UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________________________

Form 10-Q



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

For the quarterly period ended March 31, ~~2012~~2013



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

For the transition period from to

Commission file number 1-31614

______________________________________

VITESSE SEMICONDUCTOR CORPORATION

(Exact name of registrant as specified in its charter)



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

741 Calle Plano

Camarillo, California 93012

(Address of principal executive offices)(zip code)

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

______________________________________

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

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

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



Large accelerated filer o	Accelerated filer x

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

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

As of May ~~4, 2012,~~2, 2013, there were ~~25,292,377~~outstanding 37,658,091 shares of the registrant’s Common Stock, $0.01 par ~~value common stock outstanding.~~value.

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VITESSE SEMICONDUCTOR CORPORATION

UNAUDITED QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE AND SIX MONTHS ENDED MARCH 31, ~~2012~~2013

TABLE OF CONTENTS



PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	3
	Unaudited Consolidated Balance Sheets as of March 31, ~~2012~~2013 and September 30, ~~2011~~2012	3
	Unaudited Consolidated Statements of Operations for the Three and Six Months Ended March 31, ~~2012~~2013 and ~~2011~~2012	4
	Unaudited Consolidated Statements of ~~Stockholders'~~Stockholders’ Deficit for the Six Months Ended March 31, ~~2012~~2013	5
	Unaudited Consolidated Statements of Cash Flows for the Six Months Ended March 31, ~~2012~~2013 and ~~2011~~2012	6
	Notes to Unaudited Consolidated Financial Statements	7
Item 2.	~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations	1822
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3134
Item 4.	Controls and Procedures	3134

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	3235
Item 1A.	Risk Factors	3235
Item 6.	Exhibits	3235

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PART I. FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

VITESSE SEMICONDUCTOR CORPORATION

UNAUDITED CONSOLIDATED BALANCE SHEETS


	March 31, 2012			September 30, 2011			March 31, 2013			September 30, 2012
	(in thousands)						(in thousands, except par value)
ASSETS
Current assets:
Cash	$	19,212		$	17,318		$	36,914		$	23,891
Accounts receivable, net	10,333			9,591			8,429			9,403
Inventory	16,898			20,857
Restricted cash	391			404
Inventory, net							12,566			12,060
Prepaid expenses and other current assets	2,133			2,039			2,964			2,125
Total current assets	48,967			50,209			60,873			47,479
Property, plant and equipment, net	4,890			5,934			3,126			3,832
Other intangible assets, net	1,621			1,781			1,087			1,175
Other assets	2,859			3,070			3,766			4,130
	$	58,337		$	60,994		$	68,852		$	56,616

LIABILITIES AND STOCKHOLDERS' DEFICIT
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	5,958		$	5,198		$	6,540		$	5,726
Accrued expenses and other current liabilities	13,521			14,463			12,445			12,188
Current portion of debt, net							8,006			—
Deferred revenue	3,197			3,878			2,005			871
Current portion of capital leases	11			11
Total current liabilities	22,687			23,550			28,996			18,785
Other long-term liabilities	1,660			1,927			442			574
Long-term debt, net	15,637			15,444			8,083			15,852
Compound embedded derivative	9,778			7,796			—			2,899
Convertible subordinated debt, net of discount	41,616			40,736
Convertible subordinated debt, net							43,440			42,521
Total liabilities	91,378			89,453			80,961			80,631
Commitments and contingencies, See note 10
Stockholders' deficit:
Preferred stock, $0.01 par value. 10,000,000 shares authorized; Series B Non Cumulative, Convertible, 134,720 shares outstanding at March 31, 2012 and September 30, 2011	1			1
Common stock, $0.01 par value. 250,000,000 shares authorized; 25,291,058 and 24,470,280 shares outstanding at March 31, 2012 and September 30, 2011, respectively	253			245
Stockholders’ deficit:
Preferred stock, $0.01 par value: 10,000 shares authorized; Series B Non Cumulative, Convertible, 135 shares outstanding at March 31, 2013 and September 30, 2012, respectively							1			1
Common stock, $0.01 par value: 250,000 shares authorized; 37,455 and 25,812 shares outstanding at March 31, 2013 and September 30, 2012, respectively							375			258
Additional paid-in-capital	1,826,884			1,824,433			1,851,644			1,829,976
Accumulated deficit	(1,860,179		)	(1,853,138		)	(1,864,129		)	(1,854,250		)
Total stockholders' deficit	(33,041		)	(28,459		)
Total stockholders’ deficit							(12,109		)	(24,015		)
	$	58,337		$	60,994		$	68,852		$	56,616

See accompanying notes to unaudited consolidated financial statements.

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VITESSE SEMICONDUCTOR CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS


	Three Months Ended March 31,						Six Months Ended March 31,						Three Months Ended March 31,						Six Months Ended March 31,
	2012			2011			2012			2011			2013			2012			2013			2012
	(in thousands, except per share data)												(in thousands, except per share data)
Net revenues:
Product revenues	$	27,195		$	34,403		$	56,137		$	71,999		$	24,689		$	27,195		$	48,594		$	56,137
Intellectual property revenues	2,542			2,489			3,591			2,640			64			2,542			1,886			3,591
Net revenues	29,737			36,892			59,728			74,639			24,753			29,737			50,480			59,728
Costs and expenses:
Cost of product revenues	10,595			12,995			22,758			27,343			11,369			10,595			22,344			22,758
Engineering, research and development	9,580			14,898			22,005			29,080			9,777			9,580			20,281			22,005
Selling, general and administrative	8,379			9,978			15,803			20,436			7,390			8,383			15,360			15,835
Restructuring and impairment charges	4			78			32			342
Amortization of intangible assets	79			61			146			226			89			79			186			146
Costs and expenses	28,637			38,010			60,744			77,427			28,625			28,637			58,171			60,744
Income (loss) from operations	1,100			(1,118		)	(1,016		)	(2,788		)
(Loss) income from operations													(3,872		)	1,100			(7,691		)	(1,016		)
Other expense (income):
Interest expense, net	1,924			2,039			3,873			4,558			1,966			1,924			3,936			3,873
Loss on compound embedded derivative	5,280			1,976			1,982			5,460
Loss on extinguishment of debt	—			3,874			—			3,874
(Gain) loss on compound embedded derivative													—			5,280			(803		)	1,982
Other expense (income), net	29			(41		)	41			(56		)	5			29			(26		)	41
Other expense, net	7,233			7,848			5,896			13,836			1,971			7,233			3,107			5,896
Loss before income tax expense	(6,133		)	(8,966		)	(6,912		)	(16,624		)
Income tax expense	63			75			129			149
Loss before income tax (benefit) expense													(5,843		)	(6,133		)	(10,798		)	(6,912		)
Income tax (benefit) expense													(996		)	63			(919		)	129
Net loss	$	(6,196	)	$	(9,041	)	$	(7,041	)	$	(16,773	)	$	(4,847	)	$	(6,196	)	$	(9,879	)	$	(7,041	)

Net loss per common share - basic and diluted	$	(0.25	)	$	(0.37	)	$	(0.28	)	$	(0.69	)	$	(0.13	)	$	(0.25	)	$	(0.30	)	$	(0.28	)

Weighted average common shares outstanding - basic and diluted	25,043			24,303			24,776			24,175			37,215			25,043			32,587			24,776

See accompanying notes to unaudited consolidated financial statements.

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VITESSE SEMICONDUCTOR CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

Preferred Stock Common Stock
Additional
Paid-in-Capital
Accumulated Deficit
Total
Stockholders' Deficit
(in thousands, except share data) Shares Amount Shares Amount
Balance at September 30, 2011 134,720
$ 1
24,470,280
$ 245
$ 1,824,433
$ (1,853,138 ) $ (28,459 )
Net loss —
—
—
—
—
(7,041 ) (7,041 )
Compensation expense related to stock options, awards and ESPP —
—
—
—
2,209
—
2,209
Issuance of common stock upon exercise of stock options —
—
2,922
—
8
—
8
Issuance of shares under ESPP —
—
334,646
3
865
—
868
Release of restricted stock units —
—
685,479
7
(7 ) —
—
Repurchase and retirement of restricted stock units for payroll taxes —
—
(202,269 ) (2 ) (624 ) —
(626 )
Balance at March 31, 2012 134,720
$ 1
25,291,058
$ 253
$ 1,826,884
$ (1,860,179 ) $ (33,041 )



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

See accompanying notes to unaudited consolidated financial statements.

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VITESSE SEMICONDUCTOR CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Six Months Ended March 31,						Six Months Ended March 31,
	2012			2011			2013			2012
	(in thousands)						(in thousands)
Cash flows provided by (used in) operating activities:
Cash flows (used in) provided by operating activities:
Net loss	$	(7,041	)	$	(16,773	)	$	(9,879	)	$	(7,041	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization	1,492			1,856			1,327			1,492
Stock-based compensation	2,209			1,608			2,149			2,209
Change in fair value of compound embedded derivative liability	1,982			5,460			(803		)	1,982
Loss (gain) on disposal of assets	659			(42		)
Loss on extinguishment of debt, net	—			3,874
Interest paid in kind	—			415
Common stock issued for employee stock plans							863			868
Gain on disposal of assets							(153		)	659
Amortization of debt issuance costs	136			210			135			136
Amortization of debt discounts	1,156			917			1,247			1,156
Accretion of debt premiums	(77		)	(30		)	(83		)	(77		)
Change in operating assets and liabilities:
Accounts receivable	(742		)	393			974			(742		)
Inventory	3,959			1,366			(506		)	3,959
Prepaids and other assets	3			1,063			(610		)	3
Accounts payable	760			(2,124		)	814			760
Accrued expenses and other liabilities	(351		)	(3,342		)	153			(1,219		)
Deferred revenue	(681		)	(3,559		)	1,134			(681		)
Net cash provided by (used in) operating activities	3,464			(8,708		)
Net cash (used in) provided by operating activities							(3,238		)	3,464

Cash flows used in investing activities:
Capital expenditures	(258		)	(1,674		)	(470		)	(258		)
Payments under licensed intangibles	(688		)	(814		)
Proceeds from the sale of capital assets							156			—
Payments under licensing agreements							(98		)	(688		)
Net cash used in investing activities	(946		)	(2,488		)	(412		)	(946		)

Cash flows used in financing activities:
Cash flows provided by (used in) financing activities:
Proceeds from the exercise of stock options	8			—			—			8
Payment of senior debt	—			(8,000		)
Debt issuance costs	—			(60		)
Prepayment fee on senior debt	—			(80		)
Repurchase and retirement of restricted stock units for payroll taxes	(626		)	(554		)
Capital lease obligations	(6		)	(4		)
Net cash used in financing activities	(624		)	(8,698		)
Net proceeds from the sale of common stock							17,055			—
Repurchase of restricted stock units for payroll taxes							(378		)	(626		)
Other							(4		)	(6		)
Net cash provided by (used in) financing activities							16,673			(624		)

Net increase (decrease) in cash	1,894			(19,894		)
Net increase in cash							13,023			1,894
Cash at beginning of period	17,318			38,127			23,891			17,318
Cash at end of period	$	19,212		$	18,233		$	36,914		$	19,212

Supplemental disclosure of non cash transactions:
Cash paid during the year for:
Supplemental cash flow information:
Cash paid during the period for:
Interest	$	2,660		$	3,056		$	2,664		$	2,660
Income taxes	264			336			76			264
Non cash investing and financing activities:
Common stock issued under ESPP	868			—
Common stock issued in exchange for Series B Preferred Stock	—			3
Residual value allocated to the equity conversion feature	—			2,490
Premium related to Term B Loan issued in debt exchange	—			2,572
Non-cash financing activities:
Reclassification of compound embedded derivative liability to additional paid-in-capital							$	2,096		—

See accompanying notes to unaudited consolidated financial statements.

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

~~For the three and six months ended~~ March 31, ~~2012~~2013

NOTE ~~1—THE~~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 ~~utilized~~used primarily by manufacturers of networking systems for Carrier and Enterprise networking applications. Vitesse designs, develops and markets a diverse portfolio of high-performance, low-power and cost-competitive semiconductor products for these applications.

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

Fiscal Year

Our fiscal year is October 1 through September 30.

Basis of Presentation

The interim unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Securities and Exchange Commission (“SEC”) Form 10-Q and Article 10 of SEC Regulation S-X. They do not include all of the information and footnotes required by GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended September 30, ~~2011~~2012, included in our Annual Report on Form 10-K filed with the SEC on December ~~6, 2011.~~4, 2012, as amended by Amendment No. 1 to Annual Report on Form 10-K/A filed with the SEC on April 16, 2013.

