuations in demand for network infrastructure equipment;

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|• | The timing of receipt, reduction or cancellation of significant orders and shipments;

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|• | Fluctuations in the levels of component inventories held by our customers and channel partners;

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|• | The gain or loss of significant customers;

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

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|• | Increased competition from current and future competitors;

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|• | Market acceptance of our products and our customers products;

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|• | Our ability to develop, introduce and market new products and technologies on a timely basis;

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|• | The availability and cost of products from our suppliers;

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|• | Reductions in the selling prices of our products;

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|• | Design changes to our products made by our customers;

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|• | New product and technology introductions by competitors;

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|• | Failure by third-party foundries and other subcontractors to manufacture, assemble, test and ship products on time;

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

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|• | Intellectual property disputes; and

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|• | The timing and extent of product development costs.

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


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


The lengthy life cycle of our products as well as the short life cycles of some of the end products for which our products are designed may leave us with obsolete or excess inventories, which could have an adverse impact on our operating profit and net income results.


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


Further, the life cycles of some of our products depend heavily upon the life cycles of the end products for which our products are designed.  Products with short life cycles require us to manage production and inventory levels closely.  Write-offs of obsolete or excess inventories resulting from unanticipated changes in the estimated total demand for our products and/or the estimated life cycles of the end products for which our products are designed may negatively affect our operating profit and net income results.


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


A portion of our sales is realized through independent resellers and distributors that are not under our control.  For the year ended September 30, 2012, 47.5% of our net revenues were through these entities.  These independent sales organizations generally represent product lines offered by several companies and thus could reduce their sales efforts applied to our products or terminate their representation of us.  Our revenues could be adversely affected if our relationships with resellers or distributors were to deteriorate or if the financial condition of one or more significant resellers or distributors were to decline.


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


Further, we use the “sell-through” accounting policy model which recognizes revenue only upon shipment of the merchandise from our distributor to the final customer.  Because we use the “sell-through” methodology, we may have variability in our revenue from quarter to quarter as customers have substantial flexibility to reschedule backlog with most of our distribution partners as part of their terms and conditions of sale.


Order or shipment cancellations or deferrals could cause reductions in our revenues or unplanned inventory growth resulting in excess inventory, which may adversely affect our operating results.


We sell, and expect to continue selling, a significant number of products pursuant to purchase orders that customers may cancel or defer on short notice without incurring a significant penalty.  If a customer cancels or defers product shipments or refuses to accept shipped products, we may incur unanticipated reductions or delays in recognizing revenues and be required to hold excess inventory.  Holding excess inventory could reduce our profit margins by reducing sales prices or requiring inventory write-downs or write-offs for excess or obsolete inventory.


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


Sales to customers located outside the United States account for a significant percentage of our revenues.  International sales constituted 65.2% , 63.3% and 67.3% of our net revenue in fiscal years 2012, 2011 and 2010, respectively.  Development and customer support operations located outside the United States have historically accounted for a significant percentage of our operating expenses, and we anticipate that such operations will continue to account for a significant percentage of our expenses.  International sales and operations involve a variety of risks and uncertainties, including risks related to:


|  |                                         
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|• | Reliance on strategic alliance partners;

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|• | Compliance with changing foreign regulatory requirements and tax laws;

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|• | Difficulties in staffing and managing foreign operations;

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|• | Reduced protection for intellectual property rights in some countries;

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

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|• | Political and economic instability and potential hostilities and changes in diplomatic and trade relationships;

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|- | -------------------------------------------------------------------------------------------
|• | Economic downturns in international markets and disruptions in capital and trading markets;

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|- | ---------------
|• | Wage inflation;

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|- | ---------------
|• | Currency risks;

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|• | Existing or future environmental laws and regulations;

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|• | Cultural differences in the conduct of business;

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|- | ---------------------------------------------
|• | Natural disasters, acts of terrorism and war;

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|• | Changing restrictions imposed by United States export laws, including increasing restrictions based on security concerns; and

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|- | -------------------------------------------------------------------------------------------------------------
|• | Competition from companies based in North America that have established significant international operations.

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


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If we are unable to develop and introduce new products successfully, keep abreast of the rapid technological changes in our market or achieve market acceptance of our new products, our revenues and operating results will be adversely affected.


Our future success will depend on our ability to develop and timely introduce new, high-performance ICs and IC systems for existing and new markets and our success in developing and delivering these new products will depend on various factors, including our ability to:


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|• | Accurately predict market requirements, changes in technology and evolving industry standards;

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|- | -------------------------------
|• | Accurately define new products;

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|• | Expand our software capabilities in order to provide customers with complete product solutions;

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|• | Complete and introduce new products in a cost-effective and timely manner;

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|• | Qualify and obtain industry interoperability certification of our products and our customers products into which our products will be incorporated, including the related software content included in our products or with which our products integrate;

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|• | Work with our wafer foundry, assembly, and probe and test subcontractors to achieve high manufacturing yields;

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|• | Convince leading communications equipment manufacturers to select these products; and

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|- | -------------------------------------------------------------------
|• | Gain market acceptance of our products and our customers' products.

We may not have sufficient resources to make the substantial investment in research and development in order to develop and bring to market new and enhanced products or to improve and further develop the software content included in our products or their compatibility with systems in which our products integrate. Furthermore, we are required to continually evaluate expenditures for planned product development and to choose among alternative technologies based on our expectations of future market growth. We may be unable to timely develop and introduce new or enhanced products, our products may not satisfy customer requirements or achieve market acceptance, or we may be unable to anticipate new industry standards and technological changes. We also may not be able to respond successfully to new product announcements and introductions by competitors.


There can be no assurance that we will be successful in developing and marketing these new or other future products. Our inability to develop and introduce new products successfully and in a timely manner could negatively affect our business and results of operations.


Demand for our products is dependent on demand for our customers' products.


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


Failure to accurately forecast market and customer demand for our products, or to quickly adjust to forecast changes, could adversely affect our business and financial results or operating efficiencies.


Product introductions as well as plans for future products are based on our expectations regarding market demand and direction.  If our expectations regarding market demand and direction are incorrect, the rate of development or acceptance of our current and next-generation solutions do not meet market demand and customer expectation, the sales of our legacy or current Carrier and Enterprise networking and storage products decline more rapidly than we anticipate, or if the rate of decline continues to exceed the rate of growth of our new products, our revenues and operating results could be materially and adversely affected.


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


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


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


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


Wafer fabrication for our products is outsourced to third-party silicon wafer foundry subcontractors, primarily TSMC and, to a lesser extent, Global Foundries, IBM, and TowerJazz Semiconductor.  We depend on these third-party wafer foundries to allocate a portion of their manufacturing capacity sufficient to meet our needs and to produce wafers of acceptable quality in a timely manner.  There are significant risks associated with our reliance on third-party foundries, including:


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|- | -------------------------------------------------------------------------------------------------------
|• | Lack of assured wafer supply, the potential for wafer shortages and possible increases in wafer prices;

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

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|- | ------------------------------------------------------------------------------
|• | Unavailability of, or delays in, obtaining access to key process technologies.

These risks and other risks associated with our reliance on third-party wafer foundries could materially and adversely affect our revenues, cash flows, operating results, and relationships with our customers.


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


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


Certain of our suppliers integrate components or use materials manufactured in Japan in the production of our products.  The earthquake and tsunami that occurred in March 2011 in Japan disrupted the global supply chain for components manufactured in Japan that are incorporated in our products or included in the end user products of our customers.  Due to cross dependencies, supply chain disruptions stemming from the occurrences in Japan could negatively impact the demand for our products, including, for example, if our customers are unable to obtain sufficient supply of other components required for their end products.  We continue to monitor the effect of the events in Japan on end demand patterns and inventory levels throughout the supply chain.


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Certain of our suppliers integrate components or use materials manufactured in Thailand in the production of our products.  The recent flooding in Thailand has disrupted the global supply chain for components manufactured in Thailand that are incorporated in our products or included in the end user products of our customers.  Due to cross dependencies, supply chain disruptions stemming from the occurrences in Thailand could negatively impact the demand for our products, including, for example, if our customers are unable to obtain sufficient supply of other components required for their end products.  We continue to monitor the effect of the events in Thailand on end demand patterns and inventory levels throughout the supply chain.


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


In addition to third-party wafer foundries, we also depend on third-party subcontractors in Asia and the United States for the assembly, wafer probe and package testing of our products.  As with the wafer foundries, any difficulty in obtaining parts or services from these subcontractors could affect our ability to meet scheduled product deliveries to customers, which could in turn have a material adverse effect on our customer relationships, revenues and operating results.


These third-party subcontractors purchase materials used in the assembly process based on our forecast.  In the event we fail to meet our obligations by placing purchase orders that are inconsistent with our forecast, we may be required to pay for material forecasted, but not ordered.  This obligation may have an adverse effect on operating results and cash flows.


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


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


The fabrication of ICs is a highly complex and technically demanding process.  Defects in designs, problems associated with transitions to newer manufacturing processes, and the inadvertent use of defective or contaminated materials can result in unacceptable manufacturing yields and performance.  These problems are frequently difficult to detect in the early stages of the production process and can be time-consuming and expensive to correct once detected.  Even though we procure all of our wafers from third-party foundries, we may be responsible for low yields when these wafers are tested against our quality control standards.  In addition, defects in our existing or new products may require us to incur significant warranty, support and repair costs, and could divert the attention of our engineering personnel away from the development of new products.


In the past, we have experienced difficulties in achieving acceptable probe and/or final test yields on some of our products, particularly with new products, which frequently involve new manufacturing processes and smaller geometry features than previous generations.  Decreased yields can result in higher unit costs, shipment delays and increased expenses associated with resolving yield problems.  Because we also estimate yields to value work-in-process inventory, yields below our estimates may require us to increase the value of inventory and related reserves reflected on our financial statements.  Poor manufacturing yields, defects or other performance problems with our products could adversely affect our ability to provide competitively priced products and our operating results.


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


Due to the highly complex nature of our products, on occasion an undetected defect, error, or failure may occur when one of our products is deployed in the field.  The occurrence of defects, errors, or failures in our products could result in cancellation of orders, product returns, increased warranty expense, and the loss of, or delay in, market acceptance of our IC solutions.  Our customers could, in turn, bring legal actions against us, resulting in the diversion of our resources, legal expenses and


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judgments, fines or other penalties, or losses.  Any of these occurrences could adversely affect our business, results of operations and financial condition.


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


The markets for our products are intensely competitive and subject to rapid technological advancement in design technology, wafer manufacturing techniques and alternative networking technologies.  Our competitors have increasingly frequent opportunities to supplant our products in next-generation systems because of shortened product life and design cycles in many of our customers' products.  Our customers may substitute use of our products in their next-generation equipment with those of current or future competitors.  Our customers may choose to internally design and develop products for themselves.


In the communications market, which includes our Carrier and Enterprise network markets, competitors include Applied Micro Circuit, Broadcom, Marvell Technology Group, Maxim Integrated Products, Mindspeed Technologies, and PMC-Sierra.  Larger competitors in our market have acquired both mature and early stage companies with advanced technologies.  These acquisitions could enhance the ability of larger competitors to obtain new business that we might have otherwise won.  In addition, we are aware of smaller privately held companies that focus on specific portions of our range of products.  Over the next few years, we expect additional competitors, some of which may have greater financial and other resources than we have, to enter the market with new products.  These companies, individually and collectively, represent future competition during the design stage and in subsequent product sales.


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


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


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


Our operating results may be adversely impacted by worldwide political and economic conditions and uncertainties.  As a result, the market price of our common stock may decline.


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


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


We are subject to a variety of federal, state and local environmental regulations relating to the use, storage, discharge, and disposal of toxic, volatile and other hazardous chemicals used in our design process.  In some circumstances, these regulations may require us to fund remedial action regardless of fault.  Consequently, it is often difficult to estimate the future impact of environmental matters, including the potential liabilities associated with chemicals used in our design process.  If we fail to comply with these regulations, we could be subject to fines or be required to suspend or cease our operations.  In addition,


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these regulations may restrict our ability to expand operations at our present locations in the United States and worldwide or require us to incur significant compliance related expenses.


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


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


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


We rely on a combination of patent, copyright, trademark, and trade secret protections, as well as confidentiality agreements and other methods, to protect our proprietary technologies and processes.  For example, we enter into confidentiality agreements with our employees, consultants and business partners, and control access to, and distribution of our proprietary information.  As of September 30, 2012, we held 82 United States patents and 20 foreign patents and had 24 patent applications pending in the United States for various aspects of design and process innovations.


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


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|• | Steps we take to prevent misappropriation or infringement of our intellectual property will be successful;

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

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|• | Any pending patent applications or future applications will be approved;

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|• | Others will not independently develop similar products or processes to our, or design around our, patents; or

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|- | -----------------------------------------------------------------------
|• | Any of the measures described above will provide meaningful protection.

Further, we do not file patent applications on a worldwide basis, meaning we do not have patent protection in some jurisdictions.  It may be possible for a third-party, including our licensees, to misappropriate our copyrighted material or trademarks.  It is possible that existing or future patents may be challenged, invalidated or circumvented and effective patent, copyright, trademark and trade secret protection may be unavailable or limited in foreign countries.  It may be possible for a third-party to copy or otherwise obtain and use our products or technology without authorization, develop similar technology independently or design around our patents in the United States and in other jurisdictions.  It is also possible that some of our existing or new licensing relationships will enable other parties to use our intellectual property to compete against us. Legal actions to enforce intellectual property rights tend to be lengthy and expensive and the outcome often is not predictable.  As a result, despite our efforts and expenses, we may be unable to prevent others from infringing upon or misappropriating our intellectual property, which could harm our business.  In addition, practicality also limits our assertion of intellectual property rights. Patent litigation is expensive and its results are often unpredictable.  Assertion of intellectual property rights often results in counterclaims for perceived violations of the defendant's intellectual property rights and/or antitrust claims.  Certain parties after receipt of an assertion of infringement will cut off all commercial relationships with the party making the assertion, thus making assertions against suppliers, customers and key business partners risky. If we forgo making such claims, we may run the risk of creating legal and equitable defenses for an infringer.


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


The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights.  As is common in the industry, from time to time, third parties have asserted patent, copyright, trademark, and other intellectual property rights to technologies that are important to our business and have demanded that we license their patents and technology.  To date, none of these claims has resulted in the commencement of any litigation against us, nor have we believed that it is necessary to license any of the rights referred to in such claims.  We expect, however, that we will continue to receive such claims in the future, and any litigation to determine their validity, regardless of our merit or resolution, could be costly and divert the efforts and attention of our management and technical personnel.  We also may be required to defend and indemnify customers against claims of infringement of third-party intellectual property rights, which could result in significant expense.  Our recent efforts to license our intellectual property to third parties may also increase the potential for others to initiate claims against us.  We cannot assure that we would prevail in such disputes given the complex technical issues and inherent uncertainties in intellectual property litigation.  The resolution or compromise of any litigation or other legal process to enforce such alleged third party rights, including claims arising through our contractual indemnification of our customers, or claims challenging the validity of our patents, regardless of its merit or resolution, could be costly and divert the efforts and attention of our management and technical personnel.  If such litigation were to result in an adverse ruling we could be required to:


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|- | ------------------------
|• | Pay substantial damages;

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

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|• | Expend significant resources to develop non-infringing technology;

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|• | Pay substantial damages to our customers or end users to discontinue use or replace infringing technology with non-infringing technology; or

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

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


We are subject to United States Customs and Export Regulations.


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


Risks Relating to an Investment in Our Common Stock or Debt Instruments


We have significant debt in the form of our Term A Loan, Term B Loan and 2014 Debentures.


As of September 30, 2012, we had outstanding $17.2 million in original principal of our senior term loans with Whitebox VSC, Ltd., of which $7.9 million (the “Term A Loan”) bears interest at a fixed rate of 10.5% per annum, payable quarterly in arrears, and has a maturity date of February 4, 2014, and $9.3 million (the “Term B Loan”) bears interest at a fixed rate of 8.0% per annum, payable quarterly in arrears, and has a maturity date of October 30, 2014.


As of September 30, 2012, we had outstanding $46.5 million of our 8.00% Convertible Second Lien Debentures Due 2014 (the “2014 Debentures”) that mature on October 30, 2014.  Our debt could materially and adversely affect our ability to obtain financing for working capital, acquisitions or other purposes and could make us vulnerable to industry downturns and competitive pressures.  Our ability to meet our debt service obligations will be dependent upon our future performance, which will be subject to financial, business and other factors affecting our operations, many of which are beyond our control.  We believe that our existing sources of liquidity, along with cash expected to be generated from product sales, will be sufficient to fund our financing requirements for at least the next 12 months.  However, this may not be the case. If we incur operating losses and negative cash flows in the future, we may need to further reduce our operating costs or obtain alternate sources of


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financing, or both.  We may need additional capital in the future and may not have access to additional sources of capital on favorable terms or at all.  If we raise additional funds through the issuance of equity-based or debt securities, such securities may have rights, preferences or privileges senior to those of our common stock and our stockholders may experience dilution of their ownership interests.


Our operating and financial flexibility is limited by the terms of the agreements governing our Term A and Term B Loans and the indenture governing our 2014 Debentures.


The loan agreement governing our Term A Loan and Term B Loan and the indenture governing our 2014 Debentures contain financial and other covenants that may limit our ability to, or prevent us from, taking certain actions that we believe are in the best interests of our business and our stockholders. For example, the loan agreement and the indenture contain covenants that limit our ability, among other things, to:


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|• | incur additional indebtedness;

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|• | pay dividends or make distributions to our stockholders;

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|• | repurchase or redeem our stock;

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|- | -----------------
|• | make investments;

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|- | ------------
|• | grant liens;

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|- | --------------------------
|• | make capital expenditures;

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|• | enter into transactions with our stockholder and affiliates;

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|- | ------------------------------
|• | enter into hedging agreements;

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|- | ----------------
|• | sell assets; and

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|- | ---------------------------------------------------------------------
|• | acquire the assets of, or merge or consolidate with, other companies.

A breach of any of these covenants could result in a default under the loan agreement or the indenture or both, in which event our lenders could elect to declare all amounts outstanding to be immediately due and payable.  If the lenders require immediate repayment, and we do not have sufficient funds to repay them in full, substantially all of our assets secure our obligations under the Term A Loan, Term B Loan and 2014 Debentures, and assets may be sold to pay those obligations, which could severely harm our business.


Our stockholders will experience significant dilution in connection with the conversion of our Series B Preferred Stock, 2014 Debentures and our Term B Loan.


As of September 30, 2012, we had outstanding 134,720 shares of our convertible Series B Preferred Stock (convertible on a one-to-five basis), $46.5 million of 2014 Debentures and $9.3 million of Term B Loan convertible debt.  Full conversion of the currently outstanding Series B Preferred Stock, the 2014 Debentures and the Term B Loan would result in the issuance of 12,892,612 shares of common stock.  The conversion of our shares of Series B Preferred Stock, 2014 Debentures and the Term B Loan could have a significant dilutive impact on the ownership rights of our stockholders.


The holders of our 2014 Debentures can convert their debt into common stock and own a significant percentage of our voting securities, which would give these holders significant influence over us and enable them to act in a manner with which other stockholders may disagree or that is not necessarily in the interests of other stockholders.


As of September 30, 2012, we had outstanding $46.5 million of 2014 Debentures convertible at a price of $4.50 per share into an aggregate of 10,331,778 shares of our common stock.  If all of the 2014 Debentures converted into common stock, those shares would represent 28.6% of our outstanding common stock as of September 30, 2012.  Some of the holders of our 2014 Debentures also may hold shares of our common stock and shares of our series B preferred stock.  If the holders of our 2014 Debentures convert their debt into common stock, they would own a significant percentage of our voting securities and would have significant influence over all matters submitted to the stockholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets.  These security holders may have interests that are


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different from our other stockholders.  For example, the holders of the 2014 Debentures may support proposals and actions with which other stockholders may disagree or which are not in their interests.  In addition, their combined ownership of common stock, series B preferred stock and 2014 Debentures could motivate them to support a sale of Vitesse at a price that is not attractive to many other stockholders.  Furthermore, the concentration of ownership could delay or prevent a change in control of Vitesse or otherwise discourage a potential acquirer from attempting to obtain control of Vitesse, which in turn could reduce the price of our common stock.


The price of our common stock may fluctuate significantly.


The price of our common stock is volatile and may fluctuate significantly.  There can be no assurance as to the prices at which our common stock will trade or that an active trading market in our common stock will be sustained in the future.  The market price at which our common stock trades may be influenced by many factors, including:


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|• | Our operating and financial performance and prospects, including our ability to achieve sustained profitability;

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|• | The depth and liquidity of the market for our common stock which can impact, among other things, the volatility of our stock price and the availability of market participants to borrow shares;

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|• | Investor perception of us and the industry in which we operate;

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|• | The level of research on our company;

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|• | Changes in earnings estimates or buy/sell recommendations by analysts;

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|• | The issuance and sale of additional shares of common stock;

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|• | General financial and other market conditions; and

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|• | Domestic and international economic conditions.

