10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 ______________________________________

Form 10-Q

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

For the quarterly period ended March 31, 2013

OR

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

For the transition period from                 to                 

Commission file number 1-31614

 ______________________________________

VITESSE SEMICONDUCTOR CORPORATION

(Exact name of registrant as specified in its charter)

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

741 Calle Plano

Camarillo, California 93012

(Address of principal executive offices)(zip code)

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

 ______________________________________

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

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

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

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

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

As of May 2, 2013, there were outstanding 37,658,091 shares of the registrant’s Common Stock, $0.01 par value.

VITESSE SEMICONDUCTOR CORPORATION

UNAUDITED QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2013

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Unaudited Consolidated Balance Sheets as of March 31, 2013 and September 30, 2012	3
	Unaudited Consolidated Statements of Operations for the Three and Six Months Ended March 31, 2013 and 2012	4
	Unaudited Consolidated Statements of Stockholders’ Deficit for the Six Months Ended March 31, 2013	5
	Unaudited Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2013 and 2012	6
	Notes to Unaudited Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 4.	Controls and Procedures	34
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	35
Item 6.	Exhibits	35

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PART I. FINANCIAL INFORMATION

ITEM 1:  FINANCIAL STATEMENTS

VITESSE SEMICONDUCTOR CORPORATION

UNAUDITED CONSOLIDATED BALANCE SHEETS

	March 31, 2013			September 30, 2012
	(in thousands, except par value)
ASSETS
Current assets:
Cash	$	36,914		$	23,891
Accounts receivable, net	8,429			9,403
Inventory, net	12,566			12,060
Prepaid expenses and other current assets	2,964			2,125
Total current assets	60,873			47,479
Property, plant and equipment, net	3,126			3,832
Other intangible assets, net	1,087			1,175
Other assets	3,766			4,130
	$	68,852		$	56,616
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	6,540		$	5,726
Accrued expenses and other current liabilities	12,445			12,188
Current portion of debt, net	8,006			—
Deferred revenue	2,005			871
Total current liabilities	28,996			18,785
Other long-term liabilities	442			574
Long-term debt, net	8,083			15,852
Compound embedded derivative	—			2,899
Convertible subordinated debt, net	43,440			42,521
Total liabilities	80,961			80,631
Commitments and contingencies, See note 10
Stockholders’ deficit:
Preferred stock, $0.01 par value: 10,000 shares authorized; Series B Non Cumulative, Convertible, 135 shares outstanding at March 31, 2013 and September 30, 2012, respectively	1			1
Common stock, $0.01 par value: 250,000 shares authorized; 37,455 and 25,812 shares outstanding at March 31, 2013 and September 30, 2012, respectively	375			258
Additional paid-in-capital	1,851,644			1,829,976
Accumulated deficit	(1,864,129		)	(1,854,250		)
Total stockholders’ deficit	(12,109		)	(24,015		)
	$	68,852		$	56,616

See accompanying notes to unaudited consolidated financial statements.

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VITESSE SEMICONDUCTOR CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended March 31,						Six Months Ended March 31,
	2013			2012			2013			2012
	(in thousands, except per share data)
Net revenues:
Product revenues	$	24,689		$	27,195		$	48,594		$	56,137
Intellectual property revenues	64			2,542			1,886			3,591
Net revenues	24,753			29,737			50,480			59,728
Costs and expenses:
Cost of product revenues	11,369			10,595			22,344			22,758
Engineering, research and development	9,777			9,580			20,281			22,005
Selling, general and administrative	7,390			8,383			15,360			15,835
Amortization of intangible assets	89			79			186			146
Costs and expenses	28,625			28,637			58,171			60,744
(Loss) income from operations	(3,872		)	1,100			(7,691		)	(1,016		)
Other expense (income):
Interest expense, net	1,966			1,924			3,936			3,873
(Gain) loss on compound embedded derivative	—			5,280			(803		)	1,982
Other expense (income), net	5			29			(26		)	41
Other expense, net	1,971			7,233			3,107			5,896
Loss before income tax (benefit) expense	(5,843		)	(6,133		)	(10,798		)	(6,912		)
Income tax (benefit) expense	(996		)	63			(919		)	129
Net loss	$	(4,847	)	$	(6,196	)	$	(9,879	)	$	(7,041	)
Net loss per common share - basic and diluted	$	(0.13	)	$	(0.25	)	$	(0.30	)	$	(0.28	)
Weighted average common shares outstanding - basic and diluted	37,215			25,043			32,587			24,776

See accompanying notes to unaudited consolidated financial statements.

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VITESSE SEMICONDUCTOR CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

	Preferred Stock			Common Stock					Additional Paid-in-Capital			Accumulated Deficit			Total Stockholders’ Deficit
(in thousands)	Shares	Amount		Shares		Amount
Balance at September 30, 2012	135	$	1	25,812		$	258		$	1,829,976		$	(1,854,250	)	$	(24,015	)
Net loss	—	—		—		—			—			(9,879		)	(9,879		)
Compensation expense related to stock options, awards and ESPP	—	—		—		—			2,149			—			2,149
Issuance of common stock under ESPP	—	—		498		6			857			—			863
Issuance of common stock, net of offering costs	—	—		10,651		107			16,948			—			17,055
Release of restricted stock units	—	—		691		7			(7		)	—			—
Repurchase of restricted stock units for payroll taxes	—	—		(197	)	(3		)	(375		)	—			(378		)
Reclassification of compound embedded derivative liability to additional paid-in-capital	—	—		—		—			2,096			—			2,096
Balance at March 31, 2013	135	$	1	37,455		$	375		$	1,851,644		$	(1,864,129	)	$	(12,109	)

See accompanying notes to unaudited consolidated financial statements.

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VITESSE SEMICONDUCTOR CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Six Months Ended March 31,
	2013			2012
	(in thousands)
Cash flows (used in) provided by operating activities:
Net loss	$	(9,879	)	$	(7,041	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization	1,327			1,492
Stock-based compensation	2,149			2,209
Change in fair value of compound embedded derivative liability	(803		)	1,982
Common stock issued for employee stock plans	863			868
Gain on disposal of assets	(153		)	659
Amortization of debt issuance costs	135			136
Amortization of debt discounts	1,247			1,156
Accretion of debt premiums	(83		)	(77		)
Change in operating assets and liabilities:
Accounts receivable	974			(742		)
Inventory	(506		)	3,959
Prepaids and other assets	(610		)	3
Accounts payable	814			760
Accrued expenses and other liabilities	153			(1,219		)
Deferred revenue	1,134			(681		)
Net cash (used in) provided by operating activities	(3,238		)	3,464
Cash flows used in investing activities:
Capital expenditures	(470		)	(258		)
Proceeds from the sale of capital assets	156			—
Payments under licensing agreements	(98		)	(688		)
Net cash used in investing activities	(412		)	(946		)
Cash flows provided by (used in) financing activities:
Proceeds from the exercise of stock options	—			8
Net proceeds from the sale of common stock	17,055			—
Repurchase of restricted stock units for payroll taxes	(378		)	(626		)
Other	(4		)	(6		)
Net cash provided by (used in) financing activities	16,673			(624		)
Net increase in cash	13,023			1,894
Cash at beginning of period	23,891			17,318
Cash at end of period	$	36,914		$	19,212
Supplemental cash flow information:
Cash paid during the period for:
Interest	$	2,664		$	2,660
Income taxes	76			264
Non-cash financing activities:
Reclassification of compound embedded derivative liability to additional paid-in-capital	$	2,096		—

See accompanying notes to unaudited consolidated financial statements.

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

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 interim unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Securities and Exchange Commission (“SEC”) Form 10-Q and Article 10 of SEC Regulation S-X. They do not include all of the information and footnotes required by GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended September 30, 2012, included in our Annual Report on Form 10-K filed with the SEC on December 4, 2012, as amended by Amendment No. 1 to Annual Report on Form 10-K/A filed with the SEC on April 16, 2013.

The consolidated financial statements included herein are unaudited. However, they contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly our consolidated financial position, the consolidated results of our operations and the consolidated cash flows and the changes in our stockholders’ deficit. The results of operations for the three and six months ended March 31, 2013 are not necessarily indicative of the results to be expected for future quarters or the full year.

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 unaudited 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, 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 revenues 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 revenues 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 605-25, 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 revenues 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 (“R&D”) 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, requires that all stock-based payments to employees, including grants of employee stock options and employee stock purchase rights, 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 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 unaudited 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, 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 short-term debt is comprised of our Term A loan (“Term A Loan”), of which the total principal amount of $7.9 million is due in February 2014. Our long term debt is comprised of our Term B loan (“Term B Loan”) and our convertible subordinated debentures due October 2014 (“2014 Debentures”), of which the total principal amount of $55.8 million is 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. To meet the remaining debt obligation due in October 2014, we have been exploring strategic alternatives to repaying this debt, and have engaged the services of financial advisory firms to assist us in evaluating possible strategic and financing transactions. These transactions include, among others that we may consider from time to time, an extension of the maturity date and other modification of our Term A and B Loans, the refinancing of indebtedness from the proceeds of one or more new credit facilities, and the repayment of indebtedness from sales of assets and financing transactions. We will pursue these and other potential transactions until we provide for the repayment, refinancing and/or restructuring of our indebtedness. There can be no assurance, however, that our efforts will be successful.

Financial instruments, which potentially subject us to concentrations of credit risk, consist principally of cash and accounts receivable. Cash consists of demand deposits maintained with several financial institutions, which often exceed Federal Deposit Insurance Corporation (“FDIC”) limits of $250,000. We have never experienced any losses related to these balances; however, our balances are significantly in excess of insured limits.

At March 31, 2013, there were three direct customers and two distributors that accounted for 33% and 49% of accounts receivable, respectively. At September 30, 2012, there was one distributor that accounted for 14% of accounts receivable. 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.

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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 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. Should all attempts to collect a receivable fail, the receivable is written off against the allowance. Our allowance for doubtful accounts was zero and $0.3 million as of March 31, 2013 and September 30, 2012, 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. 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.

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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. As of March 31, 2013, we did not have any Level 3 recurring fair value measurements.

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 current and long-term debt, net, and convertible subordinated debt, net on our unaudited 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 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 was comprised of the conversion option and a make-whole payment for foregone interest if the holder converted 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 were 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.

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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 was presented on the balance sheet at fair value and was marked-to-market, until the make-whole payment for foregone interest expired on October 30, 2012. The change in the fair value of the compound embedded derivative was a non-cash item primarily related to the change in price of the underlying common stock and is reflected in earnings. 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.

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 revenues 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 revenues 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 is effective for financial statements of periods beginning after September 15, 2012, with early adoption permitted. The implementation of the new guidance did not impact our consolidated financial statements.

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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 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, shares to be issued under our Employee Stock Purchase Plan (“ESPP”), convertible preferred stock, 2014 Debentures and the Term B Loan. Unexercised stock options, restricted stock units, and unvested shares to be issued under our ESPP, 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.

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

	Three and Six Months Ended March 31,
	2013	2012
	(in thousands)
Outstanding stock options	2,130	1,847
Outstanding restricted stock units	2,388	1,743
ESPP shares	518	327
Convertible preferred stock	674	674
2014 Debentures	10,332	10,332
Term B Loan	1,887	1,887
Total potential common stock excluded from calculation	17,929	16,810

NOTE 3-INVENTORY

	March 31, 2013		September 30, 2012
	(in thousands)
Inventory:
Raw materials	$	1,268	$	1,394
Work-in-process	4,326		5,359
Finished goods	6,972		5,307
Total	$	12,566	$	12,060

NOTE 4-DEBT

	March 31, 2013			September 30, 2012
	(in thousands)
Term A Loan, 10.5% fixed-rate notes, due February 2014	$	8,006		$	8,090
Term B Loan, convertible, 8.0% fixed-rate notes, due October 2014	8,083			7,755
Other	—			7
2014 Debentures, convertible, 8.0% fixed-rate notes, due October 2014	43,440			42,521
Total debt, net	59,529			58,373
Less current portion of debt, net	(8,006		)	—
Long-term debt, less current portion, net	$	51,523		$	58,373

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Additional information about our debt is as follows:

	Term A Loan			Term B Loan			2014 Debentures
	(in thousands)
Principal	$	7,857		$	9,342		$	46,493
Unaccreted debt premium/(unamortized) debt discount	149			(1,259		)	(3,053		)
Carrying value	$	8,006		$	8,083		$	43,440
Interest payable terms	Quarterly, in arrears			Quarterly, in arrears			Semi-annually, in arrears
Annual effective interest rate	8.2		%	17.7		%	12.2		%
Conversion rate per common share	n/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. At March 31, 2013, 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. At March 31, 2013, conversion of the outstanding principal amount of the 2014 Debentures would result in the issuance of 10.3 million shares of common stock.

We can elect to settle any conversion in stock, cash or a combination of stock and cash. The compound embedded derivative, which expired October 30, 2012, was comprised of the conversion option and a make-whole payment for foregone interest if the holder converted the debenture early. Upon expiration off the make-whole payment for forgone interest, the compound embedded derivative no longer met the criteria for bifurcation as all components of the conversion feature were 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. The 2014 Debentures are collateralized by a second priority interest in substantially all of our assets.

The credit agreements for the Term A and B Loans and 2014 Debentures 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 a 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	$	7,857
2015	55,835
Total	$	63,692

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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.