The consolidated financial statements included herein are ~~unaudited; however,~~unaudited. However, they contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly our consolidated financial position, at ~~March 31, 2012~~ ~~and~~ ~~September 30, 2011~~, the consolidated results of our operations ~~for the~~ ~~three~~ and ~~six~~ ~~months ended~~ ~~March 31, 2012~~ ~~and 2011,~~ the consolidated cash flows ~~for the~~ ~~six~~ ~~months ended~~ ~~March 31, 2012~~ ~~and 2011,~~ and the changes in our stockholders’ ~~deficit for the~~ ~~six~~ ~~months ended~~ ~~March 31, 2012~~.deficit. The results of operations for the three and six months ended March 31, ~~2012~~2013 are not necessarily indicative of the results to be expected for future quarters or the full year.

~~Reclassifications~~Foreign Currency Translation

~~Certain reclassifications have been made to prior year amounts~~The functional currency of our foreign subsidiaries is the United States dollar; however, our foreign subsidiaries transact in local currencies. Consequently, assets and ~~related footnotes to conform to current-year presentation with no changes to stockholders’ deficit amounts for~~liabilities are translated into United States dollars at the ~~six~~ ~~months ended~~ ~~March 31, 2011~~ ~~or net loss for~~exchange rate on the ~~three~~balance sheet date. Revenues and ~~six~~ ~~months ended~~ ~~March 31, 2011~~.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, ~~derivative valuation,~~ purchased intangible asset valuations and useful lives, and deferred income tax asset valuation allowances. These estimates and assumptions are based on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The actual results we experience may differ materially and adversely from our original estimates. To the extent there are material differences between the estimates and the actual results, our future results of operations will be affected.

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Revenue Recognition

Product ~~revenues~~Revenues

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

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~~revenues from sales made through these distributors is not recognized until the distributors ship the product to their customers. We also maintain inventory, or hub arrangements with certain customers. Pursuant to these arrangements, we deliver products to a customer or a designated third-party warehouse based upon the customer’s projected needs, but do not recognize revenue unless and until the customer reports that it has removed our product from the warehouse and taken title and risk of loss.

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

Intellectual ~~property revenues~~Property Revenues

We derive intellectual property ~~(“IP”)~~ revenues from the ~~license~~sale and licensing of our ~~IP,~~intellectual property, maintenance and support and royalty revenue following the sale by our licensees of products incorporating the licensed technology. We enter into IPintellectual property licensing agreements that generally provide licensees the right to incorporate our IPintellectual property components in their products with terms and conditions that vary by licensee. Our IPintellectual property licensing agreements may include multiple elements with an IPintellectual property license bundled with support services. For such multiple element IPintellectual property licensing arrangements, we follow the guidance in ASC Topic ~~605-025 ,~~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 ~~IP.~~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 ~~when and if,~~ bug fixes and technical support. No other upgrades, products, or post-contract support are provided. These arrangements may be renewable annually by the customer. Support revenue is recognized ratably over the period during which the obligation exists, typically 12 months or less.

We recognize royalty revenue in the period in which the licensee reports shipment of products incorporating our IPintellectual 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.

~~Table of Contents~~

~~Multiple element transactions~~

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

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

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

~~Fair Value~~Shipping and Handling Fees and Costs

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

Research and Development Costs

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

Marketing Costs

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

takes place.

Stock Based Compensation

ASC Topic ~~820,~~718, ~~Fair Value Measurements~~Compensation-Stock Compensation, ~~, establishes~~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 ~~framework for measuring fair value and requires disclosures about fair value measurement. ASC 820 emphasizes that a fair value measurement should be determined~~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 ~~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)~~underlying stock at the ~~reporting entity’s own assumptions about market participant assumptions developed~~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 ~~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~~views of the ~~assets or liabilities~~SEC. We are further required to ~~develop its own assumptions about how market participants would price these assets or liabilities. We only have one Level 3 recurring fair value measurement, the compound embedded derivative.~~

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

~~Financial Instruments~~

~~ASC Topic 825,~~ ~~Financial Instruments, defines~~estimate the fair value of ~~a financial instrument~~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 amount at which the instrument could be exchanged in a current transaction between willing parties. Our financial instruments include cash, accounts receivable, accounts payable, and accrued expenses. These financial instruments are stated at their carrying values, which are estimates of their fair values because of their nearness to cash settlement or the comparability of their terms to the terms we could obtain, for similar instruments, in the current market. Our debt instruments are included in long-term debt, net, and convertible subordinated debt, net of discount on our unaudited consolidated balance sheets and are presented as described below:

~~Senior Term A Loan~~

~~At its inception,~~requisite service periods. We estimate 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 marketeach award as of the ~~valuation date.~~date of grant using the Black-Scholes option pricing model, which was developed for use in estimating the value of traded options that have no vesting restrictions and that are freely transferable. The Black-Scholes model considers, among other factors, the expected life of the award and the expected volatility of our stock price. Although the Black-Scholes model meets the accounting guidance requirements, the fair values generated by the model may not be indicative of the actual fair values of our awards, as it does not consider other factors important to those stock-based payment awards, such as continued employment, periodic vesting requirements, and limited transferability.

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

Other Income, Net

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

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~~Senior~~Income Taxes

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

Net Loss per Share

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

Risks and Uncertainties

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

Our short-term debt is comprised of our Term A loan (“Term A Loan”), of which the total principal amount of $7.9 million is due in February 2014. Our long term debt is comprised of our Term B ~~Loan~~

~~At its inception,~~loan (“Term B Loan”) and our convertible subordinated debentures due October 2014 (“2014 Debentures”), of which the ~~fair value~~total principal amount of $55.8 million is due in October 2014. We currently anticipate that cash on hand and cash provided by operating activities will permit us to pay the amount due in February 2014 and a portion of the amount due in October 2014. To meet the remaining debt obligation due in October 2014, we have been exploring strategic alternatives to repaying this debt, and have engaged the services of financial advisory firms to assist us in evaluating possible strategic and financing transactions. These transactions include, among others that we may consider from time to time, an extension of the maturity date and other modification of our Term A and B ~~Loan~~Loans, the refinancing of indebtedness from the proceeds of one or more new credit facilities, and the repayment of indebtedness from sales of assets and financing transactions. We will pursue these and other potential transactions until we provide for the repayment, refinancing and/or restructuring of our indebtedness. There can be no assurance, however, that our efforts will be successful.

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

At March 31, 2013, there were three direct customers and two distributors that accounted for 33% and 49% of accounts receivable, respectively. At September 30, 2012, there was ~~computed~~one distributor that accounted for 14% of accounts receivable. We believe that this concentration and the concentration of credit risk resulting from trade receivables owing from high-technology industry customers is substantially mitigated by our credit evaluation process, relatively short collection periods and maintaining an allowance for anticipated losses. We generally do not require collateral security for outstanding amounts.

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We currently purchase wafers from a limited number of vendors. Additionally, since we do not maintain manufacturing facilities, we depend upon close relationships with contract manufacturers to assemble our products. We believe there are other vendors who can provide the same quality wafers at competitive prices and other contract manufacturers that can provide comparable services at competitive prices. We anticipate the continued use of a limited number of vendors and contract manufacturers in the near future. We are also dependent upon third parties for our probe testing. Under our fabless business model, our long-term revenue growth is dependent on our ability to obtain sufficient external manufacturing capacity, including wafer production capacity. We believe that in addition to the vendors currently utilized by us, other vendors would be able to provide these services.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are recorded at the invoice amount and presented net of the allowance for doubtful accounts; they do not bear interest. We evaluate the collectability of accounts receivable at each balance sheet date using a ~~binomial lattice model. The valuation~~combination of factors, such as historical experience, credit quality, age of the accounts receivable balances, and economic conditions that may affect a customer’s ability to pay. We include any accounts receivable balances that are determined to be uncollectible in the overall allowance for doubtful accounts using the specific identification method. Should all attempts to collect a receivable fail, the receivable is written off against the allowance. Our allowance for doubtful accounts waszero and $0.3 million as of March 31, 2013 and September 30, 2012, respectively.

Inventory

Inventories are stated at lower of cost or market and consist of materials, labor and overhead. Inventory costs are determined using ~~Level 3 inputs. The valuation model combined expected cash outflows with market-based assumptions regarding risk-adjusted yields, stock price volatility, recent price quotes~~standard costs which approximate actual costs under the first-in, first-out method. Costs include the costs of purchased finished products, sorted wafers, and ~~trading information~~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 ~~common stock into which~~projections, a write-down of inventory may be required, and would be reflected in cost of goods sold in the ~~Term B Loan~~period the revision is ~~convertible.~~made.

~~Convertible subordinated debt~~Property, Plant and Equipment

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

leasehold improvements.

We ~~estimate~~evaluate the ~~fair values~~recoverability of ~~the convertible subordinated debt~~property, plant and compound embedded derivative (“2014 Debentures”) using a convertible bond valuation model within a lattice framework determined using Level 3 inputs. The valuation model combines expected cash outflows with market-based assumptions regarding risk-adjusted yields, stock price volatility, recent price quotes, and trading information of our common stock into which the 2014 Debentures are convertible. As the conversion price is not being indexed to our common stock, the compound embedded derivative is bifurcated and presented on the balance sheet at fair value and the compound embedded derivative is marked to market. The change in the fair value of the compound embedded derivative is a non-cash item primarily related to the change in price of the underlying common stock and is reflected in earnings. At our option, we can settle the compound embedded derivative in either cash or common stock. As we intend to, and have the ability to, satisfy the obligations with equity securities,equipment in accordance with ASC Topic ~~470,~~360, ~~Debt, we have classified~~Accounting for the ~~liability as a long-term liability on our consolidated balance sheets as of~~ ~~March 31, 2012~~Property, Plant, and ~~September 30, 2011~~Equipment.

~~The valuation methodologies we use as described above may produce a~~ 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 ~~value calculation~~values. If facts and circumstances indicate that ~~may~~the carrying amount of property, plant and equipment might not be ~~indicative~~fully recoverable, projected undiscounted net cash flows associated with the related asset or group of ~~net realizable~~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 ~~or reflective~~ of ~~future~~the assets, the assets are written down to their estimated fair values. ~~Furthermore, although we believe our valuation methods~~All long-lived assets to be disposed of 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 measurementreported at the ~~reporting date.~~lower of carrying amount or fair market value, less expected selling costs.

Intangible ~~and Long-Lived~~ Assets

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

~~Allowance for Doubtful Accounts~~

We evaluate the collectability of accounts receivable at each balance sheet date using a combination of factors, such as historical experience, credit quality, age of the accounts receivable balances, and economic conditions that may affect a customer’s ability to pay. We include any accounts receivable balances that are determined to be uncollectible in the overall allowance for doubtful accounts using the specific identification method. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Our allowance for doubtful accounts is ~~$2.0 million~~ ~~and~~ ~~$2.2 million~~ ~~as of~~ ~~March 31, 2012~~ ~~and~~ ~~September 30, 2011, respectively.~~

~~Recent Accounting Pronouncements~~

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

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Fair Value

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

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

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

Level 3: Unobservable inputs for which there is little or no market data and which requires the owner of the assets or liabilities to develop its own assumptions about how market participants would price these assets or liabilities. As of March 31, 2013, we did not have any Level 3 recurring fair value measurements.

Financial Instruments

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

Senior Term A Loan

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

Senior Term B Loan

At its inception, the fair value of the Term B Loan was computed using a binomial lattice model. The valuation was determined using Level 3 inputs. The valuation model combined expected cash outflows with market-based assumptions regarding risk-adjusted yields, stock price volatility, recent price quotes and trading information of our common stock into which the Term B Loan is convertible.

Convertible Subordinated Debt

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

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At its inception, the approximate fair value of the compound embedded derivative included in our 2014 Debentures was computed as the difference between the estimated value of the 2014 Debentures with and without the compound embedded derivative features. The fair value of the 2014 Debentures was estimated using a convertible bond valuation model within a lattice framework. These valuations were determined using Level 3 inputs. The valuation model combines expected cash outflows with market-based assumptions regarding risk-adjusted yields, stock price volatility, recent price quotes, and trading information of our common stock into which the 2014 Debentures are convertible. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement.

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

The valuation methodologies we use as described above require considerable judgment and may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although we believe our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

Warranty

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

been material.

Contingencies

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

Recent Accounting Pronouncements

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

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NOTE ~~2—COMPUTATION~~2-COMPUTATION OF NET LOSS PER SHARE

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

For periods in which we report net income, the weighted average number of shares used to calculate diluted income per share is inclusive of common stock equivalents from unexercised stock options, restricted stock units, ~~and~~ shares to be issued under our Employee Stock Purchase Plan (“ESPP”), ~~warrants,~~ convertible preferred stock, 2014 Debentures and ~~convertible debentures.~~the Term B Loan. Unexercised stock options, restricted stock units, ~~ESPP~~and unvested shares ~~and warrants~~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. ~~The dilutive effect~~

Under the two-class method of ~~the convertible preferred stock and convertible notes is determined using the if-converted method, which assumes any proceeds that could be obtained upon the exercise~~determining earnings for each class of stock, ~~options, warrants~~we consider the dividend rights and ~~ESPP~~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 ~~used to purchase~~distributed on an as-converted basis.