In addition, public stock markets have experienced, and may in the future experience, extreme price and trading volume volatility, particularly in the technology sectors of the market. This volatility has significantly affected the market prices of securities of many technology companies for reasons frequently unrelated to or disproportionately impacted by the operating performance of these companies.  These broad market fluctuations may adversely affect the market price of our common stock.


Provisions in our organizational documents and Delaware law will make it more difficult for someone to acquire control of us.


Our restated certificate of incorporation, our amended and restated bylaws and the Delaware General Corporation Law contain several provisions that would make more difficult an acquisition of control of us in a transaction not approved by our board of directors.  Our restated certificate of incorporation and amended and restated bylaws include provisions such as:


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|• | The ability of our board of directors to issue shares of our preferred stock in one or more series without further authorization of our stockholders;

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|• | A prohibition on stockholder action by written consent; and

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|• | A requirement that stockholders provide advance notice of any stockholder nominations of directors or any proposal of new business to be considered at any meeting of stockholders.

In addition to the provisions in our restated certificate of incorporation and amended and restated bylaws, Section 203 of the Delaware General Corporation Law generally provides that a corporation shall not engage in any business combination with any interested stockholder during the three-year period following the time that such stockholder becomes an interested stockholder, unless a majority of the directors then in office approves either the business combination or the transaction that results in the stockholder becoming an interested stockholder or specified stockholder approval requirements are met.


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Our ability to use our net operating losses (“NOLs”) and other tax attributes to offset future taxable income could be limited by an ownership change and/or decisions by California and other states to suspend the use of NOLs.


We have significant NOLs and research and development (“R&D”) tax credits available to offset our future United States federal and state taxable income.  Our NOLs are subject to limitations imposed by Section 382 of the Internal Revenue Code (and applicable state law).  In addition, our ability to utilize any of our NOLs and other tax attributes have been and may in the future be subject to significant limitations under Section 382 of the Internal Revenue Code (and applicable state law) if we undergo an ownership change.  In the event of an ownership change, Section 382 imposes an annual limitation (based upon our value at the time of the ownership change, as determined under Section 382 of the Internal Revenue Code) on the amount of taxable income a corporation may offset with NOLs.  If we undergo an ownership change, Section 382 would also limit our ability to use R&D tax credits.  In addition, if the tax basis of our assets exceeded the fair market value of our assets at the time of the ownership change, Section 382 could also limit our ability to use amortization of capitalized R&D and goodwill to offset taxable income for the first five years following an ownership change.  Any unused annual limitation may be carried over to later years until the applicable expiration date for the respective NOLs.  As a result, our inability to utilize these NOLs, credits or amortization as a result of any ownership changes could adversely impact our operating results and financial condition.


In addition, California and certain states have suspended use of NOLs for certain taxable years and other states are considering similar measures.  As a result, we may incur higher state income tax expense in the future.  Depending on our future tax position, continued suspension of our ability to use NOLs in states in which we are subject to income tax could have an adverse impact on our operating results and financial condition.


Our success depends on our ability to attract and retain qualified personnel.


A small number of key executive officers manage our business.  Their departure could have a material adverse effect on our operations.  We believe that our future success will also depend in large part on our continued ability to attract and retain highly qualified technical sales and marketing personnel, design and application engineers, as well as senior management.  We believe that there is, and will continue to be, intense competition for qualified personnel in the semiconductor industry as the emerging broadband wireless and wire line communications markets develop, and we cannot assure you that we will be successful in retaining our key personnel or in attracting and retaining highly qualified manufacturing personnel, technical sales and marketing personnel, design and application engineers, as well as senior management.  The loss of the services of one or more of our key employees or our inability to attract, retain and motivate qualified personnel could have a material effect on our ability to operate our business.  We do not presently maintain key-man life insurance for any of our key executive officers.


The market price for our common stock has experienced significant price and volume volatility and is likely to continue to experience significant volatility in the future.  This volatility may impair our ability to finance strategic transactions with our stock and otherwise harm our business.


Our stock price is likely to experience significant volatility in the future as a result of numerous factors outside our control.  Significant declines in our stock price may interfere with our ability to raise additional funds through equity financing or to finance strategic transactions with our stock.  We have historically used equity incentive compensation as part of our overall compensation arrangements.  The effectiveness of equity incentive compensation in retaining key employees may be adversely impacted by volatility in our stock price.  In addition, there may be increased risk of securities litigation following periods of fluctuations in our stock price.  Securities class action lawsuits are often brought against companies after periods of volatility in the market price of their securities.  These and other consequences of volatility in our stock price which could be exacerbated by the recent worldwide financial crisis could have the effect of diverting management's attention and could materially harm our business.


The effectiveness of disclosure controls is inherently limited.


We do not expect that our disclosure controls and procedures, or our internal control over financial reporting, will prevent all errors and all fraud.  A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system objectives will be met.  The design of a control system must also reflect applicable resource constraints, and the benefits of controls must be considered relative to their costs.  As a result of these inherent limitations, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected.  Failure of the control systems to prevent error or fraud could materially adversely impact our financial results and our business.


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ITEM 1B.  UNRESOLVED STAFF COMMENTS


None


ITEM 2.  PROPERTIES


Our headquarters, and principal R&D and sales facilities, is located in Camarillo, California and is leased pursuant to a non-cancellable operating lease with a term that expires on January 31, 2014.  The total space occupied in this building is approximately 111,000 square feet.  We also lease an additional 58,000 square foot facility in Camarillo (“Calle Carga”), which is leased through December 2015.  We will reoccupy and build out the Calle Carga facility upon the expiration of our main Camarillo facility lease in January 2014.  We also lease space in additional locations that include domestic and international offices in Austin, Milpitas, New Jersey, China, Denmark, Germany, India and Taiwan.  As of September 30, 2012, we lease total space of approximately 280,000 square feet.  Our current space is sufficient to accommodate current operations.


ITEM 3. LEGAL PROCEEDINGS


From time-to-time in our normal course of business, we are a party to various legal claims, actions and complaints.  Although the ultimate outcome of these matters cannot be determined, management believes that, as of September 30, 2012 , the final disposition of these proceedings will not have a material adverse effect on the financial position, results of operations, or liquidity of the Company.


ITEM 4. MINE SAFETY DISCLOSURES


Not applicable.


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PART II


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


Our common stock has been listed on The NASDAQ Global Market under the symbol “VTSS” since March 2, 2011.  Prior to March 2, 2011, our common stock was traded on the OTCQB Marketplace of the OTC Markets Group Inc.  The following table sets forth, for the periods indicated, the high and low sales prices of our common stock on The NASDAQ Global Market from and after March 2, 2011, and the high and low bid quotations of our common stock as reported on the OTCQB Marketplace prior to March 2, 2011.  Quotations reported on the OTCQB Marketplace reflect inter‐dealer prices, without retail mark-up, markdown or commission, and may not necessarily represent actual transactions.


HighLowFiscal Year Ended 2012October 1 through December 31, 2011$2.95$2.08January 1 through March 31, 20124.132.44April 1 through June 30, 20123.712.13July 1 through September 30, 20122.751.91


HighLowFiscal Year Ended 2011October 1 through December 31, 2010$4.85$3.56January 1 through March 31, 20116.004.10April 1 through June 30, 20115.253.85July 1 through September 30, 20114.202.86


Holders of Record


As of November 30, 2012, there were approximately 1,183 stockholders of record of our common stock.  The number of holders of record of our common stock does not include the number of stockholders whose shares are held in nominee or “street name” accounts through brokers and other institutions.


Dividends


We have never paid cash dividends and presently intend to retain any future earnings for business development.  Further, our existing loan agreement and the indenture governing our 2014 Debentures limit the payment of dividends without the consent of the lenders.


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Five-Year Stock Performance Graph


The following performance graph compares the cumulative total stockholder return for our common stock with the NASDAQ Composite Index, the NASDAQ Stock Market-United States Index and the NASDAQ Electronics Components Index from market close on the last trading day in September 2007 through the last trading day in September 2012.  The graph is based on the assumption that $100 was invested in each of our common stock, the NASDAQ Composite Index, the NASDAQ Stock Market-United States Index and the NASDAQ Electronics Components Index on the last trading day in September 2007.  The stock price performance on this graph is not necessarily an indicator of future price performance.


The stock price performance graph depicted below shall not be deemed to be “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”), or otherwise subject to the liabilities of such section, nor shall such graph be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing.











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ITEM 6.  SELECTED FINANCIAL DATA


The table below sets forth selected consolidated financial data for the five years in the period ended September 30, 2012 that has been derived from our audited consolidated financial statements.  The information set forth below is not necessarily indicative of results of future operations and should be read in conjunction with Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” and the audited consolidated financial statements and notes thereto included in Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.


As of and for the years ended September 30,20122011201020092008(In thousands, except per share data)Consolidated Statements of Operations Data:Product revenues$109,920$132,742$165,633$154,927$218,536Intellectual property revenues9,5638,22535713,25010,000Net revenues119,483140,967165,990168,177228,536Restructuring and impairment(1,424)3,656854528—Accounting remediation & reconstruction (revenue) expense & litigation costs——73(9,922)10,761Goodwill impairment———191,418—Income (loss) from operations1,635(11,073)3,991(179,005)8,378(Loss) income from continuing operations(1,112)(14,812)(20,176)(194,112)7,510Income from discontinued operations, net of tax——121719,044Net (loss) income(1,112)(14,812)(20,055)(194,041)16,554Fair value adjustment of Preferred Stock - Series B——126——Net (loss) income available to common stockholders$(1,112)$(14,812)$(20,181)$(194,041)$16,554Net (loss) income per share:Basic and diluted:Continuing operations$(0.04)$(0.61)$(0.96)$(16.92)$0.67Discontinued operations——0.010.010.81Net (loss) income per share$(0.04)$(0.61)$(0.95)$(16.91)$1.48Fair value adjustment of Preferred Stock-Series B——(0.01)——Net loss (income) per common share available to common stockholders$(0.04)$(0.61)$(0.96)$(16.91)$1.48Weighted average shares outstanding: basic25,12124,31521,07411,47811,181Balance Sheet Data:Cash and short-term investments$23,891$17,318$38,127$57,544$36,722Working capital28,69426,65948,03739,39749,198Total assets56,61660,99497,529109,273292,277Long term compound embedded derivative liability2,8997,79615,476——Other long term obligations, including debt58,37356,18065,095111,352126,123Total stockholders’ (deficit) equity$(24,015)$(28,459)$(21,206)$(61,273)$125,526


Fiscal Year 2012


In the fourth quarter of 2012, we determined that it was unlikely that we would be able to sublease Calle Carga, our secondary Camarillo leased office and warehouse space for the remaining lease term through December 2015.  Therefore, we decided that we would reoccupy the exited facility upon the expiration of our main Camarillo facility lease in January 2014 instead of locating to a new facility as originally planned. Accordingly, we reversed the lease termination reserve of $1.4 million .


Fiscal Year 2011


On January 18, 2011, we paid $8.0 million against the principal balance of our Senior Term Loan.  On February 4, 2011, we exchanged our existing Senior Term Loan for two new term loans (Term Loan A and Term Loan B), each in the principal amount of $9.34 million.  As of February 4, 2011 the net carrying amount of the Senior Term Loan was $18.7 million, which included the remaining outstanding principal of $17.0 million, and a payment-in-kind balance of $1.7 million.  We recognized a $3.9 million loss on the debt exchange.  Included in the loss calculation was the remaining balance of the unamortized costs of $0.6 million on the original Senior Term Loan. In July 2011, we paid down the loan by $1.5 million.


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In fiscal 2011, in order to reduce costs and streamline the product design process, we implemented a planned reduction in workforce in one of our US design centers.  We also consolidated our operations at our headquarters in Camarillo, California and implemented a reduction in personnel across multiple departments.  In fiscal 2011, we incurred approximately $3.7 million of costs and charges associated with these activities.  These activities are presented as restructuring and impairment charges on the consolidated statements of operations.


Fiscal Year 2010


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


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|• | Paid $3.6 million in cash to satisfy our obligations to the holders of the 2024 Debentures who did not participate in the transaction;

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

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|• | Issued $50.0 million in aggregate principal amount of 2014 Debentures to the holders of the 2024 Debentures who participated in the transaction; and

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|• | Issued to the holders of the 2024 Debentures who participated in the exchange 8,646,811 shares of common stock, and to some of those holders, an aggregate of 771,000 shares of a new Series B Preferred Stock, which are convertible into common stock on a five-to-one basis and have a dividend preference relative to the common stock.

In May 2010, $3.5 million of 2014 Debentures were converted into 777,778 shares of common stock, based on a conversion price of $4.50 per share.  We elected to pay the “Make-Whole Amount” (as defined in the Indenture for the 2014 Debentures) in shares of common stock, and on June 7, 2010 we issued 91,753 shares of common stock valued at $6.20 per share, the fair value per share on the date of settlement, in settlement of the Make-Whole Amount.


In October 2009, in an effort to reduce costs and shorten manufacturing time, we eliminated test activities at our headquarters and outsourced testing to a third-party facility.  This restructuring plan was approved during October 2009 with implementation efforts starting immediately and full transition of testing to the third-party by the third quarter of the fiscal year ending September 30, 2010.  In connection with this restructuring, the Company recorded restructuring charges totaling $0.9 million for severance costs for the fiscal year ended September 30, 2010.  This activity is presented as restructuring and impairment charges on the consolidated statements of operations.


Fiscal Year 2009


During the quarter ended December 31, 2008, we determined that our goodwill was fully impaired and recorded an impairment charge of $191.4 million.


Fiscal Year 2008


Sale of Storage Products Business


On October 29, 2007, we completed the sale of a portion of our Storage Products business.  For fiscal year 2008, we reported the results of operations of the Storage Products business, along with the gain recognized on the sale, in income (loss) from discontinued operations within our statement of operations.  For fiscal year 2010, we reported revenue of $0.1 million, net of taxes of $0.2 million related to the final earn-out payments resulting from the sale of the Storage Products business.


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





Cautionary Statement


The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.  This discussion contains forward-looking statements that involve risks and uncertainties.  Our actual results could differ materially from those discussed below.  Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included in Part I, Item 1A. of this Annual Report on Form 10-K.


Overview


We are a leading supplier of high-performance ICs that are used primarily by manufacturers of networking systems for Carrier and Enterprise networking applications.  We design, develop and market a diverse portfolio of high-performance, low-power and cost-competitive networking and connectivity IC solutions.  For more than 25 years, we have been a leader in the adoption of new technologies in Carrier and Enterprise networking.


Carrier and Enterprise networks have experienced a dramatic increase in both bandwidth demands and complexity driven by the introduction of new content-rich services, the convergence of voice, video and data and enhanced 4G/LTE mobile networks.  Media-rich devices such as smartphones and game consoles require increased bandwidth.  New Enterprise deployment options such as cloud based servers and social media and tele-presence have also increased demand.


These trends have forced a significant transition and consolidation of both Carrier and Enterprise networks to all-IP and packet-based Ethernet networks that can scale in terms of services, bandwidth and capability while lowering power consumption and acquisition and operations costs.  These networks are based on technology that is significantly more sophisticated, service-aware, secure and reliable than traditional Enterprise-grade Ethernet LAN technology.  Such networks are built on new technology that is often referred to as “Carrier Ethernet” in Carrier networks and “Converged Enhanced Ethernet” in Enterprise networks.


Industry Trends and Characteristics that Affect our Business


In order to achieve sustained, increasing profitability, we must achieve a combination of revenue growth, consistent or improving margins and careful control of our operating expenses.  We continue to focus on improving each of these components of our financial model.


Our new products, generally defined as products introduced since 2010, address the two largest and fastest growing segments of the communications industry-Carrier Ethernet and Enterprise networking.  Many of our products also serve the biggest market within these segments, Carrier Mobile Infrastructure, which is beginning to require Carrier Ethernet capabilities.


Our future revenue opportunities are, in part, determined by our continuing ability to participate and capture new design wins within our major customer base.  This opportunity depends in large part on our ability to develop, deploy and sell products in a timely manner with features that compete effectively in our markets.


We compete for market share based on our customers' selection of our components over those of our competitors during the design phase of our customers' systems.  Our ability to compete is dependent on the needs of our customers, how well our products address these needs, our corporate relationships and a variety of other factors.


Once selected for a design win, we have a high probability of holding the majority market share for this product, typically for the lifetime of the customer's system.  The design win is a critical milestone in the path to generating revenue, as our products, and our customers' products, are highly complex and typically require many years of development, testing and qualification before they reach full production.  As a result, it may be difficult to forecast the potential revenue from new and existing products at the time we begin our development efforts or achieve our design wins.


Our ability to improve gross margins depends upon several factors, including our ability to continue to reduce our cost of materials, assembly and test, improve manufacturing yields, migrate our products to next-generation process technology, and limit price erosion.  We have active programs in place to address each of these factors.


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As a fabless semiconductor company, we outsource the substantial majority of our manufacturing.  We must manage our supply chain efficiently to ensure competitive materials pricing and effective lead-times for the materials that we purchase.  The semiconductor industry is highly cyclical.  In periods of strong demand, we may experience longer lead times, and difficulties in obtaining capacity and/or meeting commitments for our required deliveries.  Today, almost all of our wafer fabrication and assembly is outsourced.  This production model provides us substantial advantages in terms of lower fixed costs, reduced cycle times and lower inventory levels.


Improving product yields is critical to maintaining and improving our cost of revenues.  We have a team of engineers focused on yield improvements.  Yields are affected by a variety of factors including design quality, wafer fabrication, assembly and test processes and controls, product volumes, and life cycles.  We work closely with all our manufacturing subcontractors to improve product manufacturability and yields.  We manufacture a wide variety of products, some at low volumes, which likely limits our ability to improve yields on some products.


Gross margin is also impacted by the selling prices of our products, which is primarily determined by competitive factors within the specific markets we serve.  Average margins vary widely within the markets we serve, with the Carrier networking market having the highest average margins and the Enterprise networking market having the lowest average margins.  We endeavor to increase margins by providing products that have substantial added value relative to our competition.  We also increase margins with sales from our intellectual property portfolio in the form of licensing, royalties and patent sales.


To remain competitive, we must efficiently deploy our engineering, research and development (“R&D”) resources into markets that will provide our future revenue growth.  The percentage of our total headcount that is attributed to R&D has steadily increased during the last three years from 46.8% in 2010 to 49.3% in 2011 and to 49.4% in 2012.  A large part of this growth is in our Hyderabad, India design center where we can more efficiently design software and execute product verification and validation.


Our R&D costs increased from $45.7 million in 2009 to $51.0 million in 2010 to $53.0 million in 2011, as a result of our developing and releasing over 60 new products.  Our R&D costs decreased to $42.7 million in 2012 as we consolidated our R&D locations to better focus our R&D efforts.  Although we decreased our R&D costs, we have increased our headcount levels by expanding our teams in lower-cost regions that have technical talent pools and proximity to our customers.  We intend to continue to focus our R&D efforts and to seek opportunities to more efficiently deploy our R&D resources into larger, growing markets.


As is common in the industry, we sell semiconductor products direct to OEMs and also use a number of distributors and logistics providers to sell products indirectly to our customer base.  Product revenues from direct customer sales were $53.2 million or 48.4% of product revenue in fiscal year 2012, compared to $73.6 million or 55.4% of product revenue in fiscal year 2011, and $82.5 million or 49.8% of product revenue in fiscal year 2010.  Revenues from direct customer sales, as a percentage of total sales, declined in 2012 due to declining sales to our largest direct customers.


In the normal course of business, we regularly assess our product portfolio to ensure it aligns with our strategy.  At such time, we may make the determination to phase out products (“end-of-life”).  When we end-of-life a product, we typically provide up to six months notice for our customers to make a last-time-buy of product and six additional months to take receipt of that product.  As a result, the end-of-life announcement can result in near-term increases in our revenues as customers typically respond to these announcements by making last-time-buys to ensure that they have adequate stock on hand to support their production forecast.  In 2012, we announced the end-of-life of several legacy products, allowing us to focus our manufacturing and distribution on our new products.


Our accounting policy generally uses the “sell-through” model for sales to our distributors.  The “sell-through” model recognizes revenue only upon shipment of the merchandise from our distributor to the final customer.  Because we use the “sell-through” methodology we may have variability in our revenue from quarter to quarter as customers have substantial flexibility to reschedule backlog with most of our channel partners as part of the terms and conditions of sale.  In addition, the “sell-through” policy requires that we include all distributor channel inventory on our balance sheet as part of our reported inventory.  Our product revenues from channel sales were $56.7 million, $59.2 million and $83.1 million, in fiscal years 2012, 2011 and 2010, respectively.


Our sales are distributed geographically around the world.  Revenue by geographic region is based upon country of billing.  The geographic locations of distributors and third-party manufacturing service providers may be different from the geographic location of the ultimate end users.  We believe a substantial portion of the products billed to OEMs and third-party manufacturing service providers in the Asia Pacific region are ultimately shipped to end-markets in the United States and Europe.  In 2012, 34.8% of our sales were to the United States, 52.1% to Asia and 13.1% to Europe, the Middle East and Africa


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(“EMEA”).  In 2011, 36.7% of our sales were to the United States, 45.3% to Asia and 18.0% to EMEA.  In 2010, 32.7% of our sales were to the United States, 50.6% to Asia, and 16.7% to EMEA.