NOTE 5-FAIR VALUE MEASUREMENTS AND DERIVATIVE LIABILITY

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

	2013			2012
	(in thousands)
Beginning balance September 30	$	2,899		$	7,796
Transfer to equity	(2,096		)	—
Total net gains included in earnings	(803		)	1,982
Ending balance March 31	$	—		$	9,778

There were no transfers in and/or out of Level 1, Level 2 or Level 3 fair value measurements during the six months ended March 31, 2013 and 2012, respectively.

The compound embedded derivative liability, which was included in long-term liabilities, represented the value of the equity conversion feature and a “make-whole” feature of the 2014 Debentures. 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.

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.

We use a binomial-lattice model to estimate fair values of our Term B Loan and 2014 Debenture financial instruments. The key unobservable input utilized in the model includes a discount rate of 8.% The estimated fair value of Term A Loan is determined using Level 3 inputs based primarily on the comparability of its 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:

	March 31, 2013				September 30, 2012
	Carrying value		Fair value		Carrying value		Fair value
	(in thousands)
Term A Loan	$	8,006	$	8,311	$	8,090	$	8,437
Term B Loan	8,083		9,680		7,755		9,776
2014 Debentures	43,440		48,317		42,521		46,725

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, 9.5 million shares are reserved for issuance under our stock compensation plans, 1.2 million shares are reserved for issuance under our ESPP, and 0.8 million shares are reserved for issuance upon conversion of Series B Preferred Stock.

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 March 31, 2013, there were 134,720 shares of Series B Preferred Stock outstanding that were convertible into common stock on a five-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 10 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.

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In December 2012, we raised $17.1 million, net of offering costs of $1.5 million, from the registered public sale of 10,651,280 shares of common stock at $1.75 per share, based on a negotiated discount to market.

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 non-employee directors. The options generally vest over four years and expire 10 years from the date of grant.

The Compensation Committee of the Board of Directors determines the stock based compensation grants. The exercise price of options is the closing price on the date the options are granted. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model.

Under the stock option plans, we have 4.3 million shares available for future grant as of March 31, 2013. The 2013 Incentive Plan (the “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. The Plan uses a “fungible share” concept, pursuant to which shares that are subject to appreciation awards (such as stock options and stock appreciation rights) are counted against the Plan share limit on a 1-for-1 basis for every such share subject to appreciation awards, and shares that are subject to full value awards (such as awards of stock, restricted stock and restricted stock units) are counted against the Plan share limit at a ratio of 1.5 shares for every share subject to the full value award.

As of March 31, 2013, 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:

	Three Months Ended March 31,				Six Months Ended March 31,
	2013		2012		2013		2012
	(in thousands)
Cost of revenues	$	144	$	146	$	298	$	268
Engineering, research and development	379		388		765		764
Selling, general and administrative	483		612		1,086		1,177
Total stock-based compensation expense	$	1,006	$	1,146	$	2,149	$	2,209

As of March 31, 2013, there was $7.4 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 for stock options and restricted stock units expected to be recognized is approximately 2.2 years and 2.4 years, respectively. An estimated forfeiture rate of 5.2% has been applied to all unvested options and restricted stock outstanding as of March 31, 2013.

Activity in stock option awards is as follows:

	Shares   (in thousands)		Weighted average exercise price		Weighted average remaining contractual life  (years)	Aggregate intrinsic value (in thousands)
Options outstanding, September 30, 2012	1,813		$	16.57	6.61	$	2
Granted	429		2.10		—	—
Exercised	—		—		—	—
Cancelled or expired	(112	)	15.47		—	—
Options outstanding, March 31, 2013	2,130		13.72		7.04	26
Options exercisable, March 31, 2013	1,201		$	21.98	5.63	$	—

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 $2.16, as of March 31, 2013, which would have been received by the option holders had those option holders exercised their in-the-money options as of those dates.

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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 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:

	Six Months Ended March 31,
	2013	2012
Expected life (in years)	5.63	5.63
Expected volatility:
Weighted-average	82.1%	87.0%
Range	80.5% - 82.1%	86.1% - 87.1%
Expected dividend	—	—
Risk-free interest rate	.9% - 1.0%	1.1% - 1.3%

The weighted average fair value at the date of grant of options granted in the six months ended March 31, 2013 and 2012 was $1.43 and $1.80, respectively.

The following table provides additional information in regards to options outstanding as of March 31, 2013:

	Options Outstanding				Options Exercisable
Range of Exercise Price	Number Outstanding (in thousands)	Weighted Average Remaining Contractual Life (years)	Weighted Average Exercise Price		Number Exercisable (in thousands)	Weighted Average Exercise Price
$2.10 - $2.10	427	9.93	$	2.10	—	$	—
2.26 - 4.10	427	8.51	2.69		217	2.76
4.36 - 5.20	768	7.19	4.80		487	4.88
5.40 - 63.60	440	3.50	35.44		429	36.18
66.40 - 174.80	68	0.73	115.58		68	115.58
$2.10 - $174.80	2,130	7.04	$	13.72	1,201	$	21.98

Restricted Stock Units

We grant restricted stock units to certain employees and to our employee and non-employee directors. 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.

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Activity for our restricted stock award units is as follows:

	Restricted Stock Units (in thousands)		Weighted Average Grant-Date Fair Value per Share
Restricted stock units, September 30, 2012	1,686		$	3.49
Awarded	1,472		2.11
Released	(690	)	3.61
Forfeited	(80	)	3.22
Restricted stock units, March 31, 2013	2,388		$	2.61

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 $0.4 million for the six months ended March 31, 2013, and was recorded as settlement on restricted stock tax withholding in the accompanying unaudited consolidated statements of stockholders’ deficit. Although shares withheld are not issued, they are treated as common stock repurchases in our unaudited consolidated financial statements, as they reduce the number of shares that would have been issued upon vesting.

Employee Stock Purchase Plan

In January 2011, our stockholders approved the ESPP under which 2.5 million shares of common stock were reserved for issuance. As of March 31, 2013, the ESPP had 1.2 million shares available for issuance. As of March 31, 2013, approximately 49% of the eligible employees participated in our stock purchase plan. On January 31, 2013, 0.5 million shares were issued at a price per share of $1.73, a 15% discount to the share price on that date, for the purchase period that began on August 1, 2012 and ended January 31, 2013. A new purchase period began on February 1, 2013 and ends July 31, 2013.

The fair value of the ESPP awards are calculated in accordance with ASC Topic 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 49.8%, a zero dividend rate, and a risk-free interest rate of 0.1% to 0.2%. We recognized approximately $0.3 million in ESPP stock compensation for both the six months ended March 31, 2013 and 2012, respectively.

NOTE 8-INCOME TAXES

The provision for income taxes as a percentage of loss from operations before income taxes was 8.5% for the six months ended March 31, 2013 compared to (1.9)% for the comparable period in the prior year. Our effective tax rate is primarily impacted bycertain foreign taxes, certain nondeductible interest and share based expenses,  the release of a portion of the valuation allowance related to certain foreign jurisdictions' deferred tax assets as such balances were more likely than not realizable within the applicable carryforward period, and for the six months ended March 31, 2013, by a refund of withholding taxes previously paid on certain foreign income.

At March 31, 2013, we had approximately $90.2 million of Federal Net Operating Losses (“NOLs”) that can be used in future tax years. In December 2012, we issued 10.7 million shares of common stock in a public offering which is believed to have resulted in a Section 382 ownership change. Since we maintain a full valuation allowance on all of our U.S. and state deferred tax assets, the impact of the ownership change on the future realizability of our U.S. and state deferred tax assets did not result in an impact to our provision for income taxes for the six months ended March 31, 2013, or on our net deferred tax asset as of March 31, 2013. In addition, as a result of this ownership change, substantially all of our federal NOLs, credits and certain built-in deductions or losses are subject to an annual limitation of $1.4 million. Consequently, it is anticipated that a substantial portion of the federal NOLs, credits and built-in losses will expire unutilized as a result of this limitation. If an additional ownership change should occur in the future, our ability to utilize our NOL carryforwards and other deferred tax assets to offset future taxable income may be further limited and the value and recoverability of our NOLs and other deferred tax assets could be further diminished.

NOTE 9-SEGMENT AND GEOGRAPHIC INFORMATION

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We manage and operate our business through one operating segment.

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

	Three Months Ended March 31,				Six Months Ended March 31,
	2013		2012		2013		2012
WPG Holdings**	16.7	%	14.0	%	14.9	%	12.2	%
Nu Horizons Electronics**	11.1	%	10.3	%	11.7	%	16.2	%
Harris Corporation	*		10.8	%	*		*

 __________________________________________________

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

**Distributor

Net revenues by geographic area are as follows:

	Three Months Ended March 31,				Six Months Ended March 31,
	2013		2012		2013		2012
	(in thousands)
United States	$	7,198	$	13,279	$	18,103	$	22,998
Asia Pacific	14,037		12,823		26,101		27,952
EMEA*	3,518		3,635		6,276		8,778
Total net revenues	$	24,753	$	29,737	$	50,480	$	59,728

________________________________________________

*Europe, Middle East and Africa

Revenues by geographic area are 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 original equipment manufacturer (“OEM”) and third-party manufacturing service providers in the Asia Pacific region are ultimately shipped to end-markets in the United States and Europe.

Product revenues by product line are as follows:

	Three Months Ended March 31,				Six Months Ended March 31,
	2013		2012		2013		2012
	(in thousands)
Connectivity	$	9,835	$	14,704	$	19,973	27,672
Ethernet switching	10,331		6,777		18,637		14,800
Transport processing	4,523		5,714		9,984		13,665
Product revenues	$	24,689	$	27,195	$	48,594	$	56,137

NOTE 10-COMMITMENTS AND CONTINGENCIES

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 March 31, 2013 and September 30, 2012.

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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 executives, 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-of-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.

General Contractual Indemnities/Product 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 on our business, financial condition or results of operations. We maintain general liability insurance which may provide a source of recovery to us in the event of an indemnification claim.

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

Cautionary Statement

You should read the following discussion and analysis in conjunction with our Unaudited Consolidated Financial Statements and the related Notes thereto contained in Part I, Item 1 of this Report. The information contained in this Quarterly Report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this Report, as well as in our Annual Report on Form 10-K for the year ended September 30, 2012, as amended by Amendment No. 1 to Annual Report on Form 10-K/A

(“Annual Report”) and in our other filings with the SEC, which discuss our business in greater detail.

This Quarterly Report 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 historical or current fact. We use words such as “anticipates,” “believes,” “plans,” “expects,” “future,” “intends,” “may,” “should,” “estimates,” “predicts,” “potential,” “continue,” “becoming,” “transitioning,” and similar expressions to identify such forward-looking statements. Our forward-looking statements include statements as to our business outlook, revenues, margins, expenses, tax provision, capital resources sufficiency, capital expenditures, interest income, cash commitments, and expenses. Forward-looking statements are not guarantees of future performance and 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 referenced in the subsection entitled “Risk Factors” in Part II, Item 1A of this Report and Part I, Item 1A of our Annual Report, and similar discussions in our other SEC filings. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.

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, 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 Local Area Network (“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.

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. Thus, we re-positioned our R&D teams and invested heavily to enter new markets, develop new products and obtain 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 compound annual growth rate (“CAGR”) of 17% and to 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 small-medium enterprise (“SME”) networks, small-medium business (“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

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by mobile backhaul applications, and within the Enterprise networking 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, including 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 24 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 entered pre-production on the majority of our 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 revenues were from our new product portfolio. In 2012, this grew to 14% of product revenues. We expect revenues 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 our eFEC technology that 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 effort to reduce our operating expenses, which has substantially increased our operating leverage.

Critical Accounting Policies and Estimates

Our accounting policies are more fully described in Note 1 of the unaudited 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 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 our critical accounting policies and estimates, as described in our Annual Report on Form 10-K for the year ended September 30, 2012, as amended by Amendment No. 1 to Annual Report on Form 10-K/A, are our most critical accounting policies and are most important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgments. There have been no significant changes to these policies during the six months endedMarch 31, 2013.

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 unaudited consolidated financial statements.

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Results of Operations for the three and six months ended March 31, 2013, as compared to the three and six months ended March 31, 2012

The following table sets forth certain Unaudited Consolidated Statements of Operations data for the periods indicated.

The percentages in the table are based on net revenues.