The following potentially dilutive common shares ~~at the average market price for the period.~~

~~The potential common shares~~are excluded from the ~~diluted~~ computation ~~are as follows:~~of net loss per share.


	Three and Six Months Ended March 31,		Three and Six Months Ended March 31,
	2012	2011	2013	2012
	(in thousands)		(in thousands)
Outstanding stock options	1,847	1,906	2,130	1,847
Outstanding restricted stock units	1,743	1,456	2,388	1,743
Outstanding warrants	—	8
ESPP shares			518	327
Convertible preferred stock	674	674	674	674
2014 Convertible debentures	10,332	10,332
Term B Loan convertible note	1,887	1,887
ESPP shares	327	—
2014 Debentures			10,332	10,332
Term B Loan			1,887	1,887
Total potential common stock excluded from calculation	16,810	16,263	17,929	16,810

NOTE ~~3—INVENTORY~~

~~The following table provides details of inventory as of~~ ~~March 31, 2012~~ ~~and~~ ~~September 30, 2011~~:3-INVENTORY


	March 31, 2012		September 30, 2011		March 31, 2013		September 30, 2012
	(in thousands)				(in thousands)
Inventory:
Raw materials	$	1,387	$	883	$	1,268	$	1,394
Work-in-process	8,016		9,247		4,326		5,359
Finished goods	7,495		10,727		6,972		5,307
Total	$	16,898	$	20,857	$	12,566	$	12,060

NOTE ~~4—DEBT~~4-DEBT

March 31,
2012 September 30,
2011
(in thousands)
Term A Loan, 10.5% fixed-rate notes, due February 2014 $ 8,170
$ 8,247
Term B Loan-convertible, 8.0% fixed-rate notes, due October 2014 7,453
7,177
Capital leases, non-current portion 14
20
Total long-term debt, net 15,637
15,444
2014 Convertible subordinated debentures, 8.0% fixed-rate notes, due October 2014 41,616
40,736
Total debt, net $ 57,253
$ 56,180



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

~~The Term A Loan has a remaining principal balance of~~ ~~$7.9 million~~ ~~and is carried on the balance sheet at~~ ~~$8.2 million, including remaining unaccreted premium, and matures on February 4, 2014. The Term A Loan bears interest at a fixed rate of~~ ~~10.5%~~ ~~per annum, payable quarterly in arrears. Considering the debt premium, the effective interest rate on the Term A Loan is~~ ~~8.2%~~.

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~~The Term B Loan has a principal balance of~~ ~~$9.3 million~~ ~~and~~Additional information about our debt is ~~carried on the balance sheet at~~ as follows:



	Term A Loan			Term B Loan			2014 Debentures
	(in thousands)
Principal	$	7,857		$	9,342		$	46,493
Unaccreted debt premium/(unamortized) debt discount	149			(1,259		)	(3,053		)
Carrying value	$	8,006		$	8,083		$	43,440

Interest payable terms	Quarterly, in arrears			Quarterly, in arrears			Semi-annually, in arrears
Annual effective interest rate	8.2		%	17.7		%	12.2		%
Conversion rate per common share	n/a			$	4.95		$	4.50

~~$7.5 million, net of remaining unamortized discount, and matures on October 30, 2014 unless converted earlier. The Term B Loan bears interest at a fixed rate of~~ ~~8.0%~~ ~~per annum payable quarterly in arrears.~~ Prepayments on the Term B Loan are permitted at 100% of the principal amount plus accrued interest ~~but only~~ if the closing price of our common stock has been at least 130% of the conversion price in effect for at least 20 trading days during the 30 consecutive trading day period ending on the day prior to the date of notice of prepayment. The ~~Term B Loan is convertible into our common stock at a conversion price of~~ ~~$4.95~~ ~~per share (equivalent to approximately~~ ~~202~~ ~~shares per~~ ~~$1,000~~ ~~principal amount). The~~ conversion terms are substantially similar to the conversion terms of the 2014 ~~Debentures, except that there is no provision for the potential payment of a make-whole interest amount upon conversion.~~Debentures. At March 31, ~~2012~~2013, conversion of the outstanding principal amount of the Term B Loan would result in the issuance of ~~1,887,234~~1.9 million shares of common stock. We can elect to settle any conversion in stock, cash or a combination of stock and cash. ~~Considering the debt discount, the effective interest rate on the Term B Loan is~~ ~~17.7%~~.

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

~~The 2014 Debentures have a principal balance of~~ ~~$46.5 million~~ ~~and are carried on the balance sheet at~~ ~~$41.6 million~~ net of the remaining unamortized discount, which is being amortized as interest expense over the remaining life of the debenture, and matures on October 30, 2014, unless converted earlier. The 2014 Debentures bear interest at ~~8.0%~~ ~~per annum payable semi-annually in arrears.~~ Prepayment of the 2014 Debentures is permitted at 100% of the principal amount plus accrued and unpaid interest ~~but only~~ if the closing price of our common stock has been at least 130% of the conversion price in effect for at least 20 trading days during the 30 consecutive trading day period ending on the day prior to the date of notice of prepayment. ~~The 2014 Debentures are convertible into our common stock at a conversion price of~~ ~~$4.50~~ ~~per share (equivalent to approximately~~ ~~222~~ ~~shares per~~ ~~$1,000~~ principal amount). We can elect to settle any conversion in stock, cash or a combination of stock and cash. If a 2014 Debenture is converted into common stock on or prior to October 30, 2012, we must pay a “make-whole amount” equal to the 2014 Debenture’s scheduled remaining interest payments through October 30, 2012, which we may elect to pay in cash or in shares of common stock valued at ~~95%~~ ~~of the average daily volume weighted average price per share over a~~ 10 ~~day trading period. The 2014 Debentures are collateralized by a second priority interest in substantially all of our assets.~~ At March 31, ~~2012~~2013, conversion of the outstanding principal amount of the 2014 Debentures would result in the issuance of ~~10,331,778~~ ~~shares of common stock and~~ ~~$2.2 million~~ ~~in make-whole amount that may be paid in cash or by delivery of~~ ~~0.6~~10.3 million shares of common stock. ~~Considering~~

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 ~~debt discount,~~conversion option and a make-whole payment for foregone interest if the ~~effective~~holder converted the debenture early. Upon expiration off the make-whole payment for forgone interest, ~~rate~~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 is ~~12.24%~~.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 ~~Debenture agreements~~Debentures provide for customary restrictions and limitations on our ability to incur indebtedness and liens on property, make restricted payments or investments, enter into mergers or consolidations, conduct asset sales, pay dividends or distributions and enter into specified transactions and activities, and also contain other customary default provisions. The agreements provide that we must repurchase, at the option of the holders, principal amounts plus accrued and unpaid interest upon the occurrence of a fundamental change involving us, as described in the agreements. Upon the occurrence of a fundamental change involving us, the holders of the 2014 Debentures and the Term B Loan may be entitled to receive a “make-whole premium” if they convert their 2014 Debentures or Term B Loan into common stock, payable in additional shares of common stock, if the trading price of our common stock is between $3.20 and $16 per share. Upon the occurrence of certain change in control events, the holders of the Term A and B Loans may require us to redeem all or a portion of the loans at 100% of the principal amount plus accrued and unpaid interest.

Debt Maturities

Maturity of our total aggregated outstanding debt is as follows:



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

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Except for required repurchases upon a change in control or in the event of certain asset sales, as described in the applicable credit agreements, we are not required to make any sinking fund or redemption payments with respect to this debt. ~~During the quarter ended March 31, 2012, a mandatory repayment of principal of~~ ~~$1.7 million~~ ~~following the sale of certain assets was waived by the lender.~~

~~Maturities of outstanding debt by fiscal years ending September 30 are~~ ~~$7.9 million~~ ~~and~~ ~~$55.8 million~~ ~~for 2014 and 2015, respectively.~~

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NOTE ~~5—FAIR~~5-FAIR VALUE MEASUREMENTS AND DERIVATIVE LIABILITY

~~Assets and liabilities measured at fair value on our balance sheet on a recurring basis include the following at~~ ~~March 31, 2012~~ ~~and~~ ~~September 30, 2011~~:

March 31, 2012 September 30, 2011
Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
(in thousands)
Compound embedded derivative liability $ —
$ —
$ 9,778
$ 9,778
$ —
$ —
$ 7,796
$ 7,796
$ —
$ —
$ 9,778
$ 9,778
$ —
$ —
$ 7,796
$ 7,796

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

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):

2012 2011
(in thousands)
Beginning balance at September 30, $ 7,796
$ 15,476
Transfers in and /or out of Level 3 —
—
Purchases, sales, issuances, and settlements —
—
Total net losses included in earnings 1,982
5,460
Ending balance as of March 31, $ 9,778
$ 20,936



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

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

The compound embedded derivative liability, which iswas included in ~~long term~~long-term liabilities, ~~represents~~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.

~~As of~~ ~~March 31, 2012~~,We measure the fair value of ~~the~~our Term A and B Loans is ~~$8.5 million~~and ~~$9.5 million, respectively.~~2014 Debentures (“long-term debt”) carried at amortized/accreted cost quarterly for disclosure purposes.

AsWe use a binomial-lattice model to estimate fair values of our Term B Loan and 2014 Debenture financial instruments. The key unobservable input utilized in the model includes a discount rate of ~~March 31, 2012~~8~~, the~~.% The estimated fair value of Term A Loan is determined using Level 3 inputs based primarily on the ~~2014 Debentures is~~ ~~$45.3 million~~ ~~excluding~~comparability of its terms to the terms we could obtain, for similar instruments, in the current market.

The estimated fair ~~value~~values of ~~the compound embedded derivative of~~ ~~$9.8 million~~.our financial instruments are as follows:



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

NOTE ~~6—STOCK BASED COMPENSATION~~6-STOCKHOLDERS’ EQUITY

Authorized Capital Stock

~~Under all stock option plans, a total of~~We are authorized to issue up to ~~4.1~~250 million shares of common stock, ~~have been~~par value $0.01, per share, of which 19.5 million shares are reserved for future potential issuance upon conversion of debt, 9.5 million shares are reserved for issuance ~~and~~under our stock compensation plans, ~~0.6~~1.2 million shares are reserved for issuance under our ESPP, and 0.8 million shares are reserved for issuance upon conversion of Series B Preferred Stock.

We are authorized to issue up to 10 million shares of preferred stock, par value of $0.01 per share, of which 0.8 million shares have been designated as Series B Preferred Stock. As of March 31, 2013, there were 134,720 shares of Series B Preferred Stock outstanding that were convertible into common stock on a five-to-one basis, for an aggregate of 673,600 shares of common stock. The holders of Series B Preferred Stock are entitled to receive, when, as and if declared by our board of directors out of funds legally available for the payment of dividends in respect of our common stock, dividends in an amount equal to 10 percent of par value per share plus the amount of dividends that would have been payable with respect to the shares of common stock issuable upon conversion had such shares of Series B Preferred Stock been fully converted.

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

NOTE 7-STOCK BASED COMPENSATION

Stock Options

We have in effect one stock-based plan under which non-qualified stock options and restricted stock units have been granted to employees and non-employee directors. The options generally vest over four years and expire 10 years from the date of grant.

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

Under the stock option plans, we have 4.3 million shares available for future grant as of March 31, ~~2012~~2013. The ~~2010~~2013 Incentive Plan (the “Plan”) permits the grant of stock options, stock appreciation rights, stock awards, performance awards, restricted stock and stock units, and other stock and cash-based awards. The Plan uses a “fungible share” concept, pursuant to which shares that are subject to appreciation awards (such as stock options and stock appreciation rights) are counted against the Plan share limit on a 1-for-1 basis for every such share subject to appreciation awards, and shares that are subject to full value awards (such as awards of stock, restricted stock and restricted stock units) are counted against the Plan share limit at a ratio of 1.5 shares for every share subject to the full value award.

As of March 31, ~~2012~~2013, none of our stock-based awards are classified as liabilities. We did not capitalize any stock-based compensation cost.

