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 December 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.)

4721 Calle Carga

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 January 31, 2014, there were outstanding 58,247,656 shares of the registrant’s Common Stock, $0.01 par value.

VITESSE SEMICONDUCTOR CORPORATION

UNAUDITED QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE MONTHS ENDED DECEMBER 31, 2013

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Unaudited Consolidated Balance Sheets as of December 31, 2013 and September 30, 2013	3
	Unaudited Consolidated Statements of Operations for the Three Months Ended December 31, 2013 and 2012	4
	Unaudited Consolidated Statements of Stockholders’ Equity for the Three Months Ended December 31, 2013	5
	Unaudited Consolidated Statements of Cash Flows for the Three Months Ended December 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	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Controls and Procedures	33
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 6.	Exhibits	34

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PART I. FINANCIAL INFORMATION

ITEM 1:  FINANCIAL STATEMENTS

VITESSE SEMICONDUCTOR CORPORATION

UNAUDITED CONSOLIDATED BALANCE SHEETS

	December 31, 2013			September 30, 2013
	(in thousands, except par value)
ASSETS
Current assets:
Cash	$	48,355		$	68,863
Accounts receivable	11,406			9,807
Inventory, net	12,544			10,692
Prepaid expenses and other current assets	2,946			1,897
Total current assets	75,251			91,259
Property, plant and equipment, net	3,559			3,107
Other intangible assets, net	1,169			1,170
Other assets	3,372			3,425
	$	83,351		$	98,961
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	9,449		$	7,436
Accrued expenses and other current liabilities	11,422			12,245
Current portion of debt, net	31,694			—
Deferred revenue	2,728			2,215
Total current liabilities	55,293			21,896
Other long-term liabilities	374			407
Long-term debt, net	16,163			16,366
Convertible subordinated debt, net	—			44,384
Total liabilities	71,830			83,053
Commitments and contingencies, See note 10
Stockholders’ equity:
Preferred stock, $0.01 par value: 10,000 shares authorized; no shares issued or outstanding	—			—
Common stock, $0.01 par value: 250,000 shares authorized; 57,829 and 57,545 shares outstanding at December 31, 2013 and September 30, 2013, respectively	578			575
Additional paid-in-capital	1,892,642			1,891,661
Accumulated deficit	(1,881,699		)	(1,876,328		)
Total stockholders’ equity	11,521			15,908
	$	83,351		$	98,961

See accompanying notes to unaudited consolidated financial statements.

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VITESSE SEMICONDUCTOR CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended December 31,
	2013			2012
	(in thousands, except per share data)
Net revenues:
Product revenues	$	24,863		$	23,905
Intellectual property revenues	2,220			1,822
Net revenues	27,083			25,727
Costs and expenses:
Cost of product revenues	10,676			10,975
Engineering, research and development	10,679			10,504
Selling, general and administrative	7,854			7,970
Amortization of intangible assets	88			97
Costs and expenses	29,297			29,546
Loss from operations	(2,214		)	(3,819		)
Other expense (income):
Interest expense, net	1,704			1,970
Gain on compound embedded derivative	—			(803		)
Loss on extinguishment of debt	1,594			—
Other expense (income), net	61			(31		)
Other expense, net	3,359			1,136
Loss before income tax (benefit) provision	(5,573		)	(4,955		)
Income tax (benefit) provision	(202		)	77
Net loss	$	(5,371	)	$	(5,032	)
Net loss per common share - basic and diluted	$	(0.09	)	$	(0.18	)
Weighted average common shares outstanding - basic and diluted	57,610			28,059

See accompanying notes to unaudited consolidated financial statements.

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VITESSE SEMICONDUCTOR CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

	Common Stock					Additional Paid-in-Capital			Accumulated Deficit			Total Vitesse Semiconductor Corporation Stockholders' Equity
(in thousands)	Shares		Amount
Balance at September 30, 2013	57,545		$	575		$	1,891,661		$	(1,876,328	)	$	15,908
Net loss	—		—			—			(5,371		)	(5,371		)
Compensation expense related to stock options, awards and ESPP	—		—			1,265			—			1,265
Release of restricted stock units	418		4			(4		)	—			—
Repurchase and retirement of restricted stock units for payroll taxes	(134	)	(1		)	(342		)	—			(343		)
Other	—		—			62			—			62
Balance at December 31, 2013	57,829		$	578		$	1,892,642		$	(1,881,699	)	$	11,521

See accompanying notes to unaudited consolidated financial statements.

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VITESSE SEMICONDUCTOR CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three Months Ended December 31,
	2013			2012
	(in thousands)
Cash flows used in operating activities:
Net loss	$	(5,371	)	$	(5,032	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	496			686
Stock-based compensation	1,265			1,143
Change in fair value of compound embedded derivative liability	—			(803		)
Gain on disposal of assets	(159		)	—
Loss on extinguishment of debt, net	1,594			—
Amortization of debt issuance costs	54			68
Amortization of debt discounts	512			625
Accretion of debt premiums	(9		)	(42		)
Change in operating assets and liabilities:
Accounts receivable	(1,599		)	(198		)
Inventory	(1,852		)	(586		)
Prepaids and other assets	(1,124		)	(773		)
Accounts payable	2,013			1,674
Accrued expenses and other liabilities	(856		)	(824		)
Deferred revenue	513			454
Net cash used in operating activities	(4,523		)	(3,608		)
Cash flows used in investing activities:
Capital expenditures	(884		)	(161		)
Proceeds from the sale of fixed assets	183			—
Payments under licensing agreements	(87		)	—
Net cash used in investing activities	(788		)	(161		)
Cash flows (used in) provided by financing activities:
Net proceeds from the sale of common stock	—			17,213
Repurchase of 2014 Debentures	(14,606		)	—
Consent fee on amendment of credit agreement	(308		)	—
Repurchase and retirement of restricted stock units for payroll taxes	(343		)	(254		)
Other	60			(3		)
Net cash (used in) provided by financing activities	(15,197		)	16,956
Net (decrease) increase in cash	(20,508		)	13,187
Cash at beginning of period	68,863			23,891
Cash at end of period	$	48,355		$	37,078
Supplemental cash flow information:
Cash paid during the period for:
Interest	$	2,371		$	2,262
Income taxes	25			40
Non-cash financing activities:
Equity offering costs incurred but not paid	$	—		$	112
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

THREE MONTHS ENDED DECEMBER 31, 2013 AND 2012

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 4721 Calle Carga, 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, 2013, included in our Annual Report on Form 10-K filed with the SEC on December 5, 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’ equity. The results of operations for the three months endedDecember 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, compound embedded derivative valuation, purchased intangible asset valuations and useful lives, asset retirement obligations, 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

In accordance with Accounting Standards Codification (“ASC”) Topic 605, Revenue Recognition, we recognize product revenue when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred; (iii) the price to the customer is fixed or determinable; and (iv) collection of the sales price is reasonably assured. Delivery occurs when goods are shipped and title and risk of loss transfer to the customer, in accordance with the terms specified in the arrangement with the customer. Revenue recognition is deferred where the earnings process is incomplete.

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

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 fixes and technical support. No other upgrades, products, or post-contract support are provided. These arrangements may be renewable annually by the customer. Support revenue is recognized ratably over the period during which the obligation exists, typically 12 months or less.

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

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

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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.

Engineering, Research and Development Costs

Engineering, research and development (“R&D”) costs are expensed when incurred. R&D expenses consist primarily of compensation expenses for employees and contractors engaged in research, design and development activities. R&D expenses also include costs of mask tooling, which we fully expense in the period, electronic design automation tools, software licensing contracts, subcontracting and fabrication, depreciation and amortization, and overhead including facilities expenses.

Intellectual property purchased from third-parties is capitalized and amortized over the useful life of the intellectual property.

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 various option pricing models, primarily the Black-Scholes option pricing model that was developed for use in estimating the value of traded options that have no vesting restrictions and that are freely transferable. The models consider, among other factors, the expected life of the award and the expected volatility of our stock price. Although the models meet the accounting guidance requirements, the fair values generated by the models may not be indicative of the actual fair values of our awards, as they do not consider other factors important to those stock-based payment awards, such as continued employment, periodic vesting requirements, and limited transferability.

We have elected to recognize compensation expense for all stock-based awards granted after September 30, 2005 on a straight-line basis over the requisite service period for the entire award. The amount of compensation expense recognized through the end of each reporting period is equal to the portion of the grant-date value of the awards that have vested, or for partially vested awards, the value of the portion of the award that is ultimately expected to vest for which the requisite services have been provided.

Other Income, Net 

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

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Income Taxes

We account for income taxes pursuant to the provisions of ASC Topic 740, Income Taxes (“ASC 740”). Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. We assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not “more likely than not,” we establish a valuation allowance. To the extent we establish a valuation allowance or increase or decrease this allowance in a period, we include an expense or benefit within the tax provision in the statement of operations. ASC Topic 740-10 prescribes a “more likely than not” recognition threshold and measurement analysis for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We recognize potential accrued interest and penalties related to unrecognized tax benefits within the 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 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.

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, the highly cyclical nature of the semiconductor industry; our high fixed costs; declines in average selling prices; decisions by our IC manufacturer customers to curtail outsourcing; our substantial indebtedness; our ability to fund liquidity needs; our 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; that our management information systems may prove inadequate; our ability to attract and retain qualified employees; difficulties consolidating and evolving our operational capabilities; our dependence on materials and equipment suppliers; our loss of customers; adverse tax consequences; the development of new proprietary technology and the enforcement of intellectual property rights by or against us; the complexity of packaging and test processes in our industry; competition; our need to comply with existing and future environmental regulations; and fire, flood or other calamity affecting us or others with whom we do business.

Our current debt is comprised of our convertible subordinated debentures (“2014 Debentures”), of which the total principal amount of $32.8 million is due in October 2014. Our long-term debt is comprised of our senior term loans (the “Term A Loan” and “Term B Loan”, which we collectively refer to as our “Term A and B Loans”) which have a total principal amount of $17.2 million due on August 31, 2016. We intend to use our existing cash to repay our 2014 Debentures on or before their maturity in October 2014, which will achieve our objective of reducing our outstanding indebtedness but will also reduce our cash balances. While we believe that our existing sources of liquidity, along with cash expected to be generated from revenues, will be sufficient to fund our operations for at least the next 12 months after repayment of the 2014 Debentures, this ultimately may not be the case. If we incur operating losses and negative cash flows in the future, we may need to further reduce our operating costs or obtain alternate sources of financing, or both. We may need additional capital in the future and may not have access to additional sources of capital on favorable terms or at all. If we raise additional funds through the issuance of equity or debt securities, such securities may have rights, preferences or privileges senior to those of our common stock and our stockholders may experience dilution of their ownership interests.

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 limits of $250,000. We have never experienced any losses related to these balances; however, our balances are significantly in excess of insured limits.

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At December 31, 2013, there were three customers that accounted for 52.8% of accounts receivable. At September 30, 2013, there were four customers that accounted for 63.1% 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. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Our allowance for doubtful accounts was nil as of December 31, 2013 and September 30, 2013, 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 product revenues 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. When property, plant and equipment is retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts. Gains and losses from retirements and asset disposals are recorded in selling, general and administrative (“SG&A”) expenses.

We evaluate the recoverability of property, plant and equipment in accordance with ASC Topic 360, 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.

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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, Intangibles - Goodwill and Other. We evaluate our finite-lived assets for impairment whenever events or changes in circumstances indicate the carrying value of an intangible asset or asset group may not be recoverable. The carrying value of an intangible 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.

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.

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.

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Convertible Subordinated Debt

We use a binomial-lattice model to estimate the fair value of our 2014 Debentures. At inception, 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. As more fully described in Note 4, the 2014 Debentures no longer require bifurcation and a final valuation of the compound embedded derivative was completed in October 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 revenue when products are shipped. At each reporting period, we adjust our reserve for warranty claims based on our actual warranty claims experience as a percentage of net revenue for the preceding 12 months and also consider the effect of known operational issues that may have an impact that differs from historical trends. Historically, our warranty returns have not been material.

Contingencies

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

Recent Accounting Pronouncements

In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of Unrecognized Tax Benefit When a Net Operating Loss Carryforward, A Similar Tax Loss, or a Tax Credit Carryforward Exists (A Consensus the FASB Emerging Issues Task Force). ASU 2013-11 provides guidance on financial statement presentation of unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The FASB’s objective in issuing this ASU is to eliminate diversity in practice resulting from a lack of guidance on this topic in current U.S. GAAP. This ASU applies to all entities with unrecognized tax benefits that also have tax loss or tax credit carryforwards in the same tax jurisdiction as of the reporting date. This amendment is effective for public entities for fiscal years beginning after December 15, 2013, and interim periods within those years. We do not expect the adoption of this standard to have a material impact on our unaudited condensed consolidated financial position and results of operations.

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NOTE 2-COMPUTATION OF NET LOSS PER SHARE

For the three months ended December 31, 2013 and 2012, we recorded a net loss. As such, all outstanding potential common shares were excluded from the diluted earnings per share computation.

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

	Three Months Ended December 31,
	2013	2012
	(in thousands)
Outstanding stock options	3,038	1,724
Outstanding restricted stock units	3,034	1,228
ESPP shares	365	506
Convertible preferred stock	—	674
2014 Debentures	7,298	10,332
Term B Loan	1,887	1,887
Total potential common stock excluded from calculation	15,622	16,351

NOTE 3-INVENTORY, NET

	December 31, 2013		September 30, 2013
	(in thousands)
Inventory, net:
Raw materials	$	1,307	$	1,220
Work-in-process	5,054		3,652
Finished goods	6,183		5,820
Total	$	12,544	$	10,692

NOTE 4-DEBT

	December 31, 2013		September 30, 2013
	(in thousands)
Term A Loan, bearing interest at 9.0% and 10.5% as of December 31, 2013 and September 30, 2013, respectively, due August 2016	$	7,768	$	7,919
Term B Loan, convertible, bearing interest at 9.0% and 8.0% as of December 31, 2013 and September 30, 2013, respectively, due August 2016	8,394		8,444
Other	1		3
Long-term debt, net	16,163		16,366
2014 Debentures, convertible, 8.0% fixed-rate notes, due October 2014	31,694		44,384
Total debt, net	$	47,857	$	60,750

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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		$	32,843
Unamortized debt discount	(89		)	(948		)	(1,149		)
Carrying value	$	7,768		$	8,394		$	31,694
Interest payable terms	Quarterly, in arrears			Quarterly, in arrears			Semi-annually, in arrears
Annual effective interest rate	9.5		%	13.7		%	12.2		%
Conversion rate per common share	n/a			$	4.95		$	4.50

The Term B Loan conversion terms are substantially similar to the conversion terms of the 2014 Debentures, as described below. At December 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 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 December 31, 2013, conversion of the outstanding principal amount of the 2014 Debentures would result in the issuance of 7.3 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 of 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, indebtedness at its 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 $6 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. We were in compliance with all covenants as of December 31, 2013.