	Three Months Ended March 31,										Six Months Ended March 31,
	2013					2012					2013					2012
	$			%		$			%		$			%		$			%
	(in thousands, except for percentages)
Net revenues:
Product revenues	$	24,689		99.7	%	$	27,195		91.5	%	$	48,594		96.3	%	$	56,137		94.0	%
Intellectual property revenues	64			0.3	%	2,542			8.5	%	1,886			3.7	%	3,591			6.0	%
Net revenues	24,753			100.0	%	29,737			100.0	%	50,480			100.0	%	59,728			100.0	%
Costs and expenses:
Cost of product revenues	11,369			45.9	%	10,595			35.6	%	22,344			44.3	%	22,758			38.1	%
Engineering, research and development	9,777			39.5	%	9,580			32.2	%	20,281			40.2	%	22,005			36.8	%
Selling, general and administrative	7,390			29.9	%	8,383			28.2	%	15,360			30.4	%	15,835			26.6	%
Amortization of intangible assets	89			0.4	%	79			0.3	%	186			0.4	%	146			0.2	%
Costs and expenses	28,625			115.7	%	28,637			96.3	%	58,171			115.3	%	60,744			101.7	%
(Loss) income from operations	(3,872		)	(15.7	)%	1,100			3.7	%	(7,691		)	(15.3	)%	(1,016		)	(1.7	)%
Other expense (income):
Interest expense, net	1,966			7.9	%	1,924			6.5	%	3,936			7.8	%	3,873			6.5	%
(Gain) loss on compound embedded derivative	—			—	%	5,280			17.8	%	(803		)	(1.6	)%	1,982			3.3	%
Other expense (income), net	5			—	%	29			0.1	%	(26		)	(0.1	)%	41			0.1	%
Other expense, net	1,971			7.9	%	7,233			24.4	%	3,107			6.1	%	5,896			9.9	%
Loss before income tax (benefit) expense	(5,843		)	(23.6	)%	(6,133		)	(20.7	)%	(10,798		)	(21.4	)%	(6,912		)	(11.6	)%
Income tax (benefit) expense	(996		)	(4.0	)%	63			0.2	%	(919		)	(1.8	)%	129			0.2	%
Net loss	$	(4,847	)	(19.6	)%	$	(6,196	)	(20.9	)%	$	(9,879	)	(19.6	)%	$	(7,041	)	(11.8	)%

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 (“EOL”) product decisions, and general economic conditions. Therefore, our revenues for the three and six months ended March 31, 2013 and 2012, may not necessarily be indicative of future revenues.

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Product revenues by market are as follows:

	Three Months Ended March 31,
	2013				2012
	Amount		% of Product Revenues		Amount		% of Product Revenues		Change			% Change
	(in thousands, except percentages)
Carrier networking	$	13,151	53.3	%	$	9,597	35.3	%	$	3,554		37.0	%
Enterprise networking	10,857		44.0	%	13,148		48.3	%	(2,291		)	(17.4	)%
Non-core	681		2.7	%	4,450		16.4	%	(3,769		)	(84.7	)%
Product revenues	$	24,689	100.0	%	$	27,195	100.0	%	$	(2,506	)	(9.2	)%

	Six Months Ended March 31,
	2013				2012
	Amount		% of Product Revenues		Amount		% of Product Revenues		Change			% Change
	(in thousands, except percentages)
Carrier networking	$	27,129	55.8	%	$	21,589	38.5	%	$	5,540		25.7	%
Enterprise networking	20,516		42.2	%	27,575		49.1	%	(7,059		)	(25.6	)%
Non-core	949		2.0	%	6,973		12.4	%	(6,024		)	(86.4	)%
Product revenues	$	48,594	100.0	%	$	56,137	100.0	%	$	(7,543	)	(13.4	)%

The increase in Carrier networking revenues in the three months ended March 31, 2013, as compared to the same period in the prior year is largely attributable to a tripling in sales of our new products, particularly our switches, and 1 Gigabit and 10 Gigabit PHYs for Carrier Ethernet applications. We also saw an increase in revenues from our framers going through EOL. Increases were partially offset by declines in some of our SONET-based product revenues. The increase in Carrier networking revenues in the six months ended March 31, 2013, as compared to the same period in the prior year is due to strong new product revenues and sales of framers going through EOL, partially offset by lower revenues from switch fabric products that had gone through EOL in the prior year and other mature products.

The decrease in Enterprise networking revenues in the three and six months ended March 31, 2013, as compared to the same periods in the prior year, was due to lower revenues from switch fabric products that had gone through EOL in the prior year. The decrease was partially offset by an increase in new Enterprise Ethernet switch product revenues.

The decrease in Non-core revenues in the three months ended March 31, 2013, as compared to the same period in the prior year, is largely attributable to a decrease of our mature Fibre Channel products, which had a large purchase by a single customer in the prior year. In addition to the lower Fibre Channel revenues, the decrease in Non-Core revenues in the six months ended March 31, 2013, as compared to the same period in the prior year is attributable to a decrease of legacy network processing unit (“NPU”) products which had high EOL revenues in the prior year.

Revenues from EOL products totaled $4.3 million and $5.9 million in the three months ended March 31, 2013 and 2012, respectively, and $8.8 million and $13.4 million in the six months ended March 31, 2013 and 2012, 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 EOL products to decline in this fiscal year. 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.

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

Product revenues by product line are as follows:

	Three Months Ended March 31,
	2013				2012
	Amount		% of Product Revenues		Amount		% of Product Revenues		Change			% Change
	(in thousands, except percentages)
Connectivity	$	9,835	39.8	%	$	14,704	54.1	%	$	(4,869	)	(33.1	)%
Ethernet switching	10,331		41.9	%	6,777		24.9	%	3,554			52.4	%
Transport processing	4,523		18.3	%	5,714		21.0	%	(1,191		)	(20.8	)%
Product revenues	$	24,689	100.0	%	$	27,195	100.0	%	$	(2,506	)	(9.2	)%

	Six Months Ended March 31,
	2013				2012
	Amount		% of Product Revenues		Amount		% of Product Revenues		Change			% Change
	(in thousands, except percentages)
Connectivity	$	19,973	41.1	%	$	27,672	49.3	%	$	(7,699	)	(27.8	)%
Ethernet switching	18,637		38.4	%	14,800		26.4	%	3,837			25.9	%
Transport processing	9,984		20.5	%	13,665		24.3	%	(3,681		)	(26.9	)%
Product revenues	$	48,594	100.0	%	$	56,137	100.0	%	$	(7,543	)	(13.4	)%

The decrease in Connectivity revenues in the three months and six months ended March 31, 2013, as compared to the same period in the prior year, is largely attributable to the decrease in products for Fibre Channel applications, which had a large purchase by a single customer in the prior period, and to a decrease in mature SONET-based products.

The increase in Ethernet switching revenues in the three and six months ended March 31, 2013, as compared to the same period in the prior year, is largely attributable to our new switches selling into both the Carrier and Enterprise networking market. The increase was partially offset by a decrease in sales of our other mature products.

The decrease in Transport processing revenues in the three months ended March 31, 2013, as compared to the same period in the prior year, is largely attributable to lower sales of switch fabrics going through EOL. The decrease was partially offset by increased sales of framers going through EOL. The decrease in Transport processing revenues in the six months ended March 31, 2013, as compared to the same period in the prior year is attributable to lower sales of switch fabrics, NPUs, and optical transport network products going through EOL, offset by increased sales of framers going through EOL.

Intellectual Property Revenues

	Three Months Ended March 31,
	2013				2012
	Amount		% of Net  Revenues		Amount		% of Net  Revenues		Change			% Change
	(in thousands, except percentages)
Intellectual property revenues	$	64	0.3	%	$	2,542	8.5	%	$	(2,478	)	(97.5	)%

	Six Months Ended March 31,
	2013				2012
	Amount		% of Net  Revenues		Amount		% of Net  Revenues		Change			% Change
	(in thousands, except percentages)
Intellectual property revenues	$	1,886	3.7	%	$	3,591	6.0	%	$	(1,705	)	(47.5	)%

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Intellectual property revenues decreased in the three and six months ended March 31, 2013, as compared to the same period in the prior year, due to a decrease in deliveries of intellectual property. The timing and amounts of intellectual property revenues fluctuate and tend to be unpredictable. Costs associated with the sale of intellectual property are included in selling, general and administrative expenses.

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

	Three Months Ended March 31,				Six Months Ended March 31,
	2013		2012		2013		2012
WPG Holdings**	16.7	%	14.0	%	14.9	%	12.2	%
Nu Horizons Electronics**	11.1	%	10.3	%	11.7	%	16.2	%
Harris Corporation	*		10.8	%	*		*

______________________________________

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

**Distributors

Net revenues by geographic area are as follows:

	Three Months Ended March 31,
	2013				2012
	Amount		% of Net Revenues		Amount		% of Net Revenues
	(in thousands, except percentages)
United States	$	7,198	29.1	%	$	13,279	44.7	%
Asia Pacific	14,037		56.7	%	12,823		43.1	%
EMEA*	3,518		14.2	%	3,635		12.2	%
Net revenues	$	24,753	100.0	%	$	29,737	100.0	%

	Six Months Ended March 31,
	2013				2012
	Amount		% of Net Revenues		Amount		% of Net Revenues
	(in thousands, except percentages)
United States	$	18,103	35.9	%	$	22,998	38.5	%
Asia Pacific	26,101		51.7	%	27,952		46.8	%
EMEA*	6,276		12.4	%	8,778		14.7	%
Net revenues	$	50,480	100.0	%	$	59,728	100.0	%

______________________________________

*Europe, Middle East and Africa

Revenues by geographic area are 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 Revenues

	Three Months Ended March 31,
	2013				2012
	Amount		% of Product Revenues		Amount		% of Product Revenues		Change		% Change
	(in thousands, except percentages)
Cost of product revenues	$	11,369	46.0	%	$	10,595	39.0	%	$	774	7.3	%

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	Six Months Ended March 31,
	2013				2012
	Amount		% of Product Revenues		Amount		% of Product Revenues		Change			% Change
	(in thousands, except percentages)
Cost of product revenues	$	22,344	46.0	%	$	22,758	40.5	%	$	(414	)	(1.8	)%

We use third-parties for wafer fabrication as well as test 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.

Our cost of product revenues is affected by various factors, including product mix, volume, 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 percentage of net product revenues is affected by these factors, as well as customer mix, pricing, and competitive pricing programs.

The overall increase in cost of product revenues as a percentage of product revenues is due to a mix shift toward new products and lower margin Enterprise Ethernet switches and away from Fibre Channel, NPU and switch fabrics products, going through EOL, which have higher gross margins. New products typically start out with higher costs as a percentage of revenues, which decrease with increased volumes and improved manufacturing efficiencies.

Engineering, Research and Development

	Three Months Ended March 31,
	2013				2012
	Amount		% of Net Revenues		Amount		% of Net Revenues		Change		% Change
	(in thousands, except percentages)
Engineering, research and development	$	9,777	39.5	%	$	9,580	32.2	%	$	197	2.1	%

	Six Months Ended March 31,
	2013				2012
	Amount		% of Net Revenues		Amount		% of Net Revenues		Change			% Change
	(in thousands, except percentages)
Engineering, research and development	$	20,281	40.2	%	$	22,005	36.8	%	$	(1,724	)	(7.8	)%

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.

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.

R&D expense in the three months ended March 31, 2013, is comparable to the same period in the prior year.

The decrease in R&D expense in the six months ended March 31, 2013, as compared to the same period in the prior year, is primarily attributable to $1.3 million lower spending for masks and test wafers.

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 the current year will impact product development.

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Selling, General and Administrative

	Three Months Ended March 31,
	2013				2012
	Amount		% of Net  Revenues		Amount		% of Net  Revenues		Change			% Change
	(in thousands, except percentages)
Selling, general and administrative	$	7,390	29.9	%	$	8,383	28.2	%	$	(993	)	(11.8	)%

	Six Months Ended March 31,
	2013				2012
	Amount		% of Net  Revenues		Amount		% of Net  Revenues		Change			% Change
	(in thousands, except percentages)
Selling, general and administrative	$	15,360	30.4	%	$	15,835	26.6	%	$	(475	)	(3.0	)%

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 in the three months ended March 31, 2013, as compared to the same period in the prior year, is primarily due to a $0.7 million intangible asset write-down in the prior year.

The decrease in SG&A expense in the six months ended March 31, 2013, as compared to the same period in the prior year, is primarily due to lower personnel related expenses of $0.6 million and a $0.7 million intangible asset write-down in the prior year, partially offset by a $0.5 million increase in asset retirement obligations expense as we move from our primary Camarillo facility to an adjacent building.

Interest Expense, Net

	Three Months Ended March 31,
	2013				2012
	Amount		% of Net  Revenues		Amount		% of Net  Revenues		Change		% Change
	(in thousands, except percentages)
Interest expense, net	$	1,966	7.9	%	$	1,924	6.5	%	$	42	2.2	%

	Six Months Ended March 31,
	2013				2012
	Amount		% of Net  Revenues		Amount		% of Net  Revenues		Change		% Change
	(in thousands, except percentages)
Interest expense, net	$	3,936	7.8	%	$	3,873	6.5	%	$	63	1.6	%

The change in the  income tax (benefit) expense for the three and six months ended March 31, 2013, was primarily due to a refund of withholding taxes previously paid on certain foreign income.

Gain on Compound Embedded Derivative

	Three Months Ended March 31,
	2013				2012
	Amount		% of Net  Revenues		Amount		% of Net  Revenues		Change			% Change
	(in thousands, except percentages)
Loss on compound embedded derivative	$	—	—	%	$	5,280	17.8	%	$	(5,280	)	(100.0	)%

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	Six Months Ended March 31,
	2013					2012
	Amount			% of Net  Revenues		Amount		% of Net  Revenues		Change			% Change
	(in thousands, except percentages)
(Gain) loss on compound embedded derivative	$	(803	)	(1.6	)%	$	1,982	3.3	%	$	(2,785	)	(140.5	)%

The gain on our compound embedded derivative included in our 2014 Debentures for the six months ended March 31, 2013, is primarily generated by the decrease in the price of our underlying common stock during those periods.

The compound embedded derivative included in our 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 were indexed to our own stock. A final valuation was completed on October 30, 2012, resulting in gain of $0.8 million due to the change in fair value.