Compensation ~~costs~~cost related to our stock-based compensation ~~plans are~~plan is as follows:


	Three Months Ended March 31,				Six Months Ended March 31,				Three Months Ended March 31,				Six Months Ended March 31,
	2012		2011		2012		2011		2013		2012		2013		2012
	(in thousands)								(in thousands)
Cost of revenues	$	146	$	136	$	268	$	230	$	144	$	146	$	298	$	268
Engineering, research and development	388		250		764		470		379		388		765		764
Selling, general and administrative	612		538		1,177		908		483		612		1,086		1,177
Total stock-based compensation expense	$	1,146	$	924	$	2,209	$	1,608	$	1,006	$	1,146	$	2,149	$	2,209

As of March 31, ~~2012~~2013, there was $~~7.6~~7.4 million of unrecognized stock-based compensation expense related to non-vested stock options, restricted stock units and our ESPP. The weighted average period over which the unearned stock-based compensation isfor stock options and restricted stock units expected to be recognized is approximately ~~2.5~~2.2 years ~~years.~~and 2.4 years, respectively. An estimated forfeiture rate of ~~5.23%~~5.2% has been applied to all unvested options and restricted stock outstanding as of March 31, ~~2012~~2013. ~~Future stock-based compensation expense and unearned stock-based compensation will increase to the extent that we grant additional equity awards.~~

~~Table of Contents~~

~~Stock Option Plans~~

Activity ~~under all~~in stock option ~~plans for the~~ ~~six~~ ~~months ended~~ ~~March 31, 2012~~ ~~was~~awards is as follows:


	Shares		Weighted average exercise price		Weighted average remaining contractual life (in years)	Aggregate intrinsic value		Shares (in thousands)		Weighted average exercise price		Weighted average remaining contractual life (years)	Aggregate intrinsic value (in thousands)
Options outstanding, September 30, 2011	1,699,183		$	29.77	6.37	$	—
Options outstanding, September 30, 2012								1,813		$	16.57	6.61	$	2
Granted	378,182		2.55		—	—		429		2.10		—	—
Exercised	(2,922	)	2.54		—	—		—		—		—	—
Cancelled or expired	(227,704	)	92.71		—	—		(112	)	15.47		—	—
Options outstanding, March 31, 2012	1,846,739		16.48		7.10	447,426
Options exercisable, March 31, 2012	996,735		$	27.17	5.60	$	104,826
Options outstanding, March 31, 2013								2,130		13.72		7.04	26
Options exercisable, March 31, 2013								1,201		$	21.98	5.63	$	—

This intrinsic value represents the excess of the fair market value of ~~the Company’s~~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 $~~3.72~~2.16, as of March 31, ~~2012~~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 are~~ ~~0.1 million~~ ~~in-the-money stock options that were exercisable as of~~ ~~March 31, 2012~~.

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

Six Months Ended March 31,
2012 2011
Expected life (in years) 5.63 6.24
Expected volatility:
Weighted-average 87.0% 85.7%
Range 86.1% - 87.1% 85.7% - 86.5%
Expected dividend — —
Risk-free interest rate 1.08% - 1.27% 2.29% - 2.78%

~~Our determination~~

Table of ~~the~~Contents

The fair value of stock-based ~~payment~~ awards is ~~affected by assumptions regarding a number~~estimated at the date of ~~highly complex and subjective variables. These variables include, but are not limited to: our expected stock price volatility over~~grant using the ~~term of~~Black-Scholes option valuation model; however, the ~~awards, and actual and projected employee stock option exercise behaviors. The fair~~ value of employee stock options is determined in accordance with ASC 718 and Staff Accounting Bulletin ("SAB") No. 107, as amended by SAB No. 110, which provides supplemental application guidance based on the views of the SEC,calculated using an ~~option-pricing model; however, that value~~option pricing model may not be indicative of the fair value observed in a willing buyer/willing seller market transaction, or actually realized by the employee upon exercise.

~~A summary~~ Expected volatility is based on the historical volatility of ~~restricted stock unit activity~~our common stock. The risk-free interest rate is based on the United States Treasury constant maturity rate for the expected life of the stock option. The expected life of a stock award is the period of time that the award is expected to be outstanding. Expected lives are estimated in accordance with SAB No. 107, as amended by SAB No. 110, which provides supplemental application guidance based on the views of the SEC.

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



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

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

The following table provides additional information in regards to options outstanding as of March 31, ~~2012~~2013 ~~is as follows:~~:

Restricted
Stock Units

Weighted Average
Grant-Date Fair
Value per Share
Weighted average
remaining
contractual life (in
years) Aggregate
intrinsic value
Restricted stock units expected to vest September 30, 2011 1,295,979
$ 4.67

Awarded 1,222,988
2.56

Released (685,479 ) 3.91

Forfeited (90,277 ) 3.63

Restricted stock units expected to vest March 31, 2012 1,743,211
$ 3.54
1.54
$ 6,484,745



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

Restricted Stock Units

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

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~~From time-to-time, we retain shares of common~~Activity for our restricted stock ~~from employees upon vesting of restricted shares and~~award units is as follows:



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

We issue restricted stock units as part of our equity incentive plans. For the majority of restricted stock units granted, the number of shares issued on the date the restricted stock units vest is net of the minimum statutory withholding requirements that we pay in cash to ~~cover income tax withholding.~~the appropriate taxing authorities on behalf of our employees. The impact of such withholding totaled $~~0.6~~0.4 million for the six months ended March 31, ~~2012~~2013, and was recorded as settlement on restricted stock tax withholding in the accompanying unaudited consolidated statements of stockholders’ deficit. Although shares withheld are not issued, they are treated as common stock repurchases in our unaudited consolidated financial statements, as they reduce the number of shares that would have been issued upon vesting.

Employee Stock Purchase Plan

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

The fair value of the ESPP awards are calculated in accordance with ASC Topic 718-50, Employee Share Purchase Plans, under which the fair value of each share granted under the ESPP is equal to the sum of 15% of a share of stock, a call option for 85% of a share of stock and a put option for 15% of a share of stock. The fair value of the call and put options are determined using the Black-Scholes pricing model. We used the following ~~assumptions:~~range of assumptions for both purchase periods: expected useful life of 0.5 years ~~years,~~, weighted average expected volatility of ~~48.4%~~40.4% to 49.8%, a zero dividend rate, and a risk-free interest rate of ~~0.09%~~0.1% to 0.2%. We recognized approximately $~~0.2 million~~ ~~and~~ $0.3 million in ESPP stock compensation for both the ~~three and~~ six months ended March 31, ~~2012~~ ~~related to the ESPP. On January 31,~~2013 and 2012, respectively.~~0.3 million~~ ~~shares were issued at a price per share of~~ ~~$2.59, a~~ ~~15.0%~~ ~~discount to the share price on that date.~~

NOTE ~~7—INCOME~~8-INCOME TAXES

The provision for income taxes as a percentage of ~~income~~loss from operations before income taxes was ~~(1.9)%~~8.5% for the six months ended March 31, ~~2012~~2013 compared to ~~(0.8)~~(1.9)% for the comparable period in the prior year. Our effective tax rate is primarily impacted by ~~net operating losses.~~

~~Because we have historically experienced net tax losses,~~certain foreign taxes, certain nondeductible interest and share based expenses, the ~~benefits~~release of ~~which resulted in recognized~~a portion of the valuation allowance related to certain foreign jurisdictions' deferred tax assets as such balances were more likely than not realizable within the applicable carryforward period, and for the six months ended March 31, 2013, by a refund of withholding taxes previously paid on certain foreign income.

~~we have placed a valuation allowance against our otherwise recognizable deferred tax assets.~~ At ~~September 30, 2011~~March 31, 2013, we had approximately ~~$82.9~~$90.2 million of Federal ~~net operating losses~~Net Operating Losses (“NOLs”) that can be used in future tax years. OfIn December 2012, we issued 10.7 million shares of common stock in a public offering which is believed to have resulted in a Section 382 ownership change. Since we maintain a full valuation allowance on all of our U.S. and state deferred tax assets, the impact of the ownership change on the future realizability of our U.S. and state deferred tax assets did not result in an impact to our provision for income taxes for the six months ended March 31, 2013, or on our net deferred tax asset as of March 31, 2013. In addition, as a result of this ~~amount, $56.3 million is~~ownership change, substantially all of our federal NOLs, credits and certain built-in deductions or losses are subject to an annual limitation of ~~$3.1~~$1.4 million ~~caused by~~. Consequently, it is anticipated that a ~~prior ownership change. In general,~~substantial portion of the federal NOLs, credits and built-in losses will expire unutilized as a result of this limitation. If an additional ownership change ~~will~~should occur ~~if there is a cumulative change in Vitesse's ownership by “5% shareholders” (as defined~~ in the ~~Code) that exceeds 50 percentage points over a rolling three-year period. Should an “ownership change” occur, it could significantly diminish the value of~~future, our ~~net operating loss carryforwards by limiting the rate at which they could be permitted to offset them against any future taxable income. Our~~ ability to utilize our ~~NOLs~~NOL carryforwards and other deferred tax assets to offset future taxable income may be ~~significantly~~further limited ~~if we experience another “ownership change,” as defined in Section 382~~and the value and recoverability of ~~the Internal Revenue Code of 1986, as amended (the “Code”).~~ our NOLs and other deferred tax assets could be further diminished.

NOTE ~~8—RESTRUCTURING~~9-SEGMENT AND ~~IMPAIRMENT CHARGES~~

~~The combined summary of the recent activity related to our restructuring plans are as follows:~~

Facility
Consolidation and
Operating Lease
Commitments

Severance
Costs

Property and
Equipment
Impairment
Charges
Total
(in thousands)
Liability balance at September 30, 2011 $ 2,310
$ 298
$ —
$ 2,608
Charged to operations —
24
—
24
Non-cash charges 8
—
—
8
Cash payments (443 ) (305 ) —
(748 )
Liability balance at March 31, 2012 $ 1,875
$ 17
$ —
$ 1,892

In September 2011, we initiated a restructuring plan to further align our resources with our strategic business objectives. Employees impacted under this plan were notified prior to the end of fiscal year 2011. In September 2011, we consolidated our Camarillo operations into a single facility and exited an adjacent leased facility. As a result of the lease exit, we incurred ~~$1.4 million~~ ~~in lease exit costs and~~ ~~$1.1 million~~ in asset impairment charges for asset write-down for tenant improvements at the facility which will not be recovered from future related cash flows. The related facility was vacated before September 30, 2011.

GEOGRAPHIC INFORMATION

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The fair value of the lease termination liability was determined based upon the present value of the remaining lease payments reduced by the current market rate for sublease rentals of similar properties. Our ability to generate sublease income is highly dependent upon the commercial real estate conditions at the time we perform our evaluations or negotiate sublease arrangements with third parties. The amounts we have accrued represent our best estimate of the obligations we expect to incur and could be subject to adjustments as market conditions change. Changes to the estimates will be reflected as “adjustments” in the period the changes in estimates were determined. There were no changes to the estimates for the ~~six~~ ~~months ended~~ ~~March 31, 2012~~. Our cash payments under the lease agreement may differ significantly from the exit accrual recorded due to the differences between actual experience and estimates made by management in establishing the lease termination accrual.

~~NOTE 9—SEGMENT AND GEOGRAPHIC INFORMATION~~

We manage and operate our business through one operating segment.

Net revenues tofrom customers that were equal to or greater than 10% of total net revenues ~~in the~~ ~~three and six~~ ~~months ended~~ ~~March 31, 2012~~ ~~and 2011 were~~are as follows:

Three Months Ended March 31, Six Months Ended March 31,
2012 2011 2012 2011
Nu Horizons Electronics ** 10.3 % 20.3 % 16.2 % 20.1 %
WPG ** 14.0 % *
12.2 % *
Huawei *
11.2 % *
10.6 %
Harris Corporation 10.8 % *
*
*



	Three Months Ended March 31,				Six Months Ended March 31,
	2013		2012		2013		2012

WPG Holdings**	16.7	%	14.0	%	14.9	%	12.2	%
Nu Horizons Electronics**	11.1	%	10.3	%	11.7	%	16.2	%
Harris Corporation	*		10.8	%	*		*

__________________________________________________

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

**Distributor

Net revenues ~~are summarized~~ by geographic area are as follows:


	Three Months Ended March 31,				Six Months Ended March 31,				Three Months Ended March 31,				Six Months Ended March 31,
	2012		2011		2012		2011		2013		2012		2013		2012
	(in thousands)								(in thousands)
United States	$	13,279	$	13,573	$	22,998	$	25,066	$	7,198	$	13,279	$	18,103	$	22,998
Asia Pacific	12,823		17,973		27,952		35,507		14,037		12,823		26,101		27,952
EMEA*	3,635		5,346		8,778		14,066		3,518		3,635		6,276		8,778
Total net revenues	$	29,737	$	36,892	$	59,728	$	74,639	$	24,753	$	29,737	$	50,480	$	59,728

*Europe, Middle East and Africa

~~Revenue~~Revenues by geographic area isare 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"s)~~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 by product ~~revenues based on our three product lines: (i) Connectivity; (ii) Ethernet switching; and (iii) Transport processing.~~

line are as follows:


	Three Months Ended March 31,				Six Months Ended March 31,				Three Months Ended March 31,				Six Months Ended March 31,
	2012		2011		2012		2011		2013		2012		2013		2012
	(in thousands)								(in thousands)
Connectivity	$	14,704	$	17,460	$	27,672	35,327		$	9,835	$	14,704	$	19,973	27,672
Ethernet switching	6,777		9,269		14,800		19,476		10,331		6,777		18,637		14,800
Transport processing	5,714		7,674		13,665		17,196		4,523		5,714		9,984		13,665
Product revenues	$	27,195	$	34,403	$	56,137	$	71,999	$	24,689	$	27,195	$	48,594	$	56,137

~~Table of Contents~~

NOTE ~~10—COMMITMENTS~~10-COMMITMENTS AND CONTINGENCIES

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

During our normal course of business, we make certain contractual guarantees and indemnities pursuant to which we may be required to make future payments under specific circumstances. We review our exposure under these agreements no less than annually, or more frequently when events indicate. Except for our established warranty reserves, we do not expect that any potential payments in connection with any of these indemnity obligations would have a material adverse effect on our consolidated financial position. Accordingly, except for established warranty reserves, we have not recorded any liabilities for these agreements as of March 31, ~~2012~~2013 and September 30, ~~2011~~2012.

