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 or a non-accelerated filer.

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

Vitesse Semiconductor Corporation (“we,” “us,” “Vitesse,” “our” or the “Company”) is a leading supplier of high-performance integrated circuits (“ICs”) that are used primarily by manufacturers of networking systems for Carrier and Enterprise networking applications. Vitesse designs, developsWe design, develop and marketsmarket a diverse portfolio of high-performance, low-power and cost-competitive networking and connectivity IC solutions. For more than 2530 years, Vitesse haswe have been a leader in the adoption of new technologies in Carrier and Enterprise networking.

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

InThe communications industry’s defining characteristic over the past decade is the communications industry has experienced dramaticexponential growth in traffic on public and private communications networks. These networks includinginclude those used by long-distance, and local exchange service providers and wireless service providers (“Carriers”), as well as specialized networks, such as those used by Internet service and over-the-top (“OTT”) content providers. TheDriving the traffic growth in traffic has been driven byis the rapid adoption of data-intensive applications and services such as Internetweb access, web-delivered content, Internet Protocol (“IP”IP’) video conferencing and telepresence, IP Television, expansion and upgrades in wireless networks driven by the bandwidth needs of smartphones, cloudtelevision, Cloud storage, cloudCloud computing, and software-as-a-serviceSoftware-as-a-Service (“SaaS”) by Enterprises.

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

Since the 1990s, Carrier networks globally relied upon the Synchronous Optical Network (“SONET/SDH”) had beenas the standard network transport protocol for Carrier networks throughout the world. But,protocol. SONET/SDH was designed to carry only voice andtraffic over a fixed circuit traffic. Newnetwork. Today, networks communicate using the packet-based IP implementedare replacing SONET/SDH with Ethernet specifically designed to carry voice, data, and video over a virtual packet-based

network. This technology which allows them to more readily scaleefficient scaling in terms of services, bandwidth, and capability, while offeringcapabilities, at lower power consumptioncapital and acquisition and operationoperational costs.

To accelerate the deployment of packet-based IP networks,network deployment, the industry has developed standards that willto upgrade traditional Ethernet to “Carrier Ethernet.” ItEffectively, it is in effect, an adaptation of Ethernet to provide similar operational features and functions, such as reliability, manageability, network timingservice, synchronization, and scalability, which havesecurity functions traditionally been provided by telecom protocols such as SONET/SDH. As Carrier Ethernet standards evolve, networks based on Ethernet technology will gradually replace legacy telecommunications networks. TheIn addition, the migration of Enterprise services into the Cloud will drive the need for Carrier Ethernet in Access networks aimed at delivering business services.

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

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

Based on industry market projections and internal market growth estimates, we expect our new portfolio of low-power, Carrier Ethernet switch engine and physical layer (“PHY”) products, for this segment and our other products currently in development, are expected to address an IC market that is growing at an estimated annual ratewithin the IP Edge of 28%, approaching $700$612 million by 2016. In addition, we address Carrier networking2017 with our Transport processing product line consistinga five year CAGR of both mature products and our new Ethernet-optimized Optical Transport Network (“OTN”) PHYs, which add $200 million to20%.

We also serve the potential market we can serve.

In addition to our switching and PHY products developed specifically for Carrier, Enterprise, and EnterpriseIndustrial applications, we develophave developed a number of products that address high-speed signaling and connectivity issues in a broad variety of systems. As bandwidth requirements continue to accelerate, more systems require solutions for high-speed signal integrity problems within and between high-capacity computing and communications systems. Our products address a need to transport signals at ever increasing speeds across fiber, cable, and copper backplane applications. We estimate the addressable market for our devices to be on the order of $300$292 million by 2016.2017.

New products in development infor adjacent market segments make upare the majority of the remaining portion of the $2.1$2.0 billion addressable market for our IC solutions.

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

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

Our customers are savvy buyers who carefully analyze and evaluate our ability to serve them reliably with products and technology, on a continuous basis, over the long term.long-term. A key element of our strategy is to work closely with our customers'customers’ product managers and systems design teams, as well as business unitunits and corporate management teams. These key relationships enable us to acquire a detailed understanding of our customers'customers’ business and technology needs. We also discuss key trends with service providers and IT organizations around the world to spot new networking trends in their infancy. Using this knowledge, we develop solutions to address our customers'customers’ design challenges and provide them with differentiated feature sets for their systems.