Income Tax (Benefit) Expense

	Three Months Ended March 31,
	2013					2012
	Amount			% of Net  Revenues		Amount		% of Net  Revenues		Change			% Change
	(in thousands, except percentages)
Income tax (benefit) expense	$	(996	)	(4.0	)%	$	63	0.2	%	$	(1,059	)	(1,681.0	)%

	Six Months Ended March 31,
	2013					2012
	Amount			% of Net  Revenues		Amount		% of Net  Revenues		Change			% Change
	(in thousands, except percentages)
Income tax (benefit) expense	$	(919	)	(1.8	)%	$	129	0.2	%	$	(1,048	)	(812.4	)%

Our effective tax rate for the six months ended March 31, 2013 was 8.5%. Our effective tax rate is primarily impacted by certain foreign taxes, certain nondeductible interest and share based expenses and the release of a portion of the valuation allowance related to certain foreign jurisdictions’ deferred tax assets as such balances were more likely than not realizable within the applicable carryforward period. Our effective tax rate for the six months ended March 31, 2012 was (1.9)%, which was lower than the federal and state statutory rate due to the projected federal and state losses for the fiscal year.

Financial Condition and Liquidity

Cash Flow Analysis

Cash increased to $36.9 million at March 31, 2013, from $23.9 million at September 30, 2012. During the six months ended March 31, 2013, we used cash for operations and investing activities, which was offset by cash provided by financing activities. Our cash flows from operating, investing and financing activities are summarized as follows:

30

	Six Months Ended March 31,
	2013			2012
	(in thousands)
Net cash (used in) provided by operating activities	$	(3,238	)	$	3,464
Net cash used in investing activities	(412		)	(946		)
Net cash provided by (used in) financing activities	16,673			(624		)
Net increase in cash	13,023			1,894
Cash at beginning of period	23,891			17,318
Cash at end of period	$	36,914		$	19,212

Net Cash (Used In) Provided by Operating Activities

During the six months ended March 31, 2013, cash used in operations totaled $3.2 million.  Excluding changes in working capital, we used $5.2 million to fund the cash portion of our net loss. We also used cash to fund increases in inventory and prepaid expenses totaling $1.1 million. These uses were offset by lower accounts receivable of $1.0 million and higher deferred revenue, accounts payable and accrued expense liabilities totaling $2.1 million.

Accounts receivable decreased $1.0 million from $9.4 million at September 30, 2012, to $8.4 million at March 31, 2013, primarily due to improved cash collections during the quarter ended March 31, 2013. Inventory increased $0.5 million from $12.1 million at September 30, 2012, to $12.6 million at March 31, 2013, primarily due to increased inventories held by distributors. Accounts payable, accrued expenses and other liabilities increased by $0.9 million from $18.5 million at September 30, 2012, to $19.4 million at March 31, 2013, due to the timing of obligations and/or payments to our vendors and other service providers. Deferred revenue increased $1.1 million from $0.9 million at September 30, 2012, to $2.0 million at March 31, 2013, due to increased shipments to distributors.

During the six months ended March 31, 2012, cash provided by operating activities totaled $3.5 million. Excluding changes in working capital, cash used to fund our losses totaled $1.4 million. We also used $0.7 million cash to fund the increase in accounts receivable and $0.7 million related to a decrease in deferred revenue due to lower purchases from distributors and $0.5 million related to decreased accounts payable, accrued expenses and other liabilities. These uses were offset by the generation of $4.0 million cash from operating with lower inventory levels.

Accounts receivable increased $0.7 million from $9.6 million at September 30, 2011, to $10.3 million at March 31, 2012, resulting from timing of sales. Inventory decreased $4.0 million from $20.9 million at September 30, 2011, to $16.9 million at March 31, 2012. The lower inventory is due to decreased purchasing resulting from positive changes in the availability of materials. Accounts payable, accrued expenses and other liabilities increased by $0.5 million from $21.6 million at September 30, 2011, to $21.1 million at March 31, 2012, 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.

Net Cash Used In Investing Activities

Investing activities used cash in the six months ended March 31, 2013, for capital expenditures of $0.5 million and payments under licensing agreements of $0.1 million. Expenditures were partially offset by cash provided by the sale of capital assets of $0.2 million. Investing activities used cash in the six months ended March 31, 2012, for capital expenditures of $0.3 million and payments under licensing agreements of $0.7 million.

Net Cash Provided by (Used in) Financing Activities

Net cash provided by financing activities during the six months ended March 31, 2013, totaled $16.7 million. Cash from the sale of common stock totaled $17.1 million, net of approximately $1.5 million in expenses, from the registered underwritten sale of 10,651,280 shares of common stock at $1.75 per share, based on a negotiated discount to market. Proceeds were offset by $0.4 million in cash used for the repurchase of restricted stock units for payroll taxes paid on behalf of employees. During the six months ended March 31, 2012, financing activities used $0.6 million in cash primarily for the repurchase of restricted stock units for payroll taxes.

31

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, cash generated from the sales or licensing of our intellectual property, and during the six months endedMarch 31, 2013, cash generated from the sale of our common stock. Our cash totaled $36.9 million at March 31, 2013. Our working capital at March 31, 2013, was $31.9 million.

In order to achieve sustained profitability and positive cash flows from operations, we may need to further reduce operating expenses and/or increase revenues. 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 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 short-term debt is comprised of our Term A Loan, of which the total principal amount of $7.9 million is due in February 2014. Our long term debt is comprised of our Term B Loan and our 2014 Debentures, of which the total principal amount of

$55.8 million is 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. To meet the remaining debt obligation due in October 2014, we have been exploring strategic alternatives to repaying this debt, and have engaged the services of financial advisory firms to assist us in evaluating possible strategic and financing transactions. These transactions include, among others that we may consider from time to time, an extension of the maturity date and other modification of our Term A and B Loans, the refinancing of indebtedness from the proceeds of one or more new credit facilities, and the repayment of indebtedness from sales of assets and financing transactions. We will pursue these and other potential transactions until we provide for the repayment, refinancing and/or restructuring of our indebtedness. There can be no assurance, however, that our efforts will be successful.

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. As of March 31, 2013, we raised a total of $18.6 million in gross proceeds from the sale of 10,651,280 shares of our common stock, leaving approximately $56.4 million available pursuant to the Form S-3. The Form S-3 expires on December 27, 2014.

Contractual Obligations

	Payment Obligations by Fiscal Year
	Remaining in 2013		2014-2015		2016-2017		2018 and thereafter		Total
	(in thousands)
Convertible subordinated debt (1)	$	—	$	46,493	$	—	$	—	$	46,493
Term A Loan (2)	—		7,857		—		—		7,857
Term B Loan (3)	—		9,342		—		—		9,342
Loan interest (4)	2,650		7,332		—		—		9,982
Operating leases (5)	1,620		3,143		199		—		4,962
Software licenses (6)	5,108		14,278		5,600		2,800		27,786
Inventory and related purchase obligations (7)	7,331		560		—		—		7,891
Total	$	16,709	$	89,005	$	5,799	$	2,800	$	114,313

_________________________________________________

(1) Convertible subordinated debt 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.

32

(4) Interest payable for Term A Loans, Term B Loans and convertible subordinated debt through October 2014.

(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.

Off-Balance Sheet Arrangements

At March 31, 2013, we had no material off-balance sheet arrangements, other than operating leases.

33

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our quantitative and qualitative disclosures about market risk are described in our Annual Report on Form 10-K for the year ended September 30, 2012, as amended by Amendment No. 1 to Annual Report on Form 10-K/A. There have been no material changes to these risks during the six months ended March 31, 2013.

ITEM 4. 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 March 31, 2013, 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 March 31, 2013, our disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934, during the quarter ended March 31, 2013, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitation on the Effectiveness of Internal 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.

34

PART II. OTHER INFORMATION

ITEM 1. 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 March 31, 2013, 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 1A. RISK FACTORS

There have been no material changes to the risk factors disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended September 30, 2012, as amended by Amendment No. 1 to Annual Report on Form 10-K/A.

ITEM 6. EXHIBITS

Exhibit		Incorporated by Reference				Filed or Furnished
Number	Exhibit Description	Form	File Number	Exhibit	Filing Date	Herewith
31.1	Certification 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.					X
31.2	Certification 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.					X
32.1	Certifications 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.					X
101.INS	XBRL Instance Document**					X
101.SCH	XBRL Taxonomy Extension Schema Document**					X
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document**					X
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document**					X
101.LAB	XBRL Taxonomy Extension Label Linkbase Document**					X
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document**					X

_____________________________________________________

** 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.

35

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.

May 7, 2013	VITESSE SEMICONDUCTOR CORPORATION
	By:	/s/ CHRISTOPHER R. GARDNER
		Christopher R. Gardner
		Chief Executive Officer
May 7, 2013	VITESSE SEMICONDUCTOR CORPORATION
	By:	/s/ MARTIN S. MCDERMUT
		Martin S. McDermut
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

36

EX-31.1

EXHIBIT 31.1

Certification of Chief Executive Officer Pursuant to

Securities Exchange Act Rules 13a-14(a) and 15d-14(a)

as Adopted Pursuant to

Section 302 of the Sarbanes Oxley Act of 2002

I, Christopher R. Gardner, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Vitesse Semiconductor Corporation;

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

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

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

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

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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

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

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

May 7, 2013	/s/ CHRISTOPHER R. GARDNER
	Christopher R. Gardner
	Chief Executive Officer

EX-31.2

EXHIBIT 31.2

Certification of Chief Financial Officer Pursuant to

Securities Exchange Act Rules 13a-14(a) and 15d-14(a)

as Adopted Pursuant to

Section 302 of the Sarbanes Oxley Act of 2002

I, Martin S. McDermut, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Vitesse Semiconductor Corporation;

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

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

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

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

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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

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

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

May 7, 2013	/s/ MARTIN S. MCDERMUT
	Martin S. McDermut
	Chief Financial Officer

EX-32.1

Exhibit 32.1

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

As Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Vitesse Semiconductor Corporation (the “Company”) on Form 10-Q for the three months ended March 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. 

May 7, 2013	/s/ CHRISTOPHER R. GARDNER
	Christopher R. Gardner
	Chief Executive Officer
May 7, 2013	/s/ MARTIN S. MCDERMUT
	Martin S. McDermut
	Chief Financial Officer

XML

STOCK BASED COMPENSATION Employee Stock Purchase Plan (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		6 Months Ended			3 Months Ended	6 Months Ended			3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012	Mar. 31, 2013	Jan. 31, 2013	Mar. 31, 2012	Mar. 31, 2013 ESPP Shares	Mar. 31, 2013 ESPP Shares	Jan. 31, 2013 ESPP Shares	Jan. 31, 2011 ESPP Shares	Mar. 31, 2013 Minimum ESPP Shares	Mar. 31, 2013 Maximum ESPP Shares
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Total number of common stock shares reserved for issuance						1,200,000	1,200,000		2,500,000
Issuance of common stock under ESPP (in shares)				500,000
Per share price of ESPP shares issued								$ 1.7255
Discount rate on ESPP shares issued								15.00%
ESPP for percent of share of stock						15.00%	15.00%
Call option for percent of share of stock						85.00%	85.00%
Put option for percent of share stock						15.00%	15.00%
Expected life (in years)			6 months
Weighted-average										40.40%	49.80%
Expected dividend rate						0.00%
Risk-free interest rate										0.10%	0.20%
Stock compensation recognized	$ 1,006	$ 1,146	$ 2,149		$ 2,209	$ 300	$ 0
Share-based Compensation Arrangement by Share-based Payment Award, Employees Participating, Percent						49.00%	49.00%

XML

STOCKHOLDERS' EQUITY (Details) (USD $) In Millions, except Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Mar. 31, 2013	Sep. 30, 2012	Mar. 31, 2013 Series B Convertible Preferred Stock [Member]	Mar. 31, 2013 Common Stock	Mar. 31, 2013 Stock Options	Mar. 31, 2013 ESPP Shares
Common Stock, Number of Shares, Par Value and Other Disclosures [Abstract]
Common stock, shares authorized	250,000,000	250,000,000
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares reserved for future issuance	19,500,000		800,000		9,500,000	1,200,000
Preferred Stock, Number of Shares, Par Value and Other Disclosures [Abstract]
Preferred stock, shares authorized	10,000,000	10,000,000
Preferred stock, par value (in dollars per share)	$ 0.01	$ 0.01
Preferred stock, shares outstanding	135,000	135,000	134,720
Preferred Stock, Conversion Rate			5
Convertible Preferred Stock, Shares Issuable upon Conversion				673,600
Preferred Stock, Dividend Rate, Percentage			10.00%
Stock Issued During Period, Value, New Issues	$ 17.1
stock offering costs	$ 1.5
Issuance of common stock, net of offering costs (in shares)	10,651,280
Sale of Stock, Price Per Share	$ 1.75

XML

COMPUTATION OF NET LOSS PER SHARE Schedule of Dilutive Common Shares Excluded from the Computation (Details) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Mar. 31, 2013	Mar. 31, 2012	Mar. 31, 2013	Mar. 31, 2012
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Total potential common stock excluded from calculation (in shares)	17,929	16,810	17,929	16,810
Outstanding stock options
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Total potential common stock excluded from calculation (in shares)	2,130	1,847	2,130	1,847
Outstanding restricted stock units
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Total potential common stock excluded from calculation (in shares)	2,388	1,743	2,388	1,743
ESPP Shares
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Total potential common stock excluded from calculation (in shares)	518	327	518	327
Convertible preferred stock
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Total potential common stock excluded from calculation (in shares)	674	674	674	674
2014 Convertible debentures
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Total potential common stock excluded from calculation (in shares)	10,332	10,332	10,332	10,332
Term B Loan
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Total potential common stock excluded from calculation (in shares)	1,887	1,887	1,887	1,887