Realization of Our Strategy


Several years ago, we embarked on the strategic mission of re-inventing Vitesse to take advantage of the dramatic ongoing transformation of our target networking markets.  Our objective is to be the leading supplier of high-performance ICs for the global communications infrastructure markets.  Towards that goal, we re-positioned our R&D teams and invested heavily to enter new markets, develop new products and penetrate new customers in an effort to diversify ourselves and provide new opportunities for growth.


In order to optimize the efficiency of our R&D team we chose to serve two large, growing, independent markets which rely increasingly on Ethernet technology: Carrier networking and Enterprise networking.  We estimate our total addressable market to have a CAGR of 17% and will approach $2.1 billion by 2016.  The Carrier networking market includes core, metro and access equipment used for transport, switching, routing and backhaul in service provider networks.  The Enterprise networking market covers Ethernet switching and routing equipment used within LANs in SME networks, SMB, and cloud and security appliances.  While both market segments are unique, there is tremendous synergy and cost savings in terms of R&D effort for Ethernet switch and PHY devices allowing us to address these two large markets.  Within the Carrier networking segment, our focus and growth is driven by mobile backhaul applications, and within the enterprise segment our focus and growth is driven by the migration from 100 Mbps to 1 GE and 10 GE port speeds.  In both markets, Vitesse provides unique low power and low cost solutions by optimizing the feature set for target applications.


As with any high technology company, growth opportunities begin with new products.  Over the past three years, we introduced over 60 new products.  These included many new “platform” products and technologies that will serve as the basis for future product development.  These new products allowed us to substantially increase our served markets in both Carrier and Enterprise networking.


The next step to generating growth is creating market traction and design wins where we are selected by our customers over our competitors.  As we have taken our new products to market, we have seen an increase in our customer engagements and the number of design opportunities that were being identified by our sales team.  Early adoption of our products by our customers has exceeded our goals.  In the past two years, we recorded over 600 new design wins.


Together with our customers, we are now preparing to ramp these new products.  In our industry it typically takes six to twenty four months for our customers to go from first product sample received to first customer shipment as customers do the necessary development work to complete and qualify their systems in the network.  In 2012, we shipped samples and pre-production on the majority of these new products, and we expect our customers to phase into volume production over the course of 2013.


In 2012, we began a migration of our revenues to our new product portfolio.  In 2011, only 6% of our product revenue was from our new product portfolio.  In 2012, this grew to 14% of product revenues.  We expect revenue from our new products to double in 2013 compared to 2012 and double again in 2014.


Augmenting our product revenues, we leverage our substantial intellectual property portfolio to generate revenues.  Our primary focus for intellectual property licensing has been our Gigabit Ethernet Copper PHY and switch cores and eFEC technology.  We license to non-competing third parties in adjacent or similar markets.


We have also made progress on our strategy to strengthen our operational performance and execution.  Our efforts in operations include reduction in materials costs and cycle times, improved product yields, implementation of programs such as lean manufacturing, and an enhanced customer-centric focus.  During the last three years, we accelerated our comprehensive efforts to increase our product gross margins and operating margins, which together have substantially increased our operating leverage.  In addition, we strengthened our cash balance by reducing inventory at September 30, 2012, by $15.2 million compared to September 30, 2010.





Critical Accounting Policies and Estimates


Our accounting policies are more fully described in Note 1 of the consolidated financial statements.  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes.  Actual results could differ significantly from those estimates.  We base our estimates on


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historical experience and on various other assumptions that we believe are reasonable in the circumstances.  We regularly discuss with our audit committee the basis of our estimates.  These estimates could change under different assumptions or conditions.  We believe that the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require management's most difficult, subjective and complex judgments.


Revenue Recognition


Product Revenues


In accordance with Accounting Standards Codification (“ASC”) Topic 605, Revenue Recognition , 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 where the earnings process is incomplete.


A substantial portion of our product sales is made through distributors under agreements allowing for pricing credits and/or right of return.  Our past history with these pricing credits and/or right of return provisions prevent us from being able to reasonably estimate the final price of our inventory to be sold and the amount of inventory that could be returned pursuant to these agreements.  As a result, the fixed and determinable revenue recognition criterion has not been met at the time we deliver products allowing for pricing credits or right of returns.  Accordingly, product revenue from sales made through these distributors is not recognized until the distributors ship the product to their customers.  We also maintain inventory, or hub, arrangements with certain customers.  Pursuant to these arrangements, we deliver products to a customer or a designated third-party warehouse based upon the customer’s projected needs, but do not recognize revenue unless and until the customer reports that it has removed our product from the warehouse and taken title and risk of loss.


From time-to-time, we may ship goods to our distributors with no pricing credits and/or no or limited right of return.  Under these circumstances, at the time of shipment, product prices are fixed or determinable and the amount of future returns and pricing allowances to be granted in the future can be reasonably estimated and are accrued.  Accordingly, revenues are recorded net of these estimated amounts.


Intellectual Property Revenues


We derive intellectual property revenues from the sale and licensing of our intellectual property, maintenance and support fees and royalty revenue following the sale by our licensees of products incorporating the licensed technology.  We enter into intellectual property licensing agreements that generally provide licensees the right to incorporate our intellectual property components in their products with terms and conditions that vary by licensee.  Our intellectual property licensing agreements may include multiple elements with an intellectual property license bundled with support services.  For such multiple element intellectual property licensing arrangements, we follow the guidance in ASC Topic 605-025, Multiple-Element Arrangements , to determine whether there is more than one unit of accounting.


We recognize revenue from the sale of patents when there is persuasive evidence of an arrangement, fees are fixed or determinable, delivery has occurred, and collectability is reasonably assured.  All of the requirements are generally fulfilled upon execution of the patent sale arrangement.


License and contract revenues are recorded upon delivery of the technology when there is persuasive evidence of an arrangement, fees are fixed or determinable, delivery has occurred, and collectability is reasonably assured.  The timing of delivery is dependent on, and varies with, the terms of each contract.  Other than maintenance and support, there is no continuing obligation under these arrangements after delivery of the intellectual property.  Deferred revenue is created when we bill a customer in accordance with a contract prior to having met the requirements for revenue recognition.


Certain of our agreements may contain support obligations.  Under such agreements we provide unspecified bug fixes and technical support.  No other upgrades, products, or post-contract support are provided.  These arrangements may be renewable annually by the customer.  Support revenue is recognized ratably over the period during which the obligation exists, typically 12 months or less.


We recognize royalty revenue in the period in which the licensee reports shipment of products incorporating our intellectual property components.  Royalties are calculated on a per unit basis, as specified in our agreement with the licensee.  We may, at


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our discretion and in accordance with our agreements, engage a third-party to perform royalty audits of our licensees.  Any correction of royalties previously reported would occur when the results are resolved.


For multiple-element arrangements, we allocate revenue to all deliverables based on their relative selling prices.  In such circumstances, we use a hierarchy to determine the selling price to be used for allocating revenues to deliverables: (i) vendor-specific objective evidence of fair value (VSOE); (ii) third-party evidence of selling price (TPE); and (iii) best estimate of the selling price (ESP).  VSOE generally exists only when we sell the deliverable separately and revenue is the price actually charged by us for that deliverable.  Generally, we are not able to determine TPE because our licensing arrangements differ from that of our peers.  We have concluded that no VSOE or TPE exists because it is rare that either we or our competitors sell the deliverables on a stand-alone basis.  ESPs reflect our best estimate of what the selling prices of the elements would be if they were sold regularly on a stand-alone basis.  While changes in the allocation of the estimated sales price between the units of accounting will not affect the amount of total revenue recognized for a particular sales arrangement, any material changes in these allocations could impact the timing of revenue recognition, which could affect our results of operations.


In determining ESPs, we apply significant judgment as we weigh a variety of factors, based on the facts and circumstances of the arrangement.  The facts and circumstances we may consider include, but are not limited to, prices charged for similar offerings, if any, our historical pricing practices as well as the nature and complexity of different technologies being licensed, geographies and the number of uses allowed for a given license.


Inventory Valuation


Inventories are stated at lower of cost or market and consist of materials, labor and overhead.  Inventory costs are determined using standard costs which approximate actual costs under the first-in, first-out method.  Costs include the costs of purchased finished products, sorted wafers, and outsourced assembly and test, and internal overhead.  We evaluate inventories for excess quantities and obsolescence.  Our evaluation considers market and economic conditions; technology changes, new product introductions, and changes in strategic business direction; and requires estimates that may include elements that are uncertain.  In order to state the inventory at lower of cost or market, we maintain reserves against individual stocking units.  Inventory write-downs, once established, are not reversed until the related inventories have been sold or scrapped.  If future demand or market conditions are less favorable than our projections, a write-down of inventory may be required, and would be reflected in cost of goods sold in the period the revision is made.


Fair Value


ASC Topic 820, Fair Value Measurements (“ASC 820”), establishes a framework for measuring fair value and requires disclosures about fair value measurement.  ASC 820 emphasizes that a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability.  As a basis for considering market participant assumptions in fair value measurements, ASC 820 established the following fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from sources independent of the reporting entity (observable inputs) and (2) the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs):


Level 1:  Observable inputs such as quoted prices for identical assets or liabilities in active markets;


Level 2:  Other inputs observable directly or indirectly, such as quoted prices for similar assets or liabilities or market-corroborate inputs; and


Level 3:  Unobservable inputs for which there is little or no market data and which requires the owner of the assets or liabilities to develop its own assumptions about how market participants would price these assets or liabilities.  We only have one Level 3 recurring fair value measurement, the compound embedded derivative.


Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of assets and liabilities and their placement within the fair value hierarchy.


Financial Instruments


ASC Topic 825, Financial Instruments , defines the 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, accounts receivable, accounts payable, and accrued expenses.  These financial instruments are stated at their carrying values, which are estimates of their fair values because of their nearness to cash settlement or the comparability of their terms to the terms we


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could obtain, for similar instruments, in the current market.  Our debt instruments are included in long-term debt, net, and convertible subordinated debt, net, on our consolidated balance sheets.


Senior Term A Loan


At its inception, the fair value of the Term A Loan was computed using a cash flow analysis in which the periodic cash coupon payments and the principal payment at maturity were discounted to the valuation date using an appropriate market discount rate.  The discount rate was determined by analyzing the seniority and securitization of the instrument, our financial condition and observing the quoted bond yields in the fixed income market as of the valuation date.  The valuation was determined using Level 3 inputs.


Senior Term B Loan


At its inception, the fair value of the Term B Loan was computed using a binomial lattice model.  The valuation was 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 our common stock into which the Term B Loan is convertible.


Convertible Subordinated Debt


The compound embedded derivative included in our convertible subordinated debentures due October 2014 (“2014 Debentures”) required bifurcation and accounting at fair value because the economic and contractual characteristics of the compound embedded derivative met the criteria for bifurcation and separate accounting due to the conversion price not being indexed to our own stock.  The compound embedded derivative is comprised of the conversion option and a make-whole payment for foregone interest if the holder converts the debenture early.  The make-whole payment for foregone interest expired October 30, 2012, and upon its expiration, the compound embedded derivative no longer met the criteria for bifurcation as all components of the conversion feature are now indexed to our own stock.  A final valuation was completed on October 30, 2012.  We recorded a gain of $0.8 million into earnings due to the change in value and reclassified the final liability value of $2.1 million from other long-term liabilities into equity.


At its inception, the approximate fair value of the compound embedded derivative included in our 2014 Debentures was computed as the difference between the estimated value of the 2014 Debentures with and without the compound embedded derivative features.  The fair value of the 2014 Debentures was estimated using a convertible bond valuation model within a lattice framework.  These valuations were 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 our common stock into which the 2014 Debentures are convertible. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement.


The compound embedded derivative is presented on the balance sheet at fair value and the compound embedded derivative is marked-to-market.  The change in the fair value of the compound embedded derivative is a non-cash item primarily related to the change in price of the underlying common stock and is reflected in earnings.  The compound embedded derivative expired on October 30, 2012. As we intended to, and had the ability to, satisfy the obligations with equity securities, in accordance with ASC Topic 470, Debt , we classified the liability as a long-term liability on our consolidated balance sheets as of September 30, 2012 and September 30, 2011 .


The valuation methodologies we use as described above require considerable judgment and may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values.  Furthermore, although we believe our 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.


Stock Based Compensation


We account for stock based compensation under ASC Topic 718, Compensation-Stock Compensation, which requires us to record related compensation costs.  Calculating the fair value of stock-based compensation awards requires the input of highly subjective assumptions, including the expected life of the awards and expected volatility of our stock price.  Expected volatility is a statistical measure of the amount by which a stock price is expected to fluctuate during a period.  Our estimates of expected volatilities are based on weighted historical implied volatility.  The expected forfeiture rate applied in calculating stock-based compensation cost is estimated using historical data and is updated annually.


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The assumptions used in calculating the fair value of stock-based awards involve estimates that require management judgment.  If factors change and we use different assumptions, our stock-based compensation expense could change significantly in the future.  In addition, if our actual forfeiture rate is different from our estimate, our stock-based compensation expense could change significantly in the future.


Income Taxes


We account for income taxes in accordance with ASC Topic 740, Income Taxes, which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns.  Under this method, we must make estimates and judgments in determining the provision for taxes for financial statement purposes.  These estimates and judgments occur in the calculation of tax credits, benefits, and deductions, and in the calculation of certain tax assets and liabilities that arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes, as well as the interest and penalties related to uncertain tax positions.  Significant changes in these estimates may result in an increase or decrease to our tax provision in a subsequent period.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.


We must assess the likelihood that we will be able to recover our deferred tax assets.  Our valuation allowance against the deferred tax assets is based on our assessments of historical losses and projected operating results in future periods on a “more likely than not” basis.  If and when we generate future taxable income in our tax jurisdictions against which these tax assets may be applied, some portion or all of the valuation allowance would be reversed and an increase in net income would consequently be reported in future years.


The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations.  We recognize liabilities for uncertain tax positions based on a two-step process.  The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any.  If we determine that a tax position will more likely than not be sustained on audit, the second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement.  It is inherently difficult and subjective to estimate such amounts, as we have to determine the probability of various possible outcomes.  We re-evaluate these uncertain tax positions on a quarterly basis.  This evaluation is based on factors such as changes in facts or circumstances, changes in tax law, new audit activity, and effectively settled issues.  Determining whether an uncertain tax position is effectively settled requires judgment.  Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision in the period in which a change in judgment occurs.


Restructuring Charges-Facility


In calculating the cost to abandon our under-utilized facility, we had to estimate the amount to be paid in lease termination payments, the future lease and operating costs to be paid until the lease is terminated, and the amount, if any, of sublease revenues.  This calculation required us to estimate the timing and costs of the lease to be terminated, the amount of operating costs for the affected facility and the timing and rate at which we might be able to sublease or complete negotiations of a lease termination agreement.  To form our estimates for these costs we performed an assessment of the affected facility and considered the current market conditions.  In determining if an event or circumstance occurs that discharges or removes an entity's responsibility to settle a liability for a cost associated with an exit or disposal activity recognized in a prior period, we followed the guidance in ASC 420-10-40-1, that required that the related costs shall be reversed through the same line item(s) in the income statement used when those costs were recognized initially.


Impact of Recent Accounting Pronouncements


For information with respect to recent accounting pronouncements and the impact of these pronouncements see “The Company and Its Significant Accounting Policies” footnote in the accompanying notes to the audited consolidated financial statements.


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Results of Operations


The following table sets forth certain consolidated statements of operations data for the periods indicated.  The percentages in the table are based on net revenues.


September 30,201220112010$%$%$%(in thousands, except for percentages)Net revenues:Product revenues$109,92092.0%$132,74294.2%$165,63399.8%Intellectual property revenues9,5638.0%8,2255.8%3570.2%Net revenues119,483100.0%140,967100.0%165,990100.0%Costs and expenses:—%—%Cost of product revenues46,40738.8%53,67438.1%71,55743.1%Engineering, research and development42,71335.7%52,99037.6%50,97330.7%Selling, general and administrative29,82225.0%41,23329.3%37,61822.7%Restructuring and impairment(1,424)(1.2)%3,6562.6%8540.5%Accounting remediation, reconstruction expense and litigation cost——%——%73—%Amortization of intangible assets3300.3%3480.2%7970.5%Costs and expenses117,84898.6%151,901107.8%161,87297.5%Income (loss) from operations1,6351.4%(10,934)(7.8)%4,1182.5%Other expense (income):Interest expense, net7,7786.5%8,4566.0%9,4955.7%Gain on compound embedded derivative(4,897)(4.1)%(7,680)(5.4)%(7,869)(4.7)%Loss on extinguishment of debt——%3,8742.7%21,31112.8%Other expense (income), net40—%(153)(0.1)%(164)(0.1)%Other expense, net2,9212.4%4,4973.2%22,77313.7%Loss before income tax expense(1,286)(1.1)%(15,431)(10.9)%(18,655)(11.2)%Income tax (benefit) expense(174)(0.1)%(619)(0.4)%1,5210.9%Loss from continuing operations(1,112)(0.9)%(14,812)(10.5)%(20,176)(12.1)%Income from discontinued operations, net of tax——%——%1210.1%Net loss(1,112)(0.9)%(14,812)(10.5)%(20,055)(12.0)%Fair value adjustment of Preferred Stock - Series B——%——%1260.1%Net loss available to common stockholders$(1,112)(0.9)%$(14,812)(10.5)%$(20,181)(12.1)%





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Fiscal Years Ended September 30, 2012 and 2011


Product Revenues


We sell our products into the following markets: (i) Carrier networking; (ii) Enterprise networking; and (iii) Non-core.  The Carrier networking market includes core, metro, edge, and access equipment used for transport, switching, routing, mobile access, and backhaul in service provider networks.  The Enterprise networking market covers Ethernet switching and routing equipment used within LANs in SME and SMB networks and cloud access services.  The Non-core market is comprised of products that have not received additional investment over the last five years and, as a result, have generally been in decline.


The demand for our products is affected by various factors, including our development and introduction of new products, availability and pricing of competing products, capacity constraints at our suppliers, end-of-life product decisions, and general economic conditions.  Therefore, our revenues for the fiscal years ended 2012 and 2011 may not necessarily be indicative of future revenues.


Product revenue by market is as follows:


September 30,20122011Amount% of ProductRevenuesAmount% of ProductRevenuesChange%Change(in thousands, except percentages)Carrier networking$47,63043.4%$61,68546.5%$(14,055)(22.8)%Enterprise networking53,89949.0%64,75448.8%(10,855)(16.8)%Non-core8,3917.6%6,3034.7%2,08833.1%Product revenues$109,920100.0%$132,742100.0%$(22,822)(17.2)%


The decrease in Carrier networking revenues is largely attributable to a broad-based weakness in our end customer markets for Carrier networking, particularly a decline in our SONET/SDH products, including framers, EoS mappers, and FTTH products.  The declines were partially offset by increases in transport products going through end-of-life and in our newer technologies and products, particularly in Ethernet Copper PHYs for Carrier applications.


The decrease in Enterprise networking revenues is driven by declines in 1 Gigabit Ethernet switch and PHY products selling into low-end SME/SMB applications due to overall weak market conditions, primarily in the United States and Asia.  The decrease was partially offset by an increase in Enterprise processing due to revenues from switch fabrics going through end-of-life and an increase in new products.


The increase in Non-core revenues is largely attributable to an increase of our legacy network processors and Fibre Channel PHYs as some of these products moved into end-of-life.


Revenue from end-of-life products totaled $24.9 million and $6.3 million in the fiscal year ended September 30, 2012 and 2011, respectively.  Product phase-outs are part of our normal course of business, and we will continue this practice in the future.  We expect revenues from end-of-life products to decline in fiscal year 2013. However, we cannot predict the degree and/or timing of the impact of product phase-out on future revenues.  From time-to-time, upon customer request or due to a change in our product strategy, we may decide to resume producing a part we previously phased-out.


We also classify our product revenues based on our three product lines: (i) Connectivity; (ii) Ethernet switching; and (iii) Transport processing.


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Product revenue by product line is as follows:


September 30,20122011Amount% of ProductRevenuesAmount% of ProductRevenuesChange%Change(in thousands, except percentages)Connectivity$52,93348.1%$67,73451.0%$(14,801)(21.9)%Ethernet switching32,60729.7%37,94028.6%(5,333)(14.1)%Transport processing24,38022.2%27,06820.4%(2,688)(9.9)%Product revenues$109,920100.0%$132,742100.0%$(22,822)(17.2)%


The decrease in Connectivity revenues is largely attributable to the broad-based decline in the networking equipment market, which negatively impacted the demand for our more mature products, particularly SONET/SDH-based products.


The decrease in Ethernet switching revenues is largely attributable to declines in our Gigabit Ethernet Copper PHYs selling primarily into the Enterprise market, and Ethernet MAC products selling into both the Carrier and Enterprise markets.  The decrease was partially offset by sales of our new Copper PHY products to the Carrier market.


The decrease in Transport processing revenues for fiscal year 2012 compared to fiscal year 2011 is largely attributable to the broad-based market decline for our mature SONET/SDH framers and mappers, offset by increased sales of switch fabric products to customers increasing inventories of these products as they approach end-of-life.