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

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

Our products fall into the following product lines:

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

Carrier networks are transitioning to packet-based IP/Ethernet technologies. Our latest generation switch engines target these applications with innovative features that enable true Carrier Ethernet networking. Our switch engines are based on ViSAA, the industry’s only silicon based implementation to provide Ethernet services sold by Carriers to their Enterprise customers. These products combine the packet processing features typically seen in network processors, together with Layer 2 and Layer 3 Ethernet switch functions, our VeriTime timing and synchronization technology, and an on-board CPU into a single chip at substantially lower cost and lower power than competing discrete and integrated solutions. Additionally, theyWith the addition of our CEServices™ applications software, our solutions meet MEF CE 2.0 requirements for mobile backhaulboth Mobile Access and mobile accessCloud Access equipment, providing forward compatibility for future value-add services.and can dramatically cut our customers’ time-to-market. Our new products include two majorthird generation switch engine families, JaguarJaguar-2 and Caracal,Serval-2, created to address a broad range of applications in the accessAccess and edgeEdge of the networks. In 2012, Serval, our third family of switch engine products was added to the products portfolio. Serval is aimed specifically at applicationsnetworks, including customer premise equipment (“CPE”), access network equipment, wireless base stations including small cells, and Mobile Access equipment includingsuch as base stations, small cells, fiber and microwave wireless backhaul, equipment.and Cloud Access equipment such as EADs used for delivering business services.

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

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

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

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

We provide a broad portfolio of devices for generic signal integrity applications including the high-speed transmission of signals over backplanes and copper cables. These devices include repeater and re-timer ICs that support data rates from 155 Mbps to 1516 Gbps for protocols, including, Gigabit Ethernet, Fibre Channel, Serial Attached SCSI, and Serial Advanced Technology Attachment. Our products are deployed in a wide variety of systems in Carrier, Enterprise, data center, and HD video applications, both within systems and connecting between systems. We incorporated many industry-leading proprietary features into our EQNOX signal integrity products such as VScope™, an integrated equalization waveform viewing technology and FlexEQ™, an adaptive equalization and electronic dispersion compensation technology (“EDC”). These technologies dramatically improve signal integrity transmission and reception for applications at 6 Gbps and above.

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

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

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

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

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

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

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

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

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

Our products make use of the state-of-the-art complementary-symmetry metal-oxide-semiconductor (“CMOS”) technology and other semiconductor technologies, such as silicon-germanium (“SiGe”). As a fabless semiconductor company, wafer fabrication for our products is outsourced to third-party silicon wafer foundries, primarily Taiwan Semiconductor Manufacturing

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

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

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

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

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

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

Design Opportunity Phase

Design Win Phase

Production Phase

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

As of September 30, 2012,2013, we held 8284 United States patents, and 2019 foreign patents, and had 24as well as 22 patent applications pending in the United States. We are in the process ofStates and 28 foreign applications pending. Our intellectual property strategy involves filing additional patent applications.applications in our strategic focus markets on a regular basis. We also generally enter into confidentiality agreements with our employees, consultants and business partners, and typically control access to and distribution of our proprietary information. Despite these precautions, it is possible that competitors or other unauthorized third partiesthird-parties may obtain and copy, use or disclose our technologies and processes, develop similar technology independently, or design around our patents. As such, any rights granted under our patents may not provide us with meaningful protection. In addition, we may not be able to successfully enforce our patents against infringing products in every jurisdiction. See “Risk Factors” under Item 1A of this Report for further discussion of the risks associated with patents and intellectual property.

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

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

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

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

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

We file annual, quarterly and special reports, as well as proxy statements and other information, with the Securities Exchange Commission (“SEC”). Any document that we file with the SEC may be read or copied at the SEC'sSEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for information on the public reference room. Our SEC filings are also available at the SEC'sSEC’s website at www.sec.gov, and through our website, free of charge, at www.vitesse.com. Copies of such documents maybe requested by contacting our investor relations department at 805-388-3700 or sending an e-mail through the Investor Relations page on our website. The information on our website is not incorporated by reference into and is not made a part of this report.

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

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

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

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

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

Many of our products have very long life cycles, often exceeding ten10 years or more. These life cycles may be longer than what is typically supported by wafer and/or assembly manufacturers. Accordingly, we are sometimes subjected to end-of-life notices on certain materials and/or products provided by these manufacturers. This longer life cycle may impact our ability to continue to support certain products, forcing us to cease offering these products if we cannot obtain a replacement source of material. This longer life cycle may impact revenues and/or require us to incur additional costs to obtain alternative sources for these materials.

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

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

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

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

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

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

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

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

Our ability to accurately forecast customer demand may also be impaired by the delays inherent in our lengthy sales cycle. After we have developed and delivered a product to a customer, our customers need time to test, evaluate and adopt our products and additional time to begin production of the equipment that incorporates our products. Due to this lengthy cycle, we may experience significant delays from the time we increase our operating expenses and make investments in inventory

until the time that we generate revenues from these products. It is possible that we may never generate any revenues from these products after incurring such expenditures. Even if a customer selects our product to incorporate into their equipment or devices, we have no assurance that the customer will ultimately bring our product to market or that such effort by our customer will be successful. If we incur significant research and development expenses, marketing expenses and investments in inventory in the future that we are not able to recover, and our operating results could be adversely affected.