XML

SEGMENT AND GEOGRAPHIC INFORMATION Net Revenues By Geographic Area (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended			6 Months Ended
	Mar. 31, 2013		Mar. 31, 2012	Mar. 31, 2013		Mar. 31, 2012
Revenue from External Customer [Line Items]
Total net revenues	$ 24,753		$ 29,737	$ 50,480		$ 59,728
United States
Revenue from External Customer [Line Items]
Total net revenues	7,198		13,279	18,103		22,998
Asia Pacific
Revenue from External Customer [Line Items]
Total net revenues	14,037		12,823	26,101		27,952
EMEA
Revenue from External Customer [Line Items]
Total net revenues	$ 3,518	[1]	$ 3,635	$ 6,276	[1]	$ 8,778	[1]

[1] Europe, Middle East and Africa

XML

STOCK BASED COMPENSATION Summary of Exercise Prices (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	6 Months Ended
	Mar. 31, 2013
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Exercise Price Range, Lower Range Limit	$ 2.10
Exercise Price Range, Upper Range Limit	$ 174.80
Number of Options Outstanding	2,130
Outstanding Options, Weighted Average Remaining Contractual Term	7 years 0 months 16 days
Outstanding Options, Weighted Average Exercise Price	$ 13.72
Number of Exercisable Options	1,201
Exercisable Options, Weighted Average Exercise Price	$ 21.98
$2.10 - $2.10
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Exercise Price Range, Lower Range Limit	$ 2.10
Exercise Price Range, Upper Range Limit	$ 2.10
Number of Options Outstanding	427
Outstanding Options, Weighted Average Remaining Contractual Term	9 years 11 months 6 days
Outstanding Options, Weighted Average Exercise Price	$ 2.10
Number of Exercisable Options	0
Exercisable Options, Weighted Average Exercise Price	$ 0.00
2.26 - 4.10
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Exercise Price Range, Lower Range Limit	$ 2.26
Exercise Price Range, Upper Range Limit	$ 4.10
Number of Options Outstanding	427
Outstanding Options, Weighted Average Remaining Contractual Term	8 years 6 months 2 days
Outstanding Options, Weighted Average Exercise Price	$ 2.69
Number of Exercisable Options	217
Exercisable Options, Weighted Average Exercise Price	$ 2.76
4.36 - 5.20
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Exercise Price Range, Lower Range Limit	$ 4.36
Exercise Price Range, Upper Range Limit	$ 5.20
Number of Options Outstanding	768
Outstanding Options, Weighted Average Remaining Contractual Term	7 years 2 months 10 days
Outstanding Options, Weighted Average Exercise Price	$ 4.80
Number of Exercisable Options	487
Exercisable Options, Weighted Average Exercise Price	$ 4.88
5.40 - 63.60
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Exercise Price Range, Lower Range Limit	$ 5.40
Exercise Price Range, Upper Range Limit	$ 63.60
Number of Options Outstanding	440
Outstanding Options, Weighted Average Remaining Contractual Term	3 years 6 months 0 days
Outstanding Options, Weighted Average Exercise Price	$ 35.44
Number of Exercisable Options	429
Exercisable Options, Weighted Average Exercise Price	$ 36.18
66.40 - 174.80
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Exercise Price Range, Lower Range Limit	$ 66.40
Exercise Price Range, Upper Range Limit	$ 174.80
Number of Options Outstanding	68
Outstanding Options, Weighted Average Remaining Contractual Term	0 years 8 months 22 days
Outstanding Options, Weighted Average Exercise Price	$ 115.58
Number of Exercisable Options	68
Exercisable Options, Weighted Average Exercise Price	$ 115.58

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INVENTORY

6 Months Ended

Mar. 31, 2013

Inventory Disclosure [Abstract]

INVENTORY

INVENTORY

	March 31, 2013		September 30, 2012
	(in thousands)
Inventory:
Raw materials	$	1,268	$	1,394
Work-in-process	4,326		5,359
Finished goods	6,972		5,307
Total	$	12,566	$	12,060

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SEGMENT AND GEOGRAPHIC INFORMATION Product Revenues By The Three Product Lines (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Mar. 31, 2013	Mar. 31, 2012	Mar. 31, 2013	Mar. 31, 2012
Revenue from External Customers [Line Items]
Product revenues	$ 24,689	$ 27,195	$ 48,594	$ 56,137
Connectivity
Revenue from External Customers [Line Items]
Product revenues	9,835	14,704	19,973	27,672
Ethernet switching
Revenue from External Customers [Line Items]
Product revenues	10,331	6,777	18,637	14,800
Transport processing
Revenue from External Customers [Line Items]
Product revenues	$ 4,523	$ 5,714	$ 9,984	$ 13,665

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DEBT Narrative (Details) (USD $) In Thousands, except Share data in Millions, unless otherwise specified	1 Months Ended	3 Months Ended		6 Months Ended
	Oct. 30, 2012	Mar. 31, 2013	Mar. 31, 2012	Mar. 31, 2013	Mar. 31, 2012
Debt Instrument [Line Items]
Embedded Derivative, Gain (Loss) on Embedded Derivative, Net	$ 800	$ 0	$ (5,280)	$ 803	$ (1,982)
Reclassification of compound embedded derivative liability to additional paid-in-capital				$ 2,096	$ 0
2014 Debentures, convertible, 8.0% fixed-rate notes, due October 2014
Debt Instrument [Line Items]
Percentage of principal allowed to be prepaid		100.00%		100.00%
Stock price as a percentage of conversion price, minimum		130.00%		130.00%
Debt Instrument, Convertible, Prepayment Terms, Trading Period, Minimum		20 days
Debt Instrument, Conversion, Conversion Of Term B Loan Would Convert To Shares Of Common Stock		10.3		10.3
Term B Loan Convertible Eight Point Zero Percent [Member] | Term B Loan, convertible, 8.0% fixed-rate notes, due October 2014
Debt Instrument [Line Items]
Percentage of principal allowed to be prepaid		100.00%		100.00%
Stock price as a percentage of conversion price, minimum		130.00%		130.00%
Debt Instrument, Convertible, Prepayment Terms, Trading Period, Minimum		20 days
Debt Instrument, Conversion, Trading Day Period To Pay In Cash Or Common Shares		30 days
Debt Instrument, Conversion, Conversion Of Term B Loan Would Convert To Shares Of Common Stock		1.9		1.9
Term A and B Loans
Debt Instrument [Line Items]
Percentage of principal required to be redeemed		100.00%		100.00%
Minimum | Term A and B Loans
Debt Instrument [Line Items]
Trading price of common stock payable in additional shares range				$ 3.20
Maximum | Term A and B Loans
Debt Instrument [Line Items]
Trading price of common stock payable in additional shares range				$ 16

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DEBT Schedule of Outstanding Debt (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	Mar. 31, 2013	Mar. 31, 2012
Debt Instrument [Line Items]
Carrying value	$ 51,523	$ 58,373
Notes Payable to Banks [Member] | Term A Loan Ten Point Five Percent [Member]
Debt Instrument [Line Items]
Principal	7,857
Unaccreted debt premium/(unamortized) debt discount	149
Carrying value	8,006
Annual effective interest rate	8.20%
Term B Loan, convertible, 8.0% fixed-rate notes, due October 2014 | Term B Loan Convertible Eight Point Zero Percent [Member]
Debt Instrument [Line Items]
Principal	9,342
Unaccreted debt premium/(unamortized) debt discount	(1,259)
Carrying value	8,083
Annual effective interest rate	17.70%
Conversion rate per common share	$ 4.95
2014 Debentures, convertible, 8.0% fixed-rate notes, due October 2014
Debt Instrument [Line Items]
Principal	46,493
Unaccreted debt premium/(unamortized) debt discount	(3,053)
Carrying value	$ 43,440
Annual effective interest rate	12.20%
Conversion rate per common share	$ 4.50

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DEBT Schedule of Maturities of Long-term Debt (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013
Debt Disclosure [Abstract]
2014	$ 7,857
2015	55,835
Total	$ 63,692

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FAIR VALUE MEASUREMENTS AND DERIVATIVE LIABILITY Compound embedded derivative liability activity (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Mar. 31, 2013	Mar. 31, 2012	Mar. 31, 2013	Mar. 31, 2012
Derivative [Line Items]
Fair Value Inputs, Discount Rate	8.00%
Derivative Financial Instruments, Liabilities
Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation, Calculation [Roll Forward]
Compound embedded derivative liability, beginning balance		$ 9,778	$ 2,899	$ 7,796
Transfer to equity	(2,096)	0
Total net gains included in earnings			(803)	1,982
Compound embedded derivative liability, ending balance	$ 0		$ 0

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COMPUTATION OF NET LOSS PER SHARE

6 Months Ended

Mar. 31, 2013

Earnings Per Share [Abstract]

COMPUTATION OF NET LOSS PER SHARE

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 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, shares to be issued under our Employee Stock Purchase Plan (“ESPP”), convertible preferred stock, 2014 Debentures and the Term B Loan. Unexercised stock options, restricted stock units, and unvested shares to be issued under our ESPP, 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.

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

	Three and Six Months Ended March 31,
	2013	2012
	(in thousands)
Outstanding stock options	2,130	1,847
Outstanding restricted stock units	2,388	1,743
ESPP shares	518	327
Convertible preferred stock	674	674
2014 Debentures	10,332	10,332
Term B Loan	1,887	1,887
Total potential common stock excluded from calculation	17,929	16,810

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FAIR VALUE MEASUREMENTS AND DERIVATIVE LIABILITY Schedule of the fair value of the loans and compound embedded derivative (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013	Sep. 30, 2012
Carrying (Reported) Amount, Fair Value Disclosure | Term A Loan
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Debt Instrument, Fair Value Disclosure	$ 8,006	$ 8,090
Carrying (Reported) Amount, Fair Value Disclosure | Term B Loan
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Debt Instrument, Fair Value Disclosure	8,083	7,755
Carrying (Reported) Amount, Fair Value Disclosure | 2014 Debentures
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Debt Instrument, Fair Value Disclosure	43,440	42,521
Estimate of Fair Value, Fair Value Disclosure | Term A Loan
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Debt Instrument, Fair Value Disclosure	8,311	8,437
Estimate of Fair Value, Fair Value Disclosure | Term B Loan
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Debt Instrument, Fair Value Disclosure	9,680	9,776
Estimate of Fair Value, Fair Value Disclosure | 2014 Debentures
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Debt Instrument, Fair Value Disclosure	$ 48,317	$ 46,725

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INCOME TAXES Narrative (Details) (USD $) In Millions, except Share data, unless otherwise specified	3 Months Ended	6 Months Ended
	Mar. 31, 2013	Mar. 31, 2013	Mar. 31, 2012
Operating Loss Carryforwards [Line Items]
Effective Income Tax Rate, Continuing Operations		8.50%	(1.90%)
Issuance of common stock, net of offering costs (in shares)	10,651,280
Internal Revenue Service (IRS)
Operating Loss Carryforwards [Line Items]
Operating Loss Carryforwards	90.2	90.2
Net Operating Loss Annual Limit		1.4

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CONSOLIDATED BALANCE SHEETS (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013	Sep. 30, 2012
Current assets:
Cash	$ 36,914	$ 23,891
Accounts receivable, net	8,429	9,403
Inventory, net	12,566	12,060
Prepaid expenses and other current assets	2,964	2,125
Total current assets	60,873	47,479
Property, plant and equipment, net	3,126	3,832
Other intangible assets, net	1,087	1,175
Other assets	3,766	4,130
Total Assets	68,852	56,616
Current liabilities:
Accounts payable	6,540	5,726
Accrued expenses and other current liabilities	12,445	12,188
Current portion of debt, net	8,006	0
Deferred revenue	2,005	871
Total current liabilities	28,996	18,785
Other long-term liabilities	442	574
Long-term debt, net	8,083	15,852
Compound embedded derivative	0	2,899
Convertible subordinated debt, net	43,440	42,521
Total liabilities	80,961	80,631
Commitments and contingencies, See note 10
Stockholders' deficit:
Preferred stock, $0.01 par value: 10,000 shares authorized; Series B Non Cumulative, Convertible, 135 shares outstanding at March 31, 2013 and September 30, 2012, respectively	1	1
Common stock, $0.01 par value: 250,000 shares authorized; 37,455 and 25,812 shares outstanding at March 31, 2013 and September 30, 2012, respectively	375	258
Additional paid-in-capital	1,851,644	1,829,976
Accumulated deficit	(1,864,129)	(1,854,250)
Total stockholders' deficit	(12,109)	(24,015)
Total Liabilities and Stockholders' Deficit	$ 68,852	$ 56,616