On November 5, 2013, we amended the credit agreement for the Term A and B Loans (the “Amendment”). The Amendment extends the maturity dates of our outstanding Term A Loan and Term B Loan from February 4, 2014 and October 30, 2014, respectively, to August 31, 2016, and also provides that the Term A and B Loans will each bear interest in cash at 9.0% per annum payable quarterly in arrears. The Amendment provides us with a right to optionally prepay the Term A and B Loans in whole or in part, at any time and from time-to-time, subject to the payment of a prepayment fee. The prepayment fee is 5% of the aggregate principal amount repaid for prepayments made prior to October 30, 2014, 3% for prepayments made on or after October 30, 2014 but prior to October 30, 2015, and 2% for prepayment made on or after October 30, 2015. The credit agreement for the Term A and B Loans continue to require that we prepay the Term A and B Loans upon the occurrence of certain prepayment events, but the Amendment provides us with greater flexibility to sell assets and use the resulting proceeds for purposes other than repaying the Term A and B Loans after repayment of our 2014 Debentures.

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The Amendment provides us with the right, so long as no event of default exists under the credit agreement for the Term A and B Loans, to purchase, repay, redeem, or defease any or all of the 2014 Debentures. In addition, the Amendment requires us to maintain an unrestricted cash balance of $8.0 million and achieve minimum quarterly revenues of $10.0 million.

The credit agreement for the Term A and B Loans continues to provide the lenders with the right to convert the Term B Loan into shares of our common stock at a conversion price of $4.95 per share through October 30, 2014. After that date, the lenders will not have the right to convert the Term B Loan into common stock.

In connection with the Amendment, we paid the lenders a consent fee of $0.3 million which was recorded as a debt discount and will be amortized over the remaining term of the Term A and B Loans. Additionally, in connection with the Amendment we repurchased $13.7 million principal amount of our 2014 Debentures at 107% of the principal amount thereof plus accrued interest, which eliminated the potential issuance of approximately 3.0 million dilutive common shares. After this transaction, $32.8 million principal amount of 2014 Debentures remain outstanding. We recorded a loss on extinguishment of debt in the amount of $1.6 million related to the repurchase of the 2014 Debentures.

Debt Maturities

Maturity of our total aggregated outstanding debt is as follows:

Fiscal Year	(in thousands)
2014	$	—
2015	32,843
2016	17,199
Total	$	50,042

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):

	2014		2013
	(in thousands)
Beginning balance September 30	$	—	$	2,899
Transfer to equity	—		(2,096		)
Total net gains included in earnings	—		(803		)
Ending balance December 31	$	—	$	—

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 carried at amortized/accreted cost quarterly for disclosure purposes.

We use a binomial-lattice model to estimate fair values of our financial instruments. The key unobservable input utilized in the model for our Term B Loan and 2014 Debentures includes a discount rate of 5.9% . The estimated fair value of our 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:

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	December 31, 2013				September 30, 2013
	Carrying value		Fair value		Carrying value		Fair value
	(in thousands)
Term A Loan	$	7,768	$	8,531	$	7,919	$	8,165
Term B Loan	8,394		10,350		8,444		9,781
2014 Debentures	31,694		34,691		44,384		49,282

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, 9.0 million shares of common stock have been reserved for issuance under our stock compensation plans, and 0.8 million remaining shares of common stock are reserved for issuance under our ESPP.

We are authorized to issue up to 10 million shares of preferred stock, with a par value of $0.01 per share and none were outstanding.

In December 2012, we raised $17.1 million, net of offering costs of $1.6 million, from the registered public sale of 10,651,280 shares of common stock at $1.75 per share, which was a discount to the market price of our common stock.

In June 2013, we raised an additional $37.4 million, net of offering expenses of $2.8 million, from the registered public sale of 18,720,000 shares of common stock at $2.15 per share, which was a discount to the market price of our common stock.

NOTE 7-STOCK BASED COMPENSATION

Stock Options

We have in effect one stock incentive plan, the 2013 Incentive Plan (the “Plan”) under which non-qualified stock options and restricted stock units have been granted to employees and non-employee directors. Options generally 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 generally estimated on the date of the grant using the Black-Scholes option-pricing model.

Under the Plan, we have 1.6 million shares available for future grant as of December 31, 2013. 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 December 31, 2013, none of our stock-based awards are classified as liabilities. We did not capitalize any stock-based compensation cost.

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Compensation cost related to our Plan and ESPP is as follows:

	Three Months Ended December 31,
	2013		2012
	(in thousands)
Cost of revenues	$	184	$	154
Engineering, research and development	485		386
Selling, general and administrative	596		603
Total stock-based compensation expense	$	1,265	$	1,143

As of December 31, 2013, there was $9.4 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 1.9 years and 2.4 years, respectively. Future stock-based compensation expense and unearned stock-based compensation will increase to the extent that we grant additional equity awards and our stock price increases.

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, 2013	2,089		$	13.43	6.67	$	591
Granted	1,014		2.53
Exercised	—		—
Cancelled or expired	(65	)	112.84
Options outstanding, December 31, 2013	3,038		7.64		7.73	886
Options exercisable, December 31 2013	1,377		$	13.56	5.86	$	177

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 $2.92 as of December 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. There were 0.4 million in-the-money stock options that were exercisable as of December 31, 2013.

Expected volatility used to estimate the fair value of options granted 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 time-based stock options granted in connection with stock incentive plans have been estimated using the following weighted average assumptions:

	Three Months Ended December 31,
	2013	2012
Expected life (in years)	5.79	6.08
Expected volatility	81.5%	80.5%
Expected dividend	—	—
Risk-free interest rate	1.7%	0.9%

The weighted average fair value at the date of grant of time-based options granted in the three months ended December 31, 2013 and 2012 was $1.75 and $1.47, respectively.

On December 10, 2013, we granted 500,000 market-based stock options at an exercise price of $2.53 to executive officers. The market-based options vest if either of the following conditions is met prior to December 10, 2018: (i) the closing price of our Common Stock equals or exceeds twice the exercise price of $2.53 for 30 consecutive trading days; or (ii) a change in control

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occurs where the Company’s stockholders receive in consideration of their shares of Common Stock cash or other consideration with a value at least equal to twice the exercise price of $2.53. We evaluate stock awards with market conditions as to the probability that the market conditions will be met and estimates the date at which the market conditions will be met in order to properly recognize stock-based compensation expense over the requisite service period. We used the following assumptions to estimate the fair value of the options: expected life of 1.3 years, expected volatility of 80.0%, a zero dividend rate, and a risk-free rate of 2.79%. The market-based options had a grant date per share fair value of $1.86.

The following table provides additional information in regards to options outstanding as of December 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 - $2.26	453	9.17	$	2.11	105	$	2.11
2.53	995	9.94	2.53		—	—
2.54 - 4.36	775	7.53	3.44		563	3.48
4.60 - 48.00	621	5.44	9.16		515	9.98
48.40 - 145.40	194	1.09	58.61		194	58.61
$2.10 - $145.40	3,038	7.73	$	7.64	1,377	$	13.56

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		Weighted average remaining contractual life (in years)	Aggregate intrinsic value (in thousands)
Restricted stock units, September 30, 2013	2,021		$	2.65	1.13	$	6,143
Awarded	1,441		2.54
Released	(418	)	3.30
Forfeited	(10	)	2.43
Restricted stock units, December 31, 2013	3,034		$	2.51	1.30	$	8,860

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 $0.3 million for each of the three months ended December 31, 2013 and 2012, and was recorded as settlement on restricted stock tax withholding in the accompanying unaudited consolidated statements of stockholders’ equity. 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

Pursuant to our ESPP, eligible employees may authorize payroll deductions of up to 15% of their regular base salary subject to certain limits to purchase shares at the lower of 85% of the fair market value of the common stock on the date of the commencement of the offering or on the last day of the 6-month offering period. As of December 31, 2013, the ESPP had 0.8 million shares of our common stock reserved for future issuance under the plan. On January 31, 2014, 0.4 million shares were issued at a price per share of $2.46, a 15% discount to the share price on August 1, 2013, the commencement date for the

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purchase period that ended January 31, 2014. We recognized $0.2 million and $0.1 million of stock compensation expense under the ESPP during the three months ended December 31, 2013 and 2012, respectively. We determine the fair value of the ESPP awards using the Black-Scholes pricing model. Underlying assumptions used were as follows:

	Three Months Ended December 31,
	2013	2012
Expected life (in years)	0.5	0.5
Expected volatility	50.3%	47.6%
Expected dividend	—	—
Risk-free interest rate	0.08%	0.14%

As of December 31, 2013, approximately 36.0% of the eligible employees participated in our stock purchase plan.

NOTE 8-INCOME TAXES

The income tax (benefit) provision as a percentage of loss from operations before income taxes was (3.6)% for the three months ended December 31, 2013 compared to 1.6% for the comparable period in the prior year. Our income tax benefit is primarily impacted by foreign taxes, certain nondeductible interest and share based expenses. The income tax benefit is also impacted by 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 based on our analysis of the available positive and negative evidence.

At December 31, 2013, we had approximately $41.5 million, $32.7 million, and $133.4 million of federal, state, and foreign Net Operating Losses (“NOLs”), respectively, 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. In general, a Section 382 ownership change occurs if there is a cumulative change in our ownership by “5%” shareholders (as defined in the Internal Revenue Code of 1986, as amended) that exceeds 50 percentage points over a rolling three-year period. An ownership change generally affects the rate at which NOLs and potentially other deferred tax assets are permitted to offset future taxable income. Of our federal NOL amount as of December 31, 2013, $28.1 million is subject to an annual Section 382 limitation of $1.4 million due to the December 2012 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 three months ended ended December 31, 2013, or on our net deferred tax asset as of December 31, 2013.

In June 2013, we issued an additional 18.7 million shares of common stock in a public offering. We are in the process of evaluating whether the offering caused a Section 382 ownership change. If an additional ownership change did occur or does 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

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 December 31,
	2013		2012
WPG Holdings**	18.4	%	13.2	%
Nu Horizons Electronics**	*		12.3	%
Huawei	*		11.0	%

 __________________________________________________

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

**Distributor

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Net revenues by geographic area are as follows:

	Three Months Ended December 31,
	2013		2012
	(in thousands)
United States	$	6,559	$	10,905
Asia Pacific	16,786		12,064
Europe, Middle East and Africa	3,738		2,758
Total net revenues	$	27,083	$	25,727

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.

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 December 31,
	2013		2012
	(in thousands)
Connectivity	$	8,949	10,138
Ethernet switching	11,336		8,306
Transport processing	4,578		5,461
Product revenues	$	24,863	$	23,905

NOTE 10-COMMITMENTS AND CONTINGENCIES

Operating Leases and Software Licenses

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

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

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

	Remaining in 2014		2015		2016		2017		2018		Thereafter		Total
	(in thousands)
Operating leases	$	1,639	$	1,568	$	343	$	—	$	—	$	—	$	3,550
Software licenses	5,346		6,736		2,847		2,800		2,800		—		20,529
Total	$	6,985	$	8,304	$	3,190	$	2,800	$	2,800	$	—	$	24,079

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From time-to-time, 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. Although the ultimate outcome of these matters cannot be determined, we believe that as of December 31, 2013, the final disposition of these proceedings will not have a material adverse effect on our financial position, results of operations, or liquidity. Related legal defense costs are expensed as incurred.

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 December 31, 2013 and September 30, 2013.

Patents and Licenses

We have entered into various licensing agreements requiring primarily fixed fee royalty payments. In the event that we fail to pay any 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 and product 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, 2013(“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 30 years, we have been a leader in the adoption of new technologies in Carrier and Enterprise networking.

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, have risen dramatically in Carrier and Enterprise networks . Media-rich devices, such as smartphones and game consoles, require increased bandwidth. New Enterprise deployment options, such as Cloud-based services and social media and telepresence, also spur demand. More recently, there is a trend for increased Ethernet deployment within networks used in Industrial and Military networking, automotive transport, and future Smart Grid applications, collectively referred to as the Internet of Things (“IoT”).

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

Realization of Our Transition 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. In an effort to diversify ourselves and provide new opportunities for growth, we re-positioned our R&D teams and invested heavily to enter new markets, develop new products, and penetrate new customers. Over the last three years we have seen consistent growth in this new product portfolio, which reached 33% of our total product revenues by the end of fiscal 2013.

To continue to grow our new product revenue, we must win market share in high-growth communications market segments. In 2013, we expanded our market focus to include elements of the IoT market, which provides substantial new growth opportunities for the company.

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We believe we have effectively and efficiently targeted these high-growth infrastructure markets with substantial R&D investments over the last five years. To optimize our R&D efficiency, we chose to serve large, growing, independent markets which rely increasingly on Ethernet technology: Carrier and Enterprise networks. As we are now three years into the deployment of these new products, we can see that our target markets and products were well chosen. Increasingly, we also now see opportunities for our products and technology within the IoT, where Gigabit Ethernet-based networks are emerging. There is tremendous synergy and cost savings in terms of R&D effort to provide Ethernet switch and PHY products into this emerging adjacent market.

In bringing our new products to market, our customer engagements and number of design opportunities identified by our sales team have consistently increased since 2010. Early customer adoption of our new products has exceeded our goals. In 2013, design wins for our new products increased by approximately 40% from 2012. Our new products have captured design wins at over 200 customers, including market leaders such as Alcatel-Lucent, Cisco, Ericsson, Hewlett Packard, Huawei, Juniper, Samsung, and ZTE. While many of these wins represented additional business at our most important customers, what we call “same-store-sales,” many others are wins at new customers, and reflect our growing market share. Because our products our highly complex, it takes our customers 12 to 36 months to go from sample availability to first customer shipment as customers do the necessary development work to complete and qualify their systems in the network. Since it typically takes an additional 12 to 24 months to ramp into full production, we believe design wins represent a good leading indicator of potential future revenues.

In 2013, we introduced the third-generation of both our switch engine and PHY products. These new products allowed us to significantly increase our served markets in both Carrier, Enterprise, and IoT networking. We have become the clear choice for meeting our customers’ needs for service delivery, synchronization, security, and signal integrity.

We augment our product revenues by leveraging our substantial intellectual property portfolio to generate revenues. Our primary focus for intellectual property licensing has been our Gigabit Ethernet CuPHY and switch cores and eFEC technology. We license to non-competing third-parties in adjacent or similar markets.

Our accounting policy generally uses the “sell-through” model for sales to our distributors. The “sell-through” model recognizes revenue only upon shipment of the merchandise from our distributor to the final customer. As such, we may have variability in our revenue from quarter-to-quarter as customers have substantial flexibility to reschedule backlog with of our distribution partners as part of the terms and conditions of sale. Our distributor sales were 52.7% , 51.6% and 44.6% of product revenue in fiscal 2013, 2012 and 2011, respectively.

In the normal course of business, we regularly assess our product portfolio to ensure it aligns with our strategy. At such time, we may determine to phase-out products and put them through “end-of-life”, or EOL. When we EOL a product, we typically provide up to six months notice for our customers to make a last-time-buy of product and six additional months to take receipt of that product. The EOL announcement can result in near-term increases in our revenues as customers typically respond to these announcements by making last-time-buys to ensure that they have adequate stock on hand to support their production forecast.