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

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

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

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

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

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

In addition to third-party wafer foundries, we also depend on third-party subcontractors in Asia and the United States for the assembly, wafer probe and package testing of our products. As with the wafer foundries, any difficulty in obtaining parts or

services from these subcontractors could affect our ability to meet scheduled product deliveries to customers, which could in turn have a material adverse effect on our customer relationships, revenues and operating results.

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

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

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

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

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

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

In the communications market, which includes our Carrier and Enterprise network markets, competitors include Applied Micro Circuit, Broadcom, Cortina Systems, Marvell Technology Group, and PMC-Sierra. In the signal integrity market, our competitors include Maxim Integrated Products, Mindspeed Technologies,Semtech, and PMC-Sierra.Texas Instruments. Larger competitors in our market have acquired both mature and early stage companies with advanced technologies. These acquisitions could enhance the ability of larger competitors to obtain new business that we might have otherwise won. In addition, we are aware of smaller privately privately-

held companies that focus on specific portions of our range of products. Over the next few years, we expect additional competitors, some of which may have greater financial and other resources than we have, to enter the market with new products. These companies, individually and collectively, represent future competition during the design stage and in subsequent product sales.

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

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

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

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

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

Similar legislation may be enacted in other countries or regions where we sell our products. We will need to ensure that we comply with these laws and regulations as they are enacted, and that our subcontractors also comply with these laws and

regulations. If we or our subcontractors fail to comply with the legislation, our customers may refuse or be unable to purchase our products, which could harm our business, operating results and financial condition. If we have to make significant capital expenditures to comply with environmental laws, or if we are subject to significant expenses in connection with a violation of these laws, our business, operating results and financial condition could be materially and adversely affected.

We rely on a combination of patent, copyright, trademark, and trade secret protections, as well as confidentiality agreements and other methods, to protect our proprietary technologies and processes. For example, we enter into confidentiality agreements with our employees, consultants and business partners, and control access to, and distribution of our proprietary information. As of September 30, 2012,2013, we held 8284 United States patents and 2019 foreign patents, and had 24as well as 22 patent applications pending in the United States and 28 foreign applications pending for various aspects of design and process innovations.

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

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

The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights. As is common in the industry, from time to time,time-to-time, third parties have asserted patent, copyright, trademark, and other intellectual property rights to technologies that are important to our business and have demanded that we license their patents and technology. To

date, none of these claims has resulted in the commencement of any litigation against us, norwe have wenot believed that it is necessary to license any of the rights referred to in such claims. We expect, however, that we will continue to receive such claims in the future, and any litigation to determine their validity, regardless of our merit or resolution, could be costly and divert the efforts and attention of our management and technical personnel. We also may be required to defend and indemnify customers against claims of infringement of third-party intellectual property rights, which could result in significant expense. Our recent efforts to license our intellectual property to third partiesthird-parties may also increase the potential for others to initiate claims against us. We cannot assure that we would prevail in such disputes given the complex technical issues and inherent uncertainties in intellectual property litigation. The resolution or compromise of any litigation or other legal process to enforce such alleged third partythird-party rights, including claims arising through our contractual indemnification of our customers, or claims challenging the validity of our patents, regardless of its merit or resolution, could be costly and divert the efforts and attention of our management and technical personnel. If such litigation were to result in an adverse ruling we could be required to:

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

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

As of September 30, 2012,November 7, 2013, we had outstanding $17.2 million in original principal of our senior term loans with Whitebox VSC, Ltd., of which $7.9 million (the “Term A Loan” and “Term B Loan”) bearswith certain lenders for which Whitebox VSC, Ltd. serves as agent, and $32.8 million of our 8.0% Convertible Second Lien Debentures Due 2014 (the “2014 Debentures”). Our Term A Loan and Term B Loan bear interest at a fixed rate of 10.5%9.0% per annum, payable quarterly in arrears, and hashave a maturity date of February 4,August 31, 2016, and our 2014 and $9.3 million (the “Term B Loan”) bearsDebentures bear interest at a fixed rate of 8.0% per annum, payable quarterlysemi-annually in arrears, and hashave a maturity date of October 30, 2014.

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

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

As of September 30, 2012,November 7, 2013, we had outstanding 134,720 shares of our convertible Series B Preferred Stock (convertible on a one-to-five basis), $46.5$32.8 million of 2014 Debentures and $9.3 million of Term B Loan, which indebtedness is convertible debt.into shares of our common stock at a price of $4.50 per share and $4.95 per share, respectively. Full conversion of the currently outstanding Series B Preferred Stock, the 2014 Debentures and the Term B Loan would result in the issuance of 12,892,6129,185,606 shares of common stock. The conversion of our shares of Series B Preferred Stock, 2014 Debentures and the Term B Loan could have a significant dilutive impact on the ownership rights of our stockholders.