Intellectual Property Revenue September 30,20122011Amount% of NetRevenuesAmount% of NetRevenuesChange%Change(in thousands, except percentages)Intellectual property revenues$9,5638.0%$8,2255.8%$1,33816.3%


Intellectual property includes licenses, royalties, and patents, and for the year ended September 30, 2012 also included the settlement of all future royalties under an existing agreement.  Costs associated with intellectual property revenue are included in selling, general and administrative expenses.


Net revenue from customers that were equal to or greater than 10% of total net revenues is as follows:


September 30,20122011Nu Horizons Electronics **13.5%20.6%WPG Holdings**10.7%*Huawei*10.3%
 ____________________________________________


|  |                                                          
|- | ---------------------------------------------------------
|* | Less than 10% of total net revenues for period indicated.

|   |             
|-- | ------------
|** | Distributors

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Net revenue by geographic area is as follows:


September 30,20122011Amount% of ProductRevenuesAmount% of ProductRevenuesChange%Change(in thousands, except percentages)United States$41,55934.8%$51,69836.7%$(10,139)(19.6)%Asia Pacific62,26052.1%63,92345.3%(1,663)(2.6)%EMEA*15,66413.1%25,34618.0%(9,682)(38.2)%Total net revenues$119,483100.0%$140,967100.0%$(21,484)(15.2)%
 _________________________________________________


|  |                               
|- | ------------------------------
|* | Europe, Middle East and Africa

Revenue by geographic area is based upon the country of billing.  The geographic location of distributors and third-party manufacturing service providers may be different from the geographic location of the ultimate end users.  We believe a substantial portion of the products billed to OEMs and third-party manufacturing service providers in the Asia Pacific region are ultimately shipped to end-markets in the United States and Europe.





Cost of Product Revenue September 30,20122011tiAmount% of Product RevenuesAmount% of Product RevenuesChange%Change(in thousands, except percentages)Cost of product revenues$46,40742.2%$53,67440.4%$(7,267)(13.5)%


We use third-parties for wafer fabrication and assembly services.  Cost of product revenues consists predominantly of: (i) purchased finished wafers; (ii) assembly services; (iii) test services; and (iv) labor and overhead costs associated with product procurement, planning and quality assurance.


The overall decrease in cost of product revenues is largely attributable to lower product revenues, slightly offset by a mix of products that had an overall higher cost.  Our cost of product revenues is affected by various factors, including product mix, volume, and provisions for excess and obsolete inventories, material costs, manufacturing efficiencies, and the position of our products within their life-cycles.  Our cost of product revenues as a percent of net product revenues is affected by these factors, as well as customer mix, volume, pricing, and competitive pricing programs.


We continue to focus our efforts on improving operating efficiencies, including improving product yields, reducing scrap and improving cycle times.


Engineering, Research and Development


September 30,20122011Amount% of NetRevenuesAmount% of NetRevenuesChange%Change(in thousands, except percentages)Engineering, research and development$42,71335.7%$52,99037.6%$(10,277)(19.4)%


R&D expenses consist primarily of compensation expenses for employees engaged in research, design and development activities.  R&D also includes costs of mask sets, which we fully expense in the period, and electronic design automation (“EDA”) tools, software licensing contracts, subcontracting and fabrication costs, depreciation and amortization, and facilities expenses.


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The level of R&D expense will vary from period-to-period, depending on timing of development projects and the purchase of masks aligned to those projects.  The level of R&D expense as a percentage of net revenues will vary, depending, in part, on the level of net revenues.  Our R&D efforts are critical to maintaining a high level of new product introductions and are critical to our plans for future growth.


The decrease in R&D expense for fiscal year 2012 compared to fiscal year 2011 is largely attributable to lower compensation and facility expense of $4.9 million resulting from our consolidation of multiple locations and shift in activities to lower-cost areas, lower mask and test wafer expense of $1.9 million, and lower EDA tools expense of $2.0 million.


We continue to concentrate our spending in R&D to meet customer requirements and to respond to market conditions, and we do not anticipate that the reduction in R&D spending in fiscal year 2012 will impact product development.


Selling, General and Administrative


September 30,20122011Amount% of NetRevenuesAmount% of NetRevenuesChange%Change(in thousands, except percentages)Selling, general and administrative$29,82225.0%$41,23329.3%$(11,411)(27.7)%


Selling, general and administrative (“SG&A”) expense consists primarily of compensation expense, legal and other professional fees, facilities expenses, outside labor, and communication expenses.


The decrease in SG&A expense for fiscal year 2012 compared to fiscal year 2011 is largely attributable to lower compensation related expenses of $3.6 million, a $4.1 million change in bad debt expense due to successful collection of $1.9 million of the $2.2 million of bad debts reserved in the fourth quarter of fiscal 2011, $1.4 million in lower legal and accounting fees, and lower facility and depreciation expenses of $1.2 million due to our consolidation of facilities.  Partially offsetting the reductions was a $1.3 million intangible asset write-down expense in fiscal year 2012 .


Restructuring and Impairment Charges


September 30,20122011Amount% of NetRevenuesAmount% of NetRevenuesChange%Change(in thousands, except percentages)Restructuring and impairment$(1,424)(1.2)%$3,6562.6%$(5,080)(138.9)%


During fiscal year 2011 we consolidated design activities and consolidated our Camarillo operations into a single facility, exiting an adjacent leased facility.  In connection with these activities we incurred approximately $3.7 million of restructuring charges.


In the fourth quarter of 2012, we determined that it was unlikely we would be able to sublease the exited property for the remaining lease term through December 2015.  Therefore, we decided that we would reoccupy the exited facility upon expiration of our main Camarillo facility lease in January 2014, instead of locating to a new facility as originally planned.  Accordingly, we reversed the remaining lease termination reserve of $1.4 million .


Amortization of Intangible Assets


September 30,20122011Amount% of NetRevenuesAmount% of NetRevenuesChange%Change(in thousands, except percentages)Amortization of intangible assets$3300.3%$3480.2%$(18)(5.2)%


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Amortization of intangible assets is solely comprised of the amortization of technology licensing agreements with third-parties.


Interest Expense, net


September 30,20122011Amount% of NetRevenuesAmount% of NetRevenuesChange%Change(in thousands, except percentages)Interest expense, net$7,7786.5%$8,4566.0%$(678)(8.0)%


Net interest expense is comprised of cash interest expense, amortization of debt discount, premium, and debt issuance costs, net of interest income.


The decrease in net interest expense for fiscal year 2012 compared to fiscal year 2011 was primarily due to the pay-down of $8.0 million on the Senior Term Loan in January 2011, the restructuring of the Senior Term Loan on February 4, 2011, and the $1.5 million principal payment on the Term A Loan in July 2011.


Gain on Compound Embedded Derivative


September 30,20122011Amount% of NetRevenuesAmount% of NetRevenuesChange%Change(in thousands, except percentages)Gain on compound embedded derivative$(4,897)(4.1)%$(7,680)(5.4)%$2,783(36.2)%


The gain on our compound embedded derivative related to our 2014 Debentures is primarily generated by the decrease in the price of our underlying common stock during those periods.


Loss on Extinguishment of Debt


September 30,20122011Amount% of NetRevenuesAmount% of NetRevenuesChange%Change(in thousands, except percentages)Loss on extinguishment of debt$——%$3,8742.7%$(3,874)(100.0)%


A loss on extinguishment of debt for fiscal year 2011 was a result of the extinguishment of the Senior Term Loan at fair value, in which we recognized a $3.9 million loss for the difference between the aggregate fair values of Term A and B Loans plus additional amounts and fees paid to the noteholders compared to the net carrying value of the Senior Term Loan.


Income Tax Benefit


September 30,20122011Amount% of NetRevenuesAmount% of NetRevenuesChange%Change(in thousands, except percentages)Income tax benefit$(174)(0.1)%$(619)(0.4)%$445(71.9)%


Our effective tax benefit for fiscal year 2012 was 13.6% .  Our income tax benefit is primarily impacted by foreign taxes, withholding taxes on foreign income that are creditable against United States income taxes, the removal of unrecognized tax benefits, and certain nondeductible interest and share based expenses.  The income tax benefit is also impacted by the release of a portion of the valuation allowances related to certain foreign jurisdictions' deferred tax assets as such balances were more


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likely than not realizable within the applicable carryforward period based on our analysis of the available positive and negative evidence.  Our effective tax benefit for fiscal year 2011 was 4.0% .


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Fiscal Years Ended September 30, 2011 and 2010


Product Revenues


Product revenue by market is as follows:


September 30,20112010Amount% of ProductRevenuesAmount% of ProductRevenuesChange%Change(in thousands, except percentages)Carrier networking$61,68546.5%$72,38043.7%$(10,695)(14.8)%Enterprise networking64,75448.8%75,97545.9%(11,221)(14.8)%Non-core6,3034.7%17,27810.4%(10,975)(63.5)%Product revenues$132,742100.0%$165,633100.0%$(32,891)(19.9)%


The decrease in Carrier networking revenues is largely attributable to a broad-based weakness in the market.  The weakness was seen across a wide range of customers and products, primarily in China.


The decrease in Enterprise networking revenues is driven by declines in 1 Gigabit Ethernet switch and PHY products selling into low-end SME/SMB applications due to overall weak market conditions.


The decrease in Non-core revenues is largely attributable to a decline of our legacy network processor product line and legacy Fibre Channel PHY products.


Revenue from end-of-life products was $6.3 million and $3.5 million in fiscal year 2011 and fiscal year 2010 , respectively.


We also classify our product revenues based on our three product lines: (i) Connectivity; (ii) Ethernet switching; and (iii) Transport processing.


Product revenue by product line is as follows:


September 30,20112010Amount% of ProductRevenuesAmount% of ProductRevenuesChange%Change(in thousands, except percentages)Connectivity$67,73451.0%$82,52249.8%$(14,788)(17.9)%Ethernet switching37,94028.6%46,71428.2%(8,774)(18.8)%Transport processing27,06820.4%36,39722.0%(9,329)(25.6)%Product revenues$132,742100.0%$165,633100.0%$(32,891)(19.9)%


The reduction in Connectivity revenues is largely attributable to a decrease in products for legacy Fibre Channel applications and in10G Laser Drivers for long haul DWDM applications.  The declines were partially offset by gains in PMD components for FTTH and 10GE.


The reduction in Ethernet switching revenue is largely attributable to overall market softness in our Gigabit Ethernet switches and PHYs selling primarily into SME/SMB markets.


The lower Transport processing revenue is largely attributable to decline in network processor  products and switch fabric products.  The decrease was partially offset by an increase in our legacy SONET/SDH framers.


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Intellectual Property Revenue September 30,20112010Amount% of NetRevenuesAmount% of NetRevenuesChange%Change(in thousands, except percentages)Intellectual property revenues$8,2255.8%$3570.2%$7,8682,203.9%


The increase in intellectual property revenue is attributable to the sale and licensing of intellectual property during fiscal year 2011 , as well as royalty revenues.  The royalties received or recognized for the same periods in fiscal year 2010 were minimal.  Costs associated with intellectual property revenue are included in selling, general and administrative expenses.


Net revenue from customers that were equal to or greater than 10% of total net revenues is as follows:


September 30,20112010Nu Horizons Electronics **20.6%23.9%Huawei10.3%13.3%
 ________________________________________________


**Distributor


Net revenue by geographic area is as follows:


September 30,20112010Amount% of ProductRevenuesAmount% of ProductRevenuesChange%Change(in thousands, except percentages)United States$51,69836.7%$54,19032.7%$(2,492)(4.6)%Asia Pacific63,92345.3%84,04550.6%(20,122)(23.9)%EMEA*25,34618.0%27,75516.7%(2,409)(8.7)%Total net revenues$140,967100.0%$165,990100.0%$(25,023)(15.1)%
 _________________________________________________


*Europe, Middle East and Africa





Cost of Product Revenues


September 30,20112010Amount% of Product RevenuesAmount% of Product RevenuesChange%Change(in thousands, except percentages)Cost of product revenues$53,67440.4%$71,55743.2%$(17,883)(25.0)%


The overall decrease in cost of product revenues is largely attributable to lower product revenues.  The decrease in the cost of net revenues as a percent of product revenues is due to a reduction in fixed costs of operations of $4.6 million, enabled by outsourcing wafer and final testing from our headquarters to an outsourced model using an offshore facility.


In fiscal year 2011 , we decreased production volumes in response to lower demand and improvements in availability of capacity at foundries and assembly sub-contractors eliminating the need to maintain higher inventory balances.  As a result, production costs per unit have increased due to certain fixed costs of manufacturing operations.


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Engineering, Research and Development


September 30,20112010Amount% of NetRevenuesAmount% of NetRevenuesChange%Change(in thousands, except percentages)Engineering, research and development$52,99037.6%$50,97330.7%$2,0174.0%


The higher R&D expense in fiscal year 2011 is largely attributable to increased costs of $3.2 million associated with the purchase of mask sets and wafers, EDA tools and new product evaluation boards associated with our two years of significant new product introductions and bringing those new products to market.  This increase in R&D expense was partially offset by lower compensation expenses of $1.2 million related to the reassignment of employees to selling and marketing activities and headcount reductions.


Selling, General and Administrative


September 30,20112010Amount% of NetRevenuesAmount% of NetRevenuesChange%Change(in thousands, except percentages)Selling, general and administrative$41,23329.3%$37,61822.7%$3,6159.6%


The increase in SG&A is largely attributable to an increase of $2.2 million in our allowance for doubtful accounts related to specific, potentially uncollectible accounts receivable balances identified during our fiscal year 2011 fourth quarter, $2.2 million related to increased compensation and $1.0 million due to higher facility costs partially offset by a $1.9 million decrease in professional fees.  The increased compensation expense results from the reassignment of employees from R&D, additional marketing personnel and increased non-cash stock compensation.  The increase in facility costs is primarily due to the re-allocation of expenses from cost of revenues due to the outsourcing of our wafer and final testing from our headquarters to an outsourced model.


Restructuring and Impairment Charges


September 30,20112010Amount% of NetRevenuesAmount% of NetRevenuesChange%Change(in thousands, except percentages)Restructuring and impairment$3,6562.6%$8540.5%$2,802328.1%


During fiscal year 2011 we consolidated design activities and consolidated our Camarillo operations into a single facility, exiting an adjacent leased facility.  In connection with these activities we incurred approximately $3.7 million of restructuring charges.


In fiscal year 2010, we eliminated test activities at our headquarters and outsourced testing to a third-party, offshore facility, resulting in restructuring charges of $0.9 million.


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Amortization of Intangible Assets


September 30,20112010Amount% of NetRevenuesAmount% of NetRevenuesChange%Change(in thousands, except percentages)Amortization of intangible assets$3480.2%$7970.5%$(449)(56.3)%


The decrease in amortization expense for fiscal year 2011 compared to fiscal year 2010 is due to the amortization of existing technology licensing agreements with third-parties, some of which became fully amortized during fiscal year 2011 .


Interest Expense, net


September 30,20112010Amount% of NetRevenuesAmount% of NetRevenuesChange%Change(in thousands, except percentages)Interest expense, net$8,4566.0%$9,4955.7%$(1,039)(10.9)%


The decrease in net interest expense for fiscal year 2011 compared to fiscal year 2010 was primarily due to an $8.0 million pay-down on the Senior Term Loan in January 2011, the restructuring of the Senior Term Loan on February 4, 2011, and the $1.5 million principal payment on the Term A Loan in July 2011.


Gain on Compound Embedded Derivative


September 30,20112010Amount% of Net RevenuesAmount% of Net RevenuesChange%Change(in thousands, except percentages)Gain on compound embedded derivative$(7,680)(5.4)%$(7,869)(4.7)%$189(2.4)%


The gain on our compound embedded derivative related to our 2014 Debentures in fiscal years 2011 and 2010 is primarily generated by the decrease in the price of our underlying common stock during those periods.


In fiscal year 2010, the gain on the compound embedded derivative was partially offset by a loss of $1.1 million recorded upon the exercise of the premium put associated with our then outstanding 2024 Debentures, which did not recur in fiscal year 2011.


Loss on Extinguishment of Debt


September 30,20112010Amount% of Net RevenuesAmount% of Net RevenuesChange%Change(in thousands, except percentages)Loss on extinguishment of debt$3,8742.7%$21,31112.8%$(17,437)(81.8)%


A loss on extinguishment of debt for fiscal year 2011 was a result of the extinguishment of the Senior Term Loan at fair value, in which we recognized a $3.9 million loss for the difference between the aggregate fair values of Term A and B Loans plus additional amounts and fees paid to the noteholders compared to the net carrying value of the Senior Term Loan.  For the purposes of calculating this loss on extinguishment, the net carrying amount of the Senior Term Loan was $18.7 million, which included the remaining outstanding principal of $17.0 million, the payment-in-kind balance of $1.7 million, and the balance of the unamortized costs of $0.6 million, as of February 4, 2011.


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In fiscal year 2010 , the loss on extinguishment of debt occurred when we recorded the new instruments issued in extinguishment of the 2024 Debentures at fair value and recognized a $21.6 million loss for the difference between the fair values of the new instruments, including approximately $0.8 million for fees paid to the noteholders, compared to the net carrying value of the 2024 Debentures.


Income Tax (Benefit) Expense


September 30,20112010Amount% of Net RevenuesAmount% of Net RevenuesChange%Change(in thousands, except percentages)Income tax (benefit) expense$(619)(0.4)%$1,5210.9%$(2,140)(140.7)%


Our effective tax benefit for fiscal year 2011 was 4.0% .  The income tax benefit in fiscal year 2011 is primarily due to the reversal of uncertain tax positions due to the statute of limitations expiration, refundable federal income tax, and reversal of foreign deferred tax liabilities, minimum taxes, and foreign taxes.  Our effective tax rate for fiscal year 2010 was (8.1%), which was lower than the federal and state statutory rate due to the utilization of NOL carryforwards and tax credits to offset taxes, other than federal and state minimum taxes and foreign taxes.


Financial Condition and Liquidity


Cash Flow Analysis


Cash increased to $23.9 million at September 30, 2012 , from $17.3 million at September 30, 2011 and decreased from $38.1 million at September 30, 2010.  During the fiscal year ended September 30, 2012 , we generated cash from operations, which was partially offset by cash used for capital expenditures and financing activities.  Our cash flows from operating, investing and financing activities are summarized as follows:


September 30,201220112010(in thousands)Net cash provided by (used in) operating activities$8,809$(7,211)$1,472Net cash used in investing activities(1,602)(3,457)(3,188)Net cash used in financing activities(634)(10,141)(17,701)Net increase (decrease) in cash6,573(20,809)(19,417)Cash at beginning of period17,31838,12757,544Cash at end of period$23,891$17,318$38,127


Net Cash Provided by (Used In) Operating Activities


During the fiscal year ended September 30, 2012 , cash provided by operating activities totaled $8.8 million .  Excluding changes in working capital, cash generated by operations totaled $4.0 million .  Cash increased $8.8 million from operating with lower inventory levels and $0.9 million from operating with lower accounts receivable, prepaid and other assets.  These increases were partially offset by $1.9 million cash used to pay down accounts payable, accrued expenses and other liabilities, and $3.0 million related to a decrease in deferred revenue due to lower purchases from distributors.


Inventory decreased $8.8 million from $20.9 million at September 30, 2011 to $12.1 million at September 30, 2012 due to ongoing efforts to ensure purchases align with production and concerted efforts to reduce excess inventory.  Accounts payable and accrued liabilities decreased by $3.1 million from $21.6 million at September 30, 2011 to $18.5 million at September 30, 2012 due to the pay-down of our obligations and to a lesser extent the timing of payments to our vendors and other service providers and non-cash restructuring gain.


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During the fiscal year ended September 30, 2011 , cash used in operating activities totaled $7.2 million .  Excluding changes in working capital, cash used to fund our losses totaled $6.0 million .  We also used $9.8 million to pay down our accounts payable and accrued liabilities and $3.0 million related to a decrease in deferred revenue due to lower purchases from distributors.  These uses were partially offset by the generation of cash from the collection of accounts receivable of $4.0 million and operating with lower inventory levels of $6.4 million .


Accounts receivable decreased $4.0 million from $15.8 million at September 30, 2010 to $9.6 million at September 30, 2011 .  The decrease in accounts receivable was primarily due to lower sales during the year ended September 30, 2011 compared to the same period in the prior year, as well as a $2.2 million reserve for potential bad debt.  Inventory decreased $6.4 million from $27.3 million at September 30, 2010 to $20.9 million at September 30, 2011 .  Due to positive changes in the availability of materials, we decreased purchasing in fiscal year 2011.


Accounts payable and accrued expenses decreased by $9.8 million from $29.5 million at September 30, 2010 to $19.7 million at September 30, 2011 due to a reduction in purchases from our suppliers as industry-wide material shortages eased, as well as the timing of payments to our vendors and other service providers, and a payment of $3.0 million in settlement of litigation with the SEC in the second quarter of fiscal year 2011.


During fiscal year 2010, cash provided by operating activities totaled $1.5 million.  Cash generated by operations excluding changes in working capital totaled $2.2 million.  Accounts payable and accrued liabilities generated cash of $4.0 million and related to higher inventory purchases near year end and increases in accruals for software licensing, interest payable and payroll.  Deferred revenue increased $2.4 million resulting from an increase in distributor purchases near end of the year.  These sources were partially offset by an $8.5 million use of cash to build up our inventory levels in anticipation of higher sales demand and anticipated material shortages and increased accounts receivable of $0.7 million resulting from higher sales near year end.