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CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Mar. 31, 2013	Mar. 31, 2012
Cash flows (used in) provided by operating activities:
Net loss	$ (9,879)	$ (7,041)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization	1,327	1,492
Stock-based compensation	2,149	2,209
Change in fair value of compound embedded derivative liability	(803)	1,982
Common stock issued for employee stock plans	863	868
Gain on disposal of assets	(153)	659
Amortization of debt issuance costs	135	136
Amortization of debt discounts	1,247	1,156
Accretion of debt premiums	(83)	(77)
Change in operating assets and liabilities:
Accounts receivable	974	(742)
Inventory	(506)	3,959
Prepaids and other assets	(610)	3
Accounts payable	814	760
Accrued expenses and other liabilities	153	(1,219)
Deferred revenue	1,134	(681)
Net cash (used in) provided by operating activities	(3,238)	3,464
Cash flows used in investing activities:
Capital expenditures	(470)	(258)
Proceeds from the sale of capital assets	156	0
Payments under licensing agreements	(98)	(688)
Net cash used in investing activities	(412)	(946)
Cash flows provided by (used in) financing activities:
Proceeds from the exercise of stock options	0	8
Net proceeds from the sale of common stock	17,055	0
Repurchase of restricted stock units for payroll taxes	(378)	(626)
Capital lease obligations	(4)	(6)
Net cash provided by (used in) financing activities	16,673	(624)
Net increase in cash	13,023	1,894
Cash at beginning of period	23,891	17,318
Cash at end of period	36,914	19,212
Cash paid during the period for:
Interest	2,664	2,660
Income taxes	76	264
Non-cash financing activities:
Reclassification of compound embedded derivative liability to additional paid-in-capital	$ 2,096	$ 0

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STOCK BASED COMPENSATION Activity under all stock option plans (Details) (USD $) In Thousands, except Share data, unless otherwise specified	6 Months Ended	12 Months Ended
	Mar. 31, 2013	Sep. 30, 2012
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding [Roll Forward]
Options outstanding, Shares, Beginning balance	1,813
Options outstanding, Weighted average exercise price, Beginning balance	$ 16.57
Options outstanding, Weighted average remaining contractual life (in years), Beginning balance	7 years 0 months 14 days	6 years 7 months 10 days
Options outstanding, Aggregate intrinsic value, Beginning balance	$ 0
Shares, Granted	429
Weighted average exercise price, Granted	$ 2.10
Shares, Exercised	0
Weighted average exercise price, Exercised	$ 0.00
Shares, Cancelled or expired	(112)
Weighted average exercise price, Cancelled or expired	$ 15.47
Options outstanding, Shares, Ending balance	2,130	1,813
Options outstanding, Weighted average exercise price, Ending balance	$ 13.72	$ 16.57
Options outstanding, Weighted average remaining contractual life (in years), Ending balance	7 years 0 months 14 days	6 years 7 months 10 days
Options outstanding, Aggregate intrinsic value, Ending balance	0	0
Options exercisable, Shares, Ending balance	1,201
Options exercisable, Weighted average exercise price, Ending balance	$ 21.98
Options exercisable, Weighted average remaining contractual life (in years), Ending balance	5 years 7 months 18 days
Aggregate intrinsic value, Options exercisbale	$ 0
Closing stock price used to calculate total pretax intrinsic value	$ 2.16

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STOCK BASED COMPENSATION (Tables)

6 Months Ended

Mar. 31, 2013

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Compensation costs related to the stock-based compensation plans

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

	Three Months Ended March 31,				Six Months Ended March 31,
	2013		2012		2013		2012
	(in thousands)
Cost of revenues	$	144	$	146	$	298	$	268
Engineering, research and development	379		388		765		764
Selling, general and administrative	483		612		1,086		1,177
Total stock-based compensation expense	$	1,006	$	1,146	$	2,149	$	2,209

Activity under all stock option plans

Activity in stock option awards is as follows:

	Shares   (in thousands)		Weighted average exercise price		Weighted average remaining contractual life  (years)	Aggregate intrinsic value (in thousands)
Options outstanding, September 30, 2012	1,813		$	16.57	6.61	$	2
Granted	429		2.10		—	—
Exercised	—		—		—	—
Cancelled or expired	(112	)	15.47		—	—
Options outstanding, March 31, 2013	2,130		13.72		7.04	26
Options exercisable, March 31, 2013	1,201		$	21.98	5.63	$	—

Summary of assumptions used to value stock options granted in connection with stock incentive plans

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

	Six Months Ended March 31,
	2013	2012
Expected life (in years)	5.63	5.63
Expected volatility:
Weighted-average	82.1%	87.0%
Range	80.5% - 82.1%	86.1% - 87.1%
Expected dividend	—	—
Risk-free interest rate	.9% - 1.0%	1.1% - 1.3%

Schedule of Shares Authorized under Stock Option Plans by Exercise Price Range

The following table provides additional information in regards to options outstanding as of March 31, 2013:

	Options Outstanding				Options Exercisable
Range of Exercise Price	Number Outstanding (in thousands)	Weighted Average Remaining Contractual Life (years)	Weighted Average Exercise Price		Number Exercisable (in thousands)	Weighted Average Exercise Price
$2.10 - $2.10	427	9.93	$	2.10	—	$	—
2.26 - 4.10	427	8.51	2.69		217	2.76
4.36 - 5.20	768	7.19	4.80		487	4.88
5.40 - 63.60	440	3.50	35.44		429	36.18
66.40 - 174.80	68	0.73	115.58		68	115.58
$2.10 - $174.80	2,130	7.04	$	13.72	1,201	$	21.98

Summary of restricted stock unit activity

Activity for our restricted stock award units is as follows:

	Restricted Stock Units (in thousands)		Weighted Average Grant-Date Fair Value per Share
Restricted stock units, September 30, 2012	1,686		$	3.49
Awarded	1,472		2.11
Released	(690	)	3.61
Forfeited	(80	)	3.22
Restricted stock units, March 31, 2013	2,388		$	2.61

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STOCK BASED COMPENSATION Summary of assumptions used to value stock options granted in connection with stock incentives (Details) (USD $)	6 Months Ended
	Mar. 31, 2013	Mar. 31, 2012
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Expected life (in years)	6 months
Weighted average grant date fair value	$ 1.43	$ 1.80
Stock Options
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Expected life (in years)	5 years 7 months 18 days	5 years 7 months 17 days
Weighted-average	82.10%	87.00%
Expected volatility, range, minimum	80.50%	86.10%
Expected volatility, range, maximum	82.10%	87.10%
Expected dividend	0.00%	0.00%
Risk-free interest rate, range, minimum	0.90%	1.10%
Risk-free interest rate, range, maximum	1.00%	1.30%

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THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES Narrative (Details) (USD $)	1 Months Ended	3 Months Ended		6 Months Ended			6 Months Ended		12 Months Ended	6 Months Ended
	Oct. 30, 2012	Mar. 31, 2013 major_distributor major_customer	Mar. 31, 2012	Mar. 31, 2013 major_distributor major_customer	Mar. 31, 2012	Sep. 30, 2012 major_distributor	Mar. 31, 2013 Customer Concentration Risk [Member] Accounts Receivable [Member]	Mar. 31, 2013 Distributor Concentration Risk [Member] Accounts Receivable [Member]	Sep. 30, 2012 Distributor Concentration Risk [Member] Accounts Receivable [Member]	Mar. 31, 2013 Minimum	Mar. 31, 2013 Maximum
Long-term Debt, Current Maturities		$ 7,857,000		$ 7,857,000
Long-term Debt pf Registrant, Maturities, Repayments of Principal in 2015		55,800,000		55,800,000
Number of Major Customers		3		3
Number of Major Distributors		2		2		1
Concentration Risk, Percentage							33.00%	49.00%	14.00%
Accounts, Notes, Loans and Financing Receivable, Gross, Allowance, and Net [Abstract]
Allowance for Doubtful Accounts		0		0		300,000
Property, Plant and Equipment, Useful Life										3 years	5 years
Embedded Derivative, Gain (Loss) on Embedded Derivative, Net	800,000	0	(5,280,000)	803,000	(1,982,000)
Derivative Liabilities, Noncurrent	$ 2,100,000	$ 0		$ 0		$ 2,899,000
Standard Product Warranty Period				1 year
Standard Warranty, Reserve Adjustment, Period				12 months

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THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES

6 Months Ended

Mar. 31, 2013

Organization, Consolidation and Presentation of Financial Statements [Abstract]

THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES

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 interim unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Securities and Exchange Commission (“SEC”) Form 10-Q and Article 10 of SEC Regulation S-X. They do not include all of the information and footnotes required by GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended September 30, 2012, included in our Annual Report on Form 10-K filed with the SEC on December 4, 2012, as amended by Amendment No. 1 to Annual Report on Form 10-K/A filed with the SEC on April 16, 2013.

The consolidated financial statements included herein are unaudited. However, they contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly our consolidated financial position, the consolidated results of our operations and the consolidated cash flows and the changes in our stockholders’ deficit. The results of operations for the three and six months ended March 31, 2013 are not necessarily indicative of the results to be expected for future quarters or the full year.

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 unaudited 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, 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.

Revenue Recognition

Product Revenues

In accordance with Accounting Standards Codification (“ASC”) Topic 605, Revenue Recognition, we recognize product revenues 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 revenues 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 605-25, 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 revenues 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.

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 (“R&D”) 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, requires that all stock-based payments to employees, including grants of employee stock options and employee stock purchase rights, 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 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.

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 unaudited 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, 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 short-term debt is comprised of our Term A loan (“Term A Loan”), of which the total principal amount of $7.9 million is due in February 2014. Our long term debt is comprised of our Term B loan (“Term B Loan”) and our convertible subordinated debentures due October 2014 (“2014 Debentures”), of which the total principal amount of $55.8 million is 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. To meet the remaining debt obligation due in October 2014, we have been exploring strategic alternatives to repaying this debt, and have engaged the services of financial advisory firms to assist us in evaluating possible strategic and financing transactions. These transactions include, among others that we may consider from time to time, an extension of the maturity date and other modification of our Term A and B Loans, the refinancing of indebtedness from the proceeds of one or more new credit facilities, and the repayment of indebtedness from sales of assets and financing transactions. We will pursue these and other potential transactions until we provide for the repayment, refinancing and/or restructuring of our indebtedness. There can be no assurance, however, that our efforts will be successful.

Financial instruments, which potentially subject us to concentrations of credit risk, consist principally of cash and accounts receivable. Cash consists of demand deposits maintained with several financial institutions, which often exceed Federal Deposit Insurance Corporation (“FDIC”) limits of $250,000. We have never experienced any losses related to these balances; however, our balances are significantly in excess of insured limits.

At March 31, 2013, there were three direct customers and two distributors that accounted for 33% and 49% of accounts receivable, respectively. At September 30, 2012, there was one distributor that accounted for 14% of accounts receivable. 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 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. Should all attempts to collect a receivable fail, the receivable is written off against the allowance. Our allowance for doubtful accounts was zero and $0.3 million as of March 31, 2013 and September 30, 2012, 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. 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 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. As of March 31, 2013, we did not have any Level 3 recurring fair value measurements.

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 current and long-term debt, net, and convertible subordinated debt, net on our unaudited 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 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 was comprised of the conversion option and a make-whole payment for foregone interest if the holder converted 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 were 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 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 was presented on the balance sheet at fair value and was marked-to-market, until the make-whole payment for foregone interest expired on October 30, 2012. The change in the fair value of the compound embedded derivative was a non-cash item primarily related to the change in price of the underlying common stock and is reflected in earnings. 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.

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 revenues 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 revenues 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 is effective for financial statements of periods beginning after September 15, 2012, with early adoption permitted. The implementation of the new guidance did not impact our consolidated financial statements.

XML

CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $) In Thousands, except Per Share data, unless otherwise specified	Mar. 31, 2013	Sep. 30, 2012
Statement of Financial Position [Abstract]
Preferred stock, par value (in dollars per share)	$ 0.01	$ 0.01
Preferred stock, shares authorized	10,000	10,000
Preferred stock, shares outstanding	135	135
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized	250,000	250,000
Common stock, shares outstanding	36,770	25,812

XML

THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (Policies)

6 Months Ended

Mar. 31, 2013

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Fiscal Year

Fiscal Year

Our fiscal year is October 1 through September 30.

Basis of Presentation

Basis of Presentation

The interim unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Securities and Exchange Commission (“SEC”) Form 10-Q and Article 10 of SEC Regulation S-X. They do not include all of the information and footnotes required by GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended September 30, 2012, included in our Annual Report on Form 10-K filed with the SEC on December 4, 2012, as amended by Amendment No. 1 to Annual Report on Form 10-K/A filed with the SEC on April 16, 2013.

The consolidated financial statements included herein are unaudited. However, they contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly our consolidated financial position, the consolidated results of our operations and the consolidated cash flows and the changes in our stockholders’ deficit. The results of operations for the three and six months ended March 31, 2013 are not necessarily indicative of the results to be expected for future quarters or the full year.

Foreign Currency Translation

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

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 unaudited 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, 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.

Revenue Recognition, Product Revenues

Product Revenues

In accordance with Accounting Standards Codification (“ASC”) Topic 605, Revenue Recognition, we recognize product revenues 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 revenues 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.

Revenue Recognition, Intellectual Property Revenues

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 605-25, 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.

Revenue Recognition, Multiple Element Transactions

For multiple-element arrangements, we allocate revenues 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.

Shipping and Handling Fees Cost

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

Research and development (“R&D”) 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

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

Stock Based Compensation

ASC Topic 718, Compensation-Stock Compensation, requires that all stock-based payments to employees, including grants of employee stock options and employee stock purchase rights, 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 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 

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

Income Taxes

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 unaudited consolidated statements of operations as income tax expense.

Earnings Per Share, Policy

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.

Trade and Other Accounts Receivable, Policy

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. Should all attempts to collect a receivable fail, the receivable is written off against the allowance. Our allowance for doubtful accounts was zero and $0.3 million as of March 31, 2013 and September 30, 2012, respectively.

Inventory

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

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. 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 and Long-Lived Assets

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

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. As of March 31, 2013, we did not have any Level 3 recurring fair value measurements.