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

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

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

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

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

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

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

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

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

None

Our headquarters andwhich includes our principal R&D and sales facilities, is located in Camarillo, California and is leased pursuant to a non-cancellable operating lease with a term that expires on January 31, 2014. The total space occupied in this building is approximately 111,000 square feet. We also lease an additional 58,00064,000 square foot facility in Camarillo (“Calle Carga”), which is leased through December 2015. We will reoccupy and build out the Calle Carga facility upon the expiration of our main Camarillo facility lease in January 2014. We also lease space in additional locations that include domestic and international offices in Austin, Milpitas, New Jersey, Massachusetts, China, Denmark, Germany, India and Taiwan. As of September 30, 2012,2013, we lease total space of approximately 280,000276,000 square feet. Our current space is sufficient to accommodate current operations.

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

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

The following performance graph compares the cumulative total stockholder return for our common stock with the NASDAQ Composite Index, the NASDAQ Stock Market-United States Index and the NASDAQ Electronics Components Index from market close on the last trading day in September 20072008 through the last trading day in September 2012.2013. The graph is based on the assumption that $100 was invested in each of our common stock, the NASDAQ Composite Index, the NASDAQ Stock Market-United States Index and the NASDAQ Electronics Components Index on the last trading day in September 2007.2008. The stock price performance on this graph is not necessarily an indicator of future price performance.

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

The table below sets forth selected consolidated financial data for the five years in the period ended September 30, 20122013 that has been derived from our audited consolidated financial statements. The information set forth below is not necessarily indicative of results of future operations and should be read in conjunction with Item 7, “Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited consolidated financial statements and notes thereto included in Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.

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

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

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

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

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

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 2530 years, we have been a leader in the adoption of new technologies in Carrier and Enterprise networking.

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, 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.

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.

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

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

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

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

The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. If we determine that a tax position will more likely than not be sustained on audit, the second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as we have to determine the probability of various possible outcomes. We re-evaluate these uncertain tax

positions on a quarterly basis. This evaluation is based on factors such as changes in facts or circumstances, changes in tax law, new audit activity, and effectively settled issues. Determining whether an uncertain tax position is effectively settled requires judgment. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision in the period in which a change in judgment occurs.

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 SME/SMB networks and cloud accessCloud Access services. The Non-core market is comprised of products that have not received additional investment over the last five fiscal years and, as a result, have generally been in decline.

The decreaseincrease in Carrier networking revenues is largely attributable to a broad-based weaknessan almost doubling in sales of our end customer marketsnew Ethernet switch products, more than tripling in sales of our new Connectivity products, and increased sales for Carrier networking, particularly a decline in our SONET/SDH framer products including framers, EoS mappers, and FTTH products.going through EOL. The declinesincreases were partially offset by increasesdeclines in transport products going through end-of-life and in our newer technologies and products, particularly in Ethernet Copper PHYs for Carrier applications.sales from other SONET/SDH products.

The decrease in Enterprise networking revenues is driven by a decrease in sales of our switch fabrics products that had gone through EOL in the prior fiscal year and declines in 1 Gigabit Ethernet switch and PHYour mature crosspoint products, selling into low-end SME/SMB applications due to overall weak market conditions, primarily in the United States and Asia. The decrease was partially offset by an increasea more than doubling in Enterprise processing due to revenues fromsales of our new switch fabrics going through end-of-life and an increase in new products.

The increasedecrease in Non-core revenues is largely attributable to an increasea decrease of our legacy Fiber Channel PHYs and network processors, and Fibre Channel PHYs as some of thesewhich had gone through EOL in the prior fiscal year.

In fiscal year 2012, a number of older products moved into end-of-life.

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

Although revenues for our new Connectivity products increased, Connectivity revenues is largely attributableoverall decreased due to the broad-based decline in the networking equipment market, which negatively impacted the demand for our more mature SONET/SDH PHY-based products. In addition, there was a strong decline in our legacy non-core products, particularly SONET/SDH-basedFibre Channel PHYs products.

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

Intellectual property revenue includes licenses, royalties, and patents, and for the sale of patents. For the fiscal year ended September 30, 2012, intellectual property revenue also included the settlement of all future royalties under an existing agreement. CostsIntellectual property revenues decreased in fiscal year 2013 as compared to the prior fiscal year due to a decrease in deliverables of intellectual property. The timing and amounts of intellectual property revenues fluctuate. Expenses associated with intellectual property revenue are included in selling, general and administrative (“SG&A”) expenses.

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

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