Accounts receivable increased $0.7 million from $15.1 million at September 30, 2009 to $15.8 million at September 30, 2010.  The increase in accounts receivable was primarily due to higher sales at the end of fiscal year 2010 compared to the prior year period.  Inventory increased $8.5 million from $18.8 million at September 30, 2009 to $27.3 million at September 30, 2010, due to the build up our inventory levels in anticipation of higher sales demand and anticipated material shortages.  Accounts payable and accrued expenses increased by $4.1 million from $25.4 million at September 30, 2009 to $29.5 million at September 30, 2010, due to an increase in purchases at year end, increased accruals for software licensing, interest payable and payroll compared to the same period in fiscal year 2009.


Net Cash Used In Investing Activities


Investing activities used $1.7 million for capital expenditures and payments under licensing agreements, partially offset by $0.1 million of proceeds from the sale of fixed assets in fiscal year 2012.  Investing activities used $3.5 million and $3.2 million in cash in fiscal years 2011 and 2010, respectively for capital expenditures and payments under licensing agreements.


Net Cash Used In Financing Activities


Financing activities used $0.6 million in cash in fiscal year 2012 , primarily for the repurchase and retirement of restricted stock units for payroll taxes.  Financing activities used $10.1 million in cash in fiscal year 2011 , primarily for a principal payment of $8.0 million on the Senior Term loan, $1.5 million payment of our Term A Loan, and $0.6 million for the repurchase and retirement of restricted stock units for payroll taxes.  In 2010, our financing activities used $17.7 million in cash, which was primarily due to a cash payment of $10.0 million to the holders of the 2024 Debentures, $5.0 million to pay down the principal amount of the Senior Term Loan and equity and debt issuance costs of $2.5 million.


Capital Resources, including Long-Term Debt, Contingent Liabilities and Operating Leases


Prospective Capital Needs


Our principal sources of liquidity are our existing cash, cash generated from product sales, and cash generated from the sales or licensing of our intellectual property.  Our cash totaled $23.9 million at September 30, 2012 .  Our working capital at September 30, 2012 was $28.7 million .


In order to achieve sustained profitability and positive cash flows from operations, we may need to further reduce operating expenses and/or increase revenue.  We have completed a series of cost reduction actions that have improved our operating expense structure.  We will continue to perform additional actions, as necessary.  Our ability to maintain, or increase, current


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revenue levels to sustain profitability will depend, in part, on demand for our products.  We believe that our existing cash, along with cash expected to be generated from product sales and the sale or licensing of our intellectual property, and the careful management of working capital requirements, will be sufficient to fund our operations and R&D efforts, anticipated capital expenditures, working capital, and other financing requirements for the next 12 months.  In order to increase our working capital, we may seek to obtain additional debt or equity financing.  However, we cannot assure you that such financing will be available to us on favorable terms, or at all, particularly in light of recent economic conditions in the capital markets.


Our long term debt is comprised of our Term A and B loans and 2014 Debentures.  Amounts due under these agreements total $7.9 million in February 2014 and $55.8 million due in October 2014.  We currently anticipate that cash on hand and cash provided by operating activities will permit us to pay the amount due in February 2014 and a portion of the amount due in October 2014.  In order to meet the remaining debt obligation we may seek to modify the terms of the existing debt and/or obtain additional debt or equity financing.  However, we cannot assure you that we will be able to modify the terms of the existing debt or that additional debt or equity financing will be available to us on favorable terms or at all.


We have a Form S-3 universal shelf registration statement on file with the SEC.  The universal shelf registration statement on Form S-3 permits Vitesse to sell, in one or more public offerings, shares of our common stock, shares of preferred stock or debt securities, or any combination of such securities, for proceeds in an aggregate amount of up to $75.0 million .  The Form S-3 will expire in accordance with applicable SEC rules on December 27, 2014.  To date no securities have been issued pursuant to the registration statement.


Contractual Obligations


Our significant contractual obligations as of September 30, 2012 are as follows:


Payment Obligations by Fiscal Year20132014201520162017ThereafterTotal(in thousands)Convertible subordinated debt (1)$—$—$46,493$—$—$—$46,493Term A Loan (2)—7,857————7,857Term B Loan (3)——9,342———9,342Loan interest (4)5,3145,138———10,452Operating leases (5)3,0892,0021,131199——6,421Software licenses (6)7,6767,0736,5032,8002,8002,80029,652Inventory and related purchase obligations (7)5,033280280———5,593Total$21,112$22,350$63,749$2,999$2,800$2,800$115,810
 ________________________________________________


|    |                                                                                             
|--- | --------------------------------------------------------------------------------------------
|(1) | 2014 Debentures represents amounts due for our 8.0% convertible debentures due October 2014.

|    |                                                                                            
|--- | -------------------------------------------------------------------------------------------
|(2) | Term A Loan represents amounts due for our 10.5% fixed rate senior notes due February 2014.

|    |                                                                                          
|--- | -----------------------------------------------------------------------------------------
|(3) | Term B Loan represents amounts due for our 8.0% fixed rate senior notes due October 2014.

|    |                                                                                  
|--- | ---------------------------------------------------------------------------------
|(4) | Interest payable for Term A Loans, Term B Loans and 2014 Debentures through 2015.

|    |                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------
|(5) | We lease facilities under non-cancellable operating lease agreements that expire at various dates through 2016.

|    |                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------
|(6) | Software license commitments represent non-cancellable licenses of technology from third-parties used in the development of our products.

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(7) | Inventory and related purchase obligations represent non-cancellable purchase commitments for wafers and substrate parts.  For purposes of the table above, inventory and related purchase obligations are defined as agreements that are enforceable and legally binding and that specify all significant terms.  Our purchase orders are based on our current manufacturing needs and are typically fulfilled by our vendors within a relatively short time.

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Off-Balance Sheet Arrangements


At September 30, 2012 , we had no material off-balance sheet arrangements, other than operating leases.


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


Market risk is the potential loss arising from adverse changes in market rates and prices.  Our market risk exposure is solely a result of fluctuations in foreign currency exchange rates.  We do not hold or issue financial instruments for trading purposes.


Interest Rate Risk


Our Term A and B Loans and 2014 Debentures bear fixed interest rates, and therefore, would not be subject to interest rate risk


Foreign Currency Exchange Risk


We conduct business in certain foreign markets, primarily in the European Union and Asia.  Our primary exposure to foreign currency risk relates to investments in foreign subsidiaries that transact business in a functional currency other than the United States dollar, primarily the Euro, Danish Kroner, Taiwanese Dollar and Indian Rupee.  We primarily incur research and development, sales and customer support and administrative expenses in these foreign currencies.  All of our sales are denominated in United States dollars, and we are therefore subject to limited foreign currency exchange rate risks as a result of commercial operations in Europe and Asia.  Fluctuations in the United States dollar exchange rate for Euro, Danish Kroner, Taiwanese Dollar and Indian Rupee could result in increased or decreased costs for commercial operations in Europe and Asia.  Had exchange rates of these foreign currencies been 10% higher or lower relative to the United States dollar during 2012, total R&D and SG&A expenses would have been approximately $1.7 million higher or lower.


A relatively small amount of our monetary assets and liabilities are denominated in foreign currencies.  The impact on these assets and liabilities from fluctuations in related foreign currencies relative to the United States dollar would not have had a material impact on our 2012 results of operations.


We outsource our wafer manufacturing, assembly and testing, warehousing and shipping operations to third parties in foreign jurisdictions pursuant to short-term contracts that allow for changes in the fees we are charged for these services.  While the expenses related to these services are denominated in United States dollars, if the value of the United States dollar decreases relative to the currencies of the countries in which such contractors operate, the prices we are charged for their services may increase.  Fluctuations in currency exchange rates could affect our business in the future.


Currently, we have not implemented any hedging strategies to mitigate risks related to the impact of fluctuations in currency exchange rates.


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ITEM 8:  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


Index to Consolidated Financial StatementsReport of Independent Registered Public Accounting Firm59Consolidated Financial Statements:Consolidated Balance Sheets at September 30, 2012 and 201160Consolidated Statements of Operations for the Years Ended September 30, 2012, 2011 and 201061Consolidated Statements of Stockholders' Deficit for the Years Ended September 30, 2012, 2011 and 201062Consolidated Statements of Cash Flows for the Years Ended September 30, 2012, 2011 and 201063Notes to Consolidated Financial Statements64Schedule II Valuation and Qualifying Accounts89


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Report of Independent Registered Public Accounting Firm





Board of Directors and Stockholders


Vitesse Semiconductor Corporation


Camarillo, California


We have audited the accompanying consolidated balance sheets of Vitesse Semiconductor Corporation (Company) as of September 30, 2012 and 2011 and the related consolidated statements of operations, stockholders' deficit, and cash flows for each of the three years in the period ended September 30, 2012. In connection with our audits of the financial statements, we have also audited the financial statement schedule listed in the accompanying index at Item 15(a).  These financial statements and schedule are the responsibility of the Company's management.  Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.


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


In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Vitesse Semiconductor Corporation at September 30, 2012 and 2011, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2012 , in conformity with accounting principles generally accepted in the United States of America.


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


We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Vitesse Semiconductor Corporation's internal control over financial reporting as of September 30, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated December 4, 2012 expressed an unqualified opinion thereon.








/s/ BDO USA, LLP


Los Angeles, California


December 4, 2012


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VITESSE SEMICONDUCTOR CORPORATION


CONSOLIDATED BALANCE SHEETS


September 30, 2012September 30, 2011(in thousands, except par value)ASSETSCurrent assets:Cash$23,891$17,318Accounts receivable, net9,4039,591Inventory, net12,06020,857Prepaid expenses and other current assets2,1252,443Total current assets47,47950,209Property, plant and equipment, net3,8325,934Other intangible assets, net1,1751,781Other assets4,1303,070$56,616$60,994LIABILITIES AND STOCKHOLDERS' DEFICITCurrent liabilities:Accounts payable$5,726$5,198Accrued expenses and other current liabilities12,18814,474Deferred revenue8713,878Total current liabilities18,78523,550Other long-term liabilities5741,927Long-term debt, net15,85215,444Compound embedded derivative2,8997,796Convertible subordinated debt, net42,52140,736Total liabilities80,63189,453Commitments and contingencies, See note 12Stockholders' deficit:Preferred stock, $0.01 par value: 10,000 shares authorized; Series B Non Cumulative, Convertible, 135 shares outstanding at September 30, 2012 and 2011, respectively11Common stock, $0.01 par value: 250,000 shares authorized; 25,812 and 24,471 shares outstanding at September 30, 2012 and 2011, respectively258245Additional paid-in-capital1,829,9761,824,433Accumulated deficit(1,854,250)(1,853,138)Total stockholders' deficit(24,015)(28,459)$56,616$60,994





See accompanying notes to consolidated financial statements.





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VITESSE SEMICONDUCTOR CORPORATION


CONSOLIDATED STATEMENTS OF OPERATIONS





September 30,201220112010(in thousands, except per share data)Net revenues:Product revenues$109,920$132,742$165,633Intellectual property revenues9,5638,225357Net revenues119,483140,967165,990Costs and expenses:Cost of product revenues46,40753,67471,557Engineering, research and development42,71352,99050,973Selling, general and administrative29,82241,23337,618Restructuring and impairment(1,424)3,656854Accounting remediation, reconstruction expense and litigation cost——73Amortization of intangible assets330348797Costs and expenses117,848151,901161,872Income (loss) from operations1,635(10,934)4,118Other expense (income):Interest expense, net7,7788,4569,495Gain on compound embedded derivative(4,897)(7,680)(7,869)Loss on extinguishment of debt—3,87421,311Other expense (income), net40(153)(164)Other expense, net2,9214,49722,773Loss before income tax expense(1,286)(15,431)(18,655)Income tax (benefit) expense(174)(619)1,521Loss from continuing operations(1,112)(14,812)(20,176)Income from discontinued operations, net of tax——121Net loss(1,112)(14,812)(20,055)Fair value adjustment of Preferred Stock - Series B——126Net loss available to common stockholders$(1,112)$(14,812)$(20,181)Net loss per common share - basic and diluted:Continuing operations$(0.04)$(0.61)$(0.96)Discontinued operations——0.01Net loss per common share - basic and diluted:(0.04)(0.61)(0.95)Fair value adjustment of Preferred Stock - Series B——(0.01)Net loss per common share available to common stockholders$(0.04)$(0.61)$(0.96)Weighted average common shares outstanding - basic and diluted25,12124,31521,074





See accompanying notes to consolidated financial statements.





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VITESSE SEMICONDUCTOR CORPORATION


CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT


Preferred StockCommon StockAdditionalPaid-in-CapitalAccumulated DeficitTotal Vitesse Semiconductor Corporation Stockholders' DeficitNon Controlling InterestTotalStockholders' Deficit(in thousands)SharesAmountSharesAmountBalance at September 30, 2009—$—11,545$115$1,756,797$(1,818,271)$(61,359)$86$(61,273)Net loss—————(20,055)(20,055)(1)(20,056)Compensation expense related to stock options and awards————2,236—2,236—2,236Stock issued pursuant to debt restructuring77188,6478752,409—52,504—52,504Debt restructuring costs————(1,050)—(1,050)—(1,050)Conversion of Series B Preferred Shares(585)(6)2,92529(23)————Conversion of 8% Debentures——87096,004—6,013—6,013Tax expense on debt transaction————423—423—423Distribution to minority interest holders———————(3)(3)Balance at September 30, 2010186223,9872401,816,796(1,838,326)(21,288)82(21,206)Net loss—————(14,812)(14,812)—(14,812)Compensation expense related to stock options, awards and ESPP————3,152—3,152—3,152Residual value allocated to the equity conversion feature————2,490—2,490—2,490Premium related to Term B Loan issued in debt exchange————2,572—2,572—2,572Conversion of Series B Preferred Shares(51)(1)2553(2)————Release of restricted stock units——3353(3)————Repurchase and retirement of restricted stock units for payroll taxes——(106)(1)(572)—(573)—(573)Distribution to minority interest holders———————(82)(82)Balance at September 30, 2011135124,4712451,824,433(1,853,138)(28,459)—(28,459)Net loss—————(1,112)(1,112)—(1,112)Compensation expense related to stock options, awards and ESPP————4,442—4,442—4,442Issuance of common stock upon exercise of stock options——6—16—16—16Issuance of shares under ESPP——82281,729—1,737—1,737Release of restricted stock units——7217(7)————Repurchase and retirement of restricted stock units for payroll taxes——(208)(2)(637)—(639)—(639)Balance at September 30, 2012135$125,812$258$1,829,976$(1,854,250)$(24,015)$—$(24,015)





See accompanying notes to consolidated financial statements.





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VITESSE SEMICONDUCTOR CORPORATION


CONSOLIDATED STATEMENTS OF CASH FLOWS September 30,201220112010(in thousands)Cash flows provided by (used in) operating activities:Net loss$(1,112)$(14,812)$(20,055)Adjustments to reconcile net loss to net cash provided by (used in) operating activities:Depreciation and amortization2,9633,6283,540Stock-based compensation4,4423,1522,236Change in fair value of compound embedded derivative liability(4,897)(7,680)(7,869)Deferred income taxes(1,537)——Common stock issued for employee stock plans1,737——Allowance for doubtful accounts—2,212—Restructuring charges(1,424)——Loss on asset impairment1,3241,187—Gain on conversion of debt——(265)Loss on extinguishment of debt, net—3,79420,765Interest paid in kind—4151,268Amortization of debt issuance costs272279813Amortization of debt discounts2,3632,0371,784Accretion of debt premiums(157)(188)—Change in operating assets and liabilities:Accounts receivable1883,962(691)Inventory8,7976,416(8,464)Prepaids and other assets7391,0742,005Accounts payable528(8,018)2,025Accrued expenses and other liabilities(2,410)(1,621)2,020Deferred revenue(3,007)(3,048)2,360Net cash provided by (used in) operating activities8,809(7,211)1,472Cash flows used in investing activities:Capital expenditures(808)(3,337)(3,078)Payments under licensing agreements(867)(120)(110)Proceeds from sale of fixed assets73——Net cash used in investing activities(1,602)(3,457)(3,188)Cash flows used in financing activities:Proceeds from the exercise of stock options16——Payment of convertible debentures——(10,000)Payment of senior debt—(9,500)(5,000)Equity issuance costs——(1,050)Debt issuance costs—(60)(1,365)Prepayment fee on senior debt——(50)Repurchase and retirement of restricted stock units for payroll taxes(639)(573)—Other(11)(8)(236)Net cash used in financing activities(634)(10,141)(17,701)Net increase (decrease) in cash6,573(20,809)(19,417)Cash at beginning of period17,31838,12757,544Cash at end of period$23,891$17,318$38,127Supplemental disclosure of non cash transactions:Cash paid during the year for:Interest$5,341$5,695$4,568Income taxes1,440392565Non cash investing and financing activities:Common stock issued in exchange for Series B Preferred Stock—329,254Residual value allocated to the equity conversion feature—2,490—Premium related to Term B Loan issued in debt exchange—2,572—Issuance of 2014 convertible debentures——40,343Common stock issued in exchange for 2024 debentures——36,317Preferred stock - Series B issued in exchange for 2024 debentures——16,187Compound embedded derivative issued in exchange for 2024 debentures——27,925Common stock issued in exchange for 2014 debentures——6,013





See accompanying notes to consolidated financial statements.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE 1—THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES


Description of Business


Vitesse Semiconductor Corporation (“Vitesse,” the “Company,” “us” or “we”) is a leading supplier of high-performance integrated circuits (“ICs”) that are used primarily by manufacturers of networking systems for Carrier and Enterprise networking applications.  Vitesse designs, develops and markets a diverse portfolio of high-performance, low-power and cost-competitive semiconductor products for these applications.


Vitesse was incorporated in the state of Delaware in 1987.  Our headquarters are located at 741 Calle Plano, Camarillo, California, and our phone number is (805) 388-3700.  Our stock trades on the NASDAQ Global Market under the ticker symbol VTSS.


Fiscal Year


Our fiscal year is October 1 through September 30.


Basis of Presentation


The accompanying consolidated financial statements are prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and accounting principles generally accepted in the United States (“GAAP”).  Our reporting currency is the United States dollar.  Our consolidated financial statements include the accounts of Vitesse and our subsidiaries.  All inter-company accounts and transactions were eliminated in consolidation.


Reclassifications


Certain reclassifications have been made to prior year amounts and related footnotes to conform to current-year presentation with no changes to stockholders’ deficit amounts or net loss for fiscal year 2010 or 2011.


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 and translation gains and losses are included in results of operations.


Use of Estimates


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


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Revenue Recognition


Product Revenues


In accordance with Accounting Standards Codification (“ASC”) Topic 605, Revenue Recognition , 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 where the earnings process is incomplete.


A portion of our product sales is made through distributors under agreements allowing for pricing credits and/or right of return.  Our past history with these pricing credits and/or right of return provisions prevent us from being able to reasonably estimate the final price of our inventory to be sold and the amount of inventory that could be returned pursuant to these agreements.  As a result, the fixed and determinable revenue recognition criterion has not been met at the time we deliver products allowing for pricing credits or right of returns.  Accordingly, product revenue from sales made through these distributors is not recognized until the distributors ship the product to their customers.  We also maintain inventory, or hub, arrangements with certain customers.  Pursuant to these arrangements, we deliver products to a customer or a designated third-party warehouse based upon the customer’s projected needs, but do not recognize revenue unless and until the customer reports that it has removed our product from the warehouse and taken title and risk of loss.


From time-to-time, we may ship goods to our distributors with no pricing credits and/or no or limited right of return.  Under these circumstances, at the time of shipment, product prices are fixed or determinable and the amount of future returns and pricing allowances to be granted in the future can be reasonably estimated and are accrued.  Accordingly, revenues are recorded net of these estimated amounts.


Intellectual Property Revenues


We derive intellectual property revenues from the sale and licensing of our intellectual property, maintenance and support and royalty revenue following the sale by our licensees of products incorporating the licensed technology.  We enter into intellectual property licensing agreements that generally provide licensees the right to incorporate our intellectual property components in their products with terms and conditions that vary by licensee.  Our intellectual property licensing agreements may include multiple elements with an intellectual property license bundled with support services.  For such multiple element intellectual property licensing arrangements, we follow the guidance in ASC Topic 605-025, Multiple-Element Arrangements , to determine whether there is more than one unit of accounting.


We recognize revenue from the sale of patents when there is persuasive evidence of an arrangement, fees are fixed or determinable, delivery has occurred, and collectability is reasonably assured.  All of the requirements are generally fulfilled upon execution of the patent sale arrangement.


License and contract revenues are recorded upon delivery of the technology when there is persuasive evidence of an arrangement, fees are fixed or determinable, delivery has occurred, and collectability is reasonably assured.  The timing of delivery is dependent on, and varies with, the terms of each contract.  Other than maintenance and support, there is no continuing obligation under these arrangements after delivery of the intellectual property.  Deferred revenue is created when we bill a customer in accordance with a contract prior to having met the requirements for revenue recognition.