During the last three years, we accelerated our comprehensive efforts to increase our product gross margins and operating margins, which together have substantially increased our operating leverage. 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. As a fabless semiconductor company, we outsource the majority of our manufacturing. Our successful management of our supply chain has provided us with competitive materials pricing and effective lead times for the materials we purchase. We have sizable advantages due to lower fixed costs, reduced cycle times, and lower inventory resulting from our outsourcing of almost all of our wafer fabrication and assembly. During periods of strong demand, we could experience longer lead times, difficulties in obtaining capacity, and/or difficulty in meeting commitments for our required deliveries during periods of strong demand. Average margins vary widely within the markets we serve, with the Carrier networking market having the highest average margins and the Enterprise networking market having the lowest average margins. We endeavor to increase margins by providing products that have significant added value relative to our competition.

We have also streamlined our R&D and SG&A organizations, reducing expenses almost 25% over the past three fiscal years. We leverage top-level consultants to help us achieve short-term design goals while ensuring we maintain our in-house engineering talent to drive our overall corporate objectives.

Critical Accounting Policies and Estimates

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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, 2013, 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 three months endedDecember 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.

Results of Operations for the three months ended December 31, 2013, as compared to the three months ended December 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 December 31,
	2013					2012
	$			%		$			%
	(in thousands, except for percentages)
Net revenues:
Product revenues	$	24,863		91.8	%	$	23,905		92.9	%
Intellectual property revenues	2,220			8.2	%	1,822			7.1	%
Net revenues	27,083			100.0	%	25,727			100.0	%
Costs and expenses:
Cost of product revenues	10,676			39.4	%	10,975			42.7	%
Engineering, research and development	10,679			39.4	%	10,504			40.8	%
Selling, general and administrative	7,854			29.0	%	7,970			30.9	%
Amortization of intangible assets	88			0.3	%	97			0.4	%
Costs and expenses	29,297			108.1	%	29,546			114.8	%
Loss from operations	(2,214		)	(8.1	)%	(3,819		)	(14.8	)%
Other expense (income):
Interest expense, net	1,704			6.3	%	1,970			7.7	%
Gain on compound embedded derivative	—			—	%	(803		)	(3.1	)%
Loss on extinguishment of debt	1,594			5.9	%	—			—	%
Other expense (income), net	61			0.2	%	(31		)	(0.1	)%
Other expense, net	3,359			12.4	%	1,136			4.5	%
Loss before income tax (benefit) provision	(5,573		)	(20.5	)%	(4,955		)	(19.3	)%
Income tax (benefit) provision	(202		)	(0.7	)%	77			0.3	%
Net loss	$	(5,371	)	(19.8	)%	$	(5,032	)	(19.6	)%

Product Revenues

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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, EOL product decisions, and general economic conditions. Therefore, our revenues for the three months ended December 31, 2013 may not necessarily be indicative of future revenues.

Product revenues by market are as follows:

	Three Months Ended December 31,
	2013				2012
	Amount		% of Product Revenues		Amount		% of Product Revenues		Change			% Change
	(in thousands, except percentages)
Carrier networking	$	12,939	52.1	%	$	13,978	58.5	%	$	(1,039	)	(7.4	)%
Enterprise networking	11,767		47.3	%	9,659		40.4	%	2,108			21.8	%
Non-core	157		0.6	%	268		1.1	%	(111		)	(41.4	)%
Product revenues	$	24,863	100.0	%	$	23,905	100.0	%	$	958		4.0	%

The lower Carrier networking revenues is largely attributable to a decrease in sales of some of our mature crosspoint switches and SONET framers, which went through EOL in the prior period. Partially offsetting the decreases is an increase in sales of our new Connectivity products, which more than doubled.

The higher Enterprise networking revenues is primarily due to increases in sales of our new switches and a five-fold increase in sales of our new 10G Ethernet PHYs.

In fiscal 2012, a number of older products went through EOL. Revenues from these EOL products totaled $3.4 million and $4.5 million in the three months ended December 31, 2013 and 2012, respectively.

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 December 31,
	2013				2012
	Amount		% of Product Revenues		Amount		% of Product Revenues		Change			% Change
	(in thousands, except percentages)
Connectivity	$	8,949	36.0	%	$	10,138	42.5	%	$	(1,189	)	(11.7	)%
Ethernet switching	11,336		45.6	%	8,306		34.7	%	3,030			36.5	%
Transport processing	4,578		18.4	%	5,461		22.8	%	(883		)	(16.2	)%
Product revenues	$	24,863	100.0	%	$	23,905	100.0	%	$	958		4.0	%

The lower Connectivity revenues is largely attributable to a decrease in some of our mature crosspoint switches, partially offset by a five-fold increase in sales of our new 10G Ethernet PHYs.

The higher Ethernet switching revenues is largely attributable to an increase in sales of our new switches and new and mature 1GbE copper PHYs.

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The lower Transport processing revenues is largely attributable to decreased sales of SONET framers that went through EOL in the prior period. This decrease is partially offset by growth in our OTN mappers.

Intellectual Property Revenues

	Three Months Ended December 31,
	2013				2012
	Amount		% of Net  Revenues		Amount		% of Net  Revenues		Change		% Change
	(in thousands, except percentages)
Intellectual property revenues	$	2,220	8.2	%	$	1,822	7.1	%	$	398	21.8	%

Intellectual property revenues include licenses, royalties, and sales of patents. The higher intellectual property revenues is due to increased deliveries of intellectual property. The timing and amounts of intellectual property revenues fluctuate. Expenses associated with the sale of intellectual property are included in SG&A.

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

	Three Months Ended December 31,
	2013		2012
WPG Holdings**	18.4	%	13.2	%
Nu Horizons Electronics**	*		12.3	%
Huawei	*		11.0	%

______________________________________

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

** Distributors

Net revenues by geographic area are as follows:

	Three Months Ended December 31,
	2013				2012
	Amount		% of Net Revenues		Amount		% of Net Revenues		Change			% Change
	(in thousands, except percentages)
United States	$	6,559	24.2	%	$	10,905	42.4	%	$	(4,346	)	(39.9	)%
Asia Pacific	16,786		62.0	%	12,064		46.9	%	4,722			39.1	%
Europe, Middle East and Africa	3,738		13.8	%	2,758		10.7	%	980			35.5	%
Net revenues	$	27,083	100.0	%	$	25,727	100.0	%	$	1,356		5.3	%

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 December 31,
	2013				2012
	Amount		% of Product Revenues		Amount		% of Product Revenues		Change			% Change
	(in thousands, except percentages)
Cost of product revenues	$	10,676	42.9	%	$	10,975	45.9	%	$	(299	)	(2.7	)%

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

Our cost of product revenues is affected by various factors, including product mix, volume, and provisions for excess and obsolete inventories, material costs, manufacturing efficiencies, and the position of our products within their life-cycles. Our cost of product revenues as a percentage of net product revenues is affected by these factors, as well as customer mix, volume, pricing, and competitive pricing programs.

The decrease in cost of product revenues as a percentage of product revenues resulted from an increase in switching products sales that have a lower unit cost as a percentage of revenues as compared to the prior period.

Engineering, Research and Development

	Three Months Ended December 31,
	2013				2012
	Amount		% of Net Revenues		Amount		% of Net Revenues		Change		% Change
	(in thousands, except percentages)
Engineering, research and development	$	10,679	39.4	%	$	10,504	40.8	%	$	175	1.7	%

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

The level of R&D expenses 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 expenses 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 spending for the three months ended December 31, 2013 is consistent with spending in the prior year period.

Selling, General and Administrative

	Three Months Ended December 31,
	2013				2012
	Amount		% of Net  Revenues		Amount		% of Net  Revenues		Change			% Change
	(in thousands, except percentages)
Selling, general and administrative	$	7,854	29.0	%	$	7,970	30.9	%	$	(116	)	(1.5	)%

SG&A expenses consist primarily of compensation expense, legal and other professional fees, facilities expenses, outside labor, and communication expenses.

The decrease in SG&A expenses is due to a $0.7 million decrease in asset retirement expenses incurred in 2012 resulting from moving from our primary Camarillo facility to an adjacent building, partially offset by increased spending to move our primary test operation from Singapore to Taiwan in 2013.

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Interest Expense, Net

	Three Months Ended December 31,
	2013				2012
	Amount		% of Net  Revenues		Amount		% of Net  Revenues		Change			% Change
	(in thousands, except percentages)
Interest expense, net	$	1,704	6.3	%	$	1,970	7.7	%	$	(266	)	(13.5	)%

Interest expense, net is comprised of cash interest expense, amortization of debt discount, premium, and debt issuance cost, net of interest income. Interest expense, net decreased primarily due to the repurchase in November 2013 of $13.7 million principal amount of our 2014 Debentures.

Gain on Compound Embedded Derivative

	Three Months Ended December 31,
	2013				2012
	Amount		% of Net  Revenues		Amount			% of Net  Revenues		Change		% Change
	(in thousands, except percentages)
Gain on compound embedded derivative	$	—	—	%	$	(803	)	(3.1	)%	$	803	(100.0	)%

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.

Loss on Extinguishment of Debt

	Three Months Ended December 31,
	2013				2012
	Amount		% of Net  Revenues		Amount		% of Net  Revenues		Change		% Change
	(in thousands, except percentages)
Loss on extinguishment of debt	$	1,594	5.9	%	$	—	—	%	$	1,594	100.0	%

The loss on extinguishment of debt is due to the repurchase in November 2013 of $13.7 million principal amount of our 2014 Debentures at 107% of the principal amount thereof.

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Income Tax Benefit

	Three Months Ended December 31,
	2013					2012
	Amount			% of Net  Revenues		Amount		% of Net  Revenues		Change			% Change
	(in thousands, except percentages)
Income tax (benefit) provision	$	(202	)	(0.7	)%	$	77	0.3	%	$	(279	)	(362.3	)%

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 evaluation allowance related to certain foreign jurisdictions’ deferred tax assets as such balance were more likely than not realizable within the applicable carryforward period. Our effective tax rate for the three months ended December 31, 2013 was (3.6)% which was lower than the federal and state statutory rate due to the projected federal and state losses for the fiscal year as well as the related valuation allowances.

Financial Condition and Liquidity

Cash Flow Analysis

Cash decreased to $48.4 million at December 31, 2013, from $68.9 million at September 30, 2013. Our cash flows from operating, investing and financing activities are summarized as follows:

	Three Months Ended December 31,
	2013			2012
	(in thousands)
Net cash used in operating activities	$	(4,523	)	$	(3,608	)
Net cash used in investing activities	(788		)	(161		)
Net cash (used in) provided by financing activities	(15,197		)	16,956
Net (decrease) increase in cash	(20,508		)	13,187
Cash at beginning of period	68,863			23,891
Cash at end of period	$	48,355		$	37,078

Net Cash Used In Operating Activities

During the three months ended December 31, 2013, cash used in operations totaled $4.5 million. Excluding changes in working capital, we used $1.6 million to fund the cash portion of our net loss. We used cash to fund increases in accounts receivable, inventory and prepaid expenses and other assets totaling $4.6 million. We also used cash to paydown accrued expenses and other liabilities of $0.9 million. These uses were offset by higher accounts payable and deferred revenue totaling $2.5 million.

Accounts receivable increased $1.6 million from $9.8 million at September 30, 2013, to $11.4 million at December 31, 2013, primarily due to the timing of sales during the quarter ended December 31, 2013. Inventory levels were increased $1.9 million to $12.5 million at December 31, 2013, from $10.7 million at September 30, 2013 to meet increased demand. Accounts payable, accrued expenses and other liabilities increased by $1.1 million, from $20.1 million at September 30, 2013, to $21.2 million at December 31, 2013, due to the timing of obligations and/or payments to our vendors and other service providers. Deferred revenue increased $0.5 million from $2.2 million at September 30, 2013, to $2.7 million at December 31, 2013, due to the timing of payments from distributors.

During the three months ended December 31, 2012, cash used in operations totaled $3.6 million. Excluding changes in working capital, we used $3.3 million to fund the cash portion of our net loss. We also used cash to fund increases in accounts receivable, inventory, and prepaid expenses totaling $1.6 million. These uses were offset by higher deferred revenues, accounts payable and accrued expense liabilities totaling $1.3 million.

Inventory increased $0.5 million from $12.1 million at September 30, 2012 to $12.6 million at December 31, 2012 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 December 31, 2012 due to the timing of obligations and/

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or payments to our vendors and other service providers. Deferred revenue increased $0.4 million from $0.9 million at September 30, 2012 to $1.3 million at December 31, 2012 due to increased shipments to distributors.

Net Cash Used In Investing Activities

Investing activities used cash in the three months ended December 31, 2013 for capital expenditures of $0.9 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 three months ended December 31, 2012, for capital expenditures of $0.2 million.

Net Cash (Used in) Provided By Financing Activities

Net cash used in financing activities during the three months ended December 31, 2013, totaled $15.2 million. Cash used for the repurchase of our 2014 Debentures totaled $14.6 million. We also used cash to pay a consent fee of $0.3 million related to the November 2013 amendment of our credit agreement. Cash used for the repurchase of restricted stock units for payroll taxes on behalf of employees was $0.3 million. Net cash provided by financing activities during the three months ended December 31, 2012 totaled $17.0 million. Cash from the sale of common stock totaled $17.2 million, net of approximately $1.4 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. Offering costs of $0.1 million were incurred, but unpaid as of December 31, 2012. Proceeds were offset by $0.3 million in cash used for the repurchase of restricted stock units for payroll taxes paid on behalf of employees.

Capital Resources, Including Debt, Contingent Liabilities and Operating Leases

Prospective Capital Needs

Our principal sources of liquidity are our existing cash, cash generated from product sales, and cash generated from the sales or licensing of our intellectual property. Our cash totaled $48.4 million at December 31, 2013. Our working capital at December 31, 2013, was $20.0 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.

Our current debt is comprised of our convertible subordinated debentures (“2014 Debentures”), of which the total principal amount of $32.8 million is due in October 2014. Our long-term debt is comprised of our senior term loans (the “Term A Loan” and “Term B Loan”, which we collectively refer to as our “Term A and B Loans”) which have a total principal amount of $17.2 million due on August 31, 2016. We intend to use our existing cash to repay our 2014 Debentures on or before their maturity in October 2014, which will achieve our objective of reducing our outstanding indebtedness but will also reduce our cash balances. While we believe that our existing sources of liquidity, along with cash expected to be generated from revenues, will be sufficient to fund our operations for at least the next 12 months after repayment of the 2014 Debentures, this ultimately may not be the case. If we incur operating losses and negative cash flows in the future, we may need to further reduce our operating costs or obtain alternate sources of financing, or both. We may need additional capital in the future and may not have access to additional sources of capital on favorable terms or at all. If we raise additional funds through the issuance of equity or debt securities, such securities may have rights, preferences or privileges senior to those of our common stock and our stockholders may experience dilution of their ownership interests. 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. The Form S-3 will expire in January 2017.To date, no securities have been issued pursuant to the registration statement.