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

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 current and long-term debt, net, and convertible subordinated debt, net on our unaudited 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 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 was comprised of the conversion option and a make-whole payment for foregone interest if the holder converted 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 were 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 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 was presented on the balance sheet at fair value and was marked-to-market, until the make-whole payment for foregone interest expired on October 30, 2012. The change in the fair value of the compound embedded derivative was a non-cash item primarily related to the change in price of the underlying common stock and is reflected in earnings. 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.

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

Warranty

We generally warrant our products against defects for one year from date of shipment. A warranty reserve is recorded against revenues 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 revenues 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

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.

New Accounting Pronouncements, Policy

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 is effective for financial statements of periods beginning after September 15, 2012, with early adoption permitted. The implementation of the new guidance did not impact our consolidated financial statements.

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Document and Entity Information	6 Months Ended
	Mar. 31, 2013	May 02, 2013
Document And Entity Information [Abstract]
Entity Registrant Name	VITESSE SEMICONDUCTOR CORP
Entity Central Index Key	0000880446
Document Type	10-Q
Document Period End Date	Mar. 31, 2013
Amendment Flag	false
Current Fiscal Year End Date	--09-30
Entity Filer Category	Accelerated Filer
Document Fiscal Year Focus	2013
Document Fiscal Period Focus	Q2
Entity Common Stock, Shares Outstanding		37,658,091

XML

COMPUTATION OF NET LOSS PER SHARE (Tables)

6 Months Ended

Mar. 31, 2013

Earnings Per Share [Abstract]

Schedule of potenital common shares excluded from the diluted computation

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

	Three and Six Months Ended March 31,
	2013	2012
	(in thousands)
Outstanding stock options	2,130	1,847
Outstanding restricted stock units	2,388	1,743
ESPP shares	518	327
Convertible preferred stock	674	674
2014 Debentures	10,332	10,332
Term B Loan	1,887	1,887
Total potential common stock excluded from calculation	17,929	16,810

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CONSOLIDATED STATEMENTS OF OPERATIONS (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Mar. 31, 2013	Mar. 31, 2012	Mar. 31, 2013	Mar. 31, 2012
Net revenues:
Product revenues	$ 24,689	$ 27,195	$ 48,594	$ 56,137
Intellectual property revenues	64	2,542	1,886	3,591
Net revenues	24,753	29,737	50,480	59,728
Costs and expenses:
Cost of product revenues	11,369	10,595	22,344	22,758
Engineering, research and development	9,777	9,580	20,281	22,005
Selling, general and administrative	7,390	8,383	15,360	15,835
Amortization of intangible assets	89	79	186	146
Costs and expenses	28,625	28,637	58,171	60,744
(Loss) income from operations	(3,872)	1,100	(7,691)	(1,016)
Other (income) expense:
Interest expense, net	1,966	1,924	3,936	3,873
(Gain) loss on compound embedded derivative	0	5,280	(803)	1,982
Other expense (income), net	5	29	(26)	41
Other (income) expense, net	1,971	7,233	3,107	5,896
Loss before income tax (benefit) expense	(5,843)	(6,133)	(10,798)	(6,912)
Income tax (benefit) expense	(996)	63	(919)	129
Net loss	$ (4,847)	$ (6,196)	$ (9,879)	$ (7,041)
Net loss per common share - basic and diluted (in USD per share)	$ (0.13)	$ (0.25)	$ (0.30)	$ (0.28)
Weighted average common shares outstanding - basic and diluted (in shares)	37,215	25,043	32,587	24,776

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STOCKHOLDERS' EQUITY

6 Months Ended

Mar. 31, 2013

Equity [Abstract]

Stockholders' Equity Note Disclosure [Text Block]

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, 9.5 million shares are reserved for issuance under our stock compensation plans, 1.2 million shares are reserved for issuance under our ESPP, and 0.8 million shares are reserved for issuance upon conversion of Series B Preferred Stock.

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 March 31, 2013, there were 134,720 shares of Series B Preferred Stock outstanding that were convertible into common stock on a five-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 10 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.

In December 2012, we raised $17.1 million, net of offering costs of $1.5 million, from the registered public sale of 10,651,280 shares of common stock at $1.75 per share, based on a negotiated discount to market.

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FAIR VALUE MEASUREMENTS AND DERIVATIVE LIABILITY

6 Months Ended

Mar. 31, 2013

Fair Value Disclosures [Abstract]

FAIR VALUE MEASUREMENTS AND DERIVATIVE LIABILITY

FAIR VALUE MEASUREMENTS AND DERIVATIVE LIABILITY

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

	2013			2012
	(in thousands)
Beginning balance September 30	$	2,899		$	7,796
Transfer to equity	(2,096		)	—
Total net gains included in earnings	(803		)	1,982
Ending balance March 31	$	—		$	9,778

There were no transfers in and/or out of Level 1, Level 2 or Level 3 fair value measurements during the six months ended March 31, 2013 and 2012, respectively.

The compound embedded derivative liability, which was included in long-term liabilities, represented the value of the equity conversion feature and a “make-whole” feature of the 2014 Debentures. 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.

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.

We use a binomial-lattice model to estimate fair values of our Term B Loan and 2014 Debenture financial instruments. The key unobservable input utilized in the model includes a discount rate of 8.% The estimated fair value of Term A Loan is determined using Level 3 inputs based primarily on the comparability of its 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:

	March 31, 2013				September 30, 2012
	Carrying value		Fair value		Carrying value		Fair value
	(in thousands)
Term A Loan	$	8,006	$	8,311	$	8,090	$	8,437
Term B Loan	8,083		9,680		7,755		9,776
2014 Debentures	43,440		48,317		42,521		46,725

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SEGMENT AND GEOGRAPHIC INFORMATION (Tables)

6 Months Ended

Mar. 31, 2013

Segment Reporting [Abstract]

Schedule of Revenue by Major Customers by Reporting Segments

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

	Three Months Ended March 31,				Six Months Ended March 31,
	2013		2012		2013		2012
WPG Holdings**	16.7	%	14.0	%	14.9	%	12.2	%
Nu Horizons Electronics**	11.1	%	10.3	%	11.7	%	16.2	%
Harris Corporation	*		10.8	%	*		*

 __________________________________________________

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

**Distributor

Net Revenues By Geographic Area

Net revenues by geographic area are as follows:

	Three Months Ended March 31,				Six Months Ended March 31,
	2013		2012		2013		2012
	(in thousands)
United States	$	7,198	$	13,279	$	18,103	$	22,998
Asia Pacific	14,037		12,823		26,101		27,952
EMEA*	3,518		3,635		6,276		8,778
Total net revenues	$	24,753	$	29,737	$	50,480	$	59,728

________________________________________________

*Europe, Middle East and Africa

Product Revenues By The Three Product Lines

Product revenues by product line are as follows:

	Three Months Ended March 31,				Six Months Ended March 31,
	2013		2012		2013		2012
	(in thousands)
Connectivity	$	9,835	$	14,704	$	19,973	27,672
Ethernet switching	10,331		6,777		18,637		14,800
Transport processing	4,523		5,714		9,984		13,665
Product revenues	$	24,689	$	27,195	$	48,594	$	56,137

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INVENTORY (Tables)

6 Months Ended

Mar. 31, 2013

Inventory Disclosure [Abstract]

INVENTORY

	March 31, 2013		September 30, 2012
	(in thousands)
Inventory:
Raw materials	$	1,268	$	1,394
Work-in-process	4,326		5,359
Finished goods	6,972		5,307
Total	$	12,566	$	12,060

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SEGMENT AND GEOGRAPHIC INFORMATION

6 Months Ended

Mar. 31, 2013

Segment Reporting [Abstract]

SEGMENT AND GEOGRAPHIC INFORMATION

-SEGMENT AND GEOGRAPHIC INFORMATION

We manage and operate our business through one operating segment.

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

	Three Months Ended March 31,				Six Months Ended March 31,
	2013		2012		2013		2012
WPG Holdings**	16.7	%	14.0	%	14.9	%	12.2	%
Nu Horizons Electronics**	11.1	%	10.3	%	11.7	%	16.2	%
Harris Corporation	*		10.8	%	*		*

 __________________________________________________

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

**Distributor

Net revenues by geographic area are as follows:

	Three Months Ended March 31,				Six Months Ended March 31,
	2013		2012		2013		2012
	(in thousands)
United States	$	7,198	$	13,279	$	18,103	$	22,998
Asia Pacific	14,037		12,823		26,101		27,952
EMEA*	3,518		3,635		6,276		8,778
Total net revenues	$	24,753	$	29,737	$	50,480	$	59,728

________________________________________________

*Europe, Middle East and Africa

Revenues by geographic area are 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 original equipment manufacturer (“OEM”) and third-party manufacturing service providers in the Asia Pacific region are ultimately shipped to end-markets in the United States and Europe.

Product revenues by product line are as follows:

	Three Months Ended March 31,				Six Months Ended March 31,
	2013		2012		2013		2012
	(in thousands)
Connectivity	$	9,835	$	14,704	$	19,973	27,672
Ethernet switching	10,331		6,777		18,637		14,800
Transport processing	4,523		5,714		9,984		13,665
Product revenues	$	24,689	$	27,195	$	48,594	$	56,137

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STOCK BASED COMPENSATION

6 Months Ended

Mar. 31, 2013

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

STOCK BASED COMPENSATION

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 non-employee directors. The options generally vest over four years and expire 10 years from the date of grant.

The Compensation Committee of the Board of Directors determines the stock based compensation grants. The exercise price of options is the closing price on the date the options are granted. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model.

Under the stock option plans, we have 4.3 million shares available for future grant as of March 31, 2013. The 2013 Incentive Plan (the “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. The Plan uses a “fungible share” concept, pursuant to which shares that are subject to appreciation awards (such as stock options and stock appreciation rights) are counted against the Plan share limit on a 1-for-1 basis for every such share subject to appreciation awards, and shares that are subject to full value awards (such as awards of stock, restricted stock and restricted stock units) are counted against the Plan share limit at a ratio of 1.5 shares for every share subject to the full value award.

As of March 31, 2013, 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:

	Three Months Ended March 31,				Six Months Ended March 31,
	2013		2012		2013		2012
	(in thousands)
Cost of revenues	$	144	$	146	$	298	$	268
Engineering, research and development	379		388		765		764
Selling, general and administrative	483		612		1,086		1,177
Total stock-based compensation expense	$	1,006	$	1,146	$	2,149	$	2,209

As of March 31, 2013, there was $7.4 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 for stock options and restricted stock units expected to be recognized is approximately 2.2 years and 2.4 years, respectively. An estimated forfeiture rate of 5.2% has been applied to all unvested options and restricted stock outstanding as of March 31, 2013.

Activity in stock option awards is as follows:

	Shares   (in thousands)		Weighted average exercise price		Weighted average remaining contractual life  (years)	Aggregate intrinsic value (in thousands)
Options outstanding, September 30, 2012	1,813		$	16.57	6.61	$	2
Granted	429		2.10		—	—
Exercised	—		—		—	—
Cancelled or expired	(112	)	15.47		—	—
Options outstanding, March 31, 2013	2,130		13.72		7.04	26
Options exercisable, March 31, 2013	1,201		$	21.98	5.63	$	—

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 $2.16, as of March 31, 2013, 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 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:

	Six Months Ended March 31,
	2013	2012
Expected life (in years)	5.63	5.63
Expected volatility:
Weighted-average	82.1%	87.0%
Range	80.5% - 82.1%	86.1% - 87.1%
Expected dividend	—	—
Risk-free interest rate	.9% - 1.0%	1.1% - 1.3%

The weighted average fair value at the date of grant of options granted in the six months ended March 31, 2013 and 2012 was $1.43 and $1.80, respectively.

The following table provides additional information in regards to options outstanding as of March 31, 2013:

	Options Outstanding				Options Exercisable
Range of Exercise Price	Number Outstanding (in thousands)	Weighted Average Remaining Contractual Life (years)	Weighted Average Exercise Price		Number Exercisable (in thousands)	Weighted Average Exercise Price
$2.10 - $2.10	427	9.93	$	2.10	—	$	—
2.26 - 4.10	427	8.51	2.69		217	2.76
4.36 - 5.20	768	7.19	4.80		487	4.88
5.40 - 63.60	440	3.50	35.44		429	36.18
66.40 - 174.80	68	0.73	115.58		68	115.58
$2.10 - $174.80	2,130	7.04	$	13.72	1,201	$	21.98

Restricted Stock Units

We grant restricted stock units to certain employees and to our employee and non-employee directors. 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:

	Restricted Stock Units (in thousands)		Weighted Average Grant-Date Fair Value per Share
Restricted stock units, September 30, 2012	1,686		$	3.49
Awarded	1,472		2.11
Released	(690	)	3.61
Forfeited	(80	)	3.22
Restricted stock units, March 31, 2013	2,388		$	2.61

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 $0.4 million for the six months ended March 31, 2013, and was recorded as settlement on restricted stock tax withholding in the accompanying unaudited consolidated statements of stockholders’ deficit. Although shares withheld are not issued, they are treated as common stock repurchases in our unaudited consolidated financial statements, as they reduce the number of shares that would have been issued upon vesting.