Certain of our agreements may contain support obligations.  Under such agreements we provide unspecified bug fixes and technical support.  No other upgrades, products, or post-contract support are provided.  These arrangements may be renewable annually by the customer.  Support revenue is recognized ratably over the period during which the obligation exists, typically 12 months or less.


We recognize royalty revenue in the period in which the licensee reports shipment of products incorporating our intellectual property components.  Royalties are calculated on a per unit basis, as specified in our agreement with the licensee.  We may, at our discretion and in accordance with our agreements, engage a third-party to perform royalty audits of our licensees.  Any correction of royalties previously reported would occur when the results are resolved.


For multiple-element arrangements, we allocate revenue to all deliverables based on their relative selling prices.  In such circumstances, we use a hierarchy to determine the selling price to be used for allocating revenues to deliverables: (i) vendor-specific objective evidence of fair value (VSOE); (ii) third-party evidence of selling price (TPE); and (iii) best estimate of the selling price (ESP). VSOE generally exists only when we sell the deliverable separately and revenue is the price actually


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charged by us for that deliverable. Generally, we are not able to determine TPE because our licensing arrangements differ from that of our peers.  We have concluded that no VSOE or TPE exists because it is rare that either we or our competitors sell the deliverables on a stand-alone basis.  ESPs reflect our best estimate of what the selling prices of the elements would be if they were sold regularly on a stand-alone basis.  While changes in the allocation of the estimated sales price between the units of accounting will not affect the amount of total revenue recognized for a particular sales arrangement, any material changes in these allocations could impact the timing of revenue recognition, which could affect our results of operations.


In determining ESPs, we apply significant judgment as we weigh a variety of factors, based on the facts and circumstances of the arrangement.  The facts and circumstances we may consider include, but are not limited to, prices charged for similar offerings, if any, our historical pricing practices as well as the nature and complexity of different technologies being licensed, geographies and the number of uses allowed for a given license.


Shipping and Handling Fees and Costs


Amounts billed to customers for shipping and handling is presented in product revenues.  Costs incurred for shipping and handling are included in cost of revenues.


Research and Development Costs


Research and development costs are expensed when incurred. R&D costs include payroll and related costs, materials, services and design tools used in product development, depreciation, and other overhead costs including facilities and computer equipment costs.  Manufacturing costs associated with the development of a new fabrication process or a new product, including mask costs, are expensed until such time as these processes or products are proven through final testing and initial acceptance by the customer.


Marketing Costs


All of the costs related to marketing and advertising our products are expensed as incurred or at the time the marketing takes place.


Stock‐Based Compensation


ASC Topic 718, Compensation-Stock Compensation (“ASC 718”) requires that all stock‐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.  The benefits of tax deductions in excess of recognized compensation cost are required to be reported as a financing cash flow, rather than operating cash flow, as required under previous literature.  It is also required to calculate the compensation cost of full-value awards such as restricted stock based on the market value of the underlying stock at the date of the grant.  We estimate the expected life of a stock award as the period of time that the award is expected to be outstanding.  Expected lives are estimated in accordance with SEC Staff Accounting Bulletin (“SAB”) No. 107, as amended by SAB No. 110, which provides supplemental application guidance based on the views of the SEC.  We are further required to estimate the fair value of stock‐based payment awards on the date of grant using an option‐pricing model.  The value of the portion of the award that is ultimately expected to vest is recognized as expense ratably over the requisite service periods.  We estimate 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 our stock price.  Although the Black‐Scholes model meets the accounting guidance requirements, the fair values generated by the model may not be indicative of the actual fair values of our awards, as it does not consider other factors important to those stock-based payment awards, such as continued employment, periodic vesting requirements, and limited transferability.


We have elected to recognize compensation expense for all stock‐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 expense recognized through the end of each reporting period is equal to the portion of the grant-date value of the awards that have vested, or for partially vested awards, the value of the portion of the award that is ultimately expected to vest for which the requisite services have been provided.


Other Income, Net


Other income, net, consists of interest income, foreign exchange gains and losses and other non-operating gains and losses.


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Income Taxes


We account for income taxes pursuant to the provisions of ASC Topic 740, Income Taxes (“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 “more likely than not,” we establish a valuation allowance.  To the extent we establish a valuation allowance or increase or decrease this allowance in a period, we include an expense or benefit within the tax provision in the statement of operations.  ASC Topic 740-10 prescribes a “more likely than not” recognition threshold and measurement analysis for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  We recognize potential accrued interest and penalties related to unrecognized tax benefits within the consolidated statements of operations as income tax expense.


Net Loss per Share


Basic and diluted net loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding in each year.  Net loss available to common stockholders is computed after deducting accumulated dividends on cumulative preferred stock and fair value adjustments related to preferred stock.  Potential common shares are not included in the calculation of diluted loss per share because their effect is anti-dilutive.


Risks and Uncertainties


Our future results of operations involve a number of risks and uncertainties.  Factors that could affect our business or future results and cause actual results to vary materially from historical results include, but are not limited to, dependence on the highly cyclical nature of the semiconductor industry, fluctuations in operating results, high fixed costs, declines in average selling prices, decisions by our integrated device manufacturer customers to curtail outsourcing, our substantial indebtedness, our ability to fund liquidity needs, failure to maintain an effective system of internal controls, product return and liability risks, the absence of significant backlog in our business, our dependence on international operations and sales, proposed changes to United States tax laws, our management information systems may prove inadequate, attracting and retaining qualified employees, difficulties consolidating and evolving our operational capabilities, our dependence on materials and equipment suppliers, loss of customers, adverse tax consequences, the development of new proprietary technology and the enforcement of intellectual property rights by or against us, complexity of packaging and test processes, competition, our need to comply with existing and future environmental regulations, fire, flood or other calamity and continued control by existing stockholders.


Our long term debt is comprised of our Term A and B loans and 2014 Debentures.  Amounts due under these agreements total $7.9 million in February 2014 and $55.8 million due in October 2014.  We currently anticipate that cash on hand and cash provided by operating activities will permit us to pay the amount due in February 2014 and a portion of the amount due in October 2014.  In order to meet the remaining debt obligation, we may seek to modify the terms of the existing debt and/or obtain additional debt or equity financing.  However, we cannot assure you that we will be able to modify the terms of the existing debt or that additional debt or equity financing will be available to us on favorable terms or at all.


Financial instruments, which potentially subject us to concentrations of credit risk, consist principally of cash and accounts receivable.  Cash consist of demand deposits maintained with several financial institutions.  Cash is maintained at financial institutions and, at times, balances may exceed federally insured limits.  We have never experienced any losses related to these balances.  All of our non-interest bearing cash balances were fully insured at September 30, 2012 due to a temporary federal program in effect from December 31, 2010 through December 31, 2012.  Under the program, there is no limit to the amount of insurance for eligible accounts.  Beginning 2013, insurance coverage will revert to $250,000 per depositor at each financial institution, and our non-interest bearing cash balances may again exceed federally insured limits.


At September 30, 2012, there was one distributor that accounted for 14% of accounts receivables.  At September 30, 2011, there was one direct customer that accounted for 14% of accounts receivables.  We believe that this concentration and the concentration of credit risk resulting from trade receivables owing from high-technology industry customers is substantially mitigated by our credit evaluation process, relatively short collection periods and maintaining an allowance for anticipated losses.  We generally do not require collateral security for outstanding amounts.


We currently purchase 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 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


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manufacturers in the near future.  We are also dependent upon third parties for our probe testing.  Under our fabless business model, our long-term revenue growth is dependent on our ability to obtain sufficient external manufacturing capacity, including wafer production capacity.  We believe that in addition to the vendors currently utilized by us, other vendors would be able to provide these services.


Accounts Receivable and Allowance for Doubtful Accounts


Accounts receivable are recorded at the invoice amount and presented net of the allowance for doubtful accounts; they do not bear interest.  We evaluate the collectability of accounts receivable at each balance sheet date using a combination of factors, such as historical experience, credit quality, age of the accounts receivable balances, and economic conditions that may affect a customer’s ability to pay.  We include 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.  Our allowance for doubtful accounts is $0.3 million and $2.2 million as of September 30, 2012 and September 30, 2011 , respectively.


Inventory


Inventories are stated at lower of cost or market and consist of materials, labor and overhead.  Inventory costs are determined using standard costs which approximate actual costs under the first-in, first-out method.  Costs include the costs of purchased finished products, sorted wafers, and outsourced assembly, testing and internal overhead.  We evaluate inventories for excess quantities and obsolescence.  Our evaluation considers market and economic conditions; technology changes, new product introductions, and changes in strategic business direction; and requires estimates that may include elements that are uncertain.  In order to state the inventory at lower of cost or market, we maintain reserves against individual stocking units.  Inventory write-downs, once established, are not reversed until the related inventories have been sold or scrapped.  If future demand or market conditions are less favorable than our projections, a write-down of inventory may be required, and would be reflected in cost of goods sold in the period the revision is made.


Property, Plant and Equipment


Property, plant and equipment are carried at cost less depreciation and amortization.  Depreciation and amortization are calculated using the straight-line method over the assets' remaining estimated useful lives, ranging from three to five years for machinery and equipment, including product tooling; and the shorter of lease terms or estimated useful lives for leasehold improvements.


We evaluate the recoverability of property, plant and equipment in accordance with ASC Topic 360, Accounting for the Property, Plant, and Equipment ("ASC 360").  We perform periodic reviews to determine whether facts and circumstances exist that would indicate that the carrying amounts of property, plant and equipment exceeds their fair values.  If facts and circumstances indicate that the carrying amount of property, plant and equipment might not be fully recoverable, projected undiscounted net cash flows associated with the related asset or group of assets over their estimated remaining useful lives are compared against their respective carrying amounts.  In the event that the projected undiscounted cash flows are not sufficient to recover the carrying value of the assets, the assets are written down to their estimated fair values.  All long-lived assets to be disposed of are reported at the lower of carrying amount or fair market value, less expected selling costs.


Intangible Assets


Our intangible assets consist primarily of technology licensing agreements with third-parties.  We account for intangible assets in accordance with ASC Topic 350, Goodwill and Others .  We evaluate our long-lived assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset or asset group may not be recoverable.  The carrying value of an asset or asset group is not recoverable if the amounts of undiscounted future cash flows the assets are expected to generate (including any net proceeds expected from the disposal of the asset) are less than its carrying value.  When we identify that impairment has occurred, we reduce the carrying value of the asset to its comparable market value (if available and appropriate) or to its estimated fair value based on a discounted cash flow approach.  Currently, we do not have goodwill or indefinite-lived intangible assets.


Fair Value


ASC Topic 820, Fair Value Measurements (“ASC 820”), establishes a framework for measuring fair value and requires disclosures about fair value measurement. ASC 820 emphasizes that a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability.  As a basis for considering market


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participant assumptions in fair value measurements, ASC 820 established the following fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from sources independent of the reporting entity (observable inputs) and (2) the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs):


Level 1:  Observable inputs such as quoted prices for identical assets or liabilities in active markets;


Level 2:  Other inputs observable directly or indirectly, such as quoted prices for similar assets or liabilities or market-corroborate inputs; and


Level 3:  Unobservable inputs for which there is little or no market data and which requires the owner of the assets or liabilities to develop its own assumptions about how market participants would price these assets or liabilities.  We only have one Level 3 recurring fair value measurement, the compound embedded derivative.


Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of assets and liabilities and their placement within the fair value hierarchy.


Financial Instruments


ASC Topic 825, Financial Instruments , defines the 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, accounts receivable, accounts payable, and accrued expenses.  These financial instruments are stated at their carrying values, which are estimates of their fair values because of their nearness to cash settlement or the comparability of their terms to the terms we could obtain, for similar instruments, in the current market.  Our debt instruments are included in long-term debt, net, and convertible subordinated debt, net on our consolidated balance sheets.


Senior Term A Loan


At its inception, the fair value of the Term A Loan was computed using a cash flow analysis in which the periodic cash coupon payments and the principal payment at maturity were discounted to the valuation date using an appropriate market discount rate.  The discount rate was determined by analyzing the seniority and securitization of the instrument, our financial condition, and observing the quoted bond yields in the fixed income market as of the valuation date.  The valuation was determined using Level 3 inputs.


Senior Term B Loan


At its inception, the fair value of the Term B Loan was computed using a binomial lattice model.  The valuation was 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 our common stock into which the Term B Loan is convertible.


Convertible Subordinated Debt


The compound embedded derivative included in our convertible subordinated debentures due October 2014 (“2014 Debentures”) required bifurcation and accounting at fair value because the economic and contractual characteristics of the compound embedded derivative met the criteria for bifurcation and separate accounting due to the conversion price not being indexed to our own stock.  The compound embedded derivative is comprised of the conversion option and a make-whole payment for foregone interest if the holder converts the debenture early.  The make-whole payment for foregone interest expires October 30, 2012, and upon its expiration, the compound embedded derivative will no longer meet the criteria for bifurcation as all components of the conversion feature will then be indexed to our own stock.  A final valuation was completed on October 30, 2012.  We recorded a gain of $0.8 million into earnings due to the change in value and reclassified the final liability value of $2.1 million from other long-term liabilities to equity.


At its inception, the approximate fair value of the compound embedded derivative included in our 2014 Debentures was computed as the difference between the estimated value of the 2014 Debentures with and without the compound embedded derivative features.  The fair value of the 2014 Debentures was estimated using a convertible bond valuation model within a lattice framework.  These valuations were 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


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information of our common stock into which the 2014 Debentures are convertible. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement.


The compound embedded derivative is presented on the balance sheet at fair value and the compound embedded derivative is marked-to-market.  The change in the fair value of the compound embedded derivative is a non-cash item primarily related to the change in price of the underlying common stock and is reflected in earnings.  The compound embedded derivative expired on October 30, 2012. As we intended to, and had the ability to, satisfy the obligations with equity securities, in accordance with ASC Topic 470, Debt , we classified the liability as a long-term liability on our consolidated balance sheets as of September 30, 2012 and September 30, 2011 .


The valuation methodologies we use as described above require considerable judgment and may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values.  Furthermore, although we believe our 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.


Warranty


We generally warrant our products against defects for one year from date of shipment.  A warranty reserve is recorded against revenue when products are shipped.  At each reporting period, we adjust our reserve for warranty claims based on our actual warranty claims experience as a percentage of net revenue for the preceding 12 months and also consider the effect of known operational issues that may have an impact that differs from historical trends.  Historically, our warranty returns have not been material.


Contingencies


We assess our exposure to loss contingencies, including environmental, legal and income tax matters, and provide an accrual for 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.


Recent Accounting Pronouncements


In July 2012, the FASB issued ASU 2012-02, Intangibles-Goodwill and Other (Topic 350)-Testing Indefinite-Lived Intangible Assets for Impairment ("ASU 2012-02") , to establish an optional two-step analysis for impairment testing of indefinite-lived intangibles other than goodwill.  The standards update will be effective for financial statements of periods beginning after September 15, 2012, with early adoption permitted. The implementation of the new guidance is not expected to have a material impact on our consolidated financial statements.


NOTE 2—COMPUTATION OF NET LOSS PER SHARE


In accordance with ASC Topic 260, Earnings per Share , basic net income and loss per share is computed by dividing net income or loss by the weighted average number of common shares outstanding during the period.


For fiscal years 2012, 2011 and 2010, we recorded a net loss.  As such, all outstanding potential common shares were excluded from the diluted earnings per share computation.


For periods in which we report net income, 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, and shares to be issued under our Employee Stock Purchase Plan (“ESPP”), warrants, convertible preferred stock, 2014 Debentures and Term B Loan.  Unexercised stock options, restricted stock units, unvested shares to be issued under our ESPP, and warrants are considered to be common stock equivalents if, using the treasury stock method, they are determined to be dilutive.


Under the two-class method of determining earnings for each class of stock, we consider the dividend rights and participating rights in undistributed earnings for each class of stock.  The allocation of undistributed earnings to preferred shares is equal to the amount of earnings per common share that would be distributed on an as-converted basis.


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The following potentially dilutive common shares are excluded from the computation of net loss per share.


September 30,201220112010(in thousands)Outstanding stock options1,8131,6991,490Outstanding restricted stock units1,6861,296771Outstanding warrants—88ESPP shares506293—Convertible preferred stock6746749292014 Debentures10,33210,33210,332Term B Loan1,8871,887—Total potential common stock excluded from calculation16,89816,18913,530





NOTE 3-DETAILS OF CERTAIN FINANCIAL STATEMENT COMPONENTS


The following tables provide details of selected balance sheet items:


September 30,20122011(in thousands)Inventory:Raw materials$1,394$883Work-in-process5,3599,247Finished goods5,30710,727Total$12,060$20,857


September 30,20122011(in thousands)Property, Plant and Equipment, net:Machinery and equipment$80,805$89,547Furniture and fixtures801810Computer equipment9,0259,397Leasehold improvements3,1663,257Construction in progress6628993,863103,300Less: Accumulated depreciation(90,031)(97,366)Total$3,832$5,934


Depreciation expense was $2.6 million , $3.3 million and $2.7 million for fiscal 2012, 2011 and 2010, respectively.


September 30,20122011(in thousands)Other Intangible Assets, net:Intellectual property and technology license agreements$4,482$4,757Less: Accumulated amortization(3,307)(2,976)Total$1,175$1,781


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Intangible assets consisted primarily of technology licensing agreements with third-parties, intellectual property and related costs for our Enterprise Resource Planning (“ERP”) system.  In fiscal year 2012 approximately $1.1 million of our ERP software was completely written off as it was not deemed useful any longer.


The future amortization expense of amortizable intangible assets for the next five years is (in thousands): $321 , $231 , $211 , $190 , $108 , and $114 in 2013, 2014, 2015, 2016, 2017, and thereafter, respectively.


September 30,20122011(in thousands)Other Assets:Deferred tax asset$1,420$—Restricted cash1,8611,821Debt issue costs, net559831Other290418Total$4,130$3,070


Restricted cash consists of interest bearing certificates of deposit collaterizing letters of credit and other commitments.


September 30,20122011(in thousands)Accrued Expenses and Other Current Liabilities:Accrued software license agreements$4,003$4,384Accrued vacation2,6273,033Accrued wages and benefits2,4322,571Interest payable2,1962,196Accrued income taxes16048Accrued warranty liability305164Accrued other4652,078Total$12,188$14,474





NOTE 4—DEBT


September 30,20122011(in thousands)Term A Loan, 10.5% fixed-rate notes, due February 2014$8,090$8,247Term B Loan, convertible, 8.0% fixed-rate notes, due October 20147,7557,177Other720Total long-term debt, net15,85215,4442014 Debentures, convertible, 8.0% fixed-rate notes, due October 201442,52140,736Total debt, net$58,373$56,180


Additional information about our debt is as follows:


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Term A LoanTerm B Loan2014 Debentures(in thousands)Principal$7,857$9,342$46,493Unaccreted debt premium/(unamortized debt discount)233(1,587)(3,972)Carrying value$8,090$7,755$42,521Interest payable termsQuarterly, in arrearsQuarterly, in arrearsSemi-annually, in arrearsAnnual effective interest rate8.2%17.7%12.2%Conversion price per common sharen/a$4.95$4.50


Prepayments on the Term B Loan are permitted at 100% of the principal amount plus accrued interest if the closing price of our common stock has been at least 130% of the conversion price in effect for at least 20 trading days during the 30 consecutive trading day period ending on the day prior to the date of notice of prepayment.  The conversion terms are substantially similar to the conversion terms of the 2014 Debentures, except that there is no provision for the potential payment of a make-whole interest amount upon conversion.  At September 30, 2012 , conversion of the outstanding principal amount of the Term B Loan would result in the issuance of 1.9 million shares of common stock.  We can elect to settle any conversion in stock, cash or a combination of stock and cash.


The Term A Loan and Term B Loan (collectively, “Term A and B Loans”) are collateralized by substantially all of our assets.


Prepayment of the 2014 Debentures is permitted at 100% of the principal amount plus accrued and unpaid interest if the closing price of our common stock has been at least 130% of the conversion price in effect for at least 20 trading days during the 30 consecutive trading day period ending on the day prior to the date of notice of prepayment.  We can elect to settle any conversion in stock, cash or a combination of stock and cash. If a 2014 Debenture is converted into common stock on or prior to October 30, 2012, we must pay a “make-whole amount” equal to the 2014 Debenture’s scheduled remaining interest payments through October 30, 2012, which we may elect to pay in cash or in shares of common stock valued at 95% of the average daily volume weighted average price per share over a 10 day trading period.  The 2014 Debentures are collateralized by a second priority interest in substantially all of our assets.  At September 30, 2012 , conversion of the outstanding principal amount of the 2014 Debentures would result in the issuance of 10.3 million shares of common stock and $0.3 million in make-whole amount that may be paid in cash or by delivery of 0.1 million shares of common stock.  The make-whole payment for foregone interest expired October 30, 2012, and upon its expiration, the compound embedded derivative no longer met the criteria for bifurcation as all components of the derivative were indexed to our own stock.  A final valuation will be completed with any change in value recorded into earnings and the final value reclassified from other long-term liabilities to equity.