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Contractual Obligations

	Payment Obligations by Fiscal Year
	Remaining in 2014		2015		2016		2017		2018		2019 and Thereafter		Total
	(in thousands)
Convertible subordinated debt (1)	$	—	$	32,843	$	—	$	—	$	—	$	—	$	32,843
Term A Loan (2)	—		—		7,857		—		—		—		7,857
Term B Loan (3)	—		—		9,342		—		—		—		9,342
Loan interest (4)	2,489		3,102		1,776		—		—		—		7,367
Operating leases (5)	1,639		1,568		343		—		—		—		3,550
Software licenses (6)	5,346		6,736		2,847		2,800		2,800		—		20,529
Inventory and related purchase obligations (7)	5,560		1,233		60		60		—		—		6,913
Total	$	15,034	$	45,482	$	22,225	$	2,860	$	2,800	$	—	$	88,401

_________________________________________________

(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 9.0% fixed rate senior notes due August 31, 2016.

(3) Term B Loan represents amounts due for our 9.0% fixed rate senior notes due August 31, 2016.

(4) Interest payable for 2014 Debentures through 2015 and Term A and B Loans through 2016.

(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 other purchase obligations represent non-cancellable purchase commitments. For purposes of the table above, inventory and other 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.Other purchase commitments may be for longer periods and are dictated by contractual terms.

Off-Balance Sheet Arrangements

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

32

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, 2013. There have been no material changes to these risks during the three months ended December 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 December 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 December 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 December 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.

33

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 December 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, 2013.

ITEM 6. EXHIBITS

Exhibit		Incorporated by Reference				Filed or Furnished
Number	Exhibit Description	Form	File Number	Exhibit	Filing Date	Herewith
10.1*†	Vitesse Semiconductor Corporation Fiscal Year 2014 Executive Bonus Plan, dated as of December 23, 2013.					X
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

_____________________________________________________

* A management contract or compensatory plan or arrangement.

** 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.

† Certain portions of this agreement have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for an order granting confidential treatment pursuant to Rule 24b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934.

34

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.

February 4, 2014	VITESSE SEMICONDUCTOR CORPORATION
	By:	/s/ CHRISTOPHER R. GARDNER
		Christopher R. Gardner
		Chief Executive Officer
February 4, 2014	VITESSE SEMICONDUCTOR CORPORATION
	By:	/s/ MARTIN S. MCDERMUT
		Martin S. McDermut
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

35

EX-10.1

EXHIBIT 10.1

Fiscal Year 2014 Executive Bonus Plan

1.PURPOSE OF PLAN

The purpose of this Vitesse Semiconductor Corporation Fiscal Year 2014 Executive Bonus Plan (this “Plan”) is to provide members of the executive staff (“Executive”) of Vitesse Semiconductor Corporation, a Delaware corporation, (the “Corporation”) with the opportunity to earn incentive bonuses based on (a) the executive’s achievement of designated personal performance goals during Fiscal Year 2014 and (b) the Corporation’s attainment of specific financial performance objectives for Fiscal Year 2014.

2.DEFINITIONS

2.1 “2014 Fiscal Year” means the fiscal year of the Corporation that began on October 1, 2013 and will end on September 30, 2014.

2.2 “Adjusted EBITDA” means net income before interest, expenses for taxes, depreciation, amortization, deferred stock compensation and non-recurring professional fees. The Administrator may, from time-to-time, make other exceptions to the definition as it deems appropriate with respect to unusual or non-recurring events such as balance sheet adjustments, mergers, acquisitions, and divestitures.

2.3 “Administrator” means the Compensation Committee of the Board of Directors of the Corporation.

2.4 “Base Salary” means a Participant’s Base Salary paid (or deferred) in the 2014 Fiscal Year. Base Salary does not include bonuses or any form of compensation other than salary.

2.5 “Eligible Person” is (a) any “officer” as that term is defined in Rule 16a-1(f) under the Securities Exchange Act of 1934 (except the President/Chief Executive Officer) or (b) any vice-president who is a member of the Corporation’s executive staff.

2.6 “Goals” means the individual personal performance goals established by the Corporation’s Chief Executive Officer for each Participant for the 2014 Fiscal Year.

2.7 “Participant” means an Eligible Person who has been designated by the Administrator as eligible to earn a Bonus for the 2014 Fiscal Year.

2.8 “Total Bonus” means the portion of a Participant’s Bonus, if any, that is based on both the Participant’s achievement of his/her Personal Goals and the Corporation’s level of Adjusted EBITDA for the 2014 Fiscal Year.

3.PLAN ADMINISTRATION

3.1 Administration. This Plan shall be administered by and all awards under this Plan shall be authorized by the Administrator.

3.2 Powers of the Administrator. Subject to the express provisions of this Plan, the Administrator is authorized and empowered to do all things necessary or desirable in connection with the authorization of awards and the administration of this Plan, including, without limitation, the authority to:

(a)determine the Eligible Persons and, from among the Eligible Persons, designate those who are Participants;

(b)approve the Goals established by the Corporation’s Chief Executive Officer for each Participant;

(c)determine and approve the amount of the actual Bonus for each Participant; and

(d)construe and interpret this Plan and any agreements defining the rights and obligations of the Corporation and Participants under this Plan, further define the terms used in this Plan, and prescribe, amend and rescind rules and regulations relating to the administration of this Plan or the Bonus payments under this Plan.

3.3 Binding Determinations. Any action taken by, or inaction of, the Corporation, the Corporation’s Chief Executive Officer, or the Administrator relating or pursuant to this Plan and within its or his authority hereunder or under applicable law shall be within the absolute discretion of that entity, person or body and shall be conclusive and binding upon all persons. Neither the Corporation’s Chief Executive Officer, the Administrator, nor any person acting at the direction thereof, shall be liable for any act, omission, interpretation, construction or determination made in good faith in connection with this Plan (or any award made under this Plan), and all such persons shall be entitled to indemnification and reimbursement by the Corporation in respect of any claim, loss, damage or expense (including, without limitation, attorneys’ fees) arising or resulting therefrom to the fullest extent permitted by law and/or under any directors and officers liability insurance coverage that may be in effect from time to time.

3.4 Reliance on Experts. In making any determination or in taking or not taking any action under this Plan, the Administrator may obtain and may rely upon the advice of experts, including employees and professional advisors to the Corporation. No director, officer or agent of the Corporation shall be liable for any such action or determination taken or made or omitted in good faith.

3.5 Delegation. The Administrator may delegate ministerial, non-discretionary functions to individuals who are officers or employees of the Corporation or to third parties.

4.ELIGIBILITY

The Administrator may grant Bonus opportunities under this Plan only to those persons that the Administrator determines to be Eligible Persons. The Administrator shall notify each Participant of his/her eligibility to earn a Bonus under this Plan by the later of December 31, 2013 or the 45th day following the date that the Participant becomes an Eligible Person. Such notice shall be in writing and shall include a description of the Participant’s Goals.

5.BONUS CALCULATIONS

5.1 Goals

5.1.1 Establishment. The Corporation’s Chief Executive Officer shall establish Goals for each Participant by the later of December 31, 2013 or the 45th day following the date the Participant becomes an Eligible Person.

5.1.2 Adjustment. To preserve the intended incentives and benefits of a Goal Bonus opportunity, the Chief Executive Officer may (i) adjust the Goals to reflect any material change in corporate capitalization, any material corporate transaction (such as a reorganization, combination, separation, merger, acquisition or any combination of the foregoing), or any complete or partial liquidation of the Corporation or (ii) make other appropriate adjustments to the Goals.

5.1.3 Determination of Achievement of Goals. The Corporation’s Chief Executive Officer shall, in his sole discretion, determine the extent to which each Participant has attained the Goals established for such Participant for the 2014 Fiscal Year, which shall be expressed as a whole percentage from 0% to 100%. The Chief Executive Officer shall make that determination within 90 days following the end of the 2014 Fiscal Year and notify the Administrator and the Participant of that determination as soon thereafter as practicable.

5.2 Total Bonus

Each Participant’s Total Bonus, if any, shall be an amount equal to (a) times (b) times (c), where (a) equals the Participant’s Base Salary, (b) equals the percentage of Total Bonus with 100% of Goals Achieved for the respective Adjusted EBITDA and (c) equals the percentage of the Participant’s achievement of his/her Goals; provided, however, that such Total Bonus shall be prorated for any Participant who is first employed by the Corporation after October 1, 2013, to reflect the portion of the 2014 Fiscal Year during which he/she was a Participant.

The formula can also be stated as:

(Base Salary) X (% of Total Bonus with 100% of Goals Achieved for the respective Adjusted EBITDA) X (% of Goals Attained), as described in Table 1 below.

An additional bonus will be paid to the VP of Sales only as:

(Base Salary) X (% of Revenue Bonus Goals Achieved + % of Design Win Bonus Goals Achieved), as described in Table 2 below.

6.VESTING

6.1 Vesting. A Participant’s right to receive a Bonus under this Plan shall vest on September 30, 2014, subject to the employment and performance requirements set forth in this Section 6 (and subject to the levels of (a) the Participant’s achievement of Goals and (b) the Company’s Adjusted EBITDA).

6.2 Continued Employment Required. A Participant must continue to be employed by the Corporation without performance deficiencies (as described in Section 6.5) until September 30, 2014 as a condition to vesting in the right to receive a Bonus payment under this Plan. Employment for only a portion of the vesting period, even if a substantial portion, will not entitle the Eligible Person to any proportionate vesting. An approved leave of absence by a Participant, either at the time of the vesting date, or at any time during the vesting period, will not prevent vesting of payments under the Plan.

6.3 Effect of Termination Prior to Vesting. If a Participant’s employment with the Corporation terminates before September 30, 2014 for reason that is not governed by a Change in Control or employment agreement, his/her participation in the Plan will terminate immediately and he/he shall not be eligible for a Bonus.

6.4 Events Not Deemed Terminations of Service. Unless the express policy of the Corporation or the Administrator otherwise provides, the employment relationship shall not be considered terminated in the case of (a) sick leave, (b) military leave, or (c) any other leave of absence authorized by the Corporation or the Administrator; provided that, unless re-employment upon the expiration of such leave is guaranteed by contract or law or the Administrator otherwise provides, such leave is for a period of not more than three months.

6.5 Effect of Performance Deficiencies. A Participant’s right to receive a Bonus will not become vested if, (a) at the close of the 2014 Fiscal Year, the Participant is on a Corrective Action Plan, or (b) during the 2014 Fiscal Year, the Participant is otherwise notified that his/her job performance is deficient and he/she has failed to correct the deficiencies by the end of the 2014 Fiscal Year.

7.TIME OF BONUS PAYMENTS

Each Participant’s Bonus, if any, shall be paid by the end of the first quarter of Fiscal Year 2015, or as soon as practicable after determination and certification of the actual financial performance levels for the year and grant of approval by the Compensation Committee in a duly held meeting, but, in no event, later than March 15, 2015.

8.OTHER PROVISIONS

8.1 Compliance with Laws. This Plan, the granting and vesting of awards under this Plan, and the payment of money under this Plan are subject to compliance with all applicable federal and state laws, rules and regulations (including, but not limited to, state and federal securities law) and to such approvals by any listing, regulatory or governmental authority as may, in the opinion of counsel for the Corporation, be necessary or advisable in connection therewith.

8.2 No Rights to Awards. No person shall have any claim or rights to be granted awards (or additional awards, as the case may be) under this Plan, subject to any express contractual rights (set forth in a document other than this Plan) to the contrary.

8.3 No Employment/Service Contract. Nothing contained in this Plan (or in any other documents under this Plan) shall confer upon any Eligible Person or Participant any right to continue in the employ or other service of the Corporation, constitute any contract or agreement of employment or other service or affect an employee’s status as an employee at will, nor shall interfere in any way with the right of the Corporation to change a person’s compensation or other benefits, or to terminate his/her employment or other service, with or without cause. Nothing in this Section 8.3, however, is intended to adversely affect any express independent right of such person under a separate employment or service contract.

8.4 Plan Not Funded. Awards payable under this Plan shall be payable from the general assets of the Corporation and no special or separate reserve, fund or deposit shall be made to assure payment of such awards. No Participant, beneficiary or other person shall have any right, title or interest in any fund or in any specific asset of the Corporation by reason of any award hereunder. Neither the provisions of this Plan (or of any related documents), nor the creation or adoption of this Plan, nor any action taken pursuant to the provisions of this Plan shall create, or be construed to create, a trust of any kind or a fiduciary relationship between the Corporation and any Participant, beneficiary or other person. To the extent that a Participant, beneficiary or other person acquires a right to receive payment pursuant to any award hereunder, such right shall be no greater than the right of any unsecured general creditor of the Corporation.

8.5 Tax Withholding. Upon any payment of any award, the Corporation shall deduct from any amount otherwise payable in cash to the Participant (or the Participant’s personal representative or beneficiary, as the case may be) the minimum amount of any taxes which the Corporation may be required to withhold with respect to such cash payment.

8.6 Effective Date, Term, Amendments.

8.6.1 Effective Date and Term. This Plan is effective as of December 23, 2013, the date of its approval by the Compensation Committee of the Board of Directors of the Corporation (the “Effective Date”) and shall be effective for the 2014 Fiscal Year. The Plan shall automatically terminate upon the payment of the Bonuses due hereunder or, if no Bonuses are payable hereunder, as of September 30, 2014.

8.6.2 Board Authorization. The Administrator may, at any time, amend this Plan; provided that no amendment shall adversely affect any Participant’s opportunity to earn a Bonus for the 2014 Fiscal Year.

8.7 Governing Law; Construction; Severability.

8.7.1 Choice of Law. This Plan and all other related documents shall be governed by, and construed in accordance with the laws of the State of Delaware.

8.7.2 Severability. If a court of competent jurisdiction holds any provision invalid and unenforceable, the remaining provisions of this Plan shall continue in effect.

8.8 Captions. Captions and headings are given to the sections and subsections of this Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of this Plan or any provision thereof.    

8.9 Non-Exclusivity of Plan. Nothing in this Plan shall limit or be deemed to limit the authority of the Board or the Administrator to grant any award or authorize any other compensation, under any other plan or authority. Awards under this Plan may be made in addition to, in combination with, as alternatives to or in payment of grants, awards or commitments under any other plans or arrangements of the Corporation.

8.10 No Corporate Action Restriction. The existence of this Plan shall not limit, affect or restrict in any way the right or power of the Board or the stockholders of the Corporation to make or authorize (a) any adjustment, recapitalization, reorganization or other change in the capital structure or business of the Corporation, (b) any merger, amalgamation, consolidation or change in the ownership of the Corporation, (c) any issue of bonds, debentures, capital, preferred or prior preference stock ahead of or affecting the capital stock (or the rights thereof) of the Corporation, (d) any dissolution or liquidation of the Corporation, (e) any sale or transfer of all or any part of the assets or business of the Corporation, or (f) any other corporate act or proceeding by the Corporation. No Participant, beneficiary or any other person shall have any claim under any grant of a Bonus opportunity against any member of the Board or the Administrator, or the Corporation or any employees, officers or agents of the Corporation, as a result of any such action.

INWITNESS WHEREOF, this Plan is executed by its duly authorized officer as of December 23, 2013.