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Patents and Licenses

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

Warranties

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

Intellectual Property Indemnities

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

Director and Officer Indemnities and Contractual Guarantees

We have entered into indemnification agreements with our directors and ~~executive officers,~~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, ~~against a director or executive officer,~~ we are unable to determine the maximum amount of losses that we could incur relating to such indemnities.

We have also entered into severance and ~~change in control~~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/~~Products~~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, ~~against a director or executive officer,~~ 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 as well as errors and omissions~~ 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, ~~2011~~2012 (“, as amended by Amendment No. 1 to Annual Report on Form 10-K/A

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

This Quarterly Report contains forward-looking statements that involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statements that do not directly relate to historical or current fact. We use words such as “anticipates,” “believes,” “plans,” “expects,” “future,” “intends,” “may,” “should,” “estimates,” “predicts,” “potential,” “continue,” “becoming,” “transitioning,” and similar expressions to identify such forward-looking statements. Our forward-looking statements include statements as to our business outlook, revenues, margins, expenses, tax provision, capital resources sufficiency, capital expenditures, interest income, cash commitments, and expenses. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those referenced in the subsection entitled “Risk Factors” in Part II, Item 1A of this Report and Part I, Item 1A of our Annual Report, and similar discussions in our other SEC filings. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.

Overview

We are a leading supplier of high-performance ICs ~~principally targeted at~~that are used primarily by manufacturers of networking systems ~~manufacturers in the communications industry. Within the communications industry, our products address~~for Carrier and Enterprise networking ~~where they enable data to be transmitted at high-speeds~~applications. We design, develop and ~~processed~~market a diverse portfolio of high-performance, low-power and ~~switched under~~cost-competitive networking and connectivity IC solutions. For more than 25 years, we have been a ~~variety of protocols.~~

~~Over the last 10 years, the worldwide proliferation of the Internet and the rapid growth~~leader in the ~~volume~~adoption of ~~data being sent over LANs~~new technologies in Carrier and ~~WANs has placed~~Enterprise networking.

Carrier and Enterprise networks have experienced a ~~tremendous strain on~~dramatic increase in both bandwidth demands and complexity driven by the ~~existing communications infrastructure. Communication service providers have sought to increase their revenues by delivering a growing range~~introduction of ~~data~~new content-rich services, ~~to their customers in a cost-effective manner. The resulting demand for increased bandwidth and services has created a need for faster, larger and more complex networks.~~

~~In recent years, we focused our product development and marketing efforts on products that leverage~~ the convergence of voice, video and data, and enhanced 4G/LTE mobile networks. Media-rich devices such as smartphones and game consoles require increased bandwidth. New Enterprise deployment options such as cloud based servers, social media and tele-presence have also increased demand.

These trends have forced a significant transition and consolidation of both Carrier and Enterprise ~~networking~~networks to ~~Internet Protocol-based networks.~~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 ~~next-generation~~ networks ~~share the requirements of high reliability, scalability, interoperability, and low cost. Increasingly, these networks will be delivered~~are based on technology that is significantly more sophisticated, service-aware, secure and reliable than traditional Enterprise-grade Ethernet Local Area Network (“LAN”) technology. ~~We believe~~Such networks are built on new technology that ~~products~~is often referred to as “Carrier Ethernet” in ~~this emerging technology area represent the best opportunity for us to provide differentiation~~Carrier networks and “Converged Enhanced Ethernet” in ~~the market.~~Enterprise networks.

Realization of Our Strategy

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

In order to optimize the efficiency of our R&D team we chose to serve two large, growing, independent markets which rely increasingly on Ethernet technology: Carrier networking and Enterprise networking. We estimate our total addressable market to have a compound annual growth rate (“CAGR”) of 17% and to approach $2.1 billion by 2016. The Carrier networking market includes core, metro and access equipment used for transport, switching, routing and backhaul in service provider networks. The Enterprise networking market covers Ethernet switching and routing equipment used within LANs in small-medium enterprise (“SME”) networks, small-medium business (“SMB”), and cloud and security appliances. While both market segments are unique, there is tremendous synergy and cost savings in terms of R&D effort for Ethernet switch and PHY devices allowing us to address these two large markets. Within the Carrier networking segment, our focus and growth is driven

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by mobile backhaul applications, and within the Enterprise networking segment our focus and growth is driven by the migration from 100 Mbps to 1 GE and 10 GE port speeds. In both markets, Vitesse provides unique low power and low cost solutions by optimizing the feature set for target applications.

As with any ~~high-technology~~high technology company, ~~these~~ growth opportunities begin with new products. ~~We improved~~Over the efficiency of our R&D by focusing our resources on two large, but independent markets: Carrier networking and Enterprise networking, which both rely increasingly on Ethernet technology, allowing us to maximize the impact of our R&D budget.

~~After two~~past three years, ~~of development, Vitesse~~we introduced over 3060 new products, ~~in 2010, over 20 new products in 2011, and we continue to introduce new products in 2012. These introductions included~~including many new “platform” products and ~~technology~~technologies that will serve as the basis for future product development. ~~This rate was nearly double our historic rate of product introductions and~~These new products allowed us to substantially increase our served markets in both Carrier and Enterprise ~~networking, providing us better growth opportunities.~~ networking.

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The next step to generating growth is creating market traction and design wins where we are selected by our customers over our competitors. As we ~~took~~have taken our new products to market, ~~in 2011 and 2012,~~ we ~~saw a dramatic~~have seen an increase in our customer engagements and the number of design opportunities that were being identified by our sales team. Early adoption of our products by our customers has exceeded our goals. In ~~2011,~~the past two years, we recorded over ~~300~~600 new design wins, a 250% increase from the prior year. Of these design wins, we expect 80% of the value to come from our Tier-1 and Tier-2 customers, and nearly 50% to come from our new products introduced in 2010 and 2011. Design wins remain strong as we enter 2012.wins.

Together with our customers, we are now ~~taking~~preparing to ramp these new ~~products into production.~~products. In our industry it typically takes 12six to 1824 months for our customers to go from first product sample received to first customer shipment as customers do the necessary development work to complete and qualify their systems in the network. In ~~2011 and the first~~ ~~six~~ ~~months of~~ 2012, we shipped samples and entered pre-production on the majority of ~~these~~our new products, and we expect our customers to phase into volume production over the course of 2013.

In 2012, ~~and into 2013.~~

~~As these new products ramp,~~ we ~~will begin~~began a migration of our revenues to our new ~~products, providing a new growth cycle for Vitesse.~~product portfolio. In 2011, only 5%6% of our ~~revenue was~~product revenues were from ~~products sampled in the last three years. Based on observable market traction and the design wins captured in 2011, we~~our new product portfolio. In 2012, this grew to 14% of product revenues. We expect revenues from our new products to ~~increase~~double in 2013 compared to 2012 and ~~continue~~double again in 2014.

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

We have also made ~~solid~~ progress on our strategy to strengthen our operational performance and execution. Our efforts in operations include reduction in materials costs and cycle times, improved product yields, implementation of programs such as lean manufacturing, and an ~~increased emphasis on the importance of our customers.~~enhanced customer-centric focus. During the last three years, we accelerated our comprehensive ~~efforts~~effort to ~~increase~~reduce our ~~product gross margins and~~ operating ~~margins,~~expenses, which ~~together have~~has substantially increased our operating leverage. ~~During the last three years we have:~~

~~Expanded our business in Europe and Asia, as a result of improved penetration into Tier-1 networking OEMs.~~

Transitioned to a fully outsourced manufacturing model by moving the majority of our California probe and test function to an outsourced, offshore Asian test contractor, which was completed in 2010. This production model substantially reduced our fixed costs, headcount, and cost of testing, and will allow us to reduce our manufacturing cycle times and better serve our growing customer base in Asia.

~~Consolidated multiple locations in order to gain efficiencies and streamline costs.~~

Critical Accounting Policies and Estimates

Our ~~discussion and analysis~~accounting policies are more fully described in Note 1 of ~~our historical financial condition and results of operations are based upon our~~the unaudited consolidated financial ~~statements, which have been prepared in accordance with GAAP.~~statements. The preparation of ~~these consolidated~~ financial statements in conformity with ~~those principals require us~~accounting principles generally accepted in the United States of America (“GAAP”) requires management to make ~~certain~~ estimates ~~of certain items~~ and ~~judgments as to certain~~assumptions about future events including, for example, those related to revenue recognition, inventory valuation, long-lived assets, valuation of compound embedded derivative and term loan, stock-based compensation, income taxes, and restructuring assets. These determinations, even though inherently subjective and subject to change,that affect the amounts reported ~~amounts~~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 ~~assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. While we~~estimates. These estimates could change under different assumptions

or conditions.

We believe that our estimates are based on reasonable assumptions and judgments at the time they are made, some of our assumptions, estimates and judgments will inevitably prove to be incorrect. As a result, actual outcomes will likely differ from our accruals, and those differences, positive or negative, could be material. Some of our accruals are subject to adjustment, as we believe appropriate, based on revised estimates and reconciliation to the actual results when available.

~~Our~~ critical accounting policies and estimates, ~~are~~as described in our Annual Report on Form 10-K for the year ended September 30, ~~2011~~2012., as amended by Amendment No. 1 to Annual Report on Form 10-K/A, are our most critical accounting policies and are most important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgments. There have been no significant changes to these policies during the ~~three and~~ six months endedMarch 31, ~~2012~~2013. ~~These policies and estimates continue to be those that we believe are most important to a reader’s ability to understand our financial results.~~

Impact of Recent Accounting Pronouncements

~~There are no~~For information with respect to recent accounting pronouncements ~~that~~and the impact of these pronouncements see “The Company and Its Significant Accounting Policies” footnote in the accompanying notes to the unaudited consolidated financial statements.

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Results of Operations for the three and six months ended March 31, ~~2012~~2013, as compared to the three and six months ended March 31, ~~2011~~2012

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

The percentages in the table are based on net revenues.