The credit agreements for the Term A and B Loans and 2014 Debenture agreements provide for customary restrictions and limitations on our ability to incur indebtedness and liens on property, make restricted payments or investments, enter into mergers or consolidations, conduct asset sales, pay dividends or distributions and enter into specified transactions and activities, and also contain other customary default provisions.  The agreements provide that we must repurchase, at the option of the holders, principal amounts plus accrued and unpaid interest upon the occurrence of a fundamental change involving us, as described in the agreements.  Upon the occurrence of fundamental change involving us, the holders of the 2014 Debentures and the Term B Loan may be entitled to receive a “make-whole premium” if they convert their 2014 Debentures or Term B Loan into common stock, payable in additional shares of common stock, if the trading price of our common stock is between $3.20 and $16 per share.  Upon the occurrence of certain change in control events, the holders of the Term A and B Loans may require us to redeem all or a portion of the loans at 100% of the principal amount plus accrued and unpaid interest.


Debt Maturities


Maturity of our total aggregated outstanding debt is as follows:


Fiscal year(in thousands)2014$7,857201555,835Total$63,692


Except for required repurchases upon a change in control or in the event of certain asset sales, as described in the applicable credit agreements, we are not required to make any sinking fund or redemption payments with respect to this debt.  During the fiscal year ended September 30, 2012 , a mandatory repayment of principal of $1.7 million following the sale of certain assets was waived by the Term A and B Loan noteholder.


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NOTE 5—FAIR VALUE MEASUREMENTS AND DERIVATIVE LIABILITY


Assets and liabilities measured at fair value on our balance sheet on a recurring basis are as follows:


September 30, 2012September 30, 2011Level 1Level 2Level 3TotalLevel 1Level 2Level 3Total(in thousands)Compound embedded derivative liability$—$—$2,899$2,899$—$—$7,796$7,796Total$—$—$2,899$2,899$—$—$7,796$7,796


There were no transfers in and out of Level 1 and Level 2 fair value measurements during fiscal year 2012 .


We use a convertible bond valuation model within a lattice framework to estimate fair values of our financial instruments.  The key unobservable input utilized in the model includes a discount rate of 8% .


The following table provides a reconciliation of the beginning and ending balances for the compound embedded derivative measured at fair value using significant unobservable inputs (Level 3).


September 30,20122011(in thousands)Beginning balance$7,796$15,476Transfers in and /or out of Level 3——Purchases, sales, issuances, and settlements——Total net gains included in earnings(4,897)(7,680)Ending balance$2,899$7,796


The compound embedded derivative liability represents the value of the equity conversion feature and a “make-whole” feature of the 2014 Debentures.


We measure the fair value of our Term A and B Loans and 2014 Debentures (“long-term debt”) carried at amortized/accreted cost quarterly for disclosure purposes.  The estimated fair value of long-term debt is determined using Level 3 inputs based primarily on their comparability of their terms to the terms we could obtain, for similar instruments, in the current market.


The estimated fair values of our financial instruments are as follows:


September 30,20122011Carrying valueFair valueCarrying valueFair value(in thousands)Term A Loan$8,090$8,437$8,247$9,990Term B Loan7,7559,7767,1778,6612014 Debentures42,52146,72540,73645,228





NOTE 6-STOCKHOLDERS' EQUITY


Authorized Capital Stock


We are authorized to issue up to 250 million shares of common stock, par value $0.01 , per share, of which 19.5 million shares are reserved for future potential issuance upon conversion of debt, 4.1 million shares of common stock have been reserved for issuance under our stock compensation plans, 1.7 million remaining shares of common stock are reserved for issuance under our 2011 ESPP, and 0.8 million are reserved for issuance upon conversion of Series B Preferred Stock.


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We are authorized to issue up to 10 million shares of preferred stock, par value of $0.01 per share, of which 0.8 million shares have been designated as Series B Preferred Stock. As of September 30, 2012, there were 134,720 shares of Series B Preferred Stock outstanding that were convertible into common stock on a 5 -to-one basis, for an aggregate of 673,600 shares of common stock. The holders of Series B Preferred Stock are entitled to receive, when, as and if declared by our board of directors out of funds legally available for the payment of dividends in respect of our common stock, dividends in an amount equal to ten percent of par value per share plus the amount of dividends that would have been payable with respect to the shares of common stock issuable upon conversion had such shares of Series B Preferred Stock been fully converted.


Registration Statement


We have a Form S-3 universal shelf registration statement on file with the SEC.  The universal shelf registration statement on Form S-3 permits Vitesse to sell, in one or more public offerings, shares of our common stock, shares of preferred stock or debt securities, or any combination of such securities, for proceeds in an aggregate amount of up to $75.0 million .  The Form S-3 will expire in accordance with applicable SEC rules on December 27, 2014.  To date no securities have been issued pursuant to the S-3 registration statement.





NOTE 7—STOCK BASED COMPENSATION


Stock Options


We have in effect one stock-based plan under which non-qualified stock options and restricted stock units have been granted to employees and outside directors.  Options generally vest over four years and have contractual lives of 10 years.


Under the stock plan, we have 0.6 million shares available for future grant as of September 30, 2012 .  The 2010 Incentive Plan permits the grant of stock options, stock appreciation rights, stock awards, performance awards, restricted stock and stock units, and other stock and cash-based awards.


As of September 30, 2012 , none of our stock-based awards are classified as liabilities.  We did not capitalize any stock-based compensation cost.


Compensation cost related to our stock-based compensation plan is as follows:


September 30,201220112010(in thousands)Cost of revenues$567$434$387Engineering, research and development1,530984766Selling, general and administrative2,3451,7341,083Total stock-based compensation expense$4,442$3,152$2,236


As of September 30, 2012 , there was $5.8 million of unrecognized stock-based compensation expense related to non-vested stock options, restricted stock units, and our ESPP.  The weighted average period over which the unearned stock-based compensation is expected to be recognized is approximately 2.0 years .  An estimated forfeiture rate of 5.2% has been applied to all unvested options and restricted stock outstanding as of September 30, 2012 .  On a quarterly basis, we assess changes to our estimate of expected equity award forfeitures based on our review of recent forfeiture activity and expected future employee turnover.  We recognize the effect of adjustments made to the forfeiture rates, if any, in the period that we change the forfeiture estimate.  The effect of forfeiture adjustments in 2012, 2011, and 2010 was not significant.  Future stock-based compensation expense and unearned stock-based compensation will increase to the extent that we grant additional equity awards.


The Compensation Committee of the Board of Directors determines the total value of the stock based compensation grants.  The exercise price of options is the closing price on the date the options are granted.  The options generally vest over four years and expire between five or ten years from the date of grant.  The fair value of each option grant is estimated on the date of the grant using the Black‐Scholes option‐pricing model.


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Activity in stock option awards is as follows:


Shares                        (in thousands)Weighted averageexercise priceWeighted averageremainingcontractual life                 (in years)Aggregateintrinsic value     (in thousands)Options outstanding, September 30, 20091,061$109.324.61$2Granted5755.12Exercised—Cancelled or expired(146)280.06Options outstanding, September 30, 20101,490$52.406.16$—Granted5794.30Exercised——Cancelled or expired(370)81.02Options outstanding, September 30, 20111,699$29.776.37$—Granted4012.55Exercised(6)2.54Cancelled or expired(281)76.87Options outstanding, September 30, 20121,81316.576.612Options exercisable, September 30, 2012998$26.935.16$—


This intrinsic value represents the excess of the fair market value of our common stock on the date of exercise over the exercise price of such options.  The aggregate intrinsic values in the preceding table for the options outstanding represent the total pretax intrinsic value, based on our closing stock price of $2.44 , as of September 30, 2012 , which would have been received by the option holders had those option holders exercised their in-the-money options as of those dates.


The fair value of stock‐based awards is estimated at the date of grant using the Black‐Scholes option valuation model; however, the value calculated using an option pricing model may not be indicative of the fair value observed in a willing buyer/willing seller market transaction, or actually realized by the employee upon exercise.  Expected volatility is based on the historical volatility of our common stock.  The risk-free interest rate is based on the United States Treasury constant maturity rate for the expected life of the stock option.  The expected life of a stock award is the period of time that the award is expected to be outstanding.  Expected lives are estimated in accordance with SEC Staff Accounting Bulletin (“SAB”) No. 107, as amended by SAB No. 110, which provides supplemental application guidance based on the views of the SEC.


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


September 30,201220112010Expected life (in years)6.616.176.22Expected volatility:Weighted-average86.9%85.9%86.4%Range82.2% - 87.1%85.7% - 87.9%86.2% - 89.1%Expected dividend———Risk-free interest rate1.0% - 1.3%1.1% - 2.8%1.8% - 2.8%


The weighted average fair value at the date of grant of options granted in fiscal years 2012, 2011 and 2010 was $1.80 , $3.16 and $3.80 , respectively.


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The following table provides additional information in regards to options outstanding as of September 30, 2012:


Options OutstandingOptions ExercisableRange of Exercise PriceNumber Outstanding           (in thousands)Weighted Average Remaining Contractual Life (Years)Weighted Average Exercise PriceNumber Exercisable         (in thousands)Weighted Average Exercise Price$2.26 - $2.853709.22$2.5481$2.543.33 - 4.10688.613.46383.514.36 - 4.363658.194.36924.364.60 - 5.14228.074.83134.905.20 - 174.809884.8827.5177433.66$2.26 - $174.801,8136.61$16.57998$26.93


Restricted Stock Units


We grant restricted stock units to our non-employee directors and to certain employees.  Grants vest over varying terms, to a maximum of four years from the date of the grant.  Awards to non-employee directors upon their initial appointment or election to the board vest in installments of 33.3% each over the first three anniversaries of the grant date, and annual awards to non-employee directors vest 100% on the first anniversary of the grant date.  Unvested restricted shares are forfeited if the recipient's employment terminates for any reason other than death, disability, or special circumstances as determined by the Compensation Committee of the Board of Directors.


Activity for our restricted stock award units is as follows:


RestrictedStock Units                (in thousands)Weighted AverageGrant-Date FairValue per ShareWeighted averageremainingcontractual life                 (in years)Aggregateintrinsic value     (in thousands)Restricted stock units, September 30, 2009172$7.050.66$1,272Awarded6185.37Released——Forfeited(19)6.24Restricted stock units, September 30, 2010771$5.721.35$2,408Awarded1,1224.34Released(335)5.97Forfeited(262)4.68Restricted stock units, September 30, 20111,296$4.661.38$3,823Awarded1,2582.57Released(721)3.99Forfeited(147)3.48Restricted stock units, September 30, 20121,686$3.491.09$4,113


We issue restricted stock units as part of our equity incentive plans.  For the majority of restricted stock units granted, the number of shares issued on the date the restricted stock units vest is net of the minimum statutory withholding requirements that we pay in cash to the appropriate taxing authorities on behalf of our employees.  The impact of such withholding totaled $0.6 million as of September 30, 2012 and 2011, respectively and was recorded as settlement on restricted stock tax withholding in the accompanying consolidated statements of stockholders’ deficit.  Although shares withheld are not issued, they are treated as common stock repurchases in our consolidated financial statements, as they reduce the number of shares that would have been issued upon vesting.


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Employee Stock Purchase Plan


In January 2011, our stockholders approved the 2011 ESPP under which 2.5 million shares of common stock were reserved for issuance.  As of September 30, 2012, the 2011 ESPP had 1.7 million shares available for issuance.  Approximately 34% of our employees were participating in our stock purchase plan as of September 30, 2012.  The first purchase period began on August 1, 2011 and ended January 31, 2012.  On January 31, 2012, 0.3 million shares were issued at a price per share of $2.59 , a 15.0% discount against the share price on that date.  The second purchase period began on February 1, 2012 and ended July 31, 2012.  On July 31, 2012, 0.5 million shares were issued at a price per share of $1.79 , a 15% discount to the share price on that date.  The third purchase period began on August 1, 2012 and ends January 31, 2013.


The fair value of the ESPP awards are calculated in accordance with ASC 718-50, Employee Share Purchase Plans , under which the fair value of each share granted under the ESPP is equal to the sum of 15% of a share of stock, a call option for 85% of a share of stock and a put option for 15% of a share of stock.  The fair value of the call and put options are determined using the Black-Scholes pricing model.  We used the following range of assumptions for both purchase periods: expected useful life of 0.5 years, weighted average expected volatility of 40.4% to 48.4% , a zero dividend rate, and a risk-free interest rate of 0.09% to 0.2% .  We recognized approximately $0.6 million and $0.1 million in ESPP stock compensation for the years ended September 30, 2012 and 2011, respectively.





NOTE 8—INCOME TAXES


The components of loss from continuing operations before (benefit) provision for income taxes for the years ended September 30, 2012, 2011 and 2010 were as follows:


September 30,201220112010(in thousands)Loss before income taxes:Domestic$(3,406)$(17,451)$(15,141)Foreign2,1202,020(3,514)$(1,286)$(15,431)$(18,655)


Income tax (benefit) expense consists of the following for the years ended September 30, 2012, 2011 and 2010:


September 30,201220112010(in thousands)Income tax (benefit) expense:Current:Federal$(188)$(248)$843State41(367)452Foreign1,510(4)226Total current1,363(619)1,521Deferred:Federal———State———Foreign(1,537)——Total deferred(1,537)——Total income tax (benefit) expense:$(174)$(619)$1,521


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A reconciliation of the (benefit) provision for income tax expense by applying the statutory United States federal income tax rate to income is as follows:


September 30,201220112010$%$%$%(in thousands, except for percentages)Federal income tax benefit at statutory rate$(437)34.0%$(5,246)34.0%$(6,343)34.0%State tax benefit net of federal benefit(13)1.0%(409)2.7%(476)2.6%Foreign taxes1,102(85.7)%5—%226(1.2)%Tax credits(1,230)95.6%——%——%Nondeductible expenses1,015(78.9)%1,108(7.2)%194(1.0)%Other(100)7.9%(636)4.2%366(2.0)%Change in valuation allowance(1,147)89.2%(568)3.7%328,862(1,757.1)%Rate change/other adjustments on deferred taxes636(49.5)%5,127(33.2)%(321,308)1,716.7%Income tax (benefit) expense$(174)13.6%$(619)4.0%$1,521(8.1)%


Our effective tax rate was 13.6% for the fiscal year ended September 30, 2012 compared to 4.0% for the comparable period in the prior year.  Our income tax benefit is primarily impacted by foreign taxes, withholding taxes on foreign income that are creditable against United States income taxes, the removal of unrecognized tax benefits, and certain nondeductible interest and share based expenses.  The income tax benefit is also impacted by the release of a portion of the valuation allowances related to certain foreign jurisdictions' deferred tax assets as such balances were more likely than not realizable within the applicable carryforward period based on our analysis of the available positive and negative evidence.


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


September 30,201220112010(in thousands)Deferred Tax Assets:Net operating loss carryforward$55,317$53,938$47,854Research and development tax credits11,5337,8876,564Deferred income1,724——Stock options12,59411,14812,602Fixed assets and intangible property10,0019,1897,400Inventory2,9403,1686,738Allowances and reserves9,92810,7529,974State taxes—1—Foreign tax credit/AMT credit1,398241—Other——2,211Total deferred tax assets105,43596,32493,343Deferred Tax Liabilities:Debt amortization(1,485)(655)—Other(5)(2,998)—State taxes——(104)Total deferred tax liabilities$(1,490)$(3,653)$(104)Net deferred income taxes103,94592,67193,239Valuation allowance(102,408)(92,671)(93,239)Total deferred tax asset$1,537$—$—


We have available federal and state research and development tax credit carryforwards of approximately $1.3 million and $10.2 million , respectively.  In addition, we also have approximately $1.4 million in foreign tax and AMT credits to offset future taxable income.  The federal net operating losses (“NOLs”) and tax credits may be carried forward through 2032; state NOLs may be carried forward through 2032; state tax credits may be carried forward indefinitely; and foreign NOLs have various carryforward provisions in several jurisdictions.  At September 30, 2012, we had approximately $90.2 million , $63.3 million ,


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and $217.1 million of federal, state and foreign NOLs that can be used in future tax years.  Of the federal NOL amount, $59.3 million is subject to an annual limitation of $3.1 million caused by a prior year “ownership change,” as defined in Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”).  In general, a Section 382 ownership change occurs if there is a cumulative change in Vitesse's ownership by “ 5% ” shareholders (as defined in the Code) that exceeds 50 percentage points over a rolling three -year period.  An ownership change generally affects the rate at which NOLs and potentially other deferred tax assets are permitted to offset future taxable income.  If an additional ownership change occurred during the current year or should one occur in the future, our ability to utilize our  NOL carryforwards and other deferred tax assets to offset future taxable income may be significantly limited.  Therefore, the value and recoverability of our NOLs and deferred tax assets could be further diminished as a result of an additional ownership change.


We analyzed our need to maintain the valuation allowance against our otherwise recognizable deferred tax assets in the federal, state, and foreign jurisdictions and have recorded a total valuation allowance of $102.4 million of as September 30, 2012, which represents an increase of $9.7 million from the prior year.  Because we have historically experienced net tax losses, the benefits of which resulted in recognized deferred tax assets, we have placed an $84.0 million valuation allowance against all of our otherwise recognizable deferred tax assets in the federal and state jurisdictions.  Furthermore, we have also placed a $18.4 million valuation allowance against most of our deferred tax assets in our foreign jurisdictions as we have concluded that it is more likely than not that the majority of our foreign deferred tax assets will not be realized.


Accounting guidance 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.  The total amount of gross unrecognized tax benefits was approximately $10.8 million as of September 30, 2012 and approximately $10.2 million as of September 30, 2011.  The total amount of gross unrecognized tax benefits increased by $0.6 million , the majority of which related to state research and development tax credits that have not been utilized.


As of September 30, 2012, approximately $0.2 million of the $10.8 million unrecognized tax benefits related to our state tax liability is recorded in accrued expenses and other current liabilities on the consolidated balance sheets.  The remaining $10.6 million , which relates to research and development tax credits that have not been utilized, is reflected as a reduction to the deferred tax asset arising from the research and development tax credits. As of September 30, 2011, approximately $0.3 million of the $10.2 million unrecognized tax benefits, related to our state tax liability, was recorded in accrued expenses and other current liabilities on the consolidated balance sheets.  The remaining $9.9 million , related to research and development tax credits that have not been utilized, was reflected as a reduction to the deferred tax asset arising from the research and development tax credits.


A reconciliation of the beginning and ending amount of unrecognized tax benefit is as follows: 201220112010(in thousands)Beginning balance as of September 30:$(10,215)$(10,615)$(26,288)Gross decreases - tax positions in prior period—20016,013Gross increases - current-period tax positions(47)—(340)Gross increases - tax positions in prior period(560)——Decrease relating to settlements———Reductions as a result of a lapse of statute of limitations—200—Ending balance as of September 30:$(10,822)$(10,215)$(10,615)


We recognize accrued interest and penalties related to unrecognized tax benefits within the consolidated statements of income as income tax expense.  As of September 30, 2012, there were no material interest or penalties accrued due to significant net operating losses.


We are subject to taxation in the United States and various state and foreign jurisdictions.  The 2008 through 2012 tax years generally remain subject to examination by their respective tax authorities.  Effectively, all our tax years in which a tax NOL is carried forward to the present are subject to examination by federal, state and foreign tax authorities.  Therefore, we cannot estimate the range of unrecognized tax benefits that may significantly change within the next twelve months.


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NOTE 9—RESTRUCTURING


Activity related to our restructuring accrual is as follows:


Facility Consolidation andOperating Lease CommitmentsSeveranceCostsProperty and EquipmentImpairment ChargesTotal(in thousands)Liability balance at September 30, 2010$—$—$—$—Reclass from other liability account921——921Cash payments—(828)—(828)Charged to operations1,3891,1261,1413,656Non-cash charges——(1,141)(1,141)Liability balance at September 30, 20112,310298—2,608(Credited) charged to operations(1,460)36—(1,424)Cash payments(850)(334)—(1,184)Liability balance at September 30, 2012$—$—$—$—


During fiscal year 2011, we consolidated design activities and consolidated our Camarillo operations into a single facility, exiting and adjacent leased facility.  In connection with these actions we incurred approximately $3.7 million for severance and asset write down expenses and lease termination costs.


The fair value of the lease termination liability was determined based on the present value of the remaining lease payments reduced by the current market rate for sublease rentals of similar properties.  The amounts accrued represented our best estimate of the obligations expected to be incurred.


In the fourth quarter of fiscal year 2012, we determined that it was unlikely that we would be able to sublease the exited property for the remaining lease term through December 2015.  Therefore, we decided that we would reoccupy the exited facility upon the expiration of our main Camarillo facility lease in January 2014 instead of locating to a new facility as originally planned. Accordingly, we reversed the remaining lease termination reserve of $1.4 million .








NOTE 10—SIGNIFICANT CUSTOMERS, CONCENTRATION OF CREDIT RISK AND GEOGRAPHIC INFORMATION


We manage and operate our business through one operating segment.


Net revenue from customers equal to or greater than 10% of total net revenues is as follows:


September 30,201220112010Nu Horizons Electronics **13.5%20.6%23.9%WPG Holdings**10.7%**Huawei*10.3%13.3%
 __________________________________________________


*Less than 10% of total net revenues for period indicated.