VITESSE SEMICONDUCTOR CORPORATION

By	/s/ Christopher R. Gardner
Name	Christopher R. Gardner
Title	President / CEO

EXHIBIT A

Table 1: Incentive Bonus Calculations based on Adjusted EBITDA and

Assuming All Goals Are Achieved (as Percent of Base Salary)

Adjusted EBITDA Achieved in FY2014	Total Bonus with 100% of Goals Achieved (CFO)	Total Bonus with 100% of Goals Achieved (Other VPs)
<=$[l] 1	40.0%	30.0%
>$[l] to $[l]	40.0%	35.0%
>$[l] to $[l]	50.0%	40.0%	Target Bonus
>$[l] to $[l]	52.5%	42.5%
>$[l] to $[l]	55.0%	45.0%
>$[l] to $[l]	57.5%	47.5%
> $[l]	60.0%	50.0%	Maximum Bonus

Table 2: Sales Incentive Bonus Calculations (as Percent of Base Salary)

Additional bonus that applies to VP of Sales ONLY

Product Revenue Achieved in FY2014	Revenue Bonus	New Product Design Wins Achieved in FY2014	Design Win Bonus
<$[l]	[l]%	<$[l]	[l]%	Below Minimum
$[l] to $[l]	[l]%	$[l] – <$[l]	[l]%	Minimum Bonus
>$[l] to $[l]	[l]%	$[l] – <$[l]	[l]%	Target Bonus
>$[l] to $[l]	[l]%	$[l] – $[l]	[l]%
>$[l]	[l]%	>$[l]	[l]%	Maximum Bonus

¹ Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission (“SEC”) and have been filed separately with the SEC.

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.

February 4, 2014	/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.

February 4, 2014	/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 December 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. 

February 4, 2014	/s/ CHRISTOPHER R. GARDNER
	Christopher R. Gardner
	Chief Executive Officer
February 4, 2014	/s/ MARTIN S. MCDERMUT
	Martin S. McDermut
	Chief Financial Officer

XML

STOCK BASED COMPENSATION Summary of Exercise Prices (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended
	Dec. 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	$ 175
Number of Options Outstanding	3,038
Outstanding Options, Weighted Average Remaining Contractual Term	7 years 8 months 23 days
Outstanding Options, Weighted Average Exercise Price	$ 7.64
Number of Exercisable Options	1,377
Exercisable Options, Weighted Average Exercise Price	$ 13.56
$2.10 - $2.26 [Member]
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	$ 2.26
Number of Options Outstanding	453
Outstanding Options, Weighted Average Remaining Contractual Term	9 years 2 months 1 day
Outstanding Options, Weighted Average Exercise Price	$ 2.11
Number of Exercisable Options	105
Exercisable Options, Weighted Average Exercise Price	$ 2.11
2.53 [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Exercise Price Range, Lower Range Limit	$ 2.53
Exercise Price Range, Upper Range Limit	$ 2.53
Number of Options Outstanding	995
Outstanding Options, Weighted Average Remaining Contractual Term	9 years 11 months 9 days
Outstanding Options, Weighted Average Exercise Price	$ 2.53
Number of Exercisable Options	0
Exercisable Options, Weighted Average Exercise Price	$ 0.00
2.54 - 4.36 [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Exercise Price Range, Lower Range Limit	$ 2.54
Exercise Price Range, Upper Range Limit	$ 4.36
Number of Options Outstanding	775
Outstanding Options, Weighted Average Remaining Contractual Term	7 years 6 months 11 days
Outstanding Options, Weighted Average Exercise Price	$ 3.44
Number of Exercisable Options	563
Exercisable Options, Weighted Average Exercise Price	$ 3.48
4.60 - 48.00 [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Exercise Price Range, Lower Range Limit	$ 4.60
Exercise Price Range, Upper Range Limit	$ 48.00
Number of Options Outstanding	621
Outstanding Options, Weighted Average Remaining Contractual Term	5 years 5 months 9 days
Outstanding Options, Weighted Average Exercise Price	$ 9.16
Number of Exercisable Options	515
Exercisable Options, Weighted Average Exercise Price	$ 9.98
48.40 - 145.40 [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Exercise Price Range, Lower Range Limit	$ 48.40
Exercise Price Range, Upper Range Limit	$ 145
Number of Options Outstanding	194
Outstanding Options, Weighted Average Remaining Contractual Term	1 year 1 month 2 days
Outstanding Options, Weighted Average Exercise Price	$ 58.61
Number of Exercisable Options	194
Exercisable Options, Weighted Average Exercise Price	$ 58.61

XML

SEGMENT AND GEOGRAPHIC INFORMATION Product Revenues By The Three Product Lines (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Dec. 31, 2013 product_line	Dec. 31, 2012
Revenue from External Customers [Line Items]
Number Of Product Lines	3
Product revenues	$ 24,863	$ 23,905
Connectivity [Member]
Revenue from External Customers [Line Items]
Product revenues	8,949	10,138
Ethernet switching [Member]
Revenue from External Customers [Line Items]
Product revenues	11,336	8,306
Transport processing [Member]
Revenue from External Customers [Line Items]
Product revenues	$ 4,578	$ 5,461

XML

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	Dec. 31, 2013	Sep. 30, 2013
Carrying (Reported) Amount, Fair Value Disclosure [Member] | Notes Payable to Banks [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Debt Instrument, Fair Value Disclosure	$ 7,768	$ 7,919
Carrying (Reported) Amount, Fair Value Disclosure [Member] | Convertible Notes Payable [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Debt Instrument, Fair Value Disclosure	8,394	8,444
Carrying (Reported) Amount, Fair Value Disclosure [Member] | Convertible Debt [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Debt Instrument, Fair Value Disclosure	31,694	44,384
Estimate of Fair Value, Fair Value Disclosure [Member] | Notes Payable to Banks [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Debt Instrument, Fair Value Disclosure	8,531	8,165
Estimate of Fair Value, Fair Value Disclosure [Member] | Convertible Notes Payable [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Debt Instrument, Fair Value Disclosure	10,350	9,781
Estimate of Fair Value, Fair Value Disclosure [Member] | Convertible Debt [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Debt Instrument, Fair Value Disclosure	$ 34,691	$ 49,282

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THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES Narrative (Details) (USD $) In Millions, unless otherwise specified	3 Months Ended	12 Months Ended
	Dec. 31, 2013	Sep. 30, 2013
Convertible Subordinated Debt, Current	$ 32.8
Long-term Debt pf Registrant, Maturities, Repayments of Principal in 2015	17.2
Number of Major Customers	3	4
Accounts, Notes, Loans and Financing Receivable, Gross, Allowance, and Net [Abstract]
Allowance for Doubtful Accounts	$ 0	$ 0
Standard Product Warranty Period	1 year
Standard Warranty, Reserve Adjustment, Period	12 months
Minimum [Member]
Accounts, Notes, Loans and Financing Receivable, Gross, Allowance, and Net [Abstract]
Property, Plant and Equipment, Useful Life	3 years
Maximum [Member]
Accounts, Notes, Loans and Financing Receivable, Gross, Allowance, and Net [Abstract]
Property, Plant and Equipment, Useful Life	5 years
Customer Concentration Risk [Member] | Accounts Receivable [Member]
Concentration Risk, Percentage	52.80%	63.10%

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STOCK BASED COMPENSATION Employee Stock Purchase Plan Narrative (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		0 Months Ended	3 Months Ended		0 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Aug. 02, 2013 Employee Stock [Member]	Dec. 31, 2013 Employee Stock [Member]	Dec. 31, 2012 Employee Stock [Member]	Jan. 31, 2014 Employee Stock [Member] Subsequent Event [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Maximum annual contributions per employee, percent				15.00%
Call option for percent of share of stock				85.00%
Expected life (in years)				6 months	6 months
Common stock, shares reserved for future issuance				800,000
Shares issued in period						0.4
Per share price of ESPP shares issued						$ 2.46
Discount from market price			15.00%
Stock compensation recognized	$ 1,265	$ 1,143		$ 200	$ 100
Percent of employees participating				36.00%

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STOCK BASED COMPENSATION Activity under all stock option plans (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended	12 Months Ended
	Dec. 31, 2013	Sep. 30, 2013
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding [Roll Forward]
Options outstanding, Shares, Beginning balance	2,089
Options outstanding, Weighted average exercise price, Beginning balance	$ 13.43
Options outstanding, Weighted average remaining contractual life (in years), Beginning balance	7 years 8 months 23 days	6 years 8 months 1 day
Options outstanding, Aggregate intrinsic value, Beginning balance	$ 591
Shares, Granted	1,014
Weighted average exercise price, Granted	$ 2.53
Shares, Exercised	0
Weighted average exercise price, Exercised	$ 0.00
Shares, Cancelled or expired	(65)
Weighted average exercise price, Cancelled or expired	$ 112.84
Options outstanding, Shares, Ending balance	3,038	2,089
Options outstanding, Weighted average exercise price, Ending balance	$ 7.64	$ 13.43
Options outstanding, Weighted average remaining contractual life (in years), Ending balance	7 years 8 months 23 days	6 years 8 months 1 day
Options outstanding, Aggregate intrinsic value, Ending balance	886	591
Options exercisable, Shares, Ending balance	1,377
Options exercisable, Weighted average exercise price, Ending balance	$ 13.56
Options exercisable, Weighted average remaining contractual life (in years), Ending balance	5 years 10 months 10 days
Aggregate intrinsic value, Options exercisbale	$ 177

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COMMITMENTS AND CONTINGENCIES (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013
Operating leases
Remaining in 2014	$ 1,639
2015	1,568
2016	343
2017	0
2018	0
Thereafter	0
Total	3,550
Software licenses
Remaining in 2014	5,346
2015	6,736
2016	2,847
2017	2,800
2018	2,800
Thereafter	0
Total	20,529
Total
Remaining in 2014	6,985
2015	8,304
2016	3,190
2017	2,800
2018	2,800
Thereafter	0
Total	$ 24,079

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INVENTORY

3 Months Ended

Dec. 31, 2013

Inventory Disclosure [Abstract]

INVENTORY

INVENTORY, NET

	December 31, 2013		September 30, 2013
	(in thousands)
Inventory, net:
Raw materials	$	1,307	$	1,220
Work-in-process	5,054		3,652
Finished goods	6,183		5,820
Total	$	12,544	$	10,692

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INCOME TAXES Narrative (Details) (USD $) In Millions, except Share data, unless otherwise specified	1 Months Ended		3 Months Ended
	Jun. 30, 2013	Dec. 31, 2012	Dec. 31, 2013	Dec. 31, 2012
Operating Loss Carryforwards [Line Items]
Effective Income Tax Rate, Continuing Operations			(3.60%)	1.60%
Issuance of common stock, net of offering costs (in shares)	18,720,000	10,651,280
Percent of shareholder change to limit the net loss carryforwards		5.00%
Percentage points		0.50%
Rolling period over which shareholder basis points must be over		3 years
Subject to annual limitation		$ 28.1		$ 28.1
Internal Revenue Service (IRS) [Member]
Operating Loss Carryforwards [Line Items]
Operating Loss Carryforwards			41.5
Net operating loss annual limit			1.4
State and Local Jurisdiction [Member]
Operating Loss Carryforwards [Line Items]
Operating Loss Carryforwards			32.7
Foreign Tax Authority [Member]
Operating Loss Carryforwards [Line Items]
Operating Loss Carryforwards			$ 133.4

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DEBT Schedule of Outstanding Debt (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	Dec. 31, 2013
Notes Payable to Banks [Member] | Term A Loan [Member]
Debt Instrument [Line Items]
Principal	$ 7,857
Unamortized debt discount	(89)
Carrying value	7,768
Annual effective interest rate	9.50%
Convertible Notes Payable [Member] | Term B Loan Convertible [Member]
Debt Instrument [Line Items]
Principal	9,342
Unamortized debt discount	(948)
Carrying value	8,394
Annual effective interest rate	13.70%
Conversion rate per common share	$ 4.95
Convertible Debt [Member] | 2014 Debentures [Member]
Debt Instrument [Line Items]
Principal	32,843
Unamortized debt discount	(1,149)
Carrying value	$ 31,694
Annual effective interest rate	12.20%
Conversion rate per common share	$ 4.5

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DEBT Schedule of Long-term Debt Instruments (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013	Sep. 30, 2013	Dec. 31, 2012
Debt Instrument [Line Items]
Long-term debt, net	$ 16,163	$ 16,366
Total debt, net	47,857		60,750
Notes Payable to Banks [Member] | Term A Loan [Member]
Debt Instrument [Line Items]
Stated rate	9.00%	10.50%
Long-term debt, net	7,768	7,919
Convertible Notes Payable [Member] | Term B Loan Convertible [Member]
Debt Instrument [Line Items]
Stated rate	9.00%	8.00%
Long-term debt, net	8,394	8,444
Capital Lease Obligations [Member]
Debt Instrument [Line Items]
Long-term debt, net	1	3
Convertible Debt [Member] | 2014 Debentures [Member]
Debt Instrument [Line Items]
Stated rate	8.00%	8.00%
2014 Debentures, convertible, 8.0% fixed-rate notes, due October 2014	$ 31,694	$ 44,384

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SEGMENT AND GEOGRAPHIC INFORMATION Schedule of Revenue by Major Customers by Reporting Segments (Details)	3 Months Ended
	Dec. 31, 2013		Dec. 31, 2012
Revenue from External Customer [Line Items]
Number of Operating Segments	1
Major Customers, WPG [Member] | Customer Concentration Risk [Member] | Sales [Member]
Revenue from External Customer [Line Items]
Concentration Risk, Percentage	18.40%	[1]	13.20%	[1]
Major Customers, Nu Horizons Electronics [Member] | Customer Concentration Risk [Member] | Sales [Member]
Revenue from External Customer [Line Items]
Concentration Risk, Percentage			12.30%	[1]
Major Customers, Huawei [Member] | Customer Concentration Risk [Member] | Sales [Member]
Revenue from External Customer [Line Items]
Concentration Risk, Percentage			11.00%

[1] Distributor

XML

DEBT Narrative (Details) (USD $) Share data in Millions, except Per Share data, unless otherwise specified	0 Months Ended	3 Months Ended		0 Months Ended		3 Months Ended							0 Months Ended	3 Months Ended
	Oct. 30, 2012	Dec. 31, 2013	Dec. 31, 2012	Nov. 05, 2013 Term A and B Loans	Dec. 31, 2013 Term A and B Loans	Dec. 31, 2013 Term A and B Loans Minimum [Member]	Dec. 31, 2013 Term A and B Loans Maximum [Member]	Nov. 05, 2013 Term A and B Loans Debt Instrument, Redemption, Period One [Member]	Nov. 05, 2013 Term A and B Loans Debt Instrument, Redemption, Period Two [Member]	Nov. 05, 2013 Term A and B Loans Debt Instrument, Redemption, Period Three [Member]	Dec. 31, 2013 Convertible Notes Payable [Member] Term B Loan Convertible [Member]	Sep. 30, 2013 Convertible Notes Payable [Member] Term B Loan Convertible [Member]	Nov. 05, 2013 Convertible Debt [Member] 2014 Debentures [Member]	Dec. 31, 2013 Convertible Debt [Member] 2014 Debentures [Member]	Sep. 30, 2013 Convertible Debt [Member] 2014 Debentures [Member]
Debt Instrument [Line Items]
Shares of common stock											1.9			7.3
Percentage of principal allowed to be prepaid														100.00%
Stock price as a percentage of conversion price, minimum														130.00%
Trading days														20 days
Consecutive trading day period														30 days
Gain from other long-term liabilities	$ 800,000	$ 0	$ 803,000
Reclassification of compound embedded derivative liability to additional paid-in-capital	2,100,000	0	2,096,000
Trading price of common stock payable in additional shares range						$ 3.20	$ 6
Percentage of principal required to be redeemed					100.00%
Stated rate				9.00%							9.00%	8.00%		8.00%	8.00%
Prepayment fee percent								5.00%	3.00%	2.00%
Unrestricted cash balance				8,000,000
Minimum quarterly revenue				10,000,000
Conversion price				$ 4.95							$ 4.95			$ 4.5
Fee amount				308,000
Repurchase amount													13,700,000
Prepayment repurchase percentage													107.00%
Incremental common shares attributable to conversion of debt securities													3.0
Principal amount		32,800,000												32,800,000
Loss on extinguishment of debt		$ 1,594,000	$ 0										$ 1,600,000

XML

DEBT Schedule of Maturities of Long-term Debt (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013
Debt Disclosure [Abstract]
2014	$ 0
2015	32,843
2016	17,199
Total	$ 50,042

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COMPUTATION OF NET LOSS PER SHARE

3 Months Ended

Dec. 31, 2013

Earnings Per Share [Abstract]

COMPUTATION OF NET LOSS PER SHARE

COMPUTATION OF NET LOSS PER SHARE

For the three months ended December 31, 2013 and 2012, we recorded a net loss. As such, all outstanding potential common shares were excluded from the diluted earnings per share computation.