	Three Months Ended March 31,										Six Months Ended March 31,										Three Months Ended March 31,										Six Months Ended March 31,
	2012					2011					2012					2011					2013					2012					2013					2012
	$			%		$			%		$			%		$			%		$			%		$			%		$			%		$			%
	(in thousands, except for percentages)																				(in thousands, except for percentages)
Net revenues:
Product revenues	$	27,195		91.5	%	$	34,403		93.3	%	$	56,137		94.0	%	$	71,999		96.5	%	$	24,689		99.7	%	$	27,195		91.5	%	$	48,594		96.3	%	$	56,137		94.0	%
Intellectual property revenues	2,542			8.5	%	2,489			6.7	%	3,591			6.0	%	2,640			3.5	%	64			0.3	%	2,542			8.5	%	1,886			3.7	%	3,591			6.0	%
Net revenues	29,737			100.0	%	36,892			100.0	%	59,728			100.0	%	74,639			100.0	%	24,753			100.0	%	29,737			100.0	%	50,480			100.0	%	59,728			100.0	%
Costs and expenses:
Cost of product revenues	10,595			35.6	%	12,995			35.2	%	22,758			38.1	%	27,343			36.6	%	11,369			45.9	%	10,595			35.6	%	22,344			44.3	%	22,758			38.1	%
Engineering, research and development	9,580			32.2	%	14,898			40.4	%	22,005			36.8	%	29,080			39.0	%	9,777			39.5	%	9,580			32.2	%	20,281			40.2	%	22,005			36.8	%
Selling, general and administrative	8,379			28.2	%	9,978			27.0	%	15,803			26.5	%	20,436			27.4	%	7,390			29.9	%	8,383			28.2	%	15,360			30.4	%	15,835			26.6	%
Restructuring and impairment charges	4			—	%	78			0.2	%	32			0.1	%	342			0.5	%
Amortization of intangible assets	79			0.3	%	61			0.2	%	146			0.2	%	226			0.3	%	89			0.4	%	79			0.3	%	186			0.4	%	146			0.2	%
Costs and expenses	28,637			96.3	%	38,010			103.0	%	60,744			101.7	%	77,427			103.8	%	28,625			115.7	%	28,637			96.3	%	58,171			115.3	%	60,744			101.7	%
Income (loss) from operations	1,100			3.7	%	(1,118		)	(3.0	)%	(1,016		)	(1.7	)%	(2,788		)	(3.8	)%
(Loss) income from operations																					(3,872		)	(15.7	)%	1,100			3.7	%	(7,691		)	(15.3	)%	(1,016		)	(1.7	)%
Other expense (income):
Interest expense, net	1,924			6.5	%	2,039			5.5	%	3,873			6.5	%	4,558			6.1	%	1,966			7.9	%	1,924			6.5	%	3,936			7.8	%	3,873			6.5	%
Loss on compound embedded derivative	5,280			17.8	%	1,976			5.4	%	1,982			3.3	%	5,460			7.3	%
Loss on extinguishment of debt	—			—	%	3,874			10.5	%	—			—	%	3,874			5.2	%
(Gain) loss on compound embedded derivative																					—			—	%	5,280			17.8	%	(803		)	(1.6	)%	1,982			3.3	%
Other expense (income), net	29			0.1	%	(41		)	(0.1	)%	41			0.1	%	(56		)	(0.1	)%	5			—	%	29			0.1	%	(26		)	(0.1	)%	41			0.1	%
Other expense, net	7,233			24.4	%	7,848			21.3	%	5,896			9.9	%	13,836			18.5	%	1,971			7.9	%	7,233			24.4	%	3,107			6.1	%	5,896			9.9	%
Loss before income tax expense	(6,133		)	(20.7	)%	(8,966		)	(24.3	)%	(6,912		)	(11.6	)%	(16,624		)	(22.3	)%
Income tax expense	63			0.2	%	75			0.2	%	129			0.2	%	149			0.2	%
Loss before income tax (benefit) expense																					(5,843		)	(23.6	)%	(6,133		)	(20.7	)%	(10,798		)	(21.4	)%	(6,912		)	(11.6	)%
Income tax (benefit) expense																					(996		)	(4.0	)%	63			0.2	%	(919		)	(1.8	)%	129			0.2	%
Net loss	$	(6,196	)	(20.9	)%	$	(9,041	)	(24.5	)%	$	(7,041	)	(11.8	)%	$	(16,773	)	(22.5	)%	$	(4,847	)	(19.6	)%	$	(6,196	)	(20.9	)%	$	(9,879	)	(19.6	)%	$	(7,041	)	(11.8	)%

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Product Revenues

We sell our products into the following markets: (i) Carrier networking; (ii) Enterprise networking; and (iii) Non-core. The Carrier networking market includes core, metro, edge, and access equipment used for transport, switching, routing, mobile access, and backhaul in service provider networks. The Enterprise networking market covers Ethernet switching and ~~transmission~~routing equipment used within LANs in ~~small-medium enterprise (“SME”)~~SME and ~~small-medium business (“SMB”) markets.~~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 following table summarizes our product revenues by market:~~

Three Months Ended March 31,
2012 2011
Amount
% of Product
Revenues
Amount
% of Product
Revenues
Change
%
Change
(in thousands, except percentages)
Carrier networking $ 9,597
35.3 % $ 15,498
45.0 % $ (5,901 ) (38.1 )%
Enterprise networking 13,148
48.3 % 16,545
48.1 % (3,397 ) (20.5 )%
Non-core 4,450
16.4 % 2,360
6.9 % 2,090
88.6 %
Product revenues $ 27,195
100.0 % $ 34,403
100.0 % $ (7,208 ) (21.0 )%

Six Months Ended March 31,
2012 2011
Amount
% of Product
Revenues
Amount
% of Product
Revenues
Change
%
Change
(in thousands, except percentages)
Carrier networking $ 21,589
38.5 % $ 33,663
46.7 % $ (12,074 ) (35.9 )%
Enterprise networking 27,575
49.1 % 33,891
47.1 % (6,316 ) (18.6 )%
Non-core 6,973
12.4 % 4,445
6.2 % 2,528
56.9 %
Product revenues $ 56,137
100.0 % $ 71,999
100.0 % $ (15,862 ) (22.0 )%

The decrease in Carrier networking revenues is primarily attributable to broad-based market decline in Carrier networking equipment for service providers resulting in inventory corrections by our customers that negatively impacted the demand for our products ~~particularly mature SONET-based products. The decline in Enterprise networking revenues~~ is ~~driven primarily~~affected by ~~a decline in~~various factors, including our ~~switch~~development and ~~PHY~~introduction of new products, ~~selling into low-end SME/SMB applications. This was partially offset by increased revenue from~~availability and pricing of competing products, capacity constraints at our switch fabric products as customers increased inventory after we announced our plans to phase out production of some of these products. The increase in Non-core revenues is largely attributable to increased purchases of Network Processorsuppliers, end-of-life (“~~NPU”~~EOL”) ~~products, resulting from end-of-life announcements,~~product decisions, and ~~mature products in our Fibre Channel product line, due to a large purchase from a single customer.~~

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

~~Revenue~~ for ~~end-of-life products was $5.9 million and $2.0 million in~~ the three ~~months ended~~ ~~March 31, 2012~~ and ~~2011, respectively and $13.4 million and $3.6 million in the~~ six months ended March 31, ~~2012~~2013 and ~~2011,~~2012, may not necessarily be indicative of future revenues.

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Product revenues by market are as follows:



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



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

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

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

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

Revenues from EOL products totaled $4.3 million and $5.9 million in the three months ended March 31, 2013 and 2012, respectively, and $8.8 million and $13.4 million in the six months ended March 31, 2013 and 2012, respectively. Product phase-outs are part of our normal course of business, and we will continue this practice in the ~~future; however, we cannot predict the degree and/or timing of the impact of product phase-out on future revenues.~~future. We expect revenues from EOL products to decline in this fiscal year. From time-to-time, upon customer request or due to a change in our product strategy, we may decide to resume producing a part we previously phased-out.

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~~The following table summarizes~~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:~~ line are as follows:


	Three Months Ended March 31,													Three Months Ended March 31,
	2012				2011									2013				2012
	Amount		% of Product Revenues		Amount		% of Product Revenues		Change			% Change		Amount		% of Product Revenues		Amount		% of Product Revenues		Change			% Change
	(in thousands, except percentages)													(in thousands, except percentages)
Connectivity	$	14,704	54.1	%	$	17,460	50.8	%	$	(2,756	)	(15.8	)%	$	9,835	39.8	%	$	14,704	54.1	%	$	(4,869	)	(33.1	)%
Ethernet switching	6,777		24.9	%	9,269		26.9	%	(2,492		)	(26.9	)%	10,331		41.9	%	6,777		24.9	%	3,554			52.4	%
Transport processing	5,714		21.0	%	7,674		22.3	%	(1,960		)	(25.5	)%	4,523		18.3	%	5,714		21.0	%	(1,191		)	(20.8	)%
Product revenues	$	27,195	100.0	%	$	34,403	100.0	%	$	(7,208	)	(21.0	)%	$	24,689	100.0	%	$	27,195	100.0	%	$	(2,506	)	(9.2	)%


	Six Months Ended March 31,													Six Months Ended March 31,
	2012				2011									2013				2012
	Amount		% of Product Revenues		Amount		% of Product Revenues		Change			% Change		Amount		% of Product Revenues		Amount		% of Product Revenues		Change			% Change
	(in thousands, except percentages)													(in thousands, except percentages)
Connectivity	$	27,672	49.3	%	$	35,327	49.1	%	$	(7,655	)	(21.7	)%	$	19,973	41.1	%	$	27,672	49.3	%	$	(7,699	)	(27.8	)%
Ethernet switching	14,800		26.4	%	19,476		27.0	%	(4,676		)	(24.0	)%	18,637		38.4	%	14,800		26.4	%	3,837			25.9	%
Transport processing	13,665		24.3	%	17,196		23.9	%	(3,531		)	(20.5	)%	9,984		20.5	%	13,665		24.3	%	(3,681		)	(26.9	)%
Product revenues	$	56,137	100.0	%	$	71,999	100.0	%	$	(15,862	)	(22.0	)%	$	48,594	100.0	%	$	56,137	100.0	%	$	(7,543	)	(13.4	)%

The decrease in Connectivity revenues in the three months and six months ended March 31, 2013, as compared to the same period in the prior year, is largely attributable to ~~broad-based market decline~~the decrease in ~~Carrier networking equipment for service providers that impacted the demand for our products, particularly mature, SONET-based products, partially offset by increases in some of our~~ products for Fibre Channel applications, ~~due to~~which had a large purchase by a single ~~customer.~~customer in the prior period, and to a decrease in mature SONET-based products.

The ~~decrease~~increase in Ethernet switching revenues in the three and six months ended March 31, 2013, as compared to the same period in the prior year, is largely attributable to ~~declines~~our new switches selling into both the Carrier and Enterprise networking market. The increase was partially offset by a decrease in sales of our other mature ~~Gigabit Ethernet Copper PHYs and Ethernet Media Access Control (“MAC”) products selling primarily into Enterprise markets.~~products.

The decrease in Transport processing revenues in the three months ended March 31, 2013, as compared to the same period in the prior year, is largely attributable to ~~broad-based market decline in Carrier networking equipment for service providers that impacted the demand for our products, particularly our mature SONET framers,~~lower sales of switch fabrics going through EOL. The decrease was partially offset by ~~increases~~increased sales of framers going through EOL. The decrease in ~~our NPU~~Transport processing revenues in the six months ended March 31, 2013, as compared to the same period in the prior year is attributable to lower sales of switch fabrics, NPUs, and ~~Switch Fabrics~~optical transport network products going through EOL, offset by increased sales of framers going through EOL.

Intellectual Property Revenues



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



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

Table of Contents

Intellectual property revenues decreased in the three and six months ended March 31, 2013, as ~~customers increase inventories on these products as they approach end-of-life.~~compared to the same period in the prior year, due to a decrease in deliveries of intellectual property. The timing and amounts of intellectual property revenues fluctuate and tend to be unpredictable. Costs associated with the sale of intellectual property are included in selling, general and administrative expenses.

Net revenues tofrom customers that were equal to or greater than 10% of total net revenues ~~in the~~ ~~three and six~~ ~~months ended~~ ~~March 31, 2012~~ ~~and 2011 were~~are as follows:



	Three Months Ended March 31,				Six Months Ended March 31,
	2013		2012		2013		2012

WPG Holdings**	16.7	%	14.0	%	14.9	%	12.2	%
Nu Horizons Electronics**	11.1	%	10.3	%	11.7	%	16.2	%
Harris Corporation	*		10.8	%	*		*

~~________________________________________________~~

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

**Distributors

~~Revenue from Harris Corporation was due to a periodic purchase of some of our mature Connectivity devices.~~

~~Table of Contents~~

Net revenues ~~are summarized~~ by geographic area are as follows:


	Three Months Ended March 31,								Three Months Ended March 31,
	2012				2011				2013				2012
	Amount		% of Total Net Revenues		Amount		% of Total Net Revenues		Amount		% of Net Revenues		Amount		% of Net Revenues
	(in thousands, except percentages)								(in thousands, except percentages)
United States	$	13,279	44.7	%	$	13,573	36.8	%	$	7,198	29.1	%	$	13,279	44.7	%
Asia Pacific	12,823		43.1	%	17,973		48.7	%	14,037		56.7	%	12,823		43.1	%
EMEA*	3,635		12.2	%	5,346		14.5	%	3,518		14.2	%	3,635		12.2	%
Total net revenues	$	29,737	100.0	%	$	36,892	100.0	%
Net revenues									$	24,753	100.0	%	$	29,737	100.0	%

Six Months Ended March 31,
2012 2011
Amount
% of Total Net
Revenues
Amount
% of Total Net
Revenues
(in thousands, except percentages)
United States $ 22,998
38.5 % $ 25,066
33.6 %
Asia Pacific 27,952
46.8 % 35,507
47.6 %
EMEA* 8,778
14.7 % 14,066
18.8 %
Total net revenues $ 59,728
100.0 % $ 74,639
100.0 %



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

*Europe, Middle East and Africa

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 demand for our products is affected by various factors, including our development and introduction~~Cost of ~~new products, availability and pricing of competing products, capacity constraints at our suppliers, end-of-life product decisions, and general economic conditions.~~Product Revenues

~~Therefore, our revenues for the~~ ~~three and six~~ ~~months ended~~ ~~March 31, 2012~~ ~~and 2011 may not necessarily be indicative of future revenues.~~

~~Intellectual Property (IP) Revenues~~

Three Months Ended March 31,
2012 2011
Amount
% of Net
Revenues
Amount
% of Net
Revenues
Change
%
Change
(in thousands, except percentages)
IP revenues $ 2,542
8.5 % $ 2,489
6.7 % $ 53
2.1 %