**Distributor


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Net revenue by geographic area is as follows:


September 30,201220112010(in thousands)United States$41,559$51,698$54,190Asia Pacific62,26063,92384,045EMEA*15,66425,34627,755Total net revenues$119,483$140,967$165,990
 ________________________________________________


*Europe, Middle East and Africa


Revenue by geographic area is based upon the country of billing.  The geographic location of distributors and third-party manufacturing service providers may be different from the geographic location of the ultimate end users.


We believe a substantial portion of the products billed to OEM and third-party manufacturing service providers in the Asia Pacific region are ultimately shipped to end-markets in the United States and Europe.


Substantially all long-lived assets are located in the United States.  Long-lived assets (excluding intangible assets) by country are as follows: September 30,20122011(in thousands)USA$7,889$8,295Denmark127255Germany414454$8,430$9,004





NOTE 11-RETIREMENT SAVINGS PLAN


We have a qualified retirement plan under the provisions of Section 401(k) of the Internal Revenue Code covering substantially all employees.  Participants in this plan may defer up to the maximum annual amount allowable under IRS regulations.  The contributions are fully vested and non-forfeitable at all times.  No amounts contributed by participants to the plan were matched by us for the periods presented.  In compliance with governing regulations, we made contributions to the retirement savings plans of employees of our foreign subsidiaries in the amount of $0.6 million for fiscal year 2012, $0.7 million for fiscal year 2011 and $0.3 million for fiscal year 2010.





NOTE 12—COMMITMENTS AND CONTINGENCIES


We lease facilities under non-cancellable operating leases.  The leases expire at various dates through fiscal year 2016 and frequently include renewal provisions for varying periods of time, provisions which require us to pay taxes, insurance, maintenance costs or provisions for minimum rent increases.  Minimum leases payments, including scheduled rent increases are recognized as rent expenses on a straight line basis over the applicable lease term.  Lease incentives received are recognized as a reduction of rental expense on a straight-line basis over the term of the lease.  Rent expense, including common area maintenance expense, under operating leases totaled $3.0 million for fiscal year 2012, and $3.8 million for each of the fiscal years 2011 and 2010.


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


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20132014201520162017ThereafterTotal(in thousands)Operating leases$3,089$2,002$1,131$199$—$—$6,421Software licenses7,6767,0736,5032,8002,8002,80029,652Total$10,765$9,075$7,634$2,999$2,800$2,800$36,073


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


We are involved in legal proceedings in the ordinary course of business, including actions against us which assert or may assert claims or seek to impose fines and penalties in substantial amounts.


During our normal course of business, we make certain contractual guarantees and indemnities pursuant to which we may be required to make future payments under specific circumstances.  We review our exposure under these agreements no less than annually, or more frequently when events indicate.  Except for our established warranty reserves, we do not expect that any potential payments in connection with any of these indemnity obligations would have a material adverse effect on our consolidated financial position.  Accordingly, except for established warranty reserves, we have not recorded any liabilities for these agreements as of September 30, 2012 and September 30, 2011 .


Patents and Licenses


We have entered into various licensing agreements requiring primarily fixed fee royalty payments.  Certain of these agreements contain provisions for the payment of guaranteed or minimum royalty amounts. In the event that we fail to pay any minimum annual royalties, these licenses may automatically be terminated.


Warranties


We establish reserves for future product warranty costs that are expected to be incurred pursuant to specific warranty provisions with our customers.  Our warranty reserves are established at the time of sale and updated throughout the warranty period based upon numerous factors including historical warranty return rates and expenses over various warranty periods.


Intellectual Property Indemnities


We indemnify certain customers and our contract manufacturers against liability arising from third-party claims of intellectual property rights infringement related to our products.  These indemnities appear in development and supply agreements with our customers as well as manufacturing service agreements with our contract manufacturers, are not limited in amount or duration and generally survive the expiration of the contract.  Given that the amount of any potential liabilities related to such indemnities cannot be determined until an infringement claim has been made, we are unable to determine the maximum amount of losses that we could incur related to such indemnifications.


Director and Officer Indemnities and Contractual Guarantees


We have entered into indemnification agreements with our directors and executive officers, which require us to indemnify such individuals to the fullest extent permitted by Delaware law. Our indemnification obligations under such agreements are not limited in amount or duration.  Certain costs incurred in connection with such indemnifications may be recovered under certain circumstances under various insurance policies.  Given that the amount of any potential liabilities related to such indemnities cannot be determined until a lawsuit has been filed.  We are unable to determine the maximum amount of losses that we could incur relating to such indemnities.


We have also entered into severance and change in control agreements with certain of our executives.  These agreements provide for the payment of specific compensation benefits to such executives upon the termination of their employment with us.


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General Contractual Indemnities/Products Liability


During the normal course of business, we enter into contracts with customers where we agreed to indemnify the other party for personal injury or property damage caused by our products.  Our indemnification obligations under such agreements are not generally limited in amount or duration.  Given that the amount of any potential liabilities related to such indemnities cannot be determined until a lawsuit has been filed, we are unable to determine the maximum amount of losses that we could incur relating to such indemnities.  Historically, any amounts payable pursuant to such indemnities have not had a material negative effect our business, financial condition or results of operations.  We maintain general and product liability insurance as well as errors and omissions insurance, which may provide a source of recovery to us in the event of an indemnification claim.





NOTE 13-QUARTERLY FINANCIAL DATA (UNAUDITED)


The following tables set forth the consolidated statements of operations for each of our last eight quarters.  This quarterly information is derived from unaudited interim financial statements and has been prepared on the same basis as the annual consolidated financial statements.  The per-share computation for the year is a separate, annual calculation.  Accordingly, the sum of the quarterly per-share amounts does not necessarily equal the annual per-share amount.  In management's opinion, this quarterly information reflects all adjustments necessary for fair presentation of the information for the periods presented.  The operating results for any quarter are not indicative of results for any future period.


First QuarterSecond QuarterThird QuarterFourth QuarterTotal Year(in thousands)Fiscal Year 2012:Net revenues:Product revenues$28,942$27,195$25,730$28,053$109,920Intellectual property revenues1,0492,5424,5571,4159,563Net revenues29,99129,73730,28729,468119,483Cost of product revenues12,16310,59511,27012,37946,407(Loss) income from operations(2,116)1,1002,1205311,635Net (loss) income(844)(6,196)4,7111,217(1,112)Net (loss) income per share:Basic$(0.03)$(0.25)$0.18$0.05$(0.04)Diluted$(0.03)$(0.25)$0.16$0.05$(0.04)Weighted average shares outstanding:Basic24,51225,04325,30225,62825,121Diluted24,51225,04338,41326,51325,121Fiscal Year 2011:Net revenues:Product revenues$37,596$34,403$31,856$28,887$132,742Intellectual property revenues1512,4894,1321,4538,225Net revenues37,74736,89235,98830,340140,967Cost of product revenues14,34912,99513,43212,89853,674(Loss) income from operations(1,672)(1,118)326(8,470)(10,934)Net (loss) income(7,732)(9,041)6,550(4,589)(14,812)Net (loss) income per share:Basic$(0.32)$(0.37)$0.26$(0.19)$(0.61)Diluted$(0.32)$(0.37)$0.21$(0.19)$(0.61)Weighted average shares outstanding:Basic24,05024,30324,44724,46324,315Diluted24,05024,30337,54324,46324,315


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In the second quarter of fiscal year 2012, we successfully collected on $0.2 million of bad debts that were reserved for in the fourth quarter of fiscal year 2011.  In the third quarter of fiscal year 2012, we successfully collected on $1.2 million of bad debts that were reserved for in the fourth quarter of fiscal year 2011.  In the fourth quarter of fiscal year 2012, we successfully collected on $0.5 million of bad debts that were reserved for in the fourth quarter of fiscal year 2011.  Also in the fourth quarter of 2012, we determined that it was unlikely that we would be able to sublease the exited property for the remaining lease term through December 2015.  Therefore, we decided that we would reoccupy the exited facility upon the expiration of our main Camarillo facility lease in January 2014 instead of locating a new facility as originally planned.  Accordingly, we reversed the remaining lease termination reserve of $1.4 million .


In the first quarter of fiscal year 2011, we consolidated design activities, resulting in severance costs of $0.6 million .  In the fourth quarter of fiscal year 2011, we further consolidated design activities and consolidated our Camarillo operations into a single facility,, exiting an adjacent leased facility, resulting in additional $3.1 of charges associated with these activities.  In the second quarter of fiscal year 2011, we recognized a $3.9 million loss on the debt exchange with our senior debt holder.  In the fourth quarter of fiscal year 2011, we recognized an impairment loss of $2.2 million related to specific, potentially uncollectible accounts receivable balances.





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


None


ITEM 9A.  CONTROLS AND PROCEDURES


Evaluation of Disclosure Controls and Procedures


Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated as of September 30, 2012 the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934.  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2012, our disclosure controls and procedures were effective.


Management's Annual Report on Internal Control over Financial Reporting


Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934.  Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.


Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our internal control over financial reporting as of September 30, 2012 based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based upon that evaluation, our management concluded that our internal control over financial reporting was effective as of September 30, 2012.


Attestation Report of Registered Public Accounting Firm


BDO USA, LLP, our independent registered public accounting firm that audited our financial statements included in this report, has issued an attestation report on our internal control over financial reporting.  BDO USA, LLP's attestation report appears in this Form 10-K.


Changes in Internal Control over Financial Reporting


There were no changes in our internal control over financial reporting during the quarter ended September 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


Inherent Limitation on the Effectiveness of Controls


Our disclosure controls and procedures provide our Chief Executive Officer and Chief Financial Officer reasonable assurances that our disclosure controls and procedures will achieve their objectives.  However, our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting can or will prevent all human error.  A control system, no matter how well designed and implemented, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  Furthermore, the design of a control system must reflect the fact that there are internal resource constraints, and the benefit of controls must be weighed relative to their corresponding costs.  Because of the limitations in all control systems, no evaluation of controls can provide complete assurance that all control issues and instances of error, if any, within the Company are detected.  These inherent limitations include the realities that judgments in decision‐making can be faulty, and that breakdowns can occur due to human error or mistake.  Additionally, controls, no matter how well designed, could be circumvented by the individual acts of specific persons within the organization.  The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated objectives under all potential future conditions.


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Report of Independent Registered Public Accounting Firm


Report of Independent Registered Public Accounting Firm


Board of Directors and Stockholders


Vitesse Semiconductor Corporation


Camarillo, California


We have audited Vitesse Semiconductor Corporation's internal control over financial reporting as of September 30, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Vitesse Semiconductor Corporation's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Controls and Procedures-Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit.


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


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


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


In our opinion, Vitesse Semiconductor Corporation maintained, in all material respects, effective internal control over financial reporting as of September 30, 2012, based on the COSO criteria .


We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Vitesse Semiconductor Corporation as of September 30, 2012 and 2011, and the related consolidated statements of operations, stockholders' deficit, and cash flows for each of the three years in the period ended September 20, 2012 and our report dated December 4, 2012 expressed an unqualified opinion thereon.





/s/ BDO USA, LLP


Los Angeles, California


December 4, 2012


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ITEM 9B.  OTHER INFORMATION


None.


PART III





Certain information required by Part III is omitted from this Annual Report on Form 10-K because we will file with the SEC a definitive proxy statement pursuant to Regulation 14A in connection with the solicitation of proxies for our Annual Meeting of Stockholders expected to be held in January 2013 (the “Proxy Statement”) not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and certain information included therein is incorporated herein by reference.


ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE


The information required by this item is incorporated by reference from our Proxy Statement under the headings “Election of Directors,” “Executive Officers,” “Board Meetings and Committees,” and “Section 16(a) Beneficial Ownership Reporting Compliance.”


ITEM 11. EXECUTIVE COMPENSATION


The information required by this item is incorporated by reference from our Proxy Statement under the headings “Executive Compensation,” “Director Compensation,” “Compensation Committee Interlocks and Insider Participation,” and “Compensation Committee Report.”


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


The information required by this item is incorporated by reference from our Proxy Statement under the heading “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information.”


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE


The information required by this item is incorporated by reference from our Proxy Statement under the heading “Director Independence” and “Certain Relationships and Related Person Transactions.”


ITEM 14. PRINCIPAL ACOUNTING FEES AND SERVICES


The information required by this item is incorporated by reference from our Proxy Statement under the heading “Principal Accountant Fees and Services” and “Pre-Approval Policies and Procedures.”





PART IV





ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES


(a)(1)See the financial statements and financial statement schedules listed in Item 8. Financial Statements and Supplementary Data.(a)(2)See Schedule II “Valuation and Qualifying Accounts.” All other schedules have been omitted because they are not applicable or not required, or the information is included in the consolidated financial statements or notes thereto.(a)(3)See Exhibit Index following the signature page to this Annual Report on Form 10-K.


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SCHEDULE II-Valuation and Qualifying Accounts


Balance at Beginning of YearCharged to Costs and ExpensesCharged to Other AccountsDeductions/Write-offsBalance at End of Year(in thousands)Year ended September 30, 2012Deducted from accounts receivable:Allowance for doubtful accounts$2,212$(1,954)$—$—$258Deducted from deferred tax assetValuation allowance92,671(1,147)—10,884102,408Year ended September 30, 2011Deducted from accounts receivable:Allowance for doubtful accounts—2,212——2,212Deducted from deferred tax assetValuation allowance93,239(568)——92,671Year ended September 30, 2010Deducted from accounts receivable:Allowance for doubtful accounts—————Deducted from deferred tax assetValuation allowance$422,101$(328,862)$—$—$93,239


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EXHIBIT INDEX


In reviewing the agreements included as exhibits to this Annual Report on Form 10-K, please note that they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about Vitesse or the other parties to the agreements.  The agreements may contain representations and warranties by each of the parties to the applicable agreement.  These representations and warranties have been made solely for the benefit of the other party or parties to the applicable agreement and:


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|• | should not in all instances be treated as categorical statements of fact, but rather as a means of allocating the risk to one of the parties if those statements prove to be inaccurate;

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|• | may have been qualified by disclosures that were made to the other party or parties in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;

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|• | may apply standards of materiality in a manner that is different from what may be viewed as material to you or other investors; and

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|• | were made only as of the date of the applicable agreement or other date or dates that may be specified in the agreement and are subject to more recent developments.

Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time.  Additional information about Vitesse may be found elsewhere in this Annual Report on Form 10-K and Vitesse's other public filings, which are available without charge through the SEC's website at www.sec.gov.


Incorporated by ReferenceExhibit NumberExhibit DescriptionFormFile NumberExhibitFiling DateFiled or Furnished Herewith3.1Restated Certificate of Incorporation.10-Q001-316143.1August 9, 20103.2Amended and Restated Bylaws.8-K001-316143.2December 2, 20044.1Indenture between the Registrant and U.S. Bank National Association, as Trustee, dated as of October 30, 2009.8-K001-316144.1October 30, 20094.2Form of 8.0% Convertible Second Lien Debentures Due 2014 (included in Exhibit 4.1).8-K001-316144.1October 30, 20094.3Guaranty, dated October 30, 2009, executed by Vitesse Manufacturing & Development Corporation and Vitesse Semiconductor Sales Corporation in favor of U.S. Bank National Association, as Trustee, under the Indenture dated October 30, 2009.10-K/A001-316144.6January 28, 201010.1*Employment Agreement between the Registrant and Christopher Gardner dated February 12, 2010.10-Q001-3161410.2May 17, 201010.2*Amendment to Employment Agreement, dated February 12, 2012, between Registrant and Christopher R. Gardner.8-K001-3161410.1February 16, 201210.3*Employment Agreement, dated effective November 30, 2011, between the Registrant and Martin Nuss.10-Q001-3161410.1February 7, 201210.4Form of Indemnity Agreement between each of the directors and the Registrant.8-K001-3161410.1August 22, 200710.5Loan Agreement, dated August 23, 2007 between the Registrant and Whitebox VSC, Ltd.8-K001-3161410.3August 29, 200710.6First Amendment to Loan Agreement, dated as of October 16, 2009, among the Registrant, the Lenders named therein and Whitebox VSC Ltd., as agent.8-K001-3161410.4October 20, 200910.7Second Amendment to Loan Agreement, dated as of February 4, 2011, among the Registrant, the Lenders named therein and Whitebox VSC Ltd., as agent.10-Q000-1965410.1February 8, 201110.8Term Note, dated October 29, 2007 between the Registrant and Whitebox VSC, Ltd. for $30 million.8-K001-316144.1October 31, 200710.9Intellectual Property, Assignment and License Agreement, dated October 29, 2007 between the Registrant and Maxim Integrated Products, Inc.8-K001-3161410.1October 31, 200710.10*Vitesse Semiconductor Corporation Amended and Restated 2001 Stock Incentive Plan as of September 4, 2009.10-K/A001-3161410.1January 28, 201010.11*Form of Notice of Grant of Stock Options and Option Agreement under the Vitesse Semiconductor Corporation Amended and Restated 2001 Stock Incentive Plan.10-K/A001-3161410.1January 28, 201010.12*Form of Notice of Grant of Restricted Stock Units and RSU Agreement under the Vitesse Semiconductor Corporation Amended and Restated 2001 Stock Incentive Plan.10-K/A001-3161410.2January 28, 201010.13*†Vitesse Semiconductor Corporation Fiscal Year 2012 Executive Bonus Plan, dated as of December 1, 2011.10-Q001-3161410.2February 7, 201210.14*Vitesse Semiconductor Corporation 2010 Incentive Plan.14A001-31614App. AMarch 31, 201010.15*Form of Notice of Grant of Stock Options and Option Agreement under the Vitesse Semiconductor Corporation 2010 Incentive Plan.10-K001-3161410.2December 6, 201110.16*Form of Notice of Grant of Restricted Stock Units and RSU Agreement under the Vitesse Semiconductor Corporation 2010 Incentive Plan.10-K001-3161410.2December 6, 201110.17*Automatic Equity Grant Program for Eligible Directors under the Vitesse Semiconductor Corporation 2010 Incentive Plan.X110.18*Separation and General Release Agreement, dated May 17, 2012, between Registrant and Steve M. Perna.10-Q001-3161410.1August 7, 201210.19*Vitesse Semiconductor Corporation 2011 Employee Stock Purchase Plan.14A000-19654App. ADecember 1, 201010.20*Employment Agreement between the Registrant and Martin S. McDermut dated July 27, 2011.10-K001-3161410.2December 6, 201121.0List of Subsidiaries.X123.1Consent of BDO USA, LLP.X24.1Power of Attorney (included on signature page)X31.1Certification of Principal Executive officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes‐Oxley Act of 2002.X31.2Certification of Principal Financial officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes‐Oxley Act of 2002.X32.1Certifications of Principal Executive Officer and Principal Financial Officer pursuant to Securities Exchange Act Rules 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes‐Oxley Act of 2002.X101.INSXBRL Instance Document**X1101.SCHXBRL Taxonomy Extension Schema Document**X1101.CALXBRL Taxonomy Extension Calculation Linkbase Document**X1101.DEFXBRL Taxonomy Extension Definition Linkbase Document**X1101.LABXBRL Taxonomy Extension Label Linkbase Document**X1101.PREXBRL Taxonomy Extension Presentation Linkbase Document**X1


_____________________________________________________


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|* | Each a management contract or compensatory plan or arrangement required to be filed as an exhibit to this annual report on Form 10-K.

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|† | Confidential treatment has been granted for certain portions omitted from this exhibit pursuant to an order granted by the Commission under Rule 24b-2 of the Securities Exchange Act of 1934, as amended. Confidential portions of this exhibit have been separately filed with the Securities and Exchange Commission.

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|** | XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

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|(1) | Previously filed or furnished as exhibits to Vitesse Semiconductor Corporation's Annual Report on Form 10-K for the year ended September 30, 2012, filed with the Securities and Exchange Commission on December 4, 2012.




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SIGNATURES


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


April 15, 2013VITESSE SEMICONDUCTOR CORPORATIONBy:/s/ CHRISTOPHER R. GARDNERChristopher R. GardnerChief Executive OfficerApril 15, 2013VITESSE SEMICONDUCTOR CORPORATIONBy:/s/ MARTIN S. MCDERMUTMartin S. McDermutChief Financial Officer(Principal Financial and Accounting Officer)


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POWER OF ATTORNEY


KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Christopher R. Gardner and Martin S. McDermut, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution for him, and in his name in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, and any of them or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.


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


April 15, 2013/s/ Christopher R. GardnerChristopher R. GardnerDirector, President and Chief Executive Officer(Principal Executive Officer)April 15, 2013/s/ Martin S. McDermutMartin S. McDermutChief Financial Officer(Principal Financial and Accounting Officer)April 15, 2013/s/ Mathew FreyMathew FreyDirectorApril 15, 2013/s/ Steven P. HansonSteven P. HansonDirectorApril 15, 2013/s/ James HugarJames HugarDirectorApril 15, 2013/s/ Scot B. JarvisScot B. JarvisDirectorApril 15, 2013/s/ Edward Rogas, Jr.Edward Rogas, Jr.DirectorApril 15, 2013/s/ Kenneth H. TraubKenneth H. TraubDirector





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