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

	Three Months Ended December 31,
	2013	2012
	(in thousands)
Outstanding stock options	3,038	1,724
Outstanding restricted stock units	3,034	1,228
ESPP shares	365	506
Convertible preferred stock	—	674
2014 Debentures	7,298	10,332
Term B Loan	1,887	1,887
Total potential common stock excluded from calculation	15,622	16,351

XML

FAIR VALUE MEASUREMENTS AND DERIVATIVE LIABILITY Compound embedded derivative liability activity (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011	Sep. 30, 2011
Derivative [Line Items]
Fair Value Inputs, Discount Rate	5.90%
Derivative Financial Instruments, Liabilities [Member]
Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation, Calculation [Roll Forward]
Beginning balance	$ 0		$ 0	$ 2,899
Transfer to equity	0	(2,096)
Total net gains included in earnings	0	(803)
Ending balance	$ 0		$ 0	$ 2,899

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STOCK BASED COMPENSATION Restricted Stock Units Narrative (Details) (Restricted Stock Units (RSUs) [Member], USD $) In Millions, unless otherwise specified	3 Months Ended
	Dec. 31, 2013	Dec. 31, 2012
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Impact of retaining common stock from employees upon vesting of restricted shares and restricted stock units to cover income tax withholding	$ (0.3)	$ (0.3)
Maximum [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vesting period	4 years
Non-employee Director [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vesting percentage per year	33.30%
Vesting percentage	100.00%

XML

CONSOLIDATED BALANCE SHEETS (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013	Sep. 30, 2013
Current assets:
Cash	$ 48,355	$ 68,863
Accounts receivable	11,406	9,807
Inventory, net	12,544	10,692
Prepaid expenses and other current assets	2,946	1,897
Total current assets	75,251	91,259
Property, plant and equipment, net	3,559	3,107
Other intangible assets, net	1,169	1,170
Other assets	3,372	3,425
Total Assets	83,351	98,961
Current liabilities:
Accounts payable	9,449	7,436
Accrued expenses and other current liabilities	11,422	12,245
Current portion of debt, net	31,694	0
Deferred revenue	2,728	2,215
Total current liabilities	55,293	21,896
Other long-term liabilities	374	407
Long-term debt, net	16,163	16,366
Convertible subordinated debt, net	0	44,384
Total liabilities	71,830	83,053
Commitments and contingencies, See note 10
Stockholders’ equity:
Preferred stock, $0.01 par value: 10,000 shares authorized; no shares issued or outstanding	0	0
Common stock, $0.01 par value: 250,000 shares authorized; 57,829 and 57,545 shares outstanding at December 31, 2013 and September 30, 2013, respectively	578	575
Additional paid-in-capital	1,892,642	1,891,661
Accumulated deficit	(1,881,699)	(1,876,328)
Total stockholders’ equity	11,521	15,908
Total Liabilities and Stockholders' Deficit	$ 83,351	$ 98,961

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SEGMENT AND GEOGRAPHIC INFORMATION Net Revenues By Geographic Area (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Dec. 31, 2013	Dec. 31, 2012
Revenue from External Customer [Line Items]
Total net revenues	$ 27,083	$ 25,727
United States
Revenue from External Customer [Line Items]
Total net revenues	6,559	10,905
Asia Pacific
Revenue from External Customer [Line Items]
Total net revenues	16,786	12,064
EMEA
Revenue from External Customer [Line Items]
Total net revenues	$ 3,738	$ 2,758

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CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Dec. 31, 2013	Dec. 31, 2012
Cash flows used in operating activities:
Net loss	$ (5,371)	$ (5,032)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	496	686
Stock-based compensation	1,265	1,143
Change in fair value of compound embedded derivative liability	0	(803)
Gain on disposal of assets	(159)	0
Loss on extinguishment of debt, net	1,594	0
Amortization of debt issuance costs	54	68
Amortization of debt discounts	512	625
Accretion of debt premiums	(9)	(42)
Change in operating assets and liabilities:
Accounts receivable	(1,599)	(198)
Inventory	(1,852)	(586)
Prepaids and other assets	(1,124)	(773)
Accounts payable	2,013	1,674
Accrued expenses and other liabilities	(856)	(824)
Deferred revenue	513	454
Net cash used in operating activities	(4,523)	(3,608)
Cash flows used in investing activities:
Capital expenditures	(884)	(161)
Proceeds from the sale of fixed assets	183	0
Payments under licensing agreements	(87)	0
Net cash used in investing activities	(788)	(161)
Cash flows (used in) provided by financing activities:
Net proceeds from the sale of common stock	0	17,213
Repurchase of 2014 Debentures	(14,606)	0
Consent fee on amendment of credit agreement	(308)	0
Repurchase and retirement of restricted stock units for payroll taxes	(343)	(254)
Other	60	(3)
Net cash (used in) provided by financing activities	(15,197)	16,956
Net (decrease) increase in cash	(20,508)	13,187
Cash at beginning of period	68,863	23,891
Cash at end of period	48,355	37,078
Cash paid during the period for:
Interest	2,371	2,262
Income taxes	25	40
Non-cash financing activities:
Equity offering costs incurred but not paid	0	112
Reclassification of compound embedded derivative liability to additional paid-in-capital	$ 0	$ 2,096

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STOCK BASED COMPENSATION Stock Options Narrative (Details) (USD $) In Millions, except Share data, unless otherwise specified	3 Months Ended				0 Months Ended	3 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2013 Stock Options [Member]	Dec. 31, 2012 Stock Options [Member]	Dec. 10, 2013 Stock Options [Member] Executive Officer [Member]	Dec. 31, 2013 Restricted Stock Units (RSUs) [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Expiration period	10 years
Number of shares available for future grant	1,600,000
Share limit per share	$ 1.5
Unrecognized stock-based compensation expense	$ 9.4
Weighted average period over which the unearned stock-based compensation is expected to be recognized			1 year 11 months 1 day			2 years 4 months 18 days
Closing stock price used to calculate total pretax intrinsic value	$ 2.92
In-the-money stock options exercisable	400,000
Weighted average grant date fair value	$ 1.75	$ 1.47			$ 1.86
Options granted					500,000
Weighted average exercise price, Granted	$ 2.53				$ 2.53
Consecutive trading days					30 days
Expected life (in years)			5 years 9 months 13 days	6 years 0 months 28 days	1 year 3 months 18 days
Expected volatility			81.50%	80.50%	80.00%
Expected dividend			0.00%	0.00%	0.00%
Risk-free interest rate			1.70%	0.90%	2.79%

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STOCK BASED COMPENSATION (Tables)

3 Months Ended

Dec. 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 Plan and ESPP is as follows:

	Three Months Ended December 31,
	2013		2012
	(in thousands)
Cost of revenues	$	184	$	154
Engineering, research and development	485		386
Selling, general and administrative	596		603
Total stock-based compensation expense	$	1,265	$	1,143

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, 2013	2,089		$	13.43	6.67	$	591
Granted	1,014		2.53
Exercised	—		—
Cancelled or expired	(65	)	112.84
Options outstanding, December 31, 2013	3,038		7.64		7.73	886
Options exercisable, December 31 2013	1,377		$	13.56	5.86	$	177

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

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

	Three Months Ended December 31,
	2013	2012
Expected life (in years)	5.79	6.08
Expected volatility	81.5%	80.5%
Expected dividend	—	—
Risk-free interest rate	1.7%	0.9%

We determine the fair value of the ESPP awards using the Black-Scholes pricing model. Underlying assumptions used were as follows:

	Three Months Ended December 31,
	2013	2012
Expected life (in years)	0.5	0.5
Expected volatility	50.3%	47.6%
Expected dividend	—	—
Risk-free interest rate	0.08%	0.14%

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 December 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 - $2.26	453	9.17	$	2.11	105	$	2.11
2.53	995	9.94	2.53		—	—
2.54 - 4.36	775	7.53	3.44		563	3.48
4.60 - 48.00	621	5.44	9.16		515	9.98
48.40 - 145.40	194	1.09	58.61		194	58.61
$2.10 - $145.40	3,038	7.73	$	7.64	1,377	$	13.56

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		Weighted average remaining contractual life (in years)	Aggregate intrinsic value (in thousands)
Restricted stock units, September 30, 2013	2,021		$	2.65	1.13	$	6,143
Awarded	1,441		2.54
Released	(418	)	3.30
Forfeited	(10	)	2.43
Restricted stock units, December 31, 2013	3,034		$	2.51	1.30	$	8,860

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STOCK BASED COMPENSATION Compensation costs related to the stock-based compensations plans (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Dec. 31, 2013	Dec. 31, 2012
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Total stock-based compensation expense	$ 1,265	$ 1,143
Cost of revenues [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Total stock-based compensation expense	184	154
Engineering, research and development [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Total stock-based compensation expense	485	386
Selling, general and administrative [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Total stock-based compensation expense	$ 596	$ 603

XML

COMMITMENTS AND CONTINGENCIES (Tables)

3 Months Ended

Dec. 31, 2013

Commitments and Contingencies Disclosure [Abstract]

Schedule of minimum lease payments and software licenses

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

	Remaining in 2014		2015		2016		2017		2018		Thereafter		Total
	(in thousands)
Operating leases	$	1,639	$	1,568	$	343	$	—	$	—	$	—	$	3,550
Software licenses	5,346		6,736		2,847		2,800		2,800		—		20,529
Total	$	6,985	$	8,304	$	3,190	$	2,800	$	2,800	$	—	$	24,079

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THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES

3 Months Ended

Dec. 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 4721 Calle Carga, 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, 2013, included in our Annual Report on Form 10-K filed with the SEC on December 5, 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’ equity. The results of operations for the three months endedDecember 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, compound embedded derivative valuation, purchased intangible asset valuations and useful lives, asset retirement obligations, 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

In accordance with Accounting Standards Codification (“ASC”) Topic 605, Revenue Recognition, we recognize product revenue when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred; (iii) the price to the customer is fixed or determinable; and (iv) collection of the sales price is reasonably assured. Delivery occurs when goods are shipped and title and risk of loss transfer to the customer, in accordance with the terms specified in the arrangement with the customer. Revenue recognition is deferred where the earnings process is incomplete.

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

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 fixes and technical support. No other upgrades, products, or post-contract support are provided. These arrangements may be renewable annually by the customer. Support revenue is recognized ratably over the period during which the obligation exists, typically 12 months or less.

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

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

Engineering, Research and Development Costs

Engineering, research and development (“R&D”) costs are expensed when incurred. R&D expenses consist primarily of compensation expenses for employees and contractors engaged in research, design and development activities. R&D expenses also include costs of mask tooling, which we fully expense in the period, electronic design automation tools, software licensing contracts, subcontracting and fabrication, depreciation and amortization, and overhead including facilities expenses.

Intellectual property purchased from third-parties is capitalized and amortized over the useful life of the intellectual property.

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 various option pricing models, primarily the Black-Scholes option pricing model that was developed for use in estimating the value of traded options that have no vesting restrictions and that are freely transferable. The models consider, among other factors, the expected life of the award and the expected volatility of our stock price. Although the models meet the accounting guidance requirements, the fair values generated by the models may not be indicative of the actual fair values of our awards, as they do not consider other factors important to those stock-based payment awards, such as continued employment, periodic vesting requirements, and limited transferability.

We have elected to recognize compensation expense for all stock-based awards granted after September 30, 2005 on a straight-line basis over the requisite service period for the entire award. The amount of compensation expense recognized through the end of each reporting period is equal to the portion of the grant-date value of the awards that have vested, or for partially vested awards, the value of the portion of the award that is ultimately expected to vest for which the requisite services have been provided.

Other Income, Net 

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

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 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.

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, the highly cyclical nature of the semiconductor industry; our high fixed costs; declines in average selling prices; decisions by our IC manufacturer customers to curtail outsourcing; our substantial indebtedness; our ability to fund liquidity needs; our 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; that our management information systems may prove inadequate; our ability to attract and retain qualified employees; difficulties consolidating and evolving our operational capabilities; our dependence on materials and equipment suppliers; our loss of customers; adverse tax consequences; the development of new proprietary technology and the enforcement of intellectual property rights by or against us; the complexity of packaging and test processes in our industry; competition; our need to comply with existing and future environmental regulations; and fire, flood or other calamity affecting us or others with whom we do business.

Our current debt is comprised of our convertible subordinated debentures (“2014 Debentures”), of which the total principal amount of $32.8 million is due in October 2014. Our long-term debt is comprised of our senior term loans (the “Term A Loan” and “Term B Loan”, which we collectively refer to as our “Term A and B Loans”) which have a total principal amount of $17.2 million due on August 31, 2016. We intend to use our existing cash to repay our 2014 Debentures on or before their maturity in October 2014, which will achieve our objective of reducing our outstanding indebtedness but will also reduce our cash balances. While we believe that our existing sources of liquidity, along with cash expected to be generated from revenues, will be sufficient to fund our operations for at least the next 12 months after repayment of the 2014 Debentures, this ultimately may not be the case. If we incur operating losses and negative cash flows in the future, we may need to further reduce our operating costs or obtain alternate sources of financing, or both. We may need additional capital in the future and may not have access to additional sources of capital on favorable terms or at all. If we raise additional funds through the issuance of equity or debt securities, such securities may have rights, preferences or privileges senior to those of our common stock and our stockholders may experience dilution of their ownership interests.