Employee Stock Purchase Plan

In January 2011, our stockholders approved the ESPP under which 2.5 million shares of common stock were reserved for issuance. As of March 31, 2013, the ESPP had 1.2 million shares available for issuance. As of March 31, 2013, approximately 49% of the eligible employees participated in our stock purchase plan. On January 31, 2013, 0.5 million shares were issued at a price per share of $1.73, a 15% discount to the share price on that date, for the purchase period that began on August 1, 2012 and ended January 31, 2013. A new purchase period began on February 1, 2013 and ends July 31, 2013.

The fair value of the ESPP awards are calculated in accordance with ASC Topic 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 49.8%, a zero dividend rate, and a risk-free interest rate of 0.1% to 0.2%. We recognized approximately $0.3 million in ESPP stock compensation for both the six months ended March 31, 2013 and 2012, respectively.

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INCOME TAXES

6 Months Ended

Mar. 31, 2013

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

The provision for income taxes as a percentage of loss from operations before income taxes was 8.5% for the six months ended March 31, 2013 compared to (1.9)% for the comparable period in the prior year. Our effective tax rate is primarily impacted bycertain foreign taxes, certain nondeductible interest and share based expenses,  the release of a portion of the valuation allowance related to certain foreign jurisdictions' deferred tax assets as such balances were more likely than not realizable within the applicable carryforward period, and for the six months ended March 31, 2013, by a refund of withholding taxes previously paid on certain foreign income.

At March 31, 2013, we had approximately $90.2 million of Federal Net Operating Losses (“NOLs”) that can be used in future tax years. In December 2012, we issued 10.7 million shares of common stock in a public offering which is believed to have resulted in a Section 382 ownership change. Since we maintain a full valuation allowance on all of our U.S. and state deferred tax assets, the impact of the ownership change on the future realizability of our U.S. and state deferred tax assets did not result in an impact to our provision for income taxes for the six months ended March 31, 2013, or on our net deferred tax asset as of March 31, 2013. In addition, as a result of this ownership change, substantially all of our federal NOLs, credits and certain built-in deductions or losses are subject to an annual limitation of $1.4 million. Consequently, it is anticipated that a substantial portion of the federal NOLs, credits and built-in losses will expire unutilized as a result of this limitation. If an additional ownership change should occur in the future, our ability to utilize our NOL carryforwards and other deferred tax assets to offset future taxable income may be further limited and the value and recoverability of our NOLs and other deferred tax assets could be further diminished.

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COMMITMENTS AND CONTINGENCIES

6 Months Ended

Mar. 31, 2013

Commitments and Contingencies Disclosure [Abstract]

COMMITMENTS AND CONTINGENCIES

COMMITMENTS AND CONTINGENCIES

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 March 31, 2013 and September 30, 2012.

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 executives, 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-of-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.

General Contractual Indemnities/Product 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 on our business, financial condition or results of operations. We maintain general liability insurance which may provide a source of recovery to us in the event of an indemnification claim.

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STOCK BASED COMPENSATION Compensation costs related to the stock-based compensations plans (Details) (USD $) Share data in Millions, unless otherwise specified	3 Months Ended		6 Months Ended
	Mar. 31, 2013	Mar. 31, 2012	Mar. 31, 2013	Mar. 31, 2012
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vesting period			4 years
Expiration period			10 years
Number of shares available for future grant	4.3		4.3
Total stock-based compensation expense	$ 1,006,000	$ 1,146,000	$ 2,149,000	$ 2,209,000
Unrecognized stock-based compensation expense	7,400,000		7,400,000
Cost of revenues
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Total stock-based compensation expense	144,000	146,000	298,000	268,000
Engineering, research and development
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Total stock-based compensation expense	379,000	388,000	765,000	764,000
Selling, general and administrative
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Total stock-based compensation expense	$ 483,000	$ 612,000	$ 1,086,000	$ 1,177,000
Stock Options
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Weighted average period over which the unearned stock-based compensation is expected to be recognized			2 years 2 months 19 days
Restricted Stock Units (RSUs)
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Weighted average period over which the unearned stock-based compensation is expected to be recognized			2 years 5 months 4 days
Stock Options And Restricted Stock
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Estimated forfeiture rate	5.20%		5.20%

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FAIR VALUE MEASUREMENTS AND DERIVATIVE LIABILITY (Tables)

6 Months Ended

Mar. 31, 2013

Fair Value Disclosures [Abstract]

Reconciliation of the beginning and ending balances for the compound embedded derivative

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

	2013			2012
	(in thousands)
Beginning balance September 30	$	2,899		$	7,796
Transfer to equity	(2,096		)	—
Total net gains included in earnings	(803		)	1,982
Ending balance March 31	$	—		$	9,778

Schedule of the fair value of the loans and compound embedded derivative

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

	March 31, 2013				September 30, 2012
	Carrying value		Fair value		Carrying value		Fair value
	(in thousands)
Term A Loan	$	8,006	$	8,311	$	8,090	$	8,437
Term B Loan	8,083		9,680		7,755		9,776
2014 Debentures	43,440		48,317		42,521		46,725

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INVENTORY INVENTORY (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013	Sep. 30, 2012
Inventory:
Raw materials	$ 1,268	$ 1,394
Work-in-process	4,326	5,359
Finished goods	6,972	5,307
Total	$ 12,566	$ 12,060

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SEGMENT AND GEOGRAPHIC INFORMATION Schedule of Revenue by Major Customers by Reporting Segments (Details)	3 Months Ended				6 Months Ended
	Mar. 31, 2013		Mar. 31, 2012		Mar. 31, 2013		Mar. 31, 2012
Revenue from External Customer [Line Items]
Number of Operating Segments					1
Major Customers, WPG | Customer Concentration Risk [Member] | Sales
Revenue from External Customer [Line Items]
Concentration Risk, Percentage	16.70%	[1]	14.00%	[1]	14.90%	[1]	12.20%	[1]
Major Customers, Nu Horizons Electronics | Customer Concentration Risk [Member] | Sales
Revenue from External Customer [Line Items]
Concentration Risk, Percentage	11.10%	[1]	10.30%	[1]	11.70%	[1]	16.20%	[1]
Major Customers, Harris Corporation [Member] | Customer Concentration Risk [Member] | Sales
Revenue from External Customer [Line Items]
Concentration Risk, Percentage			10.80%

[1] Distributor

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (USD $) In Thousands, except Share data, unless otherwise specified	Total	Preferred Stock	Common Stock	Additional Paid-in-Capital	Accumulated Deficit
Balance at Sep. 30, 2012	$ (24,015)	$ 1	$ 258	$ 1,829,976	$ (1,854,250)
Balance (in shares) at Sep. 30, 2012		135,000	25,812,000
Increase (Decrease) in Stockholders' Equity
Net loss	(9,879)				(9,879)
Compensation expense related to stock options, awards and ESPP	2,149			2,149
Issuance of common stock under ESPP, value	863		6	857
Issuance of common stock under ESPP (in shares)			498,000
Issuance of common stock, net of offering costs, value	17,055		107	16,948
Issuance of common stock, net of offering costs (in shares)			10,651,000
Release of restricted stock units	0		7	(7)
Release of restricted stock units (in shares)			691,000
Repurchase Of Restricted Stock Units For Payroll Taxes	(378)		(3)	(375)
Repurchase of restricted stock units for payroll taxes (in shares)			197,000
Reclassification of compound embedded derivative liability to additional paid-in-capital	2,096			2,096
Balance at Mar. 31, 2013	$ (12,109)	$ 1	$ 375	$ 1,851,644	$ (1,864,129)
Balance (in shares) at Mar. 31, 2013		135,000	37,455,000

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DEBT

6 Months Ended

Mar. 31, 2013

Debt Disclosure [Abstract]

DEBT

DEBT

	March 31, 2013			September 30, 2012
	(in thousands)
Term A Loan, 10.5% fixed-rate notes, due February 2014	$	8,006		$	8,090
Term B Loan, convertible, 8.0% fixed-rate notes, due October 2014	8,083			7,755
Other	—			7
2014 Debentures, convertible, 8.0% fixed-rate notes, due October 2014	43,440			42,521
Total debt, net	59,529			58,373
Less current portion of debt, net	(8,006		)	—
Long-term debt, less current portion, net	$	51,523		$	58,373

Additional information about our debt is as follows:

	Term A Loan			Term B Loan			2014 Debentures
	(in thousands)
Principal	$	7,857		$	9,342		$	46,493
Unaccreted debt premium/(unamortized) debt discount	149			(1,259		)	(3,053		)
Carrying value	$	8,006		$	8,083		$	43,440
Interest payable terms	Quarterly, in arrears			Quarterly, in arrears			Semi-annually, in arrears
Annual effective interest rate	8.2		%	17.7		%	12.2		%
Conversion rate per common share	n/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. At March 31, 2013, 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. At March 31, 2013, conversion of the outstanding principal amount of the 2014 Debentures would result in the issuance of 10.3 million shares of common stock.

We can elect to settle any conversion in stock, cash or a combination of stock and cash. The compound embedded derivative, which expired October 30, 2012, was comprised of the conversion option and a make-whole payment for foregone interest if the holder converted the debenture early. Upon expiration off the make-whole payment for forgone interest, the compound embedded derivative no longer met the criteria for bifurcation as all components of the conversion feature were 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. The 2014 Debentures are collateralized by a second priority interest in substantially all of our assets.

The credit agreements for the Term A and B Loans and 2014 Debentures 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 a 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	$	7,857
2015	55,835
Total	$	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.

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DEBT Schedule of Long-term Debt Instruments (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013	Sep. 30, 2012	Mar. 31, 2012
Debt Instrument [Line Items]
Long-term debt, net	$ 8,083	$ 15,852
Convertible subordinated debt, net of discount	43,440	42,521
Long-term Debt and Capital Lease Obligations	59,529	58,373
Current portion of debt, net	(8,006)	0	0
Long-term Debt, Excluding Current Maturities	51,523		58,373
Notes Payable to Banks [Member] | Term A Loan Ten Point Five Percent [Member]
Debt Instrument [Line Items]
Long-term debt, net	8,006	8,090
Long-term Debt, Excluding Current Maturities	8,006
Capital leases, non-current portion
Debt Instrument [Line Items]
Long-term debt, net	0	7
2014 Debentures, convertible, 8.0% fixed-rate notes, due October 2014
Debt Instrument [Line Items]
Convertible subordinated debt, net of discount	43,440	42,521
Long-term Debt, Excluding Current Maturities	43,440
2014 Debentures, convertible, 8.0% fixed-rate notes, due October 2014 | Term B Loan Convertible Eight Point Zero Percent [Member]
Debt Instrument [Line Items]
Long-term debt, net	$ 8,083	$ 7,755

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STOCK BASED COMPENSATION Summary of restricted stock unit activity (Details) (USD $) In Millions, except Share data, unless otherwise specified	6 Months Ended
	Mar. 31, 2013
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vesting period	4 years
Restricted Stock Units (RSUs)
Share-based Compensation Arrangement by Share-based Payment Award, Non-Option Equity Instruments, Outstanding [Roll Forward]
Restricted stock units, Restricted Stock Units, Beginning balance	1,685,564
Restricted stock units, Weighted Average Grant-Date Fair Value per Share, Beginning balance	3.49
Restricted Stock Units, Awarded	1,471,845
Weighted Average Grant-Date Fair Value per Share, Awarded	2.11
Restricted Stock Units, Released	(690,206)
Weighted Average Grant-Date Fair Value per Share, Released	3.61
Restricted Stock Units, Forfeited	(79,598)
Weighted Average Grant-Date Fair Value per Share, Forfeited	3.22
Restricted stock units, Restricted Stock Units, Ending balance	2,387,605
Restricted stock units, Weighted Average Grant-Date Fair Value per Share, Ending balance	2.61
Impact of retaining common stock from employees upon vesting of restricted shares and restricted stock units to cover income tax withholding	0.4
Non-employee Director [Member] | Restricted Stock Units (RSUs)
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based Compensation Arrangement By Share-based Payment Award, Award Vesting Percentage, Period 2	33.30%
Share-based Compensation Arrangement By Share-based Payment Award, Annual Award Vesting Percentage	100.00%
Maximum | Restricted Stock Units (RSUs)
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vesting period	4 years

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DEBT (Tables)

6 Months Ended

Mar. 31, 2013

Debt Disclosure [Abstract]

Schedule of Long-term Debt Instruments

	March 31, 2013			September 30, 2012
	(in thousands)
Term A Loan, 10.5% fixed-rate notes, due February 2014	$	8,006		$	8,090
Term B Loan, convertible, 8.0% fixed-rate notes, due October 2014	8,083			7,755
Other	—			7
2014 Debentures, convertible, 8.0% fixed-rate notes, due October 2014	43,440			42,521
Total debt, net	59,529			58,373
Less current portion of debt, net	(8,006		)	—
Long-term debt, less current portion, net	$	51,523		$	58,373

Schedule of Debt

Additional information about our debt is as follows:

	Term A Loan			Term B Loan			2014 Debentures
	(in thousands)
Principal	$	7,857		$	9,342		$	46,493
Unaccreted debt premium/(unamortized) debt discount	149			(1,259		)	(3,053		)
Carrying value	$	8,006		$	8,083		$	43,440
Interest payable terms	Quarterly, in arrears			Quarterly, in arrears			Semi-annually, in arrears
Annual effective interest rate	8.2		%	17.7		%	12.2		%
Conversion rate per common share	n/a			$	4.95		$	4.50

Schedule of Maturities of Long-term Debt

Maturity of our total aggregated outstanding debt is as follows:

Fiscal year	(in thousands)
2014	$	7,857
2015	55,835
Total	$	63,692