Six Months Ended March 31,
2012 2011
Amount
% of Net
Revenues
Amount
% of Net
Revenues
Change
%
Change
(in thousands, except percentages)
IP revenues $ 3,591
6.0 % $ 2,640
3.5 % $ 951
36.0 %



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

2327

Table of Contents

~~The increase in IP revenue in the~~ ~~six~~ ~~month period ended~~ ~~March 31, 2012~~ ~~as compared to the prior year is primarily due to the ongoing sale and licensing of IP. We continue to pursue opportunities to leverage our IP portfolio. Royalties received or recognized for the~~ ~~three and six~~ ~~months ended~~ ~~March 31, 2012~~ ~~and 2011 were not material. Costs associated with the sale of IP are included in selling, general and administrative expenses.~~

~~Cost of Product Revenues~~

Three Months Ended March 31,
2012 2011
Amount
% of Net
Product
Revenues
Amount
% of Net
Product
Revenues
Change
%
Change
(in thousands, except percentages)
Cost of product revenues $ 10,595
39.0 % $ 12,995
37.8 % $ (2,400 ) (18.5 )%

Six Months Ended March 31,
2012 2011
Amount
% of Net
Product
Revenues
Amount
% of Net
Product
Revenues
Change
%
Change
(in thousands, except percentages)
Cost of product revenues $ 22,758
40.5 % $ 27,343
38.0 % $ (4,585 ) (16.8 )%



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

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

~~The overall decrease in cost of product revenues is largely attributable to lower product revenues, combined with a favorable mix of products that had an overall lower cost.~~ Our cost of product revenues is affected by various factors, including product mix, volume, provisions for excess and obsolete inventories, material costs, manufacturing efficiencies, and the position of our products within their ~~life-cycles, either beginning or ending.~~life-cycles. Our cost of product revenues as a ~~percent~~percentage of net product ~~revenue~~revenues is affected by these factors, as well as customer mix, ~~volume,~~ pricing, and competitive pricing programs. ~~We anticipate~~

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

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

Engineering, Research and Development

Three Months Ended March 31,
2012 2011
Amount
% of Net
Revenues
Amount
% of Net
Revenues
Change
%
Change
(in thousands, except percentages)

Engineering, research and development $ 9,580
32.2 % $ 14,898
40.4 % $ (5,318 ) (35.7 )%



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

Six Months Ended March 31,
2012 2011
Amount
% of Net
Revenues
Amount
% of Net
Revenues
Change
%
Change
(in thousands, except percentages)

Engineering, research and development $ 22,005
36.8 % $ 29,080
39.0 % $ (7,075 ) (24.3 )%



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

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

facilities expenses.

~~Table of Contents~~

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

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

The decrease in R&D expense in the ~~second~~six ~~quarter of fiscal year 2012~~months ended March 31, 2013, as compared to the same period in the prior year, is primarily attributable to ~~a $2.0 million lower mask and test wafers expense, a $1.6 million lower compensation expense, and a~~ $1.3 million lower ~~expense~~spending for ~~EDA~~masks and ~~other tools. The reduction in compensation and other miscellaneous reductions resulted from our consolidation of multiple design center locations.~~test wafers.

~~The decrease in R&D expense~~ ~~for the six months endedMarch 31, 2012~~ as compared to the same period in the prior year is largely attributable to lower compensation and facility expense of $3.6 million resulting from our consolidation of multiple locations, lower mask and test wafer expense of $1.4 million, lower tools expense of $1.3 million, and lower external physical design and test services of $0.5 million.

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

Table of Contents

Selling, General and Administrative

Three Months Ended March 31,
2012 2011
Amount
% of Net
Revenues
Amount
% of Net
Revenues
Change
%
Change
(in thousands, except percentages)

Selling, general and administrative $ 8,379
28.2 % $ 9,978
27.0 % $ (1,599 ) (16.0 )%

Six Months Ended March 31,
2012 2011
Amount
% of Net
Revenues
Amount
% of Net
Revenues
Change
%
Change
(in thousands, except percentages)

Selling, general and administrative $ 15,803
26.5 % $ 20,436
27.4 % $ (4,633 ) (22.7 )%



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



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

Selling, general and administrative (“SG&A”) expense consists primarily of ~~personnel-related expenses, including stock-based~~ compensation expense, ~~as well as~~ legal and other professional fees, facilities expenses, outside labor and communication expenses.

The decrease in SG&A expense in the ~~second~~three ~~quarter of fiscal year 2012~~months ended March 31, 2013, as compared to the same period in the prior year, is ~~largely attributable to lower personnel related expenses of $1.3 million and lower facility expenses of $0.4 million~~primarily due to ~~our consolidation of facilities. Partially offsetting the reductions was~~ a $0.7 million intangible asset write-down ~~expense.~~in the prior year.

The decrease in SG&A expense in the ~~for the~~ six months endedMarch 31, ~~2012~~2013, as compared to the same period in the prior year, is ~~largely attributable~~primarily due to lower personnel related expenses of ~~$2.9 million,~~ $0.6 million ~~in lower legal~~ and ~~accounting fees, and lower facility expenses of $0.7 million due to our consolidation of facilities. Partially offsetting the reductions was~~ a $0.7 million intangible asset write-down ~~expense.~~in the prior year, partially offset by a $0.5 million increase in asset retirement obligations expense as we move from our primary Camarillo facility to an adjacent building.

~~Restructuring and Impairment Charges~~Interest Expense, Net

Three Months Ended March 31,
2012 2011
Amount
% of Net
Revenues
Amount
% of Net
Revenues
Change
%
Change
(in thousands, except percentages)

Restructuring and impairment charges $ 4
— % $ 78
0.2 % $ (74 ) (94.9 )%



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



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

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

Gain on Compound Embedded Derivative



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

2529

Table of Contents

Six Months Ended March 31,
2012 2011
Amount
% of Net
Revenues
Amount
% of Net
Revenues
Change
%
Change
(in thousands, except percentages)

Restructuring and impairment charges $ 32
0.1 % $ 342
0.5 % $ (310 ) (90.6 )%



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

The ~~restructuring and impairment costs~~gain on our compound embedded derivative included in ~~the~~ ~~three and six~~ ~~months ended~~ ~~March 31, 2012~~ ~~reflect costs related to the reduction in force at~~ our ~~Portland location, which was completed in October 2011.~~

~~The restructuring and impairment costs in the~~ ~~three and six~~ ~~months ended~~ ~~March 31, 2011~~ ~~were related to a reduction in workforce at our Westford location.~~

~~Amortization of Intangible Assets~~

Three Months Ended March 31,
2012 2011
Amount
% of Net
Revenues
Amount
% of Net
Revenues
Change
%
Change
(in thousands, except percentages)

Amortization of intangible assets $ 79
0.3 % $ 61
0.2 % $ 18
29.5 %

Six Months Ended March 31,
2012 2011
Amount
% of Net
Revenues
Amount
% of Net
Revenues
Change
%
Change
(in thousands, except percentages)

Amortization of intangible assets $ 146
0.2 % $ 226
0.3 % $ (80 ) (35.4 )%

~~The increase in amortization in the~~ ~~second~~ ~~quarter of fiscal year 2012 as compared to the same period in the prior year is attributable to the purchase of IP at the end of the first quarter of fiscal year 2012. For~~2014 Debentures for the six months ended March 31, ~~2012~~2013, ~~compared to the same period last year, amortization expense decreased due to some of the existing intangible assets being fully amortized during fiscal year 2011.~~

~~Interest Expense, net~~

Three Months Ended March 31,
2012 2011
Amount
% of Net
Revenues
Amount
% of Net
Revenues
Change
%
Change
(in thousands, except percentages)
Interest expense, net $ 1,924
6.5 % $ 2,039
5.5 % $ (115 ) (5.6 )%

Six Months Ended March 31,
2012 2011
Amount
% of Net
Revenues
Amount
% of Net
Revenues
Change
%
Change
(in thousands, except percentages)
Interest expense, net $ 3,873
6.5 % $ 4,558
6.1 % $ (685 ) (15.0 )%

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

~~The decrease in net interest expense for the~~ ~~three and six~~ ~~months ended~~ ~~March 31, 2012~~ compared to the same period last year was primarily due to the pay-down of $8.0 million on the Senior Term Loan in January 2011, the restructuring of the Senior Term Loan on February 4, 2011, and the $1.5 million principal payment on the Term A Loan in July 2011.

~~Table of Contents~~

~~Loss on Compound Embedded Derivative~~

Three Months Ended March 31,
2012 2011
Amount
% of Net
Revenues
Amount
% of Net
Revenues
Change
%
Change
(in thousands, except percentages)

Loss on compound embedded derivative $ 5,280
17.8 % $ 1,976
5.4 % $ 3,304
167.2 %

Six Months Ended March 31,
2012 2011
Amount
% of Net
Revenues
Amount
% of Net
Revenues
Change
%
Change
(in thousands, except percentages)

Loss on compound embedded derivative $ 1,982
3.3 % $ 5,460
7.3 % $ (3,478 ) (63.7 )%

~~The loss on our compound embedded derivative related to our 2014 Debentures for the~~ ~~three~~ ~~months ended~~ ~~March 31, 2012~~ ~~and~~ ~~three and six~~ ~~months ended~~ ~~March 31, 2011~~ is primarily generated by the ~~increase~~decrease in the price of our underlying common stock during those periods.

~~Loss~~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 ~~Extinguishment~~October 30, 2012, resulting in gain of ~~Debt~~$0.8 million due to the change in fair value.

Income Tax (Benefit) Expense

Three Months Ended March 31,
2012 2011
Amount
% of Net
Revenues
Amount
% of Net
Revenues
Change
%
Change
(in thousands, except percentages)

Loss on extinguishment of debt $ —
— % $ 3,874
10.5 % $ (3,874 ) (100.0 )%

Six Months Ended March 31,
2012 2011
Amount
% of Net
Revenues
Amount
% of Net
Revenues
Change
%
Change
(in thousands, except percentages)

Loss on extinguishment of debt $ —
— % $ 3,874
5.2 % $ (3,874 ) (100.0 )%



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



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

~~A loss on extinguishment of debt~~Our effective tax rate for the ~~three and~~ six months ended March 31, ~~2011~~2013 was 8.5%. Our effective tax rate is primarily impacted by certain foreign taxes, certain nondeductible interest and share based expenses and the release of a ~~result~~portion of the ~~extinguishment of~~valuation allowance related to certain foreign jurisdictions’ deferred tax assets as such balances were more likely than not realizable within the Senior Term Loan at fair value, in which we recognized a $3.9 million loss for the difference between the aggregate fair values of Term A and B Loans plus additional amounts and fees paid to the noteholders compared to the net carrying value of the Senior Term Loan. For the purposes of calculating this loss on extinguishment, the net carrying amount of the Senior Term Loan was $18.7 million, which included the remaining outstanding principal of $17.0 million, the payment-in-kind balance of $1.7 million, and the balance of the unamortized costs of $0.6 million, as of February 4, 2011.

~~Income Tax Expense~~

Three Months Ended March 31,
2012 2011
Amount
% of Net
Revenues
Amount
% of Net
Revenues
Change
%
Change
(in thousands, except percentages)

Income tax expense $ 63
0.2 % $ 75
0.2 % $ (12 ) (16.0 )%

~~Table of Contents~~

Six Months Ended March 31,
2012 2011
Amount
% of Net
Revenues
Amount
% of Net
Revenues
Change
%
Change
(in thousands, except percentages)

Income tax expense $ 129
0.2 % $ 149
0.2 % $ (20 ) (13.4 )%

applicable carryforward period. Our effective tax rate for the six months ended March 31, 2012 was (1.9)%~~. The income tax provision in the current year is primarily due to state minimum taxes and foreign taxes. Our effective tax rate for the~~ ~~six~~ ~~months ended~~ ~~March 31, 2011~~ ~~was~~ ~~(0.8)~~%, which was lower than the federal and state statutory rate due to the projected federal and state losses for the fiscal year.

Financial Condition and Liquidity

Cash Flow Analysis

Cash increased to $~~19.2~~36.9 million at March 31, ~~2012~~2013, from $~~17.3~~23.9 million at September 30, ~~2011~~2012. During the six months ended March 31, ~~2012~~2013, we ~~generated~~used cash ~~from~~for operations and investing activities, which was offset by cash ~~used for capital expenditures and~~provided by financing activities. Our cash flows from operating, investing and financing activities are summarized as follows:

Table of Contents


	Six Months Ended March 31,						Six Months Ended March 31,
	2012			2011			2013			2012
	(in thousands)						(in thousands)
Net cash provided by (used in) operating activities	$	3,464		$	(8,708	)
Net cash (used in) provided by operating activities							$	(3,238	)	$	3,464
Net cash used in investing activities	(946		)	(2,488		)	(412		)	(946		)
Net cash used in financing activities	(624		)	(8,698		)
Net increase (decrease) in cash	1,894			(19,894		)
Net cash provided by (used in) financing activities							16,673			(624		)
Net increase in cash							13,023			1,894
Cash at beginning of period	17,318			38,127			23,891			17,318
Cash at end of period	$	19,212		$	18,233		$	36,914		$	19,212

Net Cash (Used In) Provided by ~~(Used In)~~ Operating Activities

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

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

During the six months ended March 31, 2012, cash provided by operating activities totaled $3.5 million. Excluding changes in working capital, cash ~~generated by operations~~used to fund our losses totaled $~~0.5~~1.4 million. We also used $0.7 million cash ~~related~~ to fund the increase in accounts receivable and $0.7 million ~~cash~~ related to ~~the~~a decrease in deferred revenue due to lower purchases from ~~distributors.~~distributors and $0.5 million related to decreased accounts payable, accrued expenses and other liabilities. These uses were offset by the generation of ~~$4.0~~$4.0 million cash from operating with lower inventory ~~levels and~~ ~~$0.4 million~~ ~~cash from accounts payable and accrued expenses.~~levels.