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 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 December 31, 2013, there were three customers that accounted for 52.8% of accounts receivable. At September 30, 2013, there were four customers that accounted for 63.1% 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. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Our allowance for doubtful accounts was nil as of December 31, 2013 and September 30, 2013, 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 product revenues 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. When property, plant and equipment is retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts. Gains and losses from retirements and asset disposals are recorded in selling, general and administrative (“SG&A”) expenses.

We evaluate the recoverability of property, plant and equipment in accordance with ASC Topic 360, 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, Intangibles - Goodwill and Other. We evaluate our finite-lived assets for impairment whenever events or changes in circumstances indicate the carrying value of an intangible asset or asset group may not be recoverable. The carrying value of an intangible 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.

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.

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

We use a binomial-lattice model to estimate the fair value of our 2014 Debentures. At inception, 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. As more fully described in Note 4, the 2014 Debentures no longer require bifurcation and a final valuation of the compound embedded derivative was completed in October 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 revenue when products are shipped. At each reporting period, we adjust our reserve for warranty claims based on our actual warranty claims experience as a percentage of net revenue for the preceding 12 months and also consider the effect of known operational issues that may have an impact that differs from historical trends. Historically, our warranty returns have not been material.

Contingencies

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

Recent Accounting Pronouncements

In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of Unrecognized Tax Benefit When a Net Operating Loss Carryforward, A Similar Tax Loss, or a Tax Credit Carryforward Exists (A Consensus the FASB Emerging Issues Task Force). ASU 2013-11 provides guidance on financial statement presentation of unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The FASB’s objective in issuing this ASU is to eliminate diversity in practice resulting from a lack of guidance on this topic in current U.S. GAAP. This ASU applies to all entities with unrecognized tax benefits that also have tax loss or tax credit carryforwards in the same tax jurisdiction as of the reporting date. This amendment is effective for public entities for fiscal years beginning after December 15, 2013, and interim periods within those years. We do not expect the adoption of this standard to have a material impact on our unaudited condensed consolidated financial position and results of operations.

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CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $) In Thousands, except Per Share data, unless otherwise specified	Dec. 31, 2013	Sep. 30, 2013
Statement of Financial Position [Abstract]
Preferred stock, par value	$ 0.01	$ 0.01
Preferred stock, shares authorized	10,000	10,000
Preferred stock, shares outstanding	0	0
Common stock, par value	$ 0.01	$ 0.01
Common stock, shares authorized	250,000	250,000
Common stock, shares outstanding	57,829	57,545

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

3 Months Ended

Dec. 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, 2013, included in our Annual Report on Form 10-K filed with the SEC on December 5, 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’ equity. The results of operations for the three months endedDecember 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, compound embedded derivative valuation, purchased intangible asset valuations and useful lives, asset retirement obligations, 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 revenue when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred; (iii) the price to the customer is fixed or determinable; and (iv) collection of the sales price is reasonably assured. Delivery occurs when goods are shipped and title and risk of loss transfer to the customer, in accordance with the terms specified in the arrangement with the customer. Revenue recognition is deferred where the earnings process is incomplete.

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

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

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

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.

Engineering, Research and Development Costs

Engineering, Research and Development Costs

Engineering, research and development (“R&D”) costs are expensed when incurred. R&D expenses consist primarily of compensation expenses for employees and contractors engaged in research, design and development activities. R&D expenses also include costs of mask tooling, which we fully expense in the period, electronic design automation tools, software licensing contracts, subcontracting and fabrication, depreciation and amortization, and overhead including facilities expenses.

Intellectual property purchased from third-parties is capitalized and amortized over the useful life of the intellectual property.

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 various option pricing models, primarily the Black-Scholes option pricing model that was developed for use in estimating the value of traded options that have no vesting restrictions and that are freely transferable. The models consider, among other factors, the expected life of the award and the expected volatility of our stock price. Although the models meet the accounting guidance requirements, the fair values generated by the models may not be indicative of the actual fair values of our awards, as they do not consider other factors important to those stock-based payment awards, such as continued employment, periodic vesting requirements, and limited transferability.

We have elected to recognize compensation expense for all stock-based awards granted after September 30, 2005 on a straight-line basis over the requisite service period for the entire award. The amount of compensation expense recognized through the end of each reporting period is equal to the portion of the grant-date value of the awards that have vested, or for partially vested awards, the value of the portion of the award that is ultimately expected to vest for which the requisite services have been provided.

Other Income, Net

Other Income, Net 

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.

Net Loss per Share

Net Loss per Share

Basic and diluted net loss per share is computed by dividing net 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.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are recorded at the invoice amount and presented net of the allowance for doubtful accounts; they do not bear interest. We evaluate the collectability of accounts receivable at each balance sheet date using a combination of factors, such as historical experience, credit quality, age of the accounts receivable balances, and economic conditions that may affect a customer’s ability to pay. We include any accounts receivable balances that are determined to be uncollectible in the overall allowance for doubtful accounts using the specific identification method. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Our allowance for doubtful accounts was nil as of December 31, 2013 and September 30, 2013, 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 product revenues 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. When property, plant and equipment is retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts. Gains and losses from retirements and asset disposals are recorded in selling, general and administrative (“SG&A”) expenses.

We evaluate the recoverability of property, plant and equipment in accordance with ASC Topic 360, 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

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, Intangibles - Goodwill and Other. We evaluate our finite-lived assets for impairment whenever events or changes in circumstances indicate the carrying value of an intangible asset or asset group may not be recoverable. The carrying value of an intangible 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.

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.

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

We use a binomial-lattice model to estimate the fair value of our 2014 Debentures. At inception, 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. As more fully described in Note 4, the 2014 Debentures no longer require bifurcation and a final valuation of the compound embedded derivative was completed in October 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 revenue when products are shipped. At each reporting period, we adjust our reserve for warranty claims based on our actual warranty claims experience as a percentage of net revenue for the preceding 12 months and also consider the effect of known operational issues that may have an impact that differs from historical trends. Historically, our warranty returns have not been material.

Contingencies

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

Recent Accounting Pronouncements

In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of Unrecognized Tax Benefit When a Net Operating Loss Carryforward, A Similar Tax Loss, or a Tax Credit Carryforward Exists (A Consensus the FASB Emerging Issues Task Force). ASU 2013-11 provides guidance on financial statement presentation of unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The FASB’s objective in issuing this ASU is to eliminate diversity in practice resulting from a lack of guidance on this topic in current U.S. GAAP. This ASU applies to all entities with unrecognized tax benefits that also have tax loss or tax credit carryforwards in the same tax jurisdiction as of the reporting date. This amendment is effective for public entities for fiscal years beginning after December 15, 2013, and interim periods within those years. We do not expect the adoption of this standard to have a material impact on our unaudited condensed consolidated financial position and results of operations.

XML

Document and Entity Information	3 Months Ended
	Dec. 31, 2013	Jan. 31, 2014
Document And Entity Information [Abstract]
Entity Registrant Name	VITESSE SEMICONDUCTOR CORP
Entity Central Index Key	0000880446
Document Type	10-Q
Document Period End Date	Dec. 31, 2013
Amendment Flag	false
Current Fiscal Year End Date	--09-30
Entity Filer Category	Accelerated Filer
Document Fiscal Year Focus	2014
Document Fiscal Period Focus	Q1
Entity Common Stock, Shares Outstanding		58,247,656

XML

COMPUTATION OF NET LOSS PER SHARE (Tables)

3 Months Ended

Dec. 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 Months Ended December 31,
	2013	2012
	(in thousands)
Outstanding stock options	3,038	1,724
Outstanding restricted stock units	3,034	1,228
ESPP shares	365	506
Convertible preferred stock	—	674
2014 Debentures	7,298	10,332
Term B Loan	1,887	1,887
Total potential common stock excluded from calculation	15,622	16,351

XML

CONSOLIDATED STATEMENTS OF OPERATIONS (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended
	Dec. 31, 2013	Dec. 31, 2012
Net revenues:
Product revenues	$ 24,863	$ 23,905
Intellectual property revenues	2,220	1,822
Net revenues	27,083	25,727
Costs and expenses:
Cost of product revenues	10,676	10,975
Engineering, research and development	10,679	10,504
Selling, general and administrative	7,854	7,970
Amortization of intangible assets	88	97
Costs and expenses	29,297	29,546
Loss from operations	(2,214)	(3,819)
Other expense (income):
Interest expense, net	1,704	1,970
Gain on compound embedded derivative	0	(803)
Loss on extinguishment of debt	1,594	0
Other expense (income), net	61	(31)
Other expense, net	3,359	1,136
Loss before income tax (benefit) provision	(5,573)	(4,955)
Income tax (benefit) provision	(202)	77
Net loss	$ (5,371)	$ (5,032)
Net loss per common share - basic and diluted (in dollars per share)	$ (0.09)	$ (0.18)
Weighted average common shares outstanding - basic and diluted	57,610	28,059

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STOCKHOLDERS' EQUITY

3 Months Ended

Dec. 31, 2013

Equity [Abstract]

STOCKHOLDERS' EQUITY

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, 9.0 million shares of common stock have been reserved for issuance under our stock compensation plans, and 0.8 million remaining shares of common stock are reserved for issuance under our ESPP.

We are authorized to issue up to 10 million shares of preferred stock, with a par value of $0.01 per share and none were outstanding.

In December 2012, we raised $17.1 million, net of offering costs of $1.6 million, from the registered public sale of 10,651,280 shares of common stock at $1.75 per share, which was a discount to the market price of our common stock.

In June 2013, we raised an additional $37.4 million, net of offering expenses of $2.8 million, from the registered public sale of 18,720,000 shares of common stock at $2.15 per share, which was a discount to the market price of our common stock.

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FAIR VALUE MEASUREMENTS AND DERIVATIVE LIABILITY

3 Months Ended

Dec. 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):

	2014		2013
	(in thousands)
Beginning balance September 30	$	—	$	2,899
Transfer to equity	—		(2,096		)
Total net gains included in earnings	—		(803		)
Ending balance December 31	$	—	$	—

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 carried at amortized/accreted cost quarterly for disclosure purposes.

We use a binomial-lattice model to estimate fair values of our financial instruments. The key unobservable input utilized in the model for our Term B Loan and 2014 Debentures includes a discount rate of 5.9% . The estimated fair value of our 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:

	December 31, 2013				September 30, 2013
	Carrying value		Fair value		Carrying value		Fair value
	(in thousands)
Term A Loan	$	7,768	$	8,531	$	7,919	$	8,165
Term B Loan	8,394		10,350		8,444		9,781
2014 Debentures	31,694		34,691		44,384		49,282

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SEGMENT AND GEOGRAPHIC INFORMATION (Tables)

3 Months Ended

Dec. 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 December 31,
	2013		2012
WPG Holdings**	18.4	%	13.2	%
Nu Horizons Electronics**	*		12.3	%
Huawei	*		11.0	%

 __________________________________________________

*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 December 31,
	2013		2012
	(in thousands)
United States	$	6,559	$	10,905
Asia Pacific	16,786		12,064
Europe, Middle East and Africa	3,738		2,758
Total net revenues	$	27,083	$	25,727

Product Revenues By The Three Product Lines

Product revenues by product line are as follows:

	Three Months Ended December 31,
	2013		2012
	(in thousands)
Connectivity	$	8,949	10,138
Ethernet switching	11,336		8,306
Transport processing	4,578		5,461
Product revenues	$	24,863	$	23,905

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INVENTORY (Tables)

3 Months Ended

Dec. 31, 2013

Inventory Disclosure [Abstract]

INVENTORY

	December 31, 2013		September 30, 2013
	(in thousands)
Inventory, net:
Raw materials	$	1,307	$	1,220
Work-in-process	5,054		3,652
Finished goods	6,183		5,820
Total	$	12,544	$	10,692

XML

SEGMENT AND GEOGRAPHIC INFORMATION

3 Months Ended

Dec. 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 December 31,
	2013		2012
WPG Holdings**	18.4	%	13.2	%
Nu Horizons Electronics**	*		12.3	%
Huawei	*		11.0	%

 __________________________________________________

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

**Distributor

Net revenues by geographic area are as follows:

	Three Months Ended December 31,
	2013		2012
	(in thousands)
United States	$	6,559	$	10,905
Asia Pacific	16,786		12,064
Europe, Middle East and Africa	3,738		2,758
Total net revenues	$	27,083	$	25,727

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.

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 December 31,
	2013		2012
	(in thousands)
Connectivity	$	8,949	10,138
Ethernet switching	11,336		8,306
Transport processing	4,578		5,461
Product revenues	$	24,863	$	23,905

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STOCK BASED COMPENSATION

3 Months Ended

Dec. 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 incentive plan, the 2013 Incentive Plan (the “Plan”) under which non-qualified stock options and restricted stock units have been granted to employees and non-employee directors. Options generally 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 generally estimated on the date of the grant using the Black-Scholes option-pricing model.

Under the Plan, we have 1.6 million shares available for future grant as of December 31, 2013. 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 December 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 Plan and ESPP is as follows:

	Three Months Ended December 31,
	2013		2012
	(in thousands)
Cost of revenues	$	184	$	154
Engineering, research and development	485		386
Selling, general and administrative	596		603
Total stock-based compensation expense	$	1,265	$	1,143

As of December 31, 2013, there was $9.4 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 1.9 years and 2.4 years, respectively. Future stock-based compensation expense and unearned stock-based compensation will increase to the extent that we grant additional equity awards and our stock price increases.

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, 2013	2,089		$	13.43	6.67	$	591
Granted	1,014		2.53
Exercised	—		—
Cancelled or expired	(65	)	112.84
Options outstanding, December 31, 2013	3,038		7.64		7.73	886
Options exercisable, December 31 2013	1,377		$	13.56	5.86	$	177

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 $2.92 as of December 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. There were 0.4 million in-the-money stock options that were exercisable as of December 31, 2013.

Expected volatility used to estimate the fair value of options granted 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 time-based stock options granted in connection with stock incentive plans have been estimated using the following weighted average assumptions:

	Three Months Ended December 31,
	2013	2012
Expected life (in years)	5.79	6.08
Expected volatility	81.5%	80.5%
Expected dividend	—	—
Risk-free interest rate	1.7%	0.9%

The weighted average fair value at the date of grant of time-based options granted in the three months ended December 31, 2013 and 2012 was $1.75 and $1.47, respectively.

On December 10, 2013, we granted 500,000 market-based stock options at an exercise price of $2.53 to executive officers. The market-based options vest if either of the following conditions is met prior to December 10, 2018: (i) the closing price of our Common Stock equals or exceeds twice the exercise price of $2.53 for 30 consecutive trading days; or (ii) a change in control occurs where the Company’s stockholders receive in consideration of their shares of Common Stock cash or other consideration with a value at least equal to twice the exercise price of $2.53. We evaluate stock awards with market conditions as to the probability that the market conditions will be met and estimates the date at which the market conditions will be met in order to properly recognize stock-based compensation expense over the requisite service period. We used the following assumptions to estimate the fair value of the options: expected life of 1.3 years, expected volatility of 80.0%, a zero dividend rate, and a risk-free rate of 2.79%. The market-based options had a grant date per share fair value of $1.86.

The following table provides additional information in regards to options outstanding as of December 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 - $2.26	453	9.17	$	2.11	105	$	2.11
2.53	995	9.94	2.53		—	—
2.54 - 4.36	775	7.53	3.44		563	3.48
4.60 - 48.00	621	5.44	9.16		515	9.98
48.40 - 145.40	194	1.09	58.61		194	58.61
$2.10 - $145.40	3,038	7.73	$	7.64	1,377	$	13.56

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		Weighted average remaining contractual life (in years)	Aggregate intrinsic value (in thousands)
Restricted stock units, September 30, 2013	2,021		$	2.65	1.13	$	6,143
Awarded	1,441		2.54
Released	(418	)	3.30
Forfeited	(10	)	2.43
Restricted stock units, December 31, 2013	3,034		$	2.51	1.30	$	8,860

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 $0.3 million for each of the three months ended December 31, 2013 and 2012, and was recorded as settlement on restricted stock tax withholding in the accompanying unaudited consolidated statements of stockholders’ equity. 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

Pursuant to our ESPP, eligible employees may authorize payroll deductions of up to 15% of their regular base salary subject to certain limits to purchase shares at the lower of 85% of the fair market value of the common stock on the date of the commencement of the offering or on the last day of the 6-month offering period. As of December 31, 2013, the ESPP had 0.8 million shares of our common stock reserved for future issuance under the plan. On January 31, 2014, 0.4 million shares were issued at a price per share of $2.46, a 15% discount to the share price on August 1, 2013, the commencement date for the purchase period that ended January 31, 2014. We recognized $0.2 million and $0.1 million of stock compensation expense under the ESPP during the three months ended December 31, 2013 and 2012, respectively. We determine the fair value of the ESPP awards using the Black-Scholes pricing model. Underlying assumptions used were as follows:

	Three Months Ended December 31,
	2013	2012
Expected life (in years)	0.5	0.5
Expected volatility	50.3%	47.6%
Expected dividend	—	—
Risk-free interest rate	0.08%	0.14%

As of December 31, 2013, approximately 36.0% of the eligible employees participated in our stock purchase plan.

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INCOME TAXES

3 Months Ended

Dec. 31, 2013

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

The income tax (benefit) provision as a percentage of loss from operations before income taxes was (3.6)% for the three months ended December 31, 2013 compared to 1.6% for the comparable period in the prior year. Our income tax benefit is primarily impacted by foreign taxes, certain nondeductible interest and share based expenses. The income tax benefit is also impacted by 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 based on our analysis of the available positive and negative evidence.

At December 31, 2013, we had approximately $41.5 million, $32.7 million, and $133.4 million of federal, state, and foreign Net Operating Losses (“NOLs”), respectively, 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. In general, a Section 382 ownership change occurs if there is a cumulative change in our ownership by “5%” shareholders (as defined in the Internal Revenue Code of 1986, as amended) that exceeds 50 percentage points over a rolling three-year period. An ownership change generally affects the rate at which NOLs and potentially other deferred tax assets are permitted to offset future taxable income. Of our federal NOL amount as of December 31, 2013, $28.1 million is subject to an annual Section 382 limitation of $1.4 million due to the December 2012 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 three months ended ended December 31, 2013, or on our net deferred tax asset as of December 31, 2013.

In June 2013, we issued an additional 18.7 million shares of common stock in a public offering. We are in the process of evaluating whether the offering caused a Section 382 ownership change. If an additional ownership change did occur or does 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

3 Months Ended

Dec. 31, 2013

Commitments and Contingencies Disclosure [Abstract]

COMMITMENTS AND CONTINGENCIES

COMMITMENTS AND CONTINGENCIES

Operating Leases and Software Licenses

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

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

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

	Remaining in 2014		2015		2016		2017		2018		Thereafter		Total
	(in thousands)
Operating leases	$	1,639	$	1,568	$	343	$	—	$	—	$	—	$	3,550
Software licenses	5,346		6,736		2,847		2,800		2,800		—		20,529
Total	$	6,985	$	8,304	$	3,190	$	2,800	$	2,800	$	—	$	24,079

From time-to-time, 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. Although the ultimate outcome of these matters cannot be determined, we believe that as of December 31, 2013, the final disposition of these proceedings will not have a material adverse effect on our financial position, results of operations, or liquidity. Related legal defense costs are expensed as incurred.

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 December 31, 2013 and September 30, 2013.

Patents and Licenses

We have entered into various licensing agreements requiring primarily fixed fee royalty payments. In the event that we fail to pay any 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 and product liability insurance which may provide a source of recovery to us in the event of an indemnification claim.

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STOCKHOLDERS' EQUITY (Details) (USD $) In Millions, except Share data, unless otherwise specified	1 Months Ended
	Jun. 30, 2013	Dec. 31, 2012	Dec. 31, 2013	Sep. 30, 2013
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
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			0	0
Stock issued	$ 37.4	$ 17.1
Stock offering costs	$ 2.8	$ 1.6
Issuance of common stock, net of offering costs (in shares)	18,720,000	10,651,280
Price per share	$ 2.15	$ 1.75
Conversion of Debt, Shares Issued [Member]
Common Stock, Number of Shares, Par Value and Other Disclosures [Abstract]
Common stock, shares reserved for future issuance			19,500,000
Stock Options [Member]
Common Stock, Number of Shares, Par Value and Other Disclosures [Abstract]
Common stock, shares reserved for future issuance			9,000,000
ESPP Shares [Member]
Common Stock, Number of Shares, Par Value and Other Disclosures [Abstract]
Common stock, shares reserved for future issuance			800,000

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FAIR VALUE MEASUREMENTS AND DERIVATIVE LIABILITY (Tables)

3 Months Ended

Dec. 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):

	2014		2013
	(in thousands)
Beginning balance September 30	$	—	$	2,899
Transfer to equity	—		(2,096		)
Total net gains included in earnings	—		(803		)
Ending balance December 31	$	—	$	—

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

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

	December 31, 2013				September 30, 2013
	Carrying value		Fair value		Carrying value		Fair value
	(in thousands)
Term A Loan	$	7,768	$	8,531	$	7,919	$	8,165
Term B Loan	8,394		10,350		8,444		9,781
2014 Debentures	31,694		34,691		44,384		49,282

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COMPUTATION OF NET LOSS PER SHARE Schedule of Dilutive Common Shares Excluded from the Computation (Details) In Thousands, unless otherwise specified	3 Months Ended
	Dec. 31, 2013	Dec. 31, 2012
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	15,622	16,351
Outstanding stock options [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	3,038	1,724
Outstanding restricted stock units [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	3,034	1,228
ESPP Shares [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	365	506
Convertible preferred stock [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	0	674
2014 Convertible debentures
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	7,298	10,332
Convertible Notes Payable [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	1,887	1,887

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STOCK BASED COMPENSATION Summary of restricted stock unit activity (Details) (Restricted Stock Units (RSUs) [Member], USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended	12 Months Ended
	Dec. 31, 2013	Sep. 30, 2013
Restricted Stock Units (RSUs) [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Non-Option Equity Instruments, Outstanding [Roll Forward]
Restricted stock units, Restricted Stock Units, Beginning balance	2,021
Restricted stock units, Weighted Average Grant-Date Fair Value per Share, Beginning balance	$ 2.65
Weighted average remaining contractual life (in years), beginning balance	1 year 3 months 18 days	1 year 1 month 17 days
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Nonvested, Intrinsic Value	$ 6,143,000
Restricted Stock Units, Awarded	1,441
Weighted Average Grant-Date Fair Value per Share, Awarded	$ 2.54
Restricted Stock Units, Released	(418)
Weighted Average Grant-Date Fair Value per Share, Released	$ 3.30
Restricted Stock Units, Forfeited	(10)
Weighted Average Grant-Date Fair Value per Share, Forfeited	$ 2.43
Restricted stock units, Restricted Stock Units, Ending balance	3,034	2,021
Restricted stock units, Weighted Average Grant-Date Fair Value per Share, Ending balance	$ 2.51	$ 2.65
Weighted average remaining contractual life (in years), ending balance	1 year 3 months 18 days	1 year 1 month 17 days
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Nonvested, Intrinsic Value	$ 8,860,000	$ 6,143,000

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (USD $) In Thousands, unless otherwise specified	Total	Common Stock [Member]	Additional Paid-in-Capital [Member]	Accumulated Deficit [Member]	Parent [Member]
Balance at Sep. 30, 2013	$ 15,908	$ 575	$ 1,891,661	$ (1,876,328)	$ 15,908
Balance (in shares) at Sep. 30, 2013		57,545
Increase (Decrease) in Stockholders' Equity
Net loss	(5,371)			(5,371)	(5,371)
Compensation expense related to stock options, awards and ESPP			1,265		1,265
Release of restricted stock units (in shares)		418
Release of restricted stock units		4	(4)
Repurchase and retirement of restricted stock units for payroll taxes (in shares)		(134)
Repurchase and retirement of restricted stock units for payroll taxes		(1)	(342)		(343)
Other			62		62
Balance at Dec. 31, 2013	$ 11,521	$ 578	$ 1,892,642	$ (1,881,699)	$ 11,521
Balance (in shares) at Dec. 31, 2013		57,829

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DEBT

3 Months Ended

Dec. 31, 2013

Debt Disclosure [Abstract]

DEBT

DEBT

	December 31, 2013		September 30, 2013
	(in thousands)
Term A Loan, bearing interest at 9.0% and 10.5% as of December 31, 2013 and September 30, 2013, respectively, due August 2016	$	7,768	$	7,919
Term B Loan, convertible, bearing interest at 9.0% and 8.0% as of December 31, 2013 and September 30, 2013, respectively, due August 2016	8,394		8,444
Other	1		3
Long-term debt, net	16,163		16,366
2014 Debentures, convertible, 8.0% fixed-rate notes, due October 2014	31,694		44,384
Total debt, net	$	47,857	$	60,750

Additional information about our debt is as follows:

	Term A Loan			Term B Loan			2014 Debentures
	(in thousands)
Principal	$	7,857		$	9,342		$	32,843
Unamortized debt discount	(89		)	(948		)	(1,149		)
Carrying value	$	7,768		$	8,394		$	31,694
Interest payable terms	Quarterly, in arrears			Quarterly, in arrears			Semi-annually, in arrears
Annual effective interest rate	9.5		%	13.7		%	12.2		%
Conversion rate per common share	n/a			$	4.95		$	4.50

The Term B Loan conversion terms are substantially similar to the conversion terms of the 2014 Debentures, as described below. At December 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 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 December 31, 2013, conversion of the outstanding principal amount of the 2014 Debentures would result in the issuance of 7.3 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 of 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, indebtedness at its 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 $6 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. We were in compliance with all covenants as of December 31, 2013.

On November 5, 2013, we amended the credit agreement for the Term A and B Loans (the “Amendment”). The Amendment extends the maturity dates of our outstanding Term A Loan and Term B Loan from February 4, 2014 and October 30, 2014, respectively, to August 31, 2016, and also provides that the Term A and B Loans will each bear interest in cash at 9.0% per annum payable quarterly in arrears. The Amendment provides us with a right to optionally prepay the Term A and B Loans in whole or in part, at any time and from time-to-time, subject to the payment of a prepayment fee. The prepayment fee is 5% of the aggregate principal amount repaid for prepayments made prior to October 30, 2014, 3% for prepayments made on or after October 30, 2014 but prior to October 30, 2015, and 2% for prepayment made on or after October 30, 2015. The credit agreement for the Term A and B Loans continue to require that we prepay the Term A and B Loans upon the occurrence of certain prepayment events, but the Amendment provides us with greater flexibility to sell assets and use the resulting proceeds for purposes other than repaying the Term A and B Loans after repayment of our 2014 Debentures.

The Amendment provides us with the right, so long as no event of default exists under the credit agreement for the Term A and B Loans, to purchase, repay, redeem, or defease any or all of the 2014 Debentures. In addition, the Amendment requires us to maintain an unrestricted cash balance of $8.0 million and achieve minimum quarterly revenues of $10.0 million.

The credit agreement for the Term A and B Loans continues to provide the lenders with the right to convert the Term B Loan into shares of our common stock at a conversion price of $4.95 per share through October 30, 2014. After that date, the lenders will not have the right to convert the Term B Loan into common stock.

In connection with the Amendment, we paid the lenders a consent fee of $0.3 million which was recorded as a debt discount and will be amortized over the remaining term of the Term A and B Loans. Additionally, in connection with the Amendment we repurchased $13.7 million principal amount of our 2014 Debentures at 107% of the principal amount thereof plus accrued interest, which eliminated the potential issuance of approximately 3.0 million dilutive common shares. After this transaction, $32.8 million principal amount of 2014 Debentures remain outstanding. We recorded a loss on extinguishment of debt in the amount of $1.6 million related to the repurchase of the 2014 Debentures.

Debt Maturities

Maturity of our total aggregated outstanding debt is as follows:

Fiscal Year	(in thousands)
2014	$	—
2015	32,843
2016	17,199
Total	$	50,042

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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INVENTORY INVENTORY (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013	Sep. 30, 2013
Inventory, net:
Raw materials	$ 1,307	$ 1,220
Work-in-process	5,054	3,652
Finished goods	6,183	5,820
Total	$ 12,544	$ 10,692

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STOCK BASED COMPENSATION Summary of assumptions used to value stock options granted in connection with stock incentives (Details)	3 Months Ended
	Dec. 31, 2013	Dec. 31, 2012
Stock Options [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Expected life (in years)	5 years 9 months 13 days	6 years 0 months 28 days
Expected volatility	81.50%	80.50%
Expected dividend	0.00%	0.00%
Risk-free interest rate	1.70%	0.90%
Employee Stock [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Expected life (in years)	6 months	6 months
Expected volatility	50.30%	47.60%
Expected dividend	0.00%	0.00%
Risk-free interest rate	0.08%	0.14%

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DEBT (Tables)

3 Months Ended

Dec. 31, 2013

Debt Disclosure [Abstract]

Schedule of Long-term Debt Instruments

	December 31, 2013		September 30, 2013
	(in thousands)
Term A Loan, bearing interest at 9.0% and 10.5% as of December 31, 2013 and September 30, 2013, respectively, due August 2016	$	7,768	$	7,919
Term B Loan, convertible, bearing interest at 9.0% and 8.0% as of December 31, 2013 and September 30, 2013, respectively, due August 2016	8,394		8,444
Other	1		3
Long-term debt, net	16,163		16,366
2014 Debentures, convertible, 8.0% fixed-rate notes, due October 2014	31,694		44,384
Total debt, net	$	47,857	$	60,750

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		$	32,843
Unamortized debt discount	(89		)	(948		)	(1,149		)
Carrying value	$	7,768		$	8,394		$	31,694
Interest payable terms	Quarterly, in arrears			Quarterly, in arrears			Semi-annually, in arrears
Annual effective interest rate	9.5		%	13.7		%	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	$	—
2015	32,843
2016	17,199
Total	$	50,042