Accounts receivable increased $0.7 million from $9.6 million at September 30, 2011, to $10.3 million at March 31, 2012, resulting from timing of sales. Inventory decreased ~~$4.0~~$4.0 million from $20.9 million at September 30, 2011, to $16.9 million at March 31, 2012. The lower inventory is due to ~~ongoing efforts to ensure purchases align with production.~~decreased purchasing resulting from positive changes in the availability of materials. Accounts payable, accrued expenses and ~~accrued~~other liabilities ~~decreased~~increased by $~~0.2~~0.5 million from $~~19.7~~21.6 million at September 30, 2011, to $~~19.5~~21.1 million at March 31, 2012 due to the issuance of common stock decreasing the liability generated by the ESPP, partially offset by increased accrued liabilities due to the timing of payments to our vendors and other service providers.

~~During the~~ ~~six~~ ~~months ended~~ ~~March 31, 2011~~, ~~cash used in operating activities totaled~~ ~~$8.7 million. Excluding changes in working capital, cash used to fund our losses totaled~~ ~~$2.5 million. We also used~~ ~~$5.5 million~~ ~~to pay down our accounts payable and accrued liabilities and~~ ~~$3.6 million~~ ~~related to a decrease in deferred revenue due to lower purchases from distributors. These uses were partially offset by the generation of cash from the collection of accounts receivable of~~ ~~$0.4 million~~ ~~and operating with lower inventory levels of~~ ~~$1.4 million~~.

~~Accounts receivable decreased~~ ~~$0.4 million~~ ~~from~~ ~~$15.8 million~~ at ~~September 30, 2010~~ to ~~$15.4 million~~ at ~~March 31, 2011~~. The increased cash generated from the collection of accounts receivable was due to lower sales in the first half of fiscal year 2011 as compared to the first half of fiscal year 2010. Inventory decreased $1.4 million from ~~$27.3 million~~ at ~~September 30, 2010~~ to ~~$25.9 million~~ at ~~March 31, 2011~~. Due to positive changes in the availability of materials, we decreased purchasing in the second quarter as compared to the first quarter of fiscal year 2011. Accounts payable decreased by $2.1 million from ~~$13.2 million~~ at ~~September 30, 2010~~ to ~~$11.1 million~~ at ~~March 31, 2011~~ due to a reduction in purchases from our suppliers as industry-wide material shortages eased, as well as the timing of payments to our vendors and other service providers. ~~Accrued expenses decreased by $3.3 million from~~ ~~$16.3 million~~ at ~~September 30, 2010~~ to ~~$13.0 million~~ at ~~March 31, 2011. Accrued ex~~

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~~penses decreased primarily due to the timing of payments to our vendors and payment of the SEC settlement in the second quarter of fiscal year 2011.~~

Net Cash Used In Investing Activities

Investing activities used cash in the six months ended March 31, ~~2012~~2013, for capital expenditures of $~~0.3~~0.5 million and payments under ~~licensed and purchased intangibles~~licensing agreements of ~~$0.7 million~~.$0.1 million. Expenditures were partially offset by cash provided by the sale of capital assets of $0.2 million. Investing activities used cash in the six months ended March 31, ~~2011~~2012, for capital expenditures of $~~1.7~~0.3 million and payments under ~~licensed and purchased intangibles~~licensing agreements of $~~0.8~~0.7 million.

Net Cash ~~Used In~~Provided by (Used in) Financing Activities

~~Financing~~Net cash provided by financing activities ~~used~~during the six months ended March 31, 2013, totaled $~~0.6~~16.7 million. Cash from the sale of common stock totaled $17.1 million, net of approximately $1.5 million in expenses, from the registered underwritten sale of 10,651,280 shares of common stock at $1.75 per share, based on a negotiated discount to market. Proceeds were offset by $0.4 million in cash inused for the repurchase of restricted stock units for payroll taxes paid on behalf of employees. During the six months ended March 31, 2012, financing activities used $0.6 million in cash primarily for the repurchase ~~and retirement of restricted stock units for payroll taxes paid on behalf of employees. Financing activities used~~ ~~$8.7 million~~ ~~in cash in the~~ ~~six~~ ~~months ended~~ ~~March 31, 2011, primarily for a principal payment of $8.0 million on the Senior Term loan, and $0.6 million for the repurchase and retirement~~ of restricted stock units for payroll taxes.

~~The timing and number~~

Table of stock option exercises and employee stock purchases and the amount of cash proceeds we receive through those exercises and purchases are not within our control, and in the future we may not generate as much cash from the exercise of stock options as we have in the past. Unlike the exercise of stock options, the issuance of shares upon vesting of restricted stock units does not result in any cash proceeds to us and requires the use of cash, as we currently allow employees to elect to have a portion of the shares issued upon vesting of restricted stock units withheld to satisfy minimum statutory withholding taxes, which we then pay in cash to the appropriate tax authorities on each participating employee’s behalf.Contents

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

Prospective Capital Needs

Our principal sources of liquidity are our existing cash, ~~and cash equivalent balances,~~ cash generated from product sales, ~~and~~cash generated from the sales or licensing of our ~~IP. As~~intellectual property, and during the six months endedMarch 31, 2013, cash generated from the sale of our common stock. Our cash totaled $36.9 million at March 31, ~~2012, our cash totaled~~ ~~$19.2 million~~2013. Our working capital at March 31, ~~2012~~2013, was $~~26.3~~31.9 million.

In order to achieve sustained profitability and positive cash flows from operations, we may need to further reduce operating expenses and/or increase ~~revenue.~~revenues. We have completed a series of cost reduction actions ~~which~~that have improved our operating expense structure. We will continue to perform additional actions, as necessary. Our ability to maintain, or increase, current revenue levels to sustain profitability will depend, in part, on demand for our products. We believe that our existing cash, ~~and cash equivalent balances,~~ along with cash expected to be generated from product sales and the sale or licensing of our ~~IP,~~intellectual property, and the careful management of working capital requirements, will be sufficient to fund our operations and R&D efforts, anticipated capital expenditures, working capital, and other financing requirements for the next 12 months. In order to increase our working capital, we may seek to obtain additional debt or equity financing. However, we cannot assure you that such financing will be available to us on favorable terms, or at all, particularly in light of recent economic conditions in the capital markets.

~~We do not have~~Our short-term debt is comprised of our Term A Loan, of which the total principal ~~payments on currently outstanding debt~~amount of $7.9 million is due in February 2014. Our long term debt is comprised of our Term B Loan and our 2014 Debentures, of which the ~~next 12 months.~~total principal amount of

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

We have a Form S-3 universal shelf registration statement on file with the SEC. The universal shelf registration statement on Form S-3 permits Vitesse to sell, in one or more public offerings, shares of our common stock, shares of preferred stock or debt securities, or any combination of such securities, for proceeds in an aggregate amount of up to $75.0 million. As of March 31, 2013, we raised a total of $18.6 million in gross proceeds from the sale of 10,651,280 shares of our common stock, leaving approximately $56.4 million available pursuant to the Form S-3. The Form S-3 expires on December 27, 2014.

Contractual Obligations


	Payment Obligations by Fiscal Year										Payment Obligations by Fiscal Year
	Remaining in 2012		2013-2014		2015-2016		2017 and thereafter		Total		Remaining in 2013		2014-2015		2016-2017		2018 and thereafter		Total
	(in thousands)										(in thousands)
Convertible subordinated debt (1)	$	—	$	—	$	46,493	$	—	$	46,493	$	—	$	46,493	$	—	$	—	$	46,493
Term A Loan (2)	—		7,857		—		—		7,857		—		7,857		—		—		7,857
Term B Loan (3)	—		—		9,341		—		9,341		—		9,342		—		—		9,342
Operating leases (4)	1,818		4,818		1,334		—		7,970
Software licenses (5)	3,793		6,934		5,600		5,600		21,927
Inventory and related purchase obligations (6)	3,331		468		—		—		3,799
Loan interest (4)											2,650		7,332		—		—		9,982
Operating leases (5)											1,620		3,143		199		—		4,962
Software licenses (6)											5,108		14,278		5,600		2,800		27,786
Inventory and related purchase obligations (7)											7,331		560		—		—		7,891
Total	$	8,942	$	20,077	$	62,768	$	5,600	$	97,387	$	16,709	$	89,005	$	5,799	$	2,800	$	114,313

~~Table of Contents~~


(1)	Convertible subordinated debt represents amounts due for our 8.0% convertible ~~2014 Debentures~~debentures due October 2014.


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


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

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

(5)

We lease facilities under non-cancellable operating lease agreements that expire at various dates through 2016. During 2011, we elected to exit our Calle Carga facility, but still have obligations under the lease. Gross lease amounts for the Calle Carga facility are included in these amounts. The Calle Carga lease amounts presented have not been adjusted for any potential sublease income as allowed under relevant accounting guidance.


~~(5)~~(6)	Software license commitments represent non-cancellable licenses of IPtechnology from third-parties used in the development of our products.

~~(6)~~(7)

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

Off-Balance Sheet Arrangements

At March 31, ~~2012~~2013, we had no material off-balance sheet arrangements, other than operating leases.

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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, ~~2011~~2012., as amended by Amendment No. 1 to Annual Report on Form 10-K/A. There have been no material changes to these risks during the six months ended March 31, ~~2012~~2013.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated as of March 31, ~~2012~~2013, the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, ~~2012~~2013, our disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934, during the quarter ended March 31, ~~2012~~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.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time-to-time in our normal course of business, we are a party to various legal claims, actions and complaints. Although the ultimate outcome of these matters cannot be determined, management believes that, as of March 31, ~~2012~~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, ~~2011~~2012., as amended by Amendment No. 1 to Annual Report on Form 10-K/A.

ITEM 6. EXHIBITS

Exhibit

Incorporated by Reference

Filed or Furnished

Number

Exhibit Description

Form

File Number

Exhibit

Filing Date

Herewith

10.1*

~~Amendment to Employment Agreement, dated February 12, 2012, between Registrant and Christopher R. Gardner~~

~~8-K~~

~~1-31614~~

~~10.1~~

~~February 16, 2012~~

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.

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.

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.

101.INS

XBRL Instance Document**

101.SCH

XBRL Taxonomy Extension Schema Document**

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document**

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document**

101.LAB

XBRL Taxonomy Extension Label Linkbase Document**

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document**


*	~~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.

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SIGNATURES

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



May ~~8, 2012~~7, 2013	VITESSE SEMICONDUCTOR CORPORATION


	By:	/s/ CHRISTOPHER R. GARDNER
		Christopher R. Gardner
		Chief Executive Officer

May ~~8, 2012~~7, 2013	VITESSE SEMICONDUCTOR CORPORATION


	By:	/s/ MARTIN S. MCDERMUT
		Martin S. McDermut
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

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	March 31, 2012								September 30, 2011
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(in thousands)
Compound embedded derivative liability	$	—	$	—	$	9,778	$	9,778	$	—	$	—	$	7,796	$	7,796
	$	—	$	—	$	9,778	$	9,778	$	—	$	—	$	7,796	$	7,796



	Restricted Stock Units		Weighted Average Grant-Date Fair Value per Share		Weighted average remaining contractual life (in years)	Aggregate intrinsic value
Restricted stock units expected to vest September 30, 2011	1,295,979		$	4.67
Awarded	1,222,988		2.56
Released	(685,479	)	3.91
Forfeited	(90,277	)	3.63
Restricted stock units expected to vest March 31, 2012	1,743,211		$	3.54	1.54	$	6,484,745



	Facility Consolidation and Operating Lease Commitments			Severance Costs			Property and Equipment Impairment Charges		Total
	(in thousands)
Liability balance at September 30, 2011	$	2,310		$	298		$	—	$	2,608
Charged to operations	—			24			—		24
Non-cash charges	8			—			—		8
Cash payments	(443		)	(305		)	—		(748		)
Liability balance at March 31, 2012	$	1,875		$	17		$	—	$